ITEM 1. BUSINESS
GENERAL
SCOR U.S. Corporation ("SCOR U.S." or, collectively with its subsidiaries, the "Company") is a holding company, the principal operating subsidiary of which is SCOR Reinsurance Company ("SCOR Re"). The Company also operates through SCOR Re's wholly owned subidiaries, General Security Insurance Company ("GSIC"), The Unity Fire and General Insurance Company ("Unity Fire") and General Security Indemnity Company ("GSIND"). (SCOR Re, GSIC, Unity Fire and GSIND are collectively referred to as the "Operating Subsidiaries").
The Company, through its subsidiaries, provides property and casualty insurance and reinsurance. Reinsurance is provided to primary insurance companies on both a treaty and facultative basis. SCOR Re specializes in underwriting treaties covering non-standard automobile, commercial and technical risks and provides property, casualty and special risk coverages on a facultative basis. SCOR Re writes treaty business almost exclusively through reinsurance intermediaries and writes facultative business directly with primary insurance companies and through reinsurance intermediaries. GSIC and Unity Fire provide commercial property and casualty insurance on both a primary and excess basis and underwrite alternative risk market coverages. GSIND provides commercial property and casualty coverages on a surplus lines basis.
The Company's principal competitive strengths include (i) its consistent and disciplined underwriting strategy, (ii) its diversified products and sources of business, (iii) financial security offered ceding companies and reinsurance intermediaries, and (iv) its relationship with its principal shareholder, SCOR S.A., Paris, France.
The Operating Subsidiaries have emphasized the development of long-term relationships with medium-size, regional and specialty companies. The Company has historically underwritten substantial amounts of both property and casualty reinsurance on both a treaty and facultative basis. In 1994, property risks and casualty risks each represented approximately one-half of the Company's net premiums written and its treaty operations generated approximately 82% of its net premiums written.
SCOR Re's treaty and facultative property operations specialize in technical risks, such as boiler and machinery, oil, gas and chemical plants and non-standard automobile coverages, and also underwrite a broad range of other types of property risks. SCOR Re underwrites casualty business on both a treaty and facultative basis, primarily focusing on the short-tail automobile and general liability lines, as opposed to long-tail risks, such as medical malpractice and most products liability lines. The Company believes that its emphasis on technical risks and short-tail exposures provides it with a greater opportunity to attain favorable underwriting results.
As part of its underwriting strategy, the Company generally underwrites each piece of business separately with the goal of
achieving favorable underwriting results rather than increasing market share. The Company has over time reduced its writings of business that fail to meet clearly defined profit margin standards, and increased its writings in certain targeted areas which it believes hold greater profit potential. The Company utilizes its actuaries to provide assistance in determining premiums to be charged for all significant treaties and facultative casualty contracts written on an excess of loss basis.
The Company believes that its investment strategy, which emphasizes quality and liquidity, enhances the financial security it offers its ceding companies and reinsurance intermediaries. The Company's investment portfolio consists primarily of high-grade fixed maturity debt securities. As of December 31, 1994, virtually all of the Company's bond portfolio was rated A or better by Moody's Investors Services, Inc.
The Company is protected against certain adverse loss reserve development through retrocessional agreements with SCOR S.A, its majority shareholder. Under those agreements, the Company has significant protection against adverse reserve development for all pre-1986 business and certain pre-1990 business. See "Retrocession Agreements".
The Company believes that its relationship with SCOR S.A. strengthens its competitive position by providing the Company with management and underwriting expertise, increased underwriting capacity in certain business lines through retrocessional support, and assistance in identifying potential new products. With equity in excess of $1 billion, SCOR S.A., together with its reinsurance subsidiaries, ranks as the largest professional reinsurer in France and among the largest in the world.
The Company is headquartered in New York and operates throughout the United States with SCOR Re facultative branches in Chicago, Dallas, Hartford, New York City and San Francisco.
HISTORY
SCOR U.S. was organized as a Delaware corporation in 1981 and prior to the completion of a public offering (the "Offering") in October 1986 of 4,000,000 shares of SCOR U.S. common stock, Societe Commerciale de Reassurance ("SCOR Paris"), a French reinsurer, and Caisse Centrale de Reassurance ("CCR"), a reinsurer wholly-owned by the French Government, owned 100% of the common stock of SCOR U.S. After the Offering, SCOR Paris and CCR owned approximately 68% of such stock. As a result of its participation in joint SCOR U.S.-SCOR Paris stock repurchase programs, as well as its purchase of CCR's shares of SCOR U.S. stock, SCOR Paris owned approximately 71% of the outstanding common stock of SCOR U.S. at December 31, 1989. A reorganization completed in France in November 1989 resulted in SCOR Paris and UAP Reassurances ("UAP Re"), a former subsidiary of Societe Commerciale Union des Assurances de Paris ("UAP"), becoming wholly- owned subsidiaries of SCOR S.A. In December 1990 SCOR Paris and UAP Re were merged into SCOR S.A.
In March 1990, the Board of Directors of SCOR U.S. (the "Board") adopted an Agreement and Plan of Merger (the "Merger Agreement"),
which provided for the merger (the "Merger") with and into SCOR U.S. of Rockleigh Management Corporation ("Rockleigh"), a Delaware corporation. Rockleigh provided treaty and facultative property and casualty reinsurance through two operating subsidiaries, General Security Assurance Corporation of New York ("General Security") and Unity Fire. General Security and Unity Fire were commonly known as "The Unity Group". The Merger Agreement was executed as of March 6, 1990, and was approved by the stockholders of SCOR U.S. in June 1990. In connection with the merger, 5,353,427 shares of SCOR U.S. common stock were issued to UAP Re in exchange for all of the outstanding common stock of Rockleigh. SCOR S.A. owned approximately 80% of the outstanding common stock of SCOR U.S. at December 31, 1994.
As part of a reorganization of The Unity Group, effective January 1, 1991, all reinsurance business of Unity Fire, including related assets and liabilities as of that date, were transferred to General Security pursuant to an assumption reinsurance agreement. Subsequently, Unity Fire became a subsidiary of General Security.
Effective January 1, 1994, General Security was merged into SCOR Re. Throughout this report, all references to SCOR Re reflect the combined entity resulting from the merger of General Security into SCOR Re. The purpose of the merger was to form a single operating entity for the Company's assumed reinsurance business.
SCOR Re was organized in 1974 by SCOR Paris as part of the expansion of SCOR Paris's operations in the United States reinsurance market. SCOR Re operated as a Texas-based reinsurance company until 1985 when, as part of a general restructuring of its operations, it was merged into a newly-formed New York domiciled reinsurer which changed its name to the present name. Unity Fire was incorporated in New York in 1942 under the name Unity Fire Insurance Corporation. It was formed as the successor to the U.S. branch of a French insurer known in the United States as The Union Fire Accident and General Insurance Company, which had operated in the United States since 1910. Unity Fire's current name was adopted in 1950. General Security had been formed in New York in 1941 to succeed to the business and affairs of the U.S. branch of a French insurer known in the United States as General Fire Assurance Company. On December 4, 1992, SCOR Re acquired GSIC, formerly named The International Insurance Company of Takoma Park, Maryland. GSIC was formed in Maryland in 1936 by the General Conference of Seventh-day Adventists ("General Conference") and prior to its acquisition had provided various types of insurance to the General Conference. All of its prior business was transferred prior to its purchase by SCOR Re. GSIND, formerly named Southwest International Reinsurance Company, was organized in 1984 as a joint venture between the Company and The Dai-Tokyo Fire and Marine Insurance Company, Ltd. and has been a wholly-owned subsidiary of SCOR Re since 1990.
SCOR Re is licensed to conduct property and casualty insurance and/or reinsurance business in 32 states and is an approved reinsurer in fourteen additional states. In addition, primary insurers ceding to SCOR Re can take credit for reinsurance with respect to such business in the remaining four states, as a result of the fact that SCOR Re is domiciled in a state with substantially similar laws and maintains certain minimum requirements regarding surplus to policyholders. GSIC is licensed to conduct property and casualty
insurance and/or reinsurance business in 26 states. Unity Fire is licensed as a property and casualty insurer in 13 states and is an approved surplus lines insurer in one state. GSIND is a licensed property and casualty insurer in one state and is an approved surplus lines insurer in seven other states. In Canada, SCOR Re holds a Federal license and is licensed in the Province of Quebec, and Unity Fire holds a Federal license and is licensed in the Provinces of Alberta, British Columbia, New Brunswick and Ontario.
SCOR U.S. believes that its combined reinsurance operations rank as the 17th largest professional reinsurance organization in the United States in terms of statutory surplus at December 31, 1994, based on a report by the Reinsurance Association of America (the "RAA"). When compared with companies in the RAA report that operate primarily in the brokered reinsurance market the Company ranks as the 11th largest professional reinsurance organization.
The Company recently was notified by A.M. Best & Company, Inc. ("A.M. Best") that the rating of the Operating Subsidiaries has been reduced from "A+ (Superior)" to "A (Excellent)". A.M. Best attributed its action principally to the Company's volatile operating results. The only higher ratings obtainable from A.M. Best are "A++(Superior)" and "A+ (Superior)". A.M. Best is an independent insurance industry rating organization. A.M. Best's ratings are based on an analysis of the financial condition and operating performance of an insurance company as it relates to the industry in general. A.M. Best's publications indicate that the "A (Excellent)" rating is assigned to those companies which in A.M. Best's opinion have achieved excellent overall performance when compared to the standards established by A.M. Best and which have demonstrated a strong ability to meet their obligations to policyholders over a long period of time. A.M. Best's ratings are based upon factors of concern to policyholders and may not adequately reflect the considerations applicable to an investment in an insurance or reinsurance company. A.M. Best reviews its ratings at least annually and there is no assurance that SCOR Re, GSIC, Unity Fire and GSIND will be able to maintain their current A.M. Best ratings.
INDUSTRY OVERVIEW
Reinsurance
Reinsurance is a transaction in which a primary insurer transfers, or cedes, a portion of its insurance risk to a reinsurance company. In consideration for reinsuring risks, the reinsurer is paid a premium by the primary insurer. Although reinsurance does not legally discharge the primary insurer from its liability for the coverage provided by its policies, it does make the reinsurer liable to the primary insurer with respect to losses sustained under the policy or policies issued by the primary insurer that are covered by the reinsurance transaction.
Reinsurance provides primary insurers with three major benefits: increased premium writing capacity by reducing exposure on individual risks; protection against catastrophic losses; and stabilization of underwriting results.
In general, casualty insurance protects the insured against financial loss arising out of its obligation to others for loss or damage to persons or property. Property insurance protects the insured against financial loss arising out of the loss of property or its use caused by an insured peril. Property and casualty reinsurance protects the ceding company against loss to the extent of the reinsurance coverage provided. Property reinsurance involves a high degree of volatility but losses are generally reported within a relatively short time period after the event. A greater degree of unpredictability is associated with casualty risks because there tends to be a greater lag in the reporting and payment of casualty claims, due to the nature of the risk and the greater potential for litigation.
Generally, there are two classes of reinsurance: treaty reinsurance and facultative reinsurance. Treaty reinsurance is a contractual arrangement that provides for the automatic reinsuring of an agreed type or category of risk underwritten by the primary insurer. In treaty reinsurance, the reinsurer generally does not evaluate each individual risk but rather evaluates the overall profit potential of the business assumed from the ceding company. Facultative reinsurance is the reinsurance of individual risks. Rather than agreeing to reinsure all or a portion of an entire class of risk, the reinsurer separately rates and underwrites each risk. Facultative reinsurance is traditionally purchased by primary insurers for individual risks not covered by their reinsurance treaties, for excess losses on risks covered by their reinsurance treaties, and for unusual risks. Typically, the demand for facultative reinsurance is inversely related to the supply of treaty reinsurance.
The two major forms of reinsurance are proportional reinsurance and excess of loss reinsurance. Premiums received from both treaty and facultative reinsurance agreements vary according to, among other things, whether the reinsurance is on an excess of loss or on a proportional basis. Under proportional reinsurance, the reinsurer and the primary insurer share premiums and losses on a proportional basis. Under excess of loss reinsurance, the reinsurer indemnifies the primary insurer for all covered losses incurred on underlying insurance policies in excess of a specified retention.
Premiums that the primary insurer pays to the reinsurer for excess of loss coverage are not directly proportional to the premiums that the primary insurer receives because the reinsurer does not assume a proportional risk. The price or rating of excess of loss reinsurance may be either a fixed percentage applied to the entire portfolio of business covered or may be calculated on a self-rating basis under which the rate is adjusted in accordance with actual losses, subject to a minimum and maximum premium.
In proportional reinsurance, the reinsurer generally pays the primary insurer a ceding commission. The ceding commission is generally based on the primary insurer's cost of obtaining the business being reinsured (including commissions, local taxes, and miscellaneous administrative expenses). Furthermore, additional commissions may be paid to the ceding company based upon actual loss experience. The reinsurer generally does not pay any ceding
commissions to the primary insurer in connection with excess of loss reinsurance.
A reinsurer often reinsures some of its business with other reinsurers called retrocessionaires. Reinsurance companies enter into retrocessional agreements for reasons similar to those that cause primary insurers to purchase reinsurance.
Alternative Risk Market
The volatility in cost and availability of traditional commercial insurance coverage has prompted many entities, both individually and in groups, to utilize a variety of mechanisms to insure their property and casualty risks. These vehicles include self-insurance, captive insurance companies, risk retention groups and government pools and trusts. SCOR U.S. and other reinsurance groups provide both insurance on an excess basis and reinsurance to such entities.
UNDERWRITING
SCOR Re provides property and casualty treaty and facultative reinsurance. Its treaty business is conducted out of its home office in New York City. Its facultative business is conducted out of its branch offices in Chicago, Dallas, Hartford, New York City and San Francisco.
Unity Fire had operated as a property and casualty reinsurer, but subsequent to the above-mentioned 1991 reorganization of The Unity Group, it now provides property and casualty insurance coverages on a primary and excess basis. GSIC also operates as an insurer of such coverages in states where Unity Fire is not licensed. GSIND provides commercial property and casualty coverages on a surplus lines basis. It is the intent of the Company to merge Unity Fire and GSIC subject to approval by such companies' Boards of Directors and state regulatory authorities. The purpose of the merger is to form a single broadly licensed operating unit for the Company's primary and excess insurance business, including alternative risk business. GSIC, Unity Fire and GSIND wrote a limited amount of business in 1994.
Intercompany Pooling Agreement
Effective January 1, 1991, SCOR Re and the other Operating Subsidiaries operate under a reinsurance pooling agreement pursuant to which the net amounts under all new and renewal business written by each such company is pooled. The net balances of the pool are then distributed to each company in accordance with established proportions.
UNDERWRITING STRATEGY
SCOR Re specializes in underwriting treaties covering commercial, technical and non-standard automobile risks and in the provision of facultative property, casualty and special risk covers. SCOR Re writes treaty business almost exclusively through reinsurance
intermediaries and conducts its facultative operations directly with primary insurers and through reinsurance intermediaries. The underwriting strategies of the Company's operating subsidiaries are based upon long-term disciplined underwriting practices. These practices, which react to current industry conditions, may result in fluctuations in the Company's mix of business from year to year. The following table presents certain information with respect to the business written by the principal SCOR U.S. operating subsidiaries for the years indicated:
(Dollars in thousands) TREATY Year Ended December 31,
1994 1993 1992
Gross Premiums Written $228,795 $268,333 $237,376 Net Premiums Written 190,361 209,311 169,330 Net Premiums Earned 187,833 200,663 156,095 Net Losses Incurred 164,566 140,961 147,854 Commissions 54,442 59,816 52,027
FACULTATIVE Year Ended December 31,
1994 1993 1992
Gross Premiums Written $77,997 $66,186 $67,452 Net Premiums Written 40,699 36,102 36,213 Net Premiums Earned 40,411 35,388 35,955 Net Losses Incurred 26,704 15,331 12,691 Commissions 4,992 1,508 3,933
TOTAL Year Ended December 31,
1994 1993 1992
Gross Premiums Written $306,792 $334,519 $304,828 Net Premiums Written 231,060 245,413 205,543 Net Premiums Earned 228,244 236,051 192,050 Net Losses Incurred 191,270 156,292 160,545 Commissions 59,434 61,324 55,960
Net losses incurred for 1994 were adversely affected by $32.2 million of losses resulting from property catastrophe events. The January 1994 Northridge earthquake ("Northridge Earthquake") accounted for $26.1 million of the total for 1994. Gross premiums written and net premiums written for 1994 were increased by $1.0 million and reduced by $5.0 million, respectively, for additional premiums to reinstate catastrophe reinsurance protections primarily related to the Northridge earthquake.
Net losses incurred for 1993 were adversely affected by $13.7 million of losses resulting from property catastrophe events. Net losses incurred for 1992 were adversely affected by $50.9 million of losses resulting from property catastrophe events (primarily Hurricane Andrew). Gross premiums written and net premiums written
for 1992 were increased by $5.6 million and reduced by $6.5 million, respectively, for additional premiums to reinstate catastrophe reinsurance protections subsequent to Hurricane Andrew.
SCOR Re has historically written substantial amounts of both casualty and property business. During 1994 the Company accelerated its withdrawal from property pro rata treaties that contained rates and/or conditions deemed to be inadequate. This strategy, along with the targeting of additional casualty business, has caused the Company's overall portfolio mix to continue to shift towards a more balanced split between property and casualty businesss. The following table presents gross premiums written and net premiums written segregated by the general nature of the risks underwritten:
Gross Premiums Written (Dollars in thousands)
Casualty Property % of % of Total Amount Total Amount Total Amount
1994 $142,703 46.5 $164,089 53.5 $306,792 1993 125,475 37.5 209,044 62.5 334,519 1992 91,448 30.0 213,380 70.0 304,828
Net Premiums Written (Dollars in thousands)
Casualty Property % of % of Total Amount Total Amount Total Amount
1994 $114,988 49.8 $116,072 50.2 $231,060 1993 105,726 43.1 139,687 56.9 245,413 1992 74,094 36.0 131,449 64.0 205,543
Treaty Reinsurance
Underwriting philosophy, quality of management, claims handling ability, financial strength of the ceding insurance company, and the pricing and make-up of the portfolio to be assumed, as well as historical loss experience and exposure data, are among the primary factors considered by SCOR Re in determining whether to accept and continue to participate on a particular treaty. Generally, the Company's treaty department (the "Treaty Department") performs underwriting audits before agreeing to enter into a significant new treaty relationship. Before the Treaty Department agrees to accept a significant new casualty treaty, the Company's claims department (the "Claims Department") generally performs claims audits of the prospective ceding company. In addition, the Company's actuarial department (the "Actuarial Department") provides assistance in determining the premium to be charged for all significant excess of loss contracts. The Actuarial Department utilizes both exposure rating and experience rating techniques in evaluating the rate adequacy of all significant excess of loss treaty submissions before they are bound. The Actuarial Department utilizes explicit trend
factors in its pricing activities. The factors are specifically designed to account for the impact of inflation.
The amount of premium received and ultimate profitability of results experienced by the reinsurer for reinsuring risks on a proportional basis are generally tied to the primary insurer's initial pricing and underwriting standards. Thus, if the primary insurer does not accurately estimate the ultimate losses to be incurred on the risk insured, the reinsurer could incur substantial underwriting losses. Excess of loss reinsurance allows the reinsurer the flexibility to negotiate terms and conditions, as well as a premium based on the reinsurer's own estimate of its exposure to losses. As a practical matter, however, the amount of premium that the primary insurer charges, which may be subject to governmental regulation, may affect the rates that may be charged by the reinsurer.
Once a treaty is written, a reinsurer is not involved in the day-to-day decisions of the ceding company with respect to the underwriting of insurance policies covered by the treaty. However, treaty contracts contain provisions that allow the reinsurer access to the ceding company's records in order to review any changes in underwriting philosophy, the quality of risks accepted, price adequacy and compliance with the terms of the treaty. SCOR Re undertakes such audits for a majority of its major accounts on an annual basis. Further, the Claims Department performs periodic audits of overall claims operations of significant ceding companies as well as of specific losses.
SCOR Re writes treaty reinsurance almost exclusively through reinsurance intermediaries. SCOR Re seeks to be a lead reinsurer on treaties in which it participates, a factor that SCOR Re believes permits it to more effectively influence the terms and conditions of a treaty. SCOR Re is a lead reinsurer on treaties representing approximately 43% of its gross treaty premiums written for underwriting year 1994.
SCOR Re's Treaty Department concentrates underwriting activity in "working layer" areas (generally the first $1 million to $5 million of limit) where loss frequency, quicker loss settlement and reporting factors, as well as the increased ability to analyze the reinsurer's exposure from ceded coverages and limits, can generally yield more accurate and credible pricing analyses. SCOR Re's Treaty Department emphasizes medium-size, regional, or specialty companies which are believed to offer a more stable environment for coverage conditions and rates. In addition, in this market SCOR Re believes that its technical underwriting process provides greater opportunity to influence underwriting results. Property underwriting reflects an emphasis on technical risks (as described below), while casualty underwriting emphasizes short-tail exposures in the automobile and general liability lines of business where claims develop over a shorter period of time than do claims arising in such lines of business as medical malpractice and products liability. A significant growth area in SCOR Re's treaty underwriting has been in non-standard automobile liability. For 1994, non-standard automobile represented 20% of the Treaty Department's net premium writings. SCOR Re typically writes gross capacity for property of up to $5.0
million as to any one ceding company program and for casualty of up to $2 million as to any one ceding company program. SCOR Re's gross capacity for catastrophe business is $8.0 million per program. See "Retrocession Agreements" for a discussion of amounts retained by SCOR Re.
The portion of SCOR Re's treaty business that was previously written by General Security prior to its merger into SCOR Re is predominantly property reinsurance, with emphasis on proportional reinsurance. In addition to participation in large programs, a special effort had been made to reinsure smaller regional companies. Because of their more modest size and resources, these companies generally concentrate on less complex types of business (such as homeowners and small commercial risks). In addition, such companies rely more extensively on the use of proportional reinsurance and tend to develop long-term relationships with the reinsurer.
General Security had developed its reinsurance treaty operations over a period of almost fifty years using intermediaries as its source of business. Because of its long-term presence in the reinsurance market, the consistency of its underwriting approach and its continuous emphasis on service, General Security participated in a very broad cross-section of property reinsurance programs.
Treaty operations generated approximately $190.4 million, or 82%, of SCOR Re's net written premium volume in 1994. Property and casualty treaties represented approximately 48% and 52%, respectively, of total treaty net written premium volume. As of December 31, 1994, SCOR Re was a party to 145 proportional treaties, representing 23% of treaties in force and accounting for 83% of treaty gross written premiums, and 499 excess of loss treaties, representing 77% of treaties in force and 17% of gross treaty premiums written. SCOR Re entered into reinsurance treaties with 290 ceding companies in 1994. As previously indicated the Company has accelarated its withdrawal from property pro rata treaties deemed to have inadequate terms and/or conditions. This strategy has contributed to approximately one third fewer treaties in force at December 31, 1994 compared with December 31, 1993. The Company's strategy continued in 1995 and following the January 1995 renewal season the number of treaties in force were further reduced by approximately 25%. The Company has been increasing its share of treaties written in an attempt to develop fewer but larger cedent relationships and maintain or increase its premium volume while reducing its treaty count. SCOR Re's Treaty Department comprises twelve underwriters, with an average of over 18 years industry experience.
Effective January 1, 1992, General Security entered into a management agreement with California Reinsurance Management Corporation ("Cal Re"). Pursuant to that agreement Cal Re places property insurance business on a treaty basis with SCOR Re as the successor to General Security. SCOR Re retained approximately 21% of the business during 1994 and retroceded the remainder to a pool, managed by Cal Re, comprised of domestic and foreign reinsurers, most of which have been members prior to 1992. SCOR U.S. owns approximately 92% of the outstanding stock of Cal Re.
Facultative Reinsurance
Facultative reinsurance involves separate negotiation of each risk being underwritten; therefore, the reinsurer is in a better position to influence the terms of the original insurance. The Actuarial Department assists in the pricing of complex facultative casualty submissions. The Facultative casualty unit conducts business both directly with ceding companies and through reinsurance intermediaries out of SCOR Re's Chicago, Dallas, Hartford, New York City and San Francisco branch offices. The Facultative property unit conducts business directly with ceding companies from these branch offices, and through reinsurance intermediaries from the intermediary unit located in Hartford. SCOR Re's facultative operations generated approximately $40.7 million, or 18%, of its net written premium volume in 1994. Property and casualty coverages represented 28% and 72%, respectively, of SCOR Re's total facultative net premium volume.
Facultative Property
SCOR Re's facultative property underwriting focus has been directed toward large technical risks such as boiler and machinery; oil, gas and chemical plants; operating utilities; manufacturing facilities; heavy commercial, industrial and builder's risks; and real estate. Generally, this business involves insurance policies covering property values in excess of $20 million. The Department operates with a gross capacity of $20 million per risk, on a maximum foreseeable loss basis (as determined by SCOR Re underwriters). See "Retrocession Agreements" for a discussion of amounts retained by SCOR Re.
In order to evaluate and underwrite these risks, SCOR Re believes that specialized technical analysis is required. SCOR Re has 13 underwriters in the Facultative property unit, substantially all of whom have engineering or closely related technical degrees and have joined SCOR Re from the engineering industry or specialized underwriting organizations that place considerable emphasis on the engineering aspects of the insured risks. In addition to an average engineering industry or related experience of seven years, the staff averages 12 years of insurance and reinsurance industry experience.
Facultative property reinsurance is provided to targeted primary companies selected for their compatibility with SCOR Re's underwriting approach and experience in this specialized area. Marketing is accomplished by direct calls to ceding companies, attendance at key industry functions, technical presentations, participation in industry associations and through reinsurance intermediaries. During 1994, 20% of SCOR Re's facultative property certificates (accounting for 55% of gross premiums written) were written on a proportional basis, with the remaining 80% (accounting for 45% of gross premiums written) written on an excess of loss basis.
Facultative Casualty
SCOR Re's Facultative casualty unit primarily reinsures risks in the commercial automobile and general liability areas, focusing on working layer (generally the first $1 million of liability) and lower
excess and umbrella layer (generally the next $1 million to $10 million of liability) business, which SCOR Re believes permits more accurate claims prediction and, therefore, more accurate pricing, because the frequency and more rapid reporting and settlement of claims allows greater statistical reliability. During 1994, all of SCOR Re's facultative casualty certificates were written on an excess of loss basis. SCOR Re markets directly to ceding companies which generally retain a significant amount of liability for their own account and with which SCOR Re has established long-term relationships as well as through reinsurance intermediaries. The Facultative casualty unit's gross capacity is $5 million for any one risk. SCOR Re retains a large portion of its facultative casualty business. See "Retrocession Agreements" for a discussion of amounts retained by SCOR Re.
SCOR Re has 15 underwriters in the Facultative casualty unit. The staff averages 17 years of insurance and reinsurance industry experience.
Retrocession Agreements
SCOR Re, like most reinsurance companies, enters into retrocession arrangements for many of the same reasons primary insurers seek reinsurance, including increasing their premium writing and risk capacity without requiring additional capital and reducing the effect of individual or aggregate losses. Historically, SCOR Re has retroceded risks to retrocessionaires on both a proportional and excess of loss basis. Since a reinsurer remains liable to a ceding company with respect to any risk subject to a retrocession agreement, such retrocessionaires are subject to an initial review of financial condition before final acceptability is confirmed and subsequent reviews on an annual basis.
From 1974 through 1986, virtually all of SCOR Re's retrocessions had been to affiliates. Based on the increased surplus resulting from SCOR U.S.'s public offering in 1986, SCOR Re significantly decreased the total amount of reinsurance retroceded, a large portion of which continues to be retroceded to affiliates. All reinsurance agreements with affiliates must be submitted to the New York Insurance Department for prior review. In 1994, 11.5% of gross premiums written by the Company were retroceded to SCOR S.A., compared with 15.6% and 14.0% in 1993 and 1992, respectively.
Under its 1995 retrocessional program, SCOR Re retains a maximum of $2.0 million as to any one ceding company program for treaty business. SCOR Re retains a maximum of $3.9 million and $1.0 million per risk for facultative property and facultative casualty business, respectively. Under its 1994 retrocessional program SCOR Re retained a maximum of $2.0 million as to any one ceding company program for treaty business and a maximum of $3.3 million and $1.1 million per risk for facultative property and facultative casualty business, respectively.
SCOR Re purchases coverage against the accumulation of losses resulting from a single catastrophic event. As with most reinsurers, SCOR Re retains a share of its catastrophe exposures. In 1995, SCOR Re has general catastrophe retrocessional coverage, which
covers property exposures only, for generally 78% of $48 million in excess of $20 million per occurrence. The Company also has underlying coverage for $15 million in excess of $5 million per occurrence after a $5 million deductible. SCOR S.A. participates in SCOR Re's 1995 general catastrophe retrocessional program for a total limit of approximately $13.7 million.
Pursuant to a Net Aggregate Excess of Loss Retrocessional Agreement dated as of July 1, 1986 ("the 1986 Retrocessional Agreement"), SCOR S.A. reinsured SCOR Re for adverse loss development from pre-1986 business that exceeded the total of loss reserves established as of June 30, 1986 and premiums earned after June 30, 1986 from such pre-1986 business. The 1986 Retrocessional Agreement provided protection to the Company for business underwritten by SCOR Re only and did not provide coverage for pre-1986 business underwritten by any other subsidiary. However, business underwritten by General Security and Unity Fire is protected against adverse development by a separate net aggregate excess of loss retrocessional agreement, as described below. The 1986 Retrocessional Agreement terminated on December 31, 1993, at which time, SCOR S.A.'s liability to SCOR Re was $16.2 million. This amount is the actuarially determined expected ultimate loss from the pre-1986 business in excess of the "aggregate deductible" (which is defined as the total of net outstanding loss and loss expense reserves, net incurred but not reported ("IBNR") loss reserves and net unearned premium reserves established as of June 30, 1986 for the pre-1986 business, plus all net premiums and future net premium adjustments earned after June 30, 1986 under retrospectively rated treaties for such business). During the first quarter of 1994, SCOR Re received $16.2 million from SCOR S.A. in settlement of its liability under this agreement.
Given the remaining uncertainty of the ultimate liability of certain exposures underwritten in the pre-1986 SCOR Re business, SCOR Re and SCOR S.A. entered into a new Net Aggregate Excess of Loss Agreement ("the 1994 Retrocessional Agreement") effective January 1, 1994, which protects the same business covered under the 1986 Retrocessional Agreement. Under this Agreement, SCOR Re is responsible for any further adverse development up to $8.8 million beyond the $16.2 million of adverse development recognized under the 1986 Retrocessional Agreement, at which point the 1994 Retrocessional Agreement attaches and provides coverage for up to $10 million of any additional adverse development. Because the losses related to the 1986 Retrocessional Agreement settlement have not yet been paid, the Company earns interest on the funds received. Based on the Company's assumption of the expected payment pattern of these reserves, the Company expects that such investment income would at least equal any adverse development below the attachment point. SCOR Re paid a premium of $2 million for this coverage, which expires on December 31, 2004. At December 31, 1994, no recovery was recognized under the 1994 Retrocessional Agreement. In addition, based on the Agreement's experience, SCOR Re is eligible to receive a contingent commission of up to 27.75% of the premium.
SCOR S.A. entered into a Net Aggregate Excess of Loss Retrocessional Agreement with each of Unity Fire and General Security, pursuant to which SCOR S.A. agreed to reinsure those companies to the extent that their net ultimate incurred losses (as
defined in the agreements) arising in 1989 and prior accident years exceed an aggregate deductible. As a result of the above-described assumption by General Security of the rights, liabilities and obligations of Unity Fire, the Net Aggregate Excess of Loss Retrocessional Agreement with Unity Fire was terminated and the Net Aggregate Excess of Loss Retrocessional Agreement with General Security was amended (as so amended, the "Agreement") to include the protection formerly provided to Unity Fire by its retrocessional agreement with SCOR S.A. As a result of the merger of General Security into SCOR Re, the protection under the Agreement is now for the benefit of SCOR Re. The aggregate deductible is defined as the sum of net outstanding loss and loss expense reserves and net IBNR loss reserves as of December 31, 1989, for 1989 and prior accident years, as documented in the 1989 statutory financial statements of Unity Fire and General Security. This amount has been established at a combined aggregate of $93.8 million. The annual premium for this protection is $210,000 through 2004. The Agreement continues in force until all covered losses are settled. At December 31, 1994, SCOR S.A.'s estimated liability to SCOR Re under the Agreement was approximately $11.7 million.
The retrocession of risks underwritten by a reinsurer does not legally discharge it from liability for any part of the risk retroceded. Accordingly, the Operating Subsidiaries would be required to pay the full amount of the loss associated with the reinsured risk if for any reason SCOR S.A. or any other retrocessionnaire was unable or failed to meet its reinsurance obligations. Generally, under the New York Insurance Law, retrocessionaires which are not licensed or otherwise authorized reinsurers in New York must provide letters of credit or other permitted assets to secure their obligations to the ceding reinsurer (based on the ceding reinsurer's current estimate of the ceded liability) in order for the ceding reinsurer to take credit on its statutory financial statements for the reinsurance ceded. This security can be applied by the ceding reinsurer toward discharging its own liability in the event of a default by the retrocessionaire. At December 31, 1994, the amount of estimated liability for which retrocessionaires were liable to the Operating Subsidiaries was approximately $265.7 million, of which approximately $215.2 million was secured by letters of credit in favor of, or funds held by, the Operating Subsidiaries. Additionally, an amount of $37.6 million represents the liability on reinsurance ceded to New York licensed or authorized reinsurance companies, which are not required to provide additional security in order for the ceding reinsurer to take credit for the reinsurance ceded. The amounts of estimated liability recoverable from retrocessionaires at December 31, 1993 and 1992 were approximately $285.1 million and $289.2 million, respectively. The Operating Subsidiaries' exposure to amounts deemed unrecoverable from retrocessionaires has been limited and to the extent it has been exposed, paid losses, outstanding losses and incurred but not reported losses recoverable from retrocessionaires which are determined to be uncollectible are charged to operations.
The following table sets forth certain information regarding insurers and reinsurers that are parties to retrocessional agreements with the Company for the periods indicated:
MARKETING
SCOR Re writes all treaty business out of its home office in New York City. Virtually all treaty business is written through reinsurance intermediaries, who represent the primary insurers in negotiations with SCOR Re for the purchase of reinsurance. Brokerage commissions paid to intermediaries vary from 1% to 10% of assumed premiums depending on the type of contract negotiated, with these payments constituting part of SCOR Re's total acquisition costs. For the underwriting year 1994 approximately 95% of the gross premiums written and recorded in 1994 by SCOR Re for treaty business was arranged through intermediaries. SCOR Re's three largest intermediary production sources are E. W. Blanch Co., John P. Woods Co., Inc. and Guy Carpenter & Company, Inc., which accounted for 24%, 17% and 11%, respectively, of gross premiums written for underwriting year 1994. SCOR Re believes that the loss of all or substantially all of the business provided by any of these intermediaries could have a material adverse effect on SCOR Re's operations. However, because of the nature and extent of these relationships, as well as SCOR Re's competitive position in the marketplace, such an eventuality is considered unlikely.
The above-mentioned intermediaries are among the largest intermediaries in the reinsurance industry. The concentration of business written by SCOR Re through a small number of sources is consistent with the concentration of the property and casualty intermediary reinsurance market, in which a majority of the business is written through the top ten intermediaries.
SCOR Re conducts its facultative business principally on a direct basis through its branch offices in Chicago, Dallas, Hartford, New York City and San Francisco. SCOR Re also uses intermediaries to produce business for its facultative operations.
CLAIMS
Individual claims reported to the Operating Subsidiaries are managed by the Claims Department. The Claims Department consists of seven professionals with an average of 19 years of insurance and reinsurance industry claims experience. In addition to managing reported claims and conferring with ceding companies on claim matters, the Claims Department conducts periodic audits of specific claims and the overall claims procedures at the offices of ceding companies. Prior to SCOR Re's acceptance of certain risks, the Claims Department often conducts claims audits of prospective ceding companies, which the Company believes benefit all parties to the reinsurance arrangement. SCOR Re attempts to monitor whether the ceding company uses proper adjusting techniques, reserves properly, has sufficient staff and follows proper claims processing procedures. During such audits, the ceding company's management is provided with a constructive review and assessment of its claims operation. Recommendations regarding procedures, processing and personnel are provided to the ceding company. Potentially contested material claims are reviewed with senior management of the respective companies and with the Company's Law Department ("Law Department").
RESERVES
Significant periods of time may elapse between the occurrence of an insured loss, the reporting of the losses to the insurer and the reinsurer, the insurer's payment of that loss, and subsequent payments by the reinsurer. To recognize liabilities for unpaid losses, insurers and reinsurers establish loss and loss expense reserves, which are balance sheet liabilities representing estimates of future amounts needed to pay claims and related expenses with respect to insured events which have occurred. Loss and loss expense reserves have two components: case reserves, which are reserves for reported claims, and IBNR reserves, which are reserves for claims that have occurred but which have not yet been reported to the reinsurer.
Loss reserves are only estimates at a given point in time of what the insurer or reinsurer expects to pay on losses, based on facts and circumstances then known, predictions of future events, estimates of further trends in claim severity and frequency, and other variable factors. During the loss settlement period, which may be many years in the case of casualty claims, additional facts regarding individual claims may become known. As the insurer or reinsurer learns additional facts, it often becomes necessary to refine and adjust the estimates of liability on a claim upward or downward, and even then ultimate liability may exceed or be less than the revised estimates. The IBNR reserving process is intended to provide implicit recognition of the impact of inflation and other factors affecting claim payments by taking into account changes in historical payment patterns and apparent trends.
The inherent uncertainty of estimating loss reserves is exacerbated for reinsurers, especially casualty reinsurers, by the significant periods of time that often elapse between the occurrence of a loss and the reporting of the loss to the primary insurer and, ultimately, the reinsurer.
Loss and loss expense reserves for individual claims are initially established when reports or notices of claims are received from the ceding company. They are based upon the amount of reserves recommended by the ceding company and any additional reserves deemed necessary by the Claims Department, after an evaluation of numerous factors, including coverage, liability, severity of injury or damage, jurisdiction, and ability of the ceding company to properly evaluate and handle the claim. It is the Claims Department's policy to establish case reserves in an amount at least equal to the amount recommended by any ceding company.
The Company calculates IBNR reserves for the Operating Subsidiaries using loss development and premium based methods. In an effort to reduce the uncertainty of the reporting pattern of losses, the Company analyzes several different sources of industry data, extensively reviews the historical loss development patterns of its ceding companies which have many years of loss experience and uses the data and loss ratios developed by its own actuaries who are involved in the pricing of most treaty accounts and all excess of loss accounts. Loss development techniques are generally accepted within the industry to be appropriate for the common lines of casualty business (subsequent to the first several years). The Company's loss development techniques utilize both Company and industry development
patterns. SCOR U.S. uses premium based formulas to establish minimum IBNR amounts for the most recent underwriting years on casualty business. For such immature casualty business, premium based techniques are used since the loss reporting patterns for this business are not sufficiently credible at this stage to allow the proper use of loss development methods. SCOR U.S. also uses, where deemed appropriate, the Bornhuetter-Ferguson IBNR formula which blends both the loss development and premium based approaches. IBNR reserves are established for large treaties based on the loss experience encountered with respect to such treaties through the application of industry average loss development factors derived from RAA data. Smaller treaties, and treaties without adequate individual loss experience, are grouped both by class of business and by underwriting year or accident year relevant to IBNR calculations. The techniques applied by SCOR U.S. are generally accepted actuarial methods for establishing IBNR reserves.
The Senior Vice President and Actuary of SCOR U.S., as well as senior management, monitor IBNR reserve development on a frequent basis by reviewing and analyzing the reserves established by the Claims Department and by comparing actual with predicted development. SCOR U.S. re-evaluates its reserves quarterly to reflect current information with respect to the development of loss experience. SCOR U.S. does not discount any of its reserves for reported or unreported claims to a present value basis.
The actuarial staff consists of two Actuaries who are Fellows of the Casualty Actuarial Society and Members of the American Academy of Actuaries, and four actuarial assistants.
SCOR Re is protected by net aggregate excess of loss retrocessional agreements with SCOR S.A. ("the SCOR S.A. Retrocessional Agreements"). (See "Underwriting - Retrocession Agreements" for a description of these agreements.)
The operating subsidiaries of SCOR U.S. have not underwritten significant amounts of business in those classes or with those insurers that are known to be exposed to asbestos and environmental related claims. During the years ended December 31, 1994, 1993 and 1992, the Company has not experienced any significant amount of net loss reporting or development on claims related to these exposures. In addition, the Company is significantly protected from adverse development under the SCOR S.A. Retrocessional Agreements. Any recoveries under such agreements are considered to be fully realizable. Based on the above information, the Company believes that its exposure to asbestos and environmental related claims is not material to the Company's financial position or results of operations.
Net incurred losses for asbestos and environmental-related coverages during the year ended December 31, 1994 were estimated to be $2.4 million. The Company did not incur any net losses and loss expenses for asbestos and environmental related coverages during the years ended December 31, 1993 and 1992. Gross losses and loss expenses incurred for the year ended December 31, 1994 were estimated to be $8.6 million. At December 31, 1994, reserves for losses and loss expenses for asbestos and environmental related coverages, on a gross and net basis, were an estimated $30.5 million and an estimated $16.9 million, respectively. At December 31, 1994, reported case reserves represented an estimated $11.5 million of the
total gross reserves and an estimated $6.5 million of the total net reserves.
The table below sets forth the changes in loss and loss expense reserves of the SCOR U.S. subsidiaries for each year in the three-year period ended December 31, 1994. The lower portion of the table sets forth the adjustment between Generally Accepted Accounting Principles ("GAAP") and Statutory Accounting Practices ("SAP") reserves for losses and loss expenses. The amounts set forth below are net of deductions for reinsurance.
Year Ended December 31, 1994 1993 1992 (Dollars in thousands)
Reserve for losses and loss expenses at beginning of year - GAAP, net $340,366 $341,162 $324,117 -------- -------- -------- Provision for losses and loss expenses: Occurring in current year 193,587 160,695 165,468 Occurring in prior years (2,317) (4,403) (4,923) ------- ------- ------- Total 191,270 156,292 160,545 ------- ------- ------- Payments for losses and loss expenses: Occurring in current year 55,155 36,018 51,514 Occurring in prior years 94,366 121,070 91,986 ------- ------- ------- Total 149,521 157,088 143,500 ------- ------- ------- Reserve for losses and loss expenses at end of year - GAAP, net 382,115 340,366 341,162
Adjustment(1) 11,700 26,724 7,600 ------- ------- ------- Reserve for losses and loss expenses at end of year - SAP $393,815 $367,090 $348,762 ======== ======== ======== Reserves for losses and loss expenses at end of year - GAAP, net $382,115 $340,366 $341,162
Reinsurance recoverable on unpaid losses 222,672 221,843 220,651 -------- ------- ------- Reserves for losses and loss expenses at end of year - GAAP, gross $604,787 $562,209 $561,813 ======== ======== ========
(1) The net GAAP reserve for losses and loss expenses reflected above is net of $11,700,000, $26,724,000 and $7,600,000 of recoveries in 1994, 1993 and 1992, respectively, under the Retrocessional Agreements with SCOR S.A. SAP requires that losses and loss expense reserves ceded under the SCOR S.A. Retrocessional Agreements be reported as an asset rather than a reduction to net losses and loss expense reserves.
The table on page 24 represents the development of balance sheet reserves for 1984 through 1994 calculated in accordance with GAAP. The top line shows the reserves at the balance sheet date for each of the indicated years, representing the estimated amounts of losses and loss expenses for claims arising during that year and in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not yet reported. The upper portion of the table shows the re-estimated amount of the previously recorded reserves based on experience as of the end of each succeeding year. The estimate changes as more information becomes known about claims for individual years. The lower portion of the table shows the cumulative amounts paid as of successive years with respect to that reserve liability. The cumulative redundancy (deficiency) represents the aggregate change in the estimates over all prior years.
In evaluating information in the table, it should be noted that each amount includes the effects of all changes in amounts for prior periods. For example, the amount of the deficiency related to losses settled in 1985 but incurred in 1984 will be included in the cumulative deficiency amount for the year 1984. The table does not present accident or policy year development data. Conditions and trends that have affected the development of liability in the past will not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table.
Under the 1986 Retrocessional Agreement, SCOR Re was generally protected from any net adverse loss development, in the aggregate, for all pre-1986 underwriting business. However, while some adverse loss reserve development is included in the table set forth below, such adverse loss development is entirely offset by premiums subsequently earned on pre-1986 underwriting business, which are not reflected in the table.
The reserve for losses and loss expenses is based upon estimates received from ceding reinsureds on treaty contracts, accumulation of case estimates for losses and loss expenses on claims reported on facultative contracts and estimates of losses and loss expenses incurred but not reported based upon the Company's expectations of what may have been incurred. Such provisions are necessarily based on estimates and, accordingly, there can be no assurance that the ultimate liability will not exceed such estimates and have a material adverse effect on the Company's results of operations and financial condition. Nevertheless, the Company believes that its reserves make reasonable provision for all unpaid losses and loss expense obligations, including sufficient provision for any potential future adverse development of previous years' reserves.
INVESTMENTS
The investments of the Company's reinsurance and insurance subsidiaries must comply with the insurance laws of their respective states of domicile, and of certain other states in which they are regulated. The principal operating subsidiaries are all domiciled in the State of New York, except for General Security Insurance Company which is domiciled in Maryland. These laws prescribe the kind, quality, and concentration of investments which may be made by reinsurance and insurance companies. In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common stocks, real estate mortgages and real estate.
The Company's investments are managed by an investment officer, currently the Vice President and Treasurer of SCOR U.S., who presents proposed investment strategies quarterly to the Finance Committee of the SCOR U.S. Board of Directors and the Boards of Directors of SCOR U.S., SCOR Reinsurance Company, General Security Insurance Company, Unity Fire and General Insurance Company and General Security Indemnity Company for approval. The Finance Committee and the Boards of Directors approve all investment transactions and proposed adjustments to investment strategies on a quarterly basis. SCOR U.S.'s current investment policy (i) requires an amount at least equal to reserves to be invested in fixed income U.S. Government and agency obligations and corporate and municipal bonds with, in the aggregate, a weighted average Moody's rating of Aa and (ii) permits the remaining invested assets to be invested in common stocks, instruments deemed to be common stock equivalents and debt instruments.
The Company's current investment strategy is to maximize after-tax investment income through a high quality diversified portfolio of primarily taxable and tax-exempt fixed maturity securities while maintaining an adequate level of liquidity and minimizing changes in the market value due to changes in interest rates.
The following table sets forth carrying values, principally at market, of SCOR U.S.'s bond portfolio, as rated by Moody's, at December 31, 1994:
BONDS CLASSIFIED BY RATING DECEMBER 31, 1994 (in thousands) NAIC Carrying % of Bond Classification Value Portfolio
U.S. Treasuries and Agencies 1 $158,571 28.6% Foreign Government and Agencies 1 14,636 2.6% Aaa 1 202,626 36.5% Aa 1 89,607 16.2% A 1 86,346 15.6% Baa 2 2,787 0.5%
Total $554,573 100%
At December 31, 1994, the aggregate amortized cost of the fixed maturities portfolio exceeded the aggregate fair market value by $33.7 million or 5.4% of the total amortized cost of fixed maturities. This amount consists of $1.4 million of unrealized gains and $35.1 million of unrealized losses. At December 31, 1993, fair value of the fixed maturities portfolio exceeded amortized cost by $24.5 million. The net unrealized loss on fixed maturities at the end of 1994 was attributable to rising interest rates. The weighted average life of SCOR U.S.'s fixed maturity portfolio was 5.8 years at December 31, 1994.
The following table sets forth the investment results of SCOR U.S. and its subsidiaries for each of the years indicated:
Year Ended December 31. 1994 1993 1992 (in thousands)
Net investment income $40,990 $42,044 $42,880 Average invested assets 694,785 658,626 604,770 Bond portfolio yield (a) 6.5% 7.1% 7.6% Equity portfolio yield (b) 6.9 4.8 4.2 Pre-tax yield (c) 5.9 6.4 7.1 After-tax yield 4.6 4.9 5.3 Realized gains $ 984 $12,930 $15,048 Unrealized gains (losses) (d) (40,116) 5,686 (10,439) --------------------------------- (a) Yield based on average amortized cost. (b) Yield based on average market value. (c) Net investment income divided by average invested assets at carrying value. (d) Represents the yearly change in net unrealized gains (losses) on fixed maturities and equity securities, net of any tax effect.
Net investment income for 1994 decreased 3% to $41.0 million from $42.0 million in 1993. Net investment income (pre-tax) has been adversely affected by the high level of claim payments made since mid-1992 related to catastrophic events and the lower reinvestment rates available during 1993 and early 1994 as the Company sold securities to realize investment gains. On an after-tax basis net investment income was $31.6 million for 1994, a decrease of 2% from $32.3 million in 1993. Net realized investment gains for 1994 were $1.0 million, compared with $12.9 million for 1993.
The following table provides a maturity profile of the SCOR U.S. fixed maturity investments based on carrying values at December 31 for the last three years:
1994 1993 1992 (in thousands) Maturity
1 year or less $21,955 $13,847 $21,478 Over 1 year - 3 years 62,109 77,028 52,214 Over 3 years - 5 years 107,826 101,393 94,713 Over 5 years - 10 years 359,809 392,340 363,570 Over 10 years - 15 years 30,023 15,975 20,355 Over 15 years - 20 years 1,348 2,392 5,754 Over 20 years 3,457 3,005 3,317 ------ ------- ------ Total fixed maturities $586,527 $605,980 $561,401 ======== ======== ========
REGULATION
The terms and conditions of reinsurance agreements generally are not subject to regulation by any government authority with respect to rates or coverage terms and conditions. This is in contrast with primary policies which are generally closely regulated by state insurance departments. As a practical matter, however, in a competitive market, such as was the case in 1994, the lower rates charged by primary insurers influence downward the rates that can be charged by reinsurers.
SCOR U.S. and its reinsurance operations are subject to regulation under the insurance statutes (including holding company regulations) of various states. These regulations vary from state to state, but generally require insurance holding companies and insurers and reinsurers that are subsidiaries of holding companies to register and file with
state regulatory authorities certain reports including information concerning their capital structure, ownership, financial condition and general business operations. State regulatory authorities monitor compliance with state mandated standards of solvency, licensing requirements, investment limitations, restrictions on the size of risks which may be reinsured, deposits of securities for the benefit of reinsureds, methods of accounting, and reserves for unearned premiums, losses and other purposes. In general, such regulations are for the protection of reinsureds and, ultimately, their policyholders, rather than securityholders.
State laws also require prior notice or regulatory agency approval of changes in control of an insurer or its holding company and of certain intercorporate transfers of assets within the holding company structure. The insurance laws of New York and Maryland provide that no corporation or other person except an authorized insurer, may acquire control of a domestic insurance or reinsurance company unless it has given notice to such company and obtained prior written approval of the Superintendent of Insurance. Any purchaser of 10% or more of the outstanding voting securities of an insurance or reinsurance company is presumed to have acquired control, unless such presumption is rebutted. Therefore, an investor who intends to acquire 10% or more of the outstanding voting securities of SCOR U.S. could become subject to such regulations and would be required to file certain notices and reports with the New York Superintendent of Insurance and the Maryland Commissioner of Insurance prior to such acquisition.
SCOR U.S.'s reinsurance and insurance subsidiaries are subject to periodic examinations of their affairs by the insurance departments of the states in which they are licensed and to triennial examination by the New York Insurance Department, the domiciliary state of SCOR Re, Unity Fire and GSIND and the Maryland Insurance Administration with respect to GSIC, which is domiciled in Maryland. Each of these subsidiaries is also required to file annual and other reports relating to its financial condition and other matters.
SCOR U.S. is a holding company. Its principal sources of cash are cash dividends from SCOR Re, borrowings, and the issuance of equity securities. Generally, dividends which can be paid, without prior approval of the New York Insurance Superintendent, by insurers domiciled in New York State are limited for any twelve-month period to the lesser of 10% of statutory surplus or adjusted net investment income (as defined by New York Insurance Law) for the previous twelve months. During the year ending December 31, 1994, $11.9 million of dividends were declared and paid to SCOR U.S. At December 31, 1994, the aggregate statutory surplus of the SCOR U.S. operating subsidiaries was $243.4 million. Based on the statutory surplus of the Company's operating subsidiaries at December 31, 1994, $24.3 million is the maximum amount available for dividends to the Company in 1995 without prior regulatory approval.
A substantial number of states have adopted or are considering laws and regulations which, among other things, mandate rate decreases, or limit the ability of insurance companies to effect rate increases or to cancel or not renew existing policies principally in personal lines, such as automobile insurance. In an effort to improve state regulation of the insurance industry, the industry introduced various
regulatory and legislative changes which may impact reinsurers. There are also proposals for the Federal government's participation in the regulation of insurance, either in addition to or in lieu of the existing state regulatory system. The Federal government is considering two "tort reform" measures which, among other things, limit non-economic and punitive damages to the larger of $250,000 or three times economic injury. These proposals have been passed in the House of Representatives and are awaiting Senate review. SCOR U.S. is unable to predict what effect these developments may have on its operations and financial condition.
The National Association of Insurance Commissioners ("NAIC"), an organization that assists state insurance regulators in achieving regulatory objectives, established minimum capital requirements, referred to as risk-based capital, by adopting a risk-based capital formula for property and casualty companies in December 1993. The risk-based capital formula is applied to statutory financial statements beginning for the year ended December 31, 1994. The essential elements of these requirements focus on a company's types of business, historical loss development patterns and asset quality. Based on the prescribed formula the statutory surplus of each of the Company's operating subsidiaries is sufficient to meet these risk based capital requirements and to conduct its respective operations.
The NAIC's Insurance Regulatory Information System ("IRIS") is primarily intended to assist state insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies operating in their respective state. IRIS identifies eleven industry ratios and specifies "usual values" for each ratio. Departure from the usual values on four or more of the ratios generally leads to inquiries from state insurance commissioners as to certain aspects of the Company's business.
For the year ended December 31, 1994, SCOR Re fell outside the usual values for one of the eleven ratios, specifically its change in surplus ratio of -10%. The usual value assigned to the change in surplus ratio is up to but not including -10%. SCOR Re's departure from the usual value of the change in surplus ratio was principally attributable to the combined net loss of the Operating Subsidiaries, primarily caused by losses from the Northridge Earthquake and $11.9 million of dividends paid to SCOR U.S.
SCOR Re Voting Trust
The New York Insurance Law prohibits (with certain exceptions) the issuance of a license to a company that is owned or financially controlled in whole or in part by a government, unless an insurer was so owned or financially controlled prior to the effective date of such statute. Both Unity Fire and General Security were so owned or financially controlled prior to such effective date. Because SCOR S.A., the controlling stockholder of SCOR U.S., was indirectly partially owned by certain French insurance companies which were majority owned by the French Government, SCOR U.S., in 1984, to permit SCOR Re to obtain a New York insurance license, established a voting trust for its holdings of capital stock of SCOR Re. The voting trust was irrevocable for a period of ten years (through June 6, 1994), unless SCOR Re's New York license was withdrawn. In 1994, in order for SCOR Re to retain its New York license and obtain a California
insurance license, the voting trust was renewed for an additional period of three years.
The five voting trustees under the voting trust possess and are entitled to exercise all the rights and powers of absolute owners of the capital stock of SCOR Re, except to pass any voting right or ownership interest to others. Decisions of the voting trustees may be made by majority vote, provided that such majority consists of at least two voting trustees who are not officers, directors or stockholders of SCOR S.A. The voting trustees are required to forward any dividends paid by SCOR Re to SCOR U.S. as the registered holder of the voting trust certificates evidencing beneficial ownership of SCOR Re's stock. Transfers of voting trust certificates may only be made by the registered holder thereof. The current voting trustees are as follows: Patrick Peugeot, Jacques P. Blondeau, Allan M. Chapin, Michel J. Gudefin, and David J. Sherwood. All of the voting trustees are directors of SCOR U.S. with the exception of Mr. Chapin.
Although there can be no assurances as to the actions the voting trustees may or may not take in the future, since the establishment of the voting trust in June 1984, the actions of the voting trustees have been limited primarily to the election of directors of SCOR Re.
General Security Voting Trust
Effective February 1, 1993, a voting trust was established by SCOR U.S. for its holdings of capital stock of General Security in order to satisfy the insurance laws of the State of California. Upon completion of the merger of General Security into SCOR Re in 1994, the General Security voting trust was terminated.
COMPETITION
The reinsurance business traditionally has been competitive. From mid-1984 into 1987, there was a significant contraction of capacity in the reinsurance market which diminished competition. However, since 1987 the capacity of the reinsurance industry has expanded, and competition has increased. See "Management's Discussion and Analysis of Financial Condition and Results of Operations".
The number of competitors of SCOR Re cannot reasonably be determined because there are virtually no barriers to entry to the U.S. reinsurance marketplace. Competitors include major domestic and international reinsurance companies, subsidiaries, affiliates or reinsurance departments of both domestic and international insurance companies, and underwriting syndicates.
The reinsurance market has two basic segments: reinsurers that primarily obtain their business directly from ceding companies and those that obtain business from ceding companies through reinsurance intermediaries. Virtually all of SCOR Re's new treaty business is produced by intermediaries, while SCOR Re's Facultative Department produces its business directly and through intermediaries.
Competition in the types of reinsurance business in which SCOR U.S.'s subsidiaries are engaged is based on many factors, including perceived overall financial strength of the reinsurer, premiums charged, contract terms and conditions, services offered, speed of
claims payment and reputation and experience in the line of business to be written. Some competitors of SCOR Re possess greater financial and other resources.
SCOR U.S. believes that the A.M. Best's "A (Excellent)" rating of the Operating Subsidiaries, as well as their surplus position, reputation for prompt claims service and active marketing, coupled with their underwriting skills, targeted markets, SCOR Re's technical engineering expertise and ability to serve as a lead underwriter on treaties, available capacity and the benefits derived from being affiliated with one of the largest reinsurers in the world, such as increased product development and research capabilities, place its subsidiaries in a favorable position to compete for new reinsurance business. Another factor taken into consideration in the placement of business with SCOR U.S.'s subsidiaries is the number of jurisdictions in which they are either licensed or authorized to do business. SCOR U.S.'s management is committed to increasing the number of such jurisdictions.
The Company believes that the reinsurance industry is currently experiencing a consolidation in which larger reinsurers will write a greater proportion of total industry premiums as ceding companies and intermediaries place increasing importance on size and financial strength in the selection of reinsurers. The aggregate statutory surplus of the Company's operating subsidiaries was $243.4 million as of December 31, 1994, making the Company's combined reinsurance operations the 17th largest in the United States, based on statutory surplus, according to industry statistics compiled by the RAA.
SCOR U.S. has no significant foreign source business and currently has no plans for significant expansion into such markets.
EMPLOYEES
At December 31, 1994, SCOR U.S. and its subsidiaries employed a total of 182 employees. None of SCOR U.S.'s employees is represented by a labor union, and SCOR U.S. believes that its employee relations are good.
ITEM 2.
ITEM 2. PROPERTIES
SCOR U.S. and its subsidiaries lease the following properties:
Lease Square Expiration Feet
110 William Street, New York, New York 5/13/95 (1) 49,858 2 World Trade Center, New York, New York 8/31/98 (1) 16,632 One Commercial Plaza, Hartford, Connecticut 1/31/96 2,766 Xerox Centre, Irving, Texas 5/31/98 4,226 199 South Los Robles Avenue, Pasadena, Ca. 9/30/95 (2) 5,217 919 Conestoga Road, Rosemont, Pennsylvania 2/28/95 (3) 4,645 One Market, San Francisco, California 11/30/98 3,133 300 S. Wacker Drive, Chicago, Illinois 4/01/04 3,215
(1) In March 1995 the Company entered into a lease for its New York Headquarters for approximately 59,000 square feet of office space at 2 World Trade Center, New York, New York, which expires in 2011. The Company's existing lease at 2 World Trade Center will terminate upon taking possession of the new space. The Company also extended its lease at 110 William Street, New York, New York until September 30, 1995, at which time all New York operations will relocate to 2 World Trade Center.
(2) The Company intends to relocate the Cal Re Pasedena, California operations to New York prior to the September 1995 lease expiration.
(3) The Company relocated the operations of its subsidiary, Morgard, Inc., from Rosemont, Pennsylvania to New York at lease expiration.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to various lawsuits arising in the normal course of its business. The Company does not believe that any of the litigation to which it is currently a party will have a material adverse effect on the operating results or financial condition of SCOR U.S. and its subsidiaries.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth quarter of 1994.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Shares of SCOR U.S. Common Stock, par value $0.30 per share, have been listed on the New York Stock Exchange (the "NYSE") since 1988 under the symbol "SUR" and are principally traded on the NYSE. The following table sets forth, for the indicated calendar periods, the high and low sales prices per share of Common Stock as reported by the NYSE, and the cash dividends declared and subsequently paid per share:
High Low Dividends
Year Ended December 31, 1994: First Quarter $ 13 $ 10 1/4 $ .09 Second Quarter 12 1/4 10 1/8 .09 Third Quarter 12 1/4 11 .09 Fourth Quarter 11 3/8 7 1/2 .09
Year Ended December 31, 1993: First Quarter $ 20 3/4 $ 17 $ .08 Second Quarter 19 3/4 16 1/8 .08 Third Quarter 16 7/8 14 7/8 .08 Fourth Quarter 16 3/4 12 3/8 .08
On March 10, 1995, the Board of Directors of SCOR U.S. reduced the regular quarterly dividend rate to $.05 per share.
On March 28, 1995, there were approximately 140 holders of record of SCOR U.S. Common Stock, and in excess of 300 beneficial holders.
It is the intention of the Company to declare quarterly dividends to the extent deemed by the Board of Directors to be appropriate. Dividends are paid principally from amounts received by the Company as dividends from SCOR Re. Generally, dividends which can be paid, without prior approval of the New York Superintendent of Insurance, by insurers domiciled in New York State are limited for any twelve-month period to the lesser of 10% of statutory surplus or adjusted net investment income (as defined by New York Insurance Law) for the previous twelve months. The non-insurer subsidiaries generally may pay dividends from surplus or, if none, out of profits for the current and preceding fiscal years. At December 31, 1994, the statutory surplus of SCOR Re was $243.4 million. Based on SCOR Re's statutory surplus at December 31, 1994, $24.3 million is available for dividends to SCOR U.S. during 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The operating results of the property and casualty insurance and reinsurance industry are subject to significant fluctuations due to competition, catastrophic events, general economic conditions, interest rates and other factors, such as changes in tax laws and regulations. The operating results of SCOR U.S. historically have been influenced by these cycles. In recent years, the results of certain casualty lines of business have become less predictable for some insurers and reinsurers as a result of expanding theories of tort and insurance liability and latent risks, such as asbestos and pollution liability whose effects may not be known for many years. The operating subsidiaries of SCOR U.S. have not underwritten significant amounts of business in those classes or with those insurers that are known to be exposed to asbestos and environmental related claims. The Company has not experienced any material amount of net loss reporting or development on claims related to these exposures. In addition, the Company is significantly protected from certain adverse loss reserve development through retrocessional agreements with SCOR S.A., its majority shareholder (see Note 4 to the Company's Consolidated Financial Statements). Any recoveries under such agreements are considered to be fully realizable. Based on the above information, the Company believes that its exposure to asbestos and environmental related claims is not material to the Company's financial position or results of operations.
The industry experienced an extended down cycle from 1979 to the end of 1984. Underwriting losses in that period grew significantly as a result of an increase in the frequency and severity of reported losses. The industry was affected by expanding theories of tort and insurance liability and by growing exposure to long-tail risks, including asbestos and pollution claims, which were not adequately taken into account in the pricing, terms and conditions of insurance and reinsurance contracts being written during that period. At the same time, premium rates declined as interest rates increased and insurers and reinsurers sought premium income to invest at these higher rates. These conditions led to a decline in the surplus of reinsurers and the insolvency or voluntary withdrawal from the market of a number of insurance and reinsurance companies.
From 1985 through 1987, the demand for reinsurance increased and reinsurance pricing and underwriting results improved. This attracted increased capacity into the industry as insurers and reinsurers strengthened their surplus through capital infusions and increased earnings. In the mid-1980's, the industry adopted contract language changes designed to exclude asbestos and pollution claims. However, asbestos and pollution claims result, and will continue to result, in numerous claims to the insurance industry under policies written prior to such changes, adversely affecting the operating results of certain of the Company's competitors.
Beginning in mid-1987, the insurance and reinsurance industry experienced increased competition and reduced premium rates. In addition, ceding companies increased their retentions, resulting in
less available business to be reinsured, increased competition and lower premium rates in the reinsurance industry. This competitive environment, which has continued into 1995, has seen little improvement in rates compared with recent years, with the exception of rates for certain property reinsurance coverages.
Property catastrophe losses in 1989 caused a reduction in London market reinsurance and retrocessional capacity for property reinsurers at the end of 1990, and a consequent increase in certain property reinsurance rates in 1991. Record insured catastrophe losses in 1992, which approximated $23 billion including those caused by Hurricanes Andrew and Iniki and the Los Angeles riots, led to increases in property catastrophe reinsurance rates, as well as improved rates, terms and conditions on certain other property coverages. These record losses in 1992 also caused a further shortage of catastrophe retrocessional capacity and led to an influx of new capital to reinsurers primarily providing catastrophe coverage. Approximately $5 billion of capital was raised by these companies, the majority of which are located in Bermuda. However, the demand for catastrophe protection has continued and conditions have remained at favorable levels for reinsurers as the occurrences of catastrophe losses has continued subsequent to the record 1992 year. Following a 1993 year that produced $5.7 billion of catastrophe losses, the estimated 1994 level of $15 billion has made the past 12 months the second most costly period for catastrophes in the history of the U.S. insurance industry. Of this total, $10.4 billion was produced by the earthquake in California ("Northridge earthquake") a loss that has been exceeded in magnitude only by Hurricane Andrew in 1992.
The Company believes that the reinsurance industry currently is experiencing a consolidation in which larger reinsurers will write a greater proportion of total industry premiums, as ceding companies and intermediaries place increasing importance on size and financial strength in the selection of reinsurers. The aggregate statutory surplus of the Company's operating subsidiaries was $243.4 million as of December 31, 1994, ranking the Company's combined reinsurance operations as the 17th largest based on the statutory surplus of reinsurers reporting to the Reinsurance Association of America (RAA) as of December 31, 1994.
Many of the factors that have resulted in the current down cycle continue and SCOR U.S. cannot predict if, when or to what extent general market conditions will improve for the insurance and reinsurance industry. Even so, SCOR U.S. believes that the consolidation in the industry, along with the impact of recent catastrophe losses on the property and casualty insurance industry and generally declining cash flow in recent years, may favorably influence property and casualty pricing, as well as reinsurance buying trends, in the future.
During the first quarter of 1994, the Company merged its two principal operating subsidiaries, SCOR Reinsurance Company and General Security Assurance Corporation of New York, to form a single operating entity for the Company's assumed reinsurance business. The Company also intends to merge two of its other operating subsidiaries, The Unity Fire and General Insurance Company and General Security Insurance Company, subject to approval by such companies' Boards of Directors and state regulatory authorities, to form a single broadly
licensed operating unit for the Company's primary and excess insurance business. Both the completed merger and the intended merger are not expected to have a material effect on the Company's growth, liquidity or results of operations.
UNDERWRITING RESULTS
The underwriting results of a property and casualty insurer or reinsurer are discussed frequently by reference to its loss ratio, underwriting expense ratio and combined ratio. The loss ratio is the result of dividing losses and loss expenses incurred by net premiums earned. The underwriting expense ratio is the result of dividing underwriting expenses by net premiums written for purposes of Statutory Accounting Practices ("SAP") and net premiums earned for purposes of Generally Accepted Accounting Principles ("GAAP"). The combined ratio is the sum of the loss ratio and the underwriting expense ratio. A combined ratio under 100% generally indicates underwriting profits and a combined ratio exceeding 100% generally indicates underwriting losses. Underwriting profit is only one element of overall profitability, which also includes investment results, interest expense and the effects of income taxation. Accordingly, the combined ratio alone should not be used to measure overall profitability. Except as indicated, the ratios discussed below have been calculated on a GAAP basis.
The following table sets forth the Company's GAAP combined ratios and the components thereof for the periods indicated, and the SAP combined ratio for the Company's insurance and reinsurance subsidiaries and for the reinsurance industry based on statistics distributed by the RAA. The GAAP ratios include the operating expenses of the holding company and the operations of the non insurance subsidiaries, in addition to the operating expenses of the insurance and reinsurance subsidiaries. The SAP expense ratios include only the operating expenses of the insurance and reinsurance subsidiaries. In addition, the GAAP loss ratio takes into consideration the recoveries under certain retrocessional agreements with SCOR S.A., whereas these recoveries are included in other income for SAP purposes. A reconciliation between the Company's GAAP consolidated net income and statutory net income of the insurance and reinsurance subsidiaries is included in Note 11 to the Company's Consolidated Financial Statements.
Year Ended December 31, 1994 1993 1992 GAAP RATIOS (Total Company) Loss ratio 83.8% 66.2% 83.6% Commission ratio 26.0 26.0 29.1 U/W, admin. and other expense ratio 13.2 12.9 14.7 Expense ratio 39.2 38.9 43.8 Combined ratio 123.0% 105.1% 127.4%
SAP COMBINED RATIOS Company (insur. subs. only) 118.8% 103.7% 123.3% Industry 106.7% 107.3% 117.4%
COMPARISON OF 1994 WITH 1993
Gross premiums written for 1994 decreased 8% to $306.8 million from $334.5 million in 1993. Net premiums written for 1994 decreased 6% to $231.1 million from $245.4 million for 1993. Gross premiums written and net premiums written for 1994 were increased by $1.0 million and reduced by $5.0 million, respectively, for additional premiums to reinstate catastrophe reinsurance protections primarily related to the Northridge earthquake. Excluding these reinstatement premiums, gross premiums written and net premiums written for 1994 decreased by 9% and 4%, respectively, compared with 1993. The decrease in premium volume was attributable principally to the Company's continued withdrawal from certain property and casualty lines of business where the Company believes rates and/or conditions are inadequate. More specifically, throughout 1994 the Company has been reducing its property business written on a pro rata basis. A combination of an acceleration in the reduction of this business and fewer attractive opportunities in targeted lines of business caused the reduction in 1994 premium volume. In general, a weak pricing environment persisted throughout 1994, with the exception of catastrophe-exposed risks and some specialized lines of business.
Net losses and loss expenses incurred increased 22% in 1994 to $191 million from $156.3 million in 1993. The loss ratio was 83.8% for 1994 as compared with 66.2% for 1993. During 1994 the Company incurred $32.2 million of net losses ($62.7 million of gross losses) resulting from property catastrophe events, primarily the Northridge earthquake and the early 1994 winter freeze, which added 15.6 points to the loss ratio. Of these amounts, the Northridge earthquake accounted for $26.1 million of net incurred losses and $54.8 million of gross incurred losses. During 1993 the Company incurred $13.7 million of net losses ($19.1 million of gross losses) resulting from property catastrophe events, primarily the World Trade Center bombing, the East Coast blizzard, the Midwest floods and the California fires, which adversely affected the loss ratio by 5.8 points.
During 1994 and 1993, the Company ceded $82.9 million and $88.9 million of earned premiums, respectively. The Company recovered from retrocessionnaires $78.4 million and $57.3 million of losses during 1994 and 1993, respectively. Ceded premiums in 1994 included $6.0 million of reinstatement premiums paid by the Company. Ceded losses in 1994 and 1993 included $30.5 million and $5.4 million, respectively, of losses resulting from property catastrophe events.
Commission expenses decreased 3% to $59.4 million in 1994 from $61.3 million in 1993. The decrease was caused principally by the decline in the Company's net premium volume. The commission ratio was 26.0% for 1994 and 1993. The effect of net reinstatement premiums related primarily to the Northridge earthquake added approximately 0.5 points to the 1994 commission ratio.
Underwriting, administration and other expenses decreased 1% in 1994 to $30.0 million from $30.5 million in 1993. The underwriting, administration and other expense ratio was 13.2% for 1994 as compared with 12.9% for 1993. The effect of net reinstatement premiums related primarily to the Northridge earthquake added 0.3 points to the 1994 ratio. As discussed in Note 3 to the Company's Consolidated Financial
Statements, the Company has made various acquisitions. The pre-tax effect on operations from recent acquisitions, including the amortization of goodwill and acquired licenses, was a charge of $2.8 million in 1994 compared with a charge of $2.6 million in 1993. The operations of the acquired companies are not expected to have a material effect on the Company's liquidity, financial position or results of operations.
The combined ratio was 123.0% for 1994, compared with 105.1% for 1993. The effect of property catastrophe events on the 1994 and 1993 combined ratio was 16.4 points and 5.8 points, respectively.
Net investment income for 1994 decreased 3% to $41.0 million from $42.0 million for 1993. Net investment income (pre-tax) has been affected adversely by the high level of claim payments made since mid- 1992 related to catastrophe events and the lower reinvestment rates available during 1993 and early 1994 as the Company sold securities to realize investment gains. On an after-tax basis net investment income was $31.6 million for 1994, a decrease of 2% from $32.3 million in 1993. Net realized investment gains for 1994 were $1.0 million, compared with $12.9 million for 1993.
Interest expense increased 11% to $8.9 million in 1994 from $8.0 million in 1993. The increase was principally due to a full year of interest expense recognized on the Company's 5.25% Convertible Subordinated Debentures due April 1, 2000 ("Debentures") that were issued in March 1993, compared with nine months of interest expense in 1993. (See Liquidity and Capital Resources)
During 1994 the Company repurchased in the open market $3.9 million in principal amount of the Debentures and recognized an extraordinary gain of $351,000, or $0.02 per share, net of tax.
As a result of the Company's implementation, as of January 1, 1993, of the FASB's Emerging Issues Task Force consensus regarding Issue No. 93-6, "Accounting for Multiple-Year Retrospectively Rated Contracts by Ceding and Assuming Enterprises" ("EITF 93-6"), $2.6 million (net of $1.4 million tax effect), or $0.14 per share, is included as a reduction to 1993 income for the cumulative effect of this accounting change.
For 1994, the Company posted a net loss of $7.8 million, or $0.43 per share, on a primary basis, compared with a net income of $25.3 million, or $1.38 per share, for 1993. On a fully diluted basis, net income for 1993 was $1.33 per share. The 1994 results were affected by after-tax charges to operations, net of reinsurance, of $24.2 million, or $1.33 per share for property catastrophe events. The 1993 results were affected by after-tax charges to operations, net of reinsurance, of $8.9 million, or $0.48 per share, for property catastrophe events. Average common and common equivalent shares outstanding (on a primary basis) for 1994 were 18.2 million, compared with 18.4 million for 1993.
SUBSEQUENT EVENT
The Company believes that its potential for losses from January 17, 1995 Nambu-Jishin earthquake in Kobe, Japan is limited since foreign writings represent an insignificant portion of its portfolio.
Comparison of 1993 with 1992
Gross premiums written for 1993 increased 10% to $334.5 million from $304.8 million in 1992. Net premiums written for 1993 increased 19% to $245.4 million from $205.5 million for 1992. Gross premiums written and net premiums written for 1992 were increased by $5.6 million and reduced by $6.5 million, respectively, for additional premiums to reinstate catastrophe reinsurance protections subsequent to Hurricane Andrew. Excluding these reinstatement premiums, gross premiums written and net premiums written for 1993 increased by 12% and 16%, respectively, compared with 1992. The increase in premium volume was attributable principally to new and increased participations in treaty business. Much of the growth resulted from targeted market segments such as nonstandard auto, a line of business that experienced a 73% increase in net premiums written in 1993 to $38 million, or 16% of the total net volume. Offsetting a portion of the Company's premium growth was a continued withdrawal from certain property and casualty lines of business where the Company believes rates and/or conditions are inadequate. In general, a weak pricing environment persisted throughout 1993, with the exception of catastrophe-exposed risks and some specialized lines of business.
Net losses and loss expenses incurred decreased 3% in 1993 to $156.3 million from $160.5 million in 1992. The loss ratio was 66.2% for 1993 as compared with 83.6% for 1992. During 1993 the Company incurred $13.7 million of net losses ($19.1 million of gross losses) resulting from property catastrophe events, primarily the World Trade Center bombing, the East Coast blizzard, the Midwest floods and the California fires, which adversely affected the loss ratio by 5.8 points. During 1992 the Company incurred $50.9 million of net losses ($162.6 million of gross losses) resulting from property catastrophe events, primarily Hurricanes Andrew and Iniki and the Los Angeles riots, which added 28.4 points to the loss ratio. Of these amounts, Hurricane Andrew accounted for $37.9 million of net incurred losses and $137.1 million of gross incurred losses.
During 1993 and 1992, the Company ceded $88.9 million and $90.8 million of earned premiums, respectively. The Company recovered from retrocessionnaires $57.3 million and $177.1 million of losses during 1993 and 1992, respectively. Ceded premiums in 1992 included $12.1 million of reinstatement premiums paid by the Company. Ceded losses in 1992 included $111.7 million of losses resulting from property catastrophe events.
Commission expenses increased 10% to $61.3 million in 1993 from $56.0 million in 1992. The commission ratio was 26.0% for 1993, compared with 29.1% for 1992. The decrease in the commission ratio for 1993 is primarily attributable to the current mix of business, on which the commission rate for certain new business is lower than the commission rate on canceled property pro rata treaties and the effect of net reinstatement premiums related to Hurricane Andrew, which added approximately one point to the 1992 commission ratio.
Underwriting, administration and other expenses increased 8% in 1993 to $30.5 million from $28.3 million in 1992. The underwriting, administration and other expense ratio was 12.9% for 1993 as compared
with 14.7% for 1992. The effect of net reinstatement premiums related to Hurricane Andrew added 0.5 points to the 1992 ratio. The increase in underwriting, administration and other expenses in 1993 was principally related to compensation expenses, the majority of which was an increase in costs associated with the Company's retirement plans. In addition, as discussed in Note 3 to the Company's Consolidated Financial Statements, the Company has made various acquisitions. The pre-tax effect on operations from recent acquisitions, including the amortization of goodwill and acquired licenses, was a charge of $2.6 million in 1993 compared with a charge of $1.8 million in 1992. The operations of the acquired companies are not expected to have a material effect on the Company's liquidity or results of operations.
The combined ratio was 105.1% for 1993, compared with 127.4% for 1992. The effect of property catastrophe events on the 1993 and 1992 combined ratio was 5.8 points and 29.8 points, respectively.
Net investment income for 1993 decreased 2% to $42.0 million from $42.9 million for 1992. Net investment income (pre-tax) has been affected adversely by: 1) the high level of claim payments made over the past eighteen months related to catastrophic events; 2) the Company's managed shift toward a greater percentage of tax-exempt securities; and 3) the general decline in interest rates over the past several quarters which has had an adverse effect on available yields for new and reinvested funds. Offsetting the above factors was an increase in investment income related to the investment of the proceeds from the Debentures in March 1993. On an after-tax basis net investment income was $32.2 million for 1993, virtually unchanged from 1992. Net realized investment gains for 1993 were $12.9 million, compared with $15.0 million for 1992.
Interest expense increased 75% to $8.0 million in 1993 from $4.6 million in 1992. The increase was due to $3.5 million of interest expense recognized on the Debentures.
As a result of the Company's implementation, as of January 1, 1993, of EITF 93-6, $2.6 million (after an income tax benefit of $1.4 million), or $0.14 per share, is included as a reduction to 1993 income for the cumulative effect of this accounting change.
Net income for 1993 increased 249% to $25.3 million, or $1.38 per share, on a primary basis, compared with $7.2 million, or $0.40 per share, for 1992. Net income for 1993 on a fully diluted basis was $1.33 per share, compared with $0.40 per share for 1992. The 1993 results were affected by after-tax charges to operations, net of reinsurance, of $8.9 million, or $0.48 per share ($0.43 per share on a fully diluted basis) for property catastrophe events. The 1992 results were affected by after-tax charges to operations, net of reinsurance, of $37.9 million, or $2.08 per share (on a primary and fully diluted basis) for property catastrophe events. Average common and common equivalent shares outstanding (on a primary basis) for 1993 were 18.4 million, compared with 18.3 million for 1992.
INCOME TAXES
SCOR U.S.'s Federal income tax provision (benefit) was ($11.3 million), $7.0 million and ($3.8 million) for the years ended
December 31, 1994, 1993 and 1992, respectively. Although the Company's income from operations before Federal income taxes and cumulative effect of accounting changes was $630,000 for 1992, a net operating loss for tax purposes resulted after the elimination of tax- exempt investment income. A reconciliation between income taxes computed at the statutory rate and SCOR U.S.'s provisions for income taxes for the years ended December 31, 1994, 1993 and 1992, is included in Note 9 to SCOR U.S.'s Consolidated Financial Statements.
The Omnibus Budget Reconciliation Act of 1993 (the "Act") was signed into law in August 1993. The Act provided for an increase in the corporate tax rate to 35% from the previous 34% rate. As a result of the revaluation of the Company's net deferred tax assets to reflect the change in tax rates, the Company recognized a net benefit of $472,000, or $.03 per share, in 1993. This benefit is included in the provision for Federal income taxes attributable to income from operations. In addition, as a result of the new tax rate, it is likely that the Company will pay taxes at a higher effective rate in future years to the extent that the Company generates taxable earnings.
GAAP requires the establishment of a valuation allowance for deferred income tax benefits where it is more likely than not that some portion of the deferred income tax benefits will not be realized. Management believes, based on the Company's historical record of generating taxable income and its expectations of future earnings, that the Company's taxable income in future years will be sufficient to realize the net deferred income tax benefits reflected on its consolidated balance sheet as of December 31, 1994. In addition, management believes certain tax planning strategies exist, including its ability to alter the mix of its investment portfolio to taxable investments from tax-exempt investments, which could be implemented if necessary to ensure sufficient taxable income to realize fully its net deferred income tax benefits. Management also believes that the Company's net deferred income tax benefits related to unrealized depreciation of fixed maturity investments is recoverable through its ability to hold these investments to maturity. Accordingly, SCOR U.S. has not established a valuation allowance with respect to its net deferred income tax benefits.
ECONOMIC ENVIRONMENT
The Company's commercial paper bears interest at short-term rates in effect at each respective issuance date. To the extent interest rates increased during 1994, interest expense has been affected adversely. In addition, prices of fixed maturity investments generally decline as market interest rates increase. Accordingly, the fair value of the Company's fixed maturity portfolio holdings has decreased during the recent period of increasing interest rates. SCOR U.S. also pursues an investment strategy that tends to mitigate interest rate risk by establishing a maturity distribution profile of fixed maturity investments sufficient to fund loss and loss expense obligations when they become due. In addition, management believes that SCOR U.S. and its operating companies pursue a conservative investment strategy which avoids significant exposure to credit risk.
LIQUIDITY AND CAPITAL RESOURCES
SCOR U.S. is a holding company. Its principal sources of cash are cash dividends from its operating subsidiaries, borrowings, and the issuance of equity securities. Generally, dividends that can be paid by insurers domiciled in New York State, without prior approval of the New York Insurance Superintendent, are limited for any twelve- month period to the lesser of 10% of statutory surplus or adjusted net investment income (as defined by New York Insurance Law) for the previous twelve months. During the year ending December 31, 1994, $11.9 million of dividends were declared to SCOR U.S. At December 31, 1994, the aggregate statutory surplus of the SCOR U.S. operating subsidiaries was $243.4 million. Based on the statutory surplus of the Company's operating subsidiaries at December 31, 1994, $24.3 million is available for dividends to SCOR U.S. during 1995.
On March 29, 1993, SCOR U.S. sold at par $86.25 million of 5.25% Convertible Subordinated Debentures due April 1, 2000 through a private offering. The Debentures are not redeemable by the Company prior to April 3, 1996 and are convertible into approximately 3.4 million shares of SCOR U.S. common stock at a conversion price of $25.375 per share. Expenses incurred in the offering of approximately $1.8 million were deferred and are being amortized over the life of the Debentures. The Company contributed $50 million of the net proceeds to SCOR Re.
During 1994 the Company repurchased in the open market $3.9 million in principal amount of the Debentures and recognized an extraordinary gain of $351,000, or $0.02 per share, net of tax. These purchases were executed under a $10 million program authorized by the Board of Directors. In January 1995, the Company repurchased an additional $6.0 million in principal amount of the Debentures under this authorization. Funding for the aggregate amount of repurchased Debentures, all of which settled in January 1995, was achieved through the issuance of the Company's commercial paper.
In January 1995, the Board of Directors authorized the Company to repurchase up to an additional $20 million of Debentures in the open market, as market conditions permit. In connection with this additional authorization, SCOR U.S. has established a $20 million credit agreement with SCOR S.A. the proceeds of which are restricted to the repurchase of the Debentures or the repayment of any debt incurred to repurchase Debentures.
On October 1, 1990 SCOR U.S. renewed a $20.0 million note which was payable on that date. The new note is due and payable on October 3, 1995 and bears interest at a fixed annual rate of 9.575%. The Company has entered into an interest rate swap agreement related to this note with a commercial bank. The swap agreement has a maturity date of October 1, 1995 and provides for the Company to make floating rate payments in exchange for fixed rate payments due on the loan. The floating rate, which resets every six months and is capped at 12.380%, was 11.068% as of December 31, 1994. The Company most likely will refinance this debt when due and is currently exploring various options.
SCOR U.S. has established a commercial paper program which allows it to raise up to $50.0 million. At December 31, 1994, $11.3 million of commercial paper was outstanding.
SCOR U.S. has a $30.0 million revolving line of credit with a bank which serves as a backstop for its commercial paper program. No borrowings have been made under this facility.
At December 31, 1994, the amount remaining under the Company's existing stock repurchase program is approximately $1.4 million, which may be utilized as market conditions permit. During 1993, the Company repurchased 40,800 shares of its common stock for an aggregate cost of $616,000. The Company did not repurchase any shares under this program during 1994.
The primary sources of liquidity for the SCOR U.S. insurance and reinsurance subsidiaries are net cash flow from operating activities, the maturity or sale of investments, and capital contributions from SCOR U.S. Net cash provided by operating activities was $1.3 million for 1994 compared with $27.8 million for 1993. Cash flow from operating activities during 1994 was adversely affected by continued property catastrophe paid loss activity as well as the payment of several large previously reserved casualty claims. The Company has not suffered any adverse effect in the timing of recoveries or credit worthiness of retrocessionnaires due to the recent catastrophe activity . Loss payments associated with the recent catastrophe activity are not expected to have an adverse material effect on the Company's short-term or long-term liquidity.
During 1994 and 1993, the Company incurred $4.1 million and $9.4 million, respectively, of capital expenditures, which primarily related to the development of information systems. At December 31, 1994, the Company had no significant commitments for capital expenditures.
Effective January 1, 1991, SCOR Re and certain of the Company's other operating subsidiaries operate under a reinsurance pooling agreement pursuant to which the net amounts under all new and renewal business written by each such company are pooled. The net balances of the pool are then distributed to each company in accordance with established proportions.
At December 31, 1994, total investments and cash at carrying value were $677.6 million compared with $733.8 million at December 31, 1993. The decreased level of investments and cash is primarily attributable to the $58.9 million decrease in fair value of investments carried at fair value during the year. SCOR U.S.'s fixed maturity investments are substantially all investment grade, liquid securities with a weighted average maturity of 5.8 years. Approximately 99% of the fixed maturity portfolio is rated A or better. SCOR U.S. does not have any investment in real estate or high yield bonds. At December 31, 1994, the Company did not have any non income producing investments.
SCOR U.S. believes that cash and short-term investments are maintained at an adequate level for payment of claims and expenses as they become due. In addition, SCOR U.S. maintains a maturity distribution profile of fixed maturity investments sufficient to fund
anticipated loss and loss expense obligations as they become due. The Company's long-term obligations primarily consist of the Debentures and the claims liabilities of its principal operating subsidiaries, which at December 31, 1994 averaged approximately 4.5 years.
The Company may be subject to gains and losses resulting from currency fluctuations because some of its investments are denominated in currencies other than United States dollars, as are some of its net loss reserve liabilities. The Company makes investments denominated in foreign currencies to mitigate, in part, the effects of currency fluctuations on its results of operations. Investments denominated in foreign currencies do not constitute a material portion of the Company's investment portfolio and, in the opinion of management, are sufficient to meet its foreign currency obligations. Net gains (losses) resulting from foreign currency transactions during 1994, 1993 and 1992 were ($156,000), ($929,000) and $555,000, respectively.
Stockholders' equity at December 31, 1994 was $239.4 million, a decrease of $51.3 million from December 31, 1993. This decrease resulted primarily from the net loss of $7.8 million for the year, unrealized depreciation of investments carried at fair value, net of tax effect, of $38.3 million and by cash dividends declared of $6.5 million.
The ratio of net premiums written to surplus, sometimes referred to as "insurance exposure", relates to the amount of risk to which an insurer's statutory capital and surplus can be exposed, as measured by the amount of premiums written in relation to such surplus. Insurance practice and regulatory guidelines suggest that property and casualty insurance companies maintain a net premiums written to surplus ratio of less than 3 to 1. For the reinsurance industry, a ratio of 2 to 1 or less is generally considered prudent. SCOR U.S.'s net premiums written to surplus ratios were .95 to 1, .87 to 1 and .97 to 1 for 1994, 1993 and 1992, respectively.
RATINGS
Upon issuance in 1993, the Debentures were assigned an A3 rating from Moody's Investors Service Inc. ("Moody's") and were rated BBB- Plus by Standard & Poor's Corp. ("S&P"). The Company's commercial paper program has been rated P-1 by Moody's and A-1 by S&P since its establishment. On November 22, 1994 S&P lowered its ratings on the Debentures to BBB and on the commercial paper to A-2. S&P attributed its action to the Company's volatile earnings record and reduced surplus resulting from its past concentration in reinsuring property risks, while acknowledging that the Company maintains a good position in the brokered reinsurance market, a sound investment strategy and benefits from its ownership by SCOR S.A. Moody's has not changed any of the Company's ratings to date. Although the Company may experience increased future borrowing costs as a result of negative ratings changes, the Company has not experienced any significant adverse effect subsequent to the above action.
The Company recently was notified by A.M. Best & Company, Inc., an independent insurance industry rating organization, that the rating of its principal operating companies has been reduced from A+ (Superior) to A (Excellent) for reasons similar to those noted above.
REGULATORY MATTERS
The National Association of Insurance Commissioners ("NAIC"), an organization that assists state insurance regulators in achieving regulatory objectives, established minimum capital requirements, referred to as risk based capital, by adopting a risk-based capital formula for property and casualty companies in December 1993. The risk-based capital formula is applied to statutory financial statements beginning for the year ending December 31, 1994. The essential elements of these requirements focus on a company's types of business, historical loss development patterns and asset quality. Based on the prescribed formula the statutory surplus of each of the Company's operating subsidiaries is sufficient to meet these risk- based capital requirements and to conduct its respective operations.
The NAIC is currently developing an Investments of Insurers Model Act, which, if adopted by the individual states, would establish uniform limitations upon the type and amounts of investments insurers may hold. Based upon the current proposals of this Model Act, which are subject to review and change, the Company does not believe a uniform standard would significantly affect the current investment mix or operations of its insurance and reinsurance subsidiaries.
ACCOUNTING PRONOUNCEMENTS
Effective as of December 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). SFAS 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. The adoption of SFAS 115 did not have any effect on the Company's financial position or its results from operations.
The FASB's Emerging Issues Task Force ("EITF") reached a consensus on July 22, 1993 regarding Issue No. 93-6, "Accounting for Multiple-Year Retrospectively Rated Contracts by Ceding and Assuming Enterprises" ("EITF 93-6"). EITF 93-6 has had an impact on certain of the Company's retrocessional agreements. As a result of the Company's implementation of the change in accounting method, as of January 1, 1993, $2,600,000 (net of $1,400,000 tax effect), or $0.14 per share, is included as a reduction to income as a cumulative adjustment. The effect of this change, excluding the cumulative adjustment, for the year ended December 31, 1993 was to increase net income by $2,600,000 or $0.14 per share.
In the first quarter of 1993, the Company adopted Statement of Financial Accounting Standards No. 113 "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" ("SFAS 113"). The adoption of SFAS 113 did not have a material effect on the Company's financial position or its results from operations.
In the first quarter of 1992, the Company adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS 109"), which changed the method of accounting for income taxes. As a result of adopting SFAS 109, the Company recognized a cumulative benefit of the change in accounting principle of $2.4 million, or $0.13 a share, as of January 1, 1992.
In the first quarter of 1992, the Company also changed its accounting method for deferred policy acquisition costs to consider anticipated investment income in evaluating the recoverability of such costs. This new method is preferable because it is the prevalent method used in the insurance industry. The newly adopted accounting method also allows for a more appropriate matching of the income statement amounts of commissions expense with the related earned premiums and the balance sheet amounts of deferred policy acquisition costs with the related unearned premiums. This change resulted in the recognition of a cumulative benefit of the change in accounting principle of $481,000 (after reduction for income taxes of $248,000), or $0.02 per share, as of January 1, 1992.
The FASB has issued Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Post Employment Benefits" ("SFAS 112"), which is effective for 1994 financial statements. SFAS 112 establishes accounting standards for employers who provide benefits for former or inactive employees after employment but before retirement. SCOR U.S. provides no such applicable post retirement benefits and therefore is not affected by SFAS 112.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See The Consolidated Financial Statements and Notes thereto and the Schedules on pages through and S-1 through S-7 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to "Election of Directors" in the Proxy Statement for the 1995 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days of the close of SCOR U.S.'s fiscal year ended December 31, 1994 ("Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to "Compensation of Executive Officers and Directors" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to "Certain Transactions and Relationships with Directors and Officers" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
The financial statements and schedules listed in the accompanying Index to Financial Statements (Page) are filed as part of this Annual Report on Form 10-K.
The exhibits listed in the accompanying Index to Exhibits are filed as part of this Annual Report on Form 10-K.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of 1994.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SCOR U.S. CORPORATION
By: Jeffrey D. Cropsey Senior Vice President and Chief Financial Officer
Dated: March 28, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
Jacques P. Blondeau* Chairman of March 28, 1995 the Board of Directors
John R. Cox* Director March 28, 1995
Serge M. P. Osouf* Vice Chairman of March 28, 1995 the Board of Directors
Raymond H. Deck* Director March 28, 1995
Michael J. Gudefin* Director March 28, 1995
Jerome Karter* President and March 28, 1995 Chief Executive Officer
Richard M. Murray* Director March 28, 1995
Patrick Peugeot* Director March 28, 1995
SIGNATURE TITLE DATE
John W. Popp* Director March 28, 1995
Francois Reach* Director March 28, 1995
David J. Sherwood* Director March 28, 1995
Jeffrey D. Cropsey Sr Vice President and March 28, 1995 Chief Financial Officer (Principal Financial Officer)
Francis J. Fenwick Vice President & Controller March 28, 1995 (Controller)
*By: John T. Andrews, Jr. Senior Vice President March 28, 1995 Attorney-in-Fact General Counsel and Corporate Secretary
INDEX TO REPORT AND CONSOLIDATED FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS OF SCOR U.S.
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 1994 and 1993 -
Consolidated Statements of Operations for the years ended December 31, 1994, 1993 and 1992 -
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994, 1993 and 1992 -
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992 -
Notes to Consolidated Financial Statements -
Schedules:
Schedule I -- Summary of Investments Other than Investments in Related Parties at December 31, 1994 S-1
Schedule II -- Condensed Financial Information of Registrant Balance Sheets at December 31, 1994 and 1993 S-2
Statements of Operations for the years ended December 31, 1994, 1993 and 1992 S-3
Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992 S-4 - S-5
Schedule IV -- Reinsurance S-6
Schedule VI -- Supplementary Information Concerning Property/Casualty Insurance Operations for the years ended December 31, 1994, 1993 and 1992 S-7
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders SCOR U.S. Corporation:
We have audited the consolidated balance sheets of SCOR U.S. Corporation and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1994 as listed in the accompanying index of the 1994 Annual Report on Form 10-K of SCOR U.S. Corporation. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SCOR U.S. Corporation and subsidiaries as of December 31, 1994 and 1993 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in Note 2(k) to the consolidated financial statements, in 1993 the Company adopted the provisions of the Statement of Financial Accounting Standards ("SFAS") No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," and the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and also adopted the consensus opinion regarding the Financial Accounting Standards Board's Emerging Issues Task Force regarding Issue No. 93-6, "Accounting for Multiple-Year Retrospectively Related Contracts by Ceding and Assuming Enterprises". In 1992, the Company adopted the provisions of SFAS No. 109, "Accounting for Income Taxes", and changed its method of accounting for deferred policy acquisitions costs.
KPMG Peat Marwick LLP
New York, New York February 2, 1995
SCOR U.S. CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION
SCOR U.S. Corporation ("SCOR U.S.") is a Delaware corporation that was formed in December 1981. Prior to the offering of 4,000,000 shares to the public on September 25, 1986, SCOR U.S. was owned by Societe Commerciale de Reassurance ("SCOR Paris"), a French reinsurance company, and by Caisse Centrale de Reassurance ("CCR"), a reinsurer wholly owned by the French government which also owned approximately 30% of SCOR Paris. As a result of a corporate reorganization completed in France in November 1989, SCOR Paris became a wholly owned subsidiary of SCOR S.A. In December 1990, SCOR Paris and another subsidiary of SCOR S.A., UAP Reassurances ("UAP Re") were merged into SCOR S.A.
In June 1990, Rockleigh Management Corporation ("Rockleigh"), a wholly owned subsidiary of UAP Re, was merged into SCOR U.S. Rockleigh owned 100% of both The Unity Fire and General Insurance Company ("Unity Fire") and General Security Assurance Corporation of New York ("General Security"), each of which was a professional reinsurance company. On January 1, 1994, General Security was merged into SCOR Reinsurance Company ("SCOR Re"), the Company's principal operating subsidiary.
As a result of the issuance of common shares of SCOR U.S. to UAP Re in the Rockleigh merger, SCOR Paris' participation in SCOR U.S. stock repurchase programs and various other purchases, as well as SCOR Paris' purchase of CCR's shares of SCOR U.S., SCOR S.A. owned approximately 80% of the outstanding common stock of SCOR U.S. at December 31, 1994. The remaining 20% is held publicly and represents 3,616,864 shares of the outstanding shares of SCOR U.S. common stock.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The accompanying consolidated financial statements are presented in conformity with generally accepted accounting principles ("GAAP"). The consolidated financial statements of SCOR U.S. Corporation and subsidiaries (the "Company") include the accounts of SCOR U.S. and its wholly owned subsidiaries, SCOR Re, Unity Fire, General Security Indemnity Company ("GSIND") (formerly Southwest International Reinsurance Company), Morgard, Inc. ("Morgard"), General Security Insurance Company ("GSIC") (formerly The International Insurance Company of Takoma Park, Maryland ("IIC")), SCOR Services, Inc., and BIND, Inc., and its majority owned subsidiary, California Reinsurance Management Corporation ("Cal Re") and its equity affiliate Commercial Risk Partners Limited ("Commercial Risk"). The Company operates primarily in one significant industry segment; property and casualty reinsurance. Substantially all of the Company's gross premiums written are assumed from domestic ceding companies. All significant intercompany transactions have been eliminated in consolidation.
(b) Premium Income
Premium income is recognized as earned on a pro rata basis over the terms of the policies. Unearned premiums are calculated primarily on a pro rata basis on facultative business and as reported by ceding reinsureds on treaty business.
(c) Policy Acquisition Costs
Costs applicable to the acquisition of new business, principally commissions, are deferred when paid and expensed as the related premiums are earned. Deferred policy acquisition costs considers anticipated losses and loss expenses and maintenance expenses that will be incurred as those premiums are earned. Deferred policy acquisition costs are reviewed periodically to determine that they do not exceed recoverable amounts after allowing for anticipated investment income. Amortization of acquisition costs for 1994, 1993 and 1992 was $59,434,000, $61,324,000 and $55,960,000, respectively.
(d) Loss Reserves
The reserve for losses and loss expenses is based upon estimates received from ceding reinsureds on treaty contracts, accumulation of case estimates for losses and loss expenses on claims reported on facultative contracts and estimates of losses and loss expenses incurred but not reported ("IBNR") based upon the Company's expectations of what may have been incurred. Such provisions are necessarily based on estimates and, accordingly, there can be no assurance that the ultimate liability will not exceed such estimates. The reserves are reviewed continually during the year and changes in estimates are reflected in operating results currently.
(e) Property and Equipment
Depreciation and amortization of property and equipment have been provided principally on the straight-line method with estimated useful lives of fifteen years for property and five to ten years for equipment. Leasehold improvements are amortized on a straight-line basis over the term of the corresponding lease. Depreciation and amortization amounted to $1,651,000, $765,000 and $603,000 for the years ended December 31, 1994, 1993 and 1992, respectively.
(f) Investments
The Company has categorized substantially all of its investments in fixed maturities as securities "available for sale" and, in conformity with Financial Accounting Standards Board Statement No. 115 "Accounting for Certain Investments in Debt and Equity Securities", which was adopted December 31, 1993, carries such investments at fair value. Fixed maturities purchased with the intent to hold to maturity are categorized as securities "held to maturity" and are carried at amortized cost. Equity securities are carried at fair value. Short- term investments are carried at cost, which approximates fair value.
The Company's policy is to determine realized gains and losses on investments sold on the specific identification method. The Company includes unrealized gains and losses on equity securities and fixed maturities categorized as available for sale in stockholders' equity,
net of any tax effect. For cash flows statement purposes, the Company does not consider any of its investments to be cash equivalents.
(g) Earnings per Share
Primary earnings per share data are based on the weighted average number of common shares outstanding during the period and, if dilutive, common shares assumed to be outstanding which are issuable under stock option plans. Fully diluted earnings per share are based on the additional assumption that the Debentures (as defined in Note 6) are converted into common shares, if dilutive.
(h) Reclassification of Certain Amounts
Certain amounts from prior financial statements have been reclassified to conform with current classifications.
(i) Intangibles
(1) Goodwill
The Company has classified as goodwill the cost in excess of net assets of companies acquired in purchase transactions. Goodwill is amortized on a straight-line basis over a period of 10 years. Amortization charged to operations amounted to $596,000, $542,000 and $499,000 for the years ended December 31, 1994, 1993 and 1992, respectively.
(2) Insurance Licenses
In conjunction with its acquisition of IIC, the Company acquired licenses for approximately $3,200,000, which are amortized on a straight-line basis over 10 years. Amortization charged to operations amounted to $317,000 and $343,000 for the years ended December 31, 1994 and 1993, respectively. No amount was charged to operations for 1992.
(j) Foreign Currency Transactions
Revenues and expenses denominated in foreign currencies are translated at the rate of exchange at the transaction date. Assets and liabilities denominated in foreign currencies are translated at the rate of exchange at the end of a reporting period. Gains or losses resulting from foreign currency transactions are included in the Company's results from operations.
Net gains (losses) resulting from foreign currency transactions during 1994, 1993 and 1992 were $(156,000), $(929,000) and $555,000, respectively.
(k) Accounting Changes
In the first quarter of 1993, the Company adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards No. 113 "Accounting and Reporting for Reinsurance of Short- Duration and Long-Duration Contracts" ("SFAS 113"). The adoption of SFAS 113 did not have a material effect on the Company's financial position or its results from operations.
The FASB's Emerging Issues Task Force ("EITF") reached a consensus on July 22, 1993 regarding Issue No. 93-6, "Accounting for Multiple-Year Retrospectively Rated Contracts by Ceding and Assuming Enterprises" ("EITF 93-6"). EITF 93-6 had an impact on certain of the Company's retrocessional agreements. As a result of the Company's implementation of the change in accounting method, as of January 1, 1993, a charge of $2,600,000 (after an income tax benefit of $1,400,000), or $0.14 per share, is included as a reduction to income as a cumulative adjustment. The effect of this change, excluding the cumulative adjustment, for the year ended December 31, 1993 was to increase net income by $2,600,000, or $0.14 per share.
The pro-forma amounts shown in the statements of operations have been adjusted for the effect of retroactive application of the adoption of EITF 93-6, net of related income taxes.
Effective as of December 31, 1993, SCOR U.S. adopted Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). SFAS 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. The adoption of SFAS 115 did not have any effect on the Company's financial position or its results of operations.
During 1992, the Company adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS 109"), which changes the method of accounting for income taxes under GAAP. As a result of adopting SFAS 109, the Company recognized a cumulative benefit of the change in accounting principle of $2,367,000, or $0.13 per share, as of January 1, 1992. The effect of this change, excluding the cumulative benefit, for the year ended December 31, 1992 was to decrease net income by $480,000.
During 1992, the Company also changed its accounting method for deferred policy acquisition costs to consider anticipated investment income in evaluating the recoverability of such costs. This new method is preferable because it is the prevalent method used in the insurance industry. The newly adopted accounting method also allows for a more appropriate matching of the income statement amounts of commissions expense with the related earned premiums and the balance sheet amounts of deferred policy acquisition costs with the related unearned premiums. This change resulted in the recognition of a cumulative benefit of the change in accounting principle of $481,000 (after reduction for income taxes of $248,000), or $0.02 per share, as of January 1, 1992. This change had no effect on net income, excluding the cumulative benefit, for the year ended December 31, 1992.
(3) ACQUISITIONS
(a) Purchase of Morgard
On March 10, 1992, SCOR U.S. acquired 100% of the stock of Morgard, a developer, marketer and administrator of an insurance product that indemnifies monthly mortgage payments after involuntary unemployment. The purchase price was approximately $2,549,000 and the transaction was accounted for using the purchase method of accounting
and, accordingly, Morgard's purchased assets and liabilities have been recorded at their estimated fair values at the date of acquisition. The acquisition did not have a material pro forma impact on operations. In March 1994, the Company issued 31,500 shares of its common stock at an approximate market value of $360,000 as additional consideration pursuant to the Morgard purchase agreements.
(b) Investment in Commercial Risk
During January 1992, SCOR U.S. acquired 19.8% of the stock of Commercial Risk, a Bermuda holding company for two insurance subsidiaries engaged in writing shared-risk products. The majority shareholder of Commercial Risk is SCOR S.A. The purchase price was approximately $9,900,000, which included equity and debt. As a result of a recapitalization of Commercial Risk in 1994, all of SCOR U.S.'s investment was converted to equity, with SCOR U.S. owning approximately 13% of Commercial Risk. The investment in Commercial Risk is accounted for using the equity method of accounting and, accordingly, the accompanying consolidated financial statements reflect the Company's proportionate share of Commercial Risk's stockholders' equity and operating income. SCOR U.S. accounts for its proportionate share of Commercial Risk's income in its statements of operations under the caption "other expenses (income)". Income (loss) from Commercial Risk amounted to $743,000, $678,000 and ($110,000) in 1994, 1993 and 1992, respectively.
(c) Purchase of The International Insurance Company of Takoma Park, Maryland
On December 4, 1992, SCOR U.S. acquired 100% of the stock of IIC. The purchase price was approximately $8,200,000 and the transaction was accounted for using the purchase method of accounting and, accordingly, IIC's purchased assets and liabilities have been recorded at their estimated fair values at the date of acquisition. The acquisition did not have a material pro forma impact on operations. During 1993, IIC's name was changed to GSIC.
(4) REINSURANCE
SCOR U.S.'s operating subsidiaries assume reinsurance from SCOR S.A. and other affiliated companies primarily on a quota share or surplus share basis. Written premiums assumed from these companies (and the percentage of gross written premiums) were approximately $7,845,000 (2.6%), $8,375,000 (2.5%) and $6,699,000 (2.2%) for the years ended December 31, 1994, 1993 and 1992, respectively. Of these amounts, approximately $6,959,000, $7,925,000 and $6,278,000 for 1994, 1993 and 1992, respectively, were assumed from SCOR S.A.
SCOR U.S.'s operating subsidiaries also retrocede reinsurance to SCOR S.A. and other affiliated companies, primarily on a quota share or surplus share basis.
The effects of ceded reinsurance on the Statement of Operations for the years ended December 31, 1994, 1993 and 1992 are as follows:
Loss and Loss Premiums Premiums Expenses Written Earned Incurred
(in thousands)
December 31, 1994
Direct $13,667 $13,927 $ 9,554 Assumed 293,125 297,159 260,073 Ceded - affiliate (35,644) (39,718) (37,651) Ceded - other (40,088) (43,124) (40,706) ------- ------- ------- Net $231,060 $228,244 $191,270 ======= ======= =======
December 31, 1993
Direct $ 11,972 $ 8,677 $ 6,944 Assumed 322,547 316,292 206,603 Ceded - affiliate (51,453) (49,778) (37,986) Ceded - other (37,653) (39,140) (19,269) -------- ------- -------- Net $245,413 $236,051 $156,292 ======== ======== ========
December 31, 1992
Direct $ 4,922 $ 2,682 $ 1,645 Assumed 299,906 280,136 335,954 Ceded - affiliate (43,523) (39,134) (59,473) Ceded - other (55,762) (51,634) (117,581) -------- -------- -------- Net $205,543 $192,050 $160,545 ======== ======== ========
For the years ended December 31, 1994, 1993 and 1992 the percentage of assumed premiums written to net premiums written was 126.9%, 131.4% and 145.9%, respectively.
Reinsurance does not discharge or diminish the primary liability to insureds of the Company on risks reinsured; however, it does permit the Company to recover the applicable portion of any loss from its retrocessionaires. Retrocessionaires of SCOR U.S. are subject to an initial review of financial condition before final acceptability is confirmed and subsequent reviews on an annual basis. The Company, like most reinsurance companies, enters into retrocession arrangements for many of the same reasons primary insurers seek reinsurance, including increasing their premium writing and risk capacity without requiring additional capital and reducing the effect of individual or aggregate losses. Historically, SCOR Re has retroceded risks to retro- cessionaires on both a proportional and excess of loss basis. Under its 1994 retrocessional program, SCOR Re retained a maximum of $2.0 million as to any one ceding company program for treaty business and a
maximum of $3.3 million and $1.1 million per risk for facultative property and facultative casualty business, respectively.
Paid losses, outstanding losses and IBNR recoverable from retrocessionaires which are determined to be uncollectible are charged to operations. There were no such amounts charged to operations for the years ended December 31, 1994, 1993 and 1992.
Pursuant to a Net Aggregate Excess of Loss Retrocessional Agreement dated as of July 1, 1986 ("the 1986 Retrocessional Agreement"), SCOR S.A. reinsured SCOR Re for adverse loss development from pre-1986 business that exceeded the total of loss reserves established as of June 30, 1986, and premiums earned after June 30, 1986, from such pre-1986 business. The 1986 Retrocessional Agreement provided protection to the Company for business underwritten by SCOR Re only and did not provide coverage for pre-1986 business underwritten by any other subsidiary. However, business underwritten by General Security and Unity Fire is protected against adverse development by a separate net aggregate excess of loss retrocessional agreement, as described below. The 1986 Retrocessional Agreement terminated on December 31, 1993, at which time SCOR S.A.'s liability to SCOR Re was $16,224,000. This amount is the actuarially determined expected ultimate loss from the pre-1986 business in excess of the "aggregate deductible" (which is defined as the total of net outstanding loss and loss expense reserves, net incurred but not reported loss reserves and net unearned premium reserves established as of June 30, 1986 for the pre-1986 business, plus all net premiums and future net premium adjustments earned after June 30, 1986 under retrospectively rated treaties for such business). During the first quarter of 1994, SCOR Re received $16,224,000 from SCOR S.A. in settlement of its liability under this agreement.
SCOR Re and SCOR S.A. entered into a new Net Aggregate Excess of Loss Agreement ("the 1994 Retrocessional Agreement") effective January 1, 1994, which protects the same business covered under the 1986 Retrocessional Agreement. Under this Agreement, SCOR Re is responsible for any further adverse development up to $8,800,000, at which point the 1994 Retrocessional Agreement attaches and provides coverage for up to $10,000,000 of any additional adverse development. SCOR Re paid a premium of $2,000,000 for this coverage, which expires on December 31, 2004. At December 31, 1994, no recovery was recog- nized under this agreement. In addition, based on the experience of the 1994 Retrocessional Agreement, SCOR Re is eligible to receive a contingent commission of up to 27.75% of the premium.
SCOR S.A. entered into a Net Aggregate Excess of Loss Retrocessional Agreement ("the 1990 Retrocessional Agreement") with each of Unity Fire and General Security, pursuant to which SCOR S.A. agreed to reinsure those companies to the extent that their net ultimate incurred losses (as defined in the agreements) arising in 1989 and prior accident years exceed an aggregate deductible. As a result of the January 1, 1991 assumption by General Security of the rights, liabilities and obligations of Unity Fire, the Net Aggregate Excess of Loss Retrocessional Agreement with Unity Fire was terminated and the Net Aggregate Excess of Loss Retrocessional Agreement with General Security was amended (as so amended, the "Agreement") to include the protection formerly provided to Unity Fire by its retrocessional agreement with SCOR S.A. As a result of the merger of
General Security into SCOR Re, the protection under the Agreement is now for the benefit of SCOR Re. The aggregate deductible is defined as the sum of net outstanding loss and loss expense reserves and net incurred but not reported loss reserves as of December 31, 1989, for 1989 and prior accident years, as documented in the 1989 statutory financial statements of Unity Fire and General Security. This amount has been established at a combined aggregate of $93,830,000. The annual premium for this protection is $210,000 through 2004. The Agreement continues in force until all covered losses are settled. At December 31, 1994, SCOR S.A.'s estimated liability under the Agreement was approximately $11,700,000.
SCOR S.A. provides letters of credit in amounts equal to its estimated liability under its reinsurance agreements (as reestimated on a quarterly basis). The amount of letters of credit provided by SCOR S.A. at December 31, 1994 was approximately $134,500,000.
The amounts recoverable under the Net Aggregate Excess of Loss Retrocessional Agreements are included in "Retrocessions to Affiliates" above and have the effect of reducing the Company's net losses and loss expenses incurred.
The Company withholds funds from retrocessionaires in accordance with the retrocessional agreements. Under the terms of the agreements, the Company pays interest on the principal sums of amounts withheld at annual rates of 6% to 7.5% computed and rendered quarterly. The Company incurred interest expense (income) of $1,882,000, $2,191,000 and $1,755,000 in 1994, 1993 and 1992, respectively, of which $(2,000), $1,161,000 and $1,003,000, respectively, relates to SCOR S.A.
(5) INVESTMENTS
Net investment income of the Company, comprised primarily of interest and dividends, was derived from the following sources:
Year Ended December 31, 1994 1993 1992 (in thousands)
Fixed maturities $38,555 $39,859 $41,736 Equity securities 776 999 1,036 Short-term investments 2,855 2,120 1,485 Other 175 428 196 ------- ------- ------- 42,361 43,406 44,453 Investment expense (1,371) (1,362) (1,573) ------ ------- ------- Net investment income $40,990 $42,044 $42,880 ======= ======= =======
Net realized investment gains (losses) of the Company were derived from the following sources: Year Ended December 31, 1994 1993 1992 (in thousands) Net realized investment gains (losses): Fixed maturities $ (814) $10,921 $13,245 Equity securities 1,497 1,791 1,642 Other 301 218 161 ----- ------- ------- $ 984 $12,930 $15,048 ======= ======= =======
Proceeds from sales of available for sale securities during 1994, 1993 and 1992 were $260,902,000, $358,168,000 and $480,864,000, respectively. Gross gains of $7,162,000, $14,722,000 and $19,212,000, and gross losses of $6,479,000, $2,016,000 and $4,325,000 during 1994, 1993 and 1992, respectively, were realized on those sales.
The changes in net unrealized gains (losses) on investments of the Company (including unrealized gains and losses on fixed maturities held to maturity that are not reflected in stockholders' equity) are derived from the following sources: Year Ended December 31, 1994 1993 1992 (in thousands) Decrease during period in difference between fair value and cost of investments in equity securities $(3,529) $(722) $(651)
Deferred income tax benefit 1,235 212 221 ------- ------- ------- Decrease in net unrealized losses on equity securities (2,294) (510) (430) ------- ------- ------- Increase (decrease) during period in difference between fair value and cost of investments in fixed maturities (58,187) 9,758 (15,165)
Deferred income tax benefit (expense) 20,365 (3,562) 5,156 ------- ------- ------- Increase (decrease) in net unrealized gains (losses) on fixed maturities (1) (37,822) 6,196 (10,009) ------- ------- ------- Total increase (decrease) in net unrealized gains (losses) on equity securities and fixed maturities $(40,116) $ 5,686 $(10,439) ======= ======= ========
(1) Includes changes in net unrealized gains (losses) of ($55,357,000), $9,017,000 and $9,118,000, and deferred tax expense (benefit) of ($19,377,000), $3,288,000 and $3,100,000 on fixed maturities carried at market value for 1994, 1993 and 1992, respectively, which is reflected in stockholders' equity.
At December 31, 1994 and 1993, approximately $22,871,000 and $24,876,000, respectively, of bonds carried at amortized cost were on deposit with various regulatory authorities as required by law.
The following table presents gross unrealized gains and losses and the related deferred taxes on equity securities and fixed maturities carried at fair value.
Year Ended December 31, 1994 1993 (in thousands)
Equity securities:
Gross unrealized gains $251 $3,987
Gross unrealized losses (410) (617) ----- ------- Net unrealized gains (losses) (159) 3,370 ----- -------
Fixed maturities, at fair value:
Gross unrealized gains 1,112 25,937
Gross unrealized losses (34,247) (3,715) ------- ------- Net unrealized gains (losses) (33,135) 22,222 ------- ------- Total net unrealized gains (losses) (33,294) 25,592
Deferred tax asset (liability) 11,654 (8,958) ------- ------- Unrealized appreciation (depreciation) of investments $(21,640) $16,634 ======== =======
The amortized cost and estimated fair values of investments by major security type at December 31, 1994 and 1993 are as follows:
Held to Maturity December 31, 1994 Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value
(in thousands)
U.S. Treasury securities and obligations of U.S. government corpor- ations and agencies $14,199 $53 $(824) $13,428
Debt securities issued by foreign governments 8,672 226 (52) 8,846
Total fixed maturities held to maturity $22,871 $279 $(876) $22,274 ======== ======= ======== ========
Available for Sale December 31, 1994 Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value (in thousands) U.S. Treasury securities and obligations of U.S. government corpor- ations and agencies $96,097 $272 $(4,556) $91,813 Obligations of states and political subdivisions 254,196 135 (12,549) 241,782 Debt securities issued by foreign governments 5,992 77 (106) 5,963 Corporate securities 114,321 474 (6,363) 108,432 Mortgage-backed securities 91,439 148 (7,875) 83,712 Redeemable preferred stocks 34,746 6 (2,798) 31,954 ------- ------- ------- ------- Total fixed maturities available for sale 596,791 1,112 (34,247) 563,656 Equity securities 1,897 251 (410) 1,738 ------- ------- ------- ------- Total investments carried at fair value $598,688 $1,363 $(34,657) $565,394 ======= ======= ======= ========
Held to Maturity December 31, 1993 Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value
(in thousands)
U.S. Treasury securities and obligations of U.S. government corpor- ations and agencies $15,792 $ 976 $ (6) $ 16,762 Obligations of states and political subdivisions 499 21 -0- 520 Debt securities issued by foreign governments 8,459 1,242 -0- 9,701 Corporate securities 126 -0- -0- 126 ------- ------- ------- -------
Total fixed maturities held to maturity $ 24,876 $ 2,239 $ (6) $ 27,109
======== ======= ======= ========
Available for Sale December 31, 1993 Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value
(in thousands) U.S. Treasury securities and obligations of U.S. government corpor- ations and agencies $ 64,362 $ 3,780 $ (2,035) $ 66,107 Obligations of states and political subdivisions 265,111 12,677 (396) 277,392 Debt securities issued by foreign governments 3,985 503 -0- 4,488 Corporate securities 132,494 7,243 (538) 139,199 Mortgage-backed securities 59,353 1,116 (457) 60,012 Redeemable preferred stocks 33,577 618 (289) 33,906 ------- ------- ------- ------- Total fixed maturities available for sale 558,882 25,937 (3,715) 581,104 Equity securities 15,581 3,987 (617) 18,951 ------- ------- ------- ------- Total investments carried at fair value $574,463 $ 29,924 $(4,332) $600,055 ======== ======== ======== ========
The amortized cost and estimated fair value of fixed maturities at December 31, 1994, by contractual maturity, are shown below (expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties):
Available for Sale Held to Maturity ----------------- ----------------- Amortized Fair Amortized Fair Cost Value Cost Value (in thousands)
Due in one year or less $13,212 $13,126 $228 $222 Due after one year - five years 136,872 133,061 10,461 10,521 Due after five year - ten years 302,681 284,758 12,022 11,392 Due after ten years 17,841 17,045 160 139 ------- ------- ------- ------- 470,606 447,990 22,871 22,274 Mortgage-backed securities 91,439 83,712 -0- -0- Redeemable preferred stocks 34,746 31,954 -0- -0- ------- ------- ------- ------- Total $596,791 $563,656 $22,871 $22,274 ======== ======= ======== ========
(6) NOTES PAYABLE AND CREDIT ARRANGEMENTS
On March 29, 1993, SCOR U.S. sold at par $86,250,000 of 5.25% Convertible Subordinated Debentures due April 1, 2000 ("Debentures") through a private offering. The Debentures are not redeemable by the Company prior to April 3, 1996 and are convertible into approximately 3.4 million shares of SCOR U.S. common stock at a conversion price of $25.375 per share. Expenses incurred in the offering of approximately $1,800,000 were deferred and are being amortized over the life of the Debentures. The Company contributed $50,000,000 of the net proceeds to SCOR Re. Interest expense incurred on the Debentures during 1994 and 1993 was $4,465,000 and $3,484,000, respectively.
On October 1, 1990 SCOR U.S. renewed a $20,000,000 note which was payable on that date. The new note is due and payable on October 3, 1995 and bears interest at a fixed annual rate of 9.575%. On March 12, 1993, the Company entered into an intermediate-term interest rate swap agreement with a commercial bank related to this note. The swap agreement has a maturity date of October 1, 1995 and provides for the Company to make floating rate payments in exchange for fixed rate payments due on the loan. The floating rate, which is reset every six months and is capped at 12.375%, was 11.068% as of December 31, 1994, and 8.693% as of December 31, 1993. In addition, SCOR U.S. had an $8,000,000 note at market interest rates which was repaid on May 10, 1993. Interest expense incurred for these notes, including the effect of the interest rate swap, during 1994, 1993 and 1992 was $2,072,000, $1,953,000 and $2,261,000, respectively.
In 1990, SCOR U.S. established a commercial paper program that allows the Company to raise up to $50,000,000. The weighted average interest rate of commercial paper outstanding at December 31, 1994 was 6.29%. The maximum outstanding at any month end during 1994 was
$11,310,000, and the average outstanding during 1994 was $10,269,000. The weighted average interest rate during 1994 was 5.68%. Interest expense incurred on commercial paper during 1994, 1993 and 1992 was approximately $501,000, $378,000, $450,000, respectively.
Interest paid including interest paid on reinsurance funds withheld, during 1994, 1993 and 1992 was $8,647,000, $6,928,000 and $4,250,000, respectively.
(7) RETIREMENT OF DEBENTURES
During 1994 the Company repurchased in the open market $3.9 million in principal amount of the Debentures and recognized an extraordinary gain of $351,000 (after deduction for income taxes of $189,000), or $0.02 per share. Funding for the repurchased Debentures which settled in January 1995, was achieved through the issuance of the Company's commercial paper.
(8) FINANCIAL INSTRUMENTS
Off-Balance-Sheet Risk
On March 12, 1993, the Company entered into an interest rate swap agreement to effectively convert underlying fixed-rate debt into variable-rate debt based on LIBOR (See Note 6). The notional principal amount of this agreement, which matures in October 1995, is $20,000,000. The Company has entered into this agreement with a creditworthy international financial institution and considers the risk of nonperformance to be remote. The Company is exposed to market risk due to the possibility of exchanging a lower interest rate for a higher interest rate. The net interest effect of this swap transaction is reported as an adjustment of interest income as incurred.
Concentration of Credit Risk
At December 31, 1994 the Company did not have a material concentration of financial instruments in any single investee, industry or geographic location. All of the Company's investments in fixed maturities are investment grade securities and virtually all are rated A or better.
The Company's client base and their dispersion throughout the United States limits the concentration of credit risk on amounts due from clients.
At December 31, 1994, the Company had no significant concentrations of credit risk.
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company to estimate the fair value disclosures for its assets and liabilities as of December 31, 1994 and 1993:
Fixed maturities and equity securities: Fair values are based on quoted market prices or dealer quotes. If a quoted market price is
not available, fair value is estimated using quoted market prices for similar securities.
Cash and short-term investments: The carrying amount is a reasonable estimate of fair value.
Convertible subordinated debentures: Fair value is based on the prevailing market bid.
Notes payable: Fair value is based on the discounted amount of future cash flows using the Company's current estimated borrowing rate for a similar liability.
Commercial paper: The carrying amount is a reasonable estimate of fair value due to the short-term variable market rate nature of this liability.
Interest rate swap: Fair value is based on the estimated amount that the Company would pay or (receive) to terminate the swap agreement at the reporting date, taking into account current interest rates and current creditworthiness of the counterparty.
The estimated fair values of the Company's financial instruments are as follows: December 31, 1994 1993 Carrying Fair Carrying Fair Amount Value Amount Value (in thousands)
Assets Fixed maturities at fair value $563,656 $563,656 $581,104 $581,104 Fixed maturities at amortized cost 22,871 22,274 24,876 27,109 Equity securities 1,738 1,738 18,951 18,951 Short-term investments 83,303 83,303 90,642 90,642 Cash 4,763 4,763 17,096 17,096 Liabilities Convertible subordinated debentures 82,350 69,998 86,250 81,075 Notes payable 20,000 20,000 20,000 21,897 Commercial paper 11,310 11,310 10,721 10,721 Interest rate swap -0- 341 -0- (266)
(9) FEDERAL INCOME TAXES
SCOR U.S. and its subsidiaries file a consolidated Federal income tax return.
The components of the provision for Federal income taxes attributed to income from operations were as follows:
Year Ended December 31, 1994 1993 1992 (in thousands)
Current tax expense (benefit) $ (9,171) $7,882 $(1,853) Deferred tax benefit (2,091) (899) (1,918) -------- ------- ------- $(11,262) $6,983 $(3,771) ======== ====== ======= Income taxes paid $ 1,800(1) $3,546(1) $8,001 ======== ====== ======
(1) Excludes refunds received in 1994 and 1993 of $1,700,000 and $7,782,000, respectively.
Total income tax expense (benefit) for the years ended December 31, 1994, 1993 and 1992 was allocated as follows:
Year Ended December 31, 1994 1993 1992 (in thousands)
Income (loss) from continuing operations $(11,262) $6,983 $(3,771) Extraordinary item 189 -0- -0- Cummulative effect of accounting changes -0- (1,400) 2,119 Stockholders' equity: Unrealized appreciation (depre- ciation) of investments (20,611) 3,077 2,877 Foreign currency translation (229) (125) (717) ------- ----- ----- $(31,913) $8,535 $508 ======== ====== ====
The components of the net deferred Federal income tax benefits recognized in the Company's consolidated balance sheet at December 31, 1994 and 1993 were as follows:
Deferred Tax Asset (Liability) (in thousands)
1994 1993
Deferred policy acquisition costs $(7,995) $(8,449) Unearned premium reserve 6,354 6,157 Loss reserves 25,052 23,352 Other (469) (214) ------- ------- Tax effect of temporary differences 22,942 20,846 Unrealized (appreciation) depreciation of investments 11,653 (8,958) Foreign currency translation 223 6 ------- ------- $34,818 $ 11,894 ======= =======
SFAS 109 requires the establishment of a valuation allowance for deferred income tax benefits where it is more likely than not that some portion of the deferred income tax benefits will not be realized. Management believes, based on the Company's historical record of generating taxable income and its expectations of future earnings, that the Company's taxable income in future years will be sufficient to realize the net deferred income tax benefits which are reflected on its consolidated balance sheet as of December 31, 1994. In addition, management believes certain tax planning strategies exist, including its ability to alter the mix of its investment portfolio to taxable investments from tax-exempt investments, which could be implemented if necessary to ensure sufficient taxable income to realize fully its net deferred income tax benefits. Management also believes that the Company's net deferred income tax benefits related to unrealized depreciation of fixed maturity investments is recoverable through its ability to hold these investments to maturity. Accordingly, SCOR U.S. has not established a valuation allowance with respect to its net deferred income tax benefits.
The Omnibus Budget Reconciliation Act of 1993 (the "Act") was signed into law in August 1993. The Act provided for an increase in the corporate tax rate to 35% from the previous 34% rate. As a result of the revaluation of the Company's net deferred tax assets to reflect the change in tax rates, the Company recognized a net benefit of $472,000, or $0.03 per share, in 1993. This benefit is included in the provision for Federal income taxes attributable to income from operations.
A reconciliation of income tax expense (benefit) computed by applying the United States Federal income tax rate of 35% in 1994 and 1993 and 34% in 1992 to income (loss) from operations before Federal income taxes (benefit) to the provision for Federal income taxes (benefit) is as follows:
Year Ended December 31, 1994 1993 1992
(in thousands) Computed tax expense (benefit) at U.S. Federal rate $(6,809) $12,219 $ 214 Tax-exempt interest (4,282) (4,262) (3,587) Dividends received deduction (638) (672) (605) Tax rate change -0- (472) -0- Other 467 170 207 -------- ------- ------- $(11,262) $6,983 $(3,771) ======== ======= =======
(10) RESERVES FOR LOSSES AND LOSS EXPENSES
Changes in the Company's reserves for losses and loss expenses for each year in the three year period ended December 31, 1994 is summarized as follows:
December 31, 1994 1993 1992 (in thousands)
Reserve for losses and loss expenses at beginning of year, net $340,366 $341,162 $324,117 -------- -------- -------- Provision for losses and loss expenses: Occuring in current year 193,587 160,695 165,468 Occuring in prior years (2,317) (4,403) (4,923) ------- -------- ------- Total 191,270 156,292 160,545 ------- ------- -------
Payment for losses and loss expenses, net of amounts recoverable Occuring in current year 55,155 36,018 51,514 Occuring in prior years 94,366 121,070 91,986 ------ ------- ------- Total 149,521 157,088 143,500 ------- ------- -------
Reserve for losses and loss expenses at end of year, net 382,115 340,366 341,162 Reinsurance recoverable on unpaid losses 222,672 221,843 220,651 -------- ------- ------- Reserve for losses and loss expenses at end of year, gross $604,787 $562,209 $561,813 ======== ======== ========
The operating companies of SCOR U.S. have not underwritten significant amounts of business in those classes or with those insurers that are known to be exposed to asbestos and environmental- related claims. During the years ended December 31, 1994, 1993 and 1992, the Company has not experienced any significant amount of net loss reporting or development on claims related to these exposures. In addition, the Company is significantly protected from adverse development under the SCOR S.A. Retrocessional Agreements (see Note 4). Any recoveries under such agreements are considered to be fully realizable. Based on the above information, the Company believes that its exposure to asbestos and environmental-related claims is not material to the Company's financial position or results of operations.
(11) STATUTORY REQUIREMENTS
The Insurance Department of the State of New York ("Department"), in which SCOR Re, GSIND and Unity Fire are domiciled, and the Maryland Insurance Administration, in which GSIC is domiciled, recognizes as net income and surplus (stockholder's equity) those amounts determined in conformity with statutory accounting practices prescribed or permitted by the respective jurisdiction, which differ in certain respects from GAAP.
Reconciliations of statutory surplus and net income, as determined using statutory accounting principles, to the amounts included in the accompanying financial statements are as follows:
December 31, 1994 1993 (in thousands)
Statutory surplus of insurance subsidiaries $243,416 $271,895
Deferred policy acquisition costs 22,844 24,140 Unauthorized reinsurance 12,931 7,076 Non-admitted assets 4,589 3,052 Unrealized appreciation (depreciation) on fixed maturities carried at fair value (33,135) 22,222 Deferred Federal income taxes 34,818 11,894 Parent company and non-insurance subsidiaries' net assets 56,282 56,660 Long-term debt (102,350) (106,250) --------- -------- GAAP stockholders' equity $239,395 $290,689 ======== ========
Year Ended December 31, 1994 1993 1992
(in thousands)
Statutory net income (loss) of insurance subsidiaries $(1,109) $ 34,735 $ 5,164
Deferred policy acquisition costs (1,296) 1,969 5,367 Deferred Federal income taxes 2,091 899 1,918 Cumulative effect of accounting changes -0- -0- 2,848 Parent company operations (5,018) (8,128) (7,377) Non-insurance subsidiary operations (2,509) (4,147) (671) ------- ------- -------
GAAP net income (loss) $(7,841) $25,328 $7,249 ======= ======= =======
Cash dividends of the Company's reinsurance subsidiaries may be paid only out of their statutory earned surplus. For the operating subsidiaries domiciled in New York (which represents approximately 89% of the Company's statutory surplus), the payment of dividends is subject to statutory restrictions imposed by New York insurance law. Generally the maximum amount of dividends that may be paid in any twelve-month period without the prior approval of the Department is the lesser of net investment income or 10% of statutory surplus, as such terms are defined in the New York insurance law. During the year ending December 31, 1994, $11,900,000 of dividends were declared and paid to SCOR U.S.
Based on 1994 year-end statutory surplus, the maximum dividend distribution that may be made by the Company's reinsurance subsidiaries during 1995 without prior approval is approximately $24,342,000. The amount of the Company's reinsurance subsidiaries' net assets (stockholders' equity) restricted from payment of dividends to SCOR U.S. without prior approval is approximately $219,074,000, which is 92% of total consolidated net assets.
SCOR Re Voting Trust
As a result of New York Insurance Department licensing requirements regarding government financial control and ownership of insurers, all of the capital stock of SCOR Re is held in an irrevocable voting trust. The voting trust, which was to expire during 1994, was renewed for an additional three years. The five voting trustees, four of whom are directors of SCOR U.S., are entitled to exercise all of the rights and powers of absolute owners of the capital stock of SCOR Re, subject to certain limitations specified in the voting trust agreement.
General Security Voting Trust
The Insurance Laws of the State of California generally prohibit the issuance or renewal of a license to a company owned, operated or controlled, in whole or in part, by a government. In connection with
the continuation of General Security's California license, on February 1, 1993, with the approval of the New York Insurance Department, a voting trust was established by SCOR U.S. for its holdings of capital stock in General Security. This voting trust was terminated upon the merger of General Security into SCOR Re, effective January 1, 1994.
(12) EMPLOYEE BENEFITS
Pension Plans:
SCOR U.S. has a qualified defined benefit pension plan ("SCOR U.S. Group Pension Plan") covering substantially all employees of SCOR U.S. and its affiliates. Benefits under the SCOR U.S. Group Pension Plan are based on an employee's years of service and compensation. SCOR U.S.'s funding policy is to contribute at least the minimum amount required by ERISA but not more than the maximum amount that can be deducted for Federal income tax purposes. The SCOR U.S. Group Pension Plan excludes expatriates who are temporarily assigned to the U.S. and covered by other plans sponsored or funded by the Company or a member of the SCOR S.A. Group. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. In 1994, 1993 and 1992, there were no contributions required.
The following table sets forth the SCOR U.S. Group Pension Plan funded status and amounts recognized in the SCOR U.S. consolidated balance sheet at December 31, 1994 and 1993 (in thousands):
1994 1993
Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $2,892 and $2,391 in 1994 and 1993, respectively $(3,295) $(3,312) ======= ======= Projected benefit obligation for service rendered to date $(4,678) $(5,656) Plan assets at fair value 5,912 5,560 ------- ------- Plan assets in excess of projected benefit 1,234 (96) obligation Unrecognized transition asset (885) (1,033) Unrecognized net loss from past experience 184 1,495 Unrecognized prior service costs (293) 150 ------- ------ Prepaid pension cost included in other assets $ 240 $ 516 ======= =======
Net pension expense for 1994, 1993 and 1992 included the following components (in thousands):
1994 1993 1992
Service cost-benefits earned during the period $534 $592 $406 Interest cost on projected benefit obligation 325 333 230 Actual return on plan assets (413) (412) (250) Net amortization and deferral (170) (100) (279) ---- ----- ------ Net pension expense $276 $413 $107 ====== ===== ======
The weighted-average discount rate and the average rate of compensation increase used in determining the actuarial present value of the projected benefit obligation were 8% and 5.5% in 1994, 7.5% and 6.0% in 1993, 8.0% and 6.0% in 1992, respectively. The expected long- term rate of return on assets was 7.5% in 1994 and 8% in 1993.
Savings Plans:
The SCOR U.S. Group Savings Plan ("SCOR U.S. Savings Plan") is qualified under Sections 401 (a) and 401 (k) of the United States Internal Revenue Code of 1986 as amended. Substantially all employees of SCOR U.S. and affiliates are eligible to participate in the savings plan. The SCOR U.S. Savings Plan excludes expatriates who are temporarily assigned to the U.S. and covered by other plans sponsored or funded by the Company or a member of the SCOR S.A. Group. Contributions to the savings plan are determined by the Board of Directors and are made from the net profits of the current taxable year or the accumulated net profits of SCOR U.S. Contributions for the years ended December 31, 1994, 1993 and 1992 were $575,000, $585,000 and $556,000, respectively.
The pension and savings plans may be terminated at any time by the Board of Directors of SCOR U.S.
Supplemental Retirement Plan:
SCOR U.S. also sponsors the SCOR U.S. Group Supplemental Retirement Plan ("Supplemental Retirement Plan"), an unfunded nonqualified plan established in 1989 which covers a select group of management employees. This plan enables participants in the pension plan and savings plan to earn pension benefits and tax-deferred savings benefits on the same percentage of pay basis without regard to current IRS restrictions. The Supplemental Retirement Plan incurred expenses of approximately $226,000, $133,000 and $143,000 for the years ended 1994, 1993 and 1992, respectively.
Employment Contracts:
The Company has entered into employment contracts that provide minimum pension benefits to four executives. The benefits under these contracts are unfunded, and expenses of approximately $70,000, $53,000 and $45,000 were accrued in 1994, 1993 and 1992, respectively.
(13) INCENTIVE AND STOCK OPTION PLANS
In July 1986, the Company adopted a Stock Incentive Plan for Key Executives ("Incentive Plan"), pursuant to which 786,000 shares of the common stock were reserved for issuance through options for all key executives of the Company, defined to include officers and employees of the Company and those employees of SCOR S.A. who serve on the Executive Committee of the Board of Directors of SCOR U.S. In March 1994, the number of shares available for issuance under the Incentive Plan was increased to 856,740. Nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock awards and stock bonus awards were available under the Incentive Plan. Certain of these awards may result in future compensation expense to the Company. Incentive stock options were available to be granted at not less than fair market value of the Company's common stock on the date of grant. Non-qualified options were available to be granted at not less than 85% of fair market value of the Company's common stock on the date of grant. Options become exercisable as specified at the date of grant and expire ten years and one month from the date of grant.
On September 19, 1990 the shareholders of SCOR U.S. approved a Stock Option Plan for Directors. Under this plan 220,000 shares of the common stock of SCOR U.S. have been reserved for issuance. Grants of options to purchase 3,000 shares will be made to each Director, except Directors employed by the Company, three business days following each SCOR U.S. Annual Meeting. Each option granted becomes exercisable with respect to one-half the shares of SCOR U.S. common stock covered thereby on the first anniversary of the date upon which it was granted and with respect to the balance of the shares on the second anniversary thereof.
Under the Stock Option Plan for Key Employees ("SOP") approved by the shareholders of SCOR U.S. at the Annual Meeting in June 1991, 1,426,000 shares of common stock have been reserved for issuance through options for all key employees of SCOR U.S. Corporation and its subsidiaries. In March 1994, the number of shares available for issuance under the SOP was increased to 1,554,340. The per share option price shall never be less than 100% of the fair market value of the shares at the time of the grant. Unless otherwise provided by the Board of Directors, each option granted would become exercisable to the extent of one-third of the total number of the shares of common stock subject to the option on each anniversary of the grant and expire ten years from the date the option is granted.
Information regarding the above option plans is summarized below:
Number of Option Price Shares Per Share Range --------- --------------- Outstanding at December 31, 1991 1,045,605 $ 8.00 -- $15.50 Options granted 21,000 $16.75 -- $16.75 Options exercised (71,296) $ 8.00 -- $14.25 Options cancelled (19,535) $12.25 -- $14.25 --------- ----------------
Outstanding at December 31, 1992 975,774 $ 8.00 -- $16.75 Options granted 552,693 $15.50 -- $17.00 Options exercised (123,418) $ 8.00 -- $14.25 Options cancelled (30,284) $14.25 -- $17.00 --------- ----------------
Outstanding at December 31, 1993 1,374,765 $ 8.00 -- $17.00 Options granted 458,175 $ 9.00 -- $11.125 Options exercised (57,100) $ 8.00 -- $ 9.99 Options cancelled (198,889) $ 9.00 -- $17.00 --------- ---------------
Outstanding at December 31, 1994 1,576,951 $ 8.00 -- $17.00 =========== ===============
The number of options exercisable at December 31, 1994 was 856,000. The number of shares available for future grant at December 31, 1994 was 552,000.
As indicated above, the Incentive Plan allows for the granting of restricted stock awards. The following table summarizes information regarding stock awards, for each year in the three-year period ended December 31, 1994.
1994 1993 1992 Non vested restricted stock grants at the beginning of the year 4,552 -0- 19,263 Restricted stock awards granted -0- 4,552 -0- Restricted stock awards vested -0- -0- (19,263) ----- ------ ------ Non-vested restricted stock awards at the end of the year 4,552 4,552 -0- ===== ===== ======
The Company recognized compensation expense of $11,000, $-0- and $115,000 in 1994, 1993 and 1992, respectively, in connection with these awards. At December 31, 1994, the amount of deferred compensation relating to these grants which will be recognized over the remaining vesting period is $47,000 which is included in additional paid-in capital.
During 1993 and 1992 the Company issued 44,000 shares and 40,000 shares of its common stock in exchange for notes receivable from various officers of $523,000 and $358,000, respectively. These shares were issued as a result of stock options exercised under the Company's stock option plans. The balance of unpaid stock options exercised at
December 31, 1994 and 1993 was $27,000 and $1,202,000, respectively, and is recorded as a reduction to additional paid-in capital. The Company has outstanding loans with various officers related to stock options exercised and restricted stock grants. These loans bear interest at rates ranging from 4% to 10%. The aggregate unpaid principal balance at December 31, 1994 and 1993 was $27,000 and $1,202,000, respectively.
(14) COMMITMENTS
The Company conducts its operations in leased premises. The Company also leases data processing equipment and automobiles. Total rental expense for the years ended December 31, 1994, 1993 and 1992, amounted to $2,412,000, $2,438,000 and $2,088,000, respectively.
At December 31, 1994, future minimum rental commitments are as follows (in thousands):
Year Ending December 31,
1995 $2,246 1996 1,437 1997 848 1998 776 1999 526 Thereafter 68 ------ $5,901 ======
(15) CONTINGENCIES
SCOR Re, GSIC, GSIND and Unity Fire are each party to various lawsuits arising in the normal course of their business. SCOR U.S. does not believe that any of the litigation to which SCOR Re, General Security, GSIC, GSIND or Unity Fire is currently a party will have a material adverse effect on the operating results or financial condition of SCOR U.S. and its subsidiaries.
At December 31, 1994 and 1993, the Company's reinsurance subsidiaries had letters of credit outstanding aggregating approximately $1,731,000 and $16,352,000, respectively, in favor of certain insurance companies under terms of reinsurance agreements.
The Company guarantees to a commercial bank payment when due of three mortgage loans, with original principal amounts aggregating approximately $2.8 million, issued to former excecutive officers of the Company. The guarantees are secured by the residential premises.
(16) FOREIGN OPERATIONS
The Company conducts reinsurance business in Canada through branches established for that purpose. The functional currency of such branches is the Canadian dollar. The assets and liabilities of such branches included herein have been translated into United States dollars at exchange rates in effect at the balance sheet dates, and
operations at average exchange rates in effect during the relevant periods.
Foreign currency translation adjustments have been recorded as follows:
Translation Income Adjustment Taxes Net ----------- ------ ----
(in thousands)
Balance, December 31, 1991 $2,494 $ 848 $1,646 Change during the year (2,109) (717) (1,392) ------- ------ -------
Balance, December 31, 1992 385 131 254 Change during the year (367) (125) (242) ------- ------ -------
Balance, December 31, 1993 18 6 12 Change during the year (655) (229) (426) ------- ------ -------
Balance, December 31, 1994 $(637) $(223) $ (414) ======= ====== =======
(18) SUBSEQUENT EVENTS
The Company believes that its potential for losses from January 17, 1995 Nambu-Jishin earthquake in Kobe, Japan is limited since foreign writings represent an insignificant portion of its portfolio.
On March 3, 1995 the Company entered into a lease for office space for its New York headquarters. The term of the lease is approximately 16 years with aggregate minimum rental payments of approximately $30 million.
SCHEDULE I
SCOR U.S. CORPORATION SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1994
(in thousands)
Amount at Which Amortized Market Shown on Cost Value Balance Sheet
Type of investment
Fixed Maturities:
United States Government and government agencies and authorities $201,735 $188,953 $189,724
States, municipalities and political subdivisions 254,196 241,782 241,782
Foreign Governments 14,664 14,809 14,635
Convertibles and bonds with warrants attached -0- -0- -0-
All other corporate bonds 114,321 108,432 108,432
Redeemable preferred stocks 34,746 31,954 31,954 ------- ------- ------- Total fixed maturities 619,662 585,930 586,527 ------- ------- ------- Equity securities:
Common stocks 225 476 476
Non-redeemable preferred stocks 1,672 1,262 1,262 ------- ------- ------- Total equity securities 1,897 1,738 1,738 ------- ------- ------- Short-term investments 83,303 83,303 83,303
Other long-term investments 1,225 1,225 1,225 ------- ------- ------- Total investments $706,087 $672,196 $672,793 ======== ======== ========
S-1
SCHEDULE II
SCOR U.S. CORPORATION (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS (In thousands)
December 31, 1994 1993 ----------------- ASSETS
Investment in subsidiaries and affiliates $297,772 $348,232 Fixed maturities, available for sale 20,156 18,811 Short-term investments, at cost 10,256 18,957 Other long-term investments 1,225 1,081 Cash 512 1,645 Receivables from subsidiaries and affiliates 8,847 6,335 Other assets 23,029 19,816 ------- -------- $361,797 $414,877 ======= ========
LIABILITIES
Convertible subordinated debentures $82,350 $86,250 Notes payable 20,000 20,000 Commercial paper 11,310 10,721 Other liabilities 8,742 7,217 ------- -------- 122,402 124,188 ------- -------- STOCKHOLDERS' EQUITY
Preferred stock, no par value, 5,000 shares authorized; no shares issued -0- -0- Common stock, $.30 par value, 50,000 shares authorized; 18,356 and 18,299 shares issued 5,507 5,490 Additional paid-in capital 114,556 112,670 Unrealized appreciation (depreciation) of investments, net of deferred tax effect (21,640) 16,634 Foreign currency translation adjustment (414) 12 Retained earnings 143,153 157,532 Treasury stock, at cost (192 and 190 shares) (1,767) (1,649) ------- -------- 239,395 290,689 ------- -------- $361,797 $414,877 ======= ========
S-2
SCHEDULE II (CONTINUED)
SCOR U.S. CORPORATION (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF OPERATIONS (In thousands)
Year Ended December 31, 1994 1993 1992
Revenues:
Net investment income $1,682 $1,569 $ 753 Net realized investment gains (losses) 324 236 (2) ------- ------- ------- 2,006 1,805 751 ------- ------- -------
Expenses:
Other operating expenses 2,977 8,495 8,824 Interest expense 7,038 5,815 2,824 ------- ------- ------- 10,015 14,310 11,648 ------- ------- -------
Loss from operations before Federal income tax benefits and equity in income of subsidiaries and affiliate (8,009) (12,505) (10,897)
Federal income tax benefit (2,992) (4,377) (3,520) ------- ------- ------- (5,017) (8,128) (7,377) Equity in income (loss) of subsidiaries and affiliate (3,175) 36,056 11,778 ------- ------- -------
Income (loss) from operations (8,192) 27,928 4,401 Extraordinary gain on redemption of debentures, net of tax 351 -0- -0- Cumulative effect of accounting changes -0- (2,600) 2,848 ------- ------- -------
Net income (loss) ($7,841) $25,328 $7,249 ======= ======= =======
S-3
S-4
S-5
S-6
SCHEDULE VI
SCOR U.S. CORPORATION
SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS (In thousands)
Claims and Claims Expenses Incurred Related to --------------------------
Paid Current Prior Claims Year Years Net ------- ----- ------
Consolidated subsidiaries:
Year ended December 31, 1994 $193,587 $(2,317) $149,521
Year ended December 31, 1993 $160,695 $(4,403) $157,088
Year ended December 31, 1992 $165,468 $(4,923) $143,500
S-7
INDEX TO EXHIBITS
Exhibit Number Exhibit ------ -------
3(a) Certificate of Incorporation of SCOR U.S. (Incorporated by reference to Exhibit 3(a) to Registration Statement on Form S-1, File No. 33-7695).
3(b)* Bylaws of SCOR U.S. (Adopted September 6, 1986, as amended March 17, 1988, March 16, 1989, September 26, 1989, June 26, 1990, June 11, 1992 and June 16, 1994)
4(a) Form of Common Stock Certificate (Incorporated by reference to Exhibit 4 to Registration Statement on Form S-1, File No. 33-7695).
4(b) Indenture, dated as of March 15, 1993 between SCOR U.S. Corporation and The Bank of New York, related to the 5.25% Convertible Subordinated Debentures due April 1, 2000 (Incorporated by reference to Exhibit 4(b) to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1993).
9(a) SCOR Reinsurance Company 1994 Voting Trust Agreement, dated as of June 6, 1994 among SCOR Reinsurance Company, SCOR U.S. Corporation and the Voting Trustees designated therein. (Incorporated by reference to Exhibit 9(c) to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1993).
10(a)+ 1986 Stock Incentive Plan for Key Executives of SCOR U.S. (adopted July 10, 1986, as amended March 25, 1994). (Incorporated by reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K for the period ended December 31, 1993).
10(b) Amended Service Agreement dated as of June 11, 1992 between SCOR U.S. and SCOR S.A. (Incorporated by reference to Exhibit 10(i) to the Company's Annual Report on Form 10-K for the period ended December 31, 1992).
10(c)+ Employment Agreement dated as of February 27, 1989 between SCOR Re and Jerome Karter (amended March 14, 1991)(Incorporated by reference to Exhibit 10(m) to the Company's Annual Report on Form 10K for the year ended December 31, 1989).
10(d)+ Employment Agreement dated as of November 13, 1989 between SCOR U.S. and John T. Andrews, Jr (Incorporated by reference to Exhibit 10(n) to the Company's Annual Report on Form 10-K for the year ended December 31,1989).
* Filed herewith. + Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c).
EXHIBIT NUMBER EXHIBIT ------- -------
10(e) Agreement and Plan of Merger dated as of March 6, 1990, among SCOR U.S., Rockleigh Management Corporation, SCOR Paris, and UAP Reassurances (Incorporated by reference to Exhibit 10(q) to the Company's Annual Report on Form 10-K for the year ended December 31, 1990).
10(f)* Net Aggregate Excess of Loss Retrocessional Agreement, dated July 3, 1990, between SCOR Re and SCOR S.A. (amended August 21, 1992 and May 6, 1994).
10(g)* Expense Allocation Agreement dated as of January 1, 1991, among SCOR U.S., SCOR Re, and other named subsidiaries (as amended December 10, 1992, May 5, 1994 and January 6, 1995).
10(h)* Amended Consolidated Federal Income Tax Liability Allocation Agreement dated as of December 10, 1992, among SCOR U.S., SCOR Re, and other named subsidiaries (amended May 5, 1994).
10(i) SCOR U.S. Performance Incentive Plan (Incorporated by reference to Exhibit 10(r) to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1991).
10(j)*+ SCOR U.S. 1991 Stock Option Plan for Key Employees (amended March 25, 1994 and September 30, 1994).
10(k)+ SCOR U.S. 1990 Stock Option Plan for Directors (adopted September 19, 1990 and amended June 16, 1994 by vote of the stockholders). (Incorporated by reference from Exhibit 10(t) to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1994).
10(l) Pooling Agreement dated as of April 23, 1991 among SCOR Re, General Security Insurance Corporation, General Security Indemnity Company and The Unity Fire and General Insurance Company, as amended by the Amendment to the Pooling Agreement dated as of June 10, 1993, effective as of July 1, 1993. (Incorporated by reference to Exhibit 10(w) to the Company's Annual Report on Form 10-K for the period ended December 31, 1993).
10(m)+ SCOR U.S. Group Pension Plan. (Incorporated by reference from Exhibit 10(x) to the Company's Annual Report on Form 10-K for the period ended December 31, 1993).
10(n)+ SCOR U.S. Group Savings Plan.(Incorporated by reference from Exhibit 10(y) to the Company's Annual Report on Form 10-K for the period ended December 31, 1993).
* Filed herewith. + Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c).
EXHIBIT NUMBER EXHIBIT ------- -------
10(o)+ SCOR U.S. Group Supplemental Retirement Plan.(Incorporated by reference from Exhibit 10(z) to the Company's Annual Report on Form 10-K for the period ended December 31, 1993).
10(p)+ SCOR U.S. Annual Incentive Plan for 1994.(Incorporated by reference from Exhibit (10aa) to the Company's Annual Report on Form 10-K for the period ended December 31, 1993).
10(q) Second Net Aggregate Excess of Loss Retrocessional Agreement, effective as of January 1, 1994, between SCOR Re and SCOR S.A. (Incorporated by reference from Exhibit 10(bb) to the Company's Annual Report on Form 10-K for the period ended December 31, 1993).
10(r)+ Special Severance and Pension Benefits Agreement dated as of October 25, 1993 between SCOR U.S. and Jeffrey D. Cropsey. (Incorporated by reference from Exhibit 10(cc) to the Company's Annual Report on Form 10-K for the period ended December 31, 1993).
10(s)*+ Employment Agreement dated July 25, 1994 between SCOR Re and John D. Dunn, Jr.
10(t)* Investment Advisory Agreement between New England Asset Management Firm and SCOR Re dated March 1, 1995.
10(u)* Agreement of Lease between The Port Authority of New York and New Jersey and SCOR U.S. dated January 10, 1995.
11* Statement on computation of per share earnings.
12* Computation of Ratio of Consolidated Earnings to Fixed Charges
18 Letter regarding Change in Accounting Principles (Incorporated by reference to Exhibit 18 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1992).
21* Subsidiaries of SCOR U.S.
24* Consent of Independent Public Accountants.
25* Power of Attorney.
29* Information from reports furnished to state insurance regulatory authorities (Schedule P) Submitted as a paper filing under Form SE in accordance with rule 311(c) of Regulation S-T.
*Filed herewith. + Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The operating results of the property and casualty insurance and reinsurance industry are subject to significant fluctuations due to competition, catastrophic events, general economic conditions, interest rates and other factors, such as changes in tax laws and regulations. The operating results of SCOR U.S. historically have been influenced by these cycles. In recent years, the results of certain casualty lines of business have become less predictable for some insurers and reinsurers as a result of expanding theories of tort and insurance liability and latent risks, such as asbestos and pollution liability whose effects may not be known for many years. The operating subsidiaries of SCOR U.S. have not underwritten significant amounts of business in those classes or with those insurers that are known to be exposed to asbestos and environmental related claims. The Company has not experienced any material amount of net loss reporting or development on claims related to these exposures. In addition, the Company is significantly protected from certain adverse loss reserve development through retrocessional agreements with SCOR S.A., its majority shareholder (see Note 4 to the Company's Consolidated Financial Statements). Any recoveries under such agreements are considered to be fully realizable. Based on the above information, the Company believes that its exposure to asbestos and environmental related claims is not material to the Company's financial position or results of operations.
The industry experienced an extended down cycle from 1979 to the end of 1984. Underwriting losses in that period grew significantly as a result of an increase in the frequency and severity of reported losses. The industry was affected by expanding theories of tort and insurance liability and by growing exposure to long-tail risks, including asbestos and pollution claims, which were not adequately taken into account in the pricing, terms and conditions of insurance and reinsurance contracts being written during that period. At the same time, premium rates declined as interest rates increased and insurers and reinsurers sought premium income to invest at these higher rates. These conditions led to a decline in the surplus of reinsurers and the insolvency or voluntary withdrawal from the market of a number of insurance and reinsurance companies.
From 1985 through 1987, the demand for reinsurance increased and reinsurance pricing and underwriting results improved. This attracted increased capacity into the industry as insurers and reinsurers strengthened their surplus through capital infusions and increased earnings. In the mid-1980's, the industry adopted contract language changes designed to exclude asbestos and pollution claims. However, asbestos and pollution claims result, and will continue to result, in numerous claims to the insurance industry under policies written prior to such changes, adversely affecting the operating results of certain of the Company's competitors.
Beginning in mid-1987, the insurance and reinsurance industry experienced increased competition and reduced premium rates. In addition, ceding companies increased their retentions, resulting in
less available business to be reinsured, increased competition and lower premium rates in the reinsurance industry. This competitive environment, which has continued into 1995, has seen little improvement in rates compared with recent years, with the exception of rates for certain property reinsurance coverages.
Property catastrophe losses in 1989 caused a reduction in London market reinsurance and retrocessional capacity for property reinsurers at the end of 1990, and a consequent increase in certain property reinsurance rates in 1991. Record insured catastrophe losses in 1992, which approximated $23 billion including those caused by Hurricanes Andrew and Iniki and the Los Angeles riots, led to increases in property catastrophe reinsurance rates, as well as improved rates, terms and conditions on certain other property coverages. These record losses in 1992 also caused a further shortage of catastrophe retrocessional capacity and led to an influx of new capital to reinsurers primarily providing catastrophe coverage. Approximately $5 billion of capital was raised by these companies, the majority of which are located in Bermuda. However, the demand for catastrophe protection has continued and conditions have remained at favorable levels for reinsurers as the occurrences of catastrophe losses has continued subsequent to the record 1992 year. Following a 1993 year that produced $5.7 billion of catastrophe losses, the estimated 1994 level of $15 billion has made the past 12 months the second most costly period for catastrophes in the history of the U.S. insurance industry. Of this total, $10.4 billion was produced by the earthquake in California ("Northridge earthquake") a loss that has been exceeded in magnitude only by Hurricane Andrew in 1992.
The Company believes that the reinsurance industry currently is experiencing a consolidation in which larger reinsurers will write a greater proportion of total industry premiums, as ceding companies and intermediaries place increasing importance on size and financial strength in the selection of reinsurers. The aggregate statutory surplus of the Company's operating subsidiaries was $243.4 million as of December 31, 1994, ranking the Company's combined reinsurance operations as the 17th largest based on the statutory surplus of reinsurers reporting to the Reinsurance Association of America (RAA) as of December 31, 1994.
Many of the factors that have resulted in the current down cycle continue and SCOR U.S. cannot predict if, when or to what extent general market conditions will improve for the insurance and reinsurance industry. Even so, SCOR U.S. believes that the consolidation in the industry, along with the impact of recent catastrophe losses on the property and casualty insurance industry and generally declining cash flow in recent years, may favorably influence property and casualty pricing, as well as reinsurance buying trends, in the future.
During the first quarter of 1994, the Company merged its two principal operating subsidiaries, SCOR Reinsurance Company and General Security Assurance Corporation of New York, to form a single operating entity for the Company's assumed reinsurance business. The Company also intends to merge two of its other operating subsidiaries, The Unity Fire and General Insurance Company and General Security Insurance Company, subject to approval by such companies' Boards of Directors and state regulatory authorities, to form a single broadly
licensed operating unit for the Company's primary and excess insurance business. Both the completed merger and the intended merger are not expected to have a material effect on the Company's growth, liquidity or results of operations.
UNDERWRITING RESULTS
The underwriting results of a property and casualty insurer or reinsurer are discussed frequently by reference to its loss ratio, underwriting expense ratio and combined ratio. The loss ratio is the result of dividing losses and loss expenses incurred by net premiums earned. The underwriting expense ratio is the result of dividing underwriting expenses by net premiums written for purposes of Statutory Accounting Practices ("SAP") and net premiums earned for purposes of Generally Accepted Accounting Principles ("GAAP"). The combined ratio is the sum of the loss ratio and the underwriting expense ratio. A combined ratio under 100% generally indicates underwriting profits and a combined ratio exceeding 100% generally indicates underwriting losses. Underwriting profit is only one element of overall profitability, which also includes investment results, interest expense and the effects of income taxation. Accordingly, the combined ratio alone should not be used to measure overall profitability. Except as indicated, the ratios discussed below have been calculated on a GAAP basis.
The following table sets forth the Company's GAAP combined ratios and the components thereof for the periods indicated, and the SAP combined ratio for the Company's insurance and reinsurance subsidiaries and for the reinsurance industry based on statistics distributed by the RAA. The GAAP ratios include the operating expenses of the holding company and the operations of the non insurance subsidiaries, in addition to the operating expenses of the insurance and reinsurance subsidiaries. The SAP expense ratios include only the operating expenses of the insurance and reinsurance subsidiaries. In addition, the GAAP loss ratio takes into consideration the recoveries under certain retrocessional agreements with SCOR S.A., whereas these recoveries are included in other income for SAP purposes. A reconciliation between the Company's GAAP consolidated net income and statutory net income of the insurance and reinsurance subsidiaries is included in Note 11 to the Company's Consolidated Financial Statements.
Year Ended December 31, 1994 1993 1992 GAAP RATIOS (Total Company) Loss ratio 83.8% 66.2% 83.6% Commission ratio 26.0 26.0 29.1 U/W, admin. and other expense ratio 13.2 12.9 14.7 Expense ratio 39.2 38.9 43.8 Combined ratio 123.0% 105.1% 127.4%
SAP COMBINED RATIOS Company (insur. subs. only) 118.8% 103.7% 123.3% Industry 106.7% 107.3% 117.4%
COMPARISON OF 1994 WITH 1993
Gross premiums written for 1994 decreased 8% to $306.8 million from $334.5 million in 1993. Net premiums written for 1994 decreased 6% to $231.1 million from $245.4 million for 1993. Gross premiums written and net premiums written for 1994 were increased by $1.0 million and reduced by $5.0 million, respectively, for additional premiums to reinstate catastrophe reinsurance protections primarily related to the Northridge earthquake. Excluding these reinstatement premiums, gross premiums written and net premiums written for 1994 decreased by 9% and 4%, respectively, compared with 1993. The decrease in premium volume was attributable principally to the Company's continued withdrawal from certain property and casualty lines of business where the Company believes rates and/or conditions are inadequate. More specifically, throughout 1994 the Company has been reducing its property business written on a pro rata basis. A combination of an acceleration in the reduction of this business and fewer attractive opportunities in targeted lines of business caused the reduction in 1994 premium volume. In general, a weak pricing environment persisted throughout 1994, with the exception of catastrophe-exposed risks and some specialized lines of business.
Net losses and loss expenses incurred increased 22% in 1994 to $191 million from $156.3 million in 1993. The loss ratio was 83.8% for 1994 as compared with 66.2% for 1993. During 1994 the Company incurred $32.2 million of net losses ($62.7 million of gross losses) resulting from property catastrophe events, primarily the Northridge earthquake and the early 1994 winter freeze, which added 15.6 points to the loss ratio. Of these amounts, the Northridge earthquake accounted for $26.1 million of net incurred losses and $54.8 million of gross incurred losses. During 1993 the Company incurred $13.7 million of net losses ($19.1 million of gross losses) resulting from property catastrophe events, primarily the World Trade Center bombing, the East Coast blizzard, the Midwest floods and the California fires, which adversely affected the loss ratio by 5.8 points.
During 1994 and 1993, the Company ceded $82.9 million and $88.9 million of earned premiums, respectively. The Company recovered from retrocessionnaires $78.4 million and $57.3 million of losses during 1994 and 1993, respectively. Ceded premiums in 1994 included $6.0 million of reinstatement premiums paid by the Company. Ceded losses in 1994 and 1993 included $30.5 million and $5.4 million, respectively, of losses resulting from property catastrophe events.
Commission expenses decreased 3% to $59.4 million in 1994 from $61.3 million in 1993. The decrease was caused principally by the decline in the Company's net premium volume. The commission ratio was 26.0% for 1994 and 1993. The effect of net reinstatement premiums related primarily to the Northridge earthquake added approximately 0.5 points to the 1994 commission ratio.
Underwriting, administration and other expenses decreased 1% in 1994 to $30.0 million from $30.5 million in 1993. The underwriting, administration and other expense ratio was 13.2% for 1994 as compared with 12.9% for 1993. The effect of net reinstatement premiums related primarily to the Northridge earthquake added 0.3 points to the 1994 ratio. As discussed in Note 3 to the Company's Consolidated Financial
Statements, the Company has made various acquisitions. The pre-tax effect on operations from recent acquisitions, including the amortization of goodwill and acquired licenses, was a charge of $2.8 million in 1994 compared with a charge of $2.6 million in 1993. The operations of the acquired companies are not expected to have a material effect on the Company's liquidity, financial position or results of operations.
The combined ratio was 123.0% for 1994, compared with 105.1% for 1993. The effect of property catastrophe events on the 1994 and 1993 combined ratio was 16.4 points and 5.8 points, respectively.
Net investment income for 1994 decreased 3% to $41.0 million from $42.0 million for 1993. Net investment income (pre-tax) has been affected adversely by the high level of claim payments made since mid- 1992 related to catastrophe events and the lower reinvestment rates available during 1993 and early 1994 as the Company sold securities to realize investment gains. On an after-tax basis net investment income was $31.6 million for 1994, a decrease of 2% from $32.3 million in 1993. Net realized investment gains for 1994 were $1.0 million, compared with $12.9 million for 1993.
Interest expense increased 11% to $8.9 million in 1994 from $8.0 million in 1993. The increase was principally due to a full year of interest expense recognized on the Company's 5.25% Convertible Subordinated Debentures due April 1, 2000 ("Debentures") that were issued in March 1993, compared with nine months of interest expense in 1993. (See Liquidity and Capital Resources)
During 1994 the Company repurchased in the open market $3.9 million in principal amount of the Debentures and recognized an extraordinary gain of $351,000, or $0.02 per share, net of tax.
As a result of the Company's implementation, as of January 1, 1993, of the FASB's Emerging Issues Task Force consensus regarding Issue No. 93-6, "Accounting for Multiple-Year Retrospectively Rated Contracts by Ceding and Assuming Enterprises" ("EITF 93-6"), $2.6 million (net of $1.4 million tax effect), or $0.14 per share, is included as a reduction to 1993 income for the cumulative effect of this accounting change.
For 1994, the Company posted a net loss of $7.8 million, or $0.43 per share, on a primary basis, compared with a net income of $25.3 million, or $1.38 per share, for 1993. On a fully diluted basis, net income for 1993 was $1.33 per share. The 1994 results were affected by after-tax charges to operations, net of reinsurance, of $24.2 million, or $1.33 per share for property catastrophe events. The 1993 results were affected by after-tax charges to operations, net of reinsurance, of $8.9 million, or $0.48 per share, for property catastrophe events. Average common and common equivalent shares outstanding (on a primary basis) for 1994 were 18.2 million, compared with 18.4 million for 1993.
SUBSEQUENT EVENT
The Company believes that its potential for losses from January 17, 1995 Nambu-Jishin earthquake in Kobe, Japan is limited since foreign writings represent an insignificant portion of its portfolio.
Comparison of 1993 with 1992
Gross premiums written for 1993 increased 10% to $334.5 million from $304.8 million in 1992. Net premiums written for 1993 increased 19% to $245.4 million from $205.5 million for 1992. Gross premiums written and net premiums written for 1992 were increased by $5.6 million and reduced by $6.5 million, respectively, for additional premiums to reinstate catastrophe reinsurance protections subsequent to Hurricane Andrew. Excluding these reinstatement premiums, gross premiums written and net premiums written for 1993 increased by 12% and 16%, respectively, compared with 1992. The increase in premium volume was attributable principally to new and increased participations in treaty business. Much of the growth resulted from targeted market segments such as nonstandard auto, a line of business that experienced a 73% increase in net premiums written in 1993 to $38 million, or 16% of the total net volume. Offsetting a portion of the Company's premium growth was a continued withdrawal from certain property and casualty lines of business where the Company believes rates and/or conditions are inadequate. In general, a weak pricing environment persisted throughout 1993, with the exception of catastrophe-exposed risks and some specialized lines of business.
Net losses and loss expenses incurred decreased 3% in 1993 to $156.3 million from $160.5 million in 1992. The loss ratio was 66.2% for 1993 as compared with 83.6% for 1992. During 1993 the Company incurred $13.7 million of net losses ($19.1 million of gross losses) resulting from property catastrophe events, primarily the World Trade Center bombing, the East Coast blizzard, the Midwest floods and the California fires, which adversely affected the loss ratio by 5.8 points. During 1992 the Company incurred $50.9 million of net losses ($162.6 million of gross losses) resulting from property catastrophe events, primarily Hurricanes Andrew and Iniki and the Los Angeles riots, which added 28.4 points to the loss ratio. Of these amounts, Hurricane Andrew accounted for $37.9 million of net incurred losses and $137.1 million of gross incurred losses.
During 1993 and 1992, the Company ceded $88.9 million and $90.8 million of earned premiums, respectively. The Company recovered from retrocessionnaires $57.3 million and $177.1 million of losses during 1993 and 1992, respectively. Ceded premiums in 1992 included $12.1 million of reinstatement premiums paid by the Company. Ceded losses in 1992 included $111.7 million of losses resulting from property catastrophe events.
Commission expenses increased 10% to $61.3 million in 1993 from $56.0 million in 1992. The commission ratio was 26.0% for 1993, compared with 29.1% for 1992. The decrease in the commission ratio for 1993 is primarily attributable to the current mix of business, on which the commission rate for certain new business is lower than the commission rate on canceled property pro rata treaties and the effect of net reinstatement premiums related to Hurricane Andrew, which added approximately one point to the 1992 commission ratio.
Underwriting, administration and other expenses increased 8% in 1993 to $30.5 million from $28.3 million in 1992. The underwriting, administration and other expense ratio was 12.9% for 1993 as compared
with 14.7% for 1992. The effect of net reinstatement premiums related to Hurricane Andrew added 0.5 points to the 1992 ratio. The increase in underwriting, administration and other expenses in 1993 was principally related to compensation expenses, the majority of which was an increase in costs associated with the Company's retirement plans. In addition, as discussed in Note 3 to the Company's Consolidated Financial Statements, the Company has made various acquisitions. The pre-tax effect on operations from recent acquisitions, including the amortization of goodwill and acquired licenses, was a charge of $2.6 million in 1993 compared with a charge of $1.8 million in 1992. The operations of the acquired companies are not expected to have a material effect on the Company's liquidity or results of operations.
The combined ratio was 105.1% for 1993, compared with 127.4% for 1992. The effect of property catastrophe events on the 1993 and 1992 combined ratio was 5.8 points and 29.8 points, respectively.
Net investment income for 1993 decreased 2% to $42.0 million from $42.9 million for 1992. Net investment income (pre-tax) has been affected adversely by: 1) the high level of claim payments made over the past eighteen months related to catastrophic events; 2) the Company's managed shift toward a greater percentage of tax-exempt securities; and 3) the general decline in interest rates over the past several quarters which has had an adverse effect on available yields for new and reinvested funds. Offsetting the above factors was an increase in investment income related to the investment of the proceeds from the Debentures in March 1993. On an after-tax basis net investment income was $32.2 million for 1993, virtually unchanged from 1992. Net realized investment gains for 1993 were $12.9 million, compared with $15.0 million for 1992.
Interest expense increased 75% to $8.0 million in 1993 from $4.6 million in 1992. The increase was due to $3.5 million of interest expense recognized on the Debentures.
As a result of the Company's implementation, as of January 1, 1993, of EITF 93-6, $2.6 million (after an income tax benefit of $1.4 million), or $0.14 per share, is included as a reduction to 1993 income for the cumulative effect of this accounting change.
Net income for 1993 increased 249% to $25.3 million, or $1.38 per share, on a primary basis, compared with $7.2 million, or $0.40 per share, for 1992. Net income for 1993 on a fully diluted basis was $1.33 per share, compared with $0.40 per share for 1992. The 1993 results were affected by after-tax charges to operations, net of reinsurance, of $8.9 million, or $0.48 per share ($0.43 per share on a fully diluted basis) for property catastrophe events. The 1992 results were affected by after-tax charges to operations, net of reinsurance, of $37.9 million, or $2.08 per share (on a primary and fully diluted basis) for property catastrophe events. Average common and common equivalent shares outstanding (on a primary basis) for 1993 were 18.4 million, compared with 18.3 million for 1992.
INCOME TAXES
SCOR U.S.'s Federal income tax provision (benefit) was ($11.3 million), $7.0 million and ($3.8 million) for the years ended
December 31, 1994, 1993 and 1992, respectively. Although the Company's income from operations before Federal income taxes and cumulative effect of accounting changes was $630,000 for 1992, a net operating loss for tax purposes resulted after the elimination of tax- exempt investment income. A reconciliation between income taxes computed at the statutory rate and SCOR U.S.'s provisions for income taxes for the years ended December 31, 1994, 1993 and 1992, is included in Note 9 to SCOR U.S.'s Consolidated Financial Statements.
The Omnibus Budget Reconciliation Act of 1993 (the "Act") was signed into law in August 1993. The Act provided for an increase in the corporate tax rate to 35% from the previous 34% rate. As a result of the revaluation of the Company's net deferred tax assets to reflect the change in tax rates, the Company recognized a net benefit of $472,000, or $.03 per share, in 1993. This benefit is included in the provision for Federal income taxes attributable to income from operations. In addition, as a result of the new tax rate, it is likely that the Company will pay taxes at a higher effective rate in future years to the extent that the Company generates taxable earnings.
GAAP requires the establishment of a valuation allowance for deferred income tax benefits where it is more likely than not that some portion of the deferred income tax benefits will not be realized. Management believes, based on the Company's historical record of generating taxable income and its expectations of future earnings, that the Company's taxable income in future years will be sufficient to realize the net deferred income tax benefits reflected on its consolidated balance sheet as of December 31, 1994. In addition, management believes certain tax planning strategies exist, including its ability to alter the mix of its investment portfolio to taxable investments from tax-exempt investments, which could be implemented if necessary to ensure sufficient taxable income to realize fully its net deferred income tax benefits. Management also believes that the Company's net deferred income tax benefits related to unrealized depreciation of fixed maturity investments is recoverable through its ability to hold these investments to maturity. Accordingly, SCOR U.S. has not established a valuation allowance with respect to its net deferred income tax benefits.
ECONOMIC ENVIRONMENT
The Company's commercial paper bears interest at short-term rates in effect at each respective issuance date. To the extent interest rates increased during 1994, interest expense has been affected adversely. In addition, prices of fixed maturity investments generally decline as market interest rates increase. Accordingly, the fair value of the Company's fixed maturity portfolio holdings has decreased during the recent period of increasing interest rates. SCOR U.S. also pursues an investment strategy that tends to mitigate interest rate risk by establishing a maturity distribution profile of fixed maturity investments sufficient to fund loss and loss expense obligations when they become due. In addition, management believes that SCOR U.S. and its operating companies pursue a conservative investment strategy which avoids significant exposure to credit risk.
LIQUIDITY AND CAPITAL RESOURCES
SCOR U.S. is a holding company. Its principal sources of cash are cash dividends from its operating subsidiaries, borrowings, and the issuance of equity securities. Generally, dividends that can be paid by insurers domiciled in New York State, without prior approval of the New York Insurance Superintendent, are limited for any twelve- month period to the lesser of 10% of statutory surplus or adjusted net investment income (as defined by New York Insurance Law) for the previous twelve months. During the year ending December 31, 1994, $11.9 million of dividends were declared to SCOR U.S. At December 31, 1994, the aggregate statutory surplus of the SCOR U.S. operating subsidiaries was $243.4 million. Based on the statutory surplus of the Company's operating subsidiaries at December 31, 1994, $24.3 million is available for dividends to SCOR U.S. during 1995.
On March 29, 1993, SCOR U.S. sold at par $86.25 million of 5.25% Convertible Subordinated Debentures due April 1, 2000 through a private offering. The Debentures are not redeemable by the Company prior to April 3, 1996 and are convertible into approximately 3.4 million shares of SCOR U.S. common stock at a conversion price of $25.375 per share. Expenses incurred in the offering of approximately $1.8 million were deferred and are being amortized over the life of the Debentures. The Company contributed $50 million of the net proceeds to SCOR Re.
During 1994 the Company repurchased in the open market $3.9 million in principal amount of the Debentures and recognized an extraordinary gain of $351,000, or $0.02 per share, net of tax. These purchases were executed under a $10 million program authorized by the Board of Directors. In January 1995, the Company repurchased an additional $6.0 million in principal amount of the Debentures under this authorization. Funding for the aggregate amount of repurchased Debentures, all of which settled in January 1995, was achieved through the issuance of the Company's commercial paper.
In January 1995, the Board of Directors authorized the Company to repurchase up to an additional $20 million of Debentures in the open market, as market conditions permit. In connection with this additional authorization, SCOR U.S. has established a $20 million credit agreement with SCOR S.A. the proceeds of which are restricted to the repurchase of the Debentures or the repayment of any debt incurred to repurchase Debentures.
On October 1, 1990 SCOR U.S. renewed a $20.0 million note which was payable on that date. The new note is due and payable on October 3, 1995 and bears interest at a fixed annual rate of 9.575%. The Company has entered into an interest rate swap agreement related to this note with a commercial bank. The swap agreement has a maturity date of October 1, 1995 and provides for the Company to make floating rate payments in exchange for fixed rate payments due on the loan. The floating rate, which resets every six months and is capped at 12.380%, was 11.068% as of December 31, 1994. The Company most likely will refinance this debt when due and is currently exploring various options.
SCOR U.S. has established a commercial paper program which allows it to raise up to $50.0 million. At December 31, 1994, $11.3 million of commercial paper was outstanding.
SCOR U.S. has a $30.0 million revolving line of credit with a bank which serves as a backstop for its commercial paper program. No borrowings have been made under this facility.
At December 31, 1994, the amount remaining under the Company's existing stock repurchase program is approximately $1.4 million, which may be utilized as market conditions permit. During 1993, the Company repurchased 40,800 shares of its common stock for an aggregate cost of $616,000. The Company did not repurchase any shares under this program during 1994.
The primary sources of liquidity for the SCOR U.S. insurance and reinsurance subsidiaries are net cash flow from operating activities, the maturity or sale of investments, and capital contributions from SCOR U.S. Net cash provided by operating activities was $1.3 million for 1994 compared with $27.8 million for 1993. Cash flow from operating activities during 1994 was adversely affected by continued property catastrophe paid loss activity as well as the payment of several large previously reserved casualty claims. The Company has not suffered any adverse effect in the timing of recoveries or credit worthiness of retrocessionnaires due to the recent catastrophe activity . Loss payments associated with the recent catastrophe activity are not expected to have an adverse material effect on the Company's short-term or long-term liquidity.
During 1994 and 1993, the Company incurred $4.1 million and $9.4 million, respectively, of capital expenditures, which primarily related to the development of information systems. At December 31, 1994, the Company had no significant commitments for capital expenditures.
Effective January 1, 1991, SCOR Re and certain of the Company's other operating subsidiaries operate under a reinsurance pooling agreement pursuant to which the net amounts under all new and renewal business written by each such company are pooled. The net balances of the pool are then distributed to each company in accordance with established proportions.
At December 31, 1994, total investments and cash at carrying value were $677.6 million compared with $733.8 million at December 31, 1993. The decreased level of investments and cash is primarily attributable to the $58.9 million decrease in fair value of investments carried at fair value during the year. SCOR U.S.'s fixed maturity investments are substantially all investment grade, liquid securities with a weighted average maturity of 5.8 years. Approximately 99% of the fixed maturity portfolio is rated A or better. SCOR U.S. does not have any investment in real estate or high yield bonds. At December 31, 1994, the Company did not have any non income producing investments.
SCOR U.S. believes that cash and short-term investments are maintained at an adequate level for payment of claims and expenses as they become due. In addition, SCOR U.S. maintains a maturity distribution profile of fixed maturity investments sufficient to fund
anticipated loss and loss expense obligations as they become due. The Company's long-term obligations primarily consist of the Debentures and the claims liabilities of its principal operating subsidiaries, which at December 31, 1994 averaged approximately 4.5 years.
The Company may be subject to gains and losses resulting from currency fluctuations because some of its investments are denominated in currencies other than United States dollars, as are some of its net loss reserve liabilities. The Company makes investments denominated in foreign currencies to mitigate, in part, the effects of currency fluctuations on its results of operations. Investments denominated in foreign currencies do not constitute a material portion of the Company's investment portfolio and, in the opinion of management, are sufficient to meet its foreign currency obligations. Net gains (losses) resulting from foreign currency transactions during 1994, 1993 and 1992 were ($156,000), ($929,000) and $555,000, respectively.
Stockholders' equity at December 31, 1994 was $239.4 million, a decrease of $51.3 million from December 31, 1993. This decrease resulted primarily from the net loss of $7.8 million for the year, unrealized depreciation of investments carried at fair value, net of tax effect, of $38.3 million and by cash dividends declared of $6.5 million.
The ratio of net premiums written to surplus, sometimes referred to as "insurance exposure", relates to the amount of risk to which an insurer's statutory capital and surplus can be exposed, as measured by the amount of premiums written in relation to such surplus. Insurance practice and regulatory guidelines suggest that property and casualty insurance companies maintain a net premiums written to surplus ratio of less than 3 to 1. For the reinsurance industry, a ratio of 2 to 1 or less is generally considered prudent. SCOR U.S.'s net premiums written to surplus ratios were .95 to 1, .87 to 1 and .97 to 1 for 1994, 1993 and 1992, respectively.
RATINGS
Upon issuance in 1993, the Debentures were assigned an A3 rating from Moody's Investors Service Inc. ("Moody's") and were rated BBB- Plus by Standard & Poor's Corp. ("S&P"). The Company's commercial paper program has been rated P-1 by Moody's and A-1 by S&P since its establishment. On November 22, 1994 S&P lowered its ratings on the Debentures to BBB and on the commercial paper to A-2. S&P attributed its action to the Company's volatile earnings record and reduced surplus resulting from its past concentration in reinsuring property risks, while acknowledging that the Company maintains a good position in the brokered reinsurance market, a sound investment strategy and benefits from its ownership by SCOR S.A. Moody's has not changed any of the Company's ratings to date. Although the Company may experience increased future borrowing costs as a result of negative ratings changes, the Company has not experienced any significant adverse effect subsequent to the above action.
The Company recently was notified by A.M. Best & Company, Inc., an independent insurance industry rating organization, that the rating of its principal operating companies has been reduced from A+ (Superior) to A (Excellent) for reasons similar to those noted above.
REGULATORY MATTERS
The National Association of Insurance Commissioners ("NAIC"), an organization that assists state insurance regulators in achieving regulatory objectives, established minimum capital requirements, referred to as risk based capital, by adopting a risk-based capital formula for property and casualty companies in December 1993. The risk-based capital formula is applied to statutory financial statements beginning for the year ending December 31, 1994. The essential elements of these requirements focus on a company's types of business, historical loss development patterns and asset quality. Based on the prescribed formula the statutory surplus of each of the Company's operating subsidiaries is sufficient to meet these risk- based capital requirements and to conduct its respective operations.
The NAIC is currently developing an Investments of Insurers Model Act, which, if adopted by the individual states, would establish uniform limitations upon the type and amounts of investments insurers may hold. Based upon the current proposals of this Model Act, which are subject to review and change, the Company does not believe a uniform standard would significantly affect the current investment mix or operations of its insurance and reinsurance subsidiaries.
ACCOUNTING PRONOUNCEMENTS
Effective as of December 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). SFAS 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. The adoption of SFAS 115 did not have any effect on the Company's financial position or its results from operations.
The FASB's Emerging Issues Task Force ("EITF") reached a consensus on July 22, 1993 regarding Issue No. 93-6, "Accounting for Multiple-Year Retrospectively Rated Contracts by Ceding and Assuming Enterprises" ("EITF 93-6"). EITF 93-6 has had an impact on certain of the Company's retrocessional agreements. As a result of the Company's implementation of the change in accounting method, as of January 1, 1993, $2,600,000 (net of $1,400,000 tax effect), or $0.14 per share, is included as a reduction to income as a cumulative adjustment. The effect of this change, excluding the cumulative adjustment, for the year ended December 31, 1993 was to increase net income by $2,600,000 or $0.14 per share.
In the first quarter of 1993, the Company adopted Statement of Financial Accounting Standards No. 113 "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" ("SFAS 113"). The adoption of SFAS 113 did not have a material effect on the Company's financial position or its results from operations.
In the first quarter of 1992, the Company adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS 109"), which changed the method of accounting for income taxes. As a result of adopting SFAS 109, the Company recognized a cumulative benefit of the change in accounting principle of $2.4 million, or $0.13 a share, as of January 1, 1992.
In the first quarter of 1992, the Company also changed its accounting method for deferred policy acquisition costs to consider anticipated investment income in evaluating the recoverability of such costs. This new method is preferable because it is the prevalent method used in the insurance industry. The newly adopted accounting method also allows for a more appropriate matching of the income statement amounts of commissions expense with the related earned premiums and the balance sheet amounts of deferred policy acquisition costs with the related unearned premiums. This change resulted in the recognition of a cumulative benefit of the change in accounting principle of $481,000 (after reduction for income taxes of $248,000), or $0.02 per share, as of January 1, 1992.
The FASB has issued Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Post Employment Benefits" ("SFAS 112"), which is effective for 1994 financial statements. SFAS 112 establishes accounting standards for employers who provide benefits for former or inactive employees after employment but before retirement. SCOR U.S. provides no such applicable post retirement benefits and therefore is not affected by SFAS 112.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See The Consolidated Financial Statements and Notes thereto and the Schedules on pages through and S-1 through S-7 below.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to "Election of Directors" in the Proxy Statement for the 1995 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days of the close of SCOR U.S.'s fiscal year ended December 31, 1994 ("Proxy Statement").
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to "Compensation of Executive Officers and Directors" in the Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to "Certain Transactions and Relationships with Directors and Officers" in the Proxy Statement.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
The financial statements and schedules listed in the accompanying Index to Financial Statements (Page) are filed as part of this Annual Report on Form 10-K.
The exhibits listed in the accompanying Index to Exhibits are filed as part of this Annual Report on Form 10-K.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of 1994.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SCOR U.S. CORPORATION
By: Jeffrey D. Cropsey Senior Vice President and Chief Financial Officer
Dated: March 28, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
Jacques P. Blondeau* Chairman of March 28, 1995 the Board of Directors
John R. Cox* Director March 28, 1995
Serge M. P. Osouf* Vice Chairman of March 28, 1995 the Board of Directors
Raymond H. Deck* Director March 28, 1995
Michael J. Gudefin* Director March 28, 1995
Jerome Karter* President and March 28, 1995 Chief Executive Officer
Richard M. Murray* Director March 28, 1995
Patrick Peugeot* Director March 28, 1995
SIGNATURE TITLE DATE
John W. Popp* Director March 28, 1995
Francois Reach* Director March 28, 1995
David J. Sherwood* Director March 28, 1995
Jeffrey D. Cropsey Sr Vice President and March 28, 1995 Chief Financial Officer (Principal Financial Officer)
Francis J. Fenwick Vice President & Controller March 28, 1995 (Controller)
*By: John T. Andrews, Jr. Senior Vice President March 28, 1995 Attorney-in-Fact General Counsel and Corporate Secretary
INDEX TO REPORT AND CONSOLIDATED FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS OF SCOR U.S.
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 1994 and 1993 -
Consolidated Statements of Operations for the years ended December 31, 1994, 1993 and 1992 -
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994, 1993 and 1992 -
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992 -
Notes to Consolidated Financial Statements -
Schedules:
Schedule I -- Summary of Investments Other than Investments in Related Parties at December 31, 1994 S-1
Schedule II -- Condensed Financial Information of Registrant Balance Sheets at December 31, 1994 and 1993 S-2
Statements of Operations for the years ended December 31, 1994, 1993 and 1992 S-3
Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992 S-4 - S-5
Schedule IV -- Reinsurance S-6
Schedule VI -- Supplementary Information Concerning Property/Casualty Insurance Operations for the years ended December 31, 1994, 1993 and 1992 S-7
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders SCOR U.S. Corporation:
We have audited the consolidated balance sheets of SCOR U.S. Corporation and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1994 as listed in the accompanying index of the 1994 Annual Report on Form 10-K of SCOR U.S. Corporation. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SCOR U.S. Corporation and subsidiaries as of December 31, 1994 and 1993 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in Note 2(k) to the consolidated financial statements, in 1993 the Company adopted the provisions of the Statement of Financial Accounting Standards ("SFAS") No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," and the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and also adopted the consensus opinion regarding the Financial Accounting Standards Board's Emerging Issues Task Force regarding Issue No. 93-6, "Accounting for Multiple-Year Retrospectively Related Contracts by Ceding and Assuming Enterprises". In 1992, the Company adopted the provisions of SFAS No. 109, "Accounting for Income Taxes", and changed its method of accounting for deferred policy acquisitions costs.
KPMG Peat Marwick LLP
New York, New York February 2, 1995
SCOR U.S. CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION
SCOR U.S. Corporation ("SCOR U.S.") is a Delaware corporation that was formed in December 1981. Prior to the offering of 4,000,000 shares to the public on September 25, 1986, SCOR U.S. was owned by Societe Commerciale de Reassurance ("SCOR Paris"), a French reinsurance company, and by Caisse Centrale de Reassurance ("CCR"), a reinsurer wholly owned by the French government which also owned approximately 30% of SCOR Paris. As a result of a corporate reorganization completed in France in November 1989, SCOR Paris became a wholly owned subsidiary of SCOR S.A. In December 1990, SCOR Paris and another subsidiary of SCOR S.A., UAP Reassurances ("UAP Re") were merged into SCOR S.A.
In June 1990, Rockleigh Management Corporation ("Rockleigh"), a wholly owned subsidiary of UAP Re, was merged into SCOR U.S. Rockleigh owned 100% of both The Unity Fire and General Insurance Company ("Unity Fire") and General Security Assurance Corporation of New York ("General Security"), each of which was a professional reinsurance company. On January 1, 1994, General Security was merged into SCOR Reinsurance Company ("SCOR Re"), the Company's principal operating subsidiary.
As a result of the issuance of common shares of SCOR U.S. to UAP Re in the Rockleigh merger, SCOR Paris' participation in SCOR U.S. stock repurchase programs and various other purchases, as well as SCOR Paris' purchase of CCR's shares of SCOR U.S., SCOR S.A. owned approximately 80% of the outstanding common stock of SCOR U.S. at December 31, 1994. The remaining 20% is held publicly and represents 3,616,864 shares of the outstanding shares of SCOR U.S. common stock.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The accompanying consolidated financial statements are presented in conformity with generally accepted accounting principles ("GAAP"). The consolidated financial statements of SCOR U.S. Corporation and subsidiaries (the "Company") include the accounts of SCOR U.S. and its wholly owned subsidiaries, SCOR Re, Unity Fire, General Security Indemnity Company ("GSIND") (formerly Southwest International Reinsurance Company), Morgard, Inc. ("Morgard"), General Security Insurance Company ("GSIC") (formerly The International Insurance Company of Takoma Park, Maryland ("IIC")), SCOR Services, Inc., and BIND, Inc., and its majority owned subsidiary, California Reinsurance Management Corporation ("Cal Re") and its equity affiliate Commercial Risk Partners Limited ("Commercial Risk"). The Company operates primarily in one significant industry segment; property and casualty reinsurance. Substantially all of the Company's gross premiums written are assumed from domestic ceding companies. All significant intercompany transactions have been eliminated in consolidation.
(b) Premium Income
Premium income is recognized as earned on a pro rata basis over the terms of the policies. Unearned premiums are calculated primarily on a pro rata basis on facultative business and as reported by ceding reinsureds on treaty business.
(c) Policy Acquisition Costs
Costs applicable to the acquisition of new business, principally commissions, are deferred when paid and expensed as the related premiums are earned. Deferred policy acquisition costs considers anticipated losses and loss expenses and maintenance expenses that will be incurred as those premiums are earned. Deferred policy acquisition costs are reviewed periodically to determine that they do not exceed recoverable amounts after allowing for anticipated investment income. Amortization of acquisition costs for 1994, 1993 and 1992 was $59,434,000, $61,324,000 and $55,960,000, respectively.
(d) Loss Reserves
The reserve for losses and loss expenses is based upon estimates received from ceding reinsureds on treaty contracts, accumulation of case estimates for losses and loss expenses on claims reported on facultative contracts and estimates of losses and loss expenses incurred but not reported ("IBNR") based upon the Company's expectations of what may have been incurred. Such provisions are necessarily based on estimates and, accordingly, there can be no assurance that the ultimate liability will not exceed such estimates. The reserves are reviewed continually during the year and changes in estimates are reflected in operating results currently.
(e) Property and Equipment
Depreciation and amortization of property and equipment have been provided principally on the straight-line method with estimated useful lives of fifteen years for property and five to ten years for equipment. Leasehold improvements are amortized on a straight-line basis over the term of the corresponding lease. Depreciation and amortization amounted to $1,651,000, $765,000 and $603,000 for the years ended December 31, 1994, 1993 and 1992, respectively.
(f) Investments
The Company has categorized substantially all of its investments in fixed maturities as securities "available for sale" and, in conformity with Financial Accounting Standards Board Statement No. 115 "Accounting for Certain Investments in Debt and Equity Securities", which was adopted December 31, 1993, carries such investments at fair value. Fixed maturities purchased with the intent to hold to maturity are categorized as securities "held to maturity" and are carried at amortized cost. Equity securities are carried at fair value. Short- term investments are carried at cost, which approximates fair value.
The Company's policy is to determine realized gains and losses on investments sold on the specific identification method. The Company includes unrealized gains and losses on equity securities and fixed maturities categorized as available for sale in stockholders' equity,
net of any tax effect. For cash flows statement purposes, the Company does not consider any of its investments to be cash equivalents.
(g) Earnings per Share
Primary earnings per share data are based on the weighted average number of common shares outstanding during the period and, if dilutive, common shares assumed to be outstanding which are issuable under stock option plans. Fully diluted earnings per share are based on the additional assumption that the Debentures (as defined in Note 6) are converted into common shares, if dilutive.
(h) Reclassification of Certain Amounts
Certain amounts from prior financial statements have been reclassified to conform with current classifications.
(i) Intangibles
(1) Goodwill
The Company has classified as goodwill the cost in excess of net assets of companies acquired in purchase transactions. Goodwill is amortized on a straight-line basis over a period of 10 years. Amortization charged to operations amounted to $596,000, $542,000 and $499,000 for the years ended December 31, 1994, 1993 and 1992, respectively.
(2) Insurance Licenses
In conjunction with its acquisition of IIC, the Company acquired licenses for approximately $3,200,000, which are amortized on a straight-line basis over 10 years. Amortization charged to operations amounted to $317,000 and $343,000 for the years ended December 31, 1994 and 1993, respectively. No amount was charged to operations for 1992.
(j) Foreign Currency Transactions
Revenues and expenses denominated in foreign currencies are translated at the rate of exchange at the transaction date. Assets and liabilities denominated in foreign currencies are translated at the rate of exchange at the end of a reporting period. Gains or losses resulting from foreign currency transactions are included in the Company's results from operations.
Net gains (losses) resulting from foreign currency transactions during 1994, 1993 and 1992 were $(156,000), $(929,000) and $555,000, respectively.
(k) Accounting Changes
In the first quarter of 1993, the Company adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards No. 113 "Accounting and Reporting for Reinsurance of Short- Duration and Long-Duration Contracts" ("SFAS 113"). The adoption of SFAS 113 did not have a material effect on the Company's financial position or its results from operations.
The FASB's Emerging Issues Task Force ("EITF") reached a consensus on July 22, 1993 regarding Issue No. 93-6, "Accounting for Multiple-Year Retrospectively Rated Contracts by Ceding and Assuming Enterprises" ("EITF 93-6"). EITF 93-6 had an impact on certain of the Company's retrocessional agreements. As a result of the Company's implementation of the change in accounting method, as of January 1, 1993, a charge of $2,600,000 (after an income tax benefit of $1,400,000), or $0.14 per share, is included as a reduction to income as a cumulative adjustment. The effect of this change, excluding the cumulative adjustment, for the year ended December 31, 1993 was to increase net income by $2,600,000, or $0.14 per share.
The pro-forma amounts shown in the statements of operations have been adjusted for the effect of retroactive application of the adoption of EITF 93-6, net of related income taxes.
Effective as of December 31, 1993, SCOR U.S. adopted Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). SFAS 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. The adoption of SFAS 115 did not have any effect on the Company's financial position or its results of operations.
During 1992, the Company adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS 109"), which changes the method of accounting for income taxes under GAAP. As a result of adopting SFAS 109, the Company recognized a cumulative benefit of the change in accounting principle of $2,367,000, or $0.13 per share, as of January 1, 1992. The effect of this change, excluding the cumulative benefit, for the year ended December 31, 1992 was to decrease net income by $480,000.
During 1992, the Company also changed its accounting method for deferred policy acquisition costs to consider anticipated investment income in evaluating the recoverability of such costs. This new method is preferable because it is the prevalent method used in the insurance industry. The newly adopted accounting method also allows for a more appropriate matching of the income statement amounts of commissions expense with the related earned premiums and the balance sheet amounts of deferred policy acquisition costs with the related unearned premiums. This change resulted in the recognition of a cumulative benefit of the change in accounting principle of $481,000 (after reduction for income taxes of $248,000), or $0.02 per share, as of January 1, 1992. This change had no effect on net income, excluding the cumulative benefit, for the year ended December 31, 1992.
(3) ACQUISITIONS
(a) Purchase of Morgard
On March 10, 1992, SCOR U.S. acquired 100% of the stock of Morgard, a developer, marketer and administrator of an insurance product that indemnifies monthly mortgage payments after involuntary unemployment. The purchase price was approximately $2,549,000 and the transaction was accounted for using the purchase method of accounting
and, accordingly, Morgard's purchased assets and liabilities have been recorded at their estimated fair values at the date of acquisition. The acquisition did not have a material pro forma impact on operations. In March 1994, the Company issued 31,500 shares of its common stock at an approximate market value of $360,000 as additional consideration pursuant to the Morgard purchase agreements.
(b) Investment in Commercial Risk
During January 1992, SCOR U.S. acquired 19.8% of the stock of Commercial Risk, a Bermuda holding company for two insurance subsidiaries engaged in writing shared-risk products. The majority shareholder of Commercial Risk is SCOR S.A. The purchase price was approximately $9,900,000, which included equity and debt. As a result of a recapitalization of Commercial Risk in 1994, all of SCOR U.S.'s investment was converted to equity, with SCOR U.S. owning approximately 13% of Commercial Risk. The investment in Commercial Risk is accounted for using the equity method of accounting and, accordingly, the accompanying consolidated financial statements reflect the Company's proportionate share of Commercial Risk's stockholders' equity and operating income. SCOR U.S. accounts for its proportionate share of Commercial Risk's income in its statements of operations under the caption "other expenses (income)". Income (loss) from Commercial Risk amounted to $743,000, $678,000 and ($110,000) in 1994, 1993 and 1992, respectively.
(c) Purchase of The International Insurance Company of Takoma Park, Maryland
On December 4, 1992, SCOR U.S. acquired 100% of the stock of IIC. The purchase price was approximately $8,200,000 and the transaction was accounted for using the purchase method of accounting and, accordingly, IIC's purchased assets and liabilities have been recorded at their estimated fair values at the date of acquisition. The acquisition did not have a material pro forma impact on operations. During 1993, IIC's name was changed to GSIC.
(4) REINSURANCE
SCOR U.S.'s operating subsidiaries assume reinsurance from SCOR S.A. and other affiliated companies primarily on a quota share or surplus share basis. Written premiums assumed from these companies (and the percentage of gross written premiums) were approximately $7,845,000 (2.6%), $8,375,000 (2.5%) and $6,699,000 (2.2%) for the years ended December 31, 1994, 1993 and 1992, respectively. Of these amounts, approximately $6,959,000, $7,925,000 and $6,278,000 for 1994, 1993 and 1992, respectively, were assumed from SCOR S.A.
SCOR U.S.'s operating subsidiaries also retrocede reinsurance to SCOR S.A. and other affiliated companies, primarily on a quota share or surplus share basis.
The effects of ceded reinsurance on the Statement of Operations for the years ended December 31, 1994, 1993 and 1992 are as follows:
Loss and Loss Premiums Premiums Expenses Written Earned Incurred
(in thousands)
December 31, 1994
Direct $13,667 $13,927 $ 9,554 Assumed 293,125 297,159 260,073 Ceded - affiliate (35,644) (39,718) (37,651) Ceded - other (40,088) (43,124) (40,706) ------- ------- ------- Net $231,060 $228,244 $191,270 ======= ======= =======
December 31, 1993
Direct $ 11,972 $ 8,677 $ 6,944 Assumed 322,547 316,292 206,603 Ceded - affiliate (51,453) (49,778) (37,986) Ceded - other (37,653) (39,140) (19,269) -------- ------- -------- Net $245,413 $236,051 $156,292 ======== ======== ========
December 31, 1992
Direct $ 4,922 $ 2,682 $ 1,645 Assumed 299,906 280,136 335,954 Ceded - affiliate (43,523) (39,134) (59,473) Ceded - other (55,762) (51,634) (117,581) -------- -------- -------- Net $205,543 $192,050 $160,545 ======== ======== ========
For the years ended December 31, 1994, 1993 and 1992 the percentage of assumed premiums written to net premiums written was 126.9%, 131.4% and 145.9%, respectively.
Reinsurance does not discharge or diminish the primary liability to insureds of the Company on risks reinsured; however, it does permit the Company to recover the applicable portion of any loss from its retrocessionaires. Retrocessionaires of SCOR U.S. are subject to an initial review of financial condition before final acceptability is confirmed and subsequent reviews on an annual basis. The Company, like most reinsurance companies, enters into retrocession arrangements for many of the same reasons primary insurers seek reinsurance, including increasing their premium writing and risk capacity without requiring additional capital and reducing the effect of individual or aggregate losses. Historically, SCOR Re has retroceded risks to retro- cessionaires on both a proportional and excess of loss basis. Under its 1994 retrocessional program, SCOR Re retained a maximum of $2.0 million as to any one ceding company program for treaty business and a
maximum of $3.3 million and $1.1 million per risk for facultative property and facultative casualty business, respectively.
Paid losses, outstanding losses and IBNR recoverable from retrocessionaires which are determined to be uncollectible are charged to operations. There were no such amounts charged to operations for the years ended December 31, 1994, 1993 and 1992.
Pursuant to a Net Aggregate Excess of Loss Retrocessional Agreement dated as of July 1, 1986 ("the 1986 Retrocessional Agreement"), SCOR S.A. reinsured SCOR Re for adverse loss development from pre-1986 business that exceeded the total of loss reserves established as of June 30, 1986, and premiums earned after June 30, 1986, from such pre-1986 business. The 1986 Retrocessional Agreement provided protection to the Company for business underwritten by SCOR Re only and did not provide coverage for pre-1986 business underwritten by any other subsidiary. However, business underwritten by General Security and Unity Fire is protected against adverse development by a separate net aggregate excess of loss retrocessional agreement, as described below. The 1986 Retrocessional Agreement terminated on December 31, 1993, at which time SCOR S.A.'s liability to SCOR Re was $16,224,000. This amount is the actuarially determined expected ultimate loss from the pre-1986 business in excess of the "aggregate deductible" (which is defined as the total of net outstanding loss and loss expense reserves, net incurred but not reported loss reserves and net unearned premium reserves established as of June 30, 1986 for the pre-1986 business, plus all net premiums and future net premium adjustments earned after June 30, 1986 under retrospectively rated treaties for such business). During the first quarter of 1994, SCOR Re received $16,224,000 from SCOR S.A. in settlement of its liability under this agreement.
SCOR Re and SCOR S.A. entered into a new Net Aggregate Excess of Loss Agreement ("the 1994 Retrocessional Agreement") effective January 1, 1994, which protects the same business covered under the 1986 Retrocessional Agreement. Under this Agreement, SCOR Re is responsible for any further adverse development up to $8,800,000, at which point the 1994 Retrocessional Agreement attaches and provides coverage for up to $10,000,000 of any additional adverse development. SCOR Re paid a premium of $2,000,000 for this coverage, which expires on December 31, 2004. At December 31, 1994, no recovery was recog- nized under this agreement. In addition, based on the experience of the 1994 Retrocessional Agreement, SCOR Re is eligible to receive a contingent commission of up to 27.75% of the premium.
SCOR S.A. entered into a Net Aggregate Excess of Loss Retrocessional Agreement ("the 1990 Retrocessional Agreement") with each of Unity Fire and General Security, pursuant to which SCOR S.A. agreed to reinsure those companies to the extent that their net ultimate incurred losses (as defined in the agreements) arising in 1989 and prior accident years exceed an aggregate deductible. As a result of the January 1, 1991 assumption by General Security of the rights, liabilities and obligations of Unity Fire, the Net Aggregate Excess of Loss Retrocessional Agreement with Unity Fire was terminated and the Net Aggregate Excess of Loss Retrocessional Agreement with General Security was amended (as so amended, the "Agreement") to include the protection formerly provided to Unity Fire by its retrocessional agreement with SCOR S.A. As a result of the merger of
General Security into SCOR Re, the protection under the Agreement is now for the benefit of SCOR Re. The aggregate deductible is defined as the sum of net outstanding loss and loss expense reserves and net incurred but not reported loss reserves as of December 31, 1989, for 1989 and prior accident years, as documented in the 1989 statutory financial statements of Unity Fire and General Security. This amount has been established at a combined aggregate of $93,830,000. The annual premium for this protection is $210,000 through 2004. The Agreement continues in force until all covered losses are settled. At December 31, 1994, SCOR S.A.'s estimated liability under the Agreement was approximately $11,700,000.
SCOR S.A. provides letters of credit in amounts equal to its estimated liability under its reinsurance agreements (as reestimated on a quarterly basis). The amount of letters of credit provided by SCOR S.A. at December 31, 1994 was approximately $134,500,000.
The amounts recoverable under the Net Aggregate Excess of Loss Retrocessional Agreements are included in "Retrocessions to Affiliates" above and have the effect of reducing the Company's net losses and loss expenses incurred.
The Company withholds funds from retrocessionaires in accordance with the retrocessional agreements. Under the terms of the agreements, the Company pays interest on the principal sums of amounts withheld at annual rates of 6% to 7.5% computed and rendered quarterly. The Company incurred interest expense (income) of $1,882,000, $2,191,000 and $1,755,000 in 1994, 1993 and 1992, respectively, of which $(2,000), $1,161,000 and $1,003,000, respectively, relates to SCOR S.A.
(5) INVESTMENTS
Net investment income of the Company, comprised primarily of interest and dividends, was derived from the following sources:
Year Ended December 31, 1994 1993 1992 (in thousands)
Fixed maturities $38,555 $39,859 $41,736 Equity securities 776 999 1,036 Short-term investments 2,855 2,120 1,485 Other 175 428 196 ------- ------- ------- 42,361 43,406 44,453 Investment expense (1,371) (1,362) (1,573) ------ ------- ------- Net investment income $40,990 $42,044 $42,880 ======= ======= =======
Net realized investment gains (losses) of the Company were derived from the following sources: Year Ended December 31, 1994 1993 1992 (in thousands) Net realized investment gains (losses): Fixed maturities $ (814) $10,921 $13,245 Equity securities 1,497 1,791 1,642 Other 301 218 161 ----- ------- ------- $ 984 $12,930 $15,048 ======= ======= =======
Proceeds from sales of available for sale securities during 1994, 1993 and 1992 were $260,902,000, $358,168,000 and $480,864,000, respectively. Gross gains of $7,162,000, $14,722,000 and $19,212,000, and gross losses of $6,479,000, $2,016,000 and $4,325,000 during 1994, 1993 and 1992, respectively, were realized on those sales.
The changes in net unrealized gains (losses) on investments of the Company (including unrealized gains and losses on fixed maturities held to maturity that are not reflected in stockholders' equity) are derived from the following sources: Year Ended December 31, 1994 1993 1992 (in thousands) Decrease during period in difference between fair value and cost of investments in equity securities $(3,529) $(722) $(651)
Deferred income tax benefit 1,235 212 221 ------- ------- ------- Decrease in net unrealized losses on equity securities (2,294) (510) (430) ------- ------- ------- Increase (decrease) during period in difference between fair value and cost of investments in fixed maturities (58,187) 9,758 (15,165)
Deferred income tax benefit (expense) 20,365 (3,562) 5,156 ------- ------- ------- Increase (decrease) in net unrealized gains (losses) on fixed maturities (1) (37,822) 6,196 (10,009) ------- ------- ------- Total increase (decrease) in net unrealized gains (losses) on equity securities and fixed maturities $(40,116) $ 5,686 $(10,439) ======= ======= ========
(1) Includes changes in net unrealized gains (losses) of ($55,357,000), $9,017,000 and $9,118,000, and deferred tax expense (benefit) of ($19,377,000), $3,288,000 and $3,100,000 on fixed maturities carried at market value for 1994, 1993 and 1992, respectively, which is reflected in stockholders' equity.
At December 31, 1994 and 1993, approximately $22,871,000 and $24,876,000, respectively, of bonds carried at amortized cost were on deposit with various regulatory authorities as required by law.
The following table presents gross unrealized gains and losses and the related deferred taxes on equity securities and fixed maturities carried at fair value.
Year Ended December 31, 1994 1993 (in thousands)
Equity securities:
Gross unrealized gains $251 $3,987
Gross unrealized losses (410) (617) ----- ------- Net unrealized gains (losses) (159) 3,370 ----- -------
Fixed maturities, at fair value:
Gross unrealized gains 1,112 25,937
Gross unrealized losses (34,247) (3,715) ------- ------- Net unrealized gains (losses) (33,135) 22,222 ------- ------- Total net unrealized gains (losses) (33,294) 25,592
Deferred tax asset (liability) 11,654 (8,958) ------- ------- Unrealized appreciation (depreciation) of investments $(21,640) $16,634 ======== =======
The amortized cost and estimated fair values of investments by major security type at December 31, 1994 and 1993 are as follows:
Held to Maturity December 31, 1994 Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value
(in thousands)
U.S. Treasury securities and obligations of U.S. government corpor- ations and agencies $14,199 $53 $(824) $13,428
Debt securities issued by foreign governments 8,672 226 (52) 8,846
Total fixed maturities held to maturity $22,871 $279 $(876) $22,274 ======== ======= ======== ========
Available for Sale December 31, 1994 Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value (in thousands) U.S. Treasury securities and obligations of U.S. government corpor- ations and agencies $96,097 $272 $(4,556) $91,813 Obligations of states and political subdivisions 254,196 135 (12,549) 241,782 Debt securities issued by foreign governments 5,992 77 (106) 5,963 Corporate securities 114,321 474 (6,363) 108,432 Mortgage-backed securities 91,439 148 (7,875) 83,712 Redeemable preferred stocks 34,746 6 (2,798) 31,954 ------- ------- ------- ------- Total fixed maturities available for sale 596,791 1,112 (34,247) 563,656 Equity securities 1,897 251 (410) 1,738 ------- ------- ------- ------- Total investments carried at fair value $598,688 $1,363 $(34,657) $565,394 ======= ======= ======= ========
Held to Maturity December 31, 1993 Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value
(in thousands)
U.S. Treasury securities and obligations of U.S. government corpor- ations and agencies $15,792 $ 976 $ (6) $ 16,762 Obligations of states and political subdivisions 499 21 -0- 520 Debt securities issued by foreign governments 8,459 1,242 -0- 9,701 Corporate securities 126 -0- -0- 126 ------- ------- ------- -------
Total fixed maturities held to maturity $ 24,876 $ 2,239 $ (6) $ 27,109
======== ======= ======= ========
Available for Sale December 31, 1993 Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value
(in thousands) U.S. Treasury securities and obligations of U.S. government corpor- ations and agencies $ 64,362 $ 3,780 $ (2,035) $ 66,107 Obligations of states and political subdivisions 265,111 12,677 (396) 277,392 Debt securities issued by foreign governments 3,985 503 -0- 4,488 Corporate securities 132,494 7,243 (538) 139,199 Mortgage-backed securities 59,353 1,116 (457) 60,012 Redeemable preferred stocks 33,577 618 (289) 33,906 ------- ------- ------- ------- Total fixed maturities available for sale 558,882 25,937 (3,715) 581,104 Equity securities 15,581 3,987 (617) 18,951 ------- ------- ------- ------- Total investments carried at fair value $574,463 $ 29,924 $(4,332) $600,055 ======== ======== ======== ========
The amortized cost and estimated fair value of fixed maturities at December 31, 1994, by contractual maturity, are shown below (expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties):
Available for Sale Held to Maturity ----------------- ----------------- Amortized Fair Amortized Fair Cost Value Cost Value (in thousands)
Due in one year or less $13,212 $13,126 $228 $222 Due after one year - five years 136,872 133,061 10,461 10,521 Due after five year - ten years 302,681 284,758 12,022 11,392 Due after ten years 17,841 17,045 160 139 ------- ------- ------- ------- 470,606 447,990 22,871 22,274 Mortgage-backed securities 91,439 83,712 -0- -0- Redeemable preferred stocks 34,746 31,954 -0- -0- ------- ------- ------- ------- Total $596,791 $563,656 $22,871 $22,274 ======== ======= ======== ========
(6) NOTES PAYABLE AND CREDIT ARRANGEMENTS
On March 29, 1993, SCOR U.S. sold at par $86,250,000 of 5.25% Convertible Subordinated Debentures due April 1, 2000 ("Debentures") through a private offering. The Debentures are not redeemable by the Company prior to April 3, 1996 and are convertible into approximately 3.4 million shares of SCOR U.S. common stock at a conversion price of $25.375 per share. Expenses incurred in the offering of approximately $1,800,000 were deferred and are being amortized over the life of the Debentures. The Company contributed $50,000,000 of the net proceeds to SCOR Re. Interest expense incurred on the Debentures during 1994 and 1993 was $4,465,000 and $3,484,000, respectively.
On October 1, 1990 SCOR U.S. renewed a $20,000,000 note which was payable on that date. The new note is due and payable on October 3, 1995 and bears interest at a fixed annual rate of 9.575%. On March 12, 1993, the Company entered into an intermediate-term interest rate swap agreement with a commercial bank related to this note. The swap agreement has a maturity date of October 1, 1995 and provides for the Company to make floating rate payments in exchange for fixed rate payments due on the loan. The floating rate, which is reset every six months and is capped at 12.375%, was 11.068% as of December 31, 1994, and 8.693% as of December 31, 1993. In addition, SCOR U.S. had an $8,000,000 note at market interest rates which was repaid on May 10, 1993. Interest expense incurred for these notes, including the effect of the interest rate swap, during 1994, 1993 and 1992 was $2,072,000, $1,953,000 and $2,261,000, respectively.
In 1990, SCOR U.S. established a commercial paper program that allows the Company to raise up to $50,000,000. The weighted average interest rate of commercial paper outstanding at December 31, 1994 was 6.29%. The maximum outstanding at any month end during 1994 was
$11,310,000, and the average outstanding during 1994 was $10,269,000. The weighted average interest rate during 1994 was 5.68%. Interest expense incurred on commercial paper during 1994, 1993 and 1992 was approximately $501,000, $378,000, $450,000, respectively.
Interest paid including interest paid on reinsurance funds withheld, during 1994, 1993 and 1992 was $8,647,000, $6,928,000 and $4,250,000, respectively.
(7) RETIREMENT OF DEBENTURES
During 1994 the Company repurchased in the open market $3.9 million in principal amount of the Debentures and recognized an extraordinary gain of $351,000 (after deduction for income taxes of $189,000), or $0.02 per share. Funding for the repurchased Debentures which settled in January 1995, was achieved through the issuance of the Company's commercial paper.
(8) FINANCIAL INSTRUMENTS
Off-Balance-Sheet Risk
On March 12, 1993, the Company entered into an interest rate swap agreement to effectively convert underlying fixed-rate debt into variable-rate debt based on LIBOR (See Note 6). The notional principal amount of this agreement, which matures in October 1995, is $20,000,000. The Company has entered into this agreement with a creditworthy international financial institution and considers the risk of nonperformance to be remote. The Company is exposed to market risk due to the possibility of exchanging a lower interest rate for a higher interest rate. The net interest effect of this swap transaction is reported as an adjustment of interest income as incurred.
Concentration of Credit Risk
At December 31, 1994 the Company did not have a material concentration of financial instruments in any single investee, industry or geographic location. All of the Company's investments in fixed maturities are investment grade securities and virtually all are rated A or better.
The Company's client base and their dispersion throughout the United States limits the concentration of credit risk on amounts due from clients.
At December 31, 1994, the Company had no significant concentrations of credit risk.
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company to estimate the fair value disclosures for its assets and liabilities as of December 31, 1994 and 1993:
Fixed maturities and equity securities: Fair values are based on quoted market prices or dealer quotes. If a quoted market price is
not available, fair value is estimated using quoted market prices for similar securities.
Cash and short-term investments: The carrying amount is a reasonable estimate of fair value.
Convertible subordinated debentures: Fair value is based on the prevailing market bid.
Notes payable: Fair value is based on the discounted amount of future cash flows using the Company's current estimated borrowing rate for a similar liability.
Commercial paper: The carrying amount is a reasonable estimate of fair value due to the short-term variable market rate nature of this liability.
Interest rate swap: Fair value is based on the estimated amount that the Company would pay or (receive) to terminate the swap agreement at the reporting date, taking into account current interest rates and current creditworthiness of the counterparty.
The estimated fair values of the Company's financial instruments are as follows: December 31, 1994 1993 Carrying Fair Carrying Fair Amount Value Amount Value (in thousands)
Assets Fixed maturities at fair value $563,656 $563,656 $581,104 $581,104 Fixed maturities at amortized cost 22,871 22,274 24,876 27,109 Equity securities 1,738 1,738 18,951 18,951 Short-term investments 83,303 83,303 90,642 90,642 Cash 4,763 4,763 17,096 17,096 Liabilities Convertible subordinated debentures 82,350 69,998 86,250 81,075 Notes payable 20,000 20,000 20,000 21,897 Commercial paper 11,310 11,310 10,721 10,721 Interest rate swap -0- 341 -0- (266)
(9) FEDERAL INCOME TAXES
SCOR U.S. and its subsidiaries file a consolidated Federal income tax return.
The components of the provision for Federal income taxes attributed to income from operations were as follows:
Year Ended December 31, 1994 1993 1992 (in thousands)
Current tax expense (benefit) $ (9,171) $7,882 $(1,853) Deferred tax benefit (2,091) (899) (1,918) -------- ------- ------- $(11,262) $6,983 $(3,771) ======== ====== ======= Income taxes paid $ 1,800(1) $3,546(1) $8,001 ======== ====== ======
(1) Excludes refunds received in 1994 and 1993 of $1,700,000 and $7,782,000, respectively.
Total income tax expense (benefit) for the years ended December 31, 1994, 1993 and 1992 was allocated as follows:
Year Ended December 31, 1994 1993 1992 (in thousands)
Income (loss) from continuing operations $(11,262) $6,983 $(3,771) Extraordinary item 189 -0- -0- Cummulative effect of accounting changes -0- (1,400) 2,119 Stockholders' equity: Unrealized appreciation (depre- ciation) of investments (20,611) 3,077 2,877 Foreign currency translation (229) (125) (717) ------- ----- ----- $(31,913) $8,535 $508 ======== ====== ====
The components of the net deferred Federal income tax benefits recognized in the Company's consolidated balance sheet at December 31, 1994 and 1993 were as follows:
Deferred Tax Asset (Liability) (in thousands)
1994 1993
Deferred policy acquisition costs $(7,995) $(8,449) Unearned premium reserve 6,354 6,157 Loss reserves 25,052 23,352 Other (469) (214) ------- ------- Tax effect of temporary differences 22,942 20,846 Unrealized (appreciation) depreciation of investments 11,653 (8,958) Foreign currency translation 223 6 ------- ------- $34,818 $ 11,894 ======= =======
SFAS 109 requires the establishment of a valuation allowance for deferred income tax benefits where it is more likely than not that some portion of the deferred income tax benefits will not be realized. Management believes, based on the Company's historical record of generating taxable income and its expectations of future earnings, that the Company's taxable income in future years will be sufficient to realize the net deferred income tax benefits which are reflected on its consolidated balance sheet as of December 31, 1994. In addition, management believes certain tax planning strategies exist, including its ability to alter the mix of its investment portfolio to taxable investments from tax-exempt investments, which could be implemented if necessary to ensure sufficient taxable income to realize fully its net deferred income tax benefits. Management also believes that the Company's net deferred income tax benefits related to unrealized depreciation of fixed maturity investments is recoverable through its ability to hold these investments to maturity. Accordingly, SCOR U.S. has not established a valuation allowance with respect to its net deferred income tax benefits.
The Omnibus Budget Reconciliation Act of 1993 (the "Act") was signed into law in August 1993. The Act provided for an increase in the corporate tax rate to 35% from the previous 34% rate. As a result of the revaluation of the Company's net deferred tax assets to reflect the change in tax rates, the Company recognized a net benefit of $472,000, or $0.03 per share, in 1993. This benefit is included in the provision for Federal income taxes attributable to income from operations.
A reconciliation of income tax expense (benefit) computed by applying the United States Federal income tax rate of 35% in 1994 and 1993 and 34% in 1992 to income (loss) from operations before Federal income taxes (benefit) to the provision for Federal income taxes (benefit) is as follows:
Year Ended December 31, 1994 1993 1992
(in thousands) Computed tax expense (benefit) at U.S. Federal rate $(6,809) $12,219 $ 214 Tax-exempt interest (4,282) (4,262) (3,587) Dividends received deduction (638) (672) (605) Tax rate change -0- (472) -0- Other 467 170 207 -------- ------- ------- $(11,262) $6,983 $(3,771) ======== ======= =======
(10) RESERVES FOR LOSSES AND LOSS EXPENSES
Changes in the Company's reserves for losses and loss expenses for each year in the three year period ended December 31, 1994 is summarized as follows:
December 31, 1994 1993 1992 (in thousands)
Reserve for losses and loss expenses at beginning of year, net $340,366 $341,162 $324,117 -------- -------- -------- Provision for losses and loss expenses: Occuring in current year 193,587 160,695 165,468 Occuring in prior years (2,317) (4,403) (4,923) ------- -------- ------- Total 191,270 156,292 160,545 ------- ------- -------
Payment for losses and loss expenses, net of amounts recoverable Occuring in current year 55,155 36,018 51,514 Occuring in prior years 94,366 121,070 91,986 ------ ------- ------- Total 149,521 157,088 143,500 ------- ------- -------
Reserve for losses and loss expenses at end of year, net 382,115 340,366 341,162 Reinsurance recoverable on unpaid losses 222,672 221,843 220,651 -------- ------- ------- Reserve for losses and loss expenses at end of year, gross $604,787 $562,209 $561,813 ======== ======== ========
The operating companies of SCOR U.S. have not underwritten significant amounts of business in those classes or with those insurers that are known to be exposed to asbestos and environmental- related claims. During the years ended December 31, 1994, 1993 and 1992, the Company has not experienced any significant amount of net loss reporting or development on claims related to these exposures. In addition, the Company is significantly protected from adverse development under the SCOR S.A. Retrocessional Agreements (see Note 4). Any recoveries under such agreements are considered to be fully realizable. Based on the above information, the Company believes that its exposure to asbestos and environmental-related claims is not material to the Company's financial position or results of operations.
(11) STATUTORY REQUIREMENTS
The Insurance Department of the State of New York ("Department"), in which SCOR Re, GSIND and Unity Fire are domiciled, and the Maryland Insurance Administration, in which GSIC is domiciled, recognizes as net income and surplus (stockholder's equity) those amounts determined in conformity with statutory accounting practices prescribed or permitted by the respective jurisdiction, which differ in certain respects from GAAP.
Reconciliations of statutory surplus and net income, as determined using statutory accounting principles, to the amounts included in the accompanying financial statements are as follows:
December 31, 1994 1993 (in thousands)
Statutory surplus of insurance subsidiaries $243,416 $271,895
Deferred policy acquisition costs 22,844 24,140 Unauthorized reinsurance 12,931 7,076 Non-admitted assets 4,589 3,052 Unrealized appreciation (depreciation) on fixed maturities carried at fair value (33,135) 22,222 Deferred Federal income taxes 34,818 11,894 Parent company and non-insurance subsidiaries' net assets 56,282 56,660 Long-term debt (102,350) (106,250) --------- -------- GAAP stockholders' equity $239,395 $290,689 ======== ========
Year Ended December 31, 1994 1993 1992
(in thousands)
Statutory net income (loss) of insurance subsidiaries $(1,109) $ 34,735 $ 5,164
Deferred policy acquisition costs (1,296) 1,969 5,367 Deferred Federal income taxes 2,091 899 1,918 Cumulative effect of accounting changes -0- -0- 2,848 Parent company operations (5,018) (8,128) (7,377) Non-insurance subsidiary operations (2,509) (4,147) (671) ------- ------- -------
GAAP net income (loss) $(7,841) $25,328 $7,249 ======= ======= =======
Cash dividends of the Company's reinsurance subsidiaries may be paid only out of their statutory earned surplus. For the operating subsidiaries domiciled in New York (which represents approximately 89% of the Company's statutory surplus), the payment of dividends is subject to statutory restrictions imposed by New York insurance law. Generally the maximum amount of dividends that may be paid in any twelve-month period without the prior approval of the Department is the lesser of net investment income or 10% of statutory surplus, as such terms are defined in the New York insurance law. During the year ending December 31, 1994, $11,900,000 of dividends were declared and paid to SCOR U.S.
Based on 1994 year-end statutory surplus, the maximum dividend distribution that may be made by the Company's reinsurance subsidiaries during 1995 without prior approval is approximately $24,342,000. The amount of the Company's reinsurance subsidiaries' net assets (stockholders' equity) restricted from payment of dividends to SCOR U.S. without prior approval is approximately $219,074,000, which is 92% of total consolidated net assets.
SCOR Re Voting Trust
As a result of New York Insurance Department licensing requirements regarding government financial control and ownership of insurers, all of the capital stock of SCOR Re is held in an irrevocable voting trust. The voting trust, which was to expire during 1994, was renewed for an additional three years. The five voting trustees, four of whom are directors of SCOR U.S., are entitled to exercise all of the rights and powers of absolute owners of the capital stock of SCOR Re, subject to certain limitations specified in the voting trust agreement.
General Security Voting Trust
The Insurance Laws of the State of California generally prohibit the issuance or renewal of a license to a company owned, operated or controlled, in whole or in part, by a government. In connection with
the continuation of General Security's California license, on February 1, 1993, with the approval of the New York Insurance Department, a voting trust was established by SCOR U.S. for its holdings of capital stock in General Security. This voting trust was terminated upon the merger of General Security into SCOR Re, effective January 1, 1994.
(12) EMPLOYEE BENEFITS
Pension Plans:
SCOR U.S. has a qualified defined benefit pension plan ("SCOR U.S. Group Pension Plan") covering substantially all employees of SCOR U.S. and its affiliates. Benefits under the SCOR U.S. Group Pension Plan are based on an employee's years of service and compensation. SCOR U.S.'s funding policy is to contribute at least the minimum amount required by ERISA but not more than the maximum amount that can be deducted for Federal income tax purposes. The SCOR U.S. Group Pension Plan excludes expatriates who are temporarily assigned to the U.S. and covered by other plans sponsored or funded by the Company or a member of the SCOR S.A. Group. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. In 1994, 1993 and 1992, there were no contributions required.
The following table sets forth the SCOR U.S. Group Pension Plan funded status and amounts recognized in the SCOR U.S. consolidated balance sheet at December 31, 1994 and 1993 (in thousands):
1994 1993
Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $2,892 and $2,391 in 1994 and 1993, respectively $(3,295) $(3,312) ======= ======= Projected benefit obligation for service rendered to date $(4,678) $(5,656) Plan assets at fair value 5,912 5,560 ------- ------- Plan assets in excess of projected benefit 1,234 (96) obligation Unrecognized transition asset (885) (1,033) Unrecognized net loss from past experience 184 1,495 Unrecognized prior service costs (293) 150 ------- ------ Prepaid pension cost included in other assets $ 240 $ 516 ======= =======
Net pension expense for 1994, 1993 and 1992 included the following components (in thousands):
1994 1993 1992
Service cost-benefits earned during the period $534 $592 $406 Interest cost on projected benefit obligation 325 333 230 Actual return on plan assets (413) (412) (250) Net amortization and deferral (170) (100) (279) ---- ----- ------ Net pension expense $276 $413 $107 ====== ===== ======
The weighted-average discount rate and the average rate of compensation increase used in determining the actuarial present value of the projected benefit obligation were 8% and 5.5% in 1994, 7.5% and 6.0% in 1993, 8.0% and 6.0% in 1992, respectively. The expected long- term rate of return on assets was 7.5% in 1994 and 8% in 1993.
Savings Plans:
The SCOR U.S. Group Savings Plan ("SCOR U.S. Savings Plan") is qualified under Sections 401 (a) and 401 (k) of the United States Internal Revenue Code of 1986 as amended. Substantially all employees of SCOR U.S. and affiliates are eligible to participate in the savings plan. The SCOR U.S. Savings Plan excludes expatriates who are temporarily assigned to the U.S. and covered by other plans sponsored or funded by the Company or a member of the SCOR S.A. Group. Contributions to the savings plan are determined by the Board of Directors and are made from the net profits of the current taxable year or the accumulated net profits of SCOR U.S. Contributions for the years ended December 31, 1994, 1993 and 1992 were $575,000, $585,000 and $556,000, respectively.
The pension and savings plans may be terminated at any time by the Board of Directors of SCOR U.S.
Supplemental Retirement Plan:
SCOR U.S. also sponsors the SCOR U.S. Group Supplemental Retirement Plan ("Supplemental Retirement Plan"), an unfunded nonqualified plan established in 1989 which covers a select group of management employees. This plan enables participants in the pension plan and savings plan to earn pension benefits and tax-deferred savings benefits on the same percentage of pay basis without regard to current IRS restrictions. The Supplemental Retirement Plan incurred expenses of approximately $226,000, $133,000 and $143,000 for the years ended 1994, 1993 and 1992, respectively.
Employment Contracts:
The Company has entered into employment contracts that provide minimum pension benefits to four executives. The benefits under these contracts are unfunded, and expenses of approximately $70,000, $53,000 and $45,000 were accrued in 1994, 1993 and 1992, respectively.
(13) INCENTIVE AND STOCK OPTION PLANS
In July 1986, the Company adopted a Stock Incentive Plan for Key Executives ("Incentive Plan"), pursuant to which 786,000 shares of the common stock were reserved for issuance through options for all key executives of the Company, defined to include officers and employees of the Company and those employees of SCOR S.A. who serve on the Executive Committee of the Board of Directors of SCOR U.S. In March 1994, the number of shares available for issuance under the Incentive Plan was increased to 856,740. Nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock awards and stock bonus awards were available under the Incentive Plan. Certain of these awards may result in future compensation expense to the Company. Incentive stock options were available to be granted at not less than fair market value of the Company's common stock on the date of grant. Non-qualified options were available to be granted at not less than 85% of fair market value of the Company's common stock on the date of grant. Options become exercisable as specified at the date of grant and expire ten years and one month from the date of grant.
On September 19, 1990 the shareholders of SCOR U.S. approved a Stock Option Plan for Directors. Under this plan 220,000 shares of the common stock of SCOR U.S. have been reserved for issuance. Grants of options to purchase 3,000 shares will be made to each Director, except Directors employed by the Company, three business days following each SCOR U.S. Annual Meeting. Each option granted becomes exercisable with respect to one-half the shares of SCOR U.S. common stock covered thereby on the first anniversary of the date upon which it was granted and with respect to the balance of the shares on the second anniversary thereof.
Under the Stock Option Plan for Key Employees ("SOP") approved by the shareholders of SCOR U.S. at the Annual Meeting in June 1991, 1,426,000 shares of common stock have been reserved for issuance through options for all key employees of SCOR U.S. Corporation and its subsidiaries. In March 1994, the number of shares available for issuance under the SOP was increased to 1,554,340. The per share option price shall never be less than 100% of the fair market value of the shares at the time of the grant. Unless otherwise provided by the Board of Directors, each option granted would become exercisable to the extent of one-third of the total number of the shares of common stock subject to the option on each anniversary of the grant and expire ten years from the date the option is granted.
Information regarding the above option plans is summarized below:
Number of Option Price Shares Per Share Range --------- --------------- Outstanding at December 31, 1991 1,045,605 $ 8.00 -- $15.50 Options granted 21,000 $16.75 -- $16.75 Options exercised (71,296) $ 8.00 -- $14.25 Options cancelled (19,535) $12.25 -- $14.25 --------- ----------------
Outstanding at December 31, 1992 975,774 $ 8.00 -- $16.75 Options granted 552,693 $15.50 -- $17.00 Options exercised (123,418) $ 8.00 -- $14.25 Options cancelled (30,284) $14.25 -- $17.00 --------- ----------------
Outstanding at December 31, 1993 1,374,765 $ 8.00 -- $17.00 Options granted 458,175 $ 9.00 -- $11.125 Options exercised (57,100) $ 8.00 -- $ 9.99 Options cancelled (198,889) $ 9.00 -- $17.00 --------- ---------------
Outstanding at December 31, 1994 1,576,951 $ 8.00 -- $17.00 =========== ===============
The number of options exercisable at December 31, 1994 was 856,000. The number of shares available for future grant at December 31, 1994 was 552,000.
As indicated above, the Incentive Plan allows for the granting of restricted stock awards. The following table summarizes information regarding stock awards, for each year in the three-year period ended December 31, 1994.
1994 1993 1992 Non vested restricted stock grants at the beginning of the year 4,552 -0- 19,263 Restricted stock awards granted -0- 4,552 -0- Restricted stock awards vested -0- -0- (19,263) ----- ------ ------ Non-vested restricted stock awards at the end of the year 4,552 4,552 -0- ===== ===== ======
The Company recognized compensation expense of $11,000, $-0- and $115,000 in 1994, 1993 and 1992, respectively, in connection with these awards. At December 31, 1994, the amount of deferred compensation relating to these grants which will be recognized over the remaining vesting period is $47,000 which is included in additional paid-in capital.
During 1993 and 1992 the Company issued 44,000 shares and 40,000 shares of its common stock in exchange for notes receivable from various officers of $523,000 and $358,000, respectively. These shares were issued as a result of stock options exercised under the Company's stock option plans. The balance of unpaid stock options exercised at
December 31, 1994 and 1993 was $27,000 and $1,202,000, respectively, and is recorded as a reduction to additional paid-in capital. The Company has outstanding loans with various officers related to stock options exercised and restricted stock grants. These loans bear interest at rates ranging from 4% to 10%. The aggregate unpaid principal balance at December 31, 1994 and 1993 was $27,000 and $1,202,000, respectively.
(14) COMMITMENTS
The Company conducts its operations in leased premises. The Company also leases data processing equipment and automobiles. Total rental expense for the years ended December 31, 1994, 1993 and 1992, amounted to $2,412,000, $2,438,000 and $2,088,000, respectively.
At December 31, 1994, future minimum rental commitments are as follows (in thousands):
Year Ending December 31,
1995 $2,246 1996 1,437 1997 848 1998 776 1999 526 Thereafter 68 ------ $5,901 ======
(15) CONTINGENCIES
SCOR Re, GSIC, GSIND and Unity Fire are each party to various lawsuits arising in the normal course of their business. SCOR U.S. does not believe that any of the litigation to which SCOR Re, General Security, GSIC, GSIND or Unity Fire is currently a party will have a material adverse effect on the operating results or financial condition of SCOR U.S. and its subsidiaries.
At December 31, 1994 and 1993, the Company's reinsurance subsidiaries had letters of credit outstanding aggregating approximately $1,731,000 and $16,352,000, respectively, in favor of certain insurance companies under terms of reinsurance agreements.
The Company guarantees to a commercial bank payment when due of three mortgage loans, with original principal amounts aggregating approximately $2.8 million, issued to former excecutive officers of the Company. The guarantees are secured by the residential premises.
(16) FOREIGN OPERATIONS
The Company conducts reinsurance business in Canada through branches established for that purpose. The functional currency of such branches is the Canadian dollar. The assets and liabilities of such branches included herein have been translated into United States dollars at exchange rates in effect at the balance sheet dates, and
operations at average exchange rates in effect during the relevant periods.
Foreign currency translation adjustments have been recorded as follows:
Translation Income Adjustment Taxes Net ----------- ------ ----
(in thousands)
Balance, December 31, 1991 $2,494 $ 848 $1,646 Change during the year (2,109) (717) (1,392) ------- ------ -------
Balance, December 31, 1992 385 131 254 Change during the year (367) (125) (242) ------- ------ -------
Balance, December 31, 1993 18 6 12 Change during the year (655) (229) (426) ------- ------ -------
Balance, December 31, 1994 $(637) $(223) $ (414) ======= ====== =======
(18) SUBSEQUENT EVENTS
The Company believes that its potential for losses from January 17, 1995 Nambu-Jishin earthquake in Kobe, Japan is limited since foreign writings represent an insignificant portion of its portfolio.
On March 3, 1995 the Company entered into a lease for office space for its New York headquarters. The term of the lease is approximately 16 years with aggregate minimum rental payments of approximately $30 million.
SCHEDULE I
SCOR U.S. CORPORATION SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1994
(in thousands)
Amount at Which Amortized Market Shown on Cost Value Balance Sheet
Type of investment
Fixed Maturities:
United States Government and government agencies and authorities $201,735 $188,953 $189,724
States, municipalities and political subdivisions 254,196 241,782 241,782
Foreign Governments 14,664 14,809 14,635
Convertibles and bonds with warrants attached -0- -0- -0-
All other corporate bonds 114,321 108,432 108,432
Redeemable preferred stocks 34,746 31,954 31,954 ------- ------- ------- Total fixed maturities 619,662 585,930 586,527 ------- ------- ------- Equity securities:
Common stocks 225 476 476
Non-redeemable preferred stocks 1,672 1,262 1,262 ------- ------- ------- Total equity securities 1,897 1,738 1,738 ------- ------- ------- Short-term investments 83,303 83,303 83,303
Other long-term investments 1,225 1,225 1,225 ------- ------- ------- Total investments $706,087 $672,196 $672,793 ======== ======== ========
S-1
SCHEDULE II
SCOR U.S. CORPORATION (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS (In thousands)
December 31, 1994 1993 ----------------- ASSETS
Investment in subsidiaries and affiliates $297,772 $348,232 Fixed maturities, available for sale 20,156 18,811 Short-term investments, at cost 10,256 18,957 Other long-term investments 1,225 1,081 Cash 512 1,645 Receivables from subsidiaries and affiliates 8,847 6,335 Other assets 23,029 19,816 ------- -------- $361,797 $414,877 ======= ========
LIABILITIES
Convertible subordinated debentures $82,350 $86,250 Notes payable 20,000 20,000 Commercial paper 11,310 10,721 Other liabilities 8,742 7,217 ------- -------- 122,402 124,188 ------- -------- STOCKHOLDERS' EQUITY
Preferred stock, no par value, 5,000 shares authorized; no shares issued -0- -0- Common stock, $.30 par value, 50,000 shares authorized; 18,356 and 18,299 shares issued 5,507 5,490 Additional paid-in capital 114,556 112,670 Unrealized appreciation (depreciation) of investments, net of deferred tax effect (21,640) 16,634 Foreign currency translation adjustment (414) 12 Retained earnings 143,153 157,532 Treasury stock, at cost (192 and 190 shares) (1,767) (1,649) ------- -------- 239,395 290,689 ------- -------- $361,797 $414,877 ======= ========
S-2
SCHEDULE II (CONTINUED)
SCOR U.S. CORPORATION (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF OPERATIONS (In thousands)
Year Ended December 31, 1994 1993 1992
Revenues:
Net investment income $1,682 $1,569 $ 753 Net realized investment gains (losses) 324 236 (2) ------- ------- ------- 2,006 1,805 751 ------- ------- -------
Expenses:
Other operating expenses 2,977 8,495 8,824 Interest expense 7,038 5,815 2,824 ------- ------- ------- 10,015 14,310 11,648 ------- ------- -------
Loss from operations before Federal income tax benefits and equity in income of subsidiaries and affiliate (8,009) (12,505) (10,897)
Federal income tax benefit (2,992) (4,377) (3,520) ------- ------- ------- (5,017) (8,128) (7,377) Equity in income (loss) of subsidiaries and affiliate (3,175) 36,056 11,778 ------- ------- -------
Income (loss) from operations (8,192) 27,928 4,401 Extraordinary gain on redemption of debentures, net of tax 351 -0- -0- Cumulative effect of accounting changes -0- (2,600) 2,848 ------- ------- -------
Net income (loss) ($7,841) $25,328 $7,249 ======= ======= =======
S-3
S-4
S-5
S-6
SCHEDULE VI
SCOR U.S. CORPORATION
SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS (In thousands)
Claims and Claims Expenses Incurred Related to --------------------------
Paid Current Prior Claims Year Years Net ------- ----- ------
Consolidated subsidiaries:
Year ended December 31, 1994 $193,587 $(2,317) $149,521
Year ended December 31, 1993 $160,695 $(4,403) $157,088
Year ended December 31, 1992 $165,468 $(4,923) $143,500
S-7
INDEX TO EXHIBITS
Exhibit Number Exhibit ------ -------
3(a) Certificate of Incorporation of SCOR U.S. (Incorporated by reference to Exhibit 3(a) to Registration Statement on Form S-1, File No. 33-7695).
3(b)* Bylaws of SCOR U.S. (Adopted September 6, 1986, as amended March 17, 1988, March 16, 1989, September 26, 1989, June 26, 1990, June 11, 1992 and June 16, 1994)
4(a) Form of Common Stock Certificate (Incorporated by reference to Exhibit 4 to Registration Statement on Form S-1, File No. 33-7695).
4(b) Indenture, dated as of March 15, 1993 between SCOR U.S. Corporation and The Bank of New York, related to the 5.25% Convertible Subordinated Debentures due April 1, 2000 (Incorporated by reference to Exhibit 4(b) to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1993).
9(a) SCOR Reinsurance Company 1994 Voting Trust Agreement, dated as of June 6, 1994 among SCOR Reinsurance Company, SCOR U.S. Corporation and the Voting Trustees designated therein. (Incorporated by reference to Exhibit 9(c) to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1993).
10(a)+ 1986 Stock Incentive Plan for Key Executives of SCOR U.S. (adopted July 10, 1986, as amended March 25, 1994). (Incorporated by reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K for the period ended December 31, 1993).
10(b) Amended Service Agreement dated as of June 11, 1992 between SCOR U.S. and SCOR S.A. (Incorporated by reference to Exhibit 10(i) to the Company's Annual Report on Form 10-K for the period ended December 31, 1992).
10(c)+ Employment Agreement dated as of February 27, 1989 between SCOR Re and Jerome Karter (amended March 14, 1991)(Incorporated by reference to Exhibit 10(m) to the Company's Annual Report on Form 10K for the year ended December 31, 1989).
10(d)+ Employment Agreement dated as of November 13, 1989 between SCOR U.S. and John T. Andrews, Jr (Incorporated by reference to Exhibit 10(n) to the Company's Annual Report on Form 10-K for the year ended December 31,1989).
* Filed herewith. + Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c).
EXHIBIT NUMBER EXHIBIT ------- -------
10(e) Agreement and Plan of Merger dated as of March 6, 1990, among SCOR U.S., Rockleigh Management Corporation, SCOR Paris, and UAP Reassurances (Incorporated by reference to Exhibit 10(q) to the Company's Annual Report on Form 10-K for the year ended December 31, 1990).
10(f)* Net Aggregate Excess of Loss Retrocessional Agreement, dated July 3, 1990, between SCOR Re and SCOR S.A. (amended August 21, 1992 and May 6, 1994).
10(g)* Expense Allocation Agreement dated as of January 1, 1991, among SCOR U.S., SCOR Re, and other named subsidiaries (as amended December 10, 1992, May 5, 1994 and January 6, 1995).
10(h)* Amended Consolidated Federal Income Tax Liability Allocation Agreement dated as of December 10, 1992, among SCOR U.S., SCOR Re, and other named subsidiaries (amended May 5, 1994).
10(i) SCOR U.S. Performance Incentive Plan (Incorporated by reference to Exhibit 10(r) to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1991).
10(j)*+ SCOR U.S. 1991 Stock Option Plan for Key Employees (amended March 25, 1994 and September 30, 1994).
10(k)+ SCOR U.S. 1990 Stock Option Plan for Directors (adopted September 19, 1990 and amended June 16, 1994 by vote of the stockholders). (Incorporated by reference from Exhibit 10(t) to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1994).
10(l) Pooling Agreement dated as of April 23, 1991 among SCOR Re, General Security Insurance Corporation, General Security Indemnity Company and The Unity Fire and General Insurance Company, as amended by the Amendment to the Pooling Agreement dated as of June 10, 1993, effective as of July 1, 1993. (Incorporated by reference to Exhibit 10(w) to the Company's Annual Report on Form 10-K for the period ended December 31, 1993).
10(m)+ SCOR U.S. Group Pension Plan. (Incorporated by reference from Exhibit 10(x) to the Company's Annual Report on Form 10-K for the period ended December 31, 1993).
10(n)+ SCOR U.S. Group Savings Plan.(Incorporated by reference from Exhibit 10(y) to the Company's Annual Report on Form 10-K for the period ended December 31, 1993).
* Filed herewith. + Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c).
EXHIBIT NUMBER EXHIBIT ------- -------
10(o)+ SCOR U.S. Group Supplemental Retirement Plan.(Incorporated by reference from Exhibit 10(z) to the Company's Annual Report on Form 10-K for the period ended December 31, 1993).
10(p)+ SCOR U.S. Annual Incentive Plan for 1994.(Incorporated by reference from Exhibit (10aa) to the Company's Annual Report on Form 10-K for the period ended December 31, 1993).
10(q) Second Net Aggregate Excess of Loss Retrocessional Agreement, effective as of January 1, 1994, between SCOR Re and SCOR S.A. (Incorporated by reference from Exhibit 10(bb) to the Company's Annual Report on Form 10-K for the period ended December 31, 1993).
10(r)+ Special Severance and Pension Benefits Agreement dated as of October 25, 1993 between SCOR U.S. and Jeffrey D. Cropsey. (Incorporated by reference from Exhibit 10(cc) to the Company's Annual Report on Form 10-K for the period ended December 31, 1993).
10(s)*+ Employment Agreement dated July 25, 1994 between SCOR Re and John D. Dunn, Jr.
10(t)* Investment Advisory Agreement between New England Asset Management Firm and SCOR Re dated March 1, 1995.
10(u)* Agreement of Lease between The Port Authority of New York and New Jersey and SCOR U.S. dated January 10, 1995.
11* Statement on computation of per share earnings.
12* Computation of Ratio of Consolidated Earnings to Fixed Charges
18 Letter regarding Change in Accounting Principles (Incorporated by reference to Exhibit 18 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1992).
21* Subsidiaries of SCOR U.S.
24* Consent of Independent Public Accountants.
25* Power of Attorney.
29* Information from reports furnished to state insurance regulatory authorities (Schedule P) Submitted as a paper filing under Form SE in accordance with rule 311(c) of Regulation S-T.
*Filed herewith. + Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c).