SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------
FORM 10-Q
--------
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934 for the quarterly period ended June 30, 1997 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 June 30, 1997 Commission file number 1-12502
------------ -------
-------------
Chartwell Re Corporation
(Exact name of registrant as specified in its charter)
-------------
Delaware 41-1652573
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Four Stamford Plaza,
P. O. Box 120043
Stamford, Connecticut 06912-0043
(Address of principal executive offices) (zip code)
-------------
Registrant's telephone number, including area code (203) 705-2500
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 9,604,334
- ----------------------------- ------------
Description of Class Shares Outstanding
as of August 11, 1997
<PAGE>
Chartwell Re Corporation
Index To Form 10-Q
PART I FINANCIAL INFORMATION
Item 1 - Page
----
Condensed Consolidated Balance Sheets at June 30, 1997
and December 31, 1996................................... 1
Condensed Consolidated Statements of Operations for the three
and six month periods ended June 30, 1997 and 1996.... 2
Condensed Consolidated Statements of Cash Flows for the
six month periods ended June 30, 1997 and 1996........ 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 ........................... 15
Signatures ................................................. 16
i
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1- Financial Statements
CHARTWELL RE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)
June 30, December 31,
1997 1996
----------- ------------
ASSETS: (Unaudited)
Investments:
Fixed maturities:
Held to maturity (market value 1997,
$34,903; 1996, $36,620)...................... $ 34,483 $ 36,043
Available for sale (amortized cost
1997, $632,610; 1996, $609,368).............. 628,838 606,621
Other investments............................... 33,114 30,896
Cash and cash equivalents....................... 31,543 51,134
------ ------
Total investments and cash............ 727,978 724,694
Accrued investment income....................... 10,379 10,533
Premiums in process of collection............... 115,811 86,351
Reinsurance recoverable: on paid losses......... 33,153 29,767
on unpaid losses....... 184,145 172,377
Prepaid reinsurance............................. 33,641 21,733
Goodwill........................................ 57,112 59,538
Deferred policy acquisition costs............... 22,022 17,903
Deferred income taxes........................... 45,044 45,318
Deposits........................................ 18,609 18,135
Other assets.................................... 72,705 71,515
------ ------
$ 1,320,599 $ 1,257,864
=========== ===========
LIABILITIES:
Loss and loss adjustment expenses................ $ 765,798 $ 747,858
Unearned premiums................................ 103,715 81,599
Contingent interest notes........................ 28,613 27,541
Other reinsurance balances....................... 29,766 15,085
Accrued expenses and other liabilities........... 47,911 52,464
Long term debt................................... 108,224 107,297
------- -------
Total liabilities..................... 1,084,027 1,031,844
--------- ---------
COMMMITMENTS AND CONTINGENCIES
MINORITY INTEREST................................ 22 30
-- --
COMMON STOCKHOLDERS' EQUITY Common stock, par value $0.01 per share; authorized
20,000,000 shares; shares issued and outstanding 9,597,458 and 9,583,811 in
1997 and 1996, respectively.................... 96 96
Additional paid-in capital..................... 211,782 211,782
Net unrealized depreciation of investments..... (2,711) (1,521)
Foreign currency translation adjustment........ 1,238 1,914
Retained earnings.............................. 26,145 13,719
------ ------
Total common stockholders'equity....... 236,550 225,990
------- -------
$ 1,320,599 $ 1,257,864
=========== ===========
See notes to condensed consolidated financial statements
1
<PAGE>
CHARTWELL RE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
(Unaudited)
Three Month Periods Six Month Periods
Ended June 30, Ended June 30,
------------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
UNDERWRITING OPERATIONS:
Premiums earned...................... $73,890 $ 48,961 $135,675 $105,204
Net investment income................ 10,793 10,628 20,624 21,021
Net realized capital gains (losses).. (29) 21 (49) 853
-------- -------- --------- --------
Total revenues................... 84,654 59,610 156,250 27,078
-------- -------- -------- --------
Loss and loss adjustment expenses.... 49,810 35,072 91,845 76,014
Policy acquisition costs............. 20,452 11,769 37,572 25,945
Other expenses....................... 4,533 3,948 8,227 8,004
-------- -------- -------- --------
Total expenses.................. 74,795 50,789 137,644 109,963
-------- -------- -------- --------
Income before taxes -
underwriting operations 9,859 8,821 18,606 17,115
-------- -------- -------- --------
SERVICE OPERATIONS:
Service and other revenue............. 6,900 799 14,434 1,469
Equity in net earnings of investees... 1,030 871 2,176 1,757
Net investment income................. 396 2 644 4
-------- -------- -------- --------
Total revenues.................. 8,326 1,672 17,254 3,230
-------- -------- -------- --------
Amortization of goodwill............. 528 -- 1,045 --
Other expenses....................... 4,648 298 9,526 611
-------- -------- -------- --------
Total expenses.................. 5,176 298 10,571 611
-------- -------- -------- --------
Income before taxes -
service operations 3,150 1,374 6,683 2,619
-------- -------- -------- --------
CORPORATE:
Net investment income................ 13 268 144 553
Net realized capital gains (losses).. -- (21) -- 68
General and administrative expenses.. 409 236 810 347
Interest expense..................... 2,902 2,143 5,607 4,906
Amortization expense................. 158 142 399 297
-------- -------- --------- --------
Loss before taxes - corporate........ (3,456) (2,274) (6,672) (4,929)
-------- -------- --------- --------
Consolidated income before taxes
and extraordinary item............... 9,553 7,921 18,617 14,805
Income tax expense................... 2,848 2,177 5,425 4,227
-------- -------- -------- --------
Net income before extraordinary item. 6,705 5,744 13,192 10,578
Extraordinary item, net of tax....... -- 1,874 -- 1,874
-------- -------- -------- --------
Net income........................... $ 6,705 $ 3,870 $ 13,192 $ 8,704
======== ======== ======== ========
Per Share Data:
Income per common share.............. $ 0.70 $ 0.40 $ 1.37 $ 1.02
======== ======== ======== =========
Weighted average number of common
shares outstanding... 9,597,419 9,561,311 9,596,756 8,571,172
========= ========== ========= =========
See notes to condensed consolidated financial statements.
2
<PAGE>
CHARTWELL RE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
Six Month Periods
Ended June 30,
------------------
1997 1996
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net premiums collected.............................. $ 74,732 $ 60,837
Net losses & loss adjustment expenses............... (74,922) (65,098)
Overhead expenses................................... (12,398) (7,741)
Service and other revenue, net of related expenses.. 5,654 3,226
Net income taxes paid............................... (6,312) (888)
Interest received on investments.................... 20,448 19,956
Interest paid....................................... (4,765) (4,818)
Other, net.......................................... 2,039 1,964
--------- ---------
Net cash provided by operating activities.. 4,476 7,438
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of investments acquired........................ (128,460) (272,548)
Proceeds from investment matured or repaid.......... 9,904 14,055
Proceeds from investments sold...................... 94,695 145,394
--------- ---------
Net cash used in investing activities........ (23,861) (113,099)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from public stock offering............. -- 58,503
Redemption of Senior Notes -- (28,280)
Proceeds from long-term debt........................ 1,619 --
Dividends paid...................................... (766) (383)
Other, net.......................................... -- (250)
---------- ---------
Net cash provided by financing activities.... 853 29,590
Effect of exchange rate on cash......... (1,059) 10
--------- ---------
Net decrease in cash and cash equivalents............... (19,591) (76,061)
Cash and cash equivalents at beginning of period........ 51,134 155,813
--------- ---------
Cash and cash equivalents at end of period.............. $ 31,543 $ 79,752
========= =========
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income.......................................... 13,192 $ 8,704
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Extraordinary item................................ -- 1,874
Net realized capital (gains) losses............... 49 (921)
Deferred policy acquisition costs................. (4,119) 536
Unpaid loss and loss adjustment expenses.......... 17,940 (4,886)
Unearned premiums................................. 22,116 (6,839)
Reinsurance balances.............................. 2,769 291
Reinsurance recoverable........................... (15,154) (730)
Net change in receivables and payables............ (33,672) 6,815
Other, net........................................ 1,355 2,594
--------- ---------
Net cash provided by operating activities.... $ 4,476 $ 7,438
========= =========
See notes to condensed consolidated financial statements.
3
<PAGE>
CHARTWELL RE CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 1997
(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 1996 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- PRO FORMA DATA
On November 19, 1996, the Company acquired (the "Acquisition") 100% of the
outstanding stock of Archer Group Holdings plc ("Archer Holdings") through its
newly formed subsidiary, Chartwell Holdings Limited. The Acquisition has been
accounted for under the purchase method of accounting.
The following pro forma consolidated income statement information for
the Company for the six months ended June 30, 1996 is presented as though the
Acquisition, the issuance of 2,725,000 common shares through a public offering
in March and April of 1996 and the redemption by Chartwell Re Holdings
Corporation ("Holdings") of 35% of its outstanding 10.25% Senior Notes (the
"Senior Notes") due 2004 had occurred on January 1, 1996.
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
Actual Pro forma Actual Pro forma
------------- ------------- ------------- -------------
(Dollars in thousands, except share amounts)
Total revenues $92,993 $68,567 $173,648 $145,005
Net income $ 6,705 $ 6,317 $13,192 $ 12,136
Income per
per common share $ 0.70 $ 0.66 $1.37 $1.34
Weighted average
shares outstanding 9,597,419 9,561,311 9,596,756 9,048,067
Common stock equivalents were not considered as their inclusion would
not have been dilutive.
NOTE 3 - NEW ACCOUNTING STANDARD
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," which becomes effective for interim and annual periods ending after
December 15, 1997. SFAS No. 128 supersedes APB No. 15 and replaces the
presentation of primary earnings per share ("EPS") with a presentation of basic
EPS. It also requires dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures and
provides guidance on other computational issues. After the effective date, all
prior period EPS data presented shall be restated to conform with the provisions
of SFAS No. 128. The implementation of SFAS No. 128 is not expected to have a
material impact on the Company's calculation of EPS.
4
<PAGE>
ITEM 2 - Management's Discussion and Analysis
CHARTWELL RE CORPORATION
Management's Discussion and Analysis
of Financial Condition and Results of Operations
June 30, 1997
(Unaudited)
Overview
Chartwell Re Corporation ("Chartwell" or the "Company") is a holding
company which conducts business through its four principal operating
subsidiaries, Chartwell Reinsurance Company ("Chartwell Reinsurance"), The
Insurance Corporation of New York ("INSCORP"), Chartwell Advisers Limited
("Chartwell Advisers") and its recently acquired Lloyd's managing agency, Archer
Managing Agents Limited ("Archer"). Chartwell Reinsurance was founded in 1979 as
a wholly-owned subsidiary of Northwestern National Life Insurance Company
("NWNL"), and in 1989, Chartwell was formed to act as a holding company and the
parent of Chartwell Reinsurance.
Chartwell Reinsurance underwrites treaty reinsurance through
reinsurance brokers for casualty and, to a lesser extent, property risks as well
as for marine and aviation risks. INSCORP writes property and casualty insurance
for specialty program administrators. Archer is one of the largest managing
agencies in the Lloyd's marketplace with approximately 380 million pounds
sterling of underwriting capacity for the 1997 Year of Account. Chartwell
Advisers acts as the exclusive advisor for syndicate selection to New London
Capital plc, a non-affiliated publicly traded company formed to underwrite at
Lloyd's.
Chartwell's other subsidiaries include Dakota Specialty Insurance
Company ("Dakota Specialty") and Drayton Company Limited. Dakota Specialty is a
newly formed subsidiary of Chartwell whose objective is to underwrite a book of
surplus lines insurance. Drayton Company Limited is not currently writing new
business, and Chartwell is managing the resolution of Drayton's remaining claims
and assets in a controlled winding-up.
As of June 30, 1997, Chartwell had total assets in excess of $1.3
billion and stockholders' equity of $236.6 million. Chartwell Reinsurance is
rated "A" (Excellent) by A.M. Best Company, Inc., an independent rating entity
serving the insurance industry, and both INSCORP and Dakota Specialty are rated
"A-" (Excellent) by A.M. Best. In addition, Chartwell Reinsurance, INSCORP and
Dakota Specialty have each been assigned an A- claims paying ability rating by
Standard and Poor's, and the 10.25% Senior Notes (the "Senior Notes") of
Chartwell Re Holdings Corporation, an intermediate level holding company
("Holdings"), are rated BBB- by Standard & Poor's and Ba1 by Moody's,
respectively.
5
<PAGE>
Results of Operations - Six Months Ended June 30, 1997 Compared With Six Months
Ended June 30, 1996:
Revenues: Total revenues for the six months ended June 30, 1997
increased 32.6% to $173.6 million, compared to $130.9 million for the comparable
period in 1996. The accompanying table summarizes gross and net premiums written
and total revenues for the periods indicated:
Six month periods ended June 30,
--------------------------------------
1997 1996
------------------ -----------------
(in thousands)
Gross premiums written $193,615 $132,467
Net premiums written $146,262 $95,723
Premiums earned $135,675 $105,204
Net investment income 21,412 21,578
Net realized capital gains (losses) (49) 921
Service and other revenue 14,434 1,469
Equity in net earnings of investees 2,176 1,757
------------------ -----------------
Total Revenues $173,648 $130,929
=================== =================
Underwriting Operations
Gross Premiums Written; Net Premiums Written; Net Premiums Earned.
Gross premiums written for the six months ended June 30, 1997 were $193.6
million, an increase of 46.2% compared to the same period in 1996. These
increases reflect the addition of a number of new programs in the Specialty
Accounts client segment, as well as the continued growth of the Controlled
Source Insurance Accounts segment. Controlled Source Insurance Accounts grew as
a result of the expansion of current programs in response to market
opportunities as well as the addition of new programs. The distribution of the
Company's gross premiums written among its underwriting client segments was as
follows:
Six month periods ended
June 30,
-----------------------
1997 1996
----------- ----------
Reinsurance: (in thousands)
$87,312 $42,829
Specialty ----------- ----------
Global
Domestic 6,562 11,011
International 10,856 8,941
----------- ----------
17,418 19,952
----------- ----------
13,216 13,298
Regional ----------- ----------
Marine & Aviation 18,160 16,556
----------- ----------
Total Reinsurance 136,106 92,635
Controlled Source
Insurance 49,350 30,974
Controlled
Archer/OakDedicated Facilities 8,159 -
Run-Off (1) - 8,858
----------- ----------
TOTAL $193,615 $132,467
=========== ==========
(1) The run-off is reinsurance business previously written by The
Insurance Corporation of New York and not renewed into Chartwell Reinsurance
Company.
6
<PAGE>
Specialty Accounts gross premiums written for the first six months of
1997 increased 103.9% over the prior year primarily due to a number of new
workers compensation programs. Global Accounts continues to focus on the
international marketplace and, in particular, on U. K. business. Gross premiums
written in the international market increased 21.4 % while gross premiums
written in the domestic market decreased 40.4%. In the aggregate, Global
Accounts gross premiums written decreased 12.7% for the six months ended June
30, 1997 compared to June 30, 1996. Gross premiums written in the Regional
Accounts client segment were relatively flat for the first six months of 1997 as
compared with the same period last year primarily due to the non-renewal of a
specific reinsurance contract because the ceding company retained the business
after obtaining additional surplus. Marine and Aviation gross premiums increased
9.7% for the six months ended June 30, 1997 as compared with 1996 primarily due
to increases in the aviation book of business. Gross premiums written through
June 30, 1997 in the Controlled Source Insurance Accounts client segment
increased 59.3% reflecting the continued growth of existing programs as well as
the addition of new programs in the first half of the year.
In addition to underwriting through its five client segments, Chartwell
provides capital to syndicates managed by Archer through two dedicated corporate
capital vehicles, Oak Dedicated Limited and Archer Dedicated Limited. Through
these facilities, Chartwell supports capacity at Archer totaling $45.0 million
for the 1997 Year of Account. Chartwell's financial statements for the second
quarter of 1997 include $8.2 million of gross premiums written from these
facilities.
Net premiums written for the six month period ended June 30, 1997
increased 52.8% to $146.3 million compared to $95.7 million for the same period
in 1996. The increase in net premiums written resulted in large part from the
factors described above which generated the increase in gross premiums written.
Net premiums earned for the six month period ended June 30, 1997 were $135.7
million, an increase of $30.5 million or 29.0% compared to the same period in
1996.
Loss and Loss Adjustment Expenses. The Company's principal expense,
loss and loss adjustment expenses ("LAE") related to the settlement of claims,
was $91.8 million for the six month period ended June 30, 1997, a 20.8% increase
compared to $76.0 million for the comparable period in 1996. 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 67.7% for the six month period ended June 30, 1997 from
72.3% recorded for the same period in 1996. The improvement of 4.6 percentage
points in the loss and LAE ratio for the six month period ended June 30, 1997
was a result of the positive contributions of the new workers compensation
programs as well as the benefits of new reinsurance programs and the enhancement
of existing reinsurance programs at attractive terms. In addition the 1997
results were not materiallly affected by the run-off reinsurance programs
written by The Reinsurance Corporation of New York prior to December 1995, a
factor which impacted the 1996 results.
Policy Acquisition Costs. Policy acquisition costs, consisting
primarily of commissions paid to ceding companies and brokerage fees paid to
intermediaries, less commissions received on business ceded to other reinsurers,
were $37.6 million for the six month period ended June 30, 1997 compared to
$25.9 million for the same period in 1996. Policy acquisition costs expressed as
a percentage of net earned premiums (the acquisition expense ratio) increased to
27.7% from 24.7% in 1996. The increase is due to a modestly higher commission
structure for proportional business in general and the workers compensation
programs in particular.
Other Expenses. Other expenses related to underwriting operations,
which include underwriting and administrative expenses, were $8.2 million for
the six month period ended June 30, 1997 compared to $8.0 million for the same
period in 1996. Other expenses expressed as a percentage of net earned premiums
decreased to 6.1% for the six month period ended June 30, 1997 compared to 7.6%
for the same period in 1996.
Net Underwriting Results. The Company incurred an underwriting loss
(net premiums earned minus losses, LAE and underwriting expenses) of $2.0
million for the six month period ended June 30, 1997 as compared to an
underwriting loss of $4.8 million for the same period in 1996. The combined
ratio for the six month period ended June 30, 1997 computed in accordance with
GAAP improved to 101.5% compared to 104.6% for the same period in 1996. Although
the loss ratio component improved to 67.7% for the six month period ended June
30, 1997 from 72.3% recorded for the same period in 1996, the expense ratio
increased to 33.8% for the six month period ended June 30, 1997 from the 32.3%
recorded for the same period in 1996, for the reasons noted above.
7
<PAGE>
Service Operations
Revenue from service operations increased to $17.3 million for the six
month period ended June 30, 1997 compared to $3.2 million for the same period in
1996. The improvement is due principally to the revenues from Archer as well as
increases in advisory fee revenues and equity in the net earnings of investee
companies.
Corporate Operations
Interest and Amortization. Interest and amortization expenses were $6.0
million for the six month period ended June 30, 1997 compared to $5.2 million
for the same period in 1996. The 1997 amount includes $1.3 million of interest
and amortization related to the acquisition of Archer offset by a reduction in
interest expense on the Senior Notes due to the redemption, on April 8, 1996, of
35% of the principal amount of outstanding Senior Notes.
Consolidated
Net Investment Income and Net Realized Capital Gains (Losses).
Consolidated after-tax net investment income, exclusive of realized and
unrealized capital gains and losses, for the six month period ended June 30,
1997 was $15.2 million, compared to $14.4 million for the same period in 1996.
The carrying value of the Company's invested assets increased to $728.0 million
at June 30, 1997 from $724.7 million at December 31, 1996 primarily due to the
positive cash flows from operations offset by the decline in the market value of
the investment portfolio. The average annual tax equivalent yield on invested
assets after investment expenses increased to 6.53% for the first six months of
1997 compared to 6.16% for the same period in 1996.
The Company realized net capital losses of $49,000 for the first six
months of 1997 compared to net capital gains of $921,000 for the same period in
1996. The 1996 net capital gains were realized principally to reposition certain
sectors of the portfolio and to modify the portfolio to improve credit quality
without sacrificing yield.
Income Before Income Taxes. Net income before income taxes increased to
$18.6 million for the six month period ended June 30, 1997 compared to $14.8
million for the same period in 1996. The increase resulted primarily from the
increase in earned premiums, the favorable results in both loss and loss
adjustment expense and in other expenses, and from the increases in service and
other revenue.
Income Tax Expense. The provision for Federal income taxes for the six
month period ended June 30, 1997 increased to $5.4 million compared with $4.2
million for the same period in 1996. The effective tax rate was 29.1% and 28.6%
for the six month periods ended June 30, 1997 and 1996, respectively. The
principal factor in the decline below the statutory rate of 35% for both periods
was the benefit of investments in tax-advantaged securities.
Net Income. The Company realized a net profit of $13.2 million for the
six month period ended June 30, 1997 compared with a net profit of $8.7 million
for the comparable 1996 period because of the factors discussed above. Net
income per share increased 34.3% to $1.37 for the six month period ended June
30, 1997 from $1.02 per share reported a year ago. The 1996 figures include an
extraordinary charge of $1.9 million, or $0.21 per share, attributable to the
redemption of 35% of the Senior Notes which occurred on April 8, 1996.
8
<PAGE>
Results of Operations - Three Months Ended June 30, 1997 Compared With Three
Months Ended June 30, 1996:
Revenues: Total revenues for the three months ended June 30, 1997
increased 51.1% to $93.0 million, compared to $61.5 million for the comparable
period in 1996. The accompanying table summarizes gross and net premiums written
and total revenues for the periods indicated:
Three month periods ended June 30,
----------------------------------
1997 1996
-------------- --------------
(in thousands)
Gross premiums written $96,939 $63,903
============== ===============
Net premiums written $76,350 $46,005
============== ===============
Premiums earned $73,890 $48,961
Net investment income 11,202 10,898
Net realized capital losses (29) -
Service and other revenue 6,900 799
Equity in net earnings of investees 1,030 871
-------------- ---------------
Total Revenues $92,993 $61,529
============== ===============
Underwriting Operations
Gross Premiums Written; Net Premiums Written; Net Premiums Earned.
Gross premiums written for the second quarter 1997 were $96.9 million, an
increase of 51.7% compared to the same period in 1996. These increases reflect
the addition of a number of new programs in the Specialty Accounts client
segment, as well as the continued growth of the Controlled Source Insurance
Accounts segment. Controlled Source Insurance Accounts grew as a result of the
expansion of current programs in response to market opportunities. The
distribution of the Company's gross premiums written among its underwriting
client segments was as follows:
Three month periods ended
June 30,
--------------------------
1997 1996
----------- -----------
Reinsurance: (in thousands)
Specialty $40,010 $25,744
----------- -----------
Global
Domestic 2,361 5,973
International 3,906 5,468
----------- -----------
6,267 11,441
----------- -----------
Regional 8,623 6,136
----------- -----------
Marine& Aviation 7,172 5,392
----------- -----------
Total Reinsurance 62,072 48,713
Controlled Source Insurance 26,708 13,797
Archer/Oak
Dedicated Facilities 8,159 -
Run-Off(1) - 1,393
TOTAL $96,939 $63,903
=========== ===========
(1) The run-off is reinsurance business previously written by The
Insurance Corporation of New York and not renewed into Chartwell Reinsurance
Company.
9
<PAGE>
Gross premiums written in the Specialty Accounts client segment for the
three months ended June 30, 1997 increased 55.4% over the prior year primarily
due to a number of new workers compensation programs. Global Accounts continues
to focus on the international marketplace and, in particular, on U. K. business.
Global Accounts gross premiums written decreased 45.2% for the three months
ended June 30, 1997 compared to June 30, 1996. Gross premiums written in the
Regional Accounts client segment increased 40.5% for the three months ended June
30, 1997 as compared with the same period last year reflecting the expansion of
existing programs and new programs coming on line. Marine and Aviation gross
premiums written increased 33.0% for the three months ended June 30, 1997 as
compared with 1996 reflecting increases in the aviation book of business. Gross
premiums written in the Controlled Source Insurance Accounts client segment for
the three months ended June 30, 1997 increased 93.6% reflecting the continued
growth of existing programs as well as the premiums from new programs.
In addition, Chartwell's financial statements for the second quarter of
1997 include $8.2 million of gross premiums written from Archer Dedicated
Limited and Oak Dedicated Limited.
Net premiums written for the three month period ended June 30, 1997
increased 66.0% to $76.4 million compared to $46.0 million for the same period
in 1996. The increase in net premiums written resulted, in large part, from the
factors described above which generated the increase in gross premiums written.
Net premiums earned for the three month period ended June 30, 1997 were $73.9
million, an increase of $24.9 million or 50.9% compared to the same period in
1996.
Loss and Loss Adjustment Expenses. The Company's principal expense,
loss and loss adjustment expenses ("LAE") related to the settlement of claims,
was $49.8 million for the three month period ended June 30, 1997, a 42.0%
increase compared to $35.1 million for the comparable period in 1996. 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 67.4% for the three month period ended June 30,
1997 from 71.6% recorded for the same period in 1996. The improvement of 4.2
percentage points in the loss and LAE ratio for the three month period ended
June 30, 1997 was a result of the positive contributions of the new workers
compensation programs as well as the benefits of new reinsurance programs and
the enhancement of existing reinsurance programs at attractive terms. In
addition, the 1997 results were not materially affected by the run-off of
reinsurance programs written by The Reinsurance Corporation of New York prior to
December 1995, a factor which impacted the 1996 results.
Policy Acquisition Costs. Policy acquisition costs, consisting
primarily of commissions paid to ceding companies and brokerage fees paid to
intermediaries, less commissions received on business ceded to other reinsurers,
were $20.5 million for the three month period ended June 30, 1997 compared to
$11.8 million for the same period in 1996. Policy acquisition costs expressed as
a percentage of net earned premiums (the acquisition expense ratio) increased to
27.7% from 24.0% in 1996. The increase is due to a modestly higher commission
structure for proportional business in general and the workers compensation
programs in particular.
Other Expenses. Other expenses related to underwriting operations,
which include underwriting and administrative expenses, were $4.5 million for
the three month period ended June 30, 1997 compared to $3.9 million for the same
period in 1996. Other expenses expressed as a percentage of net earned premiums
decreased to 6.1% for the three month period ended June 30, 1997 compared to
8.1% for the same period in 1996.
Net Underwriting Results. The Company incurred an underwriting loss
(net premiums earned minus losses, LAE and underwriting expenses) of $905,000
for the three month period ended June 30, 1997 as compared to an underwriting
loss of $1.8 million for the same period in 1996. The combined ratio for the
three month period ended June 30, 1997 computed in accordance with GAAP was
101.2% compared to 103.7% for the same period in 1996. Although the loss ratio
component improved to 67.4% for the three month period ended June 30, 1997 from
71.6% recorded for the same period in 1996, the expense ratio increased to 33.8%
for the three month period ended June 30, 1997 from the 32.1% recorded for the
same period in 1996, for the reasons noted above.
10
<PAGE>
Service Operations
Revenue from service operations increased to $8.3 million for the three
month period ended June 30, 1997 compared to $1.7 million for the same period in
1996. The improvement is due principally to the revenues from Archer as well as
increases in advisory fee revenues and equity in the net earnings of investee
companies.
Corporate Operations
Interest and Amortization. Interest and amortization expenses were $3.1
million for the three month period ended June 30, 1997 compared to $2.3 million
for the same period in 1996. The increase is primarily due to $643,000 of
interest and amortization related to the acquisition of Archer.
Consolidated
Net Investment Income and Net Realized Capital Losses.
Consolidated after-tax net investment income, exclusive of realized and
unrealized capital losses, for the three month period ended June 30, 1997 was
$7.9 million, compared to $7.3 million for the same period in 1996. The carrying
value of the Company's invested assets increased to $728.0 million at June 30,
1997 from $724.7 million at December 31, 1996 primarily due to the positive cash
flows from operations. The average annual tax equivalent yield on invested
assets after investment expenses increased to 6.87% for the second quarter of
1997 compared to 6.13% for the same period in 1996. The Company realized net
capital losses of $29,000 for the three months ended June 30, 1997. There were
no net gains or losses for the three months ended June 30, 1996.
Income Before Income Taxes. Net income before income taxes increased to
$9.6 million for the three month period ended June 30, 1997 compared to $7.9
million for the same period in 1996. The increase resulted primarily from the
increase in earned premiums, the favorable results in both loss and loss
adjustment expense and in other expenses, and from the increases in service and
other revenue.
Income Tax Expense. The provision for Federal income taxes for the
three month period ended June 30, 1997 increased to $2.8 million compared with
$2.2 million for the same period in 1996. The effective tax rate was 29.8% and
27.5% for the three month periods ended June 30, 1997 and 1996, respectively.
The principal factor in the decline below the statutory rate of 35% for both
periods was the benefit of investments in tax-advantaged securities.
Net Income. The Company realized a net profit of $6.7 million for the
three month period ended June 30, 1997 compared with a net profit of $3.9
million for the comparable 1996 period because of the factors discussed above.
Net income per share increased 75.0% to $0.70 for the three month period ended
June 30, 1997 from $0.40 per share reported a year ago. The 1996 figures include
an extraordinary charge of $1.9 million, or $0.20 per share, attributable to the
redemption of 35% of the Senior Notes which occurred on April 8, 1996.
Liquidity and Capital Resources
As a holding company, Chartwell's assets consist primarily of the stock
of its direct and indirect subsidiaries. Chartwell's cash flow, therefore,
depends largely on dividends and other payments from Holdings, and in turn
Holdings' cash flow depends largely on interest, 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 stockholders. Chartwell could pay dividends aggregating up to $23.8 million
without regulating approval.
On both March 5, 1997 and June 3, 1997, the Company paid a quarterly
cash dividend of $0.04 per share. On August 5, 1997, the Company's Board of
Directors declared a quarterly cash dividend of $0.04 per share, which is
payable on September 2, 1997.
At June 30, 1997, 95.7% of Chartwell's total investments (including
cash and cash equivalents) consisted of fixed income securities, of which 96.6%
were rated "A" or better (or "A-1" for commercial paper) by Moody's. While
uncertainties exist regarding interest rates and inflation, Chartwell attempts
to minimize such risks and exposures by balancing the duration of reinsurance
liabilities with the duration of assets in its investment portfolio. The current
market value of Chartwell's fixed maturity investments is not necessarily
indicative of their future valuation. Chartwell 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,
1997 was comprised primarily of U.S. Treasury and government agency, mortgage
pass-through securities, and corporate and municipal bonds.
11
<PAGE>
Stockholders' equity increased approximately 4.7% to $236.6 million at
June 30, 1997 from $226.0 million at December 31, 1996. GAAP book value per
share increased to $24.65 at June 30, 1997 from $23.58 at December 31, 1996.
Chartwell's ratio of long-term debt to total capitalization (exclusive of the
Contingent Interest Notes) improved to 31.4% at June 30, 1997 from 32.2% at
December 31, 1996.
Statutory policyholders' surplus of Chartwell Reinsurance Company
increased to $247.7 million at June 30, 1997 from $238.3 million at December 31
1996.
In connection with the November 1996 acquisition of Archer, Holdings
entered into new credit facilities with First Union National Bank, N.A. (the
"First Union Credit Facility"). The new credit facilities provide term loans of
approximately $50 million (a portion of which is denominated in pounds sterling)
and a $25.0 million revolving credit facility (subsequently increased to $35.0
million).
At June 30, 1997, $45.4 million was outstanding under the First Union
Credit Facility. In addition, at June 30, 1997, $9.3 million was used to
guarantee the loan notes and $20.0 million was used to secure letters of credit.
Chartwell is largely dependent upon receipt of dividends and other
statutorily permissible payments from Holdings to meet its obligations and to
pay dividends on the Common Stock. Holdings is in turn largely dependent on
interest, dividends and other payments from its subsidiaries to meet its
obligations, including the obligation to pay interest and principal on the
Senior Notes and under the new credit facilities. The agreements governing the
foregoing debt obligations significantly restrict the ability of Holdings to
make dividend and other payments to Chartwell. Further, dividend payments by
Chartwell Reinsurance and INSCORP are subject to limits under the laws of the
States of Minnesota and New York, respectively. Under the applicable provisions
of the insurance holding company laws of the State of Minnesota, Chartwell
Reinsurance may, upon five days notice to the Commissioner following the
declaration of dividends to stockholders, and upon at least ten days notice to
the Commissioner prior to dividend payments, pay dividends to Holdings without
the approval of the Commissioner, unless such dividends, together with other
dividends paid within the preceding twelve months, exceed the greater of (i) 10%
of Chartwell Reinsurance's policyholders' surplus as of the end of the prior
calendar year or (ii) Chartwell Reinsurance's statutory net income, excluding
realized capital gains, for the prior calendar year. Any dividend in excess of
the amount determined pursuant to the foregoing formula would be characterized
as an "extraordinary dividend" requiring the prior approval of the Commissioner.
In any case, the maximum amount of dividends Chartwell Reinsurance may pay is
limited to its earned surplus, also known as unassigned funds. As of December
31, 1996, Chartwell Reinsurance reported unassigned funds in the amount of $54.5
million. Up to $23.8 million is available under the foregoing formula for the
payment of dividends by Chartwell Reinsurance without regulatory approval in
1997. Chartwell Reinsurance paid the Company no dividends in 1997 or 1996. Under
New York law, which is applicable to INSCORP, the maximum ordinary dividend
payable in any twelve month period without the approval of the Superintendent
may not exceed the lesser of (a) 10% of policyholders surplus as shown on the
company's last annual statement or any more recent quarterly statement or (b)
the Company's adjusted net investment income. Adjusted net investment income is
defined as net investment income for the twelve months preceding the declaration
of the dividend plus the excess, if any, of net investment income over dividends
declared or distributed during the period commencing thirty-six months prior to
the declaration or distribution of the current dividend and ending twelve months
prior thereto. In any case, New York law permits the payment of an ordinary
dividend by an insurer or reinsurer only out of earned surplus. Moreover,
notwithstanding the receipt of any dividend from INSCORP, Chartwell Reinsurance
may make dividend payments to Holdings only to the extent permitted under the
Minnesota provisions described above.
In addition to the foregoing limitation, the New York Insurance
Department, as is its practice in any change of control situation, has required
Chartwell to commit to preclude the acquired New York-domiciled insurer,
INSCORP, from paying any dividends for two years after the change of control
without prior regulatory approval. This two year period ends in December 1997.
The maximum dividend permitted by law is not indicative of an insurer's
actual ability to pay dividends, which may be constrained by business and
regulatory considerations, such as the impact of dividends on surplus, which
could affect an insurer's ratings or competitive position, the amount of
premiums that can be written and the ability to pay future dividends.
Furthermore, beyond the limits described in the preceding paragraph, the
Commissioner and Superintendent have discretion to limit the payment of
dividends by insurance companies domiciled in Minnesota and New York,
respectively.
12
<PAGE>
CHARTWELL RE CORPORATION
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 June 6, 1997, the Company filed a Current Report on Form 8-K under
Item 5 - Other Events, reporting the adoption of a Shareholder Right Plan.
(c) Signatures
13
<PAGE>
CHARTWELL RE CORPORATION
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: August 12, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Apr-1-1997
<PERIOD-END> Jun-30-1997
<DEBT-HELD-FOR-SALE> 628,838
<DEBT-CARRYING-VALUE> 34,483
<DEBT-MARKET-VALUE> 34,903
<EQUITIES> 33,114
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 696,435
<CASH> 31,543
<RECOVER-REINSURE> 33,153
<DEFERRED-ACQUISITION> 22,022
<TOTAL-ASSETS> 1,320,599
<POLICY-LOSSES> 765,798
<UNEARNED-PREMIUMS> 103,715
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 136,837
0
0
<COMMON> 96
<OTHER-SE> 236,454
<TOTAL-LIABILITY-AND-EQUITY> 1,320,599
73,890
<INVESTMENT-INCOME> 11,202
<INVESTMENT-GAINS> (29)
<OTHER-INCOME> 7,930
<BENEFITS> 49,810
<UNDERWRITING-AMORTIZATION> 20,452
<UNDERWRITING-OTHER> 4,533
<INCOME-PRETAX> 9,553
<INCOME-TAX> 2,848
<INCOME-CONTINUING> 6,705
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,705
<EPS-PRIMARY> 0.70
<EPS-DILUTED> 0.70
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
