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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 June 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period __________ to __________.
Commission file number 0-13891.
NAC Re Corp.
(Exact name of registrant as specified in its charter)
Delaware 13-3297840
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Greenwich Plaza, Greenwich, CT 06836-2568
(Address of principal executive offices)
(203) 622-5200
(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by a 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
There were 18,396,722 shares outstanding of the Registrant's Common Stock,
$.10 par value, as of June 30, 1997.
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NAC RE CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
Independent Accountants' Review Report 3
Consolidated Balance Sheet -
June 30, 1997 and December 31, 1996 4
Consolidated Statement of Income -
Three Months and Six Months Ended June 30, 1997 and 1996 5
Consolidated Statement of Stockholders' Equity -
Six Months Ended June 30, 1997 and 1996 6
Consolidated Statement of Cash Flows -
Six Months Ended June 30, 1997 and 1996 7
Notes to Consolidated Financial Statements 8-9
Management's Discussion and Analysis
of Financial Condition and Results of Operations 10-15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
INDEPENDENT ACCOUNTANT'S REVIEW REPORT
Board of Directors and Shareholders
NAC Re Corporation
We have reviewed the accompanying consolidated balance sheet of NAC Re
Corporation and subsidiaries as of June 30, 1997, and the related consolidated
statements of income for the three-month and six-month periods ended June 30,
1997 and 1996 and the consolidated statements of stockholders' equity and cash
flows for the six-month periods ended June 30, 1997 and 1996. These 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 inquires 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
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 audited
standards, the consolidated balance sheet of NAC Re Corporation as of December
31, 1996, 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 4, 1997, we expressed an unqualified opinion on those
consolidated financial statements.
New York, New York ERNST & YOUNG LLP
July 22, 1997
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NAC RE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
(Unaudited)
June 30, December 31,
1997 1996
----------- -----------
ASSETS
Investments:
Available for sale:
Fixed maturities (amortized cost: 1997, $1,943,612; 1996, $1,681,190) $1,968,826 $1,703,537
Equity securities (cost: 1997, $113,317; 1996, $153,197) 136,158 179,619
Short-term investments 88,476 81,893
---------- ----------
TOTAL INVESTMENTS 2,193,460 1,965,049
Cash 18,581 18,853
Accrued investment income 33,640 28,472
Premiums receivable 232,848 200,036
Reinsurance recoverable balances, net 178,236 336,324
Reinsurance recoverable on unearned premiums 25,862 20,320
Investment accounts receivable 5,164 411
Deferred policy acquisition costs 89,228 85,211
Excess of cost over net assets acquired 3,460 3,644
Deferred tax asset, net 41,407 30,390
Other assets 64,303 56,921
---------- ----------
TOTAL ASSETS $2,886,189 $2,745,631
========== ==========
LIABILITIES
Claims and claims expenses $1,567,771 $1,513,345
Unearned premiums 287,748 271,898
8% Notes due 1999 100,000 100,000
7.15% Notes due 2005 99,938 99,934
5.25% Convertible Subordinated Debentures due 2002 100,000 100,000
Investment accounts payable 31,256 25,326
Revolving credit agreement 12,924 12,924
Other liabilities 92,369 68,935
---------- ----------
TOTAL LIABILITIES 2,292,006 2,192,362
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value:
1,000 shares authorized, none issued
(Includes 90 shares of Series A Junior Participating Preferred Stock) -- --
Common stock, $.10 par value:
25,000 shares authorized (1997, 21,608; 1996, 21,464 shares issued) 2,161 2,146
Additional paid-in capital 252,091 248,662
Unrealized appreciation of investments, net of tax 31,236 31,700
Currency translation adjustments, net of tax 6,191 8,377
Retained earnings 381,818 335,868
Less treasury stock, at cost (1997, 3,211; 1996, 3,061 shares) (79,314) (73,484)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 594,183 553,269
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,886,189 $2,745,631
========== ==========
See Notes to Consolidated Financial Statements
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NAC RE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
(Unaudited)
-----------------------------------------
Three months ended Six months ended
June 30, June 30,
-------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
PREMIUMS AND OTHER REVENUES
Net premiums written $148,654 $140,852 $284,825 $263,991
Increase in unearned premiums (6,576) (10,506) (10,637) (16,824)
-------- -------- -------- --------
Premiums earned 142,078 130,346 274,188 247,167
Net investment income 30,308 25,616 58,880 51,359
Net investment gains 17,684 2,715 22,817 12,532
-------- -------- -------- --------
Total revenues 190,070 158,677 355,885 311,058
OPERATING COSTS AND EXPENSES
Claims and claims expenses 93,553 84,525 181,084 158,214
Commissions and brokerage 38,276 34,990 71,162 68,509
Acquisition and operating expenses 15,324 13,541 30,501 26,191
Interest expense 5,408 5,620 10,882 11,191
-------- -------- -------- --------
Total operating costs and expenses 152,561 138,676 293,629 264,105
INCOME
Operating income before income taxes 37,509 20,001 62,256 46,953
-------- -------- -------- --------
Federal and foreign income taxes:
Current 12,454 4,794 23,311 13,514
Deferred (3,527) (1,207) (9,491) (3,747)
-------- -------- -------- --------
Income tax expense (benefit) 8,927 3,587 13,820 9,767
-------- -------- -------- --------
Operating income/net income $ 28,582 $ 16,414 $ 48,436 $ 37,186
======== ======== ======== ========
PER SHARE DATA
Primary:
Average shares outstanding 18,778 19,253 18,735 19,408
Operating income/net income $ 1.52 $ 0.85 $ 2.59 $ 1.92
Fully Diluted (assuming conversion of
dilutive convertible securities):
Average shares outstanding 20,933 21,287 20,964 21,437
Operating income/net income $ 1.41 $ 0.81 $ 2.39 $ 1.82
Cash dividend declared per share $ 0.075 $ 0.06 $ 0.135 $ 0.11
See Notes to Consolidated Financial Statements
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NAC RE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
Six months ended
June 30,
--------------------
1997 1996
-------- --------
COMMON STOCK
Balance at beginning of year $ 2,146 $ 2,134
Issuance of shares 15 8
-------- --------
Balance at end of period $ 2,161 $ 2,142
======== ========
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year $248,662 $246,356
Issuance of shares 3,429 1,825
-------- --------
Balance at end of period $252,091 $248,181
======== ========
UNREALIZED APPRECIATION (DEPRECIATION)
OF INVESTMENTS, NET OF TAX
Balance at beginning of year $ 31,700 $ 35,187
Unrealized depreciation (464) (25,267)
-------- --------
Balance at end of period $ 31,236 $ 9,920
======== ========
CURRENCY TRANSLATION ADJUSTMENTS, NET OF TAX
Balance at beginning of year $ 8,377 $ 1,017
Translation adjustments (2,186) (696)
-------- --------
Balance at end of period $ 6,191 $ 321
======== ========
RETAINED EARNINGS
Balance at beginning of year $335,868 $269,660
Net income 48,436 37,186
Dividends (2,486) (2,082)
-------- --------
Balance at end of period $381,818 $304,764
======== ========
TREASURY STOCK
Balance at beginning of year $(73,484) $(42,598)
Purchase of treasury shares, net of reissuance (5,830) (17,184)
-------- --------
Balance at end of period $(79,314) $(59,782)
======== ========
TOTAL STOCKHOLDERS' EQUITY
Balance at beginning of year $553,269 $511,756
Issuance of shares 3,444 1,833
Unrealized depreciation (464) (25,267)
Translation adjustments (2,186) (696)
Net income 48,436 37,186
Dividends (2,486) (2,082)
Purchase of treasury shares, net of reissuance (5,830) (17,184)
-------- --------
Balance at end of period $594,183 $505,546
======== ========
See Notes to Consolidated Financial Statements
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NAC RE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Six months ended
June 30,
-----------------------
1997 1996
----------- ---------
OPERATING ACTIVITIES
Net income $ 48,436 $ 37,186
Adjustments to reconcile net income to net cash
provided by operating activities:
Reserve for claims and claims expenses, net 264,132 71,772
Unearned premiums, net 10,637 16,824
Premiums receivable (33,178) (35,784)
Accrued investment income (5,229) (329)
Reinsurance balances, net (40,982) (9,336)
Deferred policy acquisition costs (4,076) (5,408)
Net investment gains (22,817) (12,532)
Deferred tax asset, net (9,589) (3,747)
Other liabilities 12,245 13,821
Other items, net 1,027 (5,019)
----------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 220,606 67,448
----------- ---------
INVESTING ACTIVITIES
Sales of fixed maturity investments 756,696 780,979
Maturities of fixed maturity investments 15,564 18,732
Purchases of fixed maturity investments (1,036,467) (869,343)
Net (purchases) sales of short-term investments (7,633) 18,807
Sales of equity securities 110,219 52,170
Purchases of equity securities (51,266) (51,997)
Purchases of furniture and equipment (2,663) (2,407)
----------- ---------
NET CASH USED BY INVESTING ACTIVITIES (215,550) (53,059)
----------- ---------
FINANCING ACTIVITIES
Issuance of shares 2,755 1,603
Purchase of treasury shares, net of reissuance (5,830) (17,184)
Cash dividends paid to stockholders (2,213) (1,916)
Borrowings under revolving credit agreement -- 8,162
----------- ---------
NET CASH USED BY FINANCING ACTIVITIES (5,288) (9,335)
----------- ---------
Effects of exchange rate changes on cash (40) (68)
----------- ---------
(Decrease) increase in cash (272) 4,986
Cash - beginning of year 18,853 10,320
----------- ---------
Cash - end of period $ 18,581 $ 15,306
=========== =========
See Notes to Consolidated Financial Statements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
The accompanying consolidated financial statements have been prepared on
the basis of generally accepted accounting principles and in the opinion
of management, reflect all adjustments necessary (consisting of normal
recurring accruals) for a fair presentation of results for such periods.
These consolidated financial statements should be read in conjunction with
the consolidated financial statements and related notes contained in the
Company's Annual Report to Shareholders.
2. Per Share Data
Primary earnings per share data are based on weighted average common
shares and common share equivalents outstanding during the period. Fully
diluted earnings per share data assumes conversion of dilutive convertible
securities and the assumed exercise of all dilutive stock options.
3. Retrocession
The Company's balance sheet as of June 30, 1997 and December 31, 1996
reflects reinsurance recoverable balances as assets, the components of
which are stated in the table below. Effective January 1, 1997, the
Company terminated two retrocessional programs resulting in a total
consideration of approximately $230 million, representing reinsurance
recoverable balances for unpaid claims and claims expenses.
Reinsurance Recoverable Balances, Net
(In thousands)
-------------------------------------
June 30, 1997 December 31, 1996
--------------- -----------------
Paid Claims $13,183 $15,457
Unpaid Claims and Claims Expenses 198,046 406,128
Ceded Balances Payable (32,088) (38,205)
Funds Held Liability (905) (47,056)
----------- -----------
Net $178,236 $336,324
=========== ===========
The effect of retrocessional activity on premiums written, premiums earned and
claims expenses is as follows (in thousands):
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
1997 1996 1997 1996
------------------ ------- -------
Ceded premiums written $31,864 $31,866 $64,235 $69,073
Ceded premiums earned $28,767 $35,204 $58,693 $73,564
Ceded claims and claims expenses $19,794 $25,324 $38,557 $45,831
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4. Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures
about Segments of an Enterprise and Related Information." Statement No.
130 requires that a company classify items of other comprehensive income
in a financial statement and display the accumulated balance of other
comprehensive income in the equity section of a statement of financial
position. Statement No. 131 requires disclosures about segments of a
company and related information about the different types of business
activities and the different economic environment in which it operates
that differ from current practice. These statements will be effective for
periods beginning after December 15, 1997, with earlier application
permitted. The Company has not completed its analysis of all matters
associated with the implementation of these standards or determined the
period that they will be adopted. The effect of adopting these standards
will not be material to the Company's financial position.
In February 1997, the FASB issued SFAS No. 128 "Earnings Per Share." This
Statement replaces the historical presentation of primary earnings per
share with the caption Basic earnings per share. Basic earnings per share
excludes dilution and is computed by dividing income from operations by
the weighted average number of shares outstanding for the period. This
Statement is effective for financial statements issued for periods ending
after December 15, 1997, with early adoption prohibited. Upon adoption,
all prior period EPS amounts will be restated.
The Company's historical primary and fully diluted earnings per share
amounts as previously reported and the Basic and Diluted amounts required
by SFAS No. 128 are shown below. The Company's fully diluted earnings per
share data assumes the conversion of dilutive convertible securities and
the exercise of all dilutive stock options.
Net Income
----------------------------------------------------
As Reported Pro Forma
----------------------- ------------------------
Period: Primary Diluted Primary Diluted
EPS EPS EPS EPS
--------- --------- ---------- ----------
1997:
1st Qtr $1.06 $1.00 $1.08 $1.00
2nd Qtr $1.52 $1.41 $1.56 $1.42
YTD $2.59 $2.39 $2.63 $2.42
1996:
1st Qtr $1.06 $1.00 $1.08 $1.00
2nd Qtr $0.85 $0.81 $0.87 $0.81
YTD $1.92 $1.82 $1.95 $1.82
1996 Year $3.69 $3.51 $3.74 $3.51
1995 Year $3.47 $3.29 $3.55 $3.30
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Management's Discussion and Analysis of
Financial Condition and Results of Operations
NAC Re Corporation ("NAC Re") is the holding company for NAC Reinsurance
Corporation ("NAC") and its wholly owned insurance and reinsurance domestic and
foreign subsidiaries. NAC Re and its subsidiaries are collectively referred to
as the Company.
Results of Operations
For the quarter ended June 30, 1997, operating income, excluding investment
gains, was $16.9 million or $.90 per share an increase of 18.4% from the
comparable 1996 results of $.76 per share. For the six months of 1997, operating
income, excluding investment gains, was $33.4 million or $1.78 per share, an
increase of 18.7% from the comparable 1996 results of $1.50 per share.
Net income, including investment gains, for the 1997 second quarter totaled
$28.6 million or $1.52 per share, This is an increase of 78.8% over the $.85 per
share that was reported in the comparable quarter of 1996. Net income for the
first six months of 1997 totaled $48.4 million or $2.59 per share, an increase
of 30.3% over the comparable 1996 results of $1.92 per share. Included in net
income per share were investment gains, net of tax, of $.62 and $.81 for the
1997 second quarter and six month period, respectively, compared with $.09 and
$.42 for the same prior year periods.
Premium Revenues
The Company's growth in premium revenue for its domestic and international
operations are as follows:
(In millions)
Three months ended June 30,
--------------------------------------------------
Domestic International Total
---------------- -------------- ----------------
1997 1996 1997 1996 1997 1996
------- ------- ------ ------ ------- -------
Net Premiums Written:
Casualty $80.8 $83.3 $7.0 $6.1 $87.8 $89.4
Property 30.6 32.4 6.7 8.0 37.3 40.4
Specialty/Other 23.5 11.1 - - 23.5 11.1
------- ------- ------ ------ ------- -------
Total $134.9 $126.8 $13.7 $14.1 $148.6 $140.9
======= ======= ====== ====== ======= =======
(In millions)
Six months ended June 30,
--------------------------------------------------
Domestic International Total
---------------- -------------- ---------------
1997 1996 1997 1996 1997 1996
------- ------- ------ ------ ------- -------
Net Premiums Written:
Casualty $156.5 $152.4 $14.1 $11.3 $170.6 $163.7
Property 57.9 61.5 13.5 16.4 71.4 77.9
Specialty/Other 42.8 22.4 - - 42.8 22.4
------- ------- ------ ------ ------- -------
Total $257.2 $236.3 $27.6 $27.7 $284.8 $264.0
======= ======= ====== ====== ======= =======
As shown in the table above, the Company's worldwide net premiums written for
the 1997 second quarter and six month period were $148.6 million and $284.8
million, respectively, an increase of 5.5% and 7.9% over the comparable 1996
periods. During the second quarter, NAC Re experienced slowing premium growth in
both our domestic and international operations, primarily as a result of the
continuing competitive market conditions.
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Domestic net premiums written for the 1997 second quarter and six month period
were $134.9 million and $257.2 million respectively, an increase of 6.5% and
8.8% over the comparable 1996 periods. Domestic casualty net premiums written
for the 1997 second quarter declined 3.0% over the comparable prior year period,
primarily as a result of the competitive market conditions impacting our treaty
business, which was only partially offset by growth in our facultative business.
Property net premiums written for the 1997 second quarter declined 5.5% as a
result of the continuing competitive pressures. Net premiums written from the
specialty lines totaled $23.5 million, an increase of 112.8% over the 1996
second quarter, principally due to increased opportunities.
Net premiums written across all lines of business continues to be favorably
impacted by reduced ceded premium charges. The reduction in ceded premiums is
due, in part, to the favorable claims results experienced within the Company's
retrocessional programs, coupled with the changing retrocessional market
conditions and a restructuring of the Company's retrocessional programs.
The Company's international operation, NAC Reinsurance International Limited,
reported net premiums written of $13.7 million and $27.6 million for the 1997
second quarter and six month period, respectively, compared to $14.1 million and
$27.7 million for the 1996 comparable periods. The slight decrease in net
premiums for the 1997 second quarter and six month period is primarily
attributable to a decrease of $2.9 million or 17.6% in property net premiums
written due to highly competitive international market conditions. This decline
was partially offset by increases in casualty net premiums.
Operating Costs and Expenses
Claims and claims expenses represent the Company's most significant and
uncertain cost. This expense is only an estimate at a given point in time of
what the insurer or reinsurer expects to pay on the settlement of claims based
upon facts and circumstances then known. The Company would generally expect to
refine such an estimate in subsequent accounting periods by modest amounts with
adjustments possible in either direction as additional information becomes
known.
One traditional means of measuring the underwriting performance of a
property/casualty insurer is the statutory composite ratio. The composite ratio,
based upon statutory accounting practices which differ from generally accepted
accounting principles in several respects, reflects underwriting experience, but
does not reflect income from investments. A composite ratio under 100% indicates
underwriting profitability while a composite ratio exceeding 100% indicates an
underwriting loss.
The following chart sets forth statutory composite ratios and the relevant
components for the periods indicated for the Company's domestic reinsurance
subsidiary. The consolidated statutory composite ratio combines the results of
the Company's international subsidiary on a U.S. statutory basis:
Three months ended Six months ended Year ended
June 30, June 30, December 31,
------------------ ---------------- ------------
1997 1996 1997 1996 1996
------ ------ ------ ------ ------
Claims and Claims Expenses 66.0% 64.1% 65.9% 63.2% 63.7%
Commissions and Brokerage 27.7 28.2 26.9 28.9 28.3
Other Underwriting Expenses 9.6 8.9 9.9 9.2 9.1
----- ------ ----- ----- -----
Domestic Statutory Composite Ratio 103.3% 101.2% 102.7% 101.3% 101.1%
===== ===== ===== ===== =====
International Statutory Composite Ratio 110.1% 105.6% 109.7% 106.1% 105.6%
===== ===== ===== ===== =====
Consolidated Statutory Composite Ratio 103.9% 101.6% 103.4% 101.8% 101.6%
===== ===== ===== ===== =====
The Company's domestic statutory composite ratio for the 1997 second quarter and
six month period was 103.3% an 102.7%, respectively, compared with 101.2% and
101.3%, for the 1996 comparable periods. The second quarter and six month
statutory composite ratio for our international operation was 110.1% and 109.7%,
respectively, compared to 105.6% and 106.1% for the same prior year periods. The
slight increase in the composite ratio is reflective of the overall highly
competitive market conditions.
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The Company experienced net favorable claim development for the 1997 six month
period which was principally attributable to casualty business written since
1986. This favorable development in the casualty business reflects the strength
of the actuarial assumptions underlying the business written, particularly with
respect to social and economic inflation. These actuarial assumptions are
utilized to establish the expected loss ratio employed in the actuarial
methodologies used to establish the reserves for claims and claims expenses.
Such loss ratios are periodically adjusted to reflect actuarially computed
expected claims to actual claims and claims expense development, inflation and
other considerations. Such favorable development was partly offset by
unfavorable experience in our property business. The unfavorable experience in
our property business was principally from claims related to the 1995 and 1996
underwriting year. In addition, the favorable development was partly offset by
unfavorable experience on business written prior to 1985, principally related to
asbestos and environmental claims.
The pricing of the Company's reinsurance contracts contemplates many factors,
including exposure to claims and the expenses of both the client company and
broker. The Company's actuaries and underwriters evaluate the adequacy of
premium revenue net of these expenses, thereby mitigating the effect of
variations in these expenses to overall underwriting results. The Company's
commission and brokerage ratio for the 1997 second quarter and six month period
reflects a decrease compared to the 1996 second quarter and six month period,
principally due to a change in the Company's mix of business, particularly from
the specialty lines of business.
Other underwriting expenses for the 1997 second quarter and six month period
have increased compared to the 1996 prior year periods, reflecting continued
business expansion, investments in technology and the building of our
facultative and international infrastructure.
Investments
Cash and invested assets at June 30, 1997 and December 31, 1996 were $2.2
billion and $2.0 billion, respectively, excluding net investment payables of
$26.1 million and $24.9 million for 1997 and 1996, respectively.
Net investment income for the 1997 second quarter and six month period was $30.3
million and $58.9 million, respectively, increases of 18.3% and 14.6%,
respectively, over the 1996 comparable periods. The increase in net investment
income is primarily attributable to the growth in invested assets, including the
contribution from the termination of two retrocessional programs effective at
the beginning of 1997. On an after-tax basis, the increase in net investment
income was more pronounced, reflecting the benefits of the Company's increased
allocation of available cash flow from operations to tax-exempt securities. Net
investment income, net of tax, for the 1997 second quarter was $1.30 per share
an increase of 23.8% over the 1996 comparable period of $1.05 per share. For the
six months ended June 30, 1997, after-tax net investment income was $2.50 per
share, an increase of 20.2% over the comparable 1996 period. The Company's
pretax investment yield was 5.8% for the 1997 second quarter, compared to 5.7%
for the 1996 second quarter. The after-tax investment yield for the 1997 second
quarter was 4.7%, compared to 4.5% for the comparable prior year period.
Net investment gains, net of tax for the 1997 second quarter were $11.6 million
or $.62 per share, compared to net investment gains of $1.7 million or $.09 per
share for the 1996 second quarter. Net investment gains, net of tax, for the
1997 six months were $.81 per share compared to $.42 per share for the 1996
comparable period. Gains and losses on the sale of investments are recognized as
a component of operating income, but the timing and recognition of such gains
and losses are unpredictable and are not indicative of future operating results.
The Company's investment strategy is focused principally on income
predictability and asset value stability. This strategy results in an emphasis
on high quality fixed maturity investments. Tactical shifts between taxable and
tax-exempt bonds may occur in order to maximize after-tax investment returns. At
June 30, 1997, our fixed maturity investments amounted to $2.0 billion, which
approximates 89% of cash and invested assets, and 98.4% of such investments are
rated investment grade by Moody's Investor Services, Inc. or Standard & Poor's.
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While uncertainties exist regarding interest rate and inflation variability, the
Company attempts to minimize such risks and exposures by balancing the duration
of its assets with the expected duration of its liabilities. Consistent with the
payment profile of the Company's claim liabilities, as of June 30, 1997 the
Company's investment portfolio had an average duration of 5.5 years.
The balance of the Company's investment portfolio at June 30, 1997, consisting
of cash, short-term investments and equity securities, amounted to $2.2 million.
As of June 30, 1997, the Company held approximately $136.2 million or 6.2% of
cash and invested assets in equity securities which represented 20% of statutory
surplus.
Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information." Statement No. 130 requires
that a company classify items of other comprehensive income in a financial
statement and display the accumulated balance of other comprehensive income in
the equity section of a statement of financial position. Statement No. 131
requires disclosures about segments of a company and related information about
the different types of business activities and the different economic
environment in which it operates that differ from current practice. These
statements will be effective for periods beginning after December 15, 1997, with
earlier application permitted. The Company has not completed its analysis of all
matters associated with the implementation of these standards or determined the
timing of adoption. The effect of adopting these standards will not be material
to the Company's financial position.
In February 1997, the FASB issued SFAS No. 128 "Earnings Per Share." This
Statement replaces the historical presentation of primary earnings per share
with the caption Basic earnings per share. Basic earnings per share excludes
dilution and is computed by dividing income from operations by the weighted
average number of shares outstanding for the period. This Statement is effective
for financial statements issued for periods ending after December 15, 1997, with
early adoption prohibited. Upon adoption, all prior period EPS amounts will be
restated.
The Company's historical primary and fully diluted earnings per share amounts
for operating income, excluding investment gains and net income and the Basic
and Diluted amounts required by SFAS No. 128 are shown below. The Company's
fully diluted earnings per share data assumes the conversion of dilutive
convertible securities and the exercise of all dilutive stock options. The
Company's Diluted EPS amounts as reported under Statement 128 are not expected
to differ materially from previously reported fully diluted EPS.
Primary vs. Basic EPS:
Operating Income(1) Net Income Weighted Avg. Shares
-------------------- --------------------- ------------------------
As Pro As Pro As Pro
Period Reported Forma Reported Forma Reported Forma
------ --------- ------- --------- -------- ---------- ----------
1995: $2.53 $2.59 $3.47 $3.55 18,094,462 17,708,733
1996:
- 1st Qtr .73 .75 1.06 1.08 19,561,870 19,210,507
- 2nd Qtr .76 .78 .85 .87 19,253,118 18,913,257
- 3rd Qtr .76 .78 .84 .86 19,150,746 18,750,668
- 4th Qtr .75 .76 .92 .93 18,799,565 18,549,225
Full Year 3.03 3.07 3.69 3.74 19,094,714 18,854,789
1997:
- 1st Qtr .88 .89 1.06 1.08 18,691,650 18,431,878
- 2nd Qtr .90 .92 1.52 1.56 18,777,674 18,375,609
Year-to-date 1.78 1.81 2.59 2.63 18,734,511 18,403,588
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Fully Diluted vs. Diluted EPS:
Operating Income(1) Net Income Weighted Avg. Shares
-------------------- ------------------- -----------------------
As Pro As Pro As Pro
Period Reported Forma Reported Forma Reported Forma
------ --------- ------- -------- ------- ---------- ----------
1995: $2.45 $2.45 $3.29 $3.30 20,153,459 20,114,664
1996:
- 1st Qtr .71 .71 1.00 1.00 21,582,072 21,582,072
- 2nd Qtr .73 .73 .81 .81 21,286,773 21,273,320
- 3rd Qtr .73 .73 .80 .80 21,170,948 21,170,948
- 4th Qtr .72 .72 .87 .87 20,819,767 20,819,767
Full Year 2.90 2.90 3.51 3.51 21,117,116 21,114,916
1997:
- 1st Qtr .83 .83 1.00 1.00 20,711,852 20,711,852
- 2nd Qtr .85 .86 1.41 1.42 20,932,675 20,797,876
Year-to-date 1.67 1.69 2.39 2.42 20,964,197 20,754,713
(1) Excludes net realized investment gains, net of tax.
Liquidity and Capital Resources
NAC Re is a holding company and has no revenue producing operations of its own.
Cash flow within NAC Re consists of investment income, operating and interest
expenses, dividends to stockholders, rental income, dividends and tax
reimbursements from NAC, which are subject to statutory restrictions.
The statutory surplus of the reinsurance subsidiary, NAC Reinsurance Corporation
was $684.9 million at June 30, 1997 which ranks among the largest domestic
reinsurers measured on this basis.
Total assets were approximately $2.9 billion at June 30, 1997. Stockholders'
equity reached $594.2 million or $32.30 per share at June 30, 1997 compared to
$553.3 or $30.06 per share at December 31, 1996. The unrealized appreciation of
investments, net of tax, was $31.2 million at June 30, 1997, compared to an
unrealized appreciation of investments, net of tax, of $31.7 million at December
31, 1996.
Cash flow from operations for the 1997 six month period, which included
approximately $180 million from the termination of two retrocessional programs
effective at the beginning of 1997, reached $220.6 million compared to $67.4
million for the prior year period. The increase in cash flow for the 1997 six
month period was partially offset by increases in paid claim activities from
various lines of business.
NAC Re maintains a revolving credit facility under which it can borrow up to $35
million. Outstanding borrowings as of June 30, 1997 were $12.9 million and were
principally used to finance the Company's periodic repurchase of Common Stock.
NAC maintains a $15 million line of credit facility which is available for
catastrophe claim payments or working capital purposes. There have been no
borrowings under this facility.
During 1997 the Company has repurchased approximately 156,000 shares of common
stock at an average cost of $38.14 per share. From the inception of the
Company's stock repurchase program, approximately 3,236,000 shares have been
repurchased at an average cost of $24.68 per share. Approximately 846,000 shares
remain authorized for repurchase under the program.
On June 11, 1997, the Board of Directors approved a 25% increase in the
Company's quarterly dividend and declared a regular quarterly cash dividend of
$.075 per share, which was payable on July 9, 1997 to holders of record on June
25, 1997.
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Regulatory Initiatives
NAC Re and its domestic subsidiaries are subject to regulatory oversight under
the insurance statutes and regulations of the jurisdictions in which they
conduct business, including all states of the United States and Canada. NAC Re's
international subsidiary is subject to the regulatory authority of the United
Kingdom Department of Trade and Industry. The international subsidiary's
Australian branch office is also subject to the Australian Insurance and
Supervisory Commission's solvency and regulatory authority. These regulations
vary from jurisdiction to jurisdiction, and are generally designed to protect
ceding insurance companies and policyholders by ensuring each company's
financial integrity and solvency in its business transactions and operations.
Many of the insurance statutes and regulations applicable to the Company relate
to reporting and disclosure standards which allow insurance regulators to
closely monitor the Company's performance. Typical required reports include
information concerning the Company's capital structure, ownership, financial
strength and general business operations.
In 1993, the National Association of Insurance Commissioners (the "NAIC")
adopted a model risk-based capital act intended to provide an additional tool
for regulators to evaluate the capital of property and casualty insurers and
reinsurers with respect to the risks assumed by them and determine whether there
is a perceived need for possible corrective action. The nature of the corrective
action depends upon the extent of the calculated risk-based capital deficiency
and ranges from requiring the company to submit a comprehensive plan to placing
the insurer under regulatory control. While the model risk-based capital act has
not yet been adopted in New York, NAC's domicile, New York has issued a circular
letter requiring the filing of risk-based capital reports by property and
casualty insurers and reinsurers. The NAIC also adopted a proposal that requires
property and casualty insurers and reinsurers to report the results of their
risk-based capital calculations as part of the statutory annual statements filed
with state regulatory authorities. Surplus (as calculated for statutory annual
statement purposes) for each of the Company's domestic subsidiaries is well
above the risk-based capital thresholds that would require either company or
regulatory action.
Various other regulatory and legislative initiatives have been discussed from
time to time that could impact reinsurers. Generally, the thrust of regulatory
efforts has been to improve the solvency of reinsurers and create strong
incentives for insurers to do business with well capitalized, prompt paying
reinsurers operating under U.S. jurisdiction. While we cannot quantify the
impact of these regulatory efforts on the Company's operations, we believe the
Company is adequately positioned to compete in an environment of more stringent
regulation.
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PART II. OTHER INFORMATION
Item 4. Submissions of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 9, 1997. At such
meeting Ronald L. Bornhuetter, Todd G. Cole and Daniel J. McNamara were each
reelected as a director for a term expiring in 2000. Mr. Bornhuetter was
reelected by an affirmative vote of 15,339,980 shares with 639,874 shares
withheld, Mr. Cole was reelected by an affirmative vote of 15,575,598 shares
with 404,256 shares withheld, and Mr. McNamara was reelected by an affirmative
vote of 15,335,529 shares with 644,331 shares withheld.
The proposal to adopt the 1997 NAC Re Corp. Incentive and Capital Accumulation
Plan, which provides for the grant of options and restricted stock to employees,
was adopted by the following vote:
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
8,574,360 6,374,993 30,718 999,783
The proposal to amend the NAC Re Corp. Employee Stock Purchase Plan was adopted
to increase the number of shares available under such plan from 237,500 to
337,500, and to extend the expiration date of the plan from February 1, 1998 to
January 16, 2003. The proposal to amend the plan was adopted by the following
vote:
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
14,616,818 296,806 28,235 1,037,995
Item 6. Exhibits
(a) Exhibit Index:
Exhibit Description Page
- ------- ----------- ----
11-1 Statement Re: Computation of Primary Per Share Earnings 18
11-2 Statement Re: Computation of Fully Diluted Per Share Earnings 19
15 Letter Re: Unaudited Interim Financial Information 20
27 Financial Data Schedule 21-22
(b) There were no reports filed on Form 8-K for the quarter ended June 30, 1997.
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.
NAC Re CORP.
---------------
(Registrant)
Date: August 12, 1997 JEROME T. FADDEN
---------------------- -----------------------------------------
Jerome T. Fadden
Vice President, Chief Financial Officer
and Treasurer
Date: August 12, 1997 NICHOLAS M. BROWN, JR.
---------------------- -----------------------------------------
Nicholas M. Brown, Jr.
President and Chief Operating Officer
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