SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT of 1934 for the quarterly period ended June 30, 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 June 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.)
300 Atlantic Street
Stamford, Connecticut 06901
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(Address of principal executive offices) (zip code)
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Registrant's telephone number, including area code (203) 961-7300
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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 August 9, 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
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Condensed Consolidated Balance Sheets at June 30, 1996
and December 31, 1995 ............................................. 3
Condensed Consolidated Statements of Operations for the three and
six month periods ended June 30, 1996 and 1995 .................... 4
Condensed Consolidated Statements of Cash Flows for the six
month periods ended June 30, 1996 and 1995 ........................ 5
Notes to Condensed Consolidated Financial Statements .............. 6
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............................ 16
Signatures........................................................... 17
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1 - Financial Statements
CHARTWELL RE HOLDINGS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
June 30, 1996 December 31,
(Unaudited) 1995
ASSETS: ----------- ----------
Investments:
Fixed maturities:
Held for investment (market value
June 30, 1996, $26,831; December 31,
1995, $27,965)............................. $31,350 $26,691
Available for sale (amortized cost
June 30, 1996, $605,391; December 31,
1995, $481,175)............................ 589,867 489,107
Other investments............................ 30,059 33,837
Cash and cash equivalents...................... 69,483 152,507
------ -------
Total investments and cash................. 720,759 702,142
Premiums in process of collection.............. 89,883 73,620
Reinsurance recoverable........................ 190,238 195,434
Prepaid reinsurance............................ 20,002 18,212
Deferred income taxes.......................... 47,224 39,517
Deferred policy acquisition costs.............. 18,273 18,809
Deposits ...................................... 18,058 17,481
Other assets................................... 44,118 55,132
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Total assets............................... $1,148,555 $1,120,347
========== ==========
LIABILITIES:
Loss and loss adjustment expenses.............. $736,580 $741,467
Unearned premiums.............................. 83,733 90,573
Other reinsurance balances..................... 21,373 4,689
Accrued expenses and other liabilities......... 26,390 20,190
Long-term debt................................. 68,750 95,000
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Total liabilities.......................... 936,826 951,919
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COMMON STOCKHOLDERS' EQUITY:
Common stock, par value $1.00 per share;
authorized 1,000 shares; shares issued
and outstanding 100 ...........................
Additional paid-in capital .................... 217,866 169,320
Net unrealized appreciation (depreciation)
of investments ................................ (9,504) 5,219
Foreign currency translation adjustment........ 18 9
Retained earnings (deficit).................... 3,349 (6,120)
----- ------
Total common stockholder's equity ......... 211,729 168,428
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Total liabilities and stockholder's equity. $1,148,555 $1,120,347
========== ==========
See notes to condensed consolidated financial statements.
3
<PAGE>
CHARTWELL RE HOLDINGS CORPORATION AND SUBSIDIARIES
CHARTWELL RE CORPORATION AND SUBSIDIARIES (Predecessor)
Condensed Consolidated Statements of Operations
(Dollars in Thousands)
(Unaudited)
Three Month Periods Six Month Periods
Ended June 30, Ended June 30,
1996 1995 1996 1995
-------- -------- -------- --------
(Predecessor) (Predecessor)
REVENUES:
Premiums earned...................... $48,961 $28,581 $105,204 $61,367
Net investment income................ 10,657 4,547 21,292 9,368
Net realized capital gains .......... 0 1,336 921 1,403
Service and other revenue............ 1,754 271 3,226 531
----- --- ----- ---
Total revenues..................... 61,372 34,735 130,643 72,669
------ ------ ------- ------
LOSSES AND EXPENSES INCURRED:
Loss and loss adjustment expenses 35,072 20,726 76,014 44,813
Policy acquisition costs............. 11,769 6,573 25,945 14,245
Other expenses....................... 4,317 2,733 8,686 5,202
Interest and amortization............ 1,704 1,979 4,051 3,754
----- ----- ----- -----
Total losses and expenses incurred. 52,862 32,011 114,696 68,014
------ ------ ------- ------
Income before income taxes and
extraordinary item.................. 8,510 2,724 15,947 4,655
Income tax............................. 2,459 960 4,603 1,575
----- --- ----- -----
Net income before extraordinary item... 6,051 1,764 11,344 3,080
Extraordinary item, net of income tax.. 1,874 1,874
----- ----- ----- -----
Net income............................. $4,177 $1,764 $9,470 $3,080
====== ====== ====== ======
See notes to condensed consolidated financial statements.
4
<PAGE>
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)
Six Month Periods Ended
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net premiums collected.............................. $98,698 $39,403
Ceded premiums paid................................. (37,861) (2,757)
Net losses & LAE.................................... (65,098) (22,555)
Overhead expenses................................... (6,654) (5,467)
Service and other revenue........................... 3,226 531
Net income taxes (paid)/recovered................... (888) (742)
Interest received on investments.................... 19,663 9,704
Interest paid....................................... (4,818) (3,376)
Other, net.......................................... 3,782 (473)
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Net cash provided by operating activities....... 10,050 14,268
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investments sold...................... 145,394 141,982
Proceeds from investments matured or repaid......... 14,055 1,590
Cost of investments acquired........................ (272,548) (88,644)
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Net cash provided by (used in)
investing activities......................... (113,099) 54,928
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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..................... 10 11
-- --
Net increase (decrease) in cash and cash equivalents.. (83,024) 68,957
Cash and cash equivalents at beginning of year........ 152,507 37,005
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Cash and cash equivalents at end of period............ $69,483 $105,962
======= ========
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income.......................................... $9,470 $3,080
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary item ............................... 1,874
Net realized capital gains........................ (921) (1,372)
Deferred policy acquisition costs................. 536 (975)
Deferred income taxes............................. 872 1,621
Unpaid loss and loss adjustment expenses.......... (4,886) 20,504
Unearned premiums................................. (6,839) 5,123
Other reinsurance balances........................ 152 (373)
Reinsurance recoverable........................... (730) 2,105
Net change in receivables and payables............ 7,577 (13,070)
Other, net........................................ 2,945 (2,375)
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Net cash provided by operating activities....... $10,050 $14,268
====== =======
See notes to condensed consolidated financial statements.
5
<PAGE>
CHARTWELL RE HOLDINGS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 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
On March 5, 1996, the Company's parent, Chartwell Re Corporation
(Chartwell ), completed a public offering of 2,500,000 shares of common stock at
$23.00 per share (the "Offering"). The net proceeds to Chartwell were $53.7
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 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).
On April 3, 1996, the underwriters exercised the overallotment option
for 225,000 shares of common stock and Chartwell received additional net
proceeds of $4.8 million from such exercise.
NOTE 3 - SENIOR NOTE REDEMPTION
On April 8, 1996, the Company redeemed 35% of its outstanding 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.
6
<PAGE>
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 six
months ended June 30, 1996 include the results of PMC's former subsidiary, The
Reinsurance Corporation of New York (RECO).
The following pro forma consolidated income statement information for
the Company for the three and six month periods ended June 30, 1996 assumes the
Redemption occurred on January 1, 1995. The information for the three and six
month periods ended June 30, 1995 is presented as though both the Merger and
Redemption had occurred on January 1, 1995.
(In thousands)
Three Month Periods Ended Six Month Periods Ended
June 30, June 30,
1996 1995 1996 1995
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(Predecessor) (Predecessor)
Total revenues $ 61,372 $ 73,588 $130,643 $147,205
Net income $ 6,091 $ 4,753 $ 11,839 $ 5,202
Since all common shares of the Company are owned by Chartwell Re, net
income per common share is not considered meaningful and therefore not included.
NOTE 5 - RESERVE INDEMNIFICATION AGREEMENT
On June 28, 1996, Chartwell 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 Standards (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.
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
June 30, 1996
(Unaudited)
Overview
The condensed consolidated financial statements include the accounts of
Chartwell Re Holdings Corporation (Chartwell Holdings or the "Company") and its
principal wholly-owned subsidiaries, Chartwell Reinsurance Company (Chartwell
Reinsurance), The Reinsurance Corporation of New York (RECO), and Chartwell
Advisers Limited (Chartwell Advisers). Chartwell Reinsurance underwrites treaty
reinsurance through reinsurance intermediaries for both property and casualty
risks. RECO underwrites a book of select specialty property and casualty
insurance underwritten through program administrators. Chartwell Advisers acts
as the exclusive Lloyd's adviser to a non-affiliated company formed to
underwrite at Lloyd's of London (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 Re Corporation (Chartwell), the parent
Company of Chartwell Holdings, acquired RECO as a result of the merger of RECO's
former parent, Piedmont Management Company Inc. (PMC), with and into Chartwell
(the "Merger"), with Chartwell as the surviving corporation. Since the Merger
was completed in December, the net income for 1995 as it appears herein, does
not include the operations of PMC or RECO.
Results of Operations - Six Months Ended June 30, 1996 Compared With Six Months
Ended, June 30, 1995:
Revenues: Total revenues for the six months ended June 30,
1996 were $130.6 million, which is $57.9 million or 80% more than 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:
Six Months Ended June 30,
(in thousands) 1996 1995
------ --------
Gross premiums written $132,467 $ 66,128
======== ========
Net premiums written $ 95,723 $ 64,281
======== ========
Earned premiums $105,204 $ 61,367
Net investment income 21,292 9,368
Net realized capital gains 921 1,403
Service and other revenue 3,226 531
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Total revenues $130,643 $ 72,669
======== ========
8
<PAGE>
Gross Premiums Written; Net Premiums Written; Net Premiums Earned. Gross
premiums written for the six months ended June 30, 1996 were $132.5 million, an
increase of 100% 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 RECO's
reinsurance contracts which met Chartwell's underwriting standards and which
were renewed in Chartwell Reinsurance and included primarily in Regional and
Specialty Accounts client segments; and (d) certain of RECO's reinsurance
contracts that were not renewed because they did not meet Chartwell's
underwriting standards and which are classified below as "RECO 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 the six months ended June 30, 1996
increased substantially 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:
Six Months Ended June 30,
-------------------------------------------------------
(in thousands) 1996 1995
------------------------- -----------------------------
Specialty $ 42,829 $ 30,210
Global 19,952 21,277
Regional:
Property & Casualty 13,298 9,792
Marine & Aviation 16,556 4,849
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Subtotal Regional 29,854 14,641
Controlled Source 30,974 -
RECO Run - off 8,858 -
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$ 132,467 $ 66,128
========= =========
Net premiums written for the first six months of 1996 were $95.7
million, an increase of $31.4 million or 49% compared to 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 six months ended June 30, 1996 were $105.2 million, an increase
of $43.8 million or 71% compared to the same period in 1995. The increase in net
premiums earned was principally attributable to premium writings by RECO.
Loss and Loss Adjustment Expenses. The Company's principal expense,
loss and loss adjustment expenses (LAE) related to the settlement of claims, was
$76.0 million for the six months ended June 30, 1996 compared to $44.8 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 72.3%
for the six months ended June 30, 1996 from 73.3% recorded for the same period
in 1995. The 1.0% improvement in the loss and LAE ratio for the six months ended
June 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.
9
<PAGE>
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 $25.9 million for the six months ended June 30, 1996 compared to $14.2
million for the same period in 1995. Policy acquisition costs expressed as a
percentage of net earned premiums (the acquisition expense ratio) increased to
24.7% from 23.2% in 1995. The increase is due both to the RECO 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 $8.7 million for the six months ended June 30,
1996 compared to $5.2 million for the same period in 1995. Other expenses
(excluding the expenses associated with non-insurance operations) expressed as a
percentage of net earned premiums remained steady at 7.6% for the six months
ended June 30, 1996 and 1995, with the Company absorbing the transition expenses
associated with the integration of RECO. The Company believes that these
transition expenses will decrease over the remaining six months of 1996. It
should be noted that the comparable ratio for the full year 1995 was 8.0%.
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 $4.8 million for the
first six months of 1996 as compared to an underwriting loss of $2.4 million for
the first six months of 1995. The combined ratio for the first six months of
1996 computed in accordance with generally accepted accounting principles (GAAP)
was 104.6% compared to 104.1% for the 1995 period. Although the loss ratio
component improved to 72.3% for the 1996 period from 73.3% recorded for the same
period in 1995, the expense ratio increased to 32.3% from 30.8% 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 32.3% compared to 35.3% and the combined
ratio decreased to 104.6% compared to 108.1% for 1995.
Net Investment Income and Net Realized Capital Gains (Losses). Net
investment income for the first six months of 1996 was $21.3 million, an
increase of $11.9 million, or 127% over the comparable period in 1995. The
improvement reflects the increase in invested assets, principally from the
Merger, as well as from the net proceeds of Chartwell's public stock offering
and subsequent paydown to the Company in the first six months of 1996. In
addition, on June 28, 1996, Chartwell received $7.9 million in settlement of a
Reserve Indemnification Agreement with ReliaStar Financial Corporation (the
"Reserve Indemnification Agreement") which further increased Chartwell's
invested asset base. (See Note 5.) The average annual tax equivalent yield on
invested assets before investment expenses increased to 6.76% for the first six
months of 1996 compared to 6.52% for the same period in 1995.
The Company realized net capital gains of $0.9 million in the first six
months of 1996 compared to $1.4 million for the same period in 1995. The 1996
net capital gains were realized principally to reposition certain sectors of the
portfolio and, in particular, to increase the amount of tax-advantaged
securities. Trading during the first six months of 1995 was executed principally
to modify the portfolio by sector and to capitalize on some opportunities to
improve on credit quality without sacrificing yield.
10
<PAGE>
Service and Other Revenue. Service and other revenue for the first six
months of 1996 were $3.2 million, an increase of $2.7 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 revenue sources.
Interest and Amortization. Interest and amortization expenses were $4.1
million for the first six months of 1996 compared to $3.8 million for the same
period in 1995. Interest and amortization on Chartwell Holdings' 10.25% Senior
Notes due 2004 (the"Senior Notes") was $3.4 million for the first six months of
1996 and $3.8 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 six months of 1996
also includes $0.7 million of interest and amortization expense on a $20.0
million bank facility established on the date of Merger.
Income Before Income Taxes and Extraordinary Item. Results of
operations before income taxes and extraordinary item increased to $15.9 million
for the first six months of 1996 from $4.7 million for the same period in 1995.
The increase resulted primarily from the increase in earned premiums, the
favorable results in loss and loss adjustment expense and in other underwriting
expense, and from the increase in net investment income and service and other
revenue.
Income Tax Expense. The provision for Federal income taxes in the first
six months of 1996 increased to $4.6 million compared with $1.6 million for the
same period in 1995. The effective tax rates were 28.9% and 33.8% for the 1996
and 1995 periods, respectively. The principal factor in the decline below the
statutory rate of 35% was the benefit of investments in tax-advantaged
securities which increased in the 1996 period.
Net Income Before Extraordinary Item. Results of operations before
extraordinary item increased to $11.3 million in the first six months of 1996
from $3.1 million for the same period in 1995. The most significant factor is
increased 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 in the first six months of 1996
for the write-off of unamortized debt issuance costs and a redemption premium
associated with the redemption of 35% of its Senior Notes (See Note 3.)
Net Income. The Company realized a net profit of $9.5 million in the
first six months of 1996 compared with a net profit of $3.1 million for the
comparable 1995 period because of the factors discussed above.
Results of Operations - Three Months Ended June 30, 1996 Compared With Three
Months Ended June 30, 1995:
Gross Premiums Written; Net Premiums Written; Net Premiums Earned.
Gross premiums written for the three month period ended June 30, 1996 were $63.9
million, an increase of 102% compared to the 1995 period. The increase in gross
premiums written was principally attributable
11
<PAGE>
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 June 30,
---------------------------------------------------------
(in thousands) 1996 1995
------------------------- ------------------------------
Specialty $ 25,744 $ 12,940
Global 11,441 10,343
Regional:
Property & Casualty 5,673 5,249
Marine & Aviation 5,855 3,036
------- --------
Subtotal Regional 11,528 8,285
Controlled Source 13,797 -
RECO Run - off 1,393 -
-------- ---------
$ 63,903 $ 31,568
========= =========
Net premiums written for the three months ended June 30, 1996 were
$46.0 million, an increase of $15.1 million, or 49% compared to 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 six month periods. Net premiums earned for the three
months ended June 30, 1996 were $49.0 million, an increase of $20.4 million, or
71% compared to the same period in 1995. The increase in net premiums earned was
principally attributable to premium writings by RECO.
Loss and Loss Adjustment Expenses. The Company's principal expense,
loss and loss adjustment expenses (LAE) related to the settlement of claims, was
$35.1 million for the three months ended June 30,1996 compared to $20.7 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 71.6% for
the three months ended June 30, 1996 from 73.2% recorded for the comparable
period in 1995. The improvement in the loss and LAE ratio for the three months
ended June 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, primarily
commissions paid to ceding companies and brokerage fees paid to intermediaries
less commissions received on business ceded to other reinsurers, were $11.8
million for the three months ended June 30, 1996 compared to $6.6 million for
the comparable period in 1995. Policy acquisition costs expressed as a
percentage of net earned premiums (the acquisition expense ratio) increased to
24.0% from 23.0% in 1995. The increase is due both to the RECO 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 $4.3 million for the three months ended June 30,
1996 compared to $2.7 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 8.1% from 8.6% in 1995 primarily
due to the high growth rate in net premiums earned compared with the growth rate
in overhead expenses.
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<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 June 30, 1996 as compared to an underwriting loss of $1.2 million
for the comparable period in 1995. The combined ratio for the three months ended
June 30, 1996 period computed in accordance with generally accepted accounting
principles (GAAP) was 103.7% compared to 104.8% for the comparable period in
1995. Although the loss ratio component improved to 71.6% for the three months
ended June 30, 1996 compared to 73.2% recorded for the same period in 1995, the
expense ratio increased to 32.1% from 31.6% in 1995 for the reasons noted above.
On a pro forma basis, as if the Merger occurred on January 1, 1995, the loss and
loss adjustment expense ratio increased to 71.6% compared to 69.6%, the expense
ratio decreased to 32.1% compared to 33.5%, and the combined ratio increased to
103.7% compared to 103.1% for 1995.
Net Investment Income and Net Realized Capital Gains (Losses). Net
investment income for the three months ended June 30, 1996 was $10.7 million, an
increase of $6.1 million, or 133% over the comparable period in 1995. The
improvement reflects the increase in invested assets, principally from the
Merger, from the net proceeds of Chartwell's public stock offering and from
continued positive cash flow from operations. In addition, on June 28, 1996,
Chartwell received funds in final settlement of the Reserve Indemnification
Agreement which further increased Chartwell's invested asset base. (See Note 5.)
The average annual tax equivalent yield on invested assets, before investment
expenses, increased to 6.83% for the three months ended June 30, 1996 period
compared to 6.43% for the comparable period in 1995.
The Company realized no net capital gains in the three months ended
June 30, 1996 compared to $1.3 million for the same period in 1995. Trading
during the 1995 period was executed principally to modify the portfolio by
sector and to capitalize on opportunities to improve on credit quality without
sacrificing yield.
Service and Other Revenue. Service and other revenue for the three
months ended June 30, 1996 period were $1.8 million, an increase of $1.5 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 revenue sources.
Interest and Amortization. Interest and amortization expenses were $1.7
million for the three months ended June 30, 1996 period compared to $2.0 million
in the same period in 1995 . Interest and amortization on the Senior Notes
decreased to $1.4 million for the three months ended June 30, 1996 as 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 $0.3 million of interest and amortization on a $20.0 million
bank facility established on the date of Merger.
Income Before Income Taxes and Extraordinary Item. Results of
operations before income taxes and extraordinary item increased to $8.5 million
for the three months ended June 30, 1996 from $2.7 million in the same period in
1995. The increase resulted primarily from the increase in
13
<PAGE>
earned premiums, the favorable results in both loss and loss adjustment expense
and in other underwriting expense, and the increase in both net investment
income and service and other revenues.
Income Tax Expense. The provision for Federal income taxes in 1996
increased to $2.5 million compared with $1.0 million in 1995. The effective tax
rates were 28.9% and 35.2% for the 1996 and 1995 periods, respectively. The
principal factor in the decline below the statutory rate of 35% was the benefit
of investments in tax-advantaged securities which increased in the 1996 period.
Net Income Before Extraordinary Item. Results of operations before
extraordinary items increased to $6.1 million for the three months ended June
30, 1996 from $1.8 million in the comparable 1995 period. The most significant
factor is increased net investment income and increased 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 in the three months ended June
30, 1996 for the write-off of unamortized debt issuance costs and redemption
premium associated with its Senior Notes Redemption.
Net Income. The Company realized a $4.2 million net profit for the
three months ended June 30, 1996 compared to $1.8 million in the same period in
1995 because of the factors discussed above.
Liquidity and Capital Resources:
As a holding company, Chartwell Holdings' assets consist primarily of
the stock of its direct subsidiaries, Chartwell Reinsurance and Chartwell
Advisers and its indirect subsidiary, RECO. Chartwell Holdings' cash flow
therefore depends largely on dividends and tax sharing 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, which
primarily consist of 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.
14
<PAGE>
In addition to the sources of funds described above, financing
activities have also been a source of liquidity for Chartwell Holdings' and its
subsidiaries. On March 5, 1996, Chartwell completed a public offering of
2,500,000 shares of common stock at $23.00 per share. The net proceeds to
Chartwell were $53.7 million after deduction of underwriting discount and
expenses. Of the net proceeds, $48.5 million was contributed to Chartwell
Holdings of which $20.0 million was contributed to the statutory surplus of
Chartwell Reinsurance and $28.5 million was used to retire 35% of its
outstanding 10.25% 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 June 30, 1996, the carrying value of total investments, including
cash and cash equivalents, increased by $18.7 million, or 2.7%, to $720.8
million compared to $702.1 million at December 31, 1995. The primary reasons for
the increase were the net cash acquired in the public offering and subsequent
paydown to Chartwell Holdings of $48.5 million, positive cash flow from
operations of $10.1 million, cash flow from the settlement of certain December
31, 1995 securities sales of $10.9 million and cash from the settlement of the
Reserve Indemnification Agreement of $7.9 million, offset by $28.5 million for
the retirement of 35% of the Company's Senior Notes plus accrued interest and
the decline in the market value of the investment portfolio. At June 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 June 30, 1996 was comprised primarily of U.S. Treasury
and government agency mortgage pass-through securities, and corporate and
municipal bonds.
Stockholder's equity increased 26% to $211.7 million at June 30, 1996,
compared to $168.4 million at December 31, 1995 primarily as a result of
Chartwell's public common stock offering described above. Chartwell Holdings'
ratio of long-term debt to total capitalization was 24.5% as of June 30, 1996,
down from 36.1% at December 31, 1995.
Statutory surplus of Chartwell Reinsurance increased $34.9 million to
$223.0 million, and the statutory surplus of RECO increased $12.8 million to
$88.3 million, both compared to amounts at December 31, 1995. Chartwell
Reinsurance and RECO, 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.
15
<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
None.
16
<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: August 14, 1996
17
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 589,867
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