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 June 30, 2001.
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
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Commission file number 0-31967
TRENWICK AMERICA CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware 06-1087672
(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)
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Registrant's telephone number, including area code: 203-353-5500
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 August 14, 2001
- ------------------------------- ---------------------
Common Stock - $1.00 par value 100
The registrant meets the conditions set forth in General Instruction H (1)(a)
and (b) of Form 10-Q and is therefore filing this Form 10-Q in the reduced
disclosure format.
TRENWICK AMERICA CORPORATION
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
Page
ITEM 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheet
June 30, 2001 and December 31, 2000 ....................... 1
Consolidated Statement of Operations,
Comprehensive Income and Changes in Common
Stockholder's Equity
Three and Six Months Ended June 30, 2001 and
2000 ...................................................... 2
Consolidated Statement of Cash Flows
Three and Six Months Ended June 30, 2001 and
2000 ...................................................... 3
Notes to Unaudited Consolidated Financial
Statements ................................................ 4
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............. 7
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 America Corporation
Consolidated Balance Sheet
(Amounts expressed in thousands of United States dollars)
June 30, 2001 (Unaudited) and December 31, 2000
2001 2000
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ASSETS
Debt securities available for sale, at fair
value $1,060,940 $1,006,161
Equity securities, at fair value 29,839 103,641
Cash and cash equivalents 110,103 133,395
Accrued investment income 13,515 14,006
Premiums receivable 168,029 152,626
Reinsurance recoverable balances, net 543,973 511,163
Prepaid reinsurance premiums 86,099 63,879
Deferred policy acquisition costs 43,452 36,267
Due from affiliates 60,921 57,952
Net deferred income taxes 78,208 63,598
Other assets 140,303 136,850
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Total assets $2,335,382 $2,279,538
========== ==========
LIABILITIES
Unpaid claims and claims expenses $1,394,917 $1,396,504
Unearned premium income 224,594 177,174
Reinsurance balances payable 47,559 26,401
Indebtedness 295,261 283,289
Due to affiliates 58,492 75,303
Other liabilities 39,786 32,901
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Total liabilities 2,060,609 1,991,572
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MINORITY INTEREST
Mandatorily redeemable preferred capital
securities of subsidiary trust holding
solely junior subordinated debentures of
Trenwick America Corporation 87,377 87,059
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COMMON STOCKHOLDER'S EQUITY
Common stock, $1.00 par value, 1,000 shares
authorized and 100 shares issued and outstanding,
and additional paid in capital 100,731 114,847
Retained earnings 76,112 76,629
Accumulated other comprehensive income 10,553 9,431
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Total common stockholder's equity 187,396 200,907
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Total liabilities, minority interest and
common stockholder's equity $2,335,382 $2,279,538
========== ==========
The accompanying notes are an integral part of these statements.
-1-
Trenwick America Corporation
Consolidated Statement of Operations, Comprehensive Income and
Changes in Common Stockholder's Equity (Unaudited)
(Amounts expressed in thousands of United States dollars)
Three and Six Months Ended June 30, 2001 and 2000
Three Months Six Months
---------------------- ----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
REVENUES
Net premiums earned $ 87,214 $ 51,266 $ 161,136 $ 103,104
Net investment income 18,311 16,698 35,760 36,550
Net realized investment gains
(losses) 252 195 2,356 (355)
Other income 789 827 1,618 1,790
--------- --------- --------- ---------
Total revenues 106,566 68,986 200,870 141,089
--------- --------- --------- ---------
EXPENSES
Claims and claims expenses incurred 77,038 41,380 128,266 78,070
Policy acquisition costs 25,104 13,411 50,703 28,309
Underwriting expenses 4,277 5,014 8,378 10,362
General and administrative expenses 864 3,233 1,660 5,404
Interest expense and dividends on
capital securities of subsidiary
trust 7,670 9,364 16,173 17,153
Foreign currency losses (gains) 632 (301) 983 804
--------- --------- --------- ---------
Total expenses 115,585 72,101 206,163 140,102
--------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary item (9,019) (3,115) (5,293) 987
Applicable income taxes (benefit) (1,755) (7,053) (4,777) (3,452)
--------- --------- --------- ---------
Income (loss) before extraordinary
item (7,264) 3,938 (516) 4,439
Extraordinary loss on debt redemption,
net of $445
income tax benefit -- -- -- 825
--------- --------- --------- ---------
Net income (loss) $ (7,264) $ 3,938 $ (516) $ 3,614
========= ========= ========= =========
COMPREHENSIVE INCOME (LOSS):
Net income (loss) $ (7,264) $ 3,938 $ (516) $ 3,614
--------- --------- --------- ---------
Other comprehensive income (loss):
Net unrealized investment gains
(losses) (4,056) (3,411) 2,657 (1,839)
Foreign currency translation
adjustments 384 (1,749) (1,535) (2,235)
--------- --------- --------- ---------
Total other comprehensive income
(loss) (3,672) (5,160) 1,122 (4,074)
--------- --------- --------- ---------
Comprehensive income (loss) $ (10,936) $ (1,222) $ 606 $ (460)
========= ========= ========= =========
Changes in common
stockholder's Equity:
Common stockholder's equity,
beginning of year $ 209,973 $ 207,366 $ 200,907 $ 214,482
Net capital transactions with
affiliates (11,641) 24,259 (12,109) 25,881
Adjustment to paid in capital
related to Trenwick/LaSalle
business combination -- -- (2,008) --
Comprehensive income (loss) (10,936) (1,222) 606 (460)
Dividends on common stock -- -- -- (9,500)
--------- --------- --------- ---------
Common stockholder's equity, end of
period 187,396 $ 230,403 $ 187,396 $ 230,403
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
-2-
Trenwick America Corporation
Consolidated Statement of Cash Flows (Unaudited)
(Amounts expressed in thousands of United States dollars)
Three and Six Months Ended June 30, 2001 and 2000
Three Months Six Months
---------------------- ----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
OPERATING ACTIVITES:
Cash for operating activities $ (12,079) $ (4,418) $ (45,666) $ (56,182)
--------- --------- --------- ---------
Investing activities:
Purchases of debt securities (137,261) (59,911) (417,839) (157,493)
Sales of debt securities 82,034 111,540 343,718 239,979
Maturities of debt securities 4,469 19,405 19,533 59,879
Purchases of equity securities 88 (55) (1,262) (475)
Sales of equity securities 9,133 -- 81,081 368
Effect of exchange rate on cash 5 -- (204) --
Other (502) (659) (690) (1,046)
--------- --------- --------- ---------
Cash from (for) investing
activities (42,034) 70,320 24,337 141,212
--------- --------- --------- ---------
Financing activities:
Issuance of indebtedness 14,000 -- 14,000 --
Redemption of indebtedness -- -- -- (41,101)
Loans to affiliates (19,900) (16,651) (21,062) (28,243)
Capital contribution from parent 5,099 -- 5,099 --
Dividends paid -- -- -- (9,500)
Other, net -- 10 -- (621)
--------- --------- --------- ---------
Cash for financing activities (801) (16,641) (1,963) (79,465)
--------- --------- --------- ---------
Change in cash and cash equivalents (54,914) 49,261 (23,292) 5,565
Cash and cash equivalents,
beginning of year 165,017 -- 133,395 97,856
--------- --------- --------- ---------
Cash and cash equivalents, end of
period $ 110,103 $ 49,261 $ 110,103 $ 103,421
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
-3-
TRENWICK AMERICA CORPORATION
Notes to Unaudited Consolidated Financial Statements
(Amounts expressed in thousands of United States dollars except share data)
Three and Six Months Ended June 30, 2001 and 2000
Note 1 Organization and Basis of Presentation
Organization
Trenwick America Corporation is a United States holding company whose
principal subsidiaries underwrite specialty insurance and reinsurance.
Trenwick America Corporation's ultimate parent is Trenwick Group Ltd.,
which is a publicly traded Bermuda holding company.Prior to September 27,
2000, Trenwick America Corporation's parent was Trenwick Group Inc.
On September 27, 2000, Trenwick Group Ltd., a newly formed company,
acquired all of the assets and liabilities of Trenwick Group Inc. and all
of the issued and outstanding common shares of LaSalle Re Holdings Limited
and LaSalle Re Limited in exchange for Trenwick Group Ltd. common shares.
Trenwick Group Inc. then distributed the shares received from Trenwick
Group Ltd. to its shareholders in a liquidating distribution. Substantially
all of Trenwick Group Inc.'s assets and liabilities were transferred from
Trenwick Group Inc. to Chartwell Re Holdings Corporation (then a
wholly-owned subsidiary of Trenwick Group Inc.) immediately prior to the
Trenwick/LaSalle business combination. Chartwell Re Holdings Corporation
then sold most of its United Kingdom and Bermuda subsidiaries to Trenwick
Group Inc. at fair value. Immediately after the Trenwick/LaSalle business
combination, Chartwell Re Holdings Corporation merged with and into
Trenwick America Corporation, with Trenwick America Corporation as the
surviving corporation. As a result of such merger, Trenwick America
Corporation acquired Chartwell Insurance Company, The Insurance Corporation
of New York and Dakota Specialty Insurance Company. The Trenwick/LaSalle
business combination and its related transactions were completed on
September 27, 2000.
Basis of Presentation
The business combination among LaSalle Re Holdings Limited, LaSalle Re
Limited, Trenwick Group Inc. and Trenwick Group Ltd. was accounted for as a
purchase by LaSalle Re Holdings Limited of the minority interest in LaSalle
Re Limited and of Trenwick Group Inc. Accordingly, the assets and
liabilities of Trenwick America Corporation have been adjusted to reflect
their fair value, after consideration of the purchase price, as of
September 27, 2000. In addition, a portion of the goodwill resulting from
the business combination has been pushed down to Trenwick America
Corporation and was reflected in the consolidated balance sheet as of
September 27, 2000. During the three months ended March 31, 2001, an
additional $2.0 million of goodwill was pushed down to Trenwick America
Corporation due to the refinement of estimates used in the calculation of
goodwill resulting from this business combination.
As a result of the reorganization described above, the United Kingdom and
Bermuda subsidiaries of Trenwick Group Inc. were sold to Trenwick Group
Ltd., and the remaining net liabilities of Trenwick Group Inc., consisting
primarily of indebtedness and preferred capital securities, were assumed by
Trenwick America Corporation. These financial statements present the
reorganization at historical cost in a manner similar to a pooling of
interests business combination. Accordingly, the accompanying interim
financial statements for the three and six months ended June 30, 2000 have
been restated to reflect the combined operating results, cash flows, and
financial position of the United States operations of Trenwick Group Inc.
-4-
The interim financial statements include the accounts of Trenwick America
Corporation and its subsidiaries after elimination of significant
intercompany accounts and transactions. Certain items in the prior year
financial statements have been reclassified to conform to the current
presentation.
These interim financial statements have been prepared in conformity with
accounting principles that are generally accepted in the United States of
America, sometimes referred to as U.S. GAAP. To prepare these interim
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and
expenses during the reporting periods. Actual amounts may differ from these
estimates.
The interim financial statements are unaudited; however, in the opinion of
management, the interim financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
statement of the results for interim periods. These interim statements
should be read in conjunction with the audited financial statements and
related notes included in the Annual Report on Form 10-K of Trenwick
America Corporation for the year ended December 31, 2000.
Note 2 Segment information
The following tables present business segment financial information for
Trenwick America Corporation at June 30, 2001 and December 31, 2000 and for
the three and six months ended June 30, 2001 and 2000:
Total assets: 2001 2000
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Treaty reinsurance $1,545,666 $1,777,324
Specialty program insurance 522,851 376,994
Unallocated 266,865 125,220
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Total assets $2,335,382 $2,279,538
========== ==========
Three Months Six Months
------------------ -------------------
2001 2000 2001 2000
-------- ------- -------- --------
Total revenues:
Treaty reinsurance $ 81,007 $55,794 $153,215 $110,897
Specialty program
insurance 23,152 12,715 42,723 28,749
Unallocated 2,407 477 4,932 1,443
-------- ------- -------- --------
Total revenues $106,566 $68,986 $200,870 $141,089
======== ======= ======== ========
Three Months Six Months
------------------ -------------------
2001 2000 2001 2000
-------- ------- -------- --------
Net income (loss):
Treaty reinsurance $ 4,520 $13,065 $ 14,251 $ 13,978
Specialty program
insurance (8,302) 3,733 (6,510) 4,306
Unallocated (3,482) (12,860) (8,257) (14,670)
-------- ------- -------- --------
Net income (loss) $ (7,264) $ 3,938 $ (516) $ 3,614
======== ======= ======== ========
Revenues from transactions between operating segments, which are not
material, have been eliminated in consolidation. Unallocated net income
(loss) consists mainly of
-5-
interest expense and dividends on preferred capital securities of
subsidiary trust, net of applicable income taxes.
Note 3 Underwriting Activities
The components of premiums written and earned for the six months ended June
30, 2001 and 2000 are as follows:
Three Months Six Months
---------------------- ----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Assumed premiums
written $ 79,511 $ 74,542 $ 162,108 $ 163,072
Direct premiums
written 74,898 80,540 143,489 91,981
--------- --------- --------- ---------
Gross premiums written 154,409 155,082 305,597 255,053
Ceded premiums written (57,152) (91,886) (109,874) (139,293)
--------- --------- --------- ---------
Net premiums written $ 97,257 $ 63,196 $ 195,723 $ 115,760
========= ========= ========= =========
Assumed premiums
earned $ 75,917 $ 71,273 $ 139,224 $ 150,574
Direct premiums earned 57,203 66,728 110,412 76,920
--------- --------- --------- ---------
Gross premiums earned 133,120 138,001 249,636 227,494
Ceded premiums earned (45,906) (86,735) (88,500) (124,390)
--------- --------- --------- ---------
Net premiums earned $ 87,214 $ 51,266 $ 161,136 $ 103,104
========= ========= ========= =========
Note 4 Accounting Standards
In July 2001, the Financial Accounting Standards Board issued statements
covering business combinations and goodwill and other intangible assets,
which are required to be adopted at the beginning of 2002. The business
combination statement requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. The
goodwill and other intangible assets statement changes the expensing of
goodwill from an amortization method to an impairment-only approach.
Amortization of goodwill, including goodwill recorded in past business
combinations, will cease upon adoption of this statement.
Trenwick America Corporation has not determined the effect that this
statement will have on its consolidated financial position or results of
operations.
-6-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion highlights material factors affecting Trenwick America
Corporation's results of operations for the three and six months ended June 30,
2001 and 2000. This discussion and analysis should be read in conjunction with
the unaudited interim financial statements and notes thereto of Trenwick America
Corporation 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 America Corporation for the year ended December 31, 2000.
Trenwick America Corporation meets the conditions set forth in the General
Instructions (H) (I) (a) and (b) of Form 10-Q and is therefore omitting certain
information otherwise required by Item 2.
Overview
Trenwick America Corporation is a Delaware holding company headquartered in
Stamford, Connecticut whose principal subsidiaries underwrite specialty
insurance and reinsurance.
Trenwick America Corporation operates through the following two principal
operating platforms:
o Trenwick America Reinsurance Corporation underwrites treaty reinsurance on
United States property and casualty risks, including United States
reinsurance business previously written by Chartwell Re Corporation
subsidiaries; and
o Canterbury Financial Group Inc. underwrites specialty insurance through its
operating subsidiaries, Chartwell Insurance Company, The Insurance
Corporation of New York and Dakota Specialty Insurance Company.
All of Trenwick America Corporation'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. 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.
Results of Operations - Three Months Ended June 30, 2001 and Three Months
Ended June 30, 2000
2001 2000 Change
-------- -------- --------
(in thousands)
Underwriting loss $(19,205) $ (8,539) $(10,666)
Net investment income 18,311 16,698 1,613
Interest expense and dividends on
preferred stock of subsidiary (7,670) (9,364) 1,694
General and administrative expenses (864) (3,233) 2,369
Other income 789 827 (38)
-------- -------- --------
Pre-tax operating loss (8,639) (3,611) (5,028)
Applicable income taxes (benefit) (1,622) (7,227) 5,605
-------- -------- --------
Operating income (loss) (7,017) 3,616 (10,633)
Net realized investment gains, net
of income taxes 164 127 37
Foreign currency (losses) gains,
net of income taxes (411) 195 (606)
-------- -------- --------
Net income (loss) $ (7,264) $ 3,938 $(11,202)
======== ======== ========
The operating loss of $7.0 million in the three months ended June 30, 2001
represented a $10.6 million decrease from operating income of $3.6 million
recorded in the three months ended June
-7-
30, 2000. This decline was principally the result of reserve strengthening
recorded in the second quarter of 2001, offset in part by a decrease in general
and administrative expenses. The decrease of $11.2 million in net income in 2001
when compared to 2000 was primarily the result of the decrease in operating
income.
Underwriting income (loss)
2001 2000 Change
--------- -------- --------
(in thousands)
Net premiums earned $ 87,214 $ 51,266 $ 35,948
--------- -------- --------
Claims and claims expenses
incurred 77,038 41,380 35,658
Acquisition costs and
underwriting expenses 29,381 18,425 10,956
--------- -------- --------
Total expenses 106,419 59,805 46,614
--------- -------- --------
Net underwriting loss $ (19,205) $ (8,539) $(10,666)
========= ======== ========
Loss ratio 88.3% 80.7% 7.6%
Underwriting expense ratio 33.7% 35.9% (2.2)%
Combined ratio 122.0% 116.6% 5.4%
The underwriting loss of $19.2 million in 2001 represented a $10.7 million
greater loss compared to the underwriting loss of $8.5 million in 2000. The
increase in the underwriting loss was primarily due to loss reserve
strengthening of $32.2 million recorded during 2001 arising from business
written in prior years. The increase in the combined ratio in 2001 compared to
2000 is also a result of the reserve strengthening noted above, partially offset
by a decrease in the underwriting expense ratio.
Premiums written
Gross premiums written for 2001 were $154.4 million compared to $155.1 million
for the three months ended June 30, 2000, a decrease of $0.7 million or 0.5%.
Details of gross premiums written are provided below:
2001 2000 Change
-------- -------- --------
(in thousands)
Treaty reinsurance $ 79,478 $107,542 $(28,064)
Specialty program insurance 74,931 47,540 27,391
-------- -------- --------
Gross premiums written $154,409 $155,082 $ (673)
======== ======== ========
Treaty reinsurance decreased $28.1 million from the second quarter of 2000
primarily due to the non-renewal of a fronting arrangement acquired in a
previous business combination. Specialty program insurance gross premiums
written increased from $47.5 million for the second quarter of 2000 to $74.9
million for the second quarter of 2001 due to increased volume on three of its
larger existing programs combined with the addition of four new programs in
2001.
-8-
Premiums earned
2001 2000 Change
--------- --------- --------
(in thousands)
Gross premiums written $ 154,409 $ 155,082 $ (673)
Change in gross unearned
premiums (21,289) (17,081) (4,208)
--------- --------- --------
Gross premiums earned 133,120 138,001 (4,881)
--------- --------- --------
Gross premiums ceded (57,152) (91,886) 34,734
Change in ceded unearned
premiums 11,246 5,151 6,095
--------- --------- --------
Ceded premiums earned (45,906) (86,735) 40,829
--------- --------- --------
Net premiums earned $ 87,214 $ 51,266 $ 35,948
========= ========= ========
Gross premiums ceded for the three months ended June 30, 2001 were $57.1 million
compared to $91.9 million for the same period in 2000. The decrease in gross
premiums ceded of $34.7 million was due primarily to the non-renewal of the
fronting arrangement previously described.
Net premiums earned for the three months ended June 30, 2001 were $87.2 million
compared to $51.3 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 June 30, 2001 were $77.0
million, an increase of $35.6 million compared to claims and claims expenses of
$41.4 million for 2000. The increase in claims and claims expenses in 2001 is
consistent with the increase in premium volume, and included reserve
strengthening of $32.2 million and $10.5 million of additional claims and claims
expenses related to a stop loss reinsurance arrangement with an affiliate. These
amounts were reduced by a benefit of $25.7 million recorded under the terms of a
loss sharing agreement, also with affiliates, compared to a charge of $6.2
million recorded for this agreement during the same period of 2000. The reserve
strengthening of $32.2 million included $17.4 million related to the treaty
reinsurance segment's directors and officer's liability business, which was
underwritten prior to 2001 and $14.8 million of loss reserve strengthening
related to one of the specialty program insurance segment's programs.
Underwriting expenses
2001 2000 Change
-------- -------- --------
(in thousands)
Policy acquisition costs $ 25,104 $ 13,411 $ 11,693
Underwriting expenses 4,277 5,014 (737)
-------- -------- --------
Total underwriting expenses $ 29,381 $ 18,425 $ 10,956
======== ======== ========
Underwriting expense ratio 33.7% 35.9% (2.2)%
======== ======== ========
Total underwriting expenses, comprising policy acquisition costs and
underwriting expenses, for 2001 decreased by $0.7 million compared to
underwriting expenses for the three months ended June 30, 2000. Policy
acquisition costs as a percentage of earned premium were 28.8% for the three
months ended June 30, 2001, a 2.6% increase over the same period in 2000. The
increase in the acquisition ratio is primarily the result of a higher commission
ratio on treaties in runoff. Underwriting expenses for the three months ended
June 30, 2001 as a percentage of earned premium was 4.9%, a decrease of 4.9%
from 9.8% for the same period in 2000. The decrease in the underwriting expense
ratio resulted primarily from a reallocation of expenses in 2001, when expenses
in the specialty program insurance segment were reallocated from underwriting
-9-
expenses to loss adjustment expenses. Total underwriting expenses as a
percentage of net premiums earned, or the underwriting expense ratio, were 33.7%
for the three months ended June 30, 2001 compared to 35.9% for the same period
in 2000.
Net Investment Income
2001 2000 Change
----------- ----------- -----------
(in thousands)
Average invested assets $ 1,193,634 $ 1,216,237 $ (22,603)
Average annualized yields 7.28% 5.49% 1.79%
----------- ----------- -----------
Investment income-portfolio 21,688 20,426 1,262
Investment expenses (3,377) (3,728) 351
----------- ----------- -----------
Net investment income $ 18,311 $ 16,698 $ 1,613
=========== =========== ===========
Net investment income for the three months ended June 30, 2001 was $18.3 million
compared to $16.7 million for the same period in 2000. The increase in net
investment income in 2001 was primarily due to the repositioning of investments
from equity securities and tax-exempt securities into higher yielding debt
securities.
Interest Expense and Dividends on Preferred Stock of Subsidiary
Interest expense and dividends on preferred stock of subsidiaries was $7.7
million for 2001, an decrease of $1.7 million from the same period in 2000. The
increase is primarily a result of a reduction in interest rates over the
previous nine months.
Non-operating Income and Expenses
Net realized gains on investments, net of income taxes, were $0.2 million during
the three months ended June 30, 2001, compared to net realized gains of $0.1
million for the three months ended June 30, 2000. The gains were made as a
result of security sales executed pursuant to an investment policy designed to
protect the total returns on the portfolio.
Trenwick America Corporation recorded foreign currency losses, net of income
taxes, of $0.4 million for the three months ended June 30, 2001, compared to
foreign currency gains of $0.2 million for the three months ended June 30, 2000.
Results of Operations - Six Months Ended June 30, 2001 and Six Months Ended June
30, 2000
2001 2000 Change
-------- -------- --------
(in thousands)
Underwriting loss $(26,211) $(13,637) $(12,574)
Net investment income 35,760 36,550 (790)
Interest expense and dividends on
preferred stock of subsidiary (16,173) (17,153) 980
General and administrative expenses (1,660) (5,404) 3,744
Other income 1,618 1,790 (172)
-------- -------- --------
Pre-tax operating income (loss) (6,666) 2,146 (8,812)
Applicable income taxes (benefit) (5,258) (3,047) (2,211)
-------- -------- --------
Operating income (loss) (1,408) 5,193 (6,601)
Net realized investment gains (losses),
net of income taxes 1,531 (231) 1,762
Foreign currency losses, net of
income taxes (639) (523) (116)
-------- -------- --------
Income (loss) before extraordinary
item (516) 4,439 (4,955)
Extraordinary loss on debt
redemption, net of $445 income
tax benefit -- 825 825
-------- -------- --------
Net income (loss) $ (516) $ 3,614 $ (4,130)
======== ======== ========
-10-
The operating loss of $1.4 million in the six months ended June 30, 2001
represented a $6.6 million decrease from the operating income of $5.2 million
recorded in the six months ended June 30, 2000. This decline was principally the
result of loss reserve strengthening recorded during the first half of 2001,
combined with a decrease in general and administrative expenses. The decrease of
$4.1 million in net income in 2001 when compared to 2000 was the result of the
decrease in net operating income, partially offset by the increase in realized
gains and the absence of an extraordinary loss in 2001.
Underwriting income (loss)
2001 2000 Change
--------- --------- ---------
(in thousands)
Net premiums earned $ 161,136 $ 103,104 $ 58,032
--------- --------- ---------
Claims and claims expenses
incurred 128,266 78,070 50,196
Acquisition costs and
underwriting expenses 59,081 38,671 20,410
--------- --------- ---------
Total expenses 187,347 116,741 70,606
--------- --------- ---------
Net underwriting loss $ (26,211) $ (13,637) $ (12,574)
========= ========= =========
Loss ratio 79.6% 75.7% 3.9%
Underwriting expense ratio 36.7% 37.5% (0.8)%
Combined ratio 116.3% 113.2% 3.1%
The underwriting loss of $26.2 million in 2001 represented a $12.6 million
greater loss compared to the underwriting loss of $13.6 million in 2000. The
increases in the underwriting loss and the combined ratio in 2001 compared to
2000 were both primarily due to loss reserve strengthening recorded during the
first half of 2001.
Premiums written
Gross premiums written for 2001 were $305.6 million compared to $255.1 million
for the six months ended June 30, 2000, an increase of $50.5 million or 19.8%.
Details of gross premiums written are provided below:
2001 2000 Change
-------- -------- --------
(in thousands)
Treaty reinsurance $162,108 $163,072 $ (964)
Specialty program insurance 143,489 91,981 51,508
-------- -------- --------
Gross premiums written $305,597 $255,053 $ 50,544
======== ======== ========
Treaty reinsurance premiums decreased $1.0 million from the six months of 2000,
which can be attributed to the non-renewal of a fronting arrangement acquired in
a previous business combination, offset by higher than anticipated premium
volume for the 2001 underwriting year. Specialty program insurance gross
premiums written increased from $92.0 million for the six months of 2000 to
$143.5 million for the six months of 2001 due to increased volume on three of
its larger programs combined with the addition of four new programs in 2001.
Premiums earned
2001 2000 Change
--------- --------- ---------
(in thousands)
Gross premiums written $ 305,597 $ 255,053 $ 50,544
Change in gross unearned
premiums (55,961) (27,559) (28,402)
--------- --------- ---------
Gross premiums earned 249,636 227,494 22,142
--------- --------- ---------
Gross premiums ceded (109,874) (139,293) 29,419
Change in ceded unearned
premiums 21,374 14,903 6,471
--------- --------- ---------
Ceded premiums earned (88,500) (124,390) 35,890
--------- --------- ---------
Net premiums earned $ 161,136 $ 103,104 $ 58,032
========= ========= =========
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Gross premiums ceded for the six months ended June 30, 2001 were $109.9 million
compared to $139.3 million for the same period in 2000. The decrease in gross
premiums ceded of $29.4 million was due primarily to the non-renewal of a
fronting arrangement acquired in a previous business combination.
Net premiums earned for the six months ended June 30, 2001 were $161.1 million
compared to $103.1 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 six months ended June 30, 2001 were $128.3
million, an increase of $50.2 million compared to claims and claims expenses of
$78.1 million for 2000. The increase in claims and claims expenses in 2001 is
consistent with the increase in premium volume, and is also attributable to the
$32.2 million of loss reserve strengthening recorded during the first half of
2001 and $10.5 million of additional claims and claims expenses related to a
stop loss reinsurance arrangement with an affiliate. The reserve strengthening
of $32.2 million included $17.4 million related to the treaty reinsurance
segment's directors and officer's liability business, which was underwritten
prior to 2001 and $14.8 of the loss reserve strengthening recorded in 2001
related to one of the specialty program insurance segment's programs.
Underwriting expenses
2001 2000 Change
-------- -------- --------
(in thousands)
Policy acquisition costs $ 50,703 $ 28,309 $ 22,394
Underwriting expenses 8,378 10,362 (1,984)
-------- -------- --------
Total underwriting expenses $ 59,081 $ 38,671 $ 20,410
======== ======== ========
Underwriting expense ratio 36.7% 37.5% (0.8)%
======== ======== ========
Total underwriting expenses, comprising policy acquisition costs and
underwriting expenses, for 2001 increased by $20.4 million compared to
underwriting expenses for the six months ended June 30, 2000. Policy acquisition
costs as a percentage of earned premium were 31.5% for the six months ended June
30, 2001, a 4.0% increase over the same period in 2000. The increase in the
acquisition ratio is primarily the result of a higher commission ratio on
treaties in runoff. Underwriting expenses for the six months ended June 30, 2001
as a percentage of earned premium was 5.2%, a decrease of 4.9% from 10.1% for
the same period in 2000. The decrease in the underwriting expense ratio resulted
primarily from a reallocation of expenses in 2001, when expenses in the
specialty program insurance segment were reallocated from underwriting expenses
to loss adjustment expenses. Total underwriting expenses as a percentage of net
premiums earned, or the underwriting expense ratio, were 36.7% for the six
months ended June 30, 2001 compared to 37.5% for the same period in 2000.
-12-
Net Investment Income
2001 2000 Change
---------- ---------- ----------
(in thousands)
Average invested assets $1,204,649 $1,257,264 $ 52,615
Average annualized yields 7.10% 5.81% 1.29%
---------- ---------- ----------
Investment income-portfolio 42,774 43,670 (896)
Investment expenses (7,014) (7,120) 106
---------- ---------- ----------
Net investment income $ 35,760 $ 36,550 $ (790)
========== ========== ==========
Net investment income for the six months ended June 30, 2001 was $35.8 million
compared to $36.6 million for the same period in 2000. The decrease in net
investment income in 2001 was primarily due to a decrease in the average
invested assets as a result of cash used in operations.
Interest Expense and Dividends on Preferred Stock of Subsidiaries
Interest expense and dividends on preferred stock of subsidiaries was $16.2
million for 2001, a decrease of $1.0 million from the same period in 2000. The
decrease is primarily a result of a reduction in interest rates over the
previous nine months.
Non-operating Income and Expenses
Net realized gains on investments, net of income taxes, were $1.5 million during
the six months ended June 30, 2001, compared to net realized losses of $0.2
million for the six months ended June 30, 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 America Corporation recorded foreign currency losses, net of income
taxes, of $0.6 million for the six months ended June 30, 2001, compared to
foreign currency losses of $0.5 million for the six months ended June 30, 2000.
Accounting Standards
In July 2001, the Financial Accounting Standards Board issued statements
covering business combinations and goodwill and other intangible assets, which
are required to be adopted at the beginning of 2002. The business combination
statement requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. The goodwill and other
intangible assets statement changes the accounting for goodwill from an
amortization method to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, will cease upon
adoption of this statement. Trenwick America Corporation has not determined the
effect, if any, that this statement will have on its consolidated financial
position or results of operations.
Safe Harbor Disclosure
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, Trenwick America Corporation 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 America
Corporation 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
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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 America
Corporation 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 America Corporation'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 America Corporation'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 America Corporation to execute its strategies in
its property/casualty operations;
- - Catastrophe losses in Trenwick America Corporation'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 America Corporation'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 America Corporation's retrocessionaires or
reinsurers;
- - Increases in interest rates, which may cause a reduction in the market
value of Trenwick America Corporation'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 America Corporation's equity
investments;
- - Changes in the composition of Trenwick America Corporation's investment
portfolio;
- - Credit losses on Trenwick America Corporation's investment portfolio;
- - Adverse results in litigation matters, including, but not limited to,
litigation related to environmental, asbestos and other potential mass tort
claims;
- - The impact of mergers and acquisitions;
- - Gains or losses related to changes in foreign currency exchange rates; and
- - Changes in Trenwick America Corporation's capital needs.
In addition to the factors outlined above that are directly related to Trenwick
America Corporation's businesses, Trenwick America Corporation 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
-14-
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
America Corporation does not intend to update any forward-looking statement or
the foregoing list of important factors. By this cautionary note Trenwick
America Corporation 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 America Corporation is party to various legal
proceedings generally arising in the normal course of its business.
Trenwick America Corporation does not believe that the eventual
outcome of any such proceeding will have a material effect on its
financial condition or business. Trenwick America Corporation's
subsidiaries are regularly engaged in the investigation and the
defense of claims arising out of the conduct of their business.
Pursuant to Trenwick America Corporation'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
The following report on Form 8-K was filed during the quarter ended June 30,
2001:
Date of Report Item Reported
-------------- -------------
July 24, 2001 Press release, dated July 24, 2001, of Trenwick
Group Ltd., Trenwick America Corporation's parent
company, announcing second quarter earnings charges.
-16-
Trenwick America Corporation
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.
Date: August 14, 2001 /s/ Stephen H. Binet
---------------------
Name: Stephen H. Binet
Title: President and
Chief Executive Officer
Date: August 14, 2001 /s/ Alan L. Hunte
-----------------
Name: Alan L. Hunte
Title: Executive Vice President and
Chief Financial Officer
-17-