-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Rn9VPo2vdNzcCXQ6DH/26ccsbBgvTFbUBoFGldc4ZHPCNFndjt2dbOXeTQAcCdGM zjLhX3y1exxcyV+ZpCPCXw== 0000891554-01-506365.txt : 20020410 0000891554-01-506365.hdr.sgml : 20020410 ACCESSION NUMBER: 0000891554-01-506365 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRENWICK GROUP LTD CENTRAL INDEX KEY: 0001122211 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-16089 FILM NUMBER: 1790926 BUSINESS ADDRESS: STREET 1: CONTINENTAL BLDG STREET 2: 25 CHURCH ST CITY: HAMILTON STATE: D0 ZIP: 00000 MAIL ADDRESS: STREET 1: 25 CHURCH ST CONTINENTAL BLDG STREET 2: HAMILTON HM 12 BERMUNDA 10-Q 1 d27382_10-q.txt QUARTERLY REPORT ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-Q ---------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended September 30, 2001. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . --------- --------- Commission file number 1-16089 TRENWICK GROUP LTD. (Exact name of registrant as specified in its charter) ------------- Bermuda 98-0232340 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Continental Building, 25 Church Street Hamilton HM12, Bermuda (Address of principal executive offices) (zip code) ---------- Registrant's telephone number, including area code: 441-292-4985 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes [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 November 13, 2001 - ------------------------------ ----------------------- Common Shares - $.10 par value 36,859,840 TRENWICK GROUP LTD. INDEX TO FORM 10-Q PART I - FINANCIAL INFORMATION
Page ---- ITEM 1. Unaudited Consolidated Financial Statements Consolidated Balance Sheet September 30, 2001 and December 31, 2000 ......................................... 1 Consolidated Statement of Operations and Comprehensive Income Three and Nine Months Ended September 30, 2001 and 2000 .......................... 2 Consolidated Statement of Cash Flows Nine Months ended September 30, 2001 and 2000 .................................... 3 Consolidated Statement of Changes in Common Shareholders' Equity Nine Months Ended September 30, 2001 and 2000 .................................... 4 Notes to Unaudited Consolidated Financial Statements ............................. 5 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ....................................................................... 10 ITEM 3. Quantitative and Qualitative Disclosure About Market Risk......................... 20 PART II - OTHER INFORMATION ITEM 1. Legal proceedings ................................................................ 23 ITEM 2. Changes in Securities and Use of Proceeds ........................................ 23 ITEM 3. Defaults Upon Senior Securities .................................................. 23 ITEM 4. Submission of Matters to a Vote of Security Holders .............................. 23 ITEM 5. Other Information ................................................................ 23 ITEM 6. Exhibits and Reports on Form 8-K ................................................. 23 Signatures ................................................................................. 24
Trenwick Group Ltd. Consolidated Balance Sheet (Amounts expressed in thousands of United States dollars, except share and per share data) September 30, 2001 (Unaudited) and December 31, 2000
2001 2000 ----------- ---------- ASSETS Debt securities available for sale, at fair value $2,026,618 $1,813,678 Equity securities at fair value 23,185 115,901 Cash and cash equivalents 269,528 311,001 Accrued investment income 35,663 38,171 Premiums receivable 548,138 473,245 Reinsurance recoverable balances, net 1,367,288 932,051 Prepaid reinsurance premiums 184,688 147,399 Deferred policy acquisition costs 117,258 100,423 Net deferred income taxes 116,011 104,889 Other assets 185,471 183,294 ---------- ---------- Total assets $4,873,848 $4,220,052 ========== ========== LIABILITIES Unpaid claims and claims expenses $3,005,854 $2,408,926 Unearned premium income 603,165 496,338 Reinsurance balances payable 169,082 133,160 Indebtedness 298,858 286,805 Other liabilities 106,125 90,866 ---------- ---------- Total liabilities 4,183,084 3,416,095 ---------- ---------- MINORITY INTEREST Mandatorily redeemable preferred capital securities of subsidiary trust holding solely junior subordinated debentures of U.S. subsidiary 68,716 76,770 Preferred shares of Bermuda subsidiary 75,000 75,000 ---------- ---------- Total minority interest 143,716 151,770 ---------- ---------- COMMON SHAREHOLDERS' EQUITY Common shares, $0.10 par value, 36,859,840 and 36,665,103 shares issued and outstanding 3,686 3,667 Additional paid in capital 578,570 575,401 Deferred compensation under share award plans (5,589) (2,660) Retained earnings (accumulated deficit) (73,958) 58,485 Accumulated other comprehensive income 44,339 17,294 ---------- ---------- Total common shareholders' equity 547,048 652,187 ---------- ---------- Total liabilities, minority interest and common shareholders' equity $4,873,848 $4,220,052 ========== ==========
The accompanying notes are an integral part of these statements. - 1 - Trenwick Group Ltd. Consolidated Statement of Operations and Comprehensive Income (Unaudited) (Amounts expressed in thousands of United States dollars, except per share data) Three and Nine Months Ended September 30, 2001 and 2000
Three Months Nine Months -------------------- --------------------- 2001 2000 2001 2000 --------- ------- --------- -------- Revenues: Net premiums earned $ 239,862 $26,751 $ 667,208 $ 82,739 Net investment income 30,770 9,591 96,141 27,778 Net realized investment gains (losses) (3,302) 270 7,828 (1,916) Other income 1,233 -- 3,285 -- --------- ------- --------- -------- Total revenues 268,563 36,612 774,462 108,601 --------- ------- --------- -------- Expenses: Claims and claims expenses incurred 264,344 15,924 638,176 69,190 Policy acquisition costs 75,017 5,621 197,473 16,269 Underwriting expenses 21,352 3,264 56,892 10,387 General and administrative expenses 3,845 424 15,122 3,293 Interest expense and dividends on preferred shares of subsidiaries 9,601 304 30,054 915 Foreign currency losses 1,397 426 2,932 53 --------- ------- --------- -------- Total expenses 375,556 25,963 940,649 100,107 --------- ------- --------- -------- Income (loss) before other minority interest and income taxes (106,993) 10,649 (166,187) 8,494 Other minority interest in net income of subsidiary -- 2,097 -- 839 --------- ------- --------- -------- Income (loss) before income taxes (benefit) (106,993) 8,552 (166,187) 7,655 Applicable income taxes (benefit) (10,886) -- (38,187) -- --------- ------- --------- -------- Net income (loss) (96,107) 8,552 (128,000) 7,655 Dividends on preferred shares -- 1,641 -- 4,923 --------- ------- --------- -------- Net income (loss) available to common shareholders $ (96,107) $ 6,911 $(128,000) $ 2,732 ========= ======= ========= ======== EARNINGS PER COMMON SHARE Basic and diluted earnings (loss) per share $ (2.61) $ 0.44 $ (3.48) $ 0.17 ========= ======= ========= ======== COMPREHENSIVE INCOME (LOSS): Net income (loss) $ (96,107) $ 8,552 $(128,000) $ 7,655 --------- ------- --------- -------- Other comprehensive income (loss): Net unrealized investment gains 28,314 3,613 29,607 4,615 Foreign currency translation adjustments 2,121 -- (2,562) -- --------- ------- --------- -------- Total other comprehensive income 30,435 3,613 27,045 4,615 --------- ------- --------- -------- Comprehensive income (loss) $ (65,672) $12,165 $(100,955) $ 12,270 ========= ======= ========= ========
The accompanying notes are an integral part of these statements. - 2 - Trenwick Group Ltd. Consolidated Statement of Cash Flows (Unaudited) (Amounts expressed in thousands of United States dollars) Nine Months Ended September 30, 2001 and 2000 Nine Months ----------------------- 2001 2000 ---------- --------- OPERATING ACTIVITIES Premiums collected, net of acquisition costs $ 741,435 $ 89,307 Ceded premiums paid, net of acquisition costs (226,382) (20,932) Claims and claims expenses paid (621,610) (79,712) Claims and claims expenses recovered 139,179 10,312 Underwriting expenses paid (71,620) (18,615) ----------- --------- Cash for underwriting activities (38,998) (19,640) Net investment income received 116,607 27,615 Other income received, net of expenses 112 -- General and administrative expenses paid (15,682) (876) Interest expense and subsidiary preferred share dividends paid (27,164) (915) Income taxes paid (1,007) -- ----------- --------- Cash from operating activities 33,868 6,184 ----------- --------- INVESTING ACTIVITIES Purchases of debt securities (1,250,816) (206,856) Sales of debt securities 1,002,121 197,979 Maturities of debt securities 86,472 -- Purchases of equity securities (2,514) -- Sales of equity securities 97,926 -- Cash acquired in purchase of subsidiary -- 188,917 Effect on cash of exchange rate translation (2,625) -- Other (5,088) (11) ----------- --------- Cash from (for)investing activities (74,524) 180,029 ----------- --------- FINANCING ACTIVITIES Issuance of indebtedness 14,000 -- Repayment of indebtedness (647) -- Purchase of capital securities (8,462) -- Issuance of common shares 364 1,124 Trenwick Group Ltd. common share dividends paid (4,442) -- LaSalle Re Holdings preferred share dividends paid prior to business combination -- (4,923) Share and option repurchases (311) (3,175) Equity put option premium payments (1,319) (825) ----------- --------- Cash for financing activities (817) (7,799) ----------- --------- Change in cash and cash equivalents (41,473) 178,414 Cash and cash equivalents, beginning of period 311,001 19,864 ----------- --------- Cash and cash equivalents, end of period $ 269,528 $ 198,278 =========== ========= The accompanying notes are an integral part of these statements. - 3 - Trenwick Group Ltd. Consolidated Statement of Changes in Common Shareholders' Equity (Unaudited) (Amounts expressed in thousands of United States dollars except share data) Nine Months Ended September 30, 2001 and 2000
2001 2000 --------- -------- Common shareholders' equity, beginning of period $ 652,187 $286,960 COMMON SHARES AND ADDITIONAL PAID IN CAPITAL Issuance of 21,034,200 shares of Trenwick Group Ltd. to acquire minority interest in LaSalle Re Holdings' subsidiary and Trenwick Group Inc., net of acquisition costs -- 345,014 Issuance of 194,116 restricted common shares of Trenwick Group Ltd. 4,119 -- Issuance of 20,366 shares of Trenwick Group Ltd. and 21,532 common shares of LaSalle Re Holdings for cash under employee share purchase plans 363 247 Issuance of 653 common shares of LaSalle Re Holdings under employee compensation plan -- 7 Purchase and retirement of 14,609 common shares of Trenwick Group Ltd. (311) -- Cancellation of 5,134 restricted common shares (70) -- Equity put option premiums, net of applicable minority interest (1,319) (631) Exercise of options to acquire shares of LaSalle Re Holdings and its subsidiary -- 113 Compensation recognized under employee program 405 243 Change in minority interest -- (684) DEFERRED COMPENSATION UNDER SHARE AWARD PLAN Restricted common shares awarded on acquisition of Trenwick Group Inc. -- (2,803) Other restricted common shares awarded (4,119) -- Compensation expense recognized under employee share purchase plans, net of minority interest 1,121 208 Cancellation of restricted common shares 70 -- Change in minority interest -- 2 Acquisition of minority interest -- (73) RETAINED EARNINGS Net income (loss) (128,000) 7,655 LaSalle Re Holdings preferred share dividends prior to business combination -- (4,923) Trenwick Group Ltd. common share dividends, $0.12 per share (4,443) -- Options/share repurchase -- (2,437) Change in minority interest -- (176) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Other comprehensive income 27,045 4,615 Change in minority interest -- 24 Acquisition of minority interest -- (891) --------- -------- Common shareholders' equity, end of period $ 547,048 $632,470 ========= ========
The accompanying notes are an integral part of these statements. - 4 - TRENWICK GROUP LTD. Notes to Unaudited Consolidated Financial Statements (Amounts expressed in thousands of United States dollars except per share data) Three and Nine Months Ended September 30, 2001 and 2000 Note 1 Organization Organization Trenwick Group Ltd. was formed as a holding company in Bermuda to and Basis acquire two publicly held companies and the minority interest in of a subsidiary of one of those companies. That transaction, in Presentation which Trenwick Group Ltd. issued common shares to acquire LaSalle Re Holdings Limited, Trenwick Group Inc. and the minority interest in LaSalle Re Limited, was completed on September 27, 2000. Trenwick Group Ltd.'s principal subsidiaries underwrite specialty insurance and reinsurance through five business platforms: LaSalle Re Limited, Trenwick America Reinsurance Corporation, Trenwick International Limited, Chartwell Managing Agents Limited and Canterbury Financial Group Inc. Basis of Presentation The business combination between LaSalle Re Holdings Limited and Trenwick Group Inc. was accounted for as a purchase by LaSalle Re Holdings Limited of Trenwick Group Inc. and of the minority interest in LaSalle Re Limited, effective September 27, 2000. Accordingly, in these financial statements: o the assets and liabilities presented include those of LaSalle Re Holdings Limited, the minority interest in LaSalle Re Limited and the former Trenwick Group Inc.; o the revenues and expenses of LaSalle Re Holdings Limited have been included for all periods presented; o the minority interest in common shares and minority interest in net income of LaSalle Re Limited have been eliminated in the three and nine months ended September 30, 2001; and o the revenues and expenses of the former Trenwick Group Inc. were excluded from the three and nine months ended September 30, 2000 and included for the three and nine months ended September 30, 2001. Under the purchase basis of accounting, the purchase price was allocated to the identifiable assets acquired and liabilities assumed, based on their estimated fair values at the date of acquisition. The excess of the purchase price over the estimated fair value of those net assets acquired was recorded as goodwill, and is being amortized over twenty-five years. Refer to Note 5 for a discussion regarding pending changes in accounting for amortization of goodwill. The interim financial statements include the accounts of Trenwick Group Ltd. and its subsidiaries after elimination of significant intercompany accounts and transactions. Certain items in prior financial statements have been reclassified to conform to the current presentation. These interim financial statements have been prepared in conformity with accounting principles that are generally accepted in the United States of America, sometimes referred to as U.S. GAAP. To prepare these interim financial statements, 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 - 5 - financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Actual amounts may differ from these estimates. The interim financial statements are unaudited; however, in the opinion of management, the interim financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for interim periods. These interim statements should be read in conjunction with the audited financial statements and related notes included in the Annual Report on Form 10-K of Trenwick Group Ltd. for the year ended December 31, 2000. Note 2 The following tables present business segment financial Segment information for Trenwick Group Ltd. at September 30, 2001 and Information December 31, 2000 and for the three and nine months ended September 30, 2001 and 2000: 2001 2000 ---------- ---------- Total assets: Worldwide property catastrophe reinsurance $ 682,812 $ 557,401 U.S. treaty reinsurance 1,652,430 1,759,678 International specialty insurance and reinsurance 513,941 473,612 Lloyd's syndicates: Continuing 1,262,156 808,483 Runoff 110,248 157,627 U.S. specialty program insurance 544,197 372,933 Unallocated 108,064 90,318 ---------- ---------- Total assets $4,873,848 $4,220,052 ========== ==========
Three Months Nine Months ------------------ ------------------- 2001 2000 2001 2000 -------- ------- -------- -------- Total revenues: Worldwide property catastrophe reinsurance $ 33,754 $29,283 $ 95,927 $ 90,404 U.S. treaty reinsurance 82,137 -- 235,350 -- International specialty insurance and reinsurance 46,953 -- 140,302 -- Lloyd's syndicates: Continuing 78,471 2,352 220,942 5,033 Runoff 1,550 4,977 9,052 13,164 U.S. specialty program insurance 24,944 -- 67,666 -- Unallocated 754 -- 5,223 -- -------- ------- -------- -------- Total revenues $268,563 $36,612 $774,462 $108,601 ======== ======= ======== ========
- 6 -
Three Months Nine Months ------------------- -------------------- 2001 2000 2001 2000 -------- ------- --------- ------- Net income (loss): Worldwide property catastrophe reinsurance $(65,318) $13,433 $ (38,211) $14,606 U.S. treaty reinsurance 309 -- 7,805 -- International specialty insurance and reinsurance (8,811) -- (27,688) -- Lloyd's syndicates: Continuing (7,895) (1,314) (29,201) (1,556) Runoff (7,763) (3,567) (9,978) (5,395) U.S. specialty program insurance 1,872 -- (4,638) -- Unallocated (8,501) -- (26,089) -- -------- ------- --------- ------- Total net income (loss) $(96,107) $ 8,552 $(128,000) $ 7,655 ======== ======= ========= =======
Revenues from transactions between operating segments, which are immaterial, have been eliminated in consolidation. Unallocated net income (loss) consists mainly of interest expense and dividends on preferred stock of subsidiaries, net of income taxes. Note 3 The following table sets forth the computation of basic and Earnings diluted earnings per common share for the three and nine months Per Share ended September 30, 2001 and 2000:
Three Months Nine Months ------------------------- -------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS Net income (loss) available to common shareholders - basic $ (96,107) $ 6,911 $ (128,000) $ 2,732 Other minority interest in net income of subsidiary -- 1,641 -- 839 ----------- ----------- ----------- ----------- Net income (loss) available to common shareholders - diluted $ (96,107) $ 9,008 $ (128,000) $ 3,571 =========== =========== =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Weighted average shares outstanding - basic 36,855,579 15,788,915 36,810,031 15,621,556 Net weighted average shares issuable (when dilutive) on exercise of stock options and warrants and on conversion of minority interest shares of subsidiary -- 4,746,676 -- 5,054,525 ----------- ----------- ----------- ----------- Weighted average shares outstanding - diluted 36,855,579 20,535,591 36,810,031 20,676,081 =========== =========== =========== =========== Basic and diluted earnings (loss) per common share $ (2.61) $ 0.44 $ (3.48) $ 0.17 =========== =========== =========== ===========
- 7 - Note 4 The components of premiums written and earned for the three Underwriting and nine months ended September 30, 2001 and 2000 are as follows: Activities Three Months Nine Months -------------------- ---------------------- 2001 2000 2001 2000 --------- ------- ---------- -------- Assumed premiums written $ 225,439 $25,321 $ 456,928 $122,567 Direct premiums written 142,104 -- 603,794 -- --------- ------- ---------- -------- Gross premiums written 367,543 25,321 1,060,722 122,567 Ceded premiums written (124,709) (9,053) (312,273) (30,440) --------- ------- ---------- -------- Net premiums written $ 242,834 $16,268 $ 748,449 $ 92,127 ========= ======= ========== ======== Three Months Nine Months -------------------- ---------------------- 2001 2000 2001 2000 --------- ------- ---------- -------- Assumed premiums earned $ 156,806 $35,285 $ 409,144 $106,634 Direct premiums earned 190,813 -- 537,802 -- --------- ------- ---------- -------- Gross premiums earned 347,619 35,285 946,946 106,634 Ceded premiums earned (107,758) (8,534) (279,738) (23,895) --------- ------- ---------- -------- Net premiums earned $ 239,862 $26,751 $ 667,208 $ 82,739 ========= ======= ========== ======== Note 5 During the quarter ended September 30, 2001, Trenwick Group Ltd. World Trade incurred significant losses related to the World Trade Center Center terrorist attack and related disasters on September 11th. Terrorist Trenwick Group Ltd.'s incurred losses are based upon the estimate Attack of its ultimate exposure which was derived from a manual and Related assessment of its outstanding policies to determine potential Disasters exposure, and market share analysis, probable maximum loss analysis, independent risk modeling analysis and cedent loss estimates. Trenwick Group Ltd.'s losses stem from commercial property damage, which includes business interruption and incidental workers' compensation coverage, and catastrophe aviation coverage. The estimated loss from the World Trade Center terrorist attack and related disasters is approximately $404 million before reinsurance recoveries. Of the approximate $304 million reinsurance recoverable, 95% are from reinsurers rated A or better by Standard & Poor's or, alternatively by A.M. Best Company. Because of the scope and uniqueness of these events, standard loss modeling and assessment methodologies have limited relevance. As a result, the current level of losses represents Trenwick Group Ltd.'s best estimate at this time. As more accurate information regarding the events becomes available, this estimate will be revised if necessary. - 8 - Note 6 In July 2001, the Financial Accounting Standards Board issued Accounting statements covering business combinations and goodwill and other Standards intangible assets, which are required to be adopted at the beginning of 2002. The business combination statement requires that the purchase method of accounting be used for all business combinations initiated after September 30, 2001. The goodwill and other intangible assets statement changes the expensing of goodwill from an amortization method to an impairment-only approach. Amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of this statement. As of September 30, 2001, Trenwick Group Ltd. has unamortized goodwill in the amount of $42,086, which will be subject to the transition provisions of this statement. Amortization expense related to goodwill was $213 and $638 for the three and nine months ended September 30, 2001, respectively. Trenwick Group Ltd. has not determined the effect that this statement will have on its consolidated financial position or results of operations. Note 7 On November 13, 2001, Trenwick America Corporation amended its Subsequent credit facility to provide for the waiver and amendment of Event covenants related to the repurchase of preferred shares, the maintenance of a minimum interest coverage ratio, the maintenance of a minimum risk based capital ratio for Trenwick America Corporation's subsidiary, Chartwell Insurance Company and the maintenance of a minimum tangible net worth. The amendment also increased the interest rate payable on outstanding indebtedness of Trenwick America Corporation to its lenders. - 9 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion highlights material factors affecting Trenwick Group Ltd.'s results of operations for the three and nine months ended September 30, 2001 and 2000. This discussion and analysis should be read in conjunction with the unaudited interim financial statements and notes thereto of Trenwick Group Ltd. contained in this filing as well as in conjunction with the audited financial statements and related notes included in the Annual Report on Form 10-K of Trenwick Group Ltd. for the year ended December 31, 2000. Overview Trenwick Group Ltd. is a Bermuda holding company headquartered in Hamilton, Bermuda whose principal subsidiaries underwrite specialty insurance and reinsurance. Trenwick Group Ltd. was formed in 1999 to acquire Trenwick Group Inc., LaSalle Re Holdings Limited and LaSalle Re Limited. The transaction was completed on September 27, 2000. Shareholders of Trenwick Group Inc., LaSalle Re Holdings Limited and LaSalle Re Limited exchanged their shares on a one-for-one basis for newly-issued shares of Trenwick Group Ltd. LaSalle Re Holdings Limited was the accounting acquiror in the Trenwick/LaSalle business combination, and as such the financial statements reflect the results of operations of LaSalle Re Holdings Limited prior to September 27, 2000 and the combined results of operations of LaSalle Re Holdings Limited and Trenwick Group Inc. on and after September 27, 2000. Trenwick Group Ltd. operates through the following five principal operating platforms: o LaSalle Re Limited, which is located in Hamilton, Bermuda, underwrites property catastrophe reinsurance on a worldwide basis; o Trenwick America Reinsurance Corporation, which is located in Stamford Connecticut, underwrites treaty reinsurance on United States property and casualty risks, including United States reinsurance business previously written by Chartwell Re Corporation subsidiaries; o Trenwick International Limited, which is located in London, England, underwrites specialty insurance and treaty and facultative reinsurance on a worldwide basis; o Chartwell Managing Agents Limited, which is located in London, England, manages underwriting syndicates in the Lloyd's market, principally for Trenwick Group Ltd.'s own account; and o Canterbury Financial Group Inc., which is located in Stamford, Connecticut, underwrites specialty insurance through its operating subsidiaries, The Insurance Corporation of New York, Dakota Specialty Insurance Company and Chartwell Insurance Company. All of Trenwick Group Ltd.'s principal operating subsidiaries are rated A- (Excellent) by A.M. Best Company with a negative outlook and have been assigned a financial strength rating of A- by Standard and Poor's with a stable outlook. Chartwell Managing Agents Limited's syndicates are not separately rated, but trade with their business counterparties on the basis of the ratings of Lloyd's which is currently rated "A-" (Excellent) by A.M. Best Company and currently has an A financial strength rating from Standard & Poor's. These ratings are based upon factors that may be of concern to policy or contract holders, agents and intermediaries, but may not reflect the - 10 - considerations applicable to an equity investment in a reinsurance or insurance company. A change in any such rating is at the discretion of the respective rating agencies. Results of Operations - Three Months Ended September 30, 2001 and 2000
2001 2000 Change --------- -------------- --------- (in thousands) Underwriting income (loss) $(120,851) $ 1,942 $(122,793) Net investment income 30,770 9,591 21,179 Interest expense and dividends on preferred shares of subsidiaries (9,601) (304) (9,297) General and administrative expenses (3,845) (424) (3,421) Other income 1,233 -- 1,233 --------- ------- --------- Pre-tax operating income (loss) (102,294) 10,805 (113,099) Applicable income taxes (benefit) (8,820) -- (8,820) --------- ------- --------- Operating income (loss) (93,474) 10,805 (104,279) Minority interest in operating income of subsidiary -- (2,097) 2,097 Net realized investment gains (losses), net of minority interest and income taxes (1,698) 270 (1,968) Foreign currency losses, net of minority interest and income taxes (935) (426) (509) --------- ------- --------- Net income (loss) $ (96,107) $ 8,552 $(104,659) ========= ======= =========
The operating loss of $93.5 million in the 2001 quarter represented a $104.3 million decrease from operating income of $10.8 million recorded in the 2000 quarter. This decrease was principally the result of abnormal catastrophe losses, primarily the September 11th, 2001 terrorist attacks, slightly offset by increased investment income. The increase in investment income in 2001 was the result of the increase in the size of the investment portfolio from the Trenwick/LaSalle business combination. The decrease of $104.7 million in net income in 2001 when compared to 2000 was the result of the decrease in operating income due to abnormal catastrophe losses, combined with increased realized losses on investments and foreign currency losses in the 2001 quarter, offset in part by the absence of a minority interest in 2001. Underwriting income (loss) The underwriting result for the 2000 quarter included only the results of LaSalle Re Holdings Limited; the underwriting result for the 2001 quarter included the combined results of LaSalle Re Holdings Limited and Trenwick Group Inc.
2001 2000 Change --------- ------------- --------- (in thousands) Net premiums earned $ 239,862 $26,751 $ 213,111 --------- ------- --------- Claims and claims expenses incurred 264,344 15,924 248,420 Acquisition costs and underwriting expenses 96,369 8,885 87,484 --------- ------- --------- Total expenses 360,713 24,809 335,904 --------- ------- --------- Net underwriting income (loss) $(120,851) $ 1,942 $(122,793) ========= ======= ========= Loss ratio 110.2% 59.5% 50.7% Expense ratio 40.2% 33.2% 7.0% Combined ratio 150.4% 92.7% 57.7%
- 11 - The underwriting loss of $120.9 million in the 2001 quarter represented a $122.8 million decrease compared to underwriting income of $1.9 million in the 2000 quarter. The increase in underwriting loss was primarily due to abnormal catastrophe losses in 2001, which is discussed on page 12 under the caption "Claims and claims expenses." The increase in the combined ratio in the 2001 quarter compared to the 2000 quarter resulted from abnormal catastrophe losses which is discussed on page 12 under the caption "Claims and claims expenses," together with a significant change in Trenwick Group Ltd.'s mix of business following the Trenwick/LaSalle business combination. The increase in the expense ratio in the 2001 quarter as compared to the 2000 quarter can be principally attributed to the inclusion of Trenwick Group Inc.'s casualty business in the underwriting results in 2001. Premiums written Gross premiums written for the 2001 quarter were $367.5 million compared to $25.3 million for the 2000 quarter, an increase of $342.2 million. Details of gross premiums written are provided below:
2001 2000 Change -------- -------------- -------- (in thousands) Worldwide property catastrophe reinsurance $ 36,865 $15,871 $ 20,993 U.S. treaty reinsurance 80,567 -- 80,567 International specialty insurance and reinsurance 55,003 -- 55,003 Lloyd's syndicates: Continuing 112,965 2,649 110,316 Runoff 3,607 6,799 (3,193) U.S. specialty program insurance 78,536 -- 78,536 -------- ------- -------- Gross premiums written $367,543 $25,321 $342,222 ======== ======= ========
Worldwide property catastrophe reinsurance gross premium writings for the 2001 quarter increased by $21.0 million, or 132.3% from the 2000 quarter due to an increase in rates on renewal business combined with an increase in new writings, principally in the United States. The increase in Lloyd's gross written premiums for 2001 compared to 2000 was due to the addition of Trenwick Group Inc.'s Lloyd's operations managed by Chartwell Managing Agents Limited from the Trenwick/LaSalle business combination. A majority of the Lloyd's syndicate gross written premiums in 2001 represent the bookings of business managed by Chartwell Managing Agents Limited. The majority of Lloyd's business underwritten by LaSalle Re Holdings Limited prior to the combination with Trenwick Group Inc. was not renewed as of December 31, 2000 and have been classified as runoff. Additionally, results of operations from Lloyd's syndicates which were sold by Trenwick Group Inc. in 1999 have also been classified as runoff. U.S. treaty reinsurance, international specialty insurance and reinsurance and U.S. specialty program insurance gross premiums written were $80.6 million, $55.0 million and $78.5 million, respectively, for the third quarter of 2001. Trenwick Group Ltd. did not underwrite these businesses prior to the Trenwick/LaSalle business combination. Premiums earned Gross premiums earned for the 2001 quarter were $347.6 million compared to $35.3 million for the 2000 quarter, an increase of $312.3 million. Net premiums earned for the 2001 quarter were - 12 - $239.9 million compared to $26.8 million for the 2000 quarter, an increase of $213.1 million. Details of gross and net premiums earned are provided below. 2001 2000 Change --------- -------------- --------- (in thousands) Gross premiums written $ 367,543 $25,321 $ 342,222 Change in gross unearned premiums (19,924) 9,964 (29,888) --------- ------- --------- Gross premiums earned $ 347,619 $35,285 $ 312,334 --------- ------- --------- Gross premiums ceded $(124,709) $(9,053) $(115,656) Change in ceded unearned premiums 16,952 519 16,433 --------- ------- --------- Ceded premiums earned (107,757) (8,534) (99,223) --------- ------- --------- Net premiums earned $ 239,862 $26,751 $ 213,111 ========= ======= ========= Gross premiums ceded for the 2001 quarter were $124.7 million compared to $9.1 million for the 2000 quarter. The increase in gross premiums ceded of $115.7 million was due primarily to cessions relating to business acquired in the Trenwick/LaSalle business combination. Businesses acquired in the Trenwick/LaSalle business combination included Lloyd's syndicates, international specialty insurance and reinsurance and U.S. specialty program insurance, all of which have significantly larger reinsurance and retrocessional programs than LaSalle Re Limited. Net premiums earned for the 2001 quarter were $239.9 million compared to $26.8 million for the 2000 quarter. The increase in net premiums earned is commensurate with the increase in net premiums written. Claims and claims expenses Claims and claims expenses for the 2001 quarter were $264.3 million, an increase of $248.4 million compared to claims and claims expenses of $15.9 million for the 2000 quarter. The increase in claims and claims expenses in 2001 resulted from the addition of business acquired in the Trenwick/LaSalle business combination as well as abnormal catastrophe losses. Third quarter 2001 results include abnormal catastrophe losses of approximately $100 million pre-tax related to the September 11th terrorist attacks. The loss recorded in the third quarter of 2001 is based upon Trenwick Group Ltd.'s estimate of its ultimate exposure derived from a manual assessment of its outstanding policies to determine potential exposure, market share analysis, probable maximum loss analysis, independent risk modeling analysis and cedent loss estimates. Trenwick Group Ltd.'s estimated loss from the September 11th terrorist attacks is approximately $404 million before reinsurance recoveries of approximately $304 million. Of the $304 million of reinsurance recoverable, 95% are from reinsurers rated A or better by Standard & Poor's or, alternatively, A.M. Best Company. Because of the scope and uniqueness of these events, standard loss modeling and assessment methodologies have limited relevance. As a result, the expected Trenwick Group Ltd. losses represent Trenwick Group Ltd.'s best estimate at this time. As more accurate information regarding the events becomes available, we will revise this estimate if necessary. Acquisition costs and underwriting expenses 2001 2000 Change ------- -------------- -------- (in thousands) Policy acquisition costs $75,017 $5,621 $69,396 Underwriting expenses 21,352 3,264 18,088 ------- ------ ------- Total acquisition costs and underwriting expenses $96,369 $8,885 $87,484 ======= ====== ======= Expense ratio 40.2% 33.2% 7.0% ======= ====== ======= - 13 - Total policy acquisition costs and underwriting expenses, for the 2001 quarter increased by $87.5 million compared to the 2000 quarter. Total acquisition costs and underwriting expenses as a percentage of net premiums earned, or the expense ratio, were 40.2% for 2001 compared to 33.2% for 2000. This increase resulted mainly from the addition of casualty business acquired in the Trenwick/LaSalle business combination. This business, which consisted of both treaty insurance and reinsurance, generally has a higher policy acquisition cost ratio than property catastrophe business. Net Investment Income
2001 2000 Change ---------- -------------- ----------- (in thousands) Average invested assets $2,228,875 $520,270 $1,708,605 Average annualized yields 6.06% 6.93% (0.87)% ---------- -------- ---------- Investment income - portfolio 33,782 9,019 24,763 Investment income - non-portfolio 724 801 (77) Investment expenses: Interest expenses on funds withheld (2,851) -- (2,851) Other investment expenses (885) (229) (656) ---------- -------- ---------- Net investment income $ 30,770 $ 9,591 $ 21,179 ========== ======== ==========
Net investment income for the 2001 quarter was $30.8 million compared to $9.6 million for the 2000 quarter. The increase in net investment income in 2001 was due to the increase in invested assets resulting from the Trenwick/LaSalle business combination. Investment expense for 2001 includes interest expense on funds withheld of $2.9 million under the terms of stop loss reinsurance agreements purchased by Trenwick America Reinsurance Corporation prior to 2000. The balance of the increase in investment expense in 2001 results from the increase in Trenwick Group Ltd.'s invested assets under management following the Trenwick/LaSalle business combination. Interest Expense and Dividends on Preferred Stock of Subsidiaries Interest expense and dividends on preferred stock of subsidiaries was $9.6 million for the 2001 quarter, an increase of $9.3 million from the same period in 2000. The increase resulted from the increase in debt outstanding as a result of the Trenwick Group Inc. debt assumed by Trenwick Group Ltd.'s subsidiaries as well as the inclusion of dividends on preferred stock of LaSalle Re Holdings Limited in 2001, both as a result of the Trenwick/LaSalle business combination. Non-Operating Income and Expenses Minority interest represents the minority interest in common shares of LaSalle Re Limited held by third party investors prior to the Trenwick/LaSalle business combination on September 27, 2000. Net income attributed to the minority interest was calculated as 23.3% of net income in the 2000 quarter. Net realized losses on investments, net of applicable minority interest and income taxes, were $1.7 million during the 2001 quarter, compared to net realized gains of $0.3 million for the 2000 quarter. Both the gains and losses were made as a result of security sales executed pursuant to an investment policy designed to protect the total returns on the portfolio. Trenwick Group Ltd. recorded foreign currency losses, net of applicable minority interest and income taxes, of $0.9 million for the 2001 quarter, relatively unchanged from foreign currency losses of $0.4 million for the 2000 quarter. - 14 - Results of Operations - Nine Months Ended September 30, 2001 and 2000
2001 2000 Change --------- -------------- --------- (in thousands) Underwriting loss $(225,333) $(13,107) $(212,226) Net investment income 96,141 27,778 68,363 Interest expense and dividends on preferred shares of subsidiaries (30,054) (915) (29,139) General and administrative expenses (11,449) (2,841) (8,608) Other income 3,285 -- 3,285 --------- -------- --------- Pre-tax operating income (loss) (167,410) 10,915 (178,325) Applicable income taxes (benefit) (36,222) -- (36,222) --------- -------- --------- Operating income (loss) (131,188) 10,915 (142,103) Minority interest in operating income of subsidiary -- (839) 839 Net realized investment gains (losses), net of minority interest and income taxes 7,886 (1,916) 9,802 Foreign currency losses, net of minority interest and income taxes (1,964) (53) (1,911) Restructuring costs, net of income taxes (2,734) (452) (2,282) --------- -------- --------- Net (income) loss $(128,000) $ 7,655 $(135,655) ========= ======== =========
The operating loss of $131.2 million in 2001 represented a $142.1 million decrease from the operating income of $10.9 million recorded in 2000. This decrease was principally the result of abnormal catastrophe losses and loss reserve strengthening recorded during 2001, partially offset by increased investment income. The increase in investment income in 2001 was the result of the increase in the size of the investment portfolio from the Trenwick/LaSalle business combination. The decrease of $135.7 million in net income in 2001 when compared to 2000 was the result of the decrease in operating income, an increase in foreign exchange losses, which are discussed on page 18 under the caption "Non-Operating Income and Expenses," offset in part by the absence of a minority interest in 2001, and the increase in realized investment gains. Net income for 2001 was also reduced by after tax restructuring costs of $2.7 million recorded in conjunction with management changes effected at Trenwick Group Ltd.'s London operations in the second quarter of 2001. Underwriting income (loss) The underwriting result for the nine months ended September 30, 2000 included only the results of LaSalle Re Holdings Limited; the underwriting result for the nine months ended September 30, 2001 included the combined results of LaSalle Re Holdings Limited and Trenwick Group Inc.
2001 2000 Change --------- -------------- --------- (in thousands) Net premiums earned $ 667,208 $ 82,739 $ 584,469 --------- -------- --------- Claims and claims expenses incurred 638,176 69,190 568,986 Acquisition costs and underwriting expenses 254,365 26,656 227,709 --------- -------- --------- Total expenses 892,541 95,846 796,695 --------- -------- --------- Net underwriting loss $(225,333) $(13,107) $(212,226) ========= ======== ========= Loss ratio 95.6% 83.6% 12.0% Expense ratio 38.1% 32.2% 5.9% Combined ratio 133.7% 115.8% 17.9%
- 15 - The underwriting loss of $225.3 million in 2001 represented a $212.2 million increase compared to the underwriting loss of $13.1 million in 2000. The increase in underwriting loss was primarily due to $116.2 million in catastrophe losses recorded in the first nine months of 2001 as well as $76.7 of reserve strengthening in the second quarter of 2001. The majority of the catastrophe losses recorded in the first nine months of 2001 resulted from the September 11th terrorist attacks. During the first nine months of 2000, underwriting results included additions to loss reserves of $23.0 million relating to the December 1999 winter storms which hit France and Denmark. The increase in the combined ratio in 2001 compared to 2000 also resulted from the significant catastrophe losses recorded in 2001. The increase in the expense ratio in the nine months ended September 30, 2001 as compared to the nine months ended September 30, 2000 resulted from the inclusion of Trenwick Group Inc.'s casualty business in the underwriting results in 2001. Premiums written Gross premiums written for 2001 were $1.1 billion compared to $122.6 million for 2000, an increase of $938.2 million or 765%. Details of gross premiums written are provided below:
2001 2000 Change ---------- ------------- -------- (in thousands) Worldwide property catastrophe reinsurance $ 131,499 $ 97,907 $ 33,592 U.S. treaty reinsurance 242,665 -- 242,665 International specialty insurance and reinsurance 174,914 -- 174,914 Lloyd's syndicates: Continuing 285,349 5,833 279,516 Runoff 4,258 18,827 (14,569) U.S. specialty program insurance 222,037 -- 222,037 ---------- -------- -------- Gross premiums written $1,060,722 $122,567 $938,155 ========== ======== ========
Worldwide property catastrophe reinsurance gross premium writings for 2001 increased by $33.6 million over 2000 due to an increase in rates on renewal business combined with an increase in new writings, principally in the United States. The increase in Lloyd's gross written premiums for 2001 compared to 2000 was due to the addition of Trenwick Group Inc.'s Lloyd's operations managed by Chartwell Managing Agents Limited from the Trenwick/LaSalle business combination. A majority of the Lloyd's syndicate gross written premiums in 2001 represent the bookings of business managed by Chartwell Managing Agents Limited. The majority of Lloyd's business underwritten by LaSalle Re Holdings Limited prior to the combination with Trenwick Group Inc. was not renewed as of December 31, 2000 and have been classified as runoff. Additionally, results of operations from Lloyd's syndicates which were sold by Trenwick Group Inc. in 1999 have also been classified as runoff. U.S. treaty reinsurance, international specialty insurance and reinsurance and U.S. specialty program insurance gross premiums written were $242.7 million, $174.9 million and $222.0 million, respectively, for the first nine months of 2001. Trenwick Group Ltd. did not underwrite these businesses prior to the Trenwick/LaSalle business combination. - 16 - Premiums earned Gross premiums earned for 2001 were $946.9 million compared to $106.6 million for 2000, an increase of $840.3 million. Net premiums earned for 2001 were $667.2 million compared to $82.7 million for 2000, an increase of $584.5 million. Details of gross and net premiums earned are provided below:
2001 2000 Change ----------- --------------- --------- (in thousands) Gross premiums written $1,060,722 $122,567 $ 938,155 Change in gross unearned premiums (113,776) (15,933) (97,843) ---------- -------- --------- Gross premiums earned 946,946 106,634 840,312 ---------- -------- --------- Gross premiums ceded (312,273) (30,440) (281,833) Change in ceded unearned premiums 32,535 6,545 25,990 ---------- -------- --------- Ceded premiums earned (279,738) (23,895) (255,843) ---------- -------- --------- Net premiums earned $ 667,208 $ 82,739 $ 584,469 ========== ======== =========
Gross premiums ceded for 2001 were $312.3 million compared to $30.4 million for the same period in 2000. The increase in gross premiums ceded of $281.8 million was due primarily to cessions relating to business acquired in the Trenwick/LaSalle business combination. Businesses acquired in the Trenwick/LaSalle business combination included Lloyd's syndicates, international specialty insurance and reinsurance and U.S. specialty program insurance, all of which have significantly larger reinsurance and retrocessional programs than LaSalle Re Limited. Net premiums earned for 2001 were $667.2 million compared to $82.7 million for 2000. The increase in net premiums earned is commensurate with the increase in net premiums written. Claims and claims expenses Claims and claims expenses for the nine months ended September 30, 2001 were $638.2 million, an increase of $569.0 million compared to claims and claims expenses of $69.2 million for 2000. The increase in claims and claims expenses in 2001 resulted from the addition of business acquired in the Trenwick/LaSalle business combination as well as to abnormal catastrophe losses and loss reserve strengthening. During the first nine months of 2001, claims and claims expenses included $116.2 million of abnormal catastrophe losses, including approximately $100 million related to the September 11th, 2001 terrorist attacks, $10.5 million related to an accumulation of catastrophic losses including Tropical Storm Allison and storms affecting the Midwest United States, $3.9 million relating to the sinking of the Petrobras oil rig and $1.8 million related to the September 2001 total Elf Petrofina fire in France. The losses related to the September 11th terrorist attacks are based upon Trenwick Group Ltd.'s estimate of its ultimate exposure derived from a manual assessment of its outstanding policies to determine potential exposure, market share analysis, probable maximum loss analysis, independent risk modeling analysis and cedent loss estimates. Trenwick Group Ltd.'s estimated loss from the September 11th terrorist attacks is approximately $404 million before reinsurance recoveries of approximately $304 million. Of the $304 million reinsurance recoverable generated by the September 11th terrorist attacks, 95% are from reinsurers rated A or better by Standard & Poor's or, alternatively, A.M. Best Company. Because of the scope and uniqueness of these events, standard loss modeling and assessment methodologies have limited relevance. As a result, the expected losses represent Trenwick Group Ltd.'s best estimate at this time. As more accurate information regarding the events becomes available, we will revise this estimate if necessary. - 17 - Trenwick also recorded $76.7 million of reserve strengthening in the second quarter of 2001. This reserve strengthening included $17.4 million related to the treaty reinsurance segment's directors and officer's liability business, which was underwritten prior to 2001, $14.8 million related to one of the specialty program insurance segment's programs, $27.4 million relating principally to the Lloyd's segment directors and officers liability business, and $17.1 million stemming from deterioration in discontinued businesses and reviews of the property insurance and small premium liability business lines at the international specialty insurance and reinsurance segment. Acquisition costs and underwriting expenses 2001 2000 Change -------- -------------- -------- (in thousands) Policy acquisition costs $197,473 $16,269 $181,204 Underwriting expenses 56,892 10,387 46,505 -------- ------- -------- Total acquisition costs and underwriting expenses $254,365 $26,656 $227,709 ======== ======= ======== Expense ratio 38.1% 32.2% 5.9% ======== ======= ======== Total policy acquisition costs and underwriting expenses for 2001 increased by $227.7 million compared to 2000. Total acquisition costs and underwriting expenses as a percentage of net premiums earned, or the expense ratio, were 38.1% for 2001 compared to 32.2% for 2000. The increase in the expense ratio occurred principally because of an increase in policy acquisition costs relating to casualty business acquired in the Trenwick/LaSalle business combination. This business, which consisted of both treaty insurance and reinsurance, generally has a higher policy acquisition cost ratio than property catastrophe business. Net Investment Income
2001 2000 Change ---------- -------------- ---------- (in thousands) Average invested assets $2,236,609 $568,085 $1,668,524 Average annualized yields 6.30% 6.21% (0.09)% ---------- -------- ---------- Investment income - portfolio 105,711 26,464 79,247 Investment income - non-portfolio 1,938 1,993 (55) Investment expense: Interest expense on funds withheld (8,491) -- (8,491) Other investment expenses (3,017) (679) (2,338) ---------- -------- ---------- Net investment income $ 96,141 $ 27,778 $ 68,363 ========== ======== ==========
Net investment income for 2001 was $96.1 million compared to $27.8 million for the same period in 2000. The increase in net investment income in 2001 was due to the increase in invested assets resulting from the Trenwick/LaSalle business combination. Investment expense for 2001 includes interest expense on funds withheld of $8.5 million under the terms of stop loss reinsurance agreements purchased by Trenwick America Reinsurance Corporation prior to 2000. The balance of the increase in investment expense in 2001 results from the increase in Trenwick Group Ltd.'s invested assets under management following the Trenwick/LaSalle business combination. - 18 - Interest Expense and Dividends on Preferred Shares of Subsidiaries Interest expense and dividends on preferred shares of subsidiaries was $30.1 million for 2001, an increase of $29.1 million from the same period in 2000. The increase resulted from the increase in debt outstanding as a result of the Trenwick Group Inc. debt assumed by Trenwick Group Ltd.'s subsidiaries as well as the inclusion of dividends on preferred shares of LaSalle Re Holdings Limited in 2001, both as a result of the Trenwick/LaSalle business combination. Non-Operating Income and Expenses Minority interest represents the minority interest in common shares of LaSalle Re Limited held by third party investors prior to the Trenwick/LaSalle business combination on September 27, 2000. Net income attributed to the minority interest was calculated as 23.5% of net income in the first nine months of 2000. Net realized gains on investments, net of applicable minority interest and income taxes, were $7.9 million during 2001, compared to net realized losses of $1.9 million for 2000. Both the gains and losses were made as a result of security sales executed pursuant to an investment policy designed to protect the total returns on the portfolio. Trenwick Group Ltd. recorded foreign currency losses, net of applicable minority interest and income taxes, of $2.0 million for 2001, compared to foreign currency losses of $0.1 million for 2000 due to the decline in the value of European currencies which commenced in the latter portion of 2000, principally the British pound sterling, against the US dollar. Liquidity and Capital Resources As of September 30, 2001, Trenwick Group Ltd.'s consolidated investments and cash totaled $2.3 billion, an increase of $78.8 million from the balance at December 31, 2000. The cost of Trenwick Group Ltd.'s equity securities was $5.6 million less than fair value at September 30, 2001 and exceeded fair value by $2.1 million at December 31, 2000. The fair value of Trenwick Group Ltd.'s debt securities exceeded amortized cost by $59.7 million at September 30, 2001 and by $27.0 million at December 31, 2000. As of September 30, 2001, Trenwick Group Ltd.'s consolidated common shareholders' equity totaled $547.0 million, or $14.84 per common share, compared to $652.2 million, or $17.79 per common share at December 31, 2000. During the nine months ended September 30, 2001, the unrealized appreciation of debt and equity securities increased by $29.6 million, net of income tax, or $0.80 per share. Cash provided by Trenwick Group Ltd.'s operating activities for 2001 was $33.9 million compared to $6.2 million in the comparable period of 2000. The increase in cash flow from operations was due primarily to an overall increase in net investment income as a result of the increase in invested assets resulting from the Trenwick/LaSalle business combination. Net cash used in financing activities during 2001 included $4.4 million of dividends paid to common shareholders. During 2000, net cash used in financing activities included $4.9 million of dividends to preferred shareholders. On September 26, 2001, Trenwick America Corporation, the primary obligor on Trenwick Group Ltd.'s revolving credit facility, informed its lenders that it had elected to convert its revolving credit facility into a term loan facility. Trenwick America Corporation will be obligated to repay the outstanding principal under the term loan facility in six month installments over the next four years. On November 13, 2001, Trenwick America Corporation amended its credit facility to - 19 - provide for the waiver and amendment of covenants related to the repurchase of preferred shares, the maintenance of a minimum interest coverage ratio, the maintenance of a minimum risk based capital ratio for Trenwick America Corporation's subsidiary, Chartwell Insurance Company and the maintenance of a minimum tangible net worth. The amendment also increased the interest rate payable on outstanding indebtedness of Trenwick America Corporation to its lenders. As of November 13, 2001, the applicable interest rate on the term loan under the credit facility was 4.8% and the applicable commission on the outstanding letters of credit was 2.0%. Trenwick Group Ltd. paid a dividend of $0.04 per common share in each of the first three quarters of 2001 and LaSalle Re Holdings Limited paid a quarterly dividend of $.55 per share on the Series A preferred shares of LaSalle Re Holdings Limited in each of the first three quarters of 2001 and the first three quarters of 2000. Trenwick Group Ltd.'s Board of Directors reviews Trenwick Group Ltd.'s common share dividend each quarter. Among the factors considered by the Board of Directors in determining the amount of each dividend are Trenwick Group Ltd.'s results of operations and the capital requirements, growth and other characteristics of its businesses. Trenwick Group Ltd.'s total debt to capital ratio (total debt excluding the preferred capital securities divided by total debt, preferred capital securities, preferred shares and common shareholders' equity) increased to 30.2% at September 30, 2001 from 26.3% on December 31, 2000. Quantitative and Qualitative Disclosure About Market Risk Trenwick Group Ltd. reviewed the change in its exposure to market risks since December 31, 2000. In addition, the components of its investment holdings and its risk management strategy and objectives have not materially changed. Therefore, Trenwick Group Ltd. believes that the potential for loss in each market risk sector described in the 2000 Annual Report on Form 10-K has not materially changed. Accounting Standards In July 2001, the Financial Accounting Standards Board issued statements covering business combinations and goodwill and other intangible assets, which are required to be adopted at the beginning of 2002. The business combination statement requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. The goodwill and other intangible assets statement changes the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of this statement. Operating results for the third quarter of 2001 include goodwill amortization of $0.2 million or $0.01 per share. The Company has not determined the effect, if any, that this statement will have on its consolidated financial position or results of operations. Safe Harbor Disclosure In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, Trenwick Group Ltd. 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 Group Ltd. 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 - 20 - may include, but are not limited to, projections of premium revenue, investment income, other revenue, losses, expenses, earnings (including earnings per share), cash flows, plans for future operations, common shareholders' equity (including book value per share), investments, financing needs, capital plans, dividends, plans relating to products or services of Trenwick Group Ltd. 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. Forward-looking statements involve known and unknown risks and uncertainties, which may cause Trenwick Group Ltd.'s results to differ materially from such forward-looking statements. These risks and uncertainties include, but are not limited to, the following: o Changes in the level of competition in the domestic and international reinsurance or primary insurance markets that affect the volume or profitability of Trenwick Group Ltd.'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; o 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; o The ability of Trenwick Group Ltd. to execute its strategies in its property/casualty operations; o Catastrophe losses in Trenwick Group Ltd.'s domestic and international property/casualty businesses; o 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; o Changes in Trenwick Group Ltd.'s property/casualty retrocessional arrangements; o 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 Group Ltd.'s retrocessionaires or reinsurers; o Increases in interest rates, which may cause a reduction in the market value of Trenwick Group Ltd.'s fixed income portfolio, and its common shareholders' equity; o 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; o A decline in the value of Trenwick Group Ltd.'s equity investments; o Changes in the composition of Trenwick Group Ltd.'s investment portfolio; o Credit losses on Trenwick Group Ltd.'s investment portfolio; o Adverse results in litigation matters, including, but not limited to, litigation related to environmental, asbestos and other potential mass tort claims; o The passage of federal or state legislation subjecting LaSalle Re Limited to United States taxation or regulation; o A contention by the United States Internal Revenue Service that LaSalle Re Limited is subject to United States taxation; o The impact of mergers and acquisitions; o Gains or losses related to changes in foreign currency exchange rates; and o Changes in Trenwick Group Ltd.'s capital needs. In addition to the factors outlined above that are directly related to Trenwick Group Ltd.'s businesses, Trenwick Group Ltd. is also subject to general business risks, including, but not - 21 - 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 on Form 10-Q. The important factors that could affect such forward-looking statements are subject to change, and Trenwick Group Ltd. does not intend to update any forward-looking statement or the foregoing list of important factors. By this cautionary note Trenwick Group Ltd. 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. - 22 - PART II - OTHER INFORMATION Item 1. Legal Proceedings Trenwick Group Ltd. is party to various legal proceedings generally arising in the normal course of its business. Trenwick Group Ltd. does not believe that the eventual outcome of any such proceeding will have a material effect on its financial condition or business. Trenwick Group Ltd.'s subsidiaries are regularly engaged in the investigation and the defense of claims arising out of the conduct of their business. Pursuant to Trenwick Group Ltd.'s insurance and reinsurance arrangements, disputes are generally required to be finally settled by arbitration. Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1 Second Amendment and Waiver to the Credit Agreement, dated as of November 13, 2001, among Trenwick America Corporation, Trenwick Holdings Limited, the lending institutions from time to time party thereto, First Union National Bank, as Syndication Agent, Fleet National Bank, as Documentation Agent, and JP Morgan Chase Bank, as Administrative Agent. (b) Reports on Form 8-K The following report on Form 8-K was filed during the quarter ended September 30, 2001: Date of Report Item Reported -------------- ------------- July 24, 2001 Press release, dated July 24, 2001, announcing second quarter earnings changes. - 23 - 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 LTD. Date: November 14, 2001 By: /s/ James F. Billett, Jr. ----------------------------------- Name: James F. Billett, Jr. Title: Chairman, President and Chief Executive Officer Date: November 14, 2001 By: /s/ Coleman D. Ross ----------------------------------- Name: Coleman D. Ross Title: Executive Vice President and Chief Financial Officer - 24 - -----END PRIVACY-ENHANCED MESSAGE-----