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, 1996,
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, 1996 Commission file number 1-12502
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Chartwell Re Corporation
(Exact name of registrant as specified in its charter)
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Delaware 41-1652573
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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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock - $.01 par value 9,583,811
- ----------------------------- ------------
Description of Class Shares Outstanding
as of November 13, 1996
<PAGE>
Chartwell Re Corporation
Index To Form 10-Q
PART I FINANCIAL INFORMATION
Item 1 -
Page
----
Condensed Consolidated Balance Sheets at September 30, 1996
and December 31, 1995................................... 2
Condensed Consolidated Statements of Operations for the three
and nine month periods ended September 30, 1996 and 1995.. 3
Condensed Consolidated Statements of Cash Flows for the nine
month periods ended September 30, 1996 and 1995......... 4
Notes to Condensed Consolidated Financial Statements.......... 5
Item 2 -
Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 8
PART II OTHER INFORMATION
Item 6 -
Exhibits and Reports on Form 8-K.............................. 17
Signatures.................................................... 18
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1 - Financial Statements
CHARTWELL RE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
September 30, December 31,
1996 1995
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ASSETS: (Unaudited)
Investments:
Fixed maturities:
Held-to-maturity (market value
September 30, 1996, $30,271; December 31,
1995, $27,965)............................. $28,891 $26,691
Available for sale (amortized cost
September 30, 1996, $589,332; December 31,
1995, $481,175)............................ 576,459 489,107
Other investments (cost September 30, 1996,
$43,335; December 31, 1995, $33,862)....... 44,915 33,837
Cash and cash equivalents...................... 71,232 155,813
------ -------
Total investments and cash................. 721,497 705,448
Premiums in process of collection.............. 97,057 73,620
Reinsurance recoverable........................ 191,976 195,434
Prepaid reinsurance............................ 23,915 18,212
Deferred income taxes.......................... 51,976 42,819
Deferred policy acquisition costs.............. 18,333 18,809
Deposits ...................................... 18,221 17,481
Other assets................................... 61,649 61,015
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Total assets............................... $1,184,624 $1,132,838
========== ==========
LIABILITIES:
Loss and loss adjustment expenses.............. $736,267 $741,467
Unearned premiums.............................. 85,117 90,573
Contingent Interest Notes...................... 27,011 25,496
Other reinsurance balances..................... 26,152 4,689
Accrued expenses and other liabilities......... 28,913 23,131
Long-term debt................................. 68,750 95,000
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Total liabilities.......................... 972,210 980,356
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COMMON STOCKHOLDERS' EQUITY:
Common stock, par value $0.01 per share;
authorized 20,000,000 shares; shares issued
and outstanding September 30, 1996, 9,583,811;
December 31, 1995, 6,858,811 .................. 96 69
Additional paid-in capital..................... 211,781 153,305
Net unrealized appreciation (depreciation)
of investments ................................ (7,340) 5,219
Foreign currency translation adjustment........ 48 9
Retained earnings (deficit).................... 7,829 (6,120)
----- ------
Total common stockholders' equity ......... 212,414 152,482
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Total liabilities and stockholders' equity. $1,184,624 $1,132,838
========== ==========
See notes to condensed consolidated financial statements.
2
<PAGE>
CHARTWELL RE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Dollars in Thousands, except share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
-------- -------- -------- --------
REVENUES:
Premiums earned...................... $47,982 $25,988 $153,186 $87,355
Net investment income................ 11,791 5,375 33,369 14,743
Net realized capital gains .......... 81 304 1,002 1,707
Service and other revenue............ 1,842 265 5,068 796
------ ------ ------- ------
Total revenues..................... 61,696 31,932 192,625 104,601
------ ------ ------- -------
LOSSES AND EXPENSES INCURRED:
Loss and loss adjustment expenses 34,579 18,899 110,593 63,712
Policy acquisition costs............. 11,566 6,353 37,511 20,598
Other expenses....................... 4,697 2,644 13,659 7,846
Interest and amortization............ 2,253 1,996 7,456 5,750
------ ------ ------- ------
Total losses and expenses incurred. 53,095 29,892 169,219 97,906
------ ------ ------- ------
Income before income taxes and
extraordinary item.................. 8,601 2,040 23,406 6,695
Income tax............................. 2,590 577 6,817 2,152
------ ------ ------ ------
Net income before extraordinary item... 6,011 1,463 16,589 4,543
Extraordinary item, net of income tax.. (1,874)
------ ------ ------ ------
Net income............................. $6,011 $1,463 $14,715 $4,543
====== ====== ======= ======
Per Share Data:
Net income before extraordinary item... $0.63 $0.39 $1.86 $1.21
Extraordinary item, net of income tax.. (0.21)
----- ----- ------ ------
Net income............................. $0.63 $0.39 $1.65 $1.21
===== ===== ===== =====
Weighted average number of common
shares outstanding ................. 9,583,811 3,755,312 8,914,552 3,755,312
========= ========= ========= =========
See notes to condensed consolidated financial statements.
3
<PAGE>
CHARTWELL RE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net premiums collected.............................. $145,426 $59,154
Ceded premiums paid................................. (57,936) (3,306)
Net losses & LAE.................................... (96,906) (33,113)
Overhead expenses................................... (11,984) (7,769)
Service and other revenue........................... 5,068 796
Net income taxes (paid)/recovered................... (2,548) (2,043)
Interest received on investments.................... 32,815 14,712
Interest paid....................................... (7,662) (7,220)
Other, net.......................................... 967 227
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Net cash provided by operating activities....... 7,240 21,438
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Held-to-maturity Securities............ (5,391) (5,359)
Purchases of Available-for-sale Securities.......... (326,143) (237,505)
Maturities of Held-to-maturity Securities........... 675 3,730
Maturities of Available-for-sale Securities......... 26,770 830
Sale of Available-for- sale Securities.............. 183,022 204,627
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Net cash used in investing activities........... (121,067) (33,677)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from common stock offering............. 58,503
Redemption of Senior Notes.......................... (28,280)
Dividends paid...................................... (766)
Other, net.......................................... (250) (250)
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Net cash provided by (used in)
financing activities ........................ 29,207 (250)
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Effect of exchange rate on cash..................... 39 6
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Net decrease in cash and cash equivalents............. (84,581) 12,483
Cash and cash equivalents at beginning of year........ 155,813 37,005
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Cash and cash equivalents at end of period............ $71,232 $ 24,522
======= ========
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income.......................................... $14,715 $4,543
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary item ............................... 1,874
Net realized capital gains........................ (1,002) (1,677)
Deferred policy acquisition costs................. 475 (1,428)
Deferred income taxes............................. (645) (115)
Unpaid loss and loss adjustment expenses.......... (5,199) 25,562
Unearned premiums................................. (5,456) 6,957
Other reinsurance balances........................ 108 3,968
Reinsurance recoverable........................... (2,647) 1,047
Net change in receivables and payables............ 7,634 (15,214)
Other, net........................................ (2,797) (2,205)
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Net cash provided by operating activities....... $7,240 $21,438
====== ========
See notes to condensed consolidated financial statements.
4
<PAGE>
CHARTWELL RE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 1996
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim Condensed Consolidated Financial
Statements of Chartwell Re Corporation ("Chartwell" or 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 1995 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 - PUBLIC STOCK OFFERING
The Company completed a public offering of 2,725,000 shares of common
stock at $23.00 per share during the first half of 1996. The net proceeds to the
Company were $58.5 million after deduction of underwriting discount and
expenses. Of the net proceeds, $48.5 million was contributed to Chartwell Re
Holdings Corporation ("Chartwell Holdings") of which $20.0 million was
contributed to the statutory surplus of Chartwell Reinsurance Company
("Chartwell Reinsurance") and $28.5 million was used to retire (the
"Redemption") 35% of Chartwell Holdings' outstanding 10.25% Senior Notes due
2004 (the "Senior Notes") plus accrued interest (See Note 3). The remaining
funds were retained for general corporate purposes.
NOTE 3 - SENIOR NOTE REDEMPTION
On April 8, 1996, Chartwell Holdings redeemed 35% of the Senior Notes
for approximately $28.3 million including the redemption premium. Due to this
early extinguishment of debt, the Company recognized an extraordinary loss of
$1.9 million net of applicable income taxes of approximately $1.0 million. This
extraordinary charge represents the redemption premium and 35% of the remaining
original debt issuance costs relating to the Senior Notes.
NOTE 4 - PRO FORMA DATA
On December 13, 1995, Piedmont Management Company Inc. ("PMC") was
merged with and into the Company (the "Merger"), with the Company as the
surviving corporation. The Merger has been accounted for under the purchase
method of accounting effective December 31, 1995. The results of operations for
the nine months ended September 30, 1996 include the results of PMC's former
subsidiary, The Insurance Corporation of New York ("INSCORP") (formerly, The
Reinsurance Corporation of New York).
The following supplementary consolidated income statement information
for the Company for the three and nine month periods ended September 30, 1996
assumes the Redemption occurred
5
<PAGE>
on January 1, 1995. The information for the three and nine month periods ended
September 30, 1995 is presented as though both the Merger and Redemption had
occurred on January 1, 1995. The number of shares required to generate the
proceeds needed to redeem the debt was 1,316,657 shares. Such shares have been
included in the calculation of pro forma net income per common share.
(Dollars in Thousands, except share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
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Total revenues $ 61,696 $ 68,911 $ 192,625 $ 216,116
Net income $ 6,011 $(14,982) $ 17,084 $ (9,780)
Supplementary income per
common share $ 0.63 $ (1.84) $ 1.85 $ (1.20)
Supplementary weighted
average shares outstanding 9,583,811 8,175,468 9,226,648 8,175,468
Common stock equivalents were not considered as their inclusion would
not have been dilutive.
NOTE 5 - RESERVE INDEMNIFICATION AGREEMENT
On June 28, 1996, Chartwell received $7.9 million as settlement of the
receivable arising from an indemnification agreement (the "Reserve
Indemnification") between the Company and its former parent, ReliaStar Financial
Corporation ("RLR") (formerly, The NWNL Companies, Inc.). The Reserve
Indemnification, which by its terms was scheduled to be settled as of the end of
1996, was settled early by mutual agreement with RLR. The settlement did not
affect operating results for the period.
NOTE 6 - NEW ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," which became effective for the Company beginning
January 1, 1996. SFAS No. 123 requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does not require)
compensation cost to be measured based on the fair value of the equity
instrument awarded. Companies are permitted, however, to continue to apply APB
Opinion No. 25, which recognizes compensation cost based on the intrinsic value
of the equity instrument awarded. The Company will continue to apply APB Opinion
No. 25 to its stock based compensation awards to employees and will disclose the
required pro forma effect on net income and earnings per share.
NOTE 7 - PENDING ACQUISITION OF ARCHER GROUP HOLDINGS
On October 14, 1996, the Company announced that Chartwell Holdings
Limited, a newly-formed, indirect wholly-owned subsidiary of the Company, had
made a recommended cash offer (the "Offer") of 92.5 pence for each outstanding
ordinary share (each, an "Archer Share") of Archer Group Holdings plc,
("Archer"). The Offer values the existing share capital of Archer at
approximately 35 million Pounds Sterling ($55.7 million at the exchange rate on
October 14, 1996, the date the Offer was announced, excluding approximately $4.7
million of expenses and the cost of purchasing all outstanding Archer management
options).
6
<PAGE>
The Offer, which will be financed from Chartwell's existing resources
and a new credit facility, includes a Loan Note alternative whereby Archer
stockholders may elect to receive 1 Pound Sterling Loan Note for each 1 Pound
Sterling of cash consideration. The Loan Notes, which will be guaranteed by
First Union National Bank N.A., will pay interest semi-annually at the rate per
annum calculated to be one percent below Sterling LIBOR and will mature in June
2002. The Loan Notes will be transferable, subject to certain restrictions, but
will not be listed on any stock exchange.
On November 5, 1996, the Offer was declared unconditional in all
respects, and by the close of business on November 6, 1996, Chartwell owned or
had received valid acceptances in respect of 36,982,147 Archer Shares
representing approximately 97.5% of the issued share capital of Archer. In
accordance with the requirements of U.K. law regarding statutory acquisitions,
Chartwell Holdings Limited will be issuing a notice to those Archer shareholders
who have not accepted the Offer, which notice shall state that it intends to
exercise its rights to acquire all Archer Shares still outstanding at the end of
the notice period.
The Offer remains open until further notice, however, the Loan Note
Alternative will close on November 19,1996. It is anticipated that the
acquisition of Archer will be consummated by the end of November, 1996.
7
<PAGE>
ITEM 2 - Management's Discussion and Analysis
CHARTWELL RE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
September 30, 1996
(Unaudited)
Overview
The condensed consolidated financial statements include the accounts of
Chartwell and its principal wholly-owned operating subsidiaries Chartwell
Reinsurance, Chartwell Advisers Limited ("Chartwell Advisers") and INSCORP as
well as Chartwell Holdings, an intermediate level holding company. Chartwell
Reinsurance underwrites treaty reinsurance through reinsurance intermediaries
for both property and casualty risks. INSCORP underwrites a book of select
specialty property and casualty insurance underwritten through program
administrators. Chartwell Advisers is a licensed Lloyd's of London ("Lloyd's")
adviser which acts as the exclusive adviser to a non-affiliated company that was
formed to underwrite at Lloyd's through a group of wholly-owned subsidiaries
that are limited liability corporate members of certain select Lloyd's
syndicates.
On December 13, 1995, Chartwell acquired INSCORP as a result of the
Merger.Since the Merger was completed in December 1995, the financial statements
for the period ended September 30, 1995 do not include the operations of PMC or
INSCORP.
Recent Developments:
On October 14, 1996, the Company announced that Chartwell Holdings
Limited had made an Offer of 92.5 pence for each outstanding Archer Share. The
Offer values the existing share capital of Archer at approximately 35 million
Pounds Sterling ($55.7 million at the exchange rate on October 14, 1996, the
date the Offer was announced, excluding approximately $4.7 million of expenses
and the cost of purchasing all outstanding Archer management options).
The Offer, which will be financed from Chartwell's existing resources
and a new credit facility, includes a Loan Note alternative whereby Archer
stockholders may elect to receive 1 Pound Sterling Loan Note for each 1 Pound
Sterling of cash consideration. The Loan Notes, which will be guaranteed by
First Union National Bank N.A., will pay interest semi-annually at the rate per
annum calculated to be one percent below Sterling LIBOR and will mature in June
2002. The Loan Notes will be transferable, subject to certain restrictions, but
will not be listed on any stock exchange. The maximum amount of Loan Notes to be
issued will be limited to 26.3 million Pounds Sterling.
On November 5, 1996, the Offer was declared unconditional in all
respects, and by the close of business on November 6, 1996, Chartwell owned or
had received valid acceptances in respect of 36,982,147 Archer Shares
representing approximately 97.5% of the issued share capital of Archer. In
accordance with the requirements of U.K. law regarding statutory acquisitions,
Chartwell Holdings Limited will be issuing a notice to those Archer shareholders
who have not accepted the Offer, which notice shall state that it intends to
exercise its rights to acquire all Archer Shares still outstanding at the end of
the notice period.
8
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The Offer remains open until further notice, however, the Loan Note
alternative will close on November 19, 1996. It is anticipated that the
acquisition of Archer will be consummated by the end of November, 1996.
The Company may, from time to time, evaluate other opportunities for
the acquisition of books of business or of reinsurance or specialty insurance
companies as a going concern, for business combinations with other reinsurance
or insurance concerns and for the provision of insurance related advisory
services to third parties. There can be no assurance, however, that any such
business opportunities will arise.
Results of Operations - Nine Months Ended September 30, 1996 Compared With Nine
Months Ended September 30, 1995:
Revenues: Total revenues for the nine months ended September
30, 1996 increased 84% to $192.6 million, compared to $104.6 million for the
comparable period in 1995. The accompanying table summarizes gross and net
premiums written, earned premiums, net investment income, net realized capital
gains, service and other revenue and total revenues for the periods indicated:
Nine Months Ended
September 30,
(Dollars in Thousands) 1996 1995
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Gross premiums written $ 196,080 $ 95,681
========= =========
Net premiums written $ 140,960 $ 92,376
========== =========
Earned premiums $ 153,186 $ 87,355
Net investment income 33,369 14,743
Net realized capital gains 1,002 1,707
Service and other revenue 5,068 796
--------- --------
Total revenues $ 192,625 $104,601
========= ========
Gross Premiums Written; Net Premiums Written; Net Premiums Earned. Gross
premiums written for the nine months ended September 30, 1996 were $196.1
million, an increase of 105% compared to the same period in 1995. The increase
in gross premiums written was attributable to business acquired in the Merger
and continued growth with existing and new clients in the Regional and Specialty
Accounts client segments. Business emanating from the Merger consisted of: (a) a
seasoned book of specialty insurance business which is the basis for the
Controlled Source Insurance business, the Company's newest client segment; (b) a
marine pool which is included with Chartwell's other marine and aviation
business in the Regional Accounts client segment; (c) certain of INSCORP's
reinsurance contracts which met Chartwell's underwriting standards and which
were renewed in Chartwell Reinsurance and included primarily in the Regional and
Specialty Accounts client segments; and (d) certain of INSCORP's reinsurance
contracts that were not renewed because they did not meet Chartwell's
underwriting standards and which are classified below as "INSCORP Run-off." In
addition, premiums in the Regional Accounts client segment increased because of
continuing increases in its book of marine and general aviation business.
Specialty Accounts gross premiums written for the nine months ended September
30, 1996 increased 46.5% over the prior year primarily due to continued
expansion of existing clients and development of new clients. Global Accounts
continues to focus on the international market place rather than the large
domestic insurance market place
9
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where competition continues to stiffen. The distribution of the Company's gross
premiums written among its underwriting client segments was as follows:
Nine Months Ended September 30,
--------------------------------------------------
(Dollars in Thousands) 1996 1995
---------------------- --------------------------
Specialty $ 65,992 $ 45,046
Global:
Domestic 14,972 16,729
International 16,477 13,145
--------- --------
Subtotal Global 31,449 29,874
Regional:
Property & Casualty 20,681 13,278
Marine & Aviation 24,177 7,483
--------- --------
Subtotal Regional 44,858 20,761
Controlled Source 46,356 -
INSCORP Run - off 7,425 -
-------- --------
$196,080 $ 95,681
======== ========
Net premiums written for the first nine months of 1996 increased 53%
to $141.0 million, compared to $92.4 million for the same period in 1995. The
increase in net premiums written was principally attributable to the reasons
described above for the increase in gross premiums written. Net premiums earned
for the nine months ended September 30, 1996 were $153.2 million, an increase of
$65.8 million or 75% compared to the same period in 1995. The increase in net
premiums earned was principally attributable to premium writings by INSCORP.
Loss and Loss Adjustment Expenses. The Company's principal expense,
loss and loss adjustment expenses ("LAE") related to the settlement of claims,
was $110.6 million for the nine months ended September 30, 1996 compared to
$63.7 million for the comparable period in 1995. The increase is principally
attributable to the increase in earned premiums as noted above. Net losses and
LAE expressed as a percentage of net earned premiums (the loss and LAE ratio)
improved to 72.2% for the nine months ended September 30, 1996 from 73.3%
recorded for the same period in 1995. The improvement of 1.1 percentage points
in the loss and LAE ratio for the nine months ended September 30, 1996 was due
to an increase in the amount of proportional business written by the Company,
which generally has a lower loss and LAE ratio than excess of loss business
but modestly higher commissions.
Policy Acquisition Costs. Policy acquisition costs, consisting
primarily of commissions paid to ceding companies and brokerage fees paid to
intermediaries, less commissions received on business ceded to other reinsurers,
were $37.5 million for the nine months ended September 30, 1996, compared to
$20.6 million for the same period in 1995. Policy acquisition costs expressed as
a percentage of net earned premiums (the acquisition expense ratio) increased to
24.5% from 23.6% in 1995. The increase is due both to the INSCORP Run-off and to
a modestly higher commission structure, as noted above, for proportional
business.
Other Expenses. Other expenses, which include underwriting and
administrative expenses, were $13.7 million for the nine months ended September
30, 1996 compared to $7.8 million for the same period in 1995. Other expenses
(excluding expenses associated with non-insurance operatins) expressed as a
percentage of net earned premiums decreased by to 7.7% for the nine months
ended September 30, 1996 compared to 8.0% for the same period in 1995.
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Net Underwriting Results. The Company incurred an underwriting loss
(net premiums earned minus losses, LAE and underwriting expenses, excluding the
expenses associated with non-insurance operations) of $6.7 million for the nine
months ended September 30, 1996 as compared to an underwriting loss of $4.3
million for the same period in 1995. The combined ratio for the nine months
ended September 30, 1996 computed in accordance with generally accepted
accounting principles ("GAAP") was 104.4% compared to 104.9% for the same period
in 1995. Although the loss ratio component improved to 72.2% for the nine months
ended September 30, 1996 from 73.3% recorded for the same period in 1995, the
expense ratio increased to 32.2% for the nine months ended September 30, 1996
from the 31.6% recorded for the same period in 1995, for the reasons noted
above. On a pro forma basis, as if the Merger occurred on January 1, 1995, the
expense ratio decreased to 32.2% for the nine months ended September 30, 1996
compared to 34.0% for the same period in 1995, and the combined ratio decreased
to 104.4% for the nine months ended September 30, 1996 compared to 123.8% for
the same period in 1995. The pro forma loss and LAE ratio for the nine months
ended September 30, 1995 includes a strengthening of INSCORP's net loss reserves
of $25.0 million for losses incurred but not reported with respect to INSCORP's
business written in prior years. This reserve strengthening, which was
undertaken by PMC prior to the Merger, increased the Company's pro forma loss
and LAE ratio by 13.9 percentage points for the nine month period.
Net Investment Income and Net Realized Capital Gains (Losses). Net
investment income for the nine months ended September 30, 1996 was $33.4
million, an increase of $18.6 million, or 126%, over the same period in 1995.
The improvement reflects the increase in invested assets principally from the
net proceeds of Chartwell's public stock offering in the first half of 1996 and
continued positive cash flow from operations of $7.2 million offset by a decline
in the value of marked-to-market investments of $19.2 million. In addition, on
June 28, 1996, the Company received $7.9 million in settlement of a Reserve
Indemnification Agreement with ReliaStar Financial Corporation (the "Reserve
Indemnification Agreement") which further increased the Company's invested asset
base. (See Note 5.) The average annual tax equivalent yield on invested assets
before investment expenses increased to 6.78% for the nine months ended
September 30, 1996 compared to 6.48% for the same period in 1995.
The Company realized net capital gains of $1.0 million for the nine
months ended September 30, 1996 compared to $1.7 million for the same period in
1995. Both the 1996 and 1995 net capital gains were realized principally to
reposition certain sectors of the portfolio and to modify the portfolio to
improve credit quality without sacrificing yield.
Service and Other Revenue. Service and other revenue increased 537% to
$5.1 million for the nine months ended September 30, 1996 compared to $0.8
million for the same period in 1995. The improvement reflects increases in
advisory fee revenues, equity in the earnings of investee companies acquired in
the Merger and development of new non-risk bearing revenue sources.
Interest and Amortization. Interest and amortization expenses were $7.5
million for the nine months ended September 30, 1996 compared to $5.8 million
for the same period in 1995. Interest and amortization on Chartwell Holdings'
10.25% Senior Notes due 2004 (the"Senior Notes") was $4.7 million for the first
nine months of 1996 and $5.8 million for the comparable period in 1995. The 1996
amount was reduced due to the redemption of 35% of the principal amount of
outstanding Senior Notes on April 8, 1996. Interest expense for the first nine
months of 1996 also includes $1.1 million of interest and amortization expense
on a $20.0 million bank facility established on the date of Merger and $1.7
million of interest and amortization on the Company's Contingent Interest Notes.
Income Before Income Taxes and Extraordinary Item. Net income
before income taxes and extraordinary items increased to $23.4 million for
the nine months ended September 30, 1996 compared to $6.7 million for the same
period in 1995. The increase resulted primarily from the increase in earned
premiums, the favorable results in both loss and loss adjustment expense
and in other expenses, and from the increases in net investment income and
service and other revenue.
11
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Income Tax Expense. The provision for Federal income taxes for the nine
months ended September 30, 1996 increased to $6.8 million compared with $2.2
million for the same period in 1995. The effective tax rate decreased to 29.1%
for the nine months ended September 30, 1996 as compared to 32.1% for the same
period in 1995. The principal factor in the decline below the statutory rate of
35% for both nine month periods was the benefit of investments in tax-advantaged
securities which increased in the 1996 period.
Net Income Before Extraordinary Item. Net income before extraordinary
item increased to $16.6 million for the nine months ended September 30, 1996
as compared to $4.5 million for the same period in 1995, and on a per share
basis, increased 54% to $1.86 from $1.21 reported a year ago. The largest
components of this increase were increases in net investment income and service
and other revenue as described above. After-tax operating income per share
(which excludes net realized capital gains on the sale of investments)for the
nine months ended September 30, 1996 increased 96% to $1.78 from $0.91 reported
for the same period in 1995.
Extraordinary Item, Net of Income Tax. The Company recognized a net
after-tax extraordinary expense of $1.9 million for the nine months ended
September 30, 1996 for the write-off of unamortized debt issuance costs and a
redemption premium associated with the redemption of 35% the Senior Notes (See
Note 3.)
Net Income. The Company realized a net profit of $14.7 million for the
nine months ended September 30, 1996 compared with a net profit of $4.5 million
for the comparable 1995 period because of the factors discussed above. Net
income per share increased 36% to $1.65 for the nine months ended September 30,
1996 from $1.21 per share reported a year ago.
Results of Operations - Three Months Ended September 30, 1996 Compared With
Three Months Ended September 30, 1995:
Revenues: Total revenues for the three months ended September 30, 1996
increased 93% to $61.7 million compared to $31.9 million for the comparable
period in 1995. The accompanying table summarizes gross and net premiums
written, earned premiums, net investment income, net realized capital gains,
service and other revenue and total revenues for the periods indicated:
Three Months Ended
September 30,
(Dollars in Thousands) 1996 1995
------------ ------------
Gross premiums written $ 63,613 $ 29,553
============ =============
Net premiums written $ 45,237 $ 28,095
============ =============
Earned premiums $ 47,982 $ 25,988
Net investment income 11,791 5,375
Net realized capital gains 81 304
Service and other revenue 1,842 265
------------ ------------
Total revenues $ 61,696 $ 31,932
============ ============
Gross Premiums Written; Net Premiums Written; Net Premiums Earned.
Gross premiums written for the three months ended September 30, 1996 were $63.6
million, an increase of 115% compared to the 1995 period. The increase in gross
premiums written was principally attributable to
12
<PAGE>
business acquired in the Merger, as described previously. The distribution of
the Company's gross premiums written among its underwriting client segments was
as follows:
Three Months Ended September 30,
--------------------------------------------
(Dollars in Thousands) 1996 1995
------------------ ----------------------
Specialty $ 23,163 $ 14,836
Global:
Domestic 3,961 4,814
International 7,536 3,783
------ ------
Subtotal Global 11,497 8,597
Regional:
Property & Casualty 7,383 3,486
Marine & Aviation 7,621 2,634
------ ------
Subtotal Regional 15,004 6,120
Controlled Source 15,382 -
INSCORP Run - off (1,433) -
------- ------
$ 63,613 $ 29,553
======== ========
Net premiums written for the three months ended September 30, 1996
increased 61% to $45.2 million compared to $28.1 million for the same period in
1995. The increase in net premiums written was principally attributable to the
reasons described earlier in conjunction with the comparison of the results of
operations for the nine month periods. Net premiums earned for the three months
ended September 30, 1996 were $48.0 million, an increase of $22.0 million, or
85% compared to the same period in 1995. The increase in net premiums earned was
principally attributable to premium writings by INSCORP.
Loss and Loss Adjustment Expenses. The Company's principal expense,
loss and LAE related to the settlement of claims, was $34.6 million for the
three months ended September 30,1996 compared to $19.0 million for the same
period in 1995. The increase is principally attributable to the increase in
earned premiums as noted above. Net losses and LAE expressed as a percentage of
net earned premiums (the loss and LAE ratio) improved to 72.1% for the three
months ended September 30, 1996 from 73.1% recorded for the comparable period in
1995. The improvement in the loss and LAE ratio for the three months ended
September 30, 1996 was due to an increase in the amount of proportional business
written by the Company, which generally has a lower loss and LAE ratio than
excess of loss business.
Policy Acquisition Costs. Policy acquisition costs, primarily
commissions paid to ceding companies and brokerage fees paid to intermediaries
less commissions received on business ceded to other reinsurers, were $11.6
million for the three months ended September 30, 1996 compared to $6.4 million
for the comparable period in 1995. Policy acquisition costs expressed as a
percentage of net earned premiums (the acquisition expense ratio) decreased to
24.1% for the three months ended September 30, 1996 as compared to 24.4% in
1995.
Other Expenses. Other expenses, which include underwriting and
administrative expenses, were $4.7 million for the three months ended September
30, 1996 compared to $2.6 million for the comparable period in 1995. Other
expenses (excluding the expenses associated with non-insurance operations)
expressed as a percentage of net earned premiums decreased to 7.9% from 9.0% in
1995 primarily due to the high growth rate in net premiums earned compared with
the growth rate in overhead expenses.
Net Underwriting Results. The Company incurred an underwriting loss
(net premiums earned minus losses, LAE and underwriting expenses, excluding
expenses associated with non-insurance
13
<PAGE>
operations) of $1.9 million for three months ended September 30, 1996 as
compared to an underwriting loss of $1.7 million for the comparable period in
1995. The combined ratio for the three months ended September 30, 1996 period
computed in accordance with generally accepted accounting principles (GAAP) was
104.1% compared to 106.5% for the comparable period in 1995. The loss ratio
component improved to 72.1% for the three months ended September 30, 1996
compared to 73.1% recorded for the same period in 1995, and the expense ratio
also improved to 32.0% from 33.4% in 1995 for the reasons noted above. On a pro
forma basis, as if the Merger occurred on January 1, 1995, the loss and LAE
ratio decreased to 72.1% compared to 126.9%, the expense ratio increased to
32.0% compared to 31.3%, and the combined ratio decreased to 104.1% compared to
158.2% for 1995. The pro forma loss and LAE ratio for the three months ended
September 30, 1995 includes a strengthening of INSCORP's net loss reserves of
$25.0 million representing a strengthening in reserves for losses incurred but
not reported with respect to INSCORP's business written in prior years. This
reserve stregnthening, which was undertaken by PMC prior to the Merger,
increased the Company's pro forma loss and loss adjustment expense ratio by 44.3
percentage points for the three month period.
Net Investment Income and Net Realized Capital Gains (Losses). Net
investment income for the three months ended September 30, 1996 was $11.8
million, an increase of $6.4 million, or 119% over the comparable period in
1995. The improvement reflects the increase in invested assets, principally from
the net proceeds of Chartwell's public stock offering in the first half of 1996
and the funds received in final settlement of the Reserve Indemnification
Agreement at the end of the previous quarter. The average annual tax equivalent
yield on invested assets, before investment expenses, increased to 6.90% for the
three months ended September 30, 1996 period compared to 6.40% for the
comparable period in 1995.
The Company realized only $81,000 of net capital gains in the three
months ended September 30, 1996 compared to $0.3 million for the same period in
1995. Trading during the 1995 period was executed principally to reposition
certain sectors of the portfolio and to improve credit quality without
sacrificing yield.
Service and Other Revenue. Service and other revenue for the three
months ended September 30, 1996 was $1.8 million, an increase of $1.6 million
compared to the same period in 1995. The improvement reflects increases in
advisory fee revenues, equity in the earnings of investee companies acquired in
the Merger and development of new non-risk bearing revenue sources.
Interest and Amortization. Interest and amortization expenses were $2.3
million for the three months ended September 30, 1996 compared to $2.0 million
in the same period in 1995 . Interest and amortization on the Senior Notes
decreased to $1.3 million for the three months ended September 30, 1996 compared
to $2.0 million for the same period in 1995 because of the redemption of 35% of
the principal amount of the Senior Notes on April 8, 1996. Interest expense for
1996 also includes $0.4 million of interest & amortization on a $20.0 million
bank facility established on the date of Merger and $0.6 million of interest and
amortization on the Company's Contingent Interest Notes.
Income Before Income Taxes. Net income before income taxes increased
to $8.6 million for the three months ended September 30, 1996 from $2.0
million in the same period in 1995. The increase resulted primarily from the
increase in earned premiums, the favorable results in both loss and loss
adjustment expenses and in other underwriting expenses, and the increase in both
net investment income and service and other revenue.
Income Tax Expense. The provision for Federal income taxes for the
three months ended September 30, 1996 increased to $2.6 million compared with
$0.6 million for the same period in 1995. The effective tax rates were 30.1% and
28.3% for the three month periods 1996 and 1995, respectively. The principal
factor in the decline below the statutory rate of 35% for both periods was
14
<PAGE>
the benefit of investments in tax-advantaged securities. While the non-taxable
investment income increased in absolute dollars in the 1996 period, it decreased
as a percent of income before income taxes.
Net Income. Net income increased to $6.0 million for the three months
ended September 30, 1996 from $1.5 million in the comparable 1995 period. Net
income per share increased 62% to $0.63 for the 1996 period from $0.39 per share
reported a year ago. The largest components of this increase were increases in
net investment income and increased service and other revenue as described
above. After-tax operating income per share (which excludes net realized capital
gains on the sale of investments) for the 1996 period increased 82% to $0.62
from $0.34 reported for the preceding year.
Liquidity and Capital Resources:
As a holding company, Chartwell's assets consist primarily of the
stock of its indirect subsidiaries, Chartwell Reinsurance, INSCORP and Chartwell
Advisers, each of which is owned directly or indirectly by Chartwell Holdings.
Chartwell's cash flow therefore depends largely on dividends and other payments
from Chartwell Holdings, and in turn Chartwell Holdings' cash flow depends
largely on dividends and tax sharing payments from Chartwell Reinsurance.
Chartwell Reinsurance's sources of funds consist primarily of net premiums,
reinsurance recoveries, investment income and proceeds from sales and
redemptions of investments. Funds are applied primarily to payments of claims,
operating expenses and income taxes and to the purchase of investments, largely
fixed income securities. Cash and short-term investments are maintained for the
payment of claims and expenses. Chartwell Reinsurance's ability to pay cash
dividends to the Company is restricted by law or subject to approval of the
insurance regulatory authority of Minnesota, Chartwell Reinsurance's state of
domicile. The Minnesota authority recognizes only statutory accounting practices
for the ability of an insurer to pay dividends to its shareholders.
Under the insurance laws of the State of Minnesota, payment of
dividends by Chartwell Reinsurance in any year is limited to the greater of (i)
10% of capital and surplus as of the prior year end as determined in accordance
with statutory accounting policies; or (ii) statutory net income from operations
of the next preceding year excluding realized capital gains. Notwithstanding the
foregoing, Chartwell Reinsurance may pay dividends only from its earned surplus,
also known as unassigned funds. The maximum dividend that can be paid in 1996
without prior approval of the Minnesota Department of Commerce is $18.8 million.
At the August 1, 1996 Board of Directors meeting of the Company, the
Board declared a quarterly cash dividend payment of $0.04 per share payable to
stockholders of record as of August 16, 1996. The dividend was paid on August
30, 1996. At the November 6, 1996 Board of Directors meeting, the Board declared
a quarterly cash dividend payment of $0.04 per share payable on December 4, 1996
to stockholders of record as of November 20, 1996.
In addition to the sources of funds described above, financing
activities have also been a source of liquidity for Chartwell and its
subsidiaries. In the first half of 1996, the Company completed a public offering
of 2,725,000 shares of common stock at $23.00 per share. The net proceeds to the
Company were $58.5 million after deduction of underwriting discount and
expenses. Of the net proceeds, $48.5 million was contributed to Chartwell
Holdings of which $20.0 million was contributed to the statutory surplus of
Chartwell Reinsurance and $28.5 million was used to retire 35% of the Senior
Notes due 2004 plus accrued interest (See Note 3). The remaining funds were
retained for general corporate purposes. This redemption reduced Chartwell's
annual expense for interest and amortization of debt issuance costs under the
Senior Notes by $2.8 million per year. As a result of the offering, Standard &
Poor's improved its rating with respect to the Senior Notes to BBB- from BB and
Moody's improved its rating to Ba1 from Ba2.
15
<PAGE>
At September 30, 1996, the carrying value of total investments,
including cash and cash equivalents, increased by $16.1 million, or 2.3%, to
$721.5 million compared to $705.4 million at December 31, 1995. The primary
reasons for the increase were (i) the net cash acquired in the public offering
and subsequent exercise of the underwriters' over-allotment option of $58.5
million, (ii) positive cash flow from operations of $7.2 million, (iii) net
realized capital gains of $1.0 million and (iv) cash flow from certain deposits
of $0.5 million, offset by (i) $28.3 million for the retirement of 35% of the
Senior Notes plus accrued interest, (ii) the decline in the market value of the
investment portfolio of $19.2 million pre-tax, (iii) $2.8 million of
amortization of fixed income securities and changes in unrealized foreign
currency exchange values on the fixed income portfolio and (iv) $0.8 million of
common stock dividends paid. At September 30, 1996, 96% of Chartwell's total
investments (including cash and cash equivalents) consisted of fixed income
securities, of which 99% were rated "A" or better (or "A-1" for commercial
paper) by Moody's. The Company's fixed income securities portfolio at September
30, 1996 was comprised primarily of U.S. Treasury and government agency mortgage
pass-through securities, and corporate and municipal bonds.
Stockholders' equity increased 39% to $212.4 million at September 30,
1996, compared to $152.5 million at December 31, 1995 primarily as a result of
the public common stock offering described above as well as record earnings
during 1996. GAAP book value per share increased to $22.16 at September 30, 1996
from $21.35 at June 30, 1996 but decreased from $22.23 reported at December 31,
1995 due to the decline in the market value of the Company's fixed income
securities portfolio resulting from the increase in market interest rates,
offset by earnings for the nine month period. Chartwell's ratio of long-term
debt to total capitalization was 24.5% as of September 30, 1996, an improvement
from 38.4% at December 31, 1995.
Statutory surplus of Chartwell Reinsurance increased $41.9 million to
$230.0 million, and the statutory surplus of INSCORP increased $17.9 million to
$93.4 million, both compared to the amounts at December 31, 1995. Chartwell
Reinsurance and INSCORP, the Company's principal operating subsidiaries, are
rated A (Excellent) and A- (Excellent), respectively, by A.M. Best Company and
both companies are assigned an A- claims paying ability rating by Standard &
Poor's.
16
<PAGE>
CHARTWELL RE CORPORATION AND SUBSIDIARIES
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
On October 18, 1996, the Company filed a Current Report on Form
8-K with the Securities and Exchange Commission reporting under Item 5
- Other Events - the Company's Recommended Cash Offer for all of the
issued share capital of Archer Group Holdings, plc.
(c) Signatures
17
<PAGE>
CHARTWELL RE CORPORATION AND SUBSIDIARIES
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 CORPORATION
(Registrant)
/s/ Charles E. Meyers
----------------------------------------
Charles E. Meyers
Duly Authorized Officer and Senior Vice
President and Chief Financial Officer
Dated: November 14, 1996
18
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 576,459
<DEBT-CARRYING-VALUE> 28,891
<DEBT-MARKET-VALUE> 30,271
<EQUITIES> 44,915
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 650,265
<CASH> 71,232
<RECOVER-REINSURE> 30,641
<DEFERRED-ACQUISITION> 18,333
<TOTAL-ASSETS> 1,184,624
<POLICY-LOSSES> 736,267
<UNEARNED-PREMIUMS> 85,117
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