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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(Mark One)
|X|ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998
OR
|_|TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
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Chartwell Re Corporation
(Exact name of registrant as specified in its charter)
- - --------------------------------------------------------------------------------
DELAWARE 41-1652473
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Four Stamford Plaza, 107 Elm Street
Stamford, Connecticut 06902
(Address of principal executive offices and zip code)
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Registrant's telephone number, including area code: (203) 705-2500
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on which registered
Common Stock, par value $.01 per share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO __
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 9, 1999 was approximately $177,824,000.
As of March 9, 1999, there were 9,628,162 shares of Common Stock, $0.01 par
value outstanding.
Documents Incorporated by Reference
Portions of the registrant's definitive Proxy Statement for its 1999 Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission within 120 days of the close of the registrant's fiscal year ended
December 31, 1998, are incorporated by reference into Part III hereof.
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<PAGE>
CHARTWELL RE CORPORATION
TABLE OF CONTENTS
Page
Item Number
---- ------
PART I
1. Business--------------------------------------------------------- 1
2. Properties------------------------------------------------------- 18
3. Legal Proceedings------------------------------------------------ 18
4. Submission of Matters to a Vote of Security Holders-------------- 18
PART II
5. Market for the Registrant's Common Stock and Related
Stockholder Matters---------------------------------------------- 19
6. Selected Financial Data------------------------------------------ 20
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations---------------------------------------- 21
7A. Quantitative and Qualitative Disclosures About Market Risk------- 33
8. Financial Statements and Supplementary Data---------------------- 33
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures --------------------------------------- 33
PART III
10. Directors and Executive Officers of the Registrant--------------- 34
11. Executive Compensation------------------------------------------- 34
12. Security Ownership of Certain Beneficial Owners and Management--- 34
13. Certain Relationships and Related Transactions------------------- 34
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K- 34
ii
<PAGE>
PART I
Item 1. Business
Overview
Chartwell Re Corporation ("Chartwell" or the "Company") is an insurance
holding company with global underwriting and service operations which conducts
its business in the United States and in the Lloyd's market through its
principal operating subsidiaries, Chartwell Reinsurance Company ("Chartwell
Reinsurance"), The Insurance Corporation of New York ("INSCORP"), Chartwell
Managing Agents Limited ("CMA") and Dakota Specialty Insurance Company
("Dakota"). As of December 31, 1998, Chartwell had over $1.5 billion of total
assets and stockholders' equity of $292.9 million. For the year ended December
31, 1998, Chartwell's gross premiums written amounted to $343.0 million. Of such
amount, $159.2 million, or 46.4%, represented gross reinsurance premiums, $111.1
million, or 32.4%, represented gross insurance premiums and $72.6 million, or
21.2%, represented premiums from Oak Dedicated Limited, Oak Dedicated Two
Limited and ADIT One Limited, CMA's dedicated Lloyd's corporate capital vehicles
(the "Dedicated CCV's").
Chartwell Reinsurance is a broker market reinsurer with $302.9 million
of policyholders' surplus which underwrites treaty reinsurance for casualty,
property, marine and aviation risks. INSCORP is a primary insurance company with
$131.7 million of policyholders' surplus that develops property and casualty
insurance programs through specialty production sources focusing on a specific
line of business and geographic region. Chartwell and INSCORP are each licensed
or authorized to transact business in 49 states and the District of Columbia.
INSCORP is also approved to transact business in Canada. CMA is the 12th largest
managing agency at Lloyd's, managing seven Lloyd's syndicates with total
underwriting capacity of approximately (pound)300 million ($500 million) for the
1999 year of account. Approximately 46% of CMA syndicates' 1999 capacity is
supplied by Chartwell, and it is estimated that approximately 65% of CMA's 1999
premium volume will be derived from non-U.S. sources.
History
Chartwell Reinsurance was founded in 1979 as a wholly-owned subsidiary
of Northwestern National Life Insurance Company ("NWNL"). Chartwell was formed
in 1989 to act as the parent company of Chartwell Reinsurance, and, in March of
1992, Chartwell was acquired (the "1992 Acquisition") by an acquisition group
including members of Chartwell's senior management.
INSCORP was acquired by Chartwell as a result of the merger of
INSCORP's former parent, Piedmont Management Company Inc. ("Piedmont"), with and
into Chartwell, with Chartwell as the surviving corporation (the "Piedmont
Merger"). The Piedmont Merger was completed in December, 1995, and upon
consummation of the Piedmont Merger, Chartwell assumed all of Piedmont's
obligations under its Contingent Interest Notes due 2006 (the "CI Notes") which
were issued by Piedmont to its stockholders just prior to the Piedmont Merger.
In November, 1996, Chartwell Holdings Limited ("Holdings Limited"), a
newly-formed, indirect wholly-owned subsidiary of Chartwell, acquired CMA in a
cash tender offer for all of the outstanding ordinary shares of Chartwell UK
plc, formerly Archer Group Holdings plc ("Chartwell UK"), the holding company
for CMA. Chartwell UK was publicly traded on the London Stock Exchange prior to
its acquisition by Chartwell.
Ratings
Chartwell Reinsurance is rated "A" (Excellent) by A.M. Best Company.
INSCORP and Dakota, its surplus lines subsidiary, are both rated "A-"
(Excellent) by A.M. Best Company. All three companies are assigned an A- claims
paying ability rating by Standard & Poor's. All of CMA's syndicates enjoy the
benefit of the ratings of Lloyd's, which is rated "A" (Excellent) by A.M. Best
Company and has an A+ claims paying ability rating from Standard & Poor's. These
ratings are based upon factors that may be of concern to policy or contract
holders, agents and intermediaries, but may not reflect the considerations
applicable to an equity investment in a reinsurance or insurance company. A
change in any such rating is at the discretion of the respective rating
agencies.
1
<PAGE>
Corporate Structure
[GRAPHIC OMITTED]
Property and Casualty Reinsurance
Reinsurance is an arrangement in which an insurance company, the
reinsurer, agrees to indemnify another insurance company, the ceding company,
for all or a portion of the insurance risks underwritten by the ceding company
under one or more insurance policies. Reinsurance can benefit a ceding company
in a number of ways, including reducing net liability exposure on individual
risks, providing catastrophe protection from large or multiple losses,
stabilizing financial results and assisting in maintaining acceptable operating
leverage ratios. Reinsurance also provides a ceding company with additional
underwriting capacity by permitting it to accept larger risks and underwrite a
greater number of risks without a corresponding increase in its capital and
surplus.
Reinsurance is contracted either through treaties or facultative
certificates. A reinsurance treaty is an agreement whereby the ceding company is
obligated to cede, and the reinsurer is obligated to assume, a specified portion
or category of risk under all qualifying policies issued by the ceding company
during the term of the treaty. Facultative reinsurance arrangements are
separately negotiated for each insurance policy to be reinsured and result in a
facultative certificate under which the ceding company cedes, and the reinsurer
assumes, all or part of the risk under a specific insurance policy. Facultative
reinsurance is normally purchased by insurance companies for individual risks
not covered under reinsurance treaties or for amounts in excess of limits on
risks covered under reinsurance treaties. In the underwriting of treaty
reinsurance, the reinsurer does not evaluate each individual risk assumed, as it
must in the underwriting of facultative reinsurance, and generally accepts the
original underwriting decisions made by the ceding insurer.
Both treaty and facultative reinsurance can be written on either a pro
rata (also known as quota share or proportional) or excess of loss basis. Under
pro rata reinsurance, the reinsurer indemnifies the ceding company against an
agreed upon portion or share of the losses and loss adjustment expenses ("LAE")
incurred by the ceding company under the reinsured policy or policies. Premiums
that the ceding company pays to the reinsurer for pro rata reinsurance are
proportional to the premiums that the ceding company receives, consistent with
the proportional sharing of risk, generally less a ceding commission. The ceding
commission is negotiated between the reinsurer and the ceding company to
reimburse the ceding company for its acquisition costs relating to the
underlying policies and may include a contingent component that varies depending
upon the loss experience of the underlying business. As a consequence, the
underwriting results of the reinsurer may not parallel the underwriting results
of the ceding company.
Under excess of loss reinsurance, the reinsurer indemnifies the ceding
company against all or a specified portion of losses and LAE on the reinsured
policy or policies in excess of a specified dollar amount, known as the ceding
company's retention or reinsurance attachment point, generally subject to a
negotiated limit. Such reinsurance can cover losses from a single risk or from a
variety of risks in connection with a single occurrence (generally referred to
as catastrophe coverage). Excess of loss reinsurance is often written in
multiple layers. One or a group of reinsurers typically assumes that portion of
the risk immediately above the ceding company's retention up to a specified
amount, at which point another reinsurer or group of reinsurers assumes, or the
ceding company retains, the excess liability. The reinsurer assuming the risk
immediately above the ceding company's retention point is said to write working
layer (or low layer) reinsurance. A loss that is greater in amount than the
ceding company's retention will result in a loss to the working layer reinsurer,
but may not result in a loss to the reinsurers on higher layers. Since the
probability of loss for the reinsurer providing excess of loss coverage differs
from that to which the ceding company is subject, such reinsurance coverage is
priced separately from the pricing set by the ceding company with respect to its
own risks.
Reinsurers may also purchase reinsurance, known as retrocessional
reinsurance, to cover their own risks assumed from primary ceding companies.
Reinsurance companies enter into retrocessional agreements for reasons similar
to those for which ceding companies purchase reinsurance.
2
<PAGE>
Underwriting
Underwriting opportunities presented to Chartwell are evaluated based
upon a number of factors including an historical analysis of results, an
estimation of future loss costs based upon an analysis of exposure, a review of
other programs displaying similar exposure characteristics, the primary
insurer's underwriting and claims experience and the primary insurer's financial
condition.
In general, prior to authorization, underwriting submissions are
reviewed by at least two underwriters, including the manager of the relevant
underwriting unit. Large, complex or unusual submissions are generally further
reviewed by senior management.
Client Segments
Chartwell has organized its marketing and underwriting activities into
client segments differentiated from one another based on the nature of the
clientele and their businesses or products. Accordingly, Chartwell has
established three principal underwriting units - Reinsurance, Controlled Source
Insurance and CMA Dedicated Facilities. The Reinsurance unit is further divided
based upon client characteristics into four units: Specialty Accounts, Global
Accounts, Regional Accounts and Marine & Aviation Accounts. Each unit consists
of specialized, dedicated underwriters who are supported by Chartwell's
technical resources and personnel, including its actuarial, claims and
accounting departments. Chartwell employs a focused cycle management approach to
marketing and underwriting pursuant to which it seeks to emphasize different
types of business during various phases of the underwriting cycle. During soft
markets, Chartwell concentrates on identifying and pursuing underwriting
opportunities in areas exhibiting adequate profit potential and ceding
additional business upon advantageous terms. During hard markets, Chartwell's
general strategy is to expand its premium writings in all market segments.
The table set forth below shows gross premiums written by underwriting
client segment for the periods indicated:
Gross Premiums Written by Underwriting Client Segment
(Dollars in thousands)
Year Ended December 31,
------------------------------------------------------
1998 1997 1996
------------- ------------- ----------------
% of % of % of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -------
Reinsurance Operations
Specialty Accounts..........$110,829 32.3% $140,965 38.9% $100,817 38.2%
Global Accounts
Domestic................... 12,461 3.6 19,658 5.4 19,818 7.5
International.............. 10,530 3.1 22,723 6.3 24,120 9.2
------- ---- -------- ----- ------- -----
Subtotal Global Accounts.... 22,991 6.7 42,381 11.7 43,938 16.7
Regional Accounts........... 15,069 4.4 24,718 6.8 25,967 9.8
Marine & Aviation Accounts.. 10,358 3.0 28,050 7.7 27,780 10.5
------- ---- -------- ---- -------- -----
Total Reinsurance.......... 159,247 46.4 236,114 65.1 198,502 75.2
------- ---- -------- ---- -------- -----
Non-Reinsurance Operations
Controlled Source Insurance..111,131 32.4 106,543 29.4 58,752 22.3
INSCORP Run-off............. -- -- -- -- 6,584 2.5
CMA Dedicated Facilities.... 72,573 21.2 20,113 5.5 -- --
------- ---- -------- ---- -------- -----
Total Non-Reinsurance...... 183,704 53.6 126,656 34.9 65,336 24.8
------- ---- -------- ---- -------- -----
TOTAL $342,951 100.0% $362,770 100.0% $263,838 100.0%
======== ====== ======= ====== ======== ======
The growth of 30.0% in gross premiums written for the period from 1996
to 1998 is due principally to the development of the Controlled Source Insurance
portfolio, as well as the addition of premium income from Chartwell's
participation on CMA's syndicates through support of its Dedicated CCV's.
3
<PAGE>
Reinsurance Business
Chartwell segments its reinsurance marketing and underwriting activities
into four specific client units - Specialty Accounts, Global Accounts, Regional
Accounts and Marine & Aviation Accounts.
Specialty Accounts. Specialty Accounts primarily covers non-standard,
non-traditional risks that require specialized underwriting, claims and
actuarial skills. Currently, these coverages include workers compensation,
professional liability, directors' and officers' liability, surety/fidelity
programs, non-standard automobile, accident & health, political risk, employment
practices liability and managing general agencies, as well as coverages for
excess and surplus lines insurers and start-up companies. In addition, Specialty
Accounts writes business arising from the alternative risk transfer segment with
a particular emphasis in the professional liability and medical malpractice
areas.
Global Accounts. Global Accounts is principally engaged in two
activities. Global Accounts provides reinsurance to large U.S. based domestic
insurance companies with $100 million or more in surplus which write business in
more than 10 states and writes specific reinsurance programs for international
ceding companies including reinsurance of select syndicates at Lloyd's and for
other insurers and reinsurers writing non-U.S. risks.
Regional Accounts. Regional Accounts includes reinsurance of the
standard risks of insurance companies that either operate in 10 or fewer states
or have a surplus of $100 million or less.
Marine and Aviation Accounts. Marine & Aviation Accounts includes
reinsurance of domestic and international ceding companies, managing general
agencies and select Lloyd's syndicates, as well as Chartwell's participation in
certain marine & aviation pools. The majority of Chartwell's marine reinsurance
business is in the bluewater hull and energy areas. Chartwell's aviation
business is derived primarily from reinsuring general aviation and satellite
business. Business emanating from INSCORP's participation in the marine pool
managed by Navigators Group, Inc. is also included in this client segment.
Mix of Reinsurance Business. Chartwell writes excess of loss and pro
rata reinsurance as well as casualty clash and property catastrophe coverages,
all on a treaty basis. Chartwell typically focuses on the working layers of a
ceding company's reinsurance program. Chartwell does not currently write
facultative reinsurance but may commence writing such coverages depending on
market conditions.
Chartwell's mix of reinsurance business, on the basis of gross and net
reinsurance premiums written, is set forth in the following table for the
periods indicated:
4
<PAGE>
<TABLE>
Mix of Reinsurance Business
(dollars in thousands)
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------- --------------- --------------- --------------- ---------------
%of % of % of % of %of
Amount Total Amount Total Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross Premiums Written
Casualty:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Excess of Loss....... $ 29,559 18.6% $ 36,659 15.5% $ 32,679 16.5% $ 40,089 31.6% $ 32,674 28.1%
Pro Rata............. 88,899 55.8 134,495 57.0 94,223 47.5 41,570 32.7 43,328 37.2
Clash................ 1,267 0.8 1,983 0.8 1,816 0.8 2,704 2.1 3,498 2.9
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total Casualty......... 119,725 75.2 173,137 73.3 128,718 64.8 84,363 66.4 79,500 68.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Property:
Excess of Loss....... 4,435 2.8 12,912 5.5 6,267 3.2 4,730 3.7 2,656 2.3
Pro Rata............. 34,772 21.8 49,583 21.0 62,455 31.5 35,841 28.2 31,030 26.7
Catastrophe.......... 315 0.2 482 0.2 1,062 0.5 2,034 1.7 3,210 2.8
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total Property......... 39,522 24.8 62,977 26.7 69,784 35.2 42,605 33.6 36,896 31.8
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total Gross
Premiums Writtten..... $159,247 100.0% $236,114 100.0% $198,502 100.0% $126,968 100.0% $116,396 100.0%
======== ====== ======== ===== ======== ====== ======== ====== ======== ======
Net Premiums Written
Casualty:
Excess of Loss....... $ 23,740 22.6% $ 35,143 17.4% $ 32,567 18.6% $ 40,043 32.5% $ 32,680 28.7%
Pro Rata............. 56,950 54.3 118,446 58.1 81,349 46.6 40,727 33.0 43,319 38.0
Clash................ 919 0.9 1,920 0.9 1,807 1.0 2,691 2.2 3,492 3.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- ------
Total Casualty........ 81,609 77.8 155,779 76.4 115,723 66.2 83,461 67.7 79,491 69.8
-------- ----- -------- ----- -------- ----- -------- ----- -------- ------
Property:
Excess of Loss....... 2,930 2.8 11,456 5.6 5,941 3.4 4,440 3.6 2,476 2.2
Pro Rata............. 20,161 19.2 36,251 17.8 51,978 29.8 33,667 27.3 28,928 25.4
Catastrophe.......... 211 0.2 472 0.2 1,016 0.6 1,746 1.4 3,067 2.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total Property........ 23,302 22.2 48,179 23.6 58,935 33.8 39,853 32.3 34,471 30.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total Net Premiums
Written.............. $ 104,911 100.0% $203,958 100.0% $174,658 100.0% $123,314 100.0% $113,962 100.0%
========= ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
Chartwell's percentage of property writings in its overall mix of business
decreased for the year ended December 31, 1998 as compared to the year ended
December 31, 1997, principally as a result of increased competition in the
property market.
Ceding Companies. During the year ended December 31, 1998, Chartwell
received approximately 37.9% of its gross reinsurance premiums written from four
groups of ceding companies, of which LDG Reinsurance Underwriters accounted for
approximately 14.4%, American International Group accounted for approximately
11.0%, Clarendon Insurance Group accounted for approximately 6.9% and Somerset
Marine accounted for approximately 5.6%. No other ceding company or group of
affiliated ceding companies accounted for more than 5% of Chartwell's gross
reinsurance premiums written for the year ended December 31, 1998.
Brokers. During the year ended December 31, 1998, Chartwell received
approximately 51.8% of its gross reinsurance premiums written from three
reinsurance brokers, of which AON Reinsurance Agency accounted for approximately
24.2%, Guy Carpenter & Co., Inc. accounted for approximately 15.4%, and E.W.
Blanch Co. accounted for approximately 12.2%. No other broker accounted for more
than 5% of the company's gross reinsurance premiums written for the year ended
December 31, 1998.
In order to reduce the potential adverse effect arising from the
termination of any specific business relationship, Chartwell seeks business from
a large number of reinsurance brokers and ceding companies. While management
believes that its relationships with these reinsurance brokers and ceding
companies are satisfactory, the termination of all or a substantial number of
these relationships could have a material adverse effect on the business and
operations of Chartwell.
Insurance Operations
Controlled Source Insurance. Controlled Source Insurance develops
insurance programs through specialty production sources with a focus on a
specific line or lines of business, with a limited geographic emphasis, and
where the program administrator's compensation is adjusted based on the
underwriting results of the business.
Controlled Source Insurance gross written premiums grew 4.3%, 81.3%,
and 9.8% for the years ended December 31, 1998, 1997, and 1996, respectively,
over the prior year. The increases in premium reflect the geographic expansion
of existing programs as well as the development of new programs during the
periods shown.
5
<PAGE>
The table set forth below shows the gross premiums written for
Controlled Source Insurance by INSCORP for the periods indicated:
Controlled Source Insurance
Gross premiums Written by Line of Business
(Dollars in thousands)
Year Ended December 31,
------------------------------------------------------------------
1998 1997 1996
--------------- ---------------- ----------------
Amount Total Amount Total Amount Total
------- ----- ---------------- ------- -------
Commercial Multiple Peril..$ 45,737 41.2% $ 48,404 45.4% $33,014 56.2%
General Liability.......... 31,575 28.4 30,418 28.6 14,889 25.3
Automobile................. 23,354 21.0 22,267 20.9 10,849 18.5
Workers Compensation....... 4,224 3.8 4,169 3.9 -- --
Homeowners and Other....... 6,241 5.6 1,285 1.2 -- --
======== ====== ======== ====== ======= ======
Total.....................$ 111,131 100.0% $106,543 100.0% $58,752 100.0%
======== ====== ======== ====== ======= ======
During the year ended December 31, 1998, Chartwell wrote approximately
88.7% of its Controlled Source gross insurance premiums through four managing
general agents, of which Florida Intracoastal Underwriters accounted for
approximately 41.6%, HDR Insurance Services accounted for approximately 24.5%,
Inter-Reco accounted for approximately 11.7% and Professional Insurance
Underwriters accounted for approximately 10.9%. No other managing general agent
accounted for more than 5% of Chartwell's Controlled Source gross insurance
premiums written for such period.
In order to reduce the potential adverse effect arising from the
termination of any specific business relationship, Chartwell continues to seek
to establish and develop relationships with a large number of managing general
agents. While management believes that its relationships with its managing
general agents are satisfactory, the termination of all or a substantial number
of these relationships could have a material adverse effect on the business and
operations of Chartwell.
CMA Dedicated Facilities
Classes of business covered by CMA's syndicates include marine,
non-marine property, non-marine liability, aviation, motor and life. CMA manages
seven Lloyd's syndicates with total underwriting capacity of approximately
(pound)300 million ($500 million) for the 1999 year of account. Approximately
46% of CMA syndicates' 1999 capacity is supplied by Chartwell.
CMA Dedicated Corporate Capital Facilities
Gross Premiums Written by Lloyd's Market Segment
(Dollars in thousands)(1)
Year Ended December 31,
--------------------------------------------------
1998 1997
----------------------- ---------------------
Amount % of Total Amount % of Total
-------- ---------- ------- ----------
Motor................ $ 36,212 49.9% $ 7,445 37.0%
Non-Marine........... 31,121 42.9 9,969 49.6
Aviation............. 3,194 4.4 1,569 7.8
Marine............... 1,757 2.4 984 4.9
Life................. 289 0.4 146 0.7
-------- --------- --------- ----------
Total................ $ 72,573 100.0% $ 20,113 100.0%
======== ========= ========= ==========
(1)Business at CMA is conducted in pounds sterling. The dollar amounts shown
here have been converted from pounds sterling at the average exchange rate for
each of the years presented. Data is not shown for years prior to 1997 because
Chartwell acquired CMA in November 1996, and Chartwell's consolidated results
prior to 1997 did not include amounts attributable to CMA. All amounts are
presented in accordance with U.S. GAAP.
Retrocessional Arrangements
Chartwell utilizes retrocessions primarily to provide protection from
large or multiple losses and may in the future use additional retrocessions to
increase underwriting capacity. Chartwell seeks to establish long-term
relationships with its leading retrocessionaires in order to achieve continuity
and stability of coverage. Chartwell purchases property catastrophe coverage for
its Global, Regional and Specialty Accounts business to provide coverage for
losses arising from an aggregation of claims under various insurance policies
from a single event. Chartwell's current property catastrophe program, effective
January 1, 1999, provides 100% coverage for $9.5 million of exposure in excess
of a $2.5 million retention, with additional coverage provided by reinstatement
provisions. In addition, during 1998, Chartwell purchased a property catastrophe
program to protect against an accumulation of losses for Chartwell and INSCORP
from the same event; this program provides 100% coverage for $2.5 million of
exposure in excess of a combined $2.0 million retention, with additional
coverage provided by reinstatement provisions. INSCORP purchases specific
reinsurance programs for each of the programs underwritten.
6
<PAGE>
Chartwell renewed its retrocessional marine program, as of April 1,
1998, which provides $1.45 million of coverage, per risk or per event, in excess
of a $0.3 million retention, with additional coverage provided by reinstatement
provisions.
In 1997 and 1998, the Company entered into aggregate excess of loss
treaties. These treaties provide the Company with a layer of protection against
adverse results in all lines of business in excess of specified loss ratios.
Liabilities held by the Company under such treaties were $37.0 million and $10.5
million at December 31, 1998 and 1997, respectively.
Since Chartwell is contingently liable with respect to reinsurance
ceded in the event that a retrocessionaire is unable to meet its obligations
assumed under a retrocession agreement, the financial strength of each
retrocessionaire is evaluated. As of December 31, 1998, the reinsurance
recoverable balance of Chartwell Reinsurance of $86.5 million is attributable to
retrocessional arrangements with over 140 retrocessionaires. At December 31,
1998, Chartwell Reinsurance had a reserve for uncollectable reinsurance of $3.4
million.
As of December 31, 1998, the reinsurance recoverable balance of INSCORP
of $156.8 million was attributable to retrocessional arrangements with over 290
retrocessionaires. At December 31, 1998, INSCORP had a reserve for uncollectable
reinsurance of approximately $3.0 million.
Claims
Chartwell's claims department analyzes loss exposure in order to
establish case reserves, pays claims and assists in the underwriting process by
reviewing the claims activities of prospective ceding companies. In performing
these functions, the claims department consults with Chartwell's underwriting
and actuarial departments. The claims department also assists the accounting
department in reporting Chartwell's retrocessional claims and in seeking
collection of such claims on a timely basis.
In evaluating loss exposure, Chartwell's claims department reviews loss
reports received from ceding companies to confirm that submitted claims are
covered under the contract terms, establishes reserves on an individual case
basis and monitors the adequacy of such reserves. The department also tracks
industry loss activity as well as other industry trends to facilitate
management's evaluation of Chartwell's overall risk profile. Chartwell also has
an environmental claims unit to evaluate the complex toxic tort and latent
injury claims inherited through the Piedmont Merger.
Reserves
General. A significant period of time may elapse between each of: (i)
the occurrence of an event causing an insured loss; (ii) the reporting of the
loss to the ceding company; (iii) the reporting of the loss by the ceding
company to Chartwell; (iv) the ceding company's adjustment and payment of the
loss; and (v) payment to the ceding company by Chartwell. To recognize
liabilities for unpaid losses, Chartwell establishes loss and loss expense
reserves which are balance sheet liabilities representing estimates of future
amounts needed to pay claims and related expenses with respect to insured
events. Loss and LAE reserves have two components: case loss and LAE reserves,
which are estimates of future loss and LAE with respect to insured events that
have been reported to the reinsurer, and incurred but not reported reserves
("IBNR"). IBNR reserves are actuarially determined and reflect (i) an estimate
of the ultimate loss amount that will be paid by the reinsurer on claims that
have occurred but have not yet been reported to the reinsurer and (ii) the
expected change in the value of those claims that have already been reported to
the reinsurer.
When a claim is reported to the ceding company, its claims personnel
establish a liability for the estimated amount of the ultimate settlement cost
of the reported claim. The estimate reflects the judgment of the ceding company,
based on the experience and knowledge of its claims personnel, regarding the
nature and value of the claim. The ceding company may periodically adjust the
amount of case reserves as additional information becomes known or partial
payments are made.
Upon notification of loss from a ceding company, Chartwell establishes
case reserves, including LAE, based upon Chartwell's share of the amount of
reserves established by the ceding company and Chartwell's independent
evaluation of the loss. Where appropriate, Chartwell establishes case reserves
in excess of its share of the reserves established by the ceding company. These
reserves are periodically reviewed by Chartwell's claims department based on its
evaluation of reports from the ceding company and its audits of claims
activities of the ceding company.
During the claims settlement period, which may extend over a protracted
period of time, additional facts regarding claims and trends may become known.
As Chartwell becomes aware of new information, it may adjust its estimates of
its ultimate liability. The revised estimates of ultimate liability may prove to
be less than or greater than the actual settlement or award amount for which the
claim is finally discharged.
7
<PAGE>
Actuarial Methods. Chartwell utilizes the two most common methods of
actuarial evaluation used within the insurance industry, the
Bornhuetter-Ferguson method and the loss development method. The
Bornhuetter-Ferguson method involves the application of selected loss ratios to
Chartwell's earned premiums to determine estimates of ultimate expected loss and
LAE for each underwriting year. Multiplying expected losses by underwriting year
by a selected loss reporting pattern gives an estimate of reported and
unreported IBNR losses. When the IBNR is added to the loss and LAE amounts with
respect to claims that have been reported to date, an estimated ultimate
expected loss results. This method provides a more stable estimate of IBNR that
is insulated from wide variations in reported losses. In contrast, the loss
development method extrapolates the current value of reported losses to ultimate
expected losses by using selected reporting patterns of losses over time. The
selected reporting patterns are based on historical information (organized into
loss development triangles) and are adjusted to reflect the changing
characteristics of the book of business written by Chartwell.
Chartwell employs a combination of both methods outlined above. For the
older years, when reported losses have generally stabilized, Chartwell gives
greater weight to the loss development result. For the more recent years, when
reported loss activity is either less reliable in the aggregate or non-existent,
Chartwell gives greater weight to the Bornhuetter-Ferguson method. Because
losses are reported relatively earlier for property and other short tail
coverages, the weighting for those types of coverages shifts from the
Bornhuetter-Ferguson method to the loss development method at an earlier point
than for casualty and other long tail coverages.
In the reserve setting process, Chartwell includes provisions for
inflation and "social inflation" if appropriate, as losses are generally not
determined until some time in the future. Chartwell continually monitors
legislative activity and evaluates the potential effect of any legislative
changes on its reserve liabilities.
Chartwell's reserves are carried at the full amount estimated for
ultimate expected losses and LAE without any discount to reflect the time value
of money in accordance with both Statutory Accounting Practices ("SAP") and
Generally Accepted Accounting Principles ("GAAP").
Chartwell's actuarial department regularly performs loss reserve
analyses for Chartwell Reinsurance and INSCORP. Such loss reserves are also
reviewed by Milliman & Robertson, Inc. ("M&R"), an independent actuarial
consulting firm, which prepared a Statement of Actuarial Opinion as of December
31, 1998 for each of Chartwell Reinsurance and INSCORP (the "M&R Statements").
The M&R Statements were prepared solely for the use of and only to be relied
upon by Chartwell and the various state insurance departments with which
Chartwell files annual statements. The M&R Statements were not prepared for the
use of investors.
Chartwell provides capital to its Dedicated CCV's which support the
underwriting capacity of the Lloyd's syndicates managed by CMA. Loss reserves
for this business are established using methods similar to those used by
Chartwell Reinsurance and INSCORP. CMA, a subsidiary of Chartwell, has engaged
Bacon & Woodrow London Market Services Ltd. ("B&W"), an independent actuarial
consulting firm, to review the loss reserves and prepare an actuarial opinion
for each of its syndicates, including the actuarial opinion required by Lloyd's
solvency regulations. The B&W opinions, which are prepared solely for the use of
Lloyd's regulators and are only to be relied upon by CMA, assist its syndicates
in establishing appropriate reserve estimates for both the reinsurance to close
and the open years of account.
Analysis of Reserve Development. The following table presents the
development of reserves of Chartwell Reinsurance for losses and LAE for calendar
years 1988 through 1998. The first line of the table sets forth the estimated
liability for losses and LAE for claims arising in each of the indicated years
as recorded on the balance sheet of Chartwell Reinsurance as of the end of years
1988-1994, including IBNR. For the years ended December 31, 1995, 1996, 1997 and
1998, the first line includes the consolidated reserves of Chartwell Reinsurance
and INSCORP. For the years ended December 31, 1997 and 1998 the first line also
includes the loss reserves associated with the capital provided by Chartwell to
the Dedicated CCV's. The upper portion of the table shows the cumulative amounts
paid as of the end of each successive year for such claims. The bottom portion
of the table also shows the re-estimated amount of the previously recorded
liability based on experience as of the end of each succeeding year, including
cumulative payments. The estimates are readjusted as more information becomes
known about the frequency and severity of claims for each year. A redundancy
(deficiency) exists when the original liability estimate is greater (less) than
the re-estimated liability at the end of a year. The cumulative redundancy
(deficiency) shown in the table is the aggregate net change in estimate over the
period of years subsequent to the calendar year reflected at the top of the
particular columns.
In evaluating the information in the table, it should be noted that
each amount entered incorporates the effects of all changes in amounts entered
for prior periods. Thus, if the 1998 estimate for a previously incurred loss was
$150,000 and the loss was reserved at $100,000 in 1988, the $50,000 deficiency
(later estimate minus original estimate) would be included in the cumulative
redundancy (deficiency) in each of the years 1988-1998 shown in table. It should
further be noted that the table does not present accident or policy year
development data. In addition, conditions and trends that have affected the
development of liability in the past may not necessarily recur in the future.
Accordingly, it may not be appropriate to extrapolate future redundancies or
deficiencies from the table.
8
<PAGE>
<TABLE>
Analysis of Loss and LAE
Reserve Development
(Dollars in thousands)
<CAPTION>
Year Ended December 31,
- - ----------------------------------------------------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
-------- ------- ------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for Loss and
LAE(1) $156,869 $130,939 $126,746 $126,292 $189,386 $201,013 $232,733 $741,467 $747,858 $788,240 $878,617
Cumulative paid as of:
One year later 39,084 15,946 19,745 9,074 31,354 30,085 46,363 157,172 196,470 154,697
Two years later 53,101 34,928 26,338 24,227 49,686 57,368 73,462 255,876 297,598
Three years later 69,914 40,622 39,933 37,935 68,147 73,926 90,999 334,819
Four years later 75,034 52,514 52,436 51,135 78,135 84,281 101,430
Five years later 86,463 63,479 62,922 56,822 84,402 90,577
Six years later 97,020 72,347 68,070 60,207 88,111
Seven years later 104,840 76,481 70,839 62,689
Eight years later 108,913 78,808 73,147
Nine years later 111,223 80,976
Ten years later 113,341
Reserves re-estimated
as of:
One year later 158,048 129,333 125,919 126,926 192,496 204,094 233,738 754,286 758,748 766,462
Two years later 156,185 128,655 127,627 126,193 192,363 206,965 232,964 764,432 730,954
Three years later 155,224 132,406 128,740 127,102 194,876 205,369 229,253 735,913
Four years later 161,868 132,783 129,707 127,459 193,369 201,458 224,428
Five years later 159,912 133,112 129,989 126,004 188,594 197,919
Six years later 160,195 132,474 129,996 122,525 186,298
Seven years later 162,142 133,808 127,239 119,309
Eight years later 163,268 131,627 124,279
Nine years later 161,525 129,273
Ten years later 159,171
Cumulative redundancy
(deficiency) (2,302) 1,666 2,467 6,983 3,088 3,094 8,305 5,554 16,904 21,778
Cumulative % (1.5%) 1.3% 1.9% 5.5% 1.6% 1.5% 3.6% 0.7% 2.3% 2.8%
- - ---------------
(1)Reserves for loss and LAE are presented net of reinsurance recoverables for
the periods 1988 through 1991. In 1992, Chartwell adopted SFAS No. 113 which,
among other things, requires Chartwell to record its reserves for unpaid losses
and LAE without reduction for amounts that would be recovered from
retrocessionaires. The amount recoverable from retrocessionaires is recorded as
an asset on Chartwell's balance sheet. The net of such asset and the reserves
for loss and LAE is $639.6, $585.6, $575.5, $561.6, $197.3 and $167.4 million at
December 31, 1998, 1997, 1996, 1995, 1994, 1993, respectively.
</TABLE>
9
<PAGE>
Net reserves on accident years since 1988 have developed modest
redundancies or deficiencies. The gross redundancy of $21.8 million at December
31, 1998 becomes a net redundancy of $7.4 million after accounting for
reinsurance recoverables. (See Note 12 of the Notes to Consolidated Financial
Statements contained herein).
Commutation of treaties and large loss payments distort the payment
patterns represented in the table. In 1989, Chartwell Reinsurance commuted an
assumed treaty for $18.0 million affecting calendar years from 1986 to 1989. The
commutation ensured that no further adverse development on that treaty occurred
in subsequent years. In 1992, Chartwell Reinsurance commuted a retrocession
arrangement which resulted in a reduction of net paid losses for the prior
calendar years of $4.4 million. In 1993, Chartwell Reinsurance paid
approximately $12.0 million in gross losses related to Hurricanes Andrew and
Iniki. In 1995, Chartwell Reinsurance paid $10.9 million to settle three large
claims from business written prior to 1986 and to commute a group of assumed
contracts from business written prior to 1995.
At December 31, 1998, the GAAP basis reserves, before reduction for
ceded reinsurance, were $878.6 million compared to SAP basis reserves, before
reduction for ceded reinsurance, of $878.3 million. The difference is due to
adjustments for foreign currency transactions. At December 31, 1998, 1997 and
1996, GAAP basis reserves, net of amounts recoverable from retrocessionaires,
were $639.6 million, $585.6 million and $575.5 million, respectively, compared
to SAP net reserves of $598.9 million, $548.0 million and $537.2 million,
respectively. The significant differences between GAAP and SAP amounts are
mainly due to the implementation of Statement of Financial Accounting Standards
No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts" ("SFAS No. 113") (approximately $39.5 million for each
of 1998, 1997 and 1996). The remaining difference relates principally to foreign
exchange adjustments.
Activity for loss and loss adjustmen expenses as of December 31, 1998,
1997 and 1996 is herein incorporated by reference to Note 12 of the consolidated
financial statements of Chartwell included elsewhere herein.
Management believes that Chartwell's reserves are adequate. However,
the process of estimating reserves is inherently imprecise and involves an
evaluation of many variables, including potentially unpredictable social and
economic conditions. Accordingly, there can be no assurance that Chartwell's
ultimate liability will not vary significantly from amounts reserved. The
inherent uncertainties of estimating such reserves are greater for reinsurers
than for primary insurers, primarily due to the longer-term reporting nature of
the reinsurance business, the diversity of development patterns among different
types of reinsurance, the necessary reliance on ceding companies for information
regarding reported claims and differing reserving practices among ceding
companies. Reserves also include provisions for latent injury or toxic tort
claims that cannot be estimated with traditional reserving techniques. Because
of inconsistent court decisions in federal and state jurisdictions and the wide
variation among insureds with respect to underlying facts and coverage,
uncertainty exists with respect to these claims as to liabilities of ceding
companies and, consequently, reinsurance coverage. Management believes that
Chartwell Reinsurance's exposure to such latent losses is lessened because of
its relatively recent entry into the reinsurance business in 1979, its low
historical levels of premium volume prior to 1985 and its retrocessional
programs. In addition, management believes that INSCORP's exposure to adverse
development related to latent losses is lessened because a significant portion
of the $25 million net reserve strengthening recorded by INSCORP in 1995 was in
respect of such losses. In addition, the amount payable under the Company's
Contingent Interest Notes due 2006 (the "CI Notes") is subject to reduction in
the event of such adverse reserve development.
Reserves for Chartwell's participation in Lloyd's syndicates through
its Dedicated CCV's are included in the 1997 and 1998 year end reserves. Part of
the reserve represents reinsurance to close balances brought forward to the open
years of account (for example, 1995 reinsured into the 1996 open year).
Favorable or unfavorable development of the prior year's reserves can influence
the results of the open years of 1996, 1997 and 1998. Consequently, there can be
no assurance as to the adequacy of reserves and the risk of future developments,
both favorable and unfavorable, exists.
10
<PAGE>
The following table presents a three-year development of Chartwell's
reserves for losses and LAE associated with environmental and other latent
injury claims. All of the development relates to business written prior to 1984.
Year Ended December 31,
(Dollars in thousands)
<TABLE>
<CAPTION>
------------------------------------------------------------------
1998 1997 1996
-------------------- --------------------- ---------------------
Gross Net Gross Net Gross Net
--------- ---------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Liability, beginning of year....... $ 70,923 $ 48,052 $ 65,717 $ 46,958 $ 66,936 $ 46,450
Incurred during the year........... 15,387 13,244 19,851 8,660 9,482 6,538
Less amount paid during the year... 7,336 6,370 14,645 7,566 10,701 6,030
-------- --------- --------- --------- --------- --------
Liability, end of year............. $ 78,974 $ 54,926 $ 70,923 $ 48,052 $ 65,717 $ 46,958
======== ========= ========= ========= ========= ========
Deficiency for year................ $ 15,387 $ 13,244 $ 19,851 $ 8,660 $ 9,482 $ 6,538
======== ========= ========= ========= ========= ========
</TABLE>
At December 31, 1998, Chartwell Reinsurance carried loss and LAE
reserves of $351.2 million ($268.1 million after reduction for reinsurance
recoverable), of which $10.8 million gross ($6.6 million after reduction for
reinsurance recoverable), were loss reserves and allocated LAE attributable to
asbestos claims and environmental pollution claims. For the three years ended
December 31, 1998, the effect of asbestos and environmental pollution claims was
not material to Chartwell Reinsurance's results of operations.
At December 31, 1998, INSCORP carried loss and LAE reserves of $394.3
million ($253.8 million after reduction for reinsurance recoverable), of which
$68.2 million ($48.3 million after reduction for reinsurance recoverable) were
case reserves and allocated LAE attributable to asbestos claims and
environmental pollution claims.
Of the 1998 net deficiency of $13.2 million for asbestos and
environmental reserves, $11.3 million results from development on business
underwritten by INSCORP prior to the Piedmont Merger and, therefore, is subject
to the protection provided by the CI Notes, as described below. However, due to
the favorable development on non-asbestos and non-environmental exposed business
underwritten by INSCORP prior to the Piedmont Merger, there was no net adverse
development on the reserves covered by the CI Notes for the year ended December
31, 1998.
Reserve Indemnification Agreement. In connection with the 1992
Acquisition, Chartwell entered into a reserve indemnification agreement (the
"Reserve Indemnification Agreement") with NWNL and its parent company, ReliaStar
Financial Corporation ("RLR"), pursuant to which NWNL and RLR agreed jointly and
severally to provide to Chartwell limited indemnification and reimbursement for
adverse development of the net loss and LAE reserves and related accounts (the
"Covered Reserves") of Chartwell Reinsurance for accident years ending on or
before December 31, 1991 (the "Covered Years"). Pursuant to the Reserve
Indemnification Agreement as originally drafted, if Chartwell Reinsurance's
Covered Reserves as of December 31, 1996 for the Covered Years were greater than
its Covered Reserves as of December 31, 1991, RLR and NWNL would jointly and
severally indemnify and reimburse Chartwell at that time in an amount equal to
(i) 85% of the first $20 million of such difference in excess of $100,000 plus
(ii) 60% of the next $10 million of such difference, up to a maximum amount of
$23 million, representing 18% of loss reserves as of December 31, 1991. If
Chartwell Reinsurance's Covered Reserves as of December 31, 1996 for the Covered
Years were less than its Covered Reserves as of December 31, 1991, Chartwell
agreed to reimburse NWNL at that time in an amount equal to fifty percent (50%)
of the first $10 million of such difference in excess of $100,000, up to a
maximum amount of $5 million. The Reserve Indemnification Agreement, which by
its terms was scheduled to be settled as of the end of 1996, was settled early
by mutual agreement with RLR. On June 28, 1996, Chartwell received $7.9 million
as a final settlement of the Reserve Indemnification Agreement. The settlement
did not materially affect operating results for the year.
Contingent Interest Notes. Upon consummation of the Piedmont Merger,
Chartwell assumed all of Piedmont's obligations under the CI Notes which were
issued by Piedmont to its stockholders just prior to the Piedmont Merger. The CI
Notes, which mature on June 30, 2006, are designed to provide the Company with
protection against adverse development of INSCORP's reserves for losses and loss
adjustment expenses. In the event there is no adverse development, the Company
will be required to pay the holders of the CI Notes approximately $55 million in
contingent interest. This contingent interest payment is in addition to the $1
million principal amount of the CI Notes and interest on such principal amount
at 8% per annum (collectively, the "Fixed Amount") which the Company in any
event must pay at maturity or earlier redemption of the CI Notes.
11
<PAGE>
In general, assuming the CI Notes are settled at maturity, the
contingent interest will be equal to $55 million (a) less an amount equal to (i)
the amount of any adverse development of the loss and LAE reserves and related
accounts (including certain reinsurance recoverable, commissions and unearned
premiums) of INSCORP recorded as of March 31, 1995, minus (ii) $25 million, (b)
plus the amount of certain tax benefits received or recorded by Chartwell as a
result of the amount determined pursuant to clause (a) above. The amount so
calculated may not be greater than $55 million nor less than a minimum amount
equal to the lesser of (a) $10 million less the Fixed Amount and (b) the tax
benefits referred to above. In the event that the CI Notes are settled prior to
maturity, the foregoing formula will in general apply, except that the $55
million maximum amount of the CI Notes will be reduced to an amount equal to $55
million discounted back from June 30, 2006 at a discount rate of 8% per annum,
compounded annually, and the tax benefits will be calculated in a prescribed
manner.
The carrying value of the CI Notes on Chartwell's consolidated
financial statements at December 31, 1998 was $32.1 million, representing the
sum of the aggregate principal amount of the CI Notes and the present value as
of such date of the maximum amount of contingent interest payable on the CI
Notes at their stated maturity in 2006. During the term of the CI Notes, the
discounted carrying value of the CI Notes will be increased to reflect accretion
of (i) interest on the principal amount and (ii) the discounted contingent
interest. To the extent that adverse development of INSCORP's reserves
(including IBNR reserves) occurs prior to the maturity or redemption of the CI
Notes, the contingent interest payable on the CI Notes (and, therefore, the
then-current carrying value of such CI Notes) will be reduced. Such reductions
in the carrying value of the CI Notes would offset in part, in the period in
which such adverse development occurs, any reduction in Chartwell's GAAP net
income and stockholders' equity resulting from such adverse reserve development
(that would, however, still be reflected in Chartwell's statutory underwriting
results and in the policyholders' surplus of INSCORP and, if INSCORP continues
to be a subsidiary thereof, of Chartwell Reinsurance).
At its option, Chartwell may settle the CI Notes with shares of Common
Stock of Chartwell instead of payment of cash. For purposes of settlement of the
CI Notes, such Common Stock would be valued at 85% of its average closing market
price over a specified period prior to the settlement date. However, Chartwell
may not settle the CI Notes in Common Stock unless (i) such stock is registered
under the Securities Act (or is otherwise freely tradeable other than by certain
affiliates of Chartwell), (ii) such stock is listed on a national securities
exchange or NASDAQ and (iii) all CI Notes are settled in such Common Stock.
Moreover, Chartwell may not settle the CI Notes in Common Stock if the CI Notes
are being settled following acceleration thereof due to an event of default
under the CI Notes.
Investments
Chartwell's investment policies are established and approved by its
Board of Directors. Chartwell's investment policy is to maintain a portfolio
with an average rating of A or better from Moody's Investors Service ("Moody's")
and to retain such securities for sale in response to changes in interest rates
and liquidity needs. However, it is not Chartwell's policy to sell securities
merely to generate profits on short-term differences in price. The performance
of Chartwell's advisors and the fees associated therewith are periodically
reviewed by both management and the Board of Directors of Chartwell. Investments
by Chartwell Reinsurance, INSCORP and Dakota must comply with the insurance laws
of the States of Minnesota, New York and North Dakota, their respective
domiciliary states.
Chartwell's investment portfolio consists primarily of investment-grade
fixed maturity debt securities. As of December 31, 1998, approximately 92.2% of
the fixed income portfolio (exclusive of cash and investments held by CMA
managed syndicates) was rated A or better by Moody's.
12
<PAGE>
The following table summarizes the investments of Chartwell (at
carrying value):
Composition of Investment Portfolio
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- -----------------------
Amount % of Total Amount % of Total Amount % of Total
---------- ---------- --------- ---------- --------- -----------
Fixed Income Securities
<S> <C> <C> <C> <C> <C> <C>
Corporate...................................... $240,442 29.5% $ 225,587 30.8% $ 200,899 29.8%
U.S. Government & Government Agency (1)......... 212,088 26.0 240,226 32.8 249,416 37.0
Obligations of States & Political Subdivisions.. 171,883 21.0 161,544 22.1 134,769 20.0
Foreign Government & Government Agency.......... 28,456 3.5 28,867 3.9 23,807 3.5
Redeemable Preferred Stocks..................... 37,422 4.6 38,379 5.2 33,773 5.0
Other (2)......................................... 36,358 4.5 38,043 5.2 30,896 4.7
Investments Held by CMA Managed Syndicates........ 89,228 10.9 -- -- -- --
--------- ---------- --------- ------- --------- -----------
Total Investments................................ $ 815,877 100.0% $ 732,646 100.0% $ 673,560 100.0%
========= ========== ========= ======== ========= ===========
Cash & Cash Equivalents......................... $ 60,588 $ 31,607 $ 51,134
========= ========= =========
</TABLE>
- - -----------------------------------------
(1) At December 31, 1998, 1997 and 1996, $98.7, $107.1 and $170.2 million of
these securities were backed by the full faith and credit of the U.S. Government
and $113.4, $133.1 and $79.2 million were obligations of issuing agencies. (2)
Other investments include equity securities and partnership interests. In 1996,
Chartwell made a commitment to invest $15 million in a private equity fund, High
Ridge Capital Limited Partnership, which makes investments in the insurance
industry. Chartwell has contributed a total of $9.8 million to this fund as of
December 31, 1998.
The following table reflects investment results for Chartwell for the
periods indicated:
Investment Results
(Dollars in thousands)
Year Ended December 31,
---------------------------------------
1998 1997 1996
---------------------------------------
Average Invested Assets..................$ 793,912 $ 734,149 $ 727,903
Net Investment Income (1)................$ 48,869 $ 43,575 $ 44,089
Net Effective Yield (2).................. 6.2% 5.9% 6.1%
Net Realized Capital Gains (Losses)......$ 29 $ (3) $ 1,157
Effective Yield Including Realized
Capital Gains (Losses)(3).............. 6.2% 5.9% 6.2%
- - -------------------
(1) After investment expenses, excluding net realized investment gains (losses).
(2) Net investment income for the year-end period divided by average invested
assets for the same period.
(3) Net investment income for the year-end period plus net realized capital
gains (losses)for the period divided by average invested assets for the same
period.
13
<PAGE>
The following table indicates the composition of Chartwell's fixed
income portfolio (at carrying value), excluding cash and cash equivalents and
cash and investments held by CMA managed syndicates, by rating:
Composition of Fixed Income Portfolio
By Rating (1)
(Dollars in thousands)
December 31, 1998
-----------------------------
Amount Percent
----------- -----------
U.S. Government and Government Agency
Fixed Income Securities....................... $ 212,088 30.7 %
Aaa.............................................. 164,399 23.8
Aa ............................................. 92,856 13.5
A ............................................. 163,331 23.7
Baa ............................................. 57,617 8.3
=========== ===========
Total........................................ $ 690,291 100.0 %
=========== ===========
(1) Rating as assigned by Moody's. Such ratings are generally assigned upon the
issuance of the securities and subject to revision on the basis of ongoing
evaluations. Ratings in the table are as of the date indicated. Those government
guaranteed securities that are specifically rated are included in the
appropriate rating category.
Moody's rating system utilizes nine symbols to indicate the relative
investment quality of a rated bond. Aaa rated bonds are judged to be of the best
quality and are considered to carry the smallest degree of investment risk. Aa
rated bonds are also judged to be of high quality by all standards. Together
with Aaa bonds, these bonds comprise what are generally known as high grade
bonds. Bonds rated A possess many favorable investment attributes and are
considered to be upper medium grade obligations. Baa rated bonds are considered
as medium grade obligations; they are neither highly protected nor poorly
secured. Bonds rated Ba or lower (those rated B, Caa, Ca and C) are considered
to be too speculative to be of investment quality.
National Association of Insurance Commissioners ("NAIC") investment
ratings are provided annually at December 31 of each year. At December 31, 1998,
88.6% of Chartwell's fixed maturity investments (excluding investments held by
CMA managed syndicates) were rated "Class 1," and 11.4% of Chartwell's fixed
maturity investments (excluding investments held by CMA managed syndicates) were
rated "Class 2," the two highest ratings assigned by the NAIC.
The following table indicates the composition of Chartwell's fixed
income portfolio (at carrying value), excluding cash and cash equivalents and
cash and investments held by CMA managed syndicates, by time to maturity (1)
(dollars in thousands):
December 31, 1998
-------------------------
Amount Percent
---------- ----------
One year or less...................................... $ 33,918 4.9%
Over 1 year through 5 years........................... 194,558 28.2
Over 5 years through 10 years......................... 198,138 28.7
Over 10 years through 20 years........................ 46,381 6.7
Over 20 years......................................... 79,815 11.6
Mortgage backed securities............................ 137,481 19.9
========== ==========
Total............................................. $ 690,291 100.0%
========== ==========
(1) Based on stated maturity dates without prepayment assumptions.
Certain mortgage backed securities are subject to prepayment risk.
Mortgage backed securities represent 15.7% of Chartwell's total cash and
investments at December 31, 1998. During periods of significant interest rate
volatility, the underlying mortgages may prepay more quickly than anticipated.
If the repayment of principal occurs earlier than anticipated during periods of
declining interest rates, investment income may decline due to the reinvestment
of these funds at the lower current market rates. Management does not believe
that the prepayment risk associated with Chartwell's portfolio of mortgage
backed securities is significant.
14
<PAGE>
The following table sets forth certain information concerning
Chartwell's mortgage backed investments:
Distribution of Mortgage Backed Securities Portfolio
By Type (1)
(Dollars in thousands)
December 31, 1998
--------------------------------------
Estimated
Market Amortized
Value Cost Par Value
----------- ----------- ----------
Collateralized Mortgage Obligations....... $22,563 $22,112 $22,754
Pass-throughs (primarily GNMA,
FNMA and FHLMC).................. 114,918 112,733 112,314
----------- ----------- ----------
Total................................ $137,481 $134,845 $135,068
=========== =========== ==========
- - ---------------------
(1) At December 31, 1998, agency backed securities represented 97.0% of
Chartwell's mortgage backed investments. Other mortgage backed securities
represented 3.0%. These other mortgage backed securities are rated either Aaa or
A which is the highest rating category used by the SVO.
Competition
The property and casualty reinsurance and insurance business is highly
competitive. Competition with respect to the types of reinsurance and insurance
in which Chartwell is engaged is based on many factors including perceived
overall financial strength of the insurer, ratings of the insurer by A.M. Best
Company and Standard & Poor's, underwriting expertise, reputation and experience
in the lines written, premiums charged, other terms and conditions of the
insurance or reinsurance offered, services offered, and speed of claims
payments.
Chartwell competes with numerous international and domestic reinsurance
and insurance companies. These competitors, many of which have substantially
greater financial and staff resources than Chartwell, include independent
insurance and reinsurance companies, as well as subsidiaries, affiliates or
insurance or reinsurance departments of established insurance companies and
underwriting syndicates.
Insurance Regulation
General. Chartwell Reinsurance, INSCORP and Dakota are subject to the
insurance laws and regulations of Minnesota, New York and North Dakota,
respectively, their domiciliary states, and to administrative supervision by the
regulatory authorities of such states. In addition, each is subject to similar
laws, regulations and supervision in the various states in which it is licensed
or authorized to transact business, primarily with regard to solvency,
accounting practices, reports on financial condition and operations, investments
and reserves. Under state insurance law, property and casualty reinsurers and
surplus lines insurers are generally not subject to filing or other regulatory
requirements applicable to primary insurers with respect to rates, policy forms
or contract wording. Licensed insurers such as INSCORP are required to comply
with all applicable filing or regulatory requirements. In supervising and
regulating insurance companies, including reinsurers, state agencies, charged
primarily with protecting policyholders and the public rather than investors,
enjoy broad authority and discretion in applying applicable insurance laws and
regulations for the protection of policyholders and the public.
Lloyd's. Both CMA and the Dedicated CCV's, as a Lloyd's managing
general agent and Lloyd's corporate members, respectively, are subject to
regulation and supervision by the Council of Lloyd's. Lloyd's operates under a
self-regulatory regime under the Lloyd's Act 1982 and has the power to set,
interpret and change the rules which govern the operation of the Lloyd's market,
subject to regulation for solvency purposes by the Financial Services Authority
("FSA"). Lloyd's prescribes, in respect of its managing agents and corporate
members, certain minimum standards relating to their management and control,
solvency and various other requirements. In addition, Lloyd's imposes
restrictions against persons becoming controllers and major shareholders of
managing agents and corporate members without the consent of Lloyd's first
having been obtained. The United Kingdom government has established the FSA as a
single regulator to supervise securities, banking and insurance business,
including Lloyd's. When the Financial Services and Market Bill becomes law,
probably in late 2000, the FSA will have wide authorization and intervention
powers in relation to Lloyd's. A consultation process has commenced in relation
to Lloyd's regulatory framework.
15
<PAGE>
Insurance Holding Company Systems Regulations. Chartwell Reinsurance,
INSCORP and Dakota and their affiliates are subject to regulation pursuant to
the insurance holding company systems statutes of Minnesota, New York and North
Dakota. While the insurance holding company systems laws and regulations vary
from state to state, they generally require an insurance holding company and
insurers and reinsurers that are members of such insurance holding company's
system to register with the state regulatory authorities, to file with those
authorities certain reports disclosing information including their capital
structure, ownership, financial condition, certain intercompany transactions
including material transfers of assets and intercompany business agreements, and
to report material changes in such information. Such laws may also require that
intercompany transactions be fair and reasonable and that an insurer's
policyholder surplus following a dividend distribution to affiliated
stockholders be adequate to meet its financial needs.
In general, state insurance holding company systems statutes also
require prior notice to, or regulatory agency approval of, direct or indirect
changes in control of ownership of a domestic insurer or reinsurer. Under
Minnesota, New York and North Dakota law, no person, corporation or other entity
may acquire, directly or indirectly, a controlling interest in the capital stock
of a domestic insurer or reinsurer unless such person, corporation or other
entity has obtained prior approval from the insurer's domestic regulator
("Regulator") for such acquisition of control. Pursuant to the Minnesota, New
York and North Dakota insurance holding company systems statutes, any person,
corporation or other entity acquiring, controlling or holding with the power to
vote, directly or indirectly, ten percent or more of the voting securities of an
insurance company (or reinsurer), is presumed to have "control" of such company.
The party may rebut this presumption by filing with the Regulator a disclaimer
of affiliation. Other jurisdictions where Chartwell Reinsurance, INSCORP or
Dakota are licensed to transact business may have similar requirements for an
acquisition of control of insurers or reinsurers licensed or authorized in such
jurisdictions. Additional requirements in such jurisdictions may include
relicensing or subsequent approval for renewal of existing licenses upon an
acquisition of control.
Restrictions on Dividends. The principal source of funds for servicing
debt of the Company and paying dividends to stockholders of Chartwell is derived
from receipt of dividends from its insurance subsidiaries. While dividend
restrictions vary from state to state, they generally require insurers and
reinsurers to pay dividends only from earned surplus, which is defined as
unassigned funds (surplus) as reported in the statutory financial statement
filed by the insurer or reinsurer with the Regulator for the most recent period.
Subject to such constraints, the insurer or reinsurer may declare and pay
non-extraordinary dividends, subject to certain notice requirements to the
Regulator, and extraordinary dividends to stockholders subject to certain notice
and approval requirements by the Regulator. Lastly, with respect to payments of
all dividends to affiliated shareholders, following the payment of such a
dividend, an insurer's or reinsurer's policyholders' surplus must be reasonable
in relation to its outstanding liabilities and adequate for its financial needs.
See Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
On November 25, 1997, Chartwell Reinsurance paid a $3.0 million
dividend to Chartwell Re Holdings Corporation ("Re Holdings") and on February
24, 1999, Chartwell Reinsurance paid a $5.5 million dividend to Re Holdings. No
dividends were paid in 1996 or 1998.
Investment Limitations. State insurance laws and regulations prescribe
the kind, quality and concentration of investments that are permissible for
insurance and reinsurance companies domiciled in such state. The purpose of
these laws is to protect the interests of policyholders, claimants, creditors
and the general public by promoting the safety, yield and growth of an insurance
company's investment principal, the liquidity necessary to meet the insurance
company's expected business needs, and investment diversification. For example,
under Minnesota, New York and North Dakota law, non-life insurance companies,
such as Chartwell Reinsurance, INSCORP and Dakota are authorized to invest in
specifically prescribed investments. Subject to certain conditions, such
investments include federal, state and municipal government obligations, bank
obligations, obligations and stocks of corporations and business trusts, real
estate and mortgages on real estate, collateral loans, options, foreign and
other investments. Such investment obligations, however, may not be in default
as to payments of principal and interest. Property and casualty insurance and
reinsurance companies are subject to risk-based capital guidelines which could
influence investment decisions. See "Risk-Based Capital." Management of
Chartwell believes that Chartwell Reinsurance, INSCORP and Dakota are in
compliance with all applicable state insurance investment laws for non-life
insurance companies.
16
<PAGE>
Regulatory Examinations. The business and operations of Chartwell
Reinsurance, INSCORP and Dakota are subject to periodic examination by the
insurance departments of the jurisdictions in which each is licensed or
authorized to transact business. The Regulators have broad authority to conduct
examinations at any time. The report made with respect to the most recent
periodic examination of Chartwell Reinsurance is dated as of December 31, 1994
and contained no material adverse findings. The most recent periodic examination
of INSCORP was as of December 31, 1993, and the report related to such
examination has not yet been released. The most recent report of examination of
Dakota is dated as of November 21, 1996 and contained no material adverse
findings.
Risk-Based Capital. In order to enhance the regulation of insurer
solvency, the NAIC adopted risk-based capital ("RBC") requirements for property
and casualty insurance and reinsurance companies commencing with filings made in
1995 covering the 1994 year. These RBC requirements are designed to monitor
capital adequacy and to raise the level of protection that statutory surplus
provides for policyholders. The RBC formula measures four major areas of risk
facing property and casualty insurers: (i) underwriting risk, which is the risk
of errors in pricing and reserves; (ii) asset risk, which is the risk of asset
default for fixed income assets and loss in market value for equity assets;
(iii) credit risk, which is the risk of losses from unrecoverable reinsurance
and the inability of insurers to collect agents' balances and other receivables;
and (iv) off-balance sheet risk, which is primarily the risk created by
excessive growth. Insurers and reinsurers having less statutory surplus than
that required by the RBC formula will be subject to varying degrees of
regulatory action depending on the level of capital inadequacy.
The RBC formula provides a mechanism for the calculation of an
insurance company's Authorized Control Level RBC and its total adjusted capital.
The formula sets forth the points at which a commissioner of insurance is
authorized and expected to take regulatory action. The first level is known as
the Company Action Level RBC, which is set at twice the Authorized Control Level
RBC. The second level is the Regulatory Action Level RBC, set at 1.5 times the
Authorized Control Level RBC. The third is the Authorized Control Level RBC, and
the fourth is the Mandatory Control Level RBC, set at 70 percent of the
Authorized Control Level RBC.
If an insurance company's adjusted capital is higher than or equal to
the Regulatory Action Level RBC but below the Company Action Level RBC, the
insurance company must submit to its commissioner of insurance an RBC plan which
shall contain, among other things, proposals of corrective action. If an
insurance company's adjusted capital is higher than or equal to the Authorized
Control Level RBC but lower than the Regulatory Action Level RBC, the
commissioner of insurance shall perform any examination or analysis as deemed
necessary of the insurer's business and operations and issue any appropriate
corrective orders to address the insurance company's financial problems. If an
insurer's adjusted capital is higher than or equal to the Mandatory Control
Level RBC but lower than the Authorized Control Level RBC, the commissioner may
place the insurer under regulatory control. If the insurance company's adjusted
capital falls below the Mandatory Control Level RBC, the commissioner will be
required to place the insurer under regulatory control. At December 31, 1998,
the adjusted capital of each of Chartwell Reinsurance, INSCORP and Dakota was
higher than the Company Action Level RBC, and as a result, no regulatory action
is required. Should a future deficiency occur, Chartwell will be subject to an
increased level of regulatory attention and, depending on the capital
deficiency, possibly to actual control by the appropriate regulatory
authorities. There can be no assurance that any such deficiency will not occur
in the future.
NAIC-IRIS Ratios. The NAIC's Insurance Regulatory Information System
("IRIS") was developed by a committee of state insurance regulators and is
primarily intended to assist state insurance departments in executing their
statutory mandates to oversee the financial condition of insurance companies
operating in their respective states. IRIS identifies 11 industry ratios and
specifies "usual values" for each ratio. Departure by an insurer from the usual
values on four or more of the ratios generally leads to inquiries from
individual state insurance commissioners as to certain aspects of such insurer's
business. Departure from a usual value does not necessarily indicate an adverse
condition, but rather a deviation from the norm.
For the year ended December 31, 1998, Chartwell Reinsurance fell
outside the range of usual IRIS values with respect to two ratios and INSCORP
fell outside the range of usual IRIS values with respect to one ratio. The
Company does not believe such 1998 ratios are indicative of an adverse
condition. For the year ended December 31, 1998, Dakota did not fall outside the
range of usual IRIS values with respect to any ratio.
17
<PAGE>
Employees
As of December 31, 1998, Chartwell had 326 employees, including the
employees of its subsidiary, CMA. None of these employees is represented by a
labor union, and Chartwell believes that its employee relations are excellent.
Item 2. Properties.
Chartwell leases approximately 53,000 square feet of space for its
principal executive offices in Stamford, Connecticut. Chartwell also leases
approximately 39,000 square feet of space in London, England for the operations
of CMA. INSCORP is located in Jericho, New York, occupying approximately 1,150
square feet of office space. Management believes Chartwell's current office
space is adequate for its needs.
Item 3. Legal Proceedings.
In 1996 and early 1997, the Company entered into certain assumption of
liability endorsements ("ALEs") pursuant to an agreement with American Eagle
Insurance Company ("American Eagle"), which provided for the assumption of
certain policy liabilities by the Company in the event of an insolvency of
American Eagle. As part of such arrangements, the Company obtained from American
Eagle a trust fund to collateralize any potential obligations arising out of the
issuance of the ALEs by the Company. On December 3, 1997, American Eagle was
placed in receivership by the Texas Department of Insurance.
On June 16, 1998, the California Insurance Guarantee Association
("CIGA") filed suit in the Superior Court of California, County of Los Angeles,
against INSCORP seeking, among other things, a declaratory judgment that the
ALEs covered claims arising prior to the dates upon which the ALEs were issued.
On September 1, 1998, the Superior Court of California granted INSCORP's motion
to strike those portions of CIGA's complaint which sought a general declaratory
judgment that all claims under American Eagle policies with ALEs attached are
the obligation of INSCORP rather than CIGA. CIGA's claim is now solely related
to the specific American Eagle policy and accompanying ALE initially giving rise
to the dispute.
On December 2, 1998, CIGA filed a second suit in the Superior Court of
California, County of Los Angeles, against INSCORP seeking a declaratory
judgment with respect to the obligation of INSCORP on a second claim arising
prior to the effective date of the applicable ALE. The Superior Court of
California has found that the two CIGA cases are related cases and they have
been assigned to the same judge.
The Company believes, and has been so advised by counsel handling the
case, that it has a number of valid defenses to the litigation pending against
it. Such cases are, and will continue to be, vigorously defended. However, it is
not possible to predict the outcome of such cases. Litigation is subject to many
uncertainties, and it is possible that such cases could be decided or settled
unfavorably. At this time, the Company does not believe that an unfavorable
decision or settlement of such cases would materially adversely affect the
Company's results of operations or financial position.
In addition to the foregoing lawsuits, the Company is subject to the
litigation of disputes and arbitration in the normal course of their business.
The Company does not believe that any such pending litigation or arbitration to
which it is a party, or of which any of its properties or assets are subject, is
likely to have a materially adverse effect on its current financial position or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during
the fourth quarter of 1998.
18
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
As of August 29, 1996, the Company's common stock, $.01 par value per
share, commenced trading on the New York Stock Exchange ("NYSE") under the
symbol "CWL." Prior to such date, the Company's common stock traded on the
NASDAQ National Market under the symbol "CWLR." The following table sets forth
for the periods indicated the high and low closing sales prices per share of the
Company's common stock as reported by the NYSE for consolidated transactions. On
March 9, 1999, the last reported sales price of the Company's common stock on
the NYSE was $20.375 per share.
Fiscal Year ended December 31, 1997: High Low
---- ---
First Quarter $28.2500 $25.5000
Second Quarter 30.0000 24.7500
Third Quarter 36.0000 29.7500
Fourth Quarter 35.6875 30.5000
Fiscal Year ended December 31, 1998:
First Quarter $34.3750 $28.5625
Second Quarter 34.5000 28.6875
Third Quarter 30.8125 25.5000
Fourth Quarter 29.6250 22.5000
As of December 31, 1998 the Company's common stock was held by
approximately 2,300 stockholders of record, including Cede & Co. as nominee for
The Depository Trust Company.
There were no dividends declared on the Company's common stock in the
years 1992 through 1995. The Company paid quarterly cash dividends of $0.04 per
share in each quarter of 1998 and 1997 and during the last three quarters of
1996. The declaration and payment of future dividends will be at the discretion
of the Company's Board of Directors and is subject to certain legal, regulatory
and other restrictions. For a description of the restrictions on the Company's
ability to pay dividends, reference is made to Item 1, "Business--Insurance
Regulation--Restrictions on Dividends" and Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
19
<PAGE>
Item 6. Selected Financial Data.
The following table sets forth selected consolidated financial data of
Chartwell as of and for the periods indicated. This table does not include any
historical operating financial data relating to CMA prior to December 31, 1996
or Piedmont prior to December 31, 1995 because the results of operations
subsequent to the acquisition of CMA and the Piedmont Merger through the end of
the years indicated were immaterial to Chartwell. The financial data for each of
the five years in the period ended December 31, 1998 is derived from the audited
consolidated financial statements of Chartwell. The following table also
includes selected data from the Statutory Annual Statements of Chartwell
Reinsurance and INSCORP. The selected consolidated financial data should be read
in conjunction with the consolidated financial statements of Chartwell and notes
thereto and Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations," included elsewhere herein.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- ---------- ---------- ---------- ----------
Statement of Operations Data: (Dollars in thousands, except per share amounts)
UNDERWRITING OPERATIONS:
<S> <C> <C> <C> <C> <C>
Gross premiums written............................ $342,951 $ 362,770 $ 263,838 $ 126,968 $ 116,396
Net premiums written.............................. 217,054 268,260 192,251 123,314 113,962
Premiums earned................................... 229,504 245,700 209,503 120,258 102,698
Net investment income............................. 47,545 42,228 42,995 18,917 13,889
Net realized capital gains (losses)............... (339) (3) 1,106 3,109 (3,495)
--------- ---------- ---------- ---------- ----------
Total revenues................................ 276,710 287,925 253,604 142,284 113,092
--------- ---------- ---------- ---------- ----------
Loss and loss adjustment expenses................ 135,265 160,848 150,621 86,949 78,577
Policy acquisition costs......................... 61,564 72,655 52,030 28,790 24,295
Other expenses................................... 23,989 16,473 15,774 9,694 9,071
--------- ---------- ---------- ---------- ----------
Total expenses............................... 220,818 249,976 218,425 125,433 111,943
--------- ---------- ---------- ---------- ----------
Income before taxes - underwriting operations.... 55,892 37,949 35,179 16,851 1,149
--------- ---------- ---------- ---------- ----------
SERVICE OPERATIONS:
Service and other revenue........................ 14,289 28,322 6,167 1,095 1,679
Equity in net earnings of investees.............. 5,327 4,794 3,559 - -
Net investment income............................ 1,092 1,104 9 44 29
--------- ---------- ---------- ---------- ----------
Total revenues............................... 20,708 34,220 9,735 1,139 1,708
Expenses......................................... 12,888 18,084 2,233 1,056 1,104
Amortization of goodwill......................... 2,298 2,297 - - -
--------- ---------- ---------- ---------- ----------
Income before taxes - service operations......... 5,522 13,839 7,502 83 604
--------- ---------- ---------- ---------- ----------
CORPORATE:
Net investment income............................ 232 243 1,085 946 808
Net realized capital gains (losses).............. 368 - 51 90 (299)
General and administrative expenses.............. 2,988 1,903 1,162 1,211 3
Interest and amortization expense................ 13,499 12,254 10,135 7,820 7,379
--------- ---------- ---------- ---------- ----------
Loss before taxes - corporate.................... (15,887) (13,914) (10,161) (7,995) (6,873)
--------- ---------- ---------- ---------- ----------
Consolidated income (loss) before taxes and
extraordinary item........................... 45,527 37,874 32,520 8,939 (5,120)
Income tax expense (benefit)..................... 15,711 10,611 9,657 2,700 (1,685)
--------- ---------- ---------- ---------- ----------
Net income (loss) before extraordinary item...... 29,816 27,263 22,863 6,239 (3,435)
Extraordinary item, net of tax................... - - 1,874 - 465
--------- ---------- ---------- ---------- ----------
Net income (loss) (1)............................ 29,816 27,263 20,989 6,239 (3,900)
Less: Preferred dividends and accretion.......... - - - - 1,078
--------- ---------- ---------- ---------- ----------
Net income (loss) attributable to common shares.. $ 29,816 $ 27,263 $ 20,989 $ 6,239 $ (4,978)
========= ========== ========== ========== ==========
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ------------ ------------- ------------- -------------
Per Share Data (2):
<S> <C> <C> <C> <C> <C>
Basic earnings (loss) per share.................. $ 3.10 $ 2.84 $ 2.31 $ 1.66 $ (0.84)
=========== =========== =========== =========== ===========
Weighted average number of common shares
outstanding.................................. 9,625,900 9,601,314 9,081,867 3,755,312 3,760,685
=========== =========== =========== ========== ===========
Diluted earnings (loss) per share................ $ 3.00 $ 2.74 $ 2.29 $ 1.65 $ (0.84)
=========== =========== =========== =========== ===========
Weighted average number of common and common
equivalent shares outstanding................ 9,948,164 9,965,815 9,177,610 3,791,789 3,760,685
=========== =========== =========== =========== ===========
Cash dividends declared.......................... $ 0.16 $ 0.16 $ 0.12 -- --
=========== =========== =========== =========== ===========
Insurance Operating Data (GAAP):
Loss ratio....................................... 58.9% 65.5% 71.9% 72.3% 76.5%
Underwriting expense ratio....................... 37.3 36.4 32.3 31.9 32.5
=========== =========== =========== =========== ===========
Combined ratio................................... 96.2% 101.9% 104.2% 104.2% 109.0%
=========== =========== =========== =========== ===========
Insurance Operating Data (SAP)(3):
Loss ratio....................................... 53.8% 65.5% 71.9% 72.9% 75.4%
Underwriting expense ratio....................... 41.2 36.2 35.2 32.5 30.3
----------- ----------- ----------- ----------- -----------
Combined ratio................................... 95.0% 101.7% 107.1% 105.4% 105.7%
=========== =========== =========== =========== ===========
Statutory net income............................. $ 47,704 $ 25,583 $ 28,790 $ 9,507 $ 910
Statutory policyholders' surplus (4)............. 302,871 262,606 238,271 188,037 111,845
Net premiums written to surplus ratio............ 0.72:1 1.02:1 .81:1 1.02:1 1.02:1
Balance Sheet Data (GAAP)(5):
Total investments and cash(6).................... $ 876,465 $ 764,253 $ 724,694 $ 705,448 $ 275,136
Total assets..................................... 1,536,809 1,375,484 1,257,864 1,132,838 410,159
Loss and LAE reserves............................ 878,617 788,240 747,858 741,467 232,733
Long term debt................................... 108,477 104,126 107,297 95,000 75,000
Common Stockholders' equity...................... $ 292,863 $ 260,497 $ 225,990 $ 152,482 $ 56,339
</TABLE>
(1) The net loss for the year ended December 31, 1994 includes after-tax
expenses of $3.6 million for losses incurred related to the Northridge,
California earthquake and $1.2 million of recapitalization expenses.
(2) All per share amounts have been calculated in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No.
128 requires dual presentation of basic and diluted earnings per share data
presented.
(3) Statutory data has been derived from the Statutory Annual Statements of
Chartwell Reinsurance, INSCORP, Dakota and ReCor Insurance Company Inc. as filed
with insurance regulatory authorities and prepared in accordance with SAP.
(4) The statutory surplus of Chartwell Reinsurance was increased by $20.0
million in 1996 from the proceeds of a common stock offering, by $67.1 million
in 1995 as a result of the Piedmont Merger and by $30.0 million in 1994 from the
proceeds of the Senior Notes offering. The ratio of net premiums written to
surplus ratio for 1995 includes only the premiums of Chartwell Reinsurance and
excludes the increase in surplus that resulted from the Piedmont Merger.
(5) Total assets and loss and LAE reserves are stated gross of reinsurance
recoverable in accordance with the requirements of SFAS No. 113, "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration Contracts." The
balance sheet data at December 31, 1996 reflects the Acquisition of CMA and at
December 31, 1995 reflects the Piedmont Merger.
(6) Includes Chartwell's share of cash and investments held by CMA managed
syndicates, totaling $100.2 million for 1998.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of the financial condition and results of
operations of Chartwell should be read in conjunction with the consolidated
financial statements and notes thereto of Chartwell included elsewhere herein.
The following discussion does not include any information relating to CMA's
historical results of operations prior to November 19, 1996 or INSCORP's
historical results of operations prior to December 13, 1995. CMA's results of
operations for the period from November 19, 1996 to December 31, 1996 were
immaterial to Chartwell and, therefore, have not been included. INSCORP's
results of operations for the period from December 13, 1995 to December 31, 1995
were immaterial to Chartwell; Chartwell has accounted for the Piedmont Merger as
though it had occurred on December 31, 1995.
21
<PAGE>
Recent Industry Performance
The property and casualty insurance and reinsurance industry has
historically been highly cyclical. Demand for reinsurance is influenced
significantly by prevailing market conditions, including the underwriting
results of primary insurers. The supply of reinsurance is primarily related to
levels of underwriting capacity in the reinsurance industry and the relative
cost and terms of reinsurance coverage. The industry's profitability and the
cyclical trends in the industry can be affected significantly by volatile and
unpredictable developments, including the occurrence of natural disasters, other
catastrophic events, competitive pressures on pricing (premium rates),
fluctuations in interest rates, other variations in the investment environment,
changes in the judicial system regarding tort law, general economic conditions
and trends, such as inflationary pressures, that may tend to affect the size of
profits and losses experienced by ceding primary insurers and other factors such
as changes in tax laws and regulations. Many sectors of the industry are
currently in a cyclical downturn and it cannot be predicted if or when market
conditions will improve or when other sectors may experience a deterioration in
pricing and terms.
Commencing in the later part of the 1980s, primary property and
casualty insurers began to retain more of their business. This reduction in the
amount of business ceded to reinsurers, combined with the growth in reinsurance
capacity, resulted in renewed price competition and less attractive pricing for
reinsurers. This caused a downturn for the reinsurance industry, resulting in
increased underwriting losses which have continued to the present.
The following table presents the statutory combined ratios of Chartwell
and the property and casualty reinsurance industry during the 1994 to 1998
years. The combined ratio is the sum of the loss ratio (incurred losses and loss
adjustment expenses divided by net premiums earned) and the underwriting expense
ratio (underwriting expenses divided by net premiums written). A combined ratio
of over 100% indicates unprofitable underwriting. Although an insurance
company's underwriting may be unprofitable, the company may be profitable after
including investment income.
Statutory Combined Ratios
Year Ended December 31,
-----------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------ ------ ------ ------- --------
Chartwell (1)
<S> <C> <C> <C> <C> <C>
Loss Ratio....................................... 53.8% 65.5% 71.9% 72.9% 75.4%
Underwriting expense ratio....................... 41.2 36.2 35.2 32.5 30.3
------ ------ ------ ------ ------
Combined ratio................................... 95.0% 101.7% 107.1% 105.4% 105.7%
====== ====== ====== ====== ======
Property and Casualty Reinsurance Industry (2)
Loss Ratio....................................... 70.7% 69.6% 72.7% 78.2% 76.8%
Underwriting expense ratio....................... 33.7 32.7 30.8 30.1 29.9
------ ------ ------ ------ ------
Combined ratio................................... 104.4% 102.3% 103.5% 108.3% 106.7%
====== ====== ====== ====== ======
</TABLE>
- - ------------------------------------------
(1) Beginning in 1996, the combined ratio includes both Chartwell Reinsurance
and INSCORP. (2) Source: RAA Underwriting Report for the year ended December 31,
1998.
22
<PAGE>
Consolidated Results of Operations
Year Ended December 31, 1998 Compared With Year Ended December 31, 1997
Revenues: Total revenues for the year ended December 31, 1998 decreased
7.6% to $298.0 million, compared to $322.4 million for the comparable period in
1997. The following table summarizes gross and net premiums written and total
revenues for the periods indicated:
Revenues
Year Ended
December 31,
----------------------------
1998 1997
------------- ------------
(Dollars in thousands)
Gross premiums written............................ $ 342,951 $ 362,770
========== ==========
Net premiums written.............................. $ 217,054 $ 268,260
========== ==========
Premiums earned................................... 229,504 245,700
Net investment income............................. 48,869 43,575
Net realized capital gains (losses)............... 29 (3)
Service and other revenue......................... 14,289 28,322
Equity in net earnings of investees............... 5,327 4,794
---------- ----------
Total...................................... $ 298,018 $ 322,388
========== ==========
Underwriting Operations
Gross Premiums Written; Net Premiums Written; Net Premiums Earned.
Gross premiums written for the year ended December 31, 1998 were $343.0 million,
a decrease of 5.5% compared to the same period in 1997. The decrease in gross
premiums written was principally attributable to the opportunistic underwriting
of certain reinsurance accounts in 1997, which did not renew for 1998, as well
as Chartwell's response to the persistence of intense price competition in the
reinsurance industry. On a consolidated basis, pro forma for the elimination of
the opportunistic accounts underwritten in 1997, gross premiums written grew by
approximately 16.2% in 1998 compared to 1997.
Net premiums written for the year ended December 31, 1998 decreased
19.1% to $217.1 million, compared to $268.3 million for the same period in 1997.
The decrease in net premiums written was principally attributable to the reasons
described above for the decrease in gross premiums written. Net premiums earned
for the year ended December 31, 1998 were $229.5 million, a decrease of 6.6%
compared to the same period in 1997.
Loss and Loss Adjustment Expenses. The Company's principal expense,
loss and LAE related to the settlement of claims was $135.3 million for the year
ended December 31, 1998, a 15.9% decrease compared to $160.8 million for the
comparable period in 1997. The decrease is principally attributable to the
decrease in net premiums written and the benefits of new reinsurance programs,
including an aggregate excess of loss reinsurance treaty. Net losses and LAE
expressed as a percentage of net earned premiums (the loss and LAE ratio)
improved to 58.9% for the year ended December 31, 1998, from 65.5% recorded for
the same period in 1997. The improvement of 6.6 percentage points in the loss
and LAE ratio for the year ended December 31, 1998 was a result of a change in
the mix of business, the benefits of the new reinsurance programs described
above and the enhancement of existing reinsurance programs.
Policy Acquisition Costs. Policy acquisition costs, consisting
primarily of commissions paid to ceding companies and agents and brokerage fees
paid to intermediaries, less commissions received on business ceded to other
reinsurers, were $61.6 million for the year ended December 31, 1998, compared to
$72.7 million for the same period in 1997. Policy acquisition costs expressed as
a percentage of net earned premiums (the acquisition expense ratio) decreased to
26.8% from 29.6% in 1997. The decrease is primarily due to the effect of the
1998 aggregate excess of loss reinsurance treaty.
Other Expenses. Other expenses related to underwriting operations,
which include underwriting and administrative expenses, were $24.0 million for
the year ended December 31, 1998 compared to $16.5 million for the same period
in 1997. Other expenses expressed as a percentage of net earned premiums
increased to 10.5% for the year ended December 31, 1998 compared to 6.7% for the
same period in 1997. The increase reflects the reduced level of premium volume
and an increased share of expenses related to Chartwell's underwriting
participation on syndicates managed by CMA.
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<PAGE>
Net Underwriting Results. The Company produced an underwriting profit
(net premiums earned minus losses, LAE and underwriting expenses) of $8.7
million for the year ended December 31, 1998 as compared to an underwriting loss
of $4.3 million for the same period in 1997. The combined ratio computed in
accordance with GAAP for the year ended December 31, 1998 decreased to 96.2%
from 101.9% for 1997. Although the loss ratio component improved to 58.9% for
the year ended December 31, 1998 from 65.5% recorded for the same period in
1997, the expense ratio increased to 37.3% for the year ended December 31, 1998
from 36.4% recorded for the same period in 1997, for the reasons noted above.
Service Operations
Revenue from service operations, exclusive of net investment income,
decreased to $19.6 million for the year ended December 31, 1998 compared to
$33.1 million for the same period in 1997. The decline principally reflects the
decrease in profit commissions, advisory fee revenues and equity in the earnings
of investee companies. In March 1998, New London Capital plc ("NLC") notified
Chartwell Advisers Limited ("Chartwell Advisers") that it chose not to renew the
Advisory Agreement between NLC and Chartwell Advisers (the "Advisory Agreement")
after its contractual expiration on December 31, 1998. In 1997 and 1998 the
Advisory Agreement produced base fees of $1.7 and $1.3 million, respectively,
and profit commissions of $0.7 and $(0.3) million, respectively, for Chartwell
Advisers. Following expiration of the Advisory Agreement, Chartwell Advisers
will continue to earn profit commissions on the open years of account (1996,
1997 and 1998) to the extent such years are profitable.
Corporate
Interest and Amortization. Interest and amortization expenses were
$13.5 million for the year ended December 31, 1998 compared to $12.3 million for
the same period in 1997. Interest and amortization on the Re Holdings' 10.25%
Senior Notes due 2004 (the "Senior Notes") was $5.2 million for the years ended
December 31, 1998 and 1997. Interest and amortization on the Company's CI Notes
was $2.6 million and $2.5 million for the years ended December 31, 1998 and
1997, respectively. Also included in interest and amortization expense for the
years ended December 31, 1998 and 1997 is $4.3 million and $3.4 million,
respectively, related to a credit facility with First Union National Bank, N. A.
("First Union") established to fund the acquisition of CMA and replace an
existing $20 million credit facility.
Consolidated
Net Investment Income and Net Realized Capital Gains (Losses).
Consolidated net investment income, exclusive of realized and unrealized capital
gains and losses, for 1998 was $48.9 million, an increase of $5.3 million, or
12.1%, over 1997. The improvement principally reflects the positive cash flow
from operations of $33.3 million. The average annual tax equivalent yield on
invested assets (excluding investment income from the Dedicated CCV's) before
investment expenses was 6.5% for 1998, as compared to 6.7% for 1997. The Company
realized net capital gains of $29,000 for 1998 compared to net capital losses of
$3,000 for the same period in 1997.
Income Before Income Taxes. Net income before income taxes increased to
$45.5 million for the year ended December 31, 1998 compared to $37.9 million for
the same period in 1997. The increase resulted primarily from the favorable
results in both loss and loss adjustment expense and from the increase in net
investment income.
Income Tax Expense. The provision for Federal income taxes for the year
ended December 31, 1998 increased to $15.7 million compared with $10.6 million
for the same period in 1997. The effective tax rate was 34.5% and 28.0% for the
years ended December 31, 1998 and 1997, respectively. The principal factor in
the decline below the statutory rate of 35% for both periods results from the
benefit recognized on investments in tax-exempt securities. During the 1998
period, the tax benefit was largely offset by a provision for the repatriation
of earnings of non-U.S. subsidiaries as well as the establishment of a valuation
allowance of $1.4 million related to certain foreign tax credits generated
during 1998.
Net Income. The Company realized a net profit of $29.8 million for the
year ended December 31, 1998 compared with a net profit of $27.3 million for the
comparable 1997 period because of the factors discussed above. Basic net income
per share increased 9.2% to $3.10 per share for the year ended December 31, 1998
from $2.84 per share for the year ended December 31, 1997. Diluted net income
per share increased 9.5% to $3.00 per share from $2.74 per share for the year
ended December 31, 1997.
24
<PAGE>
Year Ended December 31, 1997 Compared With Year Ended December 31, 1996
Revenues: Total revenues for the year ended December 31, 1997 increased
21.9% to $322.4 million, compared to $264.5 million for the comparable period in
1996. The following table summarizes gross and net premiums written and total
revenues for the periods indicated:
Revenues
Year Ended
December 31,
--------------------------------
1997 1996
------------- --------------
(Dollars in thousands)
Gross premiums written.................... $ 362,770 $ 263,838
============= =============
Net premiums written...................... 268,260 192,251
============= =============
Premiums earned........................... 245,700 209,503
Net investment income..................... 43,575 44,089
Net realized capital gains (losses)....... (3) 1,157
Service and other revenue................. 28,322 6,167
Equity in net earnings of investees....... 4,794 3,559
------------- -------------
Total............................ $ 322,388 $ 264,475
============= =============
Underwriting Operations
Gross Premiums Written; Net Premiums Written; Net Premiums Earned.
Gross premiums written for the year ended December 31, 1997 were $362.8 million,
an increase of 37.5% compared to the same period in 1996. The increase in gross
premiums written reflects new programs and products developed during the year
with ceding companies in the Specialty Reinsurance and Controlled Source
Insurance client segments and the addition of gross premiums written through
CMA's two Dedicated CCV's. Gross premiums written by the Global Accounts,
Regional Accounts and Marine & Aviation Accounts client segments either declined
or remained constant as a result of continued competitive pressures.
Net premiums written for the year ended December 31, 1997 increased
39.5% to $268.3 million, compared to $192.3 million for the same period in 1996.
The increase in net premiums written was principally attributable to the reasons
described above for the increase in gross premiums written. Net premiums earned
for the year ended December 31, 1997 were $245.7 million, an increase of 17.3%
compared to the same period in 1996.
Loss and Loss Adjustment Expenses. The Company's principal expense,
loss and LAE related to the settlement of claims, was $160.8 million for the
year ended December 31, 1997, a 6.8% increase compared to $150.6 million for the
comparable period in 1996. The increase is principally attributable to the
increase in net premiums written as noted above. Net losses and LAE expressed as
a percentage of net earned premiums (the loss and LAE ratio) decreased to 65.5%
for the year ended December 31, 1997 from 71.9% recorded for the same period in
1996. The improvement of 6.4 percentage points in the loss and LAE ratio for the
year ended December 31, 1997 was a result of a change in the mix of business as
well as the benefits of new reinsurance programs, including aggregate excess of
loss reinsurance treaties, and the enhancement of existing reinsurance programs.
In addition, the 1997 results were not materially affected by the run-off of
reinsurance programs written by INSCORP 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 agents and brokerage fees
paid to intermediaries, less commissions received on business ceded to other
reinsurers, were $72.7 million for the year ended December 31, 1997, compared to
$52.0 million for the same period in 1996. Policy acquisition costs expressed as
a percentage of net earned premiums (the acquisition expense ratio) increased to
29.6% from 24.8% in 1996. The increase was primarily due to the effect of the
aggregate excess of loss reinsurance treaties entered into in 1997 which reduced
net earned premium for the year without providing any reduction in commission
expenses. Also contributing to the increase was the modestly higher commission
structure, as noted above, for proportional business.
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<PAGE>
Other Expenses. Other expenses related to underwriting operations,
which include underwriting and administrative expenses, were $16.5 million for
the year ended December 31, 1997 compared to $15.8 million for the same period
in 1996. Other expenses expressed as a percentage of net earned premiums
decreased to 6.7% for the year ended December 31, 1997 compared to 7.5% for the
same period in 1996.
Net Underwriting Results. The Company incurred an underwriting loss
(net premiums earned minus losses, LAE and underwriting expenses) of $4.3
million for the year ended December 31, 1997 as compared to an underwriting loss
of $8.9 million for the same period in 1996. The combined ratio computed in
accordance with GAAP for the year ended December 31, 1997 decreased to 101.9%
from 104.2% for 1996. Although the loss ratio component improved to 65.5 % for
the year ended December 31, 1997 from 71.9 % recorded for the same period in
1996, the expense ratio increased to 36.4% for the year ended December 31, 1997
from the 32.3 % recorded for the same period in 1996, for the reasons noted
above.
Service Operations
Revenue from service operations, exclusive of net investment income,
increased to $33.1 million for the year ended December 31, 1997 compared to $9.7
million for the same period in 1996. The improvement reflects increases in
advisory fee revenues, equity in the earnings of investee companies and the
inclusion, for the first time, of profit commissions and fees from CMA
operations. The 1996 amount includes a gain of $2.8 million on a foreign
exchange option entered into to protect the Company from the increasing value of
the Pound Sterling for the period from inception of the acquisition of CMA until
completion. In March 1998, NLC notified Chartwell Advisers that it chose not to
renew the Advisory Agreement after its contractual expiration on December 31,
1998. In 1997, the Advisory Agreement produced base fees of $1.7 million and a
profit commission of $0.7 million for Chartwell Advisers. Following expiration
of the Advisory Agreement, Chartwell Advisers will continue to earn profit
commissions on the open years of account (1996, 1997 and 1998) to the extent
such years are profitable.
Corporate
Interest and Amortization. Interest and amortization expenses were
$12.3 million for the year ended December 31, 1997 compared to $10.1 million for
the same period in 1996. Interest and amortization on the Senior Notes was $5.2
million for the year ended December 31, 1997 and $6.0 million for the comparable
period in 1996. Interest and amortization on the Company's CI Notes was $2.5
million and $2.2 million for the years ended December 31, 1997 and 1996,
respectively. Also included in interest and amortization expense for the year
ended December 31, 1997 is $3.4 million related to a credit facility with First
Union established to fund the acquisition of CMA and replace an existing $20
million credit facility.
Consolidated
Net Investment Income and Net Realized Capital Gains (Losses).
Consolidated net investment income, exclusive of realized and unrealized capital
gains and losses, for 1997 was $43.6 million, a decrease of 1.2% compared to the
same period in 1996. This decrease is primarily due to a repositioning of the
investment portfolio by increasing the municipal sector. This repositioning
occurred late in 1996, and the full effect was realized in 1997. The average
annual tax equivalent yield on invested assets before investment expenses for
1997 and 1996 was 6.7%.
The Company realized net capital losses of $3,000 for 1997 compared to
net capital gains of $1.2 million in 1996. The 1996 net capital gains were
realized principally to reposition certain sectors of the portfolio and to
modify the portfolio to improve credit quality without sacrificing yield.
Income Before Income Taxes and Extraordinary Item. Net income before
income taxes and extraordinary items increased to $37.9 million for the year
ended December 31, 1997 compared to $32.5 million for the same period in 1996.
The increase resulted primarily from the increase in earned premiums, the
favorable results in both loss and loss adjustment expense and other expenses,
and the contributions from CMA to income from service operations.
Income Tax Expense. The provision for Federal income taxes for the year
ended December 31, 1997 increased to $10.6 million compared with $9.7 million
for the same period in 1996. The effective tax rate was 28.0% and 29.7% for the
years ended December 31, 1997 and 1996, respectively. The principal factor in
the decline below the statutory rate of 35.0% for both periods was the benefit
of an increase during late 1996 and early 1997 of investments in tax-advantaged
securities.
26
<PAGE>
Net Income Before Extraordinary Item. Net income before extraordinary
item increased to $27.3 million for the year ended December 31, 1997 as compared
to $22.9 million for the same period in 1996, and basic earnings per share
before extraordinary item increased 12.7% to $2.84 from $2.52 for the year ended
December 31, 1996. Diluted earnings per share before extraordinary item
increased 10.0% to $2.74 from $2.49.
Extraordinary Item, Net of Income Tax. The Company recognized a net
after-tax extraordinary expense of $1.9 million for the year ended December 31,
1996 for the write-off of unamortized debt issuance costs and a redemption
premium associated with the redemption of 35% of the Senior Notes.
Net Income. The Company realized a net profit of $27.3 million for the
year ended December 31, 1997 compared with a net profit of $21.0 million for the
comparable 1996 period because of the factors discussed above. Basic net income
per share increased 22.9% to $2.84 for the year ended December 31, 1997 from
$2.31 per share for the year ended December 31, 1996. Diluted net income per
share increased 19.7% to $2.74 from $2.29 per share for the year ended December
31, 1996.
Liquidity and Capital Resources
As a holding company, Chartwell's assets consist primarily of the stock
of its direct and indirect operating subsidiaries, Chartwell Reinsurance,
INSCORP and CMA. Chartwell's cash flow, therefore, depends largely on dividends
and other statutorily permissible payments from its operating subsidiaries.
Chartwell's sources of funds consist primarily of net premiums, reinsurance
recoveries, investment income and proceeds from sales and redemptions of
investments. Funds are applied primarily to payments of claims, operating
expenses and income taxes and to the purchase of investments, largely fixed
income securities. Cash and short-term investments are maintained for the
payment of claims and expenses.
For the years ended December 31, 1998, 1997 and 1996, Chartwell's
consolidated cash flow provided by operations was $33.3 million, $28.3 million
and $12.2 million, respectively. The increase in 1998 is due to the inclusion of
Chartwell's share of the operating cash flow of syndicates managed by CMA,
offset by a decline in cash provided by the reinsurance segment due to a
reduction in premiums written and the collection of premiums on a monthly
installment basis on certain accounts in the Controlled Source Insurance
segment. The cash flow from operations in 1997 was greater than that in 1996 due
to improved underwriting cash flows comprising premiums received less paid
losses and LAE and underwriting expenses. The 1996 cash flow from operations was
reduced as a result of the run-off of INSCORP's reinsurance reserves.
Sales of available for sale investments were $158.4 million, $200.8
million and $500.7 million for the years ended December 31, 1998, 1997 and 1996,
respectively. Trading activity increased during 1996 primarily to modify the
portfolio by sector and to capitalize on some opportunities to improve on credit
quality without sacrificing yield. There was no unusual trading activity during
1997 and 1998.
At December 31, 1998, the carrying value of total investments,
including cash and cash equivalents, increased 14.7%, to $876.5 million compared
to $764.3 million at December 31, 1997. The primary reasons for the increase
were cash and investments acquired through the purchase of Oak Dedicated Two
Limited and the remainder of Archer Dedicated plc (the holding company for ADIT
One Limited), positive cash flow from operations and an increase in the market
value of the investment portfolio.
Financing activities have also been a source of liquidity for Chartwell
and its subsidiaries. On March 17, 1994, Chartwell completed the offering of
$75.0 million principal amount of the Senior Notes. The net proceeds to the
Company after transaction expenses were $71.9 million. As of December 31, 1998,
$48.8 million in principal amount of the Senior Notes were outstanding. The
Senior Notes bear interest at a rate of 10 1/4% per annum and are due on March
1, 2004.
In 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 Re 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 plus
accrued interest. The remaining funds were retained for general corporate
purposes. This redemption reduced Chartwell's annual expense for interest and
amortization of debt issuance costs under the Senior Notes by $2.8 million per
year.
In connection with the acquisition of CMA, stockholders of Chartwell UK
could elect to receive Loan Notes in the amount of one Pound Sterling for each
Pound Sterling of cash consideration. The aggregate amount of Loan Notes issued
in connection with the consummation of the acquisition of CMA was $9.4 million
(denominated in Pounds Sterling). The Loan Notes, which are guaranteed by First
Union as described below, pay interest semi-annually at the rate per annum
calculated as one percent below the Sterling London Interbank Offered Rate
("LIBOR") and will mature in June, 2002 unless redeemed at an earlier date. As
of December 31, 1998, $3.8 million of the Loan Notes have been redeemed.
27
<PAGE>
Also in connection with the acquisition of CMA, Re Holdings entered
into a new credit facility with First Union, as agent (the "Credit Facility").
The Credit Facility provides for (i) a Tranche A-1 $20.0 million loan, (ii) a
Tranche A-2 $10.0 million loan, (iii) a Tranche B $22.0 million loan
(denominated in Pounds Sterling) (Tranche A-1, Tranche A-2 and Tranche B
collectively, the "First Union Loans"), and (iv) a $25.0 million revolving
credit facility (subsequently increased to $60.0 million) (the "First Union
Revolver").
The First Union Loans have six-year terms and the First Union Revolver
has a five-year term but may be extended with the consent of the lenders.
Tranche A-1 and A-2 require repayment of principal starting in year 3, $6.0
million; year 4, $7.5 million; year 5, $7.5 million and year 6, $9.0 million.
Tranche B requires repayment of principal starting in year 3, $4.2 million; year
4, $5.3 million; year 5, $5.3 million and year 6, $6.4 million. Borrowings under
the First Union Revolver are available at any time prior to maturity, subject to
minimum funding amounts. Both the First Union Loans and the First Union Revolver
will bear interest at a rate selected by Re Holdings equal to either (1) the
Base Rate (as defined below) or (2) U.S. dollar or Sterling LIBOR plus a margin
(the "Margin"), as applicable. The amount of the Margin will depend on the
higher of Re Holdings' senior debt rating by Standard & Poor's or Moody's and
can range from 0.75% to 1.125%. Based on Re Holdings' current senior debt
ratings, the Margin over LIBOR is currently at 1.00%. The U.S. dollar Base Rate
is the higher of (1) First Union's prime commercial lending rate or (2) the
federal funds rate plus 0.5%. The Sterling Base Rate is the rate per annum
announced by Midland Bank plc plus the Margin. Re Holdings will also pay (1) an
unused commitment fee equal to 0.25% on the aggregate unused portion of the
revolver, (2) utilization fees for the issuance of letters of credit and
guarantees of Loan Notes, issued in connection with the acquisition of CMA, at a
rate per annum of 0.375% (if secured) or the Margin (if unsecured) plus a 0.075%
facing fee, currently totaling 1.075% (if unsecured) on the outstanding amount
of potential credit exposure, and (3) certain other fees customary in connection
with syndicated loans of this nature. All payments of interest and fees with
respect to each of the First Union Loans shall be made in the same currency in
which the principal of such loan is required.
At December 31, 1998, $20.0 million, $10.0 million and $15.9 million
were outstanding under the Tranche A-1, Tranche A-2 and Tranche B loans,
respectively. During 1998, the Tranche B loan increased by $1.8 million to fund
the redemption of Loan Notes for the same amount, resulting in a balance of $5.5
million used to guarantee the Loan Notes. A $5.0 million line of credit and a
total of $53.6 million in letters of credit were extended under the First Union
Revolver. All amounts denominated in Pounds Sterling were converted to U.S.
dollars at the rate of (pound)1=$1.66, the exchange rate in effect at December
31, 1998.
On June 30, 1998, the Company entered into an interest rate swap
agreement (the "Swap") for other than trading purposes with First Union to
convert a specific portion of the floating rate loans outstanding under the
Credit Facility to a fixed rate. The Swap requires the Company to pay First
Union interest on a notional amount equivalent to the principal outstanding
((pound)10,280,000 at December 31, 1998) at a fixed annual rate throughout the
term of the related debt obligation of 6.85% and for First Union to pay the
Company interest equal to the three month LIBOR interest rate determined at the
commencement of each calendar quarter. The Swap terminates on December 31, 2002.
The weighted average LIBOR rate payable by First Union in 1998 under the Swap
was 7.62%.
The notional amount set forth in the Swap does not represent an amount
exchanged by the Company and First Union, and thus is not a measure of exposure
of the Company. Since First Union is not required to collateralize its
obligations under the Swap, the Company is exposed to loss if First Union were
to default on its obligations under the Swap. The Company does not believe that
any reasonably likely change in interest rates would cause the Swap to have a
material adverse effect on the financial position, the results of operations or
cash flows of the Company. The Swap was reviewed with and approved by the
Company's Board of Directors.
Upon consummation of the Piedmont Merger, Chartwell became the
successor to Piedmont under the CI Notes. The CI Notes were issued in an
aggregate principal amount of $1 million, which principal amount will accrue
interest at a rate of 8% per annum, compounded annually. Such interest will not
be payable until maturity or earlier redemption of the CI Notes. In addition,
the CI Notes will entitle the holders thereof to receive at maturity, in
proportion to the principal amount of the CI Notes held by them, an aggregate of
from $10 million up to $55 million in contingent interest. Settlement of the CI
Notes may be made by payment of cash or, under certain specified conditions, by
delivery of shares of the Company's common stock. The CI Notes mature on June
30, 2006.
Chartwell and its subsidiaries may incur additional indebtedness in the
future, subject to the limitations contained in the Senior Notes indenture, the
agreements governing the Credit Facility and the CI Notes indenture.
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<PAGE>
The agreements governing the Senior Notes, the CI Notes and the Credit
Facility significantly restrict the ability of Re 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 of Insurance of the State of Minnesota ("the
Commissioner") following the declaration of dividends to stockholders, and upon
at least ten days notice to the Commissioner prior to dividend payments, pay
dividends without the approval of the Commissioner, unless such dividends,
together with other dividends paid within the preceding twelve months, exceed
the greater of (i) 10% of Chartwell Reinsurance's policyholders' surplus as of
the end of the prior calendar year or (ii) Chartwell Reinsurance's statutory net
income, excluding realized capital gains, for the prior calendar year. Any
dividend in excess of the amount determined pursuant to the foregoing formula
would be characterized as an "extraordinary dividend" requiring the prior
approval of the Commissioner. In any case, the maximum amount of dividends
Chartwell Reinsurance may pay is limited to its earned surplus, also known as
unassigned funds. As of December 31, 1998, Chartwell Reinsurance reported
unassigned funds, as defined, in the amount of $103.8 million. Up to $30.3
million is available under the foregoing formula for the payment of dividends by
Chartwell Reinsurance without regulatory approval in 1999. On November 25, 1997,
Chartwell Reinsurance paid a $3.0 million dividend to Re Holdings and on
February 24, 1999, Chartwell Reinsurance paid a $5.5 million dividend to Re
Holdings. Chartwell Reinsurance paid no dividends in 1996 or 1998.
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 Re 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, required
Chartwell to commit to preclude the acquired New York-domiciled insurer,
INSCORP, from paying any dividends for two years after the Piedmont Merger
without prior regulatory approval. The foregoing restriction expired on December
13, 1997. INSCORP paid no dividends in 1997 or 1998.
The maximum dividend permitted by law is not indicative of an insurer's
actual ability to pay dividends, which may be constrained by business and
regulatory considerations, such as the impact of dividends on surplus, which
could affect an insurer's ratings or competitive position, the amount of
premiums that can be written and the ability to pay future dividends.
Furthermore, beyond the limits described in the preceding paragraph, the
Commissioner and Superintendent have discretion to limit the payment of
dividends by insurance companies domiciled in Minnesota and New York,
respectively.
Management believes that current levels of cash flow from operations
and assets held at the holding company level provide the Company with sufficient
liquidity to meet its operating needs in the short term (over the next 12
months). Management expects Chartwell to be able to continue to meet its
operating needs after the next 12 months from internally generated funds. Since
the ability of Chartwell to meet its obligations in the long term (beyond such
12-month period) is dependent upon such factors as market changes, insurance
regulatory changes and economic conditions, no assurance can be given that the
available net cash flow will be sufficient to meet its operating needs. The
Company expects that, in order to repay the principal amount of the Senior Notes
on maturity or otherwise, it will be required to seek additional financing or
engage in asset sales or similar transactions, and would be required to take
similar actions in order to repay the CI Notes on maturity or otherwise, in the
event it chose or was required to settle the CI Notes in cash rather than common
stock. There can be no assurance that sufficient funds for any of the foregoing
purposes would be available to the Company at such time.
Market Risk Disclosures
Chartwell's primary market risk exposures are: foreign currency
exchange risk, in particular the U.S. dollar to the British pound sterling;
interest rate risk on fixed and variable rate U.S. dollar and British pound
sterling denominated short and long-term instruments; and equity price risk.
29
<PAGE>
Foreign Currency Exchange Rate Risk: Foreign currency risk is the risk
that Chartwell will incur economic losses due to adverse changes in foreign
currency exchange rates. This risk arises from Chartwell's international
operations, debt obligations denominated in foreign currencies and foreign
equity investments. At December 31, 1998, Chartwell had a net investment of
approximately $33.2 million in foreign subsidiaries, $26.8 million in debt
obligations denominated in foreign currencies and $3.3 million in foreign equity
investments.
A portion of Chartwell's reinsurance operations is denominated in
international currencies, particularly the British pound sterling and the
Canadian dollar. This exchange rate exposure is somewhat mitigated by investing
the premiums received in currencies in which the liabilities are denominated.
Based upon data as at December 31, 1998, management estimates that a
10% immediate unfavorable change in each of the foreign currency exchange rates
to which Chartwell is exposed would decrease the fair value of its foreign
denominated instruments by approximately $2.9 million. Chartwell's net exposure
to exchange rates consist of $19.7 million to the British pound sterling, $5.3
million to the Canadian dollar and an aggregate of $3.7 million to all other
foreign currencies.
Interest Rate Risk: Chartwell's fixed maturity investments and
indebtedness are subject to interest rate risk. Increases and decreases in
prevailing interest rates generally translate into decreases and increases in
the fair value of fixed maturity investments and the interest payable on
Chartwell's outstanding variable rate debt. On occasion, Chartwell utilizes
stand-alone derivatives to manage and mitigate the volatility of interest rates
on certain of its interest rate sensitive instruments. Additionally, the fair
value of interest rate sensitive instruments may be affected by the
creditworthiness of the issuer, prepayment option, relative values of
alternative investments, liquidity of the investment and other general market
conditions.
The table below summarizes the estimated effects of hypothetical
increases and decreases in interest rates. It is assumed that the changes occur
immediately and uniformly to each category of instrument containing interest
rate risks. The hypothetical changes in market interest rates reflect what could
be deemed best or worst case scenarios. Significant variations in market
interest rates could produce changes in the timing of repayments due to
prepayment options available. The fair value of such instruments could be
affected and therefore actual results might differ from those reflected in the
table, which follows:
<TABLE>
<CAPTION>
Estimated Fair Value Hypothetical
Hypothetical Change After Hypothetical Percentage Increase
Fair Value at in Interest Rate Change in (Decrease) in
December 31, 1998 (bp=basis points) Interest Rate Stockholders' Equity
----------------- ------------------- ----------------- -------------------
Assets: (1) (dollars in thousands)
- - --------------------------
<S> <C> <C> <C> <C>
U.S Treasury Securities $212,467 100 bp decrease $221,863 3.2%
and Obligations of US 100 bp increase 202,243 (3.5)
Government Corporation 200 bp increase 191,429 (7.2)
and Agencies 300 bp increase 172,585 (13.6)
Other fixed maturity $479,071 100 bp decrease $504,577 8.7%
investments 100 bp increase 451,318 (9.5)
200 bp increase 421,962 (19.5)
300 bp increase 370,807 (37.0)
Liabilities:
- - --------------------------
Borrowings Under $112,162 100 bp decrease $112,315 0.3%
Investment Agreements 100 bp increase 112,012 (0.3)
and other debt 200 bp increase 111,862 (0.5)
300 bp increase 111,713 (0.8)
</TABLE>
(1) Excludes investments held by CMA managed syndicates.
Equity Price Risk: The carrying values of investments subject to equity price
risks are based on quoted market prices or management's estimates of fair value
as of the balance sheet date. Market prices are subject to fluctuation and,
consequently, the amount realized in the subsequent sale of an investment may
significantly differ from the reported market value. Fluctuation in the market
price of a security may result from perceived changes in the underlying economic
characteristics of the investee, the relative price of alternative investments
and general market conditions. Furthermore, amounts realized in the sale of a
particular security may be affected by the relative quantity of the security
being sold.
Chartwell's common equity portfolio of $36.4 million primarily consists
of long term strategic minority positions in illiquid equity securities of
managing general agents of Controlled Source Insurance. A 10% immediate decrease
in the market prices of all equity securities held by Chartwell at December 31,
1998, would result in an approximate 1.2% decrease in Chartwell's stockholders'
equity.
30
<PAGE>
The above analyses do not take into account any correlation among
foreign currency exchange rates, or any correlation among various markets (i.e.,
the fixed income markets and foreign exchange and equity markets). Chartwell's
actual experience may differ from the results noted above due to the correlation
assumptions utilized, or if events occur that were not included in the
methodology, such as significant liquidity or market events. The selection of
the amount of increases or decreases in currency exchange rates, interest rates
and equity values in the above analyses should not be construed as a prediction
of future market events, but rather, to illustrate the potential impact of such
an event.
Year 2000 Compliance
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. The Company's
computer equipment, software and devices with imbedded technology that are time
sensitive may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in other normal business activities. The
consequences to the Company of such failures could include business
interruption, lost revenue or illiquidity. The magnitude of the financial impact
of such potential failures on the Company is not known at this time.
The Company believes that it has identified all significant computer
hardware and software applications and devices with imbedded time sensitive
technology that are employed by the Company in its operations that will require
modification to ensure Year 2000 Compliance. The Company is using both internal
and external resources to test all significant computer systems and applications
and to make the modifications necessary for Year 2000 Compliance. The testing
and modification process, which is proceeding on schedule, is 95% complete and
is expected to be fully completed by June 30, 1999. The testing and modification
process has not materially interfered with the Company's Information Technology
operations or the operations of the Company .
In addition, the Company has contacted all of its significant business
partners and service vendors to determine their Year 2000 Compliance readiness,
as well as the extent to which the Company is vulnerable to any third party Year
2000 issues. However, there can be no guarantee that the systems of other
companies on which the Company's systems rely will become Year 2000 compliant in
a timely manner, or that the failure by a third party to become Year 2000
compliant would not have a material adverse effect on the Company.
The Company is revising its existing disaster recovery contingency
plans to address issues specific to the Year 2000 problem. These revisions are
expected to be completed by June 30, 1999. Such plans are intended to enable the
Company to continue to operate by performing certain processes manually,
changing vendors and repairing or replacing existing systems, where feasible.
The total cost to the Company to test and modify all systems to be Year
2000 compliant has not been, and is not expected to be, material to its
financial position or results of operations in any given year. To date, the
Company has budgeted $50,000 to accomplish its Year 2000 testing and remediation
goals and approximately 50% of the amount budgeted has been expended.
Expenditures to fund Year 2000 testing and modification have to date and will
continue to be funded from operating cash flows.
The anticipated completion dates for Year 2000 compliance and the
Company's contingency plans and the cost estimates for the completion of the
Company's Year 2000 compliance program are based on management's best estimates
utilizing current data regarding available resources, coordination with third
parties and other relevant factors and information about systems conversion.
However, there can be no assurance that these estimates will be achieved, and
actual results could differ from the current plan.
In addition, the Company may also have material exposure in its
property and casualty operations to claims related to the Year 2000 issue. It is
not yet possible to determine whether such claims might be made against
insurance or reinsurance contracts in which the Company participates or if such
claims will be held to have merit.
Readers are cautioned that forward-looking statements contained in this
description of the Company's treatment of the Year 2000 issue should be read in
conjunction with the Company's disclosures under the heading "Cautionary Note
Regarding Forward-Looking Statements" below.
31
<PAGE>
Accounting Standards
Accounting for Derivative Instruments and Hedging Activities - SFAS No. 133
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which becomes effective for the
Company January 1, 2000. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The Company will be
required to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
accounting for a change in the fair value of a derivative in earnings or other
comprehensive income will depend on the intended use of the derivative and the
resulting designation. Derivatives can be designated as (a) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or a
firm commitment, (b) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (c) a hedge of the foreign currency exposure of a net
investment in foreign operations, an unrecognized firm commitment, an
available-for-sale security, or a foreign currency denominated forecasted
transaction.
The difference between a derivative's previous carrying amount and its
fair value at the date of implementation of SFAS No. 133 shall be reported as a
transition adjustment. Such adjustment shall be reported in net income or other
comprehensive income as the effect of a change in accounting principle and
presented in a manner similar to the cumulative effect of a change in accounting
principle in accordance with APB Opinion No. 20, "Accounting Changes." The
Company is currently reviewing the impact of the implementation of SFAS No. 133
on its financial statements.
Disclosures About Segments of an Enterprise and Related Information Footnotes -
SFAS No. 131
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information Footnotes," which became effective for
the Company beginning January 1, 1998. SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS No. 131 had no impact on the Company's financial position
or results of operations. Prior year segment information has been reclassified
to conform to the SFAS No. 131 requirements.
Reporting Comprehensive Income - SFAS No. 130
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which became effective for the Company beginning January 1, 1998. SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. This Statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. It does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in that
financial statement. The adoption of SFAS No. 130 had no impact on the Company's
financial position or results of operations. Prior year financial statements
have been reclassified to conform to the SFAS No. 130 requirements.
Regulatory Accounting Practices
In March 1998, the National Association of Insurance Commissioners
adopted the Codification of Statutory Accounting Principles ("Codification").
The Codification, which is intended to standardize regulatory accounting and
reporting for the insurance industry, is proposed to be effective January 1,
2001. However, statutory accounting principles will continue to be established
by individual state laws and permitted practices and it is uncertain when, or
if, the states of Minnesota, New York and North Dakota will require adoption of
Codification for the preparation of statutory financial statements. The Company
has not finalized the quantification of the effects of Codification on its
statutory financial statements.
Effects of Inflation
The effects of inflation on Chartwell are considered in pricing and
estimating reserves for unpaid losses and loss adjustment expenses. The actual
effects of inflation on Chartwell's results cannot be accurately determined
until ultimate losses are settled. However, based on the actual results reported
to date, management believes that premium rates and loss reserves, including
reserves for losses that have been incurred but not reported, adequately
incorporate the effects of inflation. See Item 1, "Business--Reserves."
32
<PAGE>
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains statements that may be
considered to be "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended.
Such statements may include, without limitation, insofar as they may be
considered to be forward-looking statements, certain statements in (i)
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Consolidated Results of Operations - Year Ended December 31, 1998
Compared With Year Ended December 31, 1997" and "--Consolidated Results of
Operations - Year Ended December 31, 1997 Compared With Year Ended December 31,
1996" concerning (A) certain relationships among gross premiums written, net
premiums written and net premiums earned and (B) the development of reserves in
respect of all or a portion of the Company's insurance and reinsurance business;
(ii) "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" concerning the potential effects of
certain events on the Company's indebtedness and portfolios of fixed income and
equity instruments, foreign currency exposure, derivatives positions and certain
other types of instruments; (iii) "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Market Risk Disclosures"
concerning the potential effects of changes in the equity markets, interest
rates and currency exchange rates; (iv) "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000 Compliance" concerning
the costs and effects of Year 2000 compliance; (v) such other statements
contained in this Annual Report that may be considered to be forward-looking
statements; and (vi) variations of the foregoing statements wherever they appear
in this Annual Report.
All forward-looking statements address matters that involve risks and
uncertainties. Accordingly, there are or will be important factors that could
cause actual results to differ materially from those indicated in such
statements. The Company believes that these include the following non-exclusive
factors:
i. the impact of changing market conditions on the Company's business
strategy;
ii. the effects of increased competition on pricing, coverage terms, retention
of customers and ability to attract new customers;
iii. greater severity or frequency of the types of large or catastrophic losses
which the Company's subsidiaries insure or reinsure;
iv. faster or more adverse loss development experience than that on which the
Company's underwriting, reserving and investment practices are based;
v. changes in the Company's retrocessional arrangements;
vi. developments in global financial markets which could adversely affect the
performance of the Company's investment portfolio;
vii. litigation, regulatory or tax developments that could adversely affect the
Company's business;
viii. risks associated with the introduction of new products and services; and
ix. the impact of mergers and acquisitions.
The facts set forth above should be considered in connection with any
forward-looking statement contained in this Annual Report. The important factors
that could affect such forward-looking statements are subject to change, and the
Company does not intend to update any forward-looking statement or the foregoing
list of important factors. By this cautionary note, the Company intends to avail
itself of the safe harbor from liability with respect of forward-looking
statements provided by Section 27A and Section 21E referred to above.
Item 7A. Quantitative and Qualitative disclosures About Market Risk
See "Market Risk Disclosures" contained in Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations.
Item 8. Financial Statements and Supplementary Data.
See the Consolidated Financial Statements and Notes thereto and the
Schedules on pages F-1 through F-26 and S-1 through S-7 included in Part IV,
Item 14.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures.
None.
33
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information called for by Item 10 is incorporated herein by
reference to the Registrant's definitive proxy statement for its 1999 Annual
Meeting of Stockholders (the "Proxy Statement") which will be filed with the
Securities and Exchange Commission pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended, not later than 120 days after
December 31, 1998.
Item 11. Executive Compensation.
The information called for by Item 11 is incorporated herein by
reference to the Proxy Statement referred to above in Item 10.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information called for by Item 12 is incorporated herein by
reference to the Proxy Statement referred to above in Item 10.
Item 13. Certain Relationships and Related Transactions.
The information called for by Item 13 is incorporated herein by
reference to the Proxy Statement referred to above in Item 10.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Financial Statements and Schedules--The financial statements
and schedules listed in the accompanying Index to Financial Statements and
Schedules on page F-1 are filed as part of this Annual Report on Form 10-K.
(b) Exhibits--The exhibits listed in the accompanying Index to
Exhibits are filed as part of this Annual Report on Form 10-K.
(c) Reports on Form 8-K-- None
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Stamford, State of
Connecticut, on March 22, 1999.
CHARTWELL RE CORPORATION
By /s/ Charles E. Meyers
-----------------------------
Charles E. Meyers
Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
Signatures Title Date
- - ---------- ----- ----
/s/ Richard E. Cole
- - ------------------------ Chief Executive Officer and March 22, 1999
Richard E. Cole Chairman of the Board of
Directors (Principal
Executive Officer)
/s/ Charles E. Meyers Senior Vice President and March 22, 1999
- - ------------------------ Chief Financial Officer
Charles E. Meyers (Principal Financial Officer
/s/ Richard B. Primerano Vice President and Controller March 22, 1999
- - ------------------------ (Principal Accounting Officer)
Richard B. Primerano
/s/ Steven J. Bensinger Director March 22, 1999
- - ------------------------
Steven J. Bensinger
/s/ Jacques Q. Bonneau Director March 22, 1999
- - ------------------------
Jacques Q. Bonneau
/s/ David J. Callard Director March 22, 1999
- - ------------------------
David J. Callard
/s/ Robert M. DeMichele Director March 22, 1999
- - ------------------------
Robert M. DeMichele
/s/ Greg S. Feldman Director March 22, 1999
- - ------------------------
Greg S. Feldman
/s/ Stephen L. Green Director March 22, 1999
- - ------------------------
Stephen L. Green
/s/ Frank E. Grzelecki Director March 22, 1999
- - ------------------------
Frank E. Grzelecki
/s/ William R. Miller Director March 22, 1999
- - ------------------------
William R. Miller
35
<PAGE>
Signatures Title Date
- - ---------- ----- ----
/s/ Lunsford Richardson, Jr. Director March 22, 1999
- - ----------------------------
Lunsford Richardson, Jr.
/s/ Stuart Smith Richardson Director March 22, 1999
- - ----------------------------
Stuart Smith Richardson
/s/ John Sagan Director March 22, 1999
- - ----------------------------
John Sagan
36
<PAGE>
CHARTWELL RE CORPORATION
Index to Financial Statements
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets at December 31, 1998 and 1997................ F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996.................................... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996........................ F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.................................... F-6
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1998, 1997 and 1996.................................... F-7
Index to Schedules
Schedule I -- Summary of Investments--Other than
Investments in Related Parties...................................... S-1
Schedule II -- Condensed Financial Information of
Registrant-Balance Sheets........................................... S-2
Schedule II -- Condensed Financial Information of
Registrant-Statements of Operations................................. S-3
Schedule II -- Condensed Financial Information of
Registrant-Statements of Cash Flows................................. S-4
Schedule IV -- Reinsurance............................................. S-5
Schedule V -- Valuation and Qualifying Accounts....................... S-6
Schedule VI -- Supplemental Information Concerning
Property/Casualty Insurance Operations.............................. S-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Chartwell Re Corporation
Stamford, Connecticut
We have audited the accompanying consolidated balance sheets of
Chartwell Re Corporation and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1998.
Our audits also included the financial statement schedules listed in the Index
on page F-1. These financial statements and financial statement schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements and financial statement schedules based
on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Chartwell Re
Corporation and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 2, 1999
F-2
<PAGE>
CHARTWELL RE CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(dollars in thousands, except share amounts)
1998 1997
---------- ---------
ASSETS:
Investments:
Fixed maturities:
Held to maturity (market value 1998,
$31,786; 1997, $37,421)...........................$ 30,539 $ 36,630
Available for sale (amortized cost 1998,
$637,747; 1997, $645,108)......................... 659,752 657,973
Other investments.................................... 36,358 38,043
Investments held by managed syndicates................. 89,228
Cash and cash equivalents.............................. 49,657 31,607
Cash and cash equivalents held by
managed syndicates................................ 10,931
----------- ---------
Total investments and cash.................. 876,465 764,253
Accrued investment income.............................. 10,723 10,677
Premiums in process of collection...................... 143,879 126,537
Reinsurance recoverable: on paid losses.............. 19,746 34,502
on unpaid losses............ 239,059 202,593
Prepaid reinsurance.................................... 40,933 29,929
Goodwill........... ................................. 58,467 61,006
Deferred policy acquisition costs...................... 24,084 26,100
Deferred income taxes.................................. 27,129 33,298
Deposits.............. ............................... 19,975 19,040
Other assets........................................... 76,349 67,549
----------- ----------
Total assets...............................$1,536,809 $ 1,375,484
=========== =========
LIABILITIES:
Loss and loss adjustment expenses......................$ 878,617 $ 788,240
Unearned premiums...................................... 108,495 111,149
Contingent interest notes.............................. 32,130 29,747
Other reinsurance balances............................. 53,323 33,723
Accrued expenses and other liabilities................. 62,888 47,967
Long term debt......................................... 108,477 104,126
----------- ----------
Total liabilities........................... 1,243,930 1,114,952
----------- ----------
COMMITMENTS AND CONTINGENCIES (Note 14)
MINORITY INTEREST...................................... 16 35
----------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00 per share;
authorized 5,000,000 shares; no shares
issued or outstanding.............................
Common stock, par value $0.01 per share;
authorized 20,000,000 shares; shares issued
and outstanding 9,627,891 and 9,609,799
in 1998 and 1997, respectively..................... 96 96
Additional paid-in capital............................. 212,156 211,864
Accumulated other comprehensive income:
Net unrealized appreciation of investments............ 12,534 8,741
Foreign currency translation adjustment............... 362 348
Retained earnings....................................... 67,715 39,448
----------- ----------
Total stockholders' equity....................... 292,863 260,497
----------- -----------
Total liabilities and stockholders' equity......$1,536,809 $ 1,375,484
=========== ===========
See notes to consolidated financial statements.
F-3
<PAGE>
CHARTWELL RE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- ---------------
UNDERWRITING OPERATIONS:
<S> <C> <C> <C>
Premiums earned........................................................ $ 229,504 $ 245,700 $ 209,503
Net investment income.................................................. 47,545 42,228 42,995
Net realized capital gains (losses).................................... (339) (3) 1,106
----------- ----------- ------------
Total revenues.............................................. 276,710 287,925 253,604
----------- ----------- ------------
Loss and loss adjustment expenses...................................... 135,265 160,848 150,621
Policy acquisition costs............................................... 61,564 72,655 52,030
Other expenses......................................................... 23,989 16,473 15,774
----------- ----------- ------------
Total expenses.............................................. 220,818 249,976 218,425
----------- ----------- ------------
Income before taxes - underwriting operations.......................... 55,892 37,949 35,179
----------- ----------- ------------
SERVICE OPERATIONS:
Service and other revenue.............................................. 14,289 28,322 6,167
Equity in net earnings of investees.................................... 5,327 4,794 3,559
Net investment income.................................................. 1,092 1,104 9
----------- ----------- ------------
Total revenues.............................................. 20,708 34,220 9,735
----------- ----------- ------------
Other expenses......................................................... 12,888 18,084 2,233
Amortization of goodwill............................................... 2,298 2,297
----------- ----------- ------------
Total expenses.............................................. 15,186 20,381 2,233
----------- ----------- ------------
Income before taxes - service operations............................... 5,522 13,839 7,502
----------- ------------ ------------
CORPORATE:
Net investment income.................................................. 232 243 1,085
Net realized capital gains............................................. 368 51
General and administrative expenses.................................... 2,988 1,903 1,162
Interest expense....................................................... 12,244 11,263 9,412
Amortization expense................................................... 1,255 991 723
----------- ----------- ------------
Loss before taxes - corporate.......................................... (15,887) (13,914) (10,161)
----------- ----------- ------------
Consolidated income before taxes and extraordinary item................ 45,527 37,874 32,520
Income tax expense..................................................... 15,711 10,611 9,657
----------- ----------- ------------
Net income before extraordinary item................................... 27,263 22,863
29,816
Extraordinary item, net of tax......................................... 1,874
----------- ----------- -----------
Net income $ 29,816 $ 27,263 $ 20,989
=========== =========== ============
Per Share Data:
Basic earnings per share:
Net income before extraordinary item................................... $ 3.10 $ 2.84 $ 2.52
Extraordinary item, net of income tax.................................. 0.21
----------- ----------- ------------
Net income $ 3.10 $ 2.84 $ 2.31
=========== =========== ============
Weighted average number of common shares outstanding................... 9,625,900 9,601,314 9,081,867
=========== =========== ============
Diluted earnings per share:
Net income before extraordinary item................................... $ 3.00 $ 2.74 $ 2.49
Extraordinary item, net of income tax.................................. 0.20
----------- ----------- ------------
Net income $ 3.00 $ 2.74 $ 2.29
============ =========== ============
Weighted average number of common and common equivalent shares
outstanding...................................................... 9,948,164 9,965,815 9,177,610
============ =========== ============
See notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
CHARTWELL RE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(dollars in thousands)
Accumulated Other
Comprehensive Income
---------------------------
Net
Unrealiz.
Apprec./ Foreign
Common Stock Additional (Deprec.) Currency Total
------------------ Paid-in of Translation Retained Stockholders'
Shares Amount Capital Investments Adjustment Earnings Equity
--------- ------- ---------- ----------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995................ 6,858,811 $ 69 $ 153,305 $ 5,219 $ 9 $ (6,120) $ 152,482
Comprehensive income:
Net income for the period............... 20,989 20,989
Unrealized appreciation/(depreciation)
during the period (net of tax of (7,897) (7,897)
($4,252)).................................
Reclassification adjustment for gains
included in net income (net of tax of 1,157 1,157
$623).....................................
Foreign currency translation adjustment. 1,905 1,905
--------- ------- --------- ----------- ----------- ---------- -----------
Total comprehensive income................ (6,740) 1,905 20,989 16,154
Issuance of common stock.................. 2,725,000 27 58,477 58,504
Common dividends - declared and paid...... (1,150) (1,150)
--------- ------- --------- ----------- ----------- ---------- -----------
Balance, December 31, 1996................ 9,583,811 $ 96 $ 211,782 $ (1,521) $ 1,914 $ 13,719 $ 225,990
========= ======= ========= =========== =========== ========== ===========
Balance, December 31, 1996................ 9,583,811 $ 96 $ 211,782 $ (1,521) $ 1,914 $ 13,719 $ 225,990
Comprehensive income:
Net income for the period............... 27,263 27,263
Unrealized appreciation/(depreciation)
during the period (net of
tax of $5,528)........................ 10,265 10,265
Reclassification adjustment for gains
included in net income (net of tax of (3)
$(2))..................................... (3)
Foreign currency translation adjustment. (1,566) (1,566)
---------- ------- --------- ----------- ----------- ---------- ------------
Total comprehensive income................ 10,262 (1,566) 27,263 35,959
Issuance of common stock.................. 25,988 82 82
Common dividends - declared and paid...... (1,534) (1,534)
---------- ------- --------- ----------- ----------- ---------- ------------
Balance, December 31, 1997................ 9,609,799 $ 96 $ 211,864 $ 8,741 $ 348 $ 39,448 $ 260,497
========== ======= ========= =========== =========== ========== ============
Balance, December 31, 1997................ 9,609,799 $ 96 $ 211,864 $ 8,741 $ 348 $ 39,448 $ 260,497
Comprehensive income:
Net income for the period............... 29,816 29,816
Unrealized appreciation/(depreciation)
during the period (net of tax of $2,037) 3,783 3,783
Reclassification adjustment for gains
included in net income (net of tax of 10 10
$5)
Foreign currency translation adjustment. 14 14
---------- ------- --------- ----------- ----------- ---------- ------------
Total comprehensive income................ 3,793 14 29,816 33,623
Issuance of common stock.................. 18,092 292 292
Common dividends - declared and paid...... (1,549) (1,549)
========= ======= ========= =========== =========== ========== ============
Balance, December 31, 1998................ 9,627,891 $ 96 $ 212,156 $ 12,534 $ 362 $ 67,715 $ 292,863
========= ======= ========= =========== =========== ========== ============
See notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
CHARTWELL RE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(dollars in thousands)
<CAPTION>
1998 1997 1996
----------- ---------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net premiums collected........................................... $ 203,434 $ 174,864 $ 126,456
Net losses and loss adjustment expenses.......................... (172,771) (150,682) (136,753)
Overhead expenses................................................ (28,132) (21,203) (17,166)
Service and other revenue........................................ 1,868 (3,954) 5,992
Net income taxes paid............................................ (12,000) (6,982) (5,378)
Interest received on investments................................. 51,716 44,876 43,652
Interest paid.................................................... (9,963) (9,071) (7,415)
Other, net....................................................... (884) 413 2,847
----------- ----------- -----------
Net cash provided by operating activities................... 33,268 28,261 12,235
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of held to maturity securities......................... (596) (8,105)
Purchases of available for sale securities....................... (164,082) (275,794) (640,182)
Maturities of held to maturity securities........................ 7,280 1,850 430
Maturities of available for sale securities...................... 8,639 31,415 20,729
Sales of available for sale securities........................... 158,416 200,792 500,706
Investment in Oak Dedicated Two Limited, net of cash acquired.... (23,048)
Investment in Archer Dedicated plc, net of cash acquired......... (4,600)
Net cash from sale of Syndicate 866.............................. 10,041
Investment in Chartwell UK plc, net of cash acquired............. (47,968)
----------- ----------- -----------
Net cash used in investing activities....................... (7,354) (42,333) (174,390)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock....................... 58,503
Issuance of long term debt....................................... 5,624 693 48,057
Redemption of long term debt..................................... (1,710) (3,476) (48,280)
Dividends paid................................................... (1,549) (1,534) (1,150)
Other, net....................................................... 292 82
----------- ----------- -----------
Net cash provided by (used in) financing activities......... 2,657 (4,235) 57,130
----------- ----------- -----------
Effect of exchange rate on cash............................. 410 (1,220) 346
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents............. 28,981 (19,527) (104,679)
Cash and cash equivalents at beginning of year................... 31,607 51,134 155,813
----------- ----------- -----------
Cash and cash equivalents at end of year......................... $ 60,588 $ 31,607 $ 51,134
=========== =========== ===========
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income....................................................... $ 29,816 $ 27,263 $ 20,989
Adjustments to reconcile net income to net cash provided by
operating activities:
Extraordinary item.......................................... 1,874
Equity in net earnings of investees......................... (3,445) (4,794) (3,559)
Net realized capital (gains) losses......................... (29) 3 (1,158)
Contingent interest......................................... 2,383 2,206 2,045
Deferred policy acquisition costs........................... 2,016 (8,197) 906
Unpaid loss and loss adjustment expenses.................... (1,045) 40,382 6,391
Unearned premiums........................................... (2,654) 29,550 (8,974)
Other reinsurance balances.................................. 8,596 10,438 6,475
Reinsurance recoverable..................................... (21,710) (34,951) (6,710)
Amortization of goodwill.................................... 2,381 2,476 132
Deferred income taxes....................................... 6,169 12,020 (2,499)
Net change in receivables and payables...................... 8,920 (45,627) (1,882)
Other net................................................... 1,870 (2,508) (1,795)
----------- ----------- -----------
Net cash provided by operating activities................... $ 33,268 $ 28,261 $ 12,235
=========== =========== ===========
See notes to consolidated financial statements.
</TABLE>
F-6
<PAGE>
CHARTWELL RE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation--Chartwell Re Corporation (the "Company") is
an insurance holding company which conducts business through its principal
indirectly owned operating subsidiaries, Chartwell Reinsurance Company
("Chartwell Reinsurance"), The Insurance Corporation of New York ("INSCORP")
(formerly, The Reinsurance Corporation of New York) and Chartwell Managing
Agents Limited ("CMA"), a managing agency in the Lloyd's marketplace which is a
wholly-owned subsidiary of Chartwell UK plc ("Chartwell UK").
The consolidated financial statements include the accounts of the
Company and all subsidiaries. All significant inter-company transactions and
accounts have been eliminated in consolidation.
Due to custom and practice in the Lloyd's market, the fiscal year end
for Chartwell UK is September 30. Therefore, the Company consolidates the
results of Chartwell UK and subsidiaries on a one quarter lag. There were no
events affecting Chartwell UK during the period from October 1, 1998 through
December 31, 1998 which would have a material impact on the financial position
of the Company.
Investments in companies in which the Company owns 20 to 50 percent of
the voting common stock or has the ability to exercise significant influence
over the operating and financial policies of the investees are accounted for
under the equity method.
(b) Investments--Fixed maturity securities are categorized as either
assets held to maturity or as available for sale. Securities on deposit with
state regulatory authorities are designated as held to maturity and are recorded
at amortized cost. The Company has both the ability and intent to hold these
securities until their maturity. All investments designated as available for
sale are stated at aggregate market value with unrealized appreciation and
depreciation reported as a separate component of stockholders' equity, net of
applicable deferred income taxes.
Realized gains and losses on sales of securities are determined on the
specific identification method. Investment income is recognized when earned.
(c) Investments and Cash and Cash Equivalents Held By Managed
Syndicates - The Company has included in the consolidated balance sheet its
pro-rata share of the investments and cash and cash equivalents held by CMA
managed syndicates. Such pro-rata share is determined based on the Company's
percentage of capacity owned through its dedicated corporate capital vehicles.
(d) Cash and Cash Equivalents--The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.
(e) Premiums Earned and Unearned Premiums-- Premiums, net of
reinsurance ceded, are recognized as income ratably during the terms of the
related insurance and reinsurance contracts. Unearned and prepaid reinsurance
premium reserves are established to cover the unexpired portion of premiums
written. Such reserves are computed by pro rata methods for direct business and
are established based on reports received from ceding companies for reinsurance.
The Company estimates and accrues for unreported premiums and losses,
as well as premium and commission adjustments on retrospectively rated or other
experience rated reinsurance contracts, based on the difference between total
costs before and after the experience under the contract (the with-and-without
method). These estimates of experience to date are based on statistical data
with subsequent adjustments recorded in the period in which they become known.
(f) Profit Commissions--Profit commissions earned on business emanating
from Lloyd's syndicates are estimated, earned and recorded using studies of the
profitability of the business underwritten. Profit commission estimates are
continually monitored and reviewed. As new information is received, changes are
reflected in current operations with final settlement three years after the
underwriting year to which it relates.
(g) Deferred Policy Acquisition Costs--Acquisition costs, comprised
primarily of commissions, are deferred and amortized over the period in which
the related premiums are earned. Deferred policy acquisition costs are reviewed
to determine that they do not exceed recoverable amounts, after considering
investment income.
(h) Deposits--Deposits are those premiums paid in relation to
reinsurance contracts which do not qualify as a transfer of risk under the
Company's accounting policies. The deposits earn interest at the contractual
amounts set forth in the reinsurance contracts.
(i) Loss and Loss Adjustment Expenses--The liability for loss and loss
adjustment expenses ("LAE") is based on reports and individual case estimates
and additional estimates provided by the Company's claims department. This
liability also includes an amount for loss and LAE incurred but not reported
based on past experience of the Company and the reinsurance and insurance
industries. These estimates are regularly reviewed and, as new information
becomes known, the liability is adjusted as necessary. Such adjustments, if any,
are reflected in results of operations in the period in which they become known.
F-7
<PAGE>
(j) Income Taxes--Income taxes are accounted for using the asset and
liability method pursuant to Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." Deferred taxes are recognized
for the tax consequences of "temporary differences" by applying enacted
statutory tax rates applicable to future years to differences arising between
the financial statement carrying amounts and the tax bases of existing assets
and liabilities. SFAS No. 109 requires the recognition of future tax benefits to
the extent that realization of such benefits is "more likely than not."
Provision for U.S. income taxes on undistributed earnings of foreign
subsidiaries is made only on those amounts in excess of the funds considered to
be permanently reinvested. Repatriation of undistributed earnings of non-U.S.
subsidiaries is done only when it is tax efficient to do so.
(k) Goodwill--Goodwill represents the unamortized excess of purchase
price over the fair value of net assets of acquired entities. Goodwill is
amortized generally on a straight-line basis over periods not to exceed forty
years. On a periodic basis, the Company estimates the future undiscounted cash
flows of the business to which it relates in order to ensure that the carrying
value of goodwill has not been impaired. If impairment exists, the carrying
amount of the goodwill is reduced by the estimated shortfall of cash flows.
Amortization charged to operations for each of the years ended December 31,
1998, 1997 and 1996 was $2,381,000, $2,476,000 and $132,000, respectively.
Accumulated amortization of goodwill at December 31, 1998 and 1997 was
$6,593,000 and $4,679,000 respectively. Approximately $1,575,000 and $2,042,000,
respectively, of accumulated amortization at December 31, 1998 and 1997 reflects
the effect of foreign currency fluctuations on goodwill related to Chartwell UK.
(l) Insurance Brokerage Assets and Liabilities - The following
fiduciary assets and liabilities maintained by the Company's insurance agency
subsidiaries on behalf of the insureds are presented net in the consolidated
financial statements at December 31, 1998 and 1997 (in thousands):
1998 1997
----------- -----------
Cash........................................$ 6,132 $ 6,397
Accounts receivable.........................$ 20,566 $ 19,559
Accounts payable............................$ (26,698) $ (25,956)
(m) Comprehensive Income--In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income,"
which became effective for the Company beginning January 1, 1998. SFAS No. 130
established standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. Comprehensive income consists of net
income, foreign currency translation adjustment and net unrealized appreciation
(depreciation) of investments and is presented in the Consolidated Statement of
Stockholders' Equity. The adoption of SFAS No. 130 had no impact on the
Company's financial position or results of operations. Prior year financial
statements have been reclassified to conform to the SFAS No. 130 requirements.
(n) Per Share Data--Basic and diluted earnings per share have been
calculated in accordance with SFAS No. 128, "Earnings Per Share." Basic earnings
per share are calculated based upon the weighted average number of common shares
outstanding. Diluted earnings per share are calculated based upon the weighted
average number of shares outstanding increased to include the number of
additional common shares that would have been outstanding if all dilutive
potential common shares had been issued. The 1996 basic and diluted earnings per
share do not include the results of Chartwell UK because their results of
operations subsequent to the acquisition of Chartwell UK to the end of the year
were immaterial to Chartwell. The following is a reconciliation of weighted
average common shares outstanding to weighted average common and common
equivalent shares outstanding for the years ended December 31, 1998, 1997 and
1996:
1998 1997 1996
---------- --------- ----------
Weighted average common shares outstanding.... 9,625,900 9,601,314 9,081,867
Dilutive effect of:
Common Stock Options.................... 231,157 258,458 64,554
Common Stock Warrants................... 91,107 106,043 31,189
----------- --------- ---------
Weighted average common and common
equivalent shares outstanding........... 9,948,164 9,965,815 9,177,610
=========== ========= ==========
F-8
<PAGE>
(o) Minority Interest--Minority interest represents the minority
stockholders' proportionate share of the equity of certain subsidiaries of
Chartwell UK.
(p) Foreign Currency Translation-- Adjustments resulting from the
translation of the financial statements of non-U.S. subsidiaries to U.S. dollars
are reported as a separate component of stockholders' equity. Assets and
liabilities denominated in foreign currency are translated at the exchange rates
in effect at the balance sheet date. Results of operations are translated at
average exchange rates during each period.
(q) Disclosure about Fair Value of Financial Instruments - SFAS No.
107, "Disclosures About Fair Value of Financial Instruments," requires
disclosures of the estimated fair market value of certain financial instruments.
In cases where quoted market prices are not readily available, fair values are
based on estimates that use present value or other valuation techniques.
(r) Management Estimates--The consolidated financial statements have
been prepared in accordance with generally accepted accounting principles. In
preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated statements of the financial condition and the reported amounts
of revenue and expenses during the reporting period. Actual results could differ
from those estimates. The Company's most significant estimates concern the
liability for loss and LAE, described above.
(s) New Accounting Standards--In June 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
becomes effective for the Company January 1, 2000. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
The Company will be required to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for a change in the fair value of a derivative in
earnings or other comprehensive income will depend on the intended use of the
derivative and the resulting designation. Derivatives can be designated as (a) a
hedge of the exposure to changes in the fair value of a recognized asset or
liability or a firm commitment, (b) a hedge of the exposure to variable cash
flows of a forecasted transaction, or (c) a hedge of the foreign currency
exposure of a net investment in foreign operations, an unrecognized firm
commitment, an available-for-sale security, or a foreign currency denominated
forecasted transaction.
The difference between a derivative's previous carrying amount and its
fair value at the date of implementation of SFAS No. 133 shall be reported as a
transition adjustment. Such adjustment shall be reported in net income or other
comprehensive income as the effect of a change in accounting principle and be
presented in a manner similar to the cumulative effect of a change in accounting
principle in accordance with APB Opinion No. 20, "Accounting Changes."
The Company is currently reviewing the impact of the implementation of
SFAS No. 133 on its financial statements.
(t) Reclassification--Certain account balances from prior years'
presentations have been reclassified to conform with the current year
presentation.
2. ACQUISITIONS AND DISPOSITIONS
Chartwell UK Acquisition
On November 19, 1996, Chartwell Holdings Limited ("Holdings Limited"),
a newly-formed, indirect wholly-owned subsidiary of the Company acquired 100% of
the outstanding stock (the "Acquisition") of Chartwell UK (formerly Archer Group
Holdings plc) in exchange for cash and loan notes ("Loan Notes"). The Loan
Notes, guaranteed by First Union National Bank N.A., pay interest semi-annually
at one percent below the Sterling London Interbank Offered Rate ("Sterling
LIBOR") and, unless previously redeemed or purchased, mature in June 2002. The
Loan Notes are transferable, subject to certain restrictions, but are not listed
on any exchange. Prior to the Acquisition, Chartwell UK was publicly traded on
the London Stock Exchange.
The Acquisition has been accounted for under the purchase method of
accounting. Accordingly, the purchase price was allocated to the net assets
acquired based on the preliminary determination of the respective fair values at
the date of acquisition, which were estimated based upon information available
at December 31, 1996. During 1997, the Company decreased the fair value of
tangible net assets acquired by approximately $6,642,000, as more information
became available. Goodwill of approximately $58,936,000, representing the final
determination of the fair value of net assets acquired over the purchase price,
is being amortized on a straight-line basis over twenty-five years.
F-9
<PAGE>
The purchase price presented at the U.S. Dollar equivalent at the date
of acquisition, was determined to be $60,289,000 and was allocated to the
respective net assets and liabilities received as follows (in thousands):
Historical book value of Chartwell UK......................... $ 6,044
------------
Acquisition adjustments:
Deferred taxes.......................................... (1,666)
Accrued expenses........................................ (8,072)
Other assets............................................ 5,047
------------
(4,691)
Fair value adjustment - Goodwill.............................. 58,936
============
Total purchase price.......................................... $ 60,289
============
Results of Chartwell UK's operations from the date of acquisition to
December 31, 1996 were not material to the consolidated financial statements of
the Company and, accordingly, have not been included in such financial
statements.
Other Transactions
On September 30, 1998, Chartwell Reinsurance acquired 100% of the
outstanding stock of Oak Dedicated Two Limited (formerly LIMIT (No. 8) Limited)
in exchange for cash of (pound)3.3 million ($5.4 million). Oak Dedicated Two
Limited is a corporate member of Lloyd's which underwrites a total capacity of
(pound)41.7 million ($69.2 million) for the 1998 year of account on syndicates
managed by CMA.
On October 28, 1998, Holdings Limited commenced the acquisition of the
remaining 70.8% of the Ordinary Shares and the remaining 69.3% of the Preference
Shares of Archer Dedicated plc ("Archer") in exchange for cash of (pound)5.7
million ($9.5 million). Archer is a holding company for ADIT One Limited, a
Lloyd's dedicated corporate capital vehicle formed in 1994 to provide a means
for investors to participate exclusively in underwriting on syndicates managed
by CMA. ADIT One Limited underwrote a total capacity of (pound)45.4 million
($75.4 million) for the 1998 year of account on syndicates managed by CMA.
On September 10, 1998, Chartwell UK sold the business of Shead Motor
Policies at Lloyd's ("Syndicate 866") and Archer Personal Lines in exchange for
cash of (pound)6.1 million ($10.0 million).
Pro Forma Information
The following pro forma unaudited consolidated income statement
information for the Company for the year ended December 31, 1996 is presented as
though the acquisition of Chartwell UK, the issuance of 2,725,000 common shares
through a public offering (See Note 15) and the redemption by Chartwell Re
Holdings Corporation ("Re Holdings") of 35% of its outstanding 10.25% Senior
Notes due 2004 ("Senior Notes") (See Note 13) had occurred on January 1, 1996
(in thousands, except per share amount):
1996
--------------
Total revenues................................................ $ 292,627
Net income.................................................... 25,484
Basic earnings per share...................................... $ 2.66
Diluted earnings per share.................................... 2.63
This pro forma financial information has been prepared for
informational purposes only and includes certain adjustments such as
amortization expense as a result of goodwill and certain other adjustments,
together with related income tax effects. The pro forma financial information is
not necessarily indicative of the results of operations as they would have been
had the transactions been consummated on the assumed dates.
F-10
<PAGE>
3. BUSINESS SEGMENTS
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information Footnotes," which became effective for the
Company beginning January 1, 1998. SFAS No. 131 establishes standards for the
way public business enterprises report information about operating segments,
products and services, geographic areas and major customers in annual financial
statements and related footnote disclosures. The adoption of SFAS No. 131 had no
impact on the Company's financial position or results of operations. Prior year
segment information has been reclassified to conform to the SFAS No. 131
requirements.
The Company's operations have been classified into four segments. The
Reinsurance, Controlled Source Insurance and CMA Dedicated Facilities segments
include the pre-tax results of the insurance and reinsurance entities over which
management of the Company is responsible for making all underwriting decisions,
including Chartwell Reinsurance, INSCORP, Oak Dedicated Limited, Oak Dedicated
Two Limited and ADIT One Ltd. The insurance and reinsurance operations of these
entities have been separated among the three segments based upon the nature of
the clientele and their business or products.
The Reinsurance products include treaty reinsurance written through
reinsurance brokers for casualty and, to a lesser extent, property risks as well
as for marine and aviation risks. The Controlled Source Insurance products
include property and casualty insurance written through specialty program
administrators. The CMA Dedicated Facilities products include marine, non-marine
property, non-marine liability, aviation, motor and life business underwritten
by Lloyd's syndicates.
The Service Operations segment includes the pre-tax results from
services or capital provided to or investments in insurance entities over which
management of the Company does not influence the underwriting decisions and the
pre-tax results of Chartwell Advisers Limited and CMA, net of related goodwill
amortization. Corporate items relate primarily to capital costs associated with
the Company's debt as well as unallocated employee expenses incurred in
connection with the investigation of possible acquisition targets.
The accounting policies of the operating segments are the same as those
described in Note 1 of Notes to Consolidated Financial Statements. The measure
of profitability of the insurance segments is composite underwriting result,
which represents gross profit margin on insurance products before insurance
administrative expenses and consists of premiums, less loss and LAE, acquisition
costs and commissions. The measure of profitability of the service operations
segment is net income (loss) before taxes, excluding non-recurring investment
and foreign exchange gains and losses.
Assets for each segment are reported based on a specific identification
basis. The insurance segments' assets primarily consist of cash and investments,
premiums in process of collection, reinsurance recoverable and deferred
acquisition costs. The service operations segment's assets primarily consist of
cash and investments, goodwill and service receivables.
F-11
<PAGE>
<TABLE>
Summarized financial information concerning the Company's operating
segments is shown in the following table (in thousands):
<CAPTION>
Controlled CMA
Source Dedicated Service
Reinsurance Insurance Facilities Operations Corporate Total
-------------- -------------- ------------ ------------ ------------ ---------
1998
<S> <C> <C> <C> <C> <C> <C>
Segment profit or loss:
Total revenues $ 156,234 $ 48,681 $ 71,795 $ 20,708 $ 600 $ 298,018
Net investment income 34,541 6,125 6,879 1,092 232 48,869
Composite underwriting result 20,859 5,988 5,828 32,675
Income (loss) before taxes 44,582 6,016 5,294 5,522 (15,887) 45,527
Segment assets:
Deferred acquisition costs 17,592 6,492 24,084
Goodwill 1,532 5,032 8,123 43,780 58,467
Total assets 671,991 591,341 195,169 45,887 32,421 1,536,809
1997
Segment profit or loss:
Total revenues $ 227,814 $ 39,787 $ 20,324 $ 34,220 $ 243 $ 322,388
Net investment income 36,053 5,851 324 1,104 243 43,575
Composite underwriting result 9,467 2,013 717 12,197
Income (loss) before taxes 35,097 3,047 (195) 13,839 (13,914) 37,874
Segment assets:
Deferred acquisition costs 18,201 7,899 26,100
Goodwill 1,568 5,179 54,259 61,006
Total assets 676,263 575,534 14,950 59,511 49,226 1,375,484
1996
Segment profit or loss:
Total revenues $ 233,264 $ 20,340 $ 9,735 $ 1,136 $ 264,475
Net investment income 37,093 5,902 9 1,085 44,089
Composite underwriting result 5,323 1,529 6,852
Income (loss) before taxes 34,160 1,019 7,502 (10,161) 32,520
Segment assets:
Deferred acquisition costs 11,928 5,975 17,903
Goodwill 1,625 5,304 52,609 59,538
Total assets 696,042 444,094 87,800 29,928 1,257,864
</TABLE>
Because of the nature of the insurance and reinsurance industries, the
Company has no individual or group which would be considered a major customer.
The Company's principle areas of operation include the United States, the United
Kingdom and, to a limited extent, Canada and continental Europe. Geographic
information is presented below (in thousands):
<TABLE>
<CAPTION>
United
United States Kingdom Other Foreign Consolidated
-------------- -------------- -------------- --------------
1998
<S> <C> <C> <C> <C>
Total revenue........................................ $ 210,334 $ 85,390 $ 2,294 $ 298,018
Income before taxes.................................. 42,900 380 2,247 45,527
Net income (loss).................................... 29,070 (616) 1,362 29,816
Identifiable net assets.............................. 1,297,558 211,175 28,076 1,536,809
1997
Total revenue........................................ $ 270,800 $ 48,130 $ 3,458 $ 322,388
Income before taxes.................................. 28,853 5,057 3,964 37,874
Net income........................................... 22,263 2,310 2,690 27,263
Identifiable net assets.............................. 1,250,477 97,281 27,726 1,375,484
1996
Total revenue........................................ $ 259,427 $ 2,124 $ 2,924 $ 264,475
Income before taxes.................................. 27,956 992 3,572 32,520
Net income........................................... 17,711 699 2,579 20,989
Identifiable net assets.............................. 1,169,387 60,755 27,722 1,257,864
</TABLE>
F-12
<PAGE>
4. INVESTMENTS
The amortized cost and estimated market values of investments in
securities with fixed maturities were as follows (in thousands):
<TABLE>
<CAPTION>
Gross Unrealized Estimated
Amortized --------------------- Market Carrying
Cost Gains Losses Value Amount
------------ ---------- --------- ----------- ----------
December 31, 1998
Held to maturity:
U.S. Treasury securities and obligations of U.S.
<S> <C> <C> <C> <C> <C>
government and government agencies............. $ 19,248 $ 379 $ $ 19,627 $ 19,248
Obligations of states and political subdivisions... 1,862 16 1,878 1,862
Debt securities issued by foreign governments...... 8,376 807 9,183 8,376
Corporate securities............................... 1,053 45 1,098 1,053
--------- ----------- -------- ---------- ----------
Subtotal............................................. 30,539 1,247 31,786 30,539
--------- ----------- -------- ---------- ----------
Available for sale:
U.S. Treasury securities and obligations of U.S.
government and government agencies............. 56,841 2,618 6 59,453 59,453
Obligations of states and political subdivisions... 163,369 6,652 170,021 170,021
Debt securities issued by foreign governments...... 19,144 940 4 20,080 20,080
Corporate securities............................... 227,775 8,224 704 235,295 235,295
Redeemable preferred stock......................... 35,773 1,732 83 37,422 37,422
Mortgage backed securities......................... 134,845 2,728 92 137,481 137,481
--------- ----------- -------- ---------- ----------
Subtotal............................................. 637,747 22,894 889 659,752 659,752
--------- ----------- -------- ---------- ----------
Total ............................................... $ 668,286 $ 24,141 $ 889 $ 691,538 $ 690,291
========= =========== ======== ========== ==========
December 31, 1997
Held to maturity:
U.S. Treasury securities and obligations of U.S.
government and government agencies............. $ 20,594 $ 95 $ 107 $ 20,582 $ 20,594
Obligations of states and political subdivisions... 1,868 11 1,879 1,868
Debt securities issued by foreign governments...... 13,013 773 26 13,760 13,013
Corporate securities............................... 1,155 45 1,200 1,155
--------- ----------- -------- ---------- ----------
Subtotal............................................. 36,630 924 133 37,421 36,630
--------- ----------- -------- ---------- ----------
Available for sale:
U.S. Treasury securities and obligations of U.S.
government and government agencies............. 58,922 604 77 59,449 59,449
Obligations of states and political subdivisions... 155,109 4,578 11 159,676 159,676
Debt securities issued by foreign governments...... 15,342 513 1 15,854 15,854
Corporate securities 212,143 4,415 461 216,097 216,097
Redeemable preferred stock......................... 36,780 1,602 3 38,379 38,379
Mortgage backed securities......................... 166,812 2,064 358 168,518 168,518
--------- ----------- --------- ----------- -----------
Subtotal............................................. 645,108 13,776 911 657,973 657,973
--------- ----------- --------- ----------- -----------
Total ............................................... $ 681,738 $ 14,700 $ 1,044 $ 695,394 $ 694,603
========= =========== ========= =========== ==========
</TABLE>
F-13
<PAGE>
The amortized cost and estimated market value of securities with fixed
maturities at December 31, 1998 and 1997, by contractual maturity, are shown
below (in thousands). Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
----------------------- -----------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---------- --------- ----------- -----------
December 31, 1998
<S> <C> <C> <C> <C>
Due in one year or less....................................... $ 11,287 $ 11,334 $ 22,516 $ 22,631
Due after one year through five years......................... 13,538 14,350 176,799 181,020
Due after five years through ten years........................ 1,172 1,436 189,474 196,966
Due after ten years........................................... 4,542 4,666 114,113 121,654
Mortgage backed securities.................................... 134,845 137,481
---------- --------- ----------- ----------
$ 30,539 $ 31,786 $ 637,747 $ 659,752
========== ========= =========== ==========
December 31, 1997
Due in one year or less....................................... $ 8,763 $ 8,856 $ 13,106 $ 13,187
Due after one year through five years......................... 17,332 17,566 170,525 172,485
Due after five years through ten years........................ 6,007 6,514 175,901 180,650
Due after ten years........................................... 4,528 4,485 118,764 123,133
Mortgage backed securities.................................... 166,812 168,518
---------- --------- ----------- ----------
$ 36,630 $ 37,421 $ 645,108 $ 657,973
========== ========= =========== ==========
</TABLE>
Proceeds from sales of available for sale securities (excluding fixed
income security paydowns and calls) during 1998, 1997, and 1996 were
$90,588,000, $77,339,000 and $281,712,000, respectively. Gross gains of
$788,000, $523,000 and $3,421,000 and gross losses of $759,000, $526,000, and
$2,264,000 were realized on those sales during the years ended December 31,
1998, 1997 and 1996, respectively.
Sources of net investment income for the years ended December 31, 1998,
1997 and 1996 were as follows (in thousands):
1998 1997 1996
------ ------ -----
Investment income:
Fixed maturities......................... $ 40,684 $ 39,752 $ 43,344
Equity securities........................ 2,618 2,841 1,150
Other.................................... 6,546 1,985 587
---------- ---------- --------
Total investment income.................... 49,848 44,578 45,081
Investment expenses........................ (979) (1,003) (992)
---------- ---------- --------
Net investment income...................... $ 48,869 $ 43,575 $ 44,089
========== ========== ========
Realized gains (losses) on investments:
Fixed maturities......................... $ 232 $ (4) $ 373
Equity securities........................ (203) 1 784
---------- ---------- --------
Net realized capital gains (losses)........ $ 29 $ (3) $ 1,157
========== ========== ========
The net unrealized appreciation (depreciation) of investments included
as a separate component of stockholders' equity at December 31, 1998 and 1997 is
as follows (in thousands):
1998 1997
---------- ----------
Difference between market value and
amortized cost of available for sale portfolio:
Fixed maturities............................. $ 22,005 $ 12,865
Equity securities............................ (2,721) 583
---------- ----------
19,284 13,448
Deferred tax benefit (expense).................. (6,750) (4,707)
---------- ----------
Net unrealized appreciation (depreciation)
of investments............................... $ 12,534 $ 8,741
========== ==========
F-14
<PAGE>
Unrealized appreciation (depreciation) of investments in equity
securities at December 31, 1998 and 1997 includes gross unrealized gains of
$1,026,000 and $1,513,000, respectively, and gross unrealized losses of
$3,747,000 and $930,000, respectively.
At December 31, 1998 and 1997, bonds with a carrying value of
approximately $35,895,000 and $36,630,000, respectively, were on deposit with
state regulatory authorities, as required by law. The Company also had cash,
cash equivalents and bonds totaling $16,449,000 and $18,681,000, in trusts held
for the benefit of ceding companies at December 31, 1998 and 1997, respectively.
At December 31, 1998 and 1997, the Company had $17,105,000 and
$15,914,000, respectively, of investments held in collateral accounts subject to
certain restrictions in conjunction with a loan guarantee and a letter of credit
arrangement (Note 14).
At December 31, 1998 and 1997, the Company had loaned securities of
approximately $12,819,000 and $14,443,000, respectively, at fair market value
under a security lending agreement administered through U.S. Bank, the Company's
primary custodian. In connection with these transactions, the Company holds as
collateral securities with a fair value equal to 102% of the fair value of the
securities lent to others. Such collateral securities are marked to market on a
daily basis and borrowers are required to supply additional collateral to
prevent any collateral from falling below 102% of the fair value of the loaned
securities.
5. FAIR VALUE AND FINANCIAL INSTRUMENTS
The following methods were used in estimating fair value disclosures
for significant financial instruments. Cash equivalents approximate their
carrying amount due to the short duration of those investments. Fixed maturity
securities are based upon quoted market information. The fair value of long term
debt at December 31, 1998 and 1997 which bears interest at a fixed rate is based
upon current rates offered to the company for debt of similar remaining
maturity. The fair value of debt at December 31, 1998 and 1997 which bears
interest at a variable rate is assumed to equal the carrying value of the debt.
The carrying amounts and fair values of the Company's significant financial
instruments are as follows (in thousands):
1998 1997
---------------------- --------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Assets:
Cash and cash equivalents....... $ 60,588 $ 60,588 $ 31,607 $ 31,607
Fixed maturity securities....... 690,291 691,538 694,603 695,394
Liabilities:
Long-term debt.................. 108,477 112,162 $ 104,126 $ 109,722
CI Note......................... 32,130 32,130 29,747 29,747
Interest Rate Swap.............. 539
On June 30, 1998, the Company entered into an interest rate swap
agreement (the "Swap") for other than trading purposes with First Union to
convert a specific portion of the floating rate loans outstanding under the
Credit Facility to a fixed rate. The Swap requires the company to pay First
Union interest on a notional amount equivalent to the principal outstanding
((pound)10,280,000 at December 31, 1998) at a fixed annual rate throughout the
term of the related debt obligation of 6.85% and for First Union to pay the
Company interest equal to the three month LIBOR interest rate determined at the
commencement of each calendar quarter. The Swap terminates on December 31, 2002.
The weighted average LIBOR rate payable by First Union in 1998 under the Swap
was 7.62%. The Swap is valued based on a mathematical approximation of market
values derived from proprietary models as of a given date and calculated on a
mid-market basis excluding any bid/offered spread that would be reflected in an
actual price quotation.
The notional amount set forth in the Swap does not represent an amount
exchanged by the Company and First Union, and thus is not a measure of exposure
of the Company. Since First Union is not required to collateralize its
obligations under the Swap, the Company is exposed to loss if First Union were
to default on its obligations under the Swap. The Company does not believe that
any reasonably likely change in interest rates would, as a result of the Swap,
have a material adverse effect on the financial position, the results of
operations or cash flows of the Company. The Swap was reviewed and approved by
the Company's Board of Directors.
The Company entered into a foreign exchange option during 1996 to
protect itself from the increasing value of the British Pound Sterling during
the period commencing from the initiation of the Acquisition to the closing of
the transaction. During that period, the Pound Sterling appreciated by
approximately 6% relative to the U.S. Dollar, resulting in a gain of $2.8
million upon settlement of the option.
F-15
<PAGE>
6. FEDERAL INCOME TAXES
The Company and it's majority owned U.S. subsidiaries file a consolidated
Federal income tax return. The 1998, 1997 and 1996 current income taxes are
based upon regular taxable income.
Consolidated income before taxes and extraordinary items for the years
ended December 31, 1998, 1997 and 1996 consisted of the following (in
thousands):
1998 1997 1996
------- -------- --------
United States........................... $ 42,900 $ 28,853 $ 27,956
Foreign................................. 2,627 9,021 4,564
------- -------- ---------
Total................................. $ 45,527 $ 37,874 $ 32,520
======== ======== =========
The components of income tax expense (benefit) for the years ended December
31, 1998, 1997 and 1996 are as follows (in thousands):
1998 1997 1996
------- -------- ---------
U.S. Taxes:
Current................................... $ 6,589 $ 2,301 $ 9,573
Deferred.................................. 4,090 4,793 (929)
-------- -------- ---------
10,679 7,094 8,644
-------- -------- ---------
Foreign Taxes:
Current................................... 5,032 2,183 1,013
Deferred.................................. 1,334
-------- -------- ---------
5,032 3,517 1,013
-------- -------- ---------
Total U.S. and foreign income
tax expense.......................... $ 15,711 $ 10,611 $ 9,657
======== ======== =========
The difference between actual income tax expense and the amount
computed by applying the statutory Federal income tax rate of 35% for the years
ended December 31, 1998, 1997 and 1996, is as follows (in thousands):
1998 1997 1996
-------- -------- ---------
Income tax expense at statutory rate..... $ 15,934 $ 13,256 $ 11,382
Non-taxable investment income............ (2,773) (2,598) (1,400)
Foreign operations....................... 219 (682)
Amortization of goodwill................. 833 833 11
Valuation allowance...................... 1,367
Other, net............................... 131 (198) (336)
-------- --------- ---------
$ 15,711 $ 10,611 $ 9,657
======== ========= =========
As of December 31, 1998, the Company and all includible subsidiaries have
U.S. net operating loss carryforwards of $15,717,000 which will be available
(subject to the annual limitation discussed below) to offset regular taxable
income during the carryforward period (expiring 2007). The net operating losses
were generated by INSCORP prior to its acquisition by the Company. Due to this
change in ownership, as defined by Section 382 of the Internal Revenue Code, the
amount of net operating loss available to offset future taxable income each year
is limited to a maximum of $3,483,000.
The Company provides income taxes on the undistributed earnings of
non-U.S. subsidiaries except to the extent that such earnings are considered
permanently reinvested outside the United States. It is not practicable to
determine the amount of income or withholding tax that would be payable upon the
remittance of those earnings. However, the Company does not anticipate that the
income or withholding tax that would be payable upon remittance of the
undistributed earnings of the non-U.S. subsidiaries would aggregate to a
material amount.
F-16
<PAGE>
The tax effects of the temporary differences comprising the Company's net
deferred tax asset at December 31, 1998 and 1997 are as follows (in thousands):
1998 1997
---------- ----------
Deferred tax assets:
Discounting of loss reserves...................... $ 32,846 $ 37,429
Unearned premiums................................. 4,729 5,686
Deposit accounting................................ 715 980
Allowance for uncollectible reinsurance........... 1,225 1,225
Net operating losses.............................. 5,375 6,802
Purchase accounting adjustments................... 5,245 6,354
Others, net....................................... 5,177 1,917
---------- ----------
Gross deferred tax assets........................... 55,312 60,393
Less: Valuation allowance............................ (1,367)
---------- ----------
Deferred tax assets after valuation allowance....... 53,945 60,393
---------- ----------
Deferred tax liabilities:
Deferred acquisition costs........................ 8,429 9,135
Earned but not reported premiums net of
loss and expense............................... 3,223 3,141
Unrealized appreciation of investments............ 6,750 4,707
Accrued market discount........................... 52 609
Profit commission................................. 696 3,149
Equity investment adjustments..................... 7,066 5,581
Others, net....................................... 600 773
---------- ----------
Gross deferred tax liabilities...................... 26,816 27,095
---------- ----------
Net deferred asset.................................. $ 27,129 $ 33,298
========== ==========
During 1998, the Company recorded a valuation allowance of $1,367,000
to reduce its deferred tax asset in accordance with the provisions of SFAS 109.
The valuation allowance is necessary because sufficient uncertainty exists
regarding the realizability of certain foreign tax credits generated during
1998. The Company will periodically review the adequacy of the valuation
allowance and will recognize benefits only as the reassessment indicates that it
is "more likely than not" that these benefits will be realized. Realization of
the related tax benefits will depend upon the recognition of future earnings
from foreign operations or a change in circumstances that cause the recognition
of these benefits to become "more likely than not."
7. EMPLOYEE BENEFIT PLANS
Eligible employees of the Company may participate in a defined
contribution plan (the "Plan") established by the Company. Under the Plan, the
Company makes a matching contribution equal to 50% of each employee's pretax
contribution, not to exceed 6% of the employee's compensation. Amounts expensed
under the Plan for the years ended December 31, 1998, 1997 and 1996 were
$209,000, $188,000 and $168,000, respectively.
Certain members of management will receive a supplement to the Plan
payable at the earlier of age 65 or employment termination. The supplement will
be equal to the aggregate contributions made with respect to the employee to a
trust established by the Company. Annual contributions to the trust are 13.5% to
20.0% of the employee's base salary as stated in their employment agreements.
The amounts expensed in 1998, 1997 and 1996 for the obligation under this plan
amounted to $206,500 each year.
Chartwell UK operates contributory defined contribution plans for its
U.K. employees. The level of the contribution varies between 5% and 20%
dependent upon the age of each participant at the beginning of each calendar
year. The amount expensed in 1998 and 1997 for the obligation under these plans
amounted to $2,305,000 and $2,523,000, respectively.
F-17
<PAGE>
8. RELATED-PARTY TRANSACTIONS
The Company holds an equity investment in certain managing general
agents ("MGAs") through which it writes Controlled Source Insurance business.
Such investments are accounted for under the equity method. At December 31,
1998, the carrying values of the investments in Florida Intracoastal
Underwriters (25% owned), HDR Insurance Services (20% owned) and Inter-Reco (49%
owned) were $1,281,000, $894,000 and $181,000, respectively. For the years ended
December 31, 1998, 1997 and 1996, the Company incurred $21,554,000, $19,536,000
and $10,038,000, respectively, of commission expense payable to these MGAs. At
December 31, 1998 and 1997, the Company's consolidated balance sheet includes
$19,332,000 and $10,811,000, respectively, of agents' balances receivable from
these MGAs including installment premiums deferred and not yet due. The current
portion of balances due from these MGAs are settled on a monthly basis.
During 1992, Chartwell Reinsurance entered into a reinsurance contract
with Old American Insurance Company, then a related party. For the years ended
December 31, 1997 and 1996, Chartwell Reinsurance earned $3,819,000 and
$1,716,000 of premium on this contract and incurred, prior to the effect of
reinsurance ceded $2,750,000 and $1,506,000 in loss and LAE, respectively. At
December 31, 1997, the loss and LAE liability for this contract was $1,141,000
and unearned premiums were $569,000, respectively. Old American Insurance
Company is no longer a related party.
9. RESTRICTION ON PAYMENT OF DIVIDENDS
The ability of the Company to pay cash dividends to shareholders is
dependent upon the amount of dividends received from Re Holdings, whose ability
to pay dividends is dependent upon the amount of dividends received from
Chartwell Reinsurance and Holdings Limited. Chartwell Reinsurance's ability to
pay cash dividends to the Company is, in turn, restricted by law or subject to
approval of the insurance regulatory authorities of Minnesota, Chartwell
Reinsurance's state of domicile. Insurance regulatory authorities recognize
statutory accounting practices for the ability of an insurer to pay dividends to
its shareholders.
Under the insurance laws of the State of Minnesota, payment of
dividends by Chartwell Reinsurance in any year is limited to the greater of: (i)
10% of capital and surplus as of the prior year end as determined in accordance
with statutory accounting practices; or (ii) statutory net income from
operations of the next preceding year excluding realized capital gains.
Notwithstanding the foregoing, Chartwell Reinsurance may pay dividends only from
its earned surplus, also known as unassigned funds. The maximum dividend that
can be paid without prior approval of the Minnesota Department of Commerce in
1999 is $30.3 million.
On November 25, 1997, Chartwell Reinsurance paid a $3.0 million
dividend to Re Holdings. On February 24, 1999, Chartwell Reinsurance paid a $5.5
million dividend to Re Holdings. No dividends were paid in 1996 or 1998.
In addition, under the insurance laws of the State of New York, INSCORP
may pay dividends to Chartwell Reinsurance only out of its statutory earned
surplus. The maximum amount of cash dividends INSCORP may pay out of its
statutory earned surplus, without prior regulatory approval, is subject to
statutory restrictions imposed by New York State Insurance Law. Generally, the
maximum amount that may be paid in any twelve month period without prior
approval is the lesser of net investment income as defined or 10% of statutory
surplus to policyholders.
In addition to the foregoing limitation, the New York State Insurance
Department, as is its practice in any change of control situation, required the
Company to commit to preclude INSCORP from paying any dividends for two years
from the date of its merger with the Company without prior regulatory approval.
The two year period ended on December 13, 1997. INSCORP paid no dividends in
1997 or 1998.
The capital and surplus of Chartwell Reinsurance on the basis of
statutory accounting practices was $302,871,000 and $262,606,000 at December 31,
1998 and 1997, respectively. Net income of Chartwell Reinsurance based on
statutory accounting principles was $23,791,000, $10,239,000 and $6,156,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
The capital and surplus of INSCORP on the basis of statutory accounting
practices was $131,747,000 and $113,677,000 at December 31, 1998 and 1997,
respectively. Net income of INSCORP based on statutory accounting principles was
$22,627,000, $14,234,000 and $22,270,000 for the years ended December 31, 1998,
1997 and 1996, respectively.
F-18
<PAGE>
10. REINSURANCE ASSUMED AND CEDED
The Company cedes a portion of its risks by utilizing various
retrocessional contracts. These contracts do not relieve the Company from its
obligations to policyholders. The Company regularly evaluates the financial
condition of its reinsurers and monitors concentration of credit risk with
respect to amounts recoverable under these contracts.
The effect of reinsurance on premiums written and earned at December 31,
1998, 1997 and 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ----------------------- ------------------------
Written Earned Written Earned Written Earned
---------------------- ----------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Primary insurance......... $ 116,853 $ 116,109 $ 105,635 $ 86,343 $ 68,308 $ 66,709
Reinsurance assumed....... 226,098 228,288 257,135 245,662 195,530 210,871
Reinsurance ceded......... (125,897) (114,893) (94,510) (86,305) (71,587) (68,077)
---------- ---------- ---------- ---------- --------- ----------
Net premiums.............. $ 217,054 $ 229,504 $ 268,260 $ 245,700 $ 192,251 $ 209,503
========== ========== ========== ========== ========== ==========
</TABLE>
Certain of the Company's large assumed reinsurance programs were not
renewed for 1998. During 1997, the Company's earned premiums related to these
programs were $48.2 million.
The effect of reinsurance on loss and LAE for the years ended December 31,
1998, 1997 and 1996 is a decrease of $74,498,000, $70,135,000 and $45,908,000,
respectively.
In 1997 and 1998, the Company entered into aggregate excess of loss
treaties. These treaties provide the Company with a layer of protection against
adverse results in all lines of business in excess of specified loss ratios.
Liabilities held by the Company under such treaties were $37.0 million and $10.5
million at December 31, 1998 and 1997, respectively.
The reinsurance recoverable balance on paid and unpaid losses and LAE
from any single entity or company in excess of 5% of the total at December 31,
1998 were as follows: London Life and Casualty Company, $51,009,000 (19.7%),
Centre Reinsurance (Bermuda) Limited, $16,608,000 (6.4%), and Western General
Insurance Ltd., $15,017,000 (5.8%).
In the normal course of business, the Company enters into trust
agreements effecting funds held arrangements or obtains letters of credit issued
by banks on behalf of the retrocessionaires which are not registered as
"authorized reinsurers" with the Minnesota Department of Commerce or the New
York State Insurance Department. The letters of credit or trust agreements serve
as collateral to the extent of their limit for the contingent liability which
exists in the event that the retrocessionaire is unable to meet its obligations
assumed under a retrocession agreement. Reinsurance recoverables with
"unauthorized reinsurers" totaled $153,709,000 and $119,768,000 as of December
31, 1998 and 1997, respectively. The respective portions collateralized were
$145,815,000 and $111,319,000.
Included in deposits on the balance sheet at December 31, 1998 and 1997
are $12,306,000 and $11,548,000, respectively, deposited with European
International Reinsurance Limited and $7,669,000 and $7,492,000, respectively,
deposited with Centre Reinsurance (Bermuda) Limited, both of which are secured
by letters of credit as described in the preceding paragraph.
11. PERMITTED STATUTORY ACCOUNTING PRACTICES
Chartwell Reinsurance, INSCORP and Dakota prepare statutory financial
statements in accordance with accounting principles and practices prescribed or
permitted by their respective domiciliary state insurance departments.
Prescribed practices include state laws, regulations, and general administrative
rules, as well as a variety of publications of the National Association of
Insurance Commissioners ("NAIC"). Permitted statutory accounting practices
encompass all accounting practices that are not prescribed; such practices
differ from state to state, may differ from company to company within a state,
and may change in the future. In March 1998, the NAIC adopted the Codification
of Statutory Accounting Principles ("Codification"). The Codification, which is
intended to standardize regulatory accounting and reporting for the insurance
industry, is proposed to be effective January 1, 2001. However, statutory
accounting principles will continue to be established by individual state laws
and permitted practices and it is uncertain when, or if, the states of
Minnesota, New York and North Dakota will require adoption of Codification for
the preparation of statutory financial statements. The Company has not finalized
the quantification of the effects of Codification on its statutory financial
statements.
F-19
<PAGE>
12. LOSS AND LAE
The following table presents the activity in the liability for loss and
LAE for the years indicated (in thousands):
1998 1997 1996
---------- ---------- ----------
Loss and LAE at beginning of year.......... $ 788,240 $ 747,858 $ 741,467
Less reinsurance recoverables.............. 202,593 172,377 179,854
---------- ---------- ----------
Net balance at beginning of year......... 585,647 575,481 561,613
---------- ---------- ----------
Add provision for loss and LAE for
claims occurring during:
Current year............................. 142,665 163,003 152,338
Prior years.............................. (7,400) (2,155) (1,717)
---------- ---------- ----------
Total incurred loss and LAE.............. 135,265 160,848 150,621
---------- ---------- ----------
Less losses and LAE payments for claims
occurring during:
Current year............................. 42,102 45,286 29,554
Prior Years.............................. 130,669 105,396 107,199
---------- ---------- ----------
Total paid loss and LAE.................. 172,771 150,682 136,753
---------- ---------- ----------
Loss and LAE acquired as of acquisition date of:
Oak Dedicated Two Limited................ 50,293
Archer Dedicated PLC..................... 41,124
---------- ---------- ----------
Total loss and LAE acquired.............. 91,417
---------- ---------- ----------
Net balance at end of year................. 639,558 585,647 575,481
Plus reinsurance recoverables.............. 239,059 202,593 172,377
========== ========== ==========
Loss and LAE at end of year................ $ 878,617 $ 788,240 $ 747,858
========== ========== ==========
As a result of changes in estimates of insured events in prior years,
the net provision for loss and LAE decreased by $7,400,000, $2,155,000, and
$1,717,000 in 1998, 1997 and 1996, respectively. These amounts, which represent
a decrease of 1.3%, 0.4% and 0.3% of the net loss and LAE at the beginning of
1998, 1997 and 1996, respectively, are the result of normal reserve development
inherent in the uncertainty of establishing loss and LAE liabilities. The
slightly larger redundancy in 1998 is attributable to favorable development in
asbestos and environmental reserves, which are in runoff.
The liabilities include provisions for latent injury or toxic tort
claims that cannot be estimated with traditional reserving techniques. Case
reserves, including LAE, have been established upon notification of loss from
ceding companies. In addition, the Company establishes additional liabilities in
excess of its share of the reserve established by the ceding company to cover
exposures on both known and unasserted claims. These liabilities are
periodically reviewed by the Company's claims department. In the reserve setting
process, the Company also includes provisions for social inflation (i.e. awards
by judges and juries that have progressively increased in recent years) and
evaluates the potential effect of any legislative changes on its reserve
liabilities. However, because of inconsistent court decisions in federal and
state jurisdictions and the wide variation among insureds with respect to
underlying facts and coverage, uncertainty exists with respect to these claims
as to liabilities of ceding companies and, consequently, reinsurance coverage.
At December 31, 1998, the Company carried case reserves and allocated
LAE attributable to asbestos claims and environmental pollution claims in the
amount of $78,974,000 ($54,926,000 after reduction for reinsurance recoverable)
of which $10,752,000 ($6,645,000 after reduction for reinsurance recoverable)
related to Chartwell Reinsurance and $68,222,000 ($48,281,000 after reduction
for reinsurance recoverable) related to INSCORP. The net deficiency attributable
to asbestos claims and environmental pollution claims for the years ended
December 31, 1998, 1997 and 1996 was $13.2 million, $8.7 million and $6.5
million, respectively. All of the net deficiency for the 1996 and 1997 years and
$11.3 million of the net deficiency for the 1998 year results from development
on business underwritten by INSCORP prior to its acquisition and, therefore, is
subject to the protection provided by the CI Notes, as discussed in Note 13.
Management believes that Chartwell Reinsurance's exposure to asbestos and
environmental losses is lessened because of its relatively recent entry into the
reinsurance business in 1979, its low historical levels of premium volume prior
to 1985, and its retrocessional programs
Environmental claims are particularly challenging to a reinsurance
company. Such claims involve underlying coverage disputes between the insured
party and its insurer; substantial legal defense costs; questions as to
occurrences and aggregation of claims and "late notice" issues. Environmental
liability suits often contain multiple party and multiple site actions that
result in varied adjudications among insureds and their insurers. Such a complex
setting forces the parties to find a reasonable basis for settling the claims.
These widely varying settlements involving primary insurers force challenges
upon the reinsurer with respect to the extent to which they should follow the
settlements of their ceding companies. Accordingly, there can be no assurance
that the Company's ultimate liability for losses and LAE will not vary
significantly from amounts reserved.
F-20
<PAGE>
13. DEBT
(a) Long-term debt--The components of long-term debt at December 31, 1998
and 1997 are as follows (in thousands):
1998 1997
---------- ----------
Senior notes.................................... $ 48,750 $ 48,750
Bank loan....................................... 56,303 51,198
Other........................................... 3,424 4,178
---------- ----------
Total........................................... $ 108,477 $ 104,126
========== ==========
On March 17, 1994, the Company completed a public offering (the
"Offering") of 10.25% Senior Notes due 2004, having a total principal amount of
$75,000,000. The net proceeds to the Company from the Offering were
approximately $71,934,000 after deducting expenses related to the Offering. Of
the net proceeds, $30,000,000 was contributed to the statutory surplus of
Chartwell Reinsurance and $23,400,000 was used to retire the Company's then
outstanding senior term loan. The remaining funds were retained by the Company
for general corporate purposes, which included the payment of interest on the
Senior Notes.
On April 8, 1996, Re Holdings redeemed 35% of the Senior Notes for
$28,300,000, including the redemption premium. Due to this early extinguishment
of debt, the Company recognized an extraordinary loss of $1,874,000, net of
applicable income taxes of $1,000,000. This extraordinary charge represents the
redemption premium and 35% of the remaining original debt issuance costs
relating to the Senior Notes.
On December 13, 1995, the Company entered into a $20,000,000 loan
agreement with Fleet Bank (the "Fleet Loan"), with a variable interest rate
based upon the Eurodollar rate plus a margin based upon the S&P rating of the
Notes, scheduled to expire on December 13, 2002. The Fleet Loan was repaid
during 1996.
On November 14, 1996, Re Holdings entered into a new credit facility
with First Union National Bank, N.A., ("First Union") as agent. The credit
facility provides for a term loan in two tranches, A & B, (the "First Union
Loans"), with outstanding balances of $30,000,000 and $15,858,000 (denominated
in Pounds Sterling), respectively at December 31, 1998 and outstanding balances
of $30,000,000 and $13,983,000 at December 31, 1997. In addition, at December
31, 1998, $5,467,000 of the Term B Loan was used to guarantee the Loan Notes.
Both loans are subject to a quarterly repayment schedule, commencing on March
31, 1999 and ending on December 31, 2002. Re Holdings used $20,000,000 of the
First Union Loans to repay all outstanding borrowings under the $20,000,000 loan
agreement with Fleet Bank. Portions of the remainder of the First Union Loans
were drawn down in cash by Re Holdings and contributed to Holdings Limited for
the purchase of Chartwell UK, and portions were utilized to guarantee the
obligations of Holdings Limited under the Loan Notes (the "First Union
Guarantee"). The holders of Loan Notes may require the Company to redeem all or
part of their holdings in June or December of each year. As the Loan Notes are
redeemed ("Loan Note Redemptions"), the First Union Guarantee is reduced and
replaced with loan proceeds to fund the Loan Note Redemptions. During 1998,
$1,800,000 of Loan Note Redemptions occurred, resulting in an outstanding
balance of Loan Notes of $5,467,000 at December 31, 1998.
Re Holdings currently has a $60,000,000 Revolving Credit Commitment
from First Union (the "First Union Revolver"), which was increased from
$35,000,000 in October of 1997. The First Union Revolver replaced Re Holdings'
$10,000,000 revolving credit facility from Fleet Bank (under which no borrowings
were outstanding). The First Union Revolver may be used to provide additional
Loan Note guarantees, to support underwriting at Lloyd's by the Company's
subsidiaries or for other general corporate purposes. At December 31, 1998, $1.4
million of the First Union credit facility was unused, $53.6 million was used to
finance unsecured letters of credit, and $5.0 million was used to secure a line
of credit. All obligations of Re Holdings under the First Union credit facility
are guaranteed by the Company.
The other portion of long-term debt primarily represents capital lease
obligations.
The Company's long-term debt agreement contains general covenants and
restrictions as well as financial covenants relating to, among other things,
minimum earned surplus, minimum statutory surplus, minimum net worth, certain
financial ratios, and maintenance of minimum cash and cash equivalent balances
on the books of the borrower.
F-21
<PAGE>
Annual maturities of long-term debt outstanding at December 31, 1998
are as follows (in thousands):
1999................................................. $ 10,799
2000................................................. 14,271
2001................................................. 13,845
2002................................................. 20,812
2003................................................. 0
Future Years......................................... 48,750
--------------
$ 108,477
==============
(b) Contingent Interest Notes--In conjunction with the 1995
acquisition of INSCORP (the "Merger"), the Company assumed all of the
obligations under the Contingent Interest Notes (the "CI Notes") of Piedmont
Management Company Inc. ("Piedmont"), INSCORP's former parent. The CI Notes were
issued immediately prior to the Merger to protect the Company against the
possibility of adverse development of INSCORP's reserves for losses and LAE and
long-tail casualty exposures (Note 12). The CI Notes were issued in an aggregate
principal amount of $1 million, with principal accruing interest at a rate of 8%
per annum, compounded annually. Such interest will not be payable until maturity
or earlier redemption of the CI Notes. In addition, the CI Notes will entitle
the holders thereof to receive at maturity, in proportion to the principal
amount of the CI Notes held by them, an aggregate of from $10 million up to $55
million in contingent interest. Settlement of the CI Notes may be made by
payment of cash or, under certain specified conditions, by delivery of shares of
the Company's common stock. The CI Notes mature on June 30, 2006. At December
31, 1998, the CI Notes are recorded at the present value of the amount which is
reasonably determined to be payable at maturity. The Company believes that
INSCORP's reserves for loss and loss adjustment expenses are an appropriate
estimate of projected ultimate losses and loss adjustment expenses to be paid
and therefore, at this time, the maximum amount of contingent interest on the CI
Notes is presently expected to be paid at maturity. The CI Notes contain
covenants which are similar in nature to those provided for in the Company's
long-term debt.
(c) Capital Leases - During 1996, the Company began leasing certain
facilities and equipment under agreements which are classified as capital
leases. The leases have original terms of 3 to 5 years and have purchase options
at the end of the original lease term. At the end of the term, the Company may
purchase the equipment for a mutually agreeable price, renew the lease or return
the equipment to the lessor and enter into a new lease. Leased capital assets
include the buildout costs of the Company's leased office space for its
principal executive offices, furniture and equipment, and electronic data
processing hardware and software and are included in Other Assets in the
consolidated balance sheet at December 31, 1998 and 1997 as follows (in
thousands):
1998 1997
------------ -----------
Office space build-out costs.........................$ 884 $ 1,179
Furniture and equipment.............................. 2,302 2,648
EDP hardware and software............................ 569 1,137
------------ -----------
$ 3,755 $ 4,964
============ ===========
Leased capital assets are amortized to interest expense on a
straight-line basis over the original lease term. For the year ended December
31, 1998, the Company recorded $312,000 of interest expense related to such
leased assets. Future minimum payments, including principal and interest, by
year and in the aggregate, under non-cancelable capital leases are as follows
(in thousands):
1999.................................................$ 1,771
2000................................................. 1,440
2001................................................. 1,014
2002................................................. 435
-------------
$ 4,660
=============
F-22
<PAGE>
14. COMMITMENTS AND CONTINGENCIES
Operating leases--The Company leases office space for its principal
executive offices in the U.S. and U.K. under non-cancelable, renewable operating
leases expiring on July 31, 2006 and December 24, 2008, respectively. The rent
expense has been accounted for on a straight-line basis after amortization of a
rent abatement allowance (on the U.S. lease). Rental expense for 1998, 1997 and
1996 was $2,521,000, $2,828,000 and $1,386,000, respectively. The future minimum
rental payments, exclusive of escalation clauses, under the existing leases as
of December 31, 1998 are as follows (in thousands):
1999................................................. $ 2,489
2000................................................. 1,450
2001................................................. 1,560
2002................................................. 1,628
2003................................................. 1,725
Future Years......................................... 5,903
Line of credit--The Company has a $60 million revolving credit facility
with First Union, of which $1.4 million was unused, $53.6 million was used to
finance unsecured letters of credit, and $5.0 million was used to secure a line
of credit as of December 31, 1998.
Loan guarantees and letters of credit--At December 31, 1998, the
Company has outstanding loan guarantees and standby letters of credit totaling
$4,353,000 and $68,905,000, respectively. The loan guarantees and standby
letters of credit are in force for five years, for which the Company pays annual
fees of $562,000. The loan guarantees and letters of credit provide capital to
NLC Name No. 6 Limited, Riverside Underwriters Plc and Oak Dedicated, corporate
members of Lloyd's, to participate in certain Lloyd's syndicates for the 1995
Underwriting Year and thereafter. The investments in NLC Name No. 6 and
Riverside Underwriters Plc, which amount to $16,429,000 at December 31, 1998,
are included in other assets with corresponding amounts included in other
liabilities for the loan guarantees and letters of credit.
Limited Partnership Investment--In 1996, the Company made a commitment
to invest $15 million in a private equity fund, High Ridge Capital Limited
Partnership, which makes investments in the insurance industry. The Company
contributed a total of $9.8 million and $3.8 million to this fund as of December
31, 1998 and 1997, respectively.
American Eagle--In 1996 and early 1997, the Company entered into
certain assumption of liability endorsement ("ALE") agreements with American
Eagle Insurance Company ("American Eagle"). On December 3, 1997, American Eagle
was placed in receivership by the Texas Department of Insurance. The Company's
contingent liability under these agreements was originally secured by $3,600,000
of funds held in trust. As of December 31, 1998, $1,200,000 of such funds have
been paid to the Company as reimbursement for losses incurred under the ALE's.
Since a significant portion of the Company's liabilities in connection with
American Eagle are colateralized by this trust fund, management of the Company
does not presently believe that any residual exposure resulting from the
receivership of American Eagle is likely to have a material adverse effect on
its financial position or results of operations.
Lloyd's Names exposure--The Company's balance sheet at December 31,
1998 includes a provision for potential exposure to certain of the Names who had
participated on syndicates managed by CMA. The provision was established by the
Company based on actuarial projections of the expected deterioration for the
applicable years of account. Management believes at the present time that the
provisions related to such potential exposure is sufficient.
Other--The Company, Chartwell Reinsurance, INSCORP and CMA are subject
to the litigation of disputes in the normal course of their business. Management
does not believe that any pending litigation or arbitration to which it is a
party, or of which any of its properties or assets are subject, is likely to
have a materially adverse effect on its current financial position or results of
operations.
15. PREFERRED AND COMMON STOCK
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 $58,503,000 after deduction of underwriting discount and expenses.
Of the net proceeds, $48,500,000 was contributed to Re Holdings, of which
$20,000,000 was contributed to the statutory surplus of Chartwell Reinsurance
and $28,500,000 was used to retire 35% of Re Holdings' outstanding Senior Notes
plus accrued interest (Note 13). The remaining funds were retained for general
corporate purposes.
F-23
<PAGE>
In 1997, the Board of Directors of the Company approved a stockholder
rights plan. Stockholders of record as of the close of business on May 22, 1997
received a dividend of one preferred share purchase right (a "Right") for each
outstanding share of common stock of the Company. The Rights attached to the
common stock certificates then outstanding and no separate certificates
representing the Rights were issued. The Rights expire on May 22, 2007.
The Rights are exercisable only if a person or group (other than the
Company, certain affiliates of the Company and certain inadvertent beneficial
owners) either (i) acquired beneficial ownership of 20% or more of the Company's
common stock or (ii) commenced or announced the intent to commence a tender
offer or exchange offer that would lead to beneficial ownership by a person or
group of 20% or more of the Company's common stock. Each Right entitles its
holder to purchase 1/100 of a share of Junior Participating Cumulative Preferred
Stock at a purchase price of $120, subject to adjustment from time to time to
prevent dilution.
In certain cases where an acquirer purchased more than 20% of the
Company's common stock, the Rights would allow stockholders (other than the
acquirer) to purchase shares of the Company's common stock at 50% of market
price. If the Company were acquired in a merger or other business combination
transaction, under certain circumstances the Rights could be used to purchase
shares in the acquirer at 50% of the market price. Subject to certain
conditions, if a person or group acquired 20% but less than 50% of the Company's
common stock, the Company's board of directors could exchange each Right held by
stockholders (other than the acquirer) for one share of common stock. The Rights
can be redeemed by the Company's board of directors for $.001 per Right at any
time prior to the acquisition by any person or group of beneficial ownership of
20% or more of the Company's common stock.
16. STOCK OPTION PLANS AND COMMON STOCK WARRANTS
During 1997, the Company adopted the 1997 Omnibus Stock Incentive Plan
(the "1997 Plan") as the successor to the 1993 Stock Option Plan (the "1993
Plan") which was adopted on October 15, 1993. Under the 1993 Plan, options to
acquire 1,000,000 shares of Common Stock were authorized to be granted to
officers, key employees and directors of the Company and its designated
subsidiaries. Upon adoption of the 1997 Plan, no further awards shall be made
under the 1993 Plan and 107,000 of previously authorized non-granted shares
under the 1993 Plan became available under the 1997 Plan. The Company also
authorized an additional 800,000 shares to be granted under the 1997 Plan. Under
both plans, the options become exercisable at various dates.
A total of 50,000 shares are available for grants of options to
non-employee directors until December 31, 2006 under the 1996 Non-Employee
Directors Stock Option Plan. An option to purchase 1,000 shares of the Company's
Common Stock was granted to all non-employee directors in office at January 1,
1996 and will be granted to all non-employee directors on the date of each
annual meeting of stockholders. The options are exercisable after six months
from the grant date at a price equal to the fair value of the Company's stock on
the date of grant. The options expire ten years after the grant date.
The total number of options available to purchase shares of Common
Stock under the Company's stock option plans at December 31, 1998, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- --------- -------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year...... 1,275,300 $ 24.55 876,400 $ 21.92 672,900 $ 21.00
Granted............................. 316,500 29.36 431,000 29.65 203,500 24.95
Exercised........................... (15,000) 21.43 (22,400) 21.04
Cancelled........................... (61,750) 29.42 (9,700) 22.01
--------- ---------- --------
Outstanding, end of year............ 1,515,050 25.39 1,275,300 24.55 876,400 21.92
========== =========== ========
Options exercisable at end of year.. 820,725 665,040 554,060
========== =========== ========
</TABLE>
F-24
<PAGE>
The Company applies the provisions of APB Opinion No. 25 "Accounting
for Stock Issued to Employees" in accounting for its stock option plans.
Accordingly, no compensation expense has been recognized for options granted
under its stock option plans and the Company has adopted the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Had
compensation cost for the Company's stock option plans been determined based
upon the fair value at the grant date for awards under these plans consistent
with the methodology prescribed under SFAS No. 123, the Company's net income and
EPS amounts for the years ended December 31, 1998, 1997 and 1996 would have been
as follows (in thousands, except per share data):
1998 1997 1996
---------- --------- ---------
Net income:
As reported............................ $ 29,816 $27,263 $20,989
Pro Forma.............................. 27,850 26,270 20,709
Basic EPS:
As reported............................ $ 3.10 $2.84 $2.31
Pro Forma.............................. 2.89 2.74 2.28
Diluted EPS:
As reported............................ $ 3.00 $2.74 $2.29
Pro Forma.............................. 2.80 2.64 2.26
The Black-Scholes Option Pricing Model was used to estimate the fair
values of options granted during 1998, 1997 and 1996. The assumptions used for
these grants included a 10-year average expected life for all years, zero-coupon
U.S. Government risk free interest rates of 5.26%, 5.76% and 6.43% for 1998,
1997 and 1996, respectively, current dividend yield rates of 1.00% for all
years, and volatility of 30.63%, 32.34% and 39.35% for 1998, 1997 and 1996,
respectively. The weighted average fair values of options granted during the
years 1998, 1997 and 1996 were $13.46, $14.29 and $13.59, respectively.
At December 31, 1998, there were warrants outstanding for the purchase of
335,002 shares of Common Stock at prices of $21 and $22 per share.
17. EMPLOYEE STOCK PURCHASE PLANS
The Company established an Employee Stock Purchase Plan which became
effective January 1, 1996. Participating employees are permitted to purchase,
annually, shares of the Company's Common Stock through payroll deductions in an
amount ranging from 2% to 10% of the employee's base pay (as elected by the
employee). The purchase price for shares purchased in a particular plan year is
equal to the lesser of (i) 85 percent of the fair market value of the Common
Stock on the beginning of such plan year or (ii) 85 percent of the fair market
value of the Common Stock at the end of such plan year. The Company has
authorized 100,000 shares of common stock for purchase under the plan of which
13,692, 11,587 and 12,381 were purchased in January 1999, February 1998 and
January 1997, respectively.
Chartwell UK established an Employee Stock Purchase Plan which became
effective May 1, 1997. Participating employees contribute savings to the Plan
ranging from (pound)5 to (pound)250 per month (as elected by the employee). At
the end of three years, the employees may use their savings to buy shares in the
Company at a price equal to 85% of the fair value of the Company's Common Stock
as of the inception of the three year period.
F-25
<PAGE>
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data is as follows (in thousands, except
per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- --------
For the year ended December 31, 1998
Premiums earned......................$ 52,743 $ 56,430 $ 59,333 $ 60,998
Net investment income................ 11,892 12,173 12,182 12,622
Net realized capital gains (losses).. 99 (39) 199 (230)
Income tax expense................... 3,070 3,335 3,448 5,858
Net income........................... 7,367 7,392 7,634 7,423
Stockholders' equity................. 269,170 278,600 291,008 292,863
Basic earnings per share............. 0.77 0.77 0.79 0.77
Diluted earnings per share........... 0.73 0.74 0.77 0.75
For the year ended December 31, 1997
Premiums earned......................$ 61,785 $ 73,890 $ 59,002 $ 51,023
Net investment income................ 10,210 11,202 10,943 11,220
Net realized capital gains (losses).. (20) (29) 112 (66)
Income tax expense................... 2,577 2,848 2,857 2,329
Net income........................... 6,487 6,705 6,987 7,084
Stockholders' equity................. 222,305 236,550 248,264 260,497
Basic earnings per share............. 0.68 0.70 0.73 0.74
Diluted earnings per share........... 0.66 0.68 0.69 0.70
F-26
<PAGE>
CHARTWELL RE CORPORATION
SCHEDULE I-SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
At December 31, 1998
(in thousands)
Column A Column B Column C Column D
- - ------------------------------------------- ---------- --------- ----------
Amount at
which shown
in the
Fair balance
Cost Value sheet
-------------------------------------------
Fixed Maturities:
Bonds:
United States Government and government
agencies and authorities (1)............. $ 206,820 $ 212,467 $ 212,088
States, municipalities and political
subdivisions (1)...................... 165,231 171,899 171,883
Foreign governments................... 27,520 29,263 28,456
All other corporate bonds............. 232,942 240,487 240,442
Redeemable preferred stock................ 35,773 37,422 37,422
--------- --------- ----------
Total fixed maturities............. 668,286 691,538 690,291
--------- --------- ----------
Equity Securities-Common stocks of
insurance companies/partnership
interests............................. 33,637 36,358 36,358
--------- --------- ----------
Total investments (2)............. $ 701,923 $ 727,896 $ 726,649
========= ========= ==========
- - -------------------------------------
(1)Balance sheet value differs from column B and C because category includes a
combination of securities "Held to Maturity" and "Available for Sale." See Notes
1b and 4 of the audited consolidated financial statements.
(2)Excludes investments held by CMA managed syndicates.
S-1
<PAGE>
CHARTWELL RE CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(in thousands)
December 31,
--------------------------
1998 1997
------------- -----------
ASSETS:
Investment in and receivable/payable
from/to subsidiaries............................ $ 311,847 $ 275,311
Cash and cash equivalents............................ 269 2,073
Other assets......................................... 12,879 12,866
------------- ----------
$ 324,995 $ 290,250
============= ==========
LIABILITIES:
Contingent interest notes........................... $ 32,130 $ 29,747
Other liabilities................................... 2 6
------------- ----------
Total liabilities............................. 32,132 29,753
------------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $1.00 per share;
authorized 5,000,000 shares;...................
Common stock, par value $.01 per share; shares
issued and outstanding 9,627,891 and 9,609,799
in 1998 and 1997, respectively................. 96 96
Additional paid-in capital......................... 212,156 211,864
Net unrealized appreciation of investments.......... 12,534 8,741
Foreign currency translation adjustment............. 362 348
Retained earnings................................... 67,715 39,448
------------- ----------
Total stockholders' equity.................... 292,863 260,497
------------- ----------
$ 324,995 $ 290,250
============= ==========
The condensed financial statements should be read in conjunction with the
consolidated financial statements and the accompanying notes thereto.
S-2
<PAGE>
CHARTWELL RE CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
(in thousands)
1998 1997 1996
--------- ---------- --------
REVENUES:
Net investment income..................... $ 45 $ 118 $ 491
Other income.............................. 2,802
---------- ---------- --------
Total revenues...................... 45 118 3,293
---------- ---------- --------
EXPENSES:
Interest and amortization................. 2,782 2,618 2,358
General expenses.......................... 320 127 119
---------- ---------- --------
Total expenses...................... 3,102 2,745 2,477
---------- --------- --------
Income (loss) before federal income
taxes and equity in earnings of
subsidiaries........................... (3,057) (2,627) 816
---------- ---------- --------
Federal income taxes:
Current................................. 360 (1,442) 241
Deferred................................ (149)
---------- ---------- --------
Total income tax expense (benefit)... 360 (1,591) 241
---------- ---------- --------
Income (loss) before equity in undistributed
income of subsidiaries.................. (3,417) (1,036) 575
Equity in undistributed income of
subsidiaries............................ 33,233 28,299 20,414
---------- ---------- ---------
Net income............................... $ 29,816 $ 27,263 $ 20,989
=========== =========== =========
The condensed financial statements should be read in conjunction with the
consolidated financial statements and the accompanying notes thereto.
S-3
<PAGE>
CHARTWELL RE CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
(in thousands)
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income taxes (paid) recovered..............$ (810) $ 191 $ (210)
Interest received on investments............... 45 113 494
Overhead expenses.............................. (319) (151)
Service and other revenue...................... 525
Other, net..................................... 33 (807) 758
--------- --------- --------
Net cash provided by (used in)
operating activities....................... (1,051) (129) 1,042
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital contributions and advances
to subsidiaries.............................. 504 2,865 (20,000)
Cash from acquisitions of Chartwell UK
net of epenses paid......................... (40,912)
--------- --------- --------
Net cash provided by (used in)
investing activities....................... 504 2,865 (60,912)
---------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock..... 58,503
Dividends paid................................. (1,549) (1,534) (1,150)
Other, net..................................... 292 82
---------- --------- --------
Net cash provided by (used in)
financing activities....................... (1,257) (1,452) 57,353
---------- ---------- --------
Net increase (decrease) in cash and
cash equivalents............................... (1,804) 1,284 (2,517)
Cash and cash equivalents at
beginning of year.............................. 2,073 789 3,306
---------- --------- ---------
Cash and cash equivalents at end of year.........$ 269 $ 2,073 $ 789
========== ========= ========
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income.....................................$ 29,816 $ 27,263 $ 20,989
Adjustments to reconcile net income to
net cash provided by
operating activities.......................
Equity in undistributed earnings of
subsidiaries............................ (33,233) (28,299) (20,414)
Contingent interest........................ 2,383 2,206 2,045
Net change in other assets and liabilities. (391) (1,105) (1,578)
Other, net................................. 374 (194)
---------- --------- --------
Net cash provided by (used in)
operating activities $ (1,051) $ (129) $ 1,042
========== ========= ========
The condensed financial statements should be read in conjunction with the
consolidated financial statements and accompanying notes thereto.
S-4
<PAGE>
<TABLE>
CHARTWELL RE CORPORATION
SCHEDLE IV - REINSURANCE
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(in thousands)
<CAPTION>
Column A Column B Column C Column D Column E Column F
- - ------------------------------------------- -------- -------- ---------- --------- -----------
Assumed Percentage
Ceded to from of amount
Gross other other Net assumed to
amount companies companies amount net
--------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
1998
Premiums earned:
Property and casualty insurance........... $116,109 $114,893 $228,288 $229,504 99.5%
--------- --------- --------- --------- ----------
Total premiums........................ $116,109 $114,893 $228,288 $229,504 99.5%
========= ========= ========= ========= ==========
1997
Premiums earned:
Property and casualty insurance........... $ 86,343 $ 86,305 $245,662 $245,700 100.0%
--------- --------- --------- --------- ----------
Total premiums........................ $ 86,343 $ 86,305 $245,662 $245,700 100.0%
========= ========= ========= ========= ==========
1996
Premiums earned:
Property and casualty insurance........... $ 66,709 $ 68,077 $210,871 $209,503 100.7%
--------- --------- --------- --------- ----------
Total premiums........................ $ 66,709 $ 68,077 $210,871 $209,503 100.7%
========= ========= ========= ========= ==========
</TABLE>
S-5
<PAGE>
<TABLE>
CHARTWELL RE CORPORATION
SCHEDLE V - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(in thousands)
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
Balance at Charged to Charged Balance
Beginning Costs and to Other Deductions at End
of Period Expenses Accounts Describe of Period
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1998
Reinsurance recoverable:
Allowance for Uncollectible
Reinsurance (1)................. $ 6,394 $ 8 $ 6,402
Year Ended December 31, 1997
Reinsurance recoverable:
Allowance for Uncollectible
Reinsurance (1)..................$ 5,731 $ 663 $ 6,394
Year Ended December 31, 1996
Reinsurance recoverable:
Allowance for Uncollectible
Reinsurance (1)................. $ 5,717 $ 14 $ 5,731
</TABLE>
(1) The Company has a reinsurance agreement which protects the Company from
certain uncollectible reinsurance balances. Uncollectible amounts have been
ceded to said contract and are reflected as reinsurance recoverable in the
balance sheet. Deductions to reserve represent subsequent collections of amounts
deemed uncollectible.
S-6
<PAGE>
<TABLE>
CHARTWELL RE CORPORATION
SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY
INSURANCE OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<CAPTION>
Claims and
Claim Adjust.
Expenses
Incurred
Related to
Reserves ----------------
for Unpaid Amort. Paid
Deferr. Claim and Disc. of Defer. Claims
Affiliation Policy Claim if any Net Policy & Claims Other Net
with Acquis. Adjust. Deduct. Unearn. Earned Invest Curr. Prior Acquis. Adjust. Operat. Premiums
Registrant Costs Exp.(1) Column(C) Prem. Prem. Income Year Year Costs Expenses Exp. Written
------ --------- -------- ------ ------- ------ ------- ------ -------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Years Ended:
December 31, 1998...$24,084 $878,617 $108,495 $229,504 $48,869 $142,665 $(7,400) $61,564 $172,771 $39,865 $217,054
December 31, 1997... 26,100 788,240 111,149 245,700 43,575 163,003 (2,155) 72,655 150,682 36,460 268,260
December 31, 1996... 17,903 747,858 81,599 209,503 44,089 152,338 (1,717) 52,030 136,753 19,169 192,251
</TABLE>
(1) The Company adopted SFAS No. 113 which, among other things, requires the
Company to record its reserves for unpaid losses and LAE without reduction for
amounts that would be recovered from retrocessionaires. The amount recoverable
from retrocessionaires is recorded as an asset on the Company's balance sheet.
The net of such asset and the reserves for loss and LAE is $639.6, $585.6 and
$575.5 million at December 1998, 1997 and 1996, respectively.
S-7
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INDEX TO EXHIBITS
Exhibits
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3.1 Restated Certificate of Incorporation of Chartwell Re Corporation.
Incorporated by reference to Exhibit 3.1 to Chartwell Re Corporation's
Registration Statement on Form S-1 (File No. 333-678).
3.2 Amended and Restated By-laws of Chartwell Re Corporation. Incorporated
by reference to Exhibit 3.2 to Chartwell Re Corporation's Registration
Statement on Form S-1 (File No. 333-678).
4.1 Rights Agreement, dated as of May 22, 1997, between Chartwell Re
Corporation and Fleet National Bank of Connecticut. Incorporated by
reference to Exhibit 4.1 to Chartwell Re Corporation's Registration
Statemen on Form 8-K filed with the Securities and Exchange Commission
on June 5, 1997 (File No. 1-12502).
4.2 Indenture, dated as of March 17, 1994, between Chartwell Re
Corporation and Bankers Trust Company, as Trustee, for the 10 1/4%
Senior Notes due 2004 (the "Senior Notes"). Incorporated by
reference to Exhibit 4.1 to Chartwell Re Corporation's Registration
Statement on Form S-1 (File No. 33-75386).
4.3 First Supplemental Indenture, dated as of December 12, 1995, among
Chartwell Re Corporation, Chartwell Re Holdings Corporation and
Bankers Trust Company, as Trustee, for the Senior Notes. Incorporated
by reference to Exhibit 4.3 to Chartwell Re Corporation's Registration
Statement on Form S-1 (File No. 333-678).
4.4 Second Supplemental Indenture, dated as of December 12, 1995, between
Chartwell Re Holdings Corporation and Bankers Trust Company, as
Trustee, for the Senior Notes. Incorporated by reference to Exhibit
4.4 to Chartwell Re Corporation's Registration Statement on Form S-1
(File No. 333-678).
4.5 Indenture, dated as of December 1, 1995, between Chartwell Re
Corporation, as the successor to Piedmont Management Company Inc., and
Fleet Bank, as Trustee, for the Contingent Interest Notes due June 30,
2006 (the "CI Notes"). Incorporated by reference to Exhibit 4.5 to
Chartwell Re Corporation's Registration Statement on Form S-1 (File
No. 333-678).
4.6 First Supplemental Indenture, dated as of December 13, 1995, among
Piedmont Management Company, Chartwell Re Corporation and Fleet Bank,
as Trustee under the CI Notes. Incorporated by reference to Exhibit
4.6 to Chartwell Re Corporation's Registration Statement on Form S-1
(File No. 333-678).
10.1 First Amended and Restated Credit Agreement, dated as of November 14,
1996 among Chartwell Re Holdings Corporation, the Lenders named
therein, First Union National Bank of North Carolina, as Agent and as
an Issuing Bank, First Union National Bank, (London Branch), as an
Issuing Bank as amended by the First Amendment to First Amended and
Restated Credit Agreement, dated as of January 24, 1997 by and between
Chartwell Re Holdings Corporation, the Lenders named therein, First
Union National Bank of North Carolina, as Agent and as Issuing Bank,
and First Union National Bank (London Branch), as an Issuing Bank.
Incorporated by reference to Exhibit 10.1 to Chartwell Re
Corporation's Annual Report on Form 10-K for the year ended December
31, 1996 (File No. 1-12502).
<PAGE>
10.2 Second Amendment to First Amended and Restated Credit Agreement, dated
as of October 30, 1997, among Chartwell Re Holdings Corporation, the
Lenders named therein, First Union National Bank, as Agent and as
Issuing Bank, and First Union National Bank (London Branch) as an
Issuing Bank. Incorporated by reference to Exhibit 10.39 to Chartwell
Re Corporation's Annual Report on Form 10-K for the year ended
December 31, 1997 (File No. 1-12502).
10.3 Third Amendment to First Amended and Restated Credit Agreement and
Acknowledgement, dated as of December 1, 1998, among Chartwell Re
Holdings Corporation. Chartwell Reinsurance Company, Chartwell Re
Corporation, Chartwell Holdings Limited, the Lenders named therein,
First Union National Bank, as Agent and as an Issuing Bank and First
Union National Bank (London Branch), as an Issuing Bank.
10.4 Stockholders Agreement, dated as of December 13, 1995, between
Chartwell Re Corporation and the security holders named in the
schedule of holders attached thereto. Incorporated by reference to
Exhibit 10.3 to Chartwell Re Corporation's Registration Statement on
Form S-1 (File No. 333-678).
10.5 Registration Rights Agreement, dated as of December 13, 1995, between
Chartwell Re Corporation and the security holders named in the
schedule of holders attached thereto. Incorporated by reference to
Exhibit 10.4 to Chartwell Re Corporation's Registration Statement on
Form S-1 (File No. 333-678).
10.6 Common Stock Purchase Warrant, dated March 6, 1992, issued by
Chartwell Re Corporation to Wand Partners (Chartwell) L.P.
Incorporated by reference to Exhibit 10.34 to Chartwell Re
Corporation's Registration Statement on Form S-1 (File No. 33-75386).
10.7 Common Stock Purchase Warrant, dated December 31, 1992, issued by
Chartwell to Wand Partners (Chartwell) L.P. Incorporated by reference
as Exhibit 10.35 to Chartwell Re Corporation's Registration Statement
on Form S-1 (File No. 33-75386).
10.8 Common Stock Purchase Warrant, dated December 31, 1992, issued by
Chartwell to John Sagan. Incorporated by reference to Exhibit 10.36 to
Chartwell Re Corporation's Registration Statement on Form S-1 (File
No. 33-75386).
10.9 Form of Common Stock Purchase Warrants, dated March 17, 1994, issued
by Chartwell Re Corporation to Wand/Chartwell Investments L.P. and to
the holders of the Series A Stock, the Series B Stock and the Series C
Stock of Chartwell Re Corporation. Incorporated by reference to
Exhibit 4.2 to Chartwell Re Corporation's Quarterly Report on Form
10-Q for the quarter ended March 31, 1994 (File No. 1-12502).
10.10 1993 Stock Option Plan of Chartwell Re Corporation. Incorporated by
reference to Exhibit 10.14 to Chartwell Re Corporation's Registration
Statement on Form S-4 (File No. 33-97010).*
10.11 Chartwell Re Corporation 1995 Employee Stock Purchase Plan.
Incorporated by reference to Exhibit 4(c) to Chartwell Re
Corporation's Registration Statement on Form S-8 (File No. 33-80975).*
<PAGE>
10.12 Chartwell Re Corporation 1996 Non-Employee Director Stock Option
Plan. Incorporated by reference to Exhibit 4(c) to Chartwell Re
Corporation's Registration Statement on Form S-8 (File No.
333-12203).*
10.13 Chartwell Re Corporation 1997 Omnibus Stock Incentive Plan.
Incorporated by reference to Exhibit A to Chartwell Re Corporation's
Definitive Proxy Statement on Schedule 14A filed with the Securities
and Exchange Commission on April 11, 1997.*
10.14 Rules of the Chartwell Re Corporation Sharesave Scheme 1997.
Incorporated by Reference to Exhibit 10.43 to Chartwell Re
Corporation's Annual Report on Form 10-K for the year ended December
31, 1997 (File No. 1-12502).*
10.15 Form of Change of Control Agreement between Chartwell Re Holdings
Corporation and senior officers of Chartwell Re Holdings Corporation.
Incorporated by Reference to Exhibit 10.32 to Chartwell Re
Corporation's Annual Report on Form 10-K for the year ended December
31, 1997 (File No. 1-12502).*
10.16 Employment Agreement between Chartwell Re Corporation and Richard E.
Cole. Incorporated by reference to Exhibit 10.19 to Chartwell Re
Corporation's Registration Statement on Form S-1 (File No. 33-75386).*
10.17 Employment Agreement between Chartwell Re Corporation and Steven J.
Bensinger. Incorporated by reference to Exhibit 10.20 to Chartwell Re
Corporation's Registration Statement on Form S-1 (File no. 33-75386).*
10.18 Employment Agreement between Chartwell Re Corporation and Jacques Q.
Bonneau. Incorporated by reference to Exhibit 10.21 to Chartwell Re
Corporation's Registration Statement on Form S-1 (File No. 33-75386).*
10.19 Fourth Amendment to the Employment Agreement between Chartwell Re
Corporation and Richard E. Cole, dated as of December 31, 1997.
Incorporated by Reference to Exhibit 10.33 to Chartwell Re Corporation
's Annual Report on Form 10-K for the year ended December 31, 1997
(File No. 1-12502).*
10.20 Fourth Amendment to the Employment Agreement between Chartwell
Re Corporation and Steven J. Bensinger, dated as of December 31, 1997.
Incorporated by reference to Exhibit 10.34 to Chartwell Re
Corporation's Annual Report on Form 10-K for the year ended December
31, 1997 (File No. 1-12502).*
10.21 Fourth Amendment to the Employment Agreement between Chartwell
Re Corporation and Jacques Q. Bonneau, dated as of December 31, 1997.
Incorporated by reference to Exhibit 10.35 to Chartwell Re
Corporation's Annual Report on Form 10-K for the year ended December
31, 1997 (File No. 1-12502).*
10.22 Fifth Amendment to the Employment Agreement between Chartwell Re
Corporation and Richard E. Cole, dated as of August 4, 1998.*
10.23 Fifth Amendment to the Employment Agreement between Chartwell Re
Corporation and Steven J. Bensinger, dated as of August 4, 1998.*
<PAGE>
10.24 Fifth Amendment to the Employment Agreement between Chartwell Re
Corporation and Jacques Q. Bonneau, dated as of August 4, 1998.*
10.25 Sixth Amendment to the Employment Agreement between Chartwell Re
Corporation and Richard E. Cole, dated as of December 30, 1998.*
10.26 Sixth Amendment to the Employment Agreement between Chartwell Re
Corporation and Steven J. Bensinger, dated as of December 30, 1998.*
10.27 Sixth Amendment to the Employment Agreement between Chartwell Re
Corporation and Jacques Q Bonneau, dated as of December 30, 1998.*
10.28 Trust Agreement, dated as of June 20, 1994, by and between Shawmut
Bank CT (currently known as State Street Bank & Trust Company) and
Chartwell Re Corporation. Incorporated by Reference to Exhibit 10.38
to Chartwell's Annual Report on Form 10-K for the year ended December
31, 1997 (File No. 1-12502).*
10.29 First Amendment to Trust Agreement, dated as of August 4, 1998, by and
between State Street Bank and Trust Company and Chartwell Re
Corporation.*
10.30 Workers Compensation Retrocessional Stop Loss Agreement, dated
September 30, 1997, by and between both Chartwell Reinsurance Company
and The Insurance Corporation of New York and Western General
Insurance Ltd. Incorporated by Reference to Exhibit 10.40 to Chartwell
Re Corporation's Annual Report on Form 10-K for the year ended
December 31, 1997 (File No. 1-12502).
10.31 Aggregate Excess of Loss Reinsurance Treaty among Chartwell
Reinsurance Company, Dakota Specialty Insurance Company, The Insurance
Corporation of New York and London Life and Casualty Reinsurance
Corporation, dated as of July 1, 1997. Incorporated by Reference to
Exhibit 10.41 to Chartwell Re Corporation's Annual Report on Form 10-K
for the year ended December 31, 1997 (File No. 1-12502).
10.32 Aggregate Excess of Loss Reinsurance Treaty among Chartwell
Reinsurance Company, Dakota Specialty Insurance Company, The Insurance
Corporation of New York, Drayton Company Limited, Chartwell Re
Holdings Corporation, London Life and Casualty Reinsurance Corporation
of Western General Insurance Ltd, dated October 1, 1998.
10.33 Tax Allocation Agreement, dated December 13, 1995, by and among
Chartwell Re Corporation, Chartwell Re Holdings Corporation, Drayton
Company Limited, Chartwell Reinsurance Company, The Reinsurance
Corporation of New York and The ReCor Insurance Company Inc.
Incorporated by Reference to Exhibit 10.28 to Chartwell Re
Corporation's Annual Report on Form 10-K for the year ended December
31, 1997 (File No. 1-12502).
12.1 Computation of ratio of earnings to fixed charges.
21. Subsidiaries of Chartwell Re Corporation.
27.1 Financial Data Schedule
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*Management contract, compensatory plan or arrangement
THIRD AMENDMENT TO
FIRST AMENDED AND RESTATED CREDIT AGREEMENT
AND ACKNOWLEDGEMENT
THIS THIRD AMENDMENT TO FIRST AMENDED AND RESTATED CREDIT AGREEMENT AND
ACKNOWLEDGEMENT, dated as of December 1, 1998 (this "Third Amendment"), is made
in respect of the First Amended and Restated Credit Agreement dated November 14,
1996 (as twice amended by amendments dated January 24, 1997 and October 30,
1997, the "Credit Agreement"), by and between CHARTWELL RE HOLDINGS CORPORATION,
a Delaware corporation (the "Borrower"), the financial institutions listed on
the signature pages thereof or that become parties thereto after the date
thereof (collectively the "Lenders"), FIRST UNION NATIONAL BANK (formerly known
as First Union National Bank of North Carolina), as agent for the Lenders (in
such capacity, the "Agent") and as an Issuing Bank, and FIRST UNION NATIONAL
BANK (LONDON BRANCH), as an Issuing Bank. Capitalized terms used but not defined
herein shall have the meanings given to such terms in the Credit Agreement.
RECITALS
A. The Borrower has requested that the Credit Agreement be amended to
change the Revolving Credit Maturity Date from January 7, 2003 to January 7,
2004. Subject to the terms and conditions set forth herein, the Agent, the
Lenders and the Issuing Bank are willing to so amend the Credit Agreement.
B. The Parent and Beechwood each join this Third Amendment to approve
the transactions contemplated hereby and reaffirm its obligations under the
Guaranty and the Beechwood Escrow and Security Agreement, respectively.
STATEMENT OF AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, for themselves
and their successors and assigns, agree as follows:
ARTICLE I
AMENDMENT TO CREDIT AGREEMENT
1.1 Amendments to Section 1.1. (a) The definition of "Revolving Credit
Maturity Date" in Section 1.1 of the Credit Agreement shall be deleted in its
entirety and the following shall be substituted therefor:
"Revolving Credit Maturity Date" shall mean January 7, 2004.
(b) The matrix set forth in the definition of "Applicable Margin
Percentage" in Section 1.1 of the Credit Agreement shall be deleted in its
entirety and the following shall be substituted therefor:
Applicable Margin
Rating Status Percentage for LIBOR Loans
Level I Status 0.750%
Level II Status 0.875%
Level III Status 1.000%
Level IV Status 1.125%
ARTICLE II
REPRESENTATIONS AND WARRANTIES
The Borrower hereby certifies and warrants to the Agent, the Issuing
Bank and the Lenders that (a) each of the representations and warranties
contained in Article VI of the Credit Agreement and in the other Credit
Documents are true and correct in all material respects on the date hereof with
the same effect as though made on the date hereof, both immediately before and
after giving effect to this Amendment (except to the extent any such
representation or warranty is expressly stated to have been made as of a
specific date, in which case such representation or warranty shall be true and
correct as of such specified date), and (b) no Default or Event of Default shall
have occurred and be continuing on the date hereof.
ARTICLE III
ACKNOWLEDGEMENT
The Parent and Beechwood hereby acknowledge that the Borrower, the
Agent, the Issuing Bank and the Lenders have agreed, as provided herein, to
amend the Credit Agreement to extend the Revolving Credit Maturity Date until
January 7, 2004. Each of the Parent and Beechwood hereby approves and consents
to the transactions contemplated by this Third Amendment and agrees that its
obligations under the Guaranty and the Beechwood Escrow and Security Agreement,
respectively, and the other Credit Documents to which it is a party shall not be
diminished as a result of the execution of the Third Amendment. This
acknowledgement by the Parent and Beechwood is made and delivered to induce the
Agent, the Issuing Bank, and the Lenders to enter into this Third Amendment, and
the Parent and Beechwood acknowledge that the Agent, the Issuing Bank, and the
Lenders would not enter into this Third Amendment in the absence of the
acknowledgements contained herein.
ARTICLE IV
GENERAL
4.1 Full Force and Effect. Except as expressly amended hereby, the
Credit Agreement shall continue in full force and effect in accordance with the
provisions thereof on the date hereof. As used in the Credit Agreement,
"hereinafter," "hereto," "hereof," and words of similar import shall, unless the
context otherwise requires, mean the Credit Agreement after amendment by this
Third Amendment. Any reference to the Credit Agreement or any of the other
Credit Documents herein or in any such documents shall refer to the Credit
Agreement and Credit Documents as amended hereby.
4.2 Applicable Law. This Third Amendment shall be governed by and
construed in accordance with the internal laws and judicial decisions of the
State of North Carolina.
4.3 Counterparts. This Third Amendment may be executed in two or more
counterparts, each of which shall constitute an original, but all of which when
taken together shall constitute but one instrument.
4.4 Headings. The headings of this Third Amendment are for the purposes
of reference only and shall not affect the construction of this Third Amendment.
4.5 Effectiveness. This Third Amendment shall be deemed fully
effective when executed by each of the parties hereto.
-------------
[Signatures Appear on the Following Page]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment
to be executed by their duly authorized officers all as of the day and year
first above written.
CHARTWELL RE HOLDINGS CORPORATION
By:________________________________
Name:______________________________
Title:_____________________________
CHARTWELL REINSURANCE COMPANY, for purposes
of Article IV of the Credit Agreement only
By:_______________________________
Name:_____________________________
Title:____________________________
<PAGE>
CHARTWELL RE CORPORATION, for purposes of
Article III of this Third Amendment only
By: ______________________________
Name:_____________________________
Title:____________________________
CHARTWELL HOLDINGS LIMITED, for purposes of
Article III of this Third Amendment only
By:_______________________________
Name:_____________________________
Title:____________________________
<PAGE>
FIRST UNION NATIONAL BANK, as Agent, as
Issuing Bank and as a Lender (formerly
known First Union National of North Carolina
and First Union National Bank
(London Branch))
By:_______________________________
Name:_____________________________
Title:____________________________
CIBC, INC.
By:_______________________________
Name:_____________________________
Title:____________________________
CREDIT LYONNAIS NEW YORK BRANCH
By:_______________________________
Name:_____________________________
Title:____________________________
<PAGE>
FLEET NATIONAL BANK
By:_______________________________
Name:_____________________________
Title:____________________________
THE ROYAL BANK OF SCOTLAND
By:_______________________________
Name:_____________________________
Title:____________________________
FIFTH AMENDMENT TO EMPLOYMENT AGREEMENT
This Fifth Amendment to the Employment Agreement between Chartwell Re
Corporation and Richard E. Cole is entered into as of August 4, 1998.
RECITALS
A. Chartwell Re Corporation (the "Company") entered into an Employment
Agreement (the "Agreement") with Richard E. Cole (the "Executive") dated
December 8, 1993; and
B. The Agreement set forth the terms and conditions of the Executive's
employment with the Company.
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the Company and Executive hereby consent to
amend the Agreement as follows:
1. Clause (i) in Section 5(e) shall be deleted and the following shall be
inserted in its place:
"As soon as practicable following the end of each calendar year ending
on or prior to the end of the Term, the Company shall contribute to a
separate account (the "Trust Account") established for the Executive in
a rabbi trust (the "Rabbi Trust") administered by a bank or trust
company reasonably satisfactory to the Executive (the "Trustee"), an
amount equal to 20% of the Base Salary paid to the Executive during
such calendar year."
2. The last sentence of clause (ii) in Section 5(e) shall be deleted and
the following shall be inserted in its place:
"The Trustee shall provide the Company with written notice of any
proposed investment and a reasonable period of time to respond to the
Trustee with a written statement that such proposed investment could
reasonably be expected to have the adverse effect described in the
immediately preceding sentence. Notwithstanding the foregoing, the
Trustee shall have ultimate investment authority with respect to all
investments made of the amounts contributed to the Trust Account."
3. The first sentence of clause (iii) in Section 5(e) shall be deleted and
the following shall be inserted in its place:
"For each taxable year of the Company, the Company shall be entitled to
instruct the Trustee to deduct from the Trust Account and distribute to
the Company as of the end of the first calendar quarter following such
taxable year an amount equal to the greater of zero and the following:
Individual Trust Account Taxes
(Aggregate Taxes - $50,000) x ------------------------------
Aggregate Taxes
where "Aggregate Taxes" means all federal, state and local income or
franchise taxes deemed payable by the Company with respect to the
aggregate income or gains (offset by losses and loss carryforwards)
recognized by the Trust Account and each other trust account held in
the Rabbi Trust and "Individual Trust Account Taxes" means all federal,
state and local income or franchise taxes deemed payable by the Company
with respect to the income or gains attributable to the Trust Account
(offset by losses and loss carryforwards of the Trust Account on a
separate basis)."
4. Clause (iv) in Section 5(e) shall be deleted and the following shall be
inserted in its place:
"Within 10 calendar days following the Executive's attainment of age 65
or, if earlier, within the time periods following the Executive's Date
of Termination specified in Section 8, the Trustee shall make payments
to the Executive in cash (or, if consented to by the Company and the
Executive, in kind) of the balance of the Trust Account less any amount
which the Trustee may deduct pursuant to clause (iii) above with
respect to the period from the end of the immediately preceding taxable
year of the Company to the date of the payment to the Executive,
including any taxes payable as a result of the distribution."
5. Clause (v) in Section 5(e) shall be deleted and the following shall be
inserted in its place:
"For purposes of determining Aggregate Taxes and Individual Trust
Account Taxes pursuant to this Section 5(e), it shall be assumed that
the Company pays all taxes at the maximum marginal rate of federal
income taxes and state and local income and franchise taxes applicable
to business corporations in the jurisdictions in which the Company is
subject to state and local income and franchise taxes, with such
federal and state taxes reduced in order to reflect the deductibility
of any state and local income and franchise taxes in determining
federal taxes."
6. The following shall be added to the end of clause (vi) in Section 5(e):
"In the event that all or any portion of the principal and interest in
the Trust Account is not available to be distributed to the Executive
for any reason, the Company shall be liable to the Executive for an
amount equal to the amount contributed to the Trust Account, increased
(or decreased) by the income (or loss) attributable to the Trust
Account, reduced by any amounts previously distributed from the Trust
Account to the Executive or his beneficiaries and reduced by any
amounts paid or payable to the Company pursuant to clause (iii) above."
7. The following shall be added to the end of Section 5(h):
"If the number of vacation, paid holiday or personal days is reduced as
a result of a change in policy by the Company, the Executive shall be
entitled to the highest number of vacation, paid holiday and personal
days to which the Executive was entitled under Company policy during
any calendar year during the Term. Upon termination in accordance with
Section 8, the Executive shall be entitled to receive the pro-rata
portion of the Executive's then current Base Salary for any of the
Executive's accrued and unutilized vacation and personal days during
the Term."
8. Section 6(b)shall be deleted and the following shall be inserted in its
place:
"Disability. If, as a result of the Executive's incapacity due to
physical or mental illness, the Executive shall have been absent from
his duties hereunder on a full-time basis for the entire period of 12
consecutive months, and within 30 days after written Notice of
Termination is given (which may occur only after the end of such 12
month period), the Executive shall not have returned to the performance
of his duties hereunder on a full-time basis, the Company may terminate
the Executive's employment hereunder for "Disability"."
9. The last sentence of Section 6(c) shall be deleted and the following
shall be inserted in its place:
"Notwithstanding the foregoing, the Executive shall not be deemed to
have been terminated for Cause without (1) delivery to the Executive of
a Notice of Termination (as defined in Section 7(a)) from the Board
finding that in the good faith opinion of a majority of the Board the
Executive was guilty of conduct set forth above in clause (i) or (ii)
hereof, and specifying the particulars thereof in detail, (2) providing
a period of 30 calendar days from the date of delivery of the Notice of
Termination for the Executive to cure the conduct set forth in the
Notice of Termination and (3) an opportunity for the Executive,
together with his counsel, to be heard before the Board."
10. Clause (i) of Section 6(d) shall be deleted and the following shall be
inserted in its place:
"a material and adverse change in the Executive's status, authority,
duties or function or in the Executive's individual ability to
participate in or receive benefits under any incentive compensation,
bonus, stock option, stock ownership, employee benefit or other
employee welfare plan on the same basis as employees of the Company
generally,"
11. Clause (iii) of Section 7(b)shall be deleted and the following shall be
inserted in its place:
"if the Executive's employment is terminated pursuant to Section 6(c),
30 days after the Notice of Termination (provided that the Executive
shall not have cured the conduct set forth in the Notice of Termination
during such 30 day period and the other requirements of Section 6(c)
shall have been met), and"
12. Section 8(a) shall be deleted and the following shall be inserted in
its place:
"Death. If the Executive's employment is terminated by his death, the
Company shall within 30 calendar days of the Executive's death pay to
the Executive's estate or as may be directed by the legal
representatives of such estate any amounts accrued and due to the
Executive under Sections 5(a), 5(b), 5(d), 5(e), 5(f), 5(g), 5(h) and
5(j) through the date of his death, and the Company shall have no
further obligations hereunder."
13. The number "180" in the first sentence of Section 8(b) shall be deleted
and the number "365" shall be inserted in its place.
14. The last sentence of Section 8(b) shall be deleted and the following
shall be inserted in its place:
"Upon the Executive's termination of employment for Disability pursuant
to Section 6(b), the Company shall within 30 calendar days of the Date
of Termination pay the Executive any amounts accrued and due to the
Executive under Sections 5(a), 5(b), 5(d), 5(e), 5(f), 5(g), 5(h) and
5(j) through his Date of Termination, and the Company shall have no
further obligations hereunder."
15. Section 8(c) shall be deleted and the following shall be inserted in
its place:
"Cause or By Executive Without Good Reason. If the Executive's
employment with the Company is terminated for Cause or by the Executive
without Good Reason, the Company shall within 30 calendar days of the
Date of Termination pay the Executive all amounts accrued and due to
the Executive under Sections 5(a), 5(d), 5(e), 5(f), 5(g), 5(h) and
5(j) through his Date of Termination and the Company shall have no
further obligations hereunder."
16. Clause (i) of Section 8(d) shall be deleted and the following shall
be inserted in its place:
"within 30 calendar days of the Date of Termination pay the Executive
all amounts accrued and due to the Executive under Sections 5(a), 5(b),
5(d), 5(e), 5(f), 5(g), 5(h) and 5(j) through his Date of Termination,"
17. Clause (ii) of Section 8(d) shall be deleted and the following shall be
inserted in its place:
"pay the Executive his Base Salary (at the highest rate in effect at
any time during the Term) for three years from the Date of Termination
(or through such earlier time that the Executive violates the
provisions of Section 10) at the times such payments would otherwise
have been made under Section 5(a),"
18. Clause (iv) of Section 8(d) shall be deleted and the following shall be
inserted in its place:
"provide the Executive with outplacement services having a value of at
least $10,000 and continuing for a period of one year from the Date of
Termination (it being understood and agreed that the Company shall not
have any obligation to purchase outplacement services in excess of
$10,000 pursuant to this clause (iv))."
19. The first paragraph of Section 8(e) shall be deleted and the following
shall be inserted in its place:
"Notwithstanding any other provisions in this Agreement, if during the
two year period following a "Change of Control" of the Company, the
Executive's employment with the Company shall terminate as a result of:
(i) the termination of the Executive's employment by
the Company (including a failure by the Company to extend the
Term) other than for Disability or Cause, or
(ii) the Executive's termination for Good Reason,
the Company shall pay to the Executive, within five (5) days following
the Date of Termination, the compensation set forth in Section 8(d)(i),
plus (in lieu of the compensation set forth in Sections 8(d)(ii) and
(iii)) a lump sum payment equal to the sum of (A) three (3) times the
Executive's Base Salary (at the highest rate in effect at any time
during the Term) and (B) an amount equal to the greater of (1) the
highest annual bonus paid to the Executive during the two fiscal years
prior to the Change of Control or (2) the highest annual bonus paid to
the Executive after the Change of Control, but only to the extent
payment of such amount does not subject the Executive to any Excise Tax
(as defined below) in connection therewith. In addition to the
foregoing, for a period of two years following the Date of Termination,
the Company shall provide the Executive with continued participation
(or equivalent benefits if such participation is not permitted) in the
employee benefit plans provided to the Executive pursuant to Section
5(c) as of the Date of Termination. If requested by the Executive
within 30 calendar days of the Date of Termination, in lieu of the
obligation of the Company set forth in the immediately preceding
sentence, the Company shall pay to the Executive within 30 calendar
days of receipt of such request the amount needed by the Executive to
purchase benefits equivalent to those provided to the Executive
pursuant to Section 5(c) as of the Date of Termination for a period of
two years from the Date of Termination."
20. The fourth sentence of Section 8(f) shall be deleted and the following
shall be inserted in its place:
"If a determination (as defined in Section 1313 of the Code) is made
that the Executive owes less Excise Tax than the amount taken into
account hereunder at the time of termination of the Executive's
employment, the Executive shall pay to the Company the amount of any
refunded Excise Tax (and any statutory interest paid to the Executive
by the Internal Revenue Service) promptly upon receipt. The Executive
shall also pay to the Company the value of any tax savings which the
Executive realizes as a result of the repayment of the Excise Tax to
the Company."
21. The following shall be added to the end of Section 9:
"Except as set forth in this Section 9, the Executive shall have no
duty to mitigate the effects of this Agreement, and the Company shall
have no right to reduce the Executive's severance benefits under this
Agreement."
22. The last sentence of Section 10(d) shall be deleted and the following
shall be inserted in its place:
"Notwithstanding the foregoing provisions of this Section 10, the
Executive (x) may discuss this Agreement with the members of his
immediate family and with his personal legal and tax advisors, provided
that, prior to disclosing any term or condition of this Agreement to
any such person, the Executive shall obtain from such person for the
benefit of the Company his or her agreement to observe the foregoing
provisions and (y) may disclose any information regarding this
Agreement or other information regarding the Company or its
majority-owned subsidiaries which, in the opinion of the Executive's
counsel, the Executive is legally compelled to disclose."
23. The first paragraph of Section 11 shall be deleted and the following
shall be inserted in its place:
"For the purposes of this Agreement, notices, demands and all other
communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered to the
recipient, addressed as follows:"
24. The following new paragraphs shall be added to the end of Section 13:
"The Executive and the Company shall each promptly select an
arbitrator and a third arbitrator shall be selected jointly by the
arbitrators selected by the parties within 15 days of their selection
by the Executive and the Company. If the arbitrators are unable to
agree on a third arbitrator within that period, then the Company or the
Executive may request that the American Arbitration Association select
the third arbitrator. The arbitrators shall possess substantive legal
experience in the principal issues in dispute and shall be independent
of the parties hereto.
The arbitration shall take place at a location selected by the
arbitrators within the New York City metropolitan area. The arbitrators
shall have the authority to award any remedy or relief that a court of
competent jurisdiction could order or grant, including, without
limitation, the issuance of an injunction. Either party may apply to a
court for enforcement of the remedy or relief the arbitrators order or
grant.
Any discovery permitted shall be limited to information directly
relevant to the controversy or claim in arbitration. In the event of
discovery disputes, the arbitrators are directed to issue such orders
as are appropriate to limit discovery in accordance with the foregoing
and as are reasonable in light of the issues in dispute, the amount in
controversy and other relevant considerations.
The Company shall reimburse the Executive, upon demand, for all costs
and expenses (including, without limitation attorneys' fees) reasonably
incurred by the Executive in good faith in connection with this
arbitration provision, including, without limitation, in connection
with any such application undertaken by the Executive in good faith as
well as for all such costs and expenses reasonably incurred by the
Executive in connection with entering or enforcing the award rendered
by the arbitrators.
Except as necessary in court proceedings to enforce this arbitration
provision or an award rendered hereunder, neither a party nor an
arbitrator may disclose the existence, content or results of any
arbitration hereunder without the prior written consent of the
Company."
25. Except as expressly amended hereby, the Agreement shall continue in
full force and effect in accordance with the provisions thereof on the
date hereof.
26. This Fifth Amendment shall inure to the benefit of and be binding upon
the parties hereto and their respective successors and assigns.
27. This Fifth Amendment may be executed in two or more counterparts, each
of which shall constitute an original, but all of which when taken
together shall constitute but one instrument.
28. This Fifth Amendment shall be governed by and construed in accordance
with the laws of the State of Delaware without regard to its conflict
of law principles.
IN WITNESS WHEREOF, the Executive has executed this Fifth Amendment and the
Company has caused this Fifth Amendment to be executed by its duly authorized
representative.
CHARTWELL RE CORPORATION
/s/ Richard E. Cole By: /s/ John V. Del Col
- - ----------------------- --------------------------------
Richard E. Cole John V. Del Col
Vice President, General Counsel
& Secretary
FIFTH AMENDMENT TO EMPLOYMENT AGREEMENT
This Fifth Amendment to the Employment Agreement between Chartwell Re
Corporation and Steven J. Bensinger is entered into as of August 4, 1998.
RECITALS
A. Chartwell Re Corporation (the "Company") entered into an Employment
Agreement (the "Agreement") with Steven J. Bensinger (the "Executive")
dated March 31, 1993; and
B. The Agreement set forth the terms and conditions of the Executive's
employment with the Company.
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the Company and Executive hereby consent to
amend the Agreement as follows:
1. Clause (i) in Section 5(e) shall be deleted and the following shall be
inserted in its place:
"As soon as practicable following the end of each calendar year ending
on or prior to the end of the Term, the Company shall contribute to a
separate account (the "Trust Account") established for the Executive in
a rabbi trust (the "Rabbi Trust") administered by a bank or trust
company reasonably satisfactory to the Executive (the "Trustee"), an
amount equal to 13-1/2% of the Base Salary paid to the Executive during
such calendar year."
2. The last sentence of clause (ii) in Section 5(e) shall be deleted
and the following shall be inserted in its place:
"The Trustee shall provide the Company with written notice of any
proposed investment and a reasonable period of time to respond to the
Trustee with a written statement that such proposed investment could
reasonably be expected to have the adverse effect described in the
immediately preceding sentence. Notwithstanding the foregoing, the
Trustee shall have ultimate investment authority with respect to all
investments made of the amounts contributed to the Trust Account."
3. The first sentence of clause (iii) in Section 5(e) shall be deleted
and the following shall be inserted in its place:
"For each taxable year of the Company, the Company shall be entitled to
instruct the Trustee to deduct from the Trust Account and distribute to
the Company as of the end of the first calendar quarter following such
taxable year an amount equal to the greater of zero and the following:
(Aggregate Taxes - $50,000) x Individual Trust Account Taxes
------------------------------
Aggregate Taxes
where "Aggregate Taxes" means all federal, state and local income or
franchise taxes deemed payable by the Company with respect to the
aggregate income or gains (offset by losses and loss carryforwards)
recognized by the Trust Account and each other trust account held in
the Rabbi Trust and "Individual Trust Account Taxes" means all federal,
state and local income or franchise taxes deemed payable by the Company
with respect to the income or gains attributable to the Trust Account
(offset by losses and loss carryforwards of the Trust Account on a
separate basis)."
4. Clause (iv) in Section 5(e) shall be deleted and the following
shall be inserted in its place:
"Within 10 calendar days following the Executive's attainment of age 65
or, if earlier, within the time periods following the Executive's Date
of Termination specified in Section 8, the Trustee shall make payments
to the Executive in cash (or, if consented to by the Company and the
Executive, in kind) of the balance of the Trust Account less any amount
which the Trustee may deduct pursuant to clause (iii) above with
respect to the period from the end of the immediately preceding taxable
year of the Company to the date of the payment to the Executive,
including any taxes payable as a result of the distribution."
5. Clause (v) in Section 5(e) shall be deleted and the following
shall be inserted in its place:
"For purposes of determining Aggregate Taxes and Individual Trust
Account Taxes pursuant to this Section 5(e), it shall be assumed that
the Company pays all taxes at the maximum marginal rate of federal
income taxes and state and local income and franchise taxes applicable
to business corporations in the jurisdictions in which the Company is
subject to state and local income and franchise taxes, with such
federal and state taxes reduced in order to reflect the deductibility
of any state and local income and franchise taxes in determining
federal taxes."
6. The following shall be added to the end of clause (vi) in Section 5(e):
"In the event that all or any portion of the principal and interest in
the Trust Account is not available to be distributed to the Executive
for any reason, the Company shall be liable to the Executive for an
amount equal to the amount contributed to the Trust Account, increased
(or decreased) by the income (or loss) attributable to the Trust
Account, reduced by any amounts previously distributed from the Trust
Account to the Executive or his beneficiaries and reduced by any
amounts paid or payable to the Company pursuant to clause (iii) above."
7. The following shall be added to the end of Section 5(h):
"If the number of vacation, paid holiday or personal days is reduced as
a result of a change in policy by the Company, the Executive shall be
entitled to the highest number of vacation, paid holiday and personal
days to which the Executive was entitled under Company policy during
any calendar year during the Term. Upon termination in accordance with
Section 8, the Executive shall be entitled to receive the pro-rata
portion of the Executive's then current Base Salary for any of the
Executive's accrued and unutilized vacation and personal days during
the Term."
8. Section 6(b) shall be deleted and the following shall be inserted
in its place:
"Disability. If, as a result of the Executive's incapacity due to
physical or mental illness, the Executive shall have been absent from
his duties hereunder on a full-time basis for the entire period of 12
consecutive months, and within 30 days after written Notice of
Termination is given (which may occur only after the end of such 12
month period), the Executive shall not have returned to the performance
of his duties hereunder on a full-time basis, the Company may terminate
the Executive's employment hereunder for "Disability"."
9. The last sentence of Section 6(c) shall be deleted and the following
shall be inserted in its place:
"Notwithstanding the foregoing, the Executive shall not be deemed to
have been terminated for Cause without (1) delivery to the Executive of
a Notice of Termination (as defined in Section 7(a)) from the Board
finding that in the good faith opinion of a majority of the Board the
Executive was guilty of conduct set forth above in clause (i) or (ii)
hereof, and specifying the particulars thereof in detail, (2) providing
a period of 30 calendar days from the date of delivery of the Notice of
Termination for the Executive to cure the conduct set forth in the
Notice of Termination and (3) an opportunity for the Executive,
together with his counsel, to be heard before the Board."
10. Clause (i) of Section 6(d) shall be deleted and the following
shall be inserted in its place:
"a material and adverse change in the Executive's status, authority,
duties or function or in the Executive's individual ability to
participate in or receive benefits under any incentive compensation,
bonus, stock option, stock ownership, employee benefit or other
employee welfare plan on the same basis as employees of the Company
generally,"
11 Clause (iii) of Section 7(b) shall be deleted and the following shall
be inserted in its place:
"if the Executive's employment is terminated pursuant to Section 6(c),
30 days after the Notice of Termination (provided that the Executive
shall not have cured the conduct set forth in the Notice of Termination
during such 30 day period and the other requirements of Section 6(c)
shall have been met), and"
12. Section 8(a) shall be deleted and the following shall be inserted in
its place:
"Death. If the Executive's employment is terminated by his death, the
Company shall within 30 calendar days of the Executive's death pay to
the Executive's estate or as may be directed by the legal
representatives of such estate any amounts accrued and due to the
Executive under Sections 5(a), 5(b)(ii), 5(d), 5(e), 5(f), 5(g), 5(h)
and 5(j) through the date of his death and shall pay all amounts under
Section 5(b)(i) when due, and the Company shall have no further
obligations hereunder."
13. The number "180" in the first sentence of Section 8(b) shall be deleted
and the number "365" shall be inserted in its place.
14. The last sentence of Section 8(b) shall be deleted and the following
shall be inserted in its place:
"Upon the Executive's termination of employment for Disability pursuant
to Section 6(b), the Company shall within 30 calendar days of the Date
of Termination pay the Executive any amounts accrued and due to the
Executive under Sections 5(a), 5(b)(ii), 5(d), 5(e), 5(f), 5(g), 5(h)
and 5(j) through his Date of Termination and shall pay all amounts
under Section 5(b)(i) when due, and the Company shall have no further
obligations hereunder."
15. Section 8(c) shall be deleted and the following shall be inserted in
its place:
"Cause or By Executive Without Good Reason. If the Executive's
employment with the Company is terminated for Cause or by the Executive
without Good Reason, the Company shall within 30 calendar days of the
Date of Termination pay the Executive all amounts accrued and due to
the Executive under Sections 5(a), 5(d), 5(e), 5(f), 5(g), 5(h) and
5(j) through his Date of Termination and the Company shall have no
further obligations hereunder."
16. Clause (i) of Section 8(d) shall be deleted and the following shall
be inserted in its place:
"within 30 calendar days of the Date of Termination pay the Executive
all amounts accrued and due to the Executive under Sections 5(a), 5(b),
5(d), 5(e), 5(f), 5(g), 5(h) and 5(j) through his Date of Termination,"
17. Clause (ii) of Section 8(d) shall be deleted and the following shall
be inserted in its place:
"pay the Executive his Base Salary (at the highest rate in effect at
any time during the Term) for three years from the Date of Termination
(or through such earlier time that the Executive violates the
provisions of Section 10) at the times such payments would otherwise
have been made under Section 5(a) and pay the Executive any remaining
installment bonus payments at the times such payments would otherwise
have been made under Section 5(b)(i),"
18. Clause (iv) of Section 8(d) shall be deleted and the following shall
be inserted in its place:
"provide the Executive with outplacement services having a value of at
least $10,000 and continuing for a period of one year from the Date of
Termination (it being understood and agreed that the Company shall not
have any obligation to purchase outplacement services in excess of
$10,000 pursuant to this clause (iv))."
19. The first paragraph of Section 8(e) shall be deleted and the following
shall be inserted in its place:
"Notwithstanding any other provisions in this Agreement, if during the
two year period following a "Change of Control" of the Company, the
Executive's employment with the Company shall terminate as a result of:
(i) the termination of the Executive's employment by
the Company (including a failure by the Company to extend the
Term) other than for Disability or Cause, or
(ii) the Executive's termination for Good Reason,
the Company shall pay to the Executive, within five (5) days following
the Date of Termination, the compensation set forth in Section 8(d)(i),
plus (in lieu of the compensation set forth in Sections 8(d)(ii) and
(iii)) a lump sum payment equal to the sum of (A) three (3) times the
Executive's Base Salary (at the highest rate in effect at any time
during the Term), (B) an amount equal to the greater of (1) the highest
annual bonus paid to the Executive during the two fiscal years prior to
the Change of Control or (2) the highest annual bonus paid to the
Executive after the Change of Control, but only to the extent payment
of such amount does not subject the Executive to any Excise Tax (as
defined below) in connection therewith and (C) any installment bonus
payments not yet paid to the Executive pursuant to Section 5(b)(i). In
addition to the foregoing, for a period of two years following the Date
of Termination, the Company shall provide the Executive with continued
participation (or equivalent benefits if such participation is not
permitted) in the employee benefit plans provided to the Executive
pursuant to Section 5(c) as of the Date of Termination. If requested by
the Executive within 30 calendar days of the Date of Termination, in
lieu of the obligation of the Company set forth in the immediately
preceding sentence, the Company shall pay to the Executive within 30
calendar days of receipt of such request the amount needed by the
Executive to purchase benefits equivalent to those provided to the
Executive pursuant to Section 5(c) as of the Date of Termination for a
period of two years from the Date of Termination."
20. The fourth sentence of Section 8(f) shall be deleted and the following
shall be inserted in its place:
"If a determination (as defined in Section 1313 of the Code) is made
that the Executive owes less Excise Tax than the amount taken into
account hereunder at the time of termination of the Executive's
employment, the Executive shall pay to the Company the amount of any
refunded Excise Tax (and any statutory interest paid to the Executive
by the Internal Revenue Service) promptly upon receipt. The Executive
shall also pay to the Company the value of any tax savings which the
Executive realizes as a result of the repayment of the Excise Tax to
the Company."
21. The following shall be added to the end of Section 9:
"Except as set forth in this Section 9, the Executive shall have no
duty to mitigate the effects of this Agreement, and the Company shall
have no right to reduce the Executive's severance benefits under this
Agreement."
22. The last sentence of Section 10(d) shall be deleted and the following
shall be inserted in its place:
"Notwithstanding the foregoing provisions of this Section 10, the
Executive (x) may discuss this Agreement with the members of his
immediate family and with his personal legal and tax advisors, provided
that, prior to disclosing any term or condition of this Agreement to
any such person, the Executive shall obtain from such person for the
benefit of the Company his or her agreement to observe the foregoing
provisions and (y) may disclose any information regarding this
Agreement or other information regarding the Company or its
majority-owned subsidiaries which, in the opinion of the Executive's
counsel, the Executive is legally compelled to disclose."
23. The first paragraph of Section 11 shall be deleted and the following
shall be inserted in its place:
"For the purposes of this Agreement, notices, demands and all other
communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered to the
recipient, addressed as follows:"
24. The following new paragraphs shall be added to the end of Section 13:
"The Executive and the Company shall each promptly select an
arbitrator and a third arbitrator shall be selected jointly by the
arbitrators selected by the parties within 15 days of their selection
by the Executive and the Company. If the arbitrators are unable to
agree on a third arbitrator within that period, then the Company or the
Executive may request that the American Arbitration Association select
the third arbitrator. The arbitrators shall possess substantive legal
experience in the principal issues in dispute and shall be independent
of the parties hereto.
The arbitration shall take place at a location selected by the
arbitrators within the New York City metropolitan area. The arbitrators
shall have the authority to award any remedy or relief that a court of
competent jurisdiction could order or grant, including, without
limitation, the issuance of an injunction. Either party may apply to a
court for enforcement of the remedy or relief the arbitrators order or
grant.
Any discovery permitted shall be limited to information directly
relevant to the controversy or claim in arbitration. In the event of
discovery disputes, the arbitrators are directed to issue such orders
as are appropriate to limit discovery in accordance with the foregoing
and as are reasonable in light of the issues in dispute, the amount in
controversy and other relevant considerations.
The Company shall reimburse the Executive, upon demand, for all costs
and expenses (including, without limitation attorneys' fees) reasonably
incurred by the Executive in good faith in connection with this
arbitration provision, including, without limitation, in connection
with any such application undertaken by the Executive in good faith as
well as for all such costs and expenses reasonably incurred by the
Executive in connection with entering or enforcing the award rendered
by the arbitrators.
Except as necessary in court proceedings to enforce this arbitration
provision or an award rendered hereunder, neither a party nor an
arbitrator may disclose the existence, content or results of any
arbitration hereunder without the prior written consent of the
Company."
25. Except as expressly amended hereby, the Agreement shall continue in
full force and effect in accordance with the provisions thereof on the
date hereof.
26. This Fifth Amendment shall inure to the benefit of and be binding upon
the parties hereto and their respective successors and assigns.
27. This Fifth Amendment may be executed in two or more counterparts, each
of which shall constitute an original, but all of which when taken
together shall constitute but one instrument.
28. This Fifth Amendment shall be governed by and construed in accordance
with the laws of the State of Delaware without regard to its conflict
of law principles.
IN WITNESS WHEREOF, the Executive has executed this Fifth Amendment and the
Company has caused this Fifth Amendment to be executed by its duly authorized
representative.
CHARTWELL RE CORPORATION
/s/ Steven J. Bensinger By: /s/ John V. Del Col
- - ------------------------- ---------------------------------
Steven J. Bensinger John V. Del Col
Vice President, General Counsel
& Secretary
FIFTH AMENDMENT TO EMPLOYMENT AGREEMENT
This Fifth Amendment to the Employment Agreement between Chartwell Re
Corporation and Jacques Q. Bonneau is entered into as of August 4, 1998.
RECITALS
A. Chartwell Re Corporation (the "Company") entered into an Employment
Agreement (the "Agreement") with Jacques Q. Bonneau (the "Executive") dated
December 8, 1993; and
B. The Agreement set forth the terms and conditions of the Executive's
employment with the Company.
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the Company and Executive hereby consent to
amend the Agreement as follows:
1. Clause (i) in Section 5(e) shall be deleted and the following shall be
inserted in its place:
"As soon as practicable following the end of each calendar year ending
on or prior to the end of the Term, the Company shall contribute to a
separate account (the "Trust Account") established for the Executive in
a rabbi trust (the "Rabbi Trust") administered by a bank or trust
company reasonably satisfactory to the Executive (the "Trustee"), an
amount equal to 13-1/2% of the Base Salary paid to the Executive during
such calendar year."
2. The last sentence of clause (ii) in Section 5(e) shall be deleted and
the following shall be inserted in its place:
"The Trustee shall provide the Company with written notice of any
proposed investment and a reasonable period of time to respond to the
Trustee with a written statement that such proposed investment could
reasonably be expected to have the adverse effect described in the
immediately preceding sentence. Notwithstanding the foregoing, the
Trustee shall have ultimate investment authority with respect to all
investments made of the amounts contributed to the Trust Account."
3. The first sentence of clause (iii) in Section 5(e) shall be deleted
and the following shall be inserted in its place:
"For each taxable year of the Company, the Company shall be entitled to
instruct the Trustee to deduct from the Trust Account and distribute to
the Company as of the end of the first calendar quarter following such
taxable year an amount equal to the greater of zero and the following:
Individual Trust Account Taxes
(Aggregate Taxes - $50,000) x ------------------------------
Aggregate Taxes
where "Aggregate Taxes" means all federal, state and local income or
franchise taxes deemed payable by the Company with respect to the
aggregate income or gains (offset by losses and loss carryforwards)
recognized by the Trust Account and each other trust account held in
the Rabbi Trust and "Individual Trust Account Taxes" means all federal,
state and local income or franchise taxes deemed payable by the Company
with respect to the income or gains attributable to the Trust Account
(offset by losses and loss carryforwards of the Trust Account on a
separate basis)."
4. Clause (iv) in Section 5(e) shall be deleted and the following shall be
inserted in its place:
"Within 10 calendar days following the Executive's attainment of age 65
or, if earlier, within the time periods following the Executive's Date
of Termination specified in Section 8, the Trustee shall make payments
to the Executive in cash (or, if consented to by the Company and the
Executive, in kind) of the balance of the Trust Account less any amount
which the Trustee may deduct pursuant to clause (iii) above with
respect to the period from the end of the immediately preceding taxable
year of the Company to the date of the payment to the Executive,
including any taxes payable as a result of the distribution."
5. Clause (v) in Section 5(e) shall be deleted and the following shall be
inserted in its place:
"For purposes of determining Aggregate Taxes and Individual Trust
Account Taxes pursuant to this Section 5(e), it shall be assumed that
the Company pays all taxes at the maximum marginal rate of federal
income taxes and state and local income and franchise taxes applicable
to business corporations in the jurisdictions in which the Company is
subject to state and local income and franchise taxes, with such
federal and state taxes reduced in order to reflect the deductibility
of any state and local income and franchise taxes in determining
federal taxes."
6. The following shall be added to the end of clause (vi) in Section 5(e):
"In the event that all or any portion of the principal and interest in
the Trust Account is not available to be distributed to the Executive
for any reason, the Company shall be liable to the Executive for an
amount equal to the amount contributed to the Trust Account, increased
(or decreased) by the income (or loss) attributable to the Trust
Account, reduced by any amounts previously distributed from the Trust
Account to the Executive or his beneficiaries and reduced by any
amounts paid or payable to the Company pursuant to clause (iii) above."
7. The following shall be added to the end of Section 5(h):
"If the number of vacation, paid holiday or personal days is reduced as
a result of a change in policy by the Company, the Executive shall be
entitled to the highest number of vacation, paid holiday and personal
days to which the Executive was entitled under Company policy during
any calendar year during the Term. Upon termination in accordance with
Section 8, the Executive shall be entitled to receive the pro-rata
portion of the Executive's then current Base Salary for any of the
Executive's accrued and unutilized vacation and personal days during
the Term."
8. Section 6(b)shall be deleted and the following shall be inserted in its
place:
"Disability. If, as a result of the Executive's incapacity due to
physical or mental illness, the Executive shall have been absent from
his duties hereunder on a full-time basis for the entire period of 12
consecutive months, and within 30 days after written Notice of
Termination is given (which may occur only after the end of such 12
month period), the Executive shall not have returned to the performance
of his duties hereunder on a full-time basis, the Company may terminate
the Executive's employment hereunder for "Disability"."
9. The last sentence of Section 6(c) shall be deleted and the following
shall be inserted in its place:
"Notwithstanding the foregoing, the Executive shall not be deemed to
have been terminated for Cause without (1) delivery to the Executive of
a Notice of Termination (as defined in Section 7(a)) from the Board
finding that in the good faith opinion of a majority of the Board the
Executive was guilty of conduct set forth above in clause (i) or (ii)
hereof, and specifying the particulars thereof in detail, (2) providing
a period of 30 calendar days from the date of delivery of the Notice of
Termination for the Executive to cure the conduct set forth in the
Notice of Termination and (3) an opportunity for the Executive,
together with his counsel, to be heard before the Board."
10. Clause (i) of Section 6(d) shall be deleted and the following shall be
inserted in its place:
"a material and adverse change in the Executive's status, authority,
duties or function or in the Executive's individual ability to
participate in or receive benefits under any incentive compensation,
bonus, stock option, stock ownership, employee benefit or other
employee welfare plan on the same basis as employees of the Company
generally,"
11. Clause (iii)of Section 7(b) shall be deleted and the following shall be
inserted in its place:
"if the Executive's employment is terminated pursuant to Section 6(c),
30 days after the Notice of Termination (provided that the Executive
shall not have cured the conduct set forth in the Notice of Termination
during such 30 day period and the other requirements of Section 6(c)
shall have been met), and"
12. Section 8(a)shall be deleted and the following shall be inserted in its
place:
"Death. If the Executive's employment is terminated by his death, the
Company shall within 30 calendar days of the Executive's death pay to
the Executive's estate or as may be directed by the legal
representatives of such estate any amounts accrued and due to the
Executive under Sections 5(a), 5(b)(ii), 5(d), 5(e), 5(f), 5(g), 5(h)
and 5(j) through the date of his death and the balance of any amounts
due under Section 5(b)(i), and the Company shall have no further
obligations hereunder."
13. The number "180" in the first sentence of Section 8(b) shall be deleted
and the number "365" shall be inserted in its place.
14. The last sentence of Section 8(b) shall be deleted and the following
shall be inserted in its place:
"Upon the Executive's termination of employment for Disability pursuant
to Section 6(b), the Company shall within 30 calendar days of the Date
of Termination pay the Executive any amounts accrued and due to the
Executive under Sections 5(a), 5(b)(ii), 5(d), 5(e), 5(f), 5(g), 5(h)
and 5(j) through his Date of Termination and the balance of any amounts
due under Section 5(b)(i), and the Company shall have no further
obligations hereunder."
15. Section 8(c) shall be deleted and the following shall be inserted in
its place:
"Cause or By Executive Without Good Reason. If the Executive's
employment with the Company is terminated for Cause or by the Executive
without Good Reason, the Company shall within 30 calendar days of the
Date of Termination pay the Executive all amounts accrued and due to
the Executive under Sections 5(a), 5(d), 5(e), 5(f), 5(g), 5(h) and
5(j) through his Date of Termination and the Company shall have no
further obligations hereunder."
16. Clause (i) of Section 8(d) shall be deleted and the following shall
be inserted in its place:
"within 30 calendar days of the Date of Termination pay the Executive
all amounts accrued and due to the Executive under Sections 5(a), 5(b),
5(d), 5(e), 5(f), 5(g), 5(h) and 5(j) through his Date of Termination,"
17. Clause (ii) of Section 8(d) shall be deleted and the following shall
be inserted in its place:
"pay the Executive his Base Salary (at the highest rate in effect at
any time during the Term) for three years from the Date of Termination
(or through such earlier time that the Executive violates the
provisions of Section 10) at the times such payments would otherwise
have been made under Section 5(a),"
18. Clause (iv) of Section 8(d) shall be deleted and the following shall be
inserted in its place:
"provide the Executive with outplacement services having a value of at
least $10,000 and continuing for a period of one year from the Date of
Termination (it being understood and agreed that the Company shall not
have any obligation to purchase outplacement services in excess of
$10,000 pursuant to this clause (iv))."
19. The first paragraph of Section 8(e) shall be deleted and the following
shall be inserted in its place:
"Notwithstanding any other provisions in this Agreement, if during the
two year period following a "Change of Control" of the Company, the
Executive's employment with the Company shall terminate as a result of:
(i) the termination of the Executive's employment by
the Company (including a failure by the Company to extend the
Term) other than for Disability or Cause, or
(ii) the Executive's termination for Good Reason,
the Company shall pay to the Executive, within five (5) days following
the Date of Termination, the compensation set forth in Section 8(d)(i),
plus (in lieu of the compensation set forth in Sections 8(d)(ii) and
(iii)) a lump sum payment equal to the sum of (A) three (3) times the
Executive's Base Salary (at the highest rate in effect at any time
during the Term) and (B) an amount equal to the greater of (1) the
highest annual bonus paid to the Executive during the two fiscal years
prior to the Change of Control or (2) the highest annual bonus paid to
the Executive after the Change of Control, but only to the extent
payment of such amount does not subject the Executive to any Excise Tax
(as defined below) in connection therewith. In addition to the
foregoing, for a period of two years following the Date of Termination,
the Company shall provide the Executive with continued participation
(or equivalent benefits if such participation is not permitted) in the
employee benefit plans provided to the Executive pursuant to Section
5(c) as of the Date of Termination. If requested by the Executive
within 30 calendar days of the Date of Termination, in lieu of the
obligation of the Company set forth in the immediately preceding
sentence, the Company shall pay to the Executive within 30 calendar
days of receipt of such request the amount needed by the Executive to
purchase benefits equivalent to those provided to the Executive
pursuant to Section 5(c) as of the Date of Termination for a period of
two years from the Date of Termination."
20. The fourth sentence of Section 8(f) shall be deleted and the following
shall be inserted in its place:
"If a determination (as defined in Section 1313 of the Code) is made
that the Executive owes less Excise Tax than the amount taken into
account hereunder at the time of termination of the Executive's
employment, the Executive shall pay to the Company the amount of any
refunded Excise Tax (and any statutory interest paid to the Executive
by the Internal Revenue Service) promptly upon receipt. The Executive
shall also pay to the Company the value of any tax savings which the
Executive realizes as a result of the repayment of the Excise Tax to
the Company."
21. The following shall be added to the end of Section 9:
"Except as set forth in this Section 9, the Executive shall have no
duty to mitigate the effects of this Agreement, and the Company shall
have no right to reduce the Executive's severance benefits under this
Agreement."
22. The last sentence of Section 10(d) shall be deleted and the following
shall be inserted in its place:
"Notwithstanding the foregoing provisions of this Section 10, the
Executive (x) may discuss this Agreement with the members of his
immediate family and with his personal legal and tax advisors, provided
that, prior to disclosing any term or condition of this Agreement to
any such person, the Executive shall obtain from such person for the
benefit of the Company his or her agreement to observe the foregoing
provisions and (y) may disclose any information regarding this
Agreement or other information regarding the Company or its
majority-owned subsidiaries which, in the opinion of the Executive's
counsel, the Executive is legally compelled to disclose."
23. The first paragraph of Section 11 shall be deleted and the following
shall be inserted in its place:
"For the purposes of this Agreement, notices, demands and all other
communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered to the
recipient, addressed as follows:"
24. The following new paragraphs shall be added to the end of Section 13:
"The Executive and the Company shall each promptly select an
arbitrator and a third arbitrator shall be selected jointly by the
arbitrators selected by the parties within 15 days of their selection
by the Executive and the Company. If the arbitrators are unable to
agree on a third arbitrator within that period, then the Company or the
Executive may request that the American Arbitration Association select
the third arbitrator. The arbitrators shall possess substantive legal
experience in the principal issues in dispute and shall be independent
of the parties hereto.
The arbitration shall take place at a location selected by the
arbitrators within the New York City metropolitan area. The arbitrators
shall have the authority to award any remedy or relief that a court of
competent jurisdiction could order or grant, including, without
limitation, the issuance of an injunction. Either party may apply to a
court for enforcement of the remedy or relief the arbitrators order or
grant.
Any discovery permitted shall be limited to information directly
relevant to the controversy or claim in arbitration. In the event of
discovery disputes, the arbitrators are directed to issue such orders
as are appropriate to limit discovery in accordance with the foregoing
and as are reasonable in light of the issues in dispute, the amount in
controversy and other relevant considerations.
The Company shall reimburse the Executive, upon demand, for all costs
and expenses (including, without limitation attorneys' fees) reasonably
incurred by the Executive in good faith in connection with this
arbitration provision, including, without limitation, in connection
with any such application undertaken by the Executive in good faith as
well as for all such costs and expenses reasonably incurred by the
Executive in connection with entering or enforcing the award rendered
by the arbitrators.
Except as necessary in court proceedings to enforce this arbitration
provision or an award rendered hereunder, neither a party nor an
arbitrator may disclose the existence, content or results of any
arbitration hereunder without the prior written consent of the
Company."
25. Except as expressly amended hereby, the Agreement shall continue in
full force and effect in accordance with the provisions thereof on the
date hereof.
26. This Fifth Amendment shall inure to the benefit of and be binding upon
the parties hereto and their respective successors and assigns.
27. This Fifth Amendment may be executed in two or more counterparts, each
of which shall constitute an original, but all of which when taken
together shall constitute but one instrument.
28. This Fifth Amendment shall be governed by and construed in accordance
with the laws of the State of Delaware without regard to its conflict
of law principles.
IN WITNESS WHEREOF, the Executive has executed this Fifth Amendment and the
Company has caused this Fifth Amendment to be executed by its duly authorized
representative.
CHARTWELL RE CORPORATION
/s/ Jacques Q. Bonneau By: /s/ John V. Del Col
- - ------------------------ ---------------------------------
Jacques Q. Bonneau John V. Del Col
Vice President, General Counsel
& Secretary
SIXTH AMENDMENT TO EMPLOYMENT AGREEMENT
This Sixth Amendment to the Employment Agreement between Chartwell Re
Corporation and Richard E. Cole is entered into as of December 30, 1998.
RECITALS
A. Chartwell Re Corporation (the "Company") entered into an Employment
Agreement (the "Agreement") with Richard E. Cole (the "Executive") dated
December 8, 1993; and
B. The Agreement set forth the terms and conditions of the Executive's
employment with the Company.
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the Company and Executive hereby consent to
amend the Agreement as follows:
1. The Term of the Agreement is hereby extended in accordance with Section
2 of the Agreement to December 31, 1999.
2. Capitalized terms used and not defined in this Sixth Amendment shall
have the respective meanings ascribed to them in the Agreement.
3. Except as expressly amended hereby, the Agreement shall continue in
full force and effect in accordance with the provisions thereof on the
date hereof.
4. This Sixth Amendment shall inure to the benefit of and be binding upon
the parties hereto and their respective successors and assigns.
5. This Sixth Amendment may be executed in two or more counterparts, each
of which shall constitute an original, but all of which when taken
together shall constitute but one instrument.
6. This Sixth Amendment shall be governed by and construed in accordance
with the laws of the State of Delaware without regard to its conflict
of law principles.
IN WITNESS WHEREOF, the Executive has executed this Sixth Amendment and the
Company has caused this Sixth Amendment to be executed by its duly authorized
representative.
CHARTWELL RE CORPORATION
/s/ Richard E. Cole By: /s/ John V. Del Col
- - ----------------------- --------------------------------
Richard E. Cole John V. Del Col
Vice President, General Counsel
& Secretary
SIXTH AMENDMENT TO EMPLOYMENT AGREEMENT
This Sixth Amendment to the Employment Agreement between Chartwell Re
Corporation and Steven J. Bensinger is entered into as of December 30, 1998.
RECITALS
A. Chartwell Re Corporation (the "Company") entered into an Employment
Agreement (the "Agreement") with Steven J. Bensinger (the "Executive")
dated March 31, 1993; and
B. The Agreement set forth the terms and conditions of the Executive's
employment with the Company.
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the Company and Executive hereby consent to
amend the Agreement as follows:
1. The Term of the Agreement is hereby extended in accordance with Section
2 of the Agreement to December 31, 1999.
2. Capitalized terms used and not defined in this Sixth Amendment shall
have the respective meanings ascribed to them in the Agreement.
3. Except as expressly amended hereby, the Agreement shall continue in
full force and effect in accordance with the provisions thereof on the
date hereof.
4. This Sixth Amendment shall inure to the benefit of and be binding upon
the parties hereto and their respective successors and assigns.
5. This Sixth Amendment may be executed in two or more counterparts, each
of which shall constitute an original, but all of which when taken
together shall constitute but one instrument.
6. This Sixth Amendment shall be governed by and construed in accordance
with the laws of the State of Delaware without regard to its conflict
of law principles.
IN WITNESS WHEREOF, the Executive has executed this Sixth Amendment and the
Company has caused this Sixth Amendment to be executed by its duly authorized
representative.
CHARTWELL RE CORPORATION
/s/ Steven J. Bensinger By: /s/ John V. Del Col
- - ------------------------ ---------------------------------
Steven J. Bensinger John V. Del Col
Vice President, General Counsel
& Secretary
SIXTH AMENDMENT TO EMPLOYMENT AGREEMENT
This Sixth Amendment to the Employment Agreement between Chartwell Re
Corporation and Jacques Q. Bonneau is entered into as of December 30, 1998.
RECITALS
A. Chartwell Re Corporation (the "Company") entered into an Employment
Agreement (the "Agreement") with Jacques Q. Bonneau (the "Executive") dated
December 8, 1993; and
B. The Agreement set forth the terms and conditions of the Executive's
employment with the Company.
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the Company and Executive hereby consent to
amend the Agreement as follows:
1. The Term of the Agreement is hereby extended in accordance with Section
2 of the Agreement to December 31, 1999.
2. Capitalized terms used and not defined in this Sixth Amendment shall
have the respective meanings ascribed to them in the Agreement.
3. Except as expressly amended hereby, the Agreement shall continue in
full force and effect in accordance with the provisions thereof on the
date hereof.
4. This Sixth Amendment shall inure to the benefit of and be binding upon
the parties hereto and their respective successors and assigns.
5. This Sixth Amendment may be executed in two or more counterparts, each
of which shall constitute an original, but all of which when taken
together shall constitute but one instrument.
6. This Sixth Amendment shall be governed by and construed in accordance
with the laws of the State of Delaware without regard to its conflict
of law principles.
IN WITNESS WHEREOF, the Executive has executed this Sixth Amendment and the
Company has caused this Sixth Amendment to be executed by its duly authorized
representative.
CHARTWELL RE CORPORATION
/s/ Jacques Q. Bonneau By: /s/ John V. Del Col
- - ------------------------ ---------------------------------
Jacques Q. Bonneau John V. Del Col
Vice President, General Counsel
& Secretary
FIRST AMENDMENT
TO
TRUST UNDER CHARTWELL RE CORPORATION
EMPLOYMENT AGREEMENTS
This First Amendment to the Trust Under Chartwell Re Corporation Employment
Agreements, by and between Chartwell Re Corporation ("Chartwell") and Shawmut
Bank CT., the predecessor in interest to Fleet National Bank (the "Trustee") is
entered into as of August 4, 1998.
RECITALS
A. Chartwell entered into the Trust Under Chartwell Re Corporation Employment
Agreements (the "Trust Agreement") with the Trustee on June 20, 1994;
B. The Trust Agreement sets forth the terms and conditions of a trust (the
"Trust") established in order to assist Chartwell in meeting its
obligations to provide supplemental benefits under certain employment
agreements; and
C. Chartwell and the Trustee wish to amend certain provisions of the Trust
Agreement at this time.
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the Company and the Trustee hereby consent to
amend the Trust Agreement as follows:
1. The following Section 1(f) shall be added immediately following Section
1(e):
"(f) The Company acknowledges and agrees (i) that the Company's
obligation to pay to the Executives supplemental benefits pursuant to
the terms of the Employment Agreements shall not be limited, terminated
or reduced in any manner as a result of the Company making any
contributions to the Trust under this Trust Agreement, (ii) that any
contributions made by the Company to the Trust under this Trust
Agreement are solely for the purpose of providing to the Company a
source of funds through which it may satisfy its liability to pay
supplemental benefits to the Executives pursuant to the terms of the
Employment Agreements and (iii) that the Company is the exclusive
beneficial owner of the Trust."
2. The last sentence of Section 2(c) shall be deleted and the following
shall be inserted in its place:
"In the event that the Company pays the entire amount due to an
Executive (or his beneficiary) pursuant to the terms of the Executive's
Employment Agreement, then the Trustee, upon receipt of certification
from the Executive that such payment has been made, shall return to the
Company all Trust assets that have been credited to such Executive's
Account (as defined in Section 5(a) hereof)."
3. Section 5(c) shall be deleted and the following shall be inserted in
its place:
"For each taxable year of the Company, the Company shall be entitled to
instruct the trustee of the Rabbi Trust to deduct from each Account and
distribute to the Company as of the end of the first calendar quarter
following such taxable year an amount equal to the greater of zero and
the following:
Individual Trust Account Taxes
(Aggregate Taxes - $50,000) x ------------------------------
Aggregate Taxes
where "Aggregate Taxes" means all federal, state and local income or
franchise taxes deemed payable by the Company with respect to the
aggregate income or gains (offset by losses and loss carryforwards)
recognized by all of the Accounts held in the Trust and "Individual
Trust Account Taxes" means, with respect to each Account, all federal,
state and local income or franchise taxes deemed payable by the Company
with respect to the income or gains (offset by losses and loss
carryforwards) attributable to such Account. In the event the Account
does not have sufficient cash to make such distribution, the Company
may cause the Trustee to sell securities or property to provide
sufficient cash. Prior to making a payment to an Executive pursuant to
Section 2(a) hereof, the Trustee shall reduce the Executive's Account
by the amount by which the Trustee may deduct pursuant to the first
sentence of this Section 5(c) with respect to the period from the end
of the immediately preceding taxable year of the Company to the date of
the payment to the Executive, including any taxes payable as a result
of the distribution. For purposes of determining Aggregate Taxes and
Individual Trust Account Taxes pursuant to this Section 5(c), it shall
be assumed that the Company pays all taxes at the maximum marginal rate
of federal income taxes and state and local income and franchise taxes
applicable to business corporations in the jurisdictions in which the
Company is subject to state and local income and franchise taxes, with
such federal and state taxes reduced in order to reflect the
deductibility of any state and local income and franchise taxes in
determining federal taxes."
4. Except as expressly amended hereby, the Trust Agreement shall continue
in full force and effect in accordance with the provisions thereof on
the date hereof.
5. This First Amendment shall inure to the benefit of and be binding upon
the parties hereto and their respective successors and assigns.
6. This First Amendment may be executed in two or more counterparts, each
of which shall constitute an original, but all of which when taken
together shall constitute but one instrument.
7. This First Amendment shall be governed by and construed in accordance
with the laws of the State of Connecticut without regard to its
conflict of law principles.
IN WITNESS WHEREOF, the parties have caused this First Amendment to be executed
by their duly authorized representatives.
CHARTWELL RE CORPORATION FLEET NATIONAL BANK,
as Trustee
By:__________________________ By:___________________________
Name: Name:
Title: Title:
CHARTWELL REINSURANCE COMPANY
UNDERWRITING YEAR
AGGREGATE EXCESS OF LOSS
REINSURANCE TREATY
EFFECTIVE JANUARY 1, 1998
ARTICLE SUMMARY PAGE
1 Business Covered 2
2 Term and Territory 3
3 Basis of Coverage 3
4 Exclusions 3
5 Coverage and Aggregate Lim 4
6 Definitions 4
7 Net Retained Lines 7
8 Base Premium, Additional Premium and
Reinsurers' Expense 7
9 Ceding Commission 8
10 Profit Sharing, Funds Held Account and
Interest Credit 8
11 Currency 9
12 Taxes 9
13 Accounts, Remittances and Loss Settlements 10
14 Loss Reserve Funding 10
15 Excess of Policy Limits 11
16 Extra Contractual Obligation 11
17 Offset and Security 12
18 Commutation 12
19 Errors and Omissions 13
20 Access to Records 13
21 No Assignment 14
22 Insolvency 14
23 Arbitration 15
24 Service of Suit 15
25 Intermediary 16
<PAGE>
UNDERWRITING YEAR
AGGREGATE EXCESS OF LOSS
REINSURANCE TREATY
(hereinafter referred to as "Treaty")
between
CHARTWELL REINSURANCE COMPANY
Stamford, Connecticut
and
DAKOTA SPECIALTY INSURANCE COMPANY
Stamford, Connecticut
and
THE INSURANCE CORPORATION OF NEW YORK
Jericho, New York
and
DRAYTON COMPANY LIMITED
Hamilton, Bermuda
and
CHARTWELL RE HOLDINGS CORPORATION
Stamford, Connecticut
(hereinafter referred to collectively as "Ceding Company")
and
THE REINSURERS SUBSCRIBING THEIR RESPECTIVE INTERESTS
AND LIABILITIES AGREEMENTS ATTACHED HERETO
(hereinafter referred to as "Reinsurers")
Article 1: Business Covered
---------------------------
The Reinsurers agree to indemnif the Ceding Company with respect to the Ultimate
Net Losses which may accrue to the Ceding Company in respect of all policies,
contracts, binders of insurance and reinsurance (all hereinafter referred to as
"Contracts"). Business Covered is defined to include all Contracts, including
Contracts underwritten by the Ceding Company's Lloyds corporate capital vehicles
including but not limited to Oak Dedicated Limited and Archer Dedicated Limited
as respects all classes of business assumed and underwritten by the Ceding
Company, prior to the Term and in force including both Contracts with prior
written premiums, which are unearned at January 1, 1998, and Contracts written
prior to the Term which have written and earned premiums to be recorded during
the Term as of the January 1, 1998 effective date and Contracts underwritten
during the Term, all subject to the terms and conditions of this Treaty.
Article 2: Term and Territory
-----------------------------
This Treaty Term shall January 1, 1998 through December 31, 1998, both days
inclusive. Coverage will extend beyond December 31, 1998 in respect of
underlying Contracts in force as of December 31, 1998 until natural expiration.
This Treaty applies to losses occurring worldwide with respect to Business
Covered.
Article 3: Basis of Coverage
----------------------------
As respects Business Covered pertaining to Contracts underwritten prior to the
Term and in force, Reinsurers shall indemnify the Ceding Company in respect of
Loss Occurrences or claims made or losses discovered as per underlying coverage
form of the Ceding Company's Contracts during the period for which Reinsurers
received their respective share of underlying earned premiums.
As respects Business Covered pertaining to Contracts underwritten during the
Term, Reinsurers shall indemnify the Ceding Company in respect of all Contracts
underwritten during the Term regardless of when the Loss Occurrences or claims
made or losses discovered occur. Coverage for Loss Occurrences or claims made or
losses discovered shall in all cases follow the underlying coverage form of the
Ceding Company's Contracts.
Article 4: Exclusions
---------------------
This Treaty shall not apply to and specifically excludes:
A. Nuclear Incident, in accordance with the following clauses attached
hereto: Liability;
1. Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance-
U.S.A. - NMA 1119;
2. Nuclear Incident Exclusion Clause - Physical Damage and Liability
(Boiler and Machinery Policies) - Reinsurance - U.S.A. - NMA 1166;
3. Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance
- Canada - NMA 1980;
4. Nuclear Incident Exclusion Clause - Physical Damage and Liability
(Boiler and Machinery Policies) Reinsurance - Canada - NMA 1251;
5. Nuclear Incident Exclusion Clause - Liability - Reinsurance - U.S.A
- NMA 1590;
6. Nuclear Incident Exclusion Clause - Liability - Reinsurance -
Canada - NMA 1979;
7. Nuclear Energy Risks Exclusion Clause (Reinsurance) (1984)
Worldwide Excluding U.S.A. and Canada - NMA 1975.
B. War risks, in accordance with the War Risks Exclusion clause attached
hereto;
C. Insolvency funds, in accordance with the Insolvency Exclusion Clause
attached hereto;
D. Assessments of any kind, from any source, and whether voluntary or
involuntary;
E. Unallocated Loss Adjustment Expenses (unless covered by the Ceding
Company per the underlying treaties and facultative business);
F. Business classified as assumed Finite or Non-traditional Reinsurance
Agreements;
G. State income and excise taxes, if any, reported hereunder;
H. Financial guaranty and Insolvency. This exclusion shall not apply to
residual value insurance.
Article 5: Coverage and Aggregate Limit
---------------------------------------
A. Coverage - Should the Ceding Company's Ultimate Net Loss Ratio
hereunder exceed the Retention, as defined in Article 6, Section H.,
the Reinsurers shall be liable for 100% (one hundred percent) of the
amount by which the paid portion of Ultimate Net Losses exceed the
Retention, subject to a maximum limit of liability to the Reinsurers of
100% (one hundred percent) of 28.55% (twenty eight point fifty five
percent) of SNWPI.
B. Aggregate Limit - The Reinsurers' maximum liability shall in all cases
be the lesser of 28.55% (twenty eight point fifty five percent) of
SNWPI or $143,200,000 (one hundred forty three million, two hundred
thousand dollars) in the aggregate for this Treaty.
Article 6: Definitions
----------------------
A. "Subject Net Written Premium Income (SNWPI)" shall be comprised of
three components of Business Covered:
1. Earned premium during the Term in respect of Contracts
underwritten prior to the Term on written premium previously
accounted for and unearned as reported by the Ceding Company
as of January 1, 1998 as respects Business Covered less ceded
earned premiums in respect of all other inuring reinsurances;
plus
2. Written premium as recorded by the Ceding Company which is
earned during the Term in respect of Contracts underwritten
prior to the Term as respects Business Covered less ceded
written premium in respect of all other inuring reinsurances;
plus
3. Written premium in respect of Contracts underwritten during
the Term as respects Business Covered less ceded written
premiums in respect of all other inuring reinsurances.
Retrospective premium adjustments related to swing-rated business
written prior to 1997 and nonstandard automobile assumed reinsurance
business with The Insurance Corporation of New York shall be excluded
from Business Covered SNWPI.
Notwithstanding the above, all property catastrophe reinstatement
premium, if any, in respect of both assumed and ceded business shall be
excluded from SNWPI.
B. "Subject Net Earned Premium Income (SNEPI)" for any inception to date
period applicable to this Treaty shall mean the SNWPI of the Ceding
Company's Business Covered, net of business excluded by the Ceding
Company, during the inception to date period less the respective Net
Premium Income Unearned as of the end of the calculation period.
C. "Net Premium Income Unearned" shall be determined by the Ceding Company
following its standard practices and calculations as respects the
subject Business Covered.
D. "Loss Occurrence" shall mean any one disaster or casualty or accident
or loss or series of disasters or casualties or accidents or losses
arising out of or caused by one event. All losses having a common
origin or traceable to the same act, omission, mistake, occurrence or
causative incident shall be considered one accident, disaster,
casualty or occurrence. For the purposes of establishing the date when
a loss has occurred, the following will apply: on reinsurance
contracts that attach on a losses occurring during basis, the Loss
Occurrence date(s) applicable shall apply; and on reinsurance
contracts that attach on a claims made basis, the claims made date(s)
applicable shall apply; and on reinsurance contracts that attach on a
losses sustained and/or losses discovered basis, the date(s) a loss is
sustained or discovered shall apply. The Ceding Company shall
establish the proper allocation of reinsurance contracts that are
written on a risks attaching basis to the appropriate Loss Occurrence
periods. The Reinsurers shall accept such Loss Occurrence Accident
Year allocations as determined by the Ceding Company.
E. "Ultimate Net Losses" shall mean the sum of losses (including loss in
Excess of Policy Limits in accordance with Article 15:Excess of Policy
Limits and Extra Contractual Obligations in accordance with Article
16: Extra Contractual Obligations) and Allocated Loss Adjustment
Expenses arising out of Business Covered hereunder. Property
catastrophe losses shall be limited to $20,000,000 (twenty million
dollars) of Ultimate Net Losses of the Ceding Company not including
the Lloyd's corporate capital vehicles and $10,000,000 (ten million
dollars) of Ultimate Net Losses for the Lloyd's corporate capital
vehicles including but not limited to Oak Dedicated Limited and Archer
Dedicated Limited. Total property catastrophe losses shall be limited
to a combined maximum of $25,000,000 (twenty five million dollars) of
Ultimate Net Losses in the aggregate. All such amounts shall be net of
all recoveries, salvages, subrogations and all claims on inuring
reinsurance whether collectible or not; provided, however, that in the
event of the Insolvency of the Ceding Company, payment by the
Reinsurers shall be made in accordance with the provisions of the
Insolvency article. Nothing herein shall be construed to mean that
losses under this Treaty are not recoverable until the Ceding
Company's Ultimate Net Losses have been ascertained.
<PAGE>
Said Ultimate Net Losses may be paid, outstanding, or incurred, as
referenced in this Treaty. In the event the reference is to Ultimate
Net Losses outstanding, the Term shall include the Ceding Company's
loss reserves for reported losses, losses incurred but not reported and
reserves for Allocated Loss Adjustment Expense for both reported losses
and losses incurred but not reported as of the calculation date; in the
event the reference is to Ultimate Net Losses incurred, the term shall
comprise the sum of Ultimate Net Losses paid and Ultimate Net Losses
outstanding.
Ultimate Net Loss shall also include all net commissions, brokerage
expenses and premium related expenses of the Ceding Company. All net
commissions, brokerage expenses, and premium related expenses of the
Ceding Company shall be subject to a maximum of 27.0% (twenty seven
point zero percent) of SNWPI. Ultimate Net Losses shall exclude both
unallocated loss adjustment expenses and all other general operating
expenses (overhead) of the Ceding Company, but shall include any
unallocated loss adjustment expenses where the underlying treaties and
facultative business with the Ceding Company client's provide for such
coverage. The Ceding Company shall determine net commissions and
brokerage based on the overall commissions and brokerage ratio for the
underwriting year of the underlying Contracts. For purposes of the
Lloyds corporate capital vehicles, a flat ceding commission of 20%
(twenty percent) will apply to gross up the premium, which will also
determine SNWPI. In all cases, Ceding Company definitions of premiums,
net commissions and brokerage in respect of Business Covered shall be
used for all purposes hereon.
F. "Allocated Loss Adjustment Expense" shall mean the Ceding Company's
share of costs and expenses allocable to specific claims which are
incurred by the Ceding Company in the investigation, appraisal,
adjustment, settlement, litigation, defense or appeal of specific
claims, including court costs and costs of supersedeas and appeal
bonds, and including:
a) pre-judgment interest, unless included as
part of the award or judgment;
b) post-judgment interest; and
c) legal expenses and costs incurred in connection
with coverage questions and legal actions connected
thereto (including declaratory judgment expense).
Allocated Loss Adjustment Expense does not include Unallocated Loss
Adjustment Expense unless covered by the Ceding Company per the
underlying treaties and facultative business. Unallocated Loss
Adjustment Expense includes, but is not limited to, salaries and
expenses of employees, and office and other overhead expenses of the
Ceding Company.
G. "Ultimate Net Loss Ratio" shall mean the ratio of Ultimate Net Losses
incurred divided by SNEPI as of the date of calculation.
H. "Retention" shall equal 79.4%(seventy nine point four percent)of SNEPI.
<PAGE>
I. "Reinsurers' Expense" shall equal 6.5% (six point five percent) of Base
Premium less Ceding Commissions plus 4.0% (four percent) of Additional
Premium, if any. Reinsurers' Expense amounts in respect of Base
Premiums less Ceding Commissions shall be subject to a minimum of
$2,275,000 (two million, two hundred seventy five thousand dollars).
J. "Finite or Non-traditional Reinsurance Agreements" shall mean any
assumed reinsurance agreement which allows for Profit Sharing (or any
other form of contractual adjustment) exceeding 75% (seventy five
percent) of initial reinsurance premium paid.
K. "Contracts" shall mean any and all original policies, contracts and
binders of insurance or reinsurance underwritten by the Ceding Company
whether facultative or treaty.
Article 7: Net Retained Lines
-----------------------------
This Treaty applies only to that portion of any policy which the Ceding Company
retains net for its own account, and in calculating the amount of any loss
hereunder and also in computing the amount and amounts in excess of which this
Treaty attaches, only loss or losses in respect of that portion of any policy
which the Ceding Company retains net for its own account shall be included.
The amount of the Reinsurers' liability hereunder in respect of any loss or
losses shall not be increased by reason of the inability of the Ceding Company
to collect from any other reinsurer, whether specific or general, any amounts
which may have become due from such reinsurer, whether such inability arises
from the insolvency of such other reinsurer or otherwise.
Article 8: Base Premium, Additional Premium and Reinsurers' Expense
--------------------------------------------------------------------
A. Base Premium - The Ceding Company shall pay to the Reinsurers
Base Premium of 10.548% (ten point five four eight percent) of
Business Covered SNWPI within 60 (sixty) days from the end of each
calendar quarter. Base Premiums shall be credited to the Funds Held
Account as of each respective calendar quarter that applicable
Business Covered SNWPI is recorded by the Ceding Company. The Base
Premiums shall not be less than $41,400,000 (forty one million, four
hundred thousand dollars) and shall not be greater than $52,900,000
(fifty two million, nine hundred thousand dollars). For purposes of
reporting and payment timing, SNWPI shall be based upon the respective
calendar quarter wherein written premium is recorded by the Ceding
Company. In accordance with Article 6: Definitions, Section A. SNWPI,
Component 1. shall be deemed recorded in the first calendar quarter of
1998.
B. Additional Premium - Within 60 days from the end of each calendar
quarter, the Ceding Company shall pay to the Reinsurers Additional
Premium equal to 73.5% (seventy three point five percent) of Ultimate
Net Losses ceded in excess of 212.86% (two hundred twelve point eight
six percent) of the net result of Base Premium less Ceding Commission.
Additional Premium shall be the lesser of 8.01% (eight point zero one
percent) of SNWPI or $40,200,000 (forty million, two hundred thousand
dollars) in the aggregate. Net Additional Premium (additions less
deductions) shall be deemed credited 100% (one hundred percent) to the
Funds Held Account as of January 1, 1998 for all purposes including
Interest Credit.
C. Reinsurers' Expense - The Reinsurers' Expense amounts shall be paid
within 60 (sixty) days in arrears of each respective calendar quarter.
Reinsurers' Expense amounts in respect of Additional Premiums, if any,
shall be paid within 75 (seventy five) days in arrears of the
respective calendar quarter end for which such calculation is being
made. Such amounts shall be deducted from the Funds Held Account.
Article 9: Ceding Commission
----------------------------
A. The Reinsurers shall pay the Ceding Company Ceding Commission equal to
23.91% (twenty three point nine one percent) of Base Premiums. There
shall be no Ceding Commission in respect of Additional Premium.
B. Ceding Commissions are payable by the Reinsurers to the Ceding Company
at the time final settlement of all Ultimate Net Losses hereunder or at
commutation, whichever occurs first. Payment shall be made by deduction
from the Funds Held Account until and unless depleted. If exhausted,
payment shall be made out of other funds of the Reinsurers.
Article 10: Profit Sharing, Funds Held Account
and Interest Credit
----------------------------------------------
A. Profit Sharing
Upon finalization of the payment of all Ultimate Net Losses recoverable
hereon and/or Commutation, the Reinsurers will relinquish to the Ceding
Company 100% (one hundred percent) of the remaining Funds Held Account
balance, if any. Payment of Profit Sharing in accordance with this
Article shall release the Reinsurers from all current and future
liability under this Treaty.
B. Funds Held Account
For purposes of this Article, the Ceding Company shall maintain a
cumulative Funds Held Account comprised of the following:
1. The Funds Held Account at December 31, 1997 shall be equal to
zero;
2. The Funds Held Account at each subsequent calendar quarter end
shall be equal to:
a. The Funds Held Account at the end of the prior
calendar quarter; plus
b. Base Premiums and Additional Premiums, if any;
less
c. Ceding Commissions paid by Reinsurers; less
d. Reinsurers' Expense; plus
e. Interest Credit; less
f. Ultimate Net Losses due from the Reinsurers for
the prior calendar quarter in accordance with
Article 5: Coverage and Aggregate Limit,
(including Commutation payments).
The Ceding Company shall report balances quarterly to the Reinsurers as
soon as practicable but no later than 75 (seventy five) days in arrears
of each calendar quarter end.
The Reinsurers shall not transfer or assign its rights to the Funds
Held Account hereon unless this Treaty is surrendered and a new Treaty
is issued. Under any and all circumstances, the Ceding Company must
make a book entry of a transfer or assignment in order for such
transfer or assignment to be valid.
C. Interest Credit
As of the end of each calendar quarter, the Ceding Company shall credit
the Funds Held Account with an Interest Credit determined by
multiplying the balance of the Funds Held Account at the end of the
respective calendar quarter by 1.8481% (one point eight four eight one
percent) to achieve an effective annual rate of 7.6% (seven point six
percent).
Interest Credit shall continue even in the event of the Ceding
Company's Insolvency.
Article 11: Currency
--------------------
All of the provisions of this Treaty involving dollar amounts are expressed in
terms of United States of America Dollars and all Premiums and loss and
Allocated Loss Adjustment Expense payments shall be made in United States of
America Dollars.
Article 12: Taxes
-----------------
A. In consideration of the terms under which this Treaty is issued, the
Ceding Company undertakes not to claim any deduction of the Premium
hereon when making Canadian tax returns or when making tax returns
other than income or profit tax returns to any state or territory of
the United States or to the District of Columbia.
B. The Ceding Company is solely liable for any Federal Excise Tax (FET)
applicable to this Treaty. Any FET payable shall be paid directly by
the Ceding Company to the taxing authorities and is in addition to
premiums. No deduction shall be made from the Funds Held Account.
<PAGE>
Article 13: Accounts, Remittances and Loss Settlements
------------------------------------------------------
A. Within 60 (sixty) days following the end of each calendar quarter, the
Ceding Company shall report to the Reinsurers the amount of:
1. Cumulative Business Covered SNWPI and Retention;
2. Cumulative Ultimate Net Losses paid;
3. Ultimate Net Losses outstanding;
4. Ceded Ultimate Net Losses paid and outstanding under this
Treaty, in accordance with Article 5: Coverage and
Aggregate Limit;
5. Base Premium and Additional Premium, if any, in accordance
with Article 8: Base Premium, Additional Premium and
Reinsurers' Expense.
The reports outlined in this section shall continue until final
settlement of all losses hereunder or Commutation in accordance with
Article 18: Commutation.
B. Remittance of premium amounts due shall be in the manner outlined under
Article 8: Base Premium, Additional Premium and Reinsurers' Expense.
C. Settlement of Ultimate Net Losses paid in excess of the Retention shall
be made by the Reinsurers to the Ceding Company quarterly within 15
(fifteen) days of receipt of the report by the Reinsurers or 75
(seventy five) days after the end of the quarter, whichever is later.
Ultimate Net Losses due from Reinsurers shall be deducted from the
Funds Held Account until depleted. Thereafter, the Reinsurers shall pay
Ultimate Net Losses due from other funds of the Reinsurers. Reinsurers
payment of Ultimate Net Losses shall be subject to the Aggregate Limit
hereunder as detailed in Article 5: Coverage and Aggregate Limit,
Section B.
Article 14: Loss Reserve Funding
--------------------------------
The Reinsurers will maintain appropriate reserves with respect to its share of
the loss reserves ceded and required under the terms of this Treaty which are
reported by the Ceding Company on the Business Covered of this Treaty.
The Reinsurers agrees to provide a clean, irrevocable and unconditional Letter
of Credit in favor of the Ceding Company issued by a bank acceptable to the
Ceding Company adjusted to at all times be equal to the ceded cumulative
Ultimate Net Losses outstanding hereunder less the Funds Held Account balance at
such dates. Such Letter of Credit shall be in the form, amount, and with an
acceptable NAIC bank required to allow the Ceding Company to take full statutory
credit for amounts recoverable under this Treaty.
<PAGE>
The Ceding Company shall reimburse the Reinsurers for the actual annual security
cost subject to a maximum of .45% (point four five percent) of the amount of
Letter of Credit issued or maintained hereon as of each December 31st. The
Reinsurers shall request such reimbursement whereupon the Ceding Company shall
make payment by direct wire transfer to the Reinsurers. All such amounts shall
not be deducted from the Funds Held Account.
Article 15: Excess of Policy Limits
-----------------------------------
A. This Treaty shall protect the Ceding Company, within the limits hereof,
for 100% (one hundred percent) of loss in Excess of Policy Limits
emanating from underlying treaties of the Ceding Company's clients and
for 80% (eighty percent) of loss in excess of the limit of its original
treaties, such loss in excess of the limit having been incurred because
of failure by it to settle within the Treaty limit or by reason of
alleged or actual negligence, fraud, or bad faith in rejecting an offer
of settlement or in the preparation of the defense or in the trial of
any action against its insured or reinsured or in the preparation or
prosecution of an appeal consequent upon such action.
However, this Article shall not apply where the loss has been incurred
due to fraud by a member of the Board of Directors or a corporate
officer of the Ceding Company acting individually or collectively or in
collusion with any individual or corporation or any other organization
or party involved in the presentation, defense or settlement of any
claim covered hereunder.
For the purpose of this Article, the word"loss" shall mean any amounts
for which the Ceding Company would have been contractually liable to
pay had it not been for the limit of the original policy.
Article 16: Extra Contractual Obligations
-----------------------------------------
A. This Treaty shall protect the Ceding Company for 100% (one hundred
percent) of Extra Contractual Obligations emanating from underlying
treaties of the Ceding Company's clients and for 80% (eighty) of any
Extra Contractual Obligations within the limits hereof. The term
"Extra Contractual Obligations" is defined as those liabilities not
covered under any other provision of the Ceding Company's original
treaties and which arise from the handling of any claim on business
covered hereunder, such liabilities arising because of, but not
limited to, the following: failure by the Ceding Company to settle
within the treaty limit, or by reason of alleged or actual negligence,
fraud, or bad faith in rejecting an offer of settlement or in the
preparation of the defense or in the trial of any action against its
insured or reinsured or in the preparation or prosecution of an appeal
consequent upon such action.
The date on which any Extra Contractual Obligation is incurred by the
Ceding Company shall be deemed, in all circumstances, to be the date
of the original disaster and/or casualty.
<PAGE>
However, this Article shall not apply where the loss has been incurred
due to fraud by a member of the Board of Directors or a corporate
officer of the Ceding Company acting individually or collectively or in
collusion with any individual or corporation or any other organization
or party involved in the presentation, defense or settlement of any
claim covered hereunder.
Article 17: Offset and Security
-------------------------------
A. The Ceding Company or the Reinsurers shall have and may exercise, at
any time and from time to time, the right to offset any balance or
balances whether on account of Base Premium, Additional Premium,
Interest Credit, or on account of ceded Ultimate Net Losses paid or
otherwise, due from one party to the other party hereto under the terms
of this Treaty.
B. Each party hereby assigns and pledges to the other party (or to each
other party, if more than one), all of its rights under this Treaty to
receive Premiums or loss payments at any time from such other party
("Collateral", as further defined in C. below) to secure its Premiums
or loss obligations to such other party at any time under this Treaty
("Secured Obligations"). If at any time a party is in default under any
Secured Obligation or shall be subject to any liquidation,
rehabilitation, reorganization or conservation proceeding, each other
party shall be entitled in its discretion, to apply or to withhold for
the purpose of applying in due course, any Collateral assigned and
pledged to it by the former party and otherwise to realize upon such
Collateral as security for such Secured Obligations.
C. The security interest described herein, and the term "Collateral",
shall apply to all payments and other proceeds in respect of the rights
assigned and pledged. A party's security interest in Collateral shall
be deemed evidenced only by the counterpart of this Treaty delivered to
such party.
D. Each right under this Article is a separate and independent right,
exercisable, without notice or demand, alone or together with other
rights ,in the sole election of the party entitled thereto, and no
waiver, delay, or failure to exercise, in respect of any right, shall
constitute a waiver of any right. The provisions of this Article shall
survive any cancellation or other termination of this Treaty.
Article 18: Commutation
-----------------------
A. The Ceding Company shall have the sole option, effective at any
calendar quarter ending on or after December 31, 1998 to commute all
ceded Ultimate Net Losses outstanding hereunder. The date that the
Ceding Company elects to commute shall be deemed the Commutation date.
At Commutation, the Reinsurers shall pay to the Ceding Company the
lesser of:
<PAGE>
1. The present value (calculated at the Interest Credit rate as
per Article 10: Profit Sharing, Funds Held Account and
Interest Credit) of ceded Ultimate Net Losses outstanding as
of the Commutation date as determined by the Ceding Company,
subject to the Reinsurers' agreement. Should the Reinsurers
fail to agree, a present value analysis will be conducted by
an independent actuarial firm acceptable to both the Ceding
Company and the Reinsurers, with the Ceding Company bearing
the costs of such analysis; or
2. The existing value of the Funds Held Account (as defined in
Article 10: Profit Sharing, Funds Held Account and Interest
Credit) as of the Commutation date.
Said payments shall constitute, together with any Profit Sharing
payment, a full and final settlement of all terms of this Treaty; the
Ceding Company will execute a hold harmless agreement so stating and
the Reinsurers will be thereby released from all current and future
liability under this Treaty.
B. Commutation payments in accordance with this Article shall be treated
as Ultimate Net Losses paid under this Treaty for determination of the
Funds Held Account.
Article 19: Errors and Omissions
--------------------------------
Any inadvertent delay, omission or error shall not be held to relieve either
party hereto from any liability which would attach to it hereunder if such
delay, omission or error had not been made, providing such delay, omission or
error is rectified upon discovery.
Article 20: Access to Records
-----------------------------
The Ceding Company shall place at the disposal of the Reinsurers at all
reasonable times, and the Reinsurers shall have the right to inspect, through
its authorized representatives, all books, records and papers of the Ceding
Company in connection with any reinsurance hereunder or claims in connection
herewith.
The Reinsurers agrees that it will not disclose any confidential information
obtained by it hereunder to parties not subject to this Treaty except under the
following circumstances and then only as necessary.
A. When disclosure of such information is required in the normal course of
Reinsurers' business; or
B. With the prior written consent of the Ceding Company; or
C. When Reinsurers is required by a subpoena or court order to disclose
such information. The Reinsurers shall promptly notify the Ceding
Company of any attempt by a third party to obtain from it any such
confidential information.
The Reinsurers will provide the Ceding Company or its designated representative
with such information as the Reinsurers and Ceding Company may agree is
necessary to the Ceding Company's handling of business reinsured herein.
The obligation contained in the provision shall survive termination of this
Treaty.
Article 21: No Assignment
-------------------------
The Ceding Company and the Reinsurers hereby agree that neither party shall have
the right to assign its respective interests and liabilities, including the
Funds Held Account, under this Treaty. Notwithstanding the above, this Article
shall not restrict the Ceding Company from making investments it deems
appropriate.
Article 22: Insolvency
----------------------
A. In the event of the Insolvency of the Ceding Company, reinsurance under
this Treaty shall be payable by the Reinsurers (on the basis of the
liability of the Ceding Company under the policy or policies reinsured
without diminution because of the Insolvency of the Ceding Company) to
the Ceding Company or to its liquidator, receiver or statutory
successor, except as provided by Section 4118a of the New York
Insurance Law or except:
1. Where the Treaty specifically provides another payee of such
reinsurance in the event of the Insolvency of the Ceding
Company.
2. Where the Reinsurers, with the consent of the direct insured
or insureds, has assumed such policy obligations of the Ceding
Company as direct obligations of the Reinsurers to the payees
under such policies and in substitution for the obligations of
the Ceding Company to such payees.
B. It is agreed, however, that the liquidator or receiver or
statutory successor of the insolvent Ceding Company shall give written
notice to the Reinsurers of the pendency of a claim against the
insolvent Ceding Company on the policy or policies reinsured within a
reasonable time after such claim is filed in the Insolvency proceeding
and that, during the pendency of such claim, the Reinsurers may
investigate such claim and interpose, at their own expense, in the
proceeding where such claim is to be adjudicated, any defense or
defenses which they may deem available to the Ceding Company or its
liquidator or receiver or statutory successor. The expense thus
incurred by the Reinsurers shall be chargeable, subject to court
approval, against the insolvent Ceding Company as part of the expense
of liquidation to the extent or a proportionate share of the benefit
which may accrue to the Ceding Company solely as a result of the
defense undertaken by the Reinsurers.
C. Should the Ceding Company go into liquidation or should a receiver be
appointed, the Reinsurers shall be entitled to deduct from any sums
which may be or may become due to the Ceding Company under this Treaty
any sums which are due to the Reinsurers by the Ceding Company under
this Treaty and which are payable at a fixed or stated date, as well as
any other sums due the Reinsurers which are permitted to be offset
under applicable law.
<PAGE>
Article 23: Arbitration
-----------------------
A. As a condition precedent to any right of action hereunder, if
any dispute shall arise between the Ceding Company and the Reinsurers
with reference to the interpretation of this Treaty or their rights
with respect to any transaction involved, whether such dispute arises
before or after termination of this Treaty, such dispute, upon the
written request of either the Ceding Company or the Reinsurers, shall
be submitted to three arbitrators, one to be chosen by the Ceding
Company, one to be chosen by the Reinsurers, and the third by the two
arbitrators so chosen. If either the Ceding Company or the Reinsurers
refuse or neglect to appoint an arbitrator within 30 (thirty) days
after the receipt of written notice from the other party requesting it
do so, the requesting party may appoint two arbitrators. If the two
arbitrators fail to agree on the selection of a third arbitrator
within 30 (thirty) days of their appointment, each of them shall name
two, of whom each shall decline one and the decision shall be made by
the American Arbitration Association. All arbitrators shall be active
or retired disinterested officers of insurance or reinsurance
companies not under the management or control of any party to this
Treaty.
B. The arbitrators are relieved of all judicial formalities and may
abstain from following the strict rules of law; they shall make their
award with a view to effecting the general purpose of this Treaty in
accordance with a literal interpretation of the language. Each of the
Ceding Company and the Reinsurers shall submit its case to its
arbitrator within 30 (thirty) days of the appointment of the third
arbitrator.
C. The decision in writing of any two arbitrators, when filed with the
parties hereto, shall be final and binding on all parties to this
Treaty. Judgment may be entered upon the final decision of the
arbitrators in any court having jurisdiction. Each of the Ceding
Company and the Reinsurers shall bear the expense of their respective
chosen arbitrator and shall jointly and equally bear with the other
party the expense of the third arbitrator and of the arbitration. Said
arbitration shall take place in Stamford, Connecticut, unless some
other place is mutually agreed upon by the Ceding Company and the
Reinsurers.
Article 24: Service of Suit
---------------------------
It is agreed that in the event of the failure of the Reinsurers hereon to pay
any amount claimed to be due to the Ceding Company hereunder, the Reinsurers, at
the request of the Ceding Company, will submit to the jurisdiction of a court of
competent jurisdiction within the United States. The foregoing shall not
constitute a waiver of the right of the Reinsurers to commence any suit in, or
to remove, remand or transfer any suit to any other court of competent
jurisdiction in accordance with the applicable statutes of the state or United
States thereto. It is further agreed that this Treaty shall be governed by the
laws of the State of Connecticut.
It is further agreed that service of process in such suit may be made upon Kroll
& Tract, Fifth Floor, 520 Madison Avenue, New York, New York, 10022-4235, United
States of America and that in any suit instituted against any one of them upon
this Treaty, the Reinsurers will abide by the final decision of such Court of
any Appellate Court in the event of an appeal. The above named are authorized
and directed to accept service of process on behalf of the Reinsurers in any
suit and/or upon request of the Ceding Company to give a written undertaking to
the Ceding Company that they will enter a general appearance upon the
Reinsurers' behalf in the event such a suit shall be instituted.
Further, pursuant to any statute of any state, territory or District of the
United States which makes provision therefor, the Reinsurers hereby designates
the Superintendent, Commissioner or Director of Insurance or other officer
specified for that purpose in the statute, or his successor or successors n
office, as its true and lawful attorney upon whom may be served any lawful
process in any action, suit or proceeding instituted by or on behalf of the
Ceding Company or any beneficiary hereunder arising out of this Treaty, and
hereby designate the above named as the person to whom said officer is
authorized to mail such process or a true copy thereof.
Article 25: Intermediary
------------------------
Pegasus Advisors, Inc., 35 Tower Lane, Avon, CT 06001, is hereby recognized as
the Intermediary negotiating this Treaty for all business hereunder and through
whom all communications, in respect of London Life and Casualty Reinsurance
Corporation only, relating hereto (including but not limited to notices,
statements and reports) shall be transmitted to both parties. It is understood,
as regards remittances due either party hereunder, that payment by the Ceding
Company to the Intermediary shall constitute payment to the Reinsurers but
payment by the Reinsurers to the Intermediary shall only constitute payment to
the Ceding Company to the extent such payments are actually received by the
Ceding Company. Notwithstanding the foregoing, it is agreed that all payments
will be direct from the Reinsurers to the Ceding Company, or from the Ceding
Company to the Reinsurers, as appropriate.
<PAGE>
NUCLEAR INCIDENT EXCLUSION CLAUSE
PHYSICAL DAMAGE - REINSURANCE - USA
-----------------------------------
1. This Contract does not cover any loss or liability accruing to the
Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any
Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or
Nuclear Energy risks.
2. Without in any way restricting the operation of paragraph (1) of
this Clause, this Contract does not cover any loss or liability accruing to the
Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any
insurance against Physical Damage (including business interruption or
consequential loss arising out of such Physical Damage) to:
I. Nuclear reactor power plants including all auxiliary propert
on the site, or
II. Any other nuclear reactor installation, including laboratories
handling radioactive materials in connection with reactor
installations, and "critical facilities" as such, or
III. Installations for fabricating complete fuel elements or for
processing substantial quantities or "special nuclear
material", and for reprocessing, salvaging, chemically
separating, storing or disposing of "spent" nuclear fuel or
waste materials, or
IV. Installations other than those listed in paragraph (2) III
above using substantial quantities of radioactive isotopes or
other products of nuclear fission.
3. Without in any way restricting the operations of paragraphs (1) and
(2) hereof, this Contract does not cover any loss or liability by radioactive
contamination accruing to the Reassured, directly or indirectly, and whether as
Insurer or Reinsurer, from any insurance on property which is on the same site
as a nuclear reactor power plant or other nuclear installation and which
normally would be insured therewith except that this paragraph (3) shall not
operate
(a) where the Reassured does not have knowledge of such nuclea
reactor power plant or nuclear installation, or
(b) where said insurance contains a provision excluding coverage
for damage to property caused by or resulting from radioactive
contamination, however caused. However on and after 1st
January 1960, this sub-paragraph (b) shall only apply provided
the said radioactive contamination exclusion provision has
been approved by the Governmental Authority having
jurisdiction thereof.
4. Without in any way restricting the operations of paragraphs (1), (2)
and (3) hereof, this Contract does not cover any loss or liability by
radioactive contamination accruing to the Reassured, directly or indirectly, and
whether as Insurer or Reinsurer, when such radioactive contamination is a named
hazard specifically insured against.
5. It is understood and agreed that this Clause shall not extend to
risks using radioactive isotopes in any form where the nuclear exposure is not
considered by the Reassured to be the primary hazard.
6. The term "special nuclear material" shall have the meaning given it
in the Atomic Energy Act of 1954 or by any law amendatory thereof.
7. The Reassured to be sole judge of what constitutes:
(a) substantial quantities, and
(b) the extent of installation, plant or site
NOTE: Without in any way restricting the operation of paragraph (1) hereof, it
is understood and agreed that
(a) all policies issued by the Reassured on or before
31st December 1957 shall be free from the application
of the other provisions of this Clause until expiry
date or 31st December 1960 whichever first occurs
whereupon all the provisions of this Clause shall
apply.
(b) with respect to any risk located in Canada, policies
issued by the Reassured on or before 31st December
1958 shall be free from the application of the other
provisions of this Clause until expiry date or 31st
December 1960 whichever first occurs whereupon all
the provisions of this Clause shall apply.
<PAGE>
NUCLEAR INCIDENT EXCLUSION CLAUSE -
PHYSICAL DAMAGE AND LIABILITY
(BOILER AND MACHINERY POLICIES) - REINSURANCE - USA
1. This Contract does not cover any loss or liability accruing to the Reassured
as a member of, or subscriber to, any association of insurers or reinsurers
formed for the purpose of covering nuclear energy risks or as a direct or
indirect reinsurer of any such member, subscriber or association.
2. Without in any way restricting the operation of paragraph (1) of this Clause,
it is understood and agreed that for all purposes of this Contract all original
Boiler and Machinery Insurance or Reinsurance contracts of the Reassured shall
be deemed to include the following provisions of this paragraph:
This Policy does not apply to "loss", whether it be direct or indirect,
proximate or remote
(a) from an Accident caused directly or indirectly by nuclear
reaction, nuclear radiation or radioactive contamination, all
whether controlled or uncontrolled; or
(b) from nuclear reaction, nuclear radiation or radioactive
contamination, all whether controlled or uncontrolled, caused
directly or indirectly by, contributed to or aggravated by an
Accident.
3. However, it is agreed that loss arising out of the use of Radioactive
Isotopes in any form is not hereby excluded from reinsurance protection.
4. Without in any way restricting the operation of paragraph (a) hereof, it is
understood and agreed that
(a) all policies issued by the Reassured effective on or before
30th April 1958, shall be free from the application of the
other provisions of this Clause until expiry date or 30th
April, 1961, whichever first occurs, whereupon all the
provisions of this Clause shall apply,
(b) with respect to any risk located in Canada, policies issued by
the Reassured, effective on or before 30th June, 1958, shall
be free from the application of the other provisions of this
Clause until expiry date or 30th June, 1961, whichever first
occurs, whereupon all the provisions of this Clause shall
apply.
<PAGE>
NUCLEAR INCIDENT EXCLUSION CLAUSE
PHYSICAL DAMAGE - REINSURANCE - CANADA
1. This Agreement does not cover any loss or liability accruing to the
Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, from any
Pool of Insureres or Reinsurers formed for the purpose of covering Atomic or
Nuclear Energy Risks.
2. Without in any way restricting the operation of paragraph 1 of this
Clause, this Agreement does not cover any loss or liability accruing to the
Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, from any
insurance against Physical Damage (including business interruption or
consequential loss arising out of such Physical Damage) to:
(1) Nuclear reactor power plants including all auxiliary property
on the site, or
(2) Any other nuclear reactor installation, including laboratories
handling radioactive materials in connection with reactor
installations, and critical facilities as such, or
(3) Installations for fabricating complete fuel elements or for
processing substantial quantities of prescribed substances,
and for reprocessing, salvaging, chemically separating,
storing or disposing of spent nuclear fuel or waste materials,
or
(4) Installations other than those listed in (3) above using
substantial quantities of radioactive isotopes or other
products of nuclear fission.
3. Without in any way restricting the operation of paragraphs 1 and 2 of
this Clause, this Agreement does not cover any loss or liability by radioactive
contamination accruing to the Reinsured directly or indirectly, and whether as
Insurer or Reinsurer, from any insurance on property which is on the same site
as a nuclear reactor power plant or other nuclear installation and which
normally would be insured therewith, except that this paragraph 3 shall not
operate
(a) where the Reinsured does not have knowledge of such nuclear
reactor power plant or nuclear installation, or
(b) where the said insurance contains a provisions excluding
coverage for damage to property caused by or resulting from
radioactive contamination, however caused.
4. Without in any way restricting the operation of paragraphs 1, 2 and 3 of
this clause, this Agreement does not cover any loss or liability by radioactive
contamination accruing to the Reinsured, directly or indirectly, and whether as
Insurer or Reinsurer, when such radioactive contamination is a named hazard
specifically insured against.
5. This Clause shall not extend to risks using radioactive isotopes in any
form where the nuclear exposure is not considered by the Reinsured to be the
primary hazard.
6. The term "prescribed substances" shall have the meaning given to it by
the Atomic Energy Control Act R.S.C. 1974 or by any law amendatory thereof.
7. Reinsured to be sole judge of what constitutes: (a) substantial
quantities, and (b) the extent of installation, plant or site.
8. Without in any way restricting the operation of paragraphs 1, 2, 3 and 4
of this Clause, this Agreement does not cover any loss or liability accruing to
the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer,
caused by any nuclear incident as defined in The Nuclear Liability Act, nuclear
explosion or contamination by radioactive material.
Note: Without in any way restricting the operation of paragraphs 1, 2, 3 and
4 of this clause, paragraph 8 of this Clause shall only apply to all
original contracts of the Reinsured whether new, renewal or replacement
which become effective on or after December 31, 1984.
<PAGE>
NUCLEAR INCIDENT EXCLUSION CLAUSE -
PHYSICAL DAMAGE AND LIABILITY
(BOILER AND MACHINERY POLICIES) - REINSURANCE - CANADA
1. This Contract does not cover any loss or liability accruing to the
Reassured as a member of, or subscriber to, any association of insurers or
reinsurers formed for the purpose of covering nuclear energy risks or as a
direct or indirect reinsurer of any such member, subscriber or association.
2. Without in any way restricting the operation of paragraph (1) of this
Clause, it is understood and agreed that for all purposes of this Contract all
original Boiler and Machinery Insurance or Reinsurance contracts of the
Reassured shall be deemed to include the following provisions of this paragraph:
This policy does not apply to loss, whether it be direct or indirect,
proximate or remote
(a) from an Accident caused directly or indirectly by nuclear
reaction, nuclear radiation or radioactive contamination, all
whether controlled or uncontrolled; or
(b) from nuclear reaction, nuclear radiation or radioactive
contamination, all whether controlled or uncontrolled, caused
directly or indirectly by, contributed to or aggravated by an
Accident.
3. However, it is agreed that loss arising out of the use of Radioactive
Isotopes in any form is not hereby excluded from reinsurance protection.
4. Without in any way restricting the operation of paragraph (1) hereof, it
is understood and agreed that policies issued by the Reassured effective on or
before 31st December, 1958, shall be free from the application of the other
provisions of this Clause until expiry date or 31st December, 1961, whichever
first occurs, whereupon all the provisions of this Clause shall apply.
<PAGE>
NUCLEAR INCIDENT EXCLUSION CLAUSE
LIABILITY - REINSURANCE - U.S.A.
---------------------------------
1. This Agreement does not cover any loss or liability accruing to the
Cedent as a member of, or subscriber to, any association of insurers or
reinsurers formed for the purpose of covering nuclear energy risks or as a
direct or indirect reinsurer of any such member, subscriber or association.
2. Without in any way restricting the operation of paragraph (1) of this
Clause it is understood and agreed that for all purposes of this Agreement all
the original policies of the Cedent (new, renewal and replacement) of the
classes specified in Clause II of this paragraph (2) from the time specified in
Clause III of this paragraph (2) shall be deemed to include the following
provision (specified as the Limited Exclusion Provision):
Limited Exclusion Provision
I. It is agreed that the policy does not apply under any
liability coverage, to (injury, (sickness, disease, death or
destruction (bodily injury or property damage with respect to
which an insured under the policy is also an insured under a
nuclear energy liability policy issued by Nuclear Energy
Liability Insurance Association, Mutual Atomic Energy
Liability Underwriters or Nuclear Insurance Association of
Canada, or would be an insured under any such policy but for
its termination upon exhaustion of its limits of liability.
II. Family Automobile Policies (liability only), Special
Automobile Policies (private passenger automobiles, liability
only), Farmers Comprehensive Personal Liability Policies
(liability only), Comprehensive Personal Liability Policies
(liability only) or policies of a similar nature; and the
liability portion of combination forms related to the four
classes of policies stated above, such a the Comprehensive
Dwelling Policy and the applicable types of Homeowners
Policies.
III. The inception dates and thereafter of all original policies as
described in II above, whether new, renewal or replacement,
being policies which either
(a) become effective on or after 1st May, 1960, or
(b) become effective before that date and contain the
Limited Exclusion provision set out above; provided
this paragraph (2) shall not be applicable to Family
Automobile Policies, Special Automobile Policies, or
policies or combination policies of a similar nature,
issued by the Cedent on New York risks, until 90 days
following approval of the Limited Exclusion Provision
by the Governmental Authority having jurisdiction
thereof.
3. Except for those classes of policies specified in Clause II of paragraph
(2) and without in any way restricting the operation of paragraph (1) of this
Clause, it is understood and agreed that for all purposes of this Agreement the
original liability policies of the Cedent (new, renewal and replacement)
affording the following coverages:
Owners, landlords and Tenants Liability, Contractual Liability,
Elevator Liability, Owners or Contractors (including railroad),
Protective Liability, Manufacturers and Contractors Liability Product
Liability, Professional and Malpractice Liability, Storekeepers
Liability, Garage Liability, Automobile Liability (including
Massachusetts Motor Vehicle or Garage Liability)
shall be deemed to include, with respect to such coverages, from the time
specified in Clause V of this paragraph (3), the following provision (specified
as the Broad Exclusion Provision):
Broad Exclusion Provision
It is agreed that the policy does not apply:
I. Under an Liability Coverage, to
(injury, sickness, disease, death or destruction
(bodily injury or property damage
(a) with respect to which an insured under the policy is
also an insured under a nuclear energy liability
policy issued by Nuclear Energy Liability Insurance
Association, Mutual Atomic Energy Liability
Underwriters or Nuclear Insurance Association of
Canada, or would be an insured under any such policy
but for its termination upon exhaustion of its limit
or liability; or
(b) resulting from the hazardous properties of nuclear
material and with respect to which (1) any person or
organization is required to maintain financial
protection pursuant to the Atomic Energy Act of 1954,
or any law amendatory thereof, or (2) the insured is,
or had this policy not been issued would be, entitled
to indemnity from the United States of America, or
any agency thereof, under any agreement entered into
by the United States of America, or any agency
thereof, with any person or organization.
II. Under any Medical Payments Coverage, or under any Supplementary Payment
Provision relating to
(immediate medical or surgical relief, (first aid, to expenses incurred
with respect to (bodily injury, sickness, disease or death (bodily
injury
resulting from the hazardous properties of nuclear material and arising
out of the operation of a nuclear facility by any person or
organization.
III. Under any Liability Coverage, to
(injury, sickness, disease, death or destruction (bodily injury or
property damage resulting from the hazardous properties of nuclear
material if
(a) the nuclear material (1) is at any nuclear facility
owned by, or operated by or on behalf of, an insured
or (2) has been discharged or dispersed therefrom;
(b) the nuclear material is contained in spent fuel or
waste at any time possessed, handled, used,
processed, stored, transported or disposed or by or
on behalf of an insured; or
(c) (the injury, sickness, disease, death or destruction
(the bodily injury or property damage
arises out of the furnishing by an insured of
services, materials, parts or equipment in connection
with the planning, construction, maintenance,
operation or use of any nuclear facility, but if such
facility is located within the United States of
America, its territories, or possessions or Canada,
this exclusion (c) applies only to (injury to or
destruction of property at such nuclear facility.
(property damage to such nuclear facility and any
property thereat.
IV. As used in this endorsement:
"hazardous properties" include radioactive, toxic or explosive properties;
"nuclear material" means source material, special nuclear material or
by-product material; "source material", "special nuclear material" and
"by-product material" have the meanings given to them in the Atomic Energy
Act of 1954 or in any law amendatory thereof; "spent fuel" means any fuel
element or fuel component, solid or liquid, which has been used or exposed
to radiation in a nuclear reactor; "waste" means any waste material (1)
containing by-product material and (2) resulting from the operation by any
person or organization of any nuclear facility included within the
definition of nuclear facility under paragraph (a) or (b) thereof; "nuclear
facility" means
(a) any nuclear reactor,
(b) any equipment or device designed or used for (1) separating the
isotopes of uranium or plutonium, (2) processing or utilizing
spent fuel, or (3) handling, processing or packaging waste,
(c) any equipment or device used for the processing, fabricating or
alloying of special nuclear material if at any time the total
amount of such material in the custody of the Insured at the
premises where such equipment or device is located consists of or
contains more than 25 grams of uranium 235,
(d) any structure, basin, excavation, premises or place prepared or
used for the storage or disposal of waste
and includes the site on which any of the foregoing is located, all
operations conducted on such site and all premises used for such
operations; "nuclear reactor" means any apparatus designed or used to
sustain nuclear fission in a self-supporting chain reaction or to contain a
critical mass of fissionable material; (with respect to injury to or
destruction of property, the word "injury" or "destruction" ("property
damage" includes all forms of radioactive contamination of property.
(includes all forms of radioactive contamination of property.
V. The inception dates and thereafter of all original policies affording
coverages specified in this paragraph (3), whether new, renewal or
replacement, being policies which become effective on or after 1st May,
1960, provided this paragraph (3) shall not be applicable to
(i) Garage and Automobile Policies issued by the Cedent on New York
risks, or
(ii) statutory liability insurance required under Chapter 90, General
laws of Massachusetts, until 90 days following approval of the
Broad Exclusion Provision by the Governmental Authority having
jurisdiction thereof.
4. Without in any way restricting the operation of paragraph (1) of this
Clause, it is understood and agreed that paragraphs (2) and (3) above
are not applicable to original liability policies of the Cedent in
Canada and that with respect of such policies this Clause shall be
deemed to include the Nuclear Energy Liability Exclusion provisions
adopted by the Canadian Underwriters' Association or the Independent
Insurance Conference of Canada.
------------------------
Note: The words printed in italics in the Limited Exclusion provision and in
the Broad Exclusion Provision shall apply only in relation to original
liability policies which include a Limited Exclusion Provision or a
Broad Exclusion provision containing those words.
<PAGE>
NUCLEAR INCIDENT EXCLUSION CLAUSE
LIABILITY - REINSURANCE - CANADA
---------------------------------
1. This Contract does not cover any loss or liability accruing to the
Company as a member of, or subscriber to, any association of insurers or
reinsurers formed for the purpose of covering nuclear energy risks or as a
direct or indirect reinsurer of any such member, subscriber, or association.
2. Without in any way restricting the operation of paragraph 1 of this
Clause, it is agreed that for all purposes of this Contract all the original
liability contracts of the Company, whether new, renewal or replacement, of the
following classes, namely,
Personal Liability
Farmers Liability
Storekeepers Liability
which become effective on or after 31st December 1984, shall be deemed to
include, from their inception dates and thereafter, the following provision:
Limited Exclusion Provision
This Policy does not apply to bodily injury or property damage with
respect to which the Insured is also insured under a contract of nuclear
energy liability insurance (whether the Insured is named in such
contract or not and whether or not it is legally enforceable by the
Insured) issued by the Nuclear Insurance Association of Canada or any
other group or pool of insurers or would be an Insured under any such
policy but for its termination upon exhaustion of its limit of liability
With respect to property, loss of use of such property shall be deemed
to be property damage.
3. Without in any way restricting the operation of paragraph 1 of this
Clause, it is agreed that for all purposes of this Contract all the original
liability contracts of the Company, whether new, renewal or replacement, of any
class whatsoever (other than Personal Liability, Farmers Liability, Storekeepers
Liability or Automobile Liability contracts), which become effective on or after
31st December 1984, shall be deemed to include, from their inception dates and
thereafter, the following provision:
Broad Exclusion Provision
It is agreed that this Policy does not apply:
(a) to liability imposed by or arising under the Nuclear
Liability Act; or
(b) to bodily injury or property damage with respect to
which an Insured under this Policy is also insured under a
contract of nuclear energy liability insurance (whether the
Insured is named in such contract or not and whether or not it is
legally enforceable by the Insured) issued by the Nuclear
Insurance Association of Canada or any other insurer or group or
pool of insurers or would be an Insured under any such policy but
for its termination upon exhaustion of its limit of liability; or
(c) to bodily injury or property damage resulting directly or
indirectly from the nuclear energy hazard arising from:
(1) the ownership, maintenance, operation or use of a
nuclear facility by or on behalf of an Insured;
(2) the furnishing by an Insured of services, materials, parts
or equipment in connection with the planning, construction,
maintenance, operation or use of any nuclear facility; and
(3) the possession, consumption, use, handling, disposal or
transportation of fissionable substances or of other
radioactive material (except radioactive isotopes, away from
a nuclear facility, which have reached the final stage of
fabrication so as to be usable for any scientific, medical
agricultural, commercial or industrial purpose) used,
distributed, handled or sold by an Insured.
As used in this Policy:
(I) The term "nuclear energy hazard" means the radioactive,
toxic, explosive or other hazardous properties of
radioactive material;
(II) The term "radioactive material" means uranium, thorium,
plutonium, neptunium, their respective derivatives and
compounds, radioactive isotopes of other elements and any
other substances that the Stomic Energy Control Board may,
by regulation, designate as being prescribed substances
capable of releasing atomic energy, or as being requisite
for the production, use or application of atomic energy;
(III) The term "nuclear facility" means:
(a) any apparatus designed or used to sustain nuclear
fission in a self-supporting chain reaction or to
contain a critical mass of plutonium, thorium and
uranium or any one or more of them;
(b) any equipment or device designed or used for (i)
separating the isotopes of plutonium, thorium and
uranium or any one or more of them, (ii) processing o
utilizing spent fuel, or (iii) handling, processing or
packaging waste;
(c) any equipment or device used for the processing,
fabricating or alloying of plutonium, thorium or
uranium enriched in the isotope uranium 233 or in the
isotope uranium 235, or any one or more of them if at
any time the total amount of such material in the
custody of the Insured at the premises where such
equipment or device is located consists of or contains
more than 25 grams of plutonium or uranium 233 or any
combination thereof, or more than 250 grams of uranium
235;
(d) any structure, basin, excavation premises or place
prepared or used for the storage or disposal of waste
radioactive material;
and includes the site on which any of the foregoing is
located, together with all operations conducted thereon and
all premises used for such operations.
(IV) the term "fissionable substance" means any prescribed
substance that is, or from which can be obtained, a
substance capable of releasing atomic energy by nuclear
fission.
(V) with respect to property, loss of use of such property
shall be deemed to be property damage.
<PAGE>
NUCLEAR ENERGY RISKS EXCLUSION CLAUSE (REINSURANCE) 1984
(WORLDWIDE EXCLUDING U.S.A. & CANADA)
--------------------------------------------------------
This Agreement shall exclude Nuclear Energy Risks whether such risks are written
directly and/or by way of reinsurance and/or via Pools and/or Associations.
For all purposes of this agreement, Nuclear Energy Risks shall be defined as all
first party and/or third party insurances (other than Workers' Compensation
and/or Employers' Liability) in respect of:
(i) nuclear reactors and nuclear power stations or plant
(ii) any other premises or facilities whatsoever related to or
concerned with:
(a) the production of nuclear energy or
(b) the production or storage or handling of nuclear fuel
or nuclear wastes
(iii) any other premises or facilities eligible for insurance by any
local Nuclear Pool and/or Association but only to the extent of
the requirements of the local Pool and/or Association, it being
the intention always that Reinsurers shall follow the fortunes of
the Reinsured insofar as the Reinsured complies with the
requirements of any such local Pool and/or Association.
However, this Exclusion shall not apply
(a) to any insurance or reinsurance in respect of the construction,
erection or installation of buildings, plant and other property
(including contractor's plant and equipment used in connection
therewith)
(i) for the storage of nuclear fuel - prior to the
commencement of storage.
(ii) as regards reactor installations - prior to the
commencement of loading of nuclear fuel into the
reactor, or prior to the initial criticality,
depending on the commencement of the insurance or
reinsurance of the relevant local Nuclear Pool and/or
Association.
(b) to any Machinery Breakdown or other Engineering insurance or
reinsurance not coming within the scope of (a) above, nor
affording coverage in the "higher radioactivity" zone
<PAGE>
WAR RISK EXCLUSION CLAUSE (REINSURANCE)
As regards interests which at time of loss or damage are on
shore, no liability shall attach hereto in respect of any loss or
damage which is occasioned by war, invasion, hostilities, acts of
foreign enemies, civil war, rebellion, insurrection, military or
usurped power, or martial law or confiscation by order of any
government or public authority.
This War Exclusion Clause shall not, however, apply to
interest which at time of loss or damage are within the territorial
limits of the United States of America (comprising the fifty States of
the Union and the District of Columbia, its territories and
possessions, including the Panama Canal Zone and the Commonwealth of
Puerto Rico and including Bridges between the United States of America
and Mexico provided they are under United States ownership), Canada,
St. Pierre and Miquelon, provided such interests are insured under
original policies, endorsements or binders containing a standard war or
hostilities or warlike operations exclusion clause.
Nevertheless, this clause shall not be construed to apply to
loss or damage occasioned by riots, strikes, civil commotion,
vandalism, malicious damage, including acts committed by agents of any
government, party or faction engaged in war, hostilities or other
warlike operation, provided such agents are acting secretly and not in
connection with any operations of military or naval armed forces in the
country where the insured are situated.
<PAGE>
INSOLVENCY FUND EXCLUSION CLAUSE
This Agreement excludes all liability o the Ceding Company arising by
contract, operation of law or otherwise, from its participation or
membership, whether voluntary or involuntary, in any insolvency fund.
"Insolvency Fund" includes any guarantee fund, insolvency fund, plan,
pool, association, fund or other arrangement, howsoever denominated,
established or governed, which provides for any assessment of or
payment or assumption by the Ceding Company of part or all of any
claim, debt, charge, fee or other obligation of an insurer or its
successors or assigns which has been declared by any competent
authority to be insolvent or which is otherwise deemed unable to meet
any claim, debt, charge fee or other obligation in whole or in part.
<PAGE>
INTERESTS AND LIABILITIES AGREEMENT
to the
UNDERWRITING YEAR
AGGREGATE EXCESS OF LOSS REINSURANCE TREATY
Effective: January 1, 1998
(hereinafter referred to as "Reinsurance Treaty")
between
CHARTWELL REINSURANCE COMPANY
Stamford, Connecticut
and
DAKOTA SPECIALTY INSURANCE COMPANY
Stamford, Connecticut
and
THE INSURANCE CORPORATION OF NEW YORK
Jericho, New York
and
DRAYTON COMPANY LIMITED
Hamilton, Bermuda
and
CHARTWELL RE HOLDINGS CORPORATION
Stamford, Connecticut
(hereinafter referred to collectively as "Ceding Company")
and
LONDON LIFE AND CASUALTY REINSURANCE CORPORATION
Wildey, St. Michael, Barbados, W.I.
(hereinafter referred to as the "Reinsurer")
It is hereby mutually agreed that the interests and liabilities of the companies
referred to herein collectively as the Ceding Company, arising under the terms
and conditions of the Treaty, are joint and not several. It is agreed that all
communications and payments to or from the Ceding Company may be made
respectively to or from Chartwell Reinsurance Company, which will act as
paymaster and agent for all transactions and communications under this Treaty.
It is hereby mutually agreed that the Reinsurer shall have a 75.00% share in the
interests and liabilities as set forth in the captioned Reinsurance Contract and
Addendum No.1 attaching to and forming part of the Reinsurance Contract. The
share of the Reinsurer shall be separate and apart from the shares of the other
reinsurers and shall not be joint with those of the other reinsurers and
Reinsurer shall in no event participate in the interests and liabilities of the
other reinsurers.
<PAGE>
In Witness Whereof, the parties hereto, by their duly authorized officers, have
executed this Agreement, in triplicate, as of the dates undermentioned.
In Stamford, Connecticut, this
1st day of October, 1998,
for and on behalf of Chartwell Reinsurance Company, Dakota Specialty Insurance
Company, The Insurance Corporation of New York, Drayton Company Limited and
Chartwell Re Holdings Corporation
By: /s/ Peter W. Wildman
--------------------------------
Peter W. Wildman
Title: Senior Vice President
--------------------------------
In Wildey, St. Michael,
Barbados, W.I., this 4th day of
September, 1998
for and on behalf of London Life and Casualty Reinsurance Corporation
By: /s/ John F. Cartwright
--------------------------------
John F. Cartwright
Title: President
-------------------------------
<PAGE>
INTERESTS AND LIABILITIES AGREEMENT
to the
UNDERWRITING YEAR
AGGREGATE EXCESS OF LOSS REINSURANCE TREATY
Effective: January 1, 1998
(hereinafter referred to as "Reinsurance Treaty")
between
CHARTWELL REINSURANCE COMPANY
Stamford, Connecticut
and
DAKOTA SPECIALTY INSURANCE COMPANY
Stamford, Connecticut
and
THE INSURANCE CORPORATION OF NEW YORK
Jericho, New York
and
DRAYTON COMPANY LIMITED
Hamilton, Bermuda
and
CHARTWELL RE HOLDINGS CORPORATION
Stamford, Connecticut
(hereinafter referred to collectively as "Ceding Company")
and
WESTERN GENERAL INSURANCE LTD.
Hamilton, Bermuda
(hereinafter referred to as the "Reinsurer")
It is hereby mutually agreed that the interests and liabilities of the companies
referred to herein collectively as the Ceding Company, arising under the terms
and conditions of the Treaty, are joint and not several. It is agreed that all
communications and payments to or from the Ceding Company may be made
respectively to or from Chartwell Reinsurance Company, which will act as
paymaster and agent for all transactions and communications under this Treaty.
It is hereby mutually agreed that the Reinsurer shall have a 25.00% share in the
interests and liabilities as set forth in the captioned Reinsurance Contract and
Addendum No.1 attaching to and forming part of the Reinsurance Contract. The
share of the Reinsurer shall be separate and apart from the shares of the other
reinsurers and shall not be joint with those of the other reinsurers and
Reinsurer shall in no event participate in the interests and liabilities of the
other reinsurers.
<PAGE>
In Witness Whereof, the parties hereto, by their duly authorized officers, have
executed this Agreement, in triplicate, as of the dates undermentioned.
In Stamford, Connecticut, this
1st day of October, 1998,
for and on behalf of Chartwell Reinsurance Company, Dakota Specialty Insurance
Company, The Insurance Corporation of New York, Drayton Company Limited and
Chartwell Re Holdings Corporation
By: /s/ Peter W. Wildman
---------------------------------
Peter W. Wildman
Title: Senior Vice President
-------------------------------
In Hamilton, Bermuda, this 1st
day of September, 1998,
for and on behalf of Western General Insurance Ltd.
By: /s/ John L. Marion
---------------------------------
John L. Marion
Title: President & Managing Director
-------------------------------
Exhibit 12.1
CHARTWELL RE CORPORATION
COMPUTATION OF EARNINGS TO FIXED CHARGES
(dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Earnings Before Fixed Charges:
Income (loss) from continuing operations
before income taxes............................ $ 45,527 $ 37,874 $ 32,520 $ 8,939 $ (5,120)
Interest and debt expense...................... 13,281 12,050 9,412 7,734 6,580
Interest portion of rental expense............. 840 943 462 244 224
======== ========= ========= ======== ==========
Earnings before fixed charges.................. $ 59,648 $ 50,867 $ 42,394 $ 16,917 $ 1,684
======== ========= ========= ======== ==========
Fixed Charges:
Interest and debt expense...................... $ 3,281 $ 12,050 $ 9,412 $ 7,734 $ 6,580
Interest portion of rental expense............. 840 943 462 244 224
======== ========= ========= ======== =========
Fixed charges.................................. $ 14,121 $ 12,993 $ 9,874 $ 7,978 $ 6,804
======== ========= ========= ======== =========
Ratio of earnings to fixed charges............. 4.22x 3.91x 4.29x 2.12x 0.25x
======== ========= ========= ======== =========
</TABLE>
Exhibit 21
Subsidiaries of Chartwell Re Corporation
Name Jurisdiction of Incorporation
---- -----------------------------
Chartwell Re Holdings Corporation Delaware
Chartwell Reinsurance Company Minnesota
The Insurance Corporation of New York New York
Chartwell Holdings Limited. United Kingdom
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<DEBT-HELD-FOR-SALE> 659,752
<DEBT-CARRYING-VALUE> 30,539
<DEBT-MARKET-VALUE> 31,786
<EQUITIES> 36,358
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 815,877
<CASH> 60,588
<RECOVER-REINSURE> 19,746
<DEFERRED-ACQUISITION> 24,084
<TOTAL-ASSETS> 1,536,809
<POLICY-LOSSES> 878,617
<UNEARNED-PREMIUMS> 108,495
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 140,607
0
0
<COMMON> 96
<OTHER-SE> 292,767
<TOTAL-LIABILITY-AND-EQUITY> 1,536,809
229,504
<INVESTMENT-INCOME> 48,869
<INVESTMENT-GAINS> (3)
<OTHER-INCOME> 19,616
<BENEFITS> 135,265
<UNDERWRITING-AMORTIZATION> 61,564
<UNDERWRITING-OTHER> 23,989
<INCOME-PRETAX> 45,527
<INCOME-TAX> 15,711
<INCOME-CONTINUING> 29,816
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,816
<EPS-PRIMARY> 3.10
<EPS-DILUTED> 3.00
<RESERVE-OPEN> 585,647
<PROVISION-CURRENT> 142,665
<PROVISION-PRIOR> (7,400)
<PAYMENTS-CURRENT> 42,102
<PAYMENTS-PRIOR> 130,669
<RESERVE-CLOSE> 639,558
<CUMULATIVE-DEFICIENCY> 7,400
</TABLE>
