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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ________________ to ________________.
Commission file number 0-13891.
NAC Re Corp.
(Exact name of registrant as specified in its charter)
Delaware 13-3297840
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Greenwich Plaza, Greenwich, CT 06836-2568
(Address of principal executive offices)
(203) 622-5200
(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
There were 18,452, 660 shares outstanding of the Registrant's Common
Stock, $.10 par value, as of March 31, 1999.
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<PAGE>
NAC RE CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
Independent Accountants' Review Report 3
Consolidated Balance Sheet -
March 31, 1999 and December 31, 1998 4
Consolidated Statement of Income -
Three Months Ended March 31, 1999 and 1998 5
Consolidated Statement of Stockholders' Equity -
Three Months Ended March 31, 1999 and 1998 6
Consolidated Statement of Cash Flows -
Three Months Ended March 31, 1999 and 1998 7
Notes to Consolidated Financial Statements 8-11
Management's Discussion and Analysis
of Financial Condition and Results of Operations 12-20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Exhibit 15 23
Exhibit 27 24-25
<PAGE>
INDEPENDENT ACCOUNTANT'S REVIEW REPORT
Board of Directors and Shareholders
NAC Re Corporation
We have reviewed the accompanying consolidated balance sheet of NAC Re
Corporation and subsidiaries as of March 31, 1999, and the related consolidated
statements of income, stockholders' equity and cash flows for the three month
periods ended March 31, 1999 and 1998. 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, 1998, 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, 1999, except for Note 15, as to which the date was
February 15, 1999, we expressed an unqualified opinion on those consolidated
financial statements.
New York, New York ERNST & YOUNG LLP
April 21, 1999,
except for Note 6, as to which the date is
May 11, 1999
-3-
<PAGE>
NAC RE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Investments:
Available for sale:
Fixed maturities (amortized cost: 1999, $2,122,326; 1998, $2,108,692) $ 2,179,670 $ 2,190,617
Equity securities (cost: 1999, $87,517; 1998, $108,276) 92,140 115,064
Short-term investments 136,669 146,828
----------- -----------
TOTAL INVESTMENTS 2,408,479 2,452,509
Cash 13,042 3,915
Accrued investment income 37,318 36,270
Premiums receivable 249,875 239,674
Reinsurance recoverable balances, net 284,897 262,872
Reinsurance recoverable on unearned premiums 43,017 49,962
Deferred policy acquisition costs 101,944 98,874
Excess of cost over net assets acquired 7,861 8,013
Deferred tax asset, net 48,211 37,481
Other assets 53,657 38,062
----------- -----------
TOTAL ASSETS $ 3,248,301 $ 3,227,632
=========== ===========
LIABILITIES
Claims and claims expenses $ 1,732,095 $ 1,718,237
Unearned premiums 344,133 341,443
8% Notes due 1999 100,000 100,000
7.15% Notes due 2005 99,951 99,949
5.25% Convertible Subordinated Debentures due 2002 100,000 100,000
Investment accounts payable 7,612 7,612
Revolving credit agreement 12,924 12,924
Other liabilities 98,903 96,742
----------- -----------
TOTAL LIABILITIES 2,495,618 2,476,907
----------- -----------
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 (1999, 22,069; 1998, 21,991 shares issued) 2,207 2,199
Additional paid-in capital 271,587 268,468
Accumulated other comprehensive income 42,411 62,778
Retained earnings 535,204 516,036
Less treasury stock, at cost (1999, 3,616; 1998, 3,617 shares) (98,726) (98,756)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 752,683 750,725
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,248,301 $ 3,227,632
=========== ===========
</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 March 31,
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
PREMIUMS AND OTHER REVENUES
Net premiums written $ 142,871 $ 136,190
Increase in unearned premiums (10,206) (2,836)
--------- ---------
Premiums earned 132,665 133,354
Net investment income 32,905 32,085
Net investment gains 2,673 7,874
--------- ---------
Total revenues 168,243 173,313
OPERATING COSTS AND EXPENSES
Claims and claims expenses 84,022 88,692
Commissions and brokerage 35,980 33,443
Other operating expenses 17,966 17,126
Interest expense 5,402 5,426
--------- ---------
Total operating costs and expenses 143,370 144,687
INCOME
Income before income taxes 24,873 28,626
--------- ---------
Federal and foreign income taxes:
Current 3,793 6,684
Deferred 252 (1,064)
--------- ---------
Income tax expense (benefit) 4,045 5,620
--------- ---------
Operating income/net income $ 20,828 $ 23,006
========= =========
PER SHARE DATA
Basic:
Average shares outstanding 18,411 18,355
--------- ---------
Operating income/net income $ 1.13 $ 1.25
========= =========
Diluted (assuming conversion of dilutive convertible securities):
Average shares outstanding 21,000 20,954
--------- ---------
Operating income/net income $ 1.03 $ 1.14
========= =========
Cash dividends declared per share $ 0.09 $ 0.075
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
-5-
<PAGE>
NAC RE CORP. AND SUBSIDIARIIES
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, 1998 $2,199 $268,468 $516,036 ($98,756) $62,778 $750,725
Comprehensive income:
Net income $20,828 20,828 20,828
Other comprehensive income,
net of tax:
Unrealized depreciation of
investments (17,382) (17,382)
Currency translation adjustments (2,985) (2,985)
-------
Other comprehensive income (20,367) (20,367)
-------
Total comprehensive income $461
=======
Issuance of shares 8 3,119 3,127
Dividends declared on common stock (1,660) (1,660)
Reissuance of treasury shares 30 30
------------------- ------------------------------------------------------
Balance at March 31, 1999 $2,207 $271,587 $535,204 ($98,726) $42,411 $752,683
=================== ======================================================
<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 $23,006 23,006 23,006
Other comprehensive income,
net of tax:
Unrealized appreciation of
investments 3,384 3,384
Currency translation adjustments 908 908
-------
Other comprehensive income 4,292 4,292
-------
Total comprehensive income $27,298
=======
Issuance of shares 7 2,482 2,489
Dividends declared on common stock (1,377) (1,377)
Purchase of treasury shares, net of
reissuance (2,326) (2,326)
------------------- ------------------------------------------------------
Balance at March 31, 1998 $2,178 $257,906 $447,938 ($90,158) $65,281 $683,145
=================== ======================================================
</TABLE>
See Notes to Consolidated Financial Statements
-6-
<PAGE>
NAC RE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
Three months ended March 31,
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 20,828 $ 23,006
Adjustments to reconcile net income to net cash
provided by operating activities:
Reserve for claims and claims expenses, net (4,866) 4,929
Unearned premiums, net 10,347 2,819
Premiums receivable (11,077) (1,991)
Accrued investment income (1,111) 2,848
Reinsurance balances, net 4,834 6,508
Deferred policy acquisition costs (3,233) (805)
Net investment gains (2,654) (7,874)
Deferred tax asset, net 231 (1,082)
Other liabilities 6,787 (4,002)
Other items, net (21,872) (10,455)
--------- ---------
NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES (1,786) 13,901
--------- ---------
INVESTING ACTIVITIES
Sales of fixed maturity investments 230,481 310,627
Maturities of fixed maturity investments 4,237 3,522
Purchases of fixed maturity investments (253,546) (340,404)
Net sales of short-term investments 8,458 21,753
Sales of equity securities 34,655 7,951
Purchases of equity securities (13,863) (14,296)
Purchases of furniture and equipment (691) (1,799)
--------- ---------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 9,731 (12,646)
--------- ---------
FINANCING ACTIVITIES
Issuance of shares 2,780 2,309
Net reissuance (purchase) of treasury shares 30 (2,326)
Cash dividends paid to stockholders (1,652) (1,372)
--------- ---------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 1,158 (1,389)
--------- ---------
Effects of exchange rate changes on cash 24 142
--------- ---------
Increase in cash 9,127 8
Cash - beginning of year 3,915 8,430
--------- ---------
Cash - end of period $ 13,042 $ 8,438
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
-7-
<PAGE>
Notes to Consolidated Financial Statements
1. General
The accompanying consolidated financial statements have been prepared on
the basis of generally accepted accounting principles and in the opinion
of management, reflect all adjustments necessary (consisting of normal
recurring accruals) for a fair presentation of results for such periods.
These consolidated financial statements should be read in conjunction with
the consolidated financial statements and related notes contained in the
Company's Annual Report to Shareholders.
2. Per Share Data
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 to conform to the
Statement No. 128 requirements.
<TABLE>
<CAPTION>
(In Thousands)
Three Months Ended March 31,
---------------------------
1999 1998
------- -------
<S> <C> <C>
Basic Earnings Per Share:
Net income $20,828 $23,006
Weighted average shares 18,411 18,355
Basic earnings per share $ 1.13 $ 1.25
Diluted Earnings Per Share:
Net income $20,828 $23,006
Add back after-tax interest on convertible debentures 876 876
------- -------
Adjusted net income $21,704 $23,882
Weighted average shares 18,411 18,355
Assumed exercise of dilutive stock options (1) 569 579
Assumed conversion of convertible debentures (2) 2,020 2,020
------- -------
Weighted average shares and dilutive securities 21,000 20,954
Diluted earnings per share $ 1.03 $ 1.14
</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.
-8-
<PAGE>
3. Retrocession
The Company's balance sheet as of March 31, 1999 and December 31, 1998
reflect reinsurance recoverable balances as assets, the components of
which are stated in the table below.
(In Thousands)
Reinsurance Recoverable Balances, Net
--------------------------------------
March 31, 1999 December 31, 1998
-------------- -----------------
Paid Claims $ 22,639 $ 20,168
Unpaid Claims and Claims Expenses 314,698 292,256
Ceded Balances Payable (51,166) (48,590)
Funds Held Liability (1,274) (962)
-------------- -----------------
Net $ 284,897 $ 262,872
============== =================
The effect of retrocessional activity on premiums written, premiums earned
and claims expenses is as follows:
(In Thousands)
Three months ended
March 31,
----------------------------
1999 1998
----------------------------
Ceded premiums written $38,234 $29,178
Ceded premiums earned $45,281 $27,919
Ceded claims and claims expenses $41,936 $16,858
4. Comprehensive Income
Comprehensive income includes all changes in equity during a period
resulting from transactions and other events from nonowner sources.
Accumulated other comprehensive income, net of tax, for the Company
includes unrealized appreciation of investments of $40.3 million and
foreign currency translation adjustments of $2.1 million at March 31,
1999.
5. Segment Information
At December 31, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This Statement
requires that companies report certain information about their operating
segments in the interim and annual financial statements. The Statement
defines operating segments based on internal management reporting and
management's decisions about assessing performance and allocating
resources.
The Company's operations are conducted in three reportable segments:
domestic reinsurance, domestic primary insurance and the international
operation. The domestic reinsurance segment generally writes property,
casualty, fidelity/surety and ocean marine business through reinsurance
brokers. The domestic primary insurance segment operates through managing
and general agents and writes certain specialty classes such as auto
warranty business. The primary operation consists of business generated by
Greenwich Insurance Company ("Greenwich") and Indian Harbor Insurance
Company ("Indian Harbor"). The international operation primarily writes
non-U.S. property and casualty reinsurance business. The Company's
international subsidiary, Stonebridge Underwriting, Ltd. ("Stonebridge"),
which is participating as a corporate capital vehicle on a Lloyd's
syndicate is included in the international operation segment.
-9-
<PAGE>
The Company evaluates performance and allocates resources based on profit or
loss from operations before income taxes, excluding gains and losses on the
Company's investment portfolio. Segment information is reviewed on a statutory
accounting basis.
<TABLE>
<CAPTION>
(In Thousands)
Three months ended March 31, 1999
------------------------------------------------------------------------
Domestic
----------------------------------------- Int'l Total
Reinsurance Primary* Total Operations Segments
----------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Net premiums written - external $ 93,177 $ 25,166 $ 118,343 $24,528 $ 142,871
Net intersegment premiums 20,962 (21,390) (428) 428 --
----------- -------- --------- ---------- ---------
Total net premiums written 114,139 3,776 117,915 24,956 142,871
Net investment income 27,099 868 27,967 3,625 31,592
Pretax income (loss) excluding realized gains 24,153 (359) 23,794 165 23,959
Realized gains (losses) 1,325 (6) 1,319 1,379 2,698
----------- -------- --------- ---------- ---------
Total segment pretax income (loss) 25,478 (365) 25,113 1,544 26,657
Total segment assets 2,382,047 82,480 2,464,527 308,709 2,773,236
<CAPTION>
(In Thousands)
Three months ended March 31, 1998
--------------------------------------------------------------------------
Domestic
----------------------------------------- Int'l Total
Reinsurance Primary* Total Operations Segments
----------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Net premiums written - external $ 97,414 $ 22,460 $ 119,874 $16,316 $ 136,190
Net intersegment premiums 20,517 (19,094) 1,423 (1,423) --
----------- -------- --------- ---------- ---------
Total net premiums written 117,931 3,366 121,297 14,893 136,190
Net investment income 27,147 739 27,886 3,759 31,645
Pretax income (loss) excluding realized gains 24,145 (60) 24,085 1,892 25,977
Realized gains (losses) 6,668 (4) 6,664 1,218 7,882
----------- -------- --------- ---------- ---------
Total segment pretax income (loss) 30,813 (64) 30,749 3,110 33,859
Total segment assets 2,348,795 76,366 2,425,161 270,723 2,695,884
</TABLE>
* The domestic primary segment ceded approximately 85% of all underwriting
activity to the domestic reinsurance segment pursuant to a quota share
reinsurance arrangement.
(In Thousands)
Three months ended March 31,
----------------------------
1999 1998
----------- -----------
Net Investment Income:
Total segment net investment income $ 31,592 $ 31,645
GAAP adjustments (61) 9
Parent Co./other investment income 1,374 431
----------- -----------
Total consolidated net investment income $ 32,905 $ 32,085
=========== ===========
Income or Loss:
Total segment pretax income $ 26,657 $ 33,859
Segment income taxes (5,667) (8,642)
GAAP adjustments 3,360 1,743
Parent Co./other net loss (3,522) (3,954)
----------- -----------
Total consolidated net income $ 20,828 $ 23,006
=========== ===========
March 31, December 31,
1999 1998
----------- -----------
Assets:
Total segment assets $ 2,773,236 $ 2,795,859
GAAP adjustments 588,811 580,769
Parent Co./other assets 1,099,208 1,090,991
Intercompany elimination (1,212,954) (1,239,987)
----------- -----------
Total consolidated assets $ 3,248,301 $ 3,227,632
=========== ===========
-10-
<PAGE>
6. Subsequent Events
On April 23, 1999, the Board of Directors of NAC Re Corp approved the
expansion of the Company's stock repurchase program. The Board authorized
the Company to repurchase up to an additional two million shares of its
Common Stock. During 1999, the Company has repurchased over 1,385,000
shares of Common Stock at a cost of $75.7 million or at an average cost of
$54.65 per share. The repurchases were all made between April 5 and May
11, 1999. Since the inception of the Company's stock repurchase program in
1988, approximately 5.0 million shares have been repurchased. Under the
repurchase program approximately 1.0 million shares remain authorized for
repurchase.
On April 26, 1999, the Board of Directors of NAC Re and XL Capital Ltd.
("XL") approved an amendment to the Merger Agreement, as set forth in the
Form 8-K filed on April 30, 1999.
The Proxy Statement/Prospectus with respect to the Special Meeting of
Stockholders to be held on May 26, 1999 to vote on the merger was
distributed to the stockholders on April 28, 1999. Subject to stockholder
and regulatory approvals, the Company expects the merger with a subsidiary
of XL to be completed in the second quarter of 1999.
Effective May 3, 1999, NAC Re reinstated to $50 million its borrowing
capacity under its revolving credit facility. Outstanding borrowings as of
March 31, 1999 were $12.9 million and were principally used to finance the
Company's periodic repurchase of Common Stock. The facility will be
reduced on a quarterly basis beginning in July 1999.
On May 11, 1999, NAC Re entered into an agreement with Mellon Bank, N.A.
to obtain additional credit facilities in the aggregate amount of $200
million. The facilities will be available to NAC Re to refinance certain
of its existing indebtedness and working capital needs on a short-term
basis. Mellon Bank is acting as an agent for lenders of the revolving
credit facilities and will also provide up to one-third of the $200
million principal. Effective May 11, 1999, NAC Re obtained its first $100
million facility and is expected to obtain its second $100 million
facility on June 14, 1999. A commitment fee of 12.5 basis points per year
will be paid on the unused credit line.
-11-
<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.
Recent Developments
On February 15, 1999, NAC Re entered into an Agreement and Plan of Merger (the
"Merger Agreement") with XL Capital Ltd. ("XL") pursuant to which NAC Re will
merge into a wholly-owned subsidiary of XL in an all stock transaction. NAC Re
shareholders will received 0.915 of an XL Class A voting ordinary share for each
share of NAC Re Common Stock in a tax-free exchange of shares. XL plans to
account for the merger as a "pooling-of-interests" under U.S. generally accepted
accounting principles ("GAAP"). The transaction is subject to approval by NAC
Re's shareholders, receipt of insurance regulatory approvals and other customary
closing conditions.
In connection with the Merger Agreement, NAC Re granted XL the option to
purchase, under certain circumstances, up to 1,860,215 shares of NAC Re Common
Stock at a purchase price of $45.3125 per share. The option is exercisable upon
certain circumstances, including if NAC Re recommends or proposes a different
transaction or if any other person commences a tender or exchange offer to
acquire 10% or more of NAC Re's Common Stock.
Detailed information regarding the proposed transaction and XL has been filed
with the Securities and Exchange Commission and has been disseminated to NAC
Re's stockholders in connection with the solicitation of stockholder approval of
the Merger Agreement.
Results of Operations
The Company's net operating earnings, excluding realized investment gains for
the 1999 first quarter was $19.1 million or $.95 per diluted share. This
represents an increase of 5.6% over the $.90 per diluted share that was reported
in the comparable quarter of 1998.
Net income, including investment gains, was $20.8 million or $1.03 per diluted
share for the 1999 first quarter, compared to $23.0 million or $1.14 per diluted
share for the 1998 first quarter. Realized investment gains, net of tax, were
$1.7 million or $.08 per diluted share for the 1999 first quarter, compared to
$5.1 million or $.24 per diluted share for the 1998 first quarter.
Premium Revenues
The Company's premium revenue for its domestic and international operations is
as follows:
<TABLE>
<CAPTION>
(In Millions) (In Millions)
Gross Premiums Written Net Premiums Written
Three Months Ended March 31, Three Months Ended March 31,
----------------------------------- ----------------------------------
(Dollars in millions) 1999 1998 Chg 1999 1998 Chg
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Domestic:
Reinsurance $ 111.5 $ 113.8 (2.1)% $ 114.1 $ 117.9 (3.2)%
Primary 38.9 35.0 11.3 3.8 3.4 12.2
-------- -------- -------- -------- -------- --------
Total Domestic 150.4 148.8 1.1 117.9 121.3 (2.8)
International: 30.3 18.0 68.3 25.0 14.9 67.6
-------- -------- -------- -------- -------- --------
Total International 30.3 18.0 68.3 25.0 14.9 67.6
Intercompany transactions: 0.4 (1.4) N/M -- -- --
-------- -------- -------- -------- -------- --------
Total $ 181.1 $ 165.4 9.5% $ 142.9 $ 136.2 4.9%
======== ======== ======== ======== ======== ========
</TABLE>
The Company's worldwide gross premiums written for the 1999 first quarter
totaled $181.1 million, an increase of 9.5% over the 1998 first quarter.
Worldwide net premiums written for the 1999 first quarter were $142.9 million,
an increase of 4.9% over the 1998 first quarter. Overall, the increase in net
premiums written was generated primarily from the domestic primary operations
and international operations. The increase was partially offset by the cost of
additional retrocessional coverages purchased to limit the Company's net
retention and to supplement its core protections.
The Company adopted SFAS No. 131 "Disclosures about Segment of an Enterprise and
Related Information" at December 31, 1998. The Company has three reportable
segments; domestic reinsurance, domestic primary insurance and international
operations. See Note 5 of the Notes to Consolidated Financial Statements for
further details.
-12-
<PAGE>
Domestic Reinsurance Operations
The domestic reinsurance segment represents the reinsurance of property,
casualty, and specialty lines of business, including general liability,
professional liability, automobile and workers' compensation, and commercial and
personal property risks, including fidelity/surety and ocean marine. The
Company's domestic operation includes business written in the United States and
Canada. The Company principally conducts its business through reinsurance
brokers, however, facultative business is handled through direct placement.
Gross Premiums Written
Three Months Ended March 31,
----------------------------
(Dollars in millions) 1999 1998 Chg
------- ------- ------
Casualty $73.5 $67.1 9.5%
Property 29.7 32.9 (9.6)
Specialty/Other 8.3 13.8 (40.4)
------- ------- ------
Total Domestic Reinsurance $111.5 $113.8 (2.1)%
Domestic reinsurance gross premiums written declined to $111.5 million for the
1999 first quarter compared to $113.8 million in the 1998 first quarter. The
decline in 1999 reflects the competitive market conditions that the reinsurance
industry has been experiencing. The decrease was partially offset by growth in
our casualty business generated from new contracts written in our treaty
operation.
Domestic Primary Operations
The Company's primary revenues consist of business generated from Greenwich and
Indian Harbor. Greenwich, licensed to write property/casualty insurance
throughout the United States, distributes its products through a network of
managing general agents and general agents who write specialized products with
an emphasis on domestic casualty products. Indian Harbor, an excess and surplus
lines carrier licensed in North Dakota, writes primary business on a
non-admitted basis in selected states. Its focus is on seasoned profitable
program business. The principal lines of primary business written include
automobile, auto warranty, aviation, multiple peril and inland marine.
Gross Premiums Written
Three Months Ended
March 31,
-------------------------
(Dollars in millions) 1999 1998 Chg
------- ------- -------
Casualty $4.1 $4.9 (16.0)%
Property 12.3 13.0 (4.9)
Specialty/Other 22.5 17.1 31.3
------- ------- -------
Total Domestic Primary $38.9 $35.0 11.3 %
Domestic primary gross premiums written for the 1999 first quarter increased to
$38.9 million or 11.3% over the comparable 1998 first quarter. The increase is
primarily attributable to growth in our ocean marine and auto warranty business,
partly offset by declines principally from our aviation programs.
International Operations
NAC Reinsurance International commenced writing non-U.S. property and casualty
treaty business in 1994, subsequently building a facultative operation starting
in 1996. Clients are also serviced through a branch operation in Sydney,
Australia and a contact office in Madrid, Spain. The international reinsurance
segment writes non-U.S. property and casualty reinsurance business. In 1998, the
Company acquired Denham Syndicate Management Limited, the Lloyd's managing
agency that manages Denham Syndicate 990. Denham underwrites a specialized book
of international business, concentrating on long-tail casualty lines and
non-marine physical damage. In 1997, the Company formed Stonebridge Underwriting
Ltd., a subsidiary of NAC Reinsurance International, which is a corporate
capital vehicle participating on the Denham Syndicate.
-13-
<PAGE>
Gross Premiums Written
Three Months Ended
March 31,
------------------------
(Dollars in millions) 1999 1998 Chg
------ ------ ------
Casualty $11.2 $7.2 56.6%
Property 8.7 8.3 2.9
Stonebridge 10.4 2.5 325.6
------ ------ ------
Total International
Operations $30.3 $18.0 68.3%
Gross premiums written from international operations were $30.3 million,
representing an increase of 68.3% over the comparable 1998 period. The increase
reflects premium growth in the casualty business resulting from new business
opportunities coupled with approximately $8.0 million of increased premiums
generated from Stonebridge Underwriting Ltd compared to prior year.
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.
The following charts set forth statutory composite ratios for the Company's
operating segments:
<TABLE>
<CAPTION>
Statutory Composite Ratio
--------------------------------------------
March 31, December 31,
--------------------------------------------
1999 1998 1998
------------ ------------ ------------
<S> <C> <C> <C>
Domestic Reinsurance
Claims and claims expenses 62.5% 65.6% 64.8%
Commissions and brokerage 28.3% 26.6% 27.7%
Other operating expenses 10.7% 10.4% 10.5%
------------ ------------ ------------
Total 101.5% 102.6% 103.0%
Domestic Primary:
Claims and claims expenses 92.3% 84.0% 101.3%
Commissions and brokerage 10.6% 0.7% (1.6)%
Other operating expenses 28.8% 35.2% 26.9%
------------ ------------ ------------
Total 131.7% 119.9% 126.6%
Total Domestic:
Claims and claims expenses 63.4% 66.0% 65.7%
Commissions and brokerage 27.7% 25.8% 26.8%
Other operating expenses 11.3% 11.0% 11.0%
------------ ------------ ------------
Total 102.4% 102.8% 103.5%
International:
Claims and claims expenses 65.7% 71.8% 73.3%
Commissions and brokerage 26.0% 19.5% 19.7%
Other operating expenses 12.4% 17.6% 18.2%
------------ ------------ ------------
Total 104.1% 108.9% 111.2%
</TABLE>
-14-
<PAGE>
The Company's domestic statutory composite ratio for the 1999 first quarter was
102.4% compared with 102.8% for the 1998 first quarter ratio and 103.5% for the
year ended December 1998. The 1999 first quarter composite ratio reflects a
slight decrease compared to the prior year period, reflecting favorable
development on business written prior to 1982 partly offset by increases in the
commission and expense ratios. The composite ratio of 103.5% for the full year
1998 reflects approximately 1.2 percentage points related to property
catastrophes recorded in the 1998 third quarter.
The international composite ratio was 104.1% for the 1999 first quarter compared
to 108.9% for the 1998 first quarter and 111.2% for the year ended December 31,
1998. This decline in the first quarter is primarily attributable to better than
expected claim development, partly offset by increases in the commission ratio.
Premiums generated from Lloyd's generally have a higher commission ratio. The
international composite ratio of 111.2% for the 1998 full year reflects
approximately 2.5 percentage points related to property catastrophes incurred
from Hurricane Georges.
The Company experienced net favorable claim development for business written
since 1982. 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 pricing of the Company's reinsurance contracts contemplates many factors,
including exposure to claims and expenses of the client 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.
Investments
Cash and invested assets totaled $2.4 billion, excluding net investment payables
of $7.6 million at March 31, 1999, no change from December 31, 1998.
Pretax net investment income for the 1999 first quarter was $32.9 million, an
increase of 2.6% over the 1998 comparable period. On an after-tax basis, net
investment income for the 1999 first quarter was $26.5 million or $1.26 per
diluted share, an increase of 3.4% over the comparable 1998 period. The increase
is primarily attributable to the higher invested asset base coupled with the
increase in the Company's investment in tax-exempt securities. The Company's
pretax investment yield was 5.6% for the 1999 first quarter, compared to 5.7%
for the 1998 first quarter. The after-tax investment yield for the 1999 first
quarter was 4.5% which is the same yield for the comparable prior year period.
Net investment gains, net of tax for the 1999 first quarter were $1.7 million or
$.08 per diluted share, compared to net investment gains of $5.1 million or $.24
per diluted share for the 1998 first quarter. Gains and losses on the sale of
investments are recognized as a component of operating income, but the timing
and recognition of such gains and losses are unpredictable and are not
indicative of future operating results.
The Company's investment strategy is focused principally on income
predictability and asset value stability. 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 March 31, 1999, our
fixed maturity investments amounted to $2.2 billion, which approximates 90% of
cash and invested assets, and 94.4% 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 March 31, 1999, consisting
of cash, short-term investments and equity securities, amounted to $241.8
million. As of March 31, 1999, the Company held approximately $92 million or 4%
of cash and invested assets in equity securities which represented about 12.6%
of statutory surplus.
-15-
<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. As of March 31, 1999, the Company's fixed maturity investment
securities had an average duration of 5.6 years.
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 $732.9 million at March 31, 1999 which ranks among the largest domestic
reinsurers measured on this basis.
Total assets exceeded $3.2 billion at March 31, 1999. Stockholders' equity
totaled $752.7 million or $40.79 per basic share at March 31, 1999 compared to
$750.7 million or $40.86 per basic share at December 31, 1998. The unrealized
appreciation of investments, net of tax, which is the principal component of
accumulated other comprehensive income, decreased to $40.3 million at March 31,
1999 from $57.7 million at December 31, 1998.
Cash flow from operations for the 1999 first quarter was a negative $1.8 million
compared to $13.9 million for the comparable 1998 period. The decline in cash
flow from the prior year period is principally attributed to increased paid
claim activity and retrocessional costs.
On April 23, 1999, the Board of Directors of NAC Re Corp approved the expansion
of the Company's stock repurchase program. The Board authorized the Company to
repurchase up to an additional two million shares of its Common Stock. During
1999, the Company has repurchased over 1,385,000 shares of Common Stock at a
cost of $75.7 million or at an average cost of $54.65 per share. The repurchases
were all made between April 5 and May 11, 1999. Since the inception of the
Company's stock repurchase program in 1988, approximately 5.0 million shares
have been repurchased. Under the repurchase program approximately 1.0 million
shares remain authorized for repurchase.
Effective May 3, 1999, NAC Re reinstated to $50 million its borrowing capacity
under its revolving credit facility. Outstanding borrowings as of March 31, 1999
were $12.9 million and were principally used to finance the Company's periodic
repurchase of Common Stock. The facility will be reduced on a quarterly basis
beginning in July 1999.
On May 11, 1999, NAC Re entered into an agreement with Mellon Bank, N.A. to
obtain additional credit facilities in the aggregate amount of $200 million. The
facilities will be available to NAC Re to refinance certain of its existing
indebtedness and working capital needs on a short-term basis. Mellon Bank is
acting as an agent for lenders of the revolving credit facilities and will also
provide up to one-third of the $200 million principal. Effective May 11, 1999,
NAC Re obtained its first $100 million facility and is expected to obtain its
second $100 million facility on June 14, 1999. A commitment fee of 12.5 basis
points per year will be paid on the unused credit line.
The Company declared a quarterly cash dividend of $.09 per share for the 1999
first quarter.
-16-
<PAGE>
Market Sensitive Instruments
Market Risk
The Company is exposed to various market risks, including changes in interest
rates and foreign currency exchange rates. Market risk is the potential loss
arising from adverse changes in interest rates and foreign currency exchange
rates. The Company manages its market risks based on guidelines established by
management. The Company does not enter into derivatives or other financial
instruments for trading purposes.
Since the Company's cash and invested assets exceed its long term debt, the
exposure to interest rate risk relates primarily to its investment portfolio.
The main objectives of managing the investment portfolio of the Company are to
maximize after tax investment income in a manner consistent with the expected
maturities of the liabilities the investments support and to ensure liquidity
and provide income predictability. At March 31, 1999, the Company's fixed
maturity portfolio totaled $2.2 billion. The Company's fixed securities are
categorized as assets held for sale and have an average duration of
approximately 5.6 years.
Generally, the fair market value of fixed income securities will increase as
interest rates fall and decrease as interest rates rise. The estimated value of
the Company's fixed income securities resulting from an immediate 100 basis
point adverse shift in the treasury yield curve will result in an unrealized
loss of approximately $104 million.
The above discussion of the Company's market risk and the estimated amounts
generated from the sensitivity analyses are forward-looking statements that
relate to risk and uncertainties. Actual results in the future may differ
materially from those projected results in the forward-looking statements.
Exchange Rate Risk
The Company's exchange rate exposure results primarily from its investments in
the Company's international operation in London, England. This exposure stems
from transaction gain and loss risk with respect to that entities' cash flows
conducted in currencies other than the functional currency. The Company's
foreign subsidiaries maintain a policy of matching asset and liability risk with
respect to both currency and interest rate exposure. The Company is also exposed
to the extent change in currency rates affect its net investment in foreign
subsidiaries.
Impact of the Year 2000 Issue
Information Technology Systems Readiness: The Company began assessing the impact
of the Year 2000 issue on its computer hardware and software systems in 1995.
The Company completed its inventory and assessment of all information technology
("IT") systems (including embedded technology) in 1998. Certain systems were
identified as requiring an upgrade, and others have been designated for
replacement with Year 2000-compliant versions. Plans are in place to complete
these upgrades and replacements by the end of the third quarter of 1999.
The Company completed verification testing of its IT infrastructure systems in
1998. Also in 1998, the Company remediated the computer code of its legacy
reinsurance system. This system is currently being tested to determine if
further remediation is required. Other critical systems that could be impacted
by a Year 2000 issue have been scheduled for some form of testing or
verification. The testing, verification, remediation, and implementation
processes are expected to continue through the end of the 1999 third quarter.
As of the date of this disclosure, management has not identified any hardware or
software computer system with a significant Year 2000 compliance problem that it
believes could have a materially adverse effect on the Company's financial
condition or results of operations. To maintain the Year 2000 readiness status
of its tested and remediated IT systems, the Company intends to, sometime in the
future, retain an IT consulting firm to assist management in monitoring future
compliance changes made by its IT vendors.
-17-
<PAGE>
Critical Third-Party Constituent Readiness: The Company has contacted its
critical customers, retrocessionnaires, reinsurance intermediaries, managing
general agents, suppliers, and other constituents to determine the nature and
extent of their Year 2000 readiness efforts, and whether their failure to
resolve their own Year 2000 problems would have a material adverse affect on the
Company's financial condition or results of operations. The majority of the
critical third-party constituents reported that they were Year 2000-ready by
December 31, 1998, while others expect that they will be ready at various dates
in 1999. The Company resurveyed all critical third-party constituents in January
1999 to determine if the companies met, or still expect to meet, their
previously reported readiness target dates. Their responses are being factored
into the Company's business contingency plans.
Compliance Costs: The Company's estimated total aggregate Year 2000 readiness
costs are not expected to exceed $2 million. Since the Company began its
project, it had incurred $409,000 through March 31, 1999, principally for
consulting fees, hardware, and hardware leases.
Contingency Planning: Management is currently revising its existing business
continuity plans to address certain potential material internal and external
Year 2000-related failures that may impact the Company's critical processes. The
Company acknowledges that, among other things, Year 2000-related failures could
lead to temporary reliance on manual systems to process business transactions;
delayed regulatory reporting of material financial and other information;
delayed receipt of premiums and payment of claims; and disruptions in the
management of the Company's bank accounts and investment portfolios. At this
time, the Company does not expect such worst-case Year 2000 disruptions to
occur, based upon the information currently available to it. However, the
Company intends to address these scenarios in its contingency plans. In
addition, the contingency plans will take into account, but not be limited to,
the following issues: (1) staffing requirements at year-end 1999 and early 2000;
(2) retention programs for critical personnel, as deemed necessary; (3)
proactive procedures and routines that can be performed to detect problems as
early as possible; and (4) plans for policy issuance and claims handling in case
temporary failures of our managing general agents and third-party administrator
systems occur. The Company intends to test its contingency plans by the third
quarter of 1999.
Potential Claims Exposure: The Company is attempting, whenever possible, to
avoid or otherwise limit its overall exposure to Year 2000-related risks in the
context of both its assumed business and retrocessional protection; however, it
may still have material exposure in its property and casualty operations to Year
2000-related claims. The Company has worked with its brokers and clients to
assess potential Year 2000 exposures in both its new and existing business. If,
in the Company's opinion, the Year 2000 exposure is minimal, or management
believes the cedent is adequately underwriting that exposure, the Company may
not exclude such exposures from its contracts. On the other hand, if the
exposure is believed to be significant, or the cedent, in management's opinion,
is not adequately underwriting the Year 2000 exposure, the Company will attempt
to exclude those exposures or non-renew those contracts. It is not yet possible
to estimate the potential financial impact on the Company of the Year
2000-related claims that may emerge in the future, or to determine whether such
claims will be made against insurance or reinsurance contracts in which the
Company participates, or if such claims will be held to have merit.
Other Year 2000 Considerations: 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 a material
adverse impact on the Company's financial condition or results of operations.
All predictions regarding the impact of the Year 2000 issue on the Company, its
critical third-party constituents, and attendant costs are inherently subject to
unknown risks and uncertainties. While the Company is currently unaware of any
material Year 2000 problems that it believes are reasonably likely to disrupt
its operations, the Company cautions that the factors and assumptions described
above, as well as unknown factors, may cause the Company's actual Year 2000
readiness results, costs and impact on its business, operations, or financial
condition to differ materially from those discussed above.
-18-
<PAGE>
Regulatory Initiatives
NAC Re and its domestic subsidiaries are subject to regulatory oversight under
the insurance statutes and regulations of the jurisdictions in which they
conduct business, including all states of the United States and Canada. NAC Re
International is subject to the regulatory authority of the United Kingdom
Department of Trade and Industry and its 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 condition, 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 legislative and regulatory initiatives have been proposed from
time-to-time that could impact the property/casualty insurance industry.
Congress is expected to consider bills targeting financial services
modernization, tax reform, Year 2000 liability, Superfund and product liability
reform, and natural disaster protection. The NAIC continues to refine the
risk-based capital formula for property/casualty insurers as well as adopt model
legislation and regulations regarding insurer investments, accounting standards,
and other regulatory matters. While the Company cannot quantify the impact of
any of these legislative or regulatory measures on its operations, we believe
the Company is adequately positioned to compete in an environment of more
stringent regulation. To the extent that federal legislation, if passed, reduces
litigation costs, it would be a favorable development for the Company.
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:
-19-
<PAGE>
o 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;
o 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;
o The ability of the Company to execute its business strategies;
o 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;
o Adverse development on claims and claims expense liabilities related
to business 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;
o Changes in the Company's retrocessional arrangements;
o 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;
o 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;
o Declines in the value of the Company's common equity investments and
credit losses on the Company's investment portfolio;
o Gains or losses related to foreign currency exchange rate
fluctuations; and
o 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.
-20-
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index:
Exhibit Description Page
- --------------------------------------------------------------------------
15 Letter Re: Unaudited Interim Financial Information 23
27 Financial Data Schedule 24
(b) A report on Form 8-K was filed on February 19, 1999, which stated that NAC
Re Corp and XL Capital Ltd had entered into an Agreement and Plan of
Merger dated as of February 15, 1999, and that in connection with the
Merger Agreement, XL had entered into a Stock Option Agreement dated
February 15, 1999 with NAC. The Form also stated that NAC and XL had
issued a joint press release announcing the signing of the Merger
Agreement.
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period covered.
-21-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NAC Re CORP.
------------
(Registrant)
Date: May 11, 1999 /s/ NICHOLAS M. BROWN, JR.
------------------------ -------------------------------------
Nicholas M. Brown, Jr.
President and Chief Executive Officer
Date: May 11, 1999 /s/ RICHARD H. MILLER
------------------------ -------------------------------------
Richard H. Miller
Chief Financial Officer and Treasurer
-22-
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 April 21,
1999, except for Note 6, as to which the date is May 11, 1999, relating to the
unaudited consolidated interim financial statements of NAC Re Corporation that
is included in its Form 10-Q for the quarter ended March 31, 1999.
ERNST & YOUNG LLP
New York, New York
April 21, 1999
-23-
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 2,179,670
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 92,140
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,408,479
<CASH> 13,042
<RECOVER-REINSURE> 22,639
<DEFERRED-ACQUISITION> 101,944
<TOTAL-ASSETS> 3,248,301
<POLICY-LOSSES> 1,732,095
<UNEARNED-PREMIUMS> 344,133
<POLICY-OTHER> 17,759
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 299,951
0
0
<COMMON> 2,207
<OTHER-SE> 750,476
<TOTAL-LIABILITY-AND-EQUITY> 3,248,301
132,665
<INVESTMENT-INCOME> 32,905
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<BENEFITS> 84,022
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<INCOME-PRETAX> 24,873
<INCOME-TAX> 4,045
<INCOME-CONTINUING> 20,828
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