<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/ / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998.
/ / 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.)
One Canterbury Green
Stamford, Connecticut 06901
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 353-5500
Metro Center, One Station Place, Stamford, Connecticut 06902
(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 October 31, 1998
----- -------------------------------
<S> <C>
Common Stock, $.10 par value 11,167,099
</TABLE>
<PAGE> 2
TRENWICK GROUP INC.
INDEX
<TABLE>
<CAPTION>
Page
PART I. Financial Information Number
<S> <C>
Consolidated Balance Sheet
September 30, 1998 and December 31, 1997 3
Consolidated Statement of Income
Three and Nine Months Ended September 30, 1998 and 1997 4
Consolidated Statement of Changes in Stockholders' Equity
Three and Nine Months Ended September 30, 1998 and 1997 5
Consolidated Statement of Cash Flows
Nine Months Ended March 31, 1998 and 1997 6
Consolidated Statement of Comprehensive Income
Three and Nine Months Ended September 30, 1998 7
Notes to Consolidated Financial Statements 8-12
Management's Discussion and Analysis
of Financial Condition and Results of Operations 13-17
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
<PAGE> 3
TRENWICK GROUP INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
(dollars in thousands)
<S> <C> <C>
Assets
Securities available for sale at fair value:
Debt securities (amortized cost: $871,724 and $788,727) $ 905,881 $ 812,314
Equity securities (cost: $47,680 and $31,603) 52,948 39,163
Cash and cash equivalents 67,029 12,847
----------- -----------
Total investments and cash 1,025,858 864,324
Accrued investment income 13,970 10,969
Receivables from ceding insurers 140,893 91,867
Reinsurance recoverable balances, net 126,510 66,361
Deferred policy acquisition costs 36,065 22,524
Net deferred income taxes 10,967 12,451
Other assets 39,068 19,427
----------- -----------
Total assets $ 1,393,331 $ 1,087,923
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Unpaid claims and claims expenses $ 671,309 $ 518,387
Unearned premium income 157,908 87,020
6.70% senior notes due 2003 75,000 --
Other liabilities 22,039 14,867
----------- -----------
Total liabilities 926,256 620,274
----------- -----------
Company-obligated mandatorily redeemable preferred
capital securities of subsidiary trust holding
solely junior subordinated debentures of Trenwick
Group Inc. 110,000 110,000
----------- -----------
Common stockholders' equity:
Common stock, $.10 par value, 30,000,000 shares
authorized; 11,385,699 and 11,951,060 shares
outstanding 1,139 1,195
Additional paid-in capital 134,105 153,714
Retained earnings 197,758 183,218
Accumulated other comprehensive income 27,195 20,245
Deferred compensation under stock award plan (3,122) (723)
----------- -----------
Total common stockholders' equity 357,075 357,649
----------- -----------
Total liabilities and stockholders' equity $ 1,393,331 $ 1,087,923
=========== ===========
</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 Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
(in thousands except per share data)
<S> <C> <C> <C> <C>
Revenues:
Net premiums earned $ 65,161 $ 43,723 $181,949 $144,742
Net investment income 14,317 12,178 41,677 36,030
Net realized investment gains 184 -- 1,444 1,916
Other income/(loss) (159) -- 173 10
-------- -------- -------- --------
Total revenues 79,503 55,901 225,243 182,698
-------- -------- -------- --------
Expenses:
Claims and claims expenses incurred 41,501 25,522 111,077 83,812
Policy acquisition costs 19,822 13,103 55,753 45,060
Underwriting expenses 6,891 3,576 17,459 11,344
General and administrative expenses 895 -- 2,744 --
Interest expense 1,292 2 2,641 892
Minority interest in subsidiary
trust 2,426 2,452 7,277 6,495
-------- -------- -------- --------
Total expenses 72,827 44,655 196,951 147,603
-------- -------- -------- --------
Income before income taxes and
extraordinary item 6,676 11,246 28,292 35,095
Income taxes 1,433 2,473 4,829 7,928
-------- -------- -------- --------
Income before extraordinary item 5,243 8,773 23,463 27,167
Extraordinary loss on debt
redemption, net of $558 income
tax benefit -- -- -- 1,037
-------- -------- -------- --------
Net income $ 5,243 $ 8,773 $ 23,463 $ 26,130
======== ======== ======== ========
BASIC EARNINGS PER SHARE
Income before extraordinary item $ .45 $ .74 $ 1.98 $ 2.35
Extraordinary loss -- -- -- .09
-------- -------- -------- --------
Net income $ .45 $ .74 $ 1.98 $ 2.26
======== ======== ======== ========
DILUTED EARNINGS PER SHARE
Income before extraordinary item $ .44 $ .73 $ 1.95 $ 2.25
======== ======== ======== ========
Net income $ .44 $ .73 $ 1.95 $ 2.25
======== ======== ======== ========
DIVIDENDS PER COMMON SHARE $ .25 $ .24 $ .75 $ .72
======== ======== ======== ========
</TABLE>
Prior period earnings per share amounts have been restated to comply with the
accounting standard, "Earnings Per Share".
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 Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
Common stockholders' equity, beginning of period $ 372,774 $ 336,666 $ 357,649 $ 265,753
Common stock, $.10 par value, and additional paid-in-capital:
Conversion of debentures (1,783,926) -- -- -- 57,780
Exercise of employer stock options (61,500, 16,000, 88,500
and 76,750 shares) 694 180 1,154 956
Income tax benefits from additional compensation deductions
allowable for income tax purposes 541 -- 748 483
Restricted common stock awarded (82,889 and 9,782 shares) -- -- 2,952 328
Restricted common stock awards cancelled (2,122 and 2,122 shares) -- (42) -- (42)
Common stock purchased and retired (732,500, 736,750 and 5,091
shares) (24,369) -- (24,519) (171)
Retained earnings:
Net income 5,243 8,773 23,463 26,130
Cash dividends (2,896) (2,948) (8,923) (8,678)
Accumulated other comprehensive income:
Investment gains, net of income taxes 3,324 6,024 6,285 7,416
Realized investment gains, net of income taxes, included in
net income (120) -- (939) (1,245)
Foreign currency translation adjustment, net of income taxes 1,605 -- 1,604 --
Deferred compensation under stock award plan:
Restricted common stock awarded -- -- (2,952) (328)
Restricted common stock awards cancelled -- 42 -- 42
Compensation expense recognized 279 136 553 407
--------- --------- --------- ---------
Common stockholders' equity, end of period $ 357,075 $ 348,831 $ 357,075 $ 348,831
========= ========= ========= =========
</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>
Nine Months Ended
September 30,
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Premiums collected $ 183,688 $ 112,384
Ceded premiums paid (42,003) (6,360)
Claims and claims expenses paid (135,318) (85,383)
Claims and claims expenses recovered 19,123 2,394
Underwriting expenses paid (18,552) (10,578)
--------- ---------
Cash provided by underwriting activities 6,938 12,457
Net investment income received 45,570 37,242
Interest expense paid (9,702) (5,364)
Income taxes paid (8,444) (6,270)
General and administrative expense (2,744) --
Other income received 54 --
--------- ---------
Cash provided by operating activities 31,672 38,065
--------- ---------
Cash flows for investing activities:
Purchases of debt securities (401,361) (171,147)
Sales of debt securities 96,569 33,980
Maturities of debt securities 329,226 53,042
Purchases of equity securities (8,091) (12,428)
Sales of equity securities 2,363 4,621
Investment in subsidiary, net of cash acquired (39,785) --
Additions to premises and equipment (1,849) (158)
--------- ---------
Cash used for investing activities (22,928) (92,090)
--------- ---------
Cash flows for financing activities:
Issuance of senior notes 75,000 --
Issuance of mandatorily redeemable preferred
capital securities -- 110,000
Redemption of convertible debentures -- (46,997)
Issuance costs of capital securities -- (1,555)
Issuance costs of senior notes (922) --
Issuance of common stock 1,154 956
Repurchase of common stock (20,721) (171)
Dividends paid (8,923) (8,598)
--------- ---------
Cash provided by financing activities 45,588 53,635
--------- ---------
Effect of exchange rate on cash (150) --
--------- ---------
Change in cash and cash equivalents 54,182 (390)
Cash and cash equivalents, beginning of period 12,847 14,253
--------- ---------
Cash and cash equivalents, end of period $ 67,029 $ 13,863
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
TRENWICK GROUP INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Net income $ 5,243 $ 8,773 $23,463 $26,130
Other comprehensive income:
Net unrealized investment gains, 3,204 6,024 5,346 6,171
net of income taxes
Foreign currency translation
adjustment, net of income taxes 1,605 -- 1,604 --
------- ------- ------- -------
Comprehensive income $10,052 $14,797 $30,413 $32,301
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE> 8
TRENWICK GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 1998 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 1997 audited financial
statements and related notes.
Earnings Per Share
Effective December 31, 1997, Trenwick adopted a new accounting standard,
"Earnings Per Share", which specifies the computation, presentation and
disclosure requirements of earnings per share and supersedes the previous
standard. It requires a dual presentation of basic and diluted earnings per
share. Basic earnings per share, which excludes the effect of common stock
equivalents, replaces primary earnings per share. Diluted earnings per
share, which utilizes the average market price per share when applying the
treasury stock method in determining common stock equivalents, replaces
fully-diluted earnings per share. Prior period per share amounts have been
restated to comply with this standard.
Debt issuance costs
Debt issuance costs associated with the issuance of the 6.70% senior notes
are being amortized over the term of the related debt using the interest
method.
Comprehensive income
As of January 1, 1998, Trenwick adopted the new accounting standard,
"Reporting Comprehensive Income", which establishes standards for reporting
and presentation of comprehensive income and its components. Comprehensive
income comprises net income and other comprehensive income. Other
comprehensive income consists of the change in the net unrealized
appreciation of investments, net of tax, and the change in foreign currency
translation adjustments, net of tax. Information for periods prior to 1998
is presented on a basis consistent with the 1998 information.
8
<PAGE> 9
Foreign Exchange
The assets and liabilities of foreign operations 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 is recorded as a
cumulative translation adjustment in accumulated other comprehensive income
within stockholders' equity, (net of applicable deferred income taxes). Foreign
currency transaction gains and losses are included in net income and are not
material.
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 Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross $ 88,488 $ 59,892 $ 242,374 $ 192,310
Ceded (19,727) (15,510) (54,164) (39,524)
--------- --------- --------- ---------
Net $ 68,761 $ 44,382 $ 188,210 $ 152,786
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Premiums Earned
----------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross $ 84,934 $ 53,883 $ 238,455 $ 174,374
Ceded (19,773) (10,160) (56,506) (29,632)
--------- --------- --------- ---------
Net $ 65,161 $ 43,723 $ 181,949 $ 144,742
========= ========= ========= =========
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
Claims and Claims Expenses Incurred
----------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross $ 55,335 $ 40,183 $ 158,159 $ 126,059
Ceded (13,834) (14,661) (47,082) (42,247)
--------- --------- --------- ---------
Net $ 41,501 $ 25,522 $ 111,077 $ 83,812
========= ========= ========= =========
</TABLE>
3. ACQUISITION OF TRENWICK INTERNATIONAL LIMITED
On February 27, 1998, Trenwick completed the acquisition of Trenwick
International Limited ("Trenwick International"), formerly Sorema (UK)
Limited, from Sorema S.A. for an aggregate purchase price of $63.2 million,
including acquisition costs, which approximated book value. On March 31,
1998, the share capital of Trenwick International was increased by $67.0
million to approximately $127.0 million. Trenwick International is based in
London and underwrites specialty insurance and reinsurance treaty and
facultative business on a worldwide basis. 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 estimated fair values at the date of
acquisition. The excess of the purchase price over the estimated fair value
of the net assets of approximately $992,000, has been recorded as goodwill,
which is being amortized on a straight line basis over 25 years. All assets
and liabilities of Trenwick International are consolidated in the balance
sheet at September 30, 1998 and its operating results are consolidated in
Trenwick's results for the year ended September 30, 1998.
4. STOCKHOLDERS' EQUITY
Preferred Stock
Trenwick has 2,000,000 shares of $.10 par value preferred stock authorized
and none outstanding.
Common Stock
On September 28, 1998, Trenwick's Board of Directors approved an additional
600,000 shares to its stock repurchase program to a total of 1,600,000
shares. The program was originally adopted on May 21, 1997. As of September
30, 1998, 732,500 shares have been repurchased at an average price of $33.27
per share.
For the nine months ended September 30, 1998, Trenwick awarded key employees
an aggregate of 82,889 shares of common stock under the terms of the 1989
and 1993 Stock Plans, valued at an average of $35.61 per share
(approximately $2,952,000). Trenwick is recognizing compensation expense
determined by the value of the shares, amortized over a five year vesting
period. During the period, 4,250 shares were repurchased at an average of
$35.29 per share (approximately $150,000) in connection with the
satisfaction of withholding taxes payable upon the vesting of shares
previously awarded under the plan.
10
<PAGE> 11
5. LONG TERM DEBT
On March 27, 1998 Trenwick completed a private offering of $75 million
aggregate principal amount of its 6.70% senior notes due April 1, 2003.
Interest is payable semi-annually on April 1 and October 1 of each year,
commencing on October 1, 1998. The notes are not subject to redemption prior
to maturity. They are unsecured obligations and will rank senior in right of
payment to all existing and future subordinated indebtedness of Trenwick,
including Trenwick's obligations with respect to its 8.82% junior
subordinated debentures held by Trenwick Capital Trust I in respect of the
$110 million 8.82% subordinated capital income securities issued by the
Trust. Under the terms of the notes, Trenwick is not restricted from
incurring indebtedness, but is subject to limits on its ability to incur
secured indebtedness for borrowed money.
A portion of the net proceeds of the offering were contributed to Trenwick's
wholly-owned subsidiary Trenwick International Limited, to support its
insurance and reinsurance operations, including increasing its statutory
capital to support its underwriting capacity. Remaining net proceeds will be
used for general corporate purposes, which may include investments in and
advances to subsidiaries, the financing of growth and expansion, the
financing of possible future acquisitions and other corporate purposes.
11
<PAGE> 12
6. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share (in thousands except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INCOME AVAILABLE TO COMMON STOCKHOLDERS:
Income before extraordinary item (basic) $ 5,243 $ 8,773 $23,463 $27,167
Add interest on convertible debentures,
net of income taxes -- -- -- 578
------- ------- ------- -------
Income before extraordinary item (diluted) $ 5,243 $ 8,773 $23,463 $27,745
======= ======= ======= =======
Net income (basic) $ 5,243 $ 8,773 $23,463 $26,130
Add interest on convertible debentures and
loss on debt redemption, net of income taxes -- -- -- 1,615
------- ------- ------- -------
Net income (diluted) $ 5,243 $ 8,773 $23,463 $27,745
======= ======= ======= =======
WEIGHTED AVERAGE SHARES OF COMMON
STOCK OUTSTANDING:
Weighted average shares outstanding (basic) 11,713 11,907 11,866 11,554
Weighted average shares issuable on
conversion of debt -- -- -- 598
Weighted average shares issuable on exercise of
employee stock options, net of assumed
repurchases 128 196 149 170
------- ------- ------- -------
Weighted average shares outstanding (diluted) 11,841 12,103 12,015 12,322
======= ======= ======= =======
PER SHARE AMOUNTS:
Basic
Income before extraordinary item .45 $ .74 1.98 $ 2.35
======= ======= ======= =======
Net income .45 $ .74 1.98 $ 2.26
======= ======= ======= =======
Diluted
Income before extraordinary item .44 $ .73 1.95 $ 2.25
======= ======= ======= =======
Net income .44 $ .73 1.95 $ 2.25
======= ======= ======= =======
</TABLE>
12
<PAGE> 13
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Trenwick ("Trenwick") is a holding company with two principal operating
subsidiaries, Trenwick America Reinsurance Corporation ("Trenwick America Re"),
which reinsures property and casualty risks written by U.S. insurance companies,
and Trenwick International Limited ("Trenwick International"), which writes
insurance and reinsurance property and casualty risks outside of the U.S.
Substantially all of Trenwick America Re's business is produced by reinsurance
brokers. Trenwick International obtains its business from a variety of
resources, including insurance and reinsurance brokers. Trenwick America Re and
Trenwick International underwrite both treaty and facultative business.
OPERATING RESULTS
Trenwick Group Inc. reported operating income, excluding catastrophe losses, of
$8.8 million or $.75 per share for the third quarter of 1998, compared to $8.8
million or $.74 per share for the third quarter of 1997. Consolidated net income
for the third quarter of 1998 of $5.2 million or $.45 per share includes
after-tax charges of $3.7 million or $.32 per share associated with claims
arising from Hurricane Georges and after-tax realized investment gains of $0.1
million or $.01 per share. Consolidated net income for the third quarter of 1997
was $8.8 million or $.74 per share. Net income per share on a diluted basis was
$.44 per share for 1998 compared to $.73 per share for 1997.
For the nine months ended September 30, 1998, Trenwick's operating income
excluding catastrophe losses was $26.2 million or $2.21 per share, compared to
$25.9 million or $2.24 per share for the nine months ended September 30, 1997.
Consolidated net income for the nine months ended September 30, 1998 of $23.5
million or $1.98 per share includes after-tax charges of $3.7 million or $.31
per share associated with claims arising from Hurricane Georges and after-tax
realized investment gains of $0.9 million or $.08 per share. Consolidated net
income for the nine months ended September 30, 1997 of $26.1 million or $2.26
per share includes after-tax realized investment gains of $1.2 million or $.11
per share and an after-tax extraordinary loss on debt redemption of $1.0 million
or $.09 per share. Net income per share on a diluted basis was $1.95 for the
nine months ended September 30, 1998, compared to $2.25 per share for the nine
months ended September 30, 1997.
PREMIUMS
Trenwick's consolidated net premium writings in the quarter and for the nine
months ended September 30, 1998 totaled $68.8 million and $188.2 million
compared to $44.4 million and $152.8 million for the same periods in 1997. This
increase of 55% and 23% for the quarter and for the nine months ended September
30, 1998 primarily reflects the inclusion of Trenwick International's business
during these periods.
13
<PAGE> 14
Net premium writings from Trenwick America, the group's U.S. operations,
increased by 10% in the quarter compared to last year. This increase partially
offset a decline in net premium writings in the prior two quarters, resulting in
a decrease in year-to-date net premium writings of 13%. Casualty business, which
represents 92% of Trenwick America's business, increased 17% in the quarter
while property business declined 34%. For the nine months ended September 30,
1998, casualty and property business declined 8% and 43%, respectively. While
Trenwick America experienced an increase in casualty business in the quarter
from certain new accounts and an increase in existing business, it does not
anticipate continued growth is this sector as a result of the intense
competition in the reinsurance markets. As previously reported, Trenwick America
withdraws from accounts when pricing falls below what it believes are acceptable
rate levels.
Trenwick continues to benefit from its recent acquisition of Trenwick
International, which reported net premium writings of $20.0 million and $54.8
million in the third quarter and nine months ended September 30, 1998,
respectively. While the international business is also highly competitive,
growth in this business is expected to result primarily from an increase in
Trenwick International's retention of business owing to a change in its
reinsurance programs and an increase in its capital. Trenwick International is
also expanding into new geographic markets previously limited by its former
parent.
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 Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Claims and claims expense ratio 63.7% 58.3% 61.1% 57.9%
Expense ratio:
Policy acquisition expense ratio 30.4 30.0 30.6 31.1
Underwriting expense ratio 10.6 8.2 9.6 7.9
----- ---- ----- ----
Total expense ratio 41.0% 38.2% 40.2% 39.0%
----- ---- ----- ----
Combined ratio (GAAP basis) 104.7% 96.5% 101.3% 96.9%
===== ==== ===== ====
</TABLE>
Trenwick's GAAP combined ratio for the third quarter and for the nine months
ended September 30, 1998 was 104.7% and 101.3% compared to 96.5% and 96.9% for
the same periods in 1997. Trenwick America's GAAP combined loss and expense
ratio in the third quarter and for the nine months ended September 30, 1998 was
107.5% and 101.5%, compared to 96.5% and 96.9% for the same periods in 1997.
Trenwick International's GAAP combined loss and expense ratio for the third
quarter and for the nine months ended September 30, 1998 was 99.1% and 100.8%,
respectively.
14
<PAGE> 15
Included in Trenwick's combined loss and expense ratio for the third quarter and
nine months ended September 30, 1998 were 8.7 and 3.1 percentage points,
respectively, associated with claims arising from Hurricane Georges.
Additionally, the increase in the combined loss and expense ratio resulted from
higher commission expenses on the Company's U.S. business and an increase in the
overhead expense ratio caused by lower year over year premium volume written by
Trenwick America. The combined loss and expense ratio for the nine months ended
September 30, 1998 includes favorable reserve development of approximately $5.9
million compared to favorable development of approximately $3.9 million for the
same period in 1997.
INVESTMENT INCOME
Trenwick's net investment income of $14.3 million and $41.7 million in the third
quarter and for the nine months ended September 30, 1998 increased 18% and 16%,
respectively, compared to $12.2 million and $36.0 million for the same periods
in 1997. Pre-tax yields on invested assets, excluding equity securities,
averaged 6.4% in both 1998 and 1997. The increase in investment income is due to
the continued growth in Trenwick's invested asset base resulting primarily from
the acquisition of Trenwick International.
After-tax net investment income in the third quarter and for the nine months
ended September 30, 1998 was $10.7 million and $31.1 million compared to $9.3
million and $27.7 million for the comparative periods in 1997. The effective
income tax rate on net investment income for the nine months ended September 30,
1998 was approximately 25.4% versus 24.0% for the same period in 1997. The
increase in the effective income tax rate is due to the fully taxable nature of
Trenwick International's investment income.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, Trenwick's consolidated investments and cash totaled
$1.0 billion, as compared to $864.3 million at December 31, 1997. The fair value
of the Company's debt securities portfolio exceeded amortized cost of $871.7
million and $788.7 million by $34.2 million and $23.6 million at September 30,
1998 and December 31, 1997, respectively. At September 30, 1998 and at December
31, 1997, the fair value of the Company's equity securities exceeded cost of
$47.7 million and $31.6 million by $5.3 million and $7.6 million, respectively.
As of September 30, 1998, Trenwick's common stockholders' equity totaled $357.1
million or $31.36 per share, as compared to $357.6 million or $29.93 per share
at December 31, 1997. Since December 31, 1997, the unrealized appreciation of
debt and equity investments increased $5.4 million, net of tax, or $.47 per
share. Consolidated stockholders' equity reflects the repurchase of 732,500
shares of the Trenwick's common stock at an average price of $33.27 per share,
totaling approximately $24.4 million. Trenwick America's statutory surplus was
$325 million as of September 30, 1998, compared to $322.9 million at December
31, 1997. Trenwick International's statutory surplus was $133 million as of
September 30, 1998.
Cash flow from operations of $31.7 million for the nine months ended September
30, 1998 decreased approximately 17% compared to cash flow from operations of
$38.1 million for the same period in 1997. The reduction in cash flow from
operations was due primarily to a decline in premium volume associated with
Trenwick America.
15
<PAGE> 16
Cash provided by financing activities for the nine months ended September 30,
1998 decreased to $45.6 million compared to $53.6 million for the same period in
1997. As of September 30, 1998, cash provided by financing activities included
proceeds of the issuance of $75 million principal amount of 6.7% Senior Notes
partially offset by repurchases of common stock of approximately $20.7 million.
Included in the same period last year was $110 million from the issuance of the
Subordinated Capital Income Securities, partially offset by the debt redemption
of approximately $47 million.
Trenwick declared a third quarter dividend of $.25 per share in 1998, a 4%
increase compared to $.24 in the third quarter of 1997.
YEAR 2000
The Year 2000 issue concerns the inability of information systems to properly
recognize and process date-sensitive information beyond January 1, 2000.
The Company began work on the Year 2000 issue in 1995. The scope of the project
included: assessment of systems and equipment affected; definition of strategies
to address affected systems and equipment; remediation of affected systems and
equipment and certification that each is Year 2000 compliant.
The Company's U.S. operations completed the modification and testing of its
internally developed software to be Year 2000 compliant during 1996. Trenwick
International Limited is currently working on the project and expects to
complete its modifications in fourth quarter of 1998. The Company has received
certification from the majority of its externally developed software vendors
indicating their products are Year 2000 compliant. The remaining vendors have
indicated that their products will be Year 2000 compliant by the end of 1998.
Based on this information the Company expects to be in full compliance with its
internal financial systems before the Year 2000.
Due to the interdependent nature of systems and facilities, the company may be
adversely impacted depending upon whether its vendors and business partners
address this issue successfully. Therefore, the company is surveying its key
business partners and vendors in an attempt to determine their respective level
of Year 2000 compliance. Where practicable, the company intends to assess and
attempt to mitigate its risks in the event that these third parties fail to be
Year 2000 compliant and is considering appropriate contingency arrangements for
such potential noncompliance by such entities.
The Company is developing contingency plans intended to mitigate the possible
disruption in business operations that may result from the Year 2000 issue, and
is developing cost estimates for such plans. The company expects to complete its
contingency plans by the end of 1998. Depending on the systems affected, these
plans could include accelerated replacement of affected equipment or software,
interim use of backup equipment and software, and increased work hours for
company personnel or use of contract personnel to correct on an accelerated
schedule any Year 2000 problems that arise or to provide manual workarounds for
information systems or similar approaches. If the company is required to
implement any of these contingency plans, it could have a material adverse
effect on the company's financial condition and results of operations.
16
<PAGE> 17
In addition, property and casualty reinsurance companies may have underwriting
exposure to the Year 2000. The Year 2000 issue is a risk for some of the
company's insureds and reinsureds and is therefore considered during the
underwriting process similar to any other risk to which Trenwick's clients may
be exposed. While the company continues to review these potential exposures, the
company is unable to determine at this time whether the adverse impact, if any,
in connection with these exposures would be material to the company.
Costs specifically associated with modifying internal use software for Year 2000
compliance are expensed as incurred. To date, we have spent approximately
$730,000 on this project. Costs to be incurred for the remainder of 1998 to fix
Year 2000 problems are estimated at approximately $83,000. Such costs do not
include normal system upgrades and replacements. The company does not expect the
costs relating to Year 2000 remediation to have a material effect on the results
of operations or financial condition.
17
<PAGE> 18
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27.0 Financial Data Schedule
b) Reports on Form 8-K
None
18
<PAGE> 19
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: November 16, 1998 JAMES F. BILLETT, JR.
------------------ --------------------------
James F. Billett, Jr.
Chairman, President and
Chief Executive Officer
Date: November 16, 1998 ALAN L. HUNTE
------------------ --------------------------
Alan L. Hunte
Vice President, Chief Financial
Officer and Treasurer
19
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Financial Statements contained in Form 10-Q for the six months ended September
30, 1998 for Trenwick Group Inc.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 905,881
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 52,948
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 958,829
<CASH> 67,029
<RECOVER-REINSURE> 126,510<F1>
<DEFERRED-ACQUISITION> 36,065
<TOTAL-ASSETS> 1,393,331
<POLICY-LOSSES> 671,309
<UNEARNED-PREMIUMS> 157,908
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 75,000
110,000
0
<COMMON> 1,139
<OTHER-SE> 355,936
<TOTAL-LIABILITY-AND-EQUITY> 1,393,331
181,949
<INVESTMENT-INCOME> 41,677
<INVESTMENT-GAINS> 1,444
<OTHER-INCOME> 173
<BENEFITS> 111,077
<UNDERWRITING-AMORTIZATION> 55,753
<UNDERWRITING-OTHER> 17,459
<INCOME-PRETAX> 28,292
<INCOME-TAX> 4,829
<INCOME-CONTINUING> 23,463
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,463
<EPS-PRIMARY> 1.98<F2>
<EPS-DILUTED> 1.95
<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.
<F2>Represents basic earnings per share.
</FN>
</TABLE>
