A pretax loss was recorded for 1998, stemming from the overall rate environment and from claims from one program that the Company has since terminated.
Cash and invested assets were $2.5 billion at December 31, 1998 compared to $2.3 billion at December 31, 1997, excluding net investment payables of $7.6 million and $25.8 million for 1998 and 1997, respectively.
Compliance Costs: The Company's estimated total aggregate Year 2000 readiness costs are not expected to exceed $2 million. The Company incurred $381,000 in 1998, principally for consulting fees, hardware, and hardware leases.
Realized investment gains or losses on the sale or maturity of investments are determined by the specific identification method. Net investment income, consisting of dividends and interest, net of investment expenses, is recognized when earned. The amortization of premium and accretion of discount for fixed maturities is computed utilizing the interest method. The effective yield utilized in the interest method is adjusted when sufficient information exists to estimate the probability and timing of prepayments.
The Company accounts for stock compensation plans in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, compensation expense for stock option grants and stock appreciation rights ("SARs") is recognized to the extent that the fair value of the stock exceeds the exercise price of the option at the measurement date.
Claims and claims expenses reflect favorable claims development from prior years. Net favorable claims development for business written since 1986 continued to emerge during 1998, 1997 and 1996. This favorable development is affected by several factors, some of which are interdependent. A principal factor is the strength of the actuarial assumptions underlying the business written, particularly with respect to the consideration given 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 comparisons of actuarially computed expected to actual claims and claims expense development, inflation and other considerations. This favorable development has offset certain unfavorable development for business written prior to 1986, principally related to asbestos and environmental claims.
In December 1998, NAC Re modified its revolving credit agreement and term loan bank facility under which it can borrow up to $50 million. A commitment fee of 1/4 of 1% per year is paid on the unused credit line. Borrowings of $12.9 million were outstanding at December 31, 1998 and were principally used in connection with repurchases of the Company's Common Stock. The facility was reduced by $5 million in January 1999 and will be further reduced on a quarterly basis beginning in April 1999. The Company periodically reviews its credit arrangements for renewal based on its working capital requirements and other financing needs. As a result, on September 30, 1998, the Company canceled its $15 million line of credit facility for its reinsurance subsidiary. Interest costs on borrowing facilities were approximately $1.0 million in 1998 and 1997 and $1.6 million in 1996.
The following pro forma information regarding net income and earnings per share required by SFAS No. 123 has been determined as if the Company had accounted for its employee stock plans under the fair value method described in that Statement. The fair value of options and other awards granted under the Company's stock-based compensation plans was estimated on the date of grant using a Black-Scholes option valuation model. The Black-Scholes option model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected dividend yield, the expected life of the options, the expected stock price volatility and the risk-free interest rate.
The Company has employment contracts with certain officers, the terms of which expire at various times through June 30, 2003. Such agreements provide for minimum salary levels, incentive bonuses payable in accordance with bonus plans and, in two contracts, supplemental retirement benefits.
The Company maintains a qualified contributory defined contribution plan for substantially all U.S. employees. Under this plan, the Company makes a matching contribution equal to 50% of each participant's eligible elective contributions, which may be up to 6% of the participant's compensation. The Company may make an additional annual discretionary matching contribution. The Company also maintains a non-qualified unfunded supplemental defined contribution plan designed to compensate individuals to the extent the Company's contributions under the qualified plan are curtailed due to Internal Revenue Code limitations. The Company expensed $1.9 million for 1998, $2.2 million for 1997 and $2.0 million for 1996, related to these plans. Contributions to the qualified plan are invested, at the election of the participant, in several funds, including a NAC Re Common Stock fund. The fund held approximately 176,000 and 111,000 shares of NAC Re Common Stock as of December 31, 1998 and 1997, respectively.
Treasury Stock: Balance, beginning of year 3,398,486 3,060,543 2,137,501 Purchases 223,060 345,375 943,042 Shares reissued (4,482) (7,432) (20,000) ----------- ----------- ----------- Balance, end of year 3,617,064 3,398,486 3,060,543 ----------- ----------- ----------- Total Common Stock outstanding 18,374,355 18,308,737 18,403,439 =========== =========== ===========