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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997
OR
|_|TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
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Commission file no. 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, 107 Elm Street
Stamford, Connecticut 06902
(Address of principal executive offices and zip code)
---------------
Registrant's telephone number, including area code: (203) 705-2500
Securities registered pursuant to Section 12(b)of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
---------------
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Documents Incorporated by Reference
The Registrant meets the conditions set forth in General Instruction I(1)(a) and
(b) of Form 10-K and is therefore filing this Form 10-K with the reduced
disclosure format.
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<PAGE>
CHARTWELL RE HOLDINGS CORPORATION
TABLE OF CONTENTS
Page
Item Number
PART I
1. Business--------------------------------------------------------- 1
2. Properties------------------------------------------------------- 19
3. Legal Proceedings------------------------------------------------ 19
4. Submission of Matters to a Vote of Security Holders-------------- 19
PART II
5. Market for the Registrant's Common Stock and Related
Stockholder Matters--------------------------------------------- 19
6. Selected Financial Data------------------------------------------ 19
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations--------------------------------------- 20
7A. Quantitative and Qualitative Disclosures About Market Risk------- 29
8. Financial Statements and Supplementary Data---------------------- 29
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures ------------------------------------------ 29
PART III
10. Directors and Executive Officers of the Registrant--------------- 29
11. Executive Compensation------------------------------------------- 29
12. Security Ownership of Certain Beneficial Owners and Management--- 29
13. Certain Relationships and Related Transactions------------------- 29
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K- 29
i
<PAGE>
PART I
Item 1. Business
Overview
Chartwell Re Holdings Corporation ("Chartwell" or the "Company") is a
wholly-owned subsidiary of Chartwell Re Corporation ("Charwtell Re") an
insurance holding company with global underwriting and service operations which
conducts its business in the United States and in the Lloyd's market. Chartwell
was formed in 1995 to act as an intermediate level holding company for Chartwell
Re and, as such, it conducts its business through its principal operating
subsidiaries, Chartwell Reinsurance Company ("Chartwell Reinsurance"), The
Insurance Corporation of New York ("INSCORP") and Archer Managing Agents Limited
("Archer"). As of December 31, 1997, Chartwell had nearly $1.4 billion of total
assets and stockholder's equity of $269.1 million. For the year ended December
31, 1997, Chartwell's gross premiums written amounted to $362.8 million. Of such
amount, $236.1 million, or 65.1%, represented gross reinsurance premiums, $106.5
million, or 29.4%, represented gross insurance premiums and $20.1 million, or
5.5%, represented premiums from Oak Dedicated Limited and ADIT One Ltd.,
Archer's dedicated corporate capital vehicles (the "Dedicated CCV's").
Chartwell Reinsurance is a broker market reinsurer with over $262
million of policyholders' surplus which underwrites treaty reinsurance for
casualty, property, marine and aviation risks. INSCORP is a primary insurance
company with over $113 million of policyholders' surplus that develops property
and casualty insurance programs through specialty production sources focusing on
a specific line of business and geographic region. Chartwell and INSCORP are
each licensed or authorized to transact business in 49 states and the District
of Columbia. INSCORP is also approved to transact business in Canada. Archer is
the tenth largest managing agency at Lloyd's, managing nine Lloyd's syndicates
with total underwriting capacity of approximately (pound)352 million ($580
million) for the 1998 year of account. Approximately 77% of Archer syndicates'
1998 capacity is supplied by corporate capital, and approximately 76% of
Archer's 1998 premium volume is derived from non-U.S. sources.
Chartwell's other operating subsidiaries are Dakota Specialty
Insurance Company ("Dakota") and Drayton Company Limited ("Drayton"). Dakota is
an indirect wholly-owned subsidiary of Chartwell which was formed late in 1996
to act as a non-admitted carrier writing surplus lines business. Currently,
Dakota is approved to write business on a surplus lines basis in 21 states.
Drayton, which was acquired by Chartwell Re in 1995, is a Bermuda-domiciled
insurer which is not currently writing new business. Chartwell is managing the
resolution of Drayton's remaining claims and assets in a controlled winding up
or "run-off" of Drayton's old business.
History
Chartwell Reinsurance was founded in 1979 as a wholly-owned subsidiary
of Northwestern National Life Insurance Company ("NWNL"). Chartwell Re was
formed in 1989 to act as the parent company of Chartwell Reinsurance, and, in
March of 1992, Chartwell Re was acquired (the "1992 Acquisition") by an
acquisition group including members of Chartwell Re's senior management.
INSCORP was acquired by Chartwell Re as a result of the merger of
INSCORP's former parent, Piedmont Management Company Inc. ("Piedmont"), with and
into Chartwell Re, with Chartwell Re as the surviving corporation (the
"Merger"). The Merger was completed in December, 1995, and upon consummation of
the Merger, Chartwell Re assumed all of Piedmont's obligations under its
Contingent Interest Notes due 2006 (the "CI Notes") which were issued by
Piedmont to its stockholders just prior to the Merger.
In November, 1996, Chartwell Holdings Limited ("Holdings Limited"), a
newly-formed, indirect wholly-owned subsidiary of Chartwell, acquired (the
"Acquisition") the parent company of Archer, Archer Group Holdings plc ("Archer
Holdings"), in a cash tender offer for all of the outstanding ordinary shares of
Archer Holdings (the "Archer Shares"). Archer Holdings was publicly traded on
the London Stock Exchange prior to the Acquisition.
Ratings
Chartwell Reinsurance is rated "A" (Excellent) by A.M. Best Company.
INSCORP and Dakota are both rated "A-" (Excellent) by A.M. Best Company. All
three companies are assigned an A- claims paying ability rating by Standard &
Poor's. All of Archer's syndicates enjoy the benefit of the newly issued ratings
of Lloyd's, which has been rated "A" (Excellent) by A.M. Best Company and has
been assigned an A+ claims paying ability rating by Standard & Poor's. These
ratings are based upon factors that may be of concern to policy or contract
holders, agents and intermediaries, but may not reflect the considerations
applicable to an equity investment in a reinsurance or insurance company. A
change in any such rating is at the discretion of the respective rating
agencies.
1
<PAGE>
Corporate Structure
The current corporate structure of Chartwell, its parent and its
principal subsidiaries is as follows:
[GRAPHIC OMITTED]
Property and Casualty Reinsurance
Reinsurance is an arrangement in which an insurance company, the
reinsurer, agrees to indemnify another insurance company, the ceding company,
for all or a portion of the insurance risks underwritten by the ceding company
under one or more insurance policies. Reinsurance can benefit a ceding company
in a number of ways, including reducing net liability exposure on individual
risks, providing catastrophe protection from large or multiple losses,
stabilizing financial results and assisting in maintaining acceptable operating
leverage ratios. Reinsurance also provides a ceding company with additional
underwriting capacity by permitting it to accept larger risks and underwrite a
greater number of risks without a corresponding increase in its capital and
surplus.
Reinsurance is contracted either through treaties or facultative
certificates. A reinsurance treaty is an agreement whereby the ceding company is
obligated to cede, and the reinsurer is obligated to assume, a specified portion
or category of risk under all qualifying policies issued by the ceding company
during the term of the treaty. Facultative reinsurance arrangements are
separately negotiated for each insurance policy to be reinsured and result in a
facultative certificate under which the ceding company cedes, and the reinsurer
assumes, all or part of the risk under a specific insurance policy. Facultative
reinsurance is normally purchased by insurance companies for individual risks
not covered under reinsurance treaties or for amounts in excess of limits on
risks covered under reinsurance treaties. In the underwriting of treaty
reinsurance, the reinsurer does not evaluate each individual risk assumed, as it
must in the underwriting of facultative reinsurance, and generally accepts the
original underwriting decisions made by the ceding insurer.
Both treaty and facultative reinsurance can be written on either a pro
rata (also known as quota share or proportional) or excess of loss basis. Under
pro rata reinsurance, the reinsurer indemnifies the ceding company against an
agreed upon portion or share of the losses and loss adjustment expenses ("LAE")
incurred by the ceding company under the reinsured policy or policies. Premiums
that the ceding company pays to the reinsurer for pro rata reinsurance are
proportional to the premiums that the ceding company receives, consistent with
the proportional sharing of risk, generally less a ceding commission. The ceding
commission is negotiated between the reinsurer and the ceding company to
reimburse the ceding company for its acquisition costs relating to the
underlying policies and may include a contingent component that varies depending
upon the loss experience of the underlying business. As a consequence, the
underwriting results of the reinsurer may not parallel the underwriting results
of the ceding company. Under excess of loss reinsurance, the reinsurer
indemnifies the ceding company against all or a specified portion of losses and
LAE on the reinsured policy or policies in excess of a specified dollar amount,
known as the ceding company's retention or reinsurance attachment point,
generally subject to a negotiated limit. Such reinsurance can cover losses from
a single risk or from a variety of risks in connection with a single occurrence
(generally referred to as catastrophe coverage). Excess of loss reinsurance is
often written in multiple layers. One or a group of reinsurers typically assumes
that portion of the risk immediately above the ceding company's retention up to
a specified amount, at which point another reinsurer or group of reinsurers
assumes, or the ceding company retains, the excess liability. The reinsurer
assuming the risk immediately above the ceding company's retention point is said
to write working layer (or low layer) reinsurance. A loss that is greater in
amount than the ceding company's retention will result in a loss to the working
layer reinsurer, but may not result in a loss to the reinsurers on higher
layers. Since the probability of loss for the reinsurer providing excess of loss
coverage differs from that to which the ceding company is subject, such
reinsurance coverage is priced separately from the pricing set by the ceding
company with respect to its own risks. Reinsurers may also purchase reinsurance,
known as retrocessional reinsurance, to cover their own risks assumed from
primary ceding companies. Reinsurance companies enter into retrocessional
agreements for reasons similar to those for which ceding companies purchase
reinsurance.
2
<PAGE>
Underwriting
Underwriting opportunities presented to Chartwell are evaluated based
upon a number of factors including an historical analysis of results, an
estimation of future loss costs based upon an analysis of exposure, a review of
other programs displaying similar exposure characteristics, the primary
insurer's underwriting and claims experience and the primary insurer's financial
condition.
In general, prior to authorization, underwriting submissions are
reviewed by at least two underwriters, including the manager of the relevant
underwriting unit. Large, complex or unusual submissions are generally further
reviewed by senior management.
Client Segments
Chartwell has organized its marketing and underwriting activities into
client segments differentiated from one another based on the nature of the
clientele and their businesses or products. Accordingly, Chartwell has
established five underwriting units, four of which are focused on reinsurance
clients; Specialty Accounts, Global Accounts, Regional Accounts, Marine &
Aviation Accounts and the fifth, Controlled Source Insurance Accounts, is
dedicated to specialty insurance program opportunities. Each unit consists of
specialized, dedicated underwriters who are supported by Chartwell's technical
resources and personnel, including its actuarial, claims and accounting
departments. Chartwell employs a focused cycle management approach to marketing
and underwriting pursuant to which it seeks to emphasize different types of
business during various phases of the underwriting cycle. During soft markets,
Chartwell concentrates on identifying and pursuing underwriting opportunities in
areas exhibiting adequate profit potential and ceding additional business upon
advantageous terms. During hard markets, Chartwell's general strategy is to
expand its premium writings in all market segments.
The table set forth below shows gross premiums written by underwriting
client segment for the periods indicated:
Gross Premiums Written by Underwriting Client Segment
(Dollars in thousands)
Year Ended December 31,
-------------------------------------------------
1997 1996 1995
---------------- ---------------- --------------
% of % of % of
Amount Total Amount Total Amount Total
--------- ------ --------- ------ -------- -----
Specialty Accounts .......... $140,965 38.9% $100,817 38.2 % $ 60,529 47.7%
Global Accounts..............
Domestic................... 19,658 5.4 19,818 7.5 21,010 16.5
International.............. 22,723 6.3 24,120 9.2 17,400 13.7
------- ----- ------- ----- ------- -----
Subtotal Global Accounts..... 42,381 11.7 43,938 16.7 38,410 30.2
Regional Accounts............ 24,718 6.8 25,967 9.8 16,738 13.2
Marine & Aviation Accounts... 28,050 7.7 27,780 10.5 11,291 8.9
------- ---- ------- ------ ------- -----
Total Reinsurance.......... 236,114 65.1% 198,502 75.2% 126,968 100.0%
------- ---- ------- ------ ------- -----
Controlled Source Insurance
Accounts.................. 106,543 29.4 58,752 22.3
------- ---- ------- -----
INSCORP Run-Off.............. -- -- 6,584 2.5
------- ---- ------- -----
Archer Dedicated Facilities.. 20,113 5.5 -- --
------- ---- ------ ------
Total........................ $362,770 100.0% $263,838 100.0%
======== ====== ======== ======
3
<PAGE>
The growth of 185.7% in gross premiums written for the period from 1995
to 1997 is due principally to the addition of the Controlled Source Insurance
portfolio and the retention of selected INSCORP reinsurance contracts as a
result of the Merger, as well as the addition of premium income from Chartwell's
participation on Archer's syndicates through support of its Dedicated CCV's.
Specialty Accounts. Specialty Accounts primarily covers non-standard,
non-traditional risks that require specialized underwriting, claims and
actuarial skills. Currently, these coverages include workers compensation,
professional liability, directors' and officers' liability, surety/fidelity
programs, non-standard automobile, accident & health, political risk, employment
practices liability and managing general agencies, as well as coverages for
excess and surplus lines insurers and start-up companies. In addition, Specialty
Accounts writes business arising from the alternative risk transfer segment with
a particular emphasis in the professional liability and medical malpractice
areas.
Specialty Accounts represented 59.7%, 50.8%, and 47.7% of gross
reinsurance premiums written by Chartwell for the years ended December 31, 1997,
1996 and 1995, respectively. The alternative risk transfer business accounted
for 7.5% and 11.5%, of gross reinsurance premiums written by Chartwell in 1997
and 1996, respectively, the majority of which was written by the Specialty
Accounts department.
The table set forth below shows the distribution of gross premiums
written for Specialty Accounts by line of business for the periods indicated:
Specialty Accounts
Gross Premiums Written by Line of Business
(Dollars in thousands)
Year Ended December 31,
-----------------------------------------------------
1997 1996 1995
---------------- ---------------- -----------------
% of % of % of
Amount Total Amount Total Amount Total
---------- ------ -------- ------ -------- ------
Workers Compensation...... $ 67,550 47.9% $ 27,477 27.3% $ 132 0.2%
Professional Liability.... 25,134 17.8 21,642 21.5 24,910 41.2
Automobile Liability...... 23,533 16.7 26,317 26.1 18,308 30.2
General Liability......... 14,580 10.3 14,176 14.1 12,505 20.7
Fidelity, Surety & Other.. 10,168 7.3 11,205 11.0 4,674 7.7
------ --- ------ ---- ----- ---
Total..................... $140,965 100.0% $100,817 100.0% $ 60,529 100.0%
======== ===== ======== ===== ======== =====
Gross premiums written for Specialty Accounts increased in 1997 by
39.8% over 1996. Contributing to this growth was a significant increase of
145.8% in the workers compensation line of business. Automobile liability and
fidelity, surety and other premiums decreased slightly in 1997 from 1996 due to
continued competition in this line, while premiums associated with professional
liability increased due to the expansion of relationships with clients in this
area.
Global Accounts. Global Accounts is principally engaged in two
activities. Global Accounts provides reinsurance to large U.S. based domestic
insurance companies with $100 million or more in surplus which write business in
more than 10 states and writes specific reinsurance programs for international
ceding companies including reinsurance of select syndicates at Lloyd's and for
other insurers and reinsurers writing non-U.S. risks.
Global Accounts represented 17.9%, 22.1%, and 30.3% of gross
reinsurance premiums written by Chartwell for the years ended December 31, 1997,
1996, and 1995, respectively. For the years ended December 31, 1997, 1996 and
1995, 46.4%, 45.1%, and 54.7%, respectively, of the gross premiums written in
the Global Accounts client segment represented domestic business and 53.6%,
54.9%, and 45.3%, respectively, represented international business.
4
<PAGE>
The table set forth below shows the distribution of gross premiums
written for Global Accounts by line of business for the periods indicated:
Global Accounts
Gross Premiums Written by Line of Business
(Dollars in thousands)
Year Ended December 31,
--------------------------------------------------
1997 1996 1995
-------------- --------------- -----------------
% of % of % of
Amount Total Amount Total Amount Total
------ ----- ------- ----- --------- -----
Property....................$ 18,802 44.4% $ 17,755 40.4% $ 19,526 50.8%
Automobile Physical Damage.. 10,797 25.5 12,680 28.9 7,714 20.1
Automobile Liability........ 6,818 16.1 8,904 20.3 7,417 19.3
General Liability........... 3,478 8.2 2,649 6.0 2,597 6.8
Other Casualty.............. 2,486 5.8 1,950 4.4 1,156 3.0
-------- ----- -------- ----- -------- ----
Total.......................$ 42,381 100.0% $ 43,938 100.0% $ 38,410 100.0%
======== ===== ======== ===== ======== ======
In 1997, Global Accounts recorded a 3.5% decline in gross premiums
written in response to the persistence of competitive conditions in both the
domestic and international markets. Automobile physical damage and liability
premiums decreased 14.9% and 23.4%, respectively, in 1997 reflecting the
increase in competition worldwide.
Regional Accounts. Regional Accounts includes reinsurance of the
standard risks of insurance companies that either operate in 10 or fewer states
or have a surplus of $100 million or less. Gross premiums written in Regional
Accounts, which represented 10.5%, 13.1%, and 13.2% of gross reinsurance
premiums written by Chartwell for the years ended December 31, 1997, 1996 and
1995, respectively, decreased 4.8% from 1996 levels. This decrease reflects the
non-renewal of one relatively large program.
The table set forth below shows the distribution of gross premiums
written for Regional Accounts by line of business for the periods indicated:
Regional Accounts
Gross Premiums Written by Line of Business
(Dollars in thousands)
Year Ended December 31,
-----------------------------------------------------
1997 1996 1995
----------------- --------------- ----------------
% of % of % of
Amount Total Amount Total Amount Total
--------- ----- -------- ----- ------- -----
Property.............. $ 11,027 44.6% $ 11,023 42.5% $ 5,118 30.6%
General Liability..... 10,834 43.8 8,264 31.8 5,620 33.6
Workers Compensation.. 1,621 6.6 3,698 14.2 3,138 18.7
Automobile Liability.. 1,236 5.0 2,982 11.5 2,862 17.1
-------- ---- -------- ---- -------- -----
Total................. $ 24,718 100.0% $ 25,967 100.0% $ 16,738 100.0%
======== ===== ======== ===== ======== =====
General liability premiums increased 31.1% in 1997 from 1996 while
property premiums were relatively flat year to year. All other lines of business
recorded decreases in gross premiums written of more than 50% in 1997 compared
to 1996, reflecting the non-renewal of one relatively large program.
Marine and Aviation Accounts. Marine & Aviation Accounts includes
reinsurance of domestic and international ceding companies, managing general
agencies and select Lloyd's syndicates, as well as Chartwell's participation in
certain marine & aviation pools. The majority of Chartwell's marine reinsurance
business is in the bluewater hull and energy areas. Chartwell's aviation
business is derived primarily from reinsuring general aviation and satellite
business. Business emanating from INSCORP's participation in the marine pool
managed by Navigators Group, Inc. is also included in this client segment.
Marine & Aviation Accounts represented 11.9%, 14.0% and 8.9% of gross
reinsurance premiums written during the years ended December 31, 1997, 1996 and
1995, respectively. Gross premiums written in Marine & Aviation Accounts were
relatively flat from 1996 to 1997 reflecting the increasingly competitive market
conditions in this segment. Marine premiums decreased 3.2% in 1997 while
Aviation premiums increased 29.5%.
5
<PAGE>
The table set forth below shows the distribution of gross premiums
written for Marine & Aviation Accounts by line of business for the periods
indicated:
Marine & Aviation Accounts
Gross Premiums Written by Line of Business
(Dollars in thousands)
Year Ended December 31,
----------------------------------------------------
1997 1996 1995
-------------- -------------- -----------------
% of % of % of
Amount Total Amount Total Amount Total
-------- ----- -------- ------ -------- -----
Marine.............. $ 23,472 83.7% $ 24,245 87.3% $ 5,034 44.6%
Aviation............ 4,578 16.3 3,535 12.7 6,257 55.4
------- ---- -------- ----- ------- -----
Total............... $ 28,050 100.0% $ 27,780 100.0% $ 11,291 100.0%
======= ===== ======== ====== ======== =====
Mix of Reinsurance Business
Chartwell writes excess of loss and pro rata reinsurance as well as
casualty clash and property catastrophe coverages, all on a treaty basis.
Chartwell typically focuses on the working layers of a ceding company's
reinsurance program. Chartwell does not currently write facultative reinsurance
but may commence writing such coverages depending on market conditions.
Chartwell's mix of reinsurance business, on the basis of gross and net
reinsurance premiums written, is set forth in the following table for the
periods indicated:
Mix of Reinsurance Business
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------- ------------------ ----------------- ------------------ ------------------
Amount % of Total Amount % of Total Amount % of Total Amount % of Total Amount % of Total
--------- ---------- ------- ---------- ------- ---------- ------- ---------- ------- ----------
Gross Premiums Written
Casualty:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Excess of Loss.............. $ 36,659 15.5% $ 32,679 16.5% $ 40,089 31.6% $ 32,674 28.1% $ 23,622 33.7%
Pro Rata.................... 134,495 57.0 94,223 47.5 41,570 32.7 43,328 37.2 28,542 40.7
Clash....................... 1,983 0.8 1,816 0.8 2,704 2.1 3,498 2.9 1,710 2.4
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total Casualty................ 173,137 73.3 128,718 64.8 84,363 66.4 79,500 68.2 53,874 76.8
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Property:
Excess of Loss.............. 12,912 5.5 6,267 3.2 4,730 3.7 2,656 2.3 1,369 2.0
Pro Rata.................... 49,583 21.0 62,455 31.5 35,841 28.2 31,030 26.7 10,105 14.4
Catastrophe................. 482 0.2 1,062 0.5 2,034 1.7 3,210 2.8 4,781 6.8
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total Property................ 62,977 26.7 69,784 35.2 42,605 33.6 36,896 31.8 16,255 23.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total Gross Premiums Written. $236,114 100.0% $ 198,502 100.0% $ 126,968 100.0% $116,396 100.0% $ 70,129 100.0%
======== ===== ========= ===== ========= ===== ======== ===== ======== =====
Net Premiums Written
Casualty:
Excess of Loss.............. $ 35,413 17.4% $ 32,567 18.6% $ 40,043 32.5% $ 32,680 28.7% $ 23,797 34.1%
Pro Rata.................... 118,446 58.1 81,349 46.6 40,727 33.0 43,319 38.0 28,560 40.9
Clash....................... 1,920 0.9 1,807 1.0 2,691 2.2 3,492 3.1 1,729 2.5
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total Casualty.................. 155,779 76.4 115,723 66.2 83,461 67.7 79,491 69.8 54,086 77.5
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Property:
Excess of Loss.............. 11,456 5.6 5,941 3.4 4,440 3.6 2,476 2.2 1,223 1.8
Pro Rata.................... 36,251 17.8 51,978 29.8 33,667 27.3 28,928 25.4 9,859 14.1
Catastrophe................. 472 0.2 1,016 0.6 1,746 1.4 3,067 2.6 4,659 6.6
-------- ----- -------- ----- ------- ----- -------- ----- ------- -----
Total Property.................. 48,179 23.6 58,935 33.8 39,853 32.3 34,471 30.2 15,741 22.5
--------- ----- -------- ----- ------- ----- -------- ----- -------- -----
Total Net Premiums Written.. $203,958 100.0% $ 174,658 100.0% $123,314 100.0% $113,962 100.0% $ 69,827 100.0%
========= ===== ========= ===== ======== ===== ======== ===== ======== =====
</TABLE>
6
<PAGE>
Chartwell's percentage of property writings in its overall mix of
business decreased for the year ended December 31, 1997 as compared to the year
ended December 31, 1996, principally as a result of increased competition in the
property market. Chartwell increased the amount of pro rata casualty business
written in 1997 over 1996 primarily as a result of opportunities associated with
workers compensation programs from specialty writers.
During the year ended December 31, 1997, Chartwell received
approximately 48.4% of its gross reinsurance premiums written from six groups of
ceding companies, of which RISCORP National Insurance Company accounted for
approximately 17.8%, American International Group accounted for approximately
7.9% through 21 treaties with 8 member companies, Somerset Marine accounted for
approximately 6.3%, AON Corporation Group accounted for approximately 5.7%,
Commercial Casualty accounted for approximately 5.5% and North Carolina Commerce
Fund accounted for approximately 5.2%. No other ceding company or group of
affiliated ceding companies accounted for more than 5% of Chartwell's gross
reinsurance premiums written for the year ended December 31, 1997, and no one
reinsurance treaty accounted for more than 18% of Chartwell's gross reinsurance
premiums written for such period.
During the year ended December 31, 1997, Chartwell received
approximately 69.7% of gross reinsurance premiums written from four reinsurance
brokers, of which Guy Carpenter & Co., Inc. accounted for approximately 26.6%,
AON Reinsurance Agency accounted for approximately 23.3%, Willis Faber North
America accounted for approximately 10.3% and E.W. Blanch Co. accounted for
approximately 9.5%. No other broker accounted for more than 5% of the company's
gross reinsurance premiums written for the year ended December 31, 1997.
In order to reduce the potential adverse effect arising from the
termination of any specific business relationship, Chartwell seeks business from
a large number of reinsurance brokers and ceding companies. While management
believes that its relationships with these reinsurance brokers and ceding
companies are satisfactory, the termination of all or a substantial number of
these relationships could have a material adverse effect on the business and
operations of Chartwell.
Insurance Operations
Controlled Source Insurance Accounts. Controlled Source Insurance
Accounts develops insurance programs through specialty production sources with a
focus on a specific line or lines of business, with a limited geographic
emphasis, and where the program administrator's compensation is adjusted based
on the underwriting results of the business.
Controlled Source Insurance Accounts gross written premiums grew 81.3%,
9.8%, and 12.6% for the years ended December 31, 1997, 1996, and 1995,
respectively, over the prior year. The increases in premium reflect the
geographic expansion of existing programs as well as the development of new
programs during the periods shown. Premiums from the automobile, general
liability and commercial multiple peril lines of business increased 105.2%,
104.3% and 46.6%, respectively, in 1997 over 1996. In addition, workers
compensation and homeowners, which were new lines of business in 1997, together
comprised 5.1% of the total Controlled Source Insurance gross written premiums
for 1997.
The table set forth below shows the gross premiums written for
Controlled Source Insurance Accounts by INSCORP for the periods indicated:
Controlled Source Insurance Accounts
Gross Premiums Written by Line of Business
(Dollars in thousands)
Year Ended December 31,
---------------------------------------------------
1997 1996 1995(1)
---------------- ---------------- ---------------
% of % of % of
Amount Total Amount Total Amount Total
--------- ------- -------- ------ -------- -----
Commercial Multiple Peril.. $ 48,404 45.4% $ 33,014 56.2% $ 25,196 47.1%
General Liability.......... 30,418 28.6 14,889 25.3 15,506 29.0
Automobile................. 22,267 20.9 10,849 18.5 12,821 23.9
Workers Compensation....... 4,169 3.9 -- -- -- --
Homeowners................. 1,285 1.2 -- -- -- --
-------- ----- ------- ----- -------- -----
Total...................... $ 106,543 100.0% $ 58,752 100.0% $ 53,523 100.0%
========= ===== ======== ===== ======== ======
- ---------------------------------
(1) Under ownership by Piedmont
7
<PAGE>
Archer Dedicated Facilities
Classes of business covered by Archer's syndicates include marine,
non-marine property, non-marine liability, aviation, motor and life. Chartwell's
participation on Archer's syndicates, through its Dedicated CCV's amounted to
(pound)27.0 million ($44.6 million) in 1997. For 1997, Chartwell's participation
at Archer represented 7.1% of Archer syndicates' total underwriting capacity
with approximately 45.0% coming from other corporate capital providers and 47.9%
from traditional Names.
Archer Dedicated Corporate Capital Facilities
Gross Premiums Written by Lloyd's Market Segment
(Dollars in thousands)(1)
Year Ended December 31,
------------------------
1997
----------------------
Amount % of Total
---------- -----------
Non-Marine..................... $9,969 49.6%
Motor.......................... 7,445 37.0
Aviation....................... 1,569 7.8
Marine......................... 984 4.9
Life........................... 146 0.7
-------- -----
Total.......................... $20,113 100.0%
======== =====
- --------------------------------
(1) Business at Archer is conducted in pounds sterling. The dollar amounts
shown here have been converted from pounds sterling at the rate of
$1.6496= (pound)1 which was the exchange rate published by Lloyd's at
December 31, 1997. Data is not shown for years prior to 1997 because
Chartwell acquired Archer in November 1996, and Chartwell's
consolidated results prior to 1997 did not include amounts
attributable to Archer. All amounts are presented in accordance with
U.S. GAAP.
Retrocessional Arrangements
Chartwell utilizes retrocessions primarily to provide protection from
large or multiple losses and may in the future use additional retrocessions to
increase underwriting capacity. Chartwell seeks to establish long-term
relationships with its leading retrocessionaires in order to achieve continuity
and stability of coverage. Chartwell purchases property catastrophe coverage for
Global, Regional and Specialty Accounts business to provide coverage for losses
arising from an aggregation of claims under various insurance policies from a
single event. Chartwell's current property catastrophe program, effective
January 1, 1998, provides 100% coverage for $9.5 million of exposure in excess
of a $2.5 million retention. In addition, during 1997, Chartwell purchased a
property catastrophe program to protect against an accumulation of losses for
Chartwell and INSCORP from the same event; this program provides 100% coverage
for $2.5 million of exposure in excess of a combined $2.0 million retention.
INSCORP purchases specific reinsurance programs for each of the programs
underwritten.
Chartwell renewed its retrocessional marine program, as of April 1,
1997, which provides $1.45 million of coverage, per risk or per event, in excess
of a $0.3 million retention.
In 1997, Chartwell Reinsurance and INSCORP entered into aggregate
excess of loss treaties with two reinsurers. These treaties provide Chartwell
Reinsurance and INSCORP with a layer of protection against adverse results in
all lines of business in excess of specified loss ratios.
Since Chartwell is contingently liable with respect to reinsurance
ceded in the event that a retrocessionaire is unable to meet its obligations
assumed under a retrocession agreement, the financial strength of each
retrocessionaire is evaluated. As of December 31, 1997, the reinsurance
recoverable balance of Chartwell Reinsurance of $54.6 million is attributable to
retrocessional arrangements with approximately 150 retrocessionaires. At
December 31, 1997, Chartwell Reinsurance had a reserve for uncollectable
reinsurance of $3.4 million.
As of December 31, 1997, the reinsurance recoverable balance of
INSCORP of $182.5 million was attributable to retrocessional arrangements with
approximately 460 retrocessionaires. At December 31, 1997, INSCORP had a reserve
for uncollectable reinsurance of approximately $3.0 million.
8
<PAGE>
Claims
Chartwell's Claims Department analyzes loss exposure in order to
establish case reserves, pays claims and assists in the underwriting process by
reviewing the claims activities of prospective ceding companies. In performing
these functions, the claims department consults with Chartwell's underwriting
and actuarial departments. The claims department also assists the accounting
department in reporting Chartwell's retrocessional claims and in seeking
collection of such claims on a timely basis.
In evaluating loss exposure, Chartwell's Claims Department reviews loss
reports received from ceding companies to confirm that submitted claims are
covered under the contract terms, establishes reserves on an individual case
basis and monitors the adequacy of such reserves. The department also tracks
industry loss activity as well as other industry trends to facilitate
management's evaluation of Chartwell's overall risk profile. Chartwell also has
an Environmental Claims Unit to evaluate the complex toxic tort and latent
injury claims inherited through the Merger.
Reserves
General. A significant period of time may elapse between each of: (i)
the occurrence of an event causing an insured loss; (ii) the reporting of the
loss to the ceding company; (iii) the reporting of the loss by the ceding
company to Chartwell; (iv) the ceding company's adjustment and payment of the
loss; and (v) payment to the ceding company by Chartwell. To recognize
liabilities for unpaid losses, Chartwell establishes loss and loss expense
reserves which are balance sheet liabilities representing estimates of future
amounts needed to pay claims and related expenses with respect to insured
events. Loss and LAE reserves have two components: case loss and LAE reserves,
which are estimates of future loss and LAE with respect to insured events that
have been reported to the reinsurer, and incurred but not reported reserves
("IBNR"). IBNR reserves are actuarially determined and reflect (i) an estimate
of the ultimate loss amount that will be paid by the reinsurer on claims that
have occurred but have not yet been reported to the reinsurer and (ii) the
expected change in the value of those claims that have already been reported to
the reinsurer.
When a claim is reported to the ceding company, its claims personnel
establish a liability for the estimated amount of the ultimate settlement cost
of the reported claim. The estimate reflects the judgment of the ceding company,
based on the experience and knowledge of its claims personnel, regarding the
nature and value of the claim. The ceding company may periodically adjust the
amount of case reserves as additional information becomes known or partial
payments are made.
Upon notification of loss from a ceding company, Chartwell establishes
case reserves, including LAE, based upon Chartwell's share of the amount of
reserves established by the ceding company and Chartwell's independent
evaluation of the loss. Where appropriate, Chartwell establishes case reserves
in excess of its share of the reserves established by the ceding company. These
reserves are periodically reviewed by Chartwell's claims department based on its
evaluation of reports from the ceding company and its audits of claims
activities of the ceding company.
During the claims settlement period, which may extend over a protracted
period of time, additional facts regarding claims and trends may become known.
As Chartwell becomes aware of new information, it may adjust its estimates of
its ultimate liability. The revised estimates of ultimate liability may prove to
be less than or greater than the actual settlement or award amount for which the
claim is finally discharged.
Actuarial Methods. Chartwell utilizes the two most common methods of
actuarial evaluation used within the insurance industry, the
Bornhuetter-Ferguson method and the loss development method. The
Bornhuetter-Ferguson method involves the application of selected loss ratios to
Chartwell's earned premiums to determine estimates of ultimate expected loss and
LAE for each underwriting year. Multiplying expected losses by underwriting year
by a selected loss reporting pattern gives an estimate of reported and
unreported IBNR losses. When the IBNR is added to the loss and LAE amounts with
respect to claims that have been reported to date, an estimated ultimate
expected loss results. This method provides a more stable estimate of IBNR that
is insulated from wide variations in reported losses. In contrast, the loss
development method extrapolates the current value of reported losses to ultimate
expected losses by using selected reporting patterns of losses over time. The
selected reporting patterns are based on historical information (organized into
loss development triangles) and are adjusted to reflect the changing
characteristics of the book of business written by Chartwell.
Chartwell employs a combination of both methods outlined above. For the
older years, when reported losses have generally stabilized, Chartwell gives
greater weight to the loss development result. For the more recent years, when
reported loss activity is either less reliable in the aggregate or non-existent,
Chartwell gives greater weight to the Bornhuetter-Ferguson method. Because
losses are reported relatively earlier for property and other short tail
coverages, the weighting for those types of coverages shifts from the
Bornhuetter-Ferguson method to the loss development method at an earlier point
than for casualty and other long tail coverages.
In the reserve setting process, Chartwell includes provisions for
inflation and "social inflation" if appropriate, as losses are generally not
determined until some time in the future. Chartwell continually monitors
legislative activity and evaluates the potential effect of any legislative
changes on its reserve liabilities.
9
<PAGE>
Chartwell's reserves are carried at the full amount estimated for
ultimate expected losses and LAE without any discount to reflect the time value
of money in accordance with both Statutory Accounting Practices ("SAP") and
Generally Accepted Accounting Principles ("GAAP").
Chartwell's actuarial department regularly performs loss reserve
analyses for Chartwell Reinsurance and INSCORP. Such loss reserves are also
reviewed by Milliman & Robertson, Inc. ("M&R"), an independent actuarial
consulting firm, which prepared a Statement of Actuarial Opinion as of December
31, 1997 for each of Chartwell Reinsurance and INSCORP (the "M&R Statements").
The M&R Statements were prepared solely for the use of and only to be relied
upon by Chartwell and the various state insurance departments with which
Chartwell files annual statements. The M&R Statements were not prepared for the
use of investors.
Chartwell provides capital to its Dedicated CCV's which support the
underwriting capacity of the Lloyd's syndicates managed by Archer. Loss reserves
for this business are established using methods similar to those used by
Chartwell Reinsurance and INSCORP. Archer, a subsidiary of Chartwell, has
engaged Bacon & Woodrow London Market Services Ltd. ("B&W"), an independent
actuarial consulting firm, to review the loss reserves and prepare an actuarial
opinion for each of Archer's syndicates, including the actuarial opinion
required by Lloyd's solvency regulations. The B&W opinions, which are prepared
solely for the use of Lloyd's regulators and are only to be relied upon by
Archer, assist Archer's syndicates in establishing appropriate reserve estimates
for both the reinsurance to close and the open years of account.
Analysis of Reserve Development. The following table presents the
development of reserves of Chartwell Reinsurance for losses and LAE for calendar
years 1987 through 1997. The first line of the table sets forth the estimated
liability for losses and LAE for claims arising in each of the indicated years
as recorded on the balance sheet of Chartwell Reinsurance as of the end of years
1987-1994, including IBNR. For the years ended December 31, 1995, 1996 and 1997,
the first line includes the consolidated reserves of Chartwell Reinsurance and
INSCORP. For the year ended December 31, 1997, the first line also includes the
loss reserves associated with the capital provided by CWL to the Dedicated CCVs.
The upper portion of the table shows the cumulative amounts paid as of the end
of each successive year for such claims. The bottom portion of the table also
shows the re-estimated amount of the previously recorded liability based on
experience as of the end of each succeeding year, including cumulative payments.
The estimates are readjusted as more information becomes known about the
frequency and severity of claims for each year. A redundancy (deficiency) exists
when the original liability estimate is greater (less) than the re-estimated
liability at the end of a year. The cumulative redundancy (deficiency) shown in
the table is the aggregate net change in estimate over the period of years
subsequent to the calendar year reflected at the top of the particular columns.
In evaluating the information in the table, it should be noted that
each amount entered incorporates the effects of all changes in amounts entered
for prior periods. Thus, if the 1991 estimate for a previously incurred loss was
$150,000 and the loss was reserved at $100,000 in 1985, the $50,000 deficiency
(later estimate minus original estimate) would be included in the cumulative
redundancy (deficiency) in each of the years 1987-1991 shown in table. It should
further be noted that the table does not present accident or policy year
development data. In addition, conditions and trends that have affected the
development of liability in the past may not necessarily recur in the future.
Accordingly, it may not be appropriate to extrapolate future redundancies or
deficiencies from the table.
10
<PAGE>
Analysis of Loss and LAE
Reserve Development
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for Loss and LAE(1) $135,818 $156,869 $130,939 $126,746 $126,292 $189,386 $201,013 $232,733 $741,467 $747,858 $788,240
Cumulative paid as of:
One year later 15,557 39,084 15,946 19,745 9,074 31,354 30,085 46,363 157,172 196,470
Two years later 51,108 53,101 34,928 26,338 24,227 49,686 57,368 73,462 255,876
Three years later 62,624 69,914 40,622 39,933 37,935 68,147 73,926 90,999
Four years later 76,432 75,034 52,514 52,436 51,135 78,135 84,281
Five years later 79,158 86,463 63,479 62,922 56,822 84,402
Six years later 88,789 97,020 72,347 68,070 60,207
Seven years later 97,869 104,840 76,481 70,839
Eight years later 105,579 108,913 78,808
Nine years later 109,376 111,223
Ten years later 111,772
Reserves re-estimated as of:
One year later 135,624 158,048 129,333 125,919 126,926 192,496 204,094 233,738 754,286 758,748
Two years later 137,539 156,185 128,655 127,627 126,193 192,363 206,965 232,964 764,432
Three years later 134,107 155,224 132,406 128,740 127,102 194,876 205,369 229,253
Four years later 136,649 161,868 132,783 129,707 127,459 193,369 201,458
Five years later 143,223 159,912 133,112 129,989 126,004 188,594
Six years later 142,078 160,195 132,474 129,996 122,525
Seven years later 146,443 162,142 133,808 127,239
Eight years later 149,830 163,268 131,627
Nine years later 152,695 161,525
Ten years later 151,299
Cumulative redundancy $(15,481) $ (4,656) $ (688) $ (493) $ 3,767 $ 792 $ (445) $ 3,480 $(22,965) $(10,890)
(deficiency)
Cumulative % (11.4%) (3.0%) (0.5%) (0.4%) 3.0% 0.4% (0.2%) 1.5% (3.1%) (1.5%)
</TABLE>
- ----------------------------
(1) Reserves for loss and LAE are presented net of reinsurance recoverables for
the periods 1987 through 1991. In 1992, Chartwell adopted SFAS No. 113
which, among other things, requires Chartwell to record its reserves for
unpaid losses and LAE without reduction for amounts that would be recovered
from retrocessionaires. The amount recoverable from retrocessionaires is
recorded as an asset on Chartwell's balance sheet. The net of such asset
and the reserves for loss and LAE is $585.6, $575.5, $561.6, $197.3 and
$167.4 million at December 31, 1997, 1996, 1995, 1994 1993, respectively.
Chartwell Reinsurance entered the property and casualty reinsurance
market in 1979. Because Chartwell Reinsurance was a new participant in the
reinsurance market, the business available to Chartwell Reinsurance prior to
1986 was not of the same quality as that available to more established market
participants and was thus subject to relatively greater loss potential.
Chartwell Reinsurance's entrance into the market also occurred during a period
of extreme price competition when the industry as a whole underestimated
significantly the potential for loss on business written. Thus, Chartwell
Reinsurance and the reinsurance industry have experienced considerable adverse
loss development for business written prior to 1986.
11
<PAGE>
In the latter part of 1984, Chartwell Reinsurance began to strengthen
management resources and to re-underwrite its business in order to position
itself for an upturn in the underwriting cycle. In addition, Chartwell
Reinsurance established an internal actuarial function at the end of 1986.
Deficiencies in balance sheet loss reserves in 1987 were affected significantly
by facultative business written prior to 1986 and an assumed treaty from one
client that has been commuted. Deficiencies arising from these two sources of
business for 1987 totaled $13.5 million. The remaining loss reserve deficiencies
have developed from casualty pro rata and casualty excess treaties. This adverse
development is attributable primarily to business written prior to 1985 when
policy forms did not typically limit coverages for latent liabilities relating
to asbestos and environmental pollution claims. After adjustment for the adverse
development attributable to the two previously described business sources, the
remaining balance sheet loss reserves have been relatively stable since December
31, 1987. Net reserves on accident years since 1987 have developed modest
redundancies or deficiencies, except for 1988 which has developed a redundancy
of approximately $11.0 million since the initial recording. The gross deficiency
of $10.9 million at December 31, 1997 becomes a net redundancy of $2.1 million
after accounting for reinsurance recoverables. The gross deficiency of $12.8
million at December 31, 1996 becomes a net redundancy of $1.7 million after
accounting for reinsurance recoverables. (See Note 11 of the Notes to
Consolidated Financial Statements contained herein).
Commutations of treaties and large loss payments distort the payment
patterns represented in the table. In 1989, Chartwell Reinsurance commuted an
assumed treaty for $18.0 million affecting calendar years from 1986 to 1989. The
commutation ensured that no further adverse development on that treaty occurred
in subsequent years. In 1992, Chartwell Reinsurance commuted a retrocession
arrangement which resulted in a reduction of net paid losses for the prior
calendar years of $4.4 million. In 1993, Chartwell Reinsurance paid
approximately $12.0 million in gross losses related to Hurricanes Andrew and
Iniki. In 1995, Chartwell Reinsurance paid $10.9 million to settle three large
claims from business written prior to 1986 and to commute a group of assumed
contracts from business written prior to 1995.
At December 31, 1997, the GAAP basis reserves, before reduction for
ceded reinsurance, were $788.2 million compared to SAP basis reserves, before
reduction for ceded reinsurance, of $790.0 million. The difference is due to
adjustments for foreign currency transactions. At December 31, 1997, 1996 and
1995, GAAP basis reserves, net of amounts recoverable from retrocessionaires,
were $585.6, $575.5 and $561.6 million, respectively, compared to SAP net
reserves of $548.0, $537.2 and $532.2 million, respectively. The differences
between GAAP and SAP amounts are due to the implementation of Statement of
Financial Accounting Standards No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts" ("SFAS" No. 113)
($39.5, $39.5 and $36.1 million for 1997, 1996 and 1995, respectively), the
recognition of future amounts recoverable under a reserve indemnification
agreement entered into by the Company in 1992 (the "Reserve Indemnification
Agreement")($3.7 million for 1995) and a foreign exchange adjustment of $1.9
million, $1.2 million and $2.9 million in 1997, 1996 and 1995, respectively.
Activity for loss and loss adjustment expenses as of December 31, 1997,
1996 and 1995 is herein incorporated by reference to Note 11 of the consolidated
financial statements of Chartwell included elsewhere herein.
Management believes that Chartwell's reserves are adequate. However,
the process of estimating reserves is inherently imprecise and involves an
evaluation of many variables, including potentially unpredictable social and
economic conditions. Accordingly, there can be no assurance that Chartwell's
ultimate liability will not vary significantly from amounts reserved. The
inherent uncertainties of estimating such reserves are greater for reinsurers
than for primary insurers, primarily due to the longer-term reporting nature of
the reinsurance business, the diversity of development patterns among different
types of reinsurance, the necessary reliance on ceding companies for information
regarding reported claims and differing reserving practices among ceding
companies. Reserves also include provisions for latent injury or toxic tort
claims that cannot be estimated with traditional reserving techniques. Because
of inconsistent court decisions in federal and state jurisdictions and the wide
variation among insureds with respect to underlying facts and coverage,
uncertainty exists with respect to these claims as to liabilities of ceding
companies and, consequently, reinsurance coverage. Management believes that
Chartwell Reinsurance's exposure to such latent losses is lessened because of
its relatively recent entry into the reinsurance business in 1979, its low
historical levels of premium volume prior to 1985 and its retrocessional
programs. In addition, management believes that INSCORP's exposure to adverse
development related to latent losses is lessened because a significant portion
of the $25 million net reserve strengthening recorded by INSCORP in 1995 was in
respect of such losses. In addition, the amount payable under Chartwell Re's
Contingent Interest Notes due 2006 (the "CI Notes") is subject to reduction in
the event of such adverse reserve development.
12
<PAGE>
Reserves for Chartwell's participation in Lloyd's syndicates through its
Dedicated CCV's are included in the 1997 year end reserves. Part of the reserve
represents reinsurance to close balances brought forward to the open years of
account (for example, 1995 reinsured into the 1996 open year). Favorable or
unfavorable development of the prior year's reserves can influence the results
of the open years of 1996 and 1997. In September of 1996, Lloyd's successfully
concluded the implementation of its Reconstruction and Renewal plan. As part of
the plan, Equitas, a new reinsurance company, was formed to reinsure all
liabilities from 1992 and prior underwriting years. The Company believes that
the formation of Equitas along with its engagement of B&W have enabled it to
control some of the uncertainties inherent in reserve estimates. There can,
however, be no assurance as to the adequacy of reserves and the risk of future
developments, both favorable and unfavorable, still remains.
The following table presents a three-year development of Chartwell's
reserves for losses and LAE associated with environmental and other latent
injury claims. All of the development relates to years prior to 1984.
Year Ended December 31,
(Dollars in thousands)
<TABLE>
<CAPTION>
---------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
Gross Net Gross Net Gross Net
-------- ------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Liability, beginning of year.......... $ 65,717 $ 46,958 $ 66,936 $ 46,450 $ 8,955 $ 4,942
Incurred during the year.............. 19,851 8,660 9,482 6,538 723 469
Less amount paid during the year...... 14,645 7,566 10,701 6,030 691 443
Purchased liabilities (1)............ 57,949 41,482
--------- -------- --------- -------- -------- ---------
Liability, end of year............... $ 70,923 $ 48,052 $ 65,717 $ 46,958 $ 66,936 $ 46,450
========== ======== ========= ======== ========= =========
Deficiency for year................. $ 19,851 $ 8,660 $ 9,482 $ 6,538 $ 723 $ 469
========= ======== ========= ======== ======== =========
</TABLE>
- -----------------------------------
(1) Represents liabilities assumed as a result of the merger of Chartwell and
Piedmont.
At December 31, 1997, Chartwell Reinsurance carried loss and LAE
reserves of $355.4 million ($305.3 million after reduction for reinsurance
recoverable), of which $8.3 million gross ($4.9 million after reduction for
reinsurance recoverable), were loss reserves and allocated LAE attributable to
asbestos claims and environmental pollution claims. For the three years ended
December 31, 1997, the effect of asbestos and environmental pollution claims was
not material to Chartwell Reinsurance's results of operations.
At December 31, 1997, INSCORP carried loss and LAE reserves of $425.5
million ($273.0 million after reduction for reinsurance recoverable), of which
$62.7 million ($43.2 million after reduction for reinsurance recoverable) were
case reserves and allocated LAE attributable to asbestos claims and
environmental pollution claims.
The 1997 net deficiency of $8.7 million for asbestos and environmental
reserves results from development on business underwritten by INSCORP prior to
the Merger and, therefore, is subject to the protection provided by the CI
Notes, as described below. However, due to the favorable development on
non-asbestos and non-environmental exposed business underwritten by INSCORP
prior to the Merger, there was no net adverse development on the reserves
covered by the CI Notes for the year ended December 31, 1997.
Reserve Indemnification Agreement. In connection with the 1992
Acquisition, Chartwell Re entered into the Reserve Indemnification Agreement
with NWNL and its parent company, ReliaStar Financial Corporation ("RLR"),
pursuant to which NWNL and RLR agreed jointly and severally to provide to
Chartwell Re limited indemnification and reimbursement for adverse development
of the net loss and LAE reserves and related accounts (the "Covered Reserves")
of Chartwell Reinsurance for accident years ending on or before December 31,
1991 (the "Covered Years"). Pursuant to the Reserve Indemnification Agreement as
originally drafted, if Chartwell Reinsurance's Covered Reserves as of December
31, 1996 for the Covered Years were greater than its Covered Reserves as of
December 31, 1991, RLR and NWNL would jointly and severally indemnify and
reimburse Chartwell Re at that time in an amount equal to (i) 85% of the first
$20 million of such difference in excess of $100,000 plus (ii) 60% of the next
$10 million of such difference, up to a maximum amount of $23 million,
representing 18% of loss reserves as of December 31, 1991. If Chartwell
Reinsurance's Covered Reserves as of December 31, 1996 for the Covered Years
were less than its Covered Reserves as of December 31, 1991, Chartwell Re agreed
to reimburse NWNL at that time in an amount equal to fifty percent (50%) of the
first $10 million of such difference in excess of $100,000, up to a maximum
amount of $5 million. The Reserve Indemnification Agreement, which by its terms
was scheduled to be settled as of the end of 1996, was settled early by mutual
agreement with RLR. On June 28, 1996, Chartwell Re received $7.9 million as a
final settlement of the Reserve Indemnification Agreement. The settlement did
not materially affect operating results for the year.
13
<PAGE>
Contingent Interest Notes
The CI Notes are designed to provide Chartwell Re with protection
against adverse development of INSCORP's reserves for losses and loss adjustment
expenses. In the event that there is no adverse development, Chartwell Re will
be required to pay the holders of the CI Notes approximately $55 million in
contingent interest. This contingent interest payment is in addition to the $1
million principal amount of the CI Notes and interest on such principal amount
at 8% per annum (collectively, the "Fixed Amount") which Chartwell Re in any
event must pay at maturity or earlier redemption of the CI Notes.
In general, assuming the CI Notes are settled at maturity, the
contingent interest will be equal to $55 million (a) less an amount equal to (i)
the amount of any adverse development of the loss and LAE reserves and related
accounts (including certain reinsurance recoverable, commissions and unearned
premiums) of INSCORP recorded as of March 31, 1995, minus (ii) $25 million, (b)
plus the amount of certain tax benefits received or recorded by Chartwell Re as
a result of the amount determined pursuant to clause (a) above. The amount so
calculated may not be greater than $55 million nor less than a minimum amount
equal to the lesser of (a) $10 million less the Fixed Amount and (b) the tax
benefits referred to above. In the event that the CI Notes are settled prior to
maturity, the foregoing formula will in general apply, except that the $55
million maximum amount of the CI Notes will be reduced to an amount equal to $55
million discounted back from June 30, 2006 at a discount rate of 8% per annum,
compounded annually, and the tax benefits will be calculated in a prescribed
manner.
Investments
Chartwell's investment policies are established and approved by its
Board of Directors. Chartwell's investment policy is to maintain a portfolio
with an average rating of A or better from Moody's and to retain such securities
for sale in response to changes in interest rates and liquidity needs. However,
it is not Chartwell's policy to sell securities merely to generate profits on
short-term differences in price. The performance of Chartwell's advisors and the
fees associated therewith are periodically reviewed by both management and the
Board of Directors of Chartwell. Investments by Chartwell Reinsurance, INSCORP
and Dakota must comply with the insurance laws of the States of Minnesota, New
York and North Dakota, their respective domiciliary states.
Chartwell's investment portfolio consists primarily of investment-grade
fixed maturity debt securities. As of December 31, 1997, approximately 92.5% of
the bond portfolio was rated A or better by Moody's.
The following table summarizes the investments of Chartwell (at
carrying value):
Composition of Investment Portfolio
(Dollars in thousands)
<TABLE>
<CAPTION>
Chartwell Re Corporation
December 31, (Predecessor)
-------------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- ---------------------
Amount % of Total Amount % of Total Amount % of Total
---------- ---------- ---------- ---------- ---------- ----------
Fixed Income Securities
<S> <C> <C> <C> <C> <C> <C>
Corporate....................................... $ 225,587 30.8% $ 200,899 29.8% $ 199,068 36.2%
U.S. Government and Government Agency (1)....... 240,226 32.8 249,416 37.0 251,373 45.7
Obligations of States and Political Subdivisions 161,544 22.1 134,769 20.0 50,715 9.2
Foreign Government and Government Agency........ 28,867 3.9 23,807 3.5 14,642 2.7
Redeemable Preferred Stocks..................... 38,379 5.2 33,773 5.0
Other(2).......................................... 38,043 5.2 30,896 4.7 33,837 6.2
--------- ------ --------- ----- -------- -----
Total Investments................................. $ 732,646 100.0% $ 673,560 100.0% $ 549,635 100.0%
========= ====== ========= ===== ========= =====
Cash & Cash Equivalents(3)........................ $ 29,534 $ 50,343 $ 152,507
========= ========= =========
</TABLE>
______________________________
(1) At December 31, 1997, 1996 and 1995, $107.1, $170.2, and $151.8 million of
these securities were backed by the full faith and credit of the U.S.
Government and $133.1, $79.2, $99.6 million were obligations of issuing
agencies.
(2) Other investments include equity securities and partnership interests. In
1996, Chartwell made a commitment to invest $15 million in a private equity
fund, High Ridge Capital Limited Partnership, which makes investments in
the insurance industry. Chartwell has contributed a total of $3.8 million
to this fund as of December 31, 1997.
(3) In the period between August 7, 1995 and December 13, 1995, the management
of Piedmont began selling investments that would not be compatible with
Chartwell's investment policy. The proceeds from these sales along with
other operating cash flows were invested in cash equivalent securities to
allow Chartwell a maximum amount of flexibility to reinvest these funds in
a manner consistent with its investment policy.
14
<PAGE>
The following table reflects investment results for Chartwell for the
periods indicated:
Investment Results(1)
(Dollars in thousands)
Chartwell Re
Corporation
(Predecessor)
Year Ended December 31,
-------------------------------------
1997 1996 1995
------------ ----------- ------------
Average Invested Assets................ $ 732,174 $ 716,004 $ 299,307
Net Investment Income (2).............. $ 43,457 $ 43,598 $ 19,907
Net Effective Yield (3)................ 5.9% 6.2% 6.7%
Net Realized Capital Gains (Losses).... $ (3) $ 1,157 $ 3,199
Effective Yield Including Realized.....
Capital Gains (Losses)(4)........ 5.9% 6.3% 7.7%
- ------------------------------------------
(1) Because the Merger was completed in December 1995, the foregoing table of
Investment Results does not include invested assets or investment income of
INSCORP for 1995.
(2) After investment expenses, excluding net realized investment gains
(losses).
(3) Net investment income for the year-end period divided by average invested
assets for the same period.
(4) Net investment income for the year-end period plus net realized capital
gains (losses) for the period divided by average invested assets for the
same period.
The following table indicates the composition of Chartwell's bond
portfolio (at carrying value), excluding cash and cash equivalents, by rating:
Composition of Bond Portfolio
By Rating (1)
(Dollars in thousands)
December 31, 1997
-------------------------------
Amount Percent
---------------- ------------
U.S. Government and Government
Agency Fixed Income Securities...... $ 240,226 34.6%
Aaa/Aa................................... 244,101 35.1
A/Baa.................................... 207,361 29.9
Ba....................................... 2,915 0.4
--------- -----
Total............................. $ 694,603 100.0%
========= =====
___________________
(1) Rating as assigned by Moody's. Such ratings are generally assigned upon the
issuance of the securities and subject to revision on the basis of ongoing
evaluations. Ratings in the table are as of the date indicated. Those
government guaranteed securities that are specifically rated are included
in the appropriate rating category.
Moody's rating system utilizes nine symbols to indicate the relative
investment quality of a rated bond. Aaa rated bonds are judged to be of the best
quality and are considered to carry the smallest degree of investment risk. Aa
rated bonds are also judged to be of high quality by all standards. Together
with Aaa bonds, these bonds comprise what are generally known as high grade
bonds. Bonds rated A possess many favorable investment attributes and are
considered to be upper medium grade obligations. Baa rated bonds are considered
as medium grade obligations; they are neither highly protected nor poorly
secured. Bonds rated Ba or lower (those rated B, Caa, Ca and C) are considered
to be too speculative to be of investment quality.
National Association of Insurance Commissioners ("NAIC") investment
ratings are provided annually at December 31 of each year. At December 31, 1997,
89.8% of Chartwell's fixed maturity investments were rated "Class 1," and 9.8%
of Chartwell's fixed maturity investments were rated "Class 2," the two highest
ratings assigned by the NAIC.
15
<PAGE>
The following table indicates the composition of Chartwell's bond
portfolio (at carrying value) by time to maturity (1)(dollars in thousands):
December 31, 1997
----------------------------
Amount Percent
------------- ------------
1 year or less.......................... $ 21,950 3.2%
Over 1 year through 5 years............. 189,817 27.3
Over 5 years through 10 years........... 186,657 26.9
Over 10 years through 20 years.......... 43,743 6.3
Over 20 years........................... 83,918 12.1
Mortgage backed securities.............. 168,518 24.2
------- ----
Total......................... $ 694,603 100.0%
========= =====
(1) Based on stated maturity dates with no prepayment assumptions.
Certain mortgage backed securities are subject to prepayment risk.
Mortgage backed securities represent 22.0% of Chartwell's total investments and
cash and 24.2% of Chartwell's bond portfolio at December 31, 1997. During
periods of significant interest rate volatility, the underlying mortgages may
prepay more quickly than anticipated. If the repayment of principal occurs
earlier than anticipated during periods of declining interest rates, investment
income may decline due to the reinvestment of these funds at the lower current
market rates. The risk is similar to corporate bonds being called prior to
maturity due to lower interest rates. Management does not believe that the
prepayment risk associated with Chartwell's portfolio of mortgage backed
securities is significant.
The following table sets forth certain information concerning
Chartwell's mortgage backed investments:
Distribution of Mortgage Backed Securities Portfolio
By Type (1)
(Dollars in thousands)
December 31, 1997
-------------------------------------
Estimated
Market Amortized
Value Cost Par Value
--------- ----------- ------------
Collateralized Mortgage Obligations... $ 31,667 $ 31,559 $ 32,211
Pass-throughs (primarily GNMA,
FNMA and FHLMC)................. 136,851 135,253 134,199
--------- --------- ---------
Total................................. $ 168,518 $ 166,812 $ 166,410
========= ========= =========
____________________________
(1) At December 31, 1997, agency backed securities represented 95.0% of
Chartwell's mortgage backed investments. Other mortgage backed securities
represented 5.0%. These other mortgage backed securities are rated either
Aaa or A as assigned by Moody's. Such ratings equate with the NAIC's
Securities Valuation Office ("SVO") rating Class 1 which is the highest
rating category used by the SVO.
Competition
The reinsurance and insurance business is highly competitive.
Competition with respect to the types of reinsurance and insurance in which
Chartwell is engaged is based on many factors including perceived overall
financial strength of the insurer, ratings of the insurer by A.M. Best Company
and Standard & Poor's, underwriting expertise, reputation and experience in the
lines written, premiums charged, other terms and conditions of the reinsurance
offered, services offered, and speed of claims payments.
Chartwell competes with numerous international and domestic reinsurance
and insurance companies. These competitors, many of which have substantially
greater financial and staff resources than Chartwell, include independent
reinsurance companies, as well as subsidiaries, affiliates or reinsurance
departments of established insurance companies and underwriting syndicates.
Chartwell competes directly with other broker market reinsurers for business
obtained through reinsurance brokers and, because reinsurance brokers must
compete with direct writers for business from ceding companies, Chartwell also
competes indirectly with direct writers.
16
<PAGE>
While the reinsurance industry has traditionally had relatively low
barriers to entry, the reinsurance industry, including the broker market, is
undergoing consolidation. Management believes that in the next few years fewer
reinsurance brokerage firms will place a greater proportion of the brokered
business. In addition, because of concerns regarding financial security and the
ease of administration, reinsurance brokers will also seek to reduce the number
of reinsurance companies with which they place business. Chartwell's management
believes that, as a consequence, a reinsurer's relative financial strength will,
in the future, be of greater importance as a competitive factor.
Chartwell may, in the future, face additional competition from other
well-capitalized companies or from market participants that may, in the future,
devote more of their capital to the reinsurance business.
Insurance Regulation
General. Chartwell Reinsurance, INSCORP and Dakota are subject to the
insurance laws and regulations of Minnesota, New York and North Dakota,
respectively, their domiciliary states, and to administrative supervision by the
regulatory authorities of such states. In addition, each is subject to similar
laws, regulations and supervision in the various states in which it is licensed
or authorized to transact business, primarily with regard to solvency,
accounting practices, reports on financial condition and operations, investments
and reserves. Under state insurance law, property and casualty reinsurers and
surplus lines insurers are generally not subject to filing or other regulatory
requirements applicable to primary insurers with respect to rates, policy forms
or contract wording. Licensed insurers such as INSCORP are required to comply
with all applicable filing or regulatory requirements. In supervising and
regulating insurance companies, including reinsurers, state agencies, charged
primarily with protecting policyholders and the public rather than investors,
enjoy broad authority and discretion in applying applicable insurance laws and
regulations for the protection of policyholders and the public.
Insurance Holding Company Systems Regulations. Chartwell Reinsurance,
INSCORP and Dakota and their affiliates are subject to regulation pursuant to
the insurance holding company systems statutes of Minnesota, New York and North
Dakota. While the insurance holding company systems laws and regulations vary
from state to state, they generally require an insurance holding company and
insurers and reinsurers that are members of such insurance holding company's
system to register with the state regulatory authorities, to file with those
authorities certain reports disclosinginformation including their capital
structure, ownership, financial condition, certain intercompany transactions
including material transfers of assets and intercompany business agreements, and
to report material changes in such information. Such laws may also require that
intercompany transactions be fair and reasonable and that an insurer's
policyholder surplus following a dividend distribution to affiliated
stockholders be adequate to meet its financial needs.
In general, state insurance holding company systems statutes also
require prior notice to, or regulatory agency approval of, direct or indirect
changes in control of ownership of a domestic insurer or reinsurer. Under
Minnesota, New York and North Dakota law, no person, corporation or other entity
may acquire, directly or indirectly, a controlling interest in the capital stock
of a domestic insurer or reinsurer unless such person, corporation or other
entity has obtained prior approval from the insurer's domestic regulator
("Regulator") for such acquisition of control. Pursuant to the Minnesota, New
York and North Dakota insurance holding company systems statutes, any person,
corporation or other entity acquiring, controlling or holding with the power to
vote, directly or indirectly, ten percent or more of the voting securities of an
insurance company (or reinsurer), is presumed to have "control" of such company.
The party may rebut this presumption by filing with the Regulator a disclaimer
of affiliation. Other jurisdictions where Chartwell Reinsurance, INSCORP or
Dakota are licensed to transact business may have similar requirements for an
acquisition of control of insurers or reinsurers licensed or authorized in such
jurisdictions. Additional requirements in such jurisdictions may include
relicensing or subsequent approval for renewal of existing licenses upon an
acquisition of control.
17
<PAGE>
Restrictions on Dividends. The principal source of funds for servicing
debt of the Company is derived from receipt of dividends from its insurance
subsidiaries. While dividend restrictions vary from state to state, they
generally require insurers and reinsurers to pay dividends only from earned
surplus, which is defined as unassigned funds (surplus) as reported in the
statutory financial statement filed by the insurer or reinsurer with the
Regulator for the most recent period. Subject to such constraints, the insurer
or reinsurer may declare and pay non-extraordinary dividends, subject to certain
notice requirements to the Regulator, and extraordinary dividends to
stockholders subject to certain notice and approval requirements by the
Regulator. Lastly, with respect to payments of all dividends to affiliated
shareholders, following the payment of such a dividend, an insurer's or
reinsurer's policyholders' surplus must be reasonable in relation to its
outstanding liabilities and adequate for its financial needs. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
On November 25, 1997, Chartwell Reinsurance paid a $3.0 million
dividend to Chartwell. No dividends were paid in 1996 or 1995.
Investment Limitations. State insurance laws and regulations prescribe
the kind, quality and concentration of investments that are permissible for
insurance and reinsurance companies domiciled in such state. The purpose of
these laws is to protect the interests of policyholders, claimants, creditors
and the general public by promoting the safety, yield and growth of an insurance
company's investment principal, the liquidity necessary to meet the insurance
company's expected business needs, and investment diversification. For example,
under Minnesota, New York and North Dakota law, non-life insurance companies,
such as Chartwell Reinsurance, INSCORP and Dakota are authorized to invest in
specifically prescribed investments. Subject to certain conditions, such
investments include federal, state and municipal government obligations, bank
obligations, obligations and stocks of corporations and business trusts, real
estate and mortgages on real estate, collateral loans, options, foreign and
other investments. Such investment obligations, however, may not be in default
as to payments of principal and interest. Property and casualty insurance and
reinsurance companies are subject to risk-based capital guidelines which could
influence investment decisions. See "Risk-Based Capital." Management of
Chartwell believes that Chartwell Reinsurance, INSCORP and Dakota are in
compliance with all applicable state insurance investment laws for non-life
insurance companies.
Regulatory Examinations. The business and operations of Chartwell
Reinsurance, INSCORP and Dakota are subject to periodic examination by the
insurance departments of the jurisdictions in which each is licensed or
authorized to transact business. The Regulators have broad authority to conduct
examinations at any time. The report made with respect to the most recent
periodic examination of Chartwell Reinsurance is dated as of December 31, 1994
and contained no material adverse findings. The most recent periodic examination
of INSCORP was as of December 31, 1993, and the report related to such
examination has not yet been released. The most recent report of examination of
Dakota is dated as of November 21, 1996 and contained no material adverse
findings.
Risk-Based Capital. In order to enhance the regulation of insurer
solvency, the NAIC adopted risk-based capital ("RBC") requirements for property
and casualty insurance and reinsurance companies commencing with filings made in
1995 covering the 1994 year. These RBC requirements are designed to monitor
capital adequacy and to raise the level of protection that statutory surplus
provides for policyholders. The RBC formula measures four major areas of risk
facing property and casualty insurers: (i) underwriting risk, which is the risk
of errors in pricing and reserves; (ii) asset risk, which is the risk of asset
default for fixed income assets and loss in market value for equity assets;
(iii) credit risk, which is the risk of losses from unrecoverable reinsurance
and the inability of insurers to collect agents' balances and other receivables;
and (iv) off-balance sheet risk, which is primarily the risk created by
excessive growth. Insurers and reinsurers having less statutory surplus than
that required by the RBC formula will be subject to varying degrees of
regulatory action depending on the level of capital inadequacy.
The RBC formula provides a mechanism for the calculation of an
insurance company's Authorized Control Level RBC and its total adjusted capital.
The formula sets forth the points at which a commissioner of insurance is
authorized and expected to take regulatory action. The first level is known as
the Company Action Level RBC, which is set at twice the Authorized Control Level
RBC. The second level is the Regulatory Action Level RBC, set at 1.5 times the
Authorized Control Level RBC. The third is the Authorized Control Level RBC, and
the fourth is the Mandatory Control Level RBC, set at 70 percent of the
Authorized Control Level RBC.
18
<PAGE>
If an insurance company's adjusted capital is higher than or equal to
the Regulatory Action Level RBC but below the Company Action Level RBC, the
insurance company must submit to its commissioner of insurance an RBC plan which
shall contain, among other things, proposals of corrective action. If an
insurance company's adjusted capital is higher than or equal to the Authorized
Control Level RBC but lower than the Regulatory Action Level RBC, the
commissioner of insurance shall perform any examination or analysis as deemed
necessary of the insurer's business and operations and issue any appropriate
corrective orders to address the insurance company's financial problems. If an
insurer's adjusted capital is higher than or equal to the Mandatory Control
Level RBC but lower than the Authorized Control Level RBC, the commissioner may
place the insurer under regulatory control. If the insurance company's adjusted
capital falls below the Mandatory Control Level RBC, the commissioner will be
required to place the insurer under regulatory control. At December 31, 1997,
the adjusted capital of each of Chartwell Reinsurance and INSCORP was higher
than the Company Action Level RBC, and as a result, no regulatory action is
required. Should a future deficiency occur, Chartwell will be subject to an
increased level of regulatory attention and, depending on the capital
deficiency, possibly to actual control by the appropriate regulatory
authorities. There can be no assurance that any such deficiency will not occur
in the future.
NAIC-IRIS Ratios
The NAIC's Insurance Regulatory Information System ("IRIS") was
developed by a committee of state insurance regulators and is primarily intended
to assist state insurance departments in executing their statutory mandates to
oversee the financial condition of insurance companies operating in their
respective states. IRIS identifies 11 industry ratios and specifies "usual
values" for each ratio. Departure by an insurer from the usual values on four or
more of the ratios generally leads to inquiries from individual state insurance
commissioners as to certain aspects of such insurer's business. Departure from a
usual value does not necessarily indicate an adverse condition, but rather a
deviation from the norm.
For the year ended December 31, 1997, Chartwell Reinsurance did not
fall outside the range of usual IRIS values with respect to any ratio. For the
year ended December 31, 1997, INSCORP fell outside the range of usual IRIS
values with respect to the Change in Net Writings ratio, due to the non-renewal
of its reinsurance portfolio.
Employees
As of December 31, 1997, Chartwell had 519 employees, including the
employees of its subsidiary, Archer. None of these employees is represented by a
labor union, and Chartwell believes that its employee relations are excellent.
Item 2. Properties.
Chartwell leases approximately 53,000 square feet of space for its
principal executive offices in Stamford, Connecticut. Chartwell also leases
approximately 68,000 square feet of space in London, England for the operations
of Archer. INSCORP is located in Jericho, New York, occupying approximately
1,150 square feet of office space. Management believes Chartwell's current
office space is adequate for its needs.
Item 3. Legal Proceedings.
Chartwell, Chartwell Reinsurance, INSCORP and Archer are subject to the
litigation of disputes in the normal course of their business. Chartwell does
not believe that any pending litigation or arbitration to which it is a party,
or of which any of its properties or assets are subject, is likely to have a
materially adverse effect on its current financial position or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders.
Information required by Item 4 has been omitted because the Registrant
meets the conditions set forth in General Instruction I(1)(a) and (b) of Form
10-K and is therefore filing this Form 10-K with the reduced disclosure format.
PART II
Item 5. Market for the Registrant's Common Stock
and Related Stockholder Matters.
There is no established public trading market for the Compay's common
stock. All of the outstanding shares of the Company's common stock are owned by
Chartwell Re.
The Company pays dividends from time to time upon the direction of its
Board of Directors; however, the agreements governing the Senior Notes (as
hereinafter defined) and the Credit Facility (as hereinafter defined) restrict
the ability of the Company to pay dividends based upon the operational
performance and liquidity of the Company.
Item 6. Selected Financial Data.
Information required by Item 6 has been omitted because the Registrant
meets the conditions set forth in General Instruction I(1)(a) and (b) of Form
10-K and is therefore filing this Form 10-K with the reduced disclosure format.
19
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion of the financial condition and results of
operations of Chartwell should be read in conjunction with the consolidated
financial statements and notes thereto of Chartwell included elsewhere herein.
The following discussion does not include any information relating to Archer's
historical results of operations prior to November 19, 1996 or INSCORP's
historical results of operations prior to December 13, 1995. Archer's results of
operations for the period from November 19, 1996 to December 31, 1996 were
immaterial to Chartwell and, therefore, have not been included. INSCORP's
results of operations for the period from December 13, 1995 to December 31, 1995
were immaterial to Chartwell; Chartwell Re has accounted for the Merger as
though it had occurred on December 31, 1995. The financial information contained
in this section for the year ended December 31, 1995 represents the results of
Chartwell Re, the parent and predecessor company of Chartwell.
Recent Industry Performance
The property and casualty insurance and reinsurance industry has
historically been highly cyclical. Demand for reinsurance is influenced
significantly by prevailing market conditions, including the underwriting
results of primary insurers. The supply of reinsurance is primarily related to
levels of underwriting capacity in the reinsurance industry and the relative
cost and terms of reinsurance coverage. The industry's profitability and the
cyclical trends in the industry can be affected significantly by volatile and
unpredictable developments, including the occurrence of natural disasters, other
catastrophic events, competitive pressures on pricing (premium rates),
fluctuations in interest rates, other variations in the investment environment,
changes in the judicial system regarding tort law, general economic conditions
and trends, such as inflationary pressures, that may tend to affect the size of
profits and losses experienced by ceding primary insurers and other factors such
as changes in tax laws and regulations. Many sectors of the industry are
currently in a cyclical downturn and it cannot be predicted if or when market
conditions will improve or when other sectors may experience a deterioration in
pricing and terms.
Commencing in the late part of the 1980s, primary property and casualty
insurers began to retain more of their business. This reduction in the amount of
business ceded to reinsurers, combined with the growth in reinsurance capacity,
resulted in renewed price competition and less attractive pricing for
reinsurers. This caused a downturn for the reinsurance industry, resulting in
increased underwriting losses which have continued to the present.
The following table presents the statutory combined ratios of
Chartwell, the property and casualty reinsurance industry during the 1993 to
1997 years. The combined ratio is the sum of the loss ratio (incurred losses and
loss adjustment expenses divided by net premiums earned) and the underwriting
expense ratio (underwriting expenses divided by net premiums written). A
combined ratio of over 100% indicates unprofitable underwriting. Although an
insurance company's underwriting may be unprofitable, the company may be
profitable after including investment income.
Statutory Combined Ratios
Year Ended December 31,
----------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- ------- -------
Chartwell (1)
<S> <C> <C> <C> <C> <C>
Loss ratio...................................... 65.5% 71.9% 72.9% 75.4% 76.7%
Underwriting expense ratio...................... 36.2 35.2 32.5 30.3 37.2
----- ----- ----- ----- -----
Combined ratio.................................. 101.7% 107.1% 105.4% 105.7% 113.9%
===== ===== ===== ===== =====
Property and Casualty Reinsurance Industry (2)
Loss ratio...................................... 69.6% 72.7% 78.2% 76.8% 76.9%
Underwriting expense ratio...................... 32.7 30.8 30.1 29.9 29.9
----- ----- ----- ----- -----
Combined ratio............................. 102.3% 103.5% 108.3% 106.7% 106.8%
===== ===== ===== ===== =====
</TABLE>
___________________________
(1) Beginning in 1996, the combined ratio includes both Chartwell Reinsurance
and INSCORP.
(2 Source: RAA Underwriting Report for the year ended December 31, 1997.
20
<PAGE>
Consolidated Results of Operations
Year Ended December 31, 1997 Compared With Year Ended December 31, 1996
Revenues: Total revenues for the year ended December 31, 1997 increased
23.4% to $322.3 million, compared to $261.2 million for the comparable period in
1996. The accompanying table summarizes gross and net premiums written and total
revenues for the periods indicated:
Revenues
Year Ended
December 31,
---------------------------
(Dollars in thousands) 1997 1996
--------- ---------
Gross premiums written.................. $ 362,770 $ 263,838
========= =========
Net premiums written.................... $ 268,260 $ 192,251
========= =========
Premiums earned......................... $ 245,700 $ 209,503
Net investment income................... 43,457 43,598
Net realized capital gains (losses)..... (3) 1,157
Service and other revenue............... 28,322 3,367
Equity in net earnings of investees 4,794 3,559
--------- ---------
Total........... $ 322,270 $ 261,184
========= =========
Underwriting Operations
Gross Premiums Written; Net Premiums Written; Net Premiums Earned.
Gross premiums written for the year ended December 31, 1997 were $362.8 million,
an increase of 37.5% compared to the same period in 1996. The increase in gross
premiums written reflects new programs and products developed during the year
with ceding companies in the Specialty and Controlled Source Insurance Accounts
client segments and the addition of gross premiums written through Archer's two
Dedicated CCV's. Gross premiums written by the Global Accounts, Regional
Accounts and Marine & Aviation Accounts client segments either declined or
remained constant as a result of continued competitive pressures.
Net premiums written for the year ended December 31, 1997 increased
39.5% to $268.3 million, compared to $192.3 million for the same period in 1996.
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 year ended December 31, 1997 were $245.7 million, an increase of 17.3%
compared to the same period in 1996.
Loss and Loss Adjustment Expenses. The Company's principal expense,
loss and LAE related to the settlement of claims, was $160.8 million for the
year ended December 31, 1997, a 6.8% increase compared to $150.6 million for the
comparable period in 1996. The increase is principally attributable to the
increase in net premiums written as noted above. Net losses and LAE expressed as
a percentage of net earned premiums (the loss and LAE ratio) decreased to 65.5%
for the year ended December 31, 1997 from 71.9% recorded for the same period in
1996. The improvement of 6.4 percentage points in the loss and LAE ratio for the
year ended December 31, 1997 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.
In addition, the 1997 results were not materially affected by the run-off of
reinsurance programs written by The Insurance Corporation of New York prior to
December 1995, a factor which impacted the 1996 results.
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 $72.7 million for the year ended December 31, 1997, compared to $52.0
million for the same period in 1996. Policy acquisition costs expressed as a
percentage of net earned premiums (the acquisition expense ratio) increased to
29.6% from 24.8% in 1996. The increase is primarily due to the effect of the
aggregate excess of loss reinsurance treaties entered into in 1997 which reduced
net earned premium for the year without providing any reduction in commission
expenses. Also contributing to the increase is the modestly higher commission
structure, as noted above, for proportional business.
21
<PAGE>
Other Expenses. Other expenses related to underwriting operations,
which include underwriting and administrative expenses, were $16.5 million for
the year ended December 31, 1997 compared to $15.8 million for the same period
in 1996. Other expenses expressed as a percentage of net earned premiums
decreased to 6.7% for the year ended December 31, 1997 compared to 7.5% for the
same period in 1996.
Net Underwriting Results. The Company incurred an underwriting loss
(net premiums earned minus losses, LAE and underwriting expenses) of $4.3
million for the year ended December 31, 1997 as compared to an underwriting loss
of $8.9 million for the same period in 1996. The combined ratio computed in
accordance with GAAP for the year ended December 31, 1997 decreased to 101.9%
from 104.2% for 1996. Although the loss ratio component improved to 65.5 % for
the year ended December 31, 1997 from 71.9 % recorded for the same period in
1996, the expense ratio increased to 36.4% for the year ended December 31, 1997
from the 32.3 % recorded for the same period in 1996, for the reasons noted
above.
Service Operations
Revenue from service operations, exclusive of net investment income,
increased to $33.1 million for the year ended December 31, 1997 compared to $6.9
million for the same period in 1996. The improvement reflects increases in
advisory fee revenues, equity in the earnings of investee companies and the
inclusion, for the first time, of profit commissions and fees from Archer
operations. In March 1998, New London Capital plc ("NLC") notified Chartwell
Advisers Limited ("Chartwell Advisers") that it chose not to renew the Advisory
Agreement between NLC and Chartwell Advisers (the "Advisory Agreement") after
its contractual expiration on December 31, 1998. In 1997, the Advisory Agreement
produced base fees of $1.7 million and a profit commission of $0.7 million for
Chartwell Advisers. Following the expiration of the Advisory Agreement,
Chartwell Advisers will continue to earn profit commissions on the open years of
account (1996, 1997 and 1998) to the extent such years are profitable.
Corporate
Interest and Amortization. Interest and amortization expenses were
$11.9 million for the year ended December 31, 1997 compared to $7.8 million for
the same period in 1996. Interest and amortization on the Company's 10.25%
Senior Notes due 2004 (the "Senior Notes") was $5.2 million for the year ended
December 31, 1997 and $6.0 million for the comparable period in 1996. Also
included in interest and amortization expense for the year ended December 31,
1997 is $3.4 million related to a credit facility with First Union National
Bank, N. A. ("First Union") established to fund the Acquisition and replace an
existing $20 million credit facility.
Consolidated
Net Investment Income and Net Realized Capital Gains (Losses).
Consolidated net investment income, exclusive of realized and unrealized capital
gains and losses for 1997 was $43.5 million, virtually the same level as the
same period in 1996. The average annual tax equivalent yield on invested assets
before investment expenses for 1997 and 1996 was 6.7%.
The Company realized net capital losses of $0.3 million for 1997
compared net capital gains of $1.2 million in 1996. The 1996 net capital gains
were realized principally to reposition certain sectors of the portfolio and to
modify the portfolio to improve credit quality without sacrificing yield.
Income Before Income Taxes and Extraordinary Item. Net income before
income taxes and extraordinary items increased to $40.5 million for the year
ended December 31, 1997 compared to $31.7 million for the same period in 1996.
The increase resulted primarily from the increase in earned premiums, the
favorable results in both loss and loss adjustment expense and other expenses,
and the contributions from Archer to income from service operations.
Income Tax Expense. The provision for Federal income taxes for the year
ended December 31, 1997 increased to $12.2 million compared with $9.3 million
for the same period in 1996. The effective tax rate was 30.1% and 29.4% for the
years ended December 31, 1997 and 1996, respectively. The principal factor in
the decline below the statutory rate of 35.0% for both periods was the benefit
of an increase during late 1996 and early 1997 of investments in tax-advantaged
securities.
22
<PAGE>
Net Income Before Minority Interest and Extraordinary Item. Net income
before minority interest and extraordinary item increased to $28.3 million for
the year ended December 31, 1997 as compared to $22.4 million for the same
period in 1996.
Minority Interest. The Company recognized $525,000 of minority
interest during the year ended December 31, 1997, representing Chartwell Re's
ownership interest in the net income of Holdings Limited.
Extraordinary Item. Net of Income Tax. The Company recognized a net
after-tax extraordinary expense of $1.9 million for the year ended December 31,
1996 for the write-off of unamortized debt issuance costs and a redemption
premium associated with the redemption of 35% of the Senior Notes.
Net Income. The Company realized a net profit of $27.8 million for the
year ended December 31, 1997 compared with a net profit of $20.5 million for the
comparable 1996 period because of the factors discussed above.
Year Ended December 31, 1996 Compared With Year Ended December 31, 1995
Revenues: Total revenues for the year ended December 31, 1996 increased
80.8% to $261.2 million, compared to $144.5 million for the comparable period in
1995. The accompanying table summarizes gross and net premiums written and total
revenues for the periods indicated:
Revenues
Year Ended
December 31,
----------------------------
1996 1995
------------- ------------
(Dollars in thousands)
Gross premiums written...................... $ 263,838 $ 126,968
========= =========
Net premiums written........................ $ 192,251 $ 123,314
========= =========
Premiums earned............................. 209,503 120,258
Net investment income....................... 43,598 19,907
Net realized capital gains.................. 1,157 3,199
Service and other revenue................... 3,367 1,095
Equity in net earnings of investees......... 3,559 --
--------- --------
Total............................. $ 261,184 $ 144,459
========= =========
Underwriting Operations
Gross Premiums Written; Net Premiums Written; Net Premiums Earned.
Gross premiums written for the year ended December 31, 1996 were $263.8 million,
an increase of 108% 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 all client segments.
Net premiums written for the year ended December 31, 1996 increased 56%
to $192.3 million, compared to $123.3 million for the same period in 1995. The
increase in net premiums written was principally attributable to the reasons
described above for the increase in gross premiums written. Net premiums earned
for the year ended December 31, 1996 were $209.5 million, an increase of $89.2
million or 74.2% compared to the same period in 1995.
Loss and Loss Adjustment Expenses. The Company's principal expense,
loss and LAE related to the settlement of claims, was $150.6 million for the
year ended December 31, 1996 a 73.3% increase compared to $86.9 million for the
comparable period in 1995. The increase is principally attributable to the
increase in net premiums written as noted above. Net losses and LAE expressed as
a percentage of net earned premiums (the loss and LAE ratio) improved to 71.9%
for the year ended December 31, 1996, from 72.3% recorded for the same period in
1995. The improvement of 0.4 percentage points in the loss and LAE ratio for the
year ended December 31, 1996 was due to an increase in the
23
<PAGE>
amount of proportional business written by the Company which generally has a
lower loss and LAE ratio than excess of loss business but modestly higher
commissions.
Policy Acquisition Costs. Policy acquisition costs, consisting
primarily of commissions paid to ceding companies and brokerage fees paid to
intermediaries, less commissions received on business ceded to other reinsurers,
were $52.0 million for the year ended December 31, 1996, compared to $28.8
million for the same period in 1995. Policy acquisition costs expressed as a
percentage of net earned premiums (the acquisition expense ratio) increased to
24.8% from 23.9% in 1995. The increase is due both to the run-off of INSCORP's
reinsurance portfolio and to a modestly higher commission structure, as noted
above, for proportional business.
Other Expenses. Other expenses related to underwriting operations,
which include underwriting and administrative expenses, were $15.8 million for
the year ended December 31, 1996 compared to $9.7 million for the same period in
1995. Other expenses expressed as a percentage of net earned premiums decreased
to 7.5% for the year ended December 31, 1996 compared to 8.0% for the same
period in 1995.
Net Underwriting Results. The Company incurred an underwriting loss
(net premiums earned minus losses, LAE and underwriting expenses) of $8.9
million for the year ended December 31, 1996 as compared to an underwriting loss
of $5.2 million for the same period in 1995. The combined ratio for the years
ended December 31, 1996 and 1995 computed in accordance with GAAP was 104.2% for
both years. Although the loss ratio component improved to 71.9% for the year
ended December 31, 1996 from 72.3% recorded for the same period in 1995, the
expense ratio increased to 32.3% for the year ended December 31, 1996 from the
31.9% recorded for the same period in 1995, for the reasons noted above. On a
pro forma basis, as if the Merger occurred on January 1, 1995, the expense ratio
decreased to 32.3% for the year ended December 31, 1996 compared to 34.9% for
the same period in 1995, and the combined ratio decreased to 104.2% for the year
ended December 31, 1996 compared to 120.8% for the same period in 1995. The pro
forma loss and LAE ratio for the year ended December 31, 1995 includes a
strengthening of INSCORP's net loss reserves of $25.0 million for losses
incurred but not reported with respect to INSCORP's business written in prior
years. This reserve strengthening, which was undertaken by Piedmont prior to the
Merger, increased the Company's pro forma loss and LAE ratio by 10.1 percentage
points for the year.
Service Operations
Revenue from service operations increased to $6.9 million for the year
ended December 31, 1996 compared to $1.1 million for the same period in 1995.
The improvement reflects increases in advisory fee revenues, equity in the
earnings of investee companies acquired in the Merger and development of new
fee-based revenue sources during the year.
Corporate
Interest and Amortization. Interest and amortization expenses were $7.8
million for the years ended December 31, 1996 and 1995. Interest and
amortization on the Senior Notes was $6.0 million for the year ended December
31, 1996 and $8.0 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 year ended December 31,
1996 also includes $1.4 million of interest and amortization expense on a $20.0
million bank facility established on the date of Merger and $0.5 million
of interest and amortization related to the Archer acquisition.
Consolidated
Net Investment Income and Net Realized Capital Gains (Losses).
Consolidated net investment income, exclusive of realized and unrealized capital
gains and losses, for 1996 was $43.6 million, an increase of $23.7 million, or
119%, over 1995. The improvement reflects the increase in invested assets
primarily due to the continued positive cash flow from operations of $14.7
million offset by a decline in the value of marked-to-market investments of
$10.0 million. In addition, on June 28, 1996, Chartwell Re received $7.9 million
in settlement of the Reserve Indemnification Agreement which further
24
<PAGE>
increased the Company's invested asset base. The average annual tax equivalent
yield on invested assets before investment expenses decreased to 6.7% for 1996
from 6.8% for 1995.
The Company realized net capital gains of $1.2 million for 1996
compared to $3.2 million for the same period in 1995. Both the 1996 and 1995 net
capital gains were realized principally to reposition certain sectors of the
portfolio and to modify the portfolio to improve credit quality without
sacrificing yield.
Income Before Income Taxes and Extraordinary Item. Net income before
income taxes and extraordinary items increased to $31.7 million for the year
ended December 31, 1996 compared to $8.9 million for the same period in 1995.
The increase resulted primarily from the increase in earned premiums, the
favorable results in both loss and loss adjustment expense and in other
expenses, and from the increases in net investment income and service and other
revenue.
Income Tax Expense. The provision for Federal income taxes for the year
ended December 31, 1996 increased to $9.3 million compared with $2.7 million for
the same period in 1995. The effective tax rate was 29.4% and 30.2% for the
years ended December 31, 1996 and 1995, respectively. The principal factor in
the decline below the statutory rate of 35% for both periods was the benefit of
investments in tax-advantaged securities which increased in the 1996 period.
Net Income Before Extraordinary Item. Net income before extraordinary
item increased to $22.4 million for the year ended December 31, 1996 as compared
to $6.2 million for the same period in 1995. The largest components of this
increase were the increases in net investment income and income from service
operations as described above.
Extraordinary Item, Net of Income Tax. The Company recognized a net
after-tax extraordinary expense of $1.9 million for the year ended December 31,
1996 for the write-off of unamortized debt issuance costs and a redemption
premium associated with the redemption of 35% of the Senior Notes.
Net Income. The Company realized a net profit of $20.5 million for the
year ended December 31, 1996 compared with a net profit of $6.2 million for the
comparable 1995 period because of the factors discussed above.
Liquidity and Capital Resources
Chartwell is a wholly-owned subsidiary of Chartwell Re. As a holding
company, Chartwell's assets consist primarily of the stock of its direct and
indirect operating subsidiaries, Chartwell Reinsurance, INSCORP, Archer, and
Chartwell Advisers. Chartwell's cash flow, therefore, depends largely on
dividends and other statutorily permissible payments from its operating
subsidiaries. Chartwell's sources of funds consist primarily of net premiums,
reinsurance recoveries, investment income and proceeds from sales and
redemptions of investments. Funds are applied primarily to payments of claims,
operating expenses and income taxes and to the purchase of investments, largely
fixed income securities. Cash and short-term investments are maintained for the
payment of claims and expenses.
For the years ended December 31, 1997, 1996 and 1995, Chartwell's
consolidated cash flow provided by operations was $25.5 million, $14.7 million
and $23.0 million, respectively. The cash flow from operations in 1997 was
greater than that in 1996 due to improved underwriting cash flows comprising
premiums received less paid losses and LAE and underwriting expenses. The 1996
cash flow from operations was reduced as a result of the run-off of INSCORP's
reinsurance reserves. The primary contributors to the positive cash flow for the
1995 period were underwriting cash flow and investment income received. The 1995
cash flow provided by operations was reduced by $10.9 million due to the payment
of three unusually large claims from business written prior to 1985 and the
commutation of a group of assumed contracts.
Sales of available for sale investments were $200.8 million, $500.7
million and $330.6 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Trading activity increased during 1996 primarily to modify the
25
<PAGE>
portfolio by sector and to capitalize on some opportunities to improve on credit
quality without sacrificing yield. There was no unusual trading activity during
1997.
At December 31, 1997, the carrying value of total investments,
including cash and cash equivalents, increased 5.3%, to $762.2 million compared
to $723.9 million at December 31, 1996. The primary reasons for the increase
were positive cash flow from operations of $25.5 million and the increase in the
market value of the investment portfolio of $15.8 million.
Financing activities have also been a source of liquidity for
Chartwell and its subsidiaries. On March 17, 1994, Chartwell Re completed the
offering of $75.0 million principal amount of the Senior Notes. The net proceeds
to Chartwell Re after transaction expenses were $71.9 million. As of December
31, 1997, $48.8 million in principal amount of the Senior Notes were
outstanding. The Senior Notes bear interest at a rate of 10 1/4% per annum and
are due on March 1, 2004. In conjunction with the Merger, the Company assumed
all of Chartwell Re's obligations with respect to the Senior Notes. (See Note 2
of the Notes to Consolidated Financial Statements contained herein).
In the first half of 1996, Chartwell Re completed a public offering of
2,725,000 shares of common stock at $23.00 per share. The net proceeds to
Chartwell Re were $58.5 million after deduction of underwriting discount and
expenses. Of the net proceeds, $48.5 million was contributed to Chartwell, of
which $20.0 million was contributed to the statutory surplus of Chartwell
Reinsurance and $28.5 million was used to retire 35% of the Senior Notes plus
accrued interest. The remaining funds were retained for general corporate
purposes. This redemption reduced Chartwell's annual expense for interest and
amortization of debt issuance costs under the Senior Notes by $2.8 million per
year.
In connection with the Acquisition, stockholders of Archer Holdings
could elect to receive Loan Notes in the amount of one Pound Sterling for each
Pound Sterling of cash consideration. The aggregate amount of Loan Notes issued
in connection with the consummation of the Acquisition was $9.4 million
(denominated in Pounds Sterling). The Loan Notes, which are guaranteed by First
Union as described below, pay interest semi-annually at the rate per annum
calculated as one percent below the Sterling London Interbank Offered Rate
("LIBOR") and will mature in June, 2002 unless redeemed at an earlier date.
Also in connection with the Acquisition, Chartwell entered into a new
credit facility with First Union, as agent (the "Credit Facility"). The Credit
Facility provides for (i) a Tranche A-1 $20.0 million loan, (ii) a Tranche A-2
$10.0 million loan, (iii) a Tranche B $22.0 million loan (denominated in Pounds
Sterling) (Tranche A-1, Tranche A-2 and Tranche B collectively, the "First Union
Loans"), and (iv) a $25.0 million revolving credit facility (subsequently
increased to $60.0 million) (the "First Union Revolver").
The First Union Loans have six-year terms and the First Union Revolver
has a five-year term but may be extended for one year with the consent of First
Union. Tranche A-1 and A-2 require repayment of principal starting in year 3,
$6.0 million; year 4, $7.5 million; year 5, $7.5 million and year 6, $9.0
million. Tranche B requires repayment of principal starting in year 3, $4.2
million; year 4, $5.3 million; year 5, $5.3 million and year 6, $6.4 million.
Borrowings under the First Union Revolver are available at any time prior to
maturity, subject to minimum funding amounts. Both the First Union Loans and the
First Union Revolver will bear interest at a rate selected by Chartwell equal to
either (1) the Base Rate (as defined below) or (2) U.S. dollar or Sterling LIBOR
plus a margin (the "Margin"), as applicable. The amount of the Margin will
depend on the higher of Chartwell's senior debt rating by Standard & Poor's or
Moody's and can range from 0.50% to 0.875%. Based on Chartwell's current senior
debt ratings, the Margin over LIBOR is currently at 0.75%. The U.S. dollar Base
Rate is the higher of (1) First Union's prime commercial lending rate or (2) the
federal funds rate plus 0.5%. The Sterling Base Rate is the rate per annum
announced by Midland Bank plc plus the Margin. Chartwell will also pay (1) an
unused commitment fee equal to 0.25% on the aggregate unused portion of the
revolver, (2) utilization fees for the issuance of letters of credit and
guarantees of Loan Notes, issued in connection with the Acquisition, at a rate
per annum of 0.375% (if secured) or the Margin plus a 0.075% facing fee,
currently totaling 0.825% (if unsecured) on the outstanding amount of potential
credit exposure, and (3) certain other fees customary in connection with
syndicated loans of this nature. All payments of interest and fees with respect
to each of the First Union Loans shall be made in the same currency in which the
principal of such loan is required.
During 1997, Chartwell maintained the full balance on the Tranche A-1
and A-2 loans. The Tranche B loan increased by $2.0 million ((pound)1.2 million)
to fund the redemption of certain Loan Notes for the same amount. The First
Union Revolver was paid off during 1997.
At December 31, 1997, $20.0 million, $10.0 million and $14.0 million
were outstanding under the Tranche A-1, Tranche A-2 and Tranche B loans,
respectively. In addition, at December 31, 1997, $7.2 million was used under the
Tranche B loan to guarantee the Loan Notes and a total of $53.0 million of
letters of credit were extended under the First Union Revolver. All amounts
denominated in Pounds Sterling were converted to U.S. dollars at the rate of
$1.6496 per (pound)1, the rate in effect at December 31, 1997.
26
<PAGE>
Upon consummation of the Merger, Chartwell Re became the successor to
Piedmont under the CI Notes. The CI Notes do not require interest payments until
maturity or earlier redemption or repurchase. Under certain circumstances the CI
Notes may be settled by delivery of shares of Chartwell Re's common stock. The
CI Notes mature on June 30, 2006.
Chartwell and its subsidiaries may incur additional indebtedness in
the future, subject to the limitations contained in the Senior Notes indenture
and the agreements governing the Credit Facility.
Chartwell is largely dependent upon receipt of dividends and other
statutorily permissible payments from its subsidiaries to meet its obligations,
including the obligation to pay interest and principal on the Senior Notes and
under the Credit Facility. Further, dividend payments by Chartwell Reinsurance
and INSCORP are subject to limits under the laws of the States of Minnesota and
New York, respectively. Under the applicable provisions of the insurance holding
company laws of the State of Minnesota, Chartwell Reinsurance may, upon five
days notice to the Commissioner of Insurance of the State of Minnesota ("the
Commissioner") following the declaration of dividends to stockholders, and upon
at least ten days notice to the Commissioner prior to dividend payments, pay
dividends without the approval of the Commissioner, unless such dividends,
together with other dividends paid within the preceding twelve months, exceed
the greater of (i) 10% of Chartwell Reinsurance's policyholders' surplus as of
the end of the prior calendar year or (ii) Chartwell Reinsurance's statutory net
income, excluding realized capital gains, for the prior calendar year. Any
dividend in excess of the amount determined pursuant to the foregoing formula
would be characterized as an "extraordinary dividend" requiring the prior
approval of the Commissioner. In any case, the maximum amount of dividends
Chartwell Reinsurance may pay is limited to its earned surplus, also known as
unassigned funds. As of December 31, 1997, Chartwell Reinsurance reported
unassigned funds, as defined, in the amount of $68.8 million. Up to $26.3
million is available under the foregoing formula for the payment of dividends by
Chartwell Reinsurance without regulatory approval in 1998. On November 25, 1997,
Chartwell Reinsurance paid a $3.0 million dividend to Chartwell. Chartwell
Reinsurance paid no dividends in 1996 or 1995.
Under New York law, which is applicable to INSCORP, the maximum
ordinary dividend payable in any twelve month period without the approval of the
Superintendent may not exceed the lesser of (a) 10% of policyholders surplus as
shown on the company's last annual statement or any more recent quarterly
statement or (b) the company's adjusted net investment income. Adjusted net
investment income is defined as net investment income for the twelve months
preceding the declaration of the dividend plus the excess, if any, of net
investment income over dividends declared or distributed during the period
commencing thirty-six months prior to the declaration or distribution of the
current dividend and ending twelve months prior thereto. In any case, New York
law permits the payment of an ordinary dividend by an insurer or reinsurer only
out of earned surplus. Moreover, notwithstanding the receipt of any dividend
from INSCORP, Chartwell Reinsurance may make dividend payments to Chartwell
only to the extent permitted under the Minnesota provisions described above.
In addition to the foregoing limitation, the New York Insurance
Department, as is its practice in any change of control situation, required
Chartwell to commit to preclude the acquired New York-domiciled insurer,
INSCORP, from paying any dividends for two years after the Merger without prior
regulatory approval. The foregoing restriction expired on December 13, 1997.
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
Commissioner and Superintendent have discretion to limit the payment of
dividends by insurance companies domiciled in Minnesota and New York,
respectively.
Management believes that current levels of cash flow from operations
and assets held at the holding company level provide the Company with sufficient
liquidity to meet its operating needs in the short term (over the next 12
months). Management expects Chartwell to be able to continue to meet its
operating needs after the next 12 months from internally generated funds. Since
the ability of Chartwell to meet its obligations in the long term (beyond such
12-month period) is dependent upon such factors as market changes, insurance
regulatory changes and economic conditions, no assurance can be given that the
available net cash flow will be sufficient to meet its operating needs. The
Company expects that, in order to repay the principal amount of the Senior Notes
on maturity or otherwise, it will be required to seek additional financing or
engage in asset sales or similar transactions. There can be no assurance that
sufficient funds for any of the foregoing purposes would be available to the
Company at such time.
27
<PAGE>
Year 2000 Compliance
The Company believes that it has identified certain significant
computer hardware and software applications that may require modification to
ensure their continued proper operation, notwithstanding the change in century
on January 1, 2000 ("Year 2000 Compliance"). The Company is using both internal
and external resources to test such 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
expected to be completed by June 30, 1999.
In addition, the Company has contacted certain 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 Compliance 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 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. These estimates
of cost and the anticipated completion date for Year 2000 Compliance 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.
Accounting Standards
Disclosures About Segments of an Enterprise and Related Information
Footnotes - SFAS No. 131
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information Footnotes," which became effective for the Company beginning January
1, 1998. SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Management believes that the presentation
of financial information under the new Statement will not be materially
different than the current presentation.
Reporting Comprehensive Income - SFAS No. 130
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which became effective for the Company beginning 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.
Earnings Per Share - SFAS No. 128
In February, 1997, the FASB issued SFAS No. 128, "Earnings Per Share,"
which became effective for interim and annual periods ending after December 15,
1997. SFAS No. 128 supersedes Accounting Principles Board Opinion ("APB") No. 15
and replaces the presentation of primary earnings per share ("EPS") with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and provides guidance on other computational issues. At
December 31, 1997, all prior period EPS data presented have been restated to
conform with the provisions of SFAS No. 128. (See Note 1).
28
<PAGE>
Long-Lived Assets - SFAS No. 121
In March 1995, the FASB issued SFAS No. 121, "Accounting For the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
which is effective for the financial statements of Chartwell for the year ended
December 31, 1996. SFAS No. 121 requires impairment of property, plant and
equipment, identifiable intangibles and goodwill to be considered whenever
evidence suggests a lack of recoverability. The implementation of SFAS No. 121
did not have a material effect on the financial condition or results of
operations of Chartwell.
Regulatory Accounting Practices
Management does not believe that current accounting changes being
contemplated by regulatory authorities, if implemented, would have a significant
effect on the operations or liquidity of Chartwell.
Effects of Inflation
The effects of inflation on Chartwell are considered in pricing and
estimating reserves for unpaid losses and loss adjustment expenses. The actual
effects of inflation on Chartwell's results cannot be accurately determined
until ultimate losses are settled. However, based on the actual results reported
to date, management believes that premium rates and loss reserves, including
reserves for losses that have been incurred but not reported, adequately
incorporate the effects of inflation.
See Item 1, "Business--Reserves."
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
See the Consolidated Financial Statements and Notes thereto and the
Schedules on pages F-1 through F-4 and S-1 through S-7 included in Part IV,
Item 14.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures.
None.
PART III
Items 10 through 13.
Information required by Items 10 through 13 has been omitted because
the Registrant meets the conditions set forth in General Instruction I(1)(a) and
(b) of Form 10-K and is therefore filing this Form 10-K with the reduced
disclosure format.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Financial Statements and Schedules--The financial statements
and schedules listed in the accompanying Index to Financial Statements and
Schedules on page F-1 are filed as part of this Annual Report on Form 10-K.
(b) Exhibits--The exhibits listed in the accompanying Index to
Exhibits are filed as part of this Annual Report on Form 10-K
(c) Reports on Form 8-K-- None
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Stamford, State of
Connecticut, on March 30, 1998.
CHARTWELL RE HOLDINGS CORPORATION
By /s/ Charles E. Meyers
-------------------------
Charles E. Meyers
Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Richard E. Cole Chief Executive Officer and March 30, 1998
- ----------------------- Chairman of the Board of Directors
Richard E. Cole (Principal Executive Officer)
/s/ Charles E. Meyers Senior Vice President and March 30, 1998
- ------------------------ Chief Financial Officer
Charles E. Meyers (Principal Financial Officer)
/s/ Richard B. Primerano Vice President and Controller March 30, 1998
- ------------------------- (Principal Accounting Officer)
Richard B. Primerano
/s/ Steven J. Bensinger
- -----------------------
Steven J. Bensinger Director March 30, 1998
/s/ Jacques Q. Bonneau
- ----------------------
Jacques Q. Bonneau Director March 20, 1998
30
<PAGE>
CHARTWELL RE HOLDINGS CORPORATION
CHARTWELL RE CORPORATION (PREDECESSOR)
Index to Financial Statements
Independent Auditors' Report.......................................... F-2
Consolidated Balance Sheets at
December 31, 1997 and 1996....................................... F-3
Consolidated Statements of Operations
for the Years Ended December 31, 1997, 1996 and 1995............ F-4
Consolidated Statements of Stockholder's Equity for the
Years Ended December 31, 1997, 1996 and 1995..................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995................................. F-6
Notes to Consolidated Financial Statements for the Years
Ended December 31, 1997, 1996 and 1995.......................... F-7
Index to Schedules
Schedule I--Summary of Investments--Other than
Investments in Related Parties................................... S-1
Schedule II--Condensed Financial Information of
Registrant-Balance Sheets........................................ S-2
Schedule II--Condensed Financial Information of
Registrant-Statements of Operations.............................. S-3
Schedule II--Condensed Financial Information of
Registrant-Statements of Cash Flows.............................. S-4
Schedule IV--Reinsurance.............................................. S-5
Schedule V--Valuation and Qualifying Accounts......................... S-6
Schedule VI--Supplemental Information Concerning
Property/Casualty Insurance Operations........................... S-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholder
Chartwell Re Holdings Corporation
Stamford, Connecticut
We have audited the accompanying consolidated balance sheets of
Chartwell Re Holdings Corporation and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of operations, stockholder's
equity, and cash flows for the years ended December 31, 1997 and 1996, and the
consolidated statements of operations, stockholders' equity and cash flows of
Chartwell Re Corporation (Predecessor) and subsidiaries for the year ended
December 31, 1995. Our audits also included the financial statement schedules
listed in the Index on page F-1. These financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Chartwell Re
Holdings Corporation and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for the years ended December
31, 1997 and 1996, and the results of operations and cash flows of Chartwell Re
Corporation (Predecessor) and subsidiaries for the year ended December 31,
1995, in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 3, 1998
F-2
<PAGE>
CHARTWELL RE HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
ASSETS: 1997 1996
Investments:
Fixed maturities:
Held to maturity (market value 1997, $37,421;
<S> <C> <C>
1996, $36,620)......................................... $ 36,630 $ 36,043
Available for sale (amortized cost 1997, $645,108;
1996, $609,368)........................................ 657,973 606,621
Other investments.......................................... 38,043 30,896
Cash and cash equivalents.................................... 29,534 50,343
---------- ----------
Total investments and cash......................... 762,180 723,903
Accrued investment income.................................... 10,667 10,529
Premiums in process of collection............................ 126,537 86,351
Reinsurance recoverable: on paid losses...................... 34,502 29,767
on unpaid losses 202,593 172,377
Prepaid reinsurance.......................................... 29,929 21,733
Goodwill..................................................... 54,259 52,609
Deferred policy acquisition costs............................ 26,100 17,903
Deferred income taxes........................................ 29,847 42,160
Deposits..................................................... 19,040 18,135
Other assets................................................. 69,406 69,757
----------- -----------
$ 1,365,060 $ 1,245,224
=========== ===========
LIABILITIES:
Loss and loss adjustment expenses............................ $ 788,240 $ 747,858
Unearned premiums............................................ 111,149 81,599
Other reinsurance balances................................... 33,723 15,085
Accrued expenses and other liabilities....................... 49,345 51,763
Long term debt............................................... 104,126 107,297
--------- ---------
Total liabilities................................. 1,086,583 1,003,602
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 13)
MINORITY INTEREST............................................ 9,425 9,469
---------- ----------
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 (depreciation) of investments..... 8,741 (1,379)
Foreign currency translation adjustment....................... 296 1,291
Retained earnings............................................. 42,149 14,375
---------- -----------
Total stockholder's equity.......................... 269,052 232,153
----------- -----------
$ 1,365,060 $ 1,245,224
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
CHARTWELL RE HOLDINGS CORPORATION
CHARTWELL RE CORPORATION (PREDECESSOR)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
Chartwell Re
Corporation
(Predecessor)
1997 1996 1995
UNDERWRITING OPERATIONS:
<S> <C> <C> <C>
Premiums earned .............................................. $ 245,700 $ 209,503 $ 120,258
Net investment income ........................................ 42,228 42,995 18,917
Net realized capital gains (losses) .......................... (3) 1,106 3,109
----------- ----------- ---------
Total revenues ........................................... 287,925 253,604 142,284
----------- ----------- ---------
Loss and loss adjustment expenses ............................ 160,848 150,621 86,949
Policy acquisition costs ..................................... 72,655 52,030 28,790
Other expenses ............................................... 16,473 15,774 9,694
----------- ----------- ---------
Total expenses .......................................... 249,976 218,425 125,433
----------- ----------- ---------
Income before taxes - underwriting operations ................ 37,949 35,179 16,851
----------- ----------- ---------
SERVICE OPERATIONS:
Service and other revenue .................................... 28,322 3,367 1,095
Equity in net earnings of investees .......................... 4,794 3,559
Net investment income ........................................ 1,104 9 44
----------- ----------- ---------
Total revenues .......................................... 34,220 6,935 1,139
----------- ----------- ---------
Other expenses ............................................... 18,084 2,233 1,056
Amortization of goodwill ..................................... 2,297
----------- ----------- ---------
Total expenses .......................................... 20,381 2,233 1,056
----------- ----------- ---------
Income before taxes - service operations ..................... 13,839 4,702 83
----------- ----------- ---------
CORPORATE:
Net investment income ........................................ 125 594 946
Net realized capital gains ................................... 51 90
General and administrative expenses .......................... 1,776 1,043 1,211
Interest expense ............................................. 9,057 7,367 7,466
Amortization expense ......................................... 579 410 354
----------- ----------- ---------
Loss before taxes - corporate ................................ (11,287) (8,175) (7,995)
----------- ----------- ---------
Consolidated income before taxes, minority interest
and extraordinary item ................................. 40,501 31,706 8,939
Income tax expense ........................................... 12,202 9,337 2,700
----------- ----------- ---------
Net income before minority interest and extraordinary item ... 28,299 22,369 6,239
Minority interest............................................. 525
Extraordinary item, net of tax ............................... 1,874
----------- ----------- ---------
Net income ................................................... $ 27,774 $ 20,495 $ 6,239
=========== =========== =========
Per Share Data:
Basic earnings per share:
Net income ......................... ......................... $ 1.66
=========
Weighted average number of common shares outstanding ......... 3,755,312
=========
Diluted earnings per share:
Net income ................................................... $ 1.65
Weighted average number of common and common equivalent shares =========
outstanding ................................................ 3,791,789
=========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
CHARTWELL RE HOLDINGS CORPORATION
CHARTWELL RE CORPORATION (PREDECESSOR)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(dollars in thousands)
<TABLE>
<CAPTION>
Chartwell Re
Corporation
(Predecessor)
1997 1996 1995
COMMON STOCK
<S> <C> <C> <C>
Balance at beginning of year......................... $ 38
Issuance of common stock............................. 31
-------- -------- --------
Balance at end of year.............................. $ 69
======== ======== ========
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year........................ $217,866 $169,320 $ 77,254
Issuance of common stock............................ 48,546 76,051
-------- -------- ---------
Balance at end of year.............................. $217,866 $217,866 $153,305
======== ======== ========
UNREALIZED APPRECIATION (DEPRECIATION) OF
INVESTMENTS, NET OF TAX
Balance at beginning of year......................... $ (1,379) $ 5,219 $ (8,608)
Change in net unrealized appreciation (depreciation). 10,120 (6,598) 13,827
-------- -------- --------
Balance at end of year............................... $ 8,741 $ (1,379) $ 5,219
======== ======== ========
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Balance at beginning of year......................... $ 1,291 $ 9 $ 14
Change in foreign currency translation adjustment.... (995) 1,282 (5)
-------- -------- --------
Balance at end of year............................... $ 296 $ 1,291 $ 9
======== ======== ========
RETAINED EARNINGS (DEFICIT)
Balance at beginning of year......................... $ 14,375 $ (6,120) $(12,359)
Net income........................................... 27,774 20,495 6,239
-------- -------- ---------
Balance at end of year............................... $ 42,149 $ 14,375 $ (6,120)
======== ======== ========
TOTAL STOCKHOLDER'S EQUITY
Balance at beginning of year........................ $232,153 $168,428 $ 56,339
Issuance of common stock............................ 48,546 76,082
Change in net unrealized appreciation (depreciation). 10,120 (6,598) 13,827
Net income........................................... 27,774 20,495 6,239
Translation adjustment............................... (995) 1,282 (5)
-------- -------- --------
Balance at end of year............................... $269,052 $232,153 $152,482
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
CHARTWELL RE HOLDINGS CORPORATION
CHARTWELL RE CORPORATION (PREDECESSOR)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(dollars in thousands)
<TABLE>
<CAPTION>
Chartwell Re
Corporation
(Predecessor)
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net premiums collected ............................................... $ 174,864 $ 126,456 $ 87,324
Net losses and loss adjustment expenses .............................. (150,682) (136,753) (56,813)
Overhead expenses .................................................... (21,052) (17,166) (9,488)
Service and other revenue ............................................ (4,479) 3,190 1,095
Net income taxes paid ................................................ (7,173) (5,168) (543)
Interest received on investments ..................................... 44,763 43,158 19,107
Interest paid ........................................................ (9,071) (7,415) (7,219)
Other, net ........................................................... (1,643) 8,443 (10,485)
-------- -------- --------
Net cash provided by operating activities ....................... 25,527 14,745 22,978
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of held to maturity securities .............................. (596) (8,105) (1,724)
Purchases of available for sale securities............................. (275,794) (640,182) (374,961)
Maturities of held to maturity securities.............................. 1,850 430 1,054
Maturities of available for sale securities ........................... 31,415 20,729 5,216
Sales of available for sale securities ................................ 200,792 500,706 330,563
Cash from acquisitions of Piedmont Management Company Inc. ............
and Drayton Company Limited ..................................... 135,937
Investment in Archer Group Holdings plc, net of cash acquired ......... (39,156)
-------- -------- --------
Net cash provided by (used in) investing activities ........... (42,333) (165,578) 96,085
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution from parent......... ............................... 48,546
Issuance of long-term debt .............................................. 693 48,057
Redemption of long-term debt ............................................ (3,476) (48,280)
Other, net .............................................................. (250)
-------- -------- --------
Net cash provided by (used in) financing activities............. (2,783) 48,323 (250)
-------- -------- --------
Effect of exchange rate on cash.......................... (1,220) 346 (5)
-------- -------- --------
Net increase (decrease) in and cash equivalents .............................. (20,809) (102,164) 118,808
Cash and cash equivalents at beginning of year ............................... 50,343 152,507 37,005
-------- -------- --------
Cash and cash equivalents at end of year ..................................... $ 29,534 $ 50,343 $ 155,813
========= ========= =========
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income ............................................................... $ 27,774 $ 20,495 $ 6,239
Adjustments to reconcile net income to net cash provided by
operating activities:
Extraordinary item ................................................. 1,874
Equity in net earnings of investees................................. (4,794) (3,559)
Net realized capital (gains) losses ................................ 3 (1,158) (3,199)
Deferred policy acquisition costs .................................. (8,197) 906 (1,502)
Unpaid loss and loss adjustment expenses ........................... 40,382 6,391 28,205
Unearned premiums .................................................. 29,550 (8,974) 5,805
Other reinsurance balances ......................................... 10,438 6,475 (4,494)
Reinsurance recoverable ............................................ (34,951) (6,710) 1,395
Net change in receivables and payables ............................. (32,502) (2,143) (11,067)
Other, net ......................................................... (2,176) 1,148 1,596
-------- -------- --------
Net cash provided by operating activities................... $ 25,527 $ 14,745 $ 22,978
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
CHARTWELL RE HOLDINGS CORPORATION
CHARTWELL RE CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation-- Chartwell Re Holdings Corporation
("Chartwell" or the "Company") is a wholly owned subsidiary of Chartwell Re
Corporation ("Chartwell Re" or the "Predecessor") and, as such, acts as an
intermediate level insurance holding company for Chartwell Re, conducting its
business through its principal operating subsidiaries, Chartwell Reinsurance
Company ("Chartwell Reinsurance"), The Insurance Corporation of New York
("INSCORP") (formerly The Reinsurance Corporation of New York) and Archer
Managing Agents Limited ("Archer"), a managing agency in the Lloyd's marketplace
which is a wholly-owned subsidiary of Archer Group Holdings plc ("Archer
Holdings").
The consolidated financial statements include the accounts of the
Company and all subsidiaries. All significant inter-company transactions and
accounts have been eliminated in consolidation.
The fiscal year end for Archer Holdings is September 30, due to custom
and practice in the Lloyd's market. There were no events affecting Archer
Holdings during the period from October 1, 1997 through December 31, 1997 which
would have a material impact on the financial position of the Company.
Investments in companies in which the Company owns 20 to 50 percent of
the voting common stock or has the ability to exercise significant influence
over the operating and financial policies of the investees are accounted for
under the equity method.
(b) Investments--Fixed maturity securities are categorized as either
assets held to maturity or as available for sale. Securities on deposit with
state regulatory authorities are designated as held to maturity and are recorded
at amortized cost. The Company has both the ability and intent to hold these
securities until their maturity. All investments designated as available for
sale are stated at aggregate market value with unrealized appreciation and
depreciation reported as a separate component of stockholder's equity, net of
applicable deferred income taxes.
Realized gains and losses on sales of securities are determined on the
specific identification method. Investment income is recognized when earned.
(c) Cash and Cash Equivalents--The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.
(d) Premiums Earned and Unearned Premiums-- Premiums, net of
reinsurance ceded, are recognized as income ratably during the terms of the
related insurance and reinsurance contracts. Unearned and prepaid reinsurance
premium reserves are established to cover the unexpired portion of premiums
written. Such reserves are computed by pro rata methods for direct business and
are established based on reports received from ceding companies for reinsurance.
The Company estimates and accrues for unreported premiums and losses,
as well as premium and commission adjustments on retrospectively rated or other
experience rated reinsurance contracts, based on the difference between total
costs before and after the experience under the contract (the with-and-without
method). These estimates of experience to date are based on statistical data
with subsequent adjustments recorded in the period in which they become known.
(e) Profit Commissions--Profit commissions earned on business emanating
from Lloyd's syndicates are estimated, earned and recorded using studies of the
profitability of the business underwritten. Profit commission estimates are
continually monitored and reviewed. As new information is received, changes are
reflected in current operations with final settlement three years after the
underwriting year to which it relates.
(f) Deferred Policy Acquisition Costs--Acquisition costs, comprised
primarily of commissions, are deferred and amortized over the period in which
the related premiums are earned.
(g) Deposits--Deposits are those premiums paid in relation to
reinsurance contracts which do not qualify as a transfer of risk under the
Company's accounting policies. The deposits earn interest at the contractual
amounts set forth in the reinsurance contracts.
(h) Loss and Loss Adjustment Expenses--The liability for loss and loss
adjustment expenses ("LAE") is based on reports and individual case estimates
and additional estimates provided by the Company's claims department. The
liability also includes an amount for loss and LAE incurred but not reported
based on past experience of the Company and the reinsurance and insurance
industries. These estimates are regularly reviewed and, as new information
becomes known, the liability is adjusted as necessary. Such adjustments, if any,
are reflected in results of operations in the period in which they become known.
(i) Income Taxes--Deferred income taxes result from temporary
differences between the tax basis of assets and liabilities and their reported
amounts in the financial statements. These differences will result in taxable or
deductible amounts in future years.
F-7
<PAGE>
(j) Goodwill--Goodwill represents the unamortized excess of purchase
price over the fair value of net assets of acquired entities. Goodwill is
amortized generally on a straight-line basis over periods not to exceed forty
years. On a periodic basis, the Company estimates the future undiscounted cash
flows of the business to which it relates in order to ensure that the carrying
value of goodwill has not been impaired. If impairment exists, the carrying
amount of the goodwill is reduced by the estimated shortfall of cash flows.
Amortization charged to operations for each of the years ended December 31,
1997, 1996 and 1995 was $2,297,000, $(11,754) and $(11,754), respectively.
Accumulated amortization of goodwill at December 31, 1997 and 1996 was
$4,179,000 and ($157,000), respectively. Approximately $2,042,000 of accumulated
amortization at December 31, 1997 reflects the effect of foreign currency
fluctuations on goodwill related to Archer Holdings.
(k) Insurance Brokerage Assets and Liabilities - The following
fiduciary assets and liabilities maintained by the Company's insurance agency
subsidiaries on behalf of the insureds and the insurance companies are presented
net in the consolidated financial statements at December 31, 1997 and 1996 (in
thousands):
1997 1996
--------- ---------
Cash....................... $ 6,397 $ 13,839
Accounts receivable........ $ 19,559 $ 18,599
Accounts payable.......... $(25,956) $(32,438)
(l) Business Segments--The Company's operations have been classified
into two business segments. The Underwriting Operations segment includes the
pre-tax results of the insurance entities over which management of the Company
is responsible for making all underwriting decisions. This segment consists
primarily of the premiums, losses, expenses and investment results of Chartwell
Reinsurance, INSCORP, Oak Dedicated Limited and ADIT One Ltd., Archer's
dedicated corporate capital vehicles. The Service Operations segment includes
the pre-tax results from services or capital provided to or investments in
insurance entities over which management of the Company does not influence the
underwriting decisions and the pre-tax results of Chartwell Advisers Limited
("Chartwell Advisers") and Archer, net of related goodwill amortization.
Corporate items relate primarily to capital costs associated with the Company's
debt as well as unallocated employee expenses incurred in connection with the
investigation of possible acquisition targets.
The statement of operations has been classified to present the total
revenue and pre-tax results of each segment. This segmentation highlights the
increasing importance of the Service segment to the Company. The identifiable
assets of each of the segments as well as the unallocated corporate assets is
summarized as follows (in thousands):
1997 1996
----------- -----------
Underwriting operations.......... $ 1,283,183 $ 1,140,136
Service operations............... 59,511 87,800
Corporate........................ 22,366 17,288
----------- -----------
Total assets................. $ 1,365,060 $ 1,245,224
=========== ===========
The Company's principle areas of operation include the United States,
the United Kingdom and, to a limited extent, Canada and continental Europe.
Geographic information is presented below:
United United Other
States Kingdom Foreign Consolidated
--------- --------- ---------- ------------
1997
Total revenue............... $ 270,682 $ 48,130 $ 3,458 $ 322,270
Income before taxes......... 31,480 5,057 3,964 40,501
Net income.................. 22,774 2,310 2,690 27,774
Identifiable net assets..... 1,240,053 97,281 27,726 1,365,060
1996
Total revenue............... $ 256,136 $ 2,124 $ 2,924 $ 261,184
Income before taxes......... 27,142 992 3,572 31,706
Net income.................. 17,217 699 2,579 20,495
Identifiable net assets..... 1,156,747 60,755 27,722 1,245,224
1995
Total revenue............... $ 140,124 $ 1,082 $ 3,253 $ 144,459
Income before taxes......... 6,176 25 2,738 8,939
Net income.................. 3,490 11 2,738 6,239
Identifiable net assets..... 1,083,913 13,137 23,297 1,120,347
F-8
<PAGE>
(m) Per Share Data--Basic and diluted earnings per share for the year
ended December 31, 1995 have been calculated in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which
became effective for interim and annual periods ending after December 15, 1997.
Basic earnings per share are calculated based upon the weighted average number
of common shares outstanding. Diluted earnings per share are calculated based
upon the weighted average number of shares outstanding increased to include the
number of additional common shares that would have been outstanding if all
dilutive potential common shares had been issued. The 1995 basic and diluted
earnings per share do not include the results of Piedmont Management Company Inc
("Piedmont") because their results of operations subsequent to the merger on
December 13, 1995 of Piedmont and Chartwell Re (the "Merger") to the end of the
year indicated were immaterial to Chartwell Re. Following is a reconciliation of
weighted average common shares outstanding to weighted average common and common
equivalent shares outstanding for the year ended December 31, 1995.
1995
Weighted average common shares outstanding... 3,755,312
Dilutive effect of:
Common Stock Options.......................
Common Stock Warrants...................... 36,477
---------
Weighted average common and common
equivalent shares outstanding............ 3,791,789
=========
(n) Minority Interest--Minority interest primarily represents the
minority stockholder's proportionate share of the equity of Holdings Limited.
(o) Foreign Currency Translation-- Adjustments resulting from the
translation of the financial statements of non-U.S. subsidiaries to U.S. dollars
are reported as a separate component of stockholder's equity. Assets and
liabilities denominated in foreign currency are translated at the exchange rates
in effect at the balance sheet date. Results of operations are translated at
average exchange rates during each period.
(p) Disclosure about Fair Value of Financial Instruments - Statement of
Financial Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments," requires disclosures of the estimated fair market value
of certain financial instruments. In cases where quoted market prices are not
readily available, fair values are based on estimates that use present value or
other valuation techniques.
(q) Management Estimates--The consolidated financial statements have
been prepared in accordance with generally accepted accounting principles. In
preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated statements of the financial condition and the reported amounts
of revenue and expenses during the reporting period. Actual results could differ
from those estimates.
(r) Reclassification-- Certain account balances from prior years
presentation have been reclassified to conform with the current year
presentation.
(s) New Accounting Standards--In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income,"
which becomes effective for the Company beginning January 1, 1998. SFAS No. 130
established 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.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information Footnotes," which becomes
effective for the Company beginning January 1, 1998. SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. Management believes that the presentation of financial information
under the new Standard will not be materially different than the current
presentation.
F-9
<PAGE>
2. ACQUISITIONS
Formation of Chartwell Re Holdings Corporation
Chartwell was formed in 1995 to act as an intermediate level holding
company for Chartwell Re following the Merger described below. All subsidiaries
of Chartwell Re were contributed to the Company and the Company assumed the
liability for the long-term debt of Chartwell Re. For accounting purposes, the
formation of Chartwell, the contribution to Chartwell of all of Chartwell Re's
subsidiaries and the assumption by Chartwell of Chartwell Re's long-term debt is
treated as if it occurred on December 31, 1995. As such, the consolidated
statements of operations, stockholder's equity and cash flows of Chartwell Re
for the year ended December 31, 1995 have been included in these financial
statements.
Archer Group Holdings Acquisition
On November 19, 1996, Chartwell Holdings Limited ("Holdings Limited"),
a newly-formed, indirect majority-owned subsidiary of the Company acquired 100%
of the outstanding stock (the "Acquisition") of Archer Holdings in exchange for
cash and loan notes ("Loan Notes"). The Loan Notes, guaranteed by First Union
National Bank N.A., pay interest semi-annually at one percent below the Sterling
London Interbank Offered Rate ("Sterling LIBOR") and, unless previously redeemed
or purchased, mature in June 2002. The Loan Notes are transferable, subject to
certain restrictions, but are not listed on any Sterling exchange. Prior to the
Acquisition, Archer Holdings was publicly traded on the London Stock Exchange.
Archer Holdings is the parent company of Archer.
The Acquisition has been accounted for under the purchase method of
accounting. Accordingly, the purchase price was allocated to the net assets
acquired based on the preliminary determination of the respective fair values at
the date of acquisition, which were estimated based upon information available
at December 31, 1996. During 1997, the Company decreased the fair value of
tangible net assets acquired by approximately $6,642,000, as more information
became available. Goodwill of approximately $58,936,000, representing the final
determination of the fair value of net assets acquired over the purchase price,
is being amortized on a straight-line basis over twenty-five years.
The purchase price presented at the U.S. Dollar equivalent at the date
of acquisition, was determined to be $60,289,000 and was allocated to the
respective net assets and liabilities received as follows (in thousands):
Historical book value of Archer Holdings................ $ 6,044
-------
Acquisition adjustments:
Deferred taxes........................................ (1,666)
Accrued expenses...................................... (8,072)
Other assets.......................................... 5,047
------
(4,691)
Fair value adjustment - Goodwill........................ 58,936
------
Total purchase price.................................... $ 60,289
========
The purchase has been reflected in the consolidated balance sheet of
the Company as of December 31, 1996. Archer Holdings' fiscal year end is
September 30. Results of Archer Holdings' operations from the date of
acquisition to December 31, 1996 were not material to the consolidated financial
statements of the Company and, accordingly, have not been included in such
financial statements.
Chartwell Re directly owns 35% of Holdings Limited. Such minority
interest is presented in the consolidated balance sheet. The Company recognized
$525,000 of minority interest during the year ended December 31, 1997,
representing Chartwell Re's ownership interest in the net income of Holdings
Limited.
Piedmont Management Company Merger
On December 13, 1995, Chartwell Re acquired INSCORP as a result of a
merger with INSCORP's former parent, Piedmont Management Company Inc.
("Piedmont") whereby Piedmont was merged with and into Chartwell Re (the
"Merger"), with Chartwell Re as the surviving corporation. As consideration for
the Merger, Chartwell Re issued an aggregate of 3,103,499 shares of common stock
to the shareholders of Piedmont, representing 45.25% of the then outstanding
common stock of Chartwell Re immediately following the Merger. The acquisition
of Piedmont was accounted for under the purchase method of accounting.
Accordingly, the purchase price of $80,256,000 was allocated to the net assets
acquired based on respective fair values at the date of acquisition. Goodwill of
approximately $5,389,000, recorded by Chartwell Re, is being amortized on a
straight line basis over forty years.
F-10
<PAGE>
Upon consummation of the Merger, Chartwell Re assumed all of
Piedmont's obligations under the Contingent Interest Notes (the "CI Notes"). The
CI Notes were issued immediately prior to the Merger to protect Chartwell Re
against the possibility of adverse development of INSCORP's reserves for LAE,
particularly with respect to INSCORP's potential exposures for environmental
impairment, asbestos-related and latent injury claims and other long-tail
casualty exposures (Notes 11 and 12).
The purchase was reflected in the consolidated balance sheet of the
Company as of December 31, 1995. Results of Piedmont's operations from the date
of acquisition to December 31, 1995 were not material to the consolidated
financial statements of the Company and, accordingly, have not been included in
such financial statements of Chartwell Re.
Drayton Acquisition
On May 31, 1995, Chartwell Re acquired 100% of the outstanding stock of
Drayton Company Limited ("Drayton") in exchange for a nominal cash payment.
Drayton is a Bermuda based insurer which is not currently writing new business.
The Company is managing the resolution of Drayton's remaining claims and assets
in a run-off of Drayton's old business.
The acquisition was accounted for under the purchase method of
accounting. Accordingly, the purchase price was allocated to the net assets
acquired based on respective fair values at the date of acquisition. Negative
goodwill of approximately $498,000, representing the excess of net assets
acquired over the purchase price, is being amortized on a straight-line basis
over the estimated run-off period of five years. The historical results of
Drayton for the periods prior to the date of acquisition were not material and
as such have not been included in the pro forma unaudited consolidated income
statement information contained in this note.
Pro Forma Information
The following pro forma unaudited consolidated income statement
information for the Company for the year ended December 31, 1996 and for
Chartwell Re for the year ended December 31, 1995 is presented as though the
acquisition of Archer Holdings, the acquisition of Piedmont, and the redemption
of 35% of the outstanding 10.25% Senior Notes due 2004 ("Senior Notes") (See
Note 12) had occurred on January 1, 1995 (in thousands, except per share
amount):
1996 1995
---------- ----------
Total revenues..................... $ 289,336 $ 324,925
Net income (loss).................. $ 24,990 $ (6,074)
Basic earnings per share........... $ (0.63)
Diluted earnings per share......... $ (0.63)
This pro forma financial information has been prepared for
informational purposes only and includes certain adjustments such as
amortization expense as a result of goodwill, and certain other adjustments,
together with related income tax effects. The pro forma financial information is
not necessarily indicative of the results of operations as they would have been
had the transactions been consummated on the assumed dates.
F-11
<PAGE>
3. INVESTMENTS
The amortized cost and estimated market values of investments in
securities with fixed maturities were as follows (in thousands):
<TABLE>
<CAPTION>
Gross Unrealized Estimated
Amortized ------------------ Market Carrying
Cost Gains Losses Value Amount
--------- ----- ------ --------- --------
December 31, 1997:
Held to maturity:
U.S. Treasury securities and obligations of U.S.
<S> <C> <C> <C> <C> <C>
government and government agencies..................... $ 20,594 $ 95 $ 107 $ 20,582 $ 20,594
Obligations of states and political subdivisions......... 1,868 11 1,879 1,868
Debt securities issued by foreign governments............ 13,013 773 26 13,760 13,013
Corporate securities..................................... 1,155 45 1,200 1,155
------ ------ ------ ----- -----
Subtotal..................................................... 36,630 924 133 37,421 36,630
------ ------ ------ ------ ------
Available for sale:
U.S. Treasury securities and obligations of U.S.
government and government agencies..................... 58,922 604 77 59,449 59,449
Obligations of states and political subdivisions......... 155,109 4,578 11 159,676 159,676
Debt securities issued by foreign governments............ 15,342 513 1 15,854 15,854
Corporate securities..................................... 212,143 4,415 461 216,097 216,097
Redeemable preferred stock............................... 36,780 1,602 3 38,379 38,379
Mortgage backed securities............................... 166,812 2,064 358 168,518 168,518
------- ------ ------ ------- -------
Subtotal..................................................... 645,108 13,776 911 657,973 657,973
------- ------ ------- ------- -------
Total........................................................ $ 681,738 $ 14,700 $ 1,044 $ 695,394 $ 694,603
========= ======== ======= ========= =========
December 31, 1996:
Held to maturity:
U.S. Treasury securities and obligations of U.S.
government and government agencies..................... $ 18,841 $ 92 $ 314 $ 18,619 $ 18,841
Obligations of states and political subdivisions......... 1,895 10 1 1,904 1,895
Debt securities issued by foreign governments............ 14,545 832 81 15,296 14,545
Corporate securities..................................... 762 39 801 762
------- ----- ----- ------ ------
Subtotal..................................................... 36,043 973 396 36,620 36,043
------- ----- ----- ------ ------
Available for sale:
U.S. Treasury securities and obligations of U.S.
government and government agencies..................... 73,419 281 1,602 72,098 72,098
Obligations of states and political subdivisions......... 132,906 848 900 132,854 132,854
Debt securities issued by foreign governments............ 8,139 129 48 8,220 8,220
Corporate securities..................................... 181,384 1,337 2,501 180,220 180,220
Redeemable preferred stock............................... 33,773 33,773 33,773
Mortgage backed securities............................... 179,747 1,026 1,317 179,456 179,456
------- ----- ----- ------- -------
Subtotal..................................................... 609,368 3,621 6,368 606,621 606,621
------- ----- ----- ------- -------
Total........................................................ $ 645,411 $ 4,594 $ 6,764 $ 643,241 $ 642,664
========= ======= ======= ========= =========
</TABLE>
F-12
<PAGE>
The amortized cost and estimated market value of securities with fixed
maturities at December 31, 1997 and 1996, by contractual maturity, are shown
below (in thousands). Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
--------------------- -------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---------- -------- ---------- ------------
December 31, 1997:
<S> <C> <C> <C> <C>
Due in one year or less................. $ 8,763 $ 8,856 $ 13,106 $ 13,187
Due after one year through five years... 17,332 17,566 170,525 172,485
Due after five years through ten years.. 6,007 6,514 175,901 180,650
Due after ten years..................... 4,528 4,485 118,764 123,133
Mortgage backed securities.............. 166,812 168,518
-------- -------- --------- ---------
$ 36,630 $ 37,421 $ 645,108 $ 657,973
======== ======== ========= =========
December 31, 1996:
Due in one year or less................. $ 1,618 $ 1,647 $ 19,378 $ 19,460
Due after one year through five years... 26,187 26,478 132,431 132,405
Due after five years through ten years.. 6,218 6,595 164,331 163,286
Due after ten years..................... 2,020 1,900 113,481 112,014
Mortgage backed securities.............. 179,747 179,456
------- -------- --------- ---------
$ 36,043 $ 36,620 $ 609,368 $ 606,621
======= ======== ========= =========
</TABLE>
Proceeds from sales of investments in securities with fixed maturities
(excluding security paydowns and calls) during 1997, 1996, and 1995, all of
which were classified as available for sale, were $77,339,000, $281,712,000 and
$326,353,000, respectively. Gross gains of $523,000, $2,683,000 and $4,805,000
and gross losses of $526,000, $2,284,000 and $1,275,000 were realized on those
sales during the years ended December 31, 1997, 1996 and 1995, respectively.
Sources of net investment income for the years ended December 31,
1997, 1996 and 1995 were as follows (in thousands):
1997 1996 1995
Investment income:
Fixed maturities ..................... $ 39,752 $ 43,344 $ 20,468
Equity securities .................... 2,841 1,150 1
Mortgage loans ....................... 5
Other ................................ 1,867 96 123
-------- -------- --------
Total investment income ................ 44,460 44,590 20,597
Investment expenses .................... (1,003) (992) (690)
-------- -------- --------
Net investment income .................. $ 43,457 $ 43,598 $ 19,907
======== ======== ========
Realized gains (losses) on investments:
Fixed maturities ..................... $ (4) $ 373 $ 3,530
Equity securities .................... 1 784 (331)
-------- -------- --------
Net realized capital gains (losses) .... $ (3) $ 1,157 $ 3,199
======== ======== ========
F-13
<PAGE>
The net unrealized appreciation (depreciation) of investments included
as a separate component of stockholder's equity at December 31, 1997 and 1996 is
as follows (in thousands):
Difference between market value and amortized 1997 1996
cost of available for sale portfolio:
Fixed maturities ....................... $ 12,865 $ (2,747)
Equity securities ...................... 583 629
-------- --------
13,448 (2,118)
Deferred tax benefit (expense) .............. (4,707) 739
-------- --------
Net unrealized appreciation (depreciation)
of investments ............................ $ 8,741 $ (1,379)
======== ========
Unrealized appreciation (depreciation) of investments in equity
securities at December 31, 1997 and 1996 includes gross unrealized gains of
$1,513,000 and $913,000, respectively, and gross unrealized losses of $930,000
and $284,000, respectively.
At December 31, 1997 and 1996, bonds with a carrying value of
approximately $36,630,000 and $36,043,000, respectively, were on deposit with
state regulatory authorities, as required by law. The Company also had cash,
cash equivalents and bonds totaling $18,681,000 and $14,669,000 in trusts held
for the benefit of ceding companies at December 31, 1997 and 1996, respectively.
At December 31, 1997 and 1996, the Company had $15,914,000 and
$15,943,000, respectively, of investments held in collateral accounts subject to
certain restrictions in conjunction with a loan guarantee and a letter of credit
arrangement (Note 13).
At December 31, 1997 and 1996, the Company had loaned securities of
approximately $14,443,000 and $53,936,000, respectively, at fair market value
under a security lending agreement administered through First Trust, the
Company's primary custodian. In connection with these transactions, the Company
holds as collateral securities with a fair value equal to 102% of the fair value
of the securities lent to others. Such collateral securities are marked to
market on a daily basis and borrowers are required to supply additional
collateral to prevent any collateral from falling below 102% of the fair value
of the loaned securities.
4. FAIR VALUE AND FINANCIAL INSTRUMENTS
The following methods were used in estimating fair value disclosures
for significant financial instruments. Cash equivalents approximate their
carrying amount due to the short duration of those investments. Fixed maturity
securities are based upon quoted market information. The fair value of long term
debt at December 31, 1997and 1996 is based upon current market price.
The carrying amounts and fair values of the Company's significant
financial instruments are as follows (in thousands):
1997 1996
Carrying Carrying
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Cash and cash equivalents ..... $ 29,534 $ 29,534 $ 50,343 $ 50,343
Fixed maturity securities ..... 694,603 695,394 642,664 643,241
Liabilities:
Long-term debt ................ $104,126 $109,722 $107,297 $108,500
On April 8, 1994, Chartwell Re entered into an interest rate swap agreement
(the "Swap") for other than trading purposes with Salomon Brothers Holding
Company ("Salomon") to convert a portion of its 10.25% fixed rate Senior Notes
(Note 12) to floating rate based on the six-month U.S. Dollar London Interbank
Offered Rate ("US LIBOR"). The Swap required Salomon to pay Chartwell Re
interest on a notional amount of $37,500,000 at the fixed rate of 6.95% and
Chartwell Re to pay interest at 4.44% for the first year and thereafter at the
six-month US LIBOR rate which reset on a semiannual basis. On May 17, 1995,
Chartwell Re terminated this swap transaction at no cost. For the year ended
December 31, 1995, Chartwell Re recorded a reduction in interest expense of
$300,000 in connection with this Swap.
F-14
<PAGE>
5. FEDERAL INCOME TAXES
The Company files a consolidated Federal income tax return with its
parent and all includable subsidiaries. The 1997 and 1996 current income taxes
are based upon regular taxable income. The 1995 current income taxes are based
upon alternative minimum taxable income.
As of December 31, 1997, for Federal income tax purposes, the Company
and all includable subsidiaries had available net operating loss
carryforwards of $19,500,000 which will begin expiring in 2007. Such net
operating loss carryforwards were generated by INSCORP prior to its acquisition
by Chartwell Re. Due to the change in ownership, as defined by Section 382 of
the Internal Revenue Code, a maximum of $3,400,000 of the net operating loss can
be utilized on an annual basis by the Company and its includable subsidiaries.
Consolidated income before taxes, minority interest and extraordinary
item consisted of the following (in thousands):
1997 1996 1995
United States.................. $31,480 $27,142 $ 6,176
Foreign ....................... 9,021 4,564 2,763
------ ------ -----
Total ...................... $40,501 $31,706 $ 8,939
======= ======= =======
The components of income tax expense (benefit) for the years ended
December 31, 1997, 1996 and 1995 are as follows (in thousands):
1997 1996 1995
U.S. Taxes
Current .................................... $ 3,743 $ 8,537 $ 208
Deferred ................................... 4,942 (213) 2,478
----- ---- -----
8,685 8,324 2,686
----- ----- -----
Foreign Taxes
Current .................................... 2,183 1,013 14
Deferred ................................... 1,334
----- ----- -----
3,517 1,013 14
----- ----- -----
Total U.S. and Foreign income tax expense ... $12,202 $ 9,337 $ 2,700
======= ======= =======
The difference between actual income tax expense and the amount
computed by applying the statutory Federal income tax rate of 35%, 35% and 34%
for the years ended December 31, 1997, 1996 and 1995, respectively, is as
follows (in thousands):
1997 1996 1995
Income tax expense
at statutory rate................ $ 14,176 $ 11,097 $ 3,039
Non-taxable investment income...... (2,598) (1,400) (342)
Foreign operations................. (682)
Amortization of goodwill........... 769 (35) (4)
Other, net......................... 537 (325) 7
-------- -------- --------
$ 12,202 $ 9,337 $ 2,700
======== ======== ========
F-15
<PAGE>
The deferred income tax expense (benefit) for the years ended December
31, 1997, 1996 and 1995 consisted of the following (in thousands):
1997 1996 1995
Discounting of loss reserves........................ $ 766 $ 1,314 $ (1,665)
Deposit accounting.................................. 150 (130) (15)
Earned but not reported premiums,
net of loss and expense....................... 1,186 (458) 4
Deferred acquisition costs.......................... 2,869 317 511
Unearned premiums................................... (1,486) (865) (389)
Profit commission................................... 1,334
Difference between carrying value and tax basis of
investments sold............................... (43) (21)
Utilization/(increase) of tax loss carryforwards.... 1,710 (4,473) 3,655
Other, net.......................................... (210) 4,082 398
---- ----- ---
$ 6,276 $ (213) $ 2,478
======= ====== =======
The tax effects of the temporary differences comprising the Company's
net deferred tax asset at December 31, 1997 and 1996 are as follows (in
thousands):
1997 1996
Deferred tax assets:
Discounting of loss reserves.............................. $ 37,429 $ 38,195
Unearned premiums......................................... 5,686 4,434
Unrealized depreciation on investments.................... 739
Deposit accounting........................................ 980 1,130
Allowance for uncollectible reinsurance................... 1,225 1,225
Tax benefit of loss carryforwards......................... 6,802 8,512
------- -------
52,122 54,235
Deferred tax liabilities:
Deferred acquisition costs................................ 9,135 6,266
Earned but not reported premiums net of loss and expense.. 3,141 2,189
Unrealized appreciation of investments.................... 4,707
Accrued market discount................................... 609 636
Profit commission......................................... 3,149 1,591
Other, net................................................ 1,534 1,393
------ ------
22,275 12,075
------ ------
Deferred income taxes, net................................. $ 29,847 $ 42,160
======== ========
Realization of the deferred tax asset is dependent on the Company
generating sufficient taxable income to realize the benefits of the net deferred
tax assets. Although realization is not assured, management believes it is more
likely than not that the entire net deferred tax asset will be realized and as
such no valuation allowance has been recorded at December 31, 1997 or 1996.
6. EMPLOYEE BENEFIT PLANS
Eligible employees of the Company may participate in a defined
contribution plan (the "Plan") established by Chartwell Re. Under the Plan, the
Company makes matching contributions equal to 50% of employee's pretax
contributions, not to exceed 6% of the employee's compensation. Amounts expensed
under the Plan for the years ended December 31, 1997, 1996 and 1995 were
$188,000, $168,000 and $92,000, respectively.
Certain members of management will receive a supplement to the Plan
payable at the earlier of age 65 or employment termination. The supplement will
be equal to the aggregate contributions made with respect to the employee to a
trust established by the Company. Annual contributions to the trust are 13.5% to
20.0% of the employee's base salary as stated in their employment agreements.
The amounts expensed in 1997, 1996 and 1995 for the obligation under this plan
amounted to $206,500, $206,500 and $168,500, respectively.
F-16
<PAGE>
Archer Holdings operates contributory defined contribution plans for
its U.K. employees. The level of the contribution varies between 5% and 20%
dependent upon the age of each participant at the beginning of each calendar
year. The amount expensed in 1997 for the obligation under these plans amounted
to $2,523,000.
7. RELATED-PARTY TRANSACTIONS AND ASSUMED REINSURANCE TREATIES
During 1992, Chartwell Reinsurance entered into a reinsurance contract
with a related party. For the years ended December 31, 1997, 1996 and 1995,
Chartwell Reinsurance earned $3,819,000, $1,716,000 and $2,606,000 of premium on
this contract and incurred, prior to the effect of reinsurance ceded,
$2,750,000, $1,506,000 and $2,688,000 in loss and LAE, respectively. At December
31, 1997 and 1996, the loss and LAE liability for this contract was $1,141,000
and $694,000 and unearned premiums were $569,000 and $224,000, respectively.
8. RESTRICTION ON PAYMENT OF DIVIDENDS
The ability of the Company to pay cash dividends to Chartwell Re is
dependent upon the amount of dividends received from Chartwell Reinsurance.
Chartwell Reinsurance's ability to pay cash dividends to the Company is, in
turn, restricted by law or subject to approval of the insurance regulatory
authorities of Minnesota, Chartwell Reinsurance's state of domicile. Insurance
regulatory authorities recognize 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 practices; 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 without prior approval of the Minnesota Department of Commerce in
1998 is $26,261,000.
On November 25, 1997, Chartwell Reinsurance paid a $3.0 million
dividend to the Company. No dividends were paid in 1996 or 1995.
In addition, under the insurance laws of the State of New York, INSCORP
may pay dividends to Chartwell Reinsurance only out of its statutory earned
surplus. The maximum amount of cash dividends INSCORP may pay out of its
statutory earned surplus, without prior regulatory approval, is subject to
statutory restrictions imposed by New York State Insurance Law. Generally, the
maximum amount that may be paid in any twelve month period without prior
approval is the lesser of net investment income as defined or 10% of statutory
surplus to policyholders.
In addition to the foregoing limitation, the New York State Insurance
Department, as is its practice in any change of control situation, has required
the Company to commit to preclude INSCORP from paying any dividends for two
years from the date of its merger with Chartwell Re without prior regulatory
approval. The two year period ended on December 13, 1997.
The capital and surplus of Chartwell Reinsurance on the basis of
statutory accounting practices was $262,606,000 and $238,271,000 at December 31,
1997 and 1996, respectively. Net income of Chartwell Reinsurance based on
statutory accounting principles was $10,239,000, $6,156,000 and $9,507,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
The capital and surplus of INSCORP on the basis of statutory accounting
practices was $113,677,000 and $98,685,000 at December 31, 1997 and 1996,
respectively. Net income of INSCORP based on statutory accounting principles was
$14,234,000 and $22,270,000 for the years ended December 31, 1997 and 1996,
respectively.
F-17
<PAGE>
9. REINSURANCE ASSUMED AND CEDED
The Company cedes a portion of its risks by utilizing various
retrocessional contracts. These contracts do not relieve the Company from its
obligations to policyholders. The Company regularly evaluates the financial
condition of its reinsurers and monitors concentration of credit risk with
respect to amounts recoverable under these contracts.
The effect of reinsurance on premiums written and earned at December
31, 1997, 1996 and 1995 is as follows (in thousands):
1997 1996 1995
Written Earned Written Earned Written Earned
------- ------ ------- ------ ------- ------
Primary insurance.... $105,635 $ 86,343 $ 68,307 $ 66,709
Reinsurance assumed.. 257,135 245,662 195,530 210,871 $126,968 $123,506
Reinsurance ceded.... 94,510 86,305 71,586 68,077 3,654 3,248
------ ------ ------ ------ ----- -----
Net premiums......... $268,260 $245,700 $192,251 $209,503 $123,314 $120,258
======== ======== ======== ======== ======== =======
Certain of the Company's large assumed reinsurance programs were not
renewed for 1998. During 1997, the Company's earned premiums related to these
programs were $48.2 million.
The effect of reinsurance on loss and LAE for the years ended December
31, 1997, 1996 and 1995 is a decrease of $70,135,000, $45,908,000 and
$1,616,000, respectively.
The reinsurance recoverable balance on paid and unpaid losses and LAE
from any single entity or company in excess of 5% of the total at December 31,
1997 were as follows: Centre Reinsurance (Bermuda) Limited, $38,885,000
(15.2%), London Life and Casualty Company, $15,689,000 (6.2%), American
Re-Insurance Company, $14,966,000 (5.9%) and European International Reinsurance
Company, Ltd., $14,000,000 (5.5%).
In the normal course of business, the Company enters into trust
agreements effecting funds held arrangements or obtains letters of credit issued
by banks on behalf of the retrocessionaires which are not registered as
"authorized reinsurers" with the Minnesota Department of Commerce or the New
York State Insurance Department. The letters of credit or trust agreements serve
as collateral to the extent of their limit for the contingent liability which
exists in the event that the retrocessionaire is unable to meet its obligations
assumed under a retrocession agreement. Reinsurance recoverables with
"unauthorized reinsurers" totaled $119,768,000 and $55,264,000 as of December
31, 1997 and 1996, respectively. The respective portions collateralized were
$111,319,000 and $51,247,000.
Included in deposits on the balance sheet at December 31, 1997 and 1996
are $11,548,000 and $11,120,000, respectively, deposited with European
International Reinsurance Limited and $7,492,000 and $7,015,000, respectively,
deposited with Centre Reinsurance (Bermuda) Limited, both of which are secured
by letters of credit as described in the preceding paragraph.
10. PERMITTED STATUTORY ACCOUNTING PRACTICES
Chartwell Reinsurance prepares its statutory financial statements in
accordance with accounting principles and practices prescribed or permitted by
the Minnesota Department of Commerce. INSCORP prepares its statutory financial
statements in accordance with accounting principles and practices prescribed or
permitted by the New York State Insurance Department. Prescribed practices
include state laws, regulations, and general administrative rules, as well as a
variety of publications of the National Association of Insurance Commissioners
("NAIC"). Permitted statutory accounting practices encompass all accounting
practices that are not prescribed; such practices differ from state to state,
may differ from company to company within a state, and may change in the future.
Furthermore, the NAIC has a project to codify statutory accounting practices,
the result of which is expected to constitute the only source of "prescribed"
statutory accounting practices. Accordingly, that project will likely change the
definitions of what comprises prescribed versus permitted statutory accounting
practices, and may result in changes to the accounting policies that insurance
and reinsurance enterprises use to prepare their statutory financial statements.
F-18
<PAGE>
11. LOSS AND LAE
The following table presents the activity in the liability for loss and
LAE for the years indicated (in thousands):
1997 1996 1995
Loss and LAE
at beginning of year.................. $ 747,858 $ 741,467 $ 232,733
Less reinsurance recoverables........... 172,377 179,854 35,432
------- ------- ------
Net balance at beginning of year..... 575,481 561,613 197,301
------- ------- -------
Add provision for loss and LAE for claims
occurring during:
Current year.......................... 163,003 152,338 86,470
Prior years........................... (2,155) (1,717) 479
------- ------- ------
Total incurred loss and LAE.......... 160,848 150,621 86,949
------- ------- ------
Less losses and LAE payments for claims
occurring during:
Current year.......................... 45,286 29,554 11,797
Prior years........................... 105,396 107,199 45,016
------- ------- ------
Total paid loss and LAE............... 150,682 136,753 56,813
------- ------- ------
Loss and LAE acquired as of acquisition date of:
Drayton................................ 4,741
INSCORP................................ 329,435
------- ------- -------
Net balance at end of year............... 585,647 575,481 561,613
Plus reinsurance recoverables............ 202,593 172,377 179,854
------- ------- -------
Loss and LAE
at end of year........................ $ 788,240 $ 747,858 $ 741,467
========= ========= =========
As a result of changes in estimates of insured events in prior years,
the net provision for loss and LAE decreased by $2,155,000 in 1997, decreased by
$1,717,000 in 1996 and increased by $479,000 in 1995. These amounts, which
represent a decrease of 0.3% and 0.2% and an increase of 0.2% of the gross loss
and LAE at the beginning of 1997, 1996 and 1995, respectively, are the result of
normal reserve development inherent in the uncertainty of establishing loss and
LAE liabilities.
The liabilities include provisions for latent injury or toxic tort
claims that cannot be estimated with traditional reserving techniques. Case
reserves, including LAE, have been established upon notification of loss from
ceding companies. In addition, the Company establishes additional liabilities in
excess of its share of the reserve established by the ceding company to cover
exposures on both known and unasserted claims. These liabilities are
periodically reviewed by the Company's claims department. In the reserve setting
process, the Company also includes provisions for social inflation (i.e. awards
by judges and juries that have progressively increased in recent years) and
evaluates the potential effect of any legislative changes on its reserve
liabilities. However, because of inconsistent court decisions in federal and
state jurisdictions and the wide variation among insureds with respect to
underlying facts and coverage, uncertainty exists with respect to these claims
as to liabilities of ceding companies and, consequently, reinsurance coverage.
At December 31, 1997, the Company carried case reserves and allocated
LAE attributable to asbestos claims and environmental pollution claims in the
amount of $70,923,000 ($48,052,000 after reduction for reinsurance recoverable)
of which $8,254,000 ($4,870,000 after reduction for reinsurance recoverable)
F-19
<PAGE>
related to Chartwell Reinsurance and $62,669,000 ($43,182,000 after reduction
for reinsurance recoverable) related to INSCORP. Management believes that
Chartwell Reinsurance's exposure to asbestos and environmental losses is
lessened because of its relatively recent entry into the reinsurance business in
1979, its low historical levels of premium volume prior to 1985, and its
retrocessional programs. In addition, management believes the Company's exposure
to adverse reserve development at INSCORP related to asbestos and environmental
losses is lessened because the CI Notes are designed to provide Chartwell Re
with protection against such adverse development of INSCORP's reserves for
losses and LAE. For the three years ended December 31, 1997, the effect of
asbestos and environmental pollution claims was not material to the Company's
results of operations.
Environmental claims are particularly challenging to a reinsurance
company. Such claims involve underlying coverage disputes between the insured
party and its insurer; substantial legal defense costs; questions as to
occurrences and aggregation of claims and "late notice" issues. Environmental
liability suits often contain multiple party and multiple site actions that
result in varied adjudications among insureds and their insurers. Such a complex
setting forces the parties to find a reasonable basis for settling the claims.
These widely varying settlements involving primary insurers force challenges
upon the reinsurer with respect to the extent to which they should follow the
settlements of their ceding companies. Accordingly, there can be no assurance
that the Company's ultimate liability for losses and LAE will not vary
significantly from amounts reserved.
In 1992, an indemnification agreement (the "Reserve Indemnification
Agreement") was entered into with NWNL and its parent company, ReliaStar
Financial Corp. ("RLR") (formerly The NWNL Companies, Inc.), which indemnified
the parties for subsequent development in Chartwell Reinsurance's December 31,
1991 balances of loss and loss adjustment expenses, the statutory provision for
uncollectible reinsurance and the collectibility of reinsurance recoverable on
losses paid, among other items, up to an aggregate of $23.0 million.
On June 28, 1996, Chartwell Re received $7,900,000 as settlement of the
receivable arising from the Reserve Indemnification Agreement. 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
materially affect operating results for the year ended December 31, 1996.
12. DEBT
(a) Long-term debt--The components of long-term debt at December 31,
1997 and 1996 are as follows (in thousands):
1997 1996
Senior notes.............. $ 48,750 $ 48,750
Bank loan................. 51,198 54,707
Other..................... 4,178 3,840
--------- ---------
Total..................... $ 104,126 $ 107,297
========= =========
On March 17, 1994, Chartwell Re completed a public offering (the
"Offering") of 10.25% Senior Notes due 2004, having a total principal amount of
$75,000,000. The net proceeds to Chartwell Re from the Offering were
approximately $71,934,000 after deducting expenses related to the Offering. Of
the net proceeds, $30,000,000 was contributed to the statutory surplus of
Chartwell Reinsurance and $23,400,000 was used to retire Chartwell Re's then
outstanding senior term loan. The remaining funds were retained by Chartwell Re
for general corporate purposes, which included the payment of interest on the
Senior Notes.
On April 8, 1996, the Company redeemed 35% of the Senior Notes for
$28,300,000, including the redemption premium. Due to this early extinguishment
of debt, the Company recognized an extraordinary loss of $1,874,000, net of
applicable income taxes of $1,000,000. This extraordinary charge represents the
redemption premium and 35% of the remaining original debt issuance costs
relating to the Senior Notes.
On December 13, 1995, Chartwell Re entered into a $20,000,000 loan
agreement with Fleet Bank (the "Fleet Loan"), with a variable interest rate
based upon the Eurodollar rate plus a margin based upon the S&P rating of the
Notes, scheduled to expire on December 13, 2002. The Fleet Loan was repaid
during 1996.
On November 14, 1996, the Company entered into a new credit facility
with First Union National Bank, N.A., ("First Union") as agent. The credit
facility provides for a term loan in two tranches, A & B, (the "First Union
Loans"), with outstanding balances of $30,000,000 and $13,983,000 (denominated
in Pounds Sterling), respectively at December 31, 1997 and 1996. In addition, at
December 31, 1997, $7,215,000 of the Tranche B Loan was used to guarantee the
Loan Notes. Both loans are subject to a quarterly repayment schedule, commencing
on March 31, 1999 and ending on December 31, 2002. The Company used $20,000,000
of the First Union Loans to repay all outstanding borrowings under the
$20,000,000 loan agreement with Fleet Bank. Portions of the remainder of the
First Union Loans were drawn down in cash by the Company and contributed to
Holdings Limited
F-20
<PAGE>
for the purchase of Archer Holdings, and portions were utilized to guarantee the
obligations of Holdings Limited under the Loan Notes (the "First Union
Guarantee"). The holders of Loan Notes may require the Company to redeem all or
part of their holdings in June or December of each year. As the Loan Notes are
redeemed ("Loan Note Redemptions"), the First Union Guarantee is reduced and
replaced with loan proceeds to fund the Loan Note Redemptions. During 1997,
$1,992,000 of Loan Note Redemptions occurred, resulting in an outstanding
balance of Loan Notes of $7,215,000 at December 31, 1997.
The Company currently has a $60,000,000 Revolving Credit Commitment
from First Union (the "First Union Revolver"), which was increased from
$35,000,000 in October of 1997. The First Union Revolver replaced the
$10,000,000 revolving credit facility from Fleet Bank (under which no borrowings
were outstanding). The First Union Revolver may be used to provide additional
Loan Note guarantees, to support underwriting at Lloyd's by the Company's
subsidiaries or for other general corporate purposes. All obligations of the
Company under the Credit Facilities are guaranteed by Chartwell Re.
The other portion of long-term debt primarily represents capital lease
obligations.
The Company's long-term debt agreement contains general covenants and
restrictions as well as financial covenants relating to, among other things,
minimum earned surplus, minimum statutory surplus, minimum net worth, certain
financial ratios, and maintenance of minimum cash and cash equivalent balances
on the books of the borrower.
Annual maturities of long-term debt outstanding at December 31, 1997
are as follows (in thousands):
1998........................................ $ 389
1999........................................ 11,576
2000........................................ 13,957
2001........................................ 13,644
2002........................................ 64,560
------
$ 104,126
=========
(b) Capital Leases - During 1996, the Company began leasing certain
facilities and equipment under agreements which are classified as capital
leases. The leases have original terms of 3 to 5 years and have purchase options
at the end of the original lease term. At the end of the term, the Company may
purchase the equipment for a mutually agreeable price, renew the lease or return
the equipment to the lessor and enter into a new lease. Leased capital assets
include the buildout costs of the Company's leased office space for its
principal executive offices, furniture and equipment, and electronic data
processing hardware and software and are included in Other Assets in the
consolidated balance sheet at December 31, 1997 and 1996 as follows (in
thousands):
1997 1996
Office space buildout costs............... $ 1,179 $ 1,474
Furniture and equipment................... 2,648 3,310
EDP hardware and software................. 1,137 1,705
------- -------
$ 4,964 $ 6,489
======= =======
Leased capital assets are amortized to interest expense on a
straight-line basis over the original lease term. For the year ended December
31, 1997, the Company recorded $230,000 of interest expense related to such
leased assets. Future minimum payments, including principal and interest, by
year and in the aggregate, under non-cancelable capital leases are as follows
(in thousands):
1998.................................................... $ 1,832
1999.................................................... 1,336
2000.................................................... 1,158
2001.................................................... 845
2002.................................................... 450
--------
$ 5,621
========
F-21
<PAGE>
13. COMMITMENTS AND CONTINGENCIES
Operating leases--The Company leases office space for its principal
executive offices in the U.S. and U.K. under non-cancelable, renewable operating
leases expiring on July 31, 2006 and December 24, 2008, respectively. The rent
expense has been accounted for on a straight-line basis after amortization of a
rent abatement allowance (on the U.S. lease). Rental expense for 1997, 1996 and
1995 was $2,828,000, $1,386,000 and $562,000, respectively. The future minimum
rental payments, exclusive of escalation clauses, under the existing leases as
of December 31, 1997 are as follows (in thousands):
1998........................................... $ 1,358
1999........................................... 1,658
2000........................................... 1,744
2001........................................... 1,854
2002........................................... 1,922
Future years................................... 7,346
Line of credit--The Company has a $60 million revolving credit facility
with First Union, of which $7 million was unused and $53 million was used to
secure unsecured letters of credit at December 31, 1997.
Loan guarantees and letters of credit -- At December 31, 1997, the
Company has outstanding loan guarantees and standby letters of credit totaling
$4,084,000 and $69,530,000, respectively. The loan guarantees and standby
letters of credit are in force for five years, for which the Company pays annual
fees of $237,000. The loan guarantees and letters of credit provide capital to
NLC Name No. 6 Limited, Riverside Underwriters Plc and Oak Dedicated, corporate
members of Lloyd's, to participate in certain Lloyd's syndicates for the 1995
Underwriting Year and thereafter. The investments in NLC Name No. 6 and
Riverside Underwriters Plc, which amount to $16,331,000 at December 31, 1997,
are included in other assets with corresponding amounts included in other
liabilities for the loan guarantees and letters of credit.
American Eagle--In 1996 and early 1997, the Company entered into
certain agreements with American Eagle Insurance Company ("American Eagle"). On
December 3, 1997, American Eagle was placed in receivership by the Texas
Department of Insurance. Since a significant portion of the Company's
liabilities in connection with American Eagle are collateralized by a trust fund
held by the Company, management of the Company does not presently believe that
any residual exposure resulting from the receivership of American Eagle is
likely to have a material adverse effect on its financial position or results of
operations.
Lloyd's Names exposure - The Company's balance sheet at December 31,
1997 includes a provision for potential exposure to certain of the Names who had
participated on syndicates managed by Archer. The provision was established by
the Company based on actuarial projections of the expected deterioration for the
applicable years of account. Management believes at the present time that the
provision related to such potential exposure is sufficient.
Other -The Company, Chartwell Reinsurance, INSCORP and Archer are
subject to the litigation of disputes in the normal course of their business.
Management does not believe that any pending litigation or arbitration to which
it is a party, or of which any of its properties or assets are subject, is
likely to have a materially adverse effect on its current financial position or
results of operations.
14. PUBLIC STOCK OFFERING
Chartwell Re completed a public offering of 2,725,000 shares of common
stock at $23.00 per share during the first hal of 1996. The net proceeds
to Chartwell Re were $58,503,000 after deduction of underwriting discount and
expenses. Of the net proceeds, $48,500,000 was contributed to the Company, of
which $20,000,000 was contributed to the statutory surplus of Chartwell
Reinsurance and $28,500,000 was used to retire 35% of the Company's outstanding
Senior Notes plus accrued interest (Note 12). The remaining funds were retained
for general corporate purposes.
F-22
<PAGE>
15. STOCK OPTION PLANS AND COMMON STOCK WARRANTS
During 1997, Chartwell Re adopted the 1997 Omnibus Stock Incentive
Plan (the "1997 Plan") as the successor to the 1993 Stock Option Plan (the "1993
Plan") which was adopted on October 15, 1993. Under the 1993 Plan, options to
acquire 1,000,000 shares of Common Stock of Chartwell Re were authorized to be
granted to officers, key employees and directors of Chartwell Re and its
designated subsidiaries. Upon adoption of the 1997 Plan, no further awards shall
be made under the 1993 Plan and 107,000 of previously authorized non-granted
shares under the 1993 Plan became available under the 1997 Plan. Chartwell Re
also authorized an additional 500,000 shares to be granted under the 1997 Plan.
Under both plans, the options become exercisable at various dates. A total of
50,000 shares are available for grants of options to non-employee directors of
Chartwell Re until December 31, 2006 under the 1996 Non-Employee Directors Stock
Option Plan. An option to purchase 1,000 shares of Chartwell Re's Common Stock
was granted to all non-employee directors of Chartwell Re in office at January
1, 1996 and will be granted to all non-employee directors of Chartwell Re on the
date of each annual meeting of stockholders. The options are exercisable after
six months from the grant date at a price equal to the fair value of Chartwell
Re's stock on the date of grant. The options expire ten years after the grant
date.
The total number of options available to purchase shares of Chartwell
Re's Common Stock under Chartwell Re's stock option plans at December 31, 1997,
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year....... 876,400 $ 21.92 672,900 $ 21.00 590,100 $ 21.00
Granted.............................. 431,000 29.65 203,500 24.95 82,800 21.00
Exercised............................ (22,400) 21.04 - - - -
Canceled............................. (9,700) 22.01 - - - -
------ ----- ------- ------ ------- -------
Outstanding, end of year............ 1,275,300 $ 24.55 876,400 $ 21.92 672,900 $ 21.00
========= ======= ======= ======= ======= =======
Options exercisable at end of year.. 665,040 554,060 409,480
======= ======= =======
</TABLE>
At December 31, 1997, there were warrants outstanding for the purchase
of 340,577 shares of Common Stock of Chartwell Re at prices of $21 and $22 per
share.
16. EMPLOYEE STOCK PURCHASE PLANS
Chartwell Re established an Employee Stock Purchase Plan which became
effective January 1, 1996. Participating employees are permitted to purchase,
annually, shares of Chartwell Re's Common Stock through payroll deductions in an
amount ranging from 2% to 10% of the employee's base pay (as elected by the
F-23
<PAGE>
employee). The purchase price for shares purchased in a particular plan year is
equal to the lesser of (i) 85 percent of the fair market value of the Common
Stock on the beginning of such plan year or (ii) 85 percent of the fair market
value of the Common Stock at the end of such plan year. Chartwell Re has
authorized 100,000 shares of common stock for purchase under the plan of which
11,587 and 12,381 were purchased in February 1998 and January 1997,
respectively.
Archer Holdings established an Employee Stock Purchase Plan which
became effective May 1, 1997. Participating employees contribute savings to the
Plan ranging from (pound)5 to (pound)250 per month (as elected by the employee).
At the end of three years, the employees may use their savings to buy shares in
Chartwell Re at a price equal to 85% of the fair value of Chartwell Re's Common
Stock as of the inception of the three year period.
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data is as follows (in thousands,
except per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
For the year ended December 31, 1997
Premiums earned..................... $ 61,785 $ 73,890 $ 59,002 $ 51,023
Net investment income.............. 10,173 11,189 10,910 11,185
Net realized capital gains (losses). (20) (29) 112 (66)
Income tax expense.................. 2,799 3,078 3,097 3,228
Net income.......................... 6,678 6,945 7,225 6,926
Stockholder's equity................ 229,374 244,135 256,825 269,052
For the year ended December 31, 1996
Premiums earned..................... $ 56,243 $ 48,961 $ 47,982 $ 56,317
Net investment income............... 10,636 10,656 11,674 10,632
Net realized capital gains.......... 921 81 155
Income tax expense.................. 2,145 2,458 2,744 1,990
Net income.......................... 5,293 4,176 6,444 4,582
Stockholder's equity................ 184,150 211,729 220,366 232,153
F-24
<PAGE>
CHARTWELL RE HOLDINGS CORPORATION
SCHEDULE I-SUMMARY OF INVESTMENTS-
OTHER THAN INVESTMENTS IN RELATED PARTIES
At December 31, 1997
(In Thousands)
Column A Column B Column C Column D
amount at
which shown
in the
balance
Cost Value sheet
---- ----- -----------
Fixed Maturities:
Bonds:
United States Government and government
agencies and authorities(1).............$ 237,958 $ 240,213 $ 240,225
States, municipalities and political
subdivisions(1)......................... 156,977 161,556 161,544
Foreign governments....................... 28,355 29,614 28,867
All other corporate bonds................. 221,668 225,632 225,588
Redeemable preferred stock................... 36,780 38,379 38,379
--------- --------- ---------
Total fixed maturities............... 681,738 695,394 694,603
--------- --------- ---------
Equity Securities- Common stocks of banks,
trusts and insurance companies............. 34,843 38,043 38,043
--------- --------- ---------
Total investments.................. $ 716,581 $ 733,437 $ 732,646
========== ========= =========
(1) Balance sheet value differs from column B and C because category includes
a combination of securities "Held to Maturity" and "Available for Sale".
See Notes 2b and 3 of the audited consolidated financial statements.
S-1
<PAGE>
CHARTWELL RE HOLDINGS CORPORATION
SCHEDULE II-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(In thousands)
December 31,
------------------------
1997 1996
ASSETS:
Investment in and receivable/payable from/to
subsidiaries....................................... $ 353,726 $ 315,818
Cash and cash equivalents............................ 3,070 8,317
Other assets......................................... 18,924 10,914
---------- ----------
$ 375,720 $ 335,049
========== ==========
LIABILITIES:
Long-term debt....................................... $ 95,940 $ 96,807
Other liabilities.................................... 10,728 6,089
---------- ----------
Total liabilities.............................. 106,668 102,896
---------- ----------
STOCKHOLDER'S EQUITY:
Common stock, par value $1.00 per share; authorized
1,000 shares; issued and outstanding 100..........
Additional paid-in capital.......................... 217,866 217,866
Net unrealized appreciation (depreciation) of
investments....................................... 8,741 (1,379)
Foreign currency translation adjustment............. 296 1,291
Retained earnings................................... 42,149 14,375
---------- ---------
Total stockholder's equity.................... 269,052 232,153
---------- ---------
$ 375,720 $ 335,049
========== ==========
The condensed financial statements should be read in conjunction with the
consolidated financial statements and the accompanying notes thereto.
S-2
<PAGE>
CHARTWELL RE HOLDINGS CORPORATION
SCHEDULE II-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
(In thousands)
Chartwell Re
Corporation
(Predecessor)
1997 1996 1995
REVENUES:
Premiums earned............................. $ 8,415 $ $
Net investment income....................... 3,879 651 946
Other income................................ 1,927 1,203
Realized gains.............................. 51 90
------- --------- ---------
Total revenues................. 14,221 1,905 1,036
------- --------- ---------
EXPENSES:
Loss and loss adjustment expenses........... 6,638
Policy acquisition costs.................... 1,683
Interest and amortization................... 7,347 7,835 7,820
General expenses............................ 2,276 2,144 1,211
------- --------- ---------
Total expenses................. 17,944 9,979 9,031
------- --------- ---------
Loss before federal income taxes, equity in
earnings of subsidiaries and extraordinary
item................................. .... (3,723) (8,074) (7,995)
------- --------- ---------
Federal income taxes:
Current.................................. (2,436) (2,783) (2,729)
Deferred................................. (74)
------- -------- --------
Total income tax benefit....... (2,510) (2,783) (2,729)
------- ------- -------
Loss before equity in undistributed income
of subsidiaries and extraordinary item.. (1,213) (5,291) (5,266)
Equity in undistributed income of
subsidiaries............................ 28,987 27,660 11,505
-------- -------- -------
Income before extraordinary item........... 27,774 22,369 6,239
Extraordinary item, net of tax............. 1,874
-------- -------- -------
Net income ................................ $ 27,774 $ 20,495 $ 6,239
======== ======== =======
The condensed financial statements should be read in conjunction with the
consolidated financial statements and the accompanying notes thereto.
S-3
<PAGE>
CHARTWELL RE HOLDINGS CORPORATION
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
(In thousands)
Chartwell Re
Corporation
(Predecessor)
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income taxes recovered............... $2,698 $ 1,941 $ 5,193
Interest received on investments......... 3,879 485 1,058
Overhead expenses........................ (4,682)
Service and other revenue................ 300
Interest paid............................ (6,706) (7,415) (7,219)
Net realized capital gains............... 51 90
Other, net............................... (5,817) (756)
------- ------- -------
Net cash used in operating
activities........................ (4,511) (10,755) (1,634)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital contributions and advances to
subsidiaries............................ (18,058) (7,446)
Cash from acquisitions of Piedmont,
net of expenses paid.................. (672)
Cost of investments acquired.............. (3,789)
Proceeds of investments sold.............. 4,723 6,344
------- ------ --------
Net cash provided by (used in)
investing activities.............. (13,335) (5,563)
------- ------ --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common
stock..................................... 48,546
Issuance of long-term debt.................. 2,689 48,057
Redemption of long-term debt................ (3,425) (73,109)
------- ------- --------
Net cash provided by (used in)
financing activities............... (736) 23,494
------- ------- --------
Effect of exchange rate
on cash........................ 206 (5)
------- ------ --------
Net decrease in cash and cash equivalents........ (5,247) (390) (7,202)
Cash and cash equivalents at beginning of year... 8,317 8,707 10,508
------- ------- --------
Cash and cash equivalents at end of year.........$ 3,070 $ 8,317 $ 3,306
======== ======== ========
RECONCILIATION OF NET INCOME TO NET CASH USED IN
OPERATING ACTIVITIES:
Net income.................................. $27,774 $ 20,495 $ 6,239
Adjustments to reconcile net income to net
cash used in operating activities
Equity in undistributed earnings of
subsidiaries.........................(28,987) (27,660) (11,505)
Net realized capital gains............. (51) (90)
Deferred income taxes.................. (1,008) 4,118
Net change in other assets and
liabilities.......................... (3,298) (2,531) (396)
Other, net.............................
------- -------- -------
Net cash used in operating
activities..................$ (4,511) $(10,755) $ (1,634)
======== ======== ========
The condensed financial statements should be read in conjunction with the
consolidated financial statements and accompanying notes thereto.
S-4
<PAGE>
<TABLE>
CHARTWELL RE HOLDINGS CORPORATION
CHARTWELL RE CORPORATION (PREDECESSOR)
SCHEDULE IV--REINSURANCE
Years Ended December 31, 1997, 1996 and 1995
(In thousands)
<CAPTION>
Column A Column B Column C Column D Column E Column F
-------- -------- -------- -------- -------- --------
Assumed Percentage
Ceded to from of amount
Gross other other Net assumed to
Amount companies companies amount net
<S> <C> <C> <C> <C> <C>
------- ---------- -------- -------- ----------
1997
Premiums earned:
Property and casualty insurance.....$86,343 $86,305 $245,662 $245,700 100.0%
-------- ------- -------- -------- -----
Total premiums...............$86,343 $86,305 $245,662 $245,700 100.0%
======== ======= ======== ========= =====
1996
Premiums earned:
Property and casualty insurance.....$66,709 $68,077 $210,871 $209,503 100.7%
------- ------- -------- --------- -----
Total premiums...............$66,709 $68,077 $210,871 $209,503 100.7%
======= ======= ======== ========= =====
CHARTWELL RE CORPORATION (PREDECESSOR)
1995
Premiums earned:
Property and casualty insurance..... $0 $ 3,248 $123,506 $120,258 102.7%
------- ------- -------- -------- -----
Total premiums............... $0 $ 3,248 $123,506 $120,258 102.7%
======= ======= ======== ======== =====
S-5
</TABLE>
<PAGE>
<TABLE>
CHARTWELL RE HOLDINGS CORPORATION
CHARTWELL RE CORPORATION (PREDECESSOR)
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1997, 1996 and 1995
(In thousands)
<CAPTION>
Column A Column B Column C Column D Column E
--------- --------- --------------------- -------- --------
Additions
---------------------
Balance at Charged to Charged Balance
Beginning Costs and to Other Deductions at End
of Period Expenses Accounts Described of Period
<S> <C> <C> <C> <C> <C>
---------- ---------- -------- ----------- ---------
Year Ended December 31, 1997:
Reinsurance recoverable:
Allowance for Uncollectible
Reinsurance (1)................ $5,731 $663 $6,394
Deposits:
FASB 113 Valuation Allowance......... $1,502 $1,502
Year Ended December 31, 1996:
Reinsurance recoverable:
Allowance for Uncollectible
Reinsurance (1)................ $5,717 $ 14 $5,731
Deposits:
FASB 113 Valuation Allowance......... $1,502 $1,502
CHARTWELL RE CORPORATION (PREDECESSOR)
Year Ended December 31, 1995:
Reinsurance recoverable:
Allowance for Uncollectible
Reinsurance (1)................ $2,649 $68 $3,000 (2) $5,717
Deposits:
FASB 113 Valuation Allowance......... $1,502 $1,502
</TABLE>
(1) The Company has a reinsurance agreement which protects the Company from
certain uncollectible reinsurance balances. Uncollectible amounts have
been ceded to said contract and are reflected as reinsurance recoverable
in the balance sheet. Deductions to reserve represent subsequent
collections of amounts deemed uncollectible.
(2) Allowance for uncollectible reinsurance on the books of INSCORP at the
date of acquisition.
S-6
<PAGE>
<TABLE>
CHARTWELL RE HOLDINGS CORPORATION
CHARTWELL RE CORPORATIONN (PREDECESSOR)
SCHEDULE VI-SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY
INSURANCE OPERATIONS
Years Ended December 31, 1997, 1996 and 1995
<CAPTION>
Claims and
Adjustment
Expenses
Incurred
Related to
----------------
Reserves
for Unpaid Amort. Paid
Claim and of Defer. Claims
Affiliation Deferr. Claim Disc. Net Policy & Claims Other Net
with Policy Adjustment if any Unearn. Earned Invest. Curr. Prior Acquis. Adjust. Operat. Premiums
Registrant Costs Exp.(1) Deduct. Prem. Prem. Income Year Year Costs Expenses Exp. Written
------------- -------- ---------- ------- ------- ------ ------ ----- ----- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Years Ended:
December 31,1997...$26,100 $788,240 $111,149 $245,700 $43,457 $163,003 ($2,155) $72,655 $150,682 $36,333 $268,260
December 31,1996... 17,903 747,858 81,599 209,503 43,598 152,338 (1,717) 52,030 136,753 19,050 192,251
CHARTWELL RE CORPORATION (PREDECESSOR)
December 31,1995... 18,809 741,467 90,573 120,258 19,907 86,470 479 28,790 56,813 11,961 123,314
(1) The Company adopted SFAS No. 113 which, among other things, requires the
Company to record its reserves for unpaid losses and LAE without reduction
for amounts that would be recovered from retrocessionaires. The amount
recoverable from retrocessionaires is recorded as an asset on the
Company's balance sheet. The net of such asset and the reserves for loss
and LAE is $585.6, $575.5 and $561.6 million at December 31, 1997, 1996
and 1995, respectively.
</TABLE>
<PAGE>
INDEX TO EXHIBITS
Exhibits
3.1 Incorporated by reference to Exhibit 3.1 to Chartwell's Annual Report
on Form 10-K for the year ended December 31, 1995.).
3.2 Incorporated by reference to Exhibit 3.2 to Chartwell's Annual Report
on Form 10-K for the year ended December 31, 1995.).
4.2 Indenture, dated as of March 17, 1994, between Chartwell Re and
Bankers Trust Company, as Trustee, for the 10 1/4% Senior Notes due
2004. Incorporated by reference to Exhibit 4.1 to Chartwell Re's
Registration Statement on Form S-1 (File No. 33-75386).
4.3 First Supplemental Indenture, dated as of December 12, 1995, among
Chartwell, Chartwell Re and the Trustee for the Senior Notes.
Incorporated by reference to Exhibit 4.3 to Chartwell Re's
Registration Statement on Form S-1 (File No. 333-678).
4.4 Second Supplemental Indenture, dated as of December 12, 1995, between
Chartwell and the Trustee for the Senior Notes. Incorporated by
reference to Exhibit 4.4 to Chartwell Re's Registration Statement on
Form S-1 (File No. 333-678).
10.1 First Amended and Restated Credit Agreement, dated as of November 14,
1996 among Chartwell, a Delaware corporation, First Union, Fleet Bank,
Royal Bank of Scotland, CIBC/Wood Gundy, Credit Lyonnais
(collectively, the "Lenders"), First Union as agent for the Lenders,
and First Union National Bank (London Branch), as amended by the First
Amendment to First Amended and Restated Credit Agreement, dated as of
January 24, 1997 by and between Chartwell, the Lenders, First Union as
agent for the Lenders, and First Union National Bank (London Branch).
Incorporated by reference to Exhibit 10.1 to Chartwell Re's Annual
Report on Form 10-K for the year ended December 31, 1996 (File No.
1-12502).
10.7 Tax Allocation Agreement, dated December 13, 1995, by and among
Chartwell, Chartwell Re, Drayton, Chartwell Reinsurance, RECO and The
Recor Insurance Company, Inc.
10.8 Second Amendment to First Amended and Restated Credit Agreement, dated
as of October 30, 1997, by and among Chartwell, a Delaware
corporation, The Royal Bank of Scotland, Fleet National Bank, CIBC
Inc., Credit Lyonnais (collectively, the "Lenders"), First Union
National Bank, as Issuing Bank and as agent for the Lenders, and First
Union National Bank (London Branch).
10.9 Workers Compensation Retrocessional Stop Loss Agreement, dated
September 30, 997, by and between both Chartwell Reinsurance Company
and The Insurance Corporation of New York and Western General
Insurance Ltd.
10.10 Aggregate Excess of Loss Reinsurance Teaty among Chartwell Reinsurance
Company, The Insurance Corporation of New York, Dakota Specialty
Insurance Company and London Life Casulaty Reinsurance Corporation,
dated as of July 1, 1997.
12.1 Computation of ratio of earnings to fixed charges.
27.1 Financial Data Schedule
- -------------------------
*Management contract, compensatory plan or arrangement
SECOND AMENDMENT TO FIRST AMENDED AND RESTATED CREDIT AGREEMENT
THIS SECOND AMENDMENT TO FIRST AMENDED AND RESTATED CREDIT AGREEMENT,
dated as of October 30, 1997 (this "Second Amendment"), is made in respect of
the First Amended and Restated Credit Agreement dated November 14, 1996 (as
amended hereby and by the First Amendment to First Amended and Restated Credit
Agreement dated as of January 24, 1997, the "Credit Agreement"), by and between
CHARTWELL RE HOLDINGS CORPORATION, a Delaware corporation (the "Borrower"), the
financial institutions listed on the signature pages thereof or that become
parties thereto after the date thereof (collectively the "Lenders"), FIRST UNION
NATIONAL BANK (formerly known as First Union National Bank of North Carolina),
as agent for the Lenders (in such capacity, the "Agent") and as an Issuing Bank,
and FIRST UNION NATIONAL BANK (LONDON BRANCH), as an Issuing Bank. Capitalized
terms used but not defined herein shall have the meanings given to such terms in
the Credit Agreement.
RECITALS
A. The Borrower has requested that reimbursement obligations with
respect to certain Letters of Credit issued in favor of Lloyd's pursuant to
Article IV be excluded from Consolidated Indebtedness for purposes of the
Capitalization Ratio to the extent of cash, Cash Equivalents and Approved L/C
Collateral provided by the Borrower or any of its Subsidiaries to the issuers of
such Letters of Credit as security for such reimbursement obligations. The
Borrower also has requested that the limitations on letters of credit, including
Letters of Credit under Article IV, issued in favor of Lloyd's imposed by
Sections 4.1(e) and 9.2(iv) be eliminated. The Agent, Issuing Banks, and Lenders
agree to grant such requests.
B. The Borrower desires, and the Agent, Lenders, and Issuing Banks are
willing, to increase the Total Revolving Credit Commitments from Thirty-Five
Million Dollars ($35,000,000) to Sixty Million Dollars ($60,000,000), subject to
the terms and conditions of this Amendment and the Credit Agreement.
C. The Borrower, Agent, Lenders, and Issuing Banks agree to change the
maximum permitted Capitalization Ratio to 0.40 to 1.0 as of the last day of any
fiscal quarter ending on or before September 30, 1999, and to 0.375 to 1.0 as of
the last day of any fiscal quarter ending thereafter.
D. The Borrower has requested an extension of the Revolving Credit
Maturity Date from the current date of December 31, 2001, to January 7, 2003,
and the Agent, Lenders and Issuing Banks are willing to grant such extension.
STATEMENT OF AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrower, the Agent, the
Issuing Banks and the Lenders, for themselves and their successors and assigns,
agree as follows:
ARTICLE I
AMENDMENTS TO CREDIT AGREEMENT
1.1 Amendments to Section 1.1.
(a) The definition of "Consolidated Indebtedness" in Section 1.1 of the
Credit Agreement shall be deleted in its entirety and the following substituted
therefor:
"Consolidated Indebtedness" shall mean, as of the last day of
any fiscal quarter, the aggregate (without duplication) of all
Indebtedness of the Parent and its Subsidiaries as of such date,
determined on a consolidated basis in accordance with Generally
Accepted Accounting Principles, excluding (y) the amount of the
Contingent Interest Notes as reported on the Parent's most recent
balance sheet and (z) reimbursement obligations with respect to (i)
letters of credit issued to secure the reinsurance obligations of one
or more Insurance Subsidiaries under reinsurance agreements entered
into in the ordinary course of such Insurance Subsidiaries' business
and (ii) the Specially Designated Letters of Credit but, in each case
described in the foregoing clauses (i) and (ii), only to the extent of
cash and Cash Equivalents provided to the issuer of such letter of
credit by the Borrower or any Subsidiary as collateral for such
reimbursement obligations, and, in the case of Letters of Credit issued
by either Issuing Bank, the amount of Approved L/C Collateral available
to be drawn upon to satisfy such reimbursement obligations.
<PAGE>
(b) Clause (y) of the definition of "Consolidated Net Worth" in Section
1.1 of the Credit Agreement shall be amended by deleting the words "Tranche A
Maturity Date" and substituting therefor the words "Revolving Credit Maturity
Date."
(c) Clause (vii) in the definition of "Indebtedness" in Section 1.1 of
the Credit Agreement shall be amended by deleting the words "Tranche A Maturity
Date" and substituting therefor the words "Revolving Credit Maturity Date."
(d) The definition of "Revolving Credit Commitment" in Section 1.1 of
the Credit Agreement shall be deleted and the following substituted therefor:
"Revolving Credit Commitment" shall mean, with respect to any
Lender at any time, the amount set forth opposite such Lender's name on
Schedule 2.2 to the Second Amendment to the Credit Agreement dated as
of October __, 1997 under the caption "Revolving Credit Commitment" or,
if such Lender has entered into one or more Assignment and Acceptances
after such date, the amount set forth for such Lender at such time in
the Register maintained by the Agent pursuant to Section 12.7(b) as
such Lender's "Revolving Credit Commitment," as such amount may be
reduced at or prior to such time pursuant to the terms hereof.
(e) The definition of "Revolving Credit Maturity Date" in Section 1.1
of the Credit Agreement shall be deleted in its entirety and the following
substituted therefor:
"Revolving Credit Maturity Date" shall mean January 7, 2003.
(f) The following definition shall be added to Section 1.1 of the
Credit Agreement:
"Specially Designated Letters of Credit" shall mean those
specific Letters of Credit issued pursuant to Article IV enumerated LC
S230745 and LC S230429 and having the Stated Amounts of
(pound)3,275,000 and (pound)1,000,000, respectively, in each case made
in favor of Lloyd's to support the relationship between a Subsidiary of
Archer and Lloyd's.
(g) The definition of "Total Revolving Credit Commitments" in Section
1.1 of the Credit Agreement shall be deleted and the following substituted
therefor:
"Total Revolving Credit Commitments" shall mean at any time
the aggregate amount of Revolving Credit Commitments of all Revolving
Lenders at such time, being on the date of the Second Amendment to the
Credit Agreement Sixty Million Dollars ($60,000,000).
1.2 Amendment to Section 4.1(e). Section 4.1(e) of the Credit Agreement
shall be deleted in its entirety.
1.3 Amendment to Section 8.1. Section 8.1 of the Credit Agreement shall
be deleted in its entirety and the following substituted therefor:
8.1 Capitalization Ratio. The Borrower will not permit the
Capitalization Ratio to be greater than (y) 0.40 to 1.0 as of the last
day of any fiscal quarter ending on or before September 30, 1999, and
(z) 0.375 to 1.0 as of the last day of any fiscal quarter ending after
September 30, 1999.
1.4 Amendment to Section 9.2(iv). Section 9.2(iv) of the Credit
Agreement shall be deleted in its entirety and the following substituted
therefor:
(iv) Indebtedness under reimbursement obligations in respect
of (x) letters of credit issued for the benefit of one or more
Insurance Subsidiaries in the ordinary course of their business to
support the payment by such Insurance Subsidiaries of obligations
arising under insurance and reinsurance contracts, (y) Letters of
Credit issued for the account of Reinsurance in favor of the Society of
Lloyd's or the Council of Lloyd's in accordance with Article IV, and
(z) other letters of credit issued for the account of Reinsurance in
favor of the Society of Lloyd's or the Council of Lloyd's;
<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES; CONDITIONS
2.1 Representations and Warranties. The Borrower hereby certifies and
warrants to the Agent, Issuing Banks and Lenders (a) that each of the
representations and warranties contained in Article VI of the Credit Agreement
and in the other Credit Documents are true and correct in all material respects
on the date hereof with the same effect as though made on the date hereof, both
immediately before and after giving effect to this Amendment (except to the
extent any such representation or warranty is expressly stated to have been made
as of a specific date, in which case such representation or warranty shall be
true and correct as of such specified date), and (b) no Default or Event of
Default shall have occurred and be continuing on the date hereof, after giving
effect to this Amendment.
2.2 Conditions to Amendments. The amendments set forth in Article I
hereof shall not be effective and in force and effect until the following
conditions have been satisfied to the reasonable satisfaction of the Agent and
the Issuing Banks:
(a) the Agent shall have received the following, each dated as of the
date hereof (unless otherwise specified):
(i) Revolving Credit Notes, in substantially the form of
Exhibit A-4 to the Credit Agreement, payable to the order of the
Lenders and in the amounts set forth on Schedule 2.2 attached hereto,
duly completed in accordance with the relevant provisions of Section
2.4 of the Credit Agreement and executed by the Borrower;
(ii) an acknowledgment and confirmation duly executed by the
Parent, as guarantor under the Guaranty, in form and substance
satisfactory to the Agent, reflecting the increase in the Total
Revolving Credit Commitments and the other amendments herein to the
Credit Agreement and confirming the Parent's obligations under the
Guaranty in respect of the Credit Agreement, as amended by this Second
Amendment;
(iii) the favorable opinions of LeBoeuf, Lamb, Greene &
MacRae, L.L.P., special counsel to the Parent, the Borrower and
Reinsurance, and of Kathleen M. Carroll, Vice President, General
Counsel and Secretary of Borrower, Reinsurance and Parent, in
substantially the form of the respective opinions provided by such
counsel in connection with the First Amendment to the Credit Agreement
dated as of January 24, 1997, addressed to the Agent, the Issuing Banks
and the Lenders; and
(iv) certificates of the secretary or an assistant secretary
of the Borrower, the Parent, and Reinsurance, in form and substance
satisfactory to the Agent, certifying (i) that the certificate of
incorporation and bylaws of each such corporation have not been amended
since January 24, 1997, (ii) that attached thereto is a true and
complete copy of resolutions adopted by the boards of directors of the
Borrower, the Parent and Reinsurance authorizing the execution,
delivery and performance of this Second Amendment and the other Credit
Documents required to be executed in connection herewith and to which
it is a party, and (iii) as to the incumbency and genuineness of the
signature of each officer of the Borrower, the Parent and Reinsurance
executing this Second Amendment or any of the other Credit Documents
required to be executed in connection herewith.
(b) the Borrower shall have paid to each of the Lenders an upfront fee
equal to 0.10% of such Lender's Revolving Commitment Percentage of $25,000,000.
<PAGE>
ARTICLE III
GENERAL
3.1 Full Force and Effect. Except as expressly amended hereby, the
Credit Agreement shall continue in full force and effect in accordance with the
provisions thereof on the date hereof. As used in the Credit Agreement,
"hereinafter," "hereto," "hereof," and words of similar import shall, unless the
context otherwise requires, mean the Credit Agreement after amendment by this
Second Amendment. Any reference to the Credit Agreement or any of the other
Credit Documents herein or in any such documents shall refer to the Credit
Agreement and Credit Documents as amended hereby.
3.2 Applicable Law. This Second Amendment shall be governed by and
construed in accordance with the internal laws and judicial decisions of the
State of North Carolina.
3.3 Counterparts. This Second Amendment may be executed in two or more
counterparts, each of which shall constitute an original, but all of which when
taken together shall constitute but one instrument.
3.4 Headings. The headings of this Second Amendment are for the
purposes of reference only and shall not affect the construction of this Second
Amendment.
3.5 Effectiveness. This Second Amendment shall be deemed fully executed
when executed by the Borrower, First Union, as Agent, each of the Lenders, and
the Issuing Banks. The amendments set forth in Article I hereof shall be
effective upon full execution hereof and satisfaction of the conditions of
Section 2.2 hereof.
<PAGE>
IN WITNESS WHEREOF, the Borrower, the Agent, the Issuing Banks, and the
Lenders have caused this Second Amendment to be executed by their duly
authorized officers all as of the day and year first above written.
CHARTWELL RE HOLDINGS CORPORATION
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
CHARTWELL REINSURANCE COMPANY
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
FIRST UNION NATIONAL BANK, as Agent, as an
Issuing Bank, and as a Lender
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
FIRST UNION NATIONAL BANK (LONDON
BRANCH), as an Issuing Bank
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
CIBC, INC.
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
CREDIT LYONNAIS
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
FLEET NATIONAL BANK
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
THE ROYAL BANK OF SCOTLAND
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
<PAGE>
Schedule 2.2 to Second Amendment to First Amended
and Restated Credit Agreement
Revolving Credit Commitments
Revolving Credit Commitments
First Union National Bank $
CIBC, Inc. $
Credit Lyonnais $
Fleet National Bank $
The Royal Bank of Scotland $
<PAGE>
Exhibit F-2
FIRST AMENDED AND RESTATED
BORROWER ESCROW AND SECURITY AGREEMENT
THIS FIRST AMENDED AND RESTATED BORROWER ESCROW AND SECURITY AGREEMENT,
dated as of the 27th day of February, 1997 (this "Agreement"), is made between
FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking association, as
Agent (in such capacity, the "Agent") under the Credit Agreement referred to
below, CHARTWELL RE HOLDINGS CORPORATION, a Delaware corporation (the
"Borrower"), CHARTWELL REINSURANCE COMPANY, a Minnesota corporation
("Reinsurance"), and FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national
banking association, as escrow agent hereunder (in such capacity, the "Escrow
Agent"). Capitalized terms used herein and not defined elsewhere herein shall
have the meanings given to them in the Credit Agreement referred to below.
RECITALS
A. The Borrower, Reinsurance, the Agent, certain Issuing Banks (the
"Issuing Banks") and certain lenders (the "Lenders") are parties to a First
Amended and Restated Credit Agreement, dated as of November 14, 1996 and as
amended by that First Amendment to First Amended and Restated Credit Agreement
dated as of January 24, 1997 (as further amended, modified, supplemented or
restated from time to time, the "Credit Agreement"), pursuant to which the
Lenders have agreed to make Term Loans and Revolving Loans to the Borrower, and
the Issuing Banks have agreed to issue Letters of Credit for the benefit of the
Borrower, upon the terms and conditions set forth therein.
B. The Credit Agreement provides that under certain circumstances payments
relating to the Letters of Credit may be deposited in cash collateral accounts
(collectively the "L/C Cash Collateral Accounts"). Such payments made into the
L/C Cash Collateral Accounts to secure Reimbursement Obligations under Letters
of Credit issued for the account of Reinsurance or for the account of
Reinsurance and the Borrower jointly shall be maintained in accounts referencing
Reinsurance and the Borrower jointly, and all other deposits shall be maintained
in accounts referencing solely the Borrower. Payments in Dollars relating to the
Letters of Credit issued in Dollar face amounts may be deposited, as applicable,
in cash collateral accounts (the "Borrower Dollars Account" and the "Joint
Dollars Account" and, collectively, the "Dollars Collateral Accounts") and
payments in Pounds Sterling relating to the Letters of Credit issued in Pounds
Sterling face amounts may be deposited, as applicable, in cash collateral
accounts (the "Borrower Sterling Account" and the "Joint Sterling Account" and,
collectively, the "Sterling Collateral Accounts"); in each case to secure
payment of the Reimbursement Obligations and the other Letter of Credit Exposure
under the Credit Agreement. The Borrower Dollars Account and the Borrower
Sterling Account shall be collectively referred to herein as the "Borrower
Collateral Accounts " and the Joint Dollars Account and the Joint Sterling
Account shall be collectively referred to herein as the "Joint Collateral
Accounts."
C. It is a condition to the making of the Loans and the issuance of the
Letters of Credit under the Credit Agreement that the Borrower shall have
agreed, by executing and delivering this Agreement, to establish the L/C Cash
Collateral Accounts and to grant and assign to the Agent a security interest in
such accounts and in the funds at any time held therein pursuant to the terms
hereof.
STATEMENT OF AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, the payment by the
Borrower and Reinsurance to the Escrow Agent of $1.00 and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and to induce the Agent, the Issuing Banks and the Revolving
Lenders to enter into the Credit Agreement and to issue the Letters of Credit or
make the Revolving Loans to the Borrower and Reinsurance thereunder, the parties
hereby agree as follows:
1. Appointment of Escrow Agent. The Borrower, Reinsurance and the Agent
hereby appoint the Escrow Agent to serve as escrow agent hereunder. The Escrow
Agent accepts such appointment and agrees to hold, invest and disburse the funds
maintained in the L/C Cash Collateral Accounts (collectively, the "Escrow
Funds") in accordance with this Agreement and as agent for the benefit of the
Agent and the Revolving Lenders so that the Agent shall have, pursuant to
Section 4, a valid and perfected first priority security interest in and Lien
upon all funds maintained and held in the L/C Cash Collateral Accounts.
<PAGE>
2. Creation of L/C Cash Collateral Accounts; Withdrawals; Disbursements.
The Borrower and the Agent hereby establish the Borrower Dollars Account, the
Joint Dollars Account, the Borrower Sterling Account, and the Joint Sterling
Account, in each case to be maintained from and after the date hereof by and in
the name of the Escrow Agent. With respect to (i) the Borrower Dollars Account,
such account shall be designated the "Chartwell Re Holdings L/C Dollars Cash
Collateral Account", Account #1072636956, (ii) the Joint Dollars Account, such
account shall be designated the "Chartwell Re Holdings and Chartwell Reinsurance
L/C Dollars Cash Collateral Account", Account #____________, (iii) the Borrower
Sterling Account, such account shall be designated the "Chartwell Re Holdings
L/C Pounds Sterling Cash Collateral Account", Account # 1072636965, and (iv) the
Joint Sterling Account, such account shall be designated the "Chartwell Re
Holdings and Chartwell Reinsurance L/C Pounds Sterling Cash Collateral Account",
Account # ___________ . All deposits of funds into, investment of funds held in,
and disbursements of funds from each L/C Cash Collateral Account shall be made
on the terms and conditions set forth herein.
(a) Except for distributions and disbursements by Escrow Agent pursuant
to Section 3 or as directed by joint direction of the Borrower and the Agent, or
joint direction of the Borrower, Reinsurance and the Agent, pursuant to Section
2(g), or as directed by the Agent pursuant to Section 2(c) or 2(d), neither the
Borrower nor Reinsurance shall be permitted to withdraw any funds from any L/C
Cash Collateral Account for any purpose.
(b) In the event of a drawing on any Letter of Credit and subsequent
payment by either Issuing Bank at any time during which any amounts are held in
the applicable L/C Cash Collateral Account, the Agent shall have the right
immediately to instruct the Escrow Agent to disburse to the Agent, and the
Escrow Agent will disburse to the Agent upon receipt of such instructions, funds
held in the applicable L/C Cash Collateral Account (including any undisbursed
interest and income) in an amount sufficient to pay in full the amount of any
Reimbursement Obligation arising therefrom (it being understood that, pursuant
to Sections 4.4 and 4.8 of the Credit Agreement, (i) disbursements to the Agent
for Reimbursement Obligations for the account of the Borrower in Dollars will be
made from the Borrower Dollars Account, (ii) disbursements to the Agent for
Reimbursement Obligations under Letters of Credit issued for the account of
Reinsurance or the Borrower and Reinsurance jointly in Dollars will be made from
the Joint Dollars Account, (iii) disbursements to the Agent for Reimbursement
Obligations under Letters of Credit issued for the account of the Borrower in
Pounds Sterling will be made from the Borrower Sterling Account, and (iv)
disbursements to the Agent for Reimbursement Obligations under Letters of Credit
issued for the account of Reinsurance or the Borrower and Reinsurance jointly in
Pounds Sterling will be made from the Joint Sterling Account); provided that, in
the event such funds in the applicable L/C Cash Collateral Account shall be
insufficient to pay in full the Reimbursement Obligation then due and owing, the
Agent may instruct the Escrow Agent to disburse to the Agent, and the Escrow
Agent will so disburse to the Agent, all of the funds then held in the
applicable L/C Cash Collateral Account, provided further, however, that each of
the Agent and Escrow Agent shall give notice to the Borrower promptly, and in
any event not more than two (2) Business Days) after, the delivery of any such
instruction.
(c) If either the Borrower or Reinsurance has made a deposit to any of
the L/C Cash Collateral Accounts pursuant to Section 4.8(b) of the Credit
Agreement, the Agent shall, upon request of the Borrower (with respect to any
deposit made by Borrower) or the Borrower and Reinsurance jointly (with respect
to any deposit made by Reinsurance), instruct the Escrow Agent to disburse to
the Borrower or Reinsurance, as applicable, and the Escrow Agent will so
disburse to the Borrower or Reinsurance, as applicable, all or a part of the
amount of funds so deposited (it being understood that neither Borrower nor
Reinsurance shall be entitled to make such request if a Default shall have
occurred and be continuing).
(d) If the Borrower has made a deposit to either of the L/C Cash Collateral
Accounts pursuant to Section 4.8(a) of the Credit Agreement, and if the amounts
deposited pursuant to Section 4.8(a) are at any time thereafter not required to
be maintained in the L/C Cash Collateral Accounts, the Agent shall instruct the
Escrow Agent to disburse to the Borrower, and the Escrow Agent will so disburse
to the Borrower, the appropriate amount of such funds.
(e) Until disbursed in accordance with Section 3, all undisbursed interest
and income on the Escrow Funds shall be deemed part of, as and when accrued, the
principal balance of such funds whereupon the same shall be deemed temporarily
part of such principal balance and shall constitute Collateral secured under
Section 4 hereof until so disbursed.
(f) Funds held in the applicable L/C Cash Collateral Account shall be
disbursed in same day available funds by the Escrow Agent in the Applicable
Currency on the Business Day next following its receipt of instructions therefor
as provided herein; provided, however, that if such instructions are received by
the Escrow Agent on a day that is not a Business Day or after 1:00 p.m.,
Charlotte time, on a Business Day, such funds shall be disbursed on the second
Business Day following receipt of such notice.
<PAGE>
(g) In addition to disbursements permitted or required under
subsections (b), (c), (d) and (e) above and Section 3, the Escrow Agent will
disburse funds held in each L/C Cash Collateral Account at any time and from
time to time in accordance with the joint written directions of the Borrower and
the Agent; provided, however, that such joint written direction with respect to
either of the Joint Dollars Collateral Accounts shall also include Reinsurance.
3. Interest and Income. All interest and income earned during any
calendar quarter on funds maintained in each L/C Cash Collateral Account shall
be disbursed by the Escrow Agent to or at the written direction of the Borrower
within ten (10) days after the end of such quarter, beginning with the quarter
ending December 31, 1996.
4. L/C Cash Collateral Account Security Interest. As security for the
payment and performance of the Reimbursement Obligations and the other Letter of
Credit Exposure of the Revolving Lenders under the Credit Agreement, the
Borrower, with respect to the Borrower Collateral Accounts, and the Borrower and
Reinsurance jointly, with respect to the Joint Collateral Accounts, hereby
pledge, grant and assign to the Agent, for the benefit of the Issuing Banks and
the Revolving Lenders, a security interest in, and all right, title and interest
in, to and under, each L/C Cash Collateral Account and in the funds now or
hereafter existing in each L/C Cash Collateral Account (the "Collateral").
5. Investment of Funds. (a) The Escrow Agent shall invest and reinvest
the funds held in the Dollars Collateral Accounts as the Borrower shall direct
in writing or pursuant to telephone instruction confirmed promptly in writing;
provided, however, that no investment or reinvestment may be made except in the
following:
(i) securities issued or unconditionally guaranteed by the United States of
America or any agency or instrumentality thereof, backed by the full faith and
credit of the United States of America and maturing within 90 days from the date
of acquisition;
(ii) commercial paper issued by any Person organized under the laws of the
United States of America, maturing within 90 days from the date of acquisition
and, at the time of acquisition, having a rating of at least A-1 or the
equivalent thereof by Standard & Poor's or at least P-1 or the equivalent
thereof by Moody's;
(iii) time deposits and certificates of deposit maturing within 90 days
from the date of issuance and issued by a bank or trust company organized under
the laws of the United States of America or any state thereof that has combined
capital and surplus of at least $500,000,000 and that has (or is a subsidiary of
a bank holding company that has) a long-term unsecured debt rating of at least A
or the equivalent thereof by Standard & Poor's or at least A2 or the equivalent
thereof by Moody's;
(iv) repurchase obligations with a term not exceeding seven (7) days with
respect to underlying securities of the types described in clause (i) above
entered into with any bank or trust company meeting the qualifications specified
in clause (iii) above; or
(v) money market funds substantially all of whose assets are comprised of
securities of the types described in clauses (i) through (iv) above.
(b) The Escrow Agent shall invest and reinvest the funds held in the Sterling
Collateral Accounts as the Borrower shall direct in writing or pursuant to
telephone instruction confirmed promptly in writing; provided, however, that no
investment or reinvestment may be made except in the following:
(i) time deposits and certificates of deposit maturing within 90 days from
the date of issuance and issued by a bank or trust company organized under the
laws of England and Wales that has (or is a subsidiary of a bank holding company
that has) a long-term unsecured debt rating of at least A or the equivalent
thereof by Standard & Poor's or at least A2 or the equivalent thereof by Moody's
or equivalent ratings from an English rating agency; or
(ii) money market funds substantially all of whose assets are comprised of
securities of the types described in clause (i) above or the equivalent in
Pounds to securities of the types described in (a)(i) through (iv) above.
<PAGE>
(c) Each of the foregoing investments shall be made in the name of the Escrow
Agent. If the Escrow Agent has not received investment direction from the
Borrower at any time at which an investment decision must be made, the Escrow
Agent shall invest the funds held in the Dollars Collateral Accounts, or such
portion thereof as to which no direction has been received, in investments
described in clause (a)(v) above, and the funds held in the Sterling Collateral
Accounts, or such portion thereof as to which no direction has been received, in
investments described in clause (b)(ii) above. Notwithstanding anything to the
contrary contained herein, the Escrow Agent may, without notice to the Borrower
or Reinsurance, sell or liquidate any of the foregoing investments at any time,
in accordance with standard commercial practices, endeavoring to mitigate costs
to the extent reasonably possible, if the proceeds thereof are required for any
release of funds permitted or required hereunder, and the Escrow Agent shall not
be liable or responsible for any loss, expense or penalty resulting from any
such sale or liquidation.
6. Escrow Agent to Maintain Records. The Escrow Agent will maintain
adequate records of all deposits to the L/C Cash Collateral Accounts and
investments of Escrow Funds and will make such records available to Borrower
upon reasonable notice.
7. Resignation of Escrow Agent. The Escrow Agent may resign from the
performance of its duties hereunder at any time by giving thirty (30) days'
prior written notice to the Borrower, Reinsurance and the Agent. Such
resignation shall take effect upon the appointment of a successor Escrow Agent
as provided hereinbelow. Upon any such notice of resignation, the Agent shall,
with the consent of the Borrower (which consent shall not be unreasonably
withheld), appoint a successor Escrow Agent hereunder, which shall be a
commercial bank, trust company or other financial institution with a combined
capital and surplus in excess of $100,000,000. Upon the acceptance of any
appointment as Escrow Agent hereunder by a successor Escrow Agent, such
successor Escrow Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Escrow Agent, and the
retiring Escrow Agent shall be discharged from its duties and obligations under
this Agreement. After any retiring Escrow Agent's resignation hereunder as
Escrow Agent, the provisions of this Agreement shall inure to its benefit as to
any actions taken or omitted to be taken by it while it was Escrow Agent under
this Agreement.
8. Liability of Escrow Agent. The Escrow Agent shall have no liability
or obligation with respect to any L/C Cash Collateral Account except for the
Escrow Agent's willful misconduct or gross negligence. The Escrow Agent's sole
responsibility shall be for the safekeeping, investment and disbursement of the
funds maintained in any L/C Cash Collateral Account in accordance with the terms
of this Agreement. The Escrow Agent shall treat the Escrow Funds with the same
care as it treats its own property. The Escrow Agent shall have no implied
duties or obligations and shall not be charged with knowledge or notice of any
fact or circumstance not specifically set forth herein. The Escrow Agent may
rely upon any instrument, not only as to its due execution, validity and
effectiveness, but also as to the truth and accuracy of any information
contained therein, that the Escrow Agent shall in good faith believe to be
genuine, to have been signed or presented by the person or parties purporting to
sign the same and to conform to the provisions of this Agreement. The Escrow
Agent shall be responsible for actual losses (defined as and limited to any
decline in principal value of an investment between the time of purchase and
time of sale) from investments in other than investments permitted under Section
5 hereof. In no event shall the Escrow Agent be liable for incidental, indirect,
special, consequential or punitive damages. The Escrow Agent shall not be
obligated to take any legal action or commence any proceeding in connection with
any L/C Cash Collateral Account or the funds therein, this Agreement or any
other Credit Document, or to appear in, prosecute or defend any such legal
action or proceeding. The Escrow Agent may consult legal counsel selected by it
in the event of any dispute or question as to the construction of any of the
provisions hereof or of any other agreement or of its duties hereunder, and
shall incur no liability and shall be fully protected in acting in accordance
with the opinion or instruction of such counsel.
<PAGE>
9. Indemnification. From and at all times after the date of this Agreement,
and in addition to the fees, costs and expenses payable under Section 9, the
Borrower agrees and, with respect to any of the following arising out of or
related to either of the Joint Collateral Accounts, the Borrower and Reinsurance
jointly and severally agree to indemnify and hold harmless the Escrow Agent and
each of its directors, officers, employees, agents and Affiliates (each, an
"Indemnified Person") against any and all claims, losses, damages, liabilities,
costs and expenses of any kind or nature whatsoever, including, without
limitation, reasonable attorneys' fees and expenses (collectively, "Indemnified
Costs"), incurred by or asserted against any such Indemnified Person from and
after the date hereof, whether direct, indirect or consequential, as a result of
or arising from or in any way relating to any action, suit or proceeding
(including any inquiry or investigation) by any Person, whether threatened or
initiated, arising from or in connection with the negotiation, preparation,
execution, performance or enforcement of this Agreement or any of the
transactions contemplated herein, in any case whether or not any such
Indemnified Person is a party to any such action, suit or proceeding or a
subject of any such inquiry or investigation if such Indemnified Person
reasonably determines that it may become a party to any such action; provided,
however, that no Indemnified Person shall have the right to be indemnified
hereunder for any Indemnified Costs to the extent resulting from the gross
negligence or willful misconduct of such Indemnified Person as finally
determined by a court of competent jurisdiction and not subject to any appeal.
If any such action or claim shall be brought or asserted against any Indemnified
Party, such Indemnified Party shall promptly notify the Borrower in writing, and
the Borrower shall assume the defense thereof, including the employment of
counsel and the payment of all expenses. Such Indemnified Party shall, in its
sole discretion, have the right to employ separate counsel (who may be selected
by such Indemnified Party in its sole discretion) in any such action and to
participate in the defense thereof, and the fees and expenses of such counsel
shall be paid by such Indemnified Party unless (a) the Borrower agrees to pay
such fees and expenses, (b) the Borrower shall fail to assume the defense of
such action or proceeding or shall fail, in the reasonable discretion of such
Indemnified Party, to employ counsel satisfactory to the Indemnified Party in
any such action or proceeding, or (c) the named parties to any such action or
proceeding (including any impleaded parties) include both such Indemnified Party
and the Borrower, Reinsurance or any other Indemnified Party, and such
Indemnified Party shall have been advised by counsel that there may be one or
more non-frivolous legal defenses available to it that are different from or
additional to those available to the Borrower, Reinsurance or such other
Indemnified Party. All of the foregoing Indemnified Costs of any Indemnified
Person shall be paid or reimbursed by the Borrower and, as applicable,
Reinsurance as and when incurred and upon demand.
10. Fees and Expenses of Escrow Agent. The Borrower will pay to the
Escrow Agent an annual escrow fee of $2,000, payable in advance on the Closing
Date and on each anniversary of the Closing Date, will pay the Escrow Agent a
handling fee of $50 per transaction associated with investments and $25 per
transaction associated with deposits and disbursements, for which handling fees
the Borrower shall be billed monthly with payment due within ten (10) days of
such invoice, and will promptly reimburse the Escrow Agent upon demand for all
reasonable out-of-pocket costs and expenses incurred by the Escrow Agent.
11. Termination of Escrow. Upon the indefeasible payment in full of the
Obligations and receipt by the Escrow Agent of notice thereof from the Agent
(which notice the Agent agrees to give promptly thereupon), this Agreement shall
terminate, and the Escrow Agent shall forthwith disburse all funds held in each
L/C Cash Collateral Account to or at the written direction of the Borrower;
provided, however, that the provisions of Sections 7, 8 and 9 shall survive such
termination.
12. Disbursement Into Court. If, at any time, there shall exist any
dispute between the Borrower or Reinsurance, on the one hand, and the Agent, on
the other hand, with respect to the holding or disposition of any portion of the
funds held in the L/C Cash Collateral Accounts or any other obligations of the
Escrow Agent hereunder, or if at any time the Escrow Agent is unable to
determine, to its sole satisfaction, the proper disposition of any portion of
such funds or Escrow Agent's proper actions with respect to its obligations
hereunder, or if the Agent has not, within thirty (30) days of the furnishing by
the Escrow Agent of a notice of resignation pursuant to Section 6, appointed a
successor Escrow Agent to act hereunder, then the Escrow Agent may, in its sole
discretion, take either or both of the following actions:
<PAGE>
(i) suspend the performance of any of its obligations under this Agreement
until such dispute or uncertainty shall be resolved to the sole satisfaction of
the Escrow Agent or until a successor Escrow Agent shall have been appointed (as
the case may be); provided, however, that the Escrow Agent shall continue to
invest the Escrow Funds in accordance with Section 5; and
(ii) petition (by means of an interpleader action or any other appropriate
method) any court of competent jurisdiction in Charlotte, North Carolina, for
instructions with respect to such dispute or uncertainty, and pay into such
court all or part of the Escrow Funds for holding and disposition in accordance
with the instructions of such court.
The Escrow Agent shall have no liability to the Borrower, Reinsurance or any
other Person with respect to any such suspension of performance or disbursement
into court, specifically including any liability or claimed liability that may
arise, or be alleged to have arisen, out of or as a result of any delay in the
disbursement of funds held in any L/C Cash Collateral Account or any delay in or
with respect to any other action required or requested of the Escrow Agent.
13. Tax Reporting. The Escrow Agent will provide to the Borrower and
Reinsurance a statement of investment income and such other statements with
respect to each L/C Cash Collateral Account as the Borrower or Reinsurance may
reasonably request from time to time. The Borrower and Reinsurance shall be
responsible for all tax reporting with respect to the L/C Cash Collateral
Accounts and the income therefrom.
14. Notices. All notices and other communications provided for
hereunder shall be in writing (including telegraphic, telex, facsimile
transmission or cable communication) and mailed, telegraphed, telexed,
telecopied, cabled or delivered to the party to be notified at the following
addresses:
If to the Borrower: Chartwell Re Holdings Corporation
4 Stamford Plaza
107 Elm Street
Stamford, Connecticut 06912-0043
Attention: Mr. Charles E. Meyers
Telephone: (203) 705-2655
Telecopy: (203) 705-2718
If to Reinsurance: Chartwell Reinsurance Company
4 Stamford Plaza
107 Elm Street
Stamford, Connecticut 06912-0043
Attention: Mr. Charles E. Meyers
Telephone: (203) 705-2655
Telecopy: (203) 705-2718
If to the Agent: First Union National Bank of North Carolina
301 South College Street
Charlotte, North Carolina 28288-0608
Attention: Syndication Agency Services
Telephone: (704) 383-3789
Telecopy: (704) 383-0288
If to the Escrow Agent: First Union National Bank of North Carolina
230 South Tryon Street, 9th Floor
Charlotte, North Carolina 28288-1179
Attention: Bond Administration
Telephone: (704) 374-6242
Telecopy: (704) 383-7316
or to such other address as any party may designate for itself by like notice to
all other parties hereto. All such notices and communications shall be deemed to
have been given (i) if mailed as provided above by any method other than
overnight delivery service, on the fifth Business Day after deposit in the
mails, (ii) if mailed by overnight delivery service, telegraphed, telexed or
telecopied, when delivered for overnight delivery, delivered to the telegraph
company, confirmed by telex answerback or transmitted by telecopier,
respectively, or (iii) if delivered by hand, upon delivery.
<PAGE>
15. Amendments, Waivers, etc. No amendment, modification, waiver,
discharge or termination of, or consent to any departure by any party hereto
from, any provision of this Agreement, shall be effective unless in a writing
signed by the Agent (and, in the event the same shall affect the rights or
obligations of the Escrow Agent under Sections 7, 8, 9 or 10, the Escrow Agent)
and the Borrower, and then the same shall be effective only in the specific
instance and for the specific purpose for which given.
16. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of North Carolina (without
regard to the conflicts of law provisions thereof).
17. Severability To the extent any provision of this Agreement is
prohibited by or invalid under the applicable law of any jurisdiction, such
provision shall be ineffective only to the extent of such prohibition or
invalidity and only in any such jurisdiction, without prohibiting or
invalidating such provision in any other jurisdiction or the remaining
provisions of this Agreement in any jurisdiction.
18. Construction. The headings of the various sections and subsections
of this Agreement have been inserted for convenience only and shall not in any
way affect the meaning or construction of any of the provisions hereof. Unless
the context otherwise requires, words in the singular include the plural and
words in the plural include the singular.
19. Counterparts. This Agreement may be executed in any number of
counterparts and by different parties hereto on separate counterparts, each of
which when so executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument.
20. Entire Agreement. This Agreement and the other documents and
instruments executed contemporaneously herewith constitute the entire agreement
between the parties hereto relating to the subject matter hereof.
21. Successors and Assigns. The provisions of this Agreement shall be
binding upon, inure to the benefit of and be enforceable by the respective
successors and assigns of the Borrower, Reinsurance, the Escrow Agent and the
Agent.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized corporate officers as of the date first above
written.
CHARTWELL RE HOLDINGS CORPORATION
By:
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Name:
--------------------------------------
Title:
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CHARTWELL REINSURANCE COMPANY
By:
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Name:
--------------------------------------
Title:
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FIRST UNION NATIONAL BANK OF
NORTH CAROLINA, as Agent
By:
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Name:
--------------------------------------
Title:
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FIRST UNION NATIONAL BANK OF
NORTH CAROLINA, as Escrow Agent
By:
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Name:
--------------------------------------
Title:
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WORKERS COMPENSATION RETROCESSIONAL STOP LOSS AGREEMENT
This agreement is madeand entered into by and between both Chartwell
Reinsurance Company, a Minnesota corporation and The Insurance Corporation of
New York, a New York corporation (hereinafter called the
"Retrocedent/Reinsured") and Western General Insurance Ltd. (hereinafter called
the "Retrocessionaire") a Bermuda corporation.
ARTICLE 1 - BUSINESS COVERED
The Retrocessionaire shall indemnify the Retrocedent/Reinsured with respect
to their net retained liability in respect of designated workers compensation
insurance coverage A and B) reinsurance and insurance as set forth in Schedules
A and B attached and made partof this Agreement and as may be amended by mutual
agreement to add additional reinsurance treaties or insurance programs as
requested by the Retrocedent/Reinsured ("Subject Business").
ARTICLE 2 - TERM
The term of this agreement shall be from 12:01 a.m. eastern standard time,
January 1, 1997 until December 31, 1997, both days inclusive and shall apply to
all in-force, new and renewal Original Contracts (as defined herein) of Subject
business attaching during this period and listed on Schedule A. Notwithstanding
the termination of this agreement as provided in this Article 2, its provisions
will continue to apply to all unexpired Original Contracts ( as defined herein)
until the termination of such Original Contracts,not toexceed twelve (12) months
plus odd time from the date of termination of this Agreement (the "Run-Off
Period").
Notwithstanding the other provisions in this Article, in the event the
Original Contracts are written in a jurisdiction where cancellation, renewal or
non-renewal is regulated by the insurance authorities, and the
Retrocedent/Reinsured is bound by such regulations and statutes of said
jurisdictions or by judicial decisions, the Retrocessionaire will remain liable
on such Original Contracts in force at the termination date of this Agreement
(and will receive premium therefor) until the date each terminates or until the
first renewal date when said Original Contracts can be lawfully nonrenewed,
whichever occurs first. If, however, the Retrocedent/Reinsured holds the Subject
Business on a net basis and for their own account, the Retrocessionaire will not
be liable for longer than the Run-Off Period.
ARTICLE 3 - TERRITORY
This Agreement will apply to the same territory as covered by the Original
Contracts.
<PAGE>
ARTICLE 4 - EXCLUSIONS
The exclusions shall be identical in all respects as those set forth in the
Original Contracts covered hereunder, it being understood that the
Retrocessionaire shall follow the fortunes of the Retrocedent/Reinsured in all
respects. However, the Nuclear Incident Exclusion, attached to, and made part of
this Agreement, shall supersede any similar exclusions contained in Original
Contracts.
ARTICLE 5 - LIMITS AND RETENTIONS
Pursuant to Coverage A, the Retrocedent/Reinsured shall retain 100% of
losses until a 55% Loss Ratio (as defined in Article 6) is attained and the
Retrocessionaire shall cover 100% of losses when the Loss Ratio exceeds 55%
until the Loss Ratio equals 72%.
Under Coverage B, the Retrocedent/Reinsured shall retain 100% of losses
when and after the Loss Ratio exceeds 72% until the Loss Ratio equals 79%. The
Retrocessionaire shall cover 100% of losses when the Loss Ratio exceeds 79%
until the Loss Ratio equals 89%. However, in no event shall the Retrocessionaire
be liable for more than $7,610,000 pursuant to Coverage B.
ARTICLE 6 - DEFINTIONS
"Original Contracts", means all agreements covering Subject Business
pursuant to which the Retrocedent/Reinsured provides reinsurance indemnity to an
original reinsured and all policies, binders, contracts or agreements of
insurance, whether written or oral, as written by the Retrocedent/Reinsured.
"Experience Account", means with respect to the profit sharing commission,
the result derived from the calculation of income minus outgo.
"Obligations" means:
I. Losses and allocated loss expenses paid by the ceding company, but not
recovered from the reinsurer; II. Reserves for losses reported and outstanding;
III. Reserves for losses incurred but not reported; and IV. Reserves for
allocated loss expenses and unearned premiums.
"Incurred Losses/Ultimate Net Loss" means those losses occurring during the
accident year of 1997, subject to extension for the Run-Off Period on Subject
Business written during the period of 1/1/97 - 12/31/97. Incurred
Losses/Ultimate Net Loss are determined by the Retrocedent/Reinsured and include
paid losses, paid loss adjustment expenses, outstanding case and loss adjustment
expenses reserves, incurred but not reported losses and related loss adjustment
expense, net of reinsurance recoveries that would inure to the benefit of the
Retrocessionaire under this Agreement as per Schedule B.
<PAGE>
"Loss Ratio" means the ratio of earned premium to incurred losses.
"Subject Net Earned Premium" shall mean premium earned on Subject Business
during the term of this Agreement, less premiums ceded and earned for
reinsurance that would inure to the benefit of the Retrocessionaire.
"Taxes" shall mean all applicable United States taxes including federal
income, excise and withholding taxes.
ARTICLE 7 - NET RETAINED LINES
This Agreement applies only to that portion of any Original Contract which
the Retrocedent/Reinsured retains net for their own account, and in calculating
the amount of any loss hereunder and also in computing the amount or amounts in
excess of the retentions, only loss or losses in respect of that portion of any
Original Policy which the Retrocedent/Reinsured retains net for their own
account shall be included.
The amount of the Retrocedent's/Reinsured's liability hereunder in respect
of any loss or losses shall not be increased by reason of the inability of the
Retrocedent/Reinsured to collect reinsurance recoverable from any other
reinsurer(s).
ARTICLE 8 - EXTRA CONTRACTUAL OBLIGATIONS
This Agreement shall cover the Retrocedent/Reinsured within the limits set
forth in Article 5, where the Ultimate Net Loss includes Extra Contractual
Obligations. The term "Extra Contractual Obligations" is defined as those
liabilities not covered under any other provision of this Agreement that arise
from the handling of any claim on Subject Business, such liabilities arising
because of, but not limited to, the following: failure by the
Retrocedent/Reinsured to settle within the limit of an Original Con tract, or by
reason of alleged or actual negligence, fraud, or bad faith in rejecting an
offer of settlement or in the preparation of the defense or in the trial or any
action against its insured or reinsured, or in the or prosecution of an appeal
consequent upon such action.
The date on which any Extra Contractual Obligation is incurred by the
Retrocedent/Reinsured shall be deemed, in all circumstances, to be the date of
loss under the Original Contract. However, this Article shall not apply where
the loss has been incurred due to fraud by a member of the Board of Directors or
a corporate officer of the Retrocedent/Reinsured acting individually or
collectively or in collusion with any individual or corporation or any other
organization or party involved in the presentation, defense or settlement of
any claim covered hereunder.
<PAGE>
This Agreement shall cover all loss from Extra Contractual Obligations
how so ever arising where the loss is incurred by the Retrocedent/Reinsured as a
result of its issuance of an Original Contract of insurance or reinsurance that
provides cover for such loss. Where such loss results from a contractual
liability arising out of an Original Contract of reinsurance,
Retrocedent/Reinsured may include all of such Extra Contractual Obligation for
the purpose of calculating the Ultimate Net Loss hereunder.
ARTICLE 9 - EXCESS OF ORIGINAL POLICY LIMITS
This Agreement shall cover the Retrocedent/Reinsured, within the limits set
forth in Article 5, in accordance with the provisions of the excess of original
policy limits clauses contained in the Retrocedents' Original Contracts of
reinsurance for any loss for which the Retrocedents may be legally liable to pay
in excess of the limits of the Original Contract of reinsurance.
In addition, this Agreement shall cover the Retrocedent/Reinsured, within
the limits set forth in Article 5, for any loss for which the
Retrocedent/Reinsured may be legally liable to pay in excess of the limits of
Original Contracts of insurance, such loss in excess of that limit having been
incurred because of its failure to settle within the limit of the Original
Contract of insurance or by reason of alleged or actual negligence, fraud, or
bad faith in rejecting an offer of settlement or in the preparati on of the
defense or in the trial of any action against the original insured or reinsured
or in the preparation or prosecution of an appeal consequent upon such action.
However, this Agreement shall not cover any loss incurred due to the fraud
of a member of the Board of Directors or a corporate officer of the
Retrocedent/Reinsured acting individually or collectively or in collusion with
any individual or corporation or any other organization or party involved in the
presentation, defense, or settlement of any claim covered hereunder.
For the purposes of this Article 9, the word "loss" shall mean any amount
for which the Retrocedent/Reinsured would have been contractually liable to pay
had it not been for the limit of an Original Contract.
Recoveries from any form of coverage that protects the
Retrocedent/Reinsured against claims which are the subject matter of this
Article shall inure to the benefit of the Retrocessionaire.
ARTICLE 10 - REINSURANCE PREMIUM
A deposit premium of $6,524,000 will be paid to the Retrocessionaire at the
inception of this Agreement. The premium shall be adjusted and the amount of the
adjustment shall be equal to the difference between the deposit premium and 8.6%
of the Subject Net Earned Premium for the term of this Agreement and will be
payable to either party on February 15, 1998. In no event shall the total
premium, inclusive of the adjustment, exceed $7,176,400.
<PAGE>
ARTICLE 11 - PROFIT SHARING COMMISSION
The Retrocessionaire shall pay a profit sharing commission, subject to full
and final commutation as provided in this Agreement, equal to the Experience
Account balance, if the balance of such account is positive. The Experience
Account shall be calculated as follows: INCOME 1. Total reinsurance premium 2.
Plus cumulative interest credit 3. Plus reinsurance premium adjustment
INCOME
1. Total reinsurance premium
2. Plus cumulative interest credit
3. Plus reinsurance premium adjustment
OUTGO
4. $250,000
5. Letter of credit costs (if applicable)
6. Trust fund costs (if applicable)
7. Cumulative losses paid
The income shall be the sum of Nos. 1 thru 3 above less outgo which is the
sum of Nos. 4 thru 7 above. The interest credit for the current quarter shall be
determined by multiplying the balance in the Experience Account as of the end of
the prior calendar quarter by 1.608% (6.59% annualized). The interest credit
shall be pro-rated for the first quarter by dividing the number of days the
funds were held by 91 and multiplying the product derived by the amount of the
interest credit.
ARTICLE 12 - REPORTS AND REMITTANCES
1. The Retrocedent/Reinsured shall furnish to the Retrocessionaire at least
sixty (60) days prior to the close of the calendar quarter an estimate of the
amount of Incurred Losses/Ultimate Net Loss ceded pursuant to this Agreement as
of the close of that calendar quarter.
2. The Retrocedent/Reinsured shall furnish to the Retrocessionaire within
forty five (45) days after the close of each calendar quarter.
A. A quarterly account of earned premium on Subject Business.
B. A quarterly account of paid and unpaid Ultimate Net Loss. These reports
shall be known collecting as the quarterly accounts(the "Quarterly Accounts").
<PAGE>
3. The Retrocessionaire shall furnish to the Retrocedent/Reinsured
forty-five (45) days after the close of each quarter a reconciliation of the
Experience Account from inception to the close of the most recent preceding
calendar quarter.
4. All amounts due and payable hereunder shall be remitted directly by wire
transfer between the Retrocedent/Reinsured and the Retrocessionaire unless
otherwise agreed to by the parties.
5. Any amounts due from one party to the other that are not paid within the
time period specified in Article 12 shall accrue interest from the date the
payment is due at a rate equal to the greater of (1) 1% per month, compounded
semi-annually, or (2) the yield on the one year United States treasury bill
existent on the first day after the previous January 1st, as published in the
Wall Street Journal, plus 250 basis points.
ARTICLE 13 - SETTLEMENT DATES
The Retrocessionaire agrees to pay the Retrocedent/Reinsured the amounts of
Ultimate Net Loss due hereunder and paid by the Retrocedent/Reinsured (or
payable in accordance with Article 20) quarterly in arrears. Payment will be
made within thirty (30) days following receipt of the Quarterly Accounts. If the
Retrocessionaire reasonably believes that any information contained in the
Quarterly Accounts is erroneous, the Retrocessionaire shall, within five (5)
days following receipt of the Quarterly Accounts , notify the
Retrocedent/Reinsured of the suspected error in writing. In such case the
Retrocessionaire shall make payment within thirty (30) days after the
Retrocedent/Reinsured corrects the error or explains the reason that the
Quarterly Accounts are correct.
Notwithstanding any provision to the contrary contained herein, and except
as provided in Articles 8 & 9, coverage pursuant to this Agreement is expressly
limited to claims or losses arising under the Original Contracts that are within
the terms, conditions and limitations of the Original Contract and within the
terms, conditions and limitations of this Agreement.
ARTICLE 14 - COMMUTATION
At the Retrocedent's/Reinsured's request, this Agreement may be commuted
within the first year provided that the Experience Account contains a credit
balance. In such event the Retrocessionaire will pay to the
Retrocedent/Reinsured $200,000 in addition to the credit balance in the
Experience Account.
In addition, the Retrocedent/Reinsured may, at their sole option, commute
this Agreement at any December 31st, beginning on December 31, 1997 after giving
ninety (90) days prior written notice of the intent to commute to the
Retrocessionaire by registered or certified mail.
<PAGE>
If, at the time of commutation, the ceded unpaid Ultimate Net Loss is less
than, or equal to, the balance in the Experience Account, the Retrocessionaire
agrees to pay an amount equal to all ceded unpaid Ultimate Net Loss as
calculated by the Retrocedent/Reinsured.
If, at the time of commutation the ceded unpaid Ultimate Net Loss is
greater than the balance in the Experience Account, the ceded unpaid Ultimate
Net Loss shall be commuted at the present value in an amount to be mutually
agreed by the parties. If the present value amount of the ceded unpaid Ultimate
Net Loss cannot be mutually agreed by the Retrocedent/Reinsured and the
Retrocessionaire, then a mutually acceptable independent third party actuary
shall be retained to independently estimate the present va lue amount of the
ceded unpaid Ultimate Net Loss (the cost of which shall be shared equally by the
Retrocedent/Reinsured and Retrocessionaire). If such actuary's estimation is
acceptable to both Retrocedent/Reinsured and Retrocessionaire, then this
Agreement shall be commuted at the value as estimated by the actuary. If
actuary's estimation is unacceptable to either the Retrocedent/Reinsured or the
Retrocessionaire, or if the parties cannot agree on the selection of the
actuary, then the Agreement will not be commuted at that time. However, the
Retrocedent/Reinsured may, as provided in this Article 14, make subsequent
requests to commute following the procedures set forth in this Article.
Payment of the ceded unpaid Ultimate Net Loss and premium refund, if any,
by the Retrocessionaire as set forth above shall constitute a complete and final
release of the retrocessionaire in respect of any and all obligations of any
nature whatsoever to the Retrocedent/Reinsured arising pursuant to this
Agreement.
ARTICLE 15 - FUNDS TRANSFERRED\SECURITY
The Retrocessionaire shall collaterize 100% of all Obligations arising
pursuant to this Agreement in a trust fund and/or by a Letter of Credit (LOC)
from a bank approved by the US Federal Reserve. The sum of the market value of
assets held in the trust fund plus the LOC shall equal or exceed all Obligations
ceded to the Retrocessionaire. If a trust fund is established the
Retrocessionaire shall provide, or it shall ensure that the trustee or bank
provides a statement of assets in the trust agreement on a quarterly basis. All
costs of the trust fund and letter of credit charges, if any, shall be paid by
the Retrocessionaire and deducted from the Experience Account as paid.
ARTICLE 16 - CHANGE IN CONTROL CLAUSE
The Retrocessionaire will have the option to commute this Agreement if
there is a change in control in the Retrocedent/Reinsured. The option must be
exercised within 60 days of the date of the change in control.
<PAGE>
"Change in Control" shall mean any of the following occurrences:
(i) any "person," as such term is used in Sections 13(d) and 14(d) of the
Exchange Act (other than the Company, any trustee or other fiduciary holding
securities under an employee benefit plan of the Company or any corporation
owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company),
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, or securities of Chartw ell representing
50% or more of the combined voting power of Chartwell's then outstanding
securities;
(ii) during any period of not more than two consecutive years (not
including any period prior to the adoption of the Plan), individuals who at the
beginning of such period constitute the Board of Directors and any new director
(other than a director designated by a person who has entered into an agreement
with the Company to effect a transaction described in clause (i), (iii), or (iv)
of this Section) whose election by the Board of Directors or nomination for
election was approved by a vote of at least two -thirds (2/3) of the directors
then still in office who either were directors at the beginning of the period or
whose election or nomination for election was previously so approved, cease for
any reason to constitute at least a majority thereof;
(iii) the stockholders of the Company approve a merger or consolidation of
the Company with any other corporation, other than (A) a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) more than 50% of the combined voting power of the voting securities of
the Company or such surviving entity outstanding immediatel y after such merger
or consolidation or (B) a merger or consolidation effected to implement a
recapitalization of Chartwell (or similar transaction) in which no "person" (as
hereinabove defined) acquires more than 50% of the combined voting power of the
Company's then outstanding securities; or
(iv) the stockholders of the Company approve a plan of complete liquidation
of the Company or an agreement for the sale or disposition by the Company of all
or substantially all of the Company's assets.
ARTICLE 17 - RIGHT OF OFFSET
The Retrocedents/Reinsured and the Retrocessionaire may offset any balance
or amount due from one party to the other under this Agreement or any other
contract heretofore or hereafter entered into between the parties, whether
acting as assuming reinsurer or ceding company or in any other capacity.
<PAGE>
ARTICLE 18 - ARBITRATION
Any dispute arising out of the interpretation, performance or breach of
this Agreement, including the formation or validity thereof, shall be submitted
for decision to a panel of three arbitrators. A demand for arbitration will be
made in writing and sent certified or registered mail, return receipt requested.
One arbitrator shall be chosen by each party and the two arbitrators shall
choose an impartial third arbitrator who shall preside at the hearing. If either
party fails to appoint its arbitrator within thirty (30) days after being
requested to do so by the other party, the latter, after ten (10) days notice by
certified or registered mail of its intention to do so, may appoint the second
arbitrator.
If the two arbitrators are unable to agree upon the third arbitrator within
thirty (30) days of their appointment, the third arbitrator shall be selected
from a list of six individuals (three named by each arbitrator) by a judge of
the federal district court having jurisdiction over the geographical area in
which the arbitration is to take place, or if the federal court declines to act,
the state court having general jurisdiction in such area.
All arbitrators shall be disinterested active or former executive officers
of insurance or reinsurance companies or Underwriters at Lloyd's of London.
Within thirty (30) days after all arbitrators have been selected, the panel
shall meet and determine timely periods for briefs, discovery procedures and
schedules for hearings.
The panel shall be relieved of all judicial formality and shall not be
bound by the strict rules of procedure and evidence. Unless the panel agrees
otherwise, arbitration shall take place in, New York, New York, or at such other
place as the parties to the proceeding shall mutually agree. Insofar as the
arbitration panel looks to substantive law, it shall consider the law of the
State of New York. The decision of any two arbitrators when rendered in writing
shall be final and binding on the parties to th e proceeding. The panel is
empowered to grant interim relief as it may deem appropriate.
The panel shall interpret this Agreement as an honorable engagement rather
than as merely a legal obligation and shall make its decision considering the
custom and practice of the applicable insurance and reinsurance business as
promptly as possible following the termination of the hearings. Judgment upon
the award may be entered in any court having jurisdiction thereof.
Each party shall bear the expense of its own arbitrator and shall jointly
and equally bear with the other party the cost of the third arbitrator The
remaining costs of the arbitration shall be allocated by the panel The panel
may, at its discretion, award such further costs and expenses as it considers
appropriate, including but not limited to attorneys fees, to the extent
permitted by law.
<PAGE>
If more than one Retrocessionaire is involved in arbitration where there
are common questions of law or fact and a possibility of conflicting awards or
inconsistent may result, all such Retrocessionaire shall constitute and act as
one party for purposes of this Article and communications shall be made by the
Retrocedent/Reinsured to each of the Retrocessionaire constituting the one
party. However, the rights of such Retrocessionaire to assert several, rather
than joint defenses or claims shall not be impa ired, nor be construed as to
change the liability of the Retrocessionaire under the terms of this Agreement
from several to joint.
ARTICLE 19 - ACCESS TO RECORDS
The Retrocessionaire or its duly accredited representatives shall have
access to the books and records of the Retrocedent/Reinsured on matters
reasonably relating to this Agreement at all reasonable times for the purpose of
obtaining information concerning this Agreement or the subject matter hereof.
Access to premium records is restricted to within seven (7) years of the
expiration of this Agreement.
ARTICLE 20 - INSOLVENCY
In the event of the Retrocedent/Reinsured's insolvency, the amounts due
under this Agreement will be paid by the Retrocessionaire on the basis of the
Retrocedent/Reinsured's liability under the Original Contracts without
diminution because of the Retrocedent/Reinsured's insolvency or because its
liquidator, receiver, conservator, or statutory successor has failed to pay all
or a portion of any claims, subject however to the right of the Retrocessionaire
to offset against such amounts due hereunder, any sum s that may be payable to
them by said insolvent Retrocedent/Reinsured in accordance with the Article 17.
Such amounts will be paid by the Retrocessionaire directly to the
Retrocedent/Reinsured, its liquidator, receiver, conservator, or statutory
successor except (a) where this Agreement specifically provides for another
payee in the event of the Retrocedent/Reinsured insolvency or (b) where the
Retrocessionaire with the consent of the direct insured or insureds, have
assumed such policy obligations of the Retrocedent/Reinsured as direct
obligations of, themselves to the payees under such policies in substitution for
the Retrocedent/Reinsured's obligation to such payees. The
Retrocedent/Reinsured's liquidator, receiver, conservator, or statutory
successor will give written notice of the pendency of a claim against the
Retrocedent/Reinsured under the policies reinsured within a reasonable time
after such claim is filed in the insolvency proceeding. During the pendency of
such claim, the Retrocessionaire may investigate said claim and interpose in the
proceeding where the claim is to be adjudicated, at their own expense, any
defense that they may deem available to the Retroc edent/Reinsured, its
liquidator, receiver, conservator, or statutory successor. The expense thus
incurred by the Retrocessionaire will be chargeable against the
Retrocedent/Reinsured, subject to court approval, as part of the expense of
conservation or liquidation to the extent that such
<PAGE>
proportionate share of the benefit will accrue to the Retrocedent/Reinsured
solely as a result of the defense undertaken by the Retrocessionaire. Where two
or more Retrocessionaires are involved in the same claim, and a m ajority in
interest elect to interpose defense to such claim, the expense will be
apportioned in accordance with the terms of this Agreement as though such
expense had been incurred by the Retrocedent/Reinsured.
ARTICLE 21 - FEDERAL EXCISE TAX
A. The Retrocessionaire has agreed to allow for the purpose of paying the
Federal Excise Tax based upon the applicable percentage of the premium payable
hereon (as imposed under Section 4371 of the Internal Revenue Code) to the
extent such premium is subject to the Federal Excise Tax.
B. In the event of any return of premium becoming due hereunder the
Retrocessionaire will deduct the applicable percentage of federal excise tax
paid from the return premium and the Retrocedent/Reinsured or its agent should
take steps to recover the tax from the United States Government.
ARTICLE 22 - FOLLOW THE FORTUNES
All cessions made under this agreement shall be subject to all the general
and special conditions, stipulations and endorsements of the Original Contracts
accepted by the Retrocedent/Reinsured, it being understood that the general
intention of this Agreement is that the Retrocessionaire shall share the
fortunes of the Retrocedent/Reinsured to the extent of its interest in such
reinsurances/insurances.
ARTICLE 23 - ERRORS AND OMISSIONS
Any omission or error by any party to this agreement will not relieve any
party of liability hereunder, provided such act, omission, or error is not
prejudicial to the any other party and is rectified promptly upon discovery by
the responsible party.
ARTICLE 24 - CURRENCY
The provisions of this agreement involving dollar designated amounts are
express in United States currency and all payments shall be made in this
currency.
<PAGE>
ARTICLE 25 - GOVERNING LAW
This agreement shall be interpreted and governed by the laws of the state
of New York without regard to its principles of choice of law.
ARTICLE 26 - SERVICE OF SUIT
In the event of the failure of the Retrocessionaire hereon to pay any
amount claimed to be due hereunder, such Retrocessionaire at the request of the
Retrocedent/Reinsured, will submit to the jurisdiction of a court of competent
jurisdiction within the United States. Nothing in this Article constitutes or
should be understood to constitute a waiver of the Retrocessionaire's rights to
commence an action in any court of competent jurisdiction in the United States,
to remove an action to a United States Di strict Court, or to seek a transfer of
a case to another court as permitted by the laws of the United States or of any
state in the United States. Service of process in such suit may be made upon
Mendes & Mount, 750 7th Avenue, New York, New York 10019-6829 USA or another
party specifically designated in the applicable Interests and Liabilities
Agreement attached hereto. In any suit instituted against it upon this
Agreement, the Retrocessionaire will abide by the final decision of such court,
or of any ap pellate court in the event of any appeal.
The above-named are authorized and directed to accept service of process on
behalf of the Retrocessionaire in any such suit and/or upon the request of
Retrocedent/Reinsured to give a written undertaking to the Retrocedent/Reinsured
that they will enter a general appearance upon the Retrocessionaire's behalf in
the event such a suit will be instituted.
Further, pursuant to any statute of any state, territory or district of the
United States which makes provision therefore, the Retrocessionaire hereon
hereby designates the Superintendent, Commissioner or Director of Insurance or
other officer specified for that purpose in the statute, or the successor or
successors in office, as its true and lawful attorney upon whom may be served
any lawful process in any action, suit or proceeding instituted by or on behalf
of the Retrocedent/Reinsured or any beneficiar y hereunder, arising out of this
Agreement, and hereby designates the above-named as the person to whom the said
officer is authorized to mail such process or a true copy thereof.
ARTICLE 27 - NO THIRD PARTY RIGHTS
This agreement is solely between the Retrocedent/Reinsured and the
Retrocessionaire, and no instance shall any other party have any rights under
this agreement except as expressly provided otherwise in the insolvency article.
<PAGE>
ARTICLE 28 - NO IMPLIED WAIVER
The failure of any party to enforce any of the provisions herein shall not
be construed to be a waiver of the right of such party to enforce any such
provision.
ARTICLE 29 - PARTICIPATION
This agreement obligates the Retrocessionaire for 100% of the interests and
liabilities set forth under this Agreement.
IN WITNESS WHEREOF, the parties hereto, by their respective duly authorized
officers, have executed this Contract, to be effective on the date indicated.
CHARTWELL REINSURANCE COMPANY
By: /s/ Jacques Q. Bonneau
- --------------------------------
Name: Jacques Q. Bonneau
Title: Senior Executive Vice President,
Chief Underwriting Officer
Date: September 30, 1997
THE INSURANCE CORPORATION OF NEW YORK
By: /s/ Jacques Q. Bonneau
- ----------------------------------
Name: Jacques Q. Bonneau
Title: Senior Executive Vice President,
Chief Underwriting Officer
Date: September 30, 1997
WESTERN GENERAL INSURANCE LTD.
By: /s/ John L. Marion
- -----------------------------------
Name: John L. Marion
Title: President & Managing Director
Date: September 30, 1997
CHARTWELL REINSURANCE COMPANY
AGGREGATE EXCESS OF LOSS
REINSURANCE TREATY
EFFECTIVE JULY 1, 1997
ARTICLE SUMMARY PAGE
1 BUSINESS COVERED 2
2 TERM 2
3 TERRITORY 2
4 EXCLUSIONS 3
5 COVERAGE AND AGGREGATE LIMIT 3
6 DEFINITIONS 4
7 NET RETAINED LINES 6
8 DEPOSIT PREMIUM, FINAL PREMIUM ADJUSTMENT
AND ADDITIONAL PREMIUM 6
9 PROFIT SHARING, FUNDS HELD ACCOUNT
AND INTEREST CREDIT 7
10 CURRENCY 8
11 TAXES 8
12 ACCOUNTS, REMITTANCES AND LOSS SETTLEMENTS 8
13 ADMINISTRATIVE UNDERSTANDING 9
14 LOSS RESERVE FUNDING 10
15 EXCESS OF POLICY LIMITS 10
16 EXTRA CONTRACTUAL OBLIGATIONS 11
17 OFFSET AND SECURITY 11
18 COMMUTATION 12
19 ERRORS AND OMISSIONS 12
20 ACCESS TO RECORDS 13
21 NO ASSIGNMENT 13
22 INSOLVENCY 13
23 ARBITRATION 14
24 SERVICE OF SUIT 15
25 INTERMEDIARY 15
26 PROPORTION 16
<PAGE>
AGGREGATE EXCESS OF LOSS
REINSURANCE TREATY
(hereinafter referred to as "Treaty")
between
CHARTWELL REINSURANCE COMPANY
Stamford, Connecticut
and
DAKOTA SPECIALTY INSURANCE COMPANY
Stamford, Connecticut
and
THE INSURANCE CORPORATION OF NEW YORK
Jericho, New York
(hereinafter referred to collectively as "Ceding Company")
and
LONDON LIFE AND CASUALTY REINSURANCE CORPORATION
Wildey, St. Michael, Barbados, W.I.
(hereinafter referred to as "Reinsurer")
Article 1: Business Covered
The Reinsurer agrees to indemnify the Ceding Company with respect to the
Ultimate Net Losses which may accrue to the Ceding Company as a result of Loss
Occurrences, claims made and losses discovered during the Term as respects all
classes of business assumed and underwritten by the Ceding Company, except for
"identified" workers' compensation business that is reinsured under the separate
Aggregate Excess of Loss Treaty with Western General Insurance Company, all
subject to the terms and conditions of this Treaty.
Article 2: Term
This Treaty shall be effective from 12:01 am Eastern Standard Time July 1, 1997,
until 11:59 pm Eastern Standard Time December 31, 1997, both days inclusive.
Should this Treaty expire while a loss covered hereunder is in progress, the
Reinsurer shall be responsible for the loss in progress in the same manner and
to the same extent it would have been responsible had the Treaty expired the day
following the conclusion of the loss in progress.
Article 3: Territory
This Treaty applies to losses occurring worldwide with respect to Business
Covered.
Article 4: Exclusions
This Treaty shall not apply to and specifically excludes:
A. Nuclear Incident, in accordance with the following clauses attached
hereto: Liability;
1. Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance -
U.S.A. - NMA 1119;
2. Nuclear Incident Exclusion Clause - Physical Damage and Liability
(Boiler and Machinery Policies) - Reinsurance - U.S.A. - NMA 1166;
3. Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance -
Canada - NMA 1980;
4. Nuclear Incident Exclusion Clause - Physical Damage and Liability
(Boiler and Machinery olicies) Reinsurance - Canada - NMA 1251;
5. Nuclear Energy Risks Exclusion Clause (Reinsurance) (1984) Worldwide
Excluding U.S.A. and Canada - NMA 1975.
B. War risks, in accordance with the War Risks Exclusion clause attached
hereto;
C. Insolvency funds, in accordance with the Insolvency Exclusion Clause
attached hereto;
D. Assessments of any kind, from any source, and whether voluntary or
involuntary;
E. Unallocated Loss Adjustment Expenses (unless covered by the Ceding
Company per the underlying treaties and facultative business);
F. Business classified as assumed Finite or Non-traditional Reinsurance
Agreements;
<PAGE>
G. Business written by or assumed from Lloyd's Corporate Capital Vehicles
including, but not limited to, Oak Dedicated Limited and Archer
Dedicated plc;
H. State income and excise taxes, if any, reported hereunder;
I. Financial guaranty and Insolvency. This exclusion shall not apply to
residual value insurance.
Article 5: Coverage and Aggregate Limit
A. Coverage - Should the Ceding Company's Loss Ratio hereunder exceed the
Retention, the Reinsurer shall be liable for 100% (one hundred percent)
of the amount by which the paid portion of Ultimate Net Losses exceed
the Retention, subject to a maximum limit of liability to the Reinsurer
of 100% (one hundred percent) of 28.62% (twenty eight point sixty two
percent) of SNEPI.
B. Aggregate Limit - The Reinsurer shall be liable for the lesser of
28.62% (twenty eight point sixty two percent) of SNEPI or $28,070,000
(twenty eight million seventy thousand dollars).
Article 6: Definitions
A. "Subject Net Earned Premium Income (SNEPI)" shall mean the Net Written
Premium Income of the Ceding Company during the Term plus the Net Written
Premium Income unearned at the beginning of the Term less the Net Written
Premium Income unearned at the end of the Term. Retrospective premium
adjustments related to swing rated business with inception dates prior to
1997, premium related to business classified as assumed Finite or
Non-traditional Reinsurance Agreements and non-standard automobile assumed
reinsurance business with The Insurance Corporation of New York shall be
excluded from Business Covered SNEPI.
B. "Net Written Premium Income" shall mean Business Covered gross written
premium, reinsurance assumed or insurance written, of the Ceding Company
less cancellations and returns and less premium paid for all other specific
or aggregate excess reinsurance, whether or not inuring to this Treaty
except for the "identified" workers' compensation business that is
reinsured under the separate Aggregate Excess of Loss Treaty with Western
General Insurance Company.
C. "Loss Occurrence" shall mean any one disaster or casualty or accident or
loss or series of disasters or casualties or accidents or losses arising
out of or caused by one event. All losses having a common origin or
traceable to the same act, omission, mistake, occurrence or causative
incident shall be considered one accident, disaster, casualty or
occurrence. For the purposes of establishing the date when a loss has
occurred, the following will apply: on reinsurance contracts that attach on
a losses occurring during basis, the Loss Occurrence date(s) applicable
shall apply; and on reinsurance contracts that attach on a claims made
basis, the claims made date(s) applicable shall apply; and on reinsurance
contracts that attach on a losses sustained and/or losses discovered basis,
the date(s) a loss is sustained or discovered shall apply. The Ceding
Company shall establish the proper allocation of reinsurance contracts that
are written on a risks attaching basis to the appropriate Loss Occurrence
periods. The Reinsurer shall accept such Loss Occurrence Accident Year
allocations as determined by the Ceding Company.
D. "Ultimate Net Losses" shall mean the sum of losses (including loss in
Excess of Policy Limits in accordance with Article 15: Excess of Policy
Limits and Extra Contractual Obligations in accordance with
Article 16: Extra Contractual
Obligations) and Allocated Loss Adjustment Expenses arising out of Business
Covered hereunder. Property
catastrophe losses shall be limited to $15,500,000 (fifteen million five
hundred thousand dollars), inclusive of budgeted catastrophe losses, of
Ultimate Net Losses in the aggregate. All such amounts shall be net of all
recoveries, salvages, subrogations and all claims on inuring reinsurance
whether collectible or not; provided, however, that in the event of the
Insolvency of the Ceding Company, payment by the Reinsurer shall be made in
accordance with the provisions of the Insolvency article. Nothing herein
shall be construed to mean that losses under this Treaty are not
recoverable until the Ceding Company's Ultimate Net Losses have been
ascertained.
Said Ultimate Net Losses may be paid, outstanding, or incurred, as
referenced in this Treaty. In the event the reference is to Ultimate
Net Losses outstanding, the Term shall include the Ceding Company's
loss reserves for reported losses, losses incurred but not reported
and reserves for Allocated Loss Adjustment Expense as of the
calculation date; in the event the reference is to Ultimate Net Losses
incurred, the term shall comprise the sum of Ultimate Net Losses paid
and Ultimate Net Losses outstanding.
The parties agree to administer loss reporting and settlement of Ultimate
Net Loss under this Treaty based upon Ultimate Net Loss data for the full
1997 accident year. Therefore, Ultimate Net Losses will firstly be based
<PAGE>
upon Loss Occurrences during the period January 1, 1997 through December
31, 1997, excluding property catastrophe losses and will then be converted
to covered Ultimate Net Losses as detailed under Article 13: Administrative
Understanding plus catastrophe losses occurring during the Term of this
Treaty. This Treaty will, therefore, cover only the Loss Occurrences during
the Term by compliance with the calculation required in Article 13:
Administrative Understanding plus property catastrophe losses occurring
during the Term of this Treaty.
E. "Allocated Loss Adjustment Expense" shall mean the Ceding Company's share of
costs and expenses allocable to specific claims which are incurred by the
Ceding Company in the investigation, appraisal, adjustment, settlement,
litigation, defense or appeal of specific claims, including court costs
and costs of supersedeas and appeal bonds, and including:
a) pre-judgment interest, unless included as part of the award or judgment;
b) post-judgment interest; and
c) legal expenses and costs incurred in connection with coverage questions
and legal actions connected thereto (including declaratory judgment
expense).
Allocated Loss Adjustment Expense does not include Unallocated Loss
Adjustment Expense unless covered by the Ceding Company per the underlying
treaties and facultative business. Unallocated Loss Adjustment Expense
includes, but is not limited to, salaries and expenses of employees, and
office and other overhead expenses of the Ceding Company.
F. "Loss Ratio" shall mean the ratio of Ultimate Net Losses incurred divided by
SNEPI as of the date of calculation.
G. "Retention" shall mean 52.362%(fifty two point three six two percent) of
SNEPI.
H. "Reinsurer's Expense" shall equal 7.0% (seven percent) of Deposit Premium
and Final Premium Adjustment plus 4.0% (four percent) of Additional Premium,
if any. Such amounts shall be paid to the Reinsurer as respective premiums
are due and shall be deducted from the Funds Held Account.
I. "Finite or Non-traditional Reinsurance Agreements" shall mean any assumed
reinsurance agreement which allows for Profit Sharing (or any other form of
contractual adjustment) exceeding 75% (seventy five percent) of initial
reinsurance premium paid.
J. "Policies" shall mean any and all original policies, contracts and binders
of insurance or reinsurance underwritten by the Ceding Company whether
facultative or treaty.
Article 7: Net Retained Lines
This Treaty applies only to that portion of any policy which the Ceding Company
retains net for its own account, and in calculating the amount of any loss
hereunder and also in computing the amount and amounts in excess of which this
Treaty attaches, only loss or losses in respect of that portion of any policy
which the Ceding Company retains net for its own account shall be included.
The amount of the Reinsurer's liability hereunder in respect of any loss or
losses shall not be increased by reason of the inability of the Ceding Company
to collect from any other reinsurer, whether specific or general, any amounts
which may have become due from such reinsurer, whether such inability arises
from the insolvency of such other reinsurer or otherwise.
Article 8: Deposit Premium, Final Premium Adjustment
and Additional Premium
A. Deposit Premium - The Ceding Company shall pay to the Reinsurer a
Deposit Premium of $10,918,750 (ten million nine hundred eighteen
thousand seven hundred fifty dollars). Deposit Premium shall be deemed
credited 100% (one hundred percent) to the Funds Held Account as of
July 1, 1997 for all purposes, including Interest Credit hereon.
B. Final Premium Adjustment - A determination of Final Premium shall be
made as of December 31, 1997 on or before February 28, 1998. Final
Premium shall be equal to cumulative SNEPI multiplied by 12.5% (twelve
point five percent) subject to the minimum Premium of $10,372,813 (ten
million three hundred seventy two thousand eight hundred thirteen
dollars) and a maximum of $12,556,563 (twelve million five hundred
fifty six thousand five hundred sixty three dollars). The Ceding
Company shall pay to the Reinsurer any additional Final Premium
Adjustment by crediting the Funds Held Account for 100% (one hundred
percent) of the amount by which the determined Final Premium exceeds
the Deposit Premium (the additional Final Premium Adjustment). The
Reinsurer shall pay to the Ceding Company any return Final Premium
Adjustment by debiting the Funds Held Account for 100% (one hundred
percent) of the amount by which the Deposit Premium exceeds the Final
Premium (the return Final Premium Adjustment). Final Premium
<PAGE>
Adjustment shall be deemed credited/debited to the Funds Held Account
as of July 1, 1997 for all purposes, including Interest Credit.
C. Additional Premium - The Ceding Company shall pay to the Reinsurer an
Additional Premium equal to 75.0% (seventy five percent) of any
Ultimate Net Losses ceded in excess of 187.5% (one hundred eighty seven
point five percent) of Final Premium subject to a maximum Additional
Premium of $3,395,000 (three million three hundred ninety five thousand
dollars). Additional Premium shall be deemed credited 100% (one hundred
percent) to the Funds Held Account as of July 1, 1997 for all purposes,
including Interest Credit.
Article 9: Profit Sharing, Funds Held Account
and Interest Expenses
A. Profit Sharing
Upon finalization of the payment of all Ultimate Net Losses recoverable
hereon and/or Commutation, the Reinsurer will relinquish to the Ceding
Company 100% (one hundred percent) of the remaining Funds Held Account
balance, if any. Payment of Profit Sharing in accordance with this
Article shall release the Reinsurer from all current and future
liability under this Treaty.
B. Funds Held Account
For purposes of this Article, the Ceding Company shall maintain a
cumulative Funds Held Account comprised of the following:
1. The Funds Held Account at June 30, 1997 shall be equal to zero;
2. The Funds Held Account at each subsequent calendar quarter end
shall be equal to:
a. The Funds Held Account at the end of the prior calendar
quarter; plus
b. Deposit Premiums, Final Premium Adjustment and Additional
Premium, if any; less
c. Reinsurer's Expense; plus
d. Interest Credit; less
e. Ultimate Net Losses due from the Reinsurer for the prior
calendar quarter in accordance with Article 5: Coverage
and Aggregate Limit, (including Commutation payments).
The Ceding Company shall report balances quarterly to the Reinsurer as
soon as practicable but no later than 75 (seventy five) days in arrears
of each calendar quarter end.
The Reinsurer shall not transfer or assign its rights to the Funds Held
Account hereon unless this Treaty is surrendered and a new Treaty is
issued. Under any and all circumstances, the Ceding Company must make a
book entry of a transfer or assignment in order for such transfer or
assignment to be valid.
C. Interest Credit
As of the end of each calendar quarter, the Ceding Company shall credit
the Funds Held Account with an Interest Credit determined by
multiplying the ending quarterly balance in the Funds Held Account for
the respective quarter by 1.6107% (one point six one zero seven
percent) to achieve an effective annual rate of 6.6% (six point six
percent).
For Interest Credit purposes, Deposit Premium, Final Premium Adjustment
and Additional Premium are all deemed credited/debited as of July 1,
1997.
Interest Credit shall continue even in the event of the Ceding
Company's Insolvency.
Article 10: Currency
All of the provisions of this Treaty involving dollar amounts are expressed in
terms of United States of America Dollars and all Premiums and loss and
Allocated Loss Adjustment Expense payments shall be made in United States of
America Dollars.
Article 11: Taxes
A. In consideration of the terms under which this Treaty is issued, the
Ceding Company undertakes not to claim any deduction of the Premium
hereon when making Canadian tax returns or when making tax returns
other than income or profit tax returns to any state or territory of
the United States or to the District of Columbia.
<PAGE>
B. The Ceding Company is solely liable for any Federal Excise Tax (FET)
applicable to this Treaty. Any FET payable shall be paid directly by
the Ceding Company to the taxing authorities and is in addition to
premiums. No deduction shall be made from the Funds Held Account.
Article 12: Accounts, Remittances and Loss Settlements
A. Within 60 (sixty) days following the end of each quarter, the Ceding
Company shall report to the Reinsurer the amount of:
1. Cumulative Business Covered SNEPI;
2. Cumulative Ultimate Net Losses paid;
3. Ultimate Net Losses outstanding;
4. Ceded Ultimate Net Losses paid and outstanding under this
Treaty, in accordance with Article 5: Coverage and Aggregate
Limit;
5. Final Premium Adjustment and Additional Premium, if any, in
accordance with Article 8: Deposit Premium, Final Premium
Adjustment and Additional Premium.
The reports outlined in this section shall continue until final
settlement of all losses hereunder or Commutation in accordance with
Article 18: Commutation.
B. Remittance of premium amounts due shall be in the manner outlined under
Article 8: Deposit Premium, Final Premium Adjustment and Additional
Premium.
C. Settlement of Ultimate Net Losses paid in excess of the retention shall
be made by the Reinsurer to the Ceding Company quarterly within 30
(thirty) days of receipt of the report by the Reinsurer or 75 (seventy
five) days after the end of the quarter, whichever is later. Reinsurer
payment of Ultimate Net Losses shall be subject to the Aggregate Limit
hereunder as detailed in Article 5: Coverage and Aggregate Limit,
Section B.
Article 13: Administrative Understanding
For the purpose of calculating cumulative paid Ultimate Net Losses, the Ceding
Company and the Reinsurer agree to apply the following percentages in the table
below to the adjusted full 1997 accident year cumulative paid Ultimate Net
Losses, excluding property catastrophe losses. The adjusted full 1997 accident
year cumulative paid Ultimate Net Losses are full 1997 accident year cumulative
paid Ultimate Net Losses, as if Business Covered applied to the entire 1997
calendar year, excluding property catastrophe losses, multiplied by X%. X% shall
equal the result of actual SNEPI multiplied by two and divided by what the SNEPI
would be as if Business Covered applied to the entire 1997 calendar year.
Percentage Applied to Adjusted
For the Calendar Cumulative Paid Ultimate Net Losses
Year Ending Full 1997 Accident Year
December 31, 1997 25.00
December 31, 1998 33.00
December 31, 1999 36.00
December 31, 2000 38.00
December 31, 2001 40.00
December 31, 2002 41.00
December 31, 2003 42.00
December 31, 2004 43.00
December 31, 2005 44.00
December 31, 2006 45.00
December 31, 2007 46.00
December 31, 2008 46.50
December 31, 2009 47.00
December 31, 2010 47.50
December 31, 2011 48.00
December 31, 2012 48.50
December 31, 2013 49.00
December 31, 2014 49.50
December 31, 2015 50.00
The incremental paid Ultimate Net Losses, excluding property catastrophe losses,
shall be the difference between the current calendar year cumulative paid
Ultimate Net Losses less the prior calendar year cumulative paid Ultimate Net
Losses as determined by the above calculation.
The result of the above cumulative calculation shall be added to cumulative paid
property catastrophe Ultimate Net Losses that occur during the Term to calculate
cumulative paid Ultimate Net Losses for all purposes hereon for this Treaty.
(See example in Exhibit I attached hereto.)
<PAGE>
Article 14: Loss Reserve Funding
The Reinsurer will maintain appropriate reserves with respect to its share of
the loss reserves ceded and required under the terms of this Treaty which are
reported by the Ceding Company on the Business Covered of this Treaty.
The Reinsurer agrees to provide a clean, irrevocable and unconditional Letter of
Credit in favor of the Ceding Company issued by a bank acceptable to the Ceding
Company adjusted to at all times be equal to the ceded cumulative Ultimate Net
Losses outstanding hereunder less the Funds Held Account balance at such dates.
Such Letter of Credit shall be in the form, amount, and with an acceptable NAIC
bank required to allow the Ceding Company to take full statutory credit for
amounts recoverable under this Treaty.
The Ceding Company shall reimburse the Reinsurer for the actual annual security
cost subject to a maximum of .35% (point three five percent) of the amount of
Letter of Credit issued or maintained hereon as of each December 31st. The
Reinsurer shall request such reimbursement whereupon the Ceding Company shall
make payment by direct wire transfer to the Reinsurer. All such amounts shall
not be deducted from the Funds Held Account.
Article 15: Excess of Policy Limits
A. This Treaty shall protect the Ceding Company, within the limits hereof,
for 100% (one hundred percent) of loss in Excess of Policy Limits
emanating from underlying treaties of the Ceding Company's clients and
for 80% (eighty percent) of loss in excess of the limit of its original
treaties, such loss in excess of the limit having been incurred because
of failure by it to settle within the Treaty limit or by reason of
alleged or actual negligence, fraud, or bad faith in rejecting an offer
of settlement or in the preparation of the defense or in the trial of
any action against its insured or reinsured or in the preparation or
prosecution of an appeal consequent upon such action.
However, this Article shall not apply where the loss has been incurred
due to fraud by a member of the Board of Directors or a corporate
officer of the Ceding Company acting individually or collectively or in
collusion with any individual or corporation or any other organization
or party involved in the presentation, defense or settlement of any
claim covered hereunder.
For the purpose of this Article, the word"loss" shall mean any amounts
for which the Ceding Company would have been contractually liable to
pay had it not been for the limit of the original policy.
B. In addition, this Treaty shall protect the Ceding Company for 100% (one
hundred percent) of its share of loss in Excess of Policy Limits
emanating from the underlying policies or contracts of the Ceding
Company's reinsureds.
Article 16: Extra Contractual Obligations
A. This Treaty shall protect the Ceding Company for 100% (one hundred
percent) of Extra Contractual Obligations emanating from underlying
treaties of the Ceding Company's clients and for 80% (eighty) of any
Extra Contractual Obligations within the limits hereof. The term
"Extra Contractual Obligations" is defined as those liabilities not
covered under any other provision of the Ceding Company's original
treaties and which arise from the handling of any claim on business
covered hereunder, such liabilities arising because of, but not
limited to, the following: failure by the Ceding Company to settle
within the treaty limit, or by reason of alleged or actual negligence,
fraud, or bad faith in rejecting an offer of settlement or in the
preparation of the defense or in the trial of any action against its
insured or reinsured or in the preparation or prosecution of an appeal
consequent upon such action.
The date on which any Extra Contractual Obligation is incurred by the
Ceding Company shall be deemed, in all circumstances, to be the date of
the original disaster and/or casualty.
However, this Article shall not apply where the loss has been incurred
due to fraud by a member of the Board of Directors or a corporate
officer of the Ceding Company acting individually or collectively or in
collusion with any individual or corporation or any other organization
or party involved in the presentation, defense or settlement of any
claim covered hereunder.
B. In addition, this Treaty shall protect the Ceding Company for 100% (one
hundred percent) of its share of Extra Contractual Obligations
emanating from the underlying policies or treaties of the Ceding
Company's reinsureds.
<PAGE>
Article 17: Offset and Security
A. The Ceding Company or the Reinsurer shall have and may exercise, at any
time and from time to time, the right to offset any balance or balances
whether on account of Deposit Premium, Final Adjustment Premium and
Additional Premium, Interest Credit, or on account of ceded Ultimate
Net Losses paid or otherwise, due from one party to the other party
hereto under the terms of this Treaty.
B. Each party hereby assigns and pledges to the other party (or
to each other party, if more than one), all of its rights under this
Treaty to receive Premiums or loss payments at any time from such
other party ("Collateral", as further defined in C. below) to secure
its Premiums or loss obligations to such other party at any time under
this Treaty ("Secured Obligations"). If at any time a party is in
default under any Secured Obligation or shall be subject to any
liquidation, rehabilitation, reorganization or conservation
proceeding, each other party shall be entitled in its discretion, to
apply or to withhold for the purpose of applying in due course, any
Collateral assigned and pledged to it by the former party and
otherwise to realize upon such Collateral as security for such Secured
Obligations.
C. The security interest described herein, and the term "Collateral",
shall apply to all payments and other proceeds in respect of the rights
assigned and pledged. A party's security interest in Collateral shall
be deemed evidenced only by the counterpart of this Treaty delivered to
such party.
D. Each right under this Article is a separate and independent right,
exercisable, without notice or demand, alone or together with other
rights ,in the sole election of the party entitled thereto, and no
waiver, delay, or failure to exercise, in respect of any right, shall
constitute a waiver of any right. The provisions of this Article shall
survive any cancellation or other termination of this Treaty.
Article 18: Commutation
A. The Ceding Company shall have the sole option, effective at any
calendar quarter ending on or after December 31, 1997 to commute all
ceded Ultimate Net Losses outstanding hereunder. The date that the
Ceding Company elects to commute shall be deemed the Commutation date.
At Commutation, the Reinsurer shall pay to the Ceding Company the
lesser of:
1. The present value (calculated at the Treaty interest rate as
per Article 9: Profit Sharing, Funds Held Account and Interest
Credit) of ceded Ultimate Net Losses outstanding as of the
Commutation date as determined by the Ceding Company, subject
to the Reinsurer's agreement. Should the Reinsurer fail to
agree, a present value analysis will be conducted by an
independent actuarial firm acceptable to both the Ceding
Company and the Reinsurer, with the Ceding Company bearing the
costs of such analysis; or
2. The existing value of the Funds Held Account (as defined in
Article 9: Profit Sharing, Funds Held Account and Interest
Credit) as of the Commutation date.
Said payments shall constitute, together with any Profit Sharing
payment, a full and final settlement of all terms of this Treaty; the
Ceding Company will execute a hold harmless agreement so stating and
the Reinsurer will be thereby released from all current and future
liability under this Treaty.
B. Commutation payments in accordance with this Article shall be treated
as Ultimate Net Losses paid under this Treaty for determination of the
Funds Held Account.
Article 19: Errors and Omissions
Any inadvertent delay, omission or error shall not be held to relieve either
party hereto from any liability which would attach to it hereunder if such
delay, omission or error had not been made, providing such delay, omission or
error is rectified upon discovery.
Article 20: Access to Records
The Ceding Company shall place at the disposal of the Reinsurer at all
reasonable times, and the Reinsurer shall have the right to inspect, through its
authorized representatives, all books, records and papers of the Ceding Company
in connection with any reinsurance hereunder or claims in connection herewith.
<PAGE>
The Reinsurer agrees that it will not disclose any confidential information
obtained by it hereunder to parties not subject to this Treaty except under the
following circumstances and then only as necessary.
A. When disclosure of such information is required in the normal course of
Reinsurer's business; or
B. With the prior written consent of the Ceding Company; or
C. When Reinsurer is required by a subpoena or court order to disclose
such information. The Reinsurer shall promptly notify the Ceding
Company of any attempt by a third party to obtain from it any such
confidential information.
The Reinsurer will provide the Ceding Company or its designated representative
with such information as the Reinsurer and Ceding Company may agree is necessary
to the Ceding Company's handling of business reinsured herein.
The obligation contained in the provision shall survive termination of this
Treaty.
Article 21: No Assignment
The Ceding Company and the Reinsurer hereby agree that neither party shall have
the right to assign its respective interests and liabilities, including the
Funds Held Account, under this Treaty. Notwithstanding the above, this Article
shall not restrict the Ceding Company from making investments it deems
appropriate.
Article 22: Insolvency
A. In the event of the Insolvency of the Ceding Company, reinsurance under
this Treaty shall be payable by the Reinsurer (on the basis of the
liability of the Ceding Company under the policy or policies reinsured
without diminution because of the Insolvency of the Ceding Company) to
the Ceding Company or to its liquidator, receiver or statutory
successor, except as provided by Section 4118a of the New York
Insurance Law or except:
1. Where the Treaty specifically provides another payee of such
reinsurance in the event of the Insolvency of the Ceding
Company.
2. Where the Reinsurer, with the consent of the direct insured or
insureds, has assumed such policy obligations of the Ceding
Company as direct obligations of the Reinsurer to the payees
under such policies and in substitution for the obligations
of the Ceding Company to such payees.
B. It is agreed, however, that the liquidator or receiver or
statutory successor of the insolvent Ceding Company shall give written
notice to the Reinsurer of the pendency of a claim against the
insolvent Ceding Company on the policy or policies reinsured within a
reasonable time after such claim is filed in the Insolvency proceeding
and that, during the pendency of such claim, the Reinsurer may
investigate such claim and interpose, at its own expense, in the
proceeding where such claim is to be adjudicated, any defense or
defenses which it may deem available to the Ceding Company or its
liquidator or receiver or statutory successor. The expense thus
incurred by the Reinsurer shall be chargeable, subject to court
approval, against the insolvent Ceding Company as part of the expense
of liquidation to the extent or a proportionate share of the benefit
which may accrue to the Ceding Company solely as a result of the
defense undertaken by the Reinsurer.
C. Should the Ceding Company go into liquidation or should a receiver be
appointed, the Reinsurer shall be entitled to deduct from any sums
which may be or may become due to the Ceding Company under this Treaty
any sums which are due to the Reinsurer by the Ceding Company under
this Treaty and which are payable at a fixed or stated date, as well as
any other sums due the Reinsurer which are permitted to be offset under
applicable law.
Article 23: Arbitration
A. As a condition precedent to any right of action hereunder, if
any dispute shall arise between the Ceding Company and the Reinsurer
with reference to the interpretation of this Treaty or their rights
with respect to any transaction involved, whether such dispute arises
before or after termination of this Treaty, such dispute, upon the
written require of either party, shall be submitted to three
arbitrators, one to be chosen by each party, and the third by the two
so chosen. If either party refuses or neglects to appoint an
arbitrator within 30 (thirty) days after the receipt of written notice
from the other party requesting it do so, the requesting party may
appoint two arbitrators. If the two arbitrators fail to agree on the
<PAGE>
selection of a third arbitrator within 30 (thirty) days of their
appointment, each of them shall name two, of whom each shall decline
one and the decision shall be made by the American Arbitration
Association. All arbitrators shall be active or retired disinterested
officers of insurance or reinsurance companies not under the
management or control of either party to this Treaty.
B. The arbitrators are relieved of all judicial formalities and may
abstain from following the strict rules of law; they shall make their
award with a view to effecting the general purpose of this Treaty in
accordance with a literal interpretation of the language. Each party
shall submit its case to its arbitrator within 30 (thirty) days of the
appointment of the third arbitrator.
C. The decision in writing of any two arbitrators, when filed with the
parties hereto, shall be final and binding on both parties. Judgment
may be entered upon the final decision of the arbitrators in any court
having jurisdiction. Each party shall bear the expense of its own
arbitrator and shall jointly and equally bear with the other party the
expense of the third arbitrator and of the arbitration. Said
arbitration shall take place in Stamford, Connecticut, unless some
other place is mutually agreed upon by the Ceding Company and the
Reinsurer.
Article 24: Service of Suit
It is agreed that in the event of the failure of the Reinsurer hereon to pay any
amount claimed to be hereunder, the Reinsurer, at the request of the Ceding
Company, will submit to the jurisdiction of a court of competent jurisdiction
within the United States. The foregoing shall not constitute a waiver of the
right of the Reinsurer to commence any suit in, or to remove, remand or transfer
any suit to any other court of competent jurisdiction in accordance with the
applicable statutes of the state or United States thereto. It is further agreed
that this Treaty shall be governed by the laws of the State of Connecticut.
It is further agreed that service of process in such suit may be made upon Kroll
& Tract, Fifth Floor, 520 Madison Avenue, New York, New York, 10022-4235, United
States of America and that in any suit instituted against any one of them upon
this Treaty, the Reinsurer will abide by the final decision of such Court of any
Appellate Court in the event of an appeal.
The above named are authorized and directed to accept service of process on
behalf of the Reinsurer in any suit and/or upon request of the Ceding Company to
give a written undertaking to the Ceding Company that they will enter a general
appearance upon the Reinsurer's behalf in the event such a suit shall be
instituted.
Further, pursuant to any statute of any state, territory or District of the
United States which makes provision therefor, the Reinsurer hereby designates
the Superintendent, Commissioner or Director of Insurance or other officer
specified for that purpose in the statute, or his successor or successors n
office, as its true and lawful attorney upon whom may be served any lawful
process in any action, suit or proceeding instituted by or on behalf of the
Ceding Company or any beneficiary hereunder arising out of this Treaty, and
hereby designate the above named as the person to whom said officer is
authorized to mail such process or a true copy thereof.
Article 25: Intermediary
Pegasus Advisors, Inc., 35 Tower Lane, Avon, CT 06001, is hereby recognized as
the Intermediary negotiating this Treaty for all business hereunder and through
whom all communications relating hereto (including but not limited to notices,
statements and reports) shall be transmitted to both parties. It is understood,
as regards remittances due either party hereunder, that payment by the Ceding
Company to the Intermediary shall constitute payment to the Reinsurer but
payment by the Reinsurer to the Intermediary shall only constitute payment to
the Ceding Company to the extent such payments are actually received by the
Ceding Company. Notwithstanding the foregoing, it is agreed that all payments
will be direct from the Reinsurer to the Ceding Company, or from the Ceding
Company to the Reinsurer, as appropriate.
<PAGE>
Article 26: Proportion
This Teaty of the undersigned Reinsurer is for 100% (one hundred percent) and
covers its 100% (one hundred percent) proportion of the foregoing interests and
liabilities.
In Witness Whereof, this Treaty has been executed
In Stamford, Connecticut, this day of 1998,
For and on behalf of
CHARTWELL REINSURANCE COMPANY
DAKOTA SPECIALTY INSURANCE COMPANY
THE INSURANCE CORPORATION OF NEW YORK
By:
And in Wildey, St. Michael, Barbados, W.I., this day of 1998,
For and on behalf of LONDON LIFE AND CASUALTY REINSURANCE CORPORATION
By:
Exhibit 12.1
CHARTWELL RE HOLDINGS CORPORATION
COMPUTATION OF EARNINGS TO FIXED CHARGES
(Dollars in thousands)
Chartwell Re Corporation
(Predecessor)
-------------------------
Year ended December 31,
-------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Earnings Before Fixed Charges:
Income (loss) from continuing
operations before minority interest,
extraordinary item and income taxes. $40,501 $31,706 $8,939 $(5,120) $6,763
Interest and debt expense........... 9,057 7,367 7,734 6,580 4,662
Interest portion of rental expense.. 943 462 244 224 182
------- ------- ------ ------ -------
Earnings before fixed charges....... $50,501 $39,535 $16,917 $1,684 $11,607
======= ======= ====== ====== =======
Fixed Charges:
Interest and debt expense........... $ 9,057 $7,367 $7,734 $6,580 $ 4,662
Interest portion of rental expense.. 943 462 244 224 182
------- ------ ------ ------ -------
Fixed charges....................... $10,000 $7,829 $7,978 $6,804 $ 4,844
======= ====== ====== ====== ======
Ratio of earnings to fixed charges.. 5.05x 5.05x 2.12x 0.25x 2.40x
==== ==== ==== ==== ====
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Dec-31-1997
<DEBT-HELD-FOR-SALE> 657,973
<DEBT-CARRYING-VALUE> 36,630
<DEBT-MARKET-VALUE> 37,421
<EQUITIES> 38,043
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 762,180
<CASH> 29,354
<RECOVER-REINSURE> 34,502
<DEFERRED-ACQUISITION> 26,100
<TOTAL-ASSETS> 1,365,060
<POLICY-LOSSES> 788,240
<UNEARNED-PREMIUMS> 111,149
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 104,126
0
0
<COMMON> 0
<OTHER-SE> 269,052
<TOTAL-LIABILITY-AND-EQUITY> 1,365,060
245,700
<INVESTMENT-INCOME> 43,457
<INVESTMENT-GAINS> (3)
<OTHER-INCOME> 33,116
<BENEFITS> 160,848
<UNDERWRITING-AMORTIZATION> 72,655
<UNDERWRITING-OTHER> 16,473
<INCOME-PRETAX> 40,501
<INCOME-TAX> 12,202
<INCOME-CONTINUING> 27,774
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,774
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 575,481
<PROVISION-CURRENT> 163,003
<PROVISION-PRIOR> (2,155)
<PAYMENTS-CURRENT> 45,286
<PAYMENTS-PRIOR> 105,396
<RESERVE-CLOSE> 585,647
<CUMULATIVE-DEFICIENCY> 2,100
</TABLE>
