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, 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 September 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
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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
(Address of principal executive offices) (zip code)
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Registrant's telephone number, including area code (203) 705-2500
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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 6, 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
Item 1- Page
----
Condensed Consolidated Balance Sheets at September 30, 1998
and December 31, 1997...................................... 1
Condensed Consolidated Statements of Operations for the three
and nine months ended September 30, 1998 and 1997........... 2
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 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..................................... 15
Item 6 - Exhibits and Reports on Form 8-K ..................... 15
Signatures .................................................... 16
i
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
CHARTWELL RE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)
September 30, December 31,
1998 1997
-------------- --------------
ASSETS: (Unaudited)
Investments:
Fixed maturities:
Held to maturity (market value 1998,
$33,905; 1997, $37,421)...............$ 32,387 36,630
Available for sale (amortized cost 1998,
$654,463; 1997, $645,108)............. 682,770 657,973
Other investments....................... 31,125 38,043
Cash and cash equivalents ................. 36,241 29,534
-------------- --------------
Total investments and cash ........ 782,523 762,180
Accrued investment income................... 9,923 10,667
Premiums in process of collection ......... 177,111 126,537
Reinsurance recoverable: on paid losses..... 20,805 34,502
on unpaid losses... 270,618 202,593
Prepaid reinsurance......................... 49,221 29,929
Goodwill.................................... 54,342 54,259
Deferred policy acquisition costs........... 23,664 26,100
Deferred income taxes....................... 22,357 29,847
Deposits ................................... 19,951 19,040
Other assets................................ 74,817 69,406
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$ 1,505,332 $ 1,365,060
=============== ==============
LIABILITIES:
Loss and loss adjustment expenses..........$ 853,631 788,240
Unearned premiums.......................... 118,203 111,149
Other reinsurance balances................. 53,316 33,723
Accrued expenses and other liabilities..... 59,546 49,345
Long term debt............................. 109,252 104,126
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Total liabilities.................. 1,193,948 1,086,583
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COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST.......................... 8,679 9,425
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STOCKHOLDER'S EQUITY
Common stock, par value $1.00 per share;
authorized 1,000 shares; shares issued
and outstanding 100......................
Additional paid-in capital.................. 217,866 217,866
Net unrealized appreciation of investments.. 16,892 8,741
Foreign currency translation adjustment..... 777 296
Retained earnings........................... 67,170 42,149
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Total stockholder's equity......... 302,705 269,052
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$ 1,505,332 $ 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 Nine Month Periods
Ended September 30, Ended September 30,
-------------------------- ---------------------
1998 1997 1998 1997
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
UNDERWRITING OPERATIONS:
Premiums earned....................... $ 59,333 $ 59,002 $ 168,506 $ 194,677
Net investment income................. 11,808 10,665 35,448 31,289
Net realized capital gains (losses)... (169) 112 (109) 63
------------- ---------- ----------- -----------
Total revenues.................... 70,972 69,779 203,845 226,029
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Loss and loss adjustment expenses..... 36,108 36,454 101,946 128,299
Policy acquisition costs.............. 15,940 19,088 45,524 56,660
Other expenses........................ 5,239 4,525 15,519 12,752
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Total expenses.................... 57,287 60,067 162,989 197,711
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Income before taxes -
underwriting operations............... 13,685 9,712 40,856 28,318
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SERVICE OPERATIONS:
Service and other revenue............. 4,259 7,076 10,898 21,510
Equity in net earnings of investees... 403 1,097 2,474 3,273
Net investment income................. 345 236 682 880
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Total revenues.................... 5,007 8,409 14,054 25,663
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Other expenses........................ 3,147 4,184 9,162 13,710
Amortization of goodwill.............. 587 476 1,722 1,521
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Total expenses.................... 3,734 4,660 10,884 15,231
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Income before taxes -
service operations.................... 1,273 3,749 3,170 10,432
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CORPORATE:
Net investment income................. 24 9 76 103
Net realized capital gains............ 368 - 368 -
General and administrative expenses... 577 449 1,755 1,233
Interest expense...................... 2,635 2,391 7,517 6,910
Amortization expense.................. 221 135 636 370
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Loss before taxes - corporate......... (3,041) (2,966) (9,464) (8,410)
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Consolidated income before taxes and
minority interest................. 11,917 10,495 34,562 30,340
Income tax expense.................... 3,725 3,097 10,616 8,974
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Net income before minority interest... 8,192 7,398 23,946 21,366
Minority interest..................... 191 (173) 1,075 (518)
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Net income...........................$ 8,383 $ 7,225 $ 25,021 $ 20,848
============= ========== ============ ===========
See notes to condensed consolidated financial statements.
2
</TABLE>
<PAGE>
CHARTWELL RE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
Nine Month Periods
Ended September 30,
-------------------------------
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net premiums collected...........................$ 99,919 $ 129,852
Net losses and loss adjustment expenses paid...... (104,580) (117,330)
Overhead expenses................................. (18,018) (17,083)
Service and other revenue, net of related
expenses........................................ (245) (4,111)
Net income taxes paid............................. (5,772) (2,093)
Interest received on investments.................. 35,666 32,656
Interest paid..................................... (8,336) (8,267)
Other, net........................................ (2,727) (5,898)
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Net cash provided by (used in)
operating activities......................... (4,093) 7,726
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for sale securities........ (141,607) (123,692)
Net cash acquired from investment in
Oak Dedicated Two Limited...................... 6,901 -
Maturities of available for sale securities....... 8,075 -
Maturities of held to maturity securities......... 2,430 18,860
Sales of available for sale securities............ 130,598 81,547
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Net cash provided by (used in)
investing activities.......................... 6,397 (23,285)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt........................ 5,624 812
Repayment of long-term debt....................... (241) -
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Net cash provided by financing activities..... 5,383 812
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Effect of exchange rate on cash............... (980) (1,276)
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Net increase (decrease) in cash and
cash equivalents............................... 6,707 (16,023)
Cash and cash equivalents at beginning of period.. 29,534 50,343
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Cash and cash equivalents at end of period.......$ 36,241 $ 34,320
============= =============
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income.......................................$ 25,021 $ 20,848
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in net earnings of investees.......... (759) (3,273)
Net realized capital gains .................. (259) (63)
Minority interest............................ (1,075) 518
Deferred policy acquisition costs............ 2,436 (9,786)
Unpaid loss and loss adjustment expenses..... 65,391 18,045
Unearned premiums............................ 7,054 39,277
Other reinsurance balances................... 301 3,198
Reinsurance recoverable...................... (54,328) (5,030)
Net change in receivables and payables....... (44,250) (45,335)
Other, net................................... (3,625) (10,673)
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Net cash provided by (used in)
operating activities......................$ (4,093) $ 7,726
============= =============
See notes to condensed consolidated financial statements.
3
<PAGE>
CHARTWELL RE HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
September 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 September 30, 1998 and 1997 was $13,276 and $12,690, respectively.
Total comprehensive income for the nine month periods ended September 30, 1998
and 1997 was $33,653 and $24,672, 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
("CIGA") filed suit in the Superior Court of California, County of Los Angeles,
against the Company's wholly-owned subsidiary, The Insurance Corporation of New
York ("INSCORP"), seeking, among other things, a declaratory judgment that the
ALEs covered claims arising prior to the date upon which the ALEs were issued.
On September 1, 1998, the Superior Court of California granted INSCORP's motion
to strike those portions of CIGA's complaint which sought a general declaratory
judgment that all claims under American Eagle policies with ALEs attached are
the obligation of INSCORP rather than CIGA. CIGA's claim is now solely related
to the specific American Eagle policy and accompanying ALE initially giving rise
to the dispute.
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. The Company does not believe that an unfavorable decision or
settlement of such case would materially adversely affect the Company's results
of operations or financial position.
5
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
Chartwell Re Holdings Corporation
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 Chartwell Managing Agents
Limited ("CMA"). 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 - Nine Months Ended September 30, 1998 Compared With Nine
Months Ended September 30, 1997:
Revenues: Total revenues for the nine months ended September 30, 1998
decreased 13.3% to $218.3 million, compared to $251.8 million for the comparable
period in 1997.
The accompanying table summarizes gross and net premiums written and
total revenues for the periods indicated:
Nine Month Periods
Ended September 30,
-----------------------------------------
1998 1997
----------------- ----------------
(in thousands)
Gross premiums written $ 256,535 $ 298,040
================== ====================
Net premiums written $ 157,640 $ 220,760
================== ====================
Premiums earned $ 168,506 $ 194,677
Net investment income 36,206 32,272
Net realized capital gains 259 63
Service and other revenue 10,898 21,510
Equity in net earnings of investees 2,474 3,273
------------------- --------------------
Total Revenues $ 218,343 $ 251,795
=================== ====================
Underwriting Operations
Gross Premiums Written; Net Premiums Written; Net Premiums Earned.
Gross premiums written for the nine months ended September 30, 1998 were $256.5
million, a decrease of 13.9% compared to the same period in 1997. The
distribution of the Company's gross premiums written among its business segments
was as follows:
Nine Month Periods
Ended September 30, % Change
-------------------------- ----------
1998 1997
------------- ----------
Gross Premiums Written from
Reinsurance Operations $ 128,681 $202,604 -36.5%
Gross Premiums Written from
Specialty Insurance Operations 127,854 95,436 34.0%
------------- ----------
Total $256,535 $298,040 -13.9%
============= ==========
Net premiums written for the nine months ended September 30, 1998
decreased 28.6% to $157.6 million compared to $220.8 million for the same period
in 1997. The decrease in gross and net 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 nine months ended September 30, 1998 were $116.0
million, a decrease of 19.4% from $143.9 million for the same period in 1997.
6
<PAGE>
The decrease in gross and net premiums written from reinsurance
operations is offset in part by the continued growth of the Controlled Source
Insurance business, which increased 7.9% in gross premiums written during the
nine months ended September 30, 1998 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 CMA (the "Dedicated
Vehicles") amounting to $40.5 million and $36.3 million on a gross and net
basis, respectively, for the nine months ended September 30, 1998 compared to
$14.5 million and $14.4 million for the nine months ended September 30, 1997.
Net premiums earned for the nine months ended September 30, 1998 were $168.5
million, a decrease of 13.4% compared to $194.7 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 $101.9 million for the nine months ended September 30, 1998, a 20.5%
decrease compared to $128.3 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 60.5% for the nine months ended September 30, 1998 from 65.9%
recorded for the same period in 1997. The improvement of 5.4 percentage points
in the loss and LAE ratio for the nine months ended September 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 $45.5 million for the nine months ended September 30, 1998 compared to
$56.7 million for the same period in 1997. Policy acquisition costs expressed as
a percentage of net premiums earned (the acquisition expense ratio) decreased to
27.0% from 29.1% for the same period in 1997.
Other Expenses. Other expenses related to underwriting operations,
which include underwriting and administrative expenses, were $15.5 million for
the nine months ended September 30, 1998 compared to $12.8 million for the same
period in 1997. Other expenses expressed as a percentage of net premiums earned
increased to 9.2% for the nine months ended September 30, 1998 compared to 6.6%
for the same period in 1997 resulting primarily from the reduced level of
premium volume and the expenses related to participation by the Dedicated
Vehicles on syndicates managed by CMA.
Net Underwriting Results. For the nine months ended September 30, 1998
the Company's net underwriting result (net premiums earned minus losses, LAE and
underwriting expenses) increased to a net gain of $5.5 million compared to a net
underwriting loss of $3.0 million for the same period in 1997. The combined
ratio for the nine months ended September 30, 1998 computed in accordance with
generally accepted accounting principles improved to 96.7% compared to 101.6%
for the same period in 1997. Although the loss ratio component improved to 60.5%
for the nine months ended September 30, 1998 from 65.9% recorded for the same
period in 1997, the expense ratio increased slightly to 36.2% for the nine
months ended September 30, 1998 from the 35.7% recorded for the same period in
1997, for the reasons noted above.
7
<PAGE>
Service Operations
Revenue from service operations decreased to $14.1 million for the nine
months ended September 30, 1998 compared to $25.7 million for the same period in
1997, principally reflecting a reduction in profit commissions at CMA as a
result of competitive market conditions at Lloyd's.
Corporate
Interest and amortization expenses were $8.2 million for the nine
months ended September 30, 1998 compared to $7.3 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 CMA 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 nine months ended September 30, 1998 was $25.7 million, compared
to $22.9 million for the same period in 1997. The carrying value of the
Company's invested assets and cash increased to $782.5 million at September 30,
1998 from $762.2 million at December 31, 1997 primarily due to the Company's
draw-down on its revolving credit facility, changes in the market value of
investments, and net cash acquired from the investment in Oak Dedicated Two
Limited. The average annual tax equivalent yield on invested assets after
investment expenses decreased to 6.30% for nine months ended September 30, 1998
compared to 6.49% 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 $259,000 for the nine months
ended September 30, 1998 compared to net capital gains of $63,000 for the nine
months ended September 30, 1997.
Income Before Income Taxes and Minority Interest. Income before income
taxes and minority interest increased to $34.6 million for the nine months ended
September 30, 1998 compared to $30.3 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 nine
months ended September 30, 1998 increased to $10.6 million compared with $9.0
million for the same period in 1997. The effective tax rate was 30.7% and 29.6%
for the nine months ended September 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 $25.0 million for the
nine months ended September 30, 1998 compared with a net profit of $20.8 million
for the comparable 1997 period because of the factors discussed above.
Results of Operations - Three Months Ended September 30, 1998 Compared With
Three Months Ended September 30, 1997:
Revenues: Total revenues for the three months ended September 30, 1998
decreased 2.3% to $76.4 million, compared to $78.2 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 September 30,
--------------------------------------
1998 1997
---------------- ---------------
(in thousands)
Gross premiums written $ 87,870 $ 104,425
================ ==============
Net premiums written $ 56,112 $ 74,498
================ ==============
Premiums earned $ 59,333 $ 59,002
Net investment income 12,177 10,910
Net realized capital gains 199 112
Service and other revenue 4,259 7,076
Equity in net earnings of investees 403 1,097
------------------- --------------
Total Revenues $ 76,371 $ 78,197
=================== ==============
Underwriting Operations
Gross Premiums Written; Net Premiums Written; Net Premiums Earned.
Gross premiums written for the third quarter of 1998 were $87.9 million, a
decrease of 15.9% 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 September 30, % Change
-------------------------- ----------
1998 1997
------------- ----------
Gross Premiums Written from
Reinsurance Operations $ 44,051 $66,498 -33.8%
Gross Premiums Written from
Specialty Insurance Operations 43,819 37,927 15.5%
------------- ----------
Total $87,870 $104,425 -15.9%
============= ==========
Net premiums written for the three months ended September 30, 1998
decreased 24.7% to $56.1 million compared to $74.5 million for the same period
in 1997. The decrease in gross and net 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 September 30, 1998 were $38.6
million, a decrease of 22.2% from $49.6 million for the same period in 1997.
9
<PAGE>
The decrease in both gross and net premiums written is offset in part
by the addition of premiums from the Dedicated Vehicles which amounted to $17.8
million and $15.9 million on a gross and net basis, respectively, for the third
quarter of 1998 compared to $6.3 million on a gross and net basis for the third
quarter of 1997. Net premiums earned for the three months ended September 30,
1998 were $59.3 million, an increase of 0.6% compared to $59.0 million for the
same period in 1997.
Loss and Loss Adjustment Expenses. The Company's principal expense,
loss and LAE related to the settlement of claims, was $36.1 million for the
three months ended September 30, 1998, a 0.9% decrease compared to $36.5 million
for the comparable period in 1997. The decrease is principally attributable to
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 60.9% for
the three months ended September 30, 1998 from 61.8% recorded for the same
period in 1997. The improvement of 0.9 percentage points in the loss and LAE
ratio for the three months ended September 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 $15.9 million for the three months ended September 30, 1998 compared to
$19.1 million for the same period in 1997. Policy acquisition costs expressed as
a percentage of net premiums earned (the acquisition expense ratio) decreased to
26.9% from 32.4% in the third quarter of 1997.
Other Expenses. Other expenses related to underwriting operations,
which include underwriting and administrative expenses, were $5.2 million for
the three months ended September 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 8.8% for the three months ended September 30, 1998 compared to 7.7%
for the same period in 1997 resulting primarily from the expenses related to
participation by the Dedicated Vehicles on syndicates managed by CMA.
Net Underwriting Results. For the three months ended September 30, 1998
the Company's net underwriting result (net premiums earned minus losses, LAE and
underwriting expenses) increased to a net gain of $2.0 million compared to a net
underwriting loss of $1.1 million for the same period in 1997. The combined
ratio for the three months ended September 30, 1998 computed in accordance with
generally accepted accounting principles improved to 96.6% compared to 101.9%
for the same period in 1997. The loss ratio component improved to 60.9% for the
three months ended September 30, 1998 from 61.8% recorded for the same period in
1997 and the expense ratio decreased to 35.7% for the three months ended
September 30, 1998 from the 40.1% recorded for the same period in 1997, for the
reasons noted above.
10
<PAGE>
Service Operations
Revenue from service operations decreased to $5.0 million for the three
months ended September 30, 1998 compared to $8.4 million for the same period in
1997, principally reflecting a reduction in profit commissions at CMA as a
result of competitive market conditions at Lloyd's.
Corporate
Interest and amortization expenses were $2.9 million for the three
months ended September 30, 1998 compared to $2.5 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 CMA 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 September 30, 1998 was $8.7 million, compared
to $7.8 million for the same period in 1997. The carrying value of the Company's
invested assets and cash increased to $782.5 million at September 30, 1998 from
$762.2 million at December 31, 1997 primarily due to the Company's draw-down on
its revolving credit facility, changes in the market value of investments, and
net cash acquired from the investment in Oak Dedicated Two Limited. The average
annual tax equivalent yield on invested assets after investment expenses
decreased to 6.26% for the third quarter of 1998 compared to 6.68% 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 $199,000 for the quarter
ended September 30, 1998 compared to net capital gains of $112,000 for the three
months ended September 30, 1997.
Income Before Income Taxes and Minority Interest. Income before income
taxes and minority interest increased to $11.9 million for the three months
ended September 30, 1998 compared to $10.5 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 September 30, 1998 increased to $3.7 million compared with
$3.1 million for the same period in 1997. The effective tax rate was 31.3% and
29.5% for the three months ended September 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 September 30, 1998 compared with a net profit of $7.2 million
for the comparable period in 1997 because of the factors discussed above.
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. No dividends have been
declared or paid by Chartwell Reinsurance, INSCORP or CMA in 1998.
11
<PAGE>
Cash used in operations for the nine month period ended September 30,
1998 was $4.1 million compared to cash flow from operations of $7.7 million for
the nine months ended September 30, 1997.
Sales of available for sale investments were $130.6 million and $81.5
million for the nine months ended September 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 September 30, 1998,
approximately 91.4% 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 September 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 12.5% to $302.7 million
at September 30, 1998 from $269.1 million at December 31, 1997.
The Company's outstanding long-term debt as of September 30, 1998
consists of Senior Notes due 2004, Loan Notes and credit facilities agented by
First Union National Bank ("First Union"). As of September 30, 1998, the
Company's Loan Notes due June 2002 constituted approximately $5.7 million
(denominated in pounds sterling) of indebtedness and the Company had outstanding
$51.2 million of indebtedness under the credit facilities with First Union. The
Company's ratio of long-term debt to total capitalization at September 30, 1998
was 26.5% compared to 27.9% at December 31, 1997.
The Company entered into an interest rate swap (the "Swap"), commencing
July 1, 1998, with First Union in connection with a portion of its indebtedness
outstanding under the First Union credit facilities. The Swap exchanges the
Company's variable rate interest for fixed rate interest of 6.85% on a notional
principal amount of $16,800,000 ((pound)10,280,000) and will terminate on
December 31, 2002.
Year 2000 Compliance
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. The Company's
computer equipment, software and devices with imbedded technology that are time
sensitive may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in other normal business activities.
12
<PAGE>
The Company believes that it has identified all significant computer
hardware and software applications and devices with imbedded time sensitive
technology that are employed by the Company in its operations that will require
modification to ensure Year 2000 Compliance. The Company is using both internal
and external resources to test all significant computer systems and applications
and to make the modifications necessary for Year 2000 Compliance. The testing
and modification process, which is proceeding on schedule, is 95% complete and
is expected to be fully completed by June 30, 1999. The testing and modification
process has not materially interfered with the Company's Information Technology
operations or the operations of the Company generally.
In addition, the Company has contacted all of its significant business
partners and service vendors to determine their Year 2000 Compliance readiness,
as well as the extent to which the Company is vulnerable to any third party Year
2000 issues. However, there can be no guarantee that the systems of other
companies on which the Company's systems rely will become Year 2000 compliant in
a timely manner, or that the failure by a third party to become Year 2000
compliant would not have a material adverse effect on the Company.
The Company is revising its existing disaster recovery contingency
plans to address issues specific to the Year 2000 problem. These revisions are
expected to be completed by June 30, 1999. Such plans are intended to enable the
Company to continue to operate by performing certain processes manually,
changing vendors and repairing or replacing existing systems, where feasible.
The total cost to the Company to test and modify all systems to be Year
2000 compliant has not been, and is not expected to be, material to its
financial position or results of operations in any given year. To date, the
Company has budgeted $25,000 to accomplish its Year 2000 testing and remediation
goals and approximately 90% of the amount budgeted has been expended.
Expenditures to fund Year 2000 testing and modification have to date and will
continue to be funded from operating cash flows.
The anticipated completion dates for Year 2000 compliance and the
Company's contingency plans and the cost estimates for the completion of the
Company's Year 2000 compliance program are based on management's best estimates
utilizing current data regarding available resources, coordination with third
parties and other relevant factors and information about systems conversion.
However, there can be no assurance that these estimates will be achieved, and
actual results could differ from the current plan.
In addition, the Company may also have material exposure in its
property and casualty operations to claims related to the Year 2000 issue. It is
not yet possible to determine whether such claims might be made against
insurance or reinsurance contracts in which the Company participates or if such
claims will be held to have merit.
Readers are cautioned that forward-looking statements contained in this
description of the Company's treatment of the Year 2000 issue should be read in
conjunction with the Company's disclosures under the heading "Cautionary Note
Regarding Forward-Looking Statements" below.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains statements that may be
considered to be "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended.
13
<PAGE>
Such statements may include, without limitation, insofar as they may be
considered to be forward-looking statements, certain statements in (i)
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations - Nine Months Ended September 30, 1998
Compared With Nine Months Ended September 30, 1997" and "--Results of Operations
- - Three Months Ended September 30, 1998 Compared With Three Months Ended
September 30, 1997" concerning (A) certain relationships among gross premiums
written, net premiums written and net premiums earned and (B) the development of
reserves in respect of all or a portion of the Company's insurance and
reinsurance business; (ii) "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" concerning
the potential effects of certain events on the Company's indebtedness and
portfolios of fixed income and equity instruments, foreign currency exposure,
derivatives positions and certain other types of instruments; (iii)
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance" concerning the costs and effects of Year 2000
compliance; (iv) such other statements contained in this Quarterly Report that
may be considered to be forward-looking statements; and (v) variations of the
foregoing statements wherever they appear in this Quarterly Report.
All forward-looking statements address matters that involve risks and
uncertainties. Accordingly, there are or will be important factors that could
cause actual results to differ materially from those indicated in such
statements. The Company believes that these include the following non-exclusive
factors:
i. the impact of changing market conditions on the Company's business
strategy;
ii. the effects of increased competition on pricing, coverage terms,
retention of customers and ability to attract new customers;
iii. greater severity or frequency of the types of large or catastrophic
losses which the Company's subsidiaries insure or reinsure;
iv. faster or more adverse loss development experience than that on
which the Company's underwriting, reserving and investment
practices are based;
v. changes in the Company's retrocessional arrangements;
vi. developments in global financial markets which could adversely
affect the performance of the Company's investment portfolio;
vii. litigation, regulatory or tax developments which could adversely
affect the Company's business;
viii. risks associated with the introduction of new products and services;
and
ix. the impact of mergers and acquisitions.
The facts set forth above should be considered in connection with any
forward-looking statement contained in this Quarterly Report. The important
factors that could affect such forward-looking statements are subject to change,
and the Company does not intend to update any forward-looking statement or the
foregoing list of important factors. By this cautionary note, the Company
intends to avail itself of the safe harbor from liability with respect of
forward-looking statements provided by Section 27A and Section 21E referred to
above.
14
<PAGE>
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 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
None
(c) Signatures
15
<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: November 12, 1998
16
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<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-1-1998
<PERIOD-END> Sep-30-1998
<DEBT-HELD-FOR-SALE> 682,770
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