-----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, S2JpLkeqAMAaRSpnfjbZV0AYvuQWpdELhw27+UCNTd5ovAAsESl4QU8HrqC/MegC 9dh6cgcYJtVyvlxGOQ3/vQ== 0000914039-98-000335.txt : 19980817 0000914039-98-000335.hdr.sgml : 19980817 ACCESSION NUMBER: 0000914039-98-000335 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRENWICK GROUP INC CENTRAL INDEX KEY: 0000787952 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 061152790 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-14737 FILM NUMBER: 98687603 BUSINESS ADDRESS: STREET 1: ONE STATION PL STREET 2: METRO CENTER CITY: STAMFORD STATE: CT ZIP: 06902 BUSINESS PHONE: 2033535500 10-Q 1 FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period to . Commission file number 0-14737 TRENWICK GROUP INC. (Exact name of registrant as specified in its charter)
Delaware 06-1152790 (State or other jurisdiction (I.R.S. Employer incorporation or organization) Identification No.) Metro Center One Station Place Stamford, Connecticut 06902 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 353-5500 None (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock. Class Outstanding at July 31, 1998 Common Stock, $.10 par value 12,056,699 2 TRENWICK GROUP INC. CONSOLIDATED BALANCE SHEET (UNAUDITED)
June 30, December 31, 1998 1997 ------------- ------------ (dollars in thousands) Assets Securities available for sale at fair value: Debt securities (amortized cost: $879,672 and $788,727) $ 903,385 $ 812,314 Equity securities (cost: $46,401 and $31,603) 57,133 39,163 Cash and cash equivalents 60,881 12,847 ------------- ------------ Total investments and cash 1,021,399 864,324 Accrued investment income 14,882 10,969 Receivables from ceding insurers 147,680 91,867 Reinsurance recoverable balances, net 123,647 66,361 Deferred policy acquisition costs 33,589 22,524 Net deferred income taxes 13,278 12,451 Other assets 35,863 19,427 ------------- ------------- Total assets $1,390,338 $1,087,923 ========== ========== Liabilities and Stockholders' Equity Liabilities: Unpaid claims and claims expenses $ 660,009 $ 518,387 Unearned premium income 150,918 87,020 6.70% senior notes due 2003 75,000 - Other liabilities 21,637 14,867 ------------- ------------ Total liabilities 907,564 620,274 ------------ ----------- Company-obligated mandatorily redeemable preferred capital securities of subsidiary trust holding solely junior subordinated debentures of Trenwick Group Inc. 110,000 110,000 ------------ ----------- Common stockholders' equity: Common stock, $.10 par value, 30,000,000 shares authorized; 12,056,699 and 11,951,060 shares outstanding 1,206 1,195 Additional paid-in capital 157,172 153,714 Retained earnings 195,411 183,218 Accumulated other comprehensive income 22,386 20,245 Deferred compensation under stock award plan (3,401) (723) -------------- --------------- Total common stockholders' equity 372,774 357,649 ------------ ------------ Total liabilities and stockholders' equity $1,390,338 $1,087,923 ========== ==========
The accompanying notes are an integral part of these statements. 3 3 TRENWICK GROUP INC. CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ 1998 1997 1998 1997 -------- -------- -------- -------- (in thousands except per share data) Revenues: Net premiums earned $ 70,964 $ 47,105 $116,788 $101,019 Net investment income 14,976 12,123 27,360 23,852 Net realized investment gains 540 1 1,260 1,916 Other income 320 10 332 10 -------- -------- -------- -------- Total revenues 86,800 59,239 145,740 126,797 -------- -------- -------- -------- Expenses: Claims and claims expenses incurred 43,071 27,486 69,576 58,290 Policy acquisition costs 20,773 14,580 35,931 31,957 Underwriting expenses 7,112 3,779 10,568 7,768 General and administrative expenses 1,025 -- 1,849 -- Interest expense 1,291 -- 1,349 890 Minority interest in subsidiary trust 2,425 2,426 4,851 4,043 -------- -------- -------- -------- Total expenses 75,697 48,271 124,124 102,948 -------- -------- -------- -------- Income before income taxes and extraordinary item 11,103 10,968 21,616 23,849 Income taxes 2,128 2,375 3,396 5,455 -------- -------- -------- -------- Income before extraordinary item 8,975 8,593 18,220 18,394 Extraordinary loss on debt redemption, net of $558 income tax benefit -- -- -- 1,037 -------- -------- -------- -------- Net income $ 8,975 $ 8,593 $ 18,220 $ 17,357 ======== ======== ======== ======== BASIC EARNINGS PER SHARE Income before extraordinary item $ .75 $ .72 $ 1.53 $ 1.62 Extraordinary loss -- -- -- .09 -------- -------- -------- -------- Net income $ .75 $ .72 $ 1.53 $ 1.53 ======== ======== ======== ======== DILUTED EARNINGS PER SHARE Income before extraordinary item $ .74 $ .71 $ 1.51 $ 1.53 ======== ======== ======== ======== Net income $ .74 $ .71 $ 1.51 $ 1.53 ======== ======== ======== ======== DIVIDENDS PER COMMON SHARE $ .25 $ .24 $ .50 $ .48 ======== ======== ======== ========
Prior period earnings per share amounts have been restated to comply with the accounting standard, "Earnings Per Share". The accompanying notes are an integral part of these statements. 4 4 TRENWICK GROUP INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
Three Months Ended Six Months Ended June 30, June 30, ---------------------------- ---------------------------- 1998 1997 1998 1997 --------- --------- --------- --------- (dollars in thousands) Common stockholders' equity, beginning of period $ 365,244 $ 322,474 $ 357,649 $ 265,753 Common stock, $.10 par value, and additional paid-in-capital: Conversion of debentures (1,783,926) -- -- -- 57,780 Exercise of employer stock options (4,500, 750, 27,000 and 60,750 shares) 132 20 460 776 Income tax benefits from additional compensation deductions allowable for income tax purposes -- 7 207 483 Restricted common stock awarded (82,889 and 9,782 shares) -- -- 2,952 328 Common stock purchased and retired (4,250 and 5,091 shares) -- -- (150) (171) Retained earnings: Net income 8,975 8,593 18,220 17,357 Cash dividends (3,014) (2,865) (6,027) (5,730) Accumulated other comprehensive income: Investment gains, net of income taxes 1,636 8,302 2,961 1,392 Realized investment gains, net of income taxes, included in net income (351) (1) (819) (1,245) Foreign currency translation adjustment, net of income taxes (1) -- (1) -- Deferred compensation under stock award plan: Restricted common stock awarded -- -- (2,952) (328) Compensation expense recognized 153 136 274 271 --------- --------- --------- --------- Common stockholders' equity, end of period $ 372,774 $ 336,666 $ 372,774 $ 336,666 ========= ========= ========= =========
The accompanying notes are an integral part of these statements. 5 5 TRENWICK GROUP INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30, 1998 1997 --------- --------- (in thousands) Cash flows from operating activities: Premiums collected $ 112,853 $ 73,612 Ceded premiums paid (34,781) (4,328) Claims and claims expenses paid (80,183) (55,859) Claims and claims expenses recovered 8,914 2,121 Underwriting expenses paid (12,542) (8,230) --------- --------- Cash used for/provided by underwriting activities (5,739) 7,316 Net investment income received 28,384 24,509 Interest expense paid (4,809) (496) Income taxes paid (6,443) (6,226) General and administrative expense (1,849) -- Other income received 11 10 --------- --------- Cash provided by operating activities 9,555 25,113 --------- --------- Cash flows for investing activities: Purchases of debt securities (252,322) (137,869) Sales of debt securities 233,262 33,980 Maturities of debt securities 33,654 26,002 Purchases of equity securities (5,382) (12,390) Sales of equity securities 1,453 4,621 Investment in subsidiary, net of cash acquired (39,784) -- Additions to premises and equipment (203) (78) --------- --------- Cash used for investing activities (29,322) (85,734) --------- --------- Cash flows for financing activities: Issuance of senior notes 75,000 -- Issuance of mandatorily redeemable preferred capital securities -- 110,000 Redemption of convertible debentures -- (46,997) Issuance costs of capital securities -- (1,498) Issuance costs of senior notes (784) -- Issuance of common stock 454 776 Repurchase of common stock (150) (171) Dividends paid (6,027) (5,730) --------- --------- Cash provided by financing activities 68,493 56,380 --------- --------- Effect of exchange rate on cash (692) -- Change in cash and cash equivalents 48,034 (4,241) Cash and cash equivalents, beginning of period 12,847 14,253 --------- --------- Cash and cash equivalents, end of period $ 60,881 $ 10,012 ========= =========
The accompanying notes are an integral part of these statements. 6 6 TRENWICK GROUP INC. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended Six Months Ended June 30, June 30, ------------------------- ------------------------- 1998 1997 1998 1997 -------- -------- -------- -------- (in thousands) Net income $ 8,975 $ 8,593 $ 18,220 $ 17,357 Other comprehensive income: Net unrealized investment gains, net of income taxes 1,285 8,301 2,142 147 Foreign currency translation adjustment, net of income taxes (1) -- (1) -- -------- -------- -------- -------- Comprehensive income $ 10,259 $ 16,894 $ 20,361 $ 17,504 ======== ======== ======== ========
The accompanying notes are an integral part of these statements. 7 7 TRENWICK GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The interim consolidated financial statements included those of Trenwick Group Inc. and its subsidiaries and have been prepared in conformity with generally accepted accounting principles applied on a basis consistent with prior periods. Certain items in the financial statements have been reclassified to conform with the 1998 presentation. Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The interim consolidated financial statements are unaudited; however, in the opinion of management, the interim consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. These interim statements should be read in conjunction with the 1997 audited financial statements and related notes. Earnings Per Share Effective December 31, 1997, Trenwick adopted a new accounting standard, "Earnings Per Share", which specifies the computation, presentation and disclosure requirements of earnings per share and supersedes the previous standard. It requires a dual presentation of basic and diluted earnings per share. Basic earnings per share, which excludes the effect of common stock equivalents, replaces primary earnings per share. Diluted earnings per share, which utilizes the average market price per share when applying the treasury stock method in determining common stock equivalents, replaces fully-diluted earnings per share. Prior period per share amounts have been restated to comply with this standard. Debt issuance costs Debt issuance costs associated with the issuance of the 6.70% senior notes are being amortized over the term of the related debt using the interest method. Comprehensive income As of January 1, 1998, Trenwick adopted the new accounting standard, "Reporting Comprehensive Income", which establishes standards for reporting and presentation of comprehensive income and its components. Comprehensive income comprises net income and other comprehensive income. Other comprehensive income consists of the change in the net unrealized appreciation of investments, net of tax, and the change in foreign currency translation adjustments, net of tax. Information for periods prior to 1998 is presented on a basis consistent with the 1998 information. 8 8 Foreign Exchange The assets and liabilities of foreign operations are translated at the rate of exchange in effect at the balance sheet date. Revenues and expenses of foreign operations are translated at the average exchange rates during the year. The effect of the translation adjustments for foreign operations is recorded as a cumulative translation adjustment in accumulated other comprehensive income within stockholders' equity, (net of applicable deferred income taxes). Foreign currency transaction gains and losses are included in net income and are not material. 2. REINSURANCE Trenwick purchases reinsurance to reduce its exposure to catastrophe losses and the frequency of large losses in all lines of business. Trenwick, however, remains liable in the event that its retrocessionaires do not meet their contractual obligations. The effects of reinsurance on premiums written, premiums earned and claims and claims expenses incurred is as follows (in thousands):
Premiums Written --------------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, --------------------------- --------------------------- 1998 1997 1998 1997 --------- --------- --------- --------- Assumed $ 92,357 $ 59,681 $ 153,886 $ 132,418 Ceded (17,401) (10,835) (34,437) (24,014) --------- --------- --------- --------- Net $ 74,956 $ 48,846 $ 119,449 $ 108,404 ========= ========= ========= =========
Premiums Earned --------------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, --------------------------- --------------------------- 1998 1997 1998 1997 --------- --------- --------- --------- Assumed $ 89,095 $ 56,266 $ 153,521 $ 120,491 Ceded (18,131) (9,161) (36,733) (19,472) --------- --------- --------- --------- Net $ 70,964 $ 47,105 $ 116,788 $ 101,019 ========= ========= ========= =========
9 9
Claims and Claims Expenses Incurred --------------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, --------------------------- --------------------------- 1998 1997 1998 1997 --------- --------- --------- --------- Assumed $ 56,113 $ 39,359 $ 102,824 $ 85,876 Ceded (13,042) (11,873) (33,248) (27,586) --------- --------- --------- --------- Net $ 43,071 $ 27,486 $ 69,576 $ 58,290 ========= ========= ========= =========
3. ACQUISITION OF TRENWICK INTERNATIONAL LIMITED On February 27, 1998, Trenwick completed the acquisition of Trenwick International Limited ("Trenwick International"), formerly Sorema (UK) Limited, from Sorema S.A. for an aggregate purchase price of $63.2 million, including acquisition costs, which approximated book value. On March 31, 1998, the share capital of Trenwick International was increased by $67.0 million to approximately $127.0 million. Trenwick International is based in London and underwrites specialty insurance and reinsurance treaty and facultative business on a worldwide basis. The acquisition has been accounted for using the purchase method of accounting, and accordingly, the purchase price has been allocated to the assets purchased and the liabilities assumed based on the estimated fair values at the date of acquisition. The excess of the purchase price over the estimated fair value of the net assets of approximately $992,000, has been recorded as goodwill, which is being amortized on a straight line basis over 25 years. All assets and liabilities of Trenwick International are consolidated in the balance sheet at June 30, 1998 and its operating results are consolidated in Trenwick's results for the quarter ended June 30, 1998. 4. STOCKHOLDERS' EQUITY Preferred Stock Trenwick has 2,000,000 shares of $.10 par value preferred stock authorized and none outstanding. For the six months ended June 30, 1998, Trenwick awarded key employees an aggregate of 82,889 shares of common stock under the terms of the 1989 and 1993 Stock Plans, valued at an average of $35.61 per share (approximately $2,952,000). Trenwick is recognizing compensation expense determined by the value of the shares, amortized over a five year vesting period. During the period, 4,250 shares were repurchased at an average of $35.29 per share (approximately $150,000) in connection with the satisfaction of withholding taxes payable upon the vesting of shares previously awarded under the plan. Common Stock On May 21, 1997, Trenwick's Board of Directors approved a stock repurchase program covering up to one million shares of the Company's common stock; no shares have been repurchased to date. 10 10 5. LONG TERM DEBT On March 27, 1998 Trenwick completed a private offering of $75 million aggregate principal amount of its 6.70% senior notes due April 1, 2003. Interest is payable semi-annually on April 1 and October 1 of each year, commencing on October 1, 1998. The notes are not subject to redemption prior to maturity. They are unsecured obligations and will rank senior in right of payment to all existing and future subordinated indebtedness of Trenwick, including Trenwick's obligations with respect to its 8.82% junior subordinated debentures held by Trenwick Capital Trust I in respect of the $110 million 8.82% subordinated capital income securities issued by the Trust. Under the terms of the notes, Trenwick is not restricted from incurring indebtedness, but is subject to limits on its ability to incur secured indebtedness for borrowed money. A portion of the net proceeds of the offering were contributed to Trenwick's wholly-owned subsidiary Trenwick International Limited, to support its insurance and reinsurance operations, including increasing its statutory capital to support its underwriting capacity. Remaining net proceeds will be used for general corporate purposes, which may include investments in and advances to subsidiaries, the financing of growth and expansion, the financing of possible future acquisitions and other corporate purposes. 11 11 6. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands except per share data):
Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 1998 1997 1998 1997 ------- ------- ------- ------- INCOME AVAILABLE TO COMMON STOCKHOLDERS: Income before extraordinary item (basic) $ 8,975 $ 8,593 $18,220 $18,394 Add interest on convertible debentures, net of income taxes -- -- -- 578 ------- ------- ------- ------- Income before extraordinary item (diluted) $ 8,975 $ 8,593 $18,220 $18,972 ======= ======= ======= ======= Net income (basic) $ 8,975 $ 8,593 $18,220 $17,357 Add interest on convertible debentures and loss on debt redemption, net of income taxes -- -- -- 1,615 ------- ------- ------- ------- Net income (diluted) $ 8,975 $ 8,593 $18,220 $18,972 ======= ======= ======= ======= WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING: Weighted average shares outstanding (basic) 11,954 11,899 11,944 11,374 Weighted average shares issuable on conversion of debt 902 Weighted average shares issuable on exercise of employee stock options, net of assumed repurchases 195 142 164 141 ------- ------- ------- ------- Weighted average shares outstanding (diluted) 12,149 12,041 12,108 12,417 ======= ======= ======= ======= PER SHARE AMOUNTS: Basic Income before extraordinary item $ .75 $ .72 $ 1.53 $ 1.62 ======= ======= ======= ======= Net income $ .75 $ .72 $ 1.53 $ 1.53 ======= ======= ======= ======= Diluted Income before extraordinary item $ .74 $ .71 $ 1.51 $ 1.53 ======= ======= ======= ======= Net income $ .74 $ .71 $ 1.51 $ 1.53 ======= ======= ======= =======
12 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Trenwick ("Trenwick") is a holding company with two principal operating subsidiaries, Trenwick America Reinsurance Corporation ("Trenwick America Re"), which reinsures property and casualty risks written by U.S. insurance companies, and Trenwick International Limited ("Trenwick International"), which writes insurance and reinsurance property and casualty risks outside of the U.S. Substantially all of Trenwick America Re's business is produced by reinsurance brokers. Trenwick International obtains its business from a variety of resources, including insurance and reinsurance brokers. Trenwick America Re and Trenwick International underwrite both treaty and facultative business. OPERATING RESULTS Trenwick Group Inc. reported consolidated net income of $9.0 million, or $.75 per share, for the second quarter of 1998 compared to $8.6 million, or $.72 per share, for the second quarter of 1997. Per share earnings on a diluted basis were $.74 for 1998 compared to $.71 for 1997. For the first half of 1998, Trenwick's net income was $18.2 million or $1.53 per share, compared to income before extraordinary item of $18.4 million or $1.62 per share in the first half of 1997. Included in net income for the first half of 1997 was an extraordinary loss on debt redemption, net of tax, of approximately $1 million or $.09 per share. Net income per diluted share was $1.51 for the first half of 1998 compared to $1.53 for the first half of 1997. Operating income for the second quarter of 1998 includes after-tax costs of approximately $800,000 or $.07 per share relating to expansion activities of the Group and profit commission adjustments on certain prior years' accounts. Expansion activities include business development and mergers and acquisitions. Net income for the second quarter of 1998 and 1997 includes after-tax realized investment gains of $351,000 or $.03 per share and $1,000 respectively. Net income for the first half of 1998 and 1997 includes after-tax realized investment gains of $819,000 or $.07 per share and $1.2 million or $.10 per share, respectively. PREMIUMS Trenwick's consolidated net premium writings in the second quarter and first half of 1998 totaled $75.0 million and $119.5 million compared to $48.9 million and $108.4 million in 1997, respectively. This increase of 53% and 10% for the second quarter and first half of 1998 primarily reflects the inclusion of Trenwick International's business during these periods. Net premium writings from the Group's U.S. operations declined 18% and 22% in the second quarter and the first half of 1998 compared to last year. Casualty business, which represents 92% of the Company's U.S. business, declined 16% and 19%, while property business declined 34% and 48%, 13 13 respectively. Premium writings declined as a result of three principal causes. Price competition among primary companies put pressure on ceding companies' own premium writings. Insurers continued to restructure their reinsurance programs, reducing the amount of reinsurance they purchase. In addition, increasingly intense competition in the reinsurance markets drove reinsurance prices on a number of casualty and property accounts below pricing levels that the Company would accept. Trenwick International reported net premium writings of $34.8 million in the second quarter of 1998. While the international business is also highly competitive, growth in this business is expected to result primarily from an increase in Trenwick International's retention of business owing to a change in its reinsurance programs, and an increase in its capital. The Company is also expanding into new geographic markets previously prohibited by its former parent. UNDERWRITING EXPERIENCE The combined ratio is one means of measuring the profitability of a property and casualty company. The combined ratio reflects underwriting experience, but does not reflect income from investments or provisions for income taxes. A combined ratio below 100% indicates profitable underwriting and a combined ratio exceeding 100% indicates unprofitable underwriting. Although a reinsurer may have unprofitable underwriting results, the reinsurer may still be profitable because of investment income earned on the accumulated invested assets. The following table sets forth Trenwick's combined ratios and the components thereof calculated on a GAAP basis for the period indicated, together with Trenwick America Re's combined ratio calculated on a statutory basis:
Three Months Ended Six Months Ended June 30, June 30, --------------------- --------------------- 1998 1997 1998 1997 ------ ------ ------ ------ Claims and claims expense ratio 60.7% 58.4% 59.6% 57.7% ------ ------ ------ ------ Expense ratio: Policy acquisition expense ratio 29.3 30.9 30.8 31.6 Underwriting expense ratio 10.0 8.0 9.0 7.7 ------ ------ ------ ------ Total expense ratio 39.3% 38.9% 39.8% 39.3% ------ ------ ------ ------ Combined ratio (GAAP basis) 100.0% 97.3% 99.4% 97.0% ------ ------ ------ ------
The Group's GAAP combined ratio for the second quarter and first half of 1998 was 100% and 99.4% compared to 97.3% and 97% for the same period in 1997. Trenwick America's GAAP combined loss and expense ratio in the second quarter and first half of 1998 was 98.7% and 98.6%, compared to 97.3% and 97% for the same periods in 1997. The increase in the combined loss and expense ratio for this business resulted primarily from higher commission expenses due to the continued shift in the mix of business from excess to quota share and an increase in the overhead expense ratio caused by lower premium writings. The combined loss and expense ratio in the first half of 1998 includes favorable reserve development of approximately $3.0 million compared to approximately $2.9 million for the same period in 1997. Trenwick America Re's statutory combined ratio for the second quarter and first half of 1998 was 98.2% and 99.1% compared to 96.1% and 96.0% for the same period in 1997. Trenwick International's GAAP combined loss and expense ratio for the second quarter and first half of 1998 was 102.2%. 14 14 INVESTMENT INCOME Group net investment income of $15 million and $27.4 million increased 24% and 15%, respectively, in the second quarter and first half of 1998 compared to $12.1 million and $23.9 million for the same periods in 1997. Pre-tax yields on invested assets, excluding equity securities, averaged 6.3% in 1998 and 6.4% in 1997. The increase in investment income is due to the continued growth in Trenwick's invested asset base resulting primarily from the acquisition of Trenwick International. After-tax net investment income in the second quarter and first half of 1998 was $10.9 million and $20.4 million compared to $9.2 million and $18.1 million for the comparative periods in 1997. The effective income tax rate on net investment income for the first half of 1998 was approximately 25.2% versus 23.9% for the same period in 1997. The increase in the effective income tax rate is due to the fully taxable nature of Trenwick International's investments. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 1998, Trenwick's consolidated investments and cash totaled $1.0 billion, as compared to $864.3 million at December 31, 1997. Included in cash and cash equivalents as of June 30, 1998 are the proceeds from the issuance of the 6.70% senior notes. The fair value of the Company's debt securities portfolio exceeded amortized cost of $879.7 million and $788.7 million by $23.7 million and $23.6 million at June 30, 1998 and December 31, 1997, respectively. At June 30, 1998 and at December 31, 1997, the fair value of the Company's equity securities exceeded cost of $46.4 million and $31.6 million by $10.7 million and $7.6 million, respectively. As of June 30, 1998, Trenwick's consolidated common stockholders' equity totaled $372.8 million or $30.92 per share, as compared to $357.6 million or $29.93 per share at December 31, 1997. Since December 31, 1997, the unrealized appreciation of debt and equity investments increased $2.1 million, net of tax, or $.18 per share. Statutory surplus of Trenwick America Re was $344.1 million as of June 30, 1998, compared to $322.9 million as of December 31, 1997. Trenwick International's statutory surplus was $129.0 million as of June 30, 1998. Cash flow from operations of $9.6 million in the first half of 1998 decreased approximately 62% compared to cash flow from operations of $25.1 million in the first half of 1997. The reduction in cash flow from operations was due primarily to timing differences on recoveries relating to Trenwick International's contracts with its former parent and a decline in premium volume associated with the Group's U.S. business. Cash provided by financing activities in the first half of 1998 increased to $68.5 million compared to cash provided by financing activities of $56.4 million in the first half of 1997, primarily due to the proceeds of the issuance of $75 million principal amount of 6.70% senior notes. Trenwick declared a second quarter dividend of $.25 per share in 1998, a 4% increase compared to $.24 in the second quarter of 1997. 15 15 Part II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders A total of 11,282,771 shares, or 93% of the 12,052,199 shares of common stock outstanding on the March 26, 1998 record date, were represented at the Company's Annual Meeting of Stockholders held on May 21, 1998. Voting results were as follows: On the proposal to elect two directors to serve in Class II until 2001, Mr. Frederick D. Watkins was elected by an affirmative vote of 11,228,098 shares, with 54,673 shares withheld, and Mr. Stephen R. Wilcox was elected by an affirmative vote of 11,231,806 shares, with 50,965 shares withheld. Messrs. Anthony S. Brown, Neil Dunn and P. Anthony Jacobs continue to serve in Class III until 1999, and Messrs. James F. Billett, Jr., W. Marston Becker and Joseph D. Sargent continue to serve in Class I until 2000. On the proposal to increase the aggregate number of shares authorized for issuance under the 1993 Stock Option Plan by 500,000 shares and increase the maximum number of shares which may be awarded under such Plan to any one participant from 150,000 to 450,000, there were 7,814,380 shares voted in favor, 2,457,658 shares opposed and 1,010,733 shares abstaining. On the proposal to ratify the appointment of Price Waterhouse LLP (now named PricewaterhouseCoopers LLP) as independent accountants for the year ending December 31, 1998, there were 11,278,079 shares voted in favor, 1,980 shares opposed and 2,712 shares abstaining. Item 5. Stockholder Proposals - 1999 Annual Meeting A stockholder of the Company may present a proposal for the 1999 Annual Meeting by directing such proposal to the Secretary at the corporate address. In order to be included in the Company's Proxy Statement and Proxy relating to such meeting, a proposal must be received no later than December 21, 1998. If a stockholder presents a proposal at the 1999 Annual Meeting without the Company's having received notice of such proposal by March 6, 1999, the Proxy Committee will be permitted to vote on such proposal in accordance with its judgement, even if its intention with respect to such proposal is not disclosed in the Company's Proxy Statement. Item 6. Exhibits and Reports on Form 8-K a) Exhibits 27.0 Financial Data Schedule b) Reports on Form 8-K None 16 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TRENWICK GROUP INC. ----------------------------- (Registrant) Date: August 14, 1998 JAMES F. BILLETT, JR. ---------------- ----------------------------- James F. Billett, Jr. Chairman, President and Chief Executive Officer Date: August 14, 1998 ALAN L. HUNTE --------------- ----------------------------- Alan L. Hunte Vice President, Chief Financial Officer and Treasurer 17 EX-27 2 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS CONTAINED IN FORM 10-Q FOR THE SIX MONTHS ENDED JUNE 30, 1998 FOR TRENWICK GROUP INC. 1,000 U.S. DOLLARS 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 1 903,385 0 0 57,133 0 0 960,518 60,881 147,680 33,589 1,390,338 660,009 150,918 0 0 75,000 110,000 0 1,206 371,568 1,390,338 116,788 27,360 1,260 332 69,576 35,931 10,568 21,616 3,396 18,220 0 0 0 18,220 1.53 1.51 0 0 0 0 0 0 0 REPRESENTS NET REINSURANCE RECOVERABLE BALANCES AFTER OFFSET OF FUNDS HELD AND REINSURANCE BALANCES PAYABLE. REPRESENTS BASIC EARNINGS PER SHARE.
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