UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934 for the quarterly period ended March 31, 1996,
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or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT of 1934
for the transition period from _______ to _______
Commission file number: 1-10961
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National Re Corporation
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(Exact name of registrant as specified in its charter)
Delaware 75-2300920
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
777 Long Ridge Road
Stamford, Connecticut 06902
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(Address of principal executive (Zip code)
offices)
Registrant's telephone number, including area code (203) 329-7700
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
-- --
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock - no par value 16,678,594
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Description of Class Shares Outstanding
as of April 30, 1996
<PAGE>
NATIONAL RE CORPORATION
Index to Form 10-Q
PART I FINANCIAL INFORMATION
Item 1 -
Consolidated balance sheets at March 31, 1996 and
December 31, 1995 1
Consolidated statements of income for the three
months ended March 31, 1996 and 1995 2
Consolidated statements of cash flows for the three
months ended March 31, 1996 and 1995 3
Notes to consolidated financial statements 4
Item 2 -
Management's discussion and analysis of
financial condition and results of operations 7
PART II OTHER INFORMATION 9
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<PAGE>
NATIONAL RE CORPORATION
Consolidated Balance Sheets
(Unaudited)
($ In Millions)
A S S E T S
<TABLE><CAPTION>
March 31, December 31,
1996 1995
--------- ------------
<S> <C> <C>
Investments, at fair value:
Fixed maturities available for sale
(amortized cost: 1996 - $1,102.5; 1995 - $1,054.1) $1,116.2 $1,092.9
Preferred stocks (cost: 1996 - $166.9; 1995 - $149.9) 170.0 155.7
Common stocks (cost: 1996 - $4.9; 1995 - $4.9) 6.5 6.2
Cash and cash equivalents 8.1 22.9
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Total investments and cash 1,300.8 1,277.7
Reinsurance balances 221.8 225.7
Recoverable from reinsurers 82.9 84.5
Accrued investment income 17.1 20.4
Deferred acquisition costs 35.6 31.7
Future value of treaties 34.2 36.3
Deferred Federal income tax benefits 42.5 31.8
Prepaid and other assets 15.3 16.4
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Total assets $1,750.2 $1,724.5
======== ========
L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y
Liabilities:
Unpaid losses and loss expenses $1,015.8 $1,001.7
Unearned premiums 115.3 107.7
Senior bank debt 85.5 85.5
Senior notes 125.0 125.0
Interest payable 2.5 5.3
Other liabilities 32.5 18.4
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Total liabilities 1,376.6 1,343.6
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Stockholders' Equity:
Preferred stock, $.01 par value, 1,000,000
shares authorized; 96,697 shares retired; issued
and outstanding in 1996 and 1995: None -- --
Common stock, no par, 40,000,000 shares
authorized; 17,192,094 and 17,190,894 issued
in 1996 and 1995 -- --
Paid-in capital 218.1 217.9
Retained earnings 155.9 141.4
Unrealized appreciation, after tax 12.2 30.1
Cumulative translation adjustment, after tax (0.1) (0.1)
Treasury stock, at cost - 450,000 shares in 1996
and 325,300 shares in 1995 (12.5) (8.4)
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Total stockholders' equity 373.6 380.9
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Total liabilities and stockholders' equity $1,750.2 $1,724.5
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
NATIONAL RE CORPORATION
Consolidated Statements of Income
(Unaudited)
(In Millions, except per share amounts)
<TABLE><CAPTION>
Three Months Ended March 31,
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1996 1995
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<S> <C> <C>
Revenues:
Net premiums written $100.4 $ 87.6
Change in unearned premiums (7.6) (10.4)
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Net premiums earned 92.8 77.2
Net investment income 20.1 18.2
Realized capital gains 4.2 0.8
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Total revenues 117.1 96.2
Expenses:
Loss and loss expenses 61.0 54.9
Underwriting expenses 28.2 20.0
Interest expense 4.0 3.4
Other expenses 2.8 2.7
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Total expenses 96.0 81.0
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Operating income before Federal income taxes 21.1 15.2
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Federal income taxes:
Current 6.9 5.9
Deferred (1.1) (2.2)
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Total income taxes 5.8 3.7
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Net income $ 15.3 $ 11.5
====== ======
Weighted average shares outstanding 16.8 16.9
====== ======
Net income per share $ 0.91 $ 0.68
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
NATIONAL RE CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
($ In Millions)
<TABLE><CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $15.3 $11.5
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization and depreciation 2.5 2.4
Deferred federal income tax benefits (1.1) (2.2)
Unpaid losses and loss expenses 14.0 21.7
Unearned premiums 7.6 10.4
Reinsurance balances 3.9 (10.9)
Recoverable from reinsurers 1.7 (4.4)
Deferred acquisition costs (3.9) (1.7)
Interest payable (2.8) 1.0
Realized capital gains (4.2) (0.8)
Other, net 19.3 16.5
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Net cash provided by operating activities 52.3 43.5
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Cash Flows From Investing Activities:
Purchases of investments (330.6) (387.5)
Sales of investments 227.3 274.6
Maturities of investments 41.0 10.6
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Net cash used by investing activities (62.3) (102.3)
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Cash Flows From Financing Activities:
Refinancing - 1994 credit agreement -- (100.0)
Senior notes -- 100.0
Refinancing fees -- (1.2)
Dividends to stockholders (0.8) (0.7)
Purchases of treasury stock (4.1) (3.8)
Exercises of stock options 0.1 0.1
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Net cash used by financing activities (4.8) (5.6)
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Change in cash and cash equivalents (14.8) (64.4)
Cash and cash equivalents at beginning of period 22.9 91.7
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Cash and cash equivalents at end of period $ 8.1 $27.3
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Supplemental Information:
Interest Paid $ 6.8 $ 2.4
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Taxes Paid $ 1.3 $ -
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</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
NATIONAL RE CORPORATION
Notes to Consolidated Financial Statements
March 31, 1996
(Unaudited)
($ In Millions)
1. Organization and Basis of Presentation
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National Re Corporation, through its principal wholly-owned subsidiary, National
Reinsurance Corporation ("National Re"), reinsures property and casualty
insurance in the United States. National Re is domiciled in the State of
Delaware and is licensed to transact business in all 50 states, the District of
Columbia, the United Kingdom and Canada. National Re's business is concentrated
in the United States, where it is one of only six major direct writers of
property and casualty reinsurance. National Re now has four subsidiaries.
National Intermediaries, Inc. is a reinsurance broker incorporated and licensed
in New York. Fairfield Insurance Company is a Connecticut domiciliary licensed
in 36 states and the District of Columbia and ultimately expects to be licensed
in all 50 states. National Risk Services, Inc. was incorporated in Connecticut
in 1995 to perform risk management, underwriting, claims advisory and other
consulting services. National Re most recently acquired Global Resolution, Inc.,
a New Jersey domiciliary, to provide management consulting for running-off
reinsurance claims and liabilities.
The accompanying unaudited consolidated financial statements include the
accounts of the Company and all its subsidiaries and, in the opinion of
management, contain all adjustments necessary to present fairly the consolidated
financial position at March 31, 1996 and December 31, 1995, and the consolidated
results of operations and cash flows for the three months ended March 31, 1996
and 1995 in conformity with generally accepted accounting principles applicable
to interim periods. The preparation of financial statements requires management
to makes estimates and assumptions that affect the reported amount of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Management of the Company believes that key
estimates and assumptions used in the preparation of these financial statements
are appropriate; however, actual results could differ and, as necessary,
adjustments are recognized in current operations. The accompanying financial
statements should be read in conjunction with the audited consolidated financial
statements of the Company on its 1995 Form 10-K.
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<PAGE>
2. Income Taxes
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The effective federal income tax rate on operating income differs from the
prevailing corporate statutory rate. A reconciliation of this difference is as
follows, in millions:
<TABLE><CAPTION>
Three Months Ended March 31,
----------------------------------------
1996 1995
----------------- ------------------
% of % of
Amount Income Amount Income
------ ------ ------ ------
<S> <C> <C> <C> <C>
Operating income before income taxes $21.1 100.0% $15.2 100.0%
===== ===== ===== =====
Provision for federal income
taxes at statutory rate $ 7.4 35.0% $ 5.3 35.0%
Add (deduct) effect of:
Tax-advantaged investment income (1.0) (4.7) (1.2) (8.1)
Dividends received deduction (0.8) (3.5) (0.5) (3.3)
Amortization of acquisition costs
and excess of purchase price over
fair value of net assets acquired 0.1 0.3 0.1 0.7
Other, net 0.1 0.4 - -
----- ----- ----- -----
Provision for federal income taxes $ 5.8 27.5% $ 3.7 24.3%
===== ===== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are summarized below,
in millions.
<TABLE><CAPTION>
March 31, December 31,
1996 1995
-------- -----------
<S> <C> <C>
Deferred tax assets:
Unpaid losses and loss expenses $69.2 $68.1
Unearned premium discount 8.1 7.5
Other 0.6 0.6
Valuation allowance - -
----- -----
Total gross deferred tax assets 77.9 76.2
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Deferred tax liabilities:
Investments (6.9) (16.5)
Deferred acquisition costs (12.5) (11.1)
Future value of treaties (12.0) (12.7)
Other (4.0) (4.1)
----- -----
Total gross deferred tax liabilities (35.4) (44.4)
----- -----
Net deferred tax asset $42.5 $31.8
===== =====
</TABLE>
-5-
<PAGE>
3. Reinsurance
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National Re places reinsurance to reduce its exposure to large losses. However,
reinsurance agreements do not relieve National Re from its obligations to
clients. National Re remains liable to clients for the portion reinsured. To
minimize its exposure to significant losses from reinsurer insolvencies,
National Re evaluates the financial condition of its reinsurers and monitors
concentrations of credit risk arising from similar geographic regions,
activities, or economic characteristics of the reinsurers. Recoverables from
foreign, non-admitted reinsurers are substantially collateralized by letters of
credit that can be drawn on for amounts remaining unpaid for extended periods.
Regarding results of operations, the effects of reinsurance were as follows, in
millions:
Three Months Ended March 31,
----------------------------
1996 1995
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Gross written premium $108.8 $ 96.2
Ceded written premium 8.4 8.6
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Net written premium $100.4 $ 87.6
====== ======
Gross earned premium $101.2 $ 85.8
Ceded earned premium 8.4 8.6
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Net earned premium $ 92.8 $ 77.2
====== ======
Gross loss and loss expenses $ 61.4 $ 61.8
Ceded loss and loss expenses 0.4 6.9
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Net loss and loss expenses $ 61.0 $ 54.9
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-6-
<PAGE>
NATIONAL RE CORPORATION
Management's Discussion and Analysis
of Financial Condition and Results of Operations
March 31, 1996
Results of Operations - Quarter Ended March 31, 1996 vs. Quarter Ended March 31,
- --------------------------------------------------------------------------------
1995
- ----
Total revenues for 1996 were $117.1 million, a 21.7% increase over 1995. Net
premiums written in 1996 were $100.4 million, an increase of $12.8 million, or
14.6% over 1995. This increase in net premiums written continues a trend that
began in the second half of 1995 and is due to increased marketing activities.
Net premiums earned were $92.8 million, or 20.2% more than 1995.
Net investment income was $20.1 million compared to $18.2 million in 1995, an
increase of $1.9 million. The improvement is due to the greater level of
invested assets. After-tax net investment income was $14.8 million in 1996
compared with $13.6 million in 1995. Realized capital gains were $4.2 million in
the current quarter compared to $0.8 million in 1995.
Total expenses in 1996 were $96.0 million compared to $81.0 million in 1995.
Loss and loss adjustment expenses were $61.0 million in 1996 compared to $54.9
million in 1995. Ceded losses in the current quarter were $0.4 million, down
from $6.9 million in 1995.
Underwriting expenses, principally commissions paid to primary insurers and
general and administrative costs, totaled $28.2 million in 1996 compared to
$20.0 million in 1995. This increase is due to a higher commission structure on
increased writings of traditional treaty business. Interest expense increased
$0.6 million to $4.0 million, primarily attributable to the replacement of
floating rate debt with fixed rate senior notes issued in 1995. Other expenses,
principally amortization of intangibles, were $2.8 and $2.7 million in the 1996
and 1995 quarters, respectively.
The statutory combined ratio for the 1996 first quarter was 98.0%, down from
98.6% in the 1995 first quarter. Under the generally accepted accounting
principles ("GAAP") basis of accounting, the combined ratios for the comparable
quarters were 96.2% and 97.0%, respectively.
Pre-tax income was $21.1 million compared with $15.2 million for the like period
in 1995. The most significant factors in this increase are greater realized
capital gains and net investment income. Total taxes in 1996 were $5.8 million
compared with $3.7 million in 1995. The effective tax rates were 27.5% and 24.3%
in the 1996 and 1995 first quarters, respectively. The higher 1996 rate was due
to a higher portion of taxable securities. The greatest factors in the decline
below the statutory rate of 35.0% in both 1996 and 1995 were the benefit of both
investments in tax-advantaged securities and the dividends received deduction.
Net income in 1996 was $15.3 million compared with $11.5 million in 1995,
reflecting increases in both income from operations and capital gains.
Reserves
- --------
Significant time often elapses between the occurrence of an insured loss,
reporting of the loss to the primary insurer and, thereafter, to the reinsurer,
and the primary insurer's payment of that loss and subsequent indemnification by
the reinsurer. To recognize liabilities for unpaid losses and loss adjustment
expenses as of the end of each accounting period, National Re establishes
reserves as balance sheet liabilities representing estimates of amounts needed
to pay reported and unreported losses and related expenses.
-7-
<PAGE>
As part of the reserving process, National Re's management reviews historical
data and anticipates the impact of various factors such as legislative
enactments, judicial decisions, changes in social and political attitudes, and
trends in general economic conditions, all of which may impact the size and
timing of the ultimate payment of losses. This process assumes that past
experience, adjusted for the effects of current developments and anticipated
trends, is an appropriate basis for predicting future events. The process of
establishing these reserves is based upon generally accepted actuarial
principles and standards, but, nevertheless, is imprecise and reflects
significant judgmental factors. However, management believes that the current
level of reserves is adequate to cover the estimated liability for unpaid losses
and loss expenses. The establishment of the appropriate level of loss reserves
is an inherently uncertain process, and therefore there can be no assurance that
ultimate losses and loss expenses will not exceed the loss reserves currently
established. However, reserves are continually reviewed, and as adjustments
become necessary, they are reflected in current operations. At March 31, 1996,
gross reserves for unpaid losses and loss adjustment expenses were $1,015.8
million.
Liquidity and Capital Resources - March 31, 1996
- ------------------------------------------------
The parent Company's cash flow consists principally of dividends and tax
payments from National Re. National Re's cash flow from operations consists of
premiums collected, income earned on invested assets and receipt of funds from
reinsurance recoverables. Consolidated cash flow from operations for the first
quarter of 1996 was $52.3 million, an increase of $8.8 million, or 20.2%, over
the first quarter 1995.
Total assets increased to $1,750.2 million at March 31, 1996. The fair value of
fixed maturity securities was $13.7 million greater than amortized cost at March
31, 1996, compared to $38.8 million greater than amortized cost at year-end.
Invested assets increased $22.9 million since December 1995 due to the
reinvestment of continued strong operating cash flow, offset by rising interest
rates. The pre-tax return on average invested assets was 6.2% in 1996 compared
with 6.4% in 1995. National Re's portfolio at March 31, 1996 was comprised
primarily of U.S. Treasury and government agency mortgage pass-through
securities, and corporate and municipal bonds rated "A" or better. 78.7% of the
bonds were rated "Aaa."
Stockholders' equity decreased to $373.6 million at March 31, 1996, compared to
$380.9 million at December 31, 1995, due to both the decrease in net unrealized
appreciation on investments and the purchases of treasury stock. On a statutory
basis, surplus increased $12.6 million to $444.9 million at March 31, 1996.
-8-
<PAGE>
NATIONAL RE CORPORATION
PART II OTHER INFORMATION
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-9-
<PAGE>
NATIONAL RE CORPORATION
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.
National Re Corporation
(Registrant)
/s/ William D. Warren
-----------------------
William D. Warren
President and Chief Executive
Officer
/s/ Peter A. Cheney
-----------------------
Peter A. Cheney
Chief Financial and Accounting
Officer
Dated: May 7, 1996
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<PAGE>
NATIONAL RE CORPORATION
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.
National Re Corporation
(Registrant)
/s/ William D. Warren
-----------------------------
William D. Warren
President and Chief Executive
Officer
/s/ Peter A. Cheney
-----------------------------
Peter A. Cheney
Chief Financial and Accounting
Officer
Dated: May 7, 1996
-10-
