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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For
the transition period from to
Commission file number 1-11868
ZURICH REINSURANCE CENTRE HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-3703575
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
One Chase Manhattan Plaza, 43rd Floor
New York, New York 10005
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (212) 898-5000
Former name, former address and former fiscal year, if changed since last
report:
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the
Exchange Act) during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock:
(Class) (Outstanding at May 1, 1996)
Common Stock, $.01 par value 26,126,040 Shares
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ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION Page No
Item 1 - Consolidated Financial Statements
Independent Accountants' Review Report 3
Consolidated Balance Sheets -
March 31, 1996 and December 31, 1995 4
Consolidated Statements of Operations -
Three months ended March 31, 1996 and 1995 5
Consolidated Statements of Cash Flows -
Three months ended March 31, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 13
Signatures 14
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INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Shareholders
Zurich Reinsurance Centre Holdings, Inc.
We have reviewed the accompanying consolidated balance sheet of Zurich
Reinsurance Centre Holdings, Inc. and Subsidiaries as of March 31, 1996, and the
related consolidated statements of operations and cash flows for the three-month
periods ended March 31, 1996 and 1995. These consolidated financial statements
are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
consolidated financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements referred to above
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Zurich Reinsurance Centre Holdings,
Inc. and Subsidiaries as of December 31, 1995 and the related consolidated
statements of operations, shareholders' equity and cash flows for the year then
ended (but not presented herein) and in our report dated February 12, 1996, we
expressed an unqualified opinion on those consolidated financial statements.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
May 7, 1996
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ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
MARCH 31, DECEMBER 31,
1996 1995
---- ----
(UNAUDITED)
ASSETS
Fixed maturities available-for-sale (amortized cost:
3/31/96 $1,029,830; 12/31/95 $1,096,903) $ 1,027,519 $ 1,122,822
Equity securities available-for-sale (cost: 3/31/96 $107,143;
12/31/95 $105,542) 128,604 124,543
Investment in affiliate (cost: 3/31/96 $9,327; 12/31/95 $3,973) 9,327 3,973
Short-term investments, at cost, which approximates market 86,624 54,063
Cash and cash equivalents 274,237 206,699
----------- -----------
Total cash and invested assets 1,526,311 1,512,100
----------- -----------
Accrued investment income 13,081 15,734
Premiums receivable 228,472 205,410
Reinsurance recoverables:
Paid losses 1,829 1,312
Unpaid losses 33,780 30,981
Prepaid reinsurance premiums 3,943 7,126
Deferred policy acquisition costs 73,731 72,200
Deferred federal income taxes 44,057 31,369
Other assets 95,503 47,432
----------- -----------
Total assets $ 2,020,707 $ 1,923,664
=========== ===========
LIABILITIES
Losses and loss adjustment expenses $ 770,879 $ 689,609
Unearned premiums 271,759 272,132
7 1/8% Senior Notes due 2023 198,399 198,394
Other liabilities 109,570 81,959
----------- -----------
Total liabilities 1,350,607 1,242,094
----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock ($.10 par value, 20,000,000 shares
authorized; no shares outstanding)
Common stock ($.01 par value, 50,000,000 shares
authorized; 26,197,541 and 26,197,541 shares issued
at 3/31/96 and 12/31/95, respectively) 262 262
Paid-in capital 624,097 624,068
Unrealized appreciation of investments (net of deferred
taxes of $6,725 and $15,776 at 3/31/96 and 12/31/95,
respectively) 12,425 29,144
Retained earnings 35,502 28,096
Treasury stock, at cost (72,901 and 0 shares at 3/31/96
and 12/31/95, respectively) (2,186)
----------- -----------
Total shareholders' equity 670,100 681,570
----------- -----------
Total liabilities and shareholders' equity $ 2,020,707 $ 1,923,664
=========== ===========
See Notes to Consolidated Financial Statements
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ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
1996 1995
--------- ---------
(UNAUDITED)
REVENUES
Net premiums written (net of premiums ceded of
$256 and $1,127 for the three months ended
March 31, 1996 and 1995, respectively) $ 176,622 $ 115,623
Increase in unearned premiums 2,810 24,624
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Net premiums earned (net of premiums ceded of
$3,438 and $848 for the three months ended
March 31, 1996 and 1995, respectively) 173,812 90,999
Net investment income 21,582 16,722
Realized capital gains (losses) 1,421 (5,896)
Other income 304 554
--------- ---------
Total revenues 197,119 102,379
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EXPENSES
Loss and loss adjustment expenses (net of reinsurance
recoveries of $3,839 and $299 for the three months
ended March 31, 1996 and 1995, respectively) 126,277 67,673
Commissions 44,613 21,813
Other operating costs and expenses 11,823 10,337
Interest and amortization 3,844 3,524
--------- ---------
Total expenses 186,557 103,347
--------- ---------
Income (loss) before income taxes 10,562 (968)
Federal income tax expense 3,156 1,625
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NET INCOME (LOSS) $ 7,406 $ (2,593)
========= =========
PER SHARE DATA
Weighted average shares outstanding (in 000's) 26,133 26,132
========= =========
Net income (loss) $ 0.28 $ (0.10)
========= =========
See Notes to Consolidated Financial Statements
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ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
1996 1995
---- ----
(UNAUDITED)
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income (loss) $ 7,406 $ (2,593)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Losses and loss adjustment expenses, net 78,471 52,940
Unearned premiums, net 2,810 24,624
Premiums receivable (23,062) (6,817)
Deferred policy acquisition costs (1,531) (5,959)
Current and deferred taxes (2,519) (1,124)
Other assets and other liabilities 4,416 1,952
Realized capital (gains) losses (1,421) 5,896
--------- ---------
Net cash provided by operating activities 64,570 68,919
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CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Sales of fixed maturities 864,212 542,908
Maturities or calls of fixed maturities 28,360 4,000
Purchases of fixed maturities (847,789) (472,458)
Sales of equity securities 16,110 2,644
Purchases of equity securities (19,607) (61,149)
Net purchases of short-term investments (32,561) (41,301)
Cost of additions to property and equipment (138) (922)
--------- ---------
Net cash provided by (used in) investing activities 8,587 (26,278)
--------- ---------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Payment of cash dividend to shareholders (2,619)
Purchase of treasury stock (3,000)
--------- ---------
Net cash used in financing activities (5,619)
--------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS 67,538 42,641
Cash and cash equivalents, beginning of period 206,699 180,320
--------- ---------
Cash and cash equivalents, end of period $ 274,237 $ 222,961
========= =========
See Notes to Consolidated Financial Statements
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ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, such financial statements do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting solely of normal recurring accruals)
considered necessary for a fair presentation have been included. The results of
operations for the interim period are not necessarily indicative of the results
that may be expected for the year ended December 31, 1996, as quarterly results
may be affected by changes in the interest rate environment and catastrophic
losses. These consolidated financial statements should be read in conjunction
with the consolidated financial statements included in Zurich Reinsurance Centre
Holdings, Inc.'s Annual Report on Form 10-K for the year ended December 31,
1995.
Financial information has been included herein related to the consolidated
financial statements of Zurich Reinsurance Centre Holdings, Inc. ("ZRCH") and
its wholly-owned subsidiaries, principally Zurich Reinsurance Centre, Inc.
("ZRC") and ZC Insurance Company ("ZCIC"), (together with ZRCH, the "Company").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Losses and Loss Adjustment Expenses
Effective January 1, 1996, the Company adopted discounting for certain tabular
workers' compensation indemnity reserves. This method is preferable as it is
more representationally faithful to the economics of the underlying business and
will enhance comparability of the Company's financial statements as it is the
prevalent method used in the reinsurance industry. Such reserves were discounted
to present value using a 5% interest rate. Since the effect of such discount as
of January 1, 1996 was $0.8 million, it has been reported as a component of
earnings. Discounting had no material effect on net income for the first quarter
of 1996 or on the pro forma net income for the first quarter of 1995. Tabular
workers' compensation indemnity reserves, net of discount, were $1.7 million as
of March 31, 1996.
Reclassifications
The Company has reclassified the presentation of certain prior year information
to conform with the current presentation.
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ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INCOME TAXES
The Company's overall effective tax rates of 29.9% and (167.9)% for the three
months ended March 31, 1996 and 1995, respectively, had both operating and
realized capital gains components. The effective tax rates on operating income
of 29.1% and 33.0% for the three months ended March 31, 1996 and 1995 differed
from the federal statutory rate of 35.12% due principally to tax-exempt
investment income and dividends. For the three months ended March 31, 1996, the
effective tax rate on realized capital gains approximated the federal statutory
rate. For the three months ended March 31, 1995, the Company established a
valuation allowance to offset potential tax benefits from realized capital
losses and, accordingly, the effective tax rate on realized capital losses was
0%.
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ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OPERATING INCOME
The Company's pre-tax operating income (excluding realized capital gains) for
the first quarter of 1996 was $9.1 million compared to $4.9 million for the
first quarter of 1995. The increase is primarily due to growth in net investment
income as discussed below.
NET INCOME (LOSS)
Net income for the first quarter of 1996 was $7.4 million compared to net loss
of $2.6 million for the first quarter of 1995. The increase is due to the $6.8
million increase in after-tax realized capital gain (loss) activity and the
increase in after-tax operating income of $3.2 million.
PREMIUMS
Gross premiums written for the first quarter of 1996 increased 51.5% to $176.9
million, compared with $116.8 million in the first quarter of 1995 (net premiums
written exhibited similar growth increasing to $176.6 million, or 52.8% from
$115.6 million for the first quarter of 1995 as there were no significant
changes in the Company's retention levels or retrocessional programs during the
first quarter of 1996). Net premiums earned increased to $173.8 million or 91.0%
over the comparable period of 1995. Premiums written increased less on a
percentage basis than premiums earned due to the maturing of, and changes in,
the Company's mix of business. The premium growth is due to a domestic whole
account quota share treaty with members of the Zurich American Insurance Group
("Zurich American") which contributed $52.4 million, $50.7 million and $39.3
million to first quarter gross premiums written, net premiums written and net
premiums earned, respectively, and an increasing proportion of renewal business
as well as new bound business.
LOSS AND LOSS ADJUSTMENT EXPENSES
Loss and loss adjustment expenses for the first quarter of 1996 were $126.3
million, a 86.6% increase over the comparable 1995 period, due to the
significant growth in earned premiums as discussed above. The GAAP loss ratio,
however, decreased 1.7 percentage points to 72.7% in the first quarter of 1996
from the 74.4% in the comparable 1995 period due to changes in the Company's mix
of business as discussed below. There were no significant catastrophe losses in
either the first quarter of 1996 or 1995.
COMMISSIONS
Commissions in the first quarter of 1996 were $44.6 million, compared to $21.8
million in the corresponding period of 1995. The GAAP commission ratio was 25.7%
in the first quarter of 1996 compared to 24.0% in the corresponding 1995 period.
Changes in the commission ratio are primarily attributable to an increase in pro
rata treaty premiums earned in 1996 relative to excess of loss premiums. Pro
rata treaties generally have higher commission rates than excess of loss
treaties.
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ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OTHER OPERATING COSTS AND EXPENSES
Other operating costs and expenses were $11.8 million in the first quarter of
1996 compared to $10.3 million in the corresponding period of 1995. The GAAP
expense ratio decreased 2.2 percentage points to 6.7% from 8.9% due to the
normalization of operating expenses and the growth in the Company's written
premium volume.
STATUTORY COMBINED RATIOS
ZRC's statutory combined ratio for the first quarter of 1996 was 103.9%,
compared with 107.2% for the corresponding 1995 period. ZRC's statutory combined
ratio for the three months ended March 31, 1996 decreased due to a 2.1
percentage point decline in the other underwriting expense ratio and a 1.2
percentage point decline in the loss and commission ratio. ZRC's statutory
combined ratios differ from the Company's GAAP combined ratios of 105.1% and
107.3%, respectively, primarily due to the deferral of certain acquisition costs
and the inclusion of certain holding company expenses, each of which is
considered in the Company's GAAP combined ratio.
NET INVESTMENT INCOME
Net investment income for the three months ended March 31, 1996 was $21.6
million, or 29.1% greater than the comparable 1995 period. The growth in net
investment income was driven by an increased invested asset base resulting from
cash flows from operations and assets acquired through the purchase of Re
Capital Corporation during April 1995. Reflective of general investment market
conditions, the after-tax annualized net investment income yield declined to
4.0% for the three months ended March 31, 1996 from 4.2% for the three months
ended March 31, 1995.
REALIZED CAPITAL GAINS (LOSSES)
Pre-tax realized capital gains for the first quarter of 1996 were $1.4 million,
compared to pre-tax realized capital losses of $5.9 million in the first quarter
of 1995. The 1996 and 1995 realized capital gain (loss) activity is reflective
of current investment market conditions and is consistent with the Company's
investment philosophy, whereby realized capital gains or losses are taken to
maximize the total investment return.
INTEREST AND AMORTIZATION
Interest and amortization expense for the three months ended March 31, 1996 was
$3.8 million, compared to $3.5 million for the corresponding period of 1995.
Interest expense of $3.5 million in the first quarter of 1996 and 1995 is
attributable to the Company's 7 1/8% Senior Notes, due 2023. Amortization
expense of $0.3 million in 1996 results from the acquisition of Re Capital
Corporation during April 1995.
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ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TAX EXPENSE
The Company's overall effective tax rates of 29.9% and (167.9)% for the three
months ended March 31, 1996 and 1995, respectively, had both operating and
realized capital gains components. The effective tax rates on operating income
of 29.1% and 33.0% for the three months ended March 31, 1996 and 1995 differed
from the federal statutory rate of 35.12% due principally to tax-exempt
investment income and dividends. For the three months ended March 31, 1996, the
effective tax rate on realized capital gains approximated the federal statutory
rate. For the three months ended March 31, 1995, the Company established a
valuation allowance to offset potential tax benefits from realized capital
losses and, accordingly, the effective tax rate on realized capital losses was
0%.
FINANCIAL CONDITION
CASH AND INVESTED ASSETS
During the first three months of 1996, the Company's cash and invested assets
increased $14.2 million to $1,526.3 million at March 31, 1996. The increase is
principally due to cash flows from operations, offset by a decrease in the
market value of the Company's investment portfolio. As of March 31, 1996,
approximately 67% of the Company's cash and investment portfolio was invested in
fixed maturity securities, 9% in equity securities and 24% in short-term
investments and cash and cash equivalents, compared to 74%, 9% and 17%,
respectively, as of December 31, 1995.
Approximately 83% and 84% of the fixed maturity portfolio at March 31, 1996 and
December 31, 1995, respectively, was invested in U.S. government obligations or
securities rated "triple-A" by Moody's Investors Service or Standard & Poor's
Corporation. The balance of the fixed maturity portfolio was invested in other
investment-grade fixed maturities. The duration of the Company's fixed maturity
portfolio of 4.2 years as of March 31, 1996 was relatively consistent with the
4.3 years duration at December 31, 1995.
LOSS RESERVES
Liabilities for gross losses and loss adjustment expenses (together, "loss
reserves") were $770.9 million as of March 31, 1996, a $81.3 million increase
from December 31, 1995. The increase in loss reserves is principally due to
significant growth in premium volume during 1996.
SHAREHOLDERS' EQUITY
Shareholders' equity at March 31, 1996 was $670.1 million, a decrease of $11.5
million, or 1.7% from December 31, 1995. The decrease is primarily due to the
after-tax decrease in the market value of available-for-sale securities held by
the Company of $16.7 million, offset by net income for 1996 of $7.4 million.
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ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and short-term investments increased to 24% of the
Company's March 31, 1996 cash and invested assets from 17% at December 31, 1995
as a result of sector shifts consistent with the Company's investment strategy.
Net cash provided by operating activities for the three months ended March 31,
1996 of $64.6 million was relatively consistent with the $68.9 million for the
three months ended March 31, 1995. The cash flows for both periods are primarily
attributable to underwriting operations and net investment income. Net cash used
in financing activities for the three months ended March 31, 1996 was $5.6
million and resulted from the Company's stock repurchase program and dividend
payment. There was no net cash provided by or used in financing activities
during the quarter ended March 31, 1995.
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ZURICH REINSURANCE CENTRE HOLDINGS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index
Exhibit Description Page
------- ---------------------------------------------------------- ----
15 Letter regarding unaudited interim financial information 15
18 Letter regarding change in accounting principle 16
27 Financial Data Schedule 17
(b) Reports on Form 8-K
There were no reports filed on Form 8-K for the period ended March 31,
1996.
Omitted from this Part II are items which are inapplicable or to which
the answer is negative for the period covered.
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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.
Zurich Reinsurance Centre Holdings, Inc.
----------------------------------------
(Registrant)
Date May 9, 1996 /s/ Richard E. Smith
----------- ---------------------------------------------------------
Richard E. Smith
President and Chief Operating Officer
Date May 9, 1996 /s/ Peter R. Porrino
----------- ---------------------------------------------------------
Peter R. Porrino
Sr. Vice President, Chief Financial Officer and Treasurer
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