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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period to .
Commission file number 0-14737
TRENWICK GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1152790
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
Metro Center
One Station Place
Stamford, Connecticut 06902
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 353-5500
None
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock.
Class Outstanding at July 31, 1998
Common Stock, $.10 par value 12,056,699
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TRENWICK GROUP INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30, December 31,
1998 1997
------------- ------------
(dollars in thousands)
Assets
Securities available for sale at fair value:
Debt securities (amortized cost: $879,672 and $788,727) $ 903,385 $ 812,314
Equity securities (cost: $46,401 and $31,603) 57,133 39,163
Cash and cash equivalents 60,881 12,847
------------- ------------
Total investments and cash 1,021,399 864,324
Accrued investment income 14,882 10,969
Receivables from ceding insurers 147,680 91,867
Reinsurance recoverable balances, net 123,647 66,361
Deferred policy acquisition costs 33,589 22,524
Net deferred income taxes 13,278 12,451
Other assets 35,863 19,427
------------- -------------
Total assets $1,390,338 $1,087,923
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Unpaid claims and claims expenses $ 660,009 $ 518,387
Unearned premium income 150,918 87,020
6.70% senior notes due 2003 75,000 -
Other liabilities 21,637 14,867
------------- ------------
Total liabilities 907,564 620,274
------------ -----------
Company-obligated mandatorily redeemable preferred
capital securities of subsidiary trust holding solely junior
subordinated debentures of Trenwick Group Inc. 110,000 110,000
------------ -----------
Common stockholders' equity:
Common stock, $.10 par value, 30,000,000 shares
authorized; 12,056,699 and 11,951,060 shares outstanding 1,206 1,195
Additional paid-in capital 157,172 153,714
Retained earnings 195,411 183,218
Accumulated other comprehensive income 22,386 20,245
Deferred compensation under stock award plan (3,401) (723)
-------------- ---------------
Total common stockholders' equity 372,774 357,649
------------ ------------
Total liabilities and stockholders' equity $1,390,338 $1,087,923
========== ==========
The accompanying notes are an integral part of these statements.
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TRENWICK GROUP INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
(in thousands except per share data)
Revenues:
Net premiums earned $ 70,964 $ 47,105 $116,788 $101,019
Net investment income 14,976 12,123 27,360 23,852
Net realized investment gains 540 1 1,260 1,916
Other income 320 10 332 10
-------- -------- -------- --------
Total revenues 86,800 59,239 145,740 126,797
-------- -------- -------- --------
Expenses:
Claims and claims expenses incurred 43,071 27,486 69,576 58,290
Policy acquisition costs 20,773 14,580 35,931 31,957
Underwriting expenses 7,112 3,779 10,568 7,768
General and administrative expenses 1,025 -- 1,849 --
Interest expense 1,291 -- 1,349 890
Minority interest in subsidiary
trust 2,425 2,426 4,851 4,043
-------- -------- -------- --------
Total expenses 75,697 48,271 124,124 102,948
-------- -------- -------- --------
Income before income taxes and
extraordinary item 11,103 10,968 21,616 23,849
Income taxes 2,128 2,375 3,396 5,455
-------- -------- -------- --------
Income before extraordinary item 8,975 8,593 18,220 18,394
Extraordinary loss on debt redemption,
net of $558 income tax benefit -- -- -- 1,037
-------- -------- -------- --------
Net income $ 8,975 $ 8,593 $ 18,220 $ 17,357
======== ======== ======== ========
BASIC EARNINGS PER SHARE
Income before extraordinary item $ .75 $ .72 $ 1.53 $ 1.62
Extraordinary loss -- -- -- .09
-------- -------- -------- --------
Net income $ .75 $ .72 $ 1.53 $ 1.53
======== ======== ======== ========
DILUTED EARNINGS PER SHARE
Income before extraordinary item $ .74 $ .71 $ 1.51 $ 1.53
======== ======== ======== ========
Net income $ .74 $ .71 $ 1.51 $ 1.53
======== ======== ======== ========
DIVIDENDS PER COMMON SHARE $ .25 $ .24 $ .50 $ .48
======== ======== ======== ========
Prior period earnings per share amounts have been restated to comply with the
accounting standard, "Earnings Per Share".
The accompanying notes are an integral part of these statements.
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TRENWICK GROUP INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(dollars in thousands)
Common stockholders' equity, beginning of period $ 365,244 $ 322,474 $ 357,649 $ 265,753
Common stock, $.10 par value, and additional
paid-in-capital:
Conversion of debentures (1,783,926) -- -- -- 57,780
Exercise of employer stock options
(4,500, 750, 27,000 and 60,750 shares) 132 20 460 776
Income tax benefits from additional
compensation deductions allowable
for income tax purposes -- 7 207 483
Restricted common stock awarded
(82,889 and 9,782 shares) -- -- 2,952 328
Common stock purchased and retired
(4,250 and 5,091 shares) -- -- (150) (171)
Retained earnings:
Net income 8,975 8,593 18,220 17,357
Cash dividends (3,014) (2,865) (6,027) (5,730)
Accumulated other comprehensive income:
Investment gains, net of income taxes 1,636 8,302 2,961 1,392
Realized investment gains, net of income taxes,
included in net income (351) (1) (819) (1,245)
Foreign currency translation adjustment, net of
income taxes (1) -- (1) --
Deferred compensation under stock award plan:
Restricted common stock awarded -- -- (2,952) (328)
Compensation expense recognized 153 136 274 271
--------- --------- --------- ---------
Common stockholders' equity, end of period $ 372,774 $ 336,666 $ 372,774 $ 336,666
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
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TRENWICK GROUP INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
1998 1997
--------- ---------
(in thousands)
Cash flows from operating activities:
Premiums collected $ 112,853 $ 73,612
Ceded premiums paid (34,781) (4,328)
Claims and claims expenses paid (80,183) (55,859)
Claims and claims expenses recovered 8,914 2,121
Underwriting expenses paid (12,542) (8,230)
--------- ---------
Cash used for/provided by underwriting activities (5,739) 7,316
Net investment income received 28,384 24,509
Interest expense paid (4,809) (496)
Income taxes paid (6,443) (6,226)
General and administrative expense (1,849) --
Other income received 11 10
--------- ---------
Cash provided by operating activities 9,555 25,113
--------- ---------
Cash flows for investing activities:
Purchases of debt securities (252,322) (137,869)
Sales of debt securities 233,262 33,980
Maturities of debt securities 33,654 26,002
Purchases of equity securities (5,382) (12,390)
Sales of equity securities 1,453 4,621
Investment in subsidiary, net of cash acquired (39,784) --
Additions to premises and equipment (203) (78)
--------- ---------
Cash used for investing activities (29,322) (85,734)
--------- ---------
Cash flows for financing activities:
Issuance of senior notes 75,000 --
Issuance of mandatorily redeemable preferred
capital securities -- 110,000
Redemption of convertible debentures -- (46,997)
Issuance costs of capital securities -- (1,498)
Issuance costs of senior notes (784) --
Issuance of common stock 454 776
Repurchase of common stock (150) (171)
Dividends paid (6,027) (5,730)
--------- ---------
Cash provided by financing activities 68,493 56,380
--------- ---------
Effect of exchange rate on cash (692) --
Change in cash and cash equivalents 48,034 (4,241)
Cash and cash equivalents, beginning of period 12,847 14,253
--------- ---------
Cash and cash equivalents, end of period $ 60,881 $ 10,012
========= =========
The accompanying notes are an integral part of these statements.
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TRENWICK GROUP INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- --------
(in thousands)
Net income $ 8,975 $ 8,593 $ 18,220 $ 17,357
Other comprehensive income:
Net unrealized investment gains,
net of income taxes 1,285 8,301 2,142 147
Foreign currency translation adjustment,
net of income taxes (1) -- (1) --
-------- -------- -------- --------
Comprehensive income $ 10,259 $ 16,894 $ 20,361 $ 17,504
======== ======== ======== ========
The accompanying notes are an integral part of these statements.
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TRENWICK GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The interim consolidated financial statements included those of Trenwick
Group Inc. and its subsidiaries and have been prepared in conformity with
generally accepted accounting principles applied on a basis consistent
with prior periods. Certain items in the financial statements have been
reclassified to conform with the 1998 presentation.
Management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The interim consolidated financial statements are unaudited; however, in
the opinion of management, the interim consolidated financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods.
These interim statements should be read in conjunction with the 1997
audited financial statements and related notes.
Earnings Per Share
Effective December 31, 1997, Trenwick adopted a new accounting standard,
"Earnings Per Share", which specifies the computation, presentation and
disclosure requirements of earnings per share and supersedes the previous
standard. It requires a dual presentation of basic and diluted earnings
per share. Basic earnings per share, which excludes the effect of common
stock equivalents, replaces primary earnings per share. Diluted earnings
per share, which utilizes the average market price per share when applying
the treasury stock method in determining common stock equivalents,
replaces fully-diluted earnings per share. Prior period per share amounts
have been restated to comply with this standard.
Debt issuance costs
Debt issuance costs associated with the issuance of the 6.70% senior notes
are being amortized over the term of the related debt using the interest
method.
Comprehensive income
As of January 1, 1998, Trenwick adopted the new accounting standard,
"Reporting Comprehensive Income", which establishes standards for
reporting and presentation of comprehensive income and its components.
Comprehensive income comprises net income and other comprehensive income.
Other comprehensive income consists of the change in the net unrealized
appreciation of investments, net of tax, and the change in foreign
currency translation adjustments, net of tax. Information for periods
prior to 1998 is presented on a basis consistent with the 1998
information.
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Foreign Exchange
The assets and liabilities of foreign operations are translated at the rate of
exchange in effect at the balance sheet date. Revenues and expenses of foreign
operations are translated at the average exchange rates during the year. The
effect of the translation adjustments for foreign operations is recorded as a
cumulative translation adjustment in accumulated other comprehensive income
within stockholders' equity, (net of applicable deferred income taxes). Foreign
currency transaction gains and losses are included in net income and are not
material.
2. REINSURANCE
Trenwick purchases reinsurance to reduce its exposure to catastrophe
losses and the frequency of large losses in all lines of business.
Trenwick, however, remains liable in the event that its retrocessionaires
do not meet their contractual obligations. The effects of reinsurance on
premiums written, premiums earned and claims and claims expenses incurred
is as follows (in thousands):
Premiums Written
---------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Assumed $ 92,357 $ 59,681 $ 153,886 $ 132,418
Ceded (17,401) (10,835) (34,437) (24,014)
--------- --------- --------- ---------
Net $ 74,956 $ 48,846 $ 119,449 $ 108,404
========= ========= ========= =========
Premiums Earned
---------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Assumed $ 89,095 $ 56,266 $ 153,521 $ 120,491
Ceded (18,131) (9,161) (36,733) (19,472)
--------- --------- --------- ---------
Net $ 70,964 $ 47,105 $ 116,788 $ 101,019
========= ========= ========= =========
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Claims and Claims Expenses Incurred
---------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Assumed $ 56,113 $ 39,359 $ 102,824 $ 85,876
Ceded (13,042) (11,873) (33,248) (27,586)
--------- --------- --------- ---------
Net $ 43,071 $ 27,486 $ 69,576 $ 58,290
========= ========= ========= =========
3. ACQUISITION OF TRENWICK INTERNATIONAL LIMITED
On February 27, 1998, Trenwick completed the acquisition of Trenwick
International Limited ("Trenwick International"), formerly Sorema (UK)
Limited, from Sorema S.A. for an aggregate purchase price of $63.2
million, including acquisition costs, which approximated book value. On
March 31, 1998, the share capital of Trenwick International was increased
by $67.0 million to approximately $127.0 million. Trenwick International
is based in London and underwrites specialty insurance and reinsurance
treaty and facultative business on a worldwide basis. The acquisition has
been accounted for using the purchase method of accounting, and
accordingly, the purchase price has been allocated to the assets purchased
and the liabilities assumed based on the estimated fair values at the date
of acquisition. The excess of the purchase price over the estimated fair
value of the net assets of approximately $992,000, has been recorded as
goodwill, which is being amortized on a straight line basis over 25 years.
All assets and liabilities of Trenwick International are consolidated in
the balance sheet at June 30, 1998 and its operating results are
consolidated in Trenwick's results for the quarter ended June 30, 1998.
4. STOCKHOLDERS' EQUITY
Preferred Stock
Trenwick has 2,000,000 shares of $.10 par value preferred stock authorized
and none outstanding.
For the six months ended June 30, 1998, Trenwick awarded key employees an
aggregate of 82,889 shares of common stock under the terms of the 1989 and
1993 Stock Plans, valued at an average of $35.61 per share (approximately
$2,952,000). Trenwick is recognizing compensation expense determined by
the value of the shares, amortized over a five year vesting period. During
the period, 4,250 shares were repurchased at an average of $35.29 per
share (approximately $150,000) in connection with the satisfaction of
withholding taxes payable upon the vesting of shares previously awarded
under the plan.
Common Stock
On May 21, 1997, Trenwick's Board of Directors approved a stock repurchase
program covering up to one million shares of the Company's common stock;
no shares have been repurchased to date.
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5. LONG TERM DEBT
On March 27, 1998 Trenwick completed a private offering of $75 million
aggregate principal amount of its 6.70% senior notes due April 1, 2003.
Interest is payable semi-annually on April 1 and October 1 of each year,
commencing on October 1, 1998. The notes are not subject to redemption
prior to maturity. They are unsecured obligations and will rank senior in
right of payment to all existing and future subordinated indebtedness of
Trenwick, including Trenwick's obligations with respect to its 8.82%
junior subordinated debentures held by Trenwick Capital Trust I in respect
of the $110 million 8.82% subordinated capital income securities issued by
the Trust. Under the terms of the notes, Trenwick is not restricted from
incurring indebtedness, but is subject to limits on its ability to incur
secured indebtedness for borrowed money.
A portion of the net proceeds of the offering were contributed to
Trenwick's wholly-owned subsidiary Trenwick International Limited, to
support its insurance and reinsurance operations, including increasing its
statutory capital to support its underwriting capacity. Remaining net
proceeds will be used for general corporate purposes, which may include
investments in and advances to subsidiaries, the financing of growth and
expansion, the financing of possible future acquisitions and other
corporate purposes.
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6. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1998 1997 1998 1997
------- ------- ------- -------
INCOME AVAILABLE TO COMMON STOCKHOLDERS:
Income before extraordinary item (basic) $ 8,975 $ 8,593 $18,220 $18,394
Add interest on convertible debentures,
net of income taxes -- -- -- 578
------- ------- ------- -------
Income before extraordinary item (diluted) $ 8,975 $ 8,593 $18,220 $18,972
======= ======= ======= =======
Net income (basic) $ 8,975 $ 8,593 $18,220 $17,357
Add interest on convertible debentures and
loss on debt redemption, net of income taxes -- -- -- 1,615
------- ------- ------- -------
Net income (diluted) $ 8,975 $ 8,593 $18,220 $18,972
======= ======= ======= =======
WEIGHTED AVERAGE SHARES OF COMMON
STOCK OUTSTANDING:
Weighted average shares outstanding (basic) 11,954 11,899 11,944 11,374
Weighted average shares issuable on
conversion of debt 902
Weighted average shares issuable on exercise of
employee stock options, net of assumed
repurchases 195 142 164 141
------- ------- ------- -------
Weighted average shares outstanding (diluted) 12,149 12,041 12,108 12,417
======= ======= ======= =======
PER SHARE AMOUNTS:
Basic
Income before extraordinary item $ .75 $ .72 $ 1.53 $ 1.62
======= ======= ======= =======
Net income $ .75 $ .72 $ 1.53 $ 1.53
======= ======= ======= =======
Diluted
Income before extraordinary item $ .74 $ .71 $ 1.51 $ 1.53
======= ======= ======= =======
Net income $ .74 $ .71 $ 1.51 $ 1.53
======= ======= ======= =======
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MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Trenwick ("Trenwick") is a holding company with two principal operating
subsidiaries, Trenwick America Reinsurance Corporation ("Trenwick America Re"),
which reinsures property and casualty risks written by U.S. insurance companies,
and Trenwick International Limited ("Trenwick International"), which writes
insurance and reinsurance property and casualty risks outside of the U.S.
Substantially all of Trenwick America Re's business is produced by reinsurance
brokers. Trenwick International obtains its business from a variety of
resources, including insurance and reinsurance brokers. Trenwick America Re and
Trenwick International underwrite both treaty and facultative business.
OPERATING RESULTS
Trenwick Group Inc. reported consolidated net income of $9.0 million, or $.75
per share, for the second quarter of 1998 compared to $8.6 million, or $.72 per
share, for the second quarter of 1997. Per share earnings on a diluted basis
were $.74 for 1998 compared to $.71 for 1997.
For the first half of 1998, Trenwick's net income was $18.2 million or $1.53 per
share, compared to income before extraordinary item of $18.4 million or $1.62
per share in the first half of 1997. Included in net income for the first half
of 1997 was an extraordinary loss on debt redemption, net of tax, of
approximately $1 million or $.09 per share. Net income per diluted share was
$1.51 for the first half of 1998 compared to $1.53 for the first half of 1997.
Operating income for the second quarter of 1998 includes after-tax costs of
approximately $800,000 or $.07 per share relating to expansion activities of the
Group and profit commission adjustments on certain prior years' accounts.
Expansion activities include business development and mergers and acquisitions.
Net income for the second quarter of 1998 and 1997 includes after-tax realized
investment gains of $351,000 or $.03 per share and $1,000 respectively. Net
income for the first half of 1998 and 1997 includes after-tax realized
investment gains of $819,000 or $.07 per share and $1.2 million or $.10 per
share, respectively.
PREMIUMS
Trenwick's consolidated net premium writings in the second quarter and first
half of 1998 totaled $75.0 million and $119.5 million compared to $48.9 million
and $108.4 million in 1997, respectively. This increase of 53% and 10% for the
second quarter and first half of 1998 primarily reflects the inclusion of
Trenwick International's business during these periods.
Net premium writings from the Group's U.S. operations declined 18% and 22% in
the second quarter and the first half of 1998 compared to last year. Casualty
business, which represents 92% of the Company's U.S. business, declined 16% and
19%, while property business declined 34% and 48%,
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respectively. Premium writings declined as a result of three principal causes.
Price competition among primary companies put pressure on ceding companies' own
premium writings. Insurers continued to restructure their reinsurance programs,
reducing the amount of reinsurance they purchase. In addition, increasingly
intense competition in the reinsurance markets drove reinsurance prices on a
number of casualty and property accounts below pricing levels that the Company
would accept.
Trenwick International reported net premium writings of $34.8 million in the
second quarter of 1998. While the international business is also highly
competitive, growth in this business is expected to result primarily from an
increase in Trenwick International's retention of business owing to a change in
its reinsurance programs, and an increase in its capital. The Company is also
expanding into new geographic markets previously prohibited by its former
parent.
UNDERWRITING EXPERIENCE
The combined ratio is one means of measuring the profitability of a property and
casualty company. The combined ratio reflects underwriting experience, but does
not reflect income from investments or provisions for income taxes. A combined
ratio below 100% indicates profitable underwriting and a combined ratio
exceeding 100% indicates unprofitable underwriting. Although a reinsurer may
have unprofitable underwriting results, the reinsurer may still be profitable
because of investment income earned on the accumulated invested assets.
The following table sets forth Trenwick's combined ratios and the components
thereof calculated on a GAAP basis for the period indicated, together with
Trenwick America Re's combined ratio calculated on a statutory basis:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1998 1997 1998 1997
------ ------ ------ ------
Claims and claims expense ratio 60.7% 58.4% 59.6% 57.7%
------ ------ ------ ------
Expense ratio:
Policy acquisition expense ratio 29.3 30.9 30.8 31.6
Underwriting expense ratio 10.0 8.0 9.0 7.7
------ ------ ------ ------
Total expense ratio 39.3% 38.9% 39.8% 39.3%
------ ------ ------ ------
Combined ratio (GAAP basis) 100.0% 97.3% 99.4% 97.0%
------ ------ ------ ------
The Group's GAAP combined ratio for the second quarter and first half of 1998
was 100% and 99.4% compared to 97.3% and 97% for the same period in 1997.
Trenwick America's GAAP combined loss and expense ratio in the second quarter
and first half of 1998 was 98.7% and 98.6%, compared to 97.3% and 97% for the
same periods in 1997. The increase in the combined loss and expense ratio for
this business resulted primarily from higher commission expenses due to the
continued shift in the mix of business from excess to quota share and an
increase in the overhead expense ratio caused by lower premium writings. The
combined loss and expense ratio in the first half of 1998 includes favorable
reserve development of approximately $3.0 million compared to approximately $2.9
million for the same period in 1997. Trenwick America Re's statutory combined
ratio for the second quarter and first half of 1998 was 98.2% and 99.1% compared
to 96.1% and 96.0% for the same period in 1997. Trenwick International's GAAP
combined loss and expense ratio for the second quarter and first half of 1998
was 102.2%.
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INVESTMENT INCOME
Group net investment income of $15 million and $27.4 million increased 24% and
15%, respectively, in the second quarter and first half of 1998 compared to
$12.1 million and $23.9 million for the same periods in 1997. Pre-tax yields on
invested assets, excluding equity securities, averaged 6.3% in 1998 and 6.4% in
1997. The increase in investment income is due to the continued growth in
Trenwick's invested asset base resulting primarily from the acquisition of
Trenwick International.
After-tax net investment income in the second quarter and first half of 1998 was
$10.9 million and $20.4 million compared to $9.2 million and $18.1 million for
the comparative periods in 1997. The effective income tax rate on net investment
income for the first half of 1998 was approximately 25.2% versus 23.9% for the
same period in 1997. The increase in the effective income tax rate is due to the
fully taxable nature of Trenwick International's investments.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, Trenwick's consolidated investments and cash totaled $1.0
billion, as compared to $864.3 million at December 31, 1997. Included in cash
and cash equivalents as of June 30, 1998 are the proceeds from the issuance of
the 6.70% senior notes. The fair value of the Company's debt securities
portfolio exceeded amortized cost of $879.7 million and $788.7 million by $23.7
million and $23.6 million at June 30, 1998 and December 31, 1997, respectively.
At June 30, 1998 and at December 31, 1997, the fair value of the Company's
equity securities exceeded cost of $46.4 million and $31.6 million by $10.7
million and $7.6 million, respectively.
As of June 30, 1998, Trenwick's consolidated common stockholders' equity totaled
$372.8 million or $30.92 per share, as compared to $357.6 million or $29.93 per
share at December 31, 1997. Since December 31, 1997, the unrealized appreciation
of debt and equity investments increased $2.1 million, net of tax, or $.18 per
share.
Statutory surplus of Trenwick America Re was $344.1 million as of June 30, 1998,
compared to $322.9 million as of December 31, 1997. Trenwick International's
statutory surplus was $129.0 million as of June 30, 1998.
Cash flow from operations of $9.6 million in the first half of 1998 decreased
approximately 62% compared to cash flow from operations of $25.1 million in the
first half of 1997. The reduction in cash flow from operations was due primarily
to timing differences on recoveries relating to Trenwick International's
contracts with its former parent and a decline in premium volume associated with
the Group's U.S. business.
Cash provided by financing activities in the first half of 1998 increased to
$68.5 million compared to cash provided by financing activities of $56.4 million
in the first half of 1997, primarily due to the proceeds of the issuance of $75
million principal amount of 6.70% senior notes.
Trenwick declared a second quarter dividend of $.25 per share in 1998, a 4%
increase compared to $.24 in the second quarter of 1997.
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Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
A total of 11,282,771 shares, or 93% of the 12,052,199 shares of common stock
outstanding on the March 26, 1998 record date, were represented at the Company's
Annual Meeting of Stockholders held on May 21, 1998. Voting results were as
follows:
On the proposal to elect two directors to serve in Class II until 2001, Mr.
Frederick D. Watkins was elected by an affirmative vote of 11,228,098 shares,
with 54,673 shares withheld, and Mr. Stephen R. Wilcox was elected by an
affirmative vote of 11,231,806 shares, with 50,965 shares withheld. Messrs.
Anthony S. Brown, Neil Dunn and P. Anthony Jacobs continue to serve in Class III
until 1999, and Messrs. James F. Billett, Jr., W. Marston Becker and Joseph D.
Sargent continue to serve in Class I until 2000.
On the proposal to increase the aggregate number of shares authorized for
issuance under the 1993 Stock Option Plan by 500,000 shares and increase the
maximum number of shares which may be awarded under such Plan to any one
participant from 150,000 to 450,000, there were 7,814,380 shares voted in favor,
2,457,658 shares opposed and 1,010,733 shares abstaining.
On the proposal to ratify the appointment of Price Waterhouse LLP (now named
PricewaterhouseCoopers LLP) as independent accountants for the year ending
December 31, 1998, there were 11,278,079 shares voted in favor, 1,980 shares
opposed and 2,712 shares abstaining.
Item 5. Stockholder Proposals - 1999 Annual Meeting
A stockholder of the Company may present a proposal for the 1999
Annual Meeting by directing such proposal to the Secretary at the
corporate address. In order to be included in the Company's Proxy
Statement and Proxy relating to such meeting, a proposal must be
received no later than December 21, 1998. If a stockholder presents a
proposal at the 1999 Annual Meeting without the Company's having
received notice of such proposal by March 6, 1999, the Proxy
Committee will be permitted to vote on such proposal in accordance
with its judgement, even if its intention with respect to such
proposal is not disclosed in the Company's Proxy Statement.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27.0 Financial Data Schedule
b) Reports on Form 8-K
None
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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 INC.
-----------------------------
(Registrant)
Date: August 14, 1998 JAMES F. BILLETT, JR.
---------------- -----------------------------
James F. Billett, Jr.
Chairman, President and
Chief Executive Officer
Date: August 14, 1998 ALAN L. HUNTE
--------------- -----------------------------
Alan L. Hunte
Vice President, Chief Financial Officer
and Treasurer
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