-----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, DOqUsaaCP32/QptFVvgIVBX2+XWdOjwJ9QBXexcP30IQty2mTKa3bjN/gQPBB3p7 9ijQT7sicxezSc2xdiwDoQ== 0000914039-99-000511.txt : 19991117 0000914039-99-000511.hdr.sgml : 19991117 ACCESSION NUMBER: 0000914039-99-000511 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 001-15389 FILM NUMBER: 99753851 BUSINESS ADDRESS: STREET 1: ONE CANTERBURY GREEN CITY: STAMFORD STATE: CT ZIP: 06901 BUSINESS PHONE: 2033535500 10-Q 1 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999. / / 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 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 October 31, 1999 ----- ------------------------------- Common Stock, $.10 par value 10,027,310
2 TRENWICK GROUP INC. INDEX
Page PART I. Financial Information Number ------ Consolidated Balance Sheets September 30, 1999 and December 31, 1998 3 Consolidated Statements of Income and Comprehensive Income Three and Nine Months Ended September 30, 1999 and 1998 4 Consolidated Statements of Changes in Common Stockholders' Equity Nine Months Ended September 30, 1999 and 1998 5 Consolidated Statements of Cash Flows Nine Months Ended September 30, 1999 and 1998 6 Notes to Consolidated Financial Statements 7-10 Management's Discussion and Analysis of Financial Condition and Results of Operations 11-15 PART II. Other Information Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17
3 TRENWICK GROUP INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31, ------------- ------------ 1999 1998 ---- ---- (dollars in thousands) Assets Securities available for sale at fair value: Debt securities (amortized cost: $821,192 and $867,552) $ 817,004 $ 893,020 Equity securities (cost: $57,474 and $44,342) 59,346 49,188 Cash and cash equivalents 85,274 63,003 ----------- ----------- Total investments and cash 961,624 1,005,211 Accrued investment income 14,430 15,974 Receivables from ceding insurers 156,933 138,550 Reinsurance recoverable balances, net 167,339 140,173 Prepaid reinsurance premiums 28,633 22,632 Deferred policy acquisition costs 44,484 35,261 Net deferred income taxes 23,457 14,101 Other assets 35,506 20,359 ----------- ----------- Total assets $ 1,432,406 $ 1,392,261 =========== =========== Liabilities and Common Stockholders' Equity Liabilities: Unpaid claims and claims expenses $ 731,494 $ 682,428 Unearned premium income 190,791 152,051 6.7% senior notes due 2003 75,000 75,000 Other liabilities 33,134 24,753 ----------- ----------- Total liabilities 1,030,419 934,232 ----------- ----------- 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; 10,455,510 and 11,051,394 shares outstanding 1,046 1,105 Additional paid-in-capital 107,917 124,180 Deferred compensation under stock award plan (4,014) (2,905) Retained earnings 189,391 206,312 Accumulated other comprehensive income (2,353) 19,337 ----------- ----------- Total common stockholders' equity 291,987 348,029 ----------- ----------- Total liabilities and common stockholders' equity $ 1,432,406 $ 1,392,261 =========== ===========
The accompanying notes are an integral part of these statements. 3 4 TRENWICK GROUP INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 1999 1998 1999 1998 ---- ---- ---- ---- (in thousands except per share data) Revenues: Net premiums earned $ 58,608 $ 65,161 $ 183,647 $ 181,949 Net investment income 13,047 14,317 40,187 41,677 Net realized investment gains (losses) (38) 184 2,991 1,444 Other income (loss) (473) (249) (360) 67 --------- -------- --------- --------- Total revenues 71,144 79,413 226,465 225,137 --------- -------- --------- --------- Expenses: Claims and claims expenses incurred 72,637 41,501 153,961 111,077 Policy acquisition costs 19,989 19,822 54,442 55,753 Underwriting expenses 8,997 6,778 22,033 17,330 Amortization of goodwill 17 23 60 23 General and administrative expenses 1,667 895 3,829 2,744 Interest expense 1,309 1,292 4,005 2,641 Minority interest in subsidiary trust 2,426 2,426 7,277 7,277 --------- -------- --------- --------- Total expenses 107,042 72,737 245,607 196,845 --------- -------- --------- --------- Income (loss) before income taxes (35,898) 6,676 (19,142) 28,292 Income tax provision (benefit) (13,472) 1,433 (10,486) 4,829 --------- -------- --------- --------- Net income (loss) $ (22,426) $ 5,243 $ (8,656) $ 23,463 ========= ======== ========= ========= BASIC EARNINGS PER SHARE $ (2.15) $ .45 $ (.82) $ 1.98 ========= ======== ========= ========= DILUTED EARNINGS PER SHARE $ (2.15) $ .44 $ (.82) $ 1.95 ========= ======== ========= ========= DIVIDENDS PER COMMON SHARE $ .26 $ .25 $ .78 $ .75 ========= ======== ========= ========= Comprehensive income (loss): Net income (loss) (22,426) 5,243 (8,656) 23,463 Other comprehensive income (loss): Unrealized investment gains (losses), net of income taxes (6,231) 3,324 (19,282) 6,285 Realized investment gains (losses), net of income taxes, included in net income 9 (120) (1,960) (939) Foreign currency translation adjustment, net of income taxes 4,326 1,605 (448) 1,604 --------- -------- --------- --------- Total other comprehensive income (loss) (1,896) 4,809 (21,690) 6,950 --------- -------- --------- --------- Comprehensive income (loss) $ (24,322) $ 10,052 $ (30,346) $ 30,413 ========= ======== ========= =========
The accompanying notes are an integral part of these statements. 4 5 TRENWICK GROUP INC. CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY (UNAUDITED)
Nine Months Ended September 30, ------------- 1999 1998 ---- ---- (dollars in thousands) Common stockholders' equity, beginning of period $ 348,029 $ 357,649 Common stock, $.10 par value, and additional paid-in-capital: Exercise of employer stock options (88,500 shares) -- 1,154 Income tax (expense)/benefit from compensation deductions (6) 748 Restricted common stock awarded (65,985 and 82,889 shares) 1,914 2,952 Common stock purchased and retired (661,869 and 736,750 shares) (18,230) (24,519) Deferred compensation under stock award plan: Restricted common stock awarded (1,914) (2,952) Compensation expense recognized 805 553 Retained earnings: Net income (loss) (8,656) 23,463 Cash dividends ($.78 and $.75) (8,265) (8,923) Accumulated other comprehensive income: Other comprehensive income (loss) (21,690) 6,950 --------- --------- Common stockholders' equity, end of period $ 291,987 $ 357,075 ========= =========
The accompanying notes are an integral part of these statements. 5 6 TRENWICK GROUP INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, ------------- 1999 1998 ---- ---- (in thousands) Cash flows for operating activities: Premiums collected $ 208,659 $ 183,688 Ceded premiums paid (32,550) (42,003) Claims and claims expenses paid (191,224) (135,318) Claims and claims expenses recovered 25,303 19,123 Underwriting expenses paid (20,487) (18,552) --------- --------- Cash used for underwriting activities (10,299) 6,938 Net investment income received 44,820 45,570 Interest expense and subsidiary trust dividends paid (12,279) (9,702) Income taxes recovered (paid) 1,007 (8,444) General and administrative expenses paid (3,829) (2,744) Other income received 142 54 --------- --------- Cash provided by operating activities 19,562 31,672 --------- --------- Cash flows for investing activities: Purchases of debt securities (479,346) (401,361) Sales of debt securities 210,584 96,569 Maturities of debt securities 308,786 329,226 Purchases of equity securities (23,519) (8,091) Sales of equity securities 14,846 2,363 Investment in subsidiary, net of cash acquired (171) (39,785) Additions to premises and equipment (1,724) (1,849) --------- --------- Cash provided by (used for) investing activities 29,456 (22,928) --------- --------- Cash flows for financing activities: Repurchase of common stock (18,783) (20,721) Dividends paid (8,265) (8,923) Issuance costs of senior notes (2) (922) Issuance of senior notes -- 75,000 Issuance of common stock -- 1,154 --------- --------- Cash provided by (used for) financing activities (27,050) 45,588 --------- --------- Effect of exchange rate on cash 303 (150) --------- --------- Change in cash and cash equivalents 22,271 54,182 Cash and cash equivalents, beginning of period 63,003 12,847 --------- --------- Cash and cash equivalents, end of period $ 85,274 $ 67,029 ========= =========
The accompanying notes are an integral part of these statements. 6 7 TRENWICK GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The interim consolidated financial statements include those of Trenwick Group Inc. and its subsidiaries ("Trenwick" or the "Company") and have been prepared in conformity with generally accepted accounting principles applied on a basis consistent with prior periods. Certain items in the financial statements have been reclassified to conform with the 1999 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 1998 audited financial statements and related notes. Acquisition of Trenwick International Limited Trenwick International's insurance operations were included in the Company's results beginning with the second quarter of 1998 following its acquisition by the Company on February 27, 1998. 2. ACQUISITION OF CHARTWELL RE CORPORATION On October 27, 1999, Trenwick completed the merger of Chartwell Re Corporation ("Chartwell") with and into Trenwick. Under the terms of the merger, stockholders of Chartwell will receive 0.825 Trenwick shares for each Chartwell share in a tax-free transaction. The acquisition will be accounted for using the purchase method of accounting. All assets and liabilities of Chartwell will be consolidated in the balance sheet at October 28, 1999 and its operating results will be reflected in Trenwick's results commencing with the period from October 28, 1999 through December 31, 1999. At closing, total assets of the combined group were approximately $3.0 billion, with a book value of approximately $523 million or $28.74 per share. Chartwell is an insurance holding company with global underwriting and service operations, conducting its business in the United States and in the Lloyd's market through its principal operating subsidiaries, Chartwell Reinsurance Company, INSCORP and Chartwell Managing Agents Limited ("CMA"). Chartwell Reinsurance Company underwrites treaty reinsurance through reinsurance brokers for casualty and, to a lesser extent, property risks as well as for marine and aviation risks. INSCORP writes property and casualty insurance through specialty program administrators. 7 8 3. REINSURANCE Trenwick purchases reinsurance to reduce its exposure to catastrophe losses and other large losses in all lines of business. Trenwick, however, remains liable in the event that its retrocessionaires do not meet their contractual obligations. The effects of reinsurance on premiums written and premiums earned are as follows (in thousands):
Premiums Written ------------------------------------------------------------ Three Months Ended Nine Months Ended September 30, September 30, -------------------------- -------------------------- 1999 1998 1999 1998 --------- --------- --------- --------- Direct 23,392 15,438 64,751 38,614 Assumed 74,449 73,050 235,748 203,760 Ceded (39,658) (19,727) (84,186) (54,164) --------- --------- --------- --------- Net $ 58,183 $ 68,761 $ 216,313 $ 188,210 ========= ========= ========= =========
Premiums Earned ------------------------------------------------------------ Three Months Ended Nine Months Ended September 30, September 30, -------------------------- -------------------------- 1999 1998 1999 1998 --------- --------- --------- --------- Direct 17,963 15,871 51,903 34,917 Assumed 75,191 69,063 209,903 203,538 Ceded (34,546) (19,773) (78,159) (56,506) --------- --------- --------- --------- Net $ 58,608 $ 65,161 $ 183,647 $ 181,949 ========= ========= ========= =========
The company recorded ceded claims and claims expenses incurred of $50,327 and $93,694 for the third quarter and nine months ended September 30, 1999 compared to $15,429 and $56,516 for the same periods in 1998. 4. STOCKHOLDERS' EQUITY Preferred Stock Trenwick has 2,000,000 shares of $.10 par value preferred stock authorized and none outstanding. Common Stock For the nine months ended September 30, 1999, Trenwick awarded key employees an aggregate of 65,985 shares of common stock under the terms of the 1993 Stock Plan, at an average price of $29.00 per share (approximately $1,914,000). Trenwick is recognizing compensation expense determined by the value of the shares, amortized over a five year vesting period. During the period, 8,369 shares were repurchased at an average price of $31.54 per share (approximately $264,000) in connection with the satisfaction of withholding taxes payable upon the vesting of shares previously awarded under the plan. 8 9 On August 30, 1999, Trenwick's Board of Directors approved an increase of 1,000,000 shares to its stock repurchase program. The program was originally adopted on May 21, 1997 with an authorization of 1,000,000 shares, which was increased by 600,000 shares in September 1998. During the nine months ended September 30, 1999, Trenwick purchased 653,500 shares under its buyback plan at an average price of $27.49 per share totaling approximately $18.0 million. As of September 30, 1999, Trenwick has an authorization of 846,000 shares remaining under the current plan. Dividends declared and paid by Trenwick during the nine months ended September 30, 1999 were approximately $8,265,000. 5. 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, 1999 1998 1999 1998 -------- -------- -------- -------- NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS: $(22,426) $ 5,243 $ (8,656) $ 23,463 WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING: Weighted average shares outstanding (basic) 10,422 11,713 10,557 11,866 Weighted average shares issuable on exercise of employee stock options, net of assumed repurchases -- 128 -- 149 -------- -------- -------- -------- Weighted average shares outstanding (diluted) 10,422 11,841 10,557 12,015 ======== ======== ======== ======== PER SHARE AMOUNTS: Basic $ (2.15) $ .45 $ (.82) $ 1.98 ======== ======== ======== ======== Diluted $ (2.15) $ .44 $ (.82) $ 1.95 ======== ======== ======== ========
6. SEGMENT INFORMATION Trenwick's reportable segments are based on its method of internal reporting, which desegregates business by geographic location. Trenwick has two reportable segments: (1) domestic operations and (2) international operations. The domestic operations provide treaty and facultative reinsurance to insurers of property and casualty risks in the United States. The international segment acquired in February 1998, provides treaty and facultative reinsurance as well as specialty insurance on a world-wide basis. 9 10 The reported operating segments for Trenwick is as follows (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, -------------------------- -------------------------- 1999 1998 1999 1998 --------- --------- --------- --------- Net premiums earned Domestic $ 32,930 $ 43,190 $ 109,254 $ 134,399 International 25,678 21,971 74,393 47,550 --------- --------- --------- --------- 58,608 65,161 183,647 181,949 Total revenues Domestic 43,092 54,065 143,413 167,879 International 28,043 25,043 83,025 55,274 Unallocated 9 305 27 1,984 --------- --------- --------- --------- 71,144 79,413 226,465 225,137 Underwriting profit (loss) Domestic (36,709) (3,149) (39,023) (1,856) International (6,306) 209 (7,766) (355) --------- --------- --------- --------- (43,015) (2,940) (46,789) (2,211) Income (loss) before Domestic (28,192) 6,835 (8,729) 28,889 income taxes International (3,941) 3,281 866 7,369 Unallocated (3,765) (3,440) (11,279) (7,966) --------- --------- --------- --------- (35,898) 6,676 (19,142) 28,292 Income tax provision Domestic (12,076) 720 (7,272) 3,269 (benefit) International (1,371) 1,081 144 2,431 Unallocated (25) (368) (3,358) (871) --------- --------- --------- --------- (13,472) 1,433 (10,486) 4,829
10 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Trenwick Group Inc. ("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. ACQUISITION OF CHARTWELL RE CORPORATION On October 27, 1999, Trenwick completed the merger of Chartwell Re Corporation ("Chartwell") with and into Trenwick. Under the terms of the merger agreement, shareholders of Chartwell have received 0.825 Trenwick shares for each Chartwell share in a tax-free transaction. On a combined basis, the new Trenwick has total assets of approximately $3.0 billion and shareholders' equity of approximately $523 million or $28.74 per share. The combination of the two companies is expected to provide a cost-effective means of augmenting capital, accelerating premium growth and adding structural platforms for future expansion. The addition of Chartwell's U.S. reinsurance business, its admitted and non-admitted U.S. insurance companies and its operations at Lloyd's will further Trenwick's strategy of entering new markets and product lines. The acquisition is expected to generate substantial economies, producing a transaction that will be accretive to Trenwick's shareholders. Trenwick also believes that the acquisition will provide additional means for competing under currently difficult industry conditions. OPERATING RESULTS Trenwick reported a consolidated net loss of $22.4 million or $2.15 per diluted share, for the third quarter of 1999 compared to consolidated net income of $5.2 million or $.44 per diluted share, for the third quarter of 1998. The 1999 results include after-tax reserve charges and the related premium adjustments to Trenwick America Re's stop-loss reinsurance protection of $17.1 million or $1.64 per diluted share as well as costs related to the Chartwell acquisition of $.8 million or $.08 per diluted share. Additionally, the net loss in the third quarter of 1999 includes after-tax charges of $4.3 million or $.42 per diluted share associated with claims arising from catastrophe losses. Net income for the third quarter of 1998 includes after-tax charges of $3.7 million or $.31 per diluted share relating to catastrophe losses. Trenwick's consolidated net loss for the nine months ended September 30, 1999 was $8.7 million or $.82 per diluted share, compared to consolidated net income of $23.5 million or $1.95 per diluted share for the nine months ended September 30, 1998. The 1999 results include after-tax reserve charges and the related premium adjustments to Trenwick America Re's stop-loss reinsurance protection of 11 12 $17.1 million or $1.62 per diluted share as well as costs related to the Chartwell acquisition of $.8 million or $.08 per diluted share. Additionally, the net loss for the nine months ended September 30, 1999 includes after-tax charges of $4.3 million or $.41 per diluted share associated with claims arising from catastrophe losses and after-tax realized investment gains of $2.0 million or $.19 per diluted share. Net income for 1998 includes after-tax charges of $3.7 million or $.31 per diluted share relating to catastrophe losses and after-tax realized investment gains of $0.9 million or $.08 per diluted share. Reserve charges reflect a deterioration in market conditions since 1997. Costs related to the Chartwell acquisition are principally severance payments associated with Trenwick employees who are not continuing with the company due to the acquisition of Chartwell Re Corporation. PREMIUMS Trenwick's consolidated gross premium writings for the third quarter and nine months ended September 30, 1999 totaled $97.8 million and $300.5 million compared to $88.5 million and $242.4 million in 1998, respectively. Net premium writings for the third quarter and nine months totaled $58.2 million and $216.3 million compared to $68.8 million and $188.2 million, respectively. The contribution to premium writings by its two principal operating companies is as follows (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ----------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Gross written premium: Trenwick America Re $ 54,745 $ 60,016 $170,165 $172,028 Trenwick International 43,096 28,472 130,334 70,346 -------- -------- -------- -------- Total $ 97,841 $ 88,488 $300,499 $242,374 -------- -------- -------- -------- Net written premium: Trenwick America Re $ 29,607 $ 48,783 $117,193 $133,401 Trenwick International 28,576 19,978 99,120 54,809 -------- -------- -------- -------- Total $ 58,183 $ 68,761 $216,313 $188,210 -------- -------- -------- --------
Trenwick America Re's gross premium writings decreased by 8.8% quarter over quarter as the Company non-renewed underpriced business in response to continuing competitive market conditions in the U.S. reinsurance sector. The decline in net premium writings for the third quarter and nine months ended September 30, 1999 was further affected by additional premiums ceded to its existing stop loss reinsurance programs as a result of the reserve increases. Trenwick International's gross premium writings increased by over 50%, quarter over quarter, due principally to its expansion into new markets and products outside of the U.S. Growth in Trenwick International's gross premiums for the first nine months of 1999 also resulted from the comparison of the nine months in 1999 to a period of approximately seven months in the prior year as a result of the purchase of Trenwick International occurring in February of 1998. 12 13 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 tables set forth Trenwick's combined ratios and the components thereof calculated on a GAAP basis for the periods indicated:
Three Months Ended September 30, ----------------------------------------------------------------------- 1999 1998 --------------------------------- -------------------------------- Group Inter- Domestic Group Inter- Domestic national national ---------------------------------------------------------------------- Claims and claims expense ratio 123.9% 86.0% 153.5% 63.7% 59.2% 66.0% ----- ----- ----- ----- ----- ----- Expense ratio: Policy acquisition expense ratio 34.1 21.8 43.7 30.4 23.9 33.8 Underwriting expense ratio 15.4 16.8 14.2 10.4 16.0 7.5 ----- ----- ----- ----- ----- ----- Total expense ratio 49.5% 38.6% 57.9% 40.8% 39.9% 41.3% ----- ----- ----- ----- ----- ----- Combined ratio 173.4% 124.6% 211.4% 104.5% 99.1% 107.3% ===== ===== ===== ===== ===== =====
Nine Months Ended September 30, ----------------------------------------------------------------------- 1999 1998 --------------------------------- -------------------------------- Group Inter- Domestic Group Inter- Domestic national national ---------------------------------------------------------------------- Claims and claims expense ratio 83.8% 74.3% 90.4% 61.1% 63.3% 60.3% ----- ----- ----- ----- ----- ----- Expense ratio: Policy acquisition expense ratio 29.7 21.0 35.5 30.6 22.2 33.6 Underwriting expense ratio 12.0 15.1 9.8 9.5 15.3 7.5 ----- ----- ----- ----- ----- ----- Total expense ratio 41.7% 36.1% 45.3% 40.1% 37.5% 41.1% ----- ----- ----- ----- ----- ----- Combined ratio 125.5% 110.4% 135.7% 101.2% 100.8% 101.4% ===== ===== ===== ===== ===== =====
As indicated in the preceding table, Trenwick's combined ratio increased from 104.5% and 101.2% to 173.4% and 125.5% primarily due to an increase in Trenwick's claims and claims expense ratio. Trenwick's domestic claims and claims expense ratio for the third quarter and nine months ended September 30, 1999 includes reserve charges of $18.7 million reflecting a deterioration in market conditions since 1997. Additionally, Trenwick's claims and claims expense ratio was affected by global catastrophes. Trenwick's domestic claims and claims expense ratio for the third quarter and nine months ended September 30, 1999 includes $2.0 million of claims arising from catastrophe losses compared to $4.2 million for the same periods in 1998. Included in Trenwick International's claims and claims expense ratio for the third quarter and nine months ended is $4.7 million related to catastrophe losses compared to $1.5 million for the same periods in 1998. 13 14 The Company's combined ratio for the third quarter of 1999 includes unfavorable reserve development of approximately $16.2 million compared to favorable reserve development of approximately $2.9 million in the third quarter of 1998. During the quarter, unfavorable reserve development of approximately $16.3 million was realized at Trenwick America and favorable development of approximately $159,000 was realized at Trenwick International. The Company's combined ratio for the nine months ended September 30, 1999 includes unfavorable reserve development of approximately $14.1 million compared to approximately $5.9 million of favorable reserve development for the same period in 1998. Unfavorable reserve development of approximately $15.9 was realized at Trenwick America during the nine months ended September 30, 1999 and favorable development of $1.8 million was realized at Trenwick International. The increase in Trenwick's combined ratio is also attributable to increases in Trenwick America Re's expense ratio arising from the decline in net premiums resulting from premium adjustments to the stop-loss reinsurance protection for the third quarter and nine months ended September 30, 1999. INVESTMENT INCOME Trenwick's net investment income of $13.0 million and $40.2 million decreased 9% and 4%, respectively, in the third quarter and for the nine months ended September 30, 1999 compared to $14.3 million and $41.7 million for the same periods in 1998. Pre-tax yields on invested assets, excluding equity securities, averaged 5.9% in 1999 and 6.4% in 1998. The decrease in investment income is due to reduced operating cash flow and a decrease in invested assets from the repurchase of shares. The effective income tax rate on net investment income for the nine months ended September 30, 1999 was approximately 25.7% versus 25.4% for the same period in 1998. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1999, Trenwick's consolidated investments and cash totaled $961.6 million, as compared to $1.0 billion at December 31, 1998. The fair value of the Company's equity securities exceeded cost of $57.5 million and $44.3 million by $1.9 million and $4.8 million at September 30, 1999 and December 31, 1998, respectively. At September 30, 1999 the amortized value of the Company's debt securities exceeded fair value by $4.2 million and at December 31, 1998 the fair value of the Company's debt securities exceeded amortized cost by $25.5 million. Trenwick generally limits its investments in debt securities that are rated below investment grade, as these investments are subject to a higher degree of credit risk than investment grade securities. Trenwick closely monitors its below investment grade securities as well as the creditworthiness of the portfolio as a whole. When fair values decline for reasons other than changes in interest rates or other perceived temporary conditions, the security is written down to its net realizable value. In the nine months ended September 30, 1999, Trenwick wrote down the value of certain securities by $3.5 million. As of September 30, 1999, Trenwick's consolidated stockholders' equity totaled $292.0 million or $27.93 per share, compared to $348.0 million or $31.49 per share at December 31, 1998. Since December 31, 1998, the unrealized appreciation of debt and equity investments decreased $21.2 million, net of tax, or $2.03 per share. Reflected in consolidated stockholders' equity at September 30, 1999 is the repurchase in 1999 of 661,869 shares of Trenwick's common stock at an average price of $27.54 totaling approximately $18.2 million. Trenwick America Re's statutory surplus was $282.9 million as of September 30, 1999, compared to $330.5 million at December 31, 1998. Trenwick International's statutory 14 15 surplus was $133.1 million as of September 30, 1999 compared to $131.9 million at December 31, 1998. Cash flow from operations of $19.6 million for the nine months ended September 30, 1999 decreased approximately 38% compared to cash flow from operations of $31.7 million for the same period in 1998. The reduction in cash flow from operations was due to a change in the mix of business towards shorter tail lines and to payments relating to 1998 catastrophe losses. Cash used by financing activities for the nine months ended September 30, 1999 was $27.1 million compared to cash provided by financing activities of $45.6 million for the same period in 1998. For the nine months ended September 30, 1999, cash used by financing activities included repurchases of common stock of approximately $18.8 million. Included in the same period last year were the proceeds from the issuance of $75 million principal amount of 6.7% senior notes partially offset by repurchases of common stock of approximately $20.7 million. Trenwick declared a third quarter dividend of $.26 per share in 1999, a 4% increase compared to $.25 per share in the third quarter of 1998. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Trenwick reviewed the change in its exposure to market risks since December 31, 1998. The components of Trenwick's investment holdings and its risk management strategy and objectives have not materially changed. Therefore, Trenwick believes that the potential for loss in each market risk sector described at year-end has not materially changed. SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS Certain statements made in this document that are not based on current or historical fact are forward-looking in nature including, without limitation, statements containing words, "believes," "anticipates," "intends," "expects," "estimates," "predicts," and words of similar import. Such forward-looking statements involve known and unknown risks, assumptions, uncertainties, and other factors that may cause actual results, performance, or achievements of Trenwick or its industry to differ materially from any future results, performance, or achievements expressed or implied by such forward-looking statements. Trenwick has identified certain risk factors which could cause actual plans or results to differ substantially from those included in any forward-looking statements. These risk factors are discussed in Trenwick's 1998 audited financial statements and related notes and such discussion regarding risk factors should be read in conjunction with other cautionary statements that are included herein or elsewhere in the Company's filings with the SEC. 15 16 Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K a) Exhibits 27.0 Financial Data Schedule b) Reports on Form 8-K The following reports on Form 8-K were filed during the quarter ended September 30, 1999:
Date of Report Item Reported -------------- ------------- September 1, 1999 Press release announcing that Trenwick's stock repurchase program had been increased by 1,000,000 shares.
16 17 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 15, 1999 JAMES F. BILLETT, JR. ------------------ --------------------------------------- James F. Billett, Jr. Chairman, President and Chief Executive Officer Date: November 15, 1999 ALAN L. HUNTE ----------------- --------------------------------------- Alan L. Hunte Vice President, Chief Financial Officer and Treasurer 17 EX-27 2 EX-27
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS CONTAINED IN FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 FOR TRENWICK GROUP, INC. 1,000 U.S. DOLLARS 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 1 817,004 0 0 59,346 0 0 876,350 85,274 167,339 44,484 1,432,406 731,494 190,791 0 0 75,000 110,000 0 1,046 290,941 1,432,406 183,647 40,187 2,991 (360) 153,961 54,442 37,204 (19,142) (10,486) 0 0 0 0 (8,656) (.82) (.82) 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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