SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended June 30, 1998 or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 for the transition
period from to .
For the Quarter Ended June 30, 1998 Commission file number 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
(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
(Address of principal executive offices) (zip code)
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Registrant's telephone number, including area code (203) 705-2500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock - $1.00 par value 100
- ------------------------------ -----
Description of Class Shares Outstanding
as of August 12, 1998
(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
Page
Item - ----
Condensed Consolidated Balance Sheets at
June 30, 1998 and December 31, 1997......................... 1
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 1998 and 1997............ 2
Condensed Consolidated Statements of Cash Flows for the
three and six months ended June 30, 1998 and 1997............ 3
Notes to Condensed Consolidated Financial Statements............ 4
Item 2 -
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 6
PART II..OTHER INFORMATION
Item 1 - Legal Proceedings...................................... 13
Item 5 - Other Information...................................... 13
Item 6 - Exhibits and Reports on Form 8-K ...................... 13
Signatures ..................................................... 14
i
<PAGE>
PART I.FINANCIAL INFORMATION
Item 1 - Financial Statements
CHARTWELL RE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)
June 30, December 31,
1998 1997
----------- ------------
ASSETS: (Unaudited)
Investments:
Fixed maturities:
Held to maturity (market value 1998,
$35,540; 1997, $37,421).......................$ 34,495 $ 36,630
Available for sale (amortized cost 1998,
$654,074; 1997, $645,108)..................... 671,968 657,973
Other investments................................. 42,628 38,043
Cash and cash equivalents........................... 26,325 29,534
--------- ---------
Total investments and cash................ 775,416 762,180
Accrued investment income........................... 10,820 10,667
Premiums in process of collection................... 163,514 126,537
Reinsurance recoverable: on paid losses............. 23,206 34,502
on unpaid losses........... 256,005 202,593
Prepaid reinsurance................................. 44,350 29,929
Goodwill............................................ 53,766 54,259
Deferred policy acquisition costs................... 24,251 26,100
Deferred income taxes............................... 25,137 29,847
Deposits............................................ 19,729 19,040
Other assets........................................ 71,437 69,406
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$ 1,467,631 $ 1,365,060
============ ===========
LIABILITIES:
Loss and loss adjustment expenses...................$ 834,011 $ 788,240
Unearned premiums................................... 117,035 111,149
Other reinsurance balances.......................... 59,600 33,723
Accrued expenses and other liabilities.............. 50,737 49,345
Long term debt...................................... 108,178 104,126
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Total liabilities........................ 1,169,561 1,086,583
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COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST................................... 8,641 9,425
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STOCKHOLDER'S EQUITY
Common stock, par value $1.00 per share; authorized
1,000 shares; shares issued and outstanding 100..
Additional paid-in capital........................ 217,866 217,866
Net unrealized appreciation of investments........ 12,271 8,741
Foreign currency translation adjustment........... 505 296
Retained earnings................................. 58,787 42,149
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Total stockholder's equity................ 289,429 269,052
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$ 1,467,631 $ 1,365,060
============ ============
See notes to condensed consolidated financial statements.
1
<PAGE>
<TABLE>
CHARTWELL RE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share amounts)
(Unaudited)
<CAPTION>
Three Month Periods Six Month Periods
Ended June 30, Ended June 30,
--------------------------- ---------------------
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
UNDERWRITING OPERATIONS:
Premiums earned....................... $ 56,430 $ 73,890 $ 109,173 $ 135,675
Net investment income................. 11,996 10,793 23,640 20,624
Net realized capital gains (losses)... (39) (29) 60 (49)
---------- ---------- ---------- ----------
Total revenues................... 68,387 84,654 132,873 156,250
---------- ---------- ---------- ----------
Loss and loss adjustment expenses..... 33,914 49,810 65,838 91,845
Policy acquisition costs.............. 14,639 20,452 29,584 37,572
Other expenses........................ 6,011 4,533 10,280 8,227
---------- ---------- ---------- ----------
Total expenses................... 54,564 74,795 105,702 137,644
---------- ---------- ---------- ----------
Income before taxes -
underwriting operations.......... 13,823 9,859 27,171 18,606
---------- ---------- ---------- ----------
SERVICE OPERATIONS:
Service and other revenue............. 3,291 6,900 6,639 14,434
Equity in net earnings of investees... 1,323 1,030 2,071 2,176
Net investment income................. 129 396 337 644
---------- ---------- ---------- ----------
Total revenues................... 4,743 8,326 9,047 17,254
---------- ---------- ---------- ----------
Other expenses........................ 3,329 4,648 6,015 9,526
Amortization of goodwill.............. 569 528 1,135 1,045
---------- ---------- ---------- ----------
Total expenses................... 3,898 5,176 7,150 10,571
---------- ---------- ---------- ----------
Income before taxes -
service operations............... 845 3,150 1,897 6,683
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CORPORATE:
Net investment income................. 32 - 52 94
General and administrative expenses... 636 394 1,178 784
Interest expense...................... 2,403 2,365 4,882 4,519
Amortization expense.................. 209 71 415 235
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Loss before taxes - corporate......... (3,216) (2,830) (6,423) (5,444)
---------- ---------- ---------- -----------
Consolidated income before taxes
and minority interest.............. 11,452 10,179 22,645 19,845
Income tax expense.................... 3,573 3,078 6,891 5,877
---------- ---------- ---------- -----------
Net income before minority interest... $ 7,879 $ 7,101 $ 15,754 $ 13,968
Minority Interest..................... 526 (156) 884 (345)
-------- ------- --------- ---------
Net Income............................ $ 8,405 $ 6,945 $ 16,638 $ 13,623
========== ========== ========== ===========
See notes to condensed consolidated financial statements.
2
</TABLE>
<PAGE>
CHARTWELL RE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Six Month Periods
Ended June 30,
--------------------------
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net premiums collected....................... $ 75,548 $ 74,732
Net losses and loss adjustment expenses paid. (73,479) (74,922)
Overhead expenses............................ (11,480) (12,372)
Service and other revenue, net of
related expenses.......................... (2,790) 5,010
Net income taxes paid........................ (2,554) (2,092)
Interest received on investments............. 22,495 21,028
Interest paid................................ (4,006) (4,765)
Other, net................................... 4,025 (3,677)
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Net cash provided by operating activities.. 7,759 2,942
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for sale securities.... (74,521) (76,930)
Maturities of available for sale securities... 7,725 9,904
Maturities of held to maturity securities 1,300 -
Sales of available for sale securities........ 51,289 43,165
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Net cash used in investing activities..... (14,207) (23,861)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt...................... 5,045 1,619
Repayment of long-term debt..................... (1,383) -
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Net cash provided by financing activities.. 3,662 1,619
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Effect of exchange rate on cash............ (423) (1,059)
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Net decrease in cash and cash equivalents............ (3,209) (20,359)
Cash and cash equivalents at beginning of period..... 29,534 50,343
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Cash and cash equivalents at end of period........... $ 26,325 $ 29,984
=========== ==========
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income....................................... $ 16,638 $13,623
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in net earnings of investees........ (865) (2,176)
Net realized capital (gains) losses........ (60) 49
Minority interest.......................... (884) 345
Deferred policy acquisition costs.......... 1,849 (4,119)
Unpaid loss and loss adjustment expenses... 45,771 17,940
Unearned premiums.......................... 5,886 22,116
Other reinsurance balances................. 11,455 2,769
Reinsurance recoverable.................... (42,116) (15,154)
Net change in receivables and payables..... (36,939) (25,065)
Other, net................................. 7,024 (7,386)
----------- ---------
Net cash provided by operating
activities........................... $ 7,759 $ 2,942
=========== =========
See notes to condensed consolidated financial statements.
3
<PAGE>
Notes to Condensed Consolidated Financial Statements
June 30, 1998 (Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim Condensed Consolidated Financial
Statements of Chartwell Re Holdings Corporation (the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information, the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for fair presentation have
been included. Operating results for any interim period are not necessarily
indicative of results that may be expected for the full year. These interim
statements should be read in conjunction with the 1997 consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K as filed with the Securities and Exchange Commission.
Certain account balances from the prior year's presentation have been
reclassified to conform to the current year's presentation.
NOTE 2 - NEW ACCOUNTING STANDARD
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"), which became effective for the Company on January 1, 1998.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. It does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in that
financial statement.
The components of the Company's comprehensive income are net income,
changes in foreign currency translation adjustments and changes in unrealized
appreciation of investments. Total comprehensive income for the three month
periods ended June 30, 1998 and 1997 was $10,955,000 and $14,684,000,
respectively. Total comprehensive income for the six month periods ended June
30, 1998 and 1997 was $20,377,000 and $11,982,000, respectively.
NOTE 3 - CONTINGENCIES
American Eagle--In 1996 and early 1997, the Company entered into
certain assumption of liability endorsements ("ALEs") pursuant to an agreement
with American Eagle Insurance Company ("American Eagle"), which provided for the
assumption of certain policy liabilities by the Company in the event of an
insolvency of American Eagle. As part of such arrangements, the Company obtained
from American Eagle a trust fund to collateralize any potential obligations
arising out of the issuance of the ALEs by the Company. On December 3, 1997,
American Eagle was placed in receivership by the Texas Department of Insurance.
4
<PAGE>
On June 16, 1998, the California Insurance Guarantee Association filed
suit in the Superior Court of California, County of Los Angeles, against the
Company, seeking, among other things, a declaratory judgment that the ALEs
covered claims arising prior to the date upon which the ALEs were issued. The
Company believes, and has been so advised by counsel handling the case, that it
has a number of valid defenses to the litigation pending against it. Such case
is, and will continue to be, vigorously defended. However, it is not possible to
predict the outcome of such case. Litigation is subject to many uncertainties,
and it is possible that such case could be decided or settled unfavorably. In
such event, it is possible that the Company's results of operations or
financial position could be materially adversely affected.
5
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
Chartwell Re Holdings Corporation is an insurance holding company with
global underwriting and service operations, conducting its business in the
United States and in the Lloyd's market through its principal operating
subsidiaries, Chartwell Reinsurance Company ("Chartwell Reinsurance"), The
Insurance Corporation of New York ("INSCORP") and Archer Group Holdings plc
("Archer"). Chartwell Re Holdings Corporation and its subsidiaries are
collectively referred to as the Company. The Company was formed in 1995 to act
as an intermediate level holding company for its parent, Chartwell Re
Corporation, a company whose common stock is traded on the New York Stock
Exchange.
Results of Operations - Six Months Ended June 30, 1998 Compared With Six Months
Ended June 30, 1997:
Revenues: Total revenues for the six months ended June 30, 1998
decreased 18.2% to $142.0 million, compared to $173.6 million forthe comparable
period in 1997.
The accompanying table summarizes gross and net premiums written and
total revenues for the periods indicated:
Six Month Periods
Ended June 30,
------------------------------------------
1998 1997
------------------------------------------
(in thousands)
Gross premiums written $168,665 $193,615
============== ===============
Net premiums written $101,528 $146,262
============== ===============
Premiums earned $109,173 $135,675
Net investment income 24,029 21,362
Net realized capital gains (losses) 60 (49)
Service and other revenue 6,639 14,434
Equity in net earnings of investees 2,071 2,176
-------------- ---------------
Total Revenues $141,972 $173,598
============== ===============
Underwriting Operations
Gross Premiums Written; Net Premiums Written; Net Premiums Earned.
Gross premiums written for the first six months of 1998 were $168.7 million, a
decrease of 12.9% compared to the same period in 1997. The distribution of the
Company's gross premiums written among its business segments was as follows:
Six Month Periods
Ended June 30, % Change
--------------------------------------
1998 1997
------------- ----------
Gross Premiums Written from
Reinsurance Operations $84,629 $136,106 -37.8%
Gross Premiums Written from
Specialty Insurance Operations 84,036 57,509 46.1%
------------- ----------
Total $168,665 $193,615 -12.9%
============= ==========
The decrease in gross premiums written from reinsurance operations is
primarily attributable to the non-renewal of several large treaties written in
1997. Certain of the treaties were non-renewed at the Company's option because
the price fell below levels at which the Company was willing to write business,
and others were not renewed because the ceding companies were directly affected
by consolidation activity in the industry. Pro forma for the elimination of
these contracts, gross premiums written from reinsurance operations for the six
months ended June 30, 1998 were $77.4 million, a decrease of 17.9% from $94.3
million for the same period in 1997.
6
<PAGE>
Net premiums written for the six months ended June 30, 1998 decreased
30.6% to $101.5 million compared to $146.3 million for the same period in 1997.
The decrease in both gross and net premiums written is principally attributable
to the opportunistic underwriting of certain reinsurance accounts in 1997, which
did not renew for 1998, as well as the Company's response to the persistence of
intense price competition in the reinsurance industry. This is offset in part by
the continued growth of the Controlled Source Insurance business, which
increased 24.2% and 49.8% in gross and net premiums written, respectively, from
the same period in 1997 as well as the addition of premiums from the Company's
two dedicated corporate capital vehicles which participate on syndicates managed
by Archer (the "Dedicated Vehicles") amounting to $22.8 million and $20.4
million on a gross and net basis, respectively, for the first half of 1998
compared to $8.2 million and $8.1 million for the first half of 1997. Net
premiums earned for the six months ended June 30, 1998 were $109.2 million, a
decrease of 19.5% compared to $135.7 million for the same period in 1997.
Loss and Loss Adjustment Expenses. The Company's principal expense,
loss and loss adjustment expenses ("LAE") related to the settlement of claims,
was $65.8 million for the six months ended June 30, 1998, a 28.3% decrease
compared to $91.8 million for the comparable period in 1997. The decrease is
principally attributable to the decrease in net premiums earned noted above and
the decrease in the loss ratio noted below. Net losses and LAE expressed as a
percentage of net premiums earned (the loss and LAE ratio) improved to 60.3% for
the six months ended June 30, 1998 from 67.7% recorded for the same period in
1997. The improvement of 7.4 percentage points in the loss and LAE ratio for the
six months ended June 30, 1998 was a result of a change in the mix of business
as well as the benefits of new reinsurance programs, including aggregate excess
of loss reinsurance treaties, and the enhancement of existing reinsurance
programs.
Policy Acquisition Costs. Policy acquisition costs, consisting
primarily of commissions paid to ceding companies and brokerage fees paid to
intermediaries, less commissions received on business ceded to other reinsurers,
were $29.6 million for the six months ended June 30, 1998 compared to $37.6
million for the same period in 1997. Policy acquisition costs expressed as a
percentage of net premiums earned (the acquisition expense ratio) decreased
modestly to 27.1% from 27.7% in the first half of 1997.
Other Expenses. Other expenses related to underwriting operations,
which include underwriting and administrative expenses, were $10.3 million for
the six months ended June 30, 1998 compared to $8.2 million for the same period
in 1997. Other expenses expressed as a percentage of net premiums earned
increased to 9.4% for the six months ended June 30, 1998 compared to 6.1% for
the same period in 1997 resulting primarily from the reduced level of premium
volume.
Net Underwriting Results. For the six months ended June 30, 1998 the
Company's net underwriting result (net premiums earned minus losses, LAE and
underwriting expenses) increased to a net gain of $3.5 million compared to a net
underwriting loss of $2.0 million for the same period in 1997. The combined
ratio for the six months ended June 30, 1998 computed in accordance with
generally accepted accounting principles improved to 96.8% compared to 101.5%
for the same period in 1997. Although the loss ratio component improved to 60.3%
for the six months ended June 30, 1998 from 67.7% recorded for the same period
in 1997, the expense ratio increased to 36.5% for the six months ended June 30,
1998 from the 33.8% recorded for the same period in 1997, for the reasons noted
above.
7
<PAGE>
Service Operations
Revenue from service operations decreased to $9.0 million for the six
months ended June 30, 1998 compared to $17.3 million for the same period in
1997, principally reflecting a reduction in profit commissions at Archer as a
result of competitive market conditions at Lloyd's.
Corporate
Interest and Amortization. Interest and amortization expenses were $5.3
million for the six months ended June 30, 1998 compared to $4.8 million for the
same period in 1997. The increase was due principally to bank fees paid for
letters of credit used to support the Company's underwriting participation on
syndicates managed by Archer and an increase in variable interest rates on debt
denominated in pounds sterling.
Consolidated
Net Investment Income and Net Realized Capital Gains. Consolidated
after-tax net investment income, exclusive of realized and unrealized capital
gains, for the six months ended June 30, 1998 was $17.0 million, compared to
$15.2 million for the same period in 1997. The carrying value of the Company's
invested assets and cash increased to $775.4 million at June 30, 1998 from
$762.2 million at December 31, 1997 primarily due to the Company's draw-down on
its revolving credit facility and changes in the market value of investments.
The average annual tax equivalent yield on invested assets after investment
expenses decreased to 6.31% for the first half of 1998 compared to 6.53% for the
same period in 1997 reflecting the lower interest rate environment. The
Company's pro rata share of investment income from the Dedicated Vehicles is
excluded from this calculation because the related invested assets are not
included in the Company's consolidated balance sheet.
The Company realized net capital gains of $60,000 for the six months
ended June 30, 1998 compared to net capital losses of $49,000 for the six months
ended June 30, 1997.
Income Before Income Taxes and Minority Interest. Income before income
taxes and minority interest increased to $22.6 million for the six months ended
June 30, 1998 compared to $19.8 million for the same period in 1997. The
increase resulted primarily from the improvement in net underwriting results
discussed above, offset, in part, by the reduction in income from service
operations.
Income Tax Expense. The provision for Federal income taxes for the six
months ended June 30, 1998 increased to $6.9 million compared with $5.9 million
for the same period in 1997. The effective tax rate was 30.4% and 29.6% for the
six months ended June 30, 1998 and 1997, respectively. For both periods, the
effective rate is below the statutory rate of 35% due to the benefit of
investments in tax-advantaged securities.
8
<PAGE>
Net Income. The Company realized a net profit of $16.6 million for the
six months ended June 30, 1998 compared with a net profit of $13.6 million for
the comparable 1997 period because of the factors discussed above.
Results of Operations - Three Months Ended June 30, 1998 Compared With Three
Months Ended June 30, 1997:
Revenues: Total revenues for the three months ended June 30, 1998
decreased 21.3% to $73.2 million, compared to $93.0 million for the comparable
period in 1997.
The accompanying table summarizes gross and net premiums written and
total revenues for the periods indicated:
Three Month Periods
Ended June 30,
--------------------------------------
1998 1997
--------------- --------------
(in thousands)
Gross premiums written $86,806 $96,939
=============== ==============
Net premiums written $59,966 $76,350
=============== ==============
Premiums earned $56,430 $73,890
Net investment income 12,157 11,189
Net realized capital gains (losses) (39) (29)
Service and other revenue 3,291 6,900
Equity in net earnings of investees 1,323 1,030
--------------- --------------
Total Revenues $73,162 $92,980
=============== ==============
Underwriting Operations
Gross Premiums Written; Net Premiums Written; Net Premiums Earned.
Gross premiums written for the second quarter of 1998 were $86.8 million, a
decrease of 10.5% compared to the same period in 1997. The distribution of the
Company's gross premiums written among its business segments was as follows:
Three Month Periods
Ended June 30, % Change
---------------------- -----------
1998 1997
--------- ----------
Gross Premiums Written from
Reinsurance Operations $40,191 $62,072 -35.3%
Gross Premiums Written from
Specialty Insurance Operations 46,615 34,867 33.7%
-------- -----------
Total $86,806 $96,939 -10.5%
========= ===========
The decrease in gross premiums written from reinsurance operations is
primarily attributable to the non-renewal of several large treaties written in
1997. Certain of the treaties were non-renewed at the Company's option because
the price fell below levels at which the Company was willing to write business,
and others were not renewed because the ceding companies were directly affected
by consolidation activity in the industry. Pro forma for the elimination of
these contracts, gross premiums written from reinsurance operations for the
three months ended June 30, 1998 were $38.9 million, a decrease of 26.2% from
$52.7 million for the same period in 1997.
9
<PAGE>
Net premiums written for the three months ended June 30, 1998 decreased
21.5% to $60.0 million compared to $76.4 million for the same period in 1997.
The decrease in both gross and net premiums written is principally attributable
to the opportunistic underwriting of certain reinsurance accounts in 1997, which
did not renew for 1998, as well as the Company's response to the persistence of
intense price competition in the reinsurance industry. This is offset in part by
the continued growth of the Controlled Source Insurance business, which
increased 10.3% and 18.9% in gross and net premiums written, respectively, for
the second quarter of 1998 as well as the addition of premiums from the
Dedicated Vehicles which amounted to $17.2 million and $15.4 million on a gross
and net basis, respectively, for the second quarter of 1998 compared to $8.2
million and $8.1 million, respectively, for the second quarter of 1997. Net
premiums earned for the three months ended June 30, 1998 were $56.4 million, a
decrease of 23.6% compared to $73.9 million for the same period in 1997.
Loss and Loss Adjustment Expenses. The Company's principal expense,
loss and loss adjustment expenses ("LAE") related to the settlement of claims,
was $33.9 million for the three months ended June 30, 1998, a 31.9% decrease
compared to $49.8 million for the comparable period in 1997. The decrease is
principally attributable to the decrease in net premiums earned noted above and
the decrease in the loss ratio noted below. Net losses and LAE expressed as a
percentage of net premiums earned (the loss and LAE ratio) improved to 60.1% for
the three months ended June 30, 1998 from 67.4% recorded for the same period in
1997. The improvement of 7.3 percentage points in the loss and LAE ratio for the
three months ended June 30, 1998 was a result of a change in the mix of business
as well as the benefits of new reinsurance programs, including aggregate excess
of loss reinsurance treaties, and the enhancement of existing reinsurance
programs.
Policy Acquisition Costs. Policy acquisition costs, consisting
primarily of commissions paid to ceding companies and brokerage fees paid to
intermediaries, less commissions received on business ceded to other reinsurers,
were $14.6 million for the three months ended June 30, 1998 compared to $20.5
million for the same period in 1997. Policy acquisition costs expressed as a
percentage of net premiums earned (the acquisition expense ratio) decreased to
25.9% from 27.7% in the second quarter of 1997.
Other Expenses. Other expenses related to underwriting operations,
which include underwriting and administrative expenses, were $6.0 million for
the three months ended June 30, 1998 compared to $4.5 million for the same
period in 1997. Other expenses expressed as a percentage of net premiums earned
increased to 10.7% for the three months ended June 30, 1998 compared to 6.1% for
the same period in 1997 resulting primarily from the reduced level of premium
volume.
Net Underwriting Results. For the three months ended June 30, 1998 the
Company's net underwriting result (net premiums earned minus losses, LAE and
underwriting expenses) increased to a net gain of $1.9 million compared to a net
underwriting loss of $0.9 million for the same period in 1997. The combined
ratio for the three months ended June 30, 1998 computed in accordance with
generally accepted accounting principles improved to 96.7% compared to 101.2%
for the same period in 1997. Although the loss ratio component improved to 60.1%
for the three months ended June 30, 1998 from 67.4% recorded for the same period
in 1997, the expense ratio increased to 36.6% for the three months ended June
30, 1998 from the 33.8% recorded for the same period in 1997, for the reasons
noted above.
10
<PAGE>
Service Operations
Revenue from service operations decreased to $4.7 million for the three
months ended June 30, 1998 compared to $8.3 million for the same period in 1997,
principally reflecting a reduction in profit commissions at Archer as a result
of competitive market conditions at Lloyd's.
Corporate
Interest and Amortization. Interest and amortization expenses were $2.6
million for the three months ended June 30, 1998 compared to $2.4 million for
the same period in 1997. The increase was due principally to bank fees paid for
letters of credit used to support the Company's underwriting participation on
syndicates managed by Archer and an increase in variable interest rates on debt
denominated in pounds sterling.
Consolidated
Net Investment Income and Net Realized Capital Gains. Consolidated
after-tax net investment income, exclusive of realized and unrealized capital
gains, for the three months ended June 30, 1998 was $8.6 million, compared to
$7.9 million for the same period in 1997. The average annual tax equivalent
yield on invested assets after investment expenses decreased to 6.13% for the
second quarter of 1998 compared to 6.87% for the same period in 1997. The
Company's pro rata share of investment income from the Dedicated Vehicles is
excluded from this calculation because the related invested assets are not
included in the Company's consolidated balance sheet.
The Company realized net capital losses of $39,000 for the quarter
ended June 30, 1998 compared to net capital losses of $29,000 for the three
months ended June 30, 1997.
Income Before Income Taxes and Minority Interest. Income before income
taxes and minority interest increased to $11.5 million for the three months
ended June 30, 1998 compared to $10.2 million for the same period in 1997. The
increase resulted primarily from the improvement in net underwriting results
discussed above, offset, in part, by the reduction in income from service
operations.
Income Tax Expense. The provision for Federal income taxes for the
three months ended June 30, 1998 increased to $3.6 million compared with $3.1
million for the same period in 1997. The effective tax rate was 31.2% and 30.2%
for the three months ended June 30, 1998 and 1997, respectively. For both
periods, the effective rate is below the statutory rate of 35% due to the
benefit of investments in tax-advantaged securities.
Net Income. The Company realized a net profit of $8.4 million for the
three months ended June 30, 1998 compared with a net profit of $6.9 million for
the comparable 1997 period because of the factors discussed above.
11
<PAGE>
Liquidity and Capital Resources
As a holding company, the Company's assets consist primarily of the
stock of its direct and indirect subsidiaries. The Company's cash flow,
therefore, depends largely on dividends and other statutorily permissible
payments from its operating subsidiaries whose principal sources of funds
consist of net premiums, reinsurance recoveries, investment income and proceeds
from sales and redemptions of investments. Funds are applied primarily to
payments of claims, operating expenses and income taxes and to the purchase of
investments, largely fixed income securities. Cash and short-term investments
are maintained for the payment of claims and expenses.
Cash flow from operations for the first six months of 1998 was
$7,759,000 compared to $2,942,000 for the six months ended June 30, 1997.
Sales of available for sale investments were $51.3 million and $43.2
million for the six months ended June 30, 1998 and 1997, respectively. There was
no unusual trading activity in either period.
The Company's investment portfolio consists primarily of
investment-grade fixed maturity debt securities. At June 30, 1998, approximately
92.2% of the bond portfolio was rated A or better ("A-1" for commercial paper)
by Moody's. While uncertainties exist regarding interest rates and inflation,
the Company attempts to minimize such risks and exposures by balancing the
duration of assets in its investment portfolio with the duration of insurance
and reinsurance liabilities. The current market value of the Company's fixed
maturity investments is not necessarily indicative of their future valuation.
The Company does not have any investments in real estate or high-yield bonds and
does not have any non-income producing fixed income investments. The Company's
fixed income securities portfolio at June 30, 1998 was comprised primarily of
U.S. Treasury and government agency, mortgage pass-through securities and
corporate and municipal bonds.
Stockholder's equity increased approximately 7.6% to $289.4 million
at June 30, 1998 from $269.1 million at December 31, 1997.
The Company's outstanding debt as of June 30, 1998 includes $48.8
million in principal amount of 10 1/4% Senior Notes Due 2004 and approximately
$5.6 million (denominated in pounds sterling) of Loan Notes due June 2002 and
$45.8 million under credit facilities with by First Union National Bank N. A.,
as agent (the "First Union Credit Facility"). The Loan Notes bear interest at a
rate per annum equal to one percent below the Sterling London Interbank Offered
Rate. The First Union Credit Facility provides term loans of approximately $50
million (a portion of which is denominated in pounds sterling) and a $60.0
million revolving credit facility. The Company's ratio of long-term debt to
total capitalization at June 30, 1998 was 27.2% compared to 27.9% at December
31, 1997.
The agreements governing the foregoing debt obligations significantly
restrict the ability of the Company's operating subsidiaries to make dividend
and other payments to the Company.
Dividend payments by the Company's operating subsidiaries are subject
to limits under the laws of the States of Minnesota and New York, respectively.
Up to $26.3 million is available under the laws of the State of Minnesota for
the payment of dividends by Chartwell Reinsurance without regulatory approval in
1998. No dividends have been declared or paid by Chartwell Reinsurance in 1998.
Under New York law, the maximum dividend payable by INSCORP to Chartwell
Reinsurance in 1998 without regulatory approval is $11.4 million. Moreover,
notwithstanding the receipt of any dividend from INSCORP, Chartwell Reinsurance
may make dividend payments only to the extent permitted under Minnesota law.
12
<PAGE>
The maximum dividend permitted by law is not indicative of an insurer's
actual ability to pay dividends, which may be constrained by business and
regulatory considerations, such as the impact of dividends on surplus, which
could affect an insurer's ratings or competitive position, the amount of
premiums that can be written and the ability to pay future dividends.
Furthermore, beyond the limits described in the preceding paragraph, the
Minnesota and New York regulators have discretion to limit further the payment
of dividends by insurance companies domiciled in their states.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to Note 3, "Contingencies," of the Notes to the Condensed
Consolidated Financial Statements included in Part I, Item 1 of this report.
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
None
(c) Signatures
13
<PAGE>
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 and Senior
Vice President and Chief Financial Officer
Dated: August 12, 1998
14
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