SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934 for the quarterly period ended September 30, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 for the transition
period from to .
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For the Quarter Ended September 30, 1997 Commission file number 1-12502
------------------ --------
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Chartwell Re Corporation
(Exact name of registrant as specified in its charter)
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Delaware 41-1652573
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Four Stamford Plaza,
P. O. Box 120043
Stamford, Connecticut 06912-0043
(Address of principal executive offices) (zip code)
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Registrant's telephone number, including area code (203) 705-2500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock - $.01 par value 9,604,600
- ----------------------------- ------------
Description of Class Shares Outstanding
as of November 11, 1997
Chartwell Re Corporation
Index To Form 10-Q
PART I FINANCIAL INFORMATION
Item 1 - Page
----
Condensed Consolidated Balance Sheets
at September 30, 1997 and December 31, 1996................... 1
Condensed Consolidated Statements of Operations for
the three and nine months ended September 30, 1997
and 1996 ...................................................... 2
Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30, 1997 and 1996.............. 3
Notes to Condensed Consolidated Financial Statements............. 4
Item 2 -
Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 6
PART II..OTHER INFORMATION
Item 6 -
Exhibits and Reports on Form 8-K ................................ 16
Signatures ...................................................... 17
CHARTWELL RE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)
September 30, December 31,
ASSETS: 1997 1996
--------------- --------------
Investments: (Unaudited)
Fixed maturities:
Held to maturity (market value 1997,
$37,336; 1996, $36,620)................. $ 36,521 $ 36,043
Available for sale (amortized cost 1997,
$629,653; 1996, $609,368)............... 634,553 606,621
Other investments............................ 37,921 30,896
Cash and cash equivalents.................... 35,471 51,134
-------- --------
Total investments and cash......... 744,466 724,694
Accrued investment income.................... 9,401 10,533
Premiums in process of collection............ 129,251 86,351
Reinsurance recoverable: on paid losses...... 27,721 29,767
on unpaid losses.... 179,453 172,377
Prepaid reinsurance.......................... 35,557 21,733
Goodwill..................................... 55,156 59,538
Deferred policy acquisition costs............ 27,689 17,903
Deferred income taxes........................ 43,834 45,318
Deposits..................................... 18,883 18,135
Other assets................................. 75,579 71,515
-------- --------
$ 1,346,990 $ 1,257,864
============ ===========
LIABILITIES:
Loss and loss adjustment expenses........... $ 765,903 $ 747,858
Unearned premiums........................... 120,876 81,599
Contingent interest notes................... 29,195 27,541
Other reinsurance balances.................. 32,111 15,085
Accrued expenses and other liabilities...... 43,088 52,464
Long term debt.............................. 107,525 107,297
-------- ---------
Total liabilities................ 1,098,698 1,031,844
---------- ----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST........................... 28 30
-------- ---------
COMMON STOCKHOLDERS' EQUITY
Common stock, par value $0.01 per share;
authorized 20,000,000 shares; shares
issued and outstanding 9,604,400
and 9,583,811 in 1997 and 1996,
respectively............................. 96 96
Preferred stock, par value $1.00 per share,
authorized 5,000,000 shares.............. - -
Additional paid-in capital................ 211,782 211,782
Net unrealized appreciation (depreciation
of investments........................... 3,827 (1,521)
Foreign currency translation adjustment... (189) 1,914
Retained earnings......................... 32,748 13,719
-------- --------
Total common stockholders' equity.... 248,264 225,990
-------- --------
$ 1,346,990 $ 1,257,864
============ ===========
See notes to condensed consolidated financial statements.
1
CHARTWELL RE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
1997 1996 1997 1996
--------- --------- ------- -------
UNDERWRITING OPERATIONS:
Premiums earned......................$ 59,002 $ 47,982 $ 194,677 $ 153,186
Net investment income................ 10,665 11,570 31,289 32,591
Net realized capital gains........... 112 97 63 950
-------- ------- -------- --------
Total revenues................... 69,779 59,649 226,029 186,727
-------- ------- -------- --------
Loss and loss adjustment expenses.... 36,454 34,579 128,299 110,593
Policy acquisition costs............. 19,088 11,566 56,660 37,511
Other expenses....................... 4,525 3,753 12,752 11,757
-------- ------- -------- --------
Total expenses.................. 60,067 49,898 197,711 159,861
-------- ------- -------- --------
Income before taxes -
underwriting operations............ 9,712 9,751 28,318 26,866
-------- ------- -------- --------
SERVICE OPERATIONS:
Service and other revenue............ 7,076 965 21,510 2,337
Equity in net earnings of investees.. 1,097 877 3,273 2,731
Net investment income................ 236 1 880 5
------- ------- -------- --------
Total revenues.................. 8,409 1,843 25,663 5,073
------- ------- -------- --------
Other expenses....................... 4,184 167 13,710 778
Amortization of goodwill............. 476 - 1,521 -
-------- ------- -------- --------
Total expenses.................. 4,660 167 15,231 778
-------- ------- -------- --------
Income before taxes -service
operations......................... 3,749 1,676 10,432 4,295
-------- ------- -------- --------
CORPORATE:
Net investment income................ 42 220 186 773
Net realized capital gain (losses)... - (16) - 52
General and administrative expenses.. 448 777 1,258 1,124
Interest expense..................... 2,957 2,118 8,564 7,024
Amortization expense................. 254 135 653 432
-------- ------- --------- --------
Loss before taxes - corporate........ (3,617) (2,826) (10,289) (7,755)
-------- ------- --------- --------
Consolidated income before taxes
and extraordinary item............ 9,844 8,601 28,461 23,406
Income tax expense................... 2,857 2,590 8,282 6,817
-------- ------- --------- --------
Net income before extraordinary
item............................... 6,987 6,011 20,179 16,589
Extraordinary item, net of tax....... - - - 1,874
--------- ------- --------- --------
Net income.......................... $ 6,987 $ 6,011 $ 20,179 14,715
========= ======== ========= ========
Per Share Data:
Primary earnings per share:
Net income before
extraordinary item.............. $ 0.69 $ 0.63 $ 2.03 $ 1.86
Extraordinary item, net of tax.... (0.21)
--------- -------- -------- --------
Net income........................ $ 0.69 $ 0.63 $ 2.03 $ 1.65
========= ======== ======== ========
Weighted average common and common
equivalent shares outstanding.....10,064,542 9,583,811 9,930,711 8,914,552
========== ========= ========= =========
Fully-diluted earnings per share:
Net income before extraordinary
item............................ $ 0.69 $ 0.63 $ 2.00 $ 1.86
Extraordinary item, net of tax.... (0.21)
---------- --------- -------- --------
Net income........................ $ 0.69 $ 0.63 $ 2.00 $ 1.65
=========== ========= ======== ========
Weighted average common and common
equivalent shares outstanding.......10,125,915 9,583,811 10,110,112 8,914,552
========== ========= ========== =========
See notes to condensed consolidated financial statements.
2
CHARTWELL RE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
Nine Months
Ended September 30,
----------------------------
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net premiums collected..................... $ 129,852 $ 87,490
Net losses and loss adjustment
expenses paid............................ (117,330) (96,906)
Overhead expenses paid..................... (17,132) (11,984)
Service and other revenue, net of
related expenses......................... (4,111) 5,068
Net income taxes paid...................... (6,319) (2,548)
Interest received on investments........... 32,739 32,815
Interest paid.............................. (8,267) (7,662)
Other, net................................. (196) 967
---------- ----------
Net cash provided by operating
activities......................... 9,236 7,240
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of investments acquired................ (204,007) (331,534)
Proceeds from investments matured
or repaid................................. 18,860 27,445
Proceeds from investments sold.............. 161,862 183,022
-------- -------
Net cash used in investing activities... (23,285) (121,067)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from public stock offering....... - 58,503
Redemption of Senior Notes.................... - (28,280)
Proceeds from long-term debt.................. 812 -
Dividends paid................................ (1,150) (766)
Other, net.................................... - (250)
--------- ---------
Net cash provided by (used in)
financing activities................ (338) 29,207
--------- --------
Effect of exchange rate on cash... (1,276) 39
--------- --------
Net decrease in cash and cash equivalents.......... (15,663) (84,581)
Cash and cash equivalents at beginning
of period....................................... 51,134 155,813
------- -------
Cash and cash equivalents at end of period......... $ 35,471 $ 71,232
========= ========
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income..................................... $ 20,179 $ 14,715
Adjustments to reconcile net income to net
cash provided by operating activities:
Extraordinary item....................... - 1,874
Equity in net earnings of investees...... (3,273) (2,731)
Net realized capital gains............... (63) (1,002)
Deferred policy acquisition costs........ (9,786) 475
Unpaid loss and loss adjustment expenses. 18,045 (5,199)
Unearned premiums........................ 39,277 (5,456)
Reinsurance balances..................... 3,198 108
Reinsurance recoverable.................. (5,030) (2,467)
Net change in receivables and payables... (53,241) 7,634
Other, net............................... (70) (711)
-------- --------
Net cash provided by
operating activities......... $ 9,236 $ 7,240
======== =======
See notes to condensed consolidated financial statements.
3
CHARTWELL RE CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 1997
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim Condensed Consolidated Financial
Statements of Chartwell Re Corporation ("Chartwell" or the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information, the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for fair presentation have
been included. Operating results for any interim period are not necessarily
indicative of results that may be expected for the full year. These interim
statements should be read in conjunction with the 1996 consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K as filed with the Securities and Exchange Commission.
NOTE 2- PRO FORMA DATA
On November 19, 1996, the Company acquired (the "Acquisition") 100% of
the outstanding stock of Archer Group Holdings plc ("Archer Holdings") through
its newly formed subsidiary, Chartwell Holdings Limited. The Acquisition has
been accounted for under the purchase method of accounting.
The following pro forma consolidated income statement information for
the Company for the nine months ended September 30, 1996 is presented as though
the Acquisition, the issuance of 2,725,000 common shares through a public
offering in March and April of 1996 and the redemption by Chartwell Re Holdings
Corporation ("Holdings") of 35% of its outstanding 10 1/4% Senior Notes (the
"Senior Notes") due 2004 had occurred on January 1, 1996.
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
Actual Pro forma Actual Pro forma
------------- ------------- ------------- ------------
Total revenues $78,230 $68,734 $251,878 $213,739
Net income $6,987 $6,544 $20,179 $18,683
Primary income per
common share $0.69 $0.68 $2.03 $2.02
Weighted average
common and common
equivalent shares
outstanding 10,064,542 9,583,811 9,930,711 9,226,648
Common stock equivalents were not considered for the 1996 pro forma
data as their inclusion would not have been dilutive.
4
NOTE 3 - NEW ACCOUNTING STANDARD
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," which becomes effective for interim and annual periods ending after
December 15, 1997. SFAS No. 128 supersedes Accounting Principles Board Opinion
("APB") No. 15 and replaces the presentation of primary earnings per share
("EPS") with a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures and provides guidance on other computational issues.
After the effective date, all prior period EPS data presented shall be restated
to conform with the provisions of SFAS No. 128. Basic earnings per share and
diluted earnings per share, calculated in accordance with SFAS No. 128 are as
follows:
Three Months Nine Months
Ended Sept. 30, 1997 Ended Sept. 30, 1997
-------------------- --------------------
Basic earnings per share $ .73 $2.10
===== =====
Diluted earnings per share $ .69 $2.03
===== =====
5
ITEM 2 - Management's Discussion and Analysis
CHARTWELL RE CORPORATION
Management's Discussion and Analysis
of Financial Condition and Results of Operations
September 30, 1997
(Unaudited)
Overview
Chartwell Re Corporation ("Chartwell" or the "Company") is an insurance
holding company with global underwriting and service operations which conducts
its business in the United States and in the Lloyd's market through its four
principal operating subsidiaries, Chartwell Reinsurance Company ("Chartwell
Reinsurance"), The Insurance Corporation of New York ("INSCORP"), Archer
Managing Agents Limited ("Archer"), and Chartwell Advisers Limited ("Chartwell
Advisers"). Chartwell Reinsurance was founded in 1979 as a wholly-owned
subsidiary of Northwestern National Life Insurance Company ("NWNL") and, in
1989, Chartwell was formed to act as a holding company and the parent of
Chartwell Reinsurance. Chartwell's common stock has been publicly traded since
December 1995.
Chartwell Reinsurance underwrites treaty reinsurance through
reinsurance brokers for casualty and, to a lesser extent, property risks as well
as for marine and aviation risks. INSCORP writes property and casualty insurance
through specialty program administrators. Archer is one of the largest managing
agencies in the Lloyd's marketplace with approximately 380 million pounds
sterling of underwriting capacity for the 1997 year of account. Chartwell
Advisers acts as the exclusive advisor for syndicate selection to a
non-affiliated publicly traded company formed to underwrite at Lloyd's.
Chartwell's other subsidiaries include Dakota Specialty Insurance
Company ("Dakota Specialty") and Drayton Company Limited ("Drayton"). Dakota
Specialty is a newly formed subsidiary of Chartwell whose objective is to
underwrite business on a non-admitted basis. Drayton is not currently
writing new business, and Chartwell is managing the resolution of Drayton's
remaining claims and assets in a controlled winding-up.
As of September 30, 1997, Chartwell had total assets in excess of $1.3
billion and stockholders' equity of $248.3 million. Chartwell Reinsurance is
rated "A" (Excellent) by A.M. Best Company, Inc., an independent rating entity
serving the insurance industry, and both INSCORP and Dakota Specialty are rated
"A-" (Excellent) by A.M. Best. In addition, Chartwell Reinsurance, INSCORP and
Dakota Specialty have each been assigned an A- claims paying ability rating by
Standard and Poor's. All of Archer's syndicates enjoy the benefit of the newly
issued ratings of Lloyd's, which has been rated "A" (Excellent) by A. M. Best
and has been assigned an A+ claims paying ability rating by S&P. The 10 1.4%
Senior Notes (the "Senior Notes") of Chartwell Re Holdings Corporation, an
intermediate level holding company ("Holdings"), are rated BBB- by Standard &
Poor's and Ba1 by Moody's, respectively.
6
Results of Operations - Nine Months Ended September 30, 1997 Compared With Nine
Months Ended September 30, 1996:
Revenues: Total revenues for the nine months ended September 30, 1997
increased 30.8% to $251.9 million, compared to $192.6 million for the comparable
period in 1996. The accompanying table summarizes gross and net premiums written
and total revenues for the periods indicated:
Nine months ended September 30,
------------------------------------
1997 1996
------------- -----------
(in thousands)
Gross premiums written $298,040 $196,080
========== ===========
Net premiums written $220,760 $140,960
========== ===========
Premiums earned $194,677 $153,186
Net investment income 32,355 33,369
Net realized capital gains 63 1,002
Service and other revenue 21,510 2,337
Equity in net earnings of investees 3,273 2,731
---------- ----------
Total Revenues $251,878 $192,625
========== ==========
Underwriting Operations
Gross Premiums Written; Net Premiums Written; Net Premiums Earned.
Gross premiums written for the nine months ended September 30, 1997 were $298.0
million, an increase of 52.0% compared to the same period in 1996. These
increases reflect (i) new programs and products developed with ceding companies
in the Specialty Accounts client segment, (ii) the expansion of existing
programs and the addition of new programs in the Controlled Source Insurance
Accounts segment and (iii) gross premiums written through two dedicated
corporate capital vehicles supporting Archer syndicates. The distribution
of the Company's gross premiums written among its underwriting client segment
was as follows:
Nine months ended
September 30,
------------------
1997 1996
------- -------
Reinsurance: (in thousands)
Specialty $132,476 $65,992
-------- -------
Global
Domestic 13,400 14,972
International 12,520 16,477
-------- --------
25,920 31,449
------- -------
Regional 19,728 20,681
-------- -------
Marine & Aviation 24,480 24,177
-------- -------
Total Reinsurance 202,604 142,299
Controlled Source Insurance 80,930 46,356
Archer/Oak Dedicated
Facilities 14,506 -
Run-Off (1) - 7,425
------- --------
TOTAL $298,040 $196,080
========== ==========
(1) The run-off is reinsurance business previously written by The
Insurance Corporation of New York and not renewed into Chartwell Reinsurance
Company.
7
Specialty Accounts gross premiums written for the first nine months of
1997 increased 100.7% over the prior year primarily due to a number of new
workers compensation programs. Global Accounts gross premiums written decreased
17.6% for the nine months ended September 30, 1997 compared to September 30,
1996 reflecting the continuation of the soft reinsurance market and increased
competition for business. Gross premiums written in the Regional Accounts client
segment decreased 4.6% for the first nine months of 1997 as compared with the
same period last year primarily resulting from the non-renewal of a specific
reinsurance contract due to the ceding company retaining the business after
obtaining additional surplus. Marine and Aviation gross premiums increased
modestly for the nine months ended September 30, 1997 as compared with 1996
primarily due to increases in the aviation book of business. Gross premiums
written through September 30, 1997 in the Controlled Source Insurance Accounts
client segment increased 74.6% reflecting the continued growth of existing
programs as well as the addition of new programs in the first nine months of the
year.
In addition to underwriting through its five client segments, Chartwell
provides capital to syndicates managed by Archer through two dedicated corporate
capital vehicles, Oak Dedicated Limited and ADIT One Limited. Through these
facilities, Chartwell provides capacity to Archer syndicates totaling $45.0
million for the 1997 year of account. Chartwell's financial statements for the
nine months ended September 30, 1997 include $14.5 million of gross premiums
written from these facilities.
Net premiums written for the nine months ended September 30, 1997
increased 56.6% to $220.8 million compared to $141.0 million for the same period
in 1996. The increase in net premiums written resulted in large part from the
factors described above which generated the increase in gross premiums written.
Net premiums earned for the nine months ended September 30, 1997 were $194.7
million, an increase of $41.5 million or 27.1% compared to the same period in
1996.
Loss and Loss Adjustment Expenses. The Company's principal expense, loss
and loss adjustment expenses ("LAE") related to the settlement of claims, was
$128.3 million for the nine months ended September 30, 1997, a 16.0% increase
compared to $110.6 million for the comparable period in 1996. The increase is
principally attributable to the increase in earned premiums as noted above. Net
losses and LAE expressed as a percentage of net earned premiums (the loss and
LAE ratio) improved to 65.9% for the nine months ended September 30, 1997 from
72.2% recorded for the same period in 1996. The improvement of 6.3 percentage
points in the loss and LAE ratio for the nine months ended September 30, 1997
was a result of a change in the mix of business as well as the benefits of new
reinsurance programs and the enhancement of existing reinsurance programs. In
addition, the 1997 results were not materially affected by the run-off of
reinsurance programs written by The Insurance Corporation of New York prior to
December 1995, a factor which impacted the 1996 results.
Policy Acquisition Costs. Policy acquisition costs, consisting primarily of
commissions paid to ceding companies and brokerage fees paid to intermediaries,
less commissions received on business ceded to other reinsurers, were $56.7
million for the nine months ended September 30, 1997 compared to $37.5 million
for the same period in 1996. Policy acquisition costs expressed as a percentage
of net earned premiums (the acquisition expense ratio) increased to 29.1% from
24.5% in 1996. The increase is due to a change in the Company's mix of business
and the effects of increased premiums ceded as well as the cost of the new
reinsurance programs.
8
Other Expenses. Other expenses related to underwriting operations, which
include underwriting and administrative expenses, were $12.8 million for the
nine months ended September 30, 1997 compared to $11.8 million for the same
period in 1996. For the nine months ended September 30, 1997, other expenses
include $1.0 million reflecting the Company's share of syndicate expenses
related to the Archer dedicated corporate capital vehicles. Other expenses
expressed as a percentage of net earned premiums decreased to 6.6% for the nine
months ended September 30, 1997 compared to 7.7% for the same period in 1996.
Net Underwriting Results. The Company incurred an underwriting loss
(net premiums earned minus losses, LAE and underwriting expenses) of $3.0
million for the nine months ended September 30, 1997 as compared to an
underwriting loss of $6.7 million for the same period in 1996. The combined
ratio for the nine months ended September 30, 1997 computed in accordance with
GAAP improved to 101.6% compared to 104.4% for the same period in 1996. Although
the loss ratio component improved to 65.9% for the nine months ended September
30, 1997 from 72.2% recorded for the same period in 1996, the expense ratio
increased to 35.7% for the nine months ended September 30, 1997 from the 32.2%
recorded for the same period in 1996, for the reasons noted above.
Service Operations
Revenue from service operations increased to $25.7 million for the nine
months ended September 30, 1997 compared to $5.1 million for the same period in
1996. The increase is due principally to the revenues from Archer as well as
increases in advisory fee revenues and equity in the net earnings of investee
companies.
Corporate
Interest and Amortization. Interest and amortization expenses were $9.2
million for the nine months ended September 30, 1997 compared to $7.5 million
for the same period in 1996. The 1997 amount includes $2.0 million of interest
and amortization related to the acquisition of Archer offset by a reduction in
interest expense on the Senior Notes due to the redemption on April 8, 1996 of
35% of the principal amount of outstanding Senior Notes.
Consolidated
Net Investment Income and Net Realized Capital Gains (Losses).
Consolidated after-tax net investment income, exclusive of realized and
unrealized capital gains and losses, for the nine months ended September 30,
1997 was $23.0 million, compared to $22.4 million for the same period in 1996.
The carrying value of the Company's invested assets increased to $744.5 million
at September 30, 1997 from $724.7 million at December 31, 1996 primarily due to
the decline in interest rates during this period as well as the positive cash
flows from operations. The average annual tax equivalent yield on invested
assets after investment expenses increased to 6.54% for the first nine months of
1997 compared to 6.31% for the same period in 1996.
The Company realized net capital gains of $63,000 for the first nine
months of 1997 compared to net capital gains of $1,002,000 for the same period
in 1996. The net capital gains were realized principally to reposition certain
sectors of the portfolio.
Income Before Income Taxes. Income before income taxes increased to
$28.5 million for the nine months ended September 30, 1997 compared to $23.4
million for the same period in 1996. The increase resulted primarily from the
increase in earned premiums, the favorable results in both loss and loss
adjustment expense and in other expenses, and from the increases in service and
other revenue.
9
Income Tax Expense. The provision for Federal income taxes for the nine
months ended September 30, 1997 increased to $8.3 million compared with $6.8
million for the same period in 1996. The effective tax rate was 29.1% for the
nine months ended September 30, 1997 and 1996. The principal factor in the
decline below the statutory rate of 35% for both periods was the benefit of
investments in tax-advantaged securities.
Net Income. The Company realized a net profit of $20.2 million for the
nine months ended September 30, 1997 compared with a net profit of $14.7 million
for the comparable 1996 period because of the factors discussed above. Net
income per share (primary) increased 23.0% to $2.03 for the nine months ended
September 30, 1997 from $1.65 per share reported a year ago. The 1996 figures
include an extraordinary charge of $1.9 million, or $0.21 per share,
attributable to the redemption of 35% of the Senior Notes which occurred on
April 8, 1996. Net income per share (primary) for the nine months ended
September 30, 1997 reflects the dilutive effect of common share equivalents
outstanding at September 30, 1997, which amounted to $.07 per share.
Results of Operations - Three Months Ended September 30, 1997 Compared With
Three Months Ended September 30, 1996:
Revenues: Total revenues for the three months ended September 30, 1997
increased 26.8% to $78.2 million, compared to $61.7 million for the comparable
period in 1996. The accompanying table summarizes gross and net premiums written
and total revenues for the periods indicated:
Three months ended September 30,
-------------------------------------
1997 1996
------------- ------------
(in thousands)
Gross premiums written $104,425 $63,613
============= ===========
Net premiums written $74,498 $45,237
============= ===========
Premiums earned $59,002 $47,982
Net investment income 10,943 11,791
Net realized capital gains 112 81
Service and other revenue 7,076 965
Equity in net earnings of investees 1,097 877
------------- -----------
Total Revenues $78,230 $61,696
============= ===========
Underwriting Operations Gross Premiums Written; Net Premiums Written; Net
Premiums Earned. Gross premiums written for the third quarter 1997 were $104.4
million, an increase of 64.2% compared to the same period in 1996. These
increases reflect (i) new programs and products developed with ceding companies
in the Specialty Accounts client segment, (ii) the expansion of existing
programs and the addition of new programs in the Controlled Source Insurance
Accounts segment and (iii) gross premiums written through two dedicated
corporate capital vehicles supporting Archer syndicates.
10
The distribution of the Company's gross premiums written among its
underwriting client segments was as follows:
Three months ended
September 30,
-------------------
1997 1996
-------- --------
Reinsurance: (in thousands)
Specialty $45,164 $23,163
-------- --------
Global
Domestic 6,838 3,961
International 1,664 7,536
-------- -------
8,502 11,497
-------- -------
Regional 6,512 7,383
-------- -------
Marine & Aviation 6,320 7,621
-------- -------
Total Reinsurance 66,498 49,664
Controlled Source Insurance 31,580 15,382
Archer/Oak Dedicated
Facilities 6,347 -
Run-Off (1) - (1,433)
--------- --------
TOTAL $104,425 $63,613
========= ========
(1) The run-off is reinsurance business previously written by The
Insurance Corporation of New York and not renewed into Chartwell Reinsurance
Company.
Gross premiums written in the Specialty Accounts client segment for the
three months ended September 30, 1997 increased 95.0% over the prior year
primarily due to a number of new workers compensation programs. Global Accounts
gross premiums written decreased 26.1% for the three months ended September 30,
1997 compared to September 30, 1996. Gross premiums written in the Regional
Accounts client segment decreased 11.8% for the three months ended September 30,
1997 as compared with the same period last year. Marine and Aviation gross
premiums written decreased 17.1% for the three months ended September 30, 1997
as compared with 1996. The decrease in gross premiums written in the Global,
Regional and Marine & Aviation client segments is primarily attributable to the
continuation of the soft reinsurance market and increased competition for
business. Gross premiums written in the Controlled Source Insurance Accounts
client segment for the three months ended September 30, 1997 increased 105.3%
reflecting the continued growth of existing programs as well as the premiums
from new programs. In addition, Chartwell's financial statements for the third
quarter of 1997 include $6.3 million of gross premiums written from the
dedicated corporate capital vehicles supporting Archer syndicates.
Net premiums written for the three months ended September 30, 1997
increased 64.7% to $74.5 million compared to $45.2 million for the same period
in 1996. The increase in net premiums written resulted, in large part, from the
factors described above which generated the increase in gross premiums written.
Net premiums earned for the three months ended September 30, 1997 were $59.0
million, an increase of $11.0 million or 23.0% compared to the same period in
1996.
11
Loss and Loss Adjustment Expenses. The Company's principal expense, loss
and loss adjustment expenses ("LAE") related to the settlement of claims, was
$36.5 million for the three months ended September 30, 1997, a 5.4% increase
compared to $34.6 million for the comparable period in 1996. The increase is
principally attributable to the increase in earned premiums as noted above. Net
losses and LAE expressed as a percentage of net earned premiums (the loss and
LAE ratio) improved to 61.8% for the three months ended September 30, 1997 from
72.1% recorded for the same period in 1996. The improvement of 10.3 percentage
points in the loss and LAE ratio for the three months ended September 30, 1997
was a result of a change in the mix of business programs as well as the benefits
of new reinsurance programs and the enhancement of existing reinsurance
programs. In addition, the 1997 results were not materially affected by the
run-off of reinsurance programs written by The Insurance Corporation of New York
prior to December 1995, a factor which impacted the 1996 results.
Policy Acquisition Costs. Policy acquisition costs, consisting primarily of
commissions paid to ceding companies and brokerage fees paid to intermediaries,
less commissions received on business ceded to other reinsurers, were $19.1
million for the three months ended September 30, 1997 compared to $11.6 million
for the same period in 1996. Policy acquisition costs expressed as a percentage
of net earned premiums (the acquisition expense ratio) increased to 32.4% from
24.1% in 1996. The increase is due to a change in the Company's mix of business
and the effects of increased premiums ceded as well as the cost of the new
reinsurance programs.
Other Expenses. Other expenses related to underwriting operations, which
include underwriting and administrative expenses, were $4.5 million for the
three months ended September 30, 1997 compared to $3.8 million for the same
period in 1996. For the three months ended September 30, 1997, other expenses
include $322,000 reflecting the Company's share of syndicate expenses related to
the Archer dedicated corporate capital vehicles. Other expenses expressed as a
percentage of net earned premiums were relatively flat at 7.7% for the three
months ended September 30, 1997 compared to 7.8% for the same period in 1996.
Net Underwriting Results. The Company incurred an underwriting loss
(net premiums earned minus losses, LAE and underwriting expenses) of $1.1
million for the three months ended September 30, 1997 as compared to an
underwriting loss of $1.9 million for the same period in 1996. The combined
ratio for the three months ended September 30, 1997 computed in accordance with
GAAP was 101.9% compared to 104.0% for the same period in 1996. Although the
loss ratio component improved to 61.8% for the three months ended September 30,
1997 from 72.1% recorded for the same period in 1996, the expense ratio
increased to 40.1% for the three months ended September 30, 1997 from the 31.9%
recorded for the same period in 1996, for the reasons noted above.
Service Operations
Revenue from service operations increased to $8.4 million for the three
months ended September 30, 1997 compared to $1.8 million for the same period in
1996. The increase is due principally to the revenues from Archer as well as
increases in advisory fee revenues and equity in the net earnings of investee
companies.
Corporate
Interest and Amortization. Interest and amortization expenses were $3.2
million for the three months ended September 30, 1997 compared to $2.3 million
for the same period in 1996. The increase is primarily due to $650,000 of
interest and amortization related to the acquisition of Archer.
12
Consolidated
Net Investment Income and Net Realized Capital Gains. Consolidated
after-tax net investment income, exclusive of realized and unrealized capital
gains, for the three months ended September 30, 1997 was $7.8 million, compared
to $8.0 million for the same period in 1996. The carrying value of the Company's
invested assets increased to $744.5 million at September 30, 1997 from $724.7
million at December 31, 1996 primarily due to the decline in interest rates
during this period as well as the positive cash flows from operations. The
average annual tax equivalent yield on invested assets after investment expenses
decreased to 6.77% for the third quarter of 1997 compared to 6.88% for the same
period in 1996.
The Company realized net capital gains of $112,000 and $81,000 for the
three months ended September 30, 1997 and 1996, respectively.
Income Before Income Taxes. Income before income taxes increased to
$9.8 million for the three months ended September 30, 1997 compared to $8.6
million for the same period in 1996. The increase resulted primarily from the
increase in earned premiums, the favorable results in both loss and loss
adjustment expense and in other expenses, and from the increases in service and
other revenue.
Income Tax Expense. The provision for Federal income taxes for the
three months ended September 30, 1997 increased to $2.9 million compared with
$2.6 million for the same period in 1996. The effective tax rate was 29.0% and
30.1% for the three months ended September 30, 1997 and 1996, respectively. The
principal factor in the decline below the statutory rate of 35% for both periods
was the benefit of investments in tax-advantaged securities.
Net Income. The Company realized a net profit of $7.0 million for the
three months ended September 30, 1997 compared with a net profit of $6.0 million
for the comparable 1996 period because of the factors discussed above. Net
income per share (primary) increased 9.5% to $0.69 for the three months ended
September 30, 1997 from $0.63 per share reported a year ago. Net income per
share (primary) for the three months ended September 30, 1997 reflects the
dilutive effect of common share equivalents outstanding at September 30, 1997,
which amounted to $.04 per share.
Liquidity and Capital Resources
As a holding company, Chartwell's assets consist primarily of the stock of
its direct and indirect subsidiaries. Chartwell's cash flow, therefore, depends
largely on dividends and other payments from Holdings, and in turn Holdings'
cash flow depends largely on interest, dividends and tax sharing payments from
Chartwell Reinsurance. Chartwell Reinsurance's sources of funds consist
primarily of net premiums, reinsurance recoveries, investment income and
proceeds from sales and redemptions of investments. Funds are applied primarily
to payments of claims, operating expenses and income taxes and to the purchase
of investments, largely fixed income securities. Cash and short-term investments
are maintained for the payment of claims and expenses. Chartwell Reinsurance's
ability to pay cash dividends to the Company is restricted by law or subject to
approval of the insurance regulatory authority of Minnesota, Chartwell
Reinsurance's state of domicile. The Minnesota authority recognizes only
statutory accounting practices for the ability of an insurer to pay dividends to
its stockholders. For the year ending December 31, 1997, Chartwell Reinsurance
has the ability to pay dividends aggregating up to $23.8 million without
regulatory approval. On November 5, 1997, the Board of Directors of Chartwell
Reinsurance declared a $3.0 million dividend payable to Holdings on November 21,
1997. No other dividends have been declared or paid by Chartwell Reinsurance in
1997.
13
The Company paid a quarterly cash dividend of $0.04 per share on March
5, 1997, June 3, 1997, and September 2, 1997. On November 5, 1997, the Company's
Board of Directors declared a quarterly cash dividend of $0.04 per share which
is payable on December 3, 1997.
At September 30, 1997, 94.9% of Chartwell's total investments
(including cash and cash equivalents) consisted of fixed income securities, of
which 95.5% were rated "A" or better (or "A-1" for commercial paper) by Moody's.
While uncertainties exist regarding interest rates and inflation, Chartwell
attempts to minimize such risks and exposures by balancing the duration of
insurance and reinsurance liabilities with the duration of assets in its
investment portfolio. The current market value of Chartwell's fixed maturity
investments is not necessarily indicative of their future valuation. Chartwell
does not have any investments in real estate or high-yield bonds and does not
have any non-income producing fixed income investments. The Company's fixed
income securities portfolio at September 30, 1997 was comprised primarily of
U.S. Treasury and government agency, mortgage pass-through securities and
corporate and municipal bonds.
Stockholders' equity increased approximately 9.9% to $248.3 million at
September 30, 1997 from $226.0 million at December 31, 1996. GAAP book value per
share increased to $25.85 at September 30, 1997 from $23.58 at December 31,
1996. Chartwell's ratio of long-term debt to total capitalization (exclusive of
the Contingent Interest Notes) improved to 30.2% at September 30, 1997 from
32.2% at December 31, 1996.
Statutory policyholders' surplus of Chartwell Reinsurance Company
increased to $251.3 million at September 30, 1997 from $238.3 million at
December 31, 1996.
In connection with the November 1996 acquisition of Archer, Holdings
entered into new credit facilities with First Union National Bank, N. A. (the
"First Union Credit Facility"). The new credit facilities provide term loans of
approximately $50 million (a portion of which is denominated in pounds sterling)
and a $25.0 million revolving credit facility which was subsequently increased
to $35.0 million and, effective October 30, 1997, was increased further to $60
million. The Company intends to use the additional funds principally to increase
the capacity it provides to Archer syndicates in 1998 through its dedicated
corporate capital vehicles.
At September 30, 1997, $45.0 million was outstanding under the First
Union Credit Facility. In addition, at September 30, 1997, $9.3 million was used
to guarantee the loan notes and $20.0 million was used to secure letters of
credit.
Chartwell is largely dependent upon receipt of dividends and other
statutorily permissible payments from Holdings to meet its obligations and to
pay dividends on the Common Stock. Holdings is in turn largely dependent on
interest, dividends and other payments from its subsidiaries to meet its
obligations, including the obligation to pay interest and principal on the
Senior Notes and under the new credit facilities. The agreements governing the
foregoing debt obligations significantly restrict the ability of Holdings to
make dividend and other payments to Chartwell. Further, dividend payments by
Chartwell Reinsurance and INSCORP are subject to limits under the laws of the
States of Minnesota and New York, respectively. Under the applicable provisions
of the insurance holding company laws of the State of Minnesota, Chartwell
Reinsurance may, upon five days notice to the Commissioner following the
declaration of dividends to stockholders, and upon at least ten days notice to
the Commissioner prior to dividend payments, pay dividends to Holdings without
the approval of the Commissioner, unless such dividends, together with other
dividends paid within the preceding twelve months, exceed the greater of (i) 10%
of Chartwell Reinsurance's policyholders' surplus as of the end of the prior
calendar year or (ii) Chartwell Reinsurance's statutory net income, excluding
realized capital gains, for the prior calendar year. Any dividend in excess of
the amount determined pursuant to the foregoing formula would be characterized
as an "extraordinary dividend" requiring the prior approval of the Commissioner.
14
In any case, the maximum amount of dividends Chartwell Reinsurance may pay is
limited to its earned surplus. Up to $23.8 million is available under the
foregoing formula for the payment of dividends by Chartwell Reinsurance without
regulatory approval in 1997. On November 5, 1997, the Board of Directors of
Chartwell Reinsurance declared a $3.0 million dividend payable to Holdings on
November 21, 1997. No other dividends have been declared or paid by Chartwell
Reinsurance in 1997. Under New York law, which is applicable to INSCORP, the
maximum ordinary dividend payable in any twelve month period without the
approval of the Superintendent may not exceed the lesser of (a) 10% of
policyholders surplus as shown on the company's last annual statement or any
more recent quarterly statement or (b) the Company's adjusted net investment
income. Adjusted net investment income is defined as net investment income for
the twelve months preceding the declaration of the dividend plus the excess, if
any, of net investment income over dividends declared or distributed during the
period commencing thirty-nine months prior to the declaration or distribution of
the current dividend and ending twelve months prior thereto. In any case, New
York law permits the payment of an ordinary dividend by an insurer or reinsurer
only out of earned surplus. Moreover, notwithstanding the receipt of any
dividend from INSCORP, Chartwell Reinsurance may make dividend payments to
Holdings only to the extent permitted under the Minnesota provisions described
above.
In addition to the foregoing limitation, the New York Insurance
Department, as is its practice in any change of control situation, has required
Chartwell to commit to preclude the acquired New York-domiciled insurer,
INSCORP, from paying any dividends for two years after the change of control
without prior regulatory approval. This two year period ends in December 1997.
The maximum dividend permitted by law is not indicative of an insurer's
actual ability to pay dividends, which may be constrained by business and
regulatory considerations, such as the impact of dividends on surplus, which
could affect an insurer's ratings or competitive position, the amount of
premiums that can be written and the ability to pay future dividends.
Furthermore, beyond the limits described in the preceding paragraph, the
Commissioner and Superintendent have discretion to limit the payment of
dividends by insurance companies domiciled in Minnesota and New York,
respectively.
15
CHARTWELL RE CORPORATION
PART II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
None
(c) Signatures
16
CHARTWELL RE CORPORATION
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHARTWELL RE CORPORATION
(Registrant)
/s/Charles E. Meyers
----------------------------------
Charles E. Meyers
Duly Authorized Officer and Senior
Vice President and Chief Financial Officer
Dated: November 11, 1997
17