SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended March 31, 2001.
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________.
Commission file number 1-16089
TRENWICK GROUP LTD.
(Exact name of registrant as specified in its charter)
Bermuda 98-0232340
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Continental Building, 25 Church Street
Hamilton HM12, Bermuda
(Address of principal executive offices) (zip code)
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Registrant's telephone number, including area code: 441-292-4985
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Shares Outstanding
Description of Class as of May 15, 2001
- -------------------- ------------------
Common Shares - $.10 par value 36,849,675
TRENWICK GROUP LTD.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
Page
ITEM 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheet
March 31, 2001 and December 31, 2000 .................................1
Consolidated Statement of Operations and Comprehensive Income
Three Months ended March 31, 2001 and 2000 ...........................2
Consolidated Statement of Cash Flows
Three Months ended March 31, 2001 and 2000 ...........................3
Consolidated Statement of Changes in Common Shareholders' Equity
Three Months ended March 31, 2001 and 2000 ...........................4
Notes to Unaudited Consolidated Financial Statements .................5
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................8
PART II - OTHER INFORMATION
ITEM 1. Legal proceedings ...................................................16
ITEM 2. Changes in Securities and Use of Proceeds ...........................16
ITEM 3. Defaults Upon Senior Securities .....................................16
ITEM 4. Submission of Matters to a Vote of Security Holders .................16
ITEM 5. Other Information ...................................................16
ITEM 6. Exhibits and Reports on Form 8-K ....................................16
Signatures ..................................................................17
Trenwick Group Ltd.
Consolidated Balance Sheet
(Amounts expressed in thousands of United States dollars, except
share and per share data)
March 31, 2001 and December 31, 2000
(Unaudited)
2001 2000
----------- -----------
ASSETS
Debt securities available for sale, at fair value $ 1,835,863 $ 1,813,678
Equity securities at fair value 44,010 115,901
Cash and cash equivalents 335,130 311,001
Accrued investment income 30,850 38,171
Premiums receivable 512,906 473,245
Reinsurance recoverable balances, net 988,146 932,051
Prepaid reinsurance premiums 156,916 147,399
Deferred policy acquisition costs 110,231 100,423
Deposits 21,680 48,969
Net deferred income taxes 104,241 104,889
Other assets 158,910 134,325
----------- -----------
Total assets $ 4,298,883 $ 4,220,052
=========== ===========
LIABILITIES
Unpaid claims and claims expenses $ 2,416,184 $ 2,408,926
Unearned premium income 543,356 496,338
Reinsurance balances payable 146,245 133,160
Indebtedness 283,141 286,805
Other liabilities 95,231 90,866
----------- -----------
Total liabilities 3,484,157 3,416,095
----------- -----------
MINORITY INTEREST
Mandatorily redeemable preferred capital securities
of subsidiary trust holding solely junior subordinated
debentures of U.S. subsidiary 68,466 76,770
Preferred shares of Bermuda subsidiary 75,000 75,000
----------- -----------
Total minority interest 143,466 151,770
----------- -----------
COMMON SHAREHOLDERS' EQUITY
Common shares, $0.10 par value, 36,845,115 and
36,665,103 shares issued and outstanding 3,685 3,667
Additional paid in capital 578,335 575,401
Deferred compensation under share award plans (5,927) (2,660)
Retained earnings 75,925 58,485
Accumulated other comprehensive income (loss) 19,242 17,294
----------- -----------
Total common shareholders' equity 671,260 652,187
----------- -----------
Total liabilities, minority interest and common
shareholders' equity $ 4,298,883 $ 4,220,052
=========== ===========
The accompanying notes are an integral part of these statements.
-1-
Trenwick Group Ltd.
Consolidated Statement of Operations and Comprehensive Income (Unaudited)
(Amounts expressed in thousands of United States dollars,
except per share data)
Three Months Ended March 31, 2001 and 2000
2001 2000
--------- --------
REVENUES
Net premiums earned $ 201,676 $ 27,212
Net investment income 32,184 8,936
Net realized investment gains (losses) 8,859 (2,224)
Other income 843 --
--------- --------
Total revenues 243,562 33,924
--------- --------
EXPENSES
Claims and claims expenses incurred 140,248 43,546
Policy acquisition costs 59,206 4,510
Underwriting expenses 16,324 3,766
General and administrative expenses 3,889 452
Interest expense and dividends on preferred stock of subsidiaries 7,472 305
Foreign currency losses (gains) 1,067 (170)
--------- --------
Total expenses 228,206 52,409
--------- --------
Income (loss) before other minority interest and income taxes 15,356 (18,485)
Other minority interest in net income (loss) of subsidiary -- (4,676)
--------- --------
Income (loss) before income taxes 15,356 (13,809)
Applicable income taxes (benefit) (3,557) --
--------- --------
Net income (loss) 18,913 (13,809)
Dividends on preferred shares -- 1,640
--------- --------
Net income (loss) available to common shareholders $ 18,913 $(15,449)
========= ========
EARNINGS PER SHARE
Basic earnings (loss) per common share $ 0.52 $ (0.99)
========= ========
Diluted earnings (loss) per common share $ 0.51 $ (0.99)
========= ========
DIVIDENDS PER COMMON SHARE $ 0.04 --
========= ========
COMPREHENSIVE INCOME (LOSS)
Net income (loss) $ 18,913 $(13,809)
--------- --------
Other comprehensive income:
Net unrealized investment gains 7,225 934
Foreign currency translation adjustments (5,277) --
--------- --------
Total other comprehensive income 1,948 934
--------- --------
Comprehensive income (loss) $ 20,861 $(12,875)
========= ========
The accompanying notes are an integral part of these statements.
-2-
Trenwick Group Ltd.
Consolidated Statement of Cash Flows (Unaudited)
(Amounts expressed in thousands of United States dollars)
Three Months Ended March 31, 2001 and 2000
2001 2000
--------- --------
OPERATING ACTIVITIES
Premiums collected, net of acquisition costs $ 222,750 $ 26,696
Ceded premiums (paid) recovered, net of acquisition costs (70,729) 4,200
Claims and claims expenses paid (211,952) (20,357)
Claims and claims expenses recovered 52,449 2,980
Underwriting expenses paid (30,472) (2,163)
--------- --------
Cash (for) from underwriting activities (37,954) 11,356
Net investment income received 32,248 9,379
Service and other income received, net of expenses 904 --
General and administrative expenses paid (4,222) (452)
Interest expense and dividends on preferred stock of subsidiaries (7,220) (305)
Income taxes recovered 325 --
--------- --------
Cash from (for) operating activities (15,919) 19,978
--------- --------
INVESTING ACTIVITIES
Purchases of debt securities (606,998) (98,774)
Sales of debt securities 556,481 76,898
Maturities of debt securities 40,913 --
Purchases of equity securities (2,519) --
Sales of equity securities 73,048 --
Effect on cash of exchange rate translation (9,179) --
Other (791) --
--------- --------
Cash from (for) investing activities 50,955 (21,876)
--------- --------
FINANCING ACTIVITIES
Repayment of indebtedness (29) --
Purchase of capital securities (8,461) --
Issuance of common shares 275 124
Trenwick Group Ltd. common share dividends paid (1,473) --
LaSalle Re Holdings preferred share dividends paid prior to
business combination -- (1,640)
Share and option repurchases (311) --
Equity put option premium payments (908) (387)
--------- --------
Cash for financing activities (10,907) (1,903)
--------- --------
Change in cash and cash equivalents 24,129 (3,801)
Cash and cash equivalents, beginning of period 311,001 19,864
--------- --------
Cash and cash equivalents, end of period $ 335,130 $ 16,063
========= ========
The accompanying notes are an integral part of these statements.
-3-
Trenwick Group Ltd.
Consolidated Statement of Changes in Common Shareholders' Equity (Unaudited)
(Amounts expressed in thousands of United States dollars except share data)
Three Months Ended March 31, 2001 and 2000
2001 2000
--------- ---------
Common shareholders' equity, beginning of period $ 652,187 $ 286,960
COMMON SHARES AND ADDITIONAL PAID IN CAPITAL
Issuance of 184,996 restricted common shares
of Trenwick Group Ltd. 3,942 --
Issuance of 13,131 shares of Trenwick Group
Ltd. and 296 common shares of LaSalle Re
Holdings for cash under employee plans 275 5
Issuance of 6,430 common shares of LaSalle
Re Holdings under employee compensation plan -- 81
Purchase and retirement of 14,609 common shares
of Trenwick Group Ltd. (311) --
Cancellation of 3,506 restricted common share awards (46) --
Equity put option premiums, net of applicable
minority interest (908) (317)
Compensation recognized under employee program -- 21
Change in minority interest -- 23
DEFERRED COMPENSATION UNDER SHARE AWARD PLAN
Restricted common shares awarded (3,942) --
Compensation expense recognized, net of minority
interest 629 70
Cancellation of shares 46 --
RETAINED EARNINGS
Net income (loss) 18,913 (13,809)
LaSalle Re Holdings preferred share dividends
prior to business combination -- (1,640)
Trenwick Group Ltd. common share dividends,
$0.04 per share (1,473) --
Change in minority interest -- 6
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) 1,948 934
--------- ---------
Common shareholders' equity, end of period $ 671,260 $ 272,334
========= =========
The accompanying notes are an integral part of these statements.
-4-
TRENWICK GROUP LTD.
Notes to Unaudited Consolidated Financial Statements
(Amounts expressed in thousands of United States dollars except per share data)
Three Months Ended March 31, 2001 and 2000
Note 1 Organization and Basis of Presentation
Organization
Trenwick Group Ltd. was formed as a holding company in Bermuda to acquire two
publicly held companies and the minority interest in a subsidiary of one of
those companies. That transaction, in which Trenwick Group Ltd. issued common
shares to acquire LaSalle Re Holdings Limited, Trenwick Group Inc. and the
minority interest in LaSalle Re Limited, was completed on September 27, 2000.
More details of this transaction are disclosed in Note 2.
Trenwick Group Ltd.'s principal subsidiaries underwrite specialty insurance and
reinsurance through five business platforms: LaSalle Re Limited, Trenwick
America Reinsurance Corporation, Trenwick International Limited, Chartwell
Managing Agents Limited and Canterbury Financial Group Inc.
Basis of Presentation
The business combination between LaSalle Re Holdings Limited and Trenwick Group
Inc. was accounted for as a purchase by LaSalle Re Holdings Limited of Trenwick
Group Inc. and of the minority interest in LaSalle Re Limited, effective
September 27, 2000. Accordingly, in these financial statements:
- - the assets and liabilities presented include those of LaSalle Re Holdings
Limited, the minority interest in LaSalle Re Limited and the former
Trenwick Group Inc.;
- - the revenues and expenses of LaSalle Re Holdings Limited have been included
for all periods presented;
- - the minority interest in common shares and minority interest in net income
of LaSalle Re Limited have been eliminated in the three months ended March
31, 2001; and
- - the revenues and expenses of the former Trenwick Group Inc. were excluded
from the three months ended March 31, 2000 and included for the three
months ended March 31, 2001.
The interim financial statements include the accounts of Trenwick Group Ltd. and
its subsidiaries after elimination of significant intercompany accounts and
transactions. Certain items in prior financial statements have been reclassified
to conform to current presentation.
These interim financial statements have been prepared in conformity with
accounting principles that are generally accepted in the United States of
America, sometimes referred to as U.S. GAAP. To prepare these interim financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting periods. Actual
amounts may differ from these estimates.
The interim financial statements are unaudited; however, in the opinion of
management, the interim financial statements include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair statement of the
results for interim periods. These interim statements should be read in
conjunction with the audited
-5-
financial statements and related notes included in the Annual Report on Form
10-K of Trenwick Group Ltd. for the year ended December 31, 2000.
Note 2 Business Combinations
Trenwick/LaSalle Business Combination
On December 19, 1999, LaSalle Re Holdings Limited, LaSalle Re Limited and
Trenwick Group Inc. signed a definitive agreement to combine under a new holding
company, Trenwick Group Ltd. On September 27, 2000, following shareholder and
regulatory approval, the newly formed Trenwick Group Ltd. issued its common
shares on a one-for-one, tax-free basis to the former shareholders of LaSalle Re
Holdings Limited, the minority shareholders of LaSalle Re Limited, then a 77.5%
owned subsidiary of LaSalle Re Holdings Limited, and the former shareholders of
Trenwick Group Inc.
The Trenwick/LaSalle business combination was accounted for as a purchase by
LaSalle Re Holdings Limited of the minority interest in LaSalle Re Limited and
of Trenwick Group Inc. Under the purchase basis of accounting, the purchase
price was allocated to the identifiable assets acquired and liabilities assumed,
based on their estimated fair values at the date of acquisition. The excess of
the purchase price over the estimated fair value of those net assets acquired
was recorded as goodwill, and is being amortized over twenty-five years.
Note 3 Segment Information
The following tables present business segment financial information for Trenwick
Group Ltd. at March 31, 2001 and December 31, 2000 and for the three months
ended March 31, 2001 and 2000:
2001 2000
---------- ----------
Total assets:
Worldwide property catastrophe reinsurance $ 570,994 $ 557,401
U.S. treaty reinsurance 1,552,536 1,759,678
International specialty insurance and reinsurance 469,593 473,612
Lloyd's syndicates:
Continuing 886,826 808,483
Runoff 115,602 157,627
U.S. specialty program insurance 478,025 372,933
Unallocated 225,307 90,318
---------- ----------
Total assets $4,298,883 $4,220,052
========== ==========
2001 2000
---------- ----------
Total revenues:
Worldwide property catastrophe reinsurance $ 31,011 $ 29,842
U.S. treaty reinsurance 71,107 --
International specialty insurance and reinsurance 44,356 --
Lloyd's syndicates:
Continuing 73,493 1,172
Runoff 1,672 2,910
U.S. specialty program insurance 19,571 --
Unallocated 2,352 --
---------- ----------
Total revenues $ 243,562 $ 33,924
========== ==========
-6-
2001 2000
---------- ----------
Net income (loss):
Worldwide property catastrophe reinsurance $ 18,207 $ (11,571)
U.S. treaty reinsurance 6,591 --
International specialty insurance and reinsurance (427) --
Lloyd's syndicates:
Continuing 421 (365)
Runoff (992) (1,873)
U.S. specialty program insurance 1,107 --
Unallocated (5,994) --
---------- ----------
Net income (loss) $ 18,913 $ (13,809)
========== ==========
Revenues from transactions between operating segments, which are immaterial,
have been eliminated in consolidation. Unallocated net income (loss) consists
mainly of interest expense and dividends on preferred stock of subsidiaries, net
of minority interest and income taxes.
Note 4 Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share for the three months ended March 31, 2001 and 2000:
2001 2000
----------- ------------
INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
Net income (loss) available to common shareholders -
basic and diluted $ 18,913 $ (15,449)
=========== ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Weighted average shares outstanding - basic 36,722,298 15,609,993
Net weighted average shares issuable (when dilutive) on
exercise of stock options and warrants for 823,964
common shares 157,396 --
----------- ------------
Weighted average shares outstanding - diluted 36,879,694 15,609,993
=========== ============
Basic earnings (loss) per common share $ 0.52 $ (0.99)
=========== ============
Diluted earnings (loss) per common share $ 0.51 $ (0.99)
=========== ============
Note 5 Underwriting Activities
The components of premiums written and earned for the three months ended March
31, 2001 and 2000 are as follows:
2001 2000
--------- --------
Assumed premiums written $ 173,549 $ 65,166
Direct premiums written 178,976 --
--------- --------
Gross premiums written 352,525 65,166
Ceded premiums written (92,884) (16,683)
--------- --------
Net premiums written $ 259,641 $ 48,483
========= ========
Assumed premiums earned $ 113,449 $ 34,461
Direct premiums earned 168,093 --
--------- --------
Gross premiums earned 281,542 34,461
Ceded premiums earned (79,866) (7,249)
--------- --------
Net premiums earned $ 201,676 $ 27,212
========= ========
-7-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion highlights material factors affecting Trenwick Group
Ltd.'s results of operations for the three months ended March 31, 2001 and 2000.
This discussion and analysis should be read in conjunction with the unaudited
interim financial statements and notes thereto of Trenwick Group Ltd. contained
in this filing as well as in conjunction with the audited financial statements
and related notes included in the Annual Report on Form 10-K of Trenwick Group
Ltd. for the year ended December 31, 2000.
Overview
Trenwick Group Ltd. is a Bermuda holding company headquartered in Hamilton,
Bermuda whose principal subsidiaries underwrite specialty insurance and
reinsurance. Trenwick Group Ltd. was formed in 1999 to acquire Trenwick Group
Inc., LaSalle Re Holdings Limited and LaSalle Re Limited. The transaction was
completed on September 27, 2000. Shareholders of Trenwick Group Inc., LaSalle Re
Holdings Limited and LaSalle Re Limited exchanged their shares on a one-for-one
basis for newly-issued shares of Trenwick Group Ltd. LaSalle Re Holdings Limited
was the accounting acquiror in the Trenwick/LaSalle business combination, and as
such the financial statements reflect the results of operations of LaSalle Re
Holdings Limited prior to September 27, 2000 and the combined results of
operations of LaSalle Re Holdings Limited and Trenwick Group Inc. on and after
September 27, 2000.
Trenwick Group Ltd. operates through the following five principal operating
platforms:
o LaSalle Re Limited, which is located in Hamilton, Bermuda, underwrites
property catastrophe reinsurance on a worldwide basis;
o Trenwick America Reinsurance Corporation, which is located in Stamford
Connecticut, underwrites treaty reinsurance on United States property and
casualty risks, including United States reinsurance business previously written
by Chartwell Re Corporation subsidiaries;
o Trenwick International Limited, which is located in London, England,
underwrites specialty insurance and treaty and facultative reinsurance on a
worldwide basis;
o Chartwell Managing Agents Limited, which is located in London, England,
manages underwriting syndicates in the Lloyd's market, principally for Trenwick
Group Ltd.'s own account; and
o Canterbury Financial Group Inc., which is located in Stamford, Connecticut,
underwrites specialty insurance through its operating subsidiaries, Chartwell
Insurance Company, The Insurance Corporation of New York and Dakota Specialty
Insurance Company.
All of Trenwick Group Ltd.'s principal operating subsidiaries are rated A
(Excellent) by A.M. Best Company and have been assigned a financial strength
rating of A+ by Standard and Poor's. All of Chartwell Managing Agents Limited's
syndicates enjoy the benefit of the ratings of Lloyd's which is rated "A"
(Excellent) by A.M. Best Company and has an A+ financial strength rating from
Standard & Poor's. These ratings are based upon factors that may be of concern
to policy or contract holders, agents and intermediaries, but may not reflect
the considerations applicable to an equity investment in a reinsurance or
insurance company. A change in any such rating is at the discretion of the
respective rating agencies.
-8-
Results of Operations - Three Months Ended March 31, 2001 and Three Months Ended
March 31, 2000
2001 2000 Change
-------- -------- --------
(in thousands)
Underwriting income (loss) $(14,102) $(24,610) $ 10,508
Net investment income 32,184 8,936 23,248
Interest expense and dividends on
preferred stock of subsidiaries (7,472) (305) (7,167)
General and administrative expenses (3,889) (452) (3,437)
Other income, net 843 -- 843
-------- -------- --------
Pre-tax operating income (loss) 7,564 (16,431) 23,995
Applicable income taxes (benefit) (4,533) -- (4,533)
-------- -------- --------
Operating income (loss) 12,097 (16,431) 28,528
Minority interest in operating (income) loss of
subsidiary -- 4,162 (4,162)
Net realized investment gains (losses), net of
minority interest and income taxes 7,772 (1,668) 9,440
Foreign currency gains (losses), net of minority
interest and income taxes (956) 128 (1,084)
-------- -------- --------
Net income (loss) $ 18,913 $(13,809) $ 32,722
======== ======== ========
Operating income of $12.1 million in the three months ended March 31, 2001
represented a $28.5 million increase over the operating loss of $16.4 million
recorded in the three months ended March 31, 2000. This improvement was
principally the result of improved underwriting results, as well as increased
investment income. The increase in investment income in 2000 was the result of
the increase in the size of the investment portfolio from the Trenwick/LaSalle
business combination. The increase of $32.7 million in net income in 2001 when
compared to 2000 was the result of the increase in operating income, the absence
of a minority interest in 2001, and the increase in realized investment gains,
offset in part by an increase in foreign exchange losses which are discussed on
page 12 under the caption "Non-Operating Income and Expenses."
Underwriting income (loss)
The underwriting result for the three months ended March 31, 2000 included only
the results of LaSalle Re Holdings Limited; the underwriting result for the
three months ended March 31, 2001 included the combined results of LaSalle Re
Holdings Limited and Trenwick Group Inc.
2001 2000 Change
--------- -------- ---------
(in thousands)
Net premiums earned $ 201,676 $ 27,212 $ 174,464
--------- -------- ---------
Claims and claims expenses incurred 140,248 43,546 96,702
Acquisition costs and underwriting expenses 75,530 8,276 67,254
--------- -------- ---------
Total expenses 215,778 51,822 163,956
--------- -------- ---------
Net underwriting loss $ (14,102) $(24,610) $ 10,508
========= ======== =========
Loss ratio 69.5% 160.0% (90.5)%
Underwriting expense ratio 37.5% 30.4% 7.1 %
Combined ratio 107.0% 190.4% (83.4)%
The underwriting loss of $14.1 million in 2001 represented a $10.5 million
decrease compared to the underwriting loss of $24.6 million in 2000. The
reduction in underwriting loss was primarily
-9-
due to the absence of significant catastrophe losses in the first quarter of
2001 compared to the same period last year. During the first quarter of 2000,
underwriting results included additions to loss reserves of $23.0 million
relating to the December 1999 winter storms which hit France and Denmark.
The decrease in the combined ratio in 2001 compared to 2000 resulted from a
significant change in Trenwick Group Ltd.'s mix of business following the
Trenwick/LaSalle business combination. Both the decrease in the loss ratio and
the increase in the underwriting expense ratio in the three months ended March
31, 2001 as compared to the three months ended March 31, 2000 resulted from the
inclusion of Trenwick Group Inc.'s casualty business in the underwriting results
in 2001. The decline in the loss ratio in 2001 also occurred due to the lower
number of catastrophic events compared to the same period in 2000.
Premiums written
Gross premiums written for 2001 were $352.5 million compared to $65.2 million
for the three months ended March 31, 2000, an increase of $287.3 million or
441.0%. Details of gross premiums written are provided below:
2001 2000 Change
--------- ------- ---------
(in thousands)
Worldwide property catastrophe reinsurance $ 58,947 $58,393 $ 554
U.S. treaty reinsurance 81,531 -- 81,531
International specialty insurance and reinsurance 62,218 -- 62,218
Lloyd's syndicates:
Continuing 84,157 1,959 82,198
Runoff (2,886) 4,814 (7,700)
U.S. specialty program insurance 68,558 -- 68,558
--------- ------- ---------
Gross premiums written $ 352,525 $65,166 $ 287,359
========= ======= =========
Worldwide property catastrophe reinsurance gross premium writings for the three
months ended March 31, 2001 were relatively unchanged from the three months
ended March 31, 2000.
The increase in Lloyd's gross written premiums for 2001 compared to 2000 was due
to the addition of Trenwick Group Inc.'s Lloyd's operations managed by Chartwell
Managing Agents Limited from the Trenwick/LaSalle business combination. A
majority of the Lloyd's syndicate gross written premiums in 2001 represent the
first quarter bookings of business managed by Chartwell Managing Agents Limited.
The majority of Lloyd's business underwritten by LaSalle Re Holdings Limited
prior to the combination with Trenwick Group Inc. was not renewed as of December
31, 2000 and have been classified as runoff. Additionally, results of operations
from Lloyd's syndicates which were sold by Trenwick Group Inc. in 1999 have also
been classified as runoff.
U.S. treaty reinsurance, international specialty insurance and reinsurance and
U.S. specialty program insurance gross premiums written increased from $0 for
the first quarter of 2000 to $81.5 million, $62.2 million and $68.6 million,
respectively, for the first quarter of 2001. Trenwick Group Ltd. did not
underwrite these businesses prior to the Trenwick/LaSalle business combination.
Premiums earned
2001 2000 Change
--------- -------- ---------
(in thousands)
Gross premiums written $ 352,525 $ 65,166 $ 287,359
Change in gross unearned premiums (70,983) (30,705) 40,278
--------- -------- ---------
Gross premiums earned 281,542 34,461 247,081
--------- -------- ---------
Gross premiums ceded (92,885) (16,683) (76,202)
Change in ceded unearned premiums 13,019 9,434 3,585
--------- -------- ---------
Ceded premiums earned (79,866) (7,249) (72,617)
--------- -------- ---------
Net premiums earned $ 201,676 $ 27,212 $ 174,464
========= ======== =========
-10-
Gross premiums ceded for the three months ended March 31, 2001 were $92.9
million compared to $16.7 million for the same period in 2000. The increase in
gross premiums ceded of $76.2 million was due primarily to cessions relating to
business acquired in the Trenwick/LaSalle business combination. Businesses
acquired in the Trenwick/LaSalle business combination included Lloyd's
syndicates, international specialty insurance and reinsurance and U.S. specialty
program insurance, all of which have significantly larger reinsurance and
retrocessional programs than LaSalle Re Limited.
Net premiums earned for the three months ended March 31, 2001 were $201.7
million compared to $27.2 million for 2000. The increase in net premiums earned
is commensurate with the increase in net premiums written.
Claims and claims expenses
Claims and claims expenses for the three months ended March 31, 2001 were $140.2
million, an increase of $96.7 million compared to claims and claims expenses of
$43.5 million for 2000. The increase in claims and claims expenses in 2001
resulted mainly from the addition of business acquired in the Trenwick/LaSalle
business combination. During the quarter ended March 31, 2000, claims and claims
expenses included an increase in loss reserves of $23.0 million relating to the
December 1999 winter storms which hit France and Denmark following an increase
in the size of the market estimate of the losses. Also, following notification
from a syndicate supported by LaSalle Re Capital, $7.4 million was recorded for
loss reserves relating to a particular program that was underwritten by the
syndicate in 1997 through to 1999.
Underwriting expenses
2001 2000 Change
------- ------ -------
(in thousands)
Policy acquisition costs $59,206 $4,510 $54,696
Underwriting expenses 16,324 3,766 12,558
------- ------ -------
Total underwriting expenses $75,530 $8,276 67,254
======= ====== =======
Underwriting expense ratio 37.5% 30.4% 7.1%
======= ====== =======
Total underwriting expenses, comprising policy acquisition costs and
underwriting expenses, for 2001 increased by $67.3 million compared to
underwriting expenses for the three months ended March 31, 2000. Similar to
claims and claims expenses, the increase was attributable to expenses incurred
on business acquired in the Trenwick/LaSalle business combination. Total
underwriting expenses as a percentage of net premiums earned, or the
underwriting expense ratio, were 37.5% for the three months ended March 31, 2001
compared to 30.4% for the same period in 2000. The increase in the underwriting
expense ratio occurred principally because of an increase in policy acquisition
costs relating to casualty business acquired in the Trenwick/LaSalle business
combination. This business, which consisted of both treaty insurance and
reinsurance, generally has a higher policy acquisition cost ratio than property
catastrophe business.
-11-
Underwriting expenses for the three months ended March 31, 2001 as a percentage
of earned premium was 8.1%, a decrease of 5.7% from 13.8% for the same period in
2000. The decrease in the underwriting expense ratio resulted from the addition
of business acquired in the Trenwick/LaSalle business combination.
Net Investment Income
2001 2000 Change
----------- --------- -----------
(in thousands)
Average invested assets $ 2,197,793 $ 568,125 $ 1,629,668
Average annualized yields 6.50% 6.05% 0.45%
----------- --------- -----------
Investment income - portfolio $ 35,687 $ 8,592 $ 27,095
Investment income - non-portfolio 522 562 (40)
Investment expenses (4,025) (218) (3,807)
----------- --------- -----------
Net investment income $ 32,184 $ 8,936 $ 23,248
=========== ========= ===========
Net investment income for the three months ended March 31, 2001 was $32.2
million compared to $8.9 million for the same period in 2000. The increase in
net investment income in 2001 was due to the increase in invested assets
resulting from the Trenwick/LaSalle business combination. Investment expense for
2001 includes interest expense on funds withheld of $2.9 million under the terms
of stop loss reinsurance agreements purchased by Trenwick America Reinsurance
Corporation prior to 2000. The balance of the increase in investment expense in
2001 results from the increase in Trenwick Group Ltd.'s invested assets under
management following the Trenwick/LaSalle business combination.
Interest Expense and Dividends on Preferred Stock of Subsidiaries
Interest expense and dividends on preferred stock of subsidiaries was $7.5
million for 2001, an increase of $7.2 million from the same period in 2000. The
increase resulted from the increase in debt outstanding as a result of the
Trenwick Group Inc. debt assumed by Trenwick Group Ltd.'s subsidiaries as well
as the inclusion of dividends on preferred stock of LaSalle Re Holdings Limited
in 2001, both as a result of the Trenwick/LaSalle business combination.
Non-Operating Income and Expenses
Minority interest represents the minority interest in common shares of LaSalle
Re Limited held by third party investors prior to the Trenwick/LaSalle business
combination on September 27, 2000. Net income attributed to the minority
interest was calculated as 25.3% of net income in the first quarter of 2000.
Net realized gains on investments, net of applicable minority interest and
income taxes, were $7.8 million during the three months ended March 31, 2001,
compared to net realized losses of $1.7 million for the three months ended March
31, 2000. Both the gains and losses were made as a result of security sales
executed pursuant to an investment policy designed to protect the total returns
on the portfolio.
Trenwick Group Ltd. recorded foreign currency losses, net of applicable minority
interest and income taxes, of $1.0 million for the three months ended March 31,
2001, compared to foreign currency gains of $0.1 million for the three months
ended March 31, 2000 due to the decline in the value of European currencies in
the latter portion of 2000, principally the British pound sterling, against the
US dollar.
-12-
Liquidity and Capital Resources
As of March 31, 2001, Trenwick Group Ltd.'s consolidated investments and cash
totaled $2.2 billion, unchanged from the balance at December 31, 2000. The cost
of Trenwick Group Ltd.'s equity securities was $2.3 million less than fair value
at March 31, 2001 and exceeded fair value by $2.1 million at December 31, 2000.
The fair value of Trenwick Group Ltd.'s debt securities exceeded amortized cost
by $33.0 million at March 31, 2001 and by $27.0 million at December 31, 2000.
As of March 31, 2001, Trenwick Group Ltd. consolidated common stockholders'
equity totaled $671.3 million, or $18.22 per common share, compared to $652.2
million, or $17.79 per common share at December 31, 2000. During the three
months ended March 31, 2001, the unrealized appreciation of debt and equity
securities increased by $7.2 million, net of tax, or $0.20 per share.
Cash used in Trenwick Group Ltd.'s operating activities for the three months
ended March 31, 2001 was $15.9 million compared to cash provided by Trenwick
Group Ltd.'s operating activities of $20.0 million in the comparable period of
2000. The reduction in cash flow from operations was due primarily to an overall
increase in claims and claims expenses paid as a result of an increase in
catastrophe losses in both 1999 and 2000.
Net cash used in financing activities during the three months ended March 31,
2001 included $1.5 million of dividends paid to common shareholders. During the
three months ended March 31, 2000, net cash used in financing activities
included $1.6 million of dividends to preferred shareholders.
Trenwick Group Ltd. paid a dividend of $0.04 per common share in the first
quarter of 2001 and LaSalle Re Holdings Limited paid a quarterly dividend of
$.55 per share on the Series A preferred shares of LaSalle Re Holdings Limited
in each of the three months ended March 31, 2001 and 2000. Trenwick Group Ltd.'s
Board of Directors reviews Trenwick Group Ltd.'s common share dividend each
quarter. Among the factors considered by the Board of Directors in determining
the amount of each dividend are Trenwick Group Ltd.'s results of operations and
the capital requirements, growth and other characteristics of its businesses.
Trenwick Group Ltd.'s total debt to capital ratio (total debt excluding the
preferred capital securities divided by total debt, preferred capital
securities, preferred shares and common shareholders' equity) decreased to 25.8%
at March 31, 2001 from 26.3% on December 31, 2000.
Quantitative and Qualitative Disclosure About Market Risk
Trenwick Group Ltd. reviewed the change in its exposure to market risks since
December 31, 2000. In addition, the components of its investment holdings and
its risk management strategy and objectives have not materially changed.
Therefore, Trenwick Group Ltd. believes that the potential for loss in each
market risk sector described in the 2000 Annual Report on Form 10-K has not
materially changed.
Accounting Standards
Effective January 1, 2001, Trenwick Group Ltd. implemented Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
adoption of this statement had no effect on Trenwick Group Ltd.'s consolidated
financial statements.
-13-
Safe Harbor Disclosure
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, Trenwick Group Ltd. sets forth below cautionary
statements identifying important risks and uncertainties that could cause its
actual results to differ materially from those that might be projected,
forecasted or estimated in its "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, made by or on behalf of Trenwick Group Ltd. in this
Quarterly Report on Form 10-Q and in press releases, written statements or
documents filed with the Securities and Exchange Commission, or in its
communications and discussions with investors and analysts in the normal course
of business through meetings, phone calls and conference calls. Such statements
may include, but are not limited to, projections of premium revenue, investment
income, other revenue, losses, expenses, earnings (including earnings per
share), cash flows, plans for future operations, common shareholders' equity
(including book value per share), investments, financing needs, capital plans,
dividends, plans relating to products or services of Trenwick Group Ltd. and
estimates concerning the effects of litigation or other disputes, as well as
assumptions for any of the foregoing and generally expressed with words such as
"believes," "estimates," "expects," "anticipates," "plans," "projects,"
"forecasts," "goals," "could have," "may have," and similar expressions.
Forward-looking statements involve known and unknown risks and uncertainties,
which may cause Trenwick Group Ltd.'s results to differ materially from such
forward-looking statements. These risks and uncertainties include, but are not
limited to, the following:
- - Changes in the level of competition in the domestic and international
reinsurance or primary insurance markets that affect the volume or
profitability of Trenwick Group Ltd.'s property/casualty business. These
changes include, but are not limited to, changes in the intensity of price
competition, the entry of new competitors, existing competitors exiting the
market and the development of new products by new and existing competitors;
- - Changes in the demand for reinsurance, including changes in ceding
companies' risk retentions and changes in the demand for excess and surplus
lines insurance coverages;
- - The ability of Trenwick Group Ltd. to execute its strategies in its
property/casualty operations;
- - Catastrophe losses in Trenwick Group Ltd.'s domestic and international
property/casualty businesses;
- - Adverse development on property/casualty claims and claims expense
liabilities related to business written in prior years, including, but not
limited to, evolving case law and its effect on environmental and other
latent injury claims, changing government regulations, newly identified
toxins, newly reported claims, new theories of liability, or new insurance
and reinsurance contract interpretations;
- - Changes in Trenwick Group Ltd.'s property/casualty retrocessional
arrangements;
- - Lower than estimated retrocessional or reinsurance recoveries on unpaid
losses, including, but not limited to, losses due to a decline in the
creditworthiness of Trenwick Group Ltd.'s retrocessionaires or reinsurers;
- - Increases in interest rates, which may cause a reduction in the market
value of Trenwick Group Ltd.'s fixed income portfolio, and its common
shareholders' equity;
- - Decreases in interest rates which may cause a reduction of income earned on
new cash flow from operations and the reinvestment of the proceeds from
sales or maturities of existing investments;
- - A decline in the value of Trenwick Group Ltd.'s equity investments;
- - Changes in the composition of Trenwick Group Ltd.'s investment portfolio;
- - Credit losses on Trenwick Group Ltd.'s investment portfolio;
- - Adverse results in litigation matters, including, but not limited to,
litigation related to environmental, asbestos and other potential mass tort
claims;
-14-
- - The passage of federal or state legislation subjecting LaSalle Re Limited
to United States taxation or regulation;
- - A contention by the United States Internal Revenue Service that LaSalle Re
Limited is subject to United States taxation;
- - The impact of mergers and acquisitions;
- - Gains or losses related to changes in foreign currency exchange rates; and
- - Changes in Trenwick Group Ltd.'s capital needs.
In addition to the factors outlined above that are directly related to Trenwick
Group Ltd.'s businesses, Trenwick Group Ltd. is also subject to general business
risks, including, but not limited to, adverse state, federal or foreign
legislation and regulation, adverse publicity or news coverage, changes in
general economic factors and the loss of key employees.
The facts set forth above should be considered in connection with any
forward-looking statement contained in this Quarterly Report on Form 10-Q. The
important factors that could affect such forward-looking statements are subject
to change, and Trenwick Group Ltd. does not intend to update any forward-looking
statement or the foregoing list of important factors. By this cautionary note
Trenwick Group Ltd. intends to avail itself of the safe harbor from liability
with respect of forward-looking statements provided by Section 27A and Section
21E referred to above.
-15-
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
Trenwick Group Ltd. is party to various legal proceedings generally arising
in the normal course of its business. Trenwick Group Ltd. does not believe that
the eventual outcome of any such proceeding will have a material effect on its
financial condition or business. Trenwick Group Ltd.'s subsidiaries are
regularly engaged in the investigation and the defense of claims arising out of
the conduct of their business. Pursuant to Trenwick Group Ltd.'s insurance and
reinsurance arrangements, disputes are generally required to be finally settled
by arbitration.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
-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 LTD.
Date: May 15, 2001 By: /s/ James F. Billett, Jr.
--------------------------
Name: James F. Billett, Jr.
Title: Chairman, President and
Chief Executive Officer
Date: May 15, 2001 By: /s/ Coleman D. Ross
-------------------
Name: Coleman D. Ross
Title: Executive Vice President and
Chief Financial Officer
-17-