SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------
FORM 10-Q
--------
(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 .
------------- ----------------
For the Quarter Ended September 30, 1997 Commission file number 0-28188
------------------ -----------------------------
-------------
Chartwell Re Holdings Corporation
(Exact name of registrant as specified in its charter)
-------------
Delaware 06-1438493
(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)
-------------
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 - $1.00 par value 100
- ------------------------------ ------
Description of Class Shares Outstanding
as of November 13, 1997
(All shares are privately held,
and there is no public market for
the Company's common shares)
Chartwell Re Holdings 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....................................... 5
PART II..OTHER INFORMATION
Item 6 -
Exhibits and Reports on Form 8-K ................................. 15
Signatures ....................................................... 16
PART I. FINANCIAL INFORMATION
ITEM 1 - Financial Statements
CHARTWELL RE HOLDINGS 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.................... 34,320 50,343
-------- --------
Total investments and cash......... 743,315 723,903
Accrued investment income.................... 9,397 10,529
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..................................... 48,359 52,609
Deferred policy acquisition costs............ 27,689 17,903
Deferred income taxes........................ 40,532 42,160
Deposits..................................... 18,883 18,135
Other assets................................. 81,931 69,757
-------- --------
$ 1,342,088 $ 1,245,224
============ ===========
LIABILITIES:
Loss and loss adjustment expenses........... $ 765,903 $ 747,858
Unearned premiums........................... 120,876 81,599
Other reinsurance balances.................. 32,111 15,085
Accrued expenses and other liabilities...... 49,588 51,763
Long term debt.............................. 107,525 107,297
-------- ---------
Total liabilities................ 1,076,003 1,003,602
---------- ----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST........................... 9,260 9,469
-------- ---------
COMMON STOCKHOLDER'S EQUITY
Common stock, par value $1.00 per share;
authorized 1,000 shares; shares
issued and outstanding 100
Additional paid-in capital................ 217,866 217,866
Net unrealized appreciation (depreciation
of investments........................... 3,827 (1,379)
Foreign currency translation adjustment... (91) 1,291
Retained earnings......................... 35,223 14,375
-------- --------
Total common stockholder's equity.... 256,825 232,153
-------- --------
$ 1,342,088 $ 1,245,224
============ ===========
See notes to condensed consolidated financial statements.
1
CHARTWELL RE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
(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................ 9 104 103 371
Net realized capital gain (losses)... - (16) - 52
General and administrative expenses.. 449 673 1,233 744
Interest expense..................... 2,391 1,599 6,910 5,509
Amortization expense................. 135 56 370 197
-------- ------- --------- --------
Loss before taxes - corporate........ (2,966) (2,240) (8,410) (6,027)
-------- ------- --------- --------
Consolidated income before taxes
and extraordinary item............ 10,495 9,187 30,340 25,134
Income tax expense................... 3,047 2,744 8,974 7,347
-------- ------- --------- --------
Net income before minority interest
and extraordinary item............ 7,398 6,443 21,366 17,787
Minority interest.................... 173 - 518 -
Extraordinary item, net of tax....... - - - 1,874
--------- ------- --------- --------
Net income.......................... $ 7,225 $ 6,443 $ 20,848 15,913
========= ======== ========= ========
See notes to condensed consolidated financial statements.
2
CHARTWELL RE HOLDINGS 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........................ (17,083) (10,792)
Service and other revenue, net of
related expenses........................... (4,111) 5,068
Net income taxes paid......................... (2,093) (2,247)
Interest received on investments.............. 32,656 32,407
Interest paid................................. (8,267) (7,662)
Other, net.................................... (5,898) 4,884
---------- ----------
Net cash provided by operating
activities......................... 7,726 12,242
---------- ---------
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:
Cash contribution from parent................. - 48,545
Redemption of Senior Notes.................... - (28,280)
Proceeds from issuance of long-term debt...... 812 -
Other, net.................................... - (250)
--------- ---------
Net cash provided by financing
activities.......................... 812 20,015
--------- --------
Effect of exchange rate on cash... (1,276) 38
--------- --------
Net decrease in cash and cash equivalents.......... (16,023) (88,772)
Cash and cash equivalents at beginning
of period....................................... 50,343 152,507
------- -------
Cash and cash equivalents at end of period......... $ 34,320 $ 63,735
========= ========
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income.................................... $ 20,848 $ 15,913
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... (45,335) 8,574
Other, net............................... (10,155) 2,153
-------- --------
Net cash provided by
operating activities......... $ 7,726 $ 12,242
======== =======
See notes to condensed consolidated financial statements.
3
CHARTWELL RE HOLDINGS 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 Holdings 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's parent, Chartwell Re Corporation
("Chartwell Re") 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 and the redemption of 35% of the Company's 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 $78,197 $68,618 $251,795 $213,337
Net income $7,225 $6,789 $20,848 $19,320
4
ITEM 2 - Management's Discussion and Analysis
CHARTWELL RE HOLDINGS CORPORATION
Management's Discussion and Analysis
of Financial Condition and Results of Operations
September 30, 1997
(Unaudited)
Overview
Chartwell Re Holdings 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"). The Company
was formed in 1995 to act as an intermediate level holding company for its
parent, Chartwell Re Corporation ("Chartwell Re"), a company whose common stock
is traded on the New York Stock Exchange.
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 stockholder's equity of $256.8 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") are rated BBB- by Standard & Poor's and Ba1 by
Moody's, respectively.
5
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 31.0% to $251.8 million, compared to $192.2 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 32,272 32,976
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 $ 251,795 $192,223
============== =============
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 segments 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.
6
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 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 $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.
7
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 $7.3
million for the nine months ended September 30, 1997 compared to $5.7 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 $22.9 million, compared to $22.2 million for the same period in 1996.
The carrying value of the Company's invested assets increased to $743.3 million
at September 30, 1997 from $723.9 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 6.49% for the first nine months of
1997 compared to 6.26% 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
$30.3 million for the nine months ended September 30, 1997 compared to $25.1
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.
8
Income Tax Expense. The provision for Federal income taxes for the nine
months ended September 30, 1997 increased to $9.0 million compared with $7.3
million for the same period in 1996. The effective tax rate was 29.6% and 29.2%
for the nine 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 $20.8 million for the
nine months ended September 30, 1997 compared with a net profit of $15.9 million
for the comparable 1996 period because of the factors discussed above.
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 27.0% to $78.2 million, compared to $61.6 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 10,910 11,675
Net realized capital gains 112 81
Service and other revenue 7,076 965
Equity in net earnings of investees 1,097 877
------------ ------------
Total Revenues $78,197 $61,580
============ ============
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.
9
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.
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 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.
10
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 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 $2.5
million for the three months ended September 30, 1997 compared to $1.7 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.
11
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 $743.3 million at September 30, 1997 from $723.9
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 6.68% 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
$10.5 million for the three months ended September 30, 1997 compared to $9.2
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 $3.1 million compared with
$2.7 million for the same period in 1996. The effective tax rate was 29.5% and
29.9% 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 $7.2 million for the
three months ended September 30, 1997 compared with a net profit of $6.4 million
for the comparable 1996 period because of the factors discussed above.
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 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 the Company on November 21, 1997. No other dividends have
been declared or paid by Chartwell Reinsurance in 1997.
At September 30, 1997, 94.9% of Chartwell's total investments
(including cash and cash equivalents) consisted of fixed income securities, of
which 95.9% 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.
12
Stockholder's equity increased approximately 10.6% to $256.8 million at
September 30, 1997 from $232.2 million at December 31, 1996. Chartwell's ratio
of long-term debt to total capitalization improved to 29.5% at September 30,
1997 from 31.6% 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, the Company
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 its subsidiaries to meet its obligations
and to pay interest and principal on the Senior Notes and under the new credit
facilities. 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 the Company 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. 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 the Company on November 21, 1997. No other dividends have been
declared or paid by Chartwell Reinsurance in 1997. Under New York law, which is
13
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 the Company 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.
14
CHARTWELL RE HOLDINGS 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
15
CHARTWELL RE HOLDINGS 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 HOLDINGS CORPORATION
(Registrant)
/s/ Charles E. Meyers
-----------------------------
Charles E. Meyers
Duly Authorized Officer and Senior
Vice President and Chief Financial Officer
Dated: November 11, 1997
16