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 September 30, 2001
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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
----------------------------- ------------------------
(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)
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 [ ]
The number of the Registrant's Common Shares (par value $1.00 per share)
outstanding as of September 30, 2001 was 39,774,879.
MAX RE CAPITAL LTD.
INDEX
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PAGE
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PART I -- FINANCIAL INFORMATION
- -------------------------------
ITEM 1. Financial Statements .................................................................. 1
The accompanying unaudited, interim financial statements have been
prepared in accordance with the instructions to Form 10-Q. In the opinion
of management, all adjustments necessary for a fair presentation have been
included.
Consolidated Balance Sheets as of September 30, 2001 (unaudited) and
December 31, 2000 (audited) ........................................................... 1
Consolidated Statements of Operations and Comprehensive Income for the
Quarters and the Nine Months Ended September 30, 2001 and 2000
(unaudited) ........................................................................... 2
Consolidated Statements of Changes in Shareholders' Equity for the Nine Months
Ended September 30, 2001 and 2000 (unaudited) ......................................... 3
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2001 and 2000 (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 ................................................................. 9
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk ............................. 13
PART II--OTHER INFORMATION ...................................................................... 15
- --------------------------
ITEM 1. Legal Proceedings ..................................................................... 15
ITEM 2. Changes in Securities ................................................................. 15
ITEM 3. Defaults Upon Senior Securities ....................................................... 15
ITEM 4. Submission of Matters to a Vote of Security Holders ................................... 15
ITEM 5. Other Information ..................................................................... 15
ITEM 6. Exhibits and Reports on Form 8-K ...................................................... 16
SIGNATURES ...................................................................................... S-1
- ----------
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)
September 30, 2001 December 31, 2000
------------------ -----------------
ASSETS
Cash and cash equivalents $ 51,471 $ 27,631
Fixed maturities, available for sale at fair value 757,664 479,634
Alternative investments, at fair value 548,949 347,099
Accrued interest income 8,981 7,111
Premiums receivable 139,051 2,708
Losses recoverable from reinsurers 102,909 5,370
Funds withheld 51,388 41,991
Deferred acquisition costs 44,720 -
Deferred charges 19,867 21,681
Prepaid reinsurance premiums 26,356 -
Other assets 5,009 2,275
------------------- -----------------
Total assets $ 1,756,365 $ 935,500
=================== =================
LIABILITIES
Life and annuity benefits $ 331,635 $ 253,919
Property and casualty losses 352,068 115,763
Property and casualty experience refunds 21,416 20,574
Reinsurance balances payable 101,006 22,667
Deposit liabilities 79,153 -
Unearned property and casualty premiums 161,321 403
Accounts payable and accrued expenses 10,781 7,579
------------------- -----------------
Total liabilities 1,057,380 420,905
------------------- -----------------
Minority interest 115,227 114,180
------------------- -----------------
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
39,774,879 shares issued and outstanding (2000 - 27,682,963) 39,775 27,683
Additional paid-in capital 546,251 376,905
Loans receivable from officers for common share sales (12,575) (11,650)
Unearned stock grant compensation (3,155) (630)
Accumulated other comprehensive income 19,774 6,801
Retained earnings (deficit) (6,312) 1,306
------------------- -----------------
Total shareholders' equity 583,758 400,415
------------------- -----------------
------------------- -----------------
Total liabilities, minority interest and shareholders' equity $ 1,756,365 $ 935,500
=================== =================
1
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(Expressed in thousands of United States Dollars, except shares and
per share amounts)
Three Months Ended Nine Months Ended
September 30 September 30
2001 2000 2001 2000
---- ---- ---- ----
REVENUE
Gross written premiums $ 42,395 $ 35,426 $ 471,103 $ 306,187
Reinsurance premiums ceded (6,352) - (79,250) -
---------- ---------- ---------- ------------
Net written premium $ 36,043 $ 35,426 $ 391,853 $ 306,187
========== ========== ========== ============
Earned premiums $ 67,871 $ 51,916 $ 310,184 $ 288,557
Earned premiums ceded (12,332) - (52,894) -
---------- ---------- ----------- ------------
Net premiums earned 55,539 51,916 257,290 288,557
Net interest income 13,244 6,035 31,998 15,560
Net gains (losses) on alternative investments (4,734) 8,577 15,383 175
Net realized gains on fixed maturities 183 325 969 327
Other income 1,056 - 2,498 -
---------- ---------- ---------- ------------
Total revenue 65,288 66,853 308,138 304,619
---------- ---------- ---------- ------------
LOSSES AND EXPENSES
Losses, benefits and experience refunds 59,626 39,637 279,209 273,869
Acquisition costs 8,813 10,929 21,262 14,086
Interest expense 2,846 - 2,846 -
General and administrative expenses 5,009 3,836 14,620 10,205
---------- ---------- ---------- ------------
Total losses and expenses 76,294 54,402 317,937 298,160
---------- ---------- ---------- ------------
INCOME / (LOSS) BEFORE MINORITY
INTEREST (11,006) 12,451 (9,799) 6,459
Minority interest (2,315) 3,281 (2,181) 1,576
---------- ---------- ---------- ------------
NET INCOME / (LOSS) (8,691) 9,170 (7,618) 4,883
Change in net unrealized appreciation of fixed
maturities 12,132 1,441 12,973 3,077
---------- ---------- ---------- ------------
COMPREHENSIVE INCOME $ 3,441 $ 10,611 $ 5,355 $ 7,960
========== ========== ========== ============
Basic net income (loss) per share $ (0.25) $ 0.33 $ (0.25) $ 0.21
========== ========== ========== ============
Diluted net income (loss) per share $ (0.26) $ 0.33 $ (0.26) $ 0.21
========== ========== ========== ============
Weighted average shares outstanding - basic 34,935,749 27,515,278 30,369,075 23,093,787
========== ========== ========== ============
Weighted average shares outstanding - diluted 42,255,081 35,269,004 38,242,049 30,557,917
========== ========== ========== ============
2
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
(Expressed in thousands of United States Dollars)
Nine Months Ended September 30
2001 2000
---- ----
Preferred Shares
Balance, beginning of period $ - $ -
------------ ------------
Balance, end of period - -
------------ ------------
Common shares
Balance, beginning of period 27,683 14,749
Issuance of shares 13,103 12,894
Repurchase of shares (1,011) (10)
------------ ------------
Balance, end of period 39,775 27,633
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Additional paid-in capital
Balance, beginning of period 376,905 200,179
Issuance of shares 182,389 175,840
Repurchase of shares (13,043) (140)
------------ ------------
Balance, end of period 546,251 375,879
------------ ------------
Retained earnings (deficit)
Balance, beginning of period 1,306 (7,393)
Net income (loss) (7,618) 4,883
------------ ------------
Balance, end of period (6,312) (2,510)
------------ ------------
Accumulated other comprehensive income
Balance, beginning of period 6,801 -
Change in net unrealized appreciation of fixed maturities 12,973 3,077
------------ ------------
Balance, end of period 19,774 3,077
------------ ------------
Notes and loans receivable from common share sale
Balance, beginning of period (11,650) (20,750)
Notes and loans issued (1,025) (21,182)
Notes and loans repaid 100 30,432
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Balance, end of period (12,575) (11,500)
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Unearned stock grant compensation
Balance, beginning of period (630) -
Stock grants awarded (3,288) -
Amortization 763 -
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Balance, end of period (3,155) -
------------ ------------
Total shareholders' equity $ 583,758 $ 392,579
============ ============
3
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Expressed in thousands of United States Dollars)
Nine Months Ended September 30
2001 2000
---- ----
OPERATING ACTIVITIES
Net income (loss) $ (7,618) $ 4,883
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Minority share of income (loss) (2,181) 1,576
Amortization of unearned stock grant compensation 763 -
Amortization of discount on fixed maturities (850) (646)
Realized gains on fixed maturities (969) (327)
Net gains on alternative investments (15,384) (175)
Accrued interest income (1,870) -
Premiums receivable (136,343) (179,693)
Losses recoverable from reinsurers (97,539) -
Funds withheld (9,397) (23,063)
Deferred acquisition costs (44,720) (1,528)
Deferred charges 1,814 (5,000)
Prepaid reinsurance premiums (26,356) -
Other assets (2,734) (953)
Life and annuity benefits 77,716 200,007
Property and casualty losses 236,305 62,653
Property and casualty experience refunds 842 13,135
Reinsurance balances payable 78,339 -
Deposit liabilities 79,153 -
Unearned property and casualty premiums 160,918 17,629
Accounts payable and accrued expenses 3,202 (4,230)
----------------- -----------------
Cash from operating activities 293,091 84,269
----------------- -----------------
INVESTING ACTIVITIES
Purchase of fixed maturities (390,287) (326,466)
Purchase of alternative investments, net (186,466) (282,500)
Sales of fixed maturities 118,497 46,601
Redemptions of fixed maturities 11,780 -
----------------- -----------------
Cash used in investing activities (446,476) (562,365)
------------------ ------------------
FINANCING ACTIVITIES
Net proceeds from subscriptions to share capital 191,179 188,584
Repurchases of common shares (14,054) -
Notes and loans repaid 100 9,250
----------------- -----------------
Cash from financing activities 177,225 197,834
----------------- -----------------
Changes in cash and cash equivalents 23,840 (280,263)
Cash and cash equivalents, beginning of period 27,631 305,142
----------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 51,471 $ 24,879
================= =================
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 Europe Ltd., Max Re Diversified Strategies, Ltd., and Max Re Managers 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 2000 audited consolidated financial statements and
notes thereto.
Max Re Capital Ltd. was incorporated on July 8, 1999 under the laws of
Bermuda to provide customized multi-line reinsurance and insurance products
through its wholly owned subsidiaries Max Re Ltd. ("Max Re"), licensed under the
laws of Bermuda as a Class 4 insurer and long-term insurer, and Max Re Europe
Limited ("Max Re Europe"), a reinsurance company incorporated and operated in
Dublin, Ireland.
On August 17, 2001, Max Re Capital Ltd. completed an initial public
offering (the "IPO") of 12,000,000 common shares. Total proceeds received net of
underwriting discounts and commissions were $179,520,000. The Company incurred
direct offering costs of $3.5 million. All offering costs were deducted from the
gross proceeds of the IPO. Substantially all of the net proceeds were
contributed to Max Re in support of its reinsurance operations.
2. EARNINGS PER SHARE
Basic net income per share is based on weighted average common shares
outstanding and excludes any dilutive effect of warrants, options and
convertible securities. Diluted net income per share assumes the conversion of
dilutive convertible securities and the exercise of all dilutive stock warrants
and options.
5
3. SEGMENT INFORMATION
A summary of operations by segment for the nine months ended September 30,
2001 and 2000 was as follows:
September 30, 2001
Life and Property and
Annuity Casualty Other Consolidated
-------------------------------------------------------------
(Expressed in thousands of United States Dollars)
Operations data:
Gross written premiums $ 113,971 $ 357,132 $ - $ 471,103
Reinsurance premiums ceded (17,424) (61,826) - (79,250)
-------------------------------------------------------------
Net written premium $ 96,547 $ 295,306 $ - $ 391,853
=============================================================
Earned premiums $ 113,971 $ 196,213 $ - $ 310,184
Earned premiums ceded (17,424) (35,470) - (52,894)
-------------------------------------------------------------
Net premiums earned 96,547 160,743 - 257,290
Net interest income - - 31,998 31,998
Net gains on alternative investments - - 15,383 15,383
Net realized gains on fixed maturities - - 969 969
Other income - 500 1,998 2,498
-------------------------------------------------------------
Total revenues 96,547 161,243 50,348 308,138
Losses, benefits and experience refunds 111,850 167,359 - 279,209
Acquisition costs 740 20,522 - 21,262
Interest expense 2,846 - - 2,846
General and administrative expense 4,694 4,178 5,748 14,620
-------------------------------------------------------------
Total losses and expenses 120,130 192,059 5,748 317,937
Income (loss) before minority interest $ (23,583) $ (30,816) $ 44,600 $ (9,799)
=============================================================
Total assets $ - $ - $ 1,756,365 $ 1,756,365
=============================================================
6
September 30, 2000
Life and Property and
Annuity Casualty Other Consolidated
-------------------------------------------------------------------
(Expressed in thousands of United States Dollars)
Operations data:
Gross written premiums $ 202,527 $ 103,660 $ - $ 306,187
Reinsurance premiums ceded - - - -
-------------------------------------------------------------------
Net written premium $ 202,527 $ 103,660 $ - $ 306,187
===================================================================
Earned premiums $ 202,527 $ 86,030 $ - $ 288,557
Earned premiums ceded - - -
-------------------------------------------------------------------
Net premiums earned 202,527 86,030 - 288,557
Net interest income - - 15,560 15,560
Net gains on alternative investments - - 175 175
Net realized gains on fixed maturities 327 327
-------------------------------------------------------------------
Total revenues 202,527 86,030 16,062 304,619
Losses, benefits and experience refunds 203,879 69,990 - 273,869
Acquisition costs 149 13,937 - 14,086
General and administrative expense 3,003 2,729 4,473 10,205
-------------------------------------------------------------------
Total losses and expenses 207,031 86,656 4,473 298,160
Income (loss) before minority interest $ (4,504) $ (626) $ 11,589 $ 6,459
===================================================================
Total assets $ - $ - $802,532 $ 802,532
===================================================================
Financial information relating to gross written premiums by geographic
region for the nine months ended September 30, 2001 and 2000 was as follows:
September 30,
2001 2000
-------------------------------
(Expressed in thousands of
United States Dollars)
North America $ 390,103 $ 243,437
Europe 81,000 62,750
Reinsurance Ceded - North America (79,250) -
-------------------------------
$ 391,853 $ 306,187
===============================
7
Four customers accounted for 33.3%, 21.9%, 17.2% and 13.8% of the Company's
gross written premiums during the nine months ended September 30, 2001. Two
customers accounted for 57.2% and 16.7% of the Company's gross written premiums
during the nine months ended September 30, 2000.
4. GRAND CENTRAL RE LIMITED
In May 2001, the Company made an equity investment of $15 million for 7.5%
of the ordinary shares of Grand Central Re Limited ("Grand Central Re"), a
reinsurance company domiciled in Bermuda. The investment in Grand Central Re is
recorded using the equity method of accounting and is classified as an
alternative investment in the accompanying consolidated balance sheet.
Max Re Managers Ltd., a wholly owned subsidiary of Max Re Capital Ltd.,
provides Grand Central Re with insurance management services under an insurance
management agreement. Fees for such services were $1,998,000 for the nine months
ended September 30, 2001 and are included in other income in the accompanying
consolidated statements of operations and comprehensive income.
5. SHARE REPURCHASE PROGRAM
On September 17, 2001, Max Re Capital Ltd. announced that its Board of
Directors authorized Max Re Capital Ltd. to repurchase up to $15 million of its
outstanding common shares, the non-voting common shares of its subsidiary Max Re
and warrants to acquire shares of either such securities. On September 27, 2001,
Max Re Capital Ltd. announced that its Board of Directors authorized the
purchase of up to an additional $25 million of such securities, bringing the
total authorized repurchases to $40 million. As of September 30, 2001, Max Re
Capital Ltd. had repurchased 1,004,000 common shares at an average of $13.90 per
common share for a total amount of approximately $14.0 million, including costs
incurred to effect the repurchases.
6. ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("FAS") 142, "Goodwill and Other Intangible
Assets." FAS 142 establishes new accounting and reporting standards for acquired
goodwill and other intangible assets. It requires that an entity determine if
the goodwill or other intangible asset has an indefinite or a finite useful
life. Those with indefinite useful lives will not be subject to amortization and
must be tested annually for impairment. In addition, in June 2001, the FASB
issued FAS 141, "Business Combinations" which requires full amortization of
negative goodwill at the time the pronouncement is implemented. These statements
are effective for all fiscal quarters of all fiscal years beginning after
December 15, 2001. Currently, these statements will not have any impact on the
financial position of the Company.
8
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 and nine month periods ended September 30, 2001
compared to the three and nine month periods ended September 30, 2000 and
financial condition as of September 30, 2001. This discussion and analysis
should be read in conjunction with the attached unaudited consolidated financial
statements and notes thereto.
Overview
The Company is a Bermuda-based provider of reinsurance for both the
life and annuity, including disability, and property and casualty insurance
markets. The Company offers customized, alternative risk transfer reinsurance
products in both markets. 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.
The Company's capital base and structured reinsurance products
provide flexibility in making decisions regarding investments. The Company's
investments are comprised of both high grade fixed income securities, referred
to in our financial statements as fixed maturities, and a diversified,
alternative investment portfolio that is currently invested in approximately 50
underlying funds.
The Company anticipates increased demand for its property and
casualty reinsurance products. The supply of property and casualty insurance and
reinsurance was significantly impacted by the terrorist attacks of September 11,
2001. The impact on the supply, as well as a much firmer price environment,
should present the Company with increased opportunities in the property and
casualty market.
Results of Operations
Three months ended September 30, 2001 compared to three months ended September
30, 2000
Gross written premiums. Gross written premiums for the three months
ended September 30, 2001 were $42.4 million compared to $35.4 million for the
three months ended September 30, 2000, which represents an increase of 20%.
Gross written premiums for life and annuity were $0.3 million for the three
months ended September 30, 2001 compared to zero for the same period in 2000. In
the current low interest rate environment, the demand for the Company's life and
annuity products has decreased, resulting in the low premium volume during the
three months ended September 30, 2001. Gross written premiums for property and
casualty were $42.1 million for the three months ended September 30, 2001
compared to $35.4 million for the same period in 2000. Gross written premiums
for property and casualty increased principally due to our underwriting team
being in place for over a year and the firmer price environment for property and
casualty reinsurance products that causes clients to seek to structure more
attractively priced alternatives and products.
Premiums ceded. Premiums ceded for the three months ended September 30,
2001 were $6.4 million compared to zero for the three months ended September 30,
2000. The premiums
9
ceded were principally related to the Company's quota-share retrocessional
agreement with Grand Central Re.
Net premiums earned. Net premiums earned for the three months ended
September 30, 2001 were $55.5 million compared to $51.9 million for the three
months ended September 30, 2000. Life and annuity net premiums earned were $0.2
million, after the deduction of $0.1 million of earned premiums ceded, for the
three months ended September 30, 2001 compared to zero for the three months
ended September 30, 2000. Property and casualty net premiums earned were $55.3
million, after the deduction of $12.3 million of earned premiums ceded, for the
three months ended September 30, 2001 compared to $51.9 million for the three
months ended September 30, 2000.
Net interest income. Net interest income was $13.2 million for the
three months ended September 30, 2001 compared to $6.0 million for the three
months ended September 30, 2000. The increase was primarily attributable to the
increase in the fixed income portfolio resulting from cash received in
collection of premiums written since September 30, 2000. Declining interest
rates caused a total return of 4.46% for the fixed income portfolio for the
three months ended September 30, 2001 compared to a total return of 2.51% for
the three months ended September 30, 2000.
Net gains (losses) on alternative investments. Net gains (losses) on
the alternative investment portfolio were $(4.7) million for the three months
ended September 30, 2001 compared to $8.6 million for the three months ended
September 30, 2000. The alternative investment portfolio lost (0.83%) during the
three months ended September 30, 2001 compared to a 3.92% gain during the three
months ended September 30, 2000.
Losses, benefits and experience refunds. Losses, benefits and
experience refunds were $59.6 million for the three months ended September 30,
2001 compared to $39.6 million for the three months ended September 30, 2000.
Life and annuity benefits were $6.4 million for the three months ended September
30, 2001 compared to $0.2 million for the three months ended September 30, 2000.
The increase was attributable to the accretion of future benefits payable on all
reinsurance policies in force. Property and casualty losses were $53.2 million
for the three months ended September 30, 2001 compared to $39.4 million for the
three months ended September 30, 2000. The increase in property and casualty
losses was directly related to the increase in property and casualty premiums
written and earned. In addition, the Company took a gross charge of $5.0 million
for estimated claims relating to the World Trade Center tragedy on September 11,
2001. After consideration of reinsurance recoveries and additional premiums on
contracts incurring losses, the Company's net provision was $3.0 million.
Acquisition costs. Acquisition costs were $8.8 million for the three
months ended September 30, 2001 compared to $10.9 million for the three months
ended September 30, 2000. Acquisition costs during each of the three months
ended September 30, 2001 and 2000 consisted primarily of amortization of
deferred policy acquisition costs. Acquisition costs are customarily associated
with the type of premium written. Generally, acquisition costs fluctuate with
business volume and changes in product mix.
General and administrative expenses. General and administrative
expenses were $5.0 million for the three months ended September 30, 2001
compared to $3.8 million for the three months ended September 30, 2000. The
increase of $1.2 million reflects the costs associated with growing the
operations, and principally relate to staff additions.
10
Net income (loss). Net loss for the three nine months ended September
30, 2001 was $(8.7) million compared to net income of $9.2 million for the three
months ended September 30, 2000.
Nine months ended September 30, 2001 compared to nine months ended September 30,
2000
Gross written premiums. Gross written premiums for the nine months
ended September 30, 2001 were $471.1 million compared to $306.2 million for the
nine months ended September 30, 2000. Gross written premiums for life and
annuity declined to $114.0 million for the nine months ended September 30, 2001
from $202.5 million for the nine months ended September 30, 2000. Gross written
premiums for property and casualty increased to $357.1 million for the nine
months ended September 30, 2001 from $103.7 million for the nine months ended
September 30, 2000. Gross written premiums for property and casualty increased
due to an improved premium price environment within the industry and the Company
having more fully developed its underwriting team.
Premiums ceded. Premiums ceded for the nine months ended September 30,
2001 were $79.3 million compared to zero for the nine months ended September 30,
2000. The premiums ceded in 2001 were related principally to the variable quota
share retrocessional agreement with Grand Central Re.
Net premiums earned. Net premiums earned for the nine months ended
September 30, 2001 were $257.3 million compared to $288.6 million for the nine
months ended September 30, 2000. Life and annuity net premiums earned were $96.5
million, after the deduction $17.4 million of earned premiums ceded, for the
nine months ended September 30, 2001 compared to $202.5 million for the same
period in 2000. Property and casualty net premiums earned were $160.7 million,
after the deduction of $35.5 million of earned premiums ceded, compared to $86.0
million for the nine months ended September 30, 2000.
Net interest income. Net interest income was $32.0 million for the nine
months ended September 30, 2001 compared to $15.6 million for the nine months
ended September 30, 2000. The increase was primarily attributable to the
increase in the fixed income portfolio resulting from cash received in
collections of written premiums since September 30, 2000.
Net gains on alternative investments. Net gains on the alternative
investment portfolio were $15.4 million for the nine months ended September 30,
2001 compared to $0.2 million for the nine months ended September 30, 2000. The
alternative investment portfolio returned 3.97% during the nine months ended
September 30, 2001 compared to 1.78% during the nine months ended September 30,
2000.
Losses, benefits and experience refunds. Losses, benefits and
experience refunds were $279.2 million for the nine months ended September 30,
2001 compared to $273.9 million for the nine months ended September 30, 2000.
Life and annuity benefits were $111.8 million for the nine months ended
September 30, 2001 compared to $203.9 million for the nine months ended
September 30, 2000. The decrease was attributable to the Company's lower premium
volume in its life and annuity business for the nine months ended September 30,
2001 compared to the nine months ended September 30, 2000. Property and casualty
losses were $158.4 million for the nine months ended September 30, 2001 compared
to $56.9 million for the nine months ended September 30, 2000. The increase in
property and casualty losses was directly related to the increase in property
and casualty premiums written and earned. Property and casualty experience
11
refunds were $9.0 million for the nine months ended September 30, 2001 compared
to $13.1 million for the nine months ended September 30, 2000.
Acquisition costs. Acquisition costs were $21.3 million for the nine
months ended September 30, 2001 compared to $14.1 million for the nine months
ended September 30, 2000. Acquisition costs during each of the nine months ended
September 30, 2001 and 2000 consisted primarily of amortization of deferred
policy acquisition costs. The increase resulted principally from an increase in
property and casualty premiums for the nine months ended September 30, 2001
compared to the nine months ended September 30, 2000, which typically include
higher policy acquisition costs compared to the life and annuity premiums.
General and administrative expenses. General and administrative
expenses were $14.6 million for the nine months ended September 30, 2001
compared to $10.2 million for the nine months ended September 30, 2000. General
and administrative expenses in the nine months ended September 30, 2001 were
4.19% of net premiums earned and deposits compared to 3.53% for the nine months
ended September 30, 2000.
Net income (loss). Net loss for the nine months ended September 30,
2001 was $(7.6) million compared to net income of $4.9 million for the nine
months ended September 30, 2000.
Liquidity and Capital Resources
As a holding company, Max Re Capital Ltd.'s principal assets are our
investments in the voting common stock of our principal subsidiary, Max Re, and
the common stock of our other subsidiaries. Our principal source of funds is
from interest income on cash balances and cash dividends from our subsidiaries,
including Max Re. The payment of dividends is, under certain circumstances,
limited under Bermuda insurance laws. In particular, each of Max Re Capital Ltd.
and 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 September 30, 2001, Max Re, which is
required to have $162.7 million in statutory capital and surplus in order to pay
dividends, had $597.8 million in statutory capital and surplus.
Cash flow. The Company's principal sources of cash are premiums and
deposits received, underwriting management fees, 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 nine months ended
September 30, 2001, we generated $293.1 million from our operating activities as
compared with $84.3 million for the nine months ended September 30, 2000. Cash
flows from operating activities increased substantially due to collection of
premiums and deposits related to the development of our reinsurance operations
and growth in business volume.
Capital resources. Our capital structure currently consists of
minority interest and equity. At September 30, 2001, total capitalization after
deducting loans to management and including retained earnings and accumulated
other comprehensive income amounted to $699.0 million as compared with $514.6
million at December 31, 2000. Shareholders' equity increased from $392.3 million
at September 30, 2000 to $583.8 million at September 30, 2001. The increase
during the nine months ended September 30, 2001 included $179.5 million net
proceeds from the issuance of 12 million additional common shares in connection
with the Company's IPO in August 2001, $14.7 million from the issuance of common
shares in connection with the
12
formation of Grand Central Re and $13.0 million in unrealized gains from fixed
maturities, offset by common share repurchases of $14.1 million, a net loss from
operations of $7.6 million and $2.5 million of unearned stock grant compensation
provided to employees during 2001 and 2000. We continuously review our capital
adequacy and we believe this level of capital is sufficient to support the
Company's current reinsurance operations and allow for future growth.
The Company has a $300 million letter of credit facility with a syndicate
of commercial banks. At September 30, 2001 and December 31, 2000 letters of
credit totaling $249.1 million and $189.7 million, respectively, issued in the
ordinary course of the Company's business have been issued by the Company's
bankers in favor of certain ceding insurance companies to meet regulatory
requirements. All issued letters of credit were fully collateralized by our
investments. The Company was in compliance with all the covenants of this letter
of credit facility at September 30, 2001.
Since inception, the Company has had no outstanding debt. The Company may
incur indebtedness in the future.
On November 2, 2001 the Board of Directors declared a quarterly shareholder
dividend of $.02 per share payable to shareholders of record on November 16,
2001. The continued payment of dividends is dependent on the ability of our
operating subsidiaries to achieve satisfactory underwriting and investment
results and other factors determined to be relevant by the Board of Directors.
The Company had no material commitments for capital expenditures at
September 30, 2001.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company engages in an investment strategy that combines a fixed income
portfolio and an alternative investment portfolio that employ strategies to
manage investment risk. The Company attempts to maintain adequate liquidity in
its fixed income 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 income 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 September 30, 2001, the Company was not exposed to or holding any
high-yield investments. Currently, the Company's policy is to limit such
investments to a maximum of two percent of invested assets. In addition, the
Company was not holding any derivative positions. Pursuant to the Company's
policy, derivative positions are allowed only for the purpose of 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 September 30, 2001,
the impact on the fixed income portfolio from an immediate 100 basis point
increase in market interest rates would
13
have resulted in an estimated decrease in market value of 3.43% or approximately
$27.4 million and the impact on the fixed income 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 $30.5 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. However, the Company consistently and
systematically monitors the strategies and funds in which it is invested, and
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 September 30, 2001, 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
.68% or approximately $3.7 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 .68% or
approximately $3.7 million.
14
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business of the Company, against or
involving the Company.
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
Forward-Looking Statements
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 our 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 us or our management. When we make
forward-looking statements, we are basing them on our management's beliefs and
assumptions, using information currently available to us. 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. We undertake 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 of these or other risks or uncertainties materialize,
or if our underlying assumptions prove to be incorrect, actual results may vary
materially from what we projected. Any forward-looking statements you read in
this Form 10-Q reflect our current views with respect to future events and are
subject to these and other risks, uncertainties and assumptions relating to our
operations, results of operations, growth strategy and liquidity. All subsequent
written and oral forward-looking statements attributable to us or individuals
acting on our behalf are expressly qualified in their entirety by this
paragraph. You should specifically consider the
15
factors identified in this Form 10-Q which could cause actual results to differ
before making an investment decision.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the period ended
September 30, 2001.
16
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: November 14, 2001
/s/ Keith S. Hynes
--------------------------------------
Name: Keith S. Hynes
Title: Executive Vice President and
Chief Financial Officer
Date: November 14, 2001
S-1