Management believes Chartwell's current office space is adequate for its needs.
Information required by Item 6 has been omitted because the Registrant meets the conditions set forth in General Instruction J(1)(a) of Form 10-K and is therefore filing this Form 10-K with the reduced disclosure format.
achieved improved underwriting results and, consequently, the supply of reinsurance capacity increased, both from existing companies and new entrants.
Revenues: Total revenues for the year ended December 31, 1996 increased 81% to $261.2 million, compared to $144.5 million for the comparable period in 1995. The accompanying table summarizes gross and net premiums written and total revenues for the periods indicated:
Revenues Year Ended December 31, ----------------------- (Dollars in thousands) 1996 1995 ---- ----
Gross premiums written............................ $263,838 $126,968 ======== ======== Net premiums written ............................. $192,251 $123,314 ======== ======== Premiums earned .................................. $209,503 $120,258 Net investment income ............................ 43,598 19,907 Net realized capital gains ....................... 1,157 3,199 Service operations ............................... 6,935 1,095 -------- -------- Total .................... $261,193 $144,459 ======== ========
Loss and Loss Adjustment Expenses. The Company's principal expense, loss and loss adjustment expenses ("LAE") related to the settlement of claims, was $150.6 million for the year ended December 31, 1996 a 73% increase compared to $86.9 million for the comparable period in 1995. The increase is principally attributable to the increase in earned premiums as noted above. Net losses and LAE expressed as a percentage of net earned premiums (the loss and LAE ratio) improved to 71.9% for the year ended December 31, 1996 from 72.3% recorded for the same period in 1995. The improvement of 0.4 percentage points in the loss and LAE ratio for the year ended December 31, 1996 was due to an increase in the amount of proportional business written by the Company which generally has a lower loss and LAE ratio than excess of loss business but modestly higher commissions.
Net Underwriting Results. The Company incurred an underwriting loss (net premiums earned minus losses, LAE and underwriting expenses) of $8.9 million for the year ended December 31, 1996 as compared to an underwriting loss of $5.2 million for the same period in 1995. The combined ratio for the years ended December 31, 1996 and 1995 computed in accordance with GAAP was 104.2% for both years. Although the loss ratio component improved to 71.9% for the year ended December 31, 1996 from 72.3% recorded for the same period in 1995, the expense ratio increased to 32.3% for the year ended December 31, 1996 from the 31.9% recorded for the same period in 1995, for the reasons noted above. On a pro forma basis, as if the Merger occurred on January 1, 1995, the expense ratio decreased to 32.3% for the year ended December 31, 1996 compared to 34.9% for the same period in 1995, and the combined ratio decreased to 104.2% for the year ended December 31, 1996 compared to 120.8% for the same period in 1995. The pro forma loss and LAE ratio for the year ended December 31, 1995 includes a strengthening of INSCORP's net loss reserves of $25.0 million for losses incurred but not reported with respect to INSCORP's business written in prior years. This reserve strengthening, which was undertaken by Piedmont prior to the Merger, increased the Company's pro forma loss and LAE ratio by 10.1 percentage points for the year.
Interest and Amortization. Interest and amortization expenses were $7.8 million for the years ended December 31, 1996 and 1995. Interest and amortization on the Company's 10.25% Senior Notes due 2004 (the "Senior Notes") was $6.0 million for the year ended December 31, 1996 and $8.0 million for the comparable period in 1995. The 1996 amount was reduced due to the redemption of 35% of the principal amount of outstanding Senior Notes on April 8, 1996. Interest expense for the year ended December 31, 1996 also includes $1.4 million of interest and amortization expense on a $20.0 million bank facility established on the date of Merger and $0.5 million of interest and amortization related to the Archer acquisition.
Net Investment Income and Net Realized Capital Gains (Losses). Consolidated net investment income, exclusive of realized and unrealized capital gains and losses, for 1996 was $43.6 million, an increase of $23.7 million, or 119%, over the same period in 1995. The improvement reflects the continued positive cash flow from operations of $14.7 million offset by a decline in the value of marked-to-market investments of $10.0 million. In addition, on June 28, 1996, Chartwell Re received $7.9 million in settlement of the Reserve Indemnification Agreement which increased the Company's invested asset base. The average annual tax equivalent yield on invested assets before investment expenses increased to 6.7% for 1996 compared to 6.8% for the same period in 1995.
Net Income Before Extraordinary Item. Net income before extraordinary item increased to $22.4 million for the year ended December 31, 1996 as compared to $6.2 million for the same period in 1995. The largest components of this increase were increases in net investment income and income from service operations as described above
December 31, ----------------------------- (Dollars in Thousands) 1995 1994 ------------- ------------- Specialty ............................ $ 60,529 $ 53,807 Global: Domestic .......................... 21,010 22,136 International ..................... 17,400 17,535 -------- -------- Subtotal Global ...................... 38,410 39,671 Regional ............................. 16,738 19,541 Marine & Aviation .................... 11,291 3,377 -------- -------- $126,968 $116,396 ======== ========
Net Underwriting Results. The Company incurred an underwriting loss (net premiums earned minus losses, LAE and underwriting expenses) of $5.2 million for the year ended December 31, 1995 as compared to an underwriting loss of $9.2 million for the same period in 1994. The combined ratio for the years ended December 31, 1995 and 1994 computed in accordance with GAAP was 104.2% and 109.0%, respectively. The loss ratio component improved to 72.3% for the year ended December 31, 1995 from 76.5% recorded for the same period in 1994, and the expense ratio improved to 31.9% for the year ended December 31, 1995 from the 32.5% recorded for the same period in 1994, for the reasons noted above. On a pro forma basis, as if the Merger occurred on January 1, 1995, the expense ratio for the year ended December 31, 1995 was 34.9%, and the combined ratio was 120.8%. The pro forma loss and LAE ratio for the year ended December 31, 1995 included strengthening of INSCORP's net loss reserves of $25.0 million for losses incurred but not reported with respect to INSCORP's business written in prior years. This reserve strengthening, which was undertaken by Piedmont prior to the Merger, increased the Company's pro forma loss and LAE ratio by 10.1 percentage points for the year.
Interest and Amortization. Interest and amortization increased by 6.0% to $7.8 million in 1995 from $7.4 million in 1994. The 1995 expense amount includes $8.0 million of interest and amortization on the Senior Notes, $0.1 million of interest on bank debt and other amortization offset by $0.3 million of savings from an interest rate swap which was terminated during the second
Net Investment Income and Net Realized Capital Gains (Losses). Net investment income, exclusive of realized and unrealized capital gains and losses, increased by 35.2% to $19.9 million in 1995 from $14.7 million in 1994 as a result of additional invested assets from operating activities and improved investment income return. The net investment income return (net investment income excluding both realized and unrealized gains and losses) based on average invested assets increased to 6.8% in 1995 from 6.3% in 1994. This increase was primarily due to an increase in market interest rates in the second half of 1994.
Income Before Income Taxes and Extraordinary Item. Net income before income taxes and extraordinary items increased to $8.9 million for the year ended December 31, 1995 compared to a loss of $5.1 million for the same period in 1994. The increase resulted primarily from the increase in earned premiums, the favorable results in both loss and loss adjustment expense and in other expenses, and from the increases in net investment income and service and other revenue.
Net Income (Loss) Before Extraordinary Item. Results of operations before extraordinary item increased to a profit of $6.2 million in 1995 from a loss of $3.4 million in 1994 because of the factors discussed above.
Extraordinary Item, Net of Income Tax. Chartwell recognized a net after-tax extraordinary expense of $0.5 million in 1994 for the write-off of unamortized debt issuance costs resulting from Chartwell's 1994 refinancing.
For the years ended December 31, 1996, 1995 and 1994, Chartwell's consolidated cash flow provided by operations was $14.7 million, $23.0 million and $30.2 million, respectively. The 1996 cash flow from operations was reduced as a result of the run-off of INSCORP's reinsurance reserves. The primary contributors to the positive cash flow for the 1995 period were underwriting cash flow (i.e., premiums received less paid losses and LAE and underwriting expenses) and investment income received. The 1995 cash flow provided by operations was reduced by $10.9 million due to the payment of three unusually large claims from business written prior to 1985 and the commutation of a group of assumed contracts.
Sales of available-for-sale investments were $500.7 million, $330.6 million and $238.6 million for the years ended December 31, 1996, 1995 and 1994, respectively. Trading activity increased during the second and third quarters of 1995 primarily to modify the portfolio by sector and to capitalize on some opportunities to improve on credit quality without sacrificing yield. Much of the activity that occurred in 1994 was due to changes in Chartwell Re's investment guidelines which called for a repositioning of the portfolio into higher yielding securities as interest rates trended upward, particularly at the short-end of the yield-curve. During this period, Chartwell Re kept durations short and reduced its exposure to corporate bonds by selling longer maturity corporate bonds in favor of shorter maturity securities.
In connection with the establishment prior to the Merger of Chartwell as an intermediate-level holding company for Chartwell Re's operations, all of Chartwell Re's obligations under the Senior Notes were assumed by Chartwell, and Chartwell Re was released from any further obligations under the Senior Notes.
In the first half of 1996, Chartwell Re completed a public offering of 2,725,000 shares of common stock at $23.00 per share. The net proceeds to Chartwell Re were $58.5 million after deduction of underwriting discount and expenses. Of the net proceeds, $48.5 million was contributed to the Company 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. This redemption reduced Chartwell's annual expense for interest and amortization of debt issuance costs under the Senior Notes by $2.8 million per year. As a result of the offering, Standard & Poor's improved its rating with respect to the Senior Notes to BBB- from BB and Moody's improved its rating to Ba1 from Ba2.
Due in part to the Merger and the above transactions, the statutory surplus of Chartwell Reinsurance, determined in accordance with SAP, increased from $81.1 million at December 31, 1993 to over $238.0 million at December 31, 1996.
Company's senior debt rating by Standard & Poor's or Moody's. The margin can range from 0.50% to 0.875%. Based on the Company's current senior debt ratings, the Margin over LIBOR would be 0.75%, compared to the margin under the Company's prior credit agreement with Fleet of 1.15%. The base rate is the higher of (1) First Union's prime commercial lending rate or (2) the federal funds rate plus 0.5%. the Company 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 Loan Note guarantees at a rate per annum of 0.375% (if secured) or the Margin (if unsecured) on the outstanding amount of potential credit exposure, and (3) certain other fees customary in connection with syndicated loans of this nature.
Upon consummation of the Merger, Chartwell Re became the successor to Piedmont under the CI Notes. The CI Notes do not require any interest payments until maturity or earlier redemption or repurchase. Under certain circumstances, the CI Notes may be settled by delivery of shares of common stock.
Chartwell and its subsidiaries may incur additional indebtedness in the future, subject to the limitations contained in the Senior Notes indenture and the agreements governing the New Credit Facilities.
Chartwell is largely dependent upon receipt of dividends and other statutorily permissible payments from its subsidiaries to meet its obligations, including the obligation to pay interest and principal on the Senior Notes and under the New Credit Facilities. Further, dividend payments by Chartwell Reinsurance and INSCORP are subject to limits under the laws of the States of Minnesota and New York, respectively. Under the applicable provisions of the insurance holding company laws of the State of Minnesota, Chartwell Reinsurance may, upon five days notice to the Commissioner following the declaration of dividends to stockholders, and upon at least ten days notice to the Commissioner prior to dividend payments, pay dividends to Chartwell without the approval of the Commissioner, unless such dividends, together with other dividends paid within the preceding twelve months, exceed the greater of (i) 10% of Chartwell Reinsurance's policyholders' surplus as of the end of the prior calendar year or (ii) Chartwell Reinsurance's statutory net income, excluding realized capital gains, for the prior calendar year. Any dividend in excess of the amount determined pursuant to the foregoing formula would be characterized as an "extraordinary dividend" requiring the prior approval of the Commissioner. In any case, the maximum amount of dividends Chartwell Reinsurance may pay is limited to its earned surplus, also known as unassigned funds. As of December 31, 1996, Chartwell Reinsurance reported unassigned funds in the amount of $54.5 million. Up to $23.8 million is available under the foregoing formula for the payment of dividends by Chartwell Reinsurance without regulatory approval in 1997. Chartwell Reinsurance paid Chartwell no dividends in 1996, 1995 or 1994.
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), including the payment of interest on the Senior Notes and the New Credit Facilities. 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. There can be no assurance that sufficient funds for any of the foregoing purposes would be available to the Company at such time.
In October 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation," which became effective for Chartwell Re beginning January 1, 1996. SFAS No. 123 requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) compensation cost to be measured based on the fair value of the equity instrument awarded. Companies are permitted, however, to continue to apply APB Opinion No. 25, which recognizes compensation cost based on the intrinsic value of the equity instrument awarded. Chartwell Re will continue to apply APB Opinion No. 25 to its stock based compensation awards to employees and will disclose the required pro forma effect on net income and earnings per share. (See Note 15).