SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended June 30, 1999 or
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( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 for the transition
period from ___________ to _____________ .
For the Quarter Ended June 30, 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
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Common Stock - $1.00 par value 100
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Description of Class Shares Outstanding as of August 12, 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 June 30, 1999
and December 31, 1998....................................... 1
Condensed Consolidated Statements of Operations for the three
and six months ended June 30, 1999 and 1998.................. 2
Condensed Consolidated Statements of Cash Flows for the
six months ended June 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.......................... 5
PART II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K ....................... 14
Signatures ..................................................... 15
i
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
CHARTWELL RE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)
June 30, December 31,
1999 1998
------------ -----------
(Unaudited)
ASSETS:
Investments:
Fixed maturities:
Held to maturity (market value 1999,
$26,949; 1998, $31,786)......................... $26,454 $30,539
Available for sale (amortized cost 1999,
$611,672; 1998, $637,747)....................... 610,273 659,752
Other investments................................... 45,690 36,358
Investments held by managed syndicates.............. 113,146 89,228
Cash and cash equivalents............................. 50,129 49,388
Cash and cash equivalents held by managed syndicates.. 9,428 10,931
----------- -----------
Total investments and cash...................... 855,120 876,196
Accrued investment income............................. 10,296 10,723
Premiums in process of collection..................... 133,688 143,879
Reinsurance recoverable: on paid losses........... 25,418 19,746
on paid losses........... 312,515 239,059
Prepaid reinsurance................................... 53,964 40,933
Goodwill.............................................. 52,673 51,902
Deferred policy acquisition costs..................... 23,869 24,084
Deferred income taxes................................. 30,276 23,159
Deposits.............................................. 20,385 19,975
Other assets.......................................... 71,875 78,898
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Total assets.................................... $1,590,079 $1,528,554
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LIABILITIES:
Loss and loss adjustment expenses..................... $936,243 $878,617
Unearned premiums..................................... 120,340 108,495
Other reinsurance balances............................ 72,050 53,323
Accrued expenses and other liabilities................ 53,668 64,143
Long term debt........................................ 100,816 108,477
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Total liabilities............................... 1,283,117 1,213,055
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COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST..................................... 6,640 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...................................... (2,387) 12,534
Foreign currency translation adjustment............. (1,045) 217
Retained earnings..................................... 85,888 77,306
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Total stockholder's equity...................... 300,322 307,923
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Total liabilities and stockholder's equity...... $1,590,079 $1,528,554
============ ===========
See notes to condensed consolidated financial statements.
1
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CHARTWELL RE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
(Unaudited)
Three Month Periods Six Month Periods
Ended June 30, Ended June 30,
-------------------- -------------------
1999 1998 1999 1998
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UNDERWRITING OPERATIONS:
Premiums earned...................... $92,330 $56,430 $161,994 $109,173
Net investment income................ 13,405 11,996 25,967 23,640
Net realized capital gains (losses).. (573) (39) (330) 60
--------- -------- --------- ---------
Total revenues................. 105,162 68,387 187,631 132,873
--------- -------- --------- ---------
Loss and loss adjustment expenses.... 57,420 33,914 109,268 65,838
Policy acquisition costs............. 26,117 14,639 45,437 29,584
Other expenses....................... 8,050 6,011 14,247 10,280
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Total expenses................. 91,587 54,564 168,952 105,702
--------- -------- --------- ---------
Income before taxes - underwriting
operations........................ 13,575 13,823 18,679 27,171
--------- -------- --------- ---------
SERVICE OPERATIONS:
Service and other revenue............ 2,764 3,291 5,317 6,639
Equity in net earnings of investees.. 659 1,323 700 2,071
Net investment income................ 164 129 409 337
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Total revenues................. 3,587 4,743 6,426 9,047
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Other expenses....................... 2,786 3,329 5,091 6,015
Amortization of goodwill............. 459 569 925 1,135
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Total expenses................. 3,245 3,898 6,016 7,150
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Income before taxes - service
operations......................... 342 845 410 1,897
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CORPORATE:
Net investment income................ 24 32 57 52
General and administrative expenses.. 623 636 1,220 1,178
Interest expense..................... 2,288 2,403 4,705 4,882
Amortization expense................. 619 209 1,226 415
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Loss before taxes - corporate........ (3,506) (3,216) (7,094) (6,423)
--------- -------- --------- ---------
Consolidated income before taxes
and minority interest.............. 10,411 11,452 11,995 22,645
Income tax expense................... 3,279 3,573 3,793 6,891
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Net income before minority interest.. 7,132 7,879 8,202 15,754
Minority interest.................... (40) 526 380 884
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Net income........................... $7,092 $8,405 $8,582 $16,638
========= ======== ========= =========
See notes to condensed consolidated financial statements.
2
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CHARTWELL RE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
Six Month Periods
Ended June 30,
--------------------------
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net premiums collected............................... $139,887 $ 75,548
Net losses and loss adjustment expenses paid......... (121,350) (73,479)
Overhead expenses.................................... (16,836) (11,480)
Service and other revenue, net of related expenses... 375 (2,790)
Net income taxes paid................................ (5,000) (2,554)
Interest received on investments..................... 25,282 22,495
Interest paid........................................ (4,539) (4,006)
Other, net........................................... (9,310) 4,025
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Net cash provided by operating activities........ 8,509 7,759
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for sale securities........... (60,387) (74,521)
Maturities of available for sale securities.......... 10,277 7,725
Maturities of held to maturity securities............ 4,425 1,300
Sales of available for sale securities............... 42,114 51,289
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Net cash used in investing activities............ (3,571) (14,207)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long term debt........................... 5,045
Repayment of long term debt.......................... (6,443) (1,383)
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Net cash provided by (used in)
financing activities............................. (6,443) 3,662
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Effect of exchange rate on cash................ 743 (423)
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Net decrease in cash and cash equivalents............ (762) (3,209)
Cash and cash equivalents at beginning of period..... 60,319 29,534
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Cash and cash equivalents at end of period............. $59,557 $26,325
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RECONCILIATION OF NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Net income........................................... $8,582 $16,638
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in net earnings of investees.............. 392 (865)
Net realized capital (gains) losses.............. 330 (60)
Minority interest................................ (380) (884)
Deferred policy acquisition costs................ 215 1,849
Unpaid loss and loss adjustment expenses......... 66,373 45,771
Unearned premiums................................ 11,845 5,886
Other reinsurance balances....................... 5,696 11,455
Reinsurance recoverable.......................... (79,128) (42,116)
Amortization of goodwill......................... 1,574 1,135
Deferred income taxes............................ (7,117) 4,710
Net change in receivables and payables........... 11,240 (41,649)
Other, net....................................... (11,113) 5,889
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Net cash provided by operating activities...... $8,509 $7,759
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See notes to condensed consolidated financial statements.
3
<PAGE>
CHARTWELL RE HOLDINGS CORPORATION
Notes to Condensed Consolidated Financial Statements
June 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 June 30, 1999 and 1998 was $(2,007,000) and
$10,955,000, respectively. Total comprehensive income (loss) for the six month
periods ended June 30, 1999 and 1998 was $(7,601,000) and $20,377,000,
respectively.
4
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
Chartwell Re Holdings Corporation
Chartwell Re Holdings Corporation is an insurance holding company with
global underwriting and service operations, conducting its business in the
United States and in the Lloyd's market through its principal operating
subsidiaries, Chartwell Reinsurance Company ("Chartwell Reinsurance"), The
Insurance Corporation of New York ("INSCORP") and Chartwell Managing Agents
Limited ("CMA"). Chartwell Re Holdings Corporation was formed in 1995 to act as
an intermediate level holding company for its parent, Chartwell Re Corporation
("Chartwell Re"), a company whose common stock is traded on the New York Stock
Exchange. Chartwell Re Holdings Corporation and its subsidiaries are
collectively referred to as the Company.
Recent Developments
On June 21, 1999, Chartwell Re entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Trenwick Group Inc. ("Trenwick") pursuant
to which Chartwell Re will merge with and into Trenwick in an all stock
transaction. Chartwell Re's stockholders will receive 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. The transaction is subject to approval by Chartwell Re's and
Trenwick's respective shareholders, expiration of the applicable waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act, regulatory approvals and
other customary closing conditions. It is expected that the merger will be
completed in the fourth quarter of 1999.
In connection with the Merger Agreement, Chartwell Re granted Trenwick
the option to purchase, under certain circumstances, up to 1,918,729 shares of
Chartwell Re's common stock at a purchase price of $23.82 per share. The option
is exercisable upon certain circumstances, which can arise if another person
proposes a takeover of Chartwell Re or if any other person commences a tender or
exchange offer to acquire 15% or more of Chartwell Re's common stock or assets.
In addition, as part of the transaction, Chartwell Re will purchase, 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 is 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 will 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.
Detailed information regarding the proposed transaction and Trenwick
has been filed with the Securities and Exchange Commission and will be
disseminated to Chartwell Re's stockholders in connection with the solicitation
of stockholder approval of the Merger Agreement and the resulting merger.
5
<PAGE>
Results of Operations - Six Months Ended June 30, 1999 Compared With Six Months
Ended June 30, 1998:
Revenues: Total revenues for the six months ended June 30, 1999
increased 36.7% to $194.1 million, compared to $142.0 million for the comparable
period in 1998.
The accompanying table summarizes gross and net premiums written and
total revenues for the periods indicated:
Six Month Periods
Ended June 30,
-------------------------------------
1999 1998
-------------------------------------
(in thousands)
Gross premiums written $248,620 $168,665
============== ==============
Net premiums written $161,071 $101,528
============== ==============
Premiums earned $161,994 $109,173
Net investment income 26,433 24,029
Net realized capital gains (losses) (330) 60
Service and other revenue 5,317 6,639
Equity in net earnings of investees 700 2,071
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Total Revenues $194,114 $141,972
============== ==============
Underwriting Operations
Gross Premiums Written; Net Premiums Written; Net Premiums Earned.
Gross premiums written for the first six months of 1999 were $248.6 million, an
increase of 47.4% compared to the same period in 1998. The distribution of the
Company's gross premiums written among its business segments was as follows:
Six Month Periods
Ended June 30,
------------------------------ -----------
1999 1998 % Change
----------- ------------ -----------
Reinsurance Operations $77,945 $84,629 (7.9)%
Specialty Insurance Operations 170,675 84,036 103.1%
----------- ------------ -----------
Total $248,620 $168,665 47.4%
=========== ============ ===========
Net premiums written for the six months ended June 30, 1999 increased
58.6% to $161.1 million compared to $101.5 million for the same period in 1998.
The increase in both gross and net premiums written principally reflects the
Company's continued growth of underwriting participation on syndicates managed
by CMA, which contributed $98.4 million and $78.7 million of premiums on a gross
and net basis, respectively, in the first six months of 1999 compared to $22.8
million and $20.4 million of gross and net premiums, respectively, in the first
six months of 1998. In addition, gross written premiums emanating from the
Controlled Source Insurance segment increased 18.0% to $72.3 million for the six
months ended June 30, 1999 compared to $61.3 million for the same period in
1998. Net premiums earned for the six months ended June 30, 1999 were $162.0
million, an increase of 48.4% compared to $109.2 million for the same period in
1998.
6
<PAGE>
Loss and Loss Adjustment Expenses. The Company's principal expense,
loss and loss adjustment expenses ("LAE") related to the settlement of claims,
was $109.3 million for the six months ended June 30, 1999, a 66.0% increase
compared to $65.8 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
67.5% for the six months ended June 30, 1999 compared to 60.3% recorded for the
same period in 1998.
The increase in loss and LAE and the loss and LAE ratio for the six
months ended June 30, 1999 is principally attributable to the recognition of
adverse loss development in the first quarter 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 discontinued the underwriting of the
extended warranty business for the 1999 year of account.
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 $45.4 million for the six months ended June 30, 1999 compared
to $29.6 million for the same period in 1998. Policy acquisition costs expressed
as a percentage of net premiums earned (the acquisition expense ratio) increased
to 28.0% from 27.1% in the first half of 1998.
Other Expenses. Other expenses related to underwriting operations,
which include underwriting and administrative expenses, were $14.2 million for
the six months ended June 30, 1999 compared to $10.3 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 decreased
to 8.8% for the six months ended June 30, 1999 compared to 9.4% for the same
period in 1998 resulting primarily from the increased level of premium volume.
Net Underwriting Results. For the six months ended June 30, 1999 the
Company's net underwriting result (net premiums earned minus losses, LAE and
underwriting expenses) decreased to a net loss of $7.0 million compared to a net
gain of $3.5 million for the same period in 1998. The deterioration in the
underwriting result is principally attributable to the adverse development in
the first quarter on business written through CMA's managed syndicates as
mentioned above. The combined ratio for the six months ended June 30, 1999
computed in accordance with generally accepted accounting principles increased
to 104.3% compared to 96.8% for the same period in 1998.
Service Operations
Revenue from service operations decreased to $6.4 million for the six
months ended June 30, 1999 compared to $9.0 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.
7
<PAGE>
Corporate
Interest and Amortization. Interest and amortization expenses were $5.9
million for the six months ended June 30, 1999 compared to $5.3 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.
Consolidated
Net Investment Income and Net Realized Capital Gains. Consolidated
after-tax net investment income, exclusive of realized and unrealized capital
gains, for the six months ended June 30, 1999 was $18.6 million compared to
$17.0 million for the same period in 1998. The carrying value of the Company's
invested assets and cash decreased to $855.1 million at June 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 5.80% for the first half of 1999
compared to 6.31% for the same period in 1998.
The Company realized net capital losses of $330,000 for the six months
ended June 30, 1999 compared to net capital gains of $60,000 for the six months
ended June 30, 1998.
Income Before Income Taxes and Minority Interest. Income before income
taxes and minority interest decreased to $12.0 million for the six months ended
June 30, 1999 compared to $22.6 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 quarter of 1999, each
as discussed above.
Income Tax Expense. The provision for Federal income taxes for the six
months ended June 30, 1999 decreased to $3.8 million compared with $6.9 million
for the same period in 1998. The effective tax rate was 31.6% and 30.4% for the
six months ended June 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.
Net Income. The Company realized a net profit of $8.6 million for the
six months ended June 30, 1999 compared with a net profit of $16.6 million for
the same period in 1998 because of the factors discussed above.
Results of Operations - Three Months Ended June 30, 1999 Compared With Three
Months Ended June 30, 1998:
Revenues: Total revenues for the three months ended June 30, 1999
increased 48.7% to $108.8 million, compared to $73.2 million for the comparable
period in 1998.
8
<PAGE>
The accompanying table summarizes gross and net premiums written and
total revenues for the periods indicated:
Three Month Periods
Ended June 30,
-------------------------------------
1999 1998
---------------- ---------------
(in thousands)
Gross premiums written $124,998 $86,806
================ ===============
Net premiums written $88,320 $59,966
================ ===============
Premiums earned $92,330 $56,430
Net investment income 13,593 12,157
Net realized capital gains (losses) (573) (39)
Service and other revenue 2,764 3,291
Equity in net earnings of investees 659 1,323
---------------- ---------------
Total Revenues $108,773 $73,162
================ ===============
Underwriting Operations
Gross Premiums Written; Net Premiums Written; Net Premiums Earned.
Gross premiums written for the second quarter of 1999 were $125.0 million, an
increase of 44.0% 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 June 30,
------------------------------- ---------
1999 1998 % Change
------------- --------------- ---------
Reinsurance Operations $33,045 $40,191 (17.8)%
Specialty Insurance Operations 91,953 46,615 97.3%
------------- --------------- ---------
Total $124,998 $86,806 44.0%
============= =============== =========
Net premiums written for the three months ended June 30, 1999 increased
47.3% to $88.3 million compared to $60.0 million for the same period in 1998.
The increase in both gross and net premiums written principally reflects the
Company's continued growth of underwriting participation on syndicates managed
by CMA, which contributed $56.2 million and $50.7 million of premiums on a gross
and net basis, respectively, in the second quarter of 1999 compared to $17.2
million and $15.4 million of gross and net premiums, respectively, in the second
quarter of 1998. In addition, gross premiums emanating from the Controlled
Source Insurance segment increased 21.4% to $35.7 million for the three months
ended June 30, 1999 compared to $29.4 million for the same period in 1998. Net
premiums earned for the three months ended June 30, 1999 were $92.3 million, an
increase of 63.6% compared to $56.4 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 $57.4 million for the three months ended June 30, 1999, a 69.3% increase
compared to $33.9 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
62.2% for the three months ended June 30, 1999 compared to 60.1% recorded for
the same period in 1998.
9
<PAGE>
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 $26.1 million for the three months ended June 30, 1999 compared
to $14.6 million for the same period in 1998. Policy acquisition costs expressed
as a percentage of net premiums earned (the acquisition expense ratio) increased
to 28.3% from 25.9% in the second quarter of 1998.
Other Expenses. Other expenses related to underwriting operations,
which include underwriting and administrative expenses, were $8.1 million for
the three months ended June 30, 1999 compared to $6.0 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 decreased
to 8.7% for the three months ended June 30, 1999 compared to 10.7% for the same
period in 1998.
Net Underwriting Results. For the three months ended June 30, 1999 the
Company's net underwriting result (net premiums earned minus losses, LAE and
underwriting expenses) decreased to a net gain of $0.7 million compared to a net
gain of $1.9 million for the same period in 1998. The combined ratio for the
three months ended June 30, 1999 computed in accordance with generally accepted
accounting principles increased to 99.2% compared to 96.7% for the same period
in 1998.
Service Operations
Revenue from service operations decreased to $3.6 million for the three
months ended June 30, 1999 compared to $4.7 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 $2.9
million for the three months ended June 30, 1999 compared to $2.6 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.
Consolidated
Net Investment Income and Net Realized Capital Gains. Consolidated
after-tax net investment income, exclusive of realized and unrealized capital
gains, for the three months ended June 30, 1999 was $9.6 million, compared to
$8.6 million for the same period in 1998. The average annual tax equivalent
yield on invested assets after investment expenses decreased to 5.76% for the
second quarter of 1999 compared to 6.13% for the same period in 1998.
The Company realized net capital losses of $573,000 for the quarter
ended June 30, 1999 compared to net capital losses of $39,000 for the three
months ended June 30, 1998.
10
<PAGE>
Income Before Income Taxes and Minority Interest. Income before income
taxes and minority interest decreased to $10.4 million for the three months
ended June 30, 1999 compared to $11.5 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 June 30, 1999 decreased to $3.3 million compared to $3.6
million for the same period in 1998. The effective tax rate was 31.5% and 31.2%
for the three months ended June 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.
Net Income. The Company realized a net profit of $7.1 million for the
three months ended June 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 and
May 26, 1999, Chartwell Reinsurance paid a $5.5 million and a $3.0 million
dividend, respectively, to the Company. On August 11, 1999, Chartwell
Reinsurance's Board of Directors declared a dividend of $10.0 million payable to
the Company on August 26, 1999. None of the dividends were "extraordinary
dividends" under Minnesota law and up to $11.8 million remains available under
Minnesota law for the payment of dividends by Chartwell Reinsurance without
regulatory approval in 1999.
Cash flow from operations for the first six months of 1999 was $8.5
million compared to $7.8 million for the six months ended June 30, 1998.
Sales of available for sale investments were $42.1 million and $51.3
million for the six months ended June 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 June 30, 1999, approximately
89.2% 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 June 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 2.5% to $300.3 million
at June 30, 1999 from $307.9 million at December 31, 1998.
11
<PAGE>
The Company's outstanding long-term debt as of June 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 June 30, 1999, the Company's
Loan Notes due June 2002 constituted approximately $5.4 million (denominated in
pounds sterling) of indebtedness and the Company had outstanding $45.1 million
of indebtedness under the credit facilities with First Union. The Company's
ratio of long-term debt to total capitalization at June 30, 1999 was 25.1%,
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 June 30, 1999. The testing and modification process has not materially
interfered with the Company's Information Technology operations or the
operations of the Company .
In addition, the Company has contacted all of its significant business
partners and service vendors to determine their Year 2000 Compliance readiness,
as well as the extent to which the Company is vulnerable to any third party Year
2000 issues. However, there can be no guarantee that the systems of other
companies on which the Company's systems rely will become Year 2000 compliant in
a timely manner, or that the failure by a third party to become Year 2000
compliant would not have a material adverse effect on the Company.
The Company is revising its existing disaster recovery contingency
plans to address issues specific to the Year 2000 problem. These revisions are
expected to be completed by September 30, 1999. Such plans are intended to
enable the Company to continue to operate by performing certain processes
manually, changing vendors and repairing or replacing existing systems, where
feasible.
The total cost to the Company to test and modify all systems to be Year
2000 compliant has not been, and is not expected to be, material to its
financial position or results of operations in any given year. To date, the
Company has budgeted $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.
12
<PAGE>
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--Recent Developments" concerning the expected timing of the
completion of the merger of the Company with and into Trenwick, (ii)
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations - Six Months Ended June 30, 1999 Compared with
Six Months Ended June 30, 1998" and "Three Months Ended June 30, 1999 Compared
With Three Months Ended June 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; (iii) "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;
(iv) "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance" concerning the costs and effects of Year 2000
compliance; (v) such other statements contained in this Quarterly Report that
may be considered to be forward-looking statements; and (vi) variations of the
foregoing statements wherever they appear in this Quarterly Report.
All forward-looking statements address matters that involve risks and
uncertainties. Accordingly, there are or will be important factors that could
cause actual results to differ materially from those indicated in such
statements. The Company believes that these include the following non-exclusive
factors:
i. the impact of changing market conditions on the Company's business
strategy;
ii. the effects of increased competitio n 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;
13
<PAGE>
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
A Report on Form 8-K was filed on June 25, 1999,
which stated that Trenwick and the Company had
entered into the Merger Agreement, dated June 21,
1999, and that in connection with the Merger
Agreement, Trenwick and the Company had entered into
a Stock Option Agreement, dated June 21, 1999. The
Report on Form 8-K also stated that Trenwick and
Chartwell had issued a joint press release announcing
the signing of the Merger Agreement.
(c) Signatures
14
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHARTWELL RE HOLDINGS CORPORATION
(Registrant)
/s/Charles E. Meyers
---------------------------------
Charles E. Meyers
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/Richard B. Primerano
---------------------------------
Richard B. Primerano
Vice President and Controller
(Principal Accounting Officer)
Dated: August 12, 1999
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<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-1-1999
<PERIOD-END> Jun-30-1999
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