SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the quarterly period ended September 30,
2000.
( ) 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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Commission file number 1-16089
TRENWICK GROUP LTD.
(Exact name of registrant as specified in its charter)
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Bermuda 98-0232340
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Continental Building, 25 Church Street
Hamilton HM12, Bermuda
(Address of principal executive offices) (zip code)
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Registrant's telephone number, including area code: 441-292-4985
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 [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Description of Class Shares Outstanding
as of November 13, 2000
--------------------- ------------------------
Common Shares - $.10 par value 36,668,594
<PAGE>
TRENWICK GROUP LTD.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
Page
ITEM 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheet
September 30, 2000 and December 31,1999..................... 3
Consolidated Statement of Operations and Comprehensive
Income Three Months and Nine Months ended
September 30, 2000 and 1999................................. 4
Consolidated Statement of Changes in Common
Shareholders' Equity Three Months and
Nine Months ended September 30, 2000 and 1999............... 5
Consolidated Statement of Cash Flows
Nine Months ended September 30, 2000 and 1999............... 6
Notes to Unaudited Consolidated Financial Statements........ 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................20
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K............................41
Signatures...............................................................43
2
<PAGE>
Part I. Financial Information
Item 1 - Financial Statements
<TABLE>
<CAPTION>
Trenwick Group Ltd.
Consolidated Balance Sheet
(Expressed in thousands of United States dollars)
Unaudited
<CAPTION>
September 30, December 31,
2000 1999
-------------- ---------------
<S> <C> <C>
Assets:Debt securities available for sale, at fair value
(amortized cost: $1,742,294 and $549,553) $1,738,500 $539,727
Equity securities available for sale, at fair value (cost: $117,843 and $0) 117,843 -
Investments held by Lloyd's syndicates 163,915 -
------------ ----------
Total investments 2,020,258 539,727
Cash and cash equivalents 122,286 19,864
Cash and cash equivalents held by Lloyd's syndicates 75,992 -
Accrued investment income 33,892 12,215
Premiums in the course of collection 502,329 78,424
Reinsurance recoverable balances, net 723,359 17,776
Prepaid reinsurance premiums 142,643 11,137
Deferred policy acquisition costs 96,790 8,470
Deposits 21,222 32,742
Net deferred income taxes 123,124 -
Other assets 150,443 5,813
------------ ----------
Total assets $4,012,338 $726,168
============ ==========
Liabilities:
Unpaid claims and claims expenses $2,253,360 $190,352
Unearned premium income 499,129 49,895
Indebtedness 266,944 -
Other liabilities 198,535 37,055
------------ ----------
Total liabilities 3,217,968 277,302
------------ ----------
Minority interest:
Subsidiary company-obligated mandatorily redeemable preferred
capital securities of subsidiary trust holding solely
junior subordinated debentures of U.S. subsidiary 86,900 -
Minority interest in preferred shares of Bermuda subsidiary 75,000 75,000
Minority interest in common shares of Bermuda subsidiary - 86,906
------------ ----------
Total minority interest 161,900 161,906
------------ ----------
Common shareholders' equity:
Common shares, $0.10 par value; 36,668,594 and
15,603,262 shares issued and outstanding 3,667 1,560
Additional paid in capital 574,748 235,349
Deferred compensation under share award plan (310) (447)
Retained earnings 58,159 58,040
Accumulated other comprehensive income (loss) (3,794) (7,542)
------------ ----------
Total common shareholders' equity 632,470 286,960
------------ ----------
Total liabilities, minority interest and common shareholders' equity $4,012,338 $726,168
============ ==========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
<TABLE>
<CAPTION>
Trenwick Group Ltd.
Consolidated Statement of Operations and
Comprehensive Income (Expressed in thousands of United
States dollars, except share and per share data)
Unaudited
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- --------------------------------
2000 1999 2000 1999
------------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Net premiums earned $26,751 $21,362 $82,739 $91,486
Net investment income 9,591 8,530 27,778 25,893
Net realized investment gains (losses) 270 (1,127) (1,916) (1,577)
Foreign currency gains (losses) (426) 218 (53) (335)
------------- ---------- ------------ ------------
Total revenues 36,186 28,983 108,548 115,467
------------- ---------- ------------ ------------
Expenses:
Claims and claims expenses incurred 15,924 25,568 69,190 100,561
Policy acquisition costs 5,621 3,409 16,269 14,496
Underwriting expenses 3,264 3,467 10,387 10,981
General and administrative expenses 424 437 3,293 717
Interest expense and dividends on preferred
stock of subsidiary 1,945 2,012 5,838 6,172
------------- ---------- ------------ ------------
Total expenses 27,178 34,893 104,977 132,927
------------- ---------- ------------ ------------
Income (loss) before other minority interest
and income taxes 9,008 (5,910) 3,571 (17,460)
Minority interest in net income (loss) of subsidiary 2,097 (1,034) 839 (4,059)
------------- ---------- ------------ ------------
Income (loss) before income taxes 6,911 (4,876) 2,732 (13,401)
Income taxes - - - -
------------- ---------- ------------ ------------
Net income (loss) $6,911 $(4,876) $2,732 $(13,401)
============= ========== ============ ============
Basic and diluted earning (loss) per share $0.44 $(0.31) $0.17 $(0.85)
============= ========== ============ ============
Comprehensive income (loss):
Net income (loss) $6,911 $(4,876) $2,732 $(13,401)
------------- ---------- ------------ ------------
Other comprehensive income (loss):
Unrealized investment gains (losses) 3,819 (393) 3,149 (13,159)
Less: reclassification adjustments for losses
(gains) included in net income (loss) (206) 865 1,466 1,210
------------- ---------- ------------ ------------
Total other comprehensive income (loss) 3,613 472 4,615 (11,949)
------------- ---------- ------------ ------------
Comprehensive income (loss) $10,524 $(4,404) $7,347 $(25,350)
============= ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
<TABLE>
<CAPTION>
Trenwick Group Ltd.
Consolidated Statement of Changes in Common Shareholders' Equity
(Expressed in thousands of United States dollars)
Unaudited
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- ----------------------------
2000 1999 2000 1999
-------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Common shareholders' equity, beginning of period $281,579 $311,804 $286,960 $349,567
Common shares, $0.10 par value,
and additional paid in capital:
Issuance of 1,120; 3,065; 21,532 and 13,450 shares
of LaSalle Re Holdings for cash under employee
stock purchase plan 13 52 247 224
Issuance of 0; 3,643; 653 and 58,643 shares of LaSalle
Re Holdings under employee compensation plan - 64 7 865
Compensation expense recognized under
employee program 200 - 243 -
Exercise of options to acquire shares of
LaSalle Re Holdings 8 - 8 -
Exercise of options to acquire shares of subsidiary 105 - 105 -
Purchase of 253,000 shares from minority interest - - - (3,275)
Equity put option premiums, net of minority interest (316) (1,420) (631) (1,420)
Change in minority interest (925) 253 (684) -
Issuance of 4,797,649 shares to acquire
minority interest in subsidiary 78,171 - 78,171 -
Issuance of 16,236,551 shares to acquire
Trenwick Group Inc. 270,980 - 270,980 -
Acquisition costs (6,940) - (6,940) -
Deferred compensation under share award plan:
Restricted common shares awarded - - - (659)
Compensation expense recognized,
net of minority interest 68 143 208 143
Change in minority interest 2 - 2 -
Acquisition of minority interest (73) - (73) -
Retained earnings:
Net income (loss) 6,911 (4,876) 2,732 (13,401)
Dividends on common shares of LaSalle Re Holdings - - - (11,711)
Repurchase of exercised share options in subsidiary (42) - (41) -
Repurchase of options to acquire shares of subsidiary - - (2,396) (1)
Change in minority interest (16) 705 (176) (1,186)
Accumulated other comprehensive income:
Unrealized gain (loss) in period, net of minority interest 3,613 472 4,615 (11,949)
Change in minority interest 23 - 24 -
Acquisition of minority interest (891) - (891) -
-------------- ------------- ------------ ------------
Common shareholders' equity, end of period $632,470 $307,197 $632,470 $307,197
============== ============= ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
<TABLE>
<CAPTION>
Trenwick Group Ltd.
Consolidated Statement of Cash Flows
(Expressed in thousands of United States dollars)
Unaudited
Nine Months Ended
September 30,
--------------------------------------
2000 1999
--------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $2,732 $ (13,401)
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Amortization of premium on investments, net (879) (34)
Net realized investment losses 1,916 1,577
Unrealized loss (gain) on foreign exchange (1,220) 203
Minority interest in net income of subsidiaries 5,761 863
Changes in assets and liabilities, net of effect from
purchase of subsidiary:
Accrued investment income 587 1,910
Premiums in the course of collection (16,780) (26,256)
Reinsurance recoverable balances 10,395 (9,100)
Prepaid reinsurance premiums (6,545) (11,408)
Deferred policy acquisition costs (2,921) (1,780)
Other assets 3,013 (1,993)
Unpaid claims and claims expenses (11,777) 45,942
Unearned premium income 15,933 19,915
Other liabilities 5,958 16,282
--------------- -----------------
Cash provided by operating activities 6,173 22,720
--------------- -----------------
Cash flows from investing activities:
Purchases of debt securities (206,856) (215,297)
Sales of debt securities 197,979 226,903
Cash acquired in purchase of subsidiary 188,917 -
--------------- -----------------
Cash provided by investing activities 180,040 11,606
--------------- -----------------
Cash flows from financing activities:
Issuance of shares 1,124 721
Dividends paid on preferred shares of LaSalle Re Holdings (4,922) (4,922)
Dividends paid on common shares of LaSalle Re Holdings - (22,853)
Share and option repurchases (3,176) -
Equity put option premium (825) (1,850)
--------------- -----------------
Cash applied to financing activities (7,799) (28,904)
--------------- -----------------
Change in cash and cash equivalents 178,414 5,422
Cash and cash equivalents, beginning of period 19,864 10,503
--------------- -----------------
Cash and cash equivalents, end of period $198,278 $15,925
=============== =================
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
TRENWICK GROUP LTD.
Notes to Unaudited Consolidated Financial Statements
1. Organization and Summary of Significant Accounting Policies
Organization
Trenwick Group Ltd. ("Trenwick" or the "Company"), is a Bermuda holding
company whose principal subsidiaries underwrite insurance and reinsurance.
Trenwick's principal operating subsidiaries as of September 30, 2000
include LaSalle Re Limited ("LaSalle Re"), Trenwick International Limited
("Trenwick International"), Chartwell Managing Agents ("CMA"), Trenwick
America Reinsurance Corporation ("Trenwick America Re"), Chartwell
Insurance Company ("Chartwell Insurance"), The Insurance Corporation of New
York ("INSCORP") and Dakota Specialty Insurance Company ("Dakota").
Trenwick was not a public company prior to September 27, 2000. On September
27, 2000, Trenwick Group Inc., LaSalle Re Holdings Limited, LaSalle Re and
Trenwick completed a business combination in which shareholders of Trenwick
Group Inc., LaSalle Re Holdings Limited and LaSalle Re exchanged their
shares on a one-for-one basis for newly-issued shares of Trenwick. LaSalle
Re Holdings Limited has been determined to be the accounting acquiror in
the business combination, and as such the financial statements reflect the
historical results of operations of LaSalle Re Holdings Limited and the
combined balance sheet of Trenwick Group Inc. and LaSalle Re Holdings
Limited.
LaSalle Re, located in Hamilton, Bermuda, primarily writes property
catastrophe reinsurance on a worldwide basis.
Trenwick International, located and domiciled in London, England,
underwrites specialty insurance and reinsurance of risks primarily located
outside the U.S. Trenwick International is authorized to write insurance in
over 30 countries and participates in the London market for worldwide
reinsurance.
CMA is a managing agency at Lloyd's and manages three Lloyd's syndicates
for the 2000 year of account. CMA is domiciled in England and, as a Lloyd's
managing general agent, is subject to regulation and supervision by the
Council of Lloyd's. Trenwick, through corporate subsidiaries, participates
in the underwriting of Lloyd's syndicates managed by CMA by providing funds
at Lloyd's, primarily in the form of letters of credit supporting
underwriting capacity. The Lloyd's syndicates in which Trenwick
participates underwrite aviation, marine and non-marine risks.
Trenwick America Re, located in Stamford, Connecticut, reinsures property
and casualty risks primarily written by U.S. insurance companies. Trenwick
America Re underwrites treaty reinsurance. Trenwick America Re is domiciled
in Connecticut and is licensed, authorized or approved to write reinsurance
in all 50 states and the District of Columbia.
7
<PAGE>
Chartwell Insurance, located in Stamford, Connecticut, underwrote treaty
reinsurance for casualty, property, marine and aviation risks prior to its
acquisition by Trenwick Group Inc. Chartwell Insurance will be used by the
Company to underwrite primary insurance in the future. Chartwell Insurance
is domiciled in Connecticut and is licensed, authorized or approved to
write insurance in 29 states and the District of Columbia.
INSCORP, located in Jericho, New York, is a primary insurance company that
develops property and casualty insurance programs through specialty
production sources focusing on a specific line of business and geographic
region. INSCORP is domiciled in New York and is licensed, authorized or
approved to transact business in all 50 states, the District of Columbia
and Canada.
Dakota, located in Stamford, Connecticut, is an approved surplus lines
insurer. It is licensed, authorized or approved to write insurance on a
surplus lines basis in 34 states and the District of Columbia.
Basis of Presentation
The interim consolidated financial statements include those of Trenwick and
its subsidiaries and have been prepared in conformity with generally
accepted accounting principles in the U.S. applied on a basis consistent
with prior periods. Certain items in the financial statements have been
reclassified to conform with the 2000 presentation.
The interim consolidated financial statements are unaudited; however, in
the opinion of management, the interim consolidated financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods.
These interim statements should be read in conjunction with the 1999
audited financial statements and related notes included in the Annual
Report on Form 10-K of LaSalle Re Holdings Limited for the fiscal year
ended September 30, 1999.
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 financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The following is a
summary of significant accounting policies.
Investments and Cash Equivalents
Trenwick has classified all of its debt and equity securities as "available
for sale" and reported them at fair value with net unrealized gains and
losses included in other comprehensive income, net of related deferred
income taxes. The fair value of debt and equity securities is estimated
using quoted market prices or broker dealer quotes. Cash equivalents
represent investments with maturities at date of purchase of three months
or less and are carried at cost which approximates fair value.
8
<PAGE>
Investments in companies in which the Company has the ability to exercise
significant influence over the operating and financial policies of the
investees are accounted for under the equity method. In addition, limited
partnerships in which the Company holds greater than 3% interest are
accounted for under the equity method.
Realized gains or losses on disposition of investments are determined on
the basis of the specific identification method. Investment income
consisting of dividends and interest, net of investment expenses, is
recognized in income when earned. The amortization of premiums and
accretion of discount for debt securities is computed utilizing the
interest method. The effective yield utilized in the interest method is
adjusted when sufficient information exists to estimate the probability and
timing of prepayments on mortgage-backed and asset-backed securities. The
net investment in the security is adjusted to the amount that would have
existed had the new effective yield been applied since the acquisition of
the security and that adjustment is included in net investment income.
Revenues
Insurance and reinsurance premiums are earned (net of reinsurance ceded) on
a pro-rata basis over the related contract period. Unearned premium income
represents the portion of premiums applicable to the unexpired portion of
premium coverage with renewal dates later than year-end. Such reserves are
computed by pro-rata methods for direct business and are established based
on reports received from ceding companies for reinsurance. Premiums on
contracts are accrued on an estimated basis throughout the term of such
contracts. These estimates may change in the near term. Retrospectively
rated and other experience rated reinsurance contracts are estimated and
accrued for 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.
Deposits
Reinsurance contracts that do not meet insurance accounting risk transfer
requirements are classified as deposits. These deposits are treated as
financing transactions and are credited or charged with interest income or
expense according to contract terms.
Policy Acquisition Costs
Policy acquisition costs are stated net of policy acquisition costs ceded
and primarily consist of commissions and brokerage expenses incurred at
policy or contract issue date. These costs vary with, and are primarily
related to, the acquisition of business and are deferred and amortized over
the period in which the related premiums are earned. Deferred policy
acquisition costs are reviewed periodically to determine that they do not
exceed recoverable amounts after allowing for anticipated investment
income.
9
<PAGE>
Reserve for Unpaid Claims and Claims Expenses
Claims are recorded as incurred so as to match such costs with premiums
over the contract periods. The amount provided for unpaid claims consists
of any unpaid reported claims and estimates for incurred but not reported
claims, net of salvage and subrogation. The estimates for claims incurred
but not reported were developed based on the Company's historical claims
experience and an actuarial evaluation of expected claims experience.
Insurance liabilities are based on estimates and the ultimate liability may
vary from such estimates. Any adjustments to these estimates are reflected
in income when known.
Income Taxes
Income taxes are provided based on income reported in the financial
statements. Deferred income taxes are provided based on an asset and
liability approach which requires the recognition of deferred income tax
assets and liabilities for the expected future tax consequences of
temporary differences between the financial statement carrying amounts and
the tax bases of assets and liabilities.
Premises and Equipment
Premises and equipment, including leasehold improvements, are included in
other assets in the accompanying consolidated balance sheet and are
recorded at cost and are amortized or depreciated using the straight-line
method over their useful lives.
Foreign Exchange
The assets and liabilities of foreign operations whose functional currency
is other than the U.S. dollar are translated at the rate of exchange in
effect at the balance sheet date. Revenues and expenses of foreign
operations are translated at the average exchange rates during the year.
The effect of the translation adjustments for foreign operations, net of
applicable deferred income taxes, is recorded as a cumulative translation
adjustment in accumulated other comprehensive income within common
shareholders' equity. Investments denominated in foreign currencies are
translated into the U.S dollar using the rate of exchange at the balance
sheet date and unrealized gains and losses on translation, net of
applicable deferred income taxes, are recorded to other comprehensive
income. Foreign currency transaction gains and losses are included in
income.
Accounting for Derivative Instruments and Hedging Activities
Effective January 1, 2001, Trenwick expects to adopt the new accounting
standard, "Accounting for Derivative Instruments and Hedging Activities,"
which requires all derivatives to be recognized on the balance sheet at
fair value. The Company is reviewing the impact of the implementation of
the standard on its financial statements. Because the Company has no
significant derivative instruments or hedging activities, management
believes the impact will not be material.
10
<PAGE>
2. Acquisitions
On September 27, 2000 the Company, Trenwick Group Inc., LaSalle Re Holdings
Limited and LaSalle Re completed a business combination (the "Business
Combination"). Under the terms of the Business Combination, the common
shareholders of Trenwick Group Inc., LaSalle Re Holdings Limited and
LaSalle Re exchanged their shares on a one-for-one basis for shares in the
Company. The Business Combination was accounted for as a purchase of
Trenwick Group Inc. and the outstanding minority interest of LaSalle Re by
LaSalle Re Holdings Limited.
The Company is a newly formed Bermuda holding company that now has five
principal operating units. Trenwick America Re provides reinsurance to U.S.
insurance companies for property and casualty risks. Trenwick International
underwrites treaty and facultative reinsurance as well as specialty
insurance on a worldwide basis. LaSalle Re is a property and casualty
reinsurer writing worldwide specialist products with an emphasis on
catastrophe coverage. Canterbury Financial Group underwrites specialty
property and casualty primary insurance programs through managing general
agents. Chartwell Managing Agents manages three underwriting syndicates at
Lloyds.
Described below is the purchase price of the business combination and the
related fair value of assets acquired (in thousands, except share and per
share data).
Trenwick's outstanding shares 16,236,551
LaSalle Re Minority shares 4,797,649
Trenwick's average price per common share 15.76
Total consideration for common shares $331,499
Total consideration for stock options 9,748
Acquisition costs 6,940
Total purchase price 348,187
Less: Fair value of assets acquired
Trenwick (237,804)
LaSalle Re minority interest (89,403)
Goodwill $20,980
The acquisition has been accounted for using the purchase method of
accounting and, accordingly, the purchase price has been allocated to the
assets purchased and the liabilities assumed based on the estimate fair
values at the date of acquisition. The excess of the purchase price over
the estimated fair value of the net assets of $20,980,0000 million has been
recorded as goodwill, which is being amortized on a straight line basis
over 25 years.
11
<PAGE>
All assets and liabilities of Trenwick Group Inc. are consolidated in the
balance sheet as of September 27, 2000 and the operating results are
included commencing September 28, 2000.
The following unaudited pro forma consolidated results of operations for
the nine month period ended September 30, 2000 and September 30, 1999
assumes the acquisition had taken place on January 1, of each period (in
thousands except per share data).
<TABLE>
<CAPTION>
9/30/00 9/30/99
---------------- -------------
<S> <C> <C>
Net premiums earned $559,202 $275,133
Total revenue 677,468 341,937
Income (loss) before extraordinary items (48,448) (26,748)
Net income (loss) (49,273) (26,748)
Basic earnings (loss) per common share $(1.36) $(0.87)
Diluted earnings (loss) per common share $(1.36) $(0.87)
</TABLE>
The above unaudited pro-forma financial information is not necessarily
indicative either of the results of operations that would have occurred had
this transaction been consummated at the beginning of the periods presented
or of future results of operations.
3. Long-term Debt
Senior Notes
On March 27, 1998 Trenwick Group Inc., completed a private offering of
$75,000,000 aggregate principal amount of 6.70% Senior Notes due April 1,
2003 (the "Senior Notes"). In conjunction with the Business Combination and
related reorganization described in Note 1, Trenwick America Corporation, a
wholly-owned subsidiary of Trenwick Group Inc. ("Trenwick America"),
assumed the obligations of Trenwick Group Inc. under the Senior Notes
effective September 27, 2000. Interest is payable semi-annually on April 1
and October 1 of each year, which commenced on October 1, 1998. The Senior
Notes are not subject to redemption prior to maturity. They are unsecured
obligations and rank senior in right of payment to all existing and future
subordinated indebtedness of Trenwick America. Under the terms of the
Senior Notes, Trenwick America is not restricted from incurring
indebtedness, but is subject to limits on its ability to incur secured
indebtedness for borrowed money.
Mandatorily Redeemable Preferred Capital Securities
On January 28, 1997, Trenwick Group Inc. purchased all of the outstanding
common securities ("Common Securities") of Trenwick Capital Trust I, a
Delaware statutory business trust (the "Trust"), at par value of
$3,403,000. The Trust then issued $110,000,000 of 8.82% Subordinated
Capital Income Securities ("Capital Securities") through a private
placement. The Trust invested the proceeds from the Common Securities and
Capital Securities in 8.82% Junior Subordinated Deferrable Interest
Debentures ("Junior Subordinated Debentures") that were issued by Trenwick
Group Inc. and have an aggregate principal amount of $113,403,000. In
connection with the Business Combination and related reorganization
described in Note 1, Trenwick America acquired the common securities of the
Trust from Trenwick Group Inc. and assumed the obligations under the Junior
Subordinated Debentures.
12
<PAGE>
The Trust was formed for the sole purpose of issuing the Capital Securities
and the Common Securities, investing the proceeds thereof in the Junior
Subordinated Debentures and making distributions to the holders of the
Capital Securities. The capital securities mature on February 1, 2037;
require preferential cumulative cash distributions at an annual rate of
8.82%, payable semi-annually on February 1 and August 1 (beginning August
1, 1997) from the payment of interest on the Junior Subordinated
Debentures; and are guaranteed by Trenwick America, within certain limits,
as to the payment of distributions and liquidation or redemption payments.
They are subject to mandatory redemption; (i) in whole but not in part at
maturity, upon repayment of the Junior Subordinated Debentures, at a
redemption price equal to the greater of the principal amount plus accrued
and unpaid interest; (ii) in whole but not in part at any time,
contemporaneously with the optional prepayment of the Junior Subordinated
Debentures upon the occurrence and continuation of certain events, at a
redemption price equal to the greater of the principal amount or the
present value of principal and interest payable to February 1, 2007, plus
accrued and unpaid interest and possible additional sums; and (iii) in
whole or in part, after February 1, 2007, contemporaneously with the
optional prepayment of the Junior Subordinated Debentures, at a redemption
price equal to the principal amount plus accrued and unpaid interest and
possible additional sums. Upon the occurrence and continuation of an event
of default with respect to the Junior Subordinated Debentures, the Capital
Securities shall have a preference over the Common Securities. Upon the
occurrence of an event of default with respect to the Junior Subordinated
Debentures which is attributable to Trenwick America's failure to make
required payments or with respect to Trenwick America's guarantee, the
holders of the Capital Securities may institute a direct action against
Trenwick America. In accordance with their terms, the Capital Securities
were subsequently exchanged for fully registered Capital Securities, which
are not subject to restrictions on transfer.
Senior Credit Facilities
On September 27, 2000, Trenwick America and Trenwick Holdings Limited, the
parent holding company of Trenwick International ("Trenwick Holdings"),
entered into an amended and restated $490,000,000 credit agreement with
various lending institutions, The Chase Manhattan Bank, as Administrative
Agent, First Union National Bank, as Syndication Agent, and Fleet National
Bank, as Documentation Agent (the "Credit Facility"). In conjunction with
the Business Combination, the Credit Facility was amended and restated to
provide for Trenwick America to be the primary obligor with respect to the
revolving credit facility and for its sister company in the United Kingdom,
Trenwick Holdings to be the primary obligor with respect to the letter of
credit facility. Trenwick America is a guarantor of Trenwick Holdings'
obligations under the Credit Facility and Trenwick is a guarantor of both
Trenwick America and Trenwick Holdings' obligations under the Credit
Facility. LaSalle Re Holdings Limited is a guarantor of Trenwick's
obligations under the Credit Facility.
13
<PAGE>
The Credit Facility provides for a $260,000,000, 364 day revolving credit
facility with an option to pay any outstanding borrowings over the four
years following the expiration of the 364 day period. In addition, the
Credit Facility provides for a $230,000,000 five year, Lloyd's letter of
credit facility. The applicable interest rate on borrowings under the
Credit Facility is currently 1.3% above the London Interbank Offered Rate
or The Chase Manhattan Bank prime commercial lending rate. At the end of
the revolving period, all outstanding revolving loans will, at the option
of Trenwick America, convert to a four-year term loan facility, subject
to scheduled principal amortization over the four-year period in accordance
with the following schedule:
Repayment Date Percentage to be Repaid
-------------- -----------------------
June 30, 2002 10.0%
December 31, 2002 12.5%
June 30, 2003 12.5%
December 31, 2003 15.0%
June 30, 2004 15.0%
December 31, 2004 17.5%
September 27, 2005 17.5%
In addition, Trenwick America is obligated under the Credit Facility to
repay a portion or all of the revolving credit facility or term loan
facility in the event of equity issuances, asset sales and debt issuances
by Trenwick Group Ltd. or its subsidiaries. As of September 30, 2000,
Trenwick America had approximately $157,214,000 of revolving loans
outstanding, the proceeds of which were used to retire a prior syndicated
debt facility.
The letter of credit portion of the Credit Facility of $230,000,000 is
available in U.S. Dollars or Pounds Sterling and may only be issued for the
account of Lloyd's to support the syndicate participations of Trenwick's
subsidiaries. The unsecured letters of credit are in force for five years.
An interest rate margin, which is currently 1.3%, is charged on an annual
basis on the utilized portion of the facility, which is currently
$215,200,000. A commitment fee, which is currently .25%, is charged on the
unused portion of the letter of credit portion of the Credit Facility.
The Credit Facility contains general covenants and restrictions as well as
financial covenants relating to, among other things, Trenwick's minimum
interest coverage, debt to capital leverage, minimum earned surplus and
tangible net worth. As of September 30, 2000, the Company is in compliance
with the Credit Facility covenants.
14
<PAGE>
Contingent Interest Notes
In conjunction with the 1999 acquisition of Chartwell Re Corporation
("Chartwell"), Trenwick Group Inc. assumed all of the obligations under the
Contingent Interest Notes due June 30, 2006 (the "CI Notes"), which were
originally issued by Piedmont Management Company Inc. ("Piedmont"),
INSCORP's former parent, to its stockholders just prior to its acquisition
by Chartwell in 1995. In conjunction with the Business Combination,
Trenwick America assumed the obligations of Trenwick Group Inc. under the
CI Notes effective September 27, 2000.
The CI Notes were issued immediately prior to Chartwell's acquisition of
Piedmont to protect Chartwell against the possibility of adverse
development of INSCORP's reserves for losses and loss adjustment expenses
and long-tail casualty exposures. The CI Notes were issued in an aggregate
principal amount of $1,000,000, 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 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
$10,000,000 up to $55,000,000 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 September 30, 2000, 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 as of September 30, 2000 are an appropriate estimate of projected
ultimate losses and loss adjustment expenses to be paid and therefore, at
this time, the amount of contingent interest on the CI Notes presently
expected to be paid at maturity is $51,771,000. The CI Notes contain
covenants, which relate to the maintenance of certain records and
limitations on certain indebtedness. As of September 30, 2000 the Company
is in compliance with those covenants.
Future minimum payments on long term debt as of September 30, 2000,
assuming repayment in full of the revolving credit portion of the Credit
Facility at the end of its one year term, are as follows (in thousands):
2001................................................. $157,214
2002................................................. 3,350
2003................................................. 75,000
2006................................................. 51,771
------------
Total................................................ $287,335
============
Restrictions on Certain Payments within Trenwick
Because Trenwick's operations are conducted through its operating
subsidiaries,Trenwick is dependent upon the ability of its operating
subsidiaries to transfer funds, principally in the form of cash dividends,
tax reimbursements and other statutorily permissible payments. In addition
to general legal restrictions on payments of dividends and other
distributions to shareholders applicable to all corporations, Trenwick's
insurance subsidiaries are subject to further regulations that, among other
things, restrict the amount of dividends and other distributions that may
be paid to their parent corporations. Management believes that current
levels of cash flow from operations and assets held at the holding company
level, together with approval of one or more extraordinary dividends from
Trenwick's operating subsidiaries, will provide Trenwick with sufficient
liquidity to meet its operating needs in the short term (over the next 12
months).
15
<PAGE>
4. Commitments and Contingencies
Letters of Credit
INSCORP has a $2,802,000 letter of credit to support the participation in
Riverside Underwriters, plc. This standby letter of credit is in force for
five years, and provides capital to participate in certain Lloyd's
syndicates for the 1996 to 2000 underwriting years of account.
Letters of credit are also provided to support the Company's domestic and
international reinsurance operations. Total letters of credit outstanding
to support reinsurance operations as of September 30, 2000 is $2,000,000.
Limited Partnership Investment
Chartwell Insurance has committed to invest $15,000,000 in a private equity
fund, High Ridge Capital Limited Partnership, which makes investments in
the insurance industry. The Company contributed a total of $13,508,000 to
this fund as of September 30, 2000.
Operating Lease Agreements
Trenwick leases office space under non-cancelable operating leases which
expire at various dates through 2015. Trenwick's future minimum lease
commitments as of September 30, 2000 are as follows:
2001................................................. $3,805,829
2002................................................. 3,608,298
2003................................................. 3,675,239
2004................................................. 3,692,317
2005................................................. 4,129,541
2006 and thereafter.................................. 11,982,962
Total office rent expense for the nine months ended September 30, 2000 and
1999 is $459,000 and $397,000, respectively.
16
<PAGE>
Litigation
The Company is party to various legal proceedings generally arising in the
normal course of its business. The Company does not believe that the
eventual outcome of any such proceeding will have a material effect on its
financial condition or results of operations or cash flows. The Company's
subsidiaries are regularly engaged in the investigation and the defense of
claims arising out of the conduct of their business. Pursuant to the
Company's insurance and reinsurance arrangements, disputes are generally
required to be finally settled by arbitration.
5. Reinsurance
Trenwick purchases reinsurance to reduce its exposure to catastrophe losses
and other large losses in all lines of business. Trenwick, however, remains
liable in the event that its retrocessionaires do not meet their
contractual obligations.
The effects of reinsurance on premiums written and earned are as follows
(in thousands):
<TABLE>
<CAPTION>
Nine Months Nine Months
Three Months Ended Three Months Ended Ended Ended
September 30, 2000 September 30, 1999 September 30, 2000 September 30, 1999
------------------ ------------------ ------------------ ------------------
Written Earned Written Earned Written Earned Written Earned
------- ------ ------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assumed $25,321 $35,285 $17,766 $28,083 $122,567 $106,634 $127,199 $107,285
Ceded (9,053) (8,534) (1,182) (6,721) (30,440) (23,895) (27,207) (15,799)
------- ------- ------ ------ -------- -------- ------- -------
Net Premiums 16,268 26,751 16,584 21,362 92,127 82,739 99,992 91,486
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
6. Share Capital and Additional Paid-in Capital
The authorized share capital of the Company is 150,000,000 shares of par
value $.10 each. This aggregate figure includes both common and preferred
shares.
Common Shares and Preferred Shares
As of September 30, 2000, the Company had outstanding 36,668,594 issued and
fully paid common shares and no preferred shares. As of September 30, 2000,
the Company's share capital was $3,667,000 and additional paid in capital
was $574,748,000.
Catastrophe Equity Put
On September 27, 2000, Trenwick assumed the benefits and obligations of
LaSalle Re Holdings Limited under a $100 million multi-year Catastrophe
Equity Put ("CatEPut") option program. The CatEPut enables Trenwick to
raise up to $100 million of equity, through the issue of convertible Series
B Preferred Shares to the option writers. The preferred shares can be
redeemed by Trenwick at any time over the five years following their issue.
In addition, the option writers can convert their preferred shares into
common shares of Trenwick at any time after they have been outstanding for
five years. Conversion is at the greater of the book value of Trenwick at
the date of conversion or the market value of the common shares based on
the 30-day trading average prior to conversion. Trenwick is obligated to
pay a net option premium of $1.9 million per annum. The net option premium
is charged to additional paid in capital, net of the minority's interest of
$0.4 million.
17
<PAGE>
7. Earnings Per Share
The following table sets forth the computation of basic and diluted
weighted average shares:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Income available to common shareholders (in
thousands):
Net income (loss) basic $ 6,911 $ (4,876) $ 2,732 $ (13,401)
Minority interest in net income of subsidiary
(when dilutive) 2,097 - 839 -
----------- ------------ ----------- -----------
$ 9,008 $ (4,876) $ 3,571 $ (13,401)
=========== =========== =========== ==========
Net income (loss) diluted
Weighted average common shares outstanding:
Weighted average shares outstanding (basic) 15,788,915 15,598,719 15,621,556 15,700,546
Weighted average shares issuable on conversion
of minority interest shares in subsidiary
(when dilutive) 4,569,759 - 4,725,546 -
Weighted average shares issuable on exercise
of employee stock options, net of assumed
repurchases (when dilutive) 176,917 - 328,979 -
----------- ------------ ----------- -----------
Weighted average shares outstanding (diluted) 20,535,591 15,598,719 20,676,081 15,700,546
=========== =========== =========== ==========
Basic and diluted earnings (loss) per share $0.44 $(0.31) $0.17 $(0.85)
=========== =========== =========== ==========
</TABLE>
8. Segment Reporting
Trenwick has determined that its reportable segments are those that are
based on the Company's method of internal reporting, which segregates its
business by geographic location and type of product offered. Trenwick has
five reportable business segments: (1) Trenwick America Re, (2) Canterbury
Financial Group Inc., (3) Trenwick International, (4) CMA, and (5) LaSalle
Re. Trenwick America Re underwrites treaty reinsurance of property and
casualty risks primarily written by U.S. insurance companies. Trenwick
America Re includes reinsurance business of Chartwell Reinsurance and its
subsidiaries since its acquisition on October 27, 1999. Canterbury
Financial Group Inc. underwrites specialty insurance in the United States
through its subsidiaries, Chartwell Insurance, INSCORP and Dakota. Trenwick
International provides specialty insurance and treaty and facultative
reinsurance on a world-wide basis. CMA manages Trenwick's participation in
the Lloyd's market. LaSalle Re is a property and casualty reinsurer writing
worldwide specialist products with an emphasis on catastrophe coverage,
with some participation in the Lloyd's market.
As described in Note 1, the Business Combination has resulted in LaSalle Re
Holdings Limited being treated as the accounting acquiror. Therefore,
Trenwick Group Ltd.'s consolidated income statement only reflects the
results of the LaSalle Re segment for the three and nine months ended
September 30, 2000 and 1999. The operating results of the other segments
will be included in Trenwick Group Ltd.'s consolidated income statement
after September 30, 2000.
18
<PAGE>
The consolidated balance sheet as of September 30, 2000 includes the assets
for all of Trenwick Group Ltd.'s segments. A breakdown of the assets by
segment is presented in the following table (in thousands):
Total Assets:
Trenwick America Re $1,708,561
Canterbury Financial Group 407,750
Trenwick International 419,946
Chartwell Managing Agents 692,779
LaSalle Re 739,816
Unallocated 43,486
--------------------
$4,012,338
====================
19
<PAGE>
Item 2.
Management Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion highlights material factors affecting our results of
operations for the three and nine months ended September 30, 2000 and 1999. This
discussion and analysis should be read in conjunction with the attached
unaudited consolidated financial statements and notes thereto of Trenwick Group
Ltd. ("Trenwick") and the audited consolidated financial statements and notes
thereto contained in the Annual Report on Form 10-K for the fiscal year ended
September 30, 1999 of Trenwick's predecessor company, LaSalle Re Holdings
Limited.
Overview
Trenwick is a Bermuda holding company headquartered in Hamilton, Bermuda whose
principal subsidiaries underwrite specialty insurance and reinsurance. Trenwick
was not a public company prior to September 27, 2000. On September 27, 2000,
Trenwick Group Inc., LaSalle Re Holdings Limited, LaSalle Re Limited ("LaSalle
Re") and Trenwick completed a business combination in which shareholders of
Trenwick Group Inc., LaSalle Re Holdings Limited and LaSalle Re exchanged their
shares on a one-for-one basis for newly-issued shares of Trenwick. LaSalle Re
Holdings Limited has been determined to be the accounting acquiror in the
business combination, and as such the financial statements reflect the
historical results of operations of LaSalle Re Holdings Limited and the combined
balance sheet of Trenwick Group Inc. and LaSalle Re Holdings Limited beginning
September 27, 2000.
As of September 30, 2000 Trenwick operates through five principal operating
platforms. LaSalle Re, located in Hamilton, Bermuda, primarily writes property
catastrophe reinsurance on a worldwide basis. Trenwick America Reinsurance
Corporation ("Trenwick America Re") underwrites U.S. property and casualty
treaty reinsurance, including U.S. reinsurance business previously written by
Chartwell Re Corporation ("Chartwell"). Canterbury Financial Group Inc.
("Canterbury Financial"), underwrites U.S. specialty insurance through its
operating subsidiaries, Chartwell Insurance Company ("Chartwell Insurance"), The
Insurance Corporation of New York ("INSCORP") and Dakota Specialty Insurance
Company ("Dakota"). Trenwick International Limited ("Trenwick International"),
domiciled in London, underwrites non-U.S. specialty insurance and treaty and
facultative reinsurance. Chartwell Managing Agents Limited ("Chartwell Managing
Agents") manages syndicates underwriting at Lloyd's. Chartwell, Canterbury
Financial and Chartwell Managing Agents were acquired by Trenwick Group Inc. on
October 27, 1999.
All of Trenwick's principal operating units are rated A (Excellent) by A.M. Best
Company and have been assigned a financial strength rating of A+ by Standard and
Poor's.
20
<PAGE>
Acquisitions
On September 27, 2000, Trenwick Group Inc., LaSalle Re Holdings Limited, LaSalle
Re and Trenwick completed a business combination with shareholders of Trenwick
Group Inc., LaSalle Re Holdings Limited and LaSalle Re receiving shares in
Trenwick on a one-for-one basis. The combination was accounted for as a purchase
by LaSalle Re Holdings Limited of Trenwick Group Inc. and the outstanding
minority interest of LaSalle Re.
Results of Operations - Three Months Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999 Change
----------- ------------- ------------
(in thousands)
<S> <C> <C> <C>
Underwriting income (loss) $1,942 $(11,082) $13,024
Net investment income 9,591 8,530 1,061
Interest expense and dividends on
preferred stock of subsidiary (1,945) (2,012) 67
----------- ------------- ------------
Operating income (loss) 9,588 (4,564) 14,152
Net realized investment gains (losses) 270 (1,127) 1,397
Foreign currency gains (losses) (426) 218 (644)
Reorganization costs (424) (437) 13
----------- ------------- ------------
Income (loss) before minority interest 9,008 (5,910) 14,918
Minority interest in net (income) loss of subsidiary (2,097) 1,034 (3,131)
----------- ------------- ------------
Net income (loss) $6,911 $(4,876) $11,787
=========== ============= ============
</TABLE>
Net income of $6.9 million in 2000 represents an $11.8 million increase over the
net loss of $4.9 million in 1999. The increase is principally caused by improved
underwriting results in 2000. Also contributing to the increase are additions to
net investment income and net realized investment gains, partially offset by
increased foreign currency losses.
Underwriting income (loss)
<TABLE>
<CAPTION>
2000 1999 Change
------------ ------------- ------------
(in thousands)
<S> <C> <C> <C>
Net premiums earned $26,751 $21,362 $5,389
------------ ------------- ----------
Claims and claims expenses incurred (15,924) (25,568) 9,644
Acquisition costs and underwriting expenses (8,885) (6,876) 2,009
------------ ------------- ----------
Total underwriting costs and expenses (24,809) (32,444) 7,635
------------ ------------- ----------
Underwriting income (loss) $1,942 $(11,082) $13,024
============ ============= ==========
Loss ratio 59.5% 119.7% (60.2)%
Underwriting expense ratio 33.2% 32.2% (1.0)%
Combined ratio 92.7% 151.9% (59.2)%
</TABLE>
Underwriting income of $1.9 million in 2000 represents a $13.0 million
improvement over the underwriting loss of $11.1 million in 1999. The improvement
is principally caused by a reduction in the loss ratio by approximately 60% and
a 25% increase in net premiums earned.
21
<PAGE>
Premiums written
Gross premiums written for the quarter ended September 30, 2000 were $25.3
million compared to $17.8 million for the quarter ended September 30, 1999, an
increase of $7.5 million or 42%. Details of gross premiums written are
provided below.
<TABLE>
<CAPTION>
2000 1999 Change
--------------------------------------------
(in thousands)
<S> <C> <C> <C>
Property catastrophe
US $8,969 $10,354 $(1,385)
International 5,463 5,864 (401)
----------- ------------- ------------
Total property catastrophe 14,432 16,218 (1,786)
Lloyd's and other lines 10,697 6,557 4,140
Fronted premiums and premium adjustments 192 (5,009) 5,201
----------- ------------- ------------
$25,321 $17,766 $7,555
=========== ============= ============
</TABLE>
Property catastrophe gross premiums written decreased from $16.2 million for the
quarter ended September 30, 1999 to $14.4 million for the quarter ended
September 30, 2000. This was primarily due to the non-renewal of certain U.S.
property catastrophe contracts with insufficient pricing levels.
For the quarter ended September 30, 2000, gross premiums written in lines of
business other than property catastrophe totaled $10.9 million compared to $1.5
million for the quarter ended September 30, 1999. The increase was due to an
increase in premium estimates on Lloyd's business for the 1999 and 1998
underwriting years of account, offset by the non-renewal of certain contracts.
Gross premiums written for the quarter ended September 30, 1999 includes a
reduction of $5.5 million relating to re-estimates of premiums on in force quota
share contracts following revised information from cedants.
Gross premiums ceded for the quarter ended September 30, 2000 were $9.1 million
compared to $1.2 million for the quarter ended September 30, 1999. The increase
of $7.9 million was due to the purchase of new reinsurance protections. As a
result of the above, net premiums written for the quarter ended September 30,
2000 were $16.3 million compared to $16.6 million for the quarter ended
September 30, 1999.
Premiums earned
<TABLE>
<CAPTION>
2000 1999 Change
--------------------------------------------
(in thousands)
<S> <C> <C> <C>
Gross premiums written $25,321 $17,766 $7,555
Change in premiums earned 9,964 10,317 (353)
----------- ------------- ------------
Gross premiums earned 35,285 28,083 7,202
----------- ------------- ------------
Gross premiums ceded 9,053 1,182 7,871
Change in premiums ceded (519) 5,539 6,058
----------- ------------- ------------
Amortized ceded premiums 8,534 6,721 1,813
----------- ------------- ------------
Net premiums earned $26,751 $21,362 $5,389
=========== ============= ============
</TABLE>
22
<PAGE>
Net premiums earned for the quarter ended September 30, 2000 were $26.8 million
compared to $21.4 million for the same quarter in 1999. The increase in net
premiums earned is due primarily to an increase in premium estimates on Lloyd's
business which is fully earned when booked.
Claims and claims expenses
The Company incurred claims and claim expenses, net of recoveries, of $15.9
million during the quarter ended September 30, 2000 compared with $25.6 million
during the quarter ended September 30, 1999. There were no major catastrophe
loss events that affected the Company during the quarter ended September 30,
2000. However, the Company provided a further $3.7 million on its Lloyd's
business associated with the increased premium estimates on the 1999 and 1998
underwriting years of account. During the quarter ended September 30, 1999 the
Company experienced net losses of $13.6 million from three catastrophic events
which occurred during the quarter: Hurricane Floyd; an earthquake which hit
Turkey and Typhoon Olga which hit North Korea. Claims and claims expenses in
both periods include reserves for reported smaller losses and the establishment
of reserves for other events that occurred during the quarter but had not been
reported.
Underwriting expenses
<TABLE>
<CAPTION>
2000 1999 Change
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Policy acquisition costs $5,621 $3,409 $2,212
Underwriting expenses 3,264 3,467 (203)
------------ ------------ ------------
Total underwriting expenses $8,885 $6,876 $2,009
============ ============ ============
Underwriting expense ratio 33.2% 32.2% 1.0%
============ ============ ============
</TABLE>
Policy acquisition costs as a percentage of net premiums earned were 21.0% for
the quarter ended September 30, 2000 compared to 16.0% for the quarter ended
September 30, 1999. The increase in the ratio was caused principally by an
increase in premiums written relating to business other than property
catastrophe, which has a higher expense ratio.
Other underwriting cost including underwriting salary cost was relatively
consistent at $3.3 million for the quarter ended September 30, 2000 compared to
$3.5 million for the quarter ended September 30, 1999.
Net Investment Income
<TABLE>
<CAPTION>
2000 1999 Change
----------------------------------------------
(in thousands)
<S> <C> <C> <C>
Average invested assets $544,304 $542,967 $1,337
Average annualized yields 6.5% 5.9% 0.6%
------------- ------------- ------------
Net investment income - portfolio 8,847 7,945 902
Net investment income - non-portfolio 744 585 159
------------- ------------- ------------
Net investment income $9,591 $8,530 $1,061
============= ============= ============
</TABLE>
Net investment income for the three months ended September 30, 2000 was $9.6
million compared to $8.5 million for the same period in 1999. Annualized
portfolio investment income as a percentage of the average market value of
invested assets was 6.5% for the three months ended September 30, 2000 compared
to 5.9% for the three months ended September 30, 1999.
23
<PAGE>
Interest Expense and Dividends on Preferred Stock of Subsidiary
Interest expense and dividends on preferred stock of subsidiary were $1.9
million for the quarter ended September 30, 2000 a decrease of $0.1 million from
the same period in 1999. Preferred stock dividends were $1.6 million in each
period.
Non-operating Income and Expenses
Net realized gains on investments were $0.3 million during the three months
ended September 30, 2000, compared to net realized losses of $1.1 million for
the three months ended September 30, 1999. Both the losses and gains were made
pursuant to a policy designed to protect the total returns on the portfolio.
The Company recorded an exchange loss of $0.4 million for the three months ended
September 30, 2000 compared to an exchange gain of $0.2 million for the three
months ended September 30, 1999 which was due to a fall in the value of European
currencies against the US dollar.
The Company incurred reorganization costs of $0.4 million during both the three
months ended September 30, 2000 and the three months ended September 30, 1999.
Results of Operations - Nine Months Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999 Change
----------------------------------------------
(in thousands)
<S> <C> <C> <C>
Underwriting income (loss) $(13,107) $(34,552) $21,445
Net investment income 27,778 25,893 1,885
Interest expense and dividends on
preferred stock of subsidiary (5,838) (6,172) 334
------------- ------------- ------------
Operating income (loss) 8,833 (14,831) 23,664
Net realized investment losses (1,916) (1,577) (339)
Foreign currency losses (53) (335) 282
Reorganization costs (3,293) (717) (2,576)
------------- ------------- ------------
Income (loss) before minority interest 3,571 (17,460) 21,031
Minority interest in net (income) loss of subsidiary (839) 4,059 (4,898)
------------- ------------- ------------
Net income (loss) $2,732 $(13,401) $16,133
============= ============= ============
</TABLE>
Net income of $2.7 million in 2000 represents a $16.1 million increase over the
net loss of $13.4 million in 1999. The increase is principally caused by
improved underwriting results in 2000. Also contributing to the increase are
additions to net investment income, offset by increased reorganization costs.
24
<PAGE>
Underwriting income (loss)
<TABLE>
<CAPTION>
2000 1999 Change
--------------------------------------------
(in thousands)
<S> <C> <C> <C>
Net premiums earned $82,739 $91,486 $(8,747)
------------ ------------- -----------
Claims and claims expenses incurred 69,190 100,561 31,371
Acquisition costs and underwriting expenses 26,656 25,477 1,179
------------ ------------- -----------
Total underwriting costs and expenses 95,846 126,038 30,192
------------ ------------- -----------
Underwriting income (loss) $(13,107) $(34,552) $21,445
============ ============= ===========
Loss ratio 83.6% 109.9% (26.3)%
Underwriting expense ratio 32.2% 27.8% 4.4%
Combined ratio 115.8% 137.7% (21.9)%
</TABLE>
Underwriting loss of $13.1 million in 2000 represents a $21.0 million
improvement over the underwriting loss of $34.6 million in 1999. The improvement
is principally caused by a 26.3% improvement in the loss ratio.
Premiums written
Gross premiums written for the nine months ended September 30, 2000 were $122.6
million compared to $127.2 million for the nine months ended September 30, 1999,
a decrease of 3.6%. Details of gross written premiums are provided below:
<TABLE>
<CAPTION>
2000 1999 Change
-------------------------------------------
(in thousands)
<S> <C> <C> <C>
Property catastrophe
US $46,721 $49,234 $(2,513)
International 31,821 38,332 (6,511)
------------ ------------ ------------
Total property catastrophe 78,542 87,566 (9,024)
Lloyd's and other lines 38,115 31,647 6,468
Fronted premiums and premium adjustments 5,910 7,986 (2,076)
------------ ------------ ------------
$122,567 $127,199 $(4,632)
============ ============ ============
</TABLE>
The Company's international property catastrophe gross premiums written
decreased $6.5 million for the nine months ended September 30, 2000 compared
with the nine months ended September 30, 1999. This decrease was the result of a
planned reduction in international catastrophe pro-rata treaties. The decrease
on the U.S. property catastrophe book was due to the non-renewal of contracts
with insufficient pricing levels.
Gross premiums written in lines other than property catstrophe increased by $4.4
million for the nine months ended September 30, 2000 compared to the nine months
ended September 30, 1999. The increase in gross premiums arose primarily from
adjustments in premium estimates associated with the Company's Lloyd's business
for the 1999 and 1998 underwriting years of account.
25
<PAGE>
Premiums ceded for the nine months ended September 30, 2000 were $30.4 million
compared to $27.2 million for the nine months ended September 30, 1999. The
increase was primarily due to an increase in the amount of reinsurance purchased
by the Company. As a result of the above, net premiums written for the nine
months ended September 30, 2000 were $92.1 million compared to $100.0 million
for the nine months ended September 30, 1999.
<TABLE>
<CAPTION>
Premiums earned 2000 1999 Change
-----------------------------------------------
(in thousands)
<S> <C> <C> <C>
Gross premiums written $122,567 $127,199 $(4,632)
Change in premiums earned (15,933) (19,914) 3,981
------------- ------------- ------------
Gross premiums earned 106,634 107,285 (651)
------------- ------------- ------------
Gross premiums ceded 30,440 27,207 (3,233)
Change in premiums ceded (6,545) (11,408) (4,863)
------------- ------------- ------------
Amortized ceded premiums 23,895 15,799 (8,096)
------------- ------------- ------------
Net premiums earned $82,739 $91,486 $(8,747)
============= ============= ============
</TABLE>
Net premiums earned for the nine months ended September 30, 2000 were $82.7
million compared to $91.5 million for the same period in 1999. The decline in
premiums earned of $8.8 million was commensurate with the decline in net
premiums written.
Claims and claims expenses
The Company incurred claims and claims expenses, net of recoveries, of $69.2
million during the nine months ended September 30, 2000 compared with $100.6
million during the nine months ended September 30, 1999. During the nine months
ended September 30, 2000 claims and claims expenses included an increase of
$16.6 million in net losses relating to Storm Martin that hit France in late
1999. This followed an increase in the market estimate of the loss set in early
2000 due to an increase in information available to the cedants. In addition,
the Company strengthened it's loss reserves for the Danish storm which occurred
in early December 1999, by $8.3 million. The Company also recorded $7.4 million
of additional loss reserves relating to its Lloyd's business.
During the nine months ended September 30, 1999, claims and claims expenses
incrured included $25.6 million in losses from various catastrophies including,
the Australian hailstorm, the Oklahoma tornadoes, Hurricane Floyd, the Turkish
earthquake that hit in August 1999, and Typhoon Olga. During this period the
Company completed a valuation of its reserving methodology and assumptions used
in setting incurred-but-not-reported loss reserves. As a result of this study,
the Company recorded an increase in claims and claims expenses of $20 million.
In addition, the Company recorded approximately $14 million of additional
reserves relating to contracts written in prior years.
Claims and claims expenses for the nine months ended September 30, 2000 and 1999
include reserves for reported smaller losses and the establishment of reserves
for other events that occurred during the quarter but had not been reported.
26
<PAGE>
<TABLE>
<CAPTION>
Underwriting expenses
2000 1999 Change
-------------------------------------------
(in thousands)
<S> <C> <C> <C>
Policy acquisition costs $16,269 $14,496 $1,773
Underwriting costs 10,387 10,981 (594)
----------- ----------- ----------
Total underwriting expenses $26,656 $25,477 $1,179
=========== =========== ==========
Underwriting expense ratio 32.2% 27.8% 4.4%
=========== =========== ==========
</TABLE>
Policy acquisition costs as a percentage of net earned premiums were 19.7% for
the nine months ended September 30, 2000 compared to 15.8% for the nine months
ended September 30, 1999. The increase in the policy acquisition expense ratio
was due to an increase in non-catastrophe business which has a higher expense
ratio and an increase in the amount of amortized ceded premiums which reduced
net earned premiums.
Underwriting costs of 10.4 million for the nine months ended September 30, 2000
were relatively unchanged compared to underwriting expenses of $11.0 million for
the nine months ended September 30, 1999.
Net Investment Income
<TABLE>
<CAPTION>
2000 1999 Change
-------------------------------------------
(in thousands)
<S> <C> <C> <C>
Average invested assets $546,657 $555,337 $8,680
Average annualized yield 6.3% 5.8% 0.5%
----------- ------------ -----------
Net investment income - portfolio 25,901 23,946 1,955
Net investment income - non portfolio 1,877 1,947 (70)
----------- ------------ -----------
Net investment income $27,778 $25,893 $1,885
=========== ============ ===========
</TABLE>
Net investment income for the nine months ended September 30, 2000 was $27.8
million compared to $25.9 million for the same period in 1999. Annualized
portfolio investment income as a percentage of the average market value of
invested assets was 6.3% for the nine months ended September 30, 2000 compared
to 5.8% for the nine months ended September 30, 1999.
Interest Expense and on Preferred Stock Dividends of Subsidiary
Interest expense and dividends on preferred stock of subsidiary were $5.8
million for the nine months ended September 30, 2000 compared with $6.2 million
for the nine months ended September 30, 1999. Preferred stock dividends were
$4.9 million in each period.
Net Operating Income and Expenses
Net realized losses on investments were $1.9 million during the nine months
ended September 30, 2000, compared to net realized losses of $1.6 million for
the nine months ended September 30, 1999. Both the losses were made pursuant to
a policy designed to protect the total returns on the portfolio.
27
<PAGE>
The Company recorded a negligible exchange loss for the nine months ended
September 30, 2000 compared to an exchange loss of $0.4 million for the nine
months ended September 30, 2000 which was due to a fall in the value of European
currencies against the US dollar.
The Company incurred reorganization costs of $3.3 million during the nine months
ended September 30, 2000 compared to $0.7 million for the nine months ended
September 30, 1999. The reorganization costs incurred in 2000 consist of the
write-off of reinsurance software of $2.2 million and reorganization costs of
$0.8 million relate primarily to the costs associated with the Company's
business combination agreement with Trenwick Group Inc. The costs incurred in
the nine months ended September 30, 1999 related to the preparation and filing
of a registration statement for an offering of preferred shares which was
subsequently withdrawn.
Investments
Trenwick's investment objective is to fund policyholder and other liabilities in
a manner that enhances shareholder value, subject to appropriate risk
constraints. Trenwick seeks to meet this investment objective through a mix of
investments that reflect the characteristics of the liabilities they support;
diversify the types of investment risks by interest rate, liquidity, credit and
equity price risk; and achieve asset diversification by investment type,
industry, issuer and geographic location. Trenwick regularly projects duration
and cash flow characteristics of its liabilities and makes appropriate
adjustments in its investment portfolios. At September 30, 2000, Trenwick had
investments, cash and cash equivalents of $2.2 billion, compared to the combined
investments, cash and cash equivalents of LaSalle Re Holdings Limited and
Trenwick Group Inc. of $2.3 billion at December 31, 1999.
Liquidity and Capital Resources
Cash Flows
Trenwick is a holding company whose principal assets are its investments in the
common stock of its operating subsidiaries. As a holding company, Trenwick's
principal source of funds consists of permissible dividends, tax allocation
payments and other statutorily permissible payments from its operating
subsidiaries together with income on the holding company's fixed-income
portfolio. Trenwick's principal uses of cash are dividends to its stockholders,
servicing its debt obligations and repurchases of its own common stock when the
pricing is attractive. Trenwick's operating subsidiaries receive cash from
premiums, investment income and proceeds from sales and maturities of portfolio
investments. They utilize cash to pay claims, purchase their own reinsurance
protections, meet operating and capital expenses and purchase fixed-income and
equity securities.
Cash provided by Trenwick's operating activities for the first nine months of
2000 was $6.2 million compared to cash provided by Trenwick's operating
activities of $22.7 million for the first nine months of 1999. The reduction in
cash flow from operations was primarily due to an overall increase in claims and
claims expenses paid.
28
<PAGE>
Trenwick's current liquidity objectives are to maximize the use of available
cash to fund ongoing operating needs, pay shareholder dividends, strategically
invest in core businesses and meet common stock repurchase objectives. During
the first nine months of 2000, net cash generated from investing, financing and
operating activities was used to pay $4.9 million of dividends to shareholders.
In 1999, net cash generated by investing, financing and operating activities was
used to pay $27.8 million of dividends to shareholders.
Dividends
Trenwick Group Inc. paid a quarterly dividend of $0.26 per share of common stock
in the first three quarters of 2000 and in each quarter of 1999. LaSalle Re
Holdings Limited paid dividends on its common shares of $0.38 per share in each
of January, April and July 1999. LaSalle Re Holdings Limited did not pay any
dividends on its common shares in 2000. LaSalle Re Holdings Limited paid a
quarterly dividend of $0.55 per share on its Series A preferred shares in each
of the four quarters of 1999 and the first three quarters of 2000. It is
expected that Trenwick's Board of Directors will review Trenwick's common share
dividend each quarter. Among the factors which will be considered by the Board
of Directors in determining the amount of each dividend will be Trenwick's
results of operations and the capital requirements, growth and other
characteristics of its businesses.
Financings, Financing Capacity and Capitalization
Trenwick continually monitors existing and alternative financing sources to
support Trenwick's capital and liquidity needs, including, but not limited to,
debt issuance, preferred or common stock issuance, intercompany borrowings and
pledging or selling of assets. Trenwick's total debt to capital ratio (total
debt excluding the preferred capital securities divided by total debt excluding
the preferred capital securities and shareholders' equity, adjusted for
unrealized gains or losses on available-for-sale investment securities) was 30%
on September 30, 2000 and 25% for LaSalle Re Holdings Limited and Trenwick Group
Inc.'s combined results at the end of 1999. The increase is primarily due to an
increase of $63.1 million of senior credit facilities offset by the redemption
of the 10.25% senior notes assumed in connection with the Chartwell acquisition.
On September 27, 2000 Trenwick America Corporation, the parent holding company
of Trenwick's United States subsidiaries ("Trenwick America"), and Trenwick
Holdings Limited, the parent holding company of Trenwick International
("Trenwick Holdings"), entered into an amended and restated $490 million credit
agreement with various lending institutions, The Chase Manhattan Bank, as
Administrative Agent, First Union National Bank, as Syndication Agent, and Fleet
National Bank, as Documentation Agent. This new credit facility provides for a
$260 million, 364-day revolving credit facility with an option to pay out
outstanding borrowings under such facility over the four years following the
expiration of the 364-day period. In addition, the credit facility provides for
a $230 million five year, Lloyd's letter of credit facility.
29
<PAGE>
The applicable interest rate on borrowings under the Credit Agreement is
currently 1.3% above the London Interbank Offered Rate or The Chase Manhattan
Bank prime commercial lending rate. In addition, a commitment fee of 0.25% is
being charged on the unused portion of the facility. The Credit Agreement's
representations, warranties and covenants are typical for transactions of this
type and include limitations based upon Trenwick's leverage ratio, interest
coverage ratio, combined surplus and risk-based capital.
In connection with the Business Combination Trenwick America assumed effective
September 27, 2000, Trenwick Group Inc.'s obligations with respect to $75
million aggregate principal amount of 6.70% Senior Notes, which are due April 1,
2003. Interest is payable semi-annually on April 1 and October 1 of each year;
interest payments commenced on October 1, 1998. The notes are not subject to
redemption prior to maturity. They are unsecured obligations and rank senior in
right of payment to all existing and future subordinated indebtedness of
Trenwick.
Trenwick America also assumed, effective September 27, 2000, Trenwick Group
Inc.'s 8.82% Junior Subordinated Deferrable Interest Debentures (the
"Debentures") held by Trenwick Capital Trust I in respect of the $110 million in
8.82% Subordinated Capital Income Securities issued by the Trust. Under the
terms of the Debentures, Trenwick is not restricted from incurring indebtedness,
but is subject to limits on its ability to incur secured indebtedness for
borrowed money.
Upon consummation of the acquisition of Chartwell in 1999, Trenwick Group Inc.
became the successor obligor under Chartwell's Contingent Interest Notes due
June 30, 2006 (the "Contingent Interest Notes"). Effective September 27, 2000,
Trenwick America assumed Trenwick Group Inc.'s obligations under the Contingent
Interest Notes in connection with the Business Combination. The Contingent
Interest Notes were issued in an aggregate principal amount of $1 million, which
accrues interest at a rate of 8% per annum, compounded annually. The interest is
not payable until the maturity or earlier redemption of the Contingent Interest
Notes. In addition, the Contingent Interest Notes entitle their holders to
receive at maturity, in proportion to the principal amount of the Contingent
Interest Notes held by them, an aggregate of from $10 million up to $55 million
in contingent interest. The amount of contingent interest payable under the
Contingent Interest Notes is dependent upon the level of loss and loss
adjustment expense reserves related to business written by INSCORP prior to
1996. Settlement of the Contingent Interest Notes may be made by payment of cash
or, under certain specified conditions, by delivery of shares of Trenwick's
common stock.
Catastrophe Equity Put
On September 27, 2000, Trenwick assumed the benefits and obligations of LaSalle
Re Holdings Limited under a $100 million multi-year Catastrophe Equity Put
("CatEPut") option program. The CatEPut enables Trenwick to raise up to $100
million of equity, through the issue of convertible Series B Preferred Shares to
the option writers. The preferred shares can be redeemed by Trenwick at any time
over the five years following their issue. In addition, the option writers can
convert their preferred shares into common shares of Trenwick at any time after
they have been outstanding for five years. Conversion is at the greater of the
book value of Trenwick at the date of conversion or the market value of the
common shares based on the 30-day trading average prior to conversion. Trenwick
is obligated to pay a net option premium of $1.9 million per annum. The net
option premium is charged to additional paid in capital, net of the minority's
interest of $0.4 million.
30
<PAGE>
Restrictions on Certain Payments within Trenwick
Because Trenwick's operations are conducted through its operating subsidiaries,
Trenwick is dependent upon the ability of its operating subsidiaries to transfer
funds, principally in the form of cash dividends, tax reimbursements and other
statutorily permissible payments. In addition to general legal restrictions on
payments of dividends and other distributions to shareholders applicable to all
corporations, Trenwick's insurance subsidiaries are subject to further
regulations that, among other things, restrict the amount of dividends and other
distributions that may be paid to their parent corporations. Management believes
that current levels of cash flow from operations and assets held at the holding
company level, together with approval of one or more extraordinary dividends
from Trenwick's operating subsidiaries, will provide Trenwick with sufficient
liquidity to meet its operating needs in the short term (over the next 12
months). Since the ability of Trenwick 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.
Trenwick expects that, in order to repay the principal amount of certain
currently outstanding indebtedness at 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 Trenwick at such time.
Under The Companies Act 1981 of Bermuda, LaSalle Re Holdings Limited, LaSalle Re
and LaSalle Re Corporate Capital Ltd. ("LaSalle Re Capital") are prohibited from
declaring or paying a dividend or making a distribution out of contributed
surplus and retained earnings if there are reasonable grounds for believing that
(i) such company is, or would offer the payment be, unable to pay its
liabilities as they come due or (ii) the realizable value of such company's
assets would thereby be less than the aggregate of its liabilities and
shareholders' equity. In addition, The Insurance Act 1978, as amended, and
related regulations of Bermuda (the "Insurance Act") would prohibit the payment
of a dividend by LaSalle Re or LaSalle Re Capital if the payment of such
dividend would result in either company no longer meeting its minimum solvency
margin or minimum liquidity ratio. As a registered Class 4 insurer, LaSalle Re
is required to maintain a minimum solvency margin equal to the greatest of (1)
$100 million, (2) 50% of its net premiums written (without deducting more than
25% of gross premiums written when computing net premiums written) and (3) 15%
of its loss and other certain insurance reserves. The minimum liquidity ratio
requires LaSalle Re and LaSalle Re Capital to maintain the value of their
respective relevant assets at not less than 75% of the amount of their
respective relevant liabilities.
31
<PAGE>
Under the applicable provisions of the insurance holding company laws of
Connecticut and North Dakota, the states of domicile of Trenwick America Re,
Chartwell Insurance and Dakota, such companies may only pay dividends without
the approval of the applicable state insurance regulator if such dividends,
together with other dividends paid within the preceding twelve months, are less
than the greater of (i) 10% of the insurer's policyholders' surplus as of the
end of the prior calendar year or (ii) the insurer's statutory net income,
excluding realized capital gains, for the prior calendar year. As a further
restriction, the maximum amount of dividends most U.S. insurers may pay is
limited to its earned surplus, also known as its unassigned funds. 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
state insurance regulator.
Under New York law, which is applicable to INSCORP and ReCor Insurance Company
Inc., the maximum ordinary dividend payable in any twelve month period without
the approval of the New York Insurance Department is the lesser of (i) 10% of
policyholders surplus as shown on the company's last annual statement or any
more recent quarterly statement or (ii) 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.
In addition to the foregoing limitations, the New York Insurance Department, as
is its practice in any change of control situation, required Trenwick to commit
to preclude the acquired New York-domiciled insurers, INSCORP and ReCor
Insurance Company Inc., from paying any dividends for two years after the merger
with Chartwell Re Corporation without prior regulatory approval. The foregoing
restriction will expire on October 27, 2001. Neither INSCORP nor ReCor Insurance
Company Inc. paid any dividends in 1997, 1998 or 1999. Moreover, insurance
holding company laws generally provide that, notwithstanding the receipt of any
dividend from a subsidiary insurer, an insurer may make dividend payments to its
parent only to the extent it is permitted to do so under its applicable dividend
restrictions. In other words, the ability of a subsidiary insurer to pay
dividends without restriction may be impaired if its parent insurer cannot pay
dividends without restriction.
The maximum dividend permitted by law may not be indicative of an insurer's
actual ability to pay dividends, which may be constrained by business and other
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, insurance
regulatory authorities often have the discretion to limit the payment of
dividends by insurance companies domiciled in their jurisdictions.
As of September 30, 2000, of Trenwick's U.S. insurance subsidiaries, only
Trenwick America Re and Dakota could pay a dividend or other distribution
without prior approval of the applicable insurance regulatory authority. As of
September 30, 2000, Trenwick America Re could pay a dividend of $4.7 million and
Dakota could pay a dividend of $2.8 million without prior approval. During 1999,
1998 and 1997, Trenwick America Re paid dividends of $53.4 million, $30.1
million and $8.3 million, respectively. Chartwell Insurance paid dividends of
$30.3 million in 1999 and $3.0 million in 1997. Chartwell Insurance did not pay
any dividends in 1998. None of Trenwick's other U.S. insurance subsidiaries paid
any dividends in 1999, 1998 or 1997.
32
<PAGE>
Under the applicable laws of the United Kingdom, Trenwick Holdings Limited,
Chartwell Holdings Limited and their respective subsidiaries may make
shareholder distributions only from accumulated realized profits, net of
accumulated realized losses. In addition, under the UK Insurance Companies Act,
Trenwick International is not permitted to make any distribution that would
reduce its net assets below the required minimum margin of solvency which, as
determined under the U.K. Financial Service Authority's rules, is approximately
$25.8 million as of September 30, 2000. Trenwick International must also notify
the U.K. Financial Services Authority of any proposal to declare or pay a
dividend on any of its share capital. Under Lloyd's regulations, Chartwell
Managing Agents is not permitted to make any distribution that would cause its
assets to fall below any of Chartwell Managing Agents' share capital, minimum
net current asset margin or minimum net asset margin. As of September 30, 2000,
the highest of the three tests required Chartwell Managing Agents to maintain
approximately $1.0 million of capital.
Reinsurance agreements provide for recovery of a portion of certain claims and
claims expenses from reinsurers. Trenwick remains liable in the event that the
reinsurer is unable to meet its obligation; however, Trenwick holds partial
collateral under these agreements.
Regulatory Matters
Trenwick and its subsidiaries are subject to regulatory oversight under the
insurance statutes and regulations of the jurisdictions in which they conduct
business, including all states of the United States, the United Kingdom and
Bermuda. These regulations vary from jurisdiction to jurisdiction and are
generally designed to protect ceding insurance companies and policyholders by
regulating Trenwick's financial integrity and solvency in its business
transactions and operations. Many of the insurance statutes and regulations
applicable to Trenwick's subsidiaries relate to reporting and enable regulators
to closely monitor their performance. Reports typically required the inclusion
of information concerning Trenwick's capital structure, ownership, financial
condition and general business operations.
Trenwick International is subject to the regulatory authority of the United
Kingdom Financial Services Authority. Both Chartwell Managing Agents and
Trenwick's dedicated Lloyd's underwriting entities, 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.
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 has been obtained. The
United Kingdom government has established the Financial Services Authority as a
single regulator to supervise securities, banking and insurance business,
including Lloyd's. When the Financial Services and Market Bill becomes law, the
Financial Services Authority will have wide authorization and intervention
powers in relation to Lloyd's. A consultation process has commenced in relation
to Lloyd's regulatory framework.
33
<PAGE>
LaSalle Re and LaSalle Re Capital are regulated by the Insurance Act, which
provides that no person shall carry on an insurance business in or from within
Bermuda unless registered as an insurer under the Insurance Act by the Minister
of Finance. Under the Insurance Act, insurance business includes reinsurance
business. The Minister, in deciding whether to grant registration, has broad
discretion to act as he things fit in the public interest. The Minister is
required by the Insurance Act to determine whether the applicant is a fit and
proper body to be engaged in the insurance business and, in particular, whether
it has, or has available to it, adequate knowledge and expertise. The
registration of an applicant as an insurer is subject to its complying with the
terms of its registration and such other conditions as the Minister may impose
at any time.
The Insurance Act distinguishes between insurers carrying on long-term business
and insurers carrying on general business. There are four classifications of
insurers carrying on general business, with Class 4 insurers subject to the
strictest regulation. LaSalle Re is registered as a Class 4 insurer in Bermuda
and is regulated as such under the Insurance Act.
The Insurance Act imposes on Bermuda insurance companies solvency, and liquidity
standards and auditing and reporting requirements and grants to the Minister
powers to supervise, investigate and intervene in the affairs of insurance
companies. Although LaSalle Re Capital is governed by the Insurance Act, it is
exempted from complying with most of the filings required to be made by
insurance companies by section 57 of the Insurance Act.
The United States National Association of Insurance Commissioners ("NAIC") has
adopted Risk-Based Capital ("RBC") requirements for property and casualty
insurance companies to evaluate the adequacy of statutory capital and surplus in
relation to investment and insurance risks such as asset quality, asset and
liability matching, loss reserve adequacy and other business factors. The RBC
formula is used by state insurance regulators as an early warning tool to
identify, for the purpose of initiating regulatory action, insurance companies
that potentially are inadequately capitalized. In addition, the formula defines
minimum capital standards that supplement the system of low fixed minimum
capital and surplus requirements on a state-by-state basis. Regulatory
compliance is determined by a ratio of the enterprise's regulatory total
adjusted capital to its authorized control level RBC, as defined by the NAIC.
Enterprises below specific trigger points or ratios are classified within
certain levels, each of which requires specific corrective action. The ratios of
Total Adjusted Capital to Authorized Control Level RBC for each of Trenwick's
United States insurance company subsidiaries exceeded all of the RBC trigger
points at September 20, 2000.
34
<PAGE>
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 January 1, 2001. The Codification provides guidance for areas where statutory
accounting has been silent and changes current statutory accounting in some
areas. However, statutory accounting principles will continue to be established
by individual state laws and permitted practices. Effective January 1, 2001,
Connecticut, New York and North Dakota, the states of domicile of Trenwick's
U.S. insurance subsidiaries, are adopting the Codification. It is uncertain what
effect adoption of the Codification for the preparation of the statutory
financial statements of Trenwick's U.S. insurance subsidiaries would have on
those statutory financial statements.
Quantitative and Qualitative Disclosure About Market Risk
The following sections address the significant market risks associated with
Trenwick's business activities as of the quarter ended September 30, 2000 and
the year ended December 31, 1999. The third quarter 2000 risk analysis differs
from that of 1999 because it includes the assets and liabilities of Trenwick
Group Inc. The 1999 comparative data only reflects LaSalle Re Holdings Limited
information. Trenwick'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 debt instruments; and equity price
risk. With respect to the Trenwick investment portfolio, the risk management
strategy is to place its investments with high credit quality issuers and to
limit the amount of credit exposure with respect to particular ratings
categories and any one issuer. Trenwick selects investments with characteristics
such as duration, yield, currency and liquidity to reflect the underlying
characteristics of related estimated claim liabilities.
As of September 30, 2000 Trenwick`s exposure to high yield investments was
minimal. While these investments are more susceptible to credit risk, their
total market value at September 30, 2000 represents less than 3% of total
investments, and therefore management believes that the exposure to credit risk
is not material. Trenwick has no derivatives and its investments do not contain
terms that may result in potential losses due to leverage.
Limited information is available with respect to the investments held by
Chartwell Managing Agents' syndicates, and therefore, risk information provided
does not include such data. Some or all of the risks described in this section
may apply to the investments held by Chartwell Managing Agents' syndicates.
The borrowings of Trenwick are summarized in the notes to the financial
statements.
35
<PAGE>
Foreign Currency Exchange Rate Risk
Foreign currency risk is the risk that Trenwick will incur economic losses due
to adverse changes in foreign currency exchange rates. This risk arises from
Trenwick's international operations, debt obligations and securities denominated
in foreign currencies and foreign equity investments. Trenwick generally
conducts its international businesses through foreign operating entities which
generally maintain assets and liabilities in local currencies, substantially
limiting exchange rate risk to net assets denominated in the foreign currency
which is the British pound sterling. At September 30, 2000 and December 31,
1999, Trenwick's net investment in foreign subsidiaries was approximately $37.5
and $0.0 million, respectively. Debt obligations denominated in foreign
currencies were $16.6 million and foreign equity investments were $12.1 million
at September 30, 2000. Trenwick's reinsurance, international insurance and
Lloyd's operations all have exposures to movements in various currencies around
the world (particularly the British pound sterling, the Euro and the Canadian
dollar), as such businesses are denominated in those currencies. Therefore,
changes in currency exchange rates affect Trenwick's Balance Sheet, Statement of
Operations and Statement of Cash Flows. This exposure is somewhat mitigated by
the fact that premiums received are invested in the same currency portfolios, to
partially offset related unpaid claims and claims expense liabilities
denominated in the same currency.
Management estimates that a 10% immediate unfavorable change in each of the
foreign currency exchange rates to which Trenwick is exposed as of September 30,
2000 would decrease the fair value of Trenwick's foreign denominated net assets
by approximately $22.1 million, which is comprised primarily of British pound
sterling. At December 31, 1999, the same 10% shift in currency exchange rates
would result in a potential loss in fair value of approximately $0.3 million.
Interest Rate Risk
Trenwick'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 Trenwick's outstanding variable rate
debt. Additionally, the fair value of interest rate sensitive instruments may be
affected by the creditworthiness of the issuer, a prepayment option, relative
values of alternative investments, liquidity of the investment and other general
market conditions.
Trenwick monitors its sensitivity to interest rate risk by evaluating the change
in its financial assets and liabilities relative to 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 this summary.
A 100 basis point increase in market interest rates would result in an estimated
pre-tax loss in the fair value of these instruments of $43.7 and $8.8 million at
September 30, 2000 and December 31, 1999, respectively. Similarly, a 100 basis
point decrease in market interest rates would result in an estimated pre-tax
gain in the fair value of these instruments of $42.4 and $8.9 million at
September 30, 2000 and December 31, 1999, respectively.
36
<PAGE>
Trenwick has not experienced unrealized gains or losses to the extent indicated
above.
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.
Of Trenwick's $117.8 million equity portfolio at September 30, 2000, $100.7
million of common equity investments are subject to equity risk. Trenwick's
potential exposure on equity securities subject to equity risk is estimated in
terms of an immediate 10% drop in equity prices from those prevailing at
September 30, 2000 which would result in a $10.1 million loss. Trenwick did not
maintain a common equity portfolio at December 31, 1999.
The fair value estimates shown are based on the composition of the equity
security portfolio at September 30, 2000 and these exposures will change as a
result of ongoing portfolio activities in response to management's assessment of
changing market conditions and available investment opportunities.
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). Trenwick'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.
Goodwill
Goodwill was $21.0 million at September 30, 2000, or approximately 3.3% of
consolidated shareholders' equity. Goodwill represents the unamortized excess of
purchase price over the fair value of net assets of acquired entities.
Identified intangible assets represent 7.7 million. Trenwick amortizes goodwill
and identified intangible assets on a straight-line basis over twenty-five years
and five years, respectively. The risk associated with the carrying value of
goodwill and identified intangible assets is whether future operating income
(before amortization of goodwill and identified intangible assets) will be
sufficient on an undiscounted basis to recover the carrying value. Trenwick
regularly evaluates the recoverability of goodwill and identified intangible
assets and believes such amounts are currently recoverable. However, any
significant change in the useful lives of goodwill or identified intangible
assets, as estimated by management, could have a material adverse effect on
Trenwick's results of operations and financial condition.
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Accounting Standards
Accounting for Derivative Instruments and Hedging Activities - SFAS No. 133
Effective January 1, 2001, Trenwick expects to adopt the new accounting
standard, "Accounting for Derivative Instruments and Hedging Activities," which
requires all derivatives to be recognized on the balance sheet at fair value.
The Company is reviewing the impact of the implementation of the standard on its
financial statement. Because the Company has no significant derivative
instruments or hedging activities, management believes the impact will not be
material.
The Euro
On January 1, 1999, eleven of the fifteen member countries of the European Union
established a fixed conversion ratio between their local currencies and a
newly-formed currency, the "Euro". The Euro began trading on foreign currency
exchanges on January 1, 1999. Beginning in January 2002, coins and paper
currency denominated in Euros will be issued and local currencies of the eleven
countries will be withdrawn from circulation. As Trenwick conducts a
considerable amount of business in countries participating in the Euro, work was
undertaken in 1998 to ensure that the introduction of the Euro would have no
adverse effect on Trenwick's business. Consequently, Trenwick modified its
computer systems to accommodate transactions denominated in the Euro. The total
cost for implementing these changes was not material. Trenwick believes the Euro
conversion will not have a material impact on its consolidated financial
position or results from operations.
Safe Harbor Disclosure
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, Trenwick sets forth below cautionary statements
identifying important risks and uncertainties that could cause its actual
results to differ materially from those that might be projected, forecasted or
estimated in its "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, made by or on behalf of Trenwick in this Quarterly Report on Form 10-Q and
in press releases, written statements or documents filed with the Securities and
Exchange Commission, or in its communications and discussions with investors and
analysts in the normal course of business through meetings, phone calls and
conference calls. Such statements may include, but are not limited to,
projections of premium revenue, investment income, other revenue, losses,
expenses, earnings (including earnings per share), cash flows, plans for future
operations, common shareholders' equity (including book value per share),
investments, financing needs, capital plans, dividends, plans relating to
products or services of Trenwick and estimates concerning the effects of
litigation or other disputes, as well as assumptions for any of the foregoing
and generally expressed with words such as "believes," "estimates," "expects,"
"anticipates," "plans," "projects," "forecasts," "goals," "could have," "may
have," and similar expressions.
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Forward-looking statements involve known and unknown risks and uncertainties,
which may cause Trenwick's results to differ materially from such
forward-looking statements. These risks and uncertainties include, but are not
limited to, the following:
- Changes in the level of competition in the domestic and international
reinsurance or primary insurance markets that affect the volume or
profitability of Trenwick's property/casualty business. These changes
include, but are not limited to, changes in the intensity of price
competition, the entry of new competitors, existing competitors exiting the
market and the development of new products by new and existing competitors;
- Changes in the demand for reinsurance, including changes in ceding
companies' risk retentions and changes in the demand for excess and surplus
lines insurance coverages;
- The ability of Trenwick to execute its strategies in its property/casualty
operations;
- Catastrophe losses in Trenwick's domestic and international
property/casualty businesses;
- Adverse development on property/casualty claims and claims expense
liabilities related to business written in prior years, including, but not
limited to, evolving case law and its effect on environmental and other
latent injury claims, changing government regulations, newly identified
toxins, newly reported claims, new theories of liability or new insurance
and reinsurance contract interpretations;
- Changes in Trenwick's property/casualty retrocessional arrangements;
- Lower than estimated retrocessional or reinsurance recoveries on unpaid
losses, including, but not limited to, losses due to a decline in the
creditworthiness of Trenwick's retrocessionaires or reinsurers;
- Increases in interest rates, which may cause a reduction in the market
value of Trenwick's fixed income portfolio, and its common shareholders'
equity;
- Decreases in interest rates which may cause a reduction of income earned on
new cash flow from operations and the reinvestment of the proceeds from
sales or maturities of existing investments;
- A decline in the value of Trenwick's equity investments;
- Changes in the composition of Trenwick's investment portfolio;
- Credit losses on Trenwick's investment portfolio;
- Adverse results in litigation matters, including, but not limited to,
litigation related to environmental, asbestos and other potential mass tort
claims;
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- The impact of mergers and acquisitions;
- Gains or losses related to changes in foreign currency exchange rates;
and
- Changes in Trenwick's capital needs.
In addition to the factors outlined above that are directly related to
Trenwick's businesses, Trenwick is also subject to general business risks,
including, but not limited to, adverse state, federal or foreign legislation and
regulation, adverse publicity or news coverage, changes in general economic
factors and the loss of key employees.
The facts set forth above should be considered in connection with any
forward-looking statement contained in this Quarterly Report. The important
factors that could affect such forward-looking statements are subject to change,
and Trenwick does not intend to update any forward-looking statement or the
foregoing list of important factors. By this cautionary note Trenwick 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.
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PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Memorandum of Association Incorporated by reference
to Exhibit 3.1 to Registration
Statement on Form S-4 (File No. 333-44290)).
3.2 Bye-Laws (Incorporated by reference to Exhibit 3.3
to Registration Statement on Form S-4
(File No. 333-44290)).
10.1 Credit Agreement, dated as of November 24, 1999 and
Amended and Restated as of September 27, 2000, among
Trenwick America Corporation, Trenwick Holdings
Limited, various lending institutions, First Union
National Bank, as Syndication Agent, Fleet National
Bank, as Documentation Agent, and Chase Manhattan
Bank, as Administrative Agent.
10.2 (a) Indenture, dated as of January 31, 1997,
between Trenwick Group Inc. and The Chase
Manhattan Bank, as Trustee, with respect to the
8.82% Junior Subordinated Deferrable Interest
Debentures. Incorporated by reference to
Exhibit 4.2(a) to Trenwick Group Inc.'s Annual
Report on Form 10-K for the year ended December
31, 1996 (File No. 0-14737).
10.2 (b) Amended and Restated Declaration o f Trust of
Trenwick Capital Trust I, dated as of January
31, 1997. Incorporated by reference to Exhibit
4.2(b) to Trenwick Group Inc.'s Annual Report
on Form 10-K for the year ended December 31,
1996 (File No. 0-14737).
10.2 (c) Exchange Capital Securities Guarantee Agreement
dated as of July 25, 1997, between Trenwick
and The Chase Manhattan Bank, as Trustee.
Incorporated by reference to Exhibit 4.7 to
Trenwick Group Inc.'s Registration Statement
on Form S-4 (File No. 333-28707).
10.4 First Supplemental Indenture, dated as of September
27, 2000, among Trenwick Group Inc., Trenwick
America Corporation and The Chase Manhattan Bank, as
Trustee, with respect to the 8.82% Junior
Subordinated Deferrable Interest Debentures
(Incorporated by reference to Exhibit 4.2 to
Trenwick America Corporation's Current Report on
Form 8-K, filed on November 16, 2000 (File No.
0-31967)
10.5 Indenture, dated as of March 27, 1998, between
Trenwick Group Inc. and The First National Bank of
Chicago, as Trustee, with respect to the $75 million
principal amount of 6.7% Senior Notes due April 1,
2003. Incorporated by reference to Exhibit 4.2 to
Trenwick Group Inc.'s Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998 (File No.
1-15389).
10.6 First Supplemental Indenture, dated as of September
27, 2000, among Trenwick Group Inc., Trenwick
America Corporation, and Bank One Trust Company,
N.A., as successor to First National Bank of
Chicago, as Trustee, with respect to the $75 million
principal amount of 6.7% Senior Notes due April 1,
2003. Incorporated by reference to Exhibit 4.4 to
Trenwick America Corporation's Current Report on
Form 8-K filed on November 16, 2000 (File No.
0-31967)
10.7 Indenture, dated as of December 1, 1995, between
Piedmont Management Company Inc. and Fleet Bank, as
Trustee, for the Contingent Interest Notes due
June 30, 2006. Incorporated by reference to Exhibit
4.5 to Chartwell Re Corporation's Registration
Statement on Form S-1 (File No. 333-678).
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10.8 First Supplemental Indenture, dated as of December
13, 1995, among Piedmont Management Company,
Chartwell Re Corporation and Fleet Bank, as Trustee
under the Contingent Interest Notes due June 30,
2006. Incorporated by reference to Exhibit 4.6 to
Chartwell Re Corporation's Registration Statement on
Form S-1 (File No. 333-678).
10.9 Second Supplemental Indenture, dated as of October
27, 1999, among Chartwell Re Corporation, Trenwick
Group Inc. and State Street Bank and Trust Company,
as successor to Fleet Bank, as Trustee, with respect
to the Contingent Interest Notes due June 30, 2006.
Incorporated by reference to Exhibit 4.7 to Trenwick
America Corporation's Current Report on Form 8-K,
filed on November 16, 2000 (File No. 0-31967).
10.10 Third Supplemental Indenture, dated as of September
27, 2000, among Trenwick Group Inc., Trenwick
America Corporation and State Street Bank and Trust
Company, as successor to Fleet Bank, as Trustee
under the Contingent Interest Notes due June 30,
2006. Incorporated by reference to Exhibit 4.8 to
Trenwick America Corporation's Current Report on
Form 8-K, filed on November 16, 2000 (File No.
0-31967).
10.11 Catastrophe Equity Securities Issuance Option
Agreement, dated as of July 1, 1997, between LaSalle
Re Holdings Limited on the one hand and European
Reinsurance Company of Zurich, Allianz
Aktiengesellschaft, Continental Casualty Company and
CIC-Hilldale, Inc. on the other hand. Incorporated
by reference to Exhibit 10.31 to LaSalle Re Holdings
Limited Annual Report on Form 10-K for the fiscal
year ended September 30, 1997 (File No. 1-12823).
10.12 Consent, dated December 18, 1999, under Catastrophe
Equity Securities Issuance Option Agreement, dated
as of July 1, 1997, executed by European Reinsurance
Company of Zurich.
10.13 Consent Agreement, dated September 27, 2000, under
Catastrophe Equity Securities Issuance Option
Agreement, dated as of July 1, 1997, executed by
European Reinsurance Company of Zurich, LaSalle Re
Holdings Limited and Trenwick Group Ltd.
10.14 Amended and Restated Change of Control Agreement,
dated September 26, 2000, between Trenwick Group Ltd
and James F. Billett, Jr.*
10.15 Form of Amended and Restated Change of Control
Agreement, dated September 26, 2000, between
Trenwick Group Ltd. and senior officers of Trenwick
Group Ltd. and Trenwick America Corporation.*
10.16 Form of Assumption Letter, dated September 27, 2000,
by Trenwick Group Ltd. assuming the obligations of
Trenwick Group Inc. under the Change of Control
Agreements.*
27.1 Financial Data Schedule
*Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
Trenwick Group Ltd. did not file any Reports on Form 8-K during
the quarter ended September 30,
2000.
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Trenwick Group Ltd.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 17, 2000 /s/ James F. Billett, Jr.
--------------------------------
Name: James F. Billett, Jr.
Title: Chairman, President and
Chief Executive Officer
Date: November 17, 2000 /s/ Coleman D. Ross
--------------------------------
Name: Coleman D. Ross
Title Executive Vice President and
Chief Financial Officer
43
