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 March 31, 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 1-15389
TRENWICK GROUP INC.
(Exact name of registrant as specified in its charter)
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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)
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Registrant's telephone number, including area code: (203) 353-5500
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 as of the latest practicable date.
Shares Outstanding
Description of Class as of May 12, 2000
------------------------- --------------------------
Common Stock - $.10 par value 16,283,018
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Trenwick Group Inc.
Index To Form 10-Q
PART I FINANCIAL INFORMATION
Item 1- Page
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Consolidated Balance Sheets
March 31, 2000 and December 31, 1999.............................. 3
Consolidated Statements of Operations and Comprehensive Income
Three Months Ended March 31, 2000 and 1999......................... 4
Consolidated Statements of Changes in Common Stockholders' Equity
Three Months Ended March 31, 2000 and 1999......................... 5
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2000 and 1999......................... 6
Notes to Condensed Consolidated Financial Statements.................... 7-10
Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 11-19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
Signatures.............................................................. 20
2
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PART I FINANCIAL INFORMATION
Item 1 - Financial Statements
TRENWICK GROUP INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31
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2000 1999
--------- ------------
Assets (dollars in thousands)
- ------
Securities available for sale at fair value:
Debt securities (amortized cost: $1,252,772
and $1,325,438) $ 1,239,190 $ 1,311,361
Equity securities (cost: $108,820 and $107,946) 112,600 110,666
Other investments 23,731 19,446
Investments held by managed syndicates 161,151 137,745
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Total investments 1,536,672 1,579,218
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Cash and cash equivalents 147,641 125,954
Cash and cash equivalents held by managed
syndicateS 41,938 44,687
Accrued investment income 20,801 26,122
Premiums in process of collection 351,104 270,455
Reinsurance recoverable balances, net 783,125 644,578
Prepaid reinsurance premiums 113,327 100,000
Goodwill 151,543 153,824
Deferred policy acquisition costs 87,796 78,896
Net deferred income taxes 97,067 97,442
Current income taxes receivable 24,341 27,292
Deposits 20,611 20,227
Other assets 90,004 71,904
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Total assets $ 3,465,970 $ 3,240,599
============ ============
Liabilities and Common Stockholders' Equity
- -------------------------------------------
Liabilities:
Unpaid claims and claims expenses $ 2,132,704 $ 1,964,139
Unearned premium income 419,048 379,684
Senior credit facilities 158,259 94,501
6.7% senior notes due 2003 75,000 75,000
10.25% senior notes due 2004 - 39,831
Contingent interest notes 35,395 34,699
Other long term debt 4,796 4,874
Other liabilities 84,727 75,541
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Total liabilities 2,909,929 2,668,269
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Company-obligated mandatorily redeemable preferred
capital securities of subsidiary trust holding
solely junior subordinated debentures
of Trenwick Group Inc. 110,000 110,000
------------ ------------
Minority interest 103 81
Common stockholders' equity:
Common stock, $.10 par value, 30,000,000 shares
authorized; 16,290,947 and 16,888,981 outstanding 1,619 1,689
Additional paid-in-capital 280,682 291,361
Deferred compensation under stock award plan (6,383) (3,553)
Retained earnings 178,978 182,477
Accumulated other comprehensive income (8,968) (9,725)
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Total common stockholders' equity 445,938 462,249
------------ ------------
Total liabilities, minority interest
and common stockholders' equity $ 3,465,970 $ 3,240,599
============ ============
The accompanying notes are an integral part of these statements
3
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TRENWICK GROUP INC.
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
March 31,
--------------------
2000 1999
---- ----
(in thousands except per share data)
Revenues:
Net premiums earned $ 134,932 $ 58,968
Net investment income 26,111 13,823
Equity in net earnings of investees 4,588 -
Net realized investment (losses) gains (669) 2,506
Other income 13 254
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Total revenues 164,975 75,551
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Expenses:
Claims and claims expenses incurred 94,913 37,976
Policy acquisition costs 38,443 16,407
Underwriting expenses 16,496 5,767
General and administrative expenses 2,171 1,201
Interest expense 6,135 1,352
Amortization expense 2,044 38
Minority interest in subsidiary trust 2,426 2,425
------------ ------------
Total expenses 162,628 65,166
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Income before income taxes & extraordinary item 2,347 10,385
Income tax expense 781 2,280
------------ ------------
Income before extraordinary item 1,566 8,105
Extraordinary loss on debt redemption,
net of $445 income tax benefit (825) -
============ ============
Net income $ 741 $ 8,105
============ ============
Basic earnings per share:
Income (loss) before extraordinary item $ .10 $ .75
Extraordinary loss (.05) -
------------ ------------
Net income (loss) $ .05 $ .75
============ ============
Diluted earnings per share
Income (loss) before extraordinary item $ .10 $ .74
Extraordinary loss (.05) -
------------ ------------
Net income (loss) $ .05 $ .74
============ ============
Dividends per common share $ .26 $ .26
============ ============
Comprehensive income (loss):
Net income (loss) 741 8,105
Other comprehensive income (loss):
Unrealized investment gains (losses) 1,393 (3,836)
Realized investment gains (losses) included
in net income (437) (1,629)
Foreign currency translation adjustment (199) (2,655)
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Total other comprehensive income (loss) 757 (8,120)
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Comprehensive income (loss) $ 1,498 $ (15)
============ ============
The accompanying notes are an integral part of these statements.
4
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TRENWICK GROUP INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
COMMON STOCKHOLDERS' EQUITY
(Unaudited)
Three Months Ended
March 31,
2000 1999
---- ----
(dollars in thousands)
Common stockholders' equity, beginning of period $ 462,249 $ 348,029
Common stock, $.10 par value, and additional
paid-in-capital:
Income tax (expense)/benefit from compensation
deductions (16)
Restricted common stock awarded (239,515
and 65,985 shares) 3,114 1,914
Common stock purchased and retired (837,549)
and 661,869 shares (13,853) (14,371)
Deferred compensation under stock award plan:
Restricted common stock awarded (3,114) (1,914)
Compensation expense recognized 284 239
Retained earnings:
Net income (loss) 741 8,105
Cash dividends ($.26 per share) (4,240) (2,784)
Accumulated other comprehensive income:
Other comprehensive income (loss) 757 (8,120)
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Common stockholders' equity, end of period $ 445,938 $ 331,082
============ ===========
The accompanying notes are an integral part of these statements.
5
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TRENWICK GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
2000 1999
---- ----
(in thousands)
Cash flows for operating activities:
Premiums collected $173,410 $ 71,582
Ceded premiums paid (59,942) (12,825)
Claims and claims expenses paid (176,843) (63,707)
Claims and claims expenses recovered 41,631 5,075
Underwriting expenses paid 16,660 (5,715)
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Cash used for underwriting activities (38,404) (5,590)
Net investment income received 26,965 16,001
Service and other income received, net
of expenses - 63
General and administrative expenses paid (2,171) (1,201)
Interest expense and subsidiary trust
dividends paid (9,544) (4,903)
Income taxes paid 6,479 2,507
Other, net 7 -
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Cash provided by (used for) (16,668) 6,877
operating activities ------------- ------------
Cash flows for investing activities:
Purchases of debt securities (221,983) (210,677)
Sales of debt securities 210,087 60,553
Maturities of debt securities 52,672 156,894
Purchases of equity securities (1,749) (17,031)
Sales of equity securities 1,040 9,708
Investment in subsidiary, net of cash acquired (3,642) (171)
Additions to premises and equipment (483) (805)
Other, net (26) -
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Cash provided by (used for)
investing activities 35,916 (1,529)
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Cash flows for financing activities:
Issuance of long term debt 64,000 -
Repurchase of common stock (16,669) (14,924)
Dividends paid (4,240) (2,784)
Issuance costs of long term debt (164) (2)
Redemption of senior notes and other debt (42,095) -
Other, net 2 -
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Cash provided by (used for)
financing activities 834 (17,710)
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Effect of exchange rate on cash (1,144) (914)
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Change in cash and cash equivalents 18,938 (13,276)
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Cash and cash equivalents, beginning of period 170,641 63,003
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Cash and cash equivalents, end of period $ 189,579 $ 49,727
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The accompanying notes are an integral part of these statements.
6
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TRENWICK GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
The interim consolidated financial statements include those of Trenwick
Group Inc. and its subsidiaries ("Trenwick" or the "Company") 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.
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.
During the first quarter of 2000 the Company changed its estimates of
Chartwell's unallocated loss adjustment expenses. The impact of this change
was an increase to pre-tax income of $4.5 million ($2.9 million after-tax).
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.
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 currently reviewing the impact of the
implementation of the standard on its financial statements.
2. Acquisitions
LaSalle Re Holdings Limited
On December 19, 1999, Trenwick and LaSalle Re Holdings Limited ("LaSalle
Re") signed a definitive agreement for Trenwick and LaSalle Re to combine,
with shareholders of both companies receiving shares in a new Bermuda
holding company to be named Trenwick Group Ltd. Under the terms of the
business combination agreement, shareholders of Trenwick and LaSalle Re
will each receive shares in the newly formed Trenwick on a one-for-one
basis. The acquisition will be accounted for as a purchase. Trenwick
expects to close the transaction late in the second quarter, or early in
the third quarter of shareholder and regulatory approvals and other
customary conditions.
On March 20, 2000, Trenwick and LaSalle Re amended and restated the
business combination agreement in order to revise the portion of the
business combination agreement related to the restructuring of Trenwick
immediately prior to the combination with LaSalle Re.
7
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3. Long Term Debt
On March 1, 2000, the Company elected to redeem its 10.25% Senior Notes due
2004 at a redemption price of 102.56% of par value. As a result, the
Company recorded an after-tax loss of $825,000, which has been reflected in
the Company's Consolidated Statement of Income as an extraordinary item.
4. 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
premiums earned are as follows (in thousands):
Premiums Written
-------------------------------------
Three Months Ended
March 31,
-------------------------------------
2000 1999
---------------- -----------------
Direct 46,618 20,039
Assumed 209,353 85,514
Ceded (94,872) (24,759)
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Net $ 161,099 $ 80,794
================ =================
Premiums Earned
-------------------------------------
Three Months Ended
March 31,
-------------------------------------
2000 1999
---------------- -----------------
Direct 28,153 16,916
Assumed 186,714 65,592
Ceded (79,935) (23,540)
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Net $ 134,932 $ 58,968
================ =================
The Company recorded ceded claims and claims expenses incurred of
$205,141,000 for the three months ended March 31, 2000, which includes
$28,548,000 ceded to the Chartwell adverse development cover, compared to
$26,594,000 for the same period in 1999. In addition, $3,048,000 of other
reinsurance balances was ceded to the Chartwell adverse development cover
for the three months ended March 31, 2000.
8
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5. Stockholders' Equity
Preferred Stock
Trenwick has 2,000,000 shares of $.10 par value preferred stock authorized
and none outstanding.
Common Stock
For the three months ended March 31, 2000, Trenwick awarded key employees
an aggregate of 239,515 shares of common stock under the terms of its stock
incentive plans, at an average price of $13.00 per share (approximately
$3,114,000). Trenwick is recognizing compensation expense determined by the
value of the shares, amortized over a five year vesting period. During the
period, 8,249 shares were repurchased at an average price of $14.02 per
share (approximately $116,000) in connection with the satisfaction of
withholding taxes payable upon the vesting of shares previously awarded
under the plan. During the three months ended March 31, 2000, Trenwick
purchased 829,300 shares under its stock repurchase program at an average
price of $16.56 per share totaling approximately $13,737,000. As of March
31, 2000, Trenwick has an authorization of 494,000 shares remaining under
its current plan.
Dividends declared and paid by Trenwick during the three months ended March
31, 2000 were approximately $4,240,000.
6. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands except per share data):
Three Months Ended
March 31,
---------------------
2000 1999
--------- ---------
Income available to common stockholders: $ 741 $ 8,105
Weighted average shares of common stock
outstanding:
Weighted average shares outstanding (basic) 15,999 10,777
Weighted average shares issuable on exercise
of employee stock options, net of assumed
repurchases - 111
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Weighted average shares outstanding (diluted) 15,999 10,888
========== =========
Per share amounts:
Basic earnings per share:
Income before extraordinary item $ .10 $ .75
========== =========
Net income $ .05 $ .75
========== =========
Diluted earnings per share:
Income before extraordinary item $ .10 $ .74
========== =========
Net income $ .05 $ .74
========== =========
9
<PAGE>
7. Segment Information
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. Trenwick has four reportable business
segments: (1) Trenwick America Reinsurance Corporation ("Trenwick America
Re"), (2) Canterbury Financial Group Inc. ("Canterbury Financial"), (3)
Trenwick International Limited ("Trenwick International") and (4) Chartwell
Managing Agents Limited ("Chartwell Managing Agents"). 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 Company and its subsidiaries
since its acquisition on October 27, 1999. Canterbury Financial underwrites
specialty insurance in the United States. Trenwick International provides
specialty insurance and treaty and facultative reinsurance on a world-wide
basis. Chartwell Managing Agents manages Trenwick's participation in the
Lloyd's market.
The summary financial results for Trenwick's operating segments for the
three months ended March 31 are as follows:
(in thousands) 2000 1999
---------- -----------
Net premiums earned:
Trenwick America Re 38,879 36,820
Canterbury Financial 10,192 -
Trenwick International 37,419 22,148
Chartwell Managing Agents 48,442 -
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134,932 58,968
Total revenues:
Trenwick America Re 56,989 50,007
Canterbury Financial 12,296 -
Trenwick International 40,166 25,528
Chartwell Managing Agents 53,413 -
Unallocated 2,111 16
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164,975 75,551
Underwriting profit (loss):
Trenwick America Re (6,734) (560)
Canterbury Financial (1,152) -
Trenwick International (2,070) (622)
Chartwell Managing Agents (4,964) -
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$ (14,920) (1,182)
Income (loss) before income taxes:
Trenwick America Re 25,289 11,377
Canterbury Financial 4,815 -
Trenwick International (498) 1,591
Chartwell Managing Agents (19,734) -
Unallocated (7,525) (2,583)
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$ 2,347 10,385
10
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Trenwick Group Inc. ("Trenwick") is a publicly traded holding company currently
headquartered in Stamford, Connecticut whose principal operating subsidiaries
underwrite specialty insurance and reinsurance through multi-national business
units. Trenwick conducts its business through four principal operating
platforms. 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"). Trenwick International Limited ("Trenwick International"),
domiciled in London, underwrites non-U.S. specialty insurance and treaty and
facultative reinsurance. As a result of the acquisition of Chartwell , Trenwick
gained two additional operating platforms, Canterbury Financial Group Inc.
("Canterbury Financial"), which underwrites U.S. specialty insurance, and
Chartwell Managing Agents Limited ("Chartwell Managing Agents") which manages
syndicates underwriting at Lloyd's.
All four 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.
Acquisitions
Chartwell Re Corporation
On October 27, 1999, Trenwick completed the merger of Chartwell with and into
Trenwick. Under the terms of the merger, stockholders of Chartwell received
0.825 Trenwick shares for each Chartwell share in a tax-free transaction. All
assets and liabilities of Chartwell were consolidated in Trenwick's balance
sheet at October 28, 1999 and its operating results were reflected in Trenwick's
results commencing with the period from October 28, 1999 through December 31,
1999.
LaSalle Re Holdings Limited
On December 19, 1999, Trenwick and LaSalle Re Holdings Limited ("LaSalle Re")
signed a definitive agreement for Trenwick and LaSalle Re to combine, with
shareholders of both companies receiving shares in a new Bermuda holding company
to be named Trenwick Group Ltd. Under the terms of the business combination
agreement, shareholders of Trenwick and LaSalle Re will each receive shares in
the newly formed Trenwick on a one-for-one basis. The acquisition will be
accounted for as a purchase. Trenwick expects to close the transaction late in
the second quarter or early in the third quarter of 2000, subject to shareholder
and regulatory approvals and other customary conditions.
On March 20, 2000, Trenwick and LaSalle Re amended and restated the business
combination agreement in order to revise the portion of the business combination
agreement related to the restructuring of Trenwick immediately prior to the
combination with LaSalle Re.
11
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Premium
Trenwick's gross and net premium writings for its domestic and international
operations were as follows:
Three Months Ended
March 31,
-------------------------------------
2000 1999
---------------- -----------------
Gross written premium:
Trenwick America Re(1) $ 55,530 $ 59,974
Canterbury Financial 44,440 -
Trenwick International 73,286 45,579
Chartwell Managing Agents 82,714 -
---------------- -----------------
Total $ 255,970 $ 105,553
================ =================
Net written premium:
Trenwick America Re $ 38,355 $ 44,170
Canterbury Financial 11,441 -
Trenwick International 59,568 36,624
Chartwell Managing Agents 51,735 -
---------------- -----------------
Total $ 161,099 $ 80,794
================ =================
(1) Includes Chartwell Insurance Company premiums in first quarter of 2000
In the first quarter of 2000, Trenwick reported net premiums written of $161.1
million, a 99.4% increase compared to $80.8 million in the first quarter of
1999.
Trenwick America Re's net reinsurance premiums written decreased 13.2% in the
quarter ended March 31, 2000 compared to the same period in 1999. The decline in
Trenwick's domestic reinsurance premium volume in the first quarter of 2000 is
primarily attributable to a decline in net casualty premium writings of 9.9%.
This decline reflects Trenwick America Re's non-renewal of accounts when pricing
fell below what it believed to be acceptable rate levels.
Trenwick International reported net premiums written of $59.6 million for the
three months ended March 31, 2000 compared to net premiums written of $36.6
million for the same period in 1999. While the international business is also
highly competitive, growth in this business has occurred as a result of Trenwick
International's expansion into new products and geographic markets previously
limited by its former parent.
During the quarter ended March 31, 2000, Chartwell Managing Agents' syndicates
reported net premiums written of $51.7 million. Prior to its acquisition by
Trenwick, Chartwell had increased significantly the amount of capacity it
supplied to the syndicates managed by Chartwell Managing Agents, resulting in an
22.6% increase in premium writings compared to the first quarter of 1999. During
the 2000 underwriting year, Trenwick is supplying 93% of the overall syndicate
capacity for Chartwell Managing Agents.
12
<PAGE>
For the quarter ended March 31, 2000, Canterbury Financial reported net premiums
written of $11.4 million. Net premiums decreased slightly as compared to the
same period in 1999, with such decrease in net premium writings resulting
principally from changes in certain reinsurance programs, increasing the amount
of reinsurance purchased in the first quarter of 2000.
Operating Ratios
The following tables set forth Trenwick's combined ratios and its components
calculated on the basis of generally accepted accounting principles for the
periods indicated:
Claims
and
Claims Total
Three months ended Expenese Expense Combined
March 31, Ratio Ratio Ratio
- ------------------------------------- ------------ ------------ -------------
2000
Trenwick America Re (1) 75.7% 41.6% 117.3%
Trenwick International 76.4% 29.2% 105.6%
Canterbury Financial 71.2% 40.1% 111.3%
Chartwell Managing Agents 61.2% 49.0% 110.2%
Trenwick Group 70.3% 40.8% 111.1%
1999
Trenwick America Re 61.1% 40.4% 101.5%
Trenwick International 69.9% 32.9% 102.8%
Trenwick Group 64.4% 37.6% 102.0%
(1) Includes Chartwell Insurance Company premiums in first quarter of 2000.
The combined ratio is one means of measuring the profitability of a property and
casualty insurance or reinsurance 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 an insurer or reinsurer may have unprofitable
underwriting results, the insurer or reinsurer may still be profitable because
of investment income earned on its accumulated invested assets.
Trenwick's claims and claims expense ratio, which is the ratio of incurred
claims and claims adjustment expenses to net earned premiums, increased from
64.4% in the first quarter of 1999 to 70.3% in the first quarter of 2000.
Trenwick's claims and claims expense ratio deteriorated in the first quarter of
2000 due to the effect of Trenwick America Re's aggregate excess of loss
reinsurance cessions in 1999 and earlier years and the absence of such ceded
reinsurance for 2000.
Trenwick recorded ceded claims and claims expenses incurred of $205,141,000 for
the three months ended March 31, 2000, which includes $28,548,000 ceded to the
Chartwell adverse development cover, compared to $26,594,000 for the same period
in 1999. In addition, $3,048,000 of other reinsurance balances was ceded to the
Chartwell adverse development cover for the three months ended March 31, 2000.
Trenwick America Re's claims and claims expense ratio was 75.7% in the first
quarter of 2000 compared to 61.1% in the same period in 1999. The increase in
Trenwick America Re's claims and claims expense ratio in 2000 is primarily due
to the reasons described in the paragraph above.
Trenwick International's claims and claims expense ratio was 76.4% in the first
quarter of 2000 compared to 69.9% in the first quarter of 1999. The increase was
due primarily to adverse loss development on prior years' reserves in the first
quarter of 2000.
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<PAGE>
Canterbury Financial's claims and claims expense ratio was 71.2% in the first
quarter of 2000.
Chartwell Managing Agents' claims and claims expense ratio was 61.2% in the
first quarter of 2000.
Trenwick's expense ratio, which is the ratio of policy acquisition costs and
underwriting expenses to net earned premiums as determined in accordance with
generally accepted accounting principles, increased in the three months ending
March 31, 2000 to 40.8% compared to 37.6% in the same period in 1999. The
overall increase in the expense ratio primarily reflected the change in business
mix following the acquisition of Chartwell in 1999. The inclusion of Canterbury
Financial and Chartwell Managing Agents in the first quarter of 2000 whose
underwriting results, in aggregate, carry a higher expense ratio resulted in the
increased ratio expense. Trenwick America Re's expense ratio in the first
quarter of 2000 was 41.6% compared to 40.4% in the same period in 1999. Trenwick
International's expense ratio was 29.2% in the first quarter of 2000 compared to
32.9% in the same period in 1999. The expense ratio of Canterbury Financial
Group and Chartwell Managing Agents in the first quarter of 2000 was 40.1% and
49.0%, respectively.
Consolidated Results of Operations
Quarter Ended March 31, 2000 Compared with Quarter Ended March 31, 1999
Revenues
Total revenues for the quarter ended March 31, 2000 increased 118.4% to $165.0
million, compared to $75.6 million for the comparable period in 1999. Included
in Trenwick's consolidated results of operations for 2000 are Chartwell's
operating results.
Net Premiums Earned
Net premiums earned for the three months ended March 31, 2000 were $134.9
million, compared to $59.0 million in 1999, a 128.8% increase. This increase
reflects the inclusion of Chartwell's business in 2000 and an increase in
business underwritten by Trenwick International, offset in part by a decline in
business underwritten by Trenwick America Re.
Net Investment Income
Trenwick's net investment income was $26.1 million in the first quarter of 2000
compared to $13.8 million in 1999. The overall increase in investment income in
the first quarter of 2000 is due to the continued growth in Trenwick's invested
asset base resulting primarily from the acquisition of Chartwell's business,
offset by decreases resulting from funding requirements for the repurchase of
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<PAGE>
Trenwick's common stock, reduced business written by Trenwick America Re and
lower interest rates on the reinvestment of securities at maturity. Pre-tax
yields on Trenwick's invested assets, excluding equity securities, were 6.2% in
the first quarter of 2000 compared to 6.1% in the first quarter of 1999.
Net Realized Investment (Losses) Gains
Trenwick realized net investment losses of $.7 million or $.04 per basic and
diluted share for the quarter ended March 31, 2000 compared to realized net
investment gains of $2.5 million or $.23 per basic and diluted share for the
same period in 1999. After-tax realized investment losses resulted primarily
from the sale of tax-exempt securities in the quarter. Due to the significant
amount of available net operating loss carryforwards, the tax benefits
associated with holding tax-exempt securities have been reduced considerably. As
a result, the Company initiated a program to restructure its investment
portfolio in the first quarter.
Other Income and Equity Earnings of Investees
For the quarters ended March 31, 2000 and 1999 other income and equity earnings
of investees was $4.6 million and $.3 million, respectively. In each period,
other income consisted of foreign transaction gains.
Claims and Claims Expenses Incurred
Trenwick's principal expense, claims and claims expenses incurred, was $94.9
million for the quarter ended March 31, 2000, a 150% increase compared to $38.0
million for the comparable period in 1999. The increase is principally
attributable to an increase in premium volume following the inclusion of
Chartwell's business in the first quarter of 2000.
Policy Acquisition Costs
Policy acquisition costs, which vary directly with premium volume and consist
primarily of commissions paid to ceding companies and agents and brokerage fees
paid to intermediaries, less commissions received on business ceded to other
reinsurers, were $38.4 million for the quarter ended March 31, 2000, compared to
$16.4 million for the same period in 1999. Policy acquisition costs expressed as
a percentage of net earned premiums (the acquisition ratio) increased to 28.5%
in the first quarter of 2000 from 27.8% in the same period in 1999 due to the
change in the mix of business written as a result of the Chartwell acquisition.
Underwriting Expenses
In the first quarter of 2000, Trenwick recorded underwriting expenses of $16.5
million compared to $5.8 million in the same period in 1999. The reason for the
increase in underwriting expenses was due to the inclusion of Chartwell's
business in the first quarter of 2000. As a result, Trenwick recorded an
underwriting loss, which is net earned premiums less claims and claims expenses
incurred, policy acquisition costs and underwriting expenses, of $14.9 million
in the three months ended March 31, 2000 compared to an underwriting loss of
$1.2 million in the same period in 1999.
15
<PAGE>
Other Expenses
Other expenses, which include amortization of goodwill and other intangibles,
general and administrative expenses, interest expense and minority interest in
subsidiary trust, were $12.8 million for the quarter ended March 31, 2000
compared to $5.0 million for the same period in 1999. The increase reflects the
addition of goodwill and increases in general and administrative expenses and
interest expense in conjunction with the acquisition of Chartwell.
Income Before Income Taxes and Extraordinary Item
Trenwick generated net income before income taxes and extraordinary item of $2.3
million for the three months ended March 31, 2000 compared to net income of
$10.4 million for the same period in 1999. The decline in net income occurred
for the reasons described above.
Income Tax Expense
The income tax expense for the quarter ended March 31, 2000 was $.8 million
compared with a provision for income taxes of $2.3 million for the same period
in 1999. The effective tax rate was 33.2% and 22.0% for the quarters ended March
31, 2000 and 1999, respectively. The principal factor in the decline below the
statutory rate of 35% for both periods resulted from the benefit recognized on
investments in tax-exempt securities. Additionally, Trenwick recorded an income
tax benefit of $445,000 applicable to the extraordinary loss on debt redemption.
Extraordinary Loss on Debt Redemption
Trenwick incurred an after-tax extraordinary loss of $825,000 in connection with
the redemption on March 1, 2000 of the remaining outstanding 10.25% Senior Notes
due 2004 at a redemption price of 102.56% of par value.
Net Income
Trenwick generated net income of $.7 million for the quarter ended March 31,
2000 compared with net income of $8.1 million for the comparable 1999 period.
The basic net income per share was $.05 for the quarter ended March 31, 2000 as
compared to basic net income of $.75 per share for the same period in 1999. The
diluted net income per share was $.05 per share compared to diluted net income
of $.74 per share for the quarter ended March 31, 1999.
Liquidity and Capital Resources
As of March 31, 2000, Trenwick's consolidated investments and cash totaled $1.7
billion, as compared to $1.7 billion at December 31, 1999. The fair value of the
Company's equity securities exceeded cost of $108.8 million and $107.9 million
by $3.8 million $2.7 million at March 31, 2000 and December 31, 1999,
respectively. The amortized value of the Company's debt securities exceeded fair
value by $13.6 million and $14.1 million at March 31, 2000 and December 31, 1999
respectively.
As of March 31, 2000, Trenwick's consolidated stockholders' equity totaled
$445.9 million or $27.37 per share, compared to $462.2 million or $27.37 per
share at December 31, 1999. Since December 31, 1999, the unrealized appreciation
of debt and equity investments decreased $1.0 million, net of tax, or $.06 per
share.
16
<PAGE>
Cash flow used for operations was $16.7 million for the three months ended March
31, 2000 compared to cash flow from operations of $6.9 million for the same
period in 1999. The reduction in cash flow from operations was due to an overall
increase in claims and claims expenses paid. For the three months ended March
31, 2000 cash flow provided by financing activities was $.8 million compared to
cash flow used for financing activities of $17.7 million for the same period in
1999. Cash provided by financing activities in the first quarter of 2000
includes proceeds from the issuance of the senior credit facilities partially
offset by the redemption of $10.25% senior notes.
Trenwick's total debt to capital ratio (total debt divided by total debt and
shareholders' equity, adjusted for unrealized gains or losses on
available-for-sale investment securities) was 46% at March 31, 2000 and 43% at
the end of 1999. Trenwick's total debt to capital ratio excluding the preferred
capital securities was 38% at March 31, 2000 and 35% at December 31, 1999. The
increase in the first quarter of 2000 primarily reflects an increase of %63.8
million of senior credit facilities offset by the redemption of the 10.25%
senior notes.
In May 1997, Trenwick's Board of Directors authorized the repurchase of one
million shares of common stock. In September 1998, August 1999, November 1999
and December 1999, the Board of Directors authorized the repurchase of
additional shares, increasing the total number of shares of common stock which
Trenwick could purchase under the stock repurchase program to 4.6 million at
purchase prices not to exceed Trenwick's book value. Under the stock repurchase
plan, Trenwick repurchased 829,300 shares of common stock at a cost of
approximately $13.7 million in the first quarter of 2000. Since May 1997,
Trenwick has purchased an aggregate of 4,106,000 shares of common stock at a
cost of approximately $95.6 million under its stock repurchase program.
Trenwick issued 239,515 shares of common stock in the first quarter of 2000
pursuant to employee benefit plans.
Trenwick declared a first quarter dividend of $.26 per share in 2000, equal to
the $.26 per share dividend paid in the first quarter of 1999.
Quantitative and Qualitative Disclosure About Market Risk
Trenwick reviewed the change in its exposure to market risks since December 31,
1999. The components of Trenwick's investment holdings and its risk management
strategy and objectives have not materially changed. Therefore, Trenwick
believes that the potential for loss in each market risk sector described at
year-end has not materially changed.
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
17
<PAGE>
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. Trenwick, as a matter of policy, does not make
any specific projections as to future earnings nor does it endorse any
projections regarding future performance that may be made by others.
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 inflation that affect the profitability of Trenwick's current
property/casualty business or the adequacy of its property/casualty claims
and claims expense liabilities and policy benefit liabilities related to
prior years' business;
- - 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;
18
<PAGE>
- - 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;
- - 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.
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
The following report on Form 8-K was filed during the quarter ended March
31, 2000:
Date of Report Item Reported
-------------- -------------
March 20, 2000 The Amended and Restated Agreement,
Schemes of Arrangement and Plan of
Reorganization, dated as of March 20,
2000, by and among LaSalle Re Holdings
Limited, LaSalle Re Limited, Trenwick
Group Inc. and Gowin Holdings
International Limited.
19
<PAGE>
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: May 15, 2000 TRENWICK GROUP INC.
---------------- ---------------------------
(Registrant)
/s/ JAMES F. BILLETT, JR.
---------------------------
James F. Billett, Jr.
Chairman, President and
Chief Executive Officer
/s/ ALAN L. HUNTE
---------------------------
Alan L. Hunte
Executive Vice President,
Chief Financial Officer and
Treasurer
20
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-2000
<PERIOD-START> Jan-01-2000
<PERIOD-END> Mar-31-2000
<DEBT-HELD-FOR-SALE> 1,239,190
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 112,600
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,536,672<F3>
<CASH> 189,579
<RECOVER-REINSURE> 783,125<F1>
<DEFERRED-ACQUISITION> 87,796
<TOTAL-ASSETS> 3,465,970
<POLICY-LOSSES> 2,132,704
<UNEARNED-PREMIUMS> 419,048
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 273,450
110,000
0
<COMMON> 1,629
<OTHER-SE> 444,309
<TOTAL-LIABILITY-AND-EQUITY> 3,465,970
134,932
<INVESTMENT-INCOME> 26,111
<INVESTMENT-GAINS> (669)
<OTHER-INCOME> 4,601
<BENEFITS> 94,913
<UNDERWRITING-AMORTIZATION> 38,443
<UNDERWRITING-OTHER> 16,496
<INCOME-PRETAX> 2,347
<INCOME-TAX> 781
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (825)<F2>
<CHANGES> 0
<NET-INCOME> 741
<EPS-BASIC> .05
<EPS-DILUTED> .05
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
1 Represents net reinsurance recoverable balances after offset of funds held
and reinsurance balances payable.
2 Including income tax benefit of $445.
3 Total investments include investments held by managed syndicates of
$161,151 and other investments of $23,731.
</FN>
</TABLE>
