SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended September 30, 1999 or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition
period from ___________ to ____________ .
For the Quarter Ended September 30, 1999 Commission file number 0-28188
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Chartwell Re Holdings Corporation
(Exact name of registrant as specified in its charter)
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Delaware 06-1438493
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Four Stamford Plaza,
P. O. Box 120043
Stamford, Connecticut 06912-0043
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(Address of principal executive offices) (zip code)
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Registrant's telephone number, including area code (203) 705-2500
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Common Stock - $1.00 par value 100
- ------------------------------ -------------------------------------------
Description of Class Shares Outstanding as of November 11, 1999
(All shares are privately held, and there is
no public market for the Company's common
shares)
<PAGE>
Chartwell Re Holdings Corporation
Index To Form 10-Q
PART I FINANCIAL INFORMATION
Item 1- Page
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Condensed Consolidated Balance Sheets at September 30, 1999
and December 31, 1998....................................... 1
Condensed Consolidated Statements of Operations for the three
and nine months ended September 30, 1999 and 1998............ 2
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 1998................ 3
Notes to Condensed Consolidated Financial Statements............. 4
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 6
PART II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K ....................... 15
Signatures ...................................................... 16
i
<PAGE>
PART I FINANCIAL INFORMATION
Item 1 - Financial Statements
CHARTWELL RE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)
September 30, December 31,
1999 1998
-------------- ------------
(Unaudited)
ASSETS:
Investments:
Fixed maturities:
Held to maturity (market value 1999, $20,982;
1998, $31,786)................................... 20,647 $ 30,539
Available for sale (amortized cost 1999, $616,490;
1998, $637,747).................................. 610,500 659,752
Other investments.................................... 36,625 36,358
Investments held by managed syndicates............... 86,439 89,228
Cash and cash equivalents.............................. 58,881 49,388
Cash and cash equivalents held by managed syndicates... 9,830 10,931
----------- -----------
Total investments and cash....................... 822,922 876,196
Accrued investment income.............................. 24,651 10,723
Premiums in process of collection...................... 139,359 143,879
Reinsurance recoverable: on paid losses.............. 31,696 19,746
on paid losses.............. 346,144 239,059
Prepaid reinsurance.................................... 53,013 40,933
Goodwill............................................... 54,269 51,902
Deferred policy acquisition costs...................... 22,458 24,084
Deferred income taxes.................................. 33,897 23,159
Deposits............................................... 21,127 19,975
Other assets........................................... 53,212 78,898
----------- -----------
Total assets..................................... $1,602,748 $1,528,554
=========== ===========
LIABILITIES:
Loss and loss adjustment expenses..................... $941,122 $878,617
Unearned premiums..................................... 115,351 108,495
Other reinsurance balances............................ 103,029 53,323
Accrued expenses and other liabilities................. 62,834 64,143
Long term debt......................................... 98,966 108,477
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Total liabilities............................... 1,321,302 1,213,055
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COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST..................................... 5,396 7,576
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STOCKHOLDER'S EQUITY
Common stock, par value $1.00 per share; authorized
1,000 shares; shares issued and outstanding 100...
Additional paid-in capital.............................. 217,866 217,866
Accumulated other comprehensive income:
Net unrealized appreciation (depreciation) of
investments....................................... (6,046) 12,534
Foreign currency translation adjustment.............. (236) 217
Retained earnings...................................... 64,466 77,306
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Total stockholder's equity....................... 276,050 307,923
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Total liabilities and stockholder's equity..... $1,602,748 $1,528,554
============= ===========
See notes to condensed consolidated financial statements
1
<PAGE>
CHARTWELL RE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
(Unaudited)
Three Month Periods Nine Month Periods
Ended September 30, Ended September 30,
-------------------- -------------------
1999 1998 1999 1998
---------- -------- -------- --------
UNDERWRITING OPERATIONS:
Premiums earned....................... $47,118 $59,333 $209,112 $168,506
Net investment income................. 6,174 11,808 32,141 35,448
Net realized capital losses........... (503) (169) (833) (109)
---------- -------- --------- --------
Total revenues.................. 52,789 70,972 240,420 203,845
---------- -------- --------- --------
Loss and loss adjustment expenses... 51,005 36,108 160,273 101,946
Policy acquisition costs.............. 16,941 15,940 62,378 45,524
Other expenses........................ 7,434 5,239 21,681 15,519
---------- -------- --------- --------
Total expenses.................. 75,380 57,287 244,332 162,989
---------- -------- --------- --------
Income (loss) before taxes -
underwriting operations............. (22,591) 13,685 (3,912) 40,856
---------- -------- --------- --------
SERVICE OPERATIONS:
Service and other revenue............. 3,919 4,259 9,236 10,898
Equity in net earnings of investees... (1,063) 403 (363) 2,474
Net investment income................. 209 345 618 682
---------- -------- --------- --------
Total revenues.................. 3,065 5,007 9,491 14,054
---------- -------- --------- --------
Other expenses........................ 3,290 3,147 8,381 9,162
Amortization of goodwill.............. 467 587 1,392 1,722
---------- -------- --------- --------
Total expenses.................. 3,757 3,734 9,773 10,884
---------- -------- --------- --------
Income (loss) before taxes - service
operations....................... (692) 1,273 (282) 3,170
CORPORATE:
Net investment income................. 14 24 71 76
Net realized capital gains............ 368 368
General and administrative expenses... 860 577 2,080 1,755
Interest expense...................... 2,950 2,635 7,655 7,517
Amortization expense.................. 602 221 1,828 636
---------- -------- --------- --------
Loss before taxes - corporate......... (4,398) (3,041) (11,492) (9,464)
---------- -------- --------- --------
Consolidated income (loss) before
taxes and minority interest...... (27,681) 11,917 (15,686) 34,562
Income tax expense (benefit).......... (4,522) 3,725 (729) 10,616
---------- -------- --------- --------
Net income (loss) before minority
interest......................... (23,159) 8,192 (14,957) 23,946
Minority interest..................... 1,737 191 2,117 1,075
---------- -------- --------- --------
Net income (loss)..................... $ (21,422) $8,383 $(12,840) $25,021
========== ======== ========= ========
See notes to condensed consolidated financial statements.
2
<PAGE>
CHARTWELL RE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
Nine Month Periods
Ended September 30,
-------------------------
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net premiums collected............................... $184,501 $99,919
Net losses and loss adjustment expenses paid......... (206,525) (104,580)
Overhead expenses.................................... (19,351) (18,018)
Service and other revenue, net of related expenses... 8,265 (245)
Net income taxes paid................................ (5,000) (5,772)
Interest received on investments..................... 34,579 35,666
Interest paid........................................ (8,003) (8,336)
Other, net........................................... (2,840) (2,727)
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Net cash used in operating activities........... (14,374) (4,093)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for sale securities........... (67,684) (141,607)
Net cash acquired from investment in Oak Dedicated
Two Limited......................................... 6,901
Maturities of available for sale securities.......... 14,544 8,075
Maturities of held to maturity securities............ 10,727 2,430
Sales of available for sale securities............... 74,879 130,598
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Net cash provided by investing activities........ 32,466 6,397
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CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long term debt........................... 5,624
Repayment of long term debt.......................... (9,548) (241)
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Net cash provided by (used in) financing
activities..................................... (9,548) 5,383
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Effect of exchange rate on cash................ (152) (980)
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Net increase in cash and cash equivalents............ 8,392 6,707
Cash and cash equivalents at beginning of period..... 60,319 29,534
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Cash and cash equivalents at end of period........... $68,711 $36,241
============ ==========
RECONCILIATION OF NET INCOME TO NET CASH USED
IN OPERATING ACTIVITIES:
Net income (loss)....................................($12,840) $25,021
Adjustments to reconcile net income to net cash
used in operating activities:
Equity in net earnings of investees.............. 2,211 (759)
Net realized capital (gains) losses.............. 833 (259)
Minority interest................................ (2,117) (1,075)
Deferred policy acquisition costs................ 1,626 2,436
Unpaid loss and loss adjustment expenses......... 61,388 65,391
Unearned premiums................................ 6,856 7,054
Other reinsurance balances....................... 37,625 301
Reinsurance recoverable..........................(119,035) (54,328)
Amortization of goodwill......................... 2,365 1,722
Deferred income taxes............................ (10,738) 7,490
Net change in receivables and payables........... 17,423 (51,740)
Other, net....................................... 29 (5,347)
============ ==========
Net cash used in operating activities..........($14,374) $(4,093)
============ ==========
See notes to condensed consolidated financial statements.
3
<PAGE>
CHARTWELL RE HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim Condensed Consolidated Financial
Statements of Chartwell Re Holdings Corporation (the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information, the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for fair presentation have
been included. Operating results for any interim period are not necessarily
indicative of results that may be expected for the full year. These interim
statements should be read in conjunction with the 1998 consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K as filed with the Securities and Exchange Commission.
NOTE 2 - COMPREHENSIVE INCOME
The components of the Company's comprehensive income are net income,
changes in foreign currency translation adjustments and changes in unrealized
appreciation (depreciation) of investments. Total comprehensive income (loss)
for the three month periods ended September 30, 1999 and 1998 was $(24,272,000)
and $13,276,000, respectively. Total comprehensive income (loss) for the nine
month periods ended September 30, 1999 and 1998 was $(31,873,000) and
$33,653,000 respectively.
NOTE 3 - BUSINESS SEGMENTS
The Company's operations have been classified into four segments--
reinsurance, controlled source insurance, Lloyd's underwriting and service
operations. The reinsurance, controlled source insurance and Lloyd's
underwriting segments include the pre-tax results of the insurance and
reinsurance entities over which management of the Company is responsible for
making underwriting decisions, including Chartwell Reinsurance Company, The
Insurance Corporation of New York, Oak Dedicated Limited, Oak Dedicated Two
Limited and Oak Dedicated Four Limited. The insurance and reinsurance operations
of these entities have been separated among the three segments based upon the
nature of the clientele and their business or products. The measure of
profitability of the insurance segments is the composite underwriting result,
which represents the gross profit margin on insurance products before insurance
administrative expenses and consists of premiums, less loss and LAE, acquisition
costs and commissions. 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 and
Chartwell Managing Agents Limited, net of related goodwill amortization. The
measure of profitability of the service operations segment is net income (loss)
before taxes, excluding non-recurring investment and foreign exchange gains and
losses. 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.
4
<PAGE>
Summarized financial information concerning the Company's operating segments is
shown in the following table (in thousands):
<TABLE>
<CAPTION>
Controlled
Source Lloyd's Service
Reinsurance Insurance Underwriting Operations Corporate Total
------------------------------------------------------------------------------------
Nine months ended September 30, 1999
Segment profit or loss:
<S> <C> <C> <C> <C> <C> <C>
Total revenues $113,347 $ 35,296 $91,777 $ 9,491 $ 71 $ 249,982
Composite underwriting result (1,138) 2,894 (15,295) (13,539)
Income (loss) before taxes 10,675 2,660 (17,247) (282) (11,492) (15,686)
Segment assets:
Total assets $609,608 $647,086 $274,691 $36,969 $34,394 $1,602,748
Nine months ended September 30, 1998
Segment profit or loss:
Total revenues $127,637 $ 35,913 $40,295 $14,054 $444 $ 218,343
Composite underwriting result 15,653 2,109 3,274 21,036
Income (loss) before taxes 34,865 1,894 4,097 3,170 (9,464) 34,562
Segment assets:
Total assets $707,611 $645,288 $80,089 $48,543 $23,801 $1,505,332
</TABLE>
NOTE 4 - SUBSEQUENT EVENTS
On October 27, 1999, Chartwell Re Corporation ("Chartwell Re") , the
parent of the Company, merged with and into Trenwick Group Inc. ("Trenwick") in
an all stock transaction. Chartwell Re's stockholders received 0.825 of a share
of Trenwick common stock for each share of Chartwell Re's common stock in a
tax-free exchange of shares. Trenwick plans to account for the merger using the
purchase method of accounting under generally accepted accounting principles.
As a condition to the merger agreement, Trenwick is indemnified and
guaranteed, effective October 27, 1999, against adverse development in the
Company's business and such indemnity and guarantee is accomplished through a
reinsurance agreement. The premiums payable under this agreement are $56.0
million and will generate an expected tax benefit of $19.6 million, which will
be recorded as a non-recurring charge in the Company's fourth quarter financial
statements.
The Company has aggregate excess of loss reinsurance treaties in place
for 1997, 1998 and 1999. As a condition to entering into the reinsurance
agreement described above, the Company was required to commute these stop loss
reinsurance treaties, effective October 1, 1999. The loss on commutation of
$54.4 million and will generate an expected tax benefit of $19.0, which will be
recorded as a non-recurring charge in the Company's fourth quarter financial
statements.
5
<PAGE>
The Company will record merger-related costs in its fourth quarter
financial statements totaling $13.4 million. Such costs consist of attorneys
fees, financial advisor fees, accountants' fees, severance costs and office
closing costs.
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
Chartwell Re Holdings Corporation
Chartwell Re Holdings Corporation is an insurance holding company with
global underwriting and service operations, conducting its business in the
United States and in the Lloyd's market through its principal operating
subsidiaries, Chartwell Reinsurance Company ("Chartwell Reinsurance"), The
Insurance Corporation of New York ("INSCORP") and Chartwell Managing Agents
Limited ("CMA"). Chartwell Re Holdings Corporation was formed in 1995 to act as
an intermediate level holding company for Chartwell Re Corporation ("Chartwell
Re"), its parent at that time. Chartwell Re Holdings Corporation and its
subsidiaries are collectively referred to as the Company.
Recent Developments
On October 27, 1999, Chartwell Re merged with and into Trenwick Group
Inc. ("Trenwick") in an all stock transaction. Chartwell Re's stockholders
received 0.825 of a share of Trenwick common stock for each share of Chartwell
Re's common stock in a tax-free exchange of shares. Trenwick plans to account
for the merger using the purchase method of accounting under U.S. generally
accepted accounting principles.
In addition, as part of the transaction, Chartwell Re purchased, at the
time of the closing of the transaction, a reinsurance policy providing for up to
$100 million in coverage against unanticipated increases in Chartwell Re's
reserves for business written on or before the date the merger was completed.
The reinsurance policy will apply to all of Chartwell Re's business, including
its operations at Lloyd's.
Chartwell Re's execution of the Merger Agreement and the resulting
merger of Chartwell Re with and into Trenwick did not cause the preferred share
purchase rights described in Note 15 of the financial statements set forth in
Chartwell Re's Annual Report on Form 10-K for the year ended December 31, 1998
to become exercisable, due to an amendment to Chartwell Re's Rights Agreement
dated as of June 21, 1999.
Results of Operations - Nine Months Ended September 30, 1999 Compared With Nine
Months Ended September 30, 1998:
Revenues: Total revenues for the nine months ended September 30,
1999 increased 14.5% to $250.0 million, compared to $218.3 million for the
comparable period in 1998.
6
<PAGE>
The accompanying table summarizes gross and net premiums written and
total revenues for the periods indicated:
Nine Month Periods
Ended September 30,
-------------------------------------
1999 1998
---------------- --------------
(in thousands)
Gross premiums written $337,461 $256,535
Net premiums written $204,444 $157,640
Premiums earned $209,112 $168,506
Net investment income 32,830 36,206
Net realized capital gains (losses) (833) 259
Service and other revenue 9,236 10,898
Equity in net earnings of investees (363) 2,474
---------------- --------------
Total Revenues $249,982 $218,343
================ ==============
Underwriting Operations
Gross Premiums Written; Net Premiums Written; Net Premiums Earned.
Gross premiums written for the first nine months of 1999 were $337.5 million, an
increase of 31.5% compared to the same period in 1998. The distribution of the
Company's gross premiums written among its business segments was as follows:
Nine Month Periods
Ended September 30,
---------------------------------------------
1999 1998 % Change
------------- ------------ ------------
Reinsurance Operations $104,041 $128,681 (19.1)%
Specialty Insurance Operations 233,420 127,854 82.6%
------------- ------------ ------------
Total $337,461 $256,535 31.5%
============= ============ ============
Net premiums written for the nine months ended September 30, 1999
increased 29.7% to $204.4 million compared to $157.6 million for the same period
in 1998. The increase in both gross and net premiums written principally
reflects the Company's underwriting participation on syndicates managed by CMA,
which contributed $124.0 million and $86.2 million of premiums on a gross and
net basis, respectively, in the first nine months of 1999 compared to $40.5
million and $36.3 million of gross and net premiums, respectively, in the first
nine months of 1998. In addition, gross written premiums emanating from the
Controlled Source Insurance segment increased 25.3% to $109.4 million for the
nine months ended September 1999 compared to $87.3 million for the same period
in 1998. Net premiums earned for the nine months ended September 30, 1999 were
$209.1 million, an increase of 24.1% compared to $168.5 million for the same
period in 1998.
Loss and Loss Adjustment Expenses. The Company's principal expense,
loss and loss adjustment expenses ("LAE") related to the settlement of claims,
was $160.3 million for the nine months ended September 30, 1999, a 57.3%
increase compared to $101.9 million for the comparable period in 1998. Net
losses and LAE expressed as a percentage of net premiums earned (the loss and
LAE ratio) was 76.6% for the nine months ended September 30, 1999 compared to
60.5% recorded for the same period in 1998.
7
<PAGE>
The increase in loss and LAE and the loss and LAE ratio for the nine
months ended September 30, 1999 is principally attributable to the recognition
of adverse loss development in the first and third quarters of 1999 in respect
of automobile insurance and extended warranty reinsurance previously written
through Lloyd's syndicates managed by CMA. CMA sold the Lloyd's syndicate which
wrote the automobile insurance in October of 1998 and the Lloyd's syndicates
which wrote the extended warranty business in November of 1999. Additionally,
Chartwell Reinsurance Company recorded net reserve charges of $15.0 million
during the third quarter of 1999, reflecting a deterioration in market
conditions since 1997.
Policy Acquisition Costs. Policy acquisition costs, consisting
primarily of commissions paid to ceding companies and agents and brokerage fees
paid to intermediaries, less commissions received on business ceded to other
reinsurers, were $62.4 million for the nine months ended September 30, 1999
compared to $45.5 million for the same period in 1998. Policy acquisition costs
expressed as a percentage of net premiums earned (the acquisition expense ratio)
increased to 29.8% from 27.0% in the first nine months of 1998.
Other Expenses. Other expenses related to underwriting operations,
which include underwriting and administrative expenses, were $21.7 million for
the nine months ended September 30, 1999 compared to $15.5 million for the same
period in 1998. The increase principally reflects an increased share of expenses
related to the Company's underwriting participation on syndicates managed by
CMA. Other expenses expressed as a percentage of net premiums earned increased
to 10.4% for the nine months ended September 30, 1999 compared to 9.2% for the
same period in 1998 resulting primarily from the reduced level of premium volume
related to the Company's reinsurance operations without a reduction in related
fixed costs.
Net Underwriting Results. For the nine months ended September 30, 1999
the Company's net underwriting result (net premiums earned minus losses, LAE and
underwriting expenses) decreased to a net loss of $35.2 million compared to a
net gain of $5.5 million for the same period in 1998. The deterioration in the
underwriting result is principally attributable to the adverse development in
the first and third quarters on business written through CMA's managed
syndicates as well as the reserve strengthening in the third quarter of 1999 as
mentioned above. The combined ratio for the nine months ended September 30, 1999
computed in accordance with generally accepted accounting principles increased
to 116.8% compared to 96.7% for the same period in 1998.
Service Operations
Revenue from service operations decreased to $9.5 million for the nine
months ended September 30, 1999 compared to $14.1 million for the same period in
1998, principally reflecting a reduction in profit commissions and equity in the
earnings of investee companies, in each case associated with CMA's syndicates.
Corporate
Interest and Amortization. Interest and amortization expenses were $9.5
million for the nine months ended September 30, 1999 compared to $8.2 million
for the same period in 1998. The increase was due principally to amortization of
goodwill related to recent acquisitions of Lloyd's corporate capital vehicles.
8
<PAGE>
Consolidated
Net Investment Income and Net Realized Capital Gains. Consolidated
after-tax net investment income, exclusive of realized and unrealized capital
gains, for the nine months ended September 30, 1999 was $23.4 million compared
to $25.7 million for the same period in 1998. The carrying value of the
Company's invested assets and cash decreased to $822.9 million at September 30,
1999 from $876.2 million at December 31, 1998 primarily due to the increase in
interest rates during the period. The average annual tax equivalent yield on
invested assets after investment expenses decreased to 5.93% for the nine months
ended September 30, 1999 compared to 6.30% for the same period in 1998.
The Company realized net capital losses of $833,000 for the nine months
ended September 30, 1999 compared to net capital gains of $259,000 for the nine
months ended September 30, 1998.
Income Before Income Taxes and Minority Interest. Income before income
taxes and minority interest decreased to a loss of $15.7 million for the nine
months ended September 30, 1999 compared to income of $34.6 million for the same
period in 1998. The decrease resulted primarily from the decline in net
underwriting results and the reduction in income from service operations in the
first and third quarters of 1999, each as discussed above.
Income Tax Expense. The provision for Federal income taxes for the nine
months ended September 30, 1999 decreased to a benefit of $0.7 million compared
with a tax expense of $10.6 million for the same period in 1998. The effective
tax rate was 4.6% and 30.7% for the nine months ended September 30, 1999 and
1998, respectively. For both periods, the effective rate is below the statutory
rate of 35% due to the benefit of investments in tax-advantaged securities,
offset in part by goodwill amortization and by a valuation allowance to reduce
the deferred tax asset in accordance with the provisions of Statement of
Financial Accounting Standards No. 109 ("SFAS 109"). The valuation allowance of
$6.1 million is necessary because sufficient uncertainty exists regarding the
realizability of certain foreign net operating losses generated through
September 30, 1999. The Company will periodically review the adequacy of the
valuation allowance and will recognize benefits only as the reassessment
indicates that it is "more likely than not" that these benefits will be
realized. Realization of the related tax benefit will depend upon the
recognition of future earnings from foreign operations or a change in
circumstances that cause the recognition of these benefits to become "more
likely than not."
Net Income. The Company realized a net loss of $12.8 million for the
nine months ended September 30, 1999 compared with a net profit of $25.0 million
for the same period in 1998 because of the factors discussed above.
9
<PAGE>
Results of Operations - Three Months Ended September 30, 1999 Compared With
Three Months Ended September 30, 1998:
Revenues: Total revenues for the three months ended September 30,
1999 decreased 26.8% to $55.9 million, compared to $76.4 million for the
comparable period in 1998.
The accompanying table summarizes gross and net premiums written and
total revenues for the periods indicated:
Three Month Periods
Ended September 30,
----------------------------------
1999 1998
-------------- ------------
(in thousands)
Gross premiums written $88,841 $87,870
============== ============
Net premiums written $43,373 $56,112
============== ============
Premiums earned $47,118 $59,333
Net investment income 6,397 12,177
Net realized capital gains (losses) (503) 199
Service and other revenue 3,919 4,259
Equity in net earnings of investees (1,063) 403
-------------- ------------
Total Revenues $55,868 $76,371
============== ============
Underwriting Operations
Gross Premiums Written; Net Premiums Written; Net Premiums Earned.
Gross premiums written for the third quarter of 1999 were $88.8 million, an
increase of 1.1% compared to the same period in 1998. The distribution of the
Company's gross premiums written among its business segments was as follows:
Three Month Periods
Ended September 30,
--------------------------------------------
1999 1998 % Change
------------ ------------- ------------
Reinsurance Operations $26,096 $44,051 (40.8)%
Specialty Insurance Operations 62,745 43,819 43.2%
------------ ------------- ------------
Total $88,841 $87,870 1.1%
============ ============= ============
Net premiums written for the three months ended September 30, 1999
decreased 22.7% to $43.4 million compared to $56.1 million for the same period
in 1998. The decrease in net premiums written principally reflects the Company's
underwriting participation on syndicates managed by CMA, which contributed $25.6
million and $7.5 million of premiums on a gross and net basis, respectively, in
the third quarter of 1999 compared to $17.8 million and $15.9 million of gross
and net premiums, respectively, in the third quarter of 1998. In addition, gross
premiums emanating from the Controlled Source Insurance segment increased 42.7%
to $37.1 million for the three months ended September 30, 1999 compared to $26.0
million for the same period in 1998. Net premiums earned for the three months
ended September 30, 1999 were $47.1 million, a decrease of 20.6% compared to
$59.3 million for the same period in 1998.
Loss and Loss Adjustment Expenses. The Company's principal expense,
loss and loss adjustment expenses ("LAE") related to the settlement of claims,
was $51.0 million for the three months ended September 30, 1999, a 41.3%
increase compared to $36.1 million for the comparable period in 1998. Net losses
and LAE expressed as a percentage of net premiums earned (the loss and LAE
ratio) was 108.2% for the three months ended September 30, 1999 compared to
60.9% recorded for the same period in 1998.
10
<PAGE>
The increase in loss and LAE and the loss and LAE ratio for the three
months ended September 30, 1999 is principally attributable to the recognition
of adverse loss development in respect of automobile insurance and extended
warranty reinsurance previously written through Lloyd's syndicates managed by
CMA. CMA sold the Lloyd's syndicate which wrote the automobile insurance in
October of 1998 and the Lloyd's syndicates which wrote the extended warranty
business in November of 1999. Additionally, Chartwell Reinsurance Company
recorded net reserve charges of $15.0 million during the third quarter of 1999,
reflecting a deterioration in market conditions since 1997.
Policy Acquisition Costs. Policy acquisition costs, consisting
primarily of commissions paid to ceding companies and agents and brokerage fees
paid to intermediaries, less commissions received on business ceded to other
reinsurers, were $16.9 million for the three months ended September 30, 1999
compared to $15.9 million for the same period in 1998. Policy acquisition costs
expressed as a percentage of net premiums earned (the acquisition expense ratio)
increased to 36.0% from 26.9% in the third quarter of 1998.
Other Expenses. Other expenses related to underwriting operations,
which include underwriting and administrative expenses, were $7.4 million for
the three months ended September 30, 1999 compared to $5.2 million for the same
period in 1998. The increase principally reflects an increased share of expenses
related to the Company's underwriting participation on syndicates managed by
CMA. Other expenses expressed as a percentage of net premiums earned increased
to 15.8% for the three months ended September 30, 1999 compared to 8.8% for the
same period in 1998.
Net Underwriting Results. For the three months ended September 30,
1999 the Company's net underwriting result (net premiums earned minus losses,
LAE and underwriting expenses) decreased to a net loss of $28.3 million compared
to a net gain of $2.0 million for the same period in 1998. The combined ratio
for the three months ended September 30, 1999 computed in accordance with
generally accepted accounting principles increased to 160.0% compared to 96.6%
for the same period in 1998.
Service Operations
Revenue from service operations decreased to $3.1 million for the three
months ended September 30, 1999 compared to $5.0 million for the same period in
1998, principally reflecting a reduction in profit commissions and equity in the
earnings of investee companies, in each case associated with CMA's syndicates.
Corporate
Interest and Amortization. Interest and amortization expenses were $3.6
million for the three months ended September 30, 1999 compared to $2.9 million
for the same period in 1998. The increase was due principally to amortization of
goodwill related to recent acquisitions of Lloyd's corporate capital vehicles.
11
<PAGE>
Consolidated
Net Investment Income and Net Realized Capital Gains. Consolidated
after-tax net investment income, exclusive of realized and unrealized capital
gains, for the three months ended September 30, 1999 was $4.9 million, compared
to $8.7 million for the same period in 1998. The decrease resulted from
revisions in estimated investment income from investments held by managed
syndicates. The average annual tax equivalent yield on invested assets after
investment expenses decreased to 5.94% for the third quarter of 1999 compared to
6.26% for the same period in 1998.
The Company realized net capital losses of $503,000 for the quarter
ended September 30, 1999 compared to net capital gains of $199,000 for the three
months ended September 30, 1998.
Income Before Income Taxes and Minority Interest. Income before income
taxes and minority interest decreased to a loss of $27.7 million for the three
months ended September 30, 1999 compared to income of $11.9 million for the same
period in 1998. The decrease resulted from the decrease in net underwriting
results, the reduction in income from service operations and the increase in
amortization expense, each as discussed above.
Income Tax Expense. The provision for Federal income taxes for the
three months ended September 30, 1999 decreased to a benefit of $4.5 million
compared to a tax expense of $3.7 million for the same period in 1998. The
effective tax rate was 16.3% and 31.3% for the three months ended September 30,
1999 and 1998, respectively. For both periods, the effective rate is below the
statutory rate of 35% due to the benefit of investments in tax-advantaged
securities, offset in part by goodwill amortization and by a valuation allowance
to reduce the deferred tax asset in accordance with the provisions of SFAS
109. The valuation allowance of $6.1 million is necessary because sufficient
uncertainty exists regarding the realizability of certain foreign net operating
losses generated through September 30, 1999. The Company will periodically
review the adequacy of the valuation allowance and will recognize benefits only
as the reassessment indicates that it is "more likely than not" that these
benefits will be realized. Realization of the related tax benefit will depend
upon the recognition of future earnings from foreign operations or a change in
circumstances that cause the recognition of these benefits to become "more
likely than not."
Net Income. The Company realized a net loss of $21.4 million for the
three months ended September 30, 1999 compared with a net profit of $8.4 million
for the same period in 1998 period because of the factors discussed above.
Liquidity and Capital Resources
As a holding company, the Company's assets consist primarily of the
stock of its direct and indirect subsidiaries. The Company's cash flow,
therefore, depends largely on dividends and other statutorily permissible
payments from its operating subsidiaries whose principal sources of funds
consist of net premiums, reinsurance recoveries, investment income and proceeds
from sales and redemptions of investments. Funds are applied primarily to
payments of claims, operating expenses and income taxes and to the purchase of
investments, largely fixed income securities. Cash and short-term investments
are maintained for the payment of claims and expenses. On February 24, 1999, May
26, 1999 and August 26, 1999 Chartwell Reinsurance paid a $5.5 million, a $3.0
million and a $10.0 million dividend, respectively, to the Company. On September
15, 1999, Chartwell Reinsurance's Board of Directors declared a dividend of
$11.8 million payable to the Company on September 28, 1999. None of the
dividends were "extraordinary dividends" under Minnesota law and only a de
minimus amount remains available under Minnesota law for the payment of
dividends by Chartwell Reinsurance without regulatory approval in 1999.
12
<PAGE>
Cash flow from operations for the first nine months of 1999 was ($14.4)
million compared to ($4.1) million for the nine months ended September 30, 1998.
Sales of available for sale investments were $74.9 million and $130.6
million for the nine months ended September 30, 1999 and 1998, respectively.
There was no unusual trading activity in either period.
The Company's investment portfolio consists primarily of
investment-grade fixed maturity debt securities. At September 30, 1999,
approximately 90.0% of the Company's bond portfolio was rated A or better ("A-1"
for commercial paper) by Moody's Investors Service. While uncertainties exist
regarding interest rates and inflation, the Company attempts to minimize such
risks and exposures by balancing the duration of assets in its investment
portfolio with the duration of insurance and reinsurance liabilities. The
current market value of the Company's fixed maturity investments is not
necessarily indicative of their future valuation. The Company does not have any
investments in real estate or high-yield bonds and does not have any non-income
producing fixed income investments. The Company's fixed income securities
portfolio at September 30, 1999 was comprised primarily of U.S. Treasury and
government agency, mortgage pass-through securities and corporate and municipal
bonds.
Stockholders' equity decreased approximately 10.3% to $276.1 million
at September 30, 1999 from $307.9 million at December 31, 1998.
The Company's outstanding long-term debt as of September 30, 1999
consists of Senior Notes due 2004, Loan Notes due June 2002 and credit
facilities agented by First Union National Bank ("First Union"). As of September
30, 1999, the Company's Loan Notes due June 2002 constituted approximately $5.6
million (denominated in pounds sterling) of indebtedness and the Company had
outstanding $43.4 million of indebtedness under the credit facilities with First
Union. The Company's ratio of long-term debt to total capitalization at
September 30, 1999 was 26.4%, compared to 26.1% at December 31, 1998.
Year 2000 Compliance
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. The Company's
computer equipment, software and devices with imbedded technology that are time
sensitive may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in other normal business activities. The
consequences to the Company of such failures could include business
interruption, lost revenue or illiquidity. The magnitude of the financial impact
of such potential failures on the Company is not known at this time.
The Company believes that it has identified all significant computer
hardware and software applications and devices with imbedded time sensitive
technology that are employed by the Company in its operations that will require
modification to ensure Year 2000 Compliance. The Company is using both internal
and external resources to test all significant computer systems and applications
and to make the modifications necessary for Year 2000 Compliance. The testing
and modification process, which is proceeding on schedule, was fully completed
on September 30, 1999. The testing and modification process has not materially
interfered with the Company's Information Technology operations or the
operations of the Company.
13
<PAGE>
In addition, the Company has contacted all of its significant business
partners and service vendors to determine their Year 2000 Compliance readiness,
as well as the extent to which the Company is vulnerable to any third party Year
2000 issues. However, there can be no guarantee that the systems of other
companies on which the Company's systems rely will become Year 2000 compliant in
a timely manner, or that the failure by a third party to become Year 2000
compliant would not have a material adverse effect on the Company.
The Company has revised its existing disaster recovery contingency
plans to address issues specific to the Year 2000 problem. Such plans are
intended to enable the Company to continue to operate by performing certain
processes manually, changing vendors and repairing or replacing existing
systems, where feasible.
The total cost to the Company to test and modify all systems to be Year
2000 compliant has not been, and is not expected to be, material to its
financial position or results of operations in any given year. To date, the
Company has budgeted $50,000 to accomplish its Year 2000 testing and remediation
goals and approximately 75% of the amount budgeted has been expended.
Expenditures to fund Year 2000 testing and modification have to date and will
continue to be funded from operating cash flows.
The anticipated completion dates for Year 2000 compliance and the
Company's contingency plans and the cost estimates for the completion of the
Company's Year 2000 compliance program are based on management's best estimates
utilizing current data regarding available resources, coordination with third
parties and other relevant factors and information about systems conversion.
However, there can be no assurance that these estimates will be achieved, and
actual results could differ from the current plan.
In addition, the Company may also have material exposure in its
property and casualty operations to claims related to the Year 2000 issue. It is
not yet possible to determine whether such claims might be made against
insurance or reinsurance contracts in which the Company participates or if such
claims will be held to have merit.
Readers are cautioned that forward-looking statements contained in this
description of the Company's treatment of the Year 2000 issue should be read in
conjunction with the Company's disclosures under the heading "Cautionary Note
Regarding Forward-Looking Statements" below.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains statements that may be
considered to be "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended.
Such statements may include, without limitation, insofar as they may be
considered to be forward-looking statements, certain statements in (i)
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations - Nine Months Ended September 30, 1999
Compared with Nine Months Ended September 30, 1998" and "Three Months Ended
September 30, 1999 Compared With Three Months Ended September 30, 1998"
concerning (A) certain relationships among gross premiums written, net premiums
written and net premiums earned and (B) the development of reserves in respect
of all or a portion of the Company's insurance and reinsurance business; (ii)
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" concerning the potential effects of
certain events on the Company's indebtedness and portfolios of fixed income and
equity instruments, foreign currency exposure, derivatives positions and certain
other types of instruments; (iii) "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000 Compliance" concerning
the costs and effects of Year 2000 compliance; (iv) such other statements
contained in this Quarterly Report that may be considered to be forward-looking
statements; and (v) variations of the foregoing statements wherever they appear
in this Quarterly Report.
14
<PAGE>
All forward-looking statements address matters that involve risks and
uncertainties. Accordingly, there are or will be important factors that could
cause actual results to differ materially from those indicated in such
statements. The Company believes that these include the following non-exclusive
factors:
i. the impact of changing market conditions on the Company's business
strategy;
ii. the effects of increased competition on pricing, coverage terms,
retention of customers and ability to attract new customers;
iii. greater severity or frequency of the types of large or catastrophic
losses which the Company's subsidiaries insure or reinsure;
iv. faster or more adverse loss development experience than that on
which the Company's underwriting, reserving and investment practices
are based;
v. changes in the Company's retrocessional arrangements;
vi. developments in global financial markets which could adversely
affect the performance of the Company's investment portfolio;
vii. litigation, regulatory or tax developments that could adversely
affect the Company's business;
viii. risks associated with the introduction of new products and services;
and
ix. the impact of mergers and acquisitions, including the acquisition
of the Company by Trenwick.
The facts set forth above should be considered in connection with any
forward-looking statement contained in this Quarterly Report. The important
factors that could affect such forward-looking statements are subject to change,
and the Company does not intend to update any forward-looking statement or the
foregoing list of important factors. By this cautionary note, the Company
intends to avail itself of the safe harbor from liability with respect of
forward-looking statements provided by Section 27A and Section 21E referred to
above.
PART II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
None
(c) Signatures
15
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHARTWELL RE HOLDINGS CORPORATION
(Registrant)
/s/ Alan L. Hunte
-------------------------------
Alan L. Hunte
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: November 11, 1999
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