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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 Quarter Ended March 31, 1996.
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number 1-12800
EXECUTIVE RISK INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1388171
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
82 Hopmeadow Street 06070
Simsbury, Connecticut (Zip Code)
(Address of principal executive offices)
(860) 408-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No .
--- ---
As of May 8, 1996, there were 8,996,041 shares of Executive Risk Inc.
Common Stock, $0.01 par value, outstanding.
As of May 8, 1996, there were --0-- shares of Executive Risk Inc. Class B
Common Stock, $0.01 par value, outstanding.
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EXECUTIVE RISK INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Independent Accountants' Review Report............................................... 2
Consolidated Balance Sheets -
March 31, 1996 and December 31, 1995................................................. 3
Consolidated Statements of Income -
Three Months Ended March 31, 1996 and 1995........................................... 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1996 and 1995........................................... 5
Notes to Consolidated Financial Statements........................................... 6 -7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................ 7-10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................... 11
Signatures.............................................................................. 12
Exhibit 15 - Independent Accountants' Acknowledgement Letter............................ 13
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ITEM 1. FINANCIAL STATEMENTS
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Stockholders and Board of Directors
Executive Risk Inc.
We have reviewed the accompanying consolidated balance sheet of Executive Risk
Inc. and its subsidiaries as of March 31, 1996, and the related consolidated
statements of income and cash flows for the three-month period 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 review, 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 Executive Risk Inc. and
subsidiaries as of December 31, 1995, and the related consolidated statements of
income, stockholders' equity and cash flows for the year then ended (not
presented herein) and in our report dated February 2, 1996, we expressed an
unqualified opinion on those consolidated financial statements.
..
.. /s/ ERNST & YOUNG LLP
----------------------------
Stamford, Connecticut
May 9, 1996
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EXECUTIVE RISK INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December
March 31, 31,
(In thousands, except share and per share data) 1996 1995
--------- --------
ASSETS
Fixed maturities available for sale, at fair value
(amortized cost: 1996 - $457,823 and 1995 - $480,135) $472,783 $503,485
Equity securities available for sale, at fair value
(cost: 1996 - $21,938 and 1995 - $20,474) 28,788 26,123
Cash and short-term investments, at cost which approximates market . 30,097 20,244
-------- --------
TOTAL CASH AND INVESTED ASSETS 531,668 549,852
Premiums receivable 11,557 10,652
Reinsurance recoverables 42,919 33,781
Accrued investment income 8,120 9,409
Investment in UPEX 1,052 990
Deferred acquisition costs 20,172 16,244
Prepaid reinsurance premiums 33,665 32,303
Deferred income taxes 20,957 18,337
Other assets 17,359 16,269
-------- --------
TOTAL ASSETS $687,469 $687,837
======== ========
LIABILITIES
Loss and loss adjustment expenses $351,671 $324,416
Unearned premiums 123,266 116,971
Note payable to bank 70,000 25,000
Accrued expenses and other liabilities 37,515 43,725
-------- --------
TOTAL LIABILITIES 582,452 510,112
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value; authorized - 52,500,000 shares;
issued - 1996 - 10,409,291 shares and 1995 - 11,626,766 shares
outstanding - 1996 - 8,994,041 shares and 1995 - 11,497,816 shares 104 116
Additional paid-in capital 87,064 87,228
Unrealized gains on investments, net of tax 14,388 19,156
Currency translation adjustments (55) 29
Retained earnings 45,063 74,315
Cost of shares in treasury, at cost: 1996 - 1,415,250 shares and
1995 - 128,950 shares (41,547) (3,119)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 105,017 177,725
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $687,469 $687,837
========= ========
The accompanying notes are an integral part of the consolidated
financial statements.
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EXECUTIVE RISK INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended March 31,
(In thousands, except per share data) 1996 1995
-------- --------
REVENUES
Gross premiums written $ 57,682 $ 35,633
Premiums ceded (18,831) (10,163)
-------- --------
Net premiums written 38,851 25,470
Change in unearned premiums (4,938) (183)
-------- --------
NET PREMIUMS EARNED 33,913 25,287
Net investment income 7,375 6,284
Net realized capital gains (losses) 954 (449)
Other income 92 102
-------- --------
TOTAL REVENUES 42,334 31,224
EXPENSES
Loss and loss adjustment expenses 22,894 17,058
Policy acquisition costs 6,744 4,880
General and administrative expenses 3,168 2,354
Long-term incentive compensation 187 420
Interest expense 578 471
-------- --------
TOTAL EXPENSES 33,571 25,183
-------- --------
INCOME BEFORE INCOME TAXES 8,763 6,041
Income tax expense (benefit)
Current 1,735 1,069
Deferred (197) (326)
-------- --------
1,538 743
-------- --------
NET INCOME $ 7,225 $ 5,298
======== ========
Earnings per common and common equivalent share $ 0.60 $ 0.45
Weighted average shares outstanding 12,028 11,747
Earnings per common and common equivalent share -
assuming full dilution $ 0.60 $ 0.45
Weighted average shares outstanding - assuming full dilution 12,061 11,819
Dividends declared per common share $ 0.02 $ 0.02
The accompanying notes are an integral part of the consolidated
financial statements.
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EXECUTIVE RISK INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
(In thousands) 1996 1995
-------- --------
OPERATING ACTIVITIES
Net income $ 7,225 $ 5,298
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization and depreciation 389 200
Share of income of UPEX (92) (102)
Deferred income taxes (197) (326)
Amortization of bond premium 444 415
Net realized (gains) losses on investments (954) 449
Other (819) (341)
Change in:
Premiums receivable (905) (6,128)
Accrued investment income 1,289 468
Deferred acquisition costs (3,928) (195)
Loss and loss adjustment expenses, net of reinsurance recoverables 18,117 6,718
Unearned premiums, net of prepaid reinsurance premiums 4,938 183
Accrued expenses and other liabilities (715) (2,321)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 24,792 4,318
INVESTING ACTIVITIES
Proceeds from sales of fixed maturities available for sale 24,414 21,007
Proceeds from maturities of investment securities 7,758 3,304
Purchase of investment securities (16,165) (34,148)
Net capital expenditures (796) (275)
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 15,211 (10,112)
FINANCING ACTIVITIES
Proceeds from exercise of options 105
Repayment of note payable to bank (25,000)
Note payable to bank 70,000
Cost of repurchase of Common Stock (75,025)
Dividends paid on Common Stock (230) (205)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (30,150) (205)
-------- --------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS 9,853 (5,999)
-------- --------
Cash and short-term investments at beginning of period 20,244 24,567
-------- --------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 30,097 $ 18,568
======== ========
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The accompanying notes are an integral part of the consolidated
financial statements.
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EXECUTIVE RISK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying unaudited interim consolidated financial
statements of Executive Risk Inc. (the "Company" or "ERI") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and notes 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 of the
financial position, results of operations and cash flows for the interim periods
have been included. Operating results for any interim period are not necessarily
indicative of results that may be expected for the full year. These consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and related notes contained in the Company's Annual Report
to Shareholders incorporated by reference in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995.
STOCK PURCHASE & SECONDARY OFFERING: On March 22, 1996, ERI entered into a Stock
Purchase Agreement ("the Agreement") with Aetna Life and Casualty Company
("AL&C") and AL&C's wholly-owned subsidiary, The Aetna Casualty and Surety
Company ("Aetna"). Prior to the closing of the Agreement, Aetna owned 4,511,300
shares of the Company's capital stock, consisting of (i) 3,286,300 shares of
Common Stock and (ii) all 1,225,000 shares of the Class B Common Stock. Together
with an option to purchase 100,000 shares of ERI Common Stock at an exercise
price of $12 per share, AC&S controlled approximately 40% of the Common and
Class B Common Stock. Pursuant to the Agreement, on March 26, 1996, the Company
purchased 1,286,300 shares of ERI Common Stock and 1,225,000 shares of ERI Class
B Common Stock from Aetna at a per share price of $29.875, or approximately $75
million in the aggregate. The price is subject to upward adjustment under
certain circumstances. Upon the closing of the Agreement, 2,000,000 shares of
Common Stock, representing approximately 22% of the Company's issued and
outstanding Common Stock, remained under Aetna ownership. In connection with the
acquisition of Aetna by The Travelers Insurance Group Inc., Aetna transferred
ownership of the remaining Common Stock to AL&C.
In connection with the Agreement, the Company secured a $70 million senior
credit facility (the "Senior Credit Facility") arranged through The Chase
Manhattan Bank (National Association) ("Chase"). See "Credit Agreement."
The Agreement also contained provisions requiring that, except under certain
market and other conditions, the Company was obligated to file a registration
statement with respect to the remaining 2,000,000 shares under AL&C ownership
and AL&C is obligated to sell all of these shares in an underwritten secondary
offering. Such registration statement was filed with the Securities and Exchange
Commission on April 24, 1996.
On May 10, 1996, the Board of Directors approved a resolution to retire the
1,225,000 shares of Class B Common Stock in treasury acquired in the Aetna stock
repurchase as described above. Such retirement has been retroactively reflected
in the March 31, 1996 balance sheet.
CREDIT AGREEMENT: Until March 26, 1996 (the "Closing Date"), the Company had a
credit agreement with Chase, Morgan Guaranty Trust Company of New York and The
Fleet National Bank of Connecticut to borrow up to $50 million, of which $25
million was outstanding through the Closing Date. On the Closing Date, the
Company borrowed $70 million under the terms of the Senior Credit Facility with
Chase. The proceeds of the loan were utilized as follows: $38 million to
partially finance the repurchase
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NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CREDIT AGREEMENT (CONTINUED)
of common stock from Aetna, $25 million to refinance the Company's previously
existing debt, and $7 million for general corporate purposes. In addition, the
Company has secured through Chase a $25 million revolving credit facility. The
Company has no current plans to draw funds under the revolving credit facility.
Interest accrues on principal balances outstanding under the term loan and
revolving credit facility at a rate per annum equal to (a) the higher of (i) the
federal funds rate plus a stipulated percentage and (ii) Chase's prime rate or,
(b) for London Interbank Offered Rate ("LIBOR") based loans, LIBOR plus a
stipulated percentage over LIBOR based on the Company's debt-to-capital ratio
and its then effective Standard & Poor's claims-paying ability rating. With
respect to $25 million of indebtedness, the Company currently has in place an
interest rate swap agreement that effectively converts a floating interest rate
to a semi-fixed interest rate. This agreement involves the receipt of floating
rate interest payments in exchange for semi-fixed interest rate payments over
the life of the agreement without an exchange of the $25 million principal
amount. The differential to be paid or received is accrued as interest rates
change and is recognized as an adjustment to interest expense related to the
debt. The fair value of the swap agreement is not recognized in the financial
statements. The swap became effective May 15, 1995 and terminates May 15, 1997.
The current borrowing rate for the Company is 6.68%. In addition, the Company
has agreed, under the Term Loan Agreement, that within 120 days from the Closing
Date, it will enter into an interest rate protection agreement providing
interest rate protection for an aggregate notional amount equal to at least 50%
of the principal outstanding under the term loan. In connection with the Senior
Credit Facility, the Company has pledged the stock of its direct subsidiary,
Executive Re, and Executive Re has pledged the stock of its direct subsidiary,
ERII. The terms of the credit agreements require, among other things, that the
Company maintain certain defined minimum consolidated net worth and combined
statutory surplus levels, and certain debt leverage, premiums-to-surplus and
fixed charge ratios, and place restrictions on the payment of dividends, the
incurrence of additional debt, the sale of assets, the making of acquisitions
and the incurrence of liens.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Management's discussion and analysis of financial condition and results of
operations compares certain financial results for the three months ended March
31, 1996 with the corresponding period for 1995. The results of Executive Risk
Inc. (the "Company" or "ERI") include the consolidated results of Executive Risk
Management Associates ("ERMA"), Executive Re Inc. ("Executive Re"), and
Executive Re's insurance subsidiaries, Executive Risk Indemnity Inc. ("ERII"),
Executive Risk Specialty Insurance Company ("ERSIC"), and Executive Risk, N.V.,
a newly formed Dutch insurance company incorporated in the Netherlands. In
addition, the Company's results include its 50% interest in UAP Executive
Partners ("UPEX"), a French underwriting agency which is a joint venture between
the Company and Union des Assurances de Paris -- Incendie-Accidents. This
interest is reported using the equity method of accounting.
On March 22, 1996, ERI entered into a Stock Purchase Agreement ("the Agreement")
with Aetna Life and Casualty Company ("AL&C") and AL&C's wholly-owned
subsidiary, The Aetna Casualty and Surety Company ("Aetna"). Prior to the
closing of the Agreement, Aetna owned 4,511,300 shares of the Company's capital
stock, consisting of (i) 3,286,300 shares of Common Stock and (ii) all 1,225,000
shares of the Class B Common Stock. Together with an option to purchase 100,000
shares of ERI Common Stock at an exercise price of $12 per share, AC&S
controlled approximately 40% of the Common and Class B Common Stock. Pursuant to
the Agreement, on March 26, 1996, the Company purchased 1,286,300 shares of ERI
Common Stock and 1,225,000 shares of ERI Class B Common Stock from Aetna at a
per share price of $29.875, or approximately $75 million in the aggregate. The
price is subject to upward adjustment under certain circumstances. Upon
the closing of the Agreement, 2,000,000 shares of Common Stock, representing
approximately 22% of the Company's issued and outstanding Common Stock, remained
under Aetna ownership. In connection with the acquisition of Aetna
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by The Travelers Insurance Group Inc., Aetna transferred ownership of the
remaining Common Stock to AL&C.
In connection with the Agreement, the Company secured a $70 million senior
credit facility (the "Senior Credit Facility") arranged through The Chase
Manhattan Bank (National Association) ("Chase"). See "Liquidity and Capital
Resources."
The Agreement also contained provisions requiring that, except under certain
market and other conditions, the Company was obligated to file a registration
statement with respect to the remaining 2,000,000 shares under AL&C ownership
and AL&C is obligated to sell all of these shares in an underwritten secondary
offering. Such registration statement was filed with the Securities and Exchange
Commission on April 24, 1996.
Results of Operations
Gross premiums written increased by $22.1 million, or 62%, to $57.7 million in
the first quarter of 1996 from $35.6 million in the first quarter of 1995. The
increase was due in part to growth in domestic and international directors and
officers liability insurance ("D&O") and miscellaneous professional liability
errors and omissions insurance ("E&O"). Also contributing to the rise in gross
premiums written was the Company's ability to issue ERII and ERSIC D&O policies,
rather than Aetna policies, to both new and renewing insureds. Converting
insureds to ERII or ERSIC policies from Aetna policies results in the Company
receiving 100% of the gross premiums written (and ceding 12.5% to Aetna) as
compared to receiving 50% when reinsuring Aetna's risks. In the first quarter of
1996, $40.7 million of gross D&O premiums written were issued on ERII and ERSIC
policies as compared to $6.4 million in the first quarter of 1995. As
approximately one-third of the increase in gross premiums written was
attributable to conversions from AC&S policies to ERII and ERSIC policies, it is
unlikely that the rate of growth achieved in the first quarter of 1996 can be
sustained in future periods.
Ceded premiums increased $8.6 million, or 85%, to $18.8 million in the first
quarter of 1996 from $10.2 million in the first quarter of 1995. The rise in
ceded premiums was due principally to an increase in direct premium volume, a
portion of which is ceded to reinsurers under the Company's various D&O and E&O
treaties.
As a result of the foregoing, net premiums written increased $13.4 million, or
53%, to $38.9 million for the quarter ended March 31, 1996 from $25.5 million
for the quarter ended March 31, 1995. Over the same periods, net premiums earned
increased to $33.9 million from $25.3 million.
Net investment income increased by $1.1 million, or 17%, to $7.4 million for the
quarter ended March 31, 1996 from $6.3 million for the quarter ended March 31,
1995. This increase resulted principally from growth in invested assets from
$445.9 million at March 31, 1995 to $509.9 million at March 31, 1996. The
nominal portfolio yield of the fixed maturity portfolio at March 31, 1996 was
6.04%, compared to 6.24% at March 31, 1995. The tax equivalent yields on the
fixed maturity portfolio were 8.22% and 8.53% for these periods, respectively.
The Company's net realized capital gains were $1.0 million in the first quarter
of 1996, as compared to net realized capital losses of $0.4 million in the first
quarter of 1995. In the first quarter of 1996, capital gains were realized from
the sale of the fixed maturity portfolios of ERI and Executive Re to provide
available cash for the repurchase of common stock from Aetna.
Loss and loss adjustment expenses ("LAE") increased by $5.8 million, or 34%,
from $17.1 million in the first quarter of 1995 to $22.9 million in the
comparable period of 1996 due to higher premiums earned. The Company's loss
ratio was 67.5% in both the first quarter of 1996 and the first quarter of 1995.
In
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connection with the Company's normal reserving review, which includes a
reevaluation of the adequacy of reserve levels for prior years' claims, the
Company reduced its unpaid loss and LAE reserves for prior report years by $1.5
million, or $0.08 per share on a fully diluted basis, in the first quarter of
1996. In the first quarter of 1995, the Company reduced its unpaid loss and LAE
reserves for prior report years by $1.1 million, or $0.06 per share on a fully
diluted basis. There can be no assurance that reserve adequacy reevaluations
will produce similar reserve reductions and net income increases in future
quarters.
Policy acquisition costs increased by $1.8 million, or 38%, to $6.7 million for
the quarter ended March 31, 1996 from $4.9 million for the quarter ended March
31, 1995. The Company's ratio of policy acquisition costs to net premiums earned
increased from 19.3% in the first quarter of 1995 to 19.9% in the first quarter
of 1996. The increase in the acquisition cost ratio was attributable to both
higher commission amounts paid to brokers and increased compensation and related
expenses incurred in hiring additional underwriting staff to support the growth
in the Company's business, partially offset by the savings achieved by paying
less in override commissions to AC&S as a result of converting insureds from
AC&S policies to ERII and ERSIC policies.
General and administrative ("G&A") expenses increased $0.8 million, or 35%, to
$3.2 million in the first quarter of 1996 from $2.4 million in the first quarter
of 1995 due largely to increased compensation and related costs associated with
the growth of the business. The ratio of G&A costs to net premiums earned
remained stable at 9.3%, unchanged from the year earlier period.
The GAAP combined ratio increased to 96.7% in the first quarter of 1996 from
96.1% in the first quarter of 1995. The increase of 0.6 percentage points was
attributable to the increase in the policy acquisition cost ratio as discussed
above. A combined ratio below 100% generally indicates profitable underwriting
prior to the consideration of investment income, capital gains and interest
expense. A company with a combined ratio exceeding 100% can still be profitable
in that period due to such factors as investment income and capital gains
realized.
Interest expense of $0.6 million for the first quarter of 1996 and $0.5 million
for the first quarter of 1995 was attributable principally to the outstanding
balances under the Company's bank credit agreement. The outstanding balances
were $25 million for the quarter ended March 31, 1995, $25 million from January
1, 1996 through March 26, 1996 and $70 million from March 26 through March 31,
1996. Interest expense will increase in future quarters as a result of the
increase in the credit facility obtained in connection with the aforementioned
repurchase of common stock from Aetna. See "Liquidity and Capital Resources."
Income tax expense increased $0.8 million, or 107%, from $0.7 million in the
first quarter of 1995 to $1.5 million in the first quarter of 1996. The
Company's effective tax rate increased from 12.3% to 17.5% for the same periods.
The increase in the effective tax rate was due to an increase in the Company's
state tax liability and growth in pre-tax income outpacing the increase in
tax-exempt investment income.
As a result of the factors described above, the Company's net income for the
first quarter of 1996 increased $1.9 million, or 36%, to $7.2 million, or $0.60
per share on a fully diluted basis, from $5.3 million, or $0.45 per share on a
fully diluted basis, in the first quarter of 1995.
Liquidity and Capital Resources
ERI is a holding company, the principal asset of which is equity in its
subsidiaries. ERI's cash flows depend primarily on dividends and other payments
from its subsidiaries. ERI's sources of funds consist primarily of premiums
received by the insurance subsidiaries, revenues received by ERMA under
insurance agency arrangements, investment income and proceeds from sales and
redemptions of investments. Funds are used primarily to pay claims and operating
expenses, to purchase investments, and to pay interest and principal under the
Company's bank indebtedness.
Cash flows from operating activities were $24.8 million for the quarter ended
March 31, 1996 and $4.3 million for the quarter ended March 31, 1995. The
increase in operating cash flows resulted from the increase in net premiums
received resulting from higher net premiums written. In addition, the Company
settled fewer losses in the first quarter of 1996 than anticipated. These losses
could be settled in future quarters, depressing net cash flows in future
periods.
The Company believes that it has sufficient liquidity to meet its anticipated
insurance obligations as well as its operating and capital expenditure needs.
Consistent with the Company's emphasis on total return, the Company's investment
strategy emphasizes quality, liquidity and diversification. With respect to
liquidity, the Company considers liability durations,
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specifically loss reserves, when determining investment maturities. In
addition, maturities have been staggered to produce a pre-planned pattern of
cash flows for purposes of loss payments and reinvestment opportunities. Average
investment duration of the fixed maturity portfolio at March 31, 1996 and
December 31, 1995 was 4.5 and 4.6 years, respectively, as compared to an
expected loss reserve duration of 4.5 to 5.5 years. The Company's short-term
investment pool was $30.1 million (5.7% of the total investment portfolio) at
March 31, 1996 and $20.2 million (3.7%) at December 31, 1995. The short-term
investment pool was increased to generate a funding source for the initiation of
an allocation to mortgage and asset backed securities, which began early in the
second quarter of 1996.
The Company's entire investment portfolio is classified as available for sale
under the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," and is
reported at fair value, with the resulting unrealized gains or losses included
as a separate component of stockholders' equity until realized. Due to a rise in
interest rates, the market value of the portfolio at March 31, 1996 was 103% of
amortized cost versus 105% of amortized cost at December 31, 1995. At March 31,
1996 and December 31, 1995, stockholders' equity was increased by $9.9 million
and $15.4 million, respectively, to record the Company's fixed maturity
investment portfolio at fair value. At March 31, 1996 and December 31, 1995, the
Company owned no derivative instruments, except for certain mortgage and other
asset backed securities and an interest rate swap agreement which was used to
effectively convert a portion of its floating rate debt to a fixed rate basis,
thus reducing the impact of interest rate changes on future income.
Until March 26, 1996 (the "Closing Date"), the Company had a credit agreement
with Chase, Morgan Guaranty Trust Company of New York and The Fleet National
Bank of Connecticut to borrow up to $50 million, of which $25 million was
outstanding through the Closing Date. On the Closing Date, the Company borrowed
$70 million under the terms of the Senior Credit Facility with Chase. The
proceeds of the loan were utilized as follows: $38 million to partially finance
the repurchase of common stock from Aetna, $25 million to refinance the
Company's previously existing debt, and $7 million for general corporate
purposes. In addition, the Company has secured through Chase a $25 million
revolving credit facility. The Company has no current plans to draw funds under
the revolving credit facility. Interest accrues on principal balances
outstanding under the term loan and revolving credit facility at a rate per
annum equal to (a) the higher of (i) the federal funds rate plus a stipulated
percentage and (ii) Chase's prime rate or, (b) for London Interbank Offered Rate
("LIBOR") based loans, LIBOR plus a stipulated percentage over LIBOR based on
the Company's debt-to-capital ratio and its then effective Standard & Poor's
claims-paying ability rating. With respect to $25 million of indebtedness, the
Company currently has in place an interest rate swap agreement that effectively
converts a floating interest rate to a semi-fixed interest rate. In addition,
the Company has agreed, under the Term Loan Agreement, that within 120 days from
the Closing Date, it will enter into an interest rate protection agreement
providing interest rate protection for an aggregate notional amount equal to at
least 50% of the principal outstanding under the term loan. In connection with
the Senior Credit Facility, the Company has pledged the stock of its direct
subsidiary, Executive Re, and Executive Re has pledged the stock of its direct
subsidiary, ERII. The terms of the credit agreements require, among other
things, that the Company maintain certain defined minimum consolidated net worth
and combined statutory surplus levels, and certain debt leverage,
premiums-to-surplus and fixed charge ratios, and place restrictions on the
payment of dividends, the incurrence of additional debt, the sale of assets, the
making of acquisitions and the incurrence of liens.
On February 9, 1996, the Company declared its first quarter dividend on the
Company's Common Stock of $.02 per share, which was paid on March 31, 1996 to
stockholders of record as of March 15, 1996. Such dividends totaled $0.2
million.
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PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBIT INDEX
Exhibit No. Description Page
----------- ----------- ----
15 Independent Accountant's Acknowledgement Letter 13
27 Financial Data Schedule 14
b) REPORTS ON FORM 8-K
On March 25, 1996, the Company filed a Current Report on Form 8-K, which
discussed the purchase by the Company of 2,511,300 shares of its capital stock
from The Aetna Casualty and Surety Company (the "Repurchase Transaction"),
including 1,286,300 shares of Common Stock and all 1,225,000 outstanding shares
of Class B Common Stock. Also discussed was the creation of a $70 million senior
credit facility for the Company, a part of the proceeds of which was used to
finance the Repurchase Transaction.
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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.
SIGNATURE TITLE DATE
--------- ----- ----
/S/Robert H. Kullas Vice Chairman, Chief Operating Officer May 14, 1996
- ------------------- and Director
Robert H. Kullas
/S/ Robert V. Deutsch Executive Vice President, Chief Financial Officer, May 14, 1996
- ----------------------- Chief Actuary, Treasurer and Assistant Secretary
Robert V. Deutsch (Principal Financial and Accounting Officer)
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