SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT of 1934 for the quarterly period ended
September 30, 1996, or
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( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ____ to _____.
For the Quarter Ended September 30, 1996 Commission file number 0-28188
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Chartwell Re Holdings Corporation
(Exact name of registrant as specified in its charter)
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Delaware 06-1438493
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(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) 705-2532
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-- --
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Common Stock - $1.00 par value 100
- ------------------------------ ---
Description of Class Shares Outstanding
as of November 14, 1996
(All shares are privately held,
and there is no public market
for the Company's common shares)
<PAGE>
Chartwell Re Holdings Corporation
Index To Form 10-Q
PART I FINANCIAL INFORMATION
Item 1 - Financial Statements Page
----
Condensed Consolidated Balance Sheets at September 30, 1996
and December 31, 1995 ............................................. 2
Condensed Consolidated Statements of Operations for the three and
nine month periods ended September 30, 1996 and 1995 .............. 3
Condensed Consolidated Statements of Cash Flows for the nine
month periods ended September 30, 1996 and 1995 ................... 4
Notes to Condensed Consolidated Financial Statements .............. 5
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 8
PART II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K............................ 17
Signatures........................................................... 18
1
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PART I. FINANCIAL INFORMATION
ITEM 1 - Financial Statements
CHARTWELL RE HOLDINGS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
September 30, December 31,
1996 1995
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ASSETS: (Unaudited)
Investments:
Fixed maturities:
Held-to-maturity (market value
September 30, 1996, $30,271; December 31,
1995, $27,965)............................. $28,891 $26,691
Available for sale (amortized cost
September 30, 1996, $589,332; December 31,
1995, $481,175)............................ 576,459 489,107
Other investments (cost September 30, 1996,
$43,335; December 31, 1995, $33,862)....... 44,915 33,837
Cash and cash equivalents...................... 63,735 152,507
------ -------
Total investments and cash................. 714,000 702,142
Premiums in process of collection.............. 97,057 73,620
Reinsurance recoverable........................ 191,976 195,434
Prepaid reinsurance............................ 23,915 18,212
Deferred income taxes.......................... 48,144 39,517
Deferred policy acquisition costs.............. 18,333 18,809
Deposits ...................................... 18,221 17,481
Other assets................................... 54,158 55,132
------ ------
Total assets............................... $1,165,804 $1,120,347
========== ==========
LIABILITIES:
Loss and loss adjustment expenses.............. $736,267 $741,467
Unearned premiums.............................. 85,117 90,573
Other reinsurance balances..................... 26,152 4,689
Accrued expenses and other liabilities......... 29,152 20,190
Long-term debt................................. 68,750 95,000
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Total liabilities.......................... 945,438 951,919
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COMMON STOCKHOLDER'S EQUITY:
Common stock, par value $1.00 per share;
authorized: 1,000 shares; issued and
outstanding: 100shares ........................
Additional paid-in capital..................... 217,866 169,320
Net unrealized appreciation (depreciation)
of investments ................................ (7,340) 5,219
Foreign currency translation adjustment........ 48 9
Retained earnings (deficit).................... 9,792 (6,120)
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Total common stockholder's equity ......... 210,366 168,428
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Total liabilities and stockholder's equity. $1,165,804 $1,120,347
========== ==========
See notes to condensed consolidated financial statements.
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CHARTWELL RE HOLDINGS CORPORATION AND SUBSIDIARIES
CHARTWELL RE CORPORATION AND SUBSIDIARIES (Predecessor)
Condensed Consolidated Statements of Operations
(Dollars in Thousands, except share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
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(Predecessor) (Predecessor)
REVENUES:
Premiums earned...................... $47,982 $25,988 $153,186 $87,355
Net investment income................ 11,675 5,375 32,967 14,743
Net realized capital gains .......... 81 304 1,002 1,707
Service and other revenue............ 1,842 265 5,068 796
------ ------ ------- ------
Total revenues..................... 61,580 31,932 192,223 104,601
------ ------ ------- -------
LOSSES AND EXPENSES INCURRED:
Loss and loss adjustment expenses 34,579 18,899 110,593 63,712
Policy acquisition costs............. 11,566 6,353 37,511 20,598
Other expenses....................... 4,593 2,644 13,279 7,846
Interest and amortization............ 1,655 1,996 5,706 5,750
------ ------ ------- ------
Total losses and expenses incurred. 52,393 29,892 167,089 97,906
------ ------ ------- ------
Income before income taxes and
extraordinary item.................. 9,187 2,040 25,134 6,695
Income tax............................. 2,744 577 7,347 2,152
------ ------ ------ ------
Net income before extraordinary item... 6,443 1,463 17,787 4,543
Extraordinary item, net of income tax.. (1,874)
------ ------ ------ ------
Net income............................. $6,443 $1,463 $15,913 $4,543
====== ====== ======= ======
See notes to condensed consolidated financial statements.
3
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CHARTWELL RE HOLDINGS CORPORATION AND SUBSIDIARIES
CHARTWELL RE CORPORATION AND SUBSIDIARIES (Predecessor)
Condensed Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
Chartwell Re Chartwell Re
Holdings Corporation
Corporation (Predecessor)
Nine Months Ended
September 30,
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net premiums collected.............................. $145,426 $59,154
Ceded premiums paid................................. (57,936) (3,306)
Net losses & LAE.................................... (96,906) (33,113)
Overhead expenses................................... (10,792) (7,769)
Service and other revenue........................... 5,068 796
Net income taxes paid .............................. (2,247) (2,043)
Interest received on investments.................... 32,407 14,712
Interest paid....................................... (7,662) (7,220)
Other, net.......................................... 4,884 227
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Net cash provided by operating activities....... 12,242 21,438
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Held-to-maturity Securities............ (5,391) (5,359)
Purchases of Available-for-sale Securities.......... (326,143) (237,505)
Maturities of Held-to-maturity Securities........... 675 3,730
Maturities of Available-for-sale Securities......... 26,770 830
Sales of Available-for-sale Securities.............. 183,022 204,627
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Net cash used in investing activities........... (121,067) (33,677)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution from parent.................... 48,545
Redemption of Senior Notes.......................... (28,280)
Other, net.......................................... (250) (250)
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Net cash provided by (used in)
financing activities ........................ 20,015 (250)
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Effect of exchange rate on cash..................... 38 6
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Net decrease in cash and cash equivalents............. (88,772) (12,483)
Cash and cash equivalents at beginning of year........ 152,507 37,005
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Cash and cash equivalents at end of period............ $63,735 $ 24,522
======= ========
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income.......................................... $15,913 $4,543
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary item ............................... 1,874
Net realized capital gains........................ (1,002) (1,677)
Deferred policy acquisition costs................. 475 (1,428)
Deferred income taxes............................. (115) (115)
Unpaid loss and loss adjustment expenses.......... (5,199) 25,562
Unearned premiums................................. (5,456) 6,957
Other reinsurance balances........................ 108 3,968
Reinsurance recoverable........................... (2,467) 1,047
Net change in receivables and payables............ 8,574 (15,214)
Other, net........................................ (463) (2,205)
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Net cash provided by operating activities....... $12,242 $21,438
====== ========
See notes to condensed consolidated financial statements.
4
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Notes to Condensed Consolidated Financial Statements
September 30, 1996
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim Condensed Consolidated Financial
Statements of Chartwell Re Holdings Corporation ("Chartwell Holdings" or the
"Company") have been prepared in accordance with generally accepted accounting
principles for interim financial information, the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for fair
presentation have been included. Operating results for any interim period are
not necessarily indicative of results that may be expected for the full year.
These interim statements should be read in conjunction with the 1995
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K as filed with the Securities and Exchange Commission.
NOTE 2 - PUBLIC STOCK OFFERING
The Company's parent, Chartwell Re Corporation ("Chartwell"), completed
a public offering of 2,725,000 shares of common stock at $23.00 per share during
the first half of 1996. The net proceeds to Chartwell were $58.5 million after
deduction of underwriting discount and expenses. Of the net proceeds, $48.5
million was contributed to the Company of which $20.0 million was contributed to
the statutory surplus of Chartwell Reinsurance Company ("Chartwell Reinsurance")
and $28.5 million was used to retire (the "Redemption") 35% of the Company's
outstanding 10.25% Senior Notes due 2004 (the "Senior Notes") plus accrued
interest (See Note 3).
NOTE 3 - SENIOR NOTE REDEMPTION
On April 8, 1996, the Company redeemed 35% of the Senior Notes for
approximately $28.3 million including the redemption premium. Due to this early
extinguishment of debt, the Company recognized an extraordinary loss of $1.9
million net of applicable income taxes of approximately $1.0 million. This
extraordinary charge represents the redemption premium and 35% of the remaining
original debt issuance costs relating to the Senior Notes.
NOTE 4 - PRO FORMA DATA
On December 13, 1995, Piedmont Management Company Inc. ("PMC") was
merged with and into Chartwell (the "Merger"), with Chartwell as the surviving
corporation. The Merger has been accounted for under the purchase method of
accounting effective December 31, 1995. The results of operations for the nine
months ended September 30, 1996 include the results of PMC's former subsidiary,
The Insurance Corporation of New York ("INSCORP") (formerly, The Reinsurance
Corporation of New York).
The following supplementary consolidated income statement information
for the Company for the three and nine month periods ended September 30, 1996
assumes the Redemption occurred on January 1, 1995. The information for the
three and nine month periods ended September 30, 1995 is presented as though
both the Merger and Redemption had occurred on January 1, 1995.
5
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(Dollars in Thousands, except share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
--------- ---------- --------- ----------
Total revenues $ 61,580 $ 68,911 $ 192,223 $ 216,116
Net income $ 6,433 $(14,982) $ 18,282 $ (9,780)
Since all common shares of the Company are owned by Chartwell, net
income per common share is not considered meaningful and therefore not included.
NOTE 5 - RESERVE INDEMNIFICATION AGREEMENT
On June 28, 1996, the Company received $7.9 million as settlement of
the receivable arising from an indemnification agreement (the "Reserve
Indemnification") between Chartwell and its former parent, ReliaStar Financial
Corporation ("RLR") (formerly, The NWNL Companies, Inc.). The Reserve
Indemnification, which by its terms was scheduled to be settled as of the end of
1996, was settled early by mutual agreement with RLR. The settlement did not
affect operating results for the period.
NOTE 6 - NEW ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," which became effective for the Company beginning
January 1, 1996. SFAS No. 123 requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does not require)
compensation cost to be measured based on the fair value of the equity
instrument awarded. Companies are permitted, however, to continue to apply APB
Opinion No. 25, which recognizes compensation cost based on the intrinsic value
of the equity instrument awarded. The Company will continue to apply APB Opinion
No. 25 to its stock based compensation awards to employees and will disclose the
required pro forma effect on net income and earnings per share.
NOTE 7 - PENDING ACQUISITION OF ARCHER GROUP HOLDINGS
On October 14, 1996, Chartwell announced that Chartwell Holdings
Limited, a newly-formed, indirect wholly-owned subsidiary of the Company, had
made a recommended cash offer (the "Offer") of 92.5 pence for each outstanding
ordinary share (each, an "Archer Share") of Archer Group Holdings plc,
("Archer"). The Offer values the existing share capital of Archer at
approximately 35 million Pounds Sterling ($55.7 million at the exchange rate on
October 14, 1996, the date the Offer was announced, excluding approximately $4.7
million of expenses and the cost of purchasing all outstanding Archer Management
options).
The Offer, which will be financed from Chartwell's existing resources
and a new credit facility, includes a Loan Note alternative whereby Archer
stockholders may elect to receive 1 Pound Sterling Loan Note for each 1 Pound
Sterling of cash consideration. The Loan Notes, which will be guaranteed by
First Union National Bank N.A., will pay interest semi-annually at the rate per
annum calculated to be one percent below Sterling LIBOR and will mature in June
2002. The Loan Notes will be transferable, subject to certain restrictions, but
will not be listed on any stock exchange.
On November 5, 1996, the Offer was declared unconditional in all
respects, and by the close of business on November 6, 1996, valid acceptances
had been received in respect of 36,892,147
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Archer Shares representing approximately 97.5% of the issued share capital of
Archer. In accordance with the requirements of U.K. law regarding statutory
acquisitions, Chartwell Holdings Limited will be issuing a notice to those
Archer shareholders who had not accepted the Offer by November 5, 1996 which
notice shall state that it intends to exercise its rights to acquire all Archer
Shares still outstanding at the end of the notice period.
The Offer remains open until further notice, however, the Loan Note
Alternative will close on November 19,1996. It is anticipated that the
acquisition of Archer will be consummated by the end of November, 1996.
7
<PAGE>
ITEM 2 - Management's Discussion and Analysis
CHARTWELL RE HOLDINGS CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
September 30, 1996
(Unaudited)
Overview
The condensed consolidated financial statements include the accounts of
Chartwell Holdings and its principal wholly-owned operating subsidiaries
Chartwell Reinsurance, Chartwell Advisers Limited ("Chartwell Advisers") and
INSCORP. Chartwell Reinsurance underwrites treaty reinsurance through
reinsurance intermediaries for both property and casualty risks. INSCORP
underwrites a book of select specialty property and casualty insurance
underwritten through program administrators. Chartwell Advisers is a licensed
Lloyd's of London ("Lloyd's") adviser which acts as the exclusive adviser to a
non-affiliated company that was formed to underwrite at Lloyd's through a group
of wholly-owned subsidiaries that are limited liability corporate members of
certain select Lloyd's syndicates.
On December 13, 1995, Chartwell, the parent company of Chartwell
Holdings, acquired INSCORP as a result of the Merger. Since the Merger was
completed in December 1995, the financial statements for the period ended
September 30, 1995 do not include the operations of PMC or INSCORP.
Recent Developments:
On October 14, 1996, Chartwell announced that Chartwell Holdings
Limited had made an Offer of 92.5 pence for each outstanding Archer Share. The
Offer values the existing share capital of Archer at approximately 35 million
Pounds Sterling ($55.7 million at the exchange rate on October 14, 1996, the
date the Offer was announced, excluding approximately $4.7 million of expenses
and the cost of purchasing all outstanding Archer management options).
The Offer, which will be financed from Chartwell's existing resources
and a new credit facility, includes a Loan Note alternative whereby Archer
stockholders may elect to receive 1 Pound Sterling Loan Note for each 1 Pound
Sterling of cash consideration. The Loan Notes, which will be guaranteed by
First Union National Bank N.A., will pay interest semi-annually at the rate per
annum calculated to be one percent below Sterling LIBOR and will mature in June
2002. The Loan Notes will be transferable, subject to certain restrictions, but
will not be listed on any stock exchange. The maximum amount of Loan Notes to be
issued will be limited to 26.3 million Pounds Sterling.
On November 5, 1996, the Offer was declared unconditional in all
respects, and by the close of business on November 6, 1996, Chartwell owned or
had received valid acceptances in respect of 36,982,147 Archer Shares
representing approximately 97.5% of the issued share capital of Archer. In
accordance with the requirements of U.K. law regarding statutory acquisitions,
Chartwell Holdings Limited will be issuing a notice to those Archer shareholders
who have not
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accepted the Offer, which notice shall state that it intends to exercise its
rights to acquire all Archer Shares still outstanding at the end of the notice
period.
The Offer remains open until further notice, however, the Loan Note
alternative will close on November 19, 1996. It is anticipated that the
acquisition of Archer will be consummated by the end of November, 1996.
Chartwell may, from time to time, evaluate other opportunities for the
acquisition of books of business or of reinsurance or specialty insurance
companies as a going concern, for business combinations with other reinsurance
or insurance concerns and for the provision of insurance related advisory
services to third parties. There can be no assurance, however, that any such
business opportunities will arise.
Results of Operations - Nine Months Ended September 30, 1996 Compared With Nine
Months Ended September 30, 1995:
Revenues: Total revenues for the nine months ended September
30, 1996 increased 84% to $192.2 million, compared to $104.6 million for the
comparable period in 1995. The accompanying table summarizes gross and net
premiums written, earned premiums, net investment income, net realized capital
gains, service and other revenue and total revenues for the periods indicated:
Nine Months Ended
September 30,
(Dollars in Thousands) 1996 1995
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Gross premiums written $ 196,080 $ 95,681
========= =========
Net premiums written $ 140,960 $ 92,376
========== =========
Earned premiums $ 153,186 $ 87,355
Net investment income 32,967 14,743
Net realized capital gains 1,002 1,707
Service and other revenue 5,068 796
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Total revenues $ 192,223 $104,601
========= ========
Gross Premiums Written; Net Premiums Written; Net Premiums Earned. Gross
premiums written for the nine months ended September 30, 1996 were $196.1
million, an increase of 105% compared to the same period in 1995. The increase
in gross premiums written was attributable to business acquired in the Merger
and continued growth with existing and new clients in the Regional and Specialty
Accounts client segments. Business emanating from the Merger consisted of: (a) a
seasoned book of specialty insurance business which is the basis for the
Controlled Source Insurance business, the Company's newest client segment; (b) a
marine pool which is included with Chartwell's other marine and aviation
business in the Regional Accounts client segment; (c) certain of INSCORP's
reinsurance contracts which met Chartwell's underwriting standards and which
were renewed in Chartwell Reinsurance and included primarily in the Regional and
Specialty Accounts client segments; and (d) certain of INSCORP's reinsurance
contracts that were not renewed because they did not meet Chartwell's
underwriting standards and which are classified below as "INSCORP Run-off." In
addition, premiums in the Regional Accounts client segment increased because of
continuing increases in its book of marine and general aviation business.
Specialty Accounts gross premiums written for
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the nine months ended September 30, 1996 increased 46.5% over the prior year
primarily due to continued expansion of existing clients and development of new
clients. Global Accounts continues to focus on the international market place
rather than the large domestic insurance market place where competition
continues to stiffen. The distribution of the Company's gross premiums written
among its underwriting client segments was as follows:
Nine Months Ended September 30,
--------------------------------------------------
(Dollars in Thousands) 1996 1995
---------------------- --------------------------
Specialty $ 65,992 $ 45,046
Global:
Domestic 14,972 16,729
International 16,477 13,145
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Subtotal Global 31,449 29,874
Regional:
Property & Casualty 20,681 13,278
Marine & Aviation 24,177 7,483
--------- --------
Subtotal Regional 44,858 20,761
Controlled Source 46,356 -
INSCORP Run - off 7,425 -
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$196,080 $ 95,681
======== ========
Net premiums written for the first nine months of 1996 increased 53%
to $141.0 million, compared to $92.4 million for the same period in 1995. The
increase in net premiums written was principally attributable to the reasons
described above for the increase in gross premiums written. Net premiums earned
for the nine months ended September 30, 1996 were $153.2 million, an increase of
$65.8 million or 75% compared to the same period in 1995. The increase in net
premiums earned was principally attributable to premium writings by INSCORP.
Loss and Loss Adjustment Expenses. The Company's principal expense,
loss and loss adjustment expenses ("LAE") related to the settlement of claims,
was $110.6 million for the nine months ended September 30, 1996 compared to
$63.7 million for the comparable period in 1995. The increase is principally
attributable to the increase in earned premiums as noted above. Net losses and
LAE expressed as a percentage of net earned premiums (the loss and LAE ratio)
improved to 72.2% for the nine months ended September 30, 1996 from 73.3%
recorded for the same period in 1995. The improvement of 1.1 percentage points
in the loss and LAE ratio for the nine months ended September 30, 1996 was due
to an increase in the amount of proportional business written by the Company,
which generally has a lower loss and LAE ratio than excess of loss business but
modestly higher commissions.
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 $37.5 million for the nine months ended September 30, 1996, compared to
$20.6 million for the same period in 1995. Policy acquisition costs expressed as
a percentage of net earned premiums (the acquisition expense ratio) increased to
24.5% from 23.6% in 1995. The increase is due both to the INSCORP Run-off and to
a modestly higher commission structure, as noted above, for proportional
business.
Other Expenses. Other expenses, which include underwriting and
administrative expenses, were $13.3 million for the nine months ended September
30, 1996 compared to $7.8 million for the same period in 1995. Other expenses
(excluding the expenses associtaed with non-insurnace
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operations) expressed as a percentage of net earned premiums decreased to 7.7%
for the nine months ended September 30, 1996 compared to 8.0% for the same
period in 1995.
Net Underwriting Results. The Company incurred an underwriting loss
(net premiums earned minus losses, LAE and underwriting expenses, excluding the
expenses associated with non-insurance operations) of $6.7 million for the nine
months ended September 30, 1996 as compared to an underwriting loss of $4.3
million for the same period in 1995. The combined ratio for the nine months
ended September 30, 1996 computed in accordance with generally accepted
accounting principles ("GAAP") was 104.4% compared to 104.9% for the same period
in 1995. Although the loss ratio component improved to 72.2% for the nine months
ended September 30, 1996 from 73.3% recorded for the same period in 1995, the
expense ratio increased to 32.2% for the nine months ended September 30, 1996
from the 31.6 % recorded for the same period in 1995, for the reasons noted
above. On a pro forma basis, as if the Merger occurred on January 1, 1995, the
expense ratio decreased to 32.2% for the nine months ended September 30, 1996
compared to 34.0% for the same period in 1995, and the combined ratio decreased
to 104.4% for the nine months ended September 30, 1996 compared to 123.8% for
the same period in 1995. The pro forma loss and LAE ratio for the nine months
ended September 30, 1995 includes a strengthening of INSCORP's net loss reserves
of $25.0 million for losses incurred but not reported with respect to INSCORP's
business written in prior years. This reserve strengthening, which was
undertaken by PMC prior to the Merger, increased the Company's pro forma loss
and LAE ratio by 13.9 percentage points for the nine month period.
Net Investment Income and Net Realized Capital Gains (Losses). Net
investment income for the nine months ended September 30, 1996 was $33.0
million, an increase of $18.2 million, or 123%, over the same period in 1995.
The improvement reflects the increase in invested assets principally from the
net proceeds of Chartwell's public stock offering and subsequent paydown to the
Company in the first half of 1996. In addition, on June 28, 1996, the Company
received $7.9 million in settlement of a Reserve Indemnification Agreement
between Chartwell and ReliaStar Financial Corporation (the "Reserve
Indemnification Agreement") which further increased the Company's invested asset
base. (See Note 5.) The average annual tax equivalent yield on invested assets
before investment expenses increased to 6.78% for the nine months ended
September 30, 1996 compared to 6.48% for the same period in 1995.
The Company realized net capital gains of $1.0 million for the nine
months ended September 30, 1996 compared to $1.7 million for the same period in
1995. Both the 1996 and 1995 net capital gains were realized principally to
reposition certain sectors of the portfolio and to modify the portfolio to
improve credit quality without sacrificing yield.
Service and Other Revenue. Service and other revenue increased 537% to
$5.1 million for the nine months ended September 30, 1996 compared to $0.8
million for the same period in 1995. The improvement reflects increases in
advisory fee revenues, equity in the earnings of investee companies acquired in
the Merger and development of new non-risk bearing revenue sources.
Interest and Amortization. Interest and amortization expenses were $5.7
million for the nine months ended September 30, 1996 compared to $5.8 million
for the same period in 1995. Interest and amortization on the Company's 10.25%
Senior Notes due 2004 (the"Senior Notes") was $4.7 million for the first nine
months of 1996 and $5.8 million for the comparable period in 1995. The 1996
amount was reduced due to the redemption of 35% of the principal amount of
outstanding Senior Notes on April 8, 1996. Interest expense for the first nine
months of 1996 also includes $1.0 million of interest and amortization expense
on a $20.0 million bank facility established on the date of Merger.
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Income Before Income Taxes and Extraordinary Item. Net income before
income taxes and extraordinary items increased to $25.1 million for the nine
months ended September 30, 1996 compared to $6.7 million for the same period
in 1995. The increase resulted primarily from the increase in earned premiums,
thefavorable results in both loss and loss adjustment expense and in
other expenses, and from the increases in net investment income and service and
other revenue.
Income Tax Expense. The provision for Federal income taxes for the nine
months ended September 30, 1996 increased to $7.3 million compared with $2.2
million for the same period in 1995. The effective tax rate decreased to 29.2%
for the nine months ended September 30, 1996 as compared to 32.1% for the same
period in 1995. The principal factor in the decline below the statutory rate of
35% for both nine month periods was the benefit of investments in tax-advantaged
securities which increased in the 1996 period.
Net Income Before Extraordinary Item. Net income before extraordinary
item increased to $17.8 million for the nine months ended September 30, 1996 as
compared to $4.5 million for the same period in 1995. The largest components of
this increase were increases in net investment income and service and other
revenue as described above.
Extraordinary Item, Net of Income Tax. The Company recognized a net
after-tax extraordinary expense of $1.9 million for the nine months ended
September 30, 1996 for the write-off of unamortized debt issuance costs and a
redemption premium associated with the redemption of 35% the Senior Notes (See
Note 3.)
Net Income. The Company realized a net profit of $15.9 million for the
nine months ended September 30, 1996 compared with a net profit of $4.5 million
for the comparable 1995 period because of the factors discussed above.
Results of Operations - Three Months Ended September 30, 1996 Compared With
Three Months Ended September 30, 1995:
Revenues: Total revenues for the three months ended September 30, 1996
increased 93% to $61.6 million compared to $31.9 million for the comparable
period in 1995. The accompanying table summarizes gross and net premiums
written, earned premiums, net investment income, net realized capital gains,
service and other revenue and total revenues for the periods indicated:
Three Months Ended
September 30,
1996 1995
(Dollars in Thousands) ------------ ------------
Gross premiums written $ 63,613 $ 29,553
============ =============
Net premiums written $ 45,237 $ 28,095
============ =============
Earned premiums $ 47,982 $ 25,988
Net investment income 11,675 5,375
Net realized capital gains 81 304
Service and other revenue 1,842 265
------------ ------------
Total revenues $ 61,580 $ 31,932
============ ============
12
<PAGE>
Gross Premiums Written; Net Premiums Written; Net Premiums Earned.
Gross premiums written for the three months ended September 30, 1996 were $63.6
million, an increase of 115% compared to the 1995 period. The increase in gross
premiums written was principally attributable to business acquired in the
Merger, as described previously. The distribution of the Company's gross
premiums written among its underwriting client segments was as follows:
Three Months Ended September 30,
--------------------------------------------
(Dollars in Thousands) 1996 1995
------------------ ----------------------
Specialty $ 23,163 $ 14,836
Global:
Domestic 3,961 4,814
International 7,536 3,783
------ ------
Subtotal Global 11,497 8,597
Regional:
Property & Casualty 7,383 3,486
Marine & Aviation 7,621 2,634
------ ------
Subtotal Regional 15,004 6,120
Controlled Source 15,382 -
INSCORP Run - off (1,433) -
------- ------
$ 63,613 $ 29,553
======== ========
Net premiums written for the three months ended September 30, 1996
increased 61% to $45.2 million compared to $28.1 million for the same period in
1995. The increase in net premiums written was principally attributable to the
reasons described earlier in conjunction with the comparison of the results of
operations for the nine month periods. Net premiums earned for the three months
ended September 30, 1996 were $48.0 million, an increase of $22.0 million, or
85% compared to the same period in 1995. The increase in net premiums earned was
principally attributable to premium writings by INSCORP.
Loss and Loss Adjustment Expenses. The Company's principal expense,
loss and LAE related to the settlement of claims, was $34.6 million for the
three months ended September 30,1996 compared to $19.0 million for the same
period in 1995. The increase is principally attributable to the increase in
earned premiums as noted above. Net losses and LAE expressed as a percentage of
net earned premiums (the loss and LAE ratio) improved to 72.1% for the three
months ended September 30, 1996 from 73.1% recorded for the comparable period in
1995. The improvement in the loss and LAE ratio for the three months ended
September 30, 1996 was due to an increase in the amount of proportional business
written by the Company, which generally has a lower loss and LAE ratio than
excess of loss business.
Policy Acquisition Costs. Policy acquisition costs, primarily
commissions paid to ceding companies and brokerage fees paid to intermediaries
less commissions received on business ceded to other reinsurers, were $11.6
million for the three months ended September 30, 1996 compared to $6.4 million
for the comparable period in 1995. Policy acquisition costs expressed as a
percentage of net earned premiums (the acquisition expense ratio) decreased to
24.1% for the three months ended September 30, 1996 as compared to 24.4% in
1995.
Other Expenses. Other expenses, which include underwriting and
administrative expenses, were $4.6 million for the three months ended September
30, 1996 compared to $2.6 million for the comparable period in 1995. Other
expenses (excluding the expenses associated with non-insurance operations)
expressed as a percentage of net earned premiums decreased to 7.9% from 9.0% in
1995 primarily due to the high growth rate in net premiums earned compared with
the growth rate in overhead expenses.
13
<PAGE>
Net Underwriting Results. The Company incurred an underwriting loss
(net premiums earned minus losses, LAE and underwriting expenses, excluding
expenses associated with non-insurance operations) of $1.9 million for three
months ended September 30, 1996 as compared to an underwriting loss of $1.7
million for the comparable period in 1995. The combined ratio for the three
months ended September 30, 1996 period computed in accordance with generally
accepted accounting principles (GAAP) was 104.1% compared to 106.5% for the
comparable period in 1995. The loss ratio component improved to 72.1% for the
three months ended September 30, 1996 compared to 73.1% recorded for the same
period in 1995, and the expense ratio also improved to 32.0% from 33.4% in 1995
for the reasons noted above. On a pro forma basis, as if the Merger occurred on
January 1, 1995, the loss and LAE ratio decreased to 72.1% compared to 126.9%,
the expense ratio increased to 32.0% compared to 31.3%, and the combined ratio
decreased to 104.1% compared to 158.2% for 1995. The pro forma loss and LAE
ratio for the three months ended September 30, 1995 includes a strengthening of
INSCORP's net loss reserves of $25.0 million representing a strengthening in
reserves for losses incurred but not reported with respect to INSCORP's business
written in prior years. This reserve stregnthening, which was undertaken by PMC
prior to the Merger, increased the Company's pro forma loss and loss adjustment
expense ratio by 44.3 percentage points for the three month period.
Net Investment Income and Net Realized Capital Gains (Losses). Net
investment income for the three months ended September 30, 1996 was $11.7
million, an increase of $6.3 million, or 117% over the comparable period in
1995. The improvement reflects the increase in invested assets, principally from
the net proceeds of Chartwell's public stock offering and subsequent paydown to
the Company in the first half of 1996. The average annual tax equivalent yield
on invested assets, before investment expenses, increased to 6.90% for the three
months ended September 30, 1996 period compared to 6.40% for the comparable
period in 1995.
The Company realized only $81,000 of net capital gains in the three
months ended September 30, 1996 compared to $0.3 million for the same period in
1995. Trading during the 1995 period was executed principally to reposition
certain sectors of the portfolio and to improve credit quality without
sacrificing yield.
Service and Other Revenue. Service and other revenue for the three
months ended September 30, 1996 was $1.8 million, an increase of $1.6 million
compared to the same period in 1995. The improvement reflects increases in
advisory fee revenues, equity in the earnings of investee companies acquired in
the Merger and development of new non-risk bearing revenue sources.
Interest and Amortization. Interest and amortization expenses were $1.7
million for the three months ended September 30, 1996 compared to $2.0 million
in the same period in 1995 . Interest and amortization on the Senior Notes
decreased to $1.3 million for the three months ended September 30, 1996 compared
to $2.0 million for the same period in 1995 because of the redemption of 35% of
the principal amount of the Senior Notes on April 8, 1996. Interest expense for
1996 also includes $0.4 million of interest & amortization on a $20.0 million
bank facility established on the date of Merger.
Income Before Income Taxes. Net income before income taxes increased to
$9.2 million for the three months ended September 30, 1996 from $2.0 million in
the same period in 1995. The increase resulted primarily from the increase in
earned premiums, the favorable results in both loss and loss adjustment expenses
and in other underwriting expenses, and the increase in both net investment
income and service and other revenue.
Income Tax Expense. The provision for Federal income taxes for the
tree months ended September 30, 1996 increased to $2.7 million compared with
$0.6 million for the same period in
14
<PAGE>
1995. The effective tax rates were 29.9% and 28.3% for the three month periods
1996 and 1995, respectively. The principal factor in the decline below the
statutory rate of 35% for both periods was the benefit of investments in
tax-advantaged securities. While the non-taxable investment income increased in
absolute dollars in the 1996 period, it decreased as a percent of income before
income taxes.
Net Income. Net income increased to $6.4 million for the three months
ended September 30, 1996 from $1.5 million in the comparable 1995 period. The
largest components of this increase were increases in net investment income and
increased service and other revenue as described above.
Liquidity and Capital Resources:
As a holding company, Chartwell Holdings' assets consist primarily of
the stock of its indirect subsidiaries, Chartwell Reinsurance and Chartwell
Advisers, and it's indirect subsidiary, INSCORP. Chartwell Holdings' cash flow
therefore depends largely on dividends and other payments from Chartwell
Reinsurance. Chartwell Reinsurance's sources of funds consist primarily of net
premiums, reinsurance recoveries, investment income and proceeds from sales and
redemptions of investments. Funds are applied primarily to payments of claims,
operating expenses and income taxes and to the purchase of investments, largely
fixed income securities. Cash and short-term investments are maintained for the
payment of claims and expenses. Chartwell Reinsurance's ability to pay cash
dividends to the Company is restricted by law or subject to approval of the
insurance regulatory authority of Minnesota, Chartwell Reinsurance's state of
domicile. The Minnesota authority recognizes only statutory accounting practices
for the ability of an insurer to pay dividends to its shareholders.
Under the insurance laws of the State of Minnesota, payment of
dividends by Chartwell Reinsurance in any year is limited to the greater of (i)
10% of capital and surplus as of the prior year end as determined in accordance
with statutory accounting policies; or (ii) statutory net income from operations
of the next preceding year excluding realized capital gains. Notwithstanding the
foregoing, Chartwell Reinsurance may pay dividends only from its earned surplus,
also known as unassigned funds. The maximum dividend that can be paid in 1996
without prior approval of the Minnesota Department of Commerce is $18.8 million.
In addition to the sources of funds described above, financing
activities have also been a source of liquidity for Chartwell Holdings and its
subsidiaries. In the first half of 1996, Chartwell completed a public offering
of 2,725,000 shares of common stock at $23.00 per share. The net proceeds to
Chartwell were $58.5 million after deduction of underwriting discount and
expenses. Of the net proceeds, $48.5 million was contributed to the Company of
which $20.0 million was contributed to the statutory surplus of Chartwell
Reinsurance and $28.5 million was used to retire 35% of the Senior Notes due
2004 plus accrued interest (See Note 3). This redemption reduced Chartwell
Holdings' annual expense for interest and amortization of debt issuance costs
under the Senior Notes by $2.8 million per year. As a result of the offering,
Standard & Poor's improved its rating with respect to the Senior Notes to BBB-
from BB and Moody's improved its rating to Ba1 from Ba2.
At September 30, 1996, the carrying value of total investments,
including cash and cash equivalents, increased by $11.9 million, or 1.79%, to
$714.0 million compared to $702.1million at December 31, 1995. The primary
reasons for the increase were (i) the net cash acquired in the public offering
and subsequent paydown to Chartwell Holdings of $48.5 million (ii) positive cash
flow from operations of $12.2 million, (iii) net realized capital gains of $1.0
million and (iv) cash flow from certain deposits of $0.5 million, offset by (i)
$28.3 million for the retirement of 35% of the Senior Notes plus accrued
interest, (ii) the decline in the market value of the investment portfolio of
$19.2
15
<PAGE>
million pre-tax and (iii) $2.8 million of amortization of fixed income
securities and changes in unrealized foreign currency exchange values on the
fixed income portfolio. At September 30, 1996, 96% of Chartwell Holdings' total
investments (including cash and cash equivalents) consisted of fixed income
securities, of which 99% were rated "A" or better (or "A-1" for commercial
paper) by Moody's. The Company's fixed income securities portfolio at September
30, 1996 was comprised primarily of U.S. Treasury and government agency mortgage
pass-through securities, and corporate and municipal bonds.
Stockholders' equity increased 31% to $220.4 million at September 30,
1996, compared to $168.4 million at December 31, 1995 primarily as a result of
Chartwell's public common stock offering described above as well as record
earnings during 1996. Chartwell Holdings ratio of long-term debt to total
capitalization was 23.8% as of September 30, 1996, an improvement from 36.1% at
December 31, 1995.
Statutory surplus of Chartwell Reinsurance increased $41.9 million to
$230.0 million, and the statutory surplus of INSCORP increased $17.9 million to
$93.4 million, both compared to the amounts at December 31, 1995. Chartwell
Reinsurance and INSCORP, the Company's principal operating subsidiaries, are
rated A (Excellent) and A- (Excellent), respectively, by A.M. Best Company and
both companies are assigned an A- claims paying ability rating by Standard &
Poor's.
16
<PAGE>
CHARTWELL RE HOLDINGS CORPORATION AND SUBSIDIARIES
PART II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule.
(b) Reports on Form 8-K
On October 18, 1996, the Company filed a -urrent Report on Form
8-K with the Securities and Exchange Commission reporting under Item 5
- Other Events - the Company's Recommended Cash Offer for all of the
issued share capital of Archer Group Holdings, plc.
17
<PAGE>
CHARTWELL RE HOLDINGS CORPORATION AND SUBSIDIARIES
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHARTWELL RE HOLDINGS CORPORATION
(Registrant)
/s/ Charles E. Meyers
--------------------------------------
Charles E. Meyers
Duly Authorized Officer, Senior Vice
President and Chief Financial Officer
Dated: November 14, 1996
18
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 576,459
<DEBT-CARRYING-VALUE> 28,891
<DEBT-MARKET-VALUE> 30,271
<EQUITIES> 44,915
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 650,265
<CASH> 63,735
<RECOVER-REINSURE> 30,641
<DEFERRED-ACQUISITION> 18,333
<TOTAL-ASSETS> 1,165,804
<POLICY-LOSSES> 736,267
<UNEARNED-PREMIUMS> 85,117
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0
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47,982
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