-----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, NFlEiJ4Eq/NzxGyboxt+9ONgco8p7z8iTKn12KGpqMQ++0ohbF05K2XrCi0945Eg 89FibZoGPwEzFsH9gvOImw== 0000914039-98-000466.txt : 19981118 0000914039-98-000466.hdr.sgml : 19981118 ACCESSION NUMBER: 0000914039-98-000466 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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: 98751705 BUSINESS ADDRESS: STREET 1: ONE STATION PL STREET 2: METRO CENTER CITY: STAMFORD STATE: CT ZIP: 06902 BUSINESS PHONE: 2033535500 10-Q 1 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 September 30, 1998. / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period __________ to __________. Commission file number 0-14737 TRENWICK GROUP INC. (Exact name of registrant as specified in its charter) Delaware 06-1152790 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Canterbury Green Stamford, Connecticut 06901 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (203) 353-5500 Metro Center, One Station Place, Stamford, Connecticut 06902 (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES /x/ NO_____ Indicate the number of shares outstanding of each of the issuer's classes of common stock.
Class Outstanding at October 31, 1998 ----- ------------------------------- Common Stock, $.10 par value 11,167,099
2 TRENWICK GROUP INC. INDEX
Page PART I. Financial Information Number Consolidated Balance Sheet September 30, 1998 and December 31, 1997 3 Consolidated Statement of Income Three and Nine Months Ended September 30, 1998 and 1997 4 Consolidated Statement of Changes in Stockholders' Equity Three and Nine Months Ended September 30, 1998 and 1997 5 Consolidated Statement of Cash Flows Nine Months Ended March 31, 1998 and 1997 6 Consolidated Statement of Comprehensive Income Three and Nine Months Ended September 30, 1998 7 Notes to Consolidated Financial Statements 8-12 Management's Discussion and Analysis of Financial Condition and Results of Operations 13-17 PART II. Other Information Item 6. Exhibits and Reports on Form 8-K 18 Signatures 19
3 TRENWICK GROUP INC. CONSOLIDATED BALANCE SHEET (UNAUDITED)
September 30, December 31, 1998 1997 ---- ---- (dollars in thousands) Assets Securities available for sale at fair value: Debt securities (amortized cost: $871,724 and $788,727) $ 905,881 $ 812,314 Equity securities (cost: $47,680 and $31,603) 52,948 39,163 Cash and cash equivalents 67,029 12,847 ----------- ----------- Total investments and cash 1,025,858 864,324 Accrued investment income 13,970 10,969 Receivables from ceding insurers 140,893 91,867 Reinsurance recoverable balances, net 126,510 66,361 Deferred policy acquisition costs 36,065 22,524 Net deferred income taxes 10,967 12,451 Other assets 39,068 19,427 ----------- ----------- Total assets $ 1,393,331 $ 1,087,923 =========== =========== Liabilities and Stockholders' Equity Liabilities: Unpaid claims and claims expenses $ 671,309 $ 518,387 Unearned premium income 157,908 87,020 6.70% senior notes due 2003 75,000 -- Other liabilities 22,039 14,867 ----------- ----------- Total liabilities 926,256 620,274 ----------- ----------- Company-obligated mandatorily redeemable preferred capital securities of subsidiary trust holding solely junior subordinated debentures of Trenwick Group Inc. 110,000 110,000 ----------- ----------- Common stockholders' equity: Common stock, $.10 par value, 30,000,000 shares authorized; 11,385,699 and 11,951,060 shares outstanding 1,139 1,195 Additional paid-in capital 134,105 153,714 Retained earnings 197,758 183,218 Accumulated other comprehensive income 27,195 20,245 Deferred compensation under stock award plan (3,122) (723) ----------- ----------- Total common stockholders' equity 357,075 357,649 ----------- ----------- Total liabilities and stockholders' equity $ 1,393,331 $ 1,087,923 =========== ===========
The accompanying notes are an integral part of these statements. 3 4 TRENWICK GROUP INC. CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 ---- ---- ---- ---- (in thousands except per share data) Revenues: Net premiums earned $ 65,161 $ 43,723 $181,949 $144,742 Net investment income 14,317 12,178 41,677 36,030 Net realized investment gains 184 -- 1,444 1,916 Other income/(loss) (159) -- 173 10 -------- -------- -------- -------- Total revenues 79,503 55,901 225,243 182,698 -------- -------- -------- -------- Expenses: Claims and claims expenses incurred 41,501 25,522 111,077 83,812 Policy acquisition costs 19,822 13,103 55,753 45,060 Underwriting expenses 6,891 3,576 17,459 11,344 General and administrative expenses 895 -- 2,744 -- Interest expense 1,292 2 2,641 892 Minority interest in subsidiary trust 2,426 2,452 7,277 6,495 -------- -------- -------- -------- Total expenses 72,827 44,655 196,951 147,603 -------- -------- -------- -------- Income before income taxes and extraordinary item 6,676 11,246 28,292 35,095 Income taxes 1,433 2,473 4,829 7,928 -------- -------- -------- -------- Income before extraordinary item 5,243 8,773 23,463 27,167 Extraordinary loss on debt redemption, net of $558 income tax benefit -- -- -- 1,037 -------- -------- -------- -------- Net income $ 5,243 $ 8,773 $ 23,463 $ 26,130 ======== ======== ======== ======== BASIC EARNINGS PER SHARE Income before extraordinary item $ .45 $ .74 $ 1.98 $ 2.35 Extraordinary loss -- -- -- .09 -------- -------- -------- -------- Net income $ .45 $ .74 $ 1.98 $ 2.26 ======== ======== ======== ======== DILUTED EARNINGS PER SHARE Income before extraordinary item $ .44 $ .73 $ 1.95 $ 2.25 ======== ======== ======== ======== Net income $ .44 $ .73 $ 1.95 $ 2.25 ======== ======== ======== ======== DIVIDENDS PER COMMON SHARE $ .25 $ .24 $ .75 $ .72 ======== ======== ======== ========
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 5 TRENWICK GROUP INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 ---- ---- ---- ---- (dollars in thousands) Common stockholders' equity, beginning of period $ 372,774 $ 336,666 $ 357,649 $ 265,753 Common stock, $.10 par value, and additional paid-in-capital: Conversion of debentures (1,783,926) -- -- -- 57,780 Exercise of employer stock options (61,500, 16,000, 88,500 and 76,750 shares) 694 180 1,154 956 Income tax benefits from additional compensation deductions allowable for income tax purposes 541 -- 748 483 Restricted common stock awarded (82,889 and 9,782 shares) -- -- 2,952 328 Restricted common stock awards cancelled (2,122 and 2,122 shares) -- (42) -- (42) Common stock purchased and retired (732,500, 736,750 and 5,091 shares) (24,369) -- (24,519) (171) Retained earnings: Net income 5,243 8,773 23,463 26,130 Cash dividends (2,896) (2,948) (8,923) (8,678) Accumulated other comprehensive income: Investment gains, net of income taxes 3,324 6,024 6,285 7,416 Realized investment gains, net of income taxes, included in net income (120) -- (939) (1,245) Foreign currency translation adjustment, net of income taxes 1,605 -- 1,604 -- Deferred compensation under stock award plan: Restricted common stock awarded -- -- (2,952) (328) Restricted common stock awards cancelled -- 42 -- 42 Compensation expense recognized 279 136 553 407 --------- --------- --------- --------- Common stockholders' equity, end of period $ 357,075 $ 348,831 $ 357,075 $ 348,831 ========= ========= ========= =========
The accompanying notes are an integral part of these statements. 5 6 TRENWICK GROUP INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, 1998 1997 ---- ---- (in thousands) Cash flows from operating activities: Premiums collected $ 183,688 $ 112,384 Ceded premiums paid (42,003) (6,360) Claims and claims expenses paid (135,318) (85,383) Claims and claims expenses recovered 19,123 2,394 Underwriting expenses paid (18,552) (10,578) --------- --------- Cash provided by underwriting activities 6,938 12,457 Net investment income received 45,570 37,242 Interest expense paid (9,702) (5,364) Income taxes paid (8,444) (6,270) General and administrative expense (2,744) -- Other income received 54 -- --------- --------- Cash provided by operating activities 31,672 38,065 --------- --------- Cash flows for investing activities: Purchases of debt securities (401,361) (171,147) Sales of debt securities 96,569 33,980 Maturities of debt securities 329,226 53,042 Purchases of equity securities (8,091) (12,428) Sales of equity securities 2,363 4,621 Investment in subsidiary, net of cash acquired (39,785) -- Additions to premises and equipment (1,849) (158) --------- --------- Cash used for investing activities (22,928) (92,090) --------- --------- Cash flows for financing activities: Issuance of senior notes 75,000 -- Issuance of mandatorily redeemable preferred capital securities -- 110,000 Redemption of convertible debentures -- (46,997) Issuance costs of capital securities -- (1,555) Issuance costs of senior notes (922) -- Issuance of common stock 1,154 956 Repurchase of common stock (20,721) (171) Dividends paid (8,923) (8,598) --------- --------- Cash provided by financing activities 45,588 53,635 --------- --------- Effect of exchange rate on cash (150) -- --------- --------- Change in cash and cash equivalents 54,182 (390) Cash and cash equivalents, beginning of period 12,847 14,253 --------- --------- Cash and cash equivalents, end of period $ 67,029 $ 13,863 ========= =========
The accompanying notes are an integral part of these statements. 6 7 TRENWICK GROUP INC. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 ---- ---- ---- ---- (in thousands) Net income $ 5,243 $ 8,773 $23,463 $26,130 Other comprehensive income: Net unrealized investment gains, 3,204 6,024 5,346 6,171 net of income taxes Foreign currency translation adjustment, net of income taxes 1,605 -- 1,604 -- ------- ------- ------- ------- Comprehensive income $10,052 $14,797 $30,413 $32,301 ======= ======= ======= =======
The accompanying notes are an integral part of these statements. 7 8 TRENWICK GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The interim consolidated financial statements included those of Trenwick Group Inc. and its subsidiaries and have been prepared in conformity with generally accepted accounting principles applied on a basis consistent with prior periods. Certain items in the financial statements have been reclassified to conform with the 1998 presentation. Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The interim consolidated financial statements are unaudited; however, in the opinion of management, the interim consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. These interim statements should be read in conjunction with the 1997 audited financial statements and related notes. Earnings Per Share Effective December 31, 1997, Trenwick adopted a new accounting standard, "Earnings Per Share", which specifies the computation, presentation and disclosure requirements of earnings per share and supersedes the previous standard. It requires a dual presentation of basic and diluted earnings per share. Basic earnings per share, which excludes the effect of common stock equivalents, replaces primary earnings per share. Diluted earnings per share, which utilizes the average market price per share when applying the treasury stock method in determining common stock equivalents, replaces fully-diluted earnings per share. Prior period per share amounts have been restated to comply with this standard. Debt issuance costs Debt issuance costs associated with the issuance of the 6.70% senior notes are being amortized over the term of the related debt using the interest method. Comprehensive income As of January 1, 1998, Trenwick adopted the new accounting standard, "Reporting Comprehensive Income", which establishes standards for reporting and presentation of comprehensive income and its components. Comprehensive income comprises net income and other comprehensive income. Other comprehensive income consists of the change in the net unrealized appreciation of investments, net of tax, and the change in foreign currency translation adjustments, net of tax. Information for periods prior to 1998 is presented on a basis consistent with the 1998 information. 8 9 Foreign Exchange The assets and liabilities of foreign operations are translated at the rate of exchange in effect at the balance sheet date. Revenues and expenses of foreign operations are translated at the average exchange rates during the year. The effect of the translation adjustments for foreign operations is recorded as a cumulative translation adjustment in accumulated other comprehensive income within stockholders' equity, (net of applicable deferred income taxes). Foreign currency transaction gains and losses are included in net income and are not material. 2. REINSURANCE Trenwick purchases reinsurance to reduce its exposure to catastrophe losses and the frequency of large losses in all lines of business. Trenwick, however, remains liable in the event that its retrocessionaires do not meet their contractual obligations. The effects of reinsurance on premiums written, premiums earned and claims and claims expenses incurred is as follows (in thousands):
Premiums Written ---------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------ 1998 1997 1998 1997 ---- ---- ---- ---- Gross $ 88,488 $ 59,892 $ 242,374 $ 192,310 Ceded (19,727) (15,510) (54,164) (39,524) --------- --------- --------- --------- Net $ 68,761 $ 44,382 $ 188,210 $ 152,786 ========= ========= ========= =========
Premiums Earned ---------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------ 1998 1997 1998 1997 ---- ---- ---- ---- Gross $ 84,934 $ 53,883 $ 238,455 $ 174,374 Ceded (19,773) (10,160) (56,506) (29,632) --------- --------- --------- --------- Net $ 65,161 $ 43,723 $ 181,949 $ 144,742 ========= ========= ========= =========
9 10
Claims and Claims Expenses Incurred ---------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------ 1998 1997 1998 1997 ---- ---- ---- ---- Gross $ 55,335 $ 40,183 $ 158,159 $ 126,059 Ceded (13,834) (14,661) (47,082) (42,247) --------- --------- --------- --------- Net $ 41,501 $ 25,522 $ 111,077 $ 83,812 ========= ========= ========= =========
3. ACQUISITION OF TRENWICK INTERNATIONAL LIMITED On February 27, 1998, Trenwick completed the acquisition of Trenwick International Limited ("Trenwick International"), formerly Sorema (UK) Limited, from Sorema S.A. for an aggregate purchase price of $63.2 million, including acquisition costs, which approximated book value. On March 31, 1998, the share capital of Trenwick International was increased by $67.0 million to approximately $127.0 million. Trenwick International is based in London and underwrites specialty insurance and reinsurance treaty and facultative business on a worldwide basis. The acquisition has been accounted for using the purchase method of accounting, and accordingly, the purchase price has been allocated to the assets purchased and the liabilities assumed based on the estimated fair values at the date of acquisition. The excess of the purchase price over the estimated fair value of the net assets of approximately $992,000, has been recorded as goodwill, which is being amortized on a straight line basis over 25 years. All assets and liabilities of Trenwick International are consolidated in the balance sheet at September 30, 1998 and its operating results are consolidated in Trenwick's results for the year ended September 30, 1998. 4. STOCKHOLDERS' EQUITY Preferred Stock Trenwick has 2,000,000 shares of $.10 par value preferred stock authorized and none outstanding. Common Stock On September 28, 1998, Trenwick's Board of Directors approved an additional 600,000 shares to its stock repurchase program to a total of 1,600,000 shares. The program was originally adopted on May 21, 1997. As of September 30, 1998, 732,500 shares have been repurchased at an average price of $33.27 per share. For the nine months ended September 30, 1998, Trenwick awarded key employees an aggregate of 82,889 shares of common stock under the terms of the 1989 and 1993 Stock Plans, valued at an average of $35.61 per share (approximately $2,952,000). Trenwick is recognizing compensation expense determined by the value of the shares, amortized over a five year vesting period. During the period, 4,250 shares were repurchased at an average of $35.29 per share (approximately $150,000) in connection with the satisfaction of withholding taxes payable upon the vesting of shares previously awarded under the plan. 10 11 5. LONG TERM DEBT On March 27, 1998 Trenwick completed a private offering of $75 million aggregate principal amount of its 6.70% senior notes due April 1, 2003. Interest is payable semi-annually on April 1 and October 1 of each year, commencing on October 1, 1998. The notes are not subject to redemption prior to maturity. They are unsecured obligations and will rank senior in right of payment to all existing and future subordinated indebtedness of Trenwick, including Trenwick's obligations with respect to its 8.82% junior subordinated debentures held by Trenwick Capital Trust I in respect of the $110 million 8.82% subordinated capital income securities issued by the Trust. Under the terms of the notes, Trenwick is not restricted from incurring indebtedness, but is subject to limits on its ability to incur secured indebtedness for borrowed money. A portion of the net proceeds of the offering were contributed to Trenwick's wholly-owned subsidiary Trenwick International Limited, to support its insurance and reinsurance operations, including increasing its statutory capital to support its underwriting capacity. Remaining net proceeds will be used for general corporate purposes, which may include investments in and advances to subsidiaries, the financing of growth and expansion, the financing of possible future acquisitions and other corporate purposes. 11 12 6. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands except per share data):
Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 ---- ---- ---- ---- INCOME AVAILABLE TO COMMON STOCKHOLDERS: Income before extraordinary item (basic) $ 5,243 $ 8,773 $23,463 $27,167 Add interest on convertible debentures, net of income taxes -- -- -- 578 ------- ------- ------- ------- Income before extraordinary item (diluted) $ 5,243 $ 8,773 $23,463 $27,745 ======= ======= ======= ======= Net income (basic) $ 5,243 $ 8,773 $23,463 $26,130 Add interest on convertible debentures and loss on debt redemption, net of income taxes -- -- -- 1,615 ------- ------- ------- ------- Net income (diluted) $ 5,243 $ 8,773 $23,463 $27,745 ======= ======= ======= ======= WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING: Weighted average shares outstanding (basic) 11,713 11,907 11,866 11,554 Weighted average shares issuable on conversion of debt -- -- -- 598 Weighted average shares issuable on exercise of employee stock options, net of assumed repurchases 128 196 149 170 ------- ------- ------- ------- Weighted average shares outstanding (diluted) 11,841 12,103 12,015 12,322 ======= ======= ======= ======= PER SHARE AMOUNTS: Basic Income before extraordinary item .45 $ .74 1.98 $ 2.35 ======= ======= ======= ======= Net income .45 $ .74 1.98 $ 2.26 ======= ======= ======= ======= Diluted Income before extraordinary item .44 $ .73 1.95 $ 2.25 ======= ======= ======= ======= Net income .44 $ .73 1.95 $ 2.25 ======= ======= ======= =======
12 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Trenwick ("Trenwick") is a holding company with two principal operating subsidiaries, Trenwick America Reinsurance Corporation ("Trenwick America Re"), which reinsures property and casualty risks written by U.S. insurance companies, and Trenwick International Limited ("Trenwick International"), which writes insurance and reinsurance property and casualty risks outside of the U.S. Substantially all of Trenwick America Re's business is produced by reinsurance brokers. Trenwick International obtains its business from a variety of resources, including insurance and reinsurance brokers. Trenwick America Re and Trenwick International underwrite both treaty and facultative business. OPERATING RESULTS Trenwick Group Inc. reported operating income, excluding catastrophe losses, of $8.8 million or $.75 per share for the third quarter of 1998, compared to $8.8 million or $.74 per share for the third quarter of 1997. Consolidated net income for the third quarter of 1998 of $5.2 million or $.45 per share includes after-tax charges of $3.7 million or $.32 per share associated with claims arising from Hurricane Georges and after-tax realized investment gains of $0.1 million or $.01 per share. Consolidated net income for the third quarter of 1997 was $8.8 million or $.74 per share. Net income per share on a diluted basis was $.44 per share for 1998 compared to $.73 per share for 1997. For the nine months ended September 30, 1998, Trenwick's operating income excluding catastrophe losses was $26.2 million or $2.21 per share, compared to $25.9 million or $2.24 per share for the nine months ended September 30, 1997. Consolidated net income for the nine months ended September 30, 1998 of $23.5 million or $1.98 per share includes after-tax charges of $3.7 million or $.31 per share associated with claims arising from Hurricane Georges and after-tax realized investment gains of $0.9 million or $.08 per share. Consolidated net income for the nine months ended September 30, 1997 of $26.1 million or $2.26 per share includes after-tax realized investment gains of $1.2 million or $.11 per share and an after-tax extraordinary loss on debt redemption of $1.0 million or $.09 per share. Net income per share on a diluted basis was $1.95 for the nine months ended September 30, 1998, compared to $2.25 per share for the nine months ended September 30, 1997. PREMIUMS Trenwick's consolidated net premium writings in the quarter and for the nine months ended September 30, 1998 totaled $68.8 million and $188.2 million compared to $44.4 million and $152.8 million for the same periods in 1997. This increase of 55% and 23% for the quarter and for the nine months ended September 30, 1998 primarily reflects the inclusion of Trenwick International's business during these periods. 13 14 Net premium writings from Trenwick America, the group's U.S. operations, increased by 10% in the quarter compared to last year. This increase partially offset a decline in net premium writings in the prior two quarters, resulting in a decrease in year-to-date net premium writings of 13%. Casualty business, which represents 92% of Trenwick America's business, increased 17% in the quarter while property business declined 34%. For the nine months ended September 30, 1998, casualty and property business declined 8% and 43%, respectively. While Trenwick America experienced an increase in casualty business in the quarter from certain new accounts and an increase in existing business, it does not anticipate continued growth is this sector as a result of the intense competition in the reinsurance markets. As previously reported, Trenwick America withdraws from accounts when pricing falls below what it believes are acceptable rate levels. Trenwick continues to benefit from its recent acquisition of Trenwick International, which reported net premium writings of $20.0 million and $54.8 million in the third quarter and nine months ended September 30, 1998, respectively. While the international business is also highly competitive, growth in this business is expected to result primarily from an increase in Trenwick International's retention of business owing to a change in its reinsurance programs and an increase in its capital. Trenwick International is also expanding into new geographic markets previously limited by its former parent. UNDERWRITING EXPERIENCE The combined ratio is one means of measuring the profitability of a property and casualty company. The combined ratio reflects underwriting experience, but does not reflect income from investments or provisions for income taxes. A combined ratio below 100% indicates profitable underwriting and a combined ratio exceeding 100% indicates unprofitable underwriting. Although a reinsurer may have unprofitable underwriting results, the reinsurer may still be profitable because of investment income earned on the accumulated invested assets. The following table sets forth Trenwick's combined ratios and the components thereof calculated on a GAAP basis for the period indicated, together with Trenwick America Re's combined ratio calculated on a statutory basis:
Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 ---- ---- ---- ---- Claims and claims expense ratio 63.7% 58.3% 61.1% 57.9% Expense ratio: Policy acquisition expense ratio 30.4 30.0 30.6 31.1 Underwriting expense ratio 10.6 8.2 9.6 7.9 ----- ---- ----- ---- Total expense ratio 41.0% 38.2% 40.2% 39.0% ----- ---- ----- ---- Combined ratio (GAAP basis) 104.7% 96.5% 101.3% 96.9% ===== ==== ===== ====
Trenwick's GAAP combined ratio for the third quarter and for the nine months ended September 30, 1998 was 104.7% and 101.3% compared to 96.5% and 96.9% for the same periods in 1997. Trenwick America's GAAP combined loss and expense ratio in the third quarter and for the nine months ended September 30, 1998 was 107.5% and 101.5%, compared to 96.5% and 96.9% for the same periods in 1997. Trenwick International's GAAP combined loss and expense ratio for the third quarter and for the nine months ended September 30, 1998 was 99.1% and 100.8%, respectively. 14 15 Included in Trenwick's combined loss and expense ratio for the third quarter and nine months ended September 30, 1998 were 8.7 and 3.1 percentage points, respectively, associated with claims arising from Hurricane Georges. Additionally, the increase in the combined loss and expense ratio resulted from higher commission expenses on the Company's U.S. business and an increase in the overhead expense ratio caused by lower year over year premium volume written by Trenwick America. The combined loss and expense ratio for the nine months ended September 30, 1998 includes favorable reserve development of approximately $5.9 million compared to favorable development of approximately $3.9 million for the same period in 1997. INVESTMENT INCOME Trenwick's net investment income of $14.3 million and $41.7 million in the third quarter and for the nine months ended September 30, 1998 increased 18% and 16%, respectively, compared to $12.2 million and $36.0 million for the same periods in 1997. Pre-tax yields on invested assets, excluding equity securities, averaged 6.4% in both 1998 and 1997. The increase in investment income is due to the continued growth in Trenwick's invested asset base resulting primarily from the acquisition of Trenwick International. After-tax net investment income in the third quarter and for the nine months ended September 30, 1998 was $10.7 million and $31.1 million compared to $9.3 million and $27.7 million for the comparative periods in 1997. The effective income tax rate on net investment income for the nine months ended September 30, 1998 was approximately 25.4% versus 24.0% for the same period in 1997. The increase in the effective income tax rate is due to the fully taxable nature of Trenwick International's investment income. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1998, Trenwick's consolidated investments and cash totaled $1.0 billion, as compared to $864.3 million at December 31, 1997. The fair value of the Company's debt securities portfolio exceeded amortized cost of $871.7 million and $788.7 million by $34.2 million and $23.6 million at September 30, 1998 and December 31, 1997, respectively. At September 30, 1998 and at December 31, 1997, the fair value of the Company's equity securities exceeded cost of $47.7 million and $31.6 million by $5.3 million and $7.6 million, respectively. As of September 30, 1998, Trenwick's common stockholders' equity totaled $357.1 million or $31.36 per share, as compared to $357.6 million or $29.93 per share at December 31, 1997. Since December 31, 1997, the unrealized appreciation of debt and equity investments increased $5.4 million, net of tax, or $.47 per share. Consolidated stockholders' equity reflects the repurchase of 732,500 shares of the Trenwick's common stock at an average price of $33.27 per share, totaling approximately $24.4 million. Trenwick America's statutory surplus was $325 million as of September 30, 1998, compared to $322.9 million at December 31, 1997. Trenwick International's statutory surplus was $133 million as of September 30, 1998. Cash flow from operations of $31.7 million for the nine months ended September 30, 1998 decreased approximately 17% compared to cash flow from operations of $38.1 million for the same period in 1997. The reduction in cash flow from operations was due primarily to a decline in premium volume associated with Trenwick America. 15 16 Cash provided by financing activities for the nine months ended September 30, 1998 decreased to $45.6 million compared to $53.6 million for the same period in 1997. As of September 30, 1998, cash provided by financing activities included proceeds of the issuance of $75 million principal amount of 6.7% Senior Notes partially offset by repurchases of common stock of approximately $20.7 million. Included in the same period last year was $110 million from the issuance of the Subordinated Capital Income Securities, partially offset by the debt redemption of approximately $47 million. Trenwick declared a third quarter dividend of $.25 per share in 1998, a 4% increase compared to $.24 in the third quarter of 1997. YEAR 2000 The Year 2000 issue concerns the inability of information systems to properly recognize and process date-sensitive information beyond January 1, 2000. The Company began work on the Year 2000 issue in 1995. The scope of the project included: assessment of systems and equipment affected; definition of strategies to address affected systems and equipment; remediation of affected systems and equipment and certification that each is Year 2000 compliant. The Company's U.S. operations completed the modification and testing of its internally developed software to be Year 2000 compliant during 1996. Trenwick International Limited is currently working on the project and expects to complete its modifications in fourth quarter of 1998. The Company has received certification from the majority of its externally developed software vendors indicating their products are Year 2000 compliant. The remaining vendors have indicated that their products will be Year 2000 compliant by the end of 1998. Based on this information the Company expects to be in full compliance with its internal financial systems before the Year 2000. Due to the interdependent nature of systems and facilities, the company may be adversely impacted depending upon whether its vendors and business partners address this issue successfully. Therefore, the company is surveying its key business partners and vendors in an attempt to determine their respective level of Year 2000 compliance. Where practicable, the company intends to assess and attempt to mitigate its risks in the event that these third parties fail to be Year 2000 compliant and is considering appropriate contingency arrangements for such potential noncompliance by such entities. The Company is developing contingency plans intended to mitigate the possible disruption in business operations that may result from the Year 2000 issue, and is developing cost estimates for such plans. The company expects to complete its contingency plans by the end of 1998. Depending on the systems affected, these plans could include accelerated replacement of affected equipment or software, interim use of backup equipment and software, and increased work hours for company personnel or use of contract personnel to correct on an accelerated schedule any Year 2000 problems that arise or to provide manual workarounds for information systems or similar approaches. If the company is required to implement any of these contingency plans, it could have a material adverse effect on the company's financial condition and results of operations. 16 17 In addition, property and casualty reinsurance companies may have underwriting exposure to the Year 2000. The Year 2000 issue is a risk for some of the company's insureds and reinsureds and is therefore considered during the underwriting process similar to any other risk to which Trenwick's clients may be exposed. While the company continues to review these potential exposures, the company is unable to determine at this time whether the adverse impact, if any, in connection with these exposures would be material to the company. Costs specifically associated with modifying internal use software for Year 2000 compliance are expensed as incurred. To date, we have spent approximately $730,000 on this project. Costs to be incurred for the remainder of 1998 to fix Year 2000 problems are estimated at approximately $83,000. Such costs do not include normal system upgrades and replacements. The company does not expect the costs relating to Year 2000 remediation to have a material effect on the results of operations or financial condition. 17 18 Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K a) Exhibits 27.0 Financial Data Schedule b) Reports on Form 8-K None 18 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TRENWICK GROUP INC. (Registrant) Date: November 16, 1998 JAMES F. BILLETT, JR. ------------------ -------------------------- James F. Billett, Jr. Chairman, President and Chief Executive Officer Date: November 16, 1998 ALAN L. HUNTE ------------------ -------------------------- Alan L. Hunte Vice President, Chief Financial Officer and Treasurer 19 EX-27 2 EX-27
7 This schedule contains summary financial information extracted from the Financial Statements contained in Form 10-Q for the six months ended September 30, 1998 for Trenwick Group Inc. 1,000 U.S. DOLLARS 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1 905,881 0 0 52,948 0 0 958,829 67,029 126,510 36,065 1,393,331 671,309 157,908 0 0 75,000 110,000 0 1,139 355,936 1,393,331 181,949 41,677 1,444 173 111,077 55,753 17,459 28,292 4,829 23,463 0 0 0 23,463 1.98 1.95 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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