FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
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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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Commission file number 000-33047
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MAX RE CAPITAL LTD.
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(Exact name of registrant as specified in its charter)
BERMUDA Not Applicable
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(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
Ascot House
28 Queen Street
Hamilton, HM 11
Bermuda
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(Address of principal executive offices)
(Zip Code)
(441) 296-8800
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(Registrant's telephone number, including area code)
MAX RE CAPITAL LTD.
INDEX
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PAGE
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PART I -- FINANCIAL INFORMATION
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ITEM 1. Financial Statements ................................................................................1
Consolidated Balance Sheets as of March 31, 2002 (unaudited) and
December 31, 2001 ..................................................................................1
Consolidated Statements of Income and Comprehensive Income for the Three Months Ended
March 31, 2002 and 2001 (unaudited) ................................................................2
Consolidated Statements of Changes in Shareholders' Equity for the Three Months
Ended March 31, 2002 and 2001 (unaudited) ..........................................................3
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2002 and 2001 (unaudited) ................................................................4
Notes to the Interim Consolidated Financial Statements (unaudited) .................................5
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ..............................................................................10
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk ...........................................15
PART II--OTHER INFORMATION ...................................................................................17
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ITEM 1. Legal Proceedings ...................................................................................17
ITEM 2. Changes in Securities ...............................................................................17
ITEM 3. Defaults Upon Senior Securities .....................................................................17
ITEM 4. Submission of Matters to a Vote of Security Holders .................................................17
ITEM 5. Other Information ..................................................................................17
ITEM 6. Exhibits and Reports on Form 8-K ...................................................................17
SIGNATURES ...................................................................................................S-1
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
MAX RE CAPITAL LTD.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Expressed in thousands of United States Dollars, except share amounts)
March 31, 2002 December 31, 2001
-------------- -----------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 194,968 $ 98,322
Fixed maturities, available for sale at fair value 873,824 884,069
Alternative investments, at fair value 630,311 627,793
Accrued interest income 9,448 10,896
Premiums receivable 289,438 89,607
Losses recoverable from reinsurers 183,051 173,663
Funds withheld 52,013 55,480
Deferred acquisition costs 104,505 39,835
Deferred charges 42,010 44,437
Prepaid reinsurance premiums 42,972 17,373
Other assets 7,158 7,075
---------------------- ---------------------
Total assets $ 2,429,698 $ 2,048,550
====================== =====================
LIABILITIES
Life and annuity benefits $ 423,537 $ 423,767
Property and casualty losses 582,486 573,421
Experience refunds 2,280 22,956
Reinsurance balances payable 154,626 129,655
Deposit liabilities 109,885 79,389
Unearned property and casualty premiums 359,083 110,963
Accounts payable and accrued expenses 11,567 8,736
Bank loan 100,000 -
---------------------- ---------------------
Total liabilities 1,743,464 1,348,887
---------------------- ---------------------
Minority interest 109,818 115,593
---------------------- ---------------------
SHAREHOLDERS' EQUITY
Preferred shares
par value $1; 20,000,000 shares authorized
no shares issued or outstanding - -
Common shares
par value $1; 200,000,000 shares authorized
39,824,379 shares issued and outstanding (2001 - 39,582,379) 39,824 39,582
Additional paid-in capital 546,900 543,438
Loans receivable from officers for common share sales (12,575) (12,575)
Unearned stock grant compensation (3,589) (2,894)
Accumulated other comprehensive income 1,001 13,475
Retained earnings 4,855 3,044
---------------------- ---------------------
Total shareholders' equity 576,416 584,070
---------------------- ---------------------
---------------------- ---------------------
Total liabilities, minority interest and shareholders' equity $ 2,429,698 $ 2,048,550
====================== =====================
See accompanying notes to consolidated financial statements.
1
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(Expressed in thousands of United States Dollars, except shares and per share
amounts)
Three Months Ended
March 31
2002 2001
---- ----
REVENUE
Gross premiums written $ 343,894 $ 276,200
Reinsurance premiums ceded (35,899) (8,200)
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Net premiums written $ 307,995 $ 268,000
Earned premiums $ 95,774 $ 57,280
Earned premiums ceded (10,301) (2,050)
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Net premiums earned 85,473 55,230
Net investment income 12,415 8,772
Net gains on alternative investments 2,666 14,791
Net realized gains on fixed maturities 149 768
Other income 1,895 45
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Total revenue 102,598 79,606
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LOSSES AND EXPENSES
Losses, benefits and experience refunds 69,632 60,667
Acquisition costs 24,191 7,192
Interest expense (148) -
General and administrative expenses 5,875 5,074
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Total losses and expenses 99,550 72,933
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INCOME BEFORE MINORITY INTEREST 3,048 6,673
Minority interest (444) (1,480)
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NET INCOME 2,604 5,193
Change in net unrealized appreciation of fixed maturities (12,474) 4,190
---------- ----------
COMPREHENSIVE INCOME (LOSS) $ (9,870) $ 9,383
========== ==========
Basic earnings per share $ 0.07 $ 0.19
========== ==========
Diluted earnings per share $ 0.06 $ 0.19
========== ==========
Weighted average shares outstanding - basic 39,653,712 27,819,946
========== ==========
Weighted average shares outstanding - diluted 47,283,178 35,573,672
========== ==========
See accompanying notes to consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(Expressed in thousands of United States Dollars)
Three Months Ended March 31
2002 2001
---- ----
Preferred Shares
Balance, beginning and end of period $ - $ -
------------ ------------
Common shares
Balance, beginning of period 39,582 27,683
Issuance of shares 262 210
Repurchase of shares (20) -
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Balance, end of period 39,824 27,893
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Additional paid-in capital
Balance, beginning of period 543,438 376,905
Issuance of shares 3,736 3,163
Repurchase of shares (274) -
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Balance, end of period 546,900 380,068
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Loans receivable from common share sales
Balance, beginning of period (12,575) (11,650)
Notes and loans issued, net of repaid - (65)
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Balance, end of period (12,575) (11,715)
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Unearned stock grant compensation
Balance, beginning of period (2,894) (630)
Stock grants awarded (971) (3,208)
Amortization 276 179
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Balance, end of period (3,589) (3,659)
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Accumulated other comprehensive income
Balance, beginning of period 13,475 6,801
Holding gains (losses) on fixed maturities (15,372) 6,064
Gains included in net income (149) (768)
Reallocation to minority interest 3,047 (1,106)
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Balance, end of period 1,001 10,991
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Retained earnings
Balance, beginning of period 3,044 1,305
Net income 2,604 5,193
Dividends paid (793) -
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Balance, end of period 4,855 6,498
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Total shareholders' equity $ 576,416 $ 410,076
============ ============
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Expressed in thousands of United States Dollars)
Three Months Ended March 31
2002 2001
---- ----
OPERATING ACTIVITIES
Net income $ 2,604 $ 5,193
Adjustments to reconcile net income to net cash
from operating activities:
Minority share of income 444 1,480
Amortization of unearned stock grant compensation 276 179
Amortization of discount on fixed maturities (69) (303)
Realized gains on fixed maturities (149) (768)
Net gains on alternative investments (2,666) (14,791)
Accrued interest income 1,448 643
Premiums receivable (199,831) (127,261)
Losses recoverable from reinsurers (9,388) (13,005)
Funds withheld 3,467 (716)
Deferred acquisition costs (64,670) (46,856)
Deferred charges 2,427 934
Prepaid reinsurance premiums (24,414) (6,150)
Other assets (1,267) (11,730)
Life and annuity benefits (230) (4,763)
Property and casualty losses 9,065 63,873
Experience refunds (20,676) 2,200
Reinsurance balances payable 24,971 5,335
Unearned property and casualty premiums 248,120 218,920
Accounts payable and accrued expenses 2,831 (3,231)
----------------- -----------------
Cash from (used in) operating activities (27,707) 69,183
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INVESTING ACTIVITIES
Purchases of fixed maturities (87,226) (81,450)
Sales (purchases) of alternative investments, net 148 (85,257)
Sales of fixed maturities 55,668 83,520
Redemptions of fixed maturities 26,500 -
----------------- -----------------
Cash used in investing activities (4,910) (83,187)
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FINANCING ACTIVITIES
Net proceeds from issuance of common shares 3,027 -
Repurchases of common shares (294) -
Proceeds from bank loan 100,000 -
Dividends paid (793) -
Distributions to / conversion of minority shareholders (3,173) -
Deposit liabilities, net 30,496 -
Note and loans repaid - 100
----------------- -----------------
Cash from financing activities 129,263 100
----------------- -----------------
Changes in cash and cash equivalents 96,646 (13,904)
Cash and cash equivalents, beginning of period 98,322 27,631
----------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 194,968 $ 13,727
================= =================
See accompanying notes to consolidated financial statements.
4
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. GENERAL
The interim consolidated financial statements have been prepared on the
basis of accounting principles generally accepted in the United States of
America ("GAAP") for interim financial information and in accordance with
Regulation S-X and include the accounts of Max Re Capital Ltd., Max Re Ltd., Max
Re Managers Ltd., Max Re Europe Limited, and Max Re Diversified Strategies, Ltd.
(collectively, the "Company"). In the opinion of management, these financial
statements reflect all the normal recurring adjustments necessary for a fair
presentation of the Company's financial position and results. The results of
operations and cash flows for any interim period are not necessarily indicative
of results for the full year. These consolidated financial statements should be
read in conjunction with the Company's audited consolidated financial statements
for the year ended December 31, 2001.
Max Re Capital Ltd. was incorporated on July 8, 1999 under the laws of
Bermuda to provide customized multi-line reinsurance and insurance products. The
Company's principal operating subsidiary is Max Re Ltd., a Bermuda, long-term
and Class 4 insurer. The Company conducts its European activities through Max Re
Europe Limited, a Dublin, Ireland based reinsurance company.
2. EARNINGS PER SHARE
Basic earnings per share is based on weighted average common shares
outstanding and excludes any dilutive effect of warrants, options and
convertible securities. Diluted earnings per share assumes the conversion of
dilutive convertible securities and the exercise of all dilutive stock warrants
and options.
3. BANK LOAN
In March 2002, the Company completed a $100 million sale of shares of Max
Re Diversified Strategies, Ltd. ("MDS"). Simultaneous with the sale, the Company
entered into a total return swap with the purchaser of these shares whereby the
Company receives the return earned on the MDS shares in exchange for a variable
rate of interest based on LIBOR plus a spread. Additional MDS shares with a fair
value of $66.7 million were pledged as collateral to which the Company is
exposed to credit risk. Under accounting principles generally accepted in the
United States, these transactions are viewed on a combined basis and accounted
for as a financing transaction, which results in the recording of a $100 million
bank loan.
The swap termination date is February 2004, with provisions for earlier
termination in the event that the Company fails to comply with certain
covenants, including maintaining a minimum financial strength rating and a
minimum MDS net asset value. At termination, the purchaser has the option to
sell the MDS shares to the Company at a price equal to the aggregate book value
of the MDS shares on the date of repurchase.
4. COMMITMENTS
In January 2002, the Company entered into a $100 million letter of credit
facility with the New York branch of Bayerische Hypo- und Vereinsbank AG
("HVB"). HVB is the majority shareholder of Grand Central Re Limited, a Bermuda
domiciled reinsurance company that is
5
managed by the Company and in which the Company has an equity interest. Under
the terms of this facility, HVB will issue letters of credit up to a total of
$100 million, secured by fixed maturities and alternative investments. This
letter of credit facility requires that the Company comply with certain
covenants, including minimum consolidated tangible net worth. The Company
believes that the terms of this letter of credit facility are comparable to the
terms that the Company would expect to negotiate with an unrelated party. At
March 31, 2002, letters of credit totaling $58.5 million were issued by HVB
under this facility. Fixed maturities with a fair value of $29.6 million and MDS
shares with a fair value of $63.0 million were pledged as collateral for these
letters of credit.
At March 31, 2002, letters of credit totaling $325.8 million were issued
under the Company's $375 million letter of credit facility with a syndicate of
banks. Fixed maturities with a fair value of $258.4 million and MDS shares with
a fair value of $150.0 million were pledges as collateral for these letters of
credit.
6
5. SEGMENT INFORMATION
The Company operates in the reinsurance business serving two markets: the
life and annuity market, which includes disability products, and the property
and casualty market. The Company evaluates the results of its reinsurance
activities in total and does not allocate assets by segment.
A summary of operations by segment for the three months ended March 31,
2002 and 2001 is as follows:
March 31, 2002
Life and Property and
Annuity Casualty Other Consolidated
---------------------------------------------------------------------
(Expressed in thousands of United States Dollars)
Gross premiums written $ 14,656 $ 329,238 $ - $ 343,894
Reinsurance premiums ceded (2,199) (33,700) - (35,899)
---------------------------------------------------------------------
Net premiums written $ 12,457 $ 295,538 $ - $ 307,995
=====================================================================
Earned premiums $ 14,656 $ 81,118 $ - $ 95,774
Earned premiums ceded (2,199) ( 8,102) - (10,301)
---------------------------------------------------------------------
Net premiums earned 12,457 73,016 - 85,473
Net interest income - - 12,415 12,415
Net gains on alternative investments - - 2,666 2,666
Net realized gains on fixed maturities - - 149 149
Other income - 1,270 625 1,895
---------------------------------------------------------------------
Total revenues 12,457 74,286 15,855 102,598
Losses, benefits and
experience refunds 15,402 54,230 - 69,632
Acquisition costs 768 23,423 - 24,191
Interest expense (565) 179 238 (148)
General and administrative expenses 1,550 1,639 2,686 5,875
---------------------------------------------------------------------
Total losses and expenses 17,155 79,471 2,924 99,550
Income (loss) before minority interest $ (4,698) $ (5,185) $ 12,931 $ 3,048
=====================================================================
Total assets $ - $ - $ 2,429,698 $ 2,429,698
=====================================================================
7
March 31, 2001
Life and Property and
Annuity Casualty Other Consolidated
---------------------------------------------------------------------
(Expressed in thousands of United States Dollars)
Gross premiums written $ - $ 276,200 $ - $ 276,200
Reinsurance premiums ceded - (8,200) - (8,200)
---------------------------------------------------------------------
Net premiums written $ - $ 268,000 $ - $ 268,000
=====================================================================
Earned premiums $ - $ 57,280 $ - $ 57,280
Earned premiums ceded (2,050) - (2,050)
---------------------------------------------------------------------
Net premiums earned - 55,230 - 55,230
Net interest income - - 8,772 8,772
Net gains on alternative investments - - 14,791 14,791
Net realized gains on fixed maturities - - 768 768
Other income - 45 - 45
---------------------------------------------------------------------
Total revenues - 55,275 24,331 79,606
Losses, benefits and
experience refunds 5,066 55,601 - 60,667
Acquisition costs 438 6,754 - 7,192
General and administrative expenses 1,323 1,516 2,235 5,074
---------------------------------------------------------------------
Total losses and expenses 6,827 63,871 2,235 72,933
Income (loss) before minority interest $ (6,827) $ (8,596) $ 22,096 $ 6,673
=====================================================================
Total assets $ - $ - $ 1,230,081 $ 1,230,081
=====================================================================
8
Financial information relating to gross premiums written by geographic
region for the three months ended March 31, 2002 and 2001 were as follows:
March 31,
2002 2001
----------------------------------
(Expressed in thousands of
United States Dollars)
North America $ 190,716 $ 195,200
Europe 153,178 81,000
Reinsurance Ceded - North America (12,922) (8,200)
Reinsurance Ceded - Europe (22,977) -
-------------------------------------
$ 307,995 $ 268,000
=====================================
Four customers accounted for 33.8%, 29.4%, 13.2% and 11.0%, respectively,
of the Company's gross premiums written during the three months ended March 31,
2002. Three customers accounted for 45.3%, 29.3% and 16.3%, respectively, of the
Company's gross premiums written during the three months ended March 31, 2001.
6. EQUITY CAPITAL
Max Re Capital Ltd.'s Board of Directors declared a dividend of $0.02 per
share on February 8, 2002 payable to shareholders of record on February 22,
2002.
As of March 31, 2002, the remaining authorization under the Company's share
repurchase program was approximately $22.7 million. The Company repurchased
20,000 common shares at an average of $14.71 per common share for a total amount
of approximately $294,000 including costs incurred to effect the repurchases,
during the three months ended March 31, 2002.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following is a discussion and analysis of the Company's results of
operations for the three months ended March 31, 2002 compared to the three
months ended March 31, 2001 and the financial condition of the Company as of
March 31, 2002. This discussion and analysis should be read in conjunction with
the attached unaudited consolidated financial statements and related notes and
the audited consolidated financial statements and related notes contained in the
Company's Annual Report for the year ended December 31, 2001.
This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company intends that the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995 apply to these
forward-looking statements. Forward-looking statements are not statements of
historical fact but rather reflect the Company's current expectations, estimates
and predictions about future results and events. These statements may use words
such as "anticipate," "believe," "estimate," "expect," "intend," "predict,"
"project" and similar expressions as they relate to the Company or the Company's
management. When the Company makes forward-looking statements, it is basing them
on management's beliefs and assumptions, using information currently available
to it. These forward-looking statements are subject to risks, uncertainties and
assumptions. Factors that could cause such forward-looking statements not to be
realized include, without limitation, acceptance in the market of the Company's
reinsurance products; pricing competition; the amount of underwriting capacity
from time to time in the market; general economic conditions and conditions
specific to the reinsurance and investment markets in which the Company
operates; material fluctuations in interest rate levels; regulatory changes and
conditions; rating agency policies and practices; claims development; and loss
of key executives. The Company cautions that the foregoing list of important
factors is not intended to be, and is not, exhaustive. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise. If one or more risks
or uncertainties materialize, or if the Company's underlying assumptions prove
to be incorrect, actual results may vary materially from what the Company
projected. Any forward-looking statements in this report reflect the Company's
current views with respect to future events and are subject to these and other
risks, uncertainties and assumptions relating to the Company's operations,
results of operations, growth strategy and liquidity. All subsequent written and
oral forward-looking statements attributable to the Company or individuals
acting on the Company's behalf are expressly qualified in their entirety by this
paragraph.
Overview
The Company is a Bermuda-based provider of reinsurance for both the
property and casualty and the life and annuity, including disability, insurance
markets. The Company principally offers customized, alternative risk transfer
reinsurance products in both markets. Commencing January 1, 2002, the Company
began selectively underwriting traditional property and casualty risks,
particularly the workers' compensation and professional liability classes. The
Company often incorporates features of alternative risk transfer products, such
as aggregate loss caps and limits on number of occurrences covered, into its
traditional risk underwriting. The Company continually considers other
opportunities in the financial services markets. In evaluating such
opportunities, the Company assesses the competitive advantage it possesses based
on its skills and capabilities.
10
The Company's capital base and structured reinsurance products provide
flexibility in making decisions regarding investments. The Company's investments
are comprised of high grade fixed maturities, an alternative investment
portfolio employing seven strategies to manage investment risk that is invested
in over 40 underlying trading entities and two strategic insurance private
equity investments.
The demand for the Company's property and casualty reinsurance products was
strong during the three months ended March 31, 2002. The property and casualty
market is currently presenting more opportunities to the Company than the life
and annuity market. In the current low interest rate environment, there is
decreased demand for the Company's life and annuity products, especially in the
United States. The Company anticipates decreased demand for its life and annuity
products until there is a sustained increase in interest rates.
Results of Operations - Three months ended March 31, 2002 compared to the three
months ended March 31, 2001
Gross premiums written. Gross premiums written for the three months ended
March 31, 2002 increased 25% to $343.9 million compared to $276.2 million for
the three months ended March 31, 2001. Gross premiums written for property and
casualty were $329.2 million for the three months ended March 31, 2002 compared
to $276.2 million for the three months ended March 31, 2001. The increase in
gross premiums written is attributable to rising demand, principally as a result
of market conditions following the September 11, 2001 tragedy. Gross premiums
written for life and annuity were $14.7 million for the three months ended March
31, 2002 compared to none for the three months ended March 31, 2001. In addition
to the low interest rate environment dampening the Company's life and annuity
production, the demand for the type of life and annuity reinsurance products
that the Company offers is typically weak during the first three months of the
calendar year.
Reinsurance Premiums ceded. Reinsurance premiums ceded for the three months
ended March 31, 2002 were $35.9 million compared to $8.2 million for the three
months ended March 31, 2001. Reinsurance premiums ceded during the three months
ended March 31, 2002 were principally related to the Company's quota-share
retrocessional agreement with Grand Central Re Limited.
Net premiums written. Net premiums written for the three months ended March
31, 2002 were $308.0 million compared to $268.0 million for the three months
ended March 31, 2001. Net premiums written for property and casualty products
for the three months ended March 31, 2002 were $295.5 million compared to $268.0
million for the three months ended March 31, 2001. Net premiums written for life
and annuity products for the three months ended March 31, 2002 were $12.5
million compared to none for the three months ended March 31, 2001.
Net premiums earned. Net premiums earned for the three months ended March
31, 2002 were $85.5 million compared to $55.2 million for the three months ended
March 31, 2001. Property and casualty net premiums earned were $73.0 million,
after the deduction of $8.1 million of earned premiums ceded, for the three
months ended March 31, 2002 compared to $55.2 million, after the deduction of
$2.1 million of earned premiums ceded, for the three months ended March 31,
2001. Life and annuity net premiums earned were $12.5 million, after the
deduction of $2.2 million of earned premiums ceded, for the three months ended
March 31, 2002 compared to no net premiums earned for the three months ended
March 31, 2001.
Net investment income. Net investment income was $12.4 million for the
three months ended March 31, 2002 compared to $8.8 million for the three months
ended March 31, 2001. The
11
increase was primarily attributable to the increase in the fixed maturities
portfolio resulting from cash received in collection of premiums written since
March 31, 2001, as well as proceeds contributed from the Company's initial
public offering in August 2001. Increasing interest rates contributed to a total
return of (0.37)% for the fixed maturities portfolio for the three months ended
March 31, 2002 compared to a total return of 2.84% for the three months ended
March 31, 2001.
Net gains on alternative investments. Net gains on the alternative
investment portfolio were $2.7 million for the three months ended March 31, 2002
compared to $14.8 million for the three months ended March 31, 2001. The
decrease was primarily the result of a 0.41% return on the alternative
investment portfolio for the first quarter of 2002 compared to a 3.60% return
for the first quarter of 2001 offset by the return generated from additional
purchases of alternative investments resulting from cash provided by operating
activities since March 31, 2001 and proceeds contributed from the Company's
initial public offering in August 2001.
Losses, benefits and experience refunds. Losses, benefits and
experience refunds were $69.6 million for the three months ended March 31, 2002
compared to $60.7 million for the three months ended March 31, 2001. Property
and casualty losses were $54.2 million for the three months ended March 31, 2002
compared to $55.6 million for the three months ended March 31, 2001. The
decrease in property and casualty losses resulted from the commutation and
novation of two reinsurance contracts during the three months ended March 31,
2002 that were written during the Company's first year of operations. The
termination of the risks associated with these contracts was the principal
contributor to a $6.0 million favorable impact on net income from property and
casualty loss reserves and experience refunds released from the balance sheet
during the three months ended March 31, 2002. Life and annuity benefits were
$15.4 million for the three months ended March 31, 2002 compared to $5.1 million
for the three months ended March 31, 2001. The increase was principally
attributable to the life and annuity premiums written and earned during the
first quarter of 2002 compared to no premiums written and earned during the same
period in 2001, offset by $2.8 million of favorable experience from life and
annuity contracts written in prior years.
Acquisition costs. Acquisition costs were $24.2 million for the three
months ended March 31, 2002 compared to $7.2 million for the three months ended
March 31, 2001. The increase in acquisition costs was a result of the Company's
increase in property and casualty insurance volume and the structuring of the
Company's contracts to provide greater ceding commissions to its clients.
Acquisition costs during each of the three months ended March 31, 2002 and 2001
consisted primarily of amortization of deferred policy acquisition costs
incurred in connection with writing property and casualty business. Acquisition
costs are customarily associated with the type of premium written by the
Company. Generally, acquisition costs fluctuate with business volume and changes
in product mix. A significant component of deferred policy acquisition costs are
ceding commissions paid to the buyer of the Company's reinsurance products.
General and administrative expenses. General and administrative
expenses were $5.9 million for the three months ended March 31, 2002 compared to
$5.1 million for the three months ended March 31, 2001. The increase reflects
the costs associated with growing the Company's operations and principally
relates to personnel costs. The Company's general and administrative expense
ratio from net premiums earned and deposits received was 5.0% for the first
quarter of 2002 compared to 9.2% for the same period in 2001. The Company
attempts to maintain a low cost operating structure.
12
Net income. Net income for the three months ended March 31, 2002 was
$2.6 million compared to net income of $5.2 million for the three months ended
March 31, 2001. The decline in net income resulted principally from lower
returns on the Company's alternative investment portfolio.
Liquidity and Capital Resources
As a holding company, Max Re Capital Ltd.'s ("Max Re Capital")
principal assets are its investments in the voting common stock of its principal
subsidiary, Max Re Ltd. ("Max Re") , and the common stock of its other
subsidiaries. The Company's principal source of funds is from interest income on
cash balances and cash dividends from its subsidiaries, including Max Re. The
payment of dividends is limited under Bermuda insurance laws. In particular, Max
Re may not declare or pay any dividends if it is in breach of its minimum
solvency or liquidity levels under Bermuda law or if the declaration or payment
of the dividends would cause it to fail to meet the minimum solvency or
liquidity levels under Bermuda laws. At March 31, 2002, Max Re, which is
required to have $148.0 million in statutory capital and surplus in order to pay
dividends, had $610.8 million in statutory capital and surplus.
Cash flow. The Company's principal sources of cash are premiums and
deposits received, underwriting management fees, reinsurance recoveries under
the Company's retrocessional contracts, investment income and proceeds from
redemptions, sales and maturities of portfolio investments. The cash is utilized
to pay losses and benefits, pay experience refunds, pay policy acquisition
costs, purchase retrocessional protection, satisfy operating and capital
expenditures and purchase investments. For the three months ended March 31,
2002, the Company used $27.7 million in its operating activities compared to
generating $69.2 million from operating activities for the three months ended
March 31, 2001. Cash flows from operating activities decreased in the period
ended March 31, 2002 compared to the same period in 2001 due to an increase
in premiums receivable and the settlement of liabilities associated with the
commutation and novation of two property and casualty contracts. Cash flows from
financing activities were principally provided by the Company's $100 million
sale of shares in MDS, its subsidiary that invests in alternative assets, and
simultaneous execution of a total return swap with the same counterparty, which
is reflected as a bank loan. The cash generated by the Company from financing
activities was principally used to purchase fixed maturities, net of sales and
redemptions, of $5.1 million during the three months ended March 31, 2002
compared principally to the purchase of alternative investments of $85.3 million
in 2001.
Capital resources. The Company's capital structure currently consists
of equity and minority interest. At March 31, 2002, total capitalization after
deducting loans to management and including retained earnings and accumulated
other comprehensive income amounted to $686.2 million as compared with $699.7
million at December 31, 2001. Shareholders' equity decreased during the quarter
ended March 31, 2002 principally due to a $12.5 million decrease in unrealized
gains from fixed maturities, which resulted from rising interest rates, offset
by net income of $2.6 million. The Company continuously reviews its capital
adequacy and believes this level of capital is sufficient to support the
Company's current reinsurance operations.
In the ordinary course of business, the Company is required to provide
letters of credit or other regulatorily approved security to certain of its
ceding reinsurance companies to meet contractual and regulatory requirements.
The Company has two letter of credit facilities as of March 31, 2002. The
Company's primary letter of credit facility is a $375 million letter of credit
facility with a syndicate of commercial banks. At March 31, 2002 and December
31, 2001 letters of credit totaling $325.8 million and $282.9 million,
respectively, were issued and outstanding
13
under this facility. In January 2002, the Company entered into a $100 million
letter of credit facility with the New York branch of Bayerische Hypo- und
Vereinsbank AG ("HVB"). The Company was provided a commitment for this facility
at the time it entered into a joint venture with HVB that resulted in the
formation of Grand Central Re Ltd. The Company believes that the terms of this
letter of credit facility are comparable to the terms that the Company would
expect to negotiate with an unrelated party. At March 31, 2002, letters of
credit totaling $58.5 million were issued by HVB under this facility. All
letters of credit issued under these facilities are collateralized by a portion
of the Company's investments. The Company was in compliance with all the
covenants of its letter of credit facilities at March 31, 2002.
In March 2002, the Company completed a $100 million sale of shares of Max
Re Diversified Strategies, Ltd. ("MDS"). Simultaneous with the sale, the Company
entered into a total return swap with the purchaser of these shares whereby the
Company receives the return earned on the MDS shares in exchange for a variable
rate of interest based on LIBOR plus a spread. Additional MDS shares with a fair
value of $66.7 million were pledged as collateral to which the Company is
exposed to credit risk. Under accounting principles generally accepted in the
United States, these transactions are viewed on a combined basis and accounted
for as a financing transaction, which results in the recording of a $100 million
bank loan. These transactions enabled the Company to transform a portion of its
MDS assets into an asset that can be held in a trust for the benefit of certain
ceding reinsurance companies that require security to meet regulatory
requirements.
The swap termination date is February 2004, with provisions for earlier
termination in the event that the Company fails to comply with certain
covenants, including maintaining a minimum financial strength rating and a
minimum MDS net asset value. At termination, the purchaser has the option to
sell the MDS shares to the Company at a price equal to the aggregate book value
of the MDS shares on the date of repurchase.
On February 8, 2002 Max Re Capital's Board of Directors declared a
quarterly shareholder dividend of $0.02 per share payable to shareholders of
record on February 22, 2002. Continuation of cash dividends in the future will
be at the discretion of the Board of Directors and will be dependent upon the
results of operations and cash flows, the financial position and capital
requirements, general business conditions, legal, tax, regulatory and any
contractual restrictions on the payment of dividends and other factors the Board
of Directors deems relevant. On May 3, 2002, the Board of Directors declared a
dividend of $0.02 per share to be paid on May 30, 2002 to shareholders of
records on May 16, 2002.
The Company had no material commitments for capital expenditures at March
31, 2002.
The Company's insurer financial strength ratings were unchanged during the
three months ended March 31, 2002. The Company's ratings are "A- (Excellent)" by
A.M. Best Company, Inc. and "A (Strong)" by Fitch, Inc. These ratings reflect
each rating agency's opinion of the Company's financial strength, operating
performance and ability to meet obligations. They are not evaluations directed
toward the protection of investors.
Critical Accounting Policies
The Company's consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America,
which require management to make estimates and assumptions. The Company believes
the critical accounting policies set forth in its Form 10-K, filed on March 27,
2002, affect the more significant judgments and estimates
14
used in the preparation of its consolidated financial statements. These
accounting policies pertain to revenue recognition, investment valuation and
loss and loss adjustment expenses. If actual events differ significantly from
the underlying judgments or estimates used by management in the application of
these accounting policies, there could be a material adverse effect on the
Company's results of operations and financial condition.
New Accounting Pronouncements
The Financial Accounting Standards Board recently issued FAS No. 143,
"Accounting for Asset Retirement Obligations" and FAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." FAS No. 143 requires that the
fair value of a liability for an asset retirement obligation be recognized in
the period such obligation is incurred. The statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002. FAS No. 144
established a single accounting model for long-lived assets to be disposed of by
sale and resolves implementation issues related to FAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
of." The statement is effective for financial statements issued for fiscal years
beginning after December 15, 2001. Currently, these statements will not have any
impact on the financial position of the Company.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company engages in an investment strategy that combines a fixed
maturities portfolio, an alternative investment portfolio that employs seven
strategies to manage investment risk, and two insurance private equity
investments. The Company attempts to maintain adequate liquidity in its fixed
maturities portfolio to fund operations and protect against unexpected events,
and the Company has diversified its portfolio to limit volatility. The Company
seeks to manage its credit risk through industry and issuer diversification, and
interest rate risk by monitoring the duration and structure of the Company's
investment portfolio relative to the duration and structure of its liability
portfolio. The Company is exposed to potential loss from various market risks,
primarily changes in interest rates and equity prices. Accordingly, earnings
would be affected by these changes. The Company manages its market risk based on
Board-approved investment policies. With respect to its fixed maturities
portfolio, the Company's risk management strategy and investment policy is to
invest in debt instruments of high credit quality issuers and to limit the
amount of credit exposure with respect to particular ratings categories and any
one issuer. The Company selects investments with characteristics such as
duration, yield, currency and liquidity intended to match the cash outflow
characteristics of the Company's life and annuity and property and casualty
liabilities.
As of March 31, 2002, the Company was not holding any high-yield
investments in its fixed maturities portfolio. Pursuant to the Company's
investment policies, derivative positions are allowed only for the purposes of
collateralization structuring, risk management and security replication. As a
result, the Company believes that its exposure to credit risk and losses due to
leverage is not material. At March 31, 2002, the impact on the fixed maturities
portfolio from an immediate 100 basis point increase in market interest rates
would have resulted in an estimated decrease in market value of 3.32% or
approximately $35.5 million and the impact on the fixed maturities portfolio
from an immediate 100 basis point decrease in market interest rates would have
resulted in an estimated increase in market value of 3.81% or approximately
$40.7 million.
With respect to the Company's alternative investment portfolio, the Company
does not directly control the allocation of its assets to strategies or
underlying funds, nor does the Company control the manner in which they are
invested by the Company's fund managers.
15
However, the Company consistently and systematically monitors the
strategies and funds in which it is invested and the portfolio manager must
ensure compliance with the Company's alternative investment guidelines. The
Company believes its overall risk is limited as a result of its selected
strategies' low volatility and low correlation to the bond market, the stock
market and each other. At March 31, 2002, the impact on the alternative
investment portfolio from an immediate 100 basis point increase in market
interest rates would have resulted in an estimated decrease in market value of
0.85% or approximately $5.4 million and the impact on the alternative investment
portfolio from an immediate 100 basis point decrease in market interest rates
would have resulted in an estimated increase in market value of 0.85% or
approximately $5.4 million.
16
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
There are no pending legal proceedings. The Company anticipates that it
will be subject to litigation and arbitration in the ordinary course of
business.
ITEM 2. Changes in Securities
Not applicable.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
ITEM 5. Other Information
Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
------- -----------
10.1 Letter of Credit Reimbursement
Agreement dated as of January 14, 2002
between Max Re Ltd. and Bayerische
Hypo- und Vereinsbank AG, New York
Branch
10.2 Total Return Swap Confirmation dated as
of March 1, 2002 between Max Re Ltd.
and Canadian Imperial Bank of Commerce
99.1 Factors Affecting Future Financial
Results (incorporated by reference to
Exhibit 99.1 of the Company's Annual
Report on Form 10-K filed with the
Securities and Exchange Commission on
March 27, 2002)
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months
ended March 31, 2002.
17
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.
Max Re Capital Ltd.
/s/ Robert J. Cooney
--------------------------------------
Name: Robert J. Cooney
Title: President and Chief Executive
Officer
Date: May 14, 2002
/s/ Keith S. Hynes
--------------------------------------
Name: Keith S. Hynes
Title: Executive Vice President and
Chief Financial Officer
Date: May 14, 2002
S-1