The Company's net operating income, excluding realized investment gains, was $73.3 million for 1998, $67.7 million for 1997, and $57.8 million for 1996. On a basic per share basis, operating income, excluding realized investment gains, was $4.01, $3.68, and $3.07 for 1998, 1997, and 1996, respectively. On a diluted per share basis, operating income, excluding realized investment gains, was $3.68, $3.42, and $2.90 for 1998, 1997, and 1996, respectively.
The pricing of the Company's reinsurance contracts incorporates many factors, including exposure to claims and the expenses of the client and broker. Commissions and brokerage expenses, as a percentage of premium revenues, declined moderately in 1998 compared to 1997. This decrease was principally due to the relative increase in 1998 of primary program business, where commission costs were significantly lower, partially offset by increases in pro rata contracts written in the Company's specialty lines of business, contracts which generally require a higher commission rate. The effect of variations in these expenses to overall underwriting results is mitigated as the evaluation of premium adequacy by the Company's actuaries and underwriters incorporates all expenses.
Domestic reinsurance gross premiums written declined to $482.2 million in 1998 compared to $536.4 million in 1997 and $573.7 million in 1996. The decrease in 1997 and further decline in 1998 largely reflects the competitive pressures in the casualty insurance market and the Company's decision to not renew accounts which do not meet the Company's profitability standards. Specifically, the 1998 decrease in the casualty book and the decrease in the specialty book, which reflects weak surety/fidelity market conditions, more than offset the increase in the property book which reflects new account business.
Since the initial capitalization of NAC Re International with $75 million in 1993 and subsequent contributions in 1994 and 1995, the stockholders' equity of NAC Re International has grown to $165.9 million as of December 31, 1998. This capital, a component of the invested assets described above, is being invested in accordance with the Company's overall investment strategy. At December 31, 1998, NAC Re International's investment portfolio, which was primarily invested in U.K. Government securities, had an average duration of 4.0 years and an after-tax investment yield of 4.1%.
Statutory surplus of the reinsurance subsidiary was approximately $737 million and $702 million at the end of 1998 and 1997, respectively. Indicative of its strengthened capital position is NAC's growth in surplus, primarily due to statutory net income, and its rank as one of the 10 largest domestic reinsurers as measured on this basis. The Company believes its surplus level enhances its ability to attract new business and retain its existing client base.
The above discussion of the Company's market risk and the estimated amounts generated from the sensitivity analyses are forward-looking statements that relate to risk and uncertainties. Actual results in the future may differ materially from those projected results in the forward-looking statements.
The Company completed verification testing of its IT infrastructure systems in 1998. Also in 1998, the Company remediated the computer code of its legacy reinsurance system. This system is currently being tested to determine if further remediation is required. Other critical systems that could be impacted by a Year 2000 issue have been scheduled for some form of testing or verification. The testing, verification, remediation, and implementation processes are expected to continue through the end of the 1999 third quarter.
As of the date of this disclosure, management has not identified any hardware or software computer system with a significant Year 2000 compliance problem that it believes could have a materially adverse effect on the Company's financial condition or results of operations. To maintain the Year 2000 readiness status of its tested and remediated IT systems, the Company intends to retain an IT consulting firm to assist management in monitoring future compliance changes made by its IT vendors.
The reserves for claims and claims expenses are based on the Company's analysis of reports and individual case estimates received from ceding companies. An amount is included for claims and claims expenses incurred but not reported on the
In Thousands December 31, 1997 -------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- Available for Sale: U.S. Treasury $ 13,957 $ 550 -- $ 14,507 Tax-exempt 1,200,314 51,892 $ (1,233) 1,250,973 Foreign Government 166,899 5,624 (202) 172,321 Corporate 419,715 8,826 (2,684) 425,857 Mortgage-backed 212,434 4,686 (275) 216,845 Subordinated convertibles 8,182 434 (531) 8,085 ---------- ---------- ---------- ---------- Total fixed maturities 2,021,501 72,012 (4,925) 2,088,588 Equity securities 124,999 19,122 (1,594) 142,527 ---------- ---------- ---------- ---------- Total $2,146,500 $ 91,134 $ (6,519) $2,231,115 ========== ========== ========== ==========
Deferred tax liability: Deferred policy acquisition costs 33,896 32,375 Unrealized appreciation of investments 31,050 29,616 Currency translation adjustments 2,755 3,225 Other 9,023 7,522 -------- -------- Deferred tax liability 76,724 72,738 -------- -------- Net deferred tax asset $ 37,481 $ 42,646 ======== ========
Year In Thousands ------------ 1999 $ 4,110 2000 4,213 2001 3,381 2002 1,027 2003 and thereafter 25,371 ------------ Total $38,102 ============
In Thousands ------------------------------------------------- Unrealized Accumulated Gains on Currency Other Comp Year ended December 31, 1996 Investments Translation Income ----------------- ------------ --------------- Beginning balance $35,187 $ 1,017 $36,204 Current period change (3,487) 7,360 3,873 ----------------- ------------ -------------- Ending Balance $31,700 $ 8,377 $40,077 ================ ============= ===============
In addition, upon the occurrence of certain events, holders of the rights would be entitled to purchase either Company stock or shares in an "acquiring entity" at half of market value. Further, at any time after a person or group acquires 15% or more (but less than 50%) of the Company's outstanding voting stock, the Board of Directors may, at its option, exchange part or all of the Rights (other than Rights held by the acquiring person or group, which would become void) for shares of the Company's common stock on a one-for-one basis.