<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996.
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period to .
--------------------- -------------------
Commission file number 0-14737
TRENWICK GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1152790
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Metro Center
One Station Place
Stamford, Connecticut 06902
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 353-5500
None
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock.
<TABLE>
<CAPTION>
Class Outstanding at April 30, 1996
----- -----------------------------
<S> <C>
Common Stock, $.10 par value 6,702,312
</TABLE>
<PAGE> 2
TRENWICK GROUP INC.
INDEX
<TABLE>
<CAPTION>
Page
PART I. Financial Information Number
------
<S> <C>
Consolidated Balance Sheet
March 31, 1996 and December 31, 1995 3
Consolidated Statement of Income
Three Months Ended March 31, 1996 and 1995 4
Consolidated Statement of Changes in Stockholders' Equity
Three Months Ended March 31, 1996 and 1995 5
Consolidated Statement of Cash Flows
Three Months Ended March 31, 1996 and 1995 6
Notes to Consolidated Financial Statements 7-8
Management's Discussion and Analysis 9-12
of Financial Condition and Results
of Operations
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
<PAGE> 3
TRENWICK GROUP INC
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ---------
(dollars in thousands)
<S> <C> <C>
Assets
Fixed maturity investments available for sale at
fair value (amortized cost: $615,983 and $609,751) $ 627,813 $ 633,525
Equity securities available for sale at
fair value (cost: $16,879 and $16,807) 19,768 19,719
Cash and cash equivalents 28,293 6,760
--------- ---------
Total investments and cash 675,874 660,004
Accrued investment income 9,720 10,198
Receivables from ceding insurers 52,482 48,979
Reinsurance recoverable balances, net 71,481 68,449
Deferred policy acquisition costs 19,868 16,725
Net deferred income taxes 17,956 13,585
Other assets 2,942 2,990
--------- ---------
Total assets $ 850,323 $ 820,930
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Unpaid claims and claims expenses $ 427,158 $ 411,874
Unearned premium income 67,245 56,050
Convertible debentures 103,500 103,500
Other liabilities 13,082 8,730
--------- ---------
Total liabilities 610,985 580,154
--------- ---------
Stockholders' equity:
Preferred stock, $.10 par value,
1,000,000 shares authorized; none outstanding
Common stock, $.10 par value, 15,000,000 shares
authorized; 6,601,122 and 6,590,411 shares outstanding 660 659
Additional paid-in capital 90,311 89,920
Retained earnings 140,085 133,949
Net unrealized appreciation of investments,
net of income taxes 9,567 17,346
Deferred compensation under stock award plan (1,285) (1,098)
--------- ---------
Total stockholders' equity 239,338 240,776
--------- ---------
Total liabilities and stockholders' equity $ 850,323 $ 820,930
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
TRENWICK GROUP INC
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------
1996 1995
------- -------
(in thousands except per share data)
<S> <C> <C>
Revenues:
Net premiums earned $47,691 $44,464
Net investment income 9,869 8,544
Net realized investment gains 50 98
------- -------
Total revenues 57,610 53,106
------- -------
Expenses:
Claims and claims expenses incurred 29,199 31,007
Policy acquisition costs 12,242 9,370
Underwriting expenses 4,028 2,866
Interest expense 1,624 1,624
------- -------
Total expenses 47,093 44,867
------- -------
Income before income taxes 10,517 8,239
Income taxes 2,335 1,735
------- -------
Net income $ 8,182 $ 6,504
======= =======
PRIMARY EARNINGS PER SHARE $ 1.20 $ .97
======= =======
Weighted average shares outstanding 6,833 6,691
======= =======
FULLY DILUTED EARNINGS PER SHARE
(assuming conversion of convertible debentures as of
the date of issuance) $ 1.03 $ .86
======= =======
Weighted average shares outstanding 8,967 8,825
======= =======
Dividends per common share $ .31 $ .28
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
TRENWICK GROUP INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1996 1995
--------- ---------
(dollars in thousands)
<S> <C> <C>
Stockholders' equity, beginning of year $ 240,776 $ 188,213
Common stock, $.10 par value, and additional
paid-in capital:
Exercise of employer stock options
(8,000 and 19,500 shares) 158 188
Income tax benefit resulting from
excess compensation expenses allowable
for income tax purposes 94 82
Restricted common stock awarded
(6,195 and 4,654 shares) 320 205
Common stock purchased and retired
(3,484 and 3,057 shares) (180) (134)
Retained earnings:
Net income 8,182 6,504
Cash dividends (2,046) (1,809)
Net unrealized (depreciation) appreciation of
investments available for sale:
Change in unrealized (depreciation) appreciation (11,967) 16,779
Change in applicable deferred income taxes 4,188 (5,872)
Deferred compensation under stock award plan:
Restricted common stock awarded (320) (205)
Compensation expense recognized 133 78
--------- ---------
Stockholders' equity, end of period $ 239,338 $ 204,029
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
TRENWICK GROUP INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1996 1995
-------- --------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Premiums collected $ 45,465 $ 32,967
Ceded premiums paid (1,663) (3,502)
Claims and claims expenses paid (19,951) (20,316)
Claims and claims expenses recovered 636 2,491
Underwriting expenses paid (5,130) (3,461)
-------- --------
Cash provided by underwriting activities 19,357 8,179
Net investment income received 10,647 10,281
Income taxes received (paid) 89 (1,987)
-------- --------
Cash provided by operating activities 30,093 16,473
-------- --------
Cash flows for investing activities:
Purchases of fixed maturity investments (22,216) (38,877)
Sales of fixed maturity investments 5,025 10,138
Maturities of fixed maturity investments 10,707 15,261
Purchases of equity securities (72) (50)
Sales of equity securities 21 --
Additions to premises and equipment (137) (177)
-------- --------
Cash used for investing activities (6,672) (13,705)
-------- --------
Cash flows for financing activities:
Issuance of common stock 158 188
Dividends paid (2,046) (1,809)
-------- --------
Cash used for financing activities (1,888) (1,621)
-------- --------
Increase in cash and cash equivalents 21,533 1,147
Cash and cash equivalents, beginning of year 6,760 9,784
-------- --------
Cash and cash equivalents, end of period $ 28,293 $ 10,931
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
TRENWICK GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
The interim consolidated financial statements included those of Trenwick
Group Inc. and its subsidiaries and have been prepared in conformity with
generally accepted accounting principles applied on a basis consistent
with prior periods. Certain items in the financial statements have been
reclassified to conform with the 1996 presentation.
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 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 1995
audited financial statements and related notes.
2. Reinsurance:
Trenwick purchases reinsurance to reduce its exposure to catastrophe
losses and the frequency of 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, premiums earned and claims and claims expenses incurred
is as follows (in thousands):
<TABLE>
<CAPTION>
Premiums Written
Three Months Ended
March 31,
--------------------
1996 1995
---- ----
<S> <C> <C>
Assumed $64,031 $53,297
Ceded (5,148) (3,920)
-------- -------
Net $58,883 $49,377
======= =======
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
Premiums Earned
Three Months Ended
March 31,
------------------
1996 1995
---- ----
<S> <C> <C>
Assumed $52,835 $48,385
Ceded (5,144) (3,921)
------- -------
Net $47,691 $44,464
======= =======
</TABLE>
<TABLE>
<CAPTION>
Claims and Claims Expenses Incurred
Three Months Ended
March 31,
------------------------
1996 1995
---- ----
<S> <C> <C>
Assumed $36,348 $36,588
Ceded (7,149) (5,581)
------- -------
Net $29,199 $31,007
======= =======
</TABLE>
3. Stock Options and Benefit Plans:
For the three months ended March 31, 1996, Trenwick awarded key employees
an aggregate of 6,195 shares of common stock under the terms of the 1989
Stock Plan, valued at $51.75 per share (approximately $320,000). Trenwick
is recognizing compensation expense determined by the value of the shares,
amortized over a five year vesting period. During the three month period,
3,484 shares were repurchased at $51.75 per share (approximately $180,000)
in connection with the satisfaction of withholding taxes payable upon the
vesting of shares previously awarded under the plan.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Trenwick Group Inc. ("Trenwick") is a holding company whose principal
subsidiary, Trenwick America Reinsurance Corporation ("Trenwick America Re")
reinsures property and casualty risks written by U.S. insurance companies.
Substantially all of Trenwick America Re's business is produced by reinsurance
brokers. Trenwick America Re divides its business into three categories: treaty,
specialty and facultative. In addition, under a strategic reinsurance agreement
with PXRE Reinsurance Company ("PXRE Re"), Trenwick America Re assumes
approximately 15% of PXRE Re's property business.
OPERATING RESULTS
Trenwick Group Inc. reported an increase in its first quarter consolidated net
income of 26% to $8.2 million or $1.20 per share compared to $6.5 million or
$.97 per share in the first quarter of 1995. Fully diluted earnings per share
increased 20% to $1.03 in the first quarter of 1996 compared to $.86 last year.
Consolidated net income in the first quarter of 1995 included an after-tax
charge of $650,000 or $.10 per share associated with a preliminary estimate of
claims arising from the Kobe, Japan earthquake in January 1995.
Operating income (net income excluding after-tax realized investment gains and
losses) was as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1996 1995
---- ----
<S> <C> <C>
Operating income $8,149 $6,440
Per Share:
Primary $1.19 $ .96
Fully diluted $1.03 $ .85
</TABLE>
Realized after-tax investment gains in the first quarter of 1996 were $33,000 or
approximately $.01 per share, compared to $64,000 or $.01 per share for the same
period in 1995.
9
<PAGE> 10
PREMIUMS
Trenwick's net premiums written of $58.9 million for the first quarter 1996
represented a 19% increase over the same period in 1995. The distribution of the
Company's net premiums written by type was as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
1996 1995 % Change
---- ---- --------
<S> <C> <C> <C>
CASUALTY
Treaty $37,351 $25,756 45%
Specialty 9,780 11,593 (16)
Facultative 1,354 1,462 (8)
------- ------- --
48,485 38,811 25
PROPERTY 10,398 10,566 (2)
------- ------- --
Total $58,883 $49,377 19%
======= ======= ==
</TABLE>
Trenwick's premium growth in the first quarter resulted from an increase in
casualty treaty business. This growth was primarily driven by business
associated with the senior underwriting executives hired in 1995. This business
was developed through existing and new relationships with various reinsurance
brokers. Specialty business declined as a result of the non-renewal of certain
accounts in 1994 and 1995 which did not meet the Company's pricing standards.
New casualty business increased 73% in the quarter over the same period in 1995
and represented approximately 26% of total premium writings during the period.
Increases in participations in renewal transactions and growth in the original
business written by several ceding companies ("continuing casualty business")
increased 12% in the quarter over the same period in 1995. Continuing casualty
business represented 56% of the total premium writings during the period. The
Company's property business, representing 18% of total premium writings for the
quarter, declined marginally.
Subsequent to the close of the quarter, Trenwick America Re entered into a
strategic reinsurance agreement with Transatlantic Reinsurance Company
(Transatlantic Re), a wholly owned subsidiary of Transatlantic Holdings Inc.
Transatlantic Re is the broker market leader in providing reinsurance to the
health care industry in the U.S., including managed care products, hospital
professional liability for institutions and medical professional liability for
doctors. Through this agreement, Trenwick America Re will provide Transatlantic
Re with incremental risk capacity that will further strengthen its lead in the
marketplace. Trenwick expects that this agreement will result in new writings in
1996 of approximately $8 million to $10 million.
10
<PAGE> 11
UNDERWRITING EXPERIENCE
The combined ratio is one means of measuring the profitability of a property and
casualty company. The combined ratio reflects underwriting experience, but does
not reflect income from investments or provisions for income taxes. A combined
ratio below 100% indicates profitable underwriting and a combined ratio
exceeding 100% indicates unprofitable underwriting. Although a reinsurer may
have unprofitable underwriting results, the reinsurer may still be profitable
because of investment income earned on the accumulated invested assets.
The following table sets forth Trenwick's combined ratios and the components
thereof calculated on a GAAP basis for the period indicated, together with
Trenwick America Re's combined ratio calculated on a statutory basis:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1996 1995
---- ----
<S> <C> <C>
Claims and claims expense ratio 61.2% 69.7%
---- ----
Expense ratio:
Policy acquisition expense ratio 25.7 21.1
Underwriting expense ratio 8.4 6.4
---- ----
Total expense ratio 34.1% 27.5%
---- ----
Combined ratio (GAAP basis) 95.3% 97.2%
---- ----
Trenwick America Re
statutory combined ratio 93.8% 95.8%
---- ----
</TABLE>
As indicated, Trenwick's claims and claims expense ratio improved in the first
quarter of 1996 compared to the same period in 1995. The claims and claims
expense ratio in the first quarter of 1996 includes favorable development of
approximately $1.7 million from casualty business written in prior years.
Additionally, the Company's first quarter 1995 loss ratio includes 2 percentage
points associated with a preliminary estimate of claims arising from the Kobe,
Japan earthquake.
INVESTMENT INCOME
Net investment income of $9.9 million increased 16% in the first quarter of 1996
compared to $8.5 million for the same period in 1995. Pre-tax yields on invested
assets averaged 6.3% in 1996 and 1995. The increase in investment income is due
primarily to the continued growth in the Company's invested asset base along
with an increase in operating cash flow.
11
<PAGE> 12
The taxable and non-taxable components of the Company's net investment income
were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1996 1995
---- ----
<S> <C> <C>
Taxable $5,614 $4,722
Non-taxable 4,255 3,822
----- -----
$9,869 $8,544
====== ======
Net investment income, after-tax $7,721 $6,760
====== ======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, Trenwick's consolidated investments and cash totaled
$675.9 million, as compared to $660.0 million at December 31, 1995. The fair
value of the Company's fixed maturity portfolio exceeded amortized cost of
$616.0 and $609.8 million by $11.8 and $23.8 million at March 31, 1996, and
December 31, 1995, respectively. At March 31, 1996 and at December 31, 1995,
the fair value of the Company's equity securities exceeded cost by $2.9 million.
As of March 31, 1996, Trenwick's consolidated stockholders' equity totaled
$239.3 million or $36.26 per share, as compared to $240.8 million or $36.54 per
share at December 31, 1995. The nominal decrease in consolidated stockholders'
equity is due to a decrease in the market value of the Company's fixed maturity
and equity investments, offsetting the increase from earnings in the period.
Since December 31, 1995, the unrealized appreciation of the Company's fixed
maturity and equity investments declined $7.8 million, net of tax, or $1.18 per
share, primarily as a result of the increase in interest rates since December
31, 1995.
Statutory surplus of Trenwick America Re was $263.7 million as of March 31,
1996, compared to $257.6 million as of December 31, 1995.
Cash flow from operations of $30.1 million in the first quarter of 1996
increased approximately 83% compared to cash flow from operations of $16.5
million in the first quarter of 1995. The increase in cash flow from operations
reflected an overall increase in premium writings.
Trenwick declared a first quarter dividend of $.31 per share in 1996, compared
to $.28 in the first quarter of 1995.
12
<PAGE> 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
11.0 Computation of Earnings Per Share
27.0 Financial Data Schedule
b) Reports on Form 8-K
None
13
<PAGE> 14
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.
TRENWICK GROUP INC.
-----------------------------
(Registrant)
Date: May 13, 1996 JAMES F. BILLETT, JR.
------------- -----------------------------
James F. Billett, Jr.
Chairman, President and
Chief Executive Officer
Date: May 13, 1996 ALAN L. HUNTE
------------ ------------------------
Alan L. Hunte
Vice President, Chief Financial Officer
and Treasurer
14
<PAGE> 1
TRENWICK GROUP INC.
Exhibit 11.0 -- COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------
1996 1995
------ ------
<S> <C> <C>
PRIMARY
Average shares outstanding 6,596 6,451
Weighted average shares of common stock
equivalents associated with
stock options, net 237 240
------ ------
Total 6,833 6,691
====== ======
Net income $8,182 $6,504
====== ======
PER SHARE AMOUNT $ 1.20 $ .97
====== ======
FULLY DILUTED
Average shares outstanding 6,596 6,451
Weighted average shares of common stock
equivalents associated with
stock options, net 237 240
Assumed conversion of 6% convertible debentures 2,134 2,134
------ ------
Total 8,967 8,825
====== ======
Net income $8,182 $6,504
Add 6% convertible conversion debenture interest
net of federal income tax effect 1,056 1,053
------ ------
Total $9,238 $7,557
====== ======
PER SHARE AMOUNT $ 1.03 $ .86
====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Form 10-Q for the three months ended March
31, 1996 for Trenwick Group Inc.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 627,813
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 19,768
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 647,581
<CASH> 28,293
<RECOVER-REINSURE> 71,481<F1>
<DEFERRED-ACQUISITION> 19,868
<TOTAL-ASSETS> 850,323
<POLICY-LOSSES> 427,158
<UNEARNED-PREMIUMS> 67,245
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 103,500
0
0
<COMMON> 660
<OTHER-SE> 238,678
<TOTAL-LIABILITY-AND-EQUITY> 850,323
47,691
<INVESTMENT-INCOME> 9,869
<INVESTMENT-GAINS> 50
<OTHER-INCOME> 0
<BENEFITS> 29,199
<UNDERWRITING-AMORTIZATION> 12,242
<UNDERWRITING-OTHER> 5,652
<INCOME-PRETAX> 10,517
<INCOME-TAX> 2,335
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,182
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.03
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>-Represents net reinsurance recoverable balances
after offset of funds held and reinsurance
balances payable.
</FN>
</TABLE>
