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 AND EXCHANGE
ACT OF 1934
For the period ended September 30, 1995
0R
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
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.)
Two World Trade Center, New York, New York 10048-0178
(Address of principal executive offices)
(212) 390-5200
(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 and 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 November 14, 1995 there were 18,170,971 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
September 30, 1995 and December 31, 1994 4
Consolidated Statement of Operations
Three Months and Nine Months ended September 30, 1995 and 1994 5
Consolidated Statement of Stockholders' Equity
Nine Months ended September 30, 1995 and 1994 6
Consolidated Statements of Cash Flows
Three Months and Nine Months Ended September 30, 1995 and 1994 7
Notes to Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 18
2
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 September 30, 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the three month and nine month periods ended September 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
October 24, 1995
3
SCOR U.S. CONSOLIDATED BALANCE SHEETS
Corporation (in thousands)
September 30, December 31,
1995 1994
(Unaudited)
Assets Investments
Fixed maturities:
Available for sale, at fair value
(amortized cost: $556,300 and $596,791) $ 563,515 $ 563,656
Held to maturity, at amortized cost
(fair value: $22,609 and $22,274) 22,155 22,871
Equity securities, at fair value
(cost: $108 and $1,897) 204 1,738
Short-term investments, at cost 122,794 83,303
Other long-term investments 1,374 1,225
--------------- ---------------
710,042 672,793
Cash 13,318 4,763
Accrued investment income 9,608 10,339
Premiums receivable 80,996 72,018
Reinsurance recoverable on paid losses
Affiliates 9,525 4,399
Other 10,414 19,356
Reinsurance recoverable on unpaid losses
Affiliates 135,803 127,096
Other 90,741 95,576
Prepaid reinsurance premiums
Affiliates 5,835 10,504
Other 4,086 8,803
Deferred policy acquisition costs 22,471 22,844
Deferred Federal income tax benefits 22,542 34,818
Investment in affiliates 12,360 11,232
Other assets 53,431 49,174
--------------- ---------------
$ 1,181,172 $ 1,143,715
=============== ===============
Liabilities Losses and loss expenses $ 618,738 $ 604,787
Unearned premiums 99,955 110,082
Funds held under reinsurance treaties
Affiliates 1,323 3,654
Other 17,248 17,104
Reinsurance balances payable
Affiliates 11,990 15,328
Other 15,010 28,357
Convertible subordinated debentures 75,950 82,350
Notes payable 25,000 20,000
Commercial paper 20,639 11,310
Other liabilities 17,933 11,348
--------------- ---------------
903,786 904,320
--------------- ---------------
Stockholders' Preferred stock, no par value, 5,000
Equity shares authorized; no shares issued
Common stock, $.30 par value,
50,000 shares authorized;
18,364 and 18,356 shares issued 5,509 5,507
Additional paid-in capital 114,669 114,556
Unrealized appreciation (depreciation) of investments,
net of deferred tax effect 4,752 (21,640)
Foreign currency translation adjustment (252) (414)
Retained earnings 154,482 143,153
Treasury stock, at cost (193 and 192 shares) (1,774) (1,767)
--------------- ---------------
277,386 239,395
--------------- ---------------
$ 1,181,172 $ 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 Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
Revenues Net premiums earned $ 53,536 $ 55,542 $ 182,340 $ 173,210
Net investment income 10,679 10,157 31,751 30,363
Net realized investment gains 121 323 713 1,059
------------- ------------- ------------- -------------
64,336 66,022 214,804 204,632
------------- ------------- ------------- -------------
Losses Losses and loss expenses, net 36,452 39,060 121,952 152,558
and Commissions, net 10,345 14,144 46,896 46,019
expenses Other underwriting and
administration expenses 7,616 6,799 20,783 19,586
Other expenses 1,016 1,590 1,040 3,065
Interest expense 2,596 2,454 6,906 6,982
------------- ------------- ------------- -------------
58,025 64,047 197,577 228,210
------------- ------------- ------------- -------------
Income (loss) from operations before
Federal income taxes benefit 6,311 1,975 17,227 (23,578)
Federal income taxes (benefit) 1,485 (472) 3,726 (12,210)
------------- ------------- ------------- -------------
Income (loss) from operations 4,826 2,447 13,501 (11,368)
Extraordinary gain on redemption of
debentures, net of tax -0- -0- 552 -0-
------------- ------------- ------------- -------------
Net income (loss) $ 4,826 $ 2,447 $ 14,053 $ (11,368)
============= ============= ============= ==============
Per share Average common and common
data equivalent shares outstanding 18,372 18,212 18,255 18,146
Primary ============= ============= ============= =============
Income (loss) from operations $ 0.26 $ 0.13 $ 0.74 $ (0.63)
Extraordinary item -0- -0- 0.03 -0-
------------- ------------- ------------- -------------
Net income (loss) $ 0.26 $ 0.13 $ 0.77 $ (0.63)
============= ============= ============= ============
Fully Average common and common
Diluted equivalent shares outstanding 21,513 18,212 21,317 18,146
============= ============= ============= =============
Income (loss) from operations $ 0.26 $ 0.13 $ 0.73 $ (0.63)
Extraordinary item -0- -0- 0.03 -0-
------------- ------------- ------------- -------------
Net income (loss) $ 0.26 $ 0.13 $ 0.76 $ (0.63)
============= ============ ============= ============
See notes to consolidated financial statements.
5
SCOR U.S. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Corporation Nine Months Ended September 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 2 17
--------------- ----------------
Balance at end of period 5,509 5,507
--------------- ----------------
Additional Paid-in Capital
Balance at beginning of year 114,556 112,670
Issuance of common stock 86 700
Change in unpaid stock options exercised 19 72
Deferred compensation 8 -0-
--------------- ----------------
Balance at end of period 114,669 113,442
--------------- ----------------
Unrealized Appreciation (Depreciation) of Investments
Balance at beginning of year (21,640) 16,634
Unrealized appreciation (depreciation) for period 26,392 (30,002)
--------------- ----------------
Balance at end of period 4,752 (13,368)
--------------- ----------------
Foreign Currency Translation Adjustment
Balance at beginning of year (414) 12
Change in foreign currency translation adjustment 162 152
--------------- ----------------
Balance at end of period (252) 164
--------------- ----------------
Retained Earnings
Balance at beginning of year 143,153 157,532
Net income (loss) 14,053 (11,368)
Dividends ($.15 and $.27 per share) (2,724) (4,903)
--------------- ----------------
Balance at end of period 154,482 141,261
--------------- ----------------
Treasury Stock
Balance at beginning of year (1,767) (1,649)
Net (purchases) reissuance of treasury stock (7) 165
--------------- ----------------
Balance at end of period (1,774) (1,484)
--------------- ----------------
Total Stockholders' Equity At End of Period $ 277,386 $ 245,522
=============== ================
Common stock shares
Balance at beginning of year 18,356 18,299
Issuance of common stock 8 57
--------------- ----------------
Balance at end of period 18,364 18,356
=============== ================
Treasury stock shares
Balance at beginning of year 192 190
Net purchases (reissuance) of treasury stock 1 (30)
--------------- ----------------
Balance at end of period 193 160
=============== ================
See notes to consolidated financial statements.
6
SCOR U.S. CONSOLIDATED STATEMENT OF CASH FLOWS
Corporation (Unaudited)
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
Cash flows Net income (loss) $ 4,826 $ 2,447 $ 14,053 $ (11,368)
from operating Adjustments to reconcile net income
activities (loss) to net cash provided by (used in)
operating activities:
Extraordinary gain on redemption
of debentures -0- -0- (552) -0-
Realized investment gains (121) (323) (713) (1,059)
Changes in assets and liabilities:
Accrued investment income 538 (154) 731 (260)
Premium balances, net 6,869 29,185 (25,663) 9,019
Prepaid reinsurance premiums 1,218 797 9,386 4,774
Reinsurance recoverable on
paid losses (8,118) (10,820) 3,816 (29,881)
Deferred policy acquisition costs 257 (36) 373 (1,505)
Losses and loss expenses (14,577) (15,879) 13,951 44,741
Unearned premiums (179) (548) (10,127) 6,709
Reinsurance recoverable on
unpaid losses 10,516 7,052 (3,872) 4,827
Funds held under reinsurance
treaties 714 (321) (2,187) (16,719)
Federal income taxes (4,715) (472) (5,473) (14,010)
Other 7,477 (3,967) 9,270 (3,766)
------------- ------------- ------------- -------------
Net cash provided by (used in) operating
activities 4,705 6,961 2,993 (8,498)
------------- ------------- ------------- -------------
Cash flows Sales, maturities or redemptions
from of fixed maturities 44,922 54,168 140,362 192,956
investing Sales of equity securities (58) 207 1,157 4,723
activities Net sales (purchases) of short-term
investments (2,070) 1,792 (35,105) 38,526
Investments in fixed maturities (42,971) (66,279) (102,762) (225,947)
Investments in equity securities -0- (1,685) -0- (3,900)
Other (4,935) (381) (5,430) (3,361)
-------------- ------------- ------------- -------------
Net cash provided by (used in) investing
activities (5,112) (12,178) (1,778) 2,997
------------- ------------- ------------- -------------
Cash flows Dividends paid (908) (1,638) (2,724) (4,903)
from Redemption of convertible subordinated
financing debentures -0- -0- (8,907) -0-
activities Proceeds of notes payable -0- -0- 5,000 -0-
Proceeds from issuance of commercial
paper-net (461) 3 8,473 30
Proceeds from stock options exercised 12 565 19 610
Other 3,570 1,372 5,479 1,747
------------- ------------- ------------- -------------
Net cash provided by (used in)
financing activities 2,213 302 7,340 (2,516)
------------- ------------- ------------- -------------
Net increase (decrease) in cash 1,806 (4,915) 8,555 (8,017)
Cash at beginning of period 11,512 13,994 4,763 17,096
------------- ------------- ------------- -------------
Cash at end of period $ 13,318 $ 9,079 $ 13,318 $ 9,079
============= ============= ============= =============
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 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.
8
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
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 nine months ended September 30, 1995 and 1994 are as follows (in
thousands):
Loss
and Loss
Premiums Premiums Expenses
Written Earned Incurred
Three Months Ended September 30, 1995
Direct $ 3,322 $ 3,118 $ 5,335
Assumed 65,679 66,062 39,941
Ceded - affiliate (3,771) (4,565) (4,543)
Ceded - other (10,656) (11,079) (4,281)
--------- --------- ---------
Net $ 54,574 $ 53,536 $ 36,452
========= ========= =========
Three Months Ended September 30, 1994
Direct $ 5,183 $ 3,395 $ 2,108
Assumed 70,142 72,478 42,679
Ceded - affiliate (8,131) (7,912) 1,218
Ceded - other (11,403) (12,419) (6,945)
--------- --------- ---------
Net $ 55,791 $ 55,542 $ 39,060
========= ========= =========
Nine Months Ended September 30, 1995
Direct $ 13,323 $ 12,708 $ 21,328
Assumed 218,665 229,408 150,823
Ceded - affiliate (20,076) (25,575) (27,596)
Ceded - other (30,313) (34,201) (22,603)
--------- --------- ---------
Net $ 181,599 $ 182,340 $ 121,952
========= ========= =========
Nine Months Ended September 30, 1994
Direct $ 11,138 $ 10,218 $ 7,744
Assumed 228,128 222,339 205,724
Ceded - affiliate (25,061) (28,845) (24,461)
Ceded - other (29,512) (30,502) (36,449)
--------- --------- ---------
Net $ 184,693 $ 173,210 $ 152,558
========= ========= =========
9
5. Subsequent Event
On November 2, 1995 the Company entered into an Agreement and Plan of
Merger with SCOR S.A., its majority shareholder, and SCOR Merger Sub Corporation
("Merger Sub"), a newly formed Delaware corporation and wholly-owned subsidiary
of SCOR S.A., which provides, among other things, that upon certain terms and
conditions, that Merger Sub will be merged with and into the Company upon
consummation of the tender offer made by SCOR S.A., through Merger Sub, to
purchase all of the outstanding shares of Common Stock of the Company not held
by it.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULT 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
10
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 includes only the operating expenses of the Operating
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 Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
GAAP Ratios (Total Company)
Loss ratio 68.1% 70.3% 66.9% 88.1%
Commission ratio 19.3% 25.5% 25.7% 26.6%
U/W, administration and
other expense ratio 16.1% 15.1% 12.0% 13.1%
Expense ratio 35.4% 40.6% 37.7% 39.7%
Combined ratio 103.5% 110.9% 104.6% 127.8%
SAP Combined Ratio *
Combined ratio 100.7% 107.2% 104.2% 122.8%
* Operating Subsidiaries Only
Comparison of Third Quarter Results for 1995 and 1994
Gross premiums written for 1995 decreased 8% to $69.0 million from $75.3
million in 1994. Net premiums written for 1995 decreased 2% to $54.6 million
11
from $55.8 million for 1994. Net premiums written for 1995 were reduced by
$19,000 for additional ceded premiums to reinstate catastrophe reinsurance
protections primarily related to the January 1994 Northridge earthquake. Net
premiums written for 1994 were increased by $180,000 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 7% in 1995 to $36.5 million
from $39.1 million in 1994. The loss ratio was 68.1% for 1995 as compared with
70.3% for 1994. During 1995 the Company incurred $249,000 of net gains ($849,000
gross) resulting from pre-1995 property catastrophe events, which reduced the
loss ratio by 0.4 points. Of these amounts, development from the Northridge
earthquake accounted for $45,000 of net incurred losses. During 1994 the Company
incurred $2.3 million of net losses ($2.0 million of gross losses) resulting
from property catastrophe events, which added to the loss ratio by 3.9 points.
During 1995 and 1994, the Company ceded $15.6 million and $20.3 million of
earned premiums, respectively. The Company recovered from retrocessionnaires
$8.8 million and $5.7 million of losses during 1995 and 1994, respectively.
Ceded premiums in 1995 included $19,000 of reinstatement premiums incurred by
the Company.
Commission expenses decreased 27% to $10.3 million in 1995 from $14.1
million in 1994. The commission ratio was 19.3% for 1995, compared with 25.5%
for 1994.
Underwriting, administration and other expenses increased 2% in 1995 to
$8.6 million from $8.4 million in 1994. The underwriting and other expense ratio
was 16.1% for 1995 as compared with 15.1% for 1994. The effect of net
reinstatement premiums related primarily to the Northridge earthquake reduced
the 1994 ratio by 0.1 points. The increase in underwriting, administration and
other expenses in 1995 was principally caused by the Company's relocation in the
third quarter of 1995.
The combined ratio was 103.5% for 1995, compared with 110.9% for 1994. The
effect of property catastrophe events on the 1995 and 1994 combined ratio was
(0.4) points and 3.8 points, respectively.
Net investment income increased 5% to $10.7 million for 1995 compared with
$10.2 million for 1994. The increase 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 for 1995 was $7.8
million virtually unchanged from 1994. Net realized investment gains for 1995
were $121,000, compared with $323,000 for 1994.
Interest expense increased 6% to $2.6 million in 1995 from $2.5 million in
1994.
12
The Company's net income for 1995 was $4.8 million, or $0.26 per share, on
a primary basis, compared with $2.4 million, or $0.13 per share, on a primary
basis, for 1994. The 1995 results were affected by after-tax benefit to
operations, net of reinsurance, of $150,000, or $0.01 per share, for pre-1995
property catastrophe events. The 1994 results were affected by after-tax charges
to operations of $1.4 million, or $0.08 per share, for property catastrophe
events. Average common and common equivalent shares outstanding (on a primary
basis) for 1995 were 18.4 million, compared with 18.2 million for 1994.
Comparison of Year to Date Results for 1995 and 1994
Gross premiums written for 1995 decreased 3% to $232.0 million from $239.3
million in 1994. Net premiums written for 1995 decreased 2% to $181.6 million
from $184.7 million for 1994. Gross premiums written for 1995 and 1994 were
increased by $900,000 and $1.0 million respectively, and net premiums written
were reduced by $1.2 million and $5.0 million, respectively, for additional
premiums 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 3% 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 20% in 1995 to $122.0
million from $152.6 million in 1994. The loss ratio was 66.9% for 1995 as
compared with 88.1% for 1994. During 1995 the Company incurred $3.1 million of
net losses ($12.5 million gross) resulting from pre-1995 property catastrophe
events, which added 2.1 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
$33.7 million of net losses ($63.0 million of gross losses) resulting from
property catastrophe events, primarily the Northridge earthquake and the early
1994 winter freeze, which added 21.4 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 $59.8 million and $59.3 million of
earned premiums, respectively. The Company recovered from retrocessionnaires
$50.2 million and $60.9 million of losses during 1995 and 1994, respectively.
Ceded premiums in 1995 and 1994 included $2.1 million and $6.0 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
$29.3 million of losses relating to the Northridge earthquake.
Commission expenses increased 2% to $46.9 million in 1995 from $46.0
million in 1994. The commission ratio was 25.7% for 1995, compared with 26.6%
for 1994. The effect of net reinstatement premiums primarily related to the
Northridge earthquake added 0.2 points and 0.8 points to the 1995 and 1994
commission ratio, respectively.
13
Underwriting, administration and other expenses decreased 4% in 1995 to
$21.8 million from $22.7 million in 1994. The underwriting and other expense
ratio was 12.0% for 1995 as compared with 13.1% for 1994. The effect of net
reinstatement premiums related primarily to the Northridge earthquake added 0.1
points and 0.4 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, offset in part by the Company's relocation in the third
quarter of 1995.
The combined ratio was 104.6% for 1995, compared with 127.8% for 1994. The
effect of property catastrophe events on the 1995 and 1994 combined ratio was
2.4 points and 22.6 points, respectively.
Net investment income increased 5% to $31.8 million for 1995 compared with
$30.4 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
months. On an after-tax basis, net investment income decreased 2% to $23.4
million for 1995, compared with $23.9 million in 1994. Net realized investment
gains for 1995 were $713,000, compared with $1.1 million for 1994.
Interest expense decreased 1% to $6.9 million in 1995 from $7.0 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 $14.1 million, or $0.77 per share, on
a primary basis, compared with a net loss of $11.4 million, or $0.63 per share,
on a primary basis, for 1994. The 1994 results were affected by after-tax
charges to operations, net of reinsurance, of $25.2 million, or $1.39 per share,
for property catastrophe events. The 1995 results include after-tax charges to
operations of $2.8 million, or $0.15 per share, for pre-1995 property
catastrophe events. Average common and common equivalent shares outstanding (on
a primary basis) for 1995 were 18.3 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 the future periods will be sufficient to
realize the net deferred income tax benefits reflected on its consolidated
balance sheet as of September 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.
14
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 nine months ended
September 30, 1995, $7.0 million of dividends were declared by SCOR Re to SCOR
U.S. At September 30, 1995, the aggregate statutory surplus of the Operating
Subsidiaries was $256.8 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.
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 September 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. In October 1995,
the Company refinanced this note with a $20 million borrowing from SCOR S.A.
SCOR U.S. has established a commercial paper program which allows it to
raise up to $50.0 million. At September 30, 1995, $20.6 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 September 30, 1995, the amount remaining under the Company's
existing stock repurchase program is approximately $1.5 million, which may be
utilized as market conditions permit. The Company has not repurchased any shares
under this program during 1995.
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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 provided by operating activities was $3.0 million for 1995 compared with
cash used in operations of $8.5 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 an 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 September 30, 1995, total investments and cash at carrying value
were $723.4 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
September 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 September 30, 1995 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 resulting
from foreign currency transactions during the periods ending September 30, 1995
and 1994 were $126,000 and $200,000, respectively.
Stockholders' equity at September 30, 1995 was $277.4 million, an
increase of $38.0 million compared with December 31, 1994. This increase
resulted primarily from net income of $14.1 million for the period and
unrealized appreciation of investments carried at fair value, net of tax effect,
of $26.4 million, less cash dividends declared of $2.7 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
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guidelines suggest that property and casualty insurance companies maintain a net
premiums written 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 .94 to 1 and 1.03 to 1 for 1995 and
1994, respectively.
Subsequent Event
On November 2, 1995 the Company entered into an Agreement and Plan of
Merger with SCOR S.A., its majority shareholder, and SCOR Merger Sub Corporation
("Merger Sub"), a newly formed Delaware corporation and wholly-owned subsidiary
of SCOR S.A., which provides, among other things, that upon certain terms and
conditions, that Merger Sub will be merged with and into the Company upon
consummation of the tender offer made by SCOR S.A., through Merger Sub, to
purchase all of the outstanding shares of Common Stock of the Company not held
by it.
17
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 5. OTHER INFORMATION
On November 2, 1995 the Company entered into an Agreement and Plan of
Merger with SCOR S.A., its majority shareholder, and SCOR Merger Sub Corporation
("Merger Sub"), a newly formed Delaware corporation and wholly-owned subsidiary
of SCOR S.A., which provides, among other things, that upon certain terms and
conditions, that Merger Sub will be merged with and into the Company upon
consummation of the tender offer made by SCOR S.A., through Merger Sub, to
purchase all of the outstanding shares of the Company not held by it. Reference
is made to the Form 8-K Current Report filed with the Securities and Exchange
Commission (the "Commission") on November 6, 1995.
On November 9, 1995 the Company filed with the Commission a Schedule
14D-9 Solicitation/Recommendation Statement with respect to SCOR S.A.'s Offer to
Purchase all of the outstanding shares of Common Stock of the Company not
already held by it.
Reference is made to the Schedule 14D-9 filed with the Commission on November 9,
1995.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10(v) Loan Agreement between SCOR U.S. Corporation and SCOR S.A dated
January 24, 1995.
10(w) Loan Agreement between SCOR U.S. Corporation and SCOR S.A. dated
October 2, 1995.
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)
Dated: November 14, 1995 /s/ Jeffrey D. Cropsey
Jeffrey D. Cropsey
Senior Vice President and
Chief Financial Officer
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