INDEPENDENT AUDITORS' REPORT
The Board of Directors
SCOR U.S. Corporation:
We have reviewed the consolidated balance sheet of SCOR U.S. Corporation
and subsidiaries (the Company) as of June 30, 1994, and the related
consolidated statements of operations, stockholders' equity and cash flows
for the three month and six month periods ended June 30, 1994 and 1993.
These consolidated financial statements are the responsibility of the
Company's management.
We conducted our review 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 inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that
should be made to the 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 SCOR U.S. Corporation
and subsidiaries as of December 31, 1993, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year
then ended (not presented herein); and in our report dated February 1,
1994, except for Note 15, as to which the date was February 10, 1994, we
expressed an unqualified opinion on those consolidated financial
statements.
As discussed in Note 3 to the consolidated financial statements for the
three month and six month periods ended June 30, 1994, the Company changed
its method of accounting for multiple year retrospectively rated
reinsurance contracts and for the adoption of the provisions of the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 113,"Accounting and Reporting of Short-Duration and Long-
Duration Contracts," in 1993.
KPMG Peat Marwick
(Signature)
New York, New York
August 2, 1994
SCOR U.S. CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
1994 1993
ASSETS
Investments:
Fixed maturities:
Available for sale, at fair value
(amortized cost: $585,826 and $558,882) $ 569,422 $ 581,104
Held to maturity, at amortized cost
(fair value: $19,977 and $27,109) 19,849 24,876
Equity securities, at fair value
(cost: $14,483 and $15,581) 15,043 18,951
Short-term investments, at cost 55,157 90,642
Other long-term investments 1,200 1,081
660,671 716,654
Cash 13,994 17,096
Accrued investment income 10,275 10,169
Premiums receivable 109,975 80,319
Reinsurance recoverable on paid losses:
Affiliates 12,216 9,498
Other 43,672 27,329
Reinsurance recoverable on unpaid losses:
Affiliates 125,463 134,154
Other 98,605 87,689
Prepaid reinsurance premiums:
Affiliates 10,407 14,578
Other 12,033 11,839
Deferred policy acquisition costs 25,609 24,140
Deferred Federal income tax benefits 38,280 11,894
Investment in affiliates 11,048 10,789
Other assets 42,455 37,963
$ 1,214,703 $ 1,194,111
See notes to consolidated financial statements.
4
SCOR U.S. CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
1994 1993
LIABILITIES
Losses and loss expenses $ 622,829 $ 562,209
Unearned premiums 121,633 114,376
Funds held under reinsurance treaties:
Affiliates 3,719 21,777
Other 19,485 17,825
Reinsurance balances payable:
Affiliates 9,898 18,196
Other 59,825 42,037
Convertible subordinated debentures 86,250 86,250
Notes payable 20,000 20,000
Commercial paper 10,954 10,721
Other liabilities 13,309 10,031
967,902 903,422
STOCKHOLDERS' EQUITY
Preferred stock, no par value, 5,000
shares authorized; no shares issued -0- -0-
Common stock, $0.30 par value,
50,000 shares authorized;
18,299 and 18,299 shares issued 5,490 5,490
Additional paid-in capital 112,894 112,670
Unrealized appreciation (depreciation)
of investments (10,299) 16,634
Foreign currency translation adjustment (269) 12
Retained earnings 140,452 157,532
Treasury stock, at cost(158 and 190 shares) (1,467) (1,649)
246,801 290,689
$ 1,214,703 $ 1,194,111
See notes to consolidated financial statements.
5
SCOR U.S. CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
Three Months Ended
June 30, June 30,
1994 1993 1994 1993
REVENUES
Net premiums earned $ 54,983 $ 56,722 $ 117,668 $ 110,482
Net investment income 10,208 10,866 20,206 20,898
Net realized investment gains 413 2,029 736 5,357
65,604 69,617 138,610 136,737
LOSSES AND EXPENSES
Losses and loss expenses, net 42,991 37,770 113,498 71,744
Commissions, net 14,356 14,489 31,875 27,769
Other underwriting and
administration expenses 5,980 6,866 12,787 13,006
Other expenses 1,062 978 1,475 1,928
Interest expense 2,204 2,349 4,528 3,521
66,593 62,452 164,163 117,968
Income (loss) from operations before
Federal income taxes and cumulative
effect of accounting changes (989) 7,165 (25,553) 18,769
Federal income taxes (benefit) (1,592) 1,292 (11,738) 4,123
Income (loss) from operations 603 5,873 (13,815) 14,646
Cumulative effect of accounting changes -0- -0- -0- (2,600)
Net income (loss) $ 603 $ 5,873 $ (13,815) $ 12,046
See notes to consolidated financial statements.
6
SCOR U.S. CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
Three Months Ended
Six Months Ended
June 30, June 30,
1994 1993 1994 1993
PER SHARE DATA
PRIMARY
Average common and common
equivalent shares outstanding 18,191 18,472 18,125 18,483
Income (loss) from operations $ 0.03 $ 0.32 $ (0.76) $ 0.79
Cumulative effect of accounting changes -0- -0- -0- (0.14)
Net income (loss) $ 0.03 $ 0.32 $ (0.76) $ 0.65
FULLY DILUTED
Average common and common
equivalent shares outstanding 18,191 21,742 18,125 20,152
Income (loss) from operations $ 0.03 $ 0.31 $ (0.76) $ 0.77
Cumulative effect of accounting changes -0- -0- -0- (0.13)
Net income (loss) $ 0.03 $ 0.31 4 (0.76) $ 0.64
See notes to consolidated financial statements.
7
SCOR U.S. CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Six Months Ended June 30,
(Unaudited)
(in thousands, except per share data)
1994 1993
COMMON STOCK
Balance at beginning of year $ 5,490 $ 5,453
Issuance of common stock -0- 37
Balance at end of period 5,490 5,490
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year 112,670 112,068
Issuance of common stock 179 1,416
Change in unpaid stock options exercised 45 (787)
Balance at end of period 112,894 112,697
UNREALIZED APPRECIATION (DEPRECIATION)
OF INVESTMENTS
Balance at beginning of year 16,634 11,416
Change in unrealized appreciation (26,933) 7,012
Balance at end of period (10,299) 18,428
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Balance at beginning of year 12 254
Change in foreign currency
translation adjustment (281) (45)
Balance at end of period (269) 209
RETAINED EARNINGS
Balance at beginning of year 157,532 138,002
Net income (13,815) 12,046
Dividends ($.18 and $.16 per share) (3,265) (2,899)
Balance at end of period 140,452 147,149
TREASURY STOCK
Balance at beginning of year (1,649) (1,077)
Net (purchases) reissuance of treasury stock 182 (4)
Balance at end of period (1,467) (1,081)
TOTAL STOCKHOLDERS' EQUITY AT END OF PERIOD $ 246,801 $ 282,892
Common stock shares
Balance at beginning of year 18,299 18,176
Issuance of common stock -0- 123
Balance at end of period 18,299 18,299
Treasury stock shares
Balance at beginning of year 190 153
Net purchases (reissuance) of treasury stock (32) 1
Balance at end of period 158 154
See notes to consolidated financial statements.
8
SCOR U.S. CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Mon
Three Months Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 603 $ 5,873 $(13,815) $ 12,046
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Cumulative effect of accounting changes -0- -0- -0- 2,600
Realized investment gains (413) (2,029) (736) (5,357)
Changes in assets and liabilities:
Accrued investment income (162) (1,976) (106) (280)
Premium balances, net (23,384) (4,177) (20,166) (8,144)
Prepaid reinsurance premiums 2,295 3,894 3,977 (5,944)
Reinsurance recoverable on paid losses (5,669) (2,048) (19,061) 7,068
Deferred policy acquisition costs (51) 685 (1,469) (1,910)
Losses and loss expenses 7,453 (10,339) 60,620 1,617
Unearned premiums (1,189) (351) 7,257 9,078
Reinsurance recoverable on unpaid losses 6,375 2,658 (2,225) (14,353)
Funds held under reinsurance treaties 123 (2,328) (16,398) (491)
Federal income taxes (1,592) (1,007) (13,538) 9,324
Other 431 582 201 712
Net cash provided by (used in) operating (15,180) (10,563) (15,459) 5,966
activities
See notes to consolidated financial statements.
9
SCOR U.S. CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Mon
Three Months Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
CASH FLOWS FROM INVESTING ACTIVITIES
Sales, maturities or redemptions
of fixed maturities 98,862 70,454 138,788 183,097
Sales of equity securities 2,145 3,435 4,516 4,953
Net sales (purchases) of
short-term investments (7,520) 63,401 36,734 (42,990)
Investments in fixed maturities (80,865) (112,295) (159,668) (225,819)
Investments in equity securities (486) (3,536) (2,215) (4,368)
Other (1,808) (2,339) (2,980) (3,594)
Net cash provided by (used in) investing activities 10,328 19,120 15,175 (88,721)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (1,632) (1,452) (3,265) (2,899)
Proceeds from issuance of convertible
subordinated debentures -0- -0- -0- 85,172
Proceeds from issuance of commercial paper-net 6 16 27 57
Proceeds from stock options exercised 27 837 45 960
Other 282 (747) 375 297
Net cash provided by (used in) financing activities (1,317) (1,346) (2,818) 83,587
Net increase (decrease) in cash (6,169) 7,211 (3,102) 832
Cash at beginning of period 20,163 13,999 17,096 20,378
Cash at end of period $ 13,994 $ 21,210 $ 13,994 $ 21,210
See notes to consolidated financial statements.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
SCOR U.S. Corporation ("SCOR U.S." or "Company") is a
holding company, the principal operating subsidiaries of which
are SCOR Reinsurance Company ("SCOR Re"), General Security
Insurance Company ("GSIC"), The Unity Fire and General Insurance
Company ("Unity Fire") and General Security Indemnity Company
("GSIND").
The Company, through its subsidiaries, provides property
and casualty insurance and reinsurance to primary insurance
companies on both a treaty and facultative basis. SCOR Re
specializes in underwriting treaties covering non-standard
automobile, commercial and technical risks and provides property,
casualty and special risk coverages on a facultative basis. SCOR
Re writes treaty business almost exclusively through reinsurance
intermediaries. SCOR Re writes facultative business directly
with primary insurance companies and through reinsurance
intermediaries. GSIC and Unity Fire provide property and
casualty insurance on both a primary and excess basis,
specializing in alternative risk market coverages. GSIND
provides commercial property and casualty coverages on a surplus
lines basis.
The unaudited interim consolidated financial statements
have been prepared on the basis of Generally Accepted Accounting
Principles ("GAAP") and in the opinion of management, reflect all
adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of results for such periods.
The results of operations for any interim period are not
necessarily indicative of results for the full year.
These consolidated financial statements should be read in
conjunction with the consolidated financial statements and
related notes in the Company's 1993 Annual Report on Form 10-K as
filed with the Securities and Exchange Commission.
2. PER SHARE DATA
Primary earnings per share are based on the weighted
average number of common shares outstanding during the period
and, if dilutive, common shares assumed to be outstanding which
are issuable under stock option plans. Fully diluted earnings
per share are based on the additional assumption that the
Debentures (as defined in Note 6) are converted into common
shares, if dilutive.
3. ACCOUNTING CHANGES
Effective as of December 31, 1993, the Company adopted
Statement of Financial Accounting Standards No. 115 "Accounting
for Certain Investments in Debt and Equity Securities" ("SFAS
115"). SFAS 115 addresses the accounting and reporting for
investments in equity securities that have readily determinable
11
fair values and for all investments in debt securities. Under
SFAS 115, investments are classified into three categories. Debt
securities that management has the positive intent and the
ability to hold to maturity are classified as "held to maturity"
and reported at amortized cost. Debt and equity securities that
are bought and held for the purpose of selling them in the near
term are classified as "trading securities" and reported at fair
value with unrealized gains and losses included in earnings.
Debt and equity securities not classified as either of the above
categories are classified as "available for sale securities" and
reported at fair value with unrealized gains and losses reported
as a separate component of stockholders' equity. The adoption of
SFAS 115 did not have any effect on the Company's financial
position or its results from operations.
The FASB's Emerging Issues Task Force ("EITF") reached a
consensus on July 22, 1993 regarding Issue No. 93-6, "Accounting
for Multiple-Year Retrospectively-Rated Contracts by Ceding and
Assuming Enterprises" ("EITF 93-6"). EITF 93-6 has had an impact
on certain of the Company's retrocessional agreements. As a
result of the Company's implementation of the change in
accounting method, as of January 1, 1993, $2.6 million, or $0.14
per share (after-tax), is included as a reduction to income as a
cumulative adjustment. The effect of this change, excluding the
cumulative adjustment, for the three months and six months ended
June 30, 1993 was to increase net income by $19,000, or $0.00 per
share, and $1.3 million, or $0.06 per share, respectively.
In the first quarter of 1993, the Company adopted Statement
of Financial Accounting Standards No. 113 "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts" ("SFAS 113"). The significant provisions of SFAS 113
require grossing-up the balance sheet to eliminate the reporting
of assets and liabilities relating to reinsured contracts net of
the effects of reinsurance, establish the conditions for a
contract to be accounted for as reinsurance, require the deferral
and amortization of any gain from retroactive contracts as
defined in SFAS 113, and provide guidance in assessing transfer
of insurance risk in reinsurance. The adoption of SFAS 113 did
not have a material effect on the Company's financial position or
its results from operations.
4. INCOME TAXES
The Company's effective income tax rate differs from the
current statutory federal income tax rate of 35% principally due
to tax-exempt interest income and dividends received deductions.
12
5. REINSURANCE
The effect of ceded reinsurance on the Statement of Operations for the
three and six months ended June 30, 1994 and 1993 are as follows (in
thousands):
THREE MONTHS ENDED JUNE 30, 1994
Loss
and Loss
Premium Premium Expenses
Written Earned Incurred
Direct $ 2,365 $ 3,017 $ 2,536
Assumed 66,833 67,370 43,632
Ceded- affiliate (6,052) (7,286) (2,285)
Ceded - other (7,057) (8,118) (892)
Net $ 56,089 $ 54,983 $ 42,991
THREE MONTHS ENDED JUNE 30, 1993
Direct $ 2,336 $ 1,679 $ 141
Assumed 72,690 73,698 55,170
Ceded - affiliate (9,102) (7,844) (10,031)
Ceded - other (5,659) (10,811) (7,510)
Net $ 60,265 $ 56,722 $ 37,770
SIX MONTHS ENDED JUNE 30, 1994
Loss
and Loss
Premiums Premiums Expenses
Written Earned Incurred
Direct $ 5,955 $ 6,823 $ 5,636
Assumed 157,986 149,861 163,045
Ceded - affiliate (16,930) (20,933) (25,679)
Ceded - other (18,109) (18,083) (29,504)
Net $ 128,902 $ 117,668 $ 113,498
SIX MONTHS ENDED JUNE 30, 1993
Direct $ 4,833 $ 4,157 $ 6,144
Assumed 155,827 147,427 110,801
Ceded - affiliate (22,039) (21,020) (23,081)
Ceded - other (25,007) (20,082) (22,120)
Net $ 113,614 $ 110,482 $ 71,744
13
6. CONVERTIBLE SUBORDINATED DEBENTURES
On March 29, 1993, SCOR U.S. sold at par $86.25 million of
5.25% Convertible Subordinated Debentures due April 1, 2000
("Debentures") through a private offering. The Debentures are
not redeemable by the Company prior to April 3, 1996 and are
convertible into approximately 3.4 million shares of SCOR U.S.
common stock at a conversion price of $25.375 per share.
Expenses incurred in the offering of approximately $1.8 million
were deferred and are being amortized over the life of the
Debentures. The Company contributed $50 million of the net
proceeds to SCOR Re.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
GENERAL
SCOR U.S. Corporation ("SCOR U.S." or the "Company") is a
holding company, the principal operating subsidiaries of which
are SCOR Reinsurance Company ("SCOR Re"), General Security
Insurance Company ("GSIC"), The Unity Fire and General Insurance
Company ("Unity Fire") and General Security Indemnity Company
("GSIND").
The Company, through its subsidiaries, provides property and
casualty insurance and reinsurance to primary insurance companies
on both a treaty and facultative basis. SCOR Re specializes in
underwriting treaties covering non-standard automobile,
commercial and technical risks and provides property, casualty
and special risk coverages on a facultative basis. SCOR Re
writes treaty business almost exclusively through reinsurance
intermediaries. SCOR Re writes facultative business directly
with primary insurance companies and through reinsurance
intermediaries. GSIC and Unity Fire provide property and
casualty insurance on both a primary and excess basis,
specializing in alternative risk market coverages. GSIND
provides commercial property and casualty coverages on a surplus
lines basis.
The operating results of the property and casualty insurance
and reinsurance industry are subject to significant fluctuations
due to competition, catastrophic events, general economic
conditions, interest rates and other factors such as changes in
tax laws and regulations. The operating results of SCOR U.S.
have been influenced by these cycles.
UNDERWRITING RESULTS
The underwriting results of a property and casualty insurer
or reinsurer are discussed frequently by reference to its loss
ratio, underwriting expense ratio and combined ratio. The loss
ratio is the result of dividing losses and loss expenses incurred
by net premiums earned. The underwriting expense ratio is the
result of dividing underwriting expenses by net premiums written
for purposes of Statutory Accounting Practices ("SAP") and net
premiums earned for purposes of Generally Accepted Accounting
Principles ("GAAP"). The combined ratio is the sum of the loss
ratio and the underwriting expense ratio. A combined ratio under
100% generally indicates underwriting profits and a combined
ratio exceeding 100% generally indicates underwriting losses.
Underwriting profit is only one element of overall profitability,
15
which also includes investment results, interest expense and the
effects of income taxation. Accordingly, the combined ratio
alone should not be used to measure overall profitability. The
ratios discussed below have been calculated on a GAAP basis.
The following table sets forth the Company's GAAP combined
ratios and the components thereof for the periods indicated, and
the SAP combined ratio for the Company's insurance and
reinsurance subsidiaries. The GAAP ratios include the operating
expenses of the holding company and the non-insurance
subsidiaries, in addition to the operating expenses of the
insurance and reinsurance subsidiaries. The SAP expense ratios
include only the operating expenses of the insurance and
reinsurance subsidiaries. In addition, the GAAP loss ratio takes
into consideration recoveries under certain retrocessional
agreements with SCOR S.A., the Company's majority shareholder,
whereas these recoveries are included in other income for SAP
purposes.
Three Months Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
GAAP RATIOS
(Total Company)
Loss ratio 78.2% 66.6% 96.5% 64.9%
Commission ratio 26.1% 25.5% 27.1% 25.1%
U/W, admin. and other
expense ratio 12.8% 13.8% 12.1% 13.5%
Expense ratio 38.9% 39.3% 39.2% 38.6%
Combined ratio 117.1% 105.9% 135.7% 103.5%
SAP RATIOS*
Combined ratio 114.0% 98.1% 130.1% 106.5%
* Reinsurance and insurance subsidiaries only.
COMPARISON OF SECOND QUARTER RESULTS FOR 1994 WITH 1993
Gross premiums written for 1994 decreased 8% to
$69.2 million from $75.0 million in 1993. Net premiums written
for 1994 decreased 7% to $56.1 million from $60.3 million for
1993. The decrease in premium volume was attributable principally
to the continued withdrawal from certain property and casualty
lines of business where the Company believes rates and/or
conditions are inadequate. More specifically, throughout 1994
16
the Company has been reducing its property business written on a
pro rata basis. A combination of an acceleration in the
reduction of this business and fewer attractive opportunities in
targeted lines of business caused the reduction in 1994 premium
volume.
Net losses and loss expenses incurred increased 14% in 1994
to $43.0 million from $37.8 million in 1993. The loss ratio was
78.2% for 1994 as compared with 66.6% for 1993. During 1993 the
Company incurred $3.0 million of net losses ($4.0 million of
gross losses) resulting from property catastrophe events,
primarily the World Trade Center bombing and the East Coast
blizzard, which adversely affected the loss ratio by 5.5 points.
The Company did not experience any material amount of incurred
losses from property catastrophe events in the second quarter of
1994. The Company experienced an increase in non-catastrophe
related treaty incurred losses during the second quarter of 1994.
During 1994 and 1993, the Company ceded $15.4 million and
$18.7 million of earned premiums, respectively. The Company
recovered from retrocessionnaires $3.2 million and $17.5 million
of losses during 1994 and 1993, respectively.
Commission expenses decreased 1% to $14.4 million in 1994
from $14.5 million in 1993. The commission ratio was 26.1% for
1994, compared with 25.5% for 1993.
Underwriting, administration and other expenses decreased
10% in 1994 to $7.0 million from $7.8 million in 1993. The
underwriting and other expense ratio was 12.8% for 1994 as
compared with 13.8% for 1993.
The combined ratio was 117.1% for 1994, compared with
105.9% for 1993. The effect of property catastrophe events on
the 1993 combined ratio was 5.5 points.
Net investment income for 1994 decreased 6% to $10.2
million from $10.9 million in 1993. Net investment income (pre-
tax) has been affected adversely by the high level of claim
payments made since mid-1992 related to catastrophic events and
the Company's managed shift toward a greater percentage of tax-
exempt securities. Offsetting the above factors was an increase
in investment income related to the proceeds of the issuance by
the Company in March, 1993 of $86.25 million of 5.25% Convertible
Subordinated Debentures due April 1, 2000 ("Debentures") (see
Liquidity and Capital Resources). On an after-tax basis, net
investment income decreased 4% to $8.1 million for 1994, compared
with $8.3 million in 1993. Net realized investment gains for
1994 were $400,000, compared with $2.0 million for 1993.
Interest expense decreased 6% to $2.2 million in 1994 from
$2.3 million in 1993.
17
The Company's net income for 1994 was $600,000, or $0.03
per share, on a primary basis, compared with $5.9 million, or
$0.32 per share, for 1993. The 1993 results were affected by
after-tax charges to operations, net of reinsurance, of $1.9
million, or $0.11 per share for property catastrophe events.
Average common and common equivalent shares outstanding (on a
primary basis) for 1994 were 18.2 million, compared with 18.5
million for 1993.
COMPARISON OF YEAR TO DATE RESULTS FOR 1994 WITH 1993
Gross premiums written for 1994 increased 2% to
$163.9 million from $160.7 million in 1993. Net premiums written
for 1994 increased 13% to $128.9 million from $113.6 million for
1993. Gross premiums written and net premiums written for 1994
were increased by $800,000 and reduced by $5.4 million,
respectively, of additional premiums to reinstate catastrophe
reinsurance protections subsequent to the January 1994 Northridge
earthquake. Excluding these reinstatement premiums, gross
premiums written and net premiums written for 1994 increased by
2% and 18%, respectively, compared with 1993. The increase in
premium volume was attributable principally to the first quarter
effect of new and increased participations in treaty business
from targeted market segments such as nonstandard automobile.
Offsetting most of the Company's premium growth was the continued
withdrawal from certain property and casualty lines of business
where the Company believes rates and/or conditions are
inadequate.
Net losses and loss expenses incurred increased 58% in 1994
to $113.5 million from $71.7 million in 1993. The loss ratio was
96.5% for 1994 as compared with 64.9% for 1993. During 1994 the
Company incurred $31.5 million of net losses ($61.0 million of
gross losses) resulting from property catastrophe events, which
added 29.7 points to the loss ratio. Of these amounts, the
January 1994 Northridge, California earthquake accounted for
$26.1 million of net incurred losses and $54.8 million of gross
incurred losses. During 1993 the Company incurred $9.0 million of
net losses ($12.1 million of gross losses) resulting from
property catastrophe events, primarily the World Trade Center
bombing and the East Coast blizzard, which adversely affected the
loss ratio by 8.1 points.
During 1994 and 1993, the Company ceded $39.0 million and
$41.1 million of earned premiums, respectively. The Company
recovered from retrocessionnaires $55.2 million and $45.2 million
of losses during 1994 and 1993, respectively. Ceded premiums in
1994 included $6.0 million of reinstatement premiums paid by the
Company. Ceded losses in 1994 included $29.5 million of losses
resulting from property catastrophe events.
18
Commission expenses increased 15% to $31.9 million in 1994
from $27.8 million in 1993. The commission ratio was 27.1% for
1994, compared with 25.1% for 1993. The increase in the
commission ratio for 1994 is primarily attributable to the effect
of net reinstatement premiums related to the property catastrophe
events, which added 1.1 points to the 1994 commission ratio.
Underwriting, administration and other expenses decreased
4% in 1994 to $14.3 million from $14.9 million in 1993. The
underwriting and other expense ratio was 12.1% for 1994 as
compared with 13.5% for 1993. The effect of net reinstatement
premiums related to the property catastrophe events added 0.5
points to the 1994 ratio. The decrease in the underwriting and
other expense ratio in 1994 was principally caused by the higher
growth rate of net premiums earned as compared with the 4%
decline in expenses.
The combined ratio was 135.7% for 1994, compared with
103.5% for 1993. The effect of property catastrophe events on
the 1994 and 1993 combined ratio was 31.3 points and 8.1 points,
respectively.
Net investment income for 1994 decreased 3% to $20.2
million from $20.9 million in 1993. Net investment income (pre-
tax) has been affected adversely by the high level of claim
payments made since mid-1992 related to catastrophic events and
the Company's managed shift toward a greater percentage of tax-
exempt securities. Offsetting the above factors was an increase
in investment income related to the proceeds of the issuance by
the Company in March, 1993 of the Debentures. On an after-tax
basis net investment income for 1994 was virtually unchanged at
$16.1 million. Net realized investment gains for 1994 were
$700,000 compared with $5.4 million for 1993.
Interest expense increased 29% to $4.5 million in 1994 from
$3.5 million in 1993. The increase was principally attributable
to six months of interest expense recognized on the Debentures in
1994 compared with three months of interest expense in 1993.
The Company's net loss for 1994 was $13.8 million, or $0.76
per share, on a primary basis, compared with net income of $12.0
million, or $0.65 per share, for 1993. The 1994 results were
affected by after-tax charges to operations, net of reinsurance,
of $23.8 million, or $1.31 per share for property catastrophe
events. The 1993 results were affected by after-tax charges to
operations, net of reinsurance, of $5.9 million, or $0.32 per
share for property catastrophe events. Average common and common
equivalent shares outstanding (on a primary basis) for 1994 were
18.1 million, compared with 18.5 million for 1993.
19
INCOME TAXES
Statement of Financial Accounting Standards No. 109
requires the establishment of a valuation allowance for deferred
income tax benefits where it is more likely than not that some
portion of the deferred income tax benefits will not be realized.
Management believes, based on the Company's historical record of
generating taxable income and its expectations of future
earnings, that the Company's taxable income in future periods
will be sufficient to realize the net deferred income tax
benefits reflected on its consolidated balance sheet as of June
30, 1994. The Company also has the ability to recover certain
income taxes paid on capital gains if capital losses were to be
realized. In addition, management believes certain tax planning
strategies exist, including its ability to alter the mix of its
investment portfolio to taxable investments from tax-exempt
investments, which could be implemented if necessary to ensure
sufficient taxable income to realize fully its net deferred
income tax benefits. Accordingly, SCOR U.S. has not established a
valuation allowance with respect to its net deferred income tax
benefits.
LIQUIDITY AND CAPITAL RESOURCES
SCOR U.S. is a holding company. Its principal sources of
cash are cash dividends from its operating subsidiaries,
borrowings, and the issuance of equity securities. Generally,
dividends that can be paid, without prior approval of the New
York Insurance Superintendent, by insurers domiciled in New York
State, including SCOR Re, are limited for any twelve-month period
to the lesser of 10% of statutory surplus or adjusted net
investment income (as defined by New York Insurance Law) for the
previous twelve months. During the twelve months ended June 30,
1994, $19.1 million of dividends were declared to SCOR U.S. At
June 30, 1994, the aggregate statutory surplus of the SCOR U.S.
operating subsidiaries was $240.5 million.
On March 29, 1993, SCOR U.S. sold at par $86.25 million of
5.25% Convertible Subordinated Debentures due April 1, 2000
through a private offering. The Debentures are not redeemable by
the Company prior to April 3, 1996 and are convertible into
approximately 3.4 million shares of SCOR U.S. common stock at a
conversion price of $25.375 per share. Expenses incurred in the
offering of approximately $1.8 million were deferred and are
being amortized over the life of the Debentures. The Company
contributed $50 million of the net proceeds to SCOR Re.
On October 1, 1990 SCOR U.S. renewed a $20.0 million note
which was payable on that date. The new note is due and payable
on October 3, 1995 and bears interest at a fixed annual rate of
9.575%. The Company has entered into an interest rate swap
20
agreement on this note with a commercial bank. The swap
agreement has a maturity date of October 1, 1995 and provides for
the Company to make floating rate payments in exchange for fixed
rate payments to be made by the counter party.
SCOR U.S. has established a commercial paper program which
allows it to raise up to $50.0 million. At June 30, 1994, $11.0
million of commercial paper was outstanding.
SCOR U.S. has a $30.0 million revolving line of credit with
a bank which serves as a backstop for its commercial paper
program. No borrowings have been made under this facility.
At June 30, 1994, the amount remaining under the Company's
existing stock repurchase program is approximately $1.4 million,
which may be utilized as market conditions permit. The Company
has not repurchased any shares during 1994.
The primary sources of liquidity for the SCOR U.S.
insurance and reinsurance subsidiaries are net cash flow from
operating activities, the maturity or sale of investments, and
capital contributions from SCOR U.S. Net cash used in operating
activities was $15.5 million for 1994 compared with cash provided
by operations of $6.0 million for 1993. Cash flow from operating
activities during 1994 was adversely affected by continued
property catastrophe paid loss activity as well as the payment of
several large previously reserved casualty claims. The Company
has not suffered any adverse effect due to the recent catastrophe
activity in the timing of recoveries or credit worthiness of
retrocessionnaires. Loss payments associated with the recent
catastrophe activity are not expected to have an adverse material
effect on the Company's short-term or long-term liquidity.
During 1993, the Company incurred $9.4 million of capital
expenditures, which primarily related to the development of
information systems. At June 30, 1994, the Company had no
significant commitments for capital expenditures.
Effective January 1, 1991, SCOR Re and certain of the
Company's other operating subsidiaries operate under a
reinsurance pooling agreement pursuant to which the net amounts
under all new and renewal business written by each such company
are pooled. The net balances of the pool are then distributed to
each company in accordance with established proportions.
At June 30, 1994, total investments and cash at carrying
value were $674.7 million compared with $733.8 million at
December 31, 1993. The decreased level of investments and cash
is primarily attributable to the decrease during the period in
the fair value of investments carried at fair value and the
negative cash flow from operations during the period. SCOR U.S.
fixed maturity investments are substantially all investment
21
grade, liquid securities with a weighted average maturity of 7
years. Approximately 98% of the fixed maturity portfolio is
rated A or better. SCOR U.S. does not have any investment in
real estate or high yield bonds. At June 30, 1994, the Company
did not have any non-income producing investments.
SCOR U.S. believes that cash and short-term investments are
maintained at an adequate level for payment of claims and
expenses as they become due. In addition, SCOR U.S. maintains a
maturity distribution profile of fixed maturity investments
sufficient to fund anticipated loss and loss expense obligations
as they become due. The Company's long-term obligations
primarily consist of the Debentures and the claims liabilities of
the principal operating subsidiaries, which at June 30, 1994
averaged approximately 4.5 years.
The Company may be subject to gains and losses resulting
from currency fluctuations because some of its investments are
denominated in currencies other than United States dollars, as
are some of its net loss reserve liabilities. The Company makes
investments denominated in foreign currencies to mitigate, in
part, the effects of currency fluctuations on its results of
operations. Investments denominated in foreign currencies
do not constitute a material portion of the Company's investment
portfolio and, in the opinion of management, are sufficient to
meet its foreign currency obligations. Net gains (losses)
resulting from foreign currency transactions during the six month
periods ended June 30, 1994 and 1993 were $ 200,000 and
(200,000), respectively.
Stockholders' equity at June 30, 1994 was $246.8 million, a
decrease of $43.9 million over December 31, 1993. This decrease
resulted primarily from the net loss of $13.8 million for the
period, unrealized depreciation of investments carried at fair
value, net of tax effect, of $26.9 million, and cash dividends
declared of $3.3 million.
The ratio of net premiums written to surplus, sometimes
referred to as "insurance exposure", relates to the amount of
risk to which an insurer's statutory capital and surplus can be
exposed, as measured by the amount of premiums written in
relation to such surplus. Insurance practice and regulatory
guidelines suggest that property and casualty insurance companies
maintain a net premiums written to surplus ratio of less than 3
to 1. For the reinsurance industry, a ratio of 2 to 1 or less is
generally considered prudent. SCOR U.S.'s net premiums written
to surplus ratios were 1.08 to 1 and 0.81 to 1 for 1994 and 1993,
respectively.
22
REGULATORY MATTERS
The National Association of Insurance Commissioners
("NAIC"), an organization that assists state insurance regulators
in achieving regulatory objectives, established minimum capital
requirements, referred to as risk based capital, by adopting a
risk-based capital formula for property and casualty companies in
December 1993. The risk based capital formula will be applied to
statutory financial statements beginning for the year ending
December 31, 1994. The essential elements of these requirements
focus on a company's types of business, historical loss
development patterns and asset quality. Based on the preliminary
assessment of the requirements, however, SCOR U.S. believes that
the statutory surplus of each of its operating subsidiaries will
be sufficient to meet these risk based capital requirements and
to conduct its respective operations.
The NAIC is currently developing an Investments of Insurers
Model Act, which, if adopted by state regulatory authorities,
would establish uniform limitations upon the type and amounts of
investments insurers may hold. Based upon the current proposals
of this Model Act, which are subject to review and change, the
Company does not believe a uniform standard would significantly
affect the current investment mix or operations of its insurance
and reinsurance subsidiaries.
ACCOUNTING PRONOUNCEMENTS
Effective as of December 31, 1993, the Company adopted
Statement of Financial Accounting Standards No. 115 "Accounting
for Certain Investments in Debt and Equity Securities" ("SFAS
115"). SFAS 115 addresses the accounting and reporting for
investments in equity securities that have readily determinable
fair values and for all investments in debt securities. Under
SFAS 115, investments are classified into three categories. Debt
securities that management has the positive intent and the
ability to hold to maturity are classified as "held to maturity"
and reported at amortized cost. Debt and equity securities that
are bought and held for the purpose of selling them in the near
term are classified as "trading securities" and reported at fair
value with unrealized gains and losses included in earnings.
Debt and equity securities not classified as either of the above
categories are classified as "available for sale securities" and
reported at fair value with unrealized gains and losses reported
as a separate component of stockholders' equity. The adoption of
SFAS 115 did not have any effect on the Company's financial
position or its results from operations.
The FASB's Emerging Issues Task Force ("EITF") reached a
consensus on July 22, 1993 regarding Issue No. 93-6, "Accounting
for Multiple-Year Retrospectively-Rated Contracts by Ceding and
Assuming Enterprises" ("EITF 93-6"). EITF 93-6 has had an impact
23
on certain of the Company's retrocessional agreements. As a
result of the Company's implementation of the change in
accounting method, as of January 1, 1993, $2.6 million, or $0.14
per share (after-tax), is included as a reduction to income as a
cumulative adjustment. The effect of this change, excluding the
cumulative adjustment, for the three months and six months ended
June 30, 1993 was to increase net income by $19,000, or $0.00 per
share, and $1.3 million, or $0.06 per share, respectively.
In the first quarter of 1993, the Company adopted Statement
of Financial Accounting Standards No. 113 "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts" ("SFAS 113"). The significant provisions of SFAS 113
require grossing-up the balance sheet to eliminate the reporting
of assets and liabilities relating to reinsured contracts net of
the effects of reinsurance, establish the conditions for a
contract to be accounted for as reinsurance, require the deferral
and amortization of any gain from retroactive contracts as
defined in SFAS 113, and provide guidance in assessing transfer
of insurance risk in reinsurance. The adoption of SFAS 113 did
not have a material effect on the Company's financial position or
its results from operations.
24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
SCOR Re, GSIC, Unity Fire and GSIND are each a party to various
lawsuits arising in the normal course of their business. SCOR
U.S. does not believe that any of the litigation to which SCOR
Re, GSIC, Unity Fire or GSIND is currently a party will have a
material adverse effect on the operating results or financial
condition of SCOR U.S. and its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the June 6, 1994 Annual Meeting of the Stockholders of SCOR
U.S. ("Meeting"), held in New York City, the stockholders voted
to elect the nominated slate of three directors, each to serve
until the Annual Meeting in 1997, to approve amendments to the
Stock Option Plan for Directors and to ratify the appointment of
KMPG Peat Marwick ("Peat Marwick") as independent auditors of
SCOR U.S. for 1994.
Holders of record of the Company's common stock as of April 18,
1994 were entitled to vote at the Meeting. On April 18, 1994,
there were 18,140,835 shares of common stock outstanding and
entitled to vote, and 17,596,616 of such shares were represented
at the Meeting. Each of the directors received at least 99.9% of
the shares cast in favor of his election. The shares cast for
each director are as follows: Raymond H. Deck: 17,592,104 shares
for and 4,512 shares withheld; Richard M. Murray: 17,591,238
shares for and 5,378 shares withheld; and Serge M.P. Osouf:
17,581,039 shares for and 15,577 shares withheld.
With respect to the approval to amend the Stock Option Plan for
Directors, the shares cast were 17,312,874 for, 267,701 shares
against and 16,041 shares in abstention.
With respect to the ratification of the appointment of Peat
Marwick, the shares cast were 17,582,703 for, 2,212 shares
against and 11,701 shares in abstention. There were no broker
non-votes for any of the matters voted upon at the Meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
9(c) SCOR REINSURANCE COMPANY 1994 VOTING TRUST AGREEMENT,
dated as of June 6, 1994 among SCOR Reinsurance
Company, SCOR U.S. Corporation and the Voting Trustees
25
10(t) SCOR U.S. CORPORATION STOCK OPTION PLAN FOR DIRECTORS
as amended by vote of the stockholders at the Annual
Meeting of Stockholders held on June 16, 1994.
11 Computation of Earnings per Share
15 Letter re Unaudited Interim Financial Information
b) Reports on Form 8-K
None.
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.
SCOR U.S. Corporation
(Registrant)
Dated: August 11, 1994 Jeffrey D. Cropsey
(Signature)
Senior Vice President and
Chief Financial Officer
26