UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the period ended June 30, 1995
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 no. 0-15176
SCOR U.S. CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-1791342
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 William Street, Suite 1800, New York, New York 10038-3995
(Address of principal executive offices)
(212) 978-8200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports 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 [ ]
At August 11, 1995 there were 18,164,620 shares of Common Stock, $.30 par
value, outstanding.
SCOR U.S. CORPORATION
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Auditors' Review Report 3
Consolidated Balance Sheets
June 30, 1995 and December 31, 1994 4
Consolidated Statements of Operations
Three Months and Six Months ended June 30, 1995 and 1994 5
Consolidated Statements of Stockholders' Equity
Six Months ended June 30, 1995 and 1994 6
Consolidated Statements of Cash Flows
Three Months and Six Months Ended June 30, 1995 and 1994 7
Notes to Consolidated Financial Statements 8-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
INDEPENDENT AUDITORS' REVIEW 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, 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for the three
month and six month periods ended June 30, 1995 and 1994. 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 review
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, 1994, 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 2, 1995 we expressed an
unqualified opinion on those consolidated financial statements.
KPMG Peat Marwick LLP
August 1, 1995
3
SCOR U.S. CONSOLIDATED BALANCE SHEETS
Corporation (in thousands)
June 30, December 31,
1995 1994
(Unaudited)
Assets Investments
Fixed maturities:
Available for sale, at fair value
(amortized cost: $557,769 and $596,791) $ 563,157 $ 563,656
Held to maturity, at amortized cost
(fair value: $26,515 and $22,274) 25,793 22,871
Equity securities, at fair value
(cost: $263 and $1,897) 523 1,738
Short-term investments, at cost 118,530 83,303
Other long-term investments 1,424 1,225
--------- ---------
709,427 672,793
Cash 11,512 4,763
Accrued investment income 10,146 10,339
Premiums receivable 90,728 72,018
Reinsurance recoverable on paid losses
Affiliates 10,589 4,399
Other 1,232 19,356
Reinsurance recoverable on unpaid losses
Affiliates 142,093 127,096
Other 94,967 95,576
Prepaid reinsurance premiums
Affiliates 6,629 10,504
Other 4,510 8,803
Deferred policy acquisition costs 22,728 22,844
Deferred Federal income tax benefits 24,423 34,818
Investment in affiliates 12,555 11,532
Other assets 46,089 48,874
--------- ---------
$ 1,187,628 $ 1,143,715
========= =========
Liabilities Losses and loss expenses $ 633,315 $ 604,787
Unearned premiums 100,134 110,082
Funds held under reinsurance treaties
Affiliates 1,435 3,654
Other 16,422 17,104
Reinsurance balances payable
Affiliates 13,003 15,328
Other 16,860 28,357
Convertible subordinated debentures 75,950 82,350
Notes payable 25,000 20,000
Commercial paper 20,321 11,310
Other liabilities 12,460 11,348
--------- ---------
914,900 904,320
--------- ---------
Stockholders' Preferred stock, no par value, 5,000
Equity shares authorized; no shares issued
Common stock, $.30 par value,
50,000 shares authorized;
18,356 and 18,356 shares issued 5,507 5,507
Additional paid-in capital 114,563 114,556
Unrealized appreciation (depreciation) of investments,
net of deferred tax effect 3,671 (21,640)
Foreign currency translation adjustment 197 (414)
Retained earnings 150,564 143,153
Treasury stock, at cost (193 and 192 shares) (1,774) (1,767)
--------- ---------
272,728 239,395
--------- ---------
$ 1,187,628 $ 1,143,715
========= =========
See notes to consolidated financial statements.
4
SCOR U.S. CONSOLIDATED STATEMENTS OF OPERATIONS
Corporation (Unaudited)
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
Revenues Net premiums earned $ 58,207 $ 54,983 $ 128,804 $ 117,668
Net investment income 10,094 10,208 21,072 20,206
Net realized investment gains 704 413 592 736
------ ------ ------- -------
69,005 65,604 150,468 138,610
------ ------ ------- -------
Losses and Losses and loss expenses, net 38,391 42,991 85,500 113,498
expenses Commissions, net 17,131 14,356 36,551 31,875
Other underwriting and
administration expenses 5,846 5,980 13,167 12,787
Other expenses (income) (675) 1,062 24 1,475
Interest expense 1,906 2,204 4,310 4,528
------ ------ ------- -------
62,599 66,593 139,552 164,163
------ ------ ------- -------
Income (loss) from operations before
Federal income taxes (benefit) 6,406 (989) 10,916 (25,553)
Federal income taxes (benefit) 1,607 (1,592) 2,241 (11,738)
------ ------ ------- -------
Income (loss) from operations 4,799 603 8,675 (13,815)
Extraordinary gain on redemption of
debentures, net of tax 35 -0- 552 -0-
------ ------ ------- -------
Net income (loss) $ 4,834 $ 603 $ 9,227 $ (13,815)
====== ====== ====== ======
Per share data Average common and common
Primary equivalent shares outstanding 18,163 18,191 18,163 18,125
====== ====== ====== ======
Income (loss) from operations $ 0.27 $ 0.03 $ 0.48 $ (0.76)
Extraordinary item -0- -0- 0.03 -0-
------ ------ ------- -------
Net income (loss) $ 0.27 $ 0.03 $ 0.51 $ (0.76)
====== ====== ====== ======
Fully Diluted Average common and common
equivalent shares outstanding 21,233 18,191 21,218 18,125
====== ====== ====== ======
Income (loss) from operations $ 0.26 $ 0.03 $ 0.47 $ (0.76)
Extraordinary item -0- -0- 0.03 -0-
------ ------ ------- -------
Net income (loss) $ 0.26 $ 0.03 $ 0.50 $ (0.76)
====== ====== ====== ======
See notes to consolidated financial statements.
5
SCOR U.S. Corporation
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Six Months Ended June 30,
(Unaudited) (in thousands, except per share data)
1995 1994
Common Stock
Balance at beginning of year $ 5,507 $ 5,490
Issuance of common stock -0- -0-
------- -------
Balance at end of period 5,507 5,490
------- -------
Additional Paid-in Capital
Balance at beginning of year 114,556 112,670
Issuance of common stock -0- 179
Change in unpaid stock options exercised 7 45
------- -------
Balance at end of period 114,563 112,894
------- -------
Unrealized Appreciation (Depreciation) of Investments
Balance at beginning of year (21,640) 16,634
Unrealized appreciation (depreciation) for period 25,311 (26,933)
------- -------
Balance at end of period 3,671 (10,299)
------- -------
Foreign Currency Translation Adjustment
Balance at beginning of year (414) 12
Change in foreign currency translation adjustment 611 (281)
------- -------
Balance at end of period 197 (269)
------- -------
Retained Earnings
Balance at beginning of year 143,153 157,532
Net income (loss) 9,227 (13,815)
Dividends ($.10 and $.18 per share) (1,816) (3,265)
------- -------
Balance at end of period 150,564 140,452
------- -------
Treasury Stock
Balance at beginning of year (1,767) (1,649)
Net (purchases) reissuance of treasury stock (7) 182
------- -------
Balance at end of period (1,774) (1,467)
------- -------
Total Stockholders' Equity At End Of Period $ 272,728 $ 246,801
======= =======
Common stock shares
Balance at beginning of year 18,356 18,299
Issuance of common stock -0- -0-
Balance at end of period 18,356 18,299
Treasury stock shares
Balance at beginning of year 192 190
Net purchases (reissuance) of treasury stock 1 (32)
------- -------
Balance at end of period 193 158
======= =======
See notes to consolidated financial statements.
6
SCOR U.S. CONSOLIDATED STATEMENTS OF CASH FLOWS
Corporation (Unaudited)
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
Cash flows Net income (loss) $ 4,834 $ 603 $ 9,227 $ (13,815)
from operating Adjustments to reconcile net income
activities (loss) to net cash used in operating
activities:
Extraordinary gain on redemption of
debentures (35) -0- (552) -0-
Realized investment gains (704) (413) (592) (736)
Changes in assets and liabilities:
Accrued investment income 327 (162) 193 (106)
Premium balances, net (8,067) (23,384) (32,532) (20,166)
Prepaid reinsurance premiums 5,927 2,295 8,168 3,977
Reinsurance recoverable on paid
losses 1,644 (5,669) 11,934 (19,061)
Deferred policy acquisition costs 665 (51) 116 (1,469)
Losses and loss expenses 19,000 7,453 28,528 60,620
Unearned premiums (10,640) (1,189) (9,948) 7,257
Reinsurance recoverable on
unpaid losses (14,094) 6,375 (14,388) (2,225)
Funds held under reinsurance treaties (1,568) 123 (2,901) (16,398)
Federal income taxes (1,392) (1,592) (758) (13,538)
Other (3,981) 431 1,793 201
------- -------- ------- --------
Net cash used in operating activities (8,084) (15,180) (1,712) (15,459)
------- -------- ------- --------
Cash flows Sales, maturities or redemptions
from of fixed maturities 75,637 98,862 95,440 138,788
investing Sales of equity securities -0- 2,145 1,215 4,516
activities Net sales (purchases) of short-term
investments (33,836) (7,520) (33,035) 36,734
Investments in fixed maturities (31,085) (80,865) (59,791) (159,668)
Investments in equity securities -0- (486) -0- (2,215)
Other (189) (1,808) (495) (2,980)
------- -------- ------- --------
Net cash provided by investing
activities 10,527 10,328 3,334 15,175
------- -------- ------- --------
Cash flows Dividend paid (908) (1,632) (1,816) (3,265)
from Redemption of convertible subordinated
financing debentures (445) -0- (8,907) -0-
activities Proceeds of notes payable -0- -0- 5,000 -0-
Proceeds from issuance of commercial paper-net 466 6 8,934 27
Proceeds from stock options exercised -0- 27 7 45
Other 1,871 282 1,909 375
------- -------- ------- --------
Net cash provided by (used in)
financing activities 984 (1,317) 5,127 (2,818)
------- -------- ------- --------
Net increase (decrease) in cash 3,427 (6,169) 6,749 (3,102)
Cash at beginning of period 8,085 20,163 4,763 17,096
------- -------- ------- --------
Cash at end of period $ 11,512 $ 13,994 $ 11,512 $ 13,994
====== ====== ====== ======
See notes to consolidated financial statements.
7
SCOR U.S. CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
SCOR U.S. Corporation ("SCOR U.S." or, collectively with its subsidiaries,
the "Company") is a holding company, the principal operating subsidiary of which
is SCOR Reinsurance Company ("SCOR Re"). The Company also operates through SCOR
Re's wholly owned subsidiaries, General Security Insurance Company ("GSIC"), The
Unity Fire and General Insurance Company ("Unity Fire") and General Security
Indemnity Company ("GSIND"). (SCOR Re, GSIC, Unity Fire and GSIND are
collectively referred to as the "Operating Subsidiaries").
The Company, through its subsidiaries, provides property and casualty
insurance and reinsurance. Reinsurance is provided to primary insurance
companies on both a treaty and facultative basis. SCOR Re specializes in
underwriting treaties covering standard and 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 and writes facultative business directly with
primary insurance companies and through reinsurance intermediaries. GSIC and
Unity Fire provide commercial property and casualty insurance on both a primary
and excess basis and underwrite 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
1994 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
Company's Convertible Subordinated Debentures are converted into common shares,
if dilutive.
3. 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.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts reported for income tax purposes and relate principally
to loss reserve discounting, unearned premiums and unrealized appreciation
(depreciation) of investments.
A valuation allowance is provided when it is more likely than not that some
8
portion of the deferred income tax benefits will not be realized.
Management believes that the deferred tax benefits will be fully realized in the
future.
4. Reinsurance
The effect of ceded reinsurance on the Statement of Operations for the
three and six months ended June 30, 1995 and 1994 are as follows (in thousands):
Loss
and Loss
Premiums Premiums Expenses
Written Earned Incurred
Three Months Ended June 30, 1995
Direct $ 5,179 $ 3,521 $ 5,456
Assumed 65,137 77,435 60,096
Ceded - affiliate (8,582) (11,735) (17,348)
Ceded - other (8,239) (11,014) (9,813)
------- ------- -------
Net $ 53,495 $ 58,207 $ 38,391
======= ======= =======
Three Months Ended June 30, 1994
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
======= ======= =======
Six Months Ended June 30, 1995
Direct $ 10,001 $ 9,590 $ 15,993
Assumed 152,986 163,346 110,882
Ceded - affiliate (16,305) (21,010) (23,053)
Ceded - other (19,657) (23,122) (18,322)
------- ------- -------
Net $ 127,025 $ 128,804 $ 85,500
======= ======= =======
Six Months Ended June 30, 1994
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
======= ======= =======
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
SCOR U.S. Corporation ("SCOR U.S." or, collectively with its subsidiaries,
the "Company") is a holding company, the principal operating subsidiary of which
is SCOR Reinsurance Company ("SCOR Re"). The Company also operates through SCOR
Re's wholly owned subsidiaries, General Security Insurance Company ("GSIC"), The
Unity Fire and General Insurance Company ("Unity Fire") and General Security
Indemnity Company ("GSIND"). (SCOR Re, GSIC, Unity Fire and GSIND are
collectively referred to as the "Operating Subsidiaries").
The Company, through its subsidiaries, provides property and casualty
insurance and reinsurance. Reinsurance is provided to primary insurance
companies on both a treaty and facultative basis. SCOR Re specializes in
underwriting treaties covering standard and 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 and writes facultative business directly with
primary insurance companies and through reinsurance intermediaries. GSIC and
Unity Fire provide commercial property and casualty insurance on both a primary
and excess basis and underwrite 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. historically 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, 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. Except as indicated, 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
Operating Subsidiaries. The GAAP ratios include the operating expenses of the
holding company and the operations of the non-insurance subsidiaries, in
addition to the operating expenses of the Operating Subsidiaries. The SAP
expense ratios include only the operating expenses of the Operating
10
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,
1995 1994 1995 1994
GAAP Ratios (Total Company)
Loss ratio 66.0% 78.2% 66.4% 96.5%
----- ----- ----- -----
Commission ratio 29.4 26.1 28.4 27.1
U/W, administration and
other expense ratio 8.9 12.8 10.2 12.1
----- ----- ----- -----
Expense ratio 38.3 38.9 38.6 39.2
----- ----- ----- -----
Combined ratio 104.3% 117.1% 105.0% 135.7%
===== ===== ===== =====
SAP Combined Ratio*
Combined ratio 108.2% 114.0% 105.6% 130.1%
===== ===== ===== =====
*Operating Subsidiaries only
Comparison of Second Quarter Results for 1995 and 1994
Gross premiums written for 1995 increased 2% to $70.3 million from $69.2
million in 1994. Net premiums written for 1995 decreased 5% to $53.5 million
from $56.1 million for 1994. Net premiums written for 1995 were reduced by $1.8
million for additional premiums to reinstate catastrophe reinsurance protections
primarily related to the January 1994 Northridge earthquake. Net premium written
for 1994 were increased by $400,000 relating to reinstatement premiums.
Excluding reinstatement premiums, net premiums written for 1995 were virtually
unchanged compared with 1994. The Company's premium volume was adversely
affected by its continued withdrawal from certain property and casualty lines of
business where the Company believes rates and/or conditions are inadequate. More
specifically, the Company has been reducing its treaty property business written
on a pro rata basis. However, the Company's increased premium writings in
targeted market segments, such as nonstandard automobile, alternative risk and
facultative offset most of the decline in property pro rata treaty business.
Net losses and loss expenses incurred decreased 11% in 1995 to $38.4
million from $43.0 million in 1994. The loss ratio was 66.0% for 1995 as
compared with 78.2% for 1994. During 1995 the Company incurred $3.7 million of
net losses ($15.0 million gross) resulting from pre-1995 property catastrophe
events, which added 8.2 points to the loss ratio. Of these amounts, development
from the Northridge earthquake accounted for $2.5 million of net incurred losses
and $12.6 million of gross incurred losses. During 1994 the Company experienced
$400,000 of net favorable development resulting from property catastrophe
events, which reduced the loss ratio by 1.3 points.
11
During 1995 and 1994, the Company ceded $22.8 million and $15.4 million of
earned premiums, respectively. The Company recovered from retrocessionnaires
$27.2 million and $3.2 million of losses during 1995 and 1994, respectively.
Ceded premiums in 1995 included $1.8 million of reinstatement premiums incurred
by the Company primarily relating to the Northridge earthquake. Ceded losses in
1995 included $10.1 million of losses relating to the Northridge earthquake.
Commission expenses increased 19% to $17.1 million in 1995 from $14.4
million in 1994. The commission ratio was 29.4% for 1995, compared with 26.1%
for 1994. The effect of net reinstatement premiums primarily related to the
Northridge earthquake added 0.9 points to the 1995 commission ratio and reduced
the 1994 commission ratio by 0.2 points. The increase in the commission ratio
for 1995 compared with the 1994 commission ratio, excluding the effect of
catastrophe events, is primarily attributable to the effect of the Company's
shift toward its targeted market segments.
Underwriting, administration and other expenses decreased 27% in 1995 to
$5.2 million from $7.0 million in 1994. The underwriting and other expense ratio
was 8.9% for 1995 as compared with 12.8% for 1994. The effect of net
reinstatement premiums related primarily to the Northridge earthquake added 0.3
points to the 1995 ratio and reduced the 1994 ratio by 0.1 points. The decrease
in underwriting, administration and other expenses (income) in 1995 was
principally caused by an improvement in the results reported by an entity in
which the Company is a minority shareholder .
The combined ratio was 104.3% for 1995, compared with 117.1% for 1994. The
effect of property catastrophe events on the 1995 and 1994 combined ratio was
9.4 points and (1.6) points, respectively.
Net investment income decreased 1% to $10.1 million for 1995 compared with
$10.2 million for 1994. The decrease in net investment income (pre-tax)
primarily resulted from an increase in the Company's short-term investments and
cash position. On an after-tax basis, net investment income decreased 7% to $7.4
million for 1995, compared with $8.0 million in 1994. Net realized investment
gains for 1995 were $700,000, compared with $400,000 for 1994.
Interest expense decreased 14% to $1.9 million in 1995 from $2.2 million in
1994.
During 1995 the Company repurchased in the open market $500,000 in
principal amount of its Subordinated Convertible Debentures (the "Debentures")
and recognized an extraordinary gain of $35,000 or less than $0.01 per share,
net of tax.
The Company's net income for 1995 was $4.8 million, or $0.27 per share, on
a primary basis, compared with of $600,000, or $0.03 per share, on a primary
basis, for 1994. The 1995 results were affected by after-tax charges to
operations, net of reinsurance, of $3.6 million, or $0.20 per share, for
pre-1995 property catastrophe events. The 1994 results include an after-tax
benefit to operations of $500,000, or $0.03 per share, for net favorable
development on property catastrophe events. Average common and common equivalent
shares outstanding (on a primary basis) for 1995 were 18.2 million, compared
with 18.2 million for 1994.
Comparison of Year to Date Results for 1995 and 1994
Gross premiums written for 1995 decreased 1% to $163.0 million from $163.9
million in 1994. Net premiums written for 1995 decreased 1% to $127.0 million
from $128.9 million for 1994. Gross premiums written for 1995 and 1994 were
increased by $900,000 and $800,000 respectively, and net premiums written were
reduced by $1.2 million and $5.1 million, respectively, for additional premiums
12
to reinstate catastrophe reinsurance protections primarily related to the
January 1994 Northridge earthquake. Excluding these reinstatement premiums,
gross premiums written and net premiums written for 1995 decreased by 1% and 4%,
respectively, compared with 1994. The Company's premium volume was adversely
affected by its continued withdrawal from certain property and casualty lines of
business where the Company believes rates and/or conditions are inadequate. More
specifically, the Company has been reducing its treaty property business written
on a pro rata basis. However, the Company's increased premium writings in
targeted market segments, such as nonstandard automobile, alternative risk and
facultative offset most of the decline in property pro rata business.
Net losses and loss expenses incurred decreased 25% in 1995 to $85.5
million from $113.5 million in 1994. The loss ratio was 66.4% for 1995 as
compared with 96.5% for 1994. During 1995 the Company incurred $3.3 million of
net losses ($13.3 million gross) resulting from pre- 1995 property catastrophe
events, which added 3.2 points to the loss ratio. Of these amounts, development
from the Northridge earthquake accounted for $2.5 million of net incurred losses
and $12.6 million of gross incurred losses. During 1994 the Company incurred
$31.5 million of net losses ($61.0 million of gross losses) resulting from
property catastrophe events, primarily the Northridge earthquake and the early
1994 winter freeze, which added 29.7 points to the loss ratio. Of these amounts,
the Northridge earthquake accounted for $26.1 million of net incurred losses and
$54.8 million of gross incurred losses.
During 1995 and 1994, the Company ceded $44.1 million and $39.0 million of
earned premiums, respectively. The Company recovered from retrocessionnaires
$41.4 million and $55.2 million of losses during 1995 and 1994, respectively.
Ceded premiums in 1995 and 1994 included $2.1 million and $5.9 million of
reinstatement premiums incurred by the Company primarily relating to the
Northridge earthquake. Ceded losses in 1995 and 1994 included $10.1 million and
$29.5 million of losses relating to the Northridge earthquake.
Commission expenses increased 15% to $36.5 million in 1995 from $31.9
million in 1994. The commission ratio was 28.4% for 1995, compared with 27.1%
for 1994. The effect of net reinstatement premiums primarily related to the
Northridge earthquake added 0.3 points and 1.1 points to the 1995 and 1994
commission ratio, respectively. The increase in the commission ratio for 1995
compared with the 1994 commission ratio, excluding the effect of catastrophe
events, is primarily attributable to the effect of the Company's shift towards
its targeted market segments..
Underwriting, administration and other expenses decreased 8% in 1995 to
$13.2 million from $14.3 million in 1994. The underwriting and other expense
ratio was 10.2% for 1995 as compared with 12.1% for 1994. The effect of net
reinstatement premiums related primarily to the Northridge earthquake added 0.1
points and 0.5 points to the 1995 and 1994 ratio. The decrease in underwriting,
administration and other expenses in 1995 was principally caused by an
improvement in the results reported by an entity in which the Company is a
minority shareholder.
The combined ratio was 105.0% for 1995, compared with 135.7% for 1994. The
effect of property catastrophe events on the 1995 and 1994 combined ratio was
3.6 points and 31.3 points, respectively.
Net investment income increased 4% to $21.1 million for 1995 compared with
$20.2 million for 1994. The increase in net investment income (pre-tax)
primarily resulted from an increase in the proportion of taxable investments in
the Company's portfolio and positive operating cash flow over the past twelve
13
months. On an after-tax basis, net investment income decreased 3% to $15.6
million for 1995, compared with $16.1 million in 1994. Net realized investment
gains for 1995 were $600,000, compared with $700,000 for 1994.
Interest expense decreased 5% to $4.3 million in 1995 from $4.5 million in
1994.
During 1995 the Company repurchased in the open market $6.4 million in
principal amount of the Debentures and recognized an extraordinary gain of
$552,000 or $0.03 per share, net of tax.
The Company's net income for 1995 was $9.2 million, or $0.51 per share, on
a primary basis, compared with a net loss of $13.8 million, or $0.76 per share,
on a primary basis, for 1994. 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 1995 results include after-tax charges to
operations of $3.0 million, or $0.16 per share, for pre-1995 property
catastrophe events. Average common and common equivalent shares outstanding (on
a primary basis) for 1995 were 18.2 million, compared with 18.1 million for
1994.
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, 1995. 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 dividends
from its operating subsidiaries, borrowings, and the issuance of equity
securities. Generally, dividends that can be paid by insurers domiciled in New
York State without prior approval of the New York Insurance Superintendent are
limited for any twelve-month period to the lesser of 10% of statutory surplus or
adjusted net investment income (as defined by The New York Insurance Law) for
the previous twelve months. During the twelve months ended June 30, 1995, $10.0
million of dividends were declared to SCOR U.S. At June 30, 1995, the aggregate
statutory surplus of the SCOR U.S. operating subsidiaries was $251.9 million.
During 1995, the Company repurchased in the open market $6.4 million in
principal amount of the Debentures and recognized an extraordinary gain of
$552,000, or $0.03 per share, net of tax. The majority of these purchases, along
with the December 1994 repurchase of $3.9 million in principal amount of the
Debentures, were executed under a $10 million program authorized by the Board of
Directors. Funding for the aggregate amount of repurchased Debentures, which
purchases settled in January 1995, was provided by the issuance of the Company's
commercial paper.
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In January 1995, the Board of Directors authorized the Company to
repurchase up to an additional $20 million of Debentures in the open market, as
market conditions permit. In connection with this additional authorization, SCOR
U.S. has established a $20 million credit agreement with SCOR S.A., the proceeds
of which are restricted to the repurchase of the Debentures or the repayment of
any debt incurred to repurchase Debentures. At June 30, 1995, the Company
utilized $5.0 million of this credit line.
On October 1, 1990 SCOR U.S. renewed a $20.0 million bank note which was
payable on that date. This 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 agreement related to 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 due
on the loan. The floating rate, which resets every six months and is capped at
12.380%, was 11.818% as of the final reset date in April 1995. The Company
intends to refinance this note when due.
SCOR U.S. has established a commercial paper program which allows it to
raise up to $50.0 million. At June 30, 1995, $20.3 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, 1995, 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 under this
program during 1995.
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 $1.7 million for 1995 compared with cash
used in operations of $15.5 million for 1994. 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 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.
At June 30, 1995, total investments and cash at carrying value were $720.9
million compared with $677.6 million at December 31, 1994. The increased level
of investments and cash is primarily attributable to the increase during the
period in the fair value of investments carried at fair value. SCOR U.S. fixed
maturity investments are substantially all investment grade, liquid securities
with a weighted average maturity of 5.8 years. Approximately 99% of the fixed
maturity portfolio is rated A or better. SCOR U.S. does not have any investments
in real estate or high yield bonds. At June 30, 1995, 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, 1995 averaged approximately 4.5 years.
15
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 periods ending June 30,
1995 and 1994 were ($91,000) and $200,000, respectively.
Stockholders' equity at June 30, 1995 was $272.7 million, an increase of
$33.3 million compared with December 31, 1994. This increase resulted primarily
from net income of $9.2 million for the period and unrealized appreciation of
investments carried at fair value, net of tax effect, of $25.3 million, less
cash dividends declared of $1.8 million.
On March 10, 1995 the Company's Board of Directors reduced the regular
quarterly dividend to $.05 per share from the previous quarterly rate of $.09
per share.
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 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 1.0 to 1 and 1.1 to 1 for 1995 and
1994, respectively.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to various lawsuits arising in the normal course of
its business. The Company does not believe that any of the litigation to which
it 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 16, 1995 Annual Meeting of the Stockholders of SCOR U.S.
("Meeting"), held in New York City, the stockholders voted to elect the
nominated slate of four directors, each to serve until the Annual Meeting in
1998 and to ratify the appointment of KMPG Peat Marwick LLP ("Peat Marwick") as
independent auditors of SCOR U.S. for 1995.
Holders of record of the Company's common stock as of April 18, 1995 were
entitled to vote at the meeting. On April 18, 1995, there were 18,164,620 shares
of common stock outstanding and entitled to vote, and 17,673,552 of such shares
were represented at the Meeting. Each of the directors received at least 99.7%
of the shares cast in favor of his election. The shares cast for each director
are as follows: Jacques P. Blondeau: 17,619,506 shares for and 54,046 shares
withheld; John R. Cox: 17,617,006 shares for and 56,546 shares withheld; Jerome
Karter: 17,619,006 shares for and 54,546 shares withheld; and Patrick Peugeot:
17,618,640 shares for and 54,912 shares withheld.
With respect to the ratification of the appointment of Peat Marwick, the
shares cast were 17,628,280 for, 36,431 shares against and 8,841 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
11 Computation of Earnings per Share
15 Letter re Unaudited Interim Financial Information
b) Reports on Form 8-K
None.
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Signatures
Pursuant to the requirements of the Securities and 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)
Jeffrey D. Cropsey
Dated: August 11, 1995 Jeffrey D. Cropsey
Senior Vice President and
Chief Financial Officer
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