10-Q 1 d50668_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 March 31, 2002. (_) 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 May 13, 2002 --------------------------------- ------------------------------------ Common Shares - $.10 par value 36,786,572 TRENWICK GROUP LTD. INDEX TO FORM 10-Q PART I - FINANCIAL INFORMATION Page ITEM 1. Unaudited Consolidated Financial Statements Consolidated Balance Sheet March 31, 2002 and December 31, 2001 ........................... 1 Consolidated Statement of Operations and Comprehensive Income Three Months ended March 31, 2002 and 2001 ..................... 2 Consolidated Statement of Cash Flows Three Months ended March 31, 2002 and 2001 ..................... 3 Consolidated Statement of Changes in Common Shareholders' Equity Three Months ended March 31, 2002 and 2001 .............. 4 Notes to Unaudited Consolidated Financial Statements ........... 5 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ...................................... 9 PART II - OTHER INFORMATION ITEM 1. Legal proceedings .............................................. 18 ITEM 2. Changes in Securities and Use of Proceeds ...................... 18 ITEM 3. Defaults Upon Senior Securities ................................ 18 ITEM 4. Submission of Matters to a Vote of Security Holders ............ 18 ITEM 5. Other Information .............................................. 18 ITEM 6. Exhibits and Reports on Form 8-K ............................... 18 Signatures ................................................................. 20 Trenwick Group Ltd. Consolidated Balance Sheet (Amounts expressed in thousands of United States dollars, except share and per share data) March 31, 2002 and December 31, 2001
(Unaudited) 2002 2001 ----------- ----------- ASSETS Debt securities available for sale, at fair value $ 1,976,416 $ 1,960,600 Equity securities at fair value 28,576 24,164 Cash and cash equivalents 364,931 331,350 Accrued investment income 33,036 38,278 Premiums receivable 720,570 535,281 Reinsurance recoverable balances, net 1,709,370 1,411,469 Prepaid reinsurance premiums 219,161 197,169 Deferred policy acquisition costs 118,721 115,870 Net deferred income taxes 145,379 139,926 Goodwill 53,598 41,653 Other assets 205,213 132,795 ----------- ----------- Total assets $ 5,574,971 $ 4,928,555 =========== =========== LIABILITIES Unpaid claims and claims expenses $ 3,631,336 $ 3,032,748 Unearned premium income 678,421 612,290 Reinsurance balances payable 267,547 225,255 Indebtedness 289,384 291,263 Other liabilities 81,088 125,554 ----------- ----------- Total liabilities 4,947,776 4,287,110 ----------- ----------- MINORITY INTEREST Mandatorily redeemable preferred capital securities of subsidiary trust holding solely junior subordinated debentures of U.S. subsidiary 68,130 68,119 Minority interest in preferred shares of Bermuda subsidiary 75,000 75,000 ----------- ----------- Total minority interest 143,130 143,119 ----------- ----------- COMMON SHAREHOLDERS' EQUITY Common shares, $0.10 par value, 36,807,596 and 36,845,141 shares issued and outstanding 3,681 3,685 Additional paid in capital 577,450 578,018 Deferred compensation under share award plans (4,018) (4,766) Retained earnings (accumulated deficit) (104,625) (101,830) Accumulated other comprehensive income 11,577 23,219 ----------- ----------- Total common shareholders' equity 484,065 498,326 ----------- ----------- Total liabilities, minority interest and common shareholders' equity $ 5,574,971 $ 4,928,555 =========== ===========
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 Months Ended March 31, 2002 and 2001
2002 2001 --------- --------- REVENUES Net premiums earned $ 266,024 $ 202,775 Net investment income 29,255 32,184 Net realized investment gains 1,457 8,859 Other income 2,602 843 --------- --------- Total revenues 299,338 244,661 --------- --------- EXPENSES Claims and claims expenses incurred 207,577 138,280 Policy acquisition costs 73,072 59,356 Underwriting expenses 23,007 15,885 General and administrative expenses 3,318 3,676 Goodwill amortization -- 213 Interest expense and subsidiary preferred share dividends 9,936 10,828 Foreign currency losses (gains) (678) 1,067 --------- --------- Total expenses 316,232 229,305 --------- --------- Income (loss) before income taxes and cumulative effect of change in accounting principles (16,894) 15,356 Applicable income taxes (benefit) (3,984) (3,557) --------- --------- Net income (loss) before cumulative effect of change in accounting principles (12,910) 18,913 Cumulative effect of change in accounting principles 11,586 -- --------- --------- Net income (loss) $ (1,324) $ 18,913 ========= ========= EARNINGS PER SHARE: Basic earnings (loss) per common share before cumulative effect of change in accounting principles $ (0.35) $ 0.52 Cumulative effect of change in accounting principles 0.31 -- --------- --------- Basic earnings (loss) per common share $ (0.04) $ 0.52 ========= ========= Diluted earnings (loss) per common share before cumulative effect of change in accounting principles $ (0.35) $ 0.51 Cumulative effect of change in accounting principles 0.31 -- --------- --------- Diluted earnings (loss) per common share $ (0.04) $ 0.51 ========= ========= COMPREHENSIVE INCOME (LOSS): Net income (loss) $ (1,324) $ 18,913 --------- --------- Other comprehensive income (loss): Net unrealized investment gains (losses) (12,755) 7,225 Foreign currency translation adjustments 1,113 (5,277) --------- --------- Total other comprehensive income (loss) (11,642) 1,948 --------- --------- Comprehensive income (loss) $ (12,966) $ 20,861 ========= =========
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) Three Months Ended March 31, 2002 and 2001 2002 2001 --------- --------- OPERATING ACTIVITIES Premiums collected, net of acquisition costs $ 301,235 $ 222,750 Ceded premiums paid, net of acquisition costs (188,222) (70,729) Claims and claims expenses paid (175,924) (211,952) Claims and claims expenses recovered 145,232 52,449 Underwriting expenses paid (31,036) (30,472) --------- --------- Cash (for) from underwriting activities 51,285 (37,954) Net investment income received 33,952 32,248 Service and other income received, net of expenses 2,570 904 General and administrative expenses paid (4,139) (4,222) Interest expense and preferred share dividends paid (7,075) (7,220) Income taxes recovered 60 325 --------- --------- Cash from (for) operating activities 76,653 (15,919) --------- --------- INVESTING ACTIVITIES Purchases of debt securities (338,066) (606,998) Sales of debt securities 208,495 556,481 Maturities of debt securities 96,125 40,913 Purchases of equity securities -- (2,519) Sales of equity securities -- 73,048 Effect on cash of exchange rate translation (3,261) (9,179) Additions to premises and equipment (3,250) (791) --------- --------- Cash from (for) investing activities (39,957) 50,955 --------- --------- FINANCING ACTIVITIES Repayment of indebtedness (1,452) (29) Indebtedness issuance costs paid (88) -- Purchase of capital securities -- (8,461) Issuance of common shares 57 275 Trenwick Group Ltd. common share dividends paid (1,471) (1,473) Share and option repurchases (161) (311) Equity put option premium payments -- (908) --------- --------- Cash for financing activities (3,115) (10,907) --------- --------- Change in cash and cash equivalents 33,581 24,129 Cash and cash equivalents, beginning of period 331,350 311,001 --------- --------- Cash and cash equivalents, end of period $ 364,931 $ 335,130 ========= ========= 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) Three Months Ended March 31, 2002 and 2001
2002 2001 --------- --------- Common shareholders' equity, beginning of period $ 498,326 $ 652,187 COMMON SHARES AND ADDITIONAL PAID IN CAPITAL Issuance of 184,996 restricted common shares -- 3,942 Issuance of 6,443 and 13,131 common shares for cash under employee and director plans 57 275 Purchase and retirement of 18,646 and 14,609 common shares (161) (311) Cancellation of 25,342 and 3,506 restricted common share awards (468) (46) Equity put option premiums -- (908) DEFERRED COMPENSATION UNDER SHARE AWARD PLAN Restricted common shares awarded -- (3,942) Compensation expense recognized 280 629 Cancellation of shares 468 46 RETAINED EARNINGS Net income (loss) (1,324) 18,913 Common share dividends, $0.04 per share (1,471) (1,473) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Other comprehensive income (loss) (11,642) 1,948 --------- --------- Common shareholders' equity, end of period $ 484,065 $ 671,260 ========= =========
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 Months Ended March 31, 2002 and 2001 Note 1 Organization Organization Trenwick Group Ltd. was formed as a holding company in Bermuda and Basis to acquire two publicly held companies and the minority of Presentation interest in a subsidiary of one of those companies. That transaction was completed on September 27, 2000. Trenwick Group Ltd.'s principal subsidiaries underwrite specialty insurance and reinsurance. Basis of Presentation 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 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 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, 2001. Note 2 During the first quarter of 2002, Trenwick Group Ltd. amended Segment the basis in which operating segments are determined. This Information change followed a realignment of certain lines of business in Trenwick Group Ltd.'s international operations in London which led to the combining of these operations into one operating segment operating through two distribution platforms. In addition, consistent with its peer group, Trenwick Group Ltd. combined its property and casualty insurance and property catastrophe reinsurance into one segment called reinsurance operations. Trenwick Group Ltd. now conducts its specialty insurance and reinsurance business in the following three business segments: - Reinsurance, which includes U.S. treaty reinsurance written principally through its U.S. subsidiary, Trenwick America Reinsurance Corporation, and worldwide property catastrophe reinsurance, written principally through its Bermuda subsidiary, LaSalle Re Limited; - International operations, which consists of international specialty insurance primarily written through its U.K. subsidiary, Trenwick International Limited, as well as Lloyd's insurance and reinsurance written principally through its U.K. subsidiary, Chartwell Managing Agents Limited; and - United States specialty program insurance, written principally through The Insurance Corporation of New York. 5 Lloyd's syndicates runoff and Excess Casualty Reinsurance Association Pool ("ECRA Pool") runoff, which includes insurance and reinsurance that was either sold or non-renewed, are excluded from the aforementioned segments. The following tables present business segment financial information for Trenwick Group Ltd. at March 31, 2002 and December 31, 2001 and for the three months ended March 31, 2002 and 2001: 2002 2001 ---------- ---------- Total assets: Reinsurance $2,346,642 $2,278,801 International operations 2,427,263 1,946,858 U.S. specialty program insurance 638,334 554,874 Lloyd's syndicates runoff and ECRA pool runoff 106,937 99,021 Unallocated 55,795 49,001 ---------- ---------- Total assets $5,574,971 $4,928,555 ========== ========== 2002 2001 --------- -------- Total revenues: Reinsurance $ 122,985 $103,217 International operations 149,289 117,849 U.S. specialty program insurance 29,520 19,571 Lloyd's syndicates runoff and ECRA pool runoff (2,581) 1,672 Unallocated 125 2,352 --------- -------- Total revenues $ 299,338 $244,661 ========= ======== 2002 2001 -------- -------- Net income (loss): Reinsurance $ 2,466 $ 27,346 International operations (3,346) (6) U.S. specialty program insurance 1,172 1,914 Lloyd's syndicates runoff and ECRA pool runoff (5,887) (992) Unallocated interest expense and subsidiary preferred share dividends (6,621) (9,740) Other unallocated and change in accounting principle 10,892 391 -------- -------- Net income (loss) $ (1,324) $ 18,913 ======== ======== Transactions between operating segments have been eliminated in consolidation. 6 Note 3 The following table sets forth the computation of basic and Earnings diluted earnings per share for the three months ended March Per Share 31, 2002 and 2001:
2002 2001 ---------- ----------- Net income (loss) $ (1,324) $ 18,913 ========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Weighted average shares outstanding - basic 36,815,374 36,722,298 Net weighted average shares issuable (when dilutive) on exercise of stock options and warrants for 823,964 common shares -- 157,396 ---------- ----------- Weighted average shares outstanding - diluted 36,815,374 36,879,694 ========== =========== Basic earnings (loss) per common share $ (0.04) $ 0.52 ========== =========== Diluted earnings (loss) per common share $ (0.04) $ 0.51 ========== ===========
For the three months ended March 31, 2002 and 2001, 3,441,835 and 2,264,279, respectively, aggregate share options and warrants were excluded from the computation of diluted earnings per share because their effect would have been antidulutive on the calculation for the respective periods. Note 4 The components of premiums written and earned for the three Underwriting months ended March 31, 2002 and 2001 are as follows: Activities 2002 2001 --------- --------- Assumed premiums written $ 310,357 $ 174,648 Direct premiums written 155,214 178,976 --------- --------- Gross premiums written 465,571 353,624 Ceded premiums written (148,421) (92,884) --------- --------- Net premiums written $ 317,150 $ 260,740 ========= ========= Assumed premiums earned $ 227,680 $ 114,548 Direct premiums earned 165,748 168,093 --------- --------- Gross premiums earned 393,428 282,641 Ceded premiums earned (127,404) (79,866) --------- --------- Net premiums earned $ 266,024 $ 202,775 ========= ========= Note 5 Effective January 1, 2002, Trenwick Group Ltd. adopted a new Accounting Financial Accounting Standards Board statement which amended Standards the accounting for goodwill and other intangible assets. This new statement suspended systematic goodwill amortization and required Trenwick Group Ltd.'s Bermuda holding company, LaSalle Re Holdings Limited to credit the negative goodwill balance of $11,586 to operations as of January 1, 2002 as a cumulative effect of an accounting change. The statement also requires that the remaining goodwill balance be tested for impairment under either market value or cash flow tests prior to the reporting of quarterly results of operations as of June 30, 2002. Any impairment noted as a result of these tests must be recorded as a cumulative effect of an accounting change as of January 1, 2002. Impairment tests will be conducted on the remaining goodwill balance and this portion of the statement will be implemented during the second quarter of 2002. 7 Note 6 On April 12, 2002, Trenwick Group Ltd., its subsidiaries and Amendment financial institutions holding a majority of the outstanding to Credit indebtedness under its revolving credit facility executed an Facility amendment to the credit facility. The amendment required Trenwick Group Ltd. to pledge its shares of LaSalle Re Holdings Limited and LaSalle Re Limited in favor of the lenders under the credit facility. In addition, the amendment revised the financial covenants relating to interest coverage and tangible net worth (each as defined by the financial covenants in the credit agreement). The amendment also increased the applicable margin on the interest paid by Trenwick Group Ltd. by 1% and added an additional .5% fee payable by Trenwick Group Ltd. in the event the loans and letters of credit outstanding are not repaid or secured in accordance with the following schedule; September 30, 2002, 40%; June 30, 2003, 60%; and June 30, 2004, 80%. 8 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 months ended March 31, 2002 and 2001. 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, 2001. 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. Trenwick Group Ltd. operates three principal businesses: - Reinsurance, which includes U.S. treaty reinsurance written principally through its U.S. subsidiary, Trenwick America Reinsurance Corporation, and worldwide property catastrophe reinsurance, written principally through its Bermuda subsidiary, LaSalle Re Limited; - International operations, which consists of international specialty insurance primarily written through its U.K. subsidiary, Trenwick International Limited, as well as Lloyd's insurance and reinsurance written principally through its U.K. subsidiary, Chartwell Managing Agents Limited; and - United States specialty program insurance, written principally through The Insurance Corporation of New York. All of Trenwick Group Ltd.'s principal operating subsidiaries are rated "A-" (Excellent) by A.M. Best Company and have been assigned a financial strength rating of A- by Standard & Poor's. All of Chartwell Managing Agents Limited's syndicates enjoy the benefit of the ratings of Lloyd's which is rated "A-" (Excellent) by A.M. Best Company and 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 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. 9 Results of Operations - Three Months Ended March 31, 2002 and 2001
2002 2001 Change -------- -------- -------- (in thousands) Underwriting income (loss) $(37,632) $(10,746) $(26,886) Net investment income 29,255 32,184 (2,929) Interest expense and subsidiary preferred share dividends (9,936) (10,828) 892 General and administrative expenses (3,318) (3,889) 571 Foreign currency gains (losses) 679 (1,067) 1,746 Other income, net 2,602 843 1,759 -------- -------- -------- Pre-tax operating income (loss) (18,350) 6,497 (24,847) Applicable income taxes (benefit) (4,293) (4,644) 351 -------- -------- -------- Operating income (loss) (14,057) 11,141 (25,198) Net realized investment gains, net of income taxes 1,147 7,772 (6,625) Cumulative effect of change in accounting for goodwill 11,586 -- 11,586 -------- -------- -------- Net income (loss) $ (1,324) $ 18,913 $(20,237) ======== ======== ========
The operating loss of $14.1 million in the three months ended March 31, 2002 represented a $25.2 million decrease from operating income of $11.1 million recorded in the three months ended March 31, 2001. This decrease was principally the result of additional underwriting losses incurred related to the September 11th terrorist attacks combined with a decrease in investment income. The decrease was offset in part by a decline in interest expense and subsidiary preferred share dividends as well as lower general and administrative expenses and an increase in foreign currency gains over prior year. Underwriting income (loss) Trenwick Group Ltd. produced an underwriting loss of $37.6 million in the first quarter of 2002 compared to an underwriting loss of $10.7 million in the first quarter of 2001. Details of underwriting income and loss are produced below:
2002 2001 Change --------- --------- -------- (in thousands) Net premiums earned $ 266,024 $ 202,775 $ 63,249 --------- --------- -------- Claims and claims expenses incurred 207,577 138,280 69,297 Acquisition costs and underwriting expenses 96,079 75,241 20,838 --------- --------- -------- Total expenses 303,656 213,521 90,135 --------- --------- -------- Net underwriting income (loss) $ (37,632) $ (10,746) $(26,886) ========= ========= ======== Loss ratio 78.0% 68.2% 9.8% Underwriting expense ratio 36.1% 37.1% (1.0)% Combined ratio 114.1% 105.3% 8.8%
The underwriting loss of $37.6 million in the first quarter of 2002 represented a $26.9 million greater loss compared to the underwriting loss of $10.7 million in the first quarter of 2001. The decrease in the underwriting result was primarily due to an additional $23.0 million of additional underwriting losses recorded related to the September 11th terrorist attacks. 10 The increase in the combined ratio in the first quarter of 2002 compared to the first quarter of 2001 resulted mainly from the additional underwriting losses recorded on the September 11th terrorist attacks previously noted. Premiums written Gross premiums written for the three months ended March 31, 2002 were $465.6 million compared to $353.6 million for the three months ended March 31, 2001, an increase of $111.9 million or 31.7%. Details of gross premiums written are provided below: 2002 2001 Change --------- --------- --------- (in thousands) Worldwide property catastrophe reinsurance $ 79,927 $ 58,947 $ 20,980 U.S. treaty reinsurance 102,968 82,630 20,338 --------- --------- --------- Total reinsurance 182,895 141,577 41,318 International specialty insurance 53,079 62,218 (9,139) Lloyd's syndicates continuing 129,695 84,157 45,538 --------- --------- --------- Total international operations 182,774 146,375 36,399 Lloyd's syndicates runoff (2,254) (2,886) 632 U.S. specialty program insurance 102,156 68,558 33,598 --------- --------- --------- Gross premiums written $ 465,571 $ 353,624 $ 111,947 ========= ========= ========= Worldwide property catastrophe reinsurance gross premium writings for the three months ended March 31, 2002 increased by $21.0 million, or 35.6% over the three months ended March 31, 2001 primarily due to rate increases caused by improving insurance and reinsurance market conditions. The increase in U.S. treaty reinsurance gross premiums written in the first quarter of 2002 of $20.3 million compared to the first quarter of 2001 was mainly attributable to premiums on prior underwriting years and increasing rates on renewal treaties. The decrease in international specialty insurance gross premiums written in the first quarter of 2002 compared to the first quarter of 2001 of $9.1 million is attributable to the transfer of treaty, professional indemnity and financial institutions business to Chartwell Managing Agents, offset in part by increases in liability premiums. The increase in Lloyd's syndicates continuing gross written premiums for the first quarter of 2002 compared to $45.5 million in the first quarter of 2001 was due to both the addition of the treaty, professional indemnity and financial institutions business from the international specialty insurance segment as well as to rate increases on aviation premiums. The increase in U.S. specialty program insurance gross premiums was due to rate increases on new and renewal policies attributed to improving market conditions. Premiums earned Net premiums earned for the three months ended March 31, 2002 were $266.0 million compared to $202.8 million for the same period in 2001. Details of premiums earned are provided below: 11 2002 2001 Change --------- --------- --------- (in thousands) Gross premiums written $ 465,571 $ 353,624 $ 111,947 Change in gross unearned premiums (72,143) (70,983) (1,160) --------- --------- --------- Gross premiums earned 393,428 282,641 110,787 --------- --------- --------- Gross premiums ceded (148,421) (92,885) (55,536) Change in ceded unearned premiums 21,017 13,019 7,998 --------- --------- --------- Ceded premiums earned (127,404) (79,866) (47,538) --------- --------- --------- Net premiums earned $ 266,024 $ 202,775 $ 63,249 ========= ========= ========= Gross premiums ceded for the three months ended March 31, 2002 were $148.4 million compared to $92.9 million for the same period in 2001. The increase in gross premiums ceded of $55.5 million was due primarily to the increase in gross premiums written as previously discussed. Claims and claims expenses Claims and claims expenses for the three months ended March 31, 2002 were $207.6 million, an increase of $69.3 million compared to claims and claims expenses of $138.3 million for the same period in 2001. The increase in claims and claims expenses in 2002 is partially attributable to $25.7 million of additional claims and claims expenses recorded in connection with the September 11th terrorist attacks. In addition, claims and claims expenses in 2002 include deterioration in indicated loss ratios for the 1999-2001 accident years on the treaty reinsurance, U.S. specialty program insurance and international specialty insurance segments of approximately $7.2 million, $1.8 million and $12.2 million, respectively. Underwriting expenses 2002 2001 Change ------- ------- -------- (in thousands) Policy acquisition costs $73,072 $59,356 $ 13,716 Underwriting expenses 23,007 15,885 7,122 ------- ------- -------- Total underwriting expenses $96,079 $75,241 $ 20,838 ======= ======= ======== Underwriting expense ratio 36.1% 37.1% (1.0)% ======= ======= ======== Total underwriting expenses, comprising policy acquisition costs and underwriting expenses, for the first three months of 2002 increased by $20.8 million compared to underwriting expenses for the first three months of 2001. The increase was attributable to the increase in premium volume as previously discussed as well as due to premium levies from Lloyd's which are new for 2002. Total underwriting expenses as a percentage of net premiums earned, or the underwriting expense ratio, was 36.1% for the three months ended March 31, 2002 compared to 37.1% for the same period in 2001. The decrease in the underwriting expense ratio occurred principally because of decreasing acquisition costs related to improved terms and conditions due to improving market conditions. Underwriting expenses for the three months ended March 31, 2002 as a percentage of earned premium was 8.6%, an increase of 0.8% from 7.8% for the same period in 2001. The increase in the underwriting expense ratio resulted principally from systems development costs incurred at the U.K. locations of Trenwick Group Ltd. Net Investment Income 2002 2001 Change ----------- ----------- --------- (in thousands) Average invested assets $ 2,318,248 $ 2,197,793 $ 120,455 Average annualized yields 5.77% 6.50% (0.73)% ----------- ----------- --------- Investment income - portfolio $ 33,439 $ 35,687 $ (2,248) Investment income - non-portfolio (171) 522 (693) Investment expenses (4,013) (4,025) 12 ----------- ----------- --------- Net investment income $ 29,255 $ 32,184 $ (2,929) =========== =========== ========= 12 Net investment income for the three months ended March 31, 2002 was $29.3 million compared to $32.2 million for the same period in 2001. The decrease in net investment income in the first quarter of 2002 was due to an overall decline in market yields during the quarter. Investment expense for both the first quarters of 2002 and 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 2001. Interest Expense and Subsidiary Preferred Share Dividends Interest expense and subsidiary preferred share dividends were $9.9 million for the first quarter of 2002, a decrease of $0.9 million from the same period in 2001. The decrease resulted from the decrease in interest rates since the first quarter of 2001. Foreign Currency Gains (Losses) Trenwick Group Ltd. recorded foreign currency gains of $0.7 million for the three months ended March 31, 2002, compared to foreign currency losses of $1.0 million for the three months ended March 31, 2001 primarily due to the decline in the value of the British pound relative to the U.S. dollar. Non-Operating Income and Expenses Net realized gains on investments, net of applicable income taxes, were $1.1 million during the three months ended March 31, 2002, compared to net realized gains of $7.8 million for the three months ended March 31, 2001. The 2001 gains reflect actions taken to reposition Trenwick Group Ltd.'s debt security portfolio, partially offset by losses recognized on the sale of equity securities. Liquidity and Capital Resources As of March 31, 2002, Trenwick Group Ltd.'s consolidated investments and cash totaled $2.4 billion, a slight increase from the balance of $2.3 billion at December 31, 2001. The cost of Trenwick Group Ltd.'s equity securities was $11.0 million less than fair value at March 31, 2002 and was less than fair value by $6.8 million at December 31, 2001. The fair value of Trenwick Group Ltd.'s debt securities exceeded amortized cost by $15.0 million at March 31, 2002 and by $34.6 million at December 31, 2001. As of March 31, 2002, Trenwick Group Ltd.'s consolidated common stockholders' equity totaled $484.1 million, or $13.15 per common share, compared to $498.3 million, or $13.52 per common share at December 31, 2001. During the three months ended March 31, 2002, the unrealized appreciation of debt and equity securities decreased by $12.6 million, net of tax, or $0.34 per share. Cash provided by Trenwick Group Ltd.'s operating activities for the three months ended March 31, 2002 was $76.7 million compared to cash used by Trenwick Group Ltd.'s operating activities of $15.9 million in the comparable period of 2001. The increase in cash flow from operations was due primarily to an overall reduction in claims and claims expenses paid as a result of recoveries on reinsurance to close the 1999 year of account on Trenwick Group Ltd.'s Lloyd's syndicates. This reduction was offset in part by an increase in ceded premiums paid for reinstatement 13 premiums related to the September 11th terrorist attacks which were included in Trenwick Group Ltd.'s 2001 operating results. Net cash used in financing activities during the three months ended March 31, 2002 and 2001 both included $1.5 million of dividends paid to common shareholders. Trenwick Group Ltd. paid a dividend of $0.04 per common share in each of the first quarters of 2002 and 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 three months ended March 31, 2002 and 2001. 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 indebtedneess divided by total debt, preferred capital securities, preferred shares and common shareholders' equity) increased slightly to 31.6% at March 31, 2002 from 31.2% on December 31, 2001. Financings, Financing Capacity and Capitalization Concurrent with the Trenwick/LaSalle business combination, Trenwick America Corporation and Trenwick Holdings Limited, Trenwick Group Ltd.'s U.S. and U.K. holding companies, entered into an amended and restated $490 million credit agreement with various lending institutions. The credit agreement consisted of both a $260 million revolving credit facility and a $230 million letter of credit facility. The revolving credit facility has subsequently been converted into a four-year term loan. Trenwick America Corporation is the primary obligor with respect to the revolving credit facility, and Trenwick Holdings Limited is the primary obligor with respect to the letter of credit facility. Guarantees are provided by LaSalle Re Holdings Limited and Trenwick Group Ltd. with respect to both Trenwick America Corporation's and Trenwick Holdings Limited's obligations and additionally by Trenwick America Corporation with respect to Trenwick Holdings Limited's obligations. The credit agreement provides for a letter of credit facility which may only be used to support the Lloyd's syndicate participations of Trenwick Group Ltd.'s subsidiaries. The letter of credit facility is scheduled to expire in November 2002. In the event that Trenwick Group Ltd. is unable to obtain a replacement letter of credit facility or post sufficient collateral to support its Lloyd's underwriting activities, it will be required to reduce or cease its underwriting activities at Lloyd's for the 2003 year of account. The applicable interest rate on borrowings under the credit facility is generally 2.5% above the London Interbank Offered Rate and was 4.6% at March 31, 2002. The term loan facility is subject to scheduled principal amortization over the four-year period in accordance with the following schedule: 2002, 22.5%; 2003, 27.5%; 2004, 32.5%; 2005, 17.5%. Trenwick America Corporation is obligated to repay a portion or all of the term loan in the event of equity issuances, asset sales or debt issuances by Trenwick Group Ltd. or its subsidiaries. At March 31, 2002, $195.0 million of term loans were outstanding, and $230.0 million of letters of credit were outstanding under the credit facility. The credit agreement contains general covenants and restrictions as well as financial covenants relating to, among other things, Trenwick Group Ltd.'s minimum interest coverage, debt to capital leverage, minimum earned surplus, maintenance of a minimum A.M. Best Company rating of A- and tangible net worth. As of March 31, 2002, Trenwick Group Ltd. was in compliance with the credit agreement covenants. 14 On April 12, 2002, Trenwick Group Ltd., its subsidiaries and financial institutions holding a majority of the outstanding indebtedness under the credit facility executed an amendment to the credit facility. The amendment required Trenwick Group Ltd. to pledge its shares of LaSalle Re Holdings Limited and LaSalle Re Limited in favor of the lenders under the credit facility. In addition, the amendment revised the financial covenants relating to interest coverage and tangible net worth (each as defined by the financial covenants in the credit agreement). The amendment set Trenwick Group Ltd.'s minimum interest coverage ratio at 1.25 to 1 for the first quarter of 2002, 1.5 to 1 for the second quarter of 2002, 1.75 to 1 for the third quarter of 2002 and 2.5 to 1 thereafter. Trenwick Group Ltd.'s interest coverage ratio for the quarter ending March 31, 2002 was 2.1 to 1. The amendment adjusted the minimum tangible net worth Trenwick Group Ltd. must maintain to the following base amounts plus 50% of net income earned during the period: Time Period Minimum Tangible Net Worth ----------- -------------------------- Through May 15, 2002 $450,000,000 From May 16, 2002 to August 14, 2002 $475,000,000 From August 15, 2002 to November 14, 2002 $525,000,000 From November 15, 2002 to March 30, 2003 $550,000,000 Thereafter $560,000,000 Trenwick Group Ltd.'s tangible net worth as of March 31, 2002 was $489.4 million. A previous amendment adjusted downward the minimum risk-based capital requirement for Trenwick Group Ltd.'s subsidiary, Chartwell Insurance Company, from 300% to 225% through December 31, 2002. Thereafter, the minimum risk-based capital for Chartwell Insurance Company returns to 300%. The risk-based capital for Chartwell Insurance Company as of December 31, 2001 was 257% If Trenwick Group Ltd. is unable to meet the credit agreement's financial covenants, it may be required to repay the outstanding indebtedness and collateralize the outstanding letters of credit issued under the credit agreement through additional financing, asset sales, subsidiary dividends or similar transactions. The amendment increased the applicable margin on the interest paid by Trenwick Group Ltd. by 1% and added an additional .5% fee payable by Trenwick Group Ltd. in the event the loans and letters of credit outstanding are not repaid or secured in accordance with the following schedule: Date Percentage of Outstanding Indebtedness ---- -------------------------------------- September 30, 2002 40% June 30, 2003 60% June 30, 2004 80% Trenwick Group Ltd.'s ability to refinance its existing debt obligations or raise additional capital is dependent upon several factors, including financial conditions with respect to both the equity and debt markets and the ratings of its securities as established by the rating agencies. Following Trenwick Group Ltd.'s claims and claims expense liability reserve increase in the second quarter of 2001 and the losses it sustained in the September 11th terrorist attacks, its senior debt ratings were downgraded by Standard & Poor's Corporation to BBB- and by Moody's Investors Service to Ba2. Trenwick Group Ltd.'s ability to refinance its outstanding debt obligations, well as the cost of such borrowings, could be adversely affected by these ratings downgrades or if its ratings were downgraded further. 15 Catastrophe Equity Put On September 27, 2000, Trenwick Group Ltd. assumed the benefits and obligations of LaSalle Re Holdings Limited under a $100 million catastrophe equity put option. The catastrophe put option was amended and restated as of January 1, 2001 and amended as of January 25, 2002. As amended, the catastrophe equity put enables Trenwick Group Ltd. to raise up to $55 million of equity, through the issue of convertible preferred shares to the option writer in the event there is a qualifying catastrophic event or events occurring prior to January 1, 2002. The preferred shares can be redeemed by Trenwick Group Ltd. at any time following their issuance. In addition, the option writer can convert its preferred shares into common shares of Trenwick Group Ltd. at any time after they have been outstanding for five years or upon a change in control of Trenwick Group Ltd. or a decline in Trenwick Group Ltd.'s net worth below a specified level. Conversion is at the greater of the book value of Trenwick Group Ltd. at the date of conversion or the market value of the common shares based on the 30-day trading average prior to conversion. The annual net option premium for the catastrophe equity put has been charged to additional paid in capital. As a result of the terrorist attacks of September 11, 2001, Trenwick Group Ltd. has incurred in excess of $140 million in catastrophe losses as defined under the option agreement and delivered notice of exercise of the catastrophe equity put on March 28, 2002. The put option writer is in the process of obtaining the applicable regulatory approvals and investigating Trenwick Group Ltd.'s compliance with the conditions precedent to the exercise of the catastrophe equity put. Quantitative and Qualitative Disclosure About Market Risk Trenwick Group Ltd. reviewed the change in its exposure to market risks since December 31, 2001. 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 2001 Annual Report on Form 10-K has not materially changed. Accounting Standards Effective January 1, 2002, Trenwick Group Ltd. adopted a new Financial Accounting Standards Board statement which amended the accounting for goodwill and other intangible assets. This new statement suspended systematic goodwill amortization and required Trenwick Group Ltd.'s Bermuda holding company, LaSalle Re Holdings Limited to credit the negative goodwill balance of $11,586 to operations as of January 1, 2002 as a cumulative effect of an accounting change. The statement also requires that the remaining goodwill balance be tested for impairment under either market value or cash flow tests prior to the reporting of quarterly results of operations as of June 30, 2002. Any impairment noted as a result of these tests must be recorded as a cumulative effect of an accounting change as of January 1, 2002. We will conduct impairment tests on the remaining goodwill balance and implement this portion of the statement during the second quarter of 2002. 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 16 Commission, or in its communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls. Such statements may include, but are not limited to, projections of premium revenue, investment income, other revenue, losses, expenses, earnings (including earnings per share), cash flows, plans for future operations, common shareholders' equity (including book value per share), investments, financing needs, capital plans, dividends, plans relating to products or services of Trenwick 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: - 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; - 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 Group Ltd. to execute its strategies in its property/casualty operations; - Catastrophe losses in Trenwick Group Ltd.'s domestic and international property/casualty businesses; - Adverse development on property/casualty claims and claims expense liabilities related to business written in prior years, including, but not limited to, evolving case law and its effect on environmental and other latent injury claims, changing government regulations, newly identified toxins, newly reported claims, new theories of liability, or new insurance and reinsurance contract interpretations; - Changes in Trenwick Group Ltd.'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 Group Ltd.'s retrocessionaires or reinsurers; - 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; - Decreases in interest rates which may cause a reduction of income earned on new cash flow from operations and the reinvestment of the proceeds from sales or maturities of existing investments; - A decline in the value of Trenwick Group Ltd.'s equity investments; - Changes in the composition of Trenwick Group Ltd.'s investment portfolio; - Credit losses on Trenwick Group Ltd.'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 passage of federal or state legislation subjecting LaSalle Re Limited to United States taxation or regulation; - A contention by the United States Internal Revenue Service that LaSalle Re Limited is subject to United States taxation; - The impact of mergers and acquisitions; - Gains or losses related to changes in foreign currency exchange rates; - Changes in Trenwick Group Ltd.'s capital needs; 17 - The ability of Trenwick Group Ltd. to obtain the necessary letters of credit or collateral to support its Lloyd's underwriting operation; - The ability of Trenwick Group Ltd. to refinance or repay its outstanding indebtedness; and - Changes in the financial strength ratings assigned to Trenwick Group Ltd. and its operating subsidiaries or Lloyd's. 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 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. 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 Third Amendment to the Credit Agreement, dated as of April 12, 2002, among Trenwick America Corporation, Trenwick Holdings Limited, the lending institutions from time to time party thereto, Wachovia Bank, 18 National Association, as Syndication Agent, Fleet National Bank, as Documentation Agent, and JP Morgan Chase Bank, as Administrative Agent. 10.2 Third Amendment to the Holdings Guaranty, dated as of April 12, 2002, among Trenwick Group Ltd., and the lending institutions from time to time party to the Credit Agreement. (b) Reports on Form 8-K None 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TRENWICK GROUP LTD. Date: May 15, 2002 By: /s/ James F. Billett, Jr. ------------------------------------- Name: James F. Billett, Jr. Title: Chairman, President and Chief Executive Officer Date: May 15, 2002 By: /s/ Alan L. Hunte ------------------------------------- Name: Alan L. Hunte Title: Executive Vice President and Chief Financial Officer 20