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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 September 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 1-16089
TRENWICK GROUP LTD.
(Exact name of registrant as specified in its charter)
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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 November 13, 2001
- ------------------------------ -----------------------
Common Shares - $.10 par value 36,859,840
TRENWICK GROUP LTD.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
Page
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ITEM 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheet
September 30, 2001 and December 31, 2000 ......................................... 1
Consolidated Statement of Operations and Comprehensive Income
Three and Nine Months Ended September 30, 2001 and 2000 .......................... 2
Consolidated Statement of Cash Flows
Nine Months ended September 30, 2001 and 2000 .................................... 3
Consolidated Statement of Changes in Common Shareholders' Equity
Nine Months Ended September 30, 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 ....................................................................... 10
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk......................... 20
PART II - OTHER INFORMATION
ITEM 1. Legal proceedings ................................................................ 23
ITEM 2. Changes in Securities and Use of Proceeds ........................................ 23
ITEM 3. Defaults Upon Senior Securities .................................................. 23
ITEM 4. Submission of Matters to a Vote of Security Holders .............................. 23
ITEM 5. Other Information ................................................................ 23
ITEM 6. Exhibits and Reports on Form 8-K ................................................. 23
Signatures ................................................................................. 24
Trenwick Group Ltd.
Consolidated Balance Sheet
(Amounts expressed in thousands of United States dollars,
except share and per share data)
September 30, 2001 (Unaudited) and December 31, 2000
2001 2000
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ASSETS
Debt securities available for sale, at fair value $2,026,618 $1,813,678
Equity securities at fair value 23,185 115,901
Cash and cash equivalents 269,528 311,001
Accrued investment income 35,663 38,171
Premiums receivable 548,138 473,245
Reinsurance recoverable balances, net 1,367,288 932,051
Prepaid reinsurance premiums 184,688 147,399
Deferred policy acquisition costs 117,258 100,423
Net deferred income taxes 116,011 104,889
Other assets 185,471 183,294
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Total assets $4,873,848 $4,220,052
========== ==========
LIABILITIES
Unpaid claims and claims expenses $3,005,854 $2,408,926
Unearned premium income 603,165 496,338
Reinsurance balances payable 169,082 133,160
Indebtedness 298,858 286,805
Other liabilities 106,125 90,866
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Total liabilities 4,183,084 3,416,095
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MINORITY INTEREST
Mandatorily redeemable preferred capital securities
of subsidiary trust holding solely junior subordinated
debentures of U.S. subsidiary 68,716 76,770
Preferred shares of Bermuda subsidiary 75,000 75,000
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Total minority interest 143,716 151,770
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COMMON SHAREHOLDERS' EQUITY
Common shares, $0.10 par value, 36,859,840 and
36,665,103 shares issued and outstanding 3,686 3,667
Additional paid in capital 578,570 575,401
Deferred compensation under share award plans (5,589) (2,660)
Retained earnings (accumulated deficit) (73,958) 58,485
Accumulated other comprehensive income 44,339 17,294
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Total common shareholders' equity 547,048 652,187
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Total liabilities, minority interest and
common shareholders' equity $4,873,848 $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 and Nine Months Ended September 30, 2001 and 2000
Three Months Nine Months
-------------------- ---------------------
2001 2000 2001 2000
--------- ------- --------- --------
Revenues:
Net premiums earned $ 239,862 $26,751 $ 667,208 $ 82,739
Net investment income 30,770 9,591 96,141 27,778
Net realized investment gains (losses) (3,302) 270 7,828 (1,916)
Other income 1,233 -- 3,285 --
--------- ------- --------- --------
Total revenues 268,563 36,612 774,462 108,601
--------- ------- --------- --------
Expenses:
Claims and claims expenses incurred 264,344 15,924 638,176 69,190
Policy acquisition costs 75,017 5,621 197,473 16,269
Underwriting expenses 21,352 3,264 56,892 10,387
General and administrative expenses 3,845 424 15,122 3,293
Interest expense and dividends on
preferred shares of subsidiaries 9,601 304 30,054 915
Foreign currency losses 1,397 426 2,932 53
--------- ------- --------- --------
Total expenses 375,556 25,963 940,649 100,107
--------- ------- --------- --------
Income (loss) before other minority
interest and income taxes (106,993) 10,649 (166,187) 8,494
Other minority interest in net
income of subsidiary -- 2,097 -- 839
--------- ------- --------- --------
Income (loss) before income taxes (benefit) (106,993) 8,552 (166,187) 7,655
Applicable income taxes (benefit) (10,886) -- (38,187) --
--------- ------- --------- --------
Net income (loss) (96,107) 8,552 (128,000) 7,655
Dividends on preferred shares -- 1,641 -- 4,923
--------- ------- --------- --------
Net income (loss) available to
common shareholders $ (96,107) $ 6,911 $(128,000) $ 2,732
========= ======= ========= ========
EARNINGS PER COMMON SHARE
Basic and diluted earnings (loss)
per share $ (2.61) $ 0.44 $ (3.48) $ 0.17
========= ======= ========= ========
COMPREHENSIVE INCOME (LOSS):
Net income (loss) $ (96,107) $ 8,552 $(128,000) $ 7,655
--------- ------- --------- --------
Other comprehensive income (loss):
Net unrealized investment gains 28,314 3,613 29,607 4,615
Foreign currency translation adjustments 2,121 -- (2,562) --
--------- ------- --------- --------
Total other comprehensive income 30,435 3,613 27,045 4,615
--------- ------- --------- --------
Comprehensive income (loss) $ (65,672) $12,165 $(100,955) $ 12,270
========= ======= ========= ========
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)
Nine Months Ended September 30, 2001 and 2000
Nine Months
-----------------------
2001 2000
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OPERATING ACTIVITIES
Premiums collected, net of acquisition costs $ 741,435 $ 89,307
Ceded premiums paid, net of acquisition costs (226,382) (20,932)
Claims and claims expenses paid (621,610) (79,712)
Claims and claims expenses recovered 139,179 10,312
Underwriting expenses paid (71,620) (18,615)
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Cash for underwriting activities (38,998) (19,640)
Net investment income received 116,607 27,615
Other income received, net of expenses 112 --
General and administrative expenses paid (15,682) (876)
Interest expense and subsidiary preferred
share dividends paid (27,164) (915)
Income taxes paid (1,007) --
----------- ---------
Cash from operating activities 33,868 6,184
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INVESTING ACTIVITIES
Purchases of debt securities (1,250,816) (206,856)
Sales of debt securities 1,002,121 197,979
Maturities of debt securities 86,472 --
Purchases of equity securities (2,514) --
Sales of equity securities 97,926 --
Cash acquired in purchase of subsidiary -- 188,917
Effect on cash of exchange rate translation (2,625) --
Other (5,088) (11)
----------- ---------
Cash from (for)investing activities (74,524) 180,029
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FINANCING ACTIVITIES
Issuance of indebtedness 14,000 --
Repayment of indebtedness (647) --
Purchase of capital securities (8,462) --
Issuance of common shares 364 1,124
Trenwick Group Ltd. common share
dividends paid (4,442) --
LaSalle Re Holdings preferred share dividends
paid prior to business combination -- (4,923)
Share and option repurchases (311) (3,175)
Equity put option premium payments (1,319) (825)
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Cash for financing activities (817) (7,799)
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Change in cash and cash equivalents (41,473) 178,414
Cash and cash equivalents, beginning of period 311,001 19,864
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Cash and cash equivalents, end of period $ 269,528 $ 198,278
=========== =========
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)
Nine Months Ended September 30, 2001 and 2000
2001 2000
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Common shareholders' equity, beginning of period $ 652,187 $286,960
COMMON SHARES AND ADDITIONAL PAID IN CAPITAL
Issuance of 21,034,200 shares of Trenwick Group Ltd. to acquire
minority interest in LaSalle Re Holdings' subsidiary and Trenwick
Group Inc., net of acquisition costs -- 345,014
Issuance of 194,116 restricted common shares of Trenwick Group Ltd. 4,119 --
Issuance of 20,366 shares of Trenwick Group Ltd. and 21,532 common
shares of LaSalle Re Holdings for cash under employee
share purchase plans 363 247
Issuance of 653 common shares of LaSalle Re Holdings under
employee compensation plan -- 7
Purchase and retirement of 14,609 common shares of Trenwick
Group Ltd. (311) --
Cancellation of 5,134 restricted common shares (70) --
Equity put option premiums, net of applicable minority interest (1,319) (631)
Exercise of options to acquire shares of LaSalle Re Holdings
and its subsidiary -- 113
Compensation recognized under employee program 405 243
Change in minority interest -- (684)
DEFERRED COMPENSATION UNDER SHARE AWARD PLAN
Restricted common shares awarded on acquisition of Trenwick Group Inc. -- (2,803)
Other restricted common shares awarded (4,119) --
Compensation expense recognized under employee share purchase
plans, net of minority interest 1,121 208
Cancellation of restricted common shares 70 --
Change in minority interest -- 2
Acquisition of minority interest -- (73)
RETAINED EARNINGS
Net income (loss) (128,000) 7,655
LaSalle Re Holdings preferred share dividends
prior to business combination -- (4,923)
Trenwick Group Ltd. common share dividends, $0.12 per share (4,443) --
Options/share repurchase -- (2,437)
Change in minority interest -- (176)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income 27,045 4,615
Change in minority interest -- 24
Acquisition of minority interest -- (891)
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Common shareholders' equity, end of period $ 547,048 $632,470
========= ========
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 and Nine Months Ended September 30, 2001 and 2000
Note 1 Organization
Organization Trenwick Group Ltd. was formed as a holding company in Bermuda to
and Basis acquire two publicly held companies and the minority interest in
of a subsidiary of one of those companies. That transaction, in
Presentation 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.
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:
o 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.;
o the revenues and expenses of LaSalle Re Holdings Limited
have been included for all periods presented;
o the minority interest in common shares and minority interest
in net income of LaSalle Re Limited have been eliminated in
the three and nine months ended September 30, 2001; and
o the revenues and expenses of the former Trenwick Group Inc.
were excluded from the three and nine months ended September
30, 2000 and included for the three and nine months ended
September 30, 2001.
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. Refer to Note 5
for a discussion regarding pending changes in accounting for
amortization of goodwill.
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 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
- 5 -
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 Group Ltd. for the
year ended December 31, 2000.
Note 2 The following tables present business segment financial
Segment information for Trenwick Group Ltd. at September 30, 2001 and
Information December 31, 2000 and for the three and nine months ended
September 30, 2001 and 2000:
2001 2000
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Total assets:
Worldwide property catastrophe reinsurance $ 682,812 $ 557,401
U.S. treaty reinsurance 1,652,430 1,759,678
International specialty insurance and reinsurance 513,941 473,612
Lloyd's syndicates:
Continuing 1,262,156 808,483
Runoff 110,248 157,627
U.S. specialty program insurance 544,197 372,933
Unallocated 108,064 90,318
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Total assets $4,873,848 $4,220,052
========== ==========
Three Months Nine Months
------------------ -------------------
2001 2000 2001 2000
-------- ------- -------- --------
Total revenues:
Worldwide property catastrophe reinsurance $ 33,754 $29,283 $ 95,927 $ 90,404
U.S. treaty reinsurance 82,137 -- 235,350 --
International specialty insurance and
reinsurance 46,953 -- 140,302 --
Lloyd's syndicates:
Continuing 78,471 2,352 220,942 5,033
Runoff 1,550 4,977 9,052 13,164
U.S. specialty program insurance 24,944 -- 67,666 --
Unallocated 754 -- 5,223 --
-------- ------- -------- --------
Total revenues $268,563 $36,612 $774,462 $108,601
======== ======= ======== ========
- 6 -
Three Months Nine Months
------------------- --------------------
2001 2000 2001 2000
-------- ------- --------- -------
Net income (loss):
Worldwide property catastrophe reinsurance $(65,318) $13,433 $ (38,211) $14,606
U.S. treaty reinsurance 309 -- 7,805 --
International specialty insurance and
reinsurance (8,811) -- (27,688) --
Lloyd's syndicates:
Continuing (7,895) (1,314) (29,201) (1,556)
Runoff (7,763) (3,567) (9,978) (5,395)
U.S. specialty program insurance 1,872 -- (4,638) --
Unallocated (8,501) -- (26,089) --
-------- ------- --------- -------
Total net income (loss) $(96,107) $ 8,552 $(128,000) $ 7,655
======== ======= ========= =======
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 income
taxes.
Note 3 The following table sets forth the computation of basic and
Earnings diluted earnings per common share for the three and nine months
Per Share ended September 30, 2001 and 2000:
Three Months Nine Months
------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS
Net income (loss) available to common
shareholders - basic $ (96,107) $ 6,911 $ (128,000) $ 2,732
Other minority interest in net income of subsidiary -- 1,641 -- 839
----------- ----------- ----------- -----------
Net income (loss) available to common
shareholders - diluted $ (96,107) $ 9,008 $ (128,000) $ 3,571
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
Weighted average shares outstanding - basic 36,855,579 15,788,915 36,810,031 15,621,556
Net weighted average shares issuable (when
dilutive) on exercise of stock options and
warrants and on conversion of minority interest
shares of subsidiary -- 4,746,676 -- 5,054,525
----------- ----------- ----------- -----------
Weighted average shares outstanding - diluted 36,855,579 20,535,591 36,810,031 20,676,081
=========== =========== =========== ===========
Basic and diluted earnings (loss)
per common share $ (2.61) $ 0.44 $ (3.48) $ 0.17
=========== =========== =========== ===========
- 7 -
Note 4 The components of premiums written and earned for the three
Underwriting and nine months ended September 30, 2001 and 2000 are as follows:
Activities
Three Months Nine Months
-------------------- ----------------------
2001 2000 2001 2000
--------- ------- ---------- --------
Assumed premiums written $ 225,439 $25,321 $ 456,928 $122,567
Direct premiums written 142,104 -- 603,794 --
--------- ------- ---------- --------
Gross premiums written 367,543 25,321 1,060,722 122,567
Ceded premiums written (124,709) (9,053) (312,273) (30,440)
--------- ------- ---------- --------
Net premiums written $ 242,834 $16,268 $ 748,449 $ 92,127
========= ======= ========== ========
Three Months Nine Months
-------------------- ----------------------
2001 2000 2001 2000
--------- ------- ---------- --------
Assumed premiums earned $ 156,806 $35,285 $ 409,144 $106,634
Direct premiums earned 190,813 -- 537,802 --
--------- ------- ---------- --------
Gross premiums earned 347,619 35,285 946,946 106,634
Ceded premiums earned (107,758) (8,534) (279,738) (23,895)
--------- ------- ---------- --------
Net premiums earned $ 239,862 $26,751 $ 667,208 $ 82,739
========= ======= ========== ========
Note 5 During the quarter ended September 30, 2001, Trenwick Group Ltd.
World Trade incurred significant losses related to the World Trade Center
Center terrorist attack and related disasters on September 11th.
Terrorist Trenwick Group Ltd.'s incurred losses are based upon the estimate
Attack of its ultimate exposure which was derived from a manual
and Related assessment of its outstanding policies to determine potential
Disasters exposure, and market share analysis, probable maximum loss
analysis, independent risk modeling analysis and cedent loss
estimates. Trenwick Group Ltd.'s losses stem from commercial
property damage, which includes business interruption and
incidental workers' compensation coverage, and catastrophe
aviation coverage. The estimated loss from the World Trade Center
terrorist attack and related disasters is approximately $404
million before reinsurance recoveries. Of the approximate $304
million reinsurance recoverable, 95% are from reinsurers rated A
or better by Standard & Poor's or, alternatively by A.M. Best
Company. Because of the scope and uniqueness of these events,
standard loss modeling and assessment methodologies have limited
relevance. As a result, the current level of losses represents
Trenwick Group Ltd.'s best estimate at this time. As more
accurate information regarding the events becomes available, this
estimate will be revised if necessary.
- 8 -
Note 6 In July 2001, the Financial Accounting Standards Board issued
Accounting statements covering business combinations and goodwill and other
Standards 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 September 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.
As of September 30, 2001, Trenwick Group Ltd. has unamortized
goodwill in the amount of $42,086, which will be subject to the
transition provisions of this statement. Amortization expense
related to goodwill was $213 and $638 for the three and nine
months ended September 30, 2001, respectively.
Trenwick Group Ltd. has not determined the effect that this
statement will have on its consolidated financial position or
results of operations.
Note 7 On November 13, 2001, Trenwick America Corporation amended its
Subsequent credit facility to provide for the waiver and amendment of
Event covenants related to the repurchase of preferred shares, the
maintenance of a minimum interest coverage ratio, the maintenance
of a minimum risk based capital ratio for Trenwick America
Corporation's subsidiary, Chartwell Insurance Company and the
maintenance of a minimum tangible net worth. The amendment also
increased the interest rate payable on outstanding indebtedness
of Trenwick America Corporation to its lenders.
- 9 -
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 and nine months ended September 30,
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, The
Insurance Corporation of New York, Dakota Specialty Insurance Company and
Chartwell Insurance Company.
All of Trenwick Group Ltd.'s principal operating subsidiaries are rated A-
(Excellent) by A.M. Best Company with a negative outlook and have been assigned
a financial strength rating of A- by Standard and Poor's with a stable outlook.
Chartwell Managing Agents Limited's syndicates are not separately rated, but
trade with their business counterparties on the basis of the ratings of Lloyd's
which is currently rated "A-" (Excellent) by A.M. Best Company and currently 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
- 10 -
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 September 30, 2001 and 2000
2001 2000 Change
--------- -------------- ---------
(in thousands)
Underwriting income (loss) $(120,851) $ 1,942 $(122,793)
Net investment income 30,770 9,591 21,179
Interest expense and dividends on
preferred shares of subsidiaries (9,601) (304) (9,297)
General and administrative expenses (3,845) (424) (3,421)
Other income 1,233 -- 1,233
--------- ------- ---------
Pre-tax operating income (loss) (102,294) 10,805 (113,099)
Applicable income taxes (benefit) (8,820) -- (8,820)
--------- ------- ---------
Operating income (loss) (93,474) 10,805 (104,279)
Minority interest in operating income of subsidiary -- (2,097) 2,097
Net realized investment gains (losses), net of
minority interest and income taxes (1,698) 270 (1,968)
Foreign currency losses, net of minority interest
and income taxes (935) (426) (509)
--------- ------- ---------
Net income (loss) $ (96,107) $ 8,552 $(104,659)
========= ======= =========
The operating loss of $93.5 million in the 2001 quarter represented a $104.3
million decrease from operating income of $10.8 million recorded in the 2000
quarter. This decrease was principally the result of abnormal catastrophe
losses, primarily the September 11th, 2001 terrorist attacks, slightly offset by
increased investment income. The increase in investment income in 2001 was the
result of the increase in the size of the investment portfolio from the
Trenwick/LaSalle business combination. The decrease of $104.7 million in net
income in 2001 when compared to 2000 was the result of the decrease in operating
income due to abnormal catastrophe losses, combined with increased realized
losses on investments and foreign currency losses in the 2001 quarter, offset in
part by the absence of a minority interest in 2001.
Underwriting income (loss)
The underwriting result for the 2000 quarter included only the results of
LaSalle Re Holdings Limited; the underwriting result for the 2001 quarter
included the combined results of LaSalle Re Holdings Limited and Trenwick Group
Inc.
2001 2000 Change
--------- ------------- ---------
(in thousands)
Net premiums earned $ 239,862 $26,751 $ 213,111
--------- ------- ---------
Claims and claims expenses incurred 264,344 15,924 248,420
Acquisition costs and underwriting expenses 96,369 8,885 87,484
--------- ------- ---------
Total expenses 360,713 24,809 335,904
--------- ------- ---------
Net underwriting income (loss) $(120,851) $ 1,942 $(122,793)
========= ======= =========
Loss ratio 110.2% 59.5% 50.7%
Expense ratio 40.2% 33.2% 7.0%
Combined ratio 150.4% 92.7% 57.7%
- 11 -
The underwriting loss of $120.9 million in the 2001 quarter represented a $122.8
million decrease compared to underwriting income of $1.9 million in the 2000
quarter. The increase in underwriting loss was primarily due to abnormal
catastrophe losses in 2001, which is discussed on page 12 under the caption
"Claims and claims expenses."
The increase in the combined ratio in the 2001 quarter compared to the 2000
quarter resulted from abnormal catastrophe losses which is discussed on page 12
under the caption "Claims and claims expenses," together with a significant
change in Trenwick Group Ltd.'s mix of business following the Trenwick/LaSalle
business combination. The increase in the expense ratio in the 2001 quarter as
compared to the 2000 quarter can be principally attributed to the inclusion of
Trenwick Group Inc.'s casualty business in the underwriting results in 2001.
Premiums written
Gross premiums written for the 2001 quarter were $367.5 million compared to
$25.3 million for the 2000 quarter, an increase of $342.2 million. Details of
gross premiums written are provided below:
2001 2000 Change
-------- -------------- --------
(in thousands)
Worldwide property catastrophe reinsurance $ 36,865 $15,871 $ 20,993
U.S. treaty reinsurance 80,567 -- 80,567
International specialty insurance and reinsurance 55,003 -- 55,003
Lloyd's syndicates:
Continuing 112,965 2,649 110,316
Runoff 3,607 6,799 (3,193)
U.S. specialty program insurance 78,536 -- 78,536
-------- ------- --------
Gross premiums written $367,543 $25,321 $342,222
======== ======= ========
Worldwide property catastrophe reinsurance gross premium writings for the 2001
quarter increased by $21.0 million, or 132.3% from the 2000 quarter due to an
increase in rates on renewal business combined with an increase in new writings,
principally in the United States.
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
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 were $80.6 million,
$55.0 million and $78.5 million, respectively, for the third quarter of 2001.
Trenwick Group Ltd. did not underwrite these businesses prior to the
Trenwick/LaSalle business combination.
Premiums earned
Gross premiums earned for the 2001 quarter were $347.6 million compared to $35.3
million for the 2000 quarter, an increase of $312.3 million. Net premiums earned
for the 2001 quarter were
- 12 -
$239.9 million compared to $26.8 million for the 2000 quarter, an increase of
$213.1 million. Details of gross and net premiums earned are provided below.
2001 2000 Change
--------- -------------- ---------
(in thousands)
Gross premiums written $ 367,543 $25,321 $ 342,222
Change in gross unearned premiums (19,924) 9,964 (29,888)
--------- ------- ---------
Gross premiums earned $ 347,619 $35,285 $ 312,334
--------- ------- ---------
Gross premiums ceded $(124,709) $(9,053) $(115,656)
Change in ceded unearned premiums 16,952 519 16,433
--------- ------- ---------
Ceded premiums earned (107,757) (8,534) (99,223)
--------- ------- ---------
Net premiums earned $ 239,862 $26,751 $ 213,111
========= ======= =========
Gross premiums ceded for the 2001 quarter were $124.7 million compared to $9.1
million for the 2000 quarter. The increase in gross premiums ceded of $115.7
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 2001 quarter were $239.9 million compared to $26.8
million for the 2000 quarter. 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 2001 quarter were $264.3 million, an increase
of $248.4 million compared to claims and claims expenses of $15.9 million for
the 2000 quarter. The increase in claims and claims expenses in 2001 resulted
from the addition of business acquired in the Trenwick/LaSalle business
combination as well as abnormal catastrophe losses. Third quarter 2001 results
include abnormal catastrophe losses of approximately $100 million pre-tax
related to the September 11th terrorist attacks. The loss recorded in the third
quarter of 2001 is based upon Trenwick Group Ltd.'s estimate of its ultimate
exposure derived from a manual assessment of its outstanding policies to
determine potential exposure, market share analysis, probable maximum loss
analysis, independent risk modeling analysis and cedent loss estimates. Trenwick
Group Ltd.'s estimated loss from the September 11th terrorist attacks is
approximately $404 million before reinsurance recoveries of approximately $304
million. Of the $304 million of reinsurance recoverable, 95% are from reinsurers
rated A or better by Standard & Poor's or, alternatively, A.M. Best Company.
Because of the scope and uniqueness of these events, standard loss modeling and
assessment methodologies have limited relevance. As a result, the expected
Trenwick Group Ltd. losses represent Trenwick Group Ltd.'s best estimate at this
time. As more accurate information regarding the events becomes available, we
will revise this estimate if necessary.
Acquisition costs and underwriting expenses
2001 2000 Change
------- -------------- --------
(in thousands)
Policy acquisition costs $75,017 $5,621 $69,396
Underwriting expenses 21,352 3,264 18,088
------- ------ -------
Total acquisition costs and
underwriting expenses $96,369 $8,885 $87,484
======= ====== =======
Expense ratio 40.2% 33.2% 7.0%
======= ====== =======
- 13 -
Total policy acquisition costs and underwriting expenses, for the 2001 quarter
increased by $87.5 million compared to the 2000 quarter. Total acquisition costs
and underwriting expenses as a percentage of net premiums earned, or the expense
ratio, were 40.2% for 2001 compared to 33.2% for 2000. This increase resulted
mainly from the addition of 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.
Net Investment Income
2001 2000 Change
---------- -------------- -----------
(in thousands)
Average invested assets $2,228,875 $520,270 $1,708,605
Average annualized yields 6.06% 6.93% (0.87)%
---------- -------- ----------
Investment income - portfolio 33,782 9,019 24,763
Investment income - non-portfolio 724 801 (77)
Investment expenses:
Interest expenses on funds withheld (2,851) -- (2,851)
Other investment expenses (885) (229) (656)
---------- -------- ----------
Net investment income $ 30,770 $ 9,591 $ 21,179
========== ======== ==========
Net investment income for the 2001 quarter was $30.8 million compared to $9.6
million for the 2000 quarter. 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 $9.6
million for the 2001 quarter, an increase of $9.3 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 23.3% of net income in the 2000 quarter.
Net realized losses on investments, net of applicable minority interest and
income taxes, were $1.7 million during the 2001 quarter, compared to net
realized gains of $0.3 million for the 2000 quarter. 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 $0.9 million for the 2001 quarter, relatively
unchanged from foreign currency losses of $0.4 million for the 2000 quarter.
- 14 -
Results of Operations - Nine Months Ended September 30, 2001 and 2000
2001 2000 Change
--------- -------------- ---------
(in thousands)
Underwriting loss $(225,333) $(13,107) $(212,226)
Net investment income 96,141 27,778 68,363
Interest expense and dividends on
preferred shares of subsidiaries (30,054) (915) (29,139)
General and administrative expenses (11,449) (2,841) (8,608)
Other income 3,285 -- 3,285
--------- -------- ---------
Pre-tax operating income (loss) (167,410) 10,915 (178,325)
Applicable income taxes (benefit) (36,222) -- (36,222)
--------- -------- ---------
Operating income (loss) (131,188) 10,915 (142,103)
Minority interest in operating income of subsidiary -- (839) 839
Net realized investment gains (losses), net of
minority interest and income taxes 7,886 (1,916) 9,802
Foreign currency losses, net of minority interest
and income taxes (1,964) (53) (1,911)
Restructuring costs, net of income taxes (2,734) (452) (2,282)
--------- -------- ---------
Net (income) loss $(128,000) $ 7,655 $(135,655)
========= ======== =========
The operating loss of $131.2 million in 2001 represented a $142.1 million
decrease from the operating income of $10.9 million recorded in 2000. This
decrease was principally the result of abnormal catastrophe losses and loss
reserve strengthening recorded during 2001, partially offset by increased
investment income. The increase in investment income in 2001 was the result of
the increase in the size of the investment portfolio from the Trenwick/LaSalle
business combination. The decrease of $135.7 million in net income in 2001 when
compared to 2000 was the result of the decrease in operating income, an increase
in foreign exchange losses, which are discussed on page 18 under the caption
"Non-Operating Income and Expenses," offset in part by the absence of a minority
interest in 2001, and the increase in realized investment gains. Net income for
2001 was also reduced by after tax restructuring costs of $2.7 million recorded
in conjunction with management changes effected at Trenwick Group Ltd.'s London
operations in the second quarter of 2001.
Underwriting income (loss)
The underwriting result for the nine months ended September 30, 2000 included
only the results of LaSalle Re Holdings Limited; the underwriting result for the
nine months ended September 30, 2001 included the combined results of LaSalle Re
Holdings Limited and Trenwick Group Inc.
2001 2000 Change
--------- -------------- ---------
(in thousands)
Net premiums earned $ 667,208 $ 82,739 $ 584,469
--------- -------- ---------
Claims and claims expenses incurred 638,176 69,190 568,986
Acquisition costs and underwriting expenses 254,365 26,656 227,709
--------- -------- ---------
Total expenses 892,541 95,846 796,695
--------- -------- ---------
Net underwriting loss $(225,333) $(13,107) $(212,226)
========= ======== =========
Loss ratio 95.6% 83.6% 12.0%
Expense ratio 38.1% 32.2% 5.9%
Combined ratio 133.7% 115.8% 17.9%
- 15 -
The underwriting loss of $225.3 million in 2001 represented a $212.2 million
increase compared to the underwriting loss of $13.1 million in 2000. The
increase in underwriting loss was primarily due to $116.2 million in catastrophe
losses recorded in the first nine months of 2001 as well as $76.7 of reserve
strengthening in the second quarter of 2001. The majority of the catastrophe
losses recorded in the first nine months of 2001 resulted from the September
11th terrorist attacks. During the first nine months 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 increase in the combined ratio in 2001 compared to 2000 also resulted from
the significant catastrophe losses recorded in 2001. The increase in the expense
ratio in the nine months ended September 30, 2001 as compared to the nine months
ended September 30, 2000 resulted from the inclusion of Trenwick Group Inc.'s
casualty business in the underwriting results in 2001.
Premiums written
Gross premiums written for 2001 were $1.1 billion compared to $122.6 million for
2000, an increase of $938.2 million or 765%. Details of gross premiums written
are provided below:
2001 2000 Change
---------- ------------- --------
(in thousands)
Worldwide property catastrophe reinsurance $ 131,499 $ 97,907 $ 33,592
U.S. treaty reinsurance 242,665 -- 242,665
International specialty insurance and reinsurance 174,914 -- 174,914
Lloyd's syndicates:
Continuing 285,349 5,833 279,516
Runoff 4,258 18,827 (14,569)
U.S. specialty program insurance 222,037 -- 222,037
---------- -------- --------
Gross premiums written $1,060,722 $122,567 $938,155
========== ======== ========
Worldwide property catastrophe reinsurance gross premium writings for 2001
increased by $33.6 million over 2000 due to an increase in rates on renewal
business combined with an increase in new writings, principally in the United
States.
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
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 were $242.7 million,
$174.9 million and $222.0 million, respectively, for the first nine months of
2001. Trenwick Group Ltd. did not underwrite these businesses prior to the
Trenwick/LaSalle business combination.
- 16 -
Premiums earned
Gross premiums earned for 2001 were $946.9 million compared to $106.6 million
for 2000, an increase of $840.3 million. Net premiums earned for 2001 were
$667.2 million compared to $82.7 million for 2000, an increase of $584.5
million. Details of gross and net premiums earned are provided below:
2001 2000 Change
----------- --------------- ---------
(in thousands)
Gross premiums written $1,060,722 $122,567 $ 938,155
Change in gross unearned premiums (113,776) (15,933) (97,843)
---------- -------- ---------
Gross premiums earned 946,946 106,634 840,312
---------- -------- ---------
Gross premiums ceded (312,273) (30,440) (281,833)
Change in ceded unearned premiums 32,535 6,545 25,990
---------- -------- ---------
Ceded premiums earned (279,738) (23,895) (255,843)
---------- -------- ---------
Net premiums earned $ 667,208 $ 82,739 $ 584,469
========== ======== =========
Gross premiums ceded for 2001 were $312.3 million compared to $30.4 million for
the same period in 2000. The increase in gross premiums ceded of $281.8 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 2001 were $667.2 million compared to $82.7 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 nine months ended September 30, 2001 were
$638.2 million, an increase of $569.0 million compared to claims and claims
expenses of $69.2 million for 2000. The increase in claims and claims expenses
in 2001 resulted from the addition of business acquired in the Trenwick/LaSalle
business combination as well as to abnormal catastrophe losses and loss reserve
strengthening. During the first nine months of 2001, claims and claims expenses
included $116.2 million of abnormal catastrophe losses, including approximately
$100 million related to the September 11th, 2001 terrorist attacks, $10.5
million related to an accumulation of catastrophic losses including Tropical
Storm Allison and storms affecting the Midwest United States, $3.9 million
relating to the sinking of the Petrobras oil rig and $1.8 million related to the
September 2001 total Elf Petrofina fire in France.
The losses related to the September 11th terrorist attacks are based upon
Trenwick Group Ltd.'s estimate of its ultimate exposure derived from a manual
assessment of its outstanding policies to determine potential exposure, market
share analysis, probable maximum loss analysis, independent risk modeling
analysis and cedent loss estimates. Trenwick Group Ltd.'s estimated loss from
the September 11th terrorist attacks is approximately $404 million before
reinsurance recoveries of approximately $304 million. Of the $304 million
reinsurance recoverable generated by the September 11th terrorist attacks, 95%
are from reinsurers rated A or better by Standard & Poor's or, alternatively,
A.M. Best Company. Because of the scope and uniqueness of these events, standard
loss modeling and assessment methodologies have limited relevance. As a result,
the expected losses represent Trenwick Group Ltd.'s best estimate at this time.
As more accurate information regarding the events becomes available, we will
revise this estimate if necessary.
- 17 -
Trenwick also recorded $76.7 million of reserve strengthening in the second
quarter of 2001. This reserve strengthening included $17.4 million related to
the treaty reinsurance segment's directors and officer's liability business,
which was underwritten prior to 2001, $14.8 million related to one of the
specialty program insurance segment's programs, $27.4 million relating
principally to the Lloyd's segment directors and officers liability business,
and $17.1 million stemming from deterioration in discontinued businesses and
reviews of the property insurance and small premium liability business lines at
the international specialty insurance and reinsurance segment.
Acquisition costs and underwriting expenses
2001 2000 Change
-------- -------------- --------
(in thousands)
Policy acquisition costs $197,473 $16,269 $181,204
Underwriting expenses 56,892 10,387 46,505
-------- ------- --------
Total acquisition costs and
underwriting expenses $254,365 $26,656 $227,709
======== ======= ========
Expense ratio 38.1% 32.2% 5.9%
======== ======= ========
Total policy acquisition costs and underwriting expenses for 2001 increased by
$227.7 million compared to 2000. Total acquisition costs and underwriting
expenses as a percentage of net premiums earned, or the expense ratio, were
38.1% for 2001 compared to 32.2% for 2000. The increase in the 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.
Net Investment Income
2001 2000 Change
---------- -------------- ----------
(in thousands)
Average invested assets $2,236,609 $568,085 $1,668,524
Average annualized yields 6.30% 6.21% (0.09)%
---------- -------- ----------
Investment income - portfolio 105,711 26,464 79,247
Investment income - non-portfolio 1,938 1,993 (55)
Investment expense:
Interest expense on funds withheld (8,491) -- (8,491)
Other investment expenses (3,017) (679) (2,338)
---------- -------- ----------
Net investment income $ 96,141 $ 27,778 $ 68,363
========== ======== ==========
Net investment income for 2001 was $96.1 million compared to $27.8 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 $8.5 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.
- 18 -
Interest Expense and Dividends on Preferred Shares of Subsidiaries
Interest expense and dividends on preferred shares of subsidiaries was $30.1
million for 2001, an increase of $29.1 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 shares 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 23.5% of net income in the first nine months of 2000.
Net realized gains on investments, net of applicable minority interest and
income taxes, were $7.9 million during 2001, compared to net realized losses of
$1.9 million for 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 $2.0 million for 2001, compared to foreign
currency losses of $0.1 million for 2000 due to the decline in the value of
European currencies which commenced in the latter portion of 2000, principally
the British pound sterling, against the US dollar.
Liquidity and Capital Resources
As of September 30, 2001, Trenwick Group Ltd.'s consolidated investments and
cash totaled $2.3 billion, an increase of $78.8 million from the balance at
December 31, 2000. The cost of Trenwick Group Ltd.'s equity securities was $5.6
million less than fair value at September 30, 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 $59.7 million at September 30, 2001 and by
$27.0 million at December 31, 2000.
As of September 30, 2001, Trenwick Group Ltd.'s consolidated common
shareholders' equity totaled $547.0 million, or $14.84 per common share,
compared to $652.2 million, or $17.79 per common share at December 31, 2000.
During the nine months ended September 30, 2001, the unrealized appreciation of
debt and equity securities increased by $29.6 million, net of income tax, or
$0.80 per share.
Cash provided by Trenwick Group Ltd.'s operating activities for 2001 was $33.9
million compared to $6.2 million in the comparable period of 2000. The increase
in cash flow from operations was due primarily to an overall increase in net
investment income as a result of the increase in invested assets resulting from
the Trenwick/LaSalle business combination.
Net cash used in financing activities during 2001 included $4.4 million of
dividends paid to common shareholders. During 2000, net cash used in financing
activities included $4.9 million of dividends to preferred shareholders.
On September 26, 2001, Trenwick America Corporation, the primary obligor on
Trenwick Group Ltd.'s revolving credit facility, informed its lenders that it
had elected to convert its revolving credit facility into a term loan facility.
Trenwick America Corporation will be obligated to repay the outstanding
principal under the term loan facility in six month installments over the next
four years. On November 13, 2001, Trenwick America Corporation amended its
credit facility to
- 19 -
provide for the waiver and amendment of covenants related to the repurchase of
preferred shares, the maintenance of a minimum interest coverage ratio, the
maintenance of a minimum risk based capital ratio for Trenwick America
Corporation's subsidiary, Chartwell Insurance Company and the maintenance of a
minimum tangible net worth. The amendment also increased the interest rate
payable on outstanding indebtedness of Trenwick America Corporation to its
lenders. As of November 13, 2001, the applicable interest rate on the term loan
under the credit facility was 4.8% and the applicable commission on the
outstanding letters of credit was 2.0%.
Trenwick Group Ltd. paid a dividend of $0.04 per common share in each of the
first three quarters 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 first three quarters of 2001 and the first three
quarters of 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) increased to 30.2%
at September 30, 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
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. Operating results for the third quarter of 2001
include goodwill amortization of $0.2 million or $0.01 per share. The Company
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 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
- 20 -
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:
o 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;
o 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;
o The ability of Trenwick Group Ltd. to execute its strategies in its
property/casualty operations;
o Catastrophe losses in Trenwick Group Ltd.'s domestic and international
property/casualty businesses;
o 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;
o Changes in Trenwick Group Ltd.'s property/casualty retrocessional
arrangements;
o 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;
o 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;
o 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;
o A decline in the value of Trenwick Group Ltd.'s equity investments;
o Changes in the composition of Trenwick Group Ltd.'s investment portfolio;
o Credit losses on Trenwick Group Ltd.'s investment portfolio;
o Adverse results in litigation matters, including, but not limited to,
litigation related to environmental, asbestos and other potential mass tort
claims;
o The passage of federal or state legislation subjecting LaSalle Re Limited
to United States taxation or regulation;
o A contention by the United States Internal Revenue Service that LaSalle Re
Limited is subject to United States taxation;
o The impact of mergers and acquisitions;
o Gains or losses related to changes in foreign currency exchange rates; and
o 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
- 21 -
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.
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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
10.1 Second Amendment and Waiver to the Credit Agreement, dated as of
November 13, 2001, among Trenwick America Corporation, Trenwick
Holdings Limited, the lending institutions from time to time party
thereto, First Union National Bank, as Syndication Agent, Fleet
National Bank, as Documentation Agent, and JP Morgan Chase Bank, as
Administrative Agent.
(b) Reports on Form 8-K
The following report on Form 8-K was filed during the quarter ended
September 30, 2001:
Date of Report Item Reported
-------------- -------------
July 24, 2001 Press release, dated July 24,
2001, announcing second quarter
earnings changes.
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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: November 14, 2001 By: /s/ James F. Billett, Jr.
-----------------------------------
Name: James F. Billett, Jr.
Title: Chairman, President and
Chief Executive Officer
Date: November 14, 2001 By: /s/ Coleman D. Ross
-----------------------------------
Name: Coleman D. Ross
Title: Executive Vice President and
Chief Financial Officer
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