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 June 30, 1998 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 June 30, 1998 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
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(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 9,626,543
- ----------------------------- ------------
Description of Class Shares Outstanding
as of August 12, 1998
Chartwell Re Corporation
Index To Form 10-Q
PART I FINANCIAL INFORMATION
Page
Item 1 - ----
Condensed Consolidated Balance Sheets at June 30, 1998
and December 31, 1997....................................... 1
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 1998 and 1997............ 2
Condensed Consolidated Statements of Cash Flows for the
three and six months ended June 30, 1998 and 1997............ 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 5 - Other Information..................................... 14
Item 6 - Exhibits and Reports on Form 8-K ..................... 15
Signatures .................................................... 16
i
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
CHARTWELL RE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)
June 30, December 31,
1998 1997
------------ -----------
ASSETS: (Unaudited)
Investments:
Fixed maturities:
Held to maturity (market value 1998, $35,540;
1997, $37,421).................................. $ 34,495 $ 36,630
Available for sale (amortized cost 1998, $654,074;
1997, $645,108)................................. 671,968 657,973
Other investments................................... 42,628 38,043
Cash and cash equivalents............................. 26,920 31,607
----------- ---------
Total investments and cash..................... 776,011 764,253
Accrued investment income............................. 10,820 10,677
Premiums in process of collection..................... 163,514 126,537
Reinsurance recoverable: on paid losses............... 23,206 34,502
on unpaid losses............. 256,005 202,593
Prepaid reinsurance................................... 44,350 29,929
Goodwill.............................................. 60,421 61,006
Deferred policy acquisition costs..................... 24,251 26,100
Deferred income taxes................................. 28,988 33,298
Deposits.............................................. 19,729 19,040
Other assets.......................................... 69,594 67,549
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$1,476,889 $1,375,484
============ ==========
LIABILITIES:
Loss and loss adjustment expenses..................... $ 834,011 $ 788,240
Unearned premiums..................................... 117,035 111,149
Contingent interest notes............................. 30,938 29,747
Other reinsurance balances............................ 59,600 33,723
Accrued expenses and other liabilities................ 48,513 47,967
Long term debt........................................ 108,178 104,126
------------ ----------
Total liabilities.......................... 1,198,275 1,114,952
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COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST..................................... 14 35
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00 per share;
authorized 5,000,000 shares; no shares issued
or outstanding.....................................
Common stock, par value $0.01 per share; authorized
20,000,000 shares; shares issued and outstanding
9,626,543 and 9,609,799 in 1998 and 1997,
respectively....................................... 96 96
Additional paid-in capital.......................... 212,128 211,864
Net unrealized appreciation of investments.......... 12,271 8,741
Foreign currency translation adjustment............. 677 348
Retained earnings................................... 53,428 39,448
------------ ----------
Total stockholders' equity................. 278,600 260,497
------------ ----------
$1,476,889 $1,375,484
============ ==========
See notes to consolidated financial statements.
1
CHARTWELL RE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share amounts)
(Unaudited)
Three Month Periods Six Month Periods
Ended June 30, Ended June 30,
--------------------------- ---------------------
1998 1997 1998 1997
------------- ---------- ---------- ----------
UNDERWRITING OPERATIONS:
Premiums earned....................... $ 56,430 $ 73,890 $ 109,173 $ 135,675
Net investment income................. 11,996 10,793 23,640 20,624
Net realized capital gains (losses)... (39) (29) 60 (49)
---------- ---------- ---------- ----------
Total revenues................... 68,387 84,654 132,873 156,250
---------- ---------- ---------- ----------
Loss and loss adjustment expenses..... 33,914 49,810 65,838 91,845
Policy acquisition costs.............. 14,639 20,452 29,584 37,572
Other expenses........................ 6,011 4,533 10,280 8,227
---------- ---------- ---------- ----------
Total expenses................... 54,564 74,795 105,702 137,644
---------- ---------- ---------- ----------
Income before taxes -
underwriting operations.......... 13,823 9,859 27,171 18,606
---------- ---------- ---------- ----------
SERVICE OPERATIONS:
Service and other revenue............. 3,291 6,900 6,639 14,434
Equity in net earnings of investees... 1,323 1,030 2,071 2,176
Net investment income................. 129 396 337 644
---------- ---------- ---------- ----------
Total revenues................... 4,743 8,326 9,047 17,254
---------- ---------- ---------- ----------
Other expenses........................ 3,329 4,648 6,015 9,526
Amortization of goodwill.............. 569 528 1,135 1,045
---------- ---------- ---------- ----------
Total expenses................... 3,898 5,176 7,150 10,571
---------- ---------- ---------- ----------
Income before taxes -
service operations............... 845 3,150 1,897 6,683
---------- ---------- ---------- -----------
CORPORATE:
Net investment income................. 48 13 88 144
General and administrative expenses... 681 409 1,305 810
Interest expense...................... 3,000 2,902 6,074 5,607
Amortization expense.................. 308 158 613 399
---------- ---------- ---------- -----------
Loss before taxes - corporate......... (3,941) (3,456) (7,904) (6,672)
---------- ---------- ---------- -----------
Consolidated income before taxes...... 10,727 9,553 21,164 18,617
Income tax expense.................... 3,335 2,848 6,405 5,425
---------- ---------- ---------- -----------
Net income............................ $ 7,392 $ 6,705 $ 14,759 $ 13,192
========== ========== ========== ===========
Per Share Data:
Basic earnings per share.............. $ 0.77 $ 0.70 $ 1.53 $ 1.37
========== ========== ========== ===========
Weighted average number of common
shares outstanding.................. 9,625,374 9,597,419 9,624,368 9,596,756
=========== =========== ========== ===========
Diluted earnings per share............ $ 0.74 $ 0.68 $ 1.47 $ 1.34
=========== =========== ========== ===========
Weighted average number of common
and common equivalent shares
outstanding........................ 9,986,569 9,840,963 10,014,613 9,841,402
=========== =========== ========== ===========
See notes to consolidated financial statements.
2
CHARTWELL RE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
Six Month Periods
Ended June 30,
---------------------
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net premiums collected.......................... $ 75,548 $ 74,732
Net losses and loss adjustment expenses paid.... (73,479) (74,922)
Overhead expenses............................... (11,610) (12,398)
Service and other revenue, net of
related expenses............................. (2,790) 5,654
Net income taxes paid........................... (3,316) (6,312)
Interest received on investments................ 22,531 20,448
Interest paid................................... (4,006) (4,765)
Other, net...................................... 3,918 2,039
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Net cash provided by operating activities.... 6,796 4,476
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for sale securities....... (74,521) (76,930)
Maturities of available for sale securities...... 7,725 9,904
Maturities of held to maturity securities........ 1,300 -
Sales of available for sale securities........... 51,289 43,165
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Net cash used in investing activities........ (14,207) (23,861)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt......................... 5,045 1,619
Repayment of long-term debt........................ (1,383) -
Dividends paid..................................... (779) (766)
Other, net......................................... 264 -
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Net cash provided by financing activities.... 3,147 853
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Effect of exchange rate on cash.............. (423) (1,059)
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Net decrease in cash and cash equivalents............... (4,687) (19,591)
Cash and cash equivalents at beginning of period........ 31,607 51,134
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Cash and cash equivalents at end of period.............. $ 26,920 $ 31,543
========= =========
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income.......................................... $ 14,759 $ 13,192
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in net earnings of investees........... (865) (2,176)
Net realized capital (gains) losses........... (60) 49
Contingent interest........................... 1,191 1,056
Deferred policy acquisition costs............. 1,849 (4,119)
Unpaid loss and loss adjustment expenses...... 45,771 17,940
Unearned premiums............................. 5,886 22,116
Other reinsurance balances.................... 11,455 2,769
Reinsurance recoverable....................... (42,116) (15,154)
Net change in receivables and payables........ (38,589) (31,496)
Other, net.................................... 7,515 299
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Net cash provided by operating activities.. $ 6,796 $ 4,476
========== =========
See notes to consolidated financial statements.
3
CHARTWELL RE CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 1998
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim Condensed Consolidated Financial
Statements of Chartwell Re Corporation (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 1997 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.
Certain account balances from the prior year's presentation have been
reclassified to conform to the current year's presentation.
NOTE 2 - NEW ACCOUNTING STANDARD
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"), which became effective for the Company on January 1, 1998.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. It does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in that
financial statement.
The components of the Company's comprehensive income are net income,
changes in foreign currency translation adjustments and changes in unrealized
appreciation of investments. Total comprehensive income for the three month
periods ended June 30, 1998 and 1997 was $9,815,000 and $14,872,000,
respectively. Total comprehensive income for the six month periods ended June
30, 1998 and 1997 was $18,618,000 and $11,326,000, respectively.
NOTE 3 - CONTINGENCIES
American Eagle--In 1996 and early 1997, the Company entered into
certain assumption of liability endorsements ("ALEs") pursuant to an agreement
with American Eagle Insurance Company ("American Eagle"), which provided for the
assumption of certain policy liabilities by the Company in the event of an
insolvency of American Eagle. As part of such arrangements, the Company obtained
from American Eagle a trust fund to collateralize any potential obligations
arising out of the issuance of the ALEs by the Company. On December 3, 1997,
American Eagle was placed in receivership by the Texas Department of Insurance.
4
On June 16, 1998, the California Insurance Guarantee Association filed
suit in the Superior Court of California, County of Los Angeles, against the
Company, seeking, among other things, a declaratory judgment that the ALEs
covered claims arising prior to the date upon which the ALEs were issued. The
Company believes, and has been so advised by counsel handling the case, that it
has a number of valid defenses to the litigation pending against it. Such case
is, and will continue to be, vigorously defended. However, it is not possible to
predict the outcome of such case. Litigation is subject to many uncertainties,
and it is possible that such case could be decided or settled unfavorably. In
such event, it is possible that the Company's results of operations or
financial position could be materially adversely affected.
5
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
Chartwell Re Corporation
Chartwell Re Corporation is an insurance holding company with global
underwriting and service operations, conducting its business in the United
States and in the Lloyd's market through its principal operating subsidiaries,
Chartwell Reinsurance Company ("Chartwell Reinsurance"), The Insurance
Corporation of New York ("INSCORP") and Archer Group Holdings plc ("Archer").
Chartwell Re Corporation and its subsidiaries are collectively referred to as
the Company.
Results of Operations - Six Months Ended June 30, 1998 Compared With Six Months
Ended June 30, 1997:
Revenues: Total revenues for the six months ended June 30, 1998
decreased 18.2% to $142.0 million, compared to $173.6 million for the comparable
period in 1997.
The accompanying table summarizes gross and net premiums written and total
revenues for the periods indicated:
Six Month Periods
Ended June 30,
--------------------------------------
1998 1997
---------------- ---------------
(in thousands)
Gross premiums written $168,665 $193,615
================ ===============
Net premiums written $101,528 $146,262
================ ===============
Premiums earned $109,173 $135,675
Net investment income 24,065 21,412
Net realized capital gains (losses) 60 (49)
Service and other revenue 6,639 14,434
Equity in net earnings of investees 2,071 2,176
---------------- ---------------
Total Revenues $142,008 $173,648
================ ===============
Underwriting Operations
Gross Premiums Written; Net Premiums Written; Net Premiums Earned.
Gross premiums written for the first six months of 1998 were $168.7 million, a
decrease of 12.9% compared to the same period in 1997. The distribution of the
Company's gross premiums written among its business segments was as follows:
Six Month Periods
Ended June 30, % Change
---------------------------- ---------
1998 1997
------------- ------------
Gross Premiums Written from
Reinsurance Operations $84,629 $136,106 -37.8%
Gross Premiums Written from
Specialty Insurance Operations 84,036 57,509 46.1%
------------- ------------
Total $168,665 $193,615 -12.9%
============= ============
The decrease in gross premiums written from reinsurance operations is
primarily attributable to the non-renewal of several large treaties written in
1997. Certain of the treaties were non-renewed at the Company's option because
the price fell below levels at which the Company was willing to write business,
and others were not renewed because the ceding companies were directly affected
by consolidation activity in the industry. Pro forma for the elimination of
these contracts, gross premiums written from reinsurance operations for the six
months ended June 30, 1998 were $77.4 million, a decrease of 17.9% from $94.3
million for the same period in 1997.
6
Net premiums written for the six months ended June 30, 1998 decreased
30.6% to $101.5 million compared to $146.3 million for the same period in 1997.
The decrease in both gross and net premiums written is principally attributable
to the opportunistic underwriting of certain reinsurance accounts in 1997, which
did not renew for 1998, as well as the Company's response to the persistence of
intense price competition in the reinsurance industry. This is offset in part by
the continued growth of the Controlled Source Insurance business, which
increased 24.2% and 49.8% in gross and net premiums written, respectively, from
the same period in 1997 as well as the addition of premiums from the Company's
two dedicated corporate capital vehicles which participate on syndicates managed
by Archer (the "Dedicated Vehicles") amounting to $22.8 million and $20.4
million on a gross and net basis, respectively, for the first half of 1998
compared to $8.2 million and $8.1 million for the first half of 1997. Net
premiums earned for the six months ended June 30, 1998 were $109.2 million, a
decrease of 19.5% compared to $135.7 million for the same period in 1997.
Loss and Loss Adjustment Expenses. The Company's principal expense,
loss and loss adjustment expenses ("LAE") related to the settlement of claims,
was $65.8 million for the six months ended June 30, 1998, a 28.3% decrease
compared to $91.8 million for the comparable period in 1997. The decrease is
principally attributable to the decrease in net premiums earned noted above and
the decrease in the loss ratio noted below. Net losses and LAE expressed as a
percentage of net premiums earned (the loss and LAE ratio) improved to 60.3% for
the six months ended June 30, 1998 from 67.7% recorded for the same period in
1997. The improvement of 7.4 percentage points in the loss and LAE ratio for the
six months ended June 30, 1998 was a result of a change in the mix of business
as well as the benefits of new reinsurance programs, including aggregate excess
of loss reinsurance treaties, and the enhancement of existing reinsurance
programs.
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 $29.6 million for the six months ended June 30, 1998 compared to $37.6
million for the same period in 1997. Policy acquisition costs expressed as a
percentage of net premiums earned (the acquisition expense ratio) decreased
modestly to 27.1% from 27.7% in the first half of 1997.
Other Expenses. Other expenses related to underwriting operations,
which include underwriting and administrative expenses, were $10.3 million for
the six months ended June 30, 1998 compared to $8.2 million for the same period
in 1997. Other expenses expressed as a percentage of net premiums earned
increased to 9.4% for the six months ended June 30, 1998 compared to 6.1% for
the same period in 1997 resulting primarily from the reduced level of premium
volume.
Net Underwriting Results. For the six months ended June 30, 1998 the
Company's net underwriting result (net premiums earned minus losses, LAE and
underwriting expenses) increased to a net gain of $3.5 million compared to a net
underwriting loss of $2.0 million for the same period in 1997. The combined
ratio for the six months ended June 30, 1998 computed in accordance with
generally accepted accounting principles improved to 96.8% compared to 101.5%
for the same period in 1997. Although the loss ratio component improved to 60.3%
for the six months ended June 30, 1998 from 67.7% recorded for the same period
in 1997, the expense ratio increased to 36.5% for the six months ended June 30,
1998 from the 33.8% recorded for the same period in 1997, for the reasons noted
above.
7
Service Operations
Revenue from service operations decreased to $9.0 million for the six
months ended June 30, 1998 compared to $17.3 million for the same period in
1997, principally reflecting a reduction in profit commissions at Archer as a
result of competitive market conditions at Lloyd's.
Corporate
Interest and Amortization. Interest and amortization expenses were $6.7
million for the six months ended June 30, 1998 compared to $6.0 million for the
same period in 1997. The increase was due principally to bank fees paid for
letters of credit used to support the Company's underwriting participation on
syndicates managed by Archer and an increase in variable interest rates on debt
denominated in pounds sterling.
Consolidated
Net Investment Income and Net Realized Capital Gains. Consolidated
after-tax net investment income, exclusive of realized and unrealized capital
gains, for the six months ended June 30, 1998 was $17.0 million, compared to
$15.2 million for the same period in 1997. The carrying value of the Company's
invested assets and cash increased to $776.0 million at June 30, 1998 from
$764.3 million at December 31, 1997 primarily due to the Company's draw-down on
its revolving credit facility and changes in the market value of investments.
The average annual tax equivalent yield on invested assets after investment
expenses decreased to 6.31% for the first half of 1998 compared to 6.53% for the
same period in 1997 reflecting the lower interest rate environment. The
Company's pro rata share of investment income from the Dedicated Vehicles is
excluded from this calculation because the related invested assets are not
included in the Company's consolidated balance sheet.
The Company realized net capital gains of $60,000 for the six months
ended June 30, 1998 compared to net capital losses of $49,000 for the six months
ended June 30, 1997.
Income Before Income Taxes. Income before income taxes increased to
$21.2 million for the six months ended June 30, 1998 compared to $18.6 million
for the same period in 1997. The increase resulted primarily from the
improvement in net underwriting results discussed above, offset, in part, by the
reduction in income from service operations.
Income Tax Expense. The provision for Federal income taxes for the six
months ended June 30, 1998 increased to $6.4 million compared with $5.4 million
for the same period in 1997. The effective tax rate was 30.3% and 29.1% for the
six months ended June 30, 1998 and 1997, respectively. For both periods, the
effective rate is below the statutory rate of 35% due to the benefit of
investments in tax-advantaged securities.
Net Income. The Company realized a net profit of $14.8 million for the
six months ended June 30, 1998 compared with a net profit of $13.2 million for
the comparable 1997 period because of the factors discussed above. Diluted
earnings per share increased 9.7% to $1.47 for the six months ended June 30,
1998 from $1.34 per share reported a year ago.
8
Results of Operations - Three Months Ended June 30, 1998 Compared With Three
Months Ended June 30, 1997:
Revenues: Total revenues for the three months ended June 30, 1998
decreased 21.3% to $73.2 million, compared to $93.0 million for the comparable
period in 1997.
The accompanying table summarizes gross and net premiums written and
total revenues for the periods indicated:
Three Month Periods
Ended June 30,
-----------------------------------
1998 1997
--------------- ---------------
(in thousands)
Gross premiums written $86,806 $96,939
============== ===============
Net premiums written $59,966 $76,350
============== ===============
Premiums earned $56,430 $73,890
Net investment income 12,173 11,202
Net realized capital gains (losses) (39) (29)
Service and other revenue 3,291 6,900
Equity in net earnings of investees 1,323 1,030
-------------- ---------------
Total Revenues $73,178 $92,993
============== ===============
Underwriting Operations
Gross Premiums Written; Net Premiums Written; Net Premiums Earned.
Gross premiums written for the second quarter of 1998 were $86.8 million, a
decrease of 10.5% compared to the same period in 1997. The distribution of the
Company's gross premiums written among its business segments was as follows:
Three Month Periods
Ended June 30, % Change
----------------------- --------
1998 1997
----------- -----------
Gross Premiums Written from
Reinsurance Operations $40,191 $62,072 -35.3%
Gross Premiums Written from
Specialty Insurance Operations 46,615 34,867 33.7%
------------ ----------
Total $86,806 $96,939 -10.5%
============ ==========
The decrease in gross premiums written from reinsurance operations is
primarily attributable to the non-renewal of several large treaties written in
1997. Certain of the treaties were non-renewed at the Company's option because
the price fell below levels at which the Company was willing to write business,
and others were not renewed because the ceding companies were directly affected
by consolidation activity in the industry. Pro forma for the elimination of
these contracts, gross premiums written from reinsurance operations for the
three months ended June 30, 1998 were $38.9 million, a decrease of 26.2% from
$52.7 million for the same period in 1997.
Net premiums written for the three months ended June 30, 1998 decreased
21.5% to $60.0 million compared to $76.4 million for the same period in 1997.
The decrease in both gross and net premiums written is principally attributable
to the opportunistic underwriting of certain reinsurance accounts in 1997, which
did not renew for 1998, as well as the Company's response to the persistence of
intense price competition in the reinsurance industry. This is offset in part by
the continued growth of the Controlled Source Insurance business, which
increased 10.3% and 18.9% in gross and net premiums written, respectively, for
the second quarter of 1998 as well as the addition of premiums from the
Dedicated Vehicles which amounted to $17.2 million and $15.4 million on a gross
and net basis, respectively, for the second quarter of 1998 compared to $8.2
million and $8.1 million, respectively, for the second quarter of 1997. Net
premiums earned for the three months ended June 30, 1998 were $56.4 million, a
decrease of 23.6% compared to $73.9 million for the same period in 1997.
9
Loss and Loss Adjustment Expenses. The Company's principal expense,
loss and loss adjustment expenses ("LAE") related to the settlement of claims,
was $33.9 million for the three months ended June 30, 1998, a 31.9% decrease
compared to $49.8 million for the comparable period in 1997. The decrease is
principally attributable to the decrease in net premiums earned noted above and
the decrease in the loss ratio noted below. Net losses and LAE expressed as a
percentage of net premiums earned (the loss and LAE ratio) improved to 60.1% for
the three months ended June 30, 1998 from 67.4% recorded for the same period in
1997. The improvement of 7.3 percentage points in the loss and LAE ratio for the
three months ended June 30, 1998 was a result of a change in the mix of business
as well as the benefits of new reinsurance programs, including aggregate excess
of loss reinsurance treaties, and the enhancement of existing reinsurance
programs.
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 $14.6 million for the three months ended June 30, 1998 compared to $20.5
million for the same period in 1997. Policy acquisition costs expressed as a
percentage of net premiums earned (the acquisition expense ratio) decreased to
25.9% from 27.7% in the second quarter of 1997.
Other Expenses. Other expenses related to underwriting operations,
which include underwriting and administrative expenses, were $6.0 million for
the three months ended June 30, 1998 compared to $4.5 million for the same
period in 1997. Other expenses expressed as a percentage of net premiums earned
increased to 10.7% for the three months ended June 30, 1998 compared to 6.1% for
the same period in 1997 resulting primarily from the reduced level of premium
volume.
Net Underwriting Results. For the three months ended June 30, 1998 the
Company's net underwriting result (net premiums earned minus losses, LAE and
underwriting expenses) increased to a net gain of $1.9 million compared to a net
underwriting loss of $0.9 million for the same period in 1997. The combined
ratio for the three months ended June 30, 1998 computed in accordance with
generally accepted accounting principles improved to 96.7% compared to 101.2%
for the same period in 1997. Although the loss ratio component improved to 60.1%
for the three months ended June 30, 1998 from 67.4% recorded for the same period
in 1997, the expense ratio increased to 36.6% for the three months ended June
30, 1998 from the 33.8% recorded for the same period in 1997, for the reasons
noted above.
10
Service Operations
Revenue from service operations decreased to $4.7 million for the three
months ended June 30, 1998 compared to $8.3 million for the same period in 1997,
principally reflecting a reduction in profit commissions at Archer as a result
of competitive market conditions at Lloyd's.
Corporate
Interest and Amortization. Interest and amortization expenses were $3.3
million for the three months ended June 30, 1998 compared to $3.1 million for
the same period in 1997. The increase was due principally to bank fees paid for
letters of credit used to support the Company's underwriting participation on
syndicates managed by Archer and an increase in variable interest rates on debt
denominated in pounds sterling.
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 June 30, 1998 was $8.6 million, compared to
$7.9 million for the same period in 1997. The average annual tax equivalent
yield on invested assets after investment expenses decreased to 6.13% for the
second quarter of 1998 compared to 6.87% for the same period in 1997. The
Company's prorata share of investment income from the Dedicated Vehicles is
excluded from this calculation because the related invested assets are not
included in the Company's consolidated balance sheet.
The Company realized net capital losses of $39,000 for the quarter
ended June 30, 1998 compared to net capital losses of $29,000 for the three
months ended June 30, 1997.
Income Before Income Taxes. Income before income taxes increased to
$10.7 million for the three months ended June 30, 1998 compared to $9.6 million
for the same period in 1997. The increase resulted primarily from the
improvement in net underwriting results discussed above, offset, in part, by the
reduction in income from service operations.
Income Tax Expense. The provision for Federal income taxes for the
three months ended June 30, 1998 increased to $3.3 million compared with $2.8
million for the same period in 1997. The effective tax rate was 31.1% and 29.8%
for the three months ended June 30, 1998 and 1997, respectively. For both
periods, the effective rate is below the statutory rate of 35% due to the
benefit of investments in tax-advantaged securities.
Net Income. The Company realized a net profit of $7.4 million for the
three months ended June 30, 1998 compared with a net profit of $6.7 million for
the comparable 1997 period because of the factors discussed above. Diluted
earnings per share increased 8.8% to $0.74 for the three months ended June 30,
1998 from $0.68 per share reported a year ago.
Liquidity and Capital Resources
As a holding company, the Company's assets consist primarily of the
stock of its direct and indirect subsidiaries. The Company's cash flow,
therefore, depends largely on dividends and other statutorily permissible
payments from its operating subsidiaries whose principal sources of funds
consist 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.
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Cash flow from operations for the first six months of 1998 was
$6,796,000 compared to $4,476,000 for the six months ended June 30, 1997.
The Company paid quarterly cash dividends of $0.04 per share on March
4, 1998 and June 3, 1998. On August 5, 1998, the Company's Board of Directors
declared a quarterly cash dividend of $0.04 per share which is payable on
September 2, 1998.
Sales of available for sale investments were $51.3 million and $43.2
million for the six months ended June 30, 1998 and 1997, respectively. There was
no unusual trading activity in either period.
The Company's investment portfolio consists primarily of investment-
grade fixed maturity debt securities. At June 30, 1998 approximately 92.2%
of the bond portfolio was rated A or better ("A-1" for commercial paper) by
Moody's. While uncertainties exist regarding interest rates and inflation, the
Company attempts to minimize such risks and exposures by balancing the duration
of assets in its investment portfolio with the duration of insurance and
reinsurance liabilities. The current market value of the Company's fixed
maturity investments is not necessarily indicative of their future valuation.
The Company 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 June 30, 1998 was comprised primarily of
U.S. Treasury and government agency, mortgage pass-through securities and
corporate and municipal bonds.
Stockholders' equity increased approximately 6.9% to $278.6 million at
June 30, 1998 from $260.5 million at December 31, 1997. GAAP book value per
share increased to $28.94 at June 30, 1998 from $27.11 at December 31, 1997.
The Company's outstanding debt as of June 30, 1998 includes $48.8 million
in principal amount of 10 1/4% Senior Notes Due 2004 and approximately $5.6
million (denominated in pounds sterling) of Loan Notes due June 2002 and $45.8
million under credit facilities with First Union National Bank N. A.,as agent
(the "First Union Credit Facility"). The Loan Notes bear interest at a rate per
annum equal to one percent below the Sterling London Interbank Offered Rate. The
First Union Credit Facility provides term loans of approximately $50 million (a
portion of which is denominated in pounds sterling) and a $60.0 million
revolving credit facility. The Company's ratio of long-term debt to total
capitalization (exclusive of its Contingent Interest Notes described below) at
June 30, 1998 was 28.0% compared to 28.6% at December 31, 1997.
The agreements governing the foregoing debt obligations significantly
restrict the ability of the Company's operating subsidiaries to make dividend
and other payments to the Company.
In addition to the foregoing debt obligations, the Company is the
obligor on $1.0 million in principal amount of Contingent Interest Notes due
June 30, 2006 (the "CI Notes"). The CI Notes accrue interest at a rate of 8% per
annum but do not require interest payments until maturity or earlier redemption.
In addition, the CI Notes will entitle the holders thereof to receive at
maturity in proportion to the principal amount of the CI Notes held by them, an
aggregate of from $10 million up to $55 million in contingent interest based on
the performance of a book of reinsurance business acquired by the Company in
connection with its merger with Piedmont Management Company Inc. Under certain
circumstances, the CI Notes may be settled by delivery of shares of the
Company's common stock.
12
Dividend payments by the Company's operating subsidiaries are subject
to limits under the laws of the States of Minnesota and New York, respectively.
Up to $26.3 million is available under the laws of the State of Minnesota for
the payment of dividends by Chartwell Reinsurance without regulatory approval in
1998. No dividends have been declared or paid by Chartwell Reinsurance in 1998.
Under New York law, the maximum dividend payable by INSCORP to Chartwell
Reinsurance in 1998 without regulatory approval is $11.4 million. Moreover,
notwithstanding the receipt of any dividend from INSCORP, Chartwell Reinsurance
may make dividend payments only to the extent permitted under Minnesota law.
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
Minnesota and New York regulators have discretion to limit further the payment
of dividends by insurance companies domiciled in their states.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to Note 3, "Contingencies," of the Notes to the
Condensed Consolidated Financial Statements included in Part I, Item 1 of this
report.
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of stockholders was held in Stamford, Connecticut
on May 21, 1998. 8,837,650 shares of Common Stock, 92.0% of outstanding shares,
were represented in person or by proxy.
The following five directors were elected to a three year term expiring in
2001:
NUMBER OF SHARES
---------------------------------
FOR WITHHELD
Jacques Q. Bonneau 8,754,103 83,547
Robert M. DeMichele 8,754,103 83,547
Greg S. Feldman 8,754,103 83,547
Stephen L. Green 8,754,103 83,547
Stuart S. Richardson 8,753,174 84,476
The proposal to amend the Chartwell Re Corporation 1997 Omnibus Stock Incentive
Plan to increase the aggregate number of shares of Common Stock subject to
awards under such plan by 300,000 shares was approved: 6,706,458 shares voted in
favor; 2,101,823 shares voted against and 29,369 shares abstained (including
broker non-votes).
Item 5 - Other Information
Rule 14a-4 of the Securities and Exchange Commission's proxy rules
allows the Company to use discretionary voting authority to vote on matters
coming before an annual meeting of stockholders, if the Company does not have
notice of the matter at least 45 days before the date corresponding to the date
on which the Company first mailed its proxy materials for the prior year's
annual meeting of stockholders or the date specified by an overriding advance
notice provision in the Company's Bylaws. The Company's Bylaws do contain such
an advance notice provision.
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Under the Company's Bylaws, no business may be brought before an Annual
Meeting of Stockholders except as specified in the notice of the meeting or as
otherwise properly brought before the meeting by or at the direction of the
Board or by a stockholder entitled to vote, who has delivered written notice to
the Secretary of the Company (containing certain information specified in the
Bylaws) not less than 60 days prior to the Annual Meeting. The Bylaws also
provide that nominations for Director may be made only by the Board or the
Nominating Committee, or by a stockholder entitled to vote who has delivered
written notice to the Secretary of the Company (containing certain information
specified in the Bylaws) not less than 60 days prior to the Annual Meeting. For
the Company's Annual Meeting of Stockholders expected to be held on May 20, 1999
stockholders must submit such written notice to the Secretary of the Company on
or before March 21, 1999.
This requirement is separate and apart from the Securities and Exchange
Commission's requirements that a stockholder must meet in order to have a
stockholder proposal included in the Company's proxy statement under Rule 14a-8.
For the Company's Annual Meeting of Stockholders expected to be held on May 20,
1999, any stockholder who wishes to submit a proposal for inclusion in the
Company's proxy materials pursuant to Rule 14a-8 must submit such proposal to
the Secretary of the Company on or before March 21, 1999.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
None
(c) Signatures
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Signatures
Pursuant to the requirements of the Securities Exchange Ac 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: August 12, 1998
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