Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 2001.
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period to .
---------------------- ----------------------
Commission file number 0-31967
TRENWICK AMERICA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 06-1087672
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Canterbury Green, Stamford, Connecticut 06901
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 203-353-5500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K |X|
There was no voting stock held by non-affiliates of the registrant on March
14, 2002.
The number of shares outstanding of each of the issuer's classes of common
stock as of the close of the period covered by this report:
Class Outstanding at March 14, 2002
----- -----------------------------
Common Stock, $1.00 par value 100
The registrant meets the conditions set forth in General Instruction I (1)(a)
and (b) of Form 10-K and is therefore filing this Form 10-K in the reduced
disclosure format.
TRENWICK AMERICA CORPORATION
Table of Contents
Page
Item Number
- ---- ------
PART I
1. Business ...................................................................... 1
2. Properties .................................................................... 3
3. Legal Proceedings ............................................................. 3
4. Submission of Matters to a Vote of Security Holders ........................... 3
PART II
5. Market for the Corporation's Common Stock and Related Stockholder Matters ..... 3
6. Selected Financial Data ....................................................... 4
7. Management's Discussion and Analysis of Financial Condition and
Results of Operation .......................................................... 4
7a. Quantitative and Qualitative Disclosures About Market Risk...................... 15
8. Financial Statements and Supplementary Data ................................... 15
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .......................................................... 15
PART III
10. Directors and Executive Officers .............................................. 15
11. Executive Compensation ........................................................ 15
12. Security Ownership of Certain Beneficial Owners and Management ................ 15
13. Certain Relationships and Related Transactions ................................ 15
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ................. 15
i
PART I
Item 1. Business
Trenwick America Corporation, a Delaware corporation, was formed in 1983 and in
1985 became a wholly-owned direct subsidiary of Trenwick Group Inc., the
ultimate controlling entity, for the purposes of serving as a United States
holding company.
On September 27, 2000, Trenwick Group Ltd., a newly formed Bermuda holding
company, issued common shares to acquire Trenwick Group Inc. and another
publicly held Bermuda company, LaSalle Re Holdings Limited, and the minority
interest in LaSalle Re Limited, a Bermuda subsidiary of LaSalle Re Holdings
Limited. Trenwick Group Inc. then distributed the shares received from Trenwick
Group Ltd. to its shareholders in a liquidating distribution. As a part of the
transaction, Trenwick Group Inc. completed a concurrent internal reorganization
of its subsidiary companies in which substantially all of Trenwick Group Inc.'s
assets and liabilities were transferred from Trenwick Group Inc. to a
subsidiary, which then merged with and into Trenwick America Corporation, with
Trenwick America Corporation as the surviving corporation. The result of the
restructuring was that Trenwick America Corporation became the intermediate
holding company for Trenwick Group Ltd.'s United States subsidiaries. This
abbreviated Annual Report on Form 10-K is required as a result of debt assumed
by Trenwick America Corporation in connection with the restructuring.
Each of Trenwick America Corporation's operating insurance company subsidiaries
is rated "A-" (Excellent) by A.M. Best Company and has been assigned an A-
financial strength rating by Standard & Poor's. These ratings are based upon
factors that may be of concern to policy or contract holders, agents and
intermediaries, but may not reflect the considerations applicable to an equity
investment in a reinsurance or insurance company. A change in any such rating is
at the discretion of the respective rating agencies.
Trenwick America Corporation conducts its specialty insurance and reinsurance
business in the following two business segments:
o treaty reinsurance; and
o specialty program insurance.
Trenwick America Corporation operates through the following two principal
operating platforms:
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 its subsidiary Chartwell Insurance Company (formerly Chartwell
Reinsurance Company); and
o Canterbury Financial Group Inc., which is located in Stamford, Connecticut,
underwrites specialty insurance in the United States through its operating
subsidiaries, Chartwell Insurance Company, The Insurance Corporation of New
York and Dakota Specialty Insurance Company.
1
Trenwick America Corporation's gross and net premium writings by business
segment for 2001, 2000 and 1999 are as follows.
2001 2000 1999
------------------ ------------------ ------------------
(expressed in thousands of United States dollars)
Gross Premiums Written
Treaty reinsurance $350,134 $338,794 $210,921
Specialty program insurance 291,433 187,545 38,088
------------------ ------------------ ------------------
Total $641,567 $526,339 $249,009
================== ================== ==================
Net Premiums Written
Treaty reinsurance $331,699 $251,284 $165,744
Specialty program insurance 99,708 54,028 5,641
------------------ ------------------ ------------------
Total $431,407 $305,312 $171,385
================== ================== ==================
For additional financial information regarding Trenwick America Corporation's
business segments, see note 3 to Trenwick America Corporation's consolidated
financial statements.
Treaty Reinsurance
Trenwick America Corporation underwrites United States treaty reinsurance
through its subsidiary, Trenwick America Reinsurance Corporation. This segment
generally obtains all of its business through brokers and reinsurance
intermediaries which seek its participation on reinsurance being placed for
their customers. In underwriting reinsurance, Trenwick America Reinsurance
Corporation does not target types of clients, classes of business or types of
reinsurance. Rather, it selects transactions based upon the quality of the
reinsured, the attractiveness of the reinsured's insurance rates and policy
conditions and the adequacy of the proposed reinsurance terms.
Trenwick America Reinsurance Corporation's commitment is currently limited to
$3.0 million per contract on casualty treaty business and $2.5 million on
property business. Larger commitments are subject to Trenwick America
Reinsurance Corporation's underwriting committee referral process.
The major lines of reinsurance currently underwritten by Trenwick America
Reinsurance Corporation are accident and health, property, errors and omissions,
environmental liability and general liability. Together these lines accounted
for an aggregate of at least 65% of its net premiums written in each of 2001,
2000 and 1999. Trenwick America Reinsurance Corporation also underwrites medical
malpractice, workers' compensation, products liability and automobile liability
lines of reinsurance. Premiums in 2001, 2000 and the fourth quarter of 1999
include business previously underwritten by Chartwell Insurance Company. This
business comprised similar lines of business underwritten by Trenwick America
Reinsurance Corporation.
Three ceding companies generated a majority of the treaty reinsurance business
for Trenwick America Reinsurance Corporation, accounting for 22%, 31%, and 25%
of this segment's gross premiums written in 2001, 2000 and 1999, respectively.
During 2001, Travelers Group, Avemco Group and American International Group
accounted for 9%, 7% and 6%, respectively, of the segment's gross premiums
written. Trenwick America Reinsurance Corporation does not believe that the loss
of these accounts would have a long-term material adverse effect on the results
and operations of its treaty reinsurance business because of its competitive
position within the reinsurance market and the availability of business from
other brokers and ceding companies. Further, Trenwick America Reinsurance
Corporation believes that it would continue to underwrite new business to
replace the accounts.
2
Specialty Program Insurance
Specialty program insurance, written through Canterbury Financial Group Inc.,
develops insurance programs in the United States through specialty production
sources with a focus on a specific line or lines of business, with a limited
geographic emphasis, and where the program administrator's compensation is
adjusted based on the underwriting results of the business. Canterbury Financial
Group Inc. evaluates each business relationship based upon the underwriting
experience and operational expertise of the production source and periodically
performs underwriting, claims and operational audits of each of its production
sources.
During the 2001 calendar year, the specialty program insurance segment
underwrote approximately 68% of its gross premiums through four managing general
agents, of which Florida Intracoastal Underwriters accounted for 27%, HDR
Insurance Services accounted for 16%, Inter-Reco accounted for 14% and Risk
Control Services accounted for 11%. No other managing general agent accounted
for more than 10% of Canterbury Financial Group Inc.'s gross insurance premiums
written for such period.
In order to reduce the potential adverse effect arising from the termination of
any specific business relationship, Canterbury Financial Group Inc. continues to
seek to establish and develop relationships with a large number of managing
general agents. While management believes that its relationships with its
managing general agents are satisfactory, the termination of all or a
substantial number of these relationships could have a material adverse effect
on the business and operations of the specialty program insurance segment.
Item 2. Properties
Trenwick America Corporation's operations are located in approximately 46,000
total square feet of leased office space at Stamford, Connecticut. Management
believes Trenwick America Corporation's current office space is adequate for its
needs.
Item 3. Legal Proceedings
Trenwick America Corporation is party to various legal proceedings generally
arising in the normal course of its business. Trenwick America Corporation does
not believe that the eventual outcome of any such proceeding will have a
material effect on its financial condition or business. Trenwick America
Corporation's subsidiaries are regularly engaged in the investigation and the
defense of claims arising out of the conduct of their business. Pursuant to
Trenwick America Corporation's insurance and reinsurance arrangements, disputes
are generally required to be finally settled by arbitration.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of shareholders of Trenwick America
Corporation during the fourth quarter of 2001.
PART II
Item 5. Market for Corporation's Common Stock and Related Stockholder Matters
There is no established public trading market for Trenwick America Corporation's
stock. All of the outstanding shares of Trenwick America Corporation's common
stock are owned by Trenwick (Barbados) Ltd., which in turn is a wholly-owned
subsidiary of Trenwick Group Ltd.
3
Item 6. Selected Financial Data
Information required by Item 6 has been omitted because Trenwick America
Corporation meets the conditions set forth in General Instruction I (1)(a) and
(b) of Form 10-K and is therefore filing this Annual Report on Form 10-K in the
reduced disclosure format.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion highlights material factors affecting Trenwick America
Corporation's results of operations for the years ended December 31, 2001 and
2000. This discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto of Trenwick America
Corporation for the years ended December 31, 2001, 2000 and 1999, contained in
this Annual Report on Form 10-K. Trenwick America Corporation meets the
conditions set forth in General Instruction I (1)(a) and (b) of Form 10-K and is
therefore omitting certain information otherwise required by Item 7.
Trenwick America Corporation discloses operating and non-operating income to
enable the reader to understand how management evaluates Trenwick America
Corporation's results of operations. These disclosures are not defined under
accounting principles generally accepted in the United States of America;
accordingly the use of these disclosures may not be comparable to other
registrants.
Overview
Trenwick America Corporation is a Delaware holding company headquartered in
Stamford, Connecticut whose principal subsidiaries underwrite specialty
insurance and reinsurance.
Trenwick America Corporation conducts its specialty insurance and reinsurance
business in the United States through the following two business segments:
o Treaty reinsurance; and
o Specialty program insurance.
Trenwick America Corporation operates through the following two principal
operating platforms:
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 its subsidiary Chartwell Insurance Company (formerly Chartwell
Reinsurance Company); and
o Canterbury Financial Group Inc., which is located in Stamford, Connecticut,
underwrites specialty insurance in the United States through its operating
subsidiaries, The Insurance Corporation of New York and Dakota Specialty
Insurance Company.
All of Trenwick America Corporation's principal operating subsidiaries are rated
A- (Excellent) by A.M. Best Company and have been assigned a financial strength
rating of A- by Standard and Poor's. These ratings are based upon factors that
may be of concern to policy or contract holders, agents and intermediaries, but
may not reflect the considerations applicable to an equity investment in a
reinsurance or insurance company. A change in any such rating is at the
discretion of the respective rating agencies.
4
Results of Operations - Years Ended December 31, 2001 and 2000
(monetary amounts in tables expressed in thousands of United States dollars)
2001 2000 Change
-------- -------- -------
Underwriting loss $(66,303) $(78,962) $12,659
Net investment income 68,041 66,601 1,440
Interest expense and subsidiary preferred
share dividends (31,336) (35,769) 4,433
General and administrative expenses (4,074) (19,131) 15,057
Other income, net 2,819 2,823 (4)
-------- -------- -------
Pretax operating loss (30,853) (64,438) 33,585
Applicable income tax benefit (13,473) (24,257) 10,784
-------- -------- -------
Operating loss (17,380) (40,181) 22,801
Net realized investment gains (losses), net o
income taxes (1,213) 4,399 (5,612)
Foreign currency losses, net of income taxes (932) (1,190) 258
-------- -------- -------
Net loss $(19,525) $(36,972) $17,447
======== ======== =======
The operating loss of $17.4 million in 2001 represented a $22.8 million decrease
from the operating loss of $40.2 million in 2000. The decrease in operating loss
was principally the result of a modest improvement in underwriting results in
the U.S. treaty reinsurance business and a reduction in general and
administrative expenses. General and administrative expenses for 2000 included
expenses assumed by Trenwick Group Ltd. subsequent to the Trenwick/LaSalle
business combination. The decrease in net loss of 2001 of $17.5 million compared
to the 2000 loss was the result of the improvement in underwriting results and
decrease in general and administrative expenses noted above, offset in part by a
decrease in realized investment gains of $5.6 million.
Underwriting Income (Loss)
2001 2000 Change
--------------- --------------- ----------------
Net premiums earned $380,288 $310,791 $69,497
--------------- --------------- ----------------
Claims and claims expenses incurred (305,488) (276,043) (29,445)
Acquisition costs and underwriting expenses (141,103) (113,710) (27,393)
--------------- --------------- ----------------
Total expenses (446,591) (389,753) (56,838)
--------------- --------------- ----------------
Net underwriting loss $(66,303) $(78,962) $12,659
=============== =============== ================
Loss ratio 80.3% 88.8% 8.5%
Expense ratio 37.1% 36.6% (0.5)%
Combined ratio 117.4% 125.4% 8.09%
The underwriting loss of $66.3 million incurred in 2001 represented a $12.7
million decrease compared to the underwriting loss of $79.0 million in 2000. The
decrease in the net underwriting loss in 2001 resulted from an improvement in
the current year results of both the reinsurance and specialty insurance
businesses. The effect of this improvement was offset in part by additional
reserve strengthening in both businesses which is further discussed on page 6
under the caption "Claims and Claims Expenses."
The improvement in the combined ratio in 2001 compared to 2000 resulted from
less adverse development on prior years' reserves.
5
Premiums Written
Gross premiums written for 2001 were $641.6 million compared to $526.3 million
for 2000, an increase of $115.2 million or 21.9%. Details of gross premiums
written are provided below.
2001 2000 Change
--------------- --------------- ---------------
Treaty reinsurance $350,134 $338,794 $11,340
Specialty insurance 291,433 187,545 103,888
--------------- --------------- ---------------
Total $641,567 $526,339 $115,228
=============== =============== ===============
Treaty reinsurance and specialty insurance gross premiums written increased from
$338.8 million and $187.5 million, respectively, for 2000, to $350.1 million,
and $291.4 million, respectively, for 2001. The modest increase in gross
premiums written for treaty reinsurance was due primarily to new business,
offset by the non-renewal of business written in both Trenwick America
Reinsurance Corporation and Chartwell Insurance Company. In 2001, treaty
reinsurance includes $34.6 million in gross premiums previously underwritten by
Chartwell Insurance Company compared to $128.9 million in 2000. Approximately
$52.5 million of the gross premiums written in 2000 was fronted business. The
increase in gross premiums written for specialty insurance was due to an
increase in the number of programs underwritten and growth in business in
existing programs.
Premiums Earned
2001 2000 Change
--------------- -------------- --------------
Gross premiums written $641,567 $526,339 $115,228
Change in gross unearned premiums (69,638) (8,004) (61,634)
--------------- -------------- --------------
Gross premiums earned 571,929 518,335 53,594
--------------- -------------- --------------
Gross premiums ceded (210,160) (221,027) 10,867
Change in gross unearned premiums ceded 18,519 13,483 5,036
--------------- -------------- --------------
Ceded premiums earned (191,641) (207,544) 15,903
--------------- -------------- --------------
Net premiums earned $380,288 $310,791 $69,497
=============== ============== ==============
A majority of gross premiums ceded in both 2001 and 2000 relates to the
specialty insurance business, which cedes a greater portion of its business
written than the treaty reinsurance business. The increase in gross premiums
ceded in 2001 compared to 2000 was offset by a decrease in gross premiums ceded
by treaty reinsurance relating to fronted business previously underwritten by
Chartwell Insurance Company which was discontinued during 2000.
Net premiums earned for 2001 were $380.3 million compared to $310.8 million for
2000. The increase in net premiums earned is commensurate with the increase in
net premiums written.
Claims and Claims Expenses
Included in claims and claims expenses in 2001 and 2000 were prior year reserve
additions of $22.4 million and $32.5 million, respectively. In 2001, prior year
treaty reinsurance reserves were increased by $29.4 million, principally
relating to liability business and $11.5 million related to prior participation
in the Excess and Casualty Reinsurance Association Pool. Similarly, in 2001
prior year specialty insurance reserves were increased by $13.9 million,
principally relating to a discontinued program. In 2000, prior year reserve
increases were $39.8 million on treaty reinsurance business and $(7.3) million
on specialty insurance business. Excluding amounts relating to increases in
prior year reserves, claims and claims expenses increased from $251.1 million in
2000 to $292.9 million in 2001, or $41.8 million. This increase is commensurate
with the increase in business underwritten in 2001 compared to 2000. The
6
claims and claims expenses in 2001 include $4.0 million incurred as a result of
the September 11th terrorist attacks.
Policy Acquisition Costs and Underwriting Expenses
2001 2000 Change
------------ ------------ ------------
Policy acquisition costs $122,213 $ 92,980 $29,233
Underwriting expenses 18,890 20,730 (1,840)
------------ ------------ ------------
Total policy acquisition costs and underwriting expenses $141,103 $113,710 $27,393
============ ============ ============
Expense ratio 37.1% 36.6% 0.5%
============ ============ ============
Total underwriting expenses, comprising policy acquisition costs and
underwriting expenses, for the 2001 year increased by $27.4 compared to total
underwriting expenses for 2000. The increase in total underwriting expenses in
2001 was commensurate with the increase in premium writings. Total underwriting
expenses as a percentage of net premiums earned were 37.1% for 2001 a modest
increase compared to 2000.
Net Investment Income
2001 2000 Change
---------------- --------------- --------------
Average invested assets $1,204,605 $1,284,027 $(79,422)
Average annualized yields 6.8% 6.3% 0.5%
Investment income 82,156 81,506 650
Investment expenses (14,115) (14,905) 790
---------------- --------------- --------------
Net investment income $68,041 $66,601 $1,440
================ =============== ==============
Net investment income for 2001 was $68.0 million compared to $66.6 million for
2000. The increase in net investment income in 2001 was due to an overall
increase in yields. Investment expense for 2001 and 2000 includes interest
expense on funds withheld of $11.3 million and $11.9 million, respectively,
relating to stop loss reinsurance agreements purchased by Trenwick America
Reinsurance Corporation prior to 2000.
Interest Expense and Subsidiary Preferred Share Dividends
Interest expense and subsidiary preferred share dividends were $31.3 million for
2001, a decrease of $4.4 million from 2000. The decrease resulted from a
reduction in interest on Trenwick America Corporation's bank credit facility
following a general decrease in interest rates.
Non-Operating Income and Expenses
Net realized investment losses, net of income taxes, were $1.2 million during
the 2001 year, compared to net realized gains of $4.4 million for 2000. The 2001
losses include $3.4 million of realized losses on investments to recognize
declines in value that were other than temporary. The gains recognized in 2000
were pursuant to an investment policy designed to protect the total returns on
the portfolio.
Trenwick America Corporation recorded foreign currency losses, net of income
taxes, of $0.9 million for 2001, compared to foreign currency losses, net of
income taxes, of $1.2 million for 2000.
Financings and Financing Capacity
Trenwick America Corporation's financing obligations generally include debt and
lease payment obligations. At December 31, 2001, annual principal payments
required by Trenwick America Corporation through 2006 relating to these
financing obligations are as follows (monetary amounts in tables expressed in
thousands of United States dollars):
7
Payments Due by Period
---------------------------------------------------------
Contractual Less than 1-3 4-5 After 5
Obligations Total 1 Year Years Years Years
- ------------------------- ----------- ---------- --------- --------- ---------
Indebtedness and
minority interest $381,035 $43,883 $192,021 $35,131 $110,000
Operating leases 10,140 1,482 3,146 3,118 2,394
Total contractual cash ----------- ---------- --------- --------- ---------
obligations $391,175 $45,365 $195,167 $38,249 $112,394
=========== ========== ========= ========= =========
Trenwick America Corporation's other commercial commitments principally consist
of reimbursement obligations for standby letters of credit. The amounts and
expiration of Trenwick America Corporation's other commercial commitments are as
follows (monetary amounts in table expressed in thousands of United States
dollars):
Expiration Periods
---------------------------------------------------------
Other Commercial Less than 1-3 4-5 After 5
Commitments Total 1 Year Years Years Years
- -------------------------- --------- ---------- --------- --------- ---------
Standby letters of credit $36 $36 $- $- $-
---------- ---------- --------- --------- ---------
Total other commercial
commitments $36 $36 $- $- $-
========== ========== ========= ========= =========
Concurrent with the Trenwick/LaSalle business combination, Trenwick America
Corporation and Trenwick Holdings Limited, Trenwick Group Ltd.'s U.S. and U.K.
holding companies, entered into an amended and restated $490 million credit
agreement with various lending institutions. The credit agreement consisted of
both a $260 million revolving credit facility and a $230 million letter of
credit facility. The revolving credit facility has subsequently been converted
into a four-year term loan. Trenwick America Corporation is the primary obligor
with respect to the revolving credit facility, and Trenwick Holdings Limited is
the primary obligor with respect to the letter of credit facility. Guarantees
are provided by LaSalle Re Holdings Limited and Trenwick Group Ltd. with respect
to both Trenwick America Corporation's and Trenwick Holdings Limited's
obligations and additionally by Trenwick America Corporation with respect to
Trenwick Holdings Limited's obligations. The credit agreement provides for a
letter of credit facility which may only be used to support the Lloyd's
syndicate participations of Trenwick Group Ltd.'s subsidiaries. The letter of
credit facility is scheduled to expire in November 2002. The applicable interest
rate on borrowings under the credit facility is generally 2.5% above the London
Interbank Offered Rate and was 4.7% at year end 2001. The term loan facility is
subject to scheduled principal amortization over the four-year period in
accordance with the following schedule: 2002, 22.5%; 2003, 27.5%; 2004, 32.5%;
2005, 17.5%.
Trenwick America Corporation is obligated to repay a portion or all of the term
loan in the event of equity issuances, asset sales or debt issuances by Trenwick
Group Ltd. or its subsidiaries. At year end 2001, $195.0 million of term loans
were outstanding, and $230.0 million of letters of credit were outstanding under
the credit facility.
The credit agreement contains general covenants and restrictions as well as
financial covenants relating to, among other things, Trenwick Group Ltd.'s
minimum interest coverage, debt to capital leverage, minimum earned surplus,
maintenance of a minimum A.M. Best Company rating of A- and tangible net worth.
As of year end 2001, Trenwick Group Ltd. was in compliance with the credit
agreement covenants.
8
The financial covenants relating to interest coverage, risk based capital and
tangible net worth (each as defined by the financial covenants in the credit
agreement) were revised downward in an amendment to the credit agreement
executed following the September 11th terrorist attacks. The amendment set
Trenwick Group Ltd.'s minimum interest coverage ratio at 1.5 to 1 for the fourth
quarter of 2001, 2.0 to 1 for the first quarter of 2002 and 2.5 to 1 thereafter.
Trenwick Group Ltd.'s interest coverage ratio at December 31, 2001 was 2.0 to 1.
The amendment adjusted downward the minimum risk-based capital requirement for
Trenwick America Corporation's subsidiary, Chartwell Insurance Company, from
300% to 225% through December 31, 2002. Thereafter, the minimum risk-based
capital for Chartwell Insurance Company returns to 300%. The risk based capital
for Chartwell Insurance Company as of December 31, 2001 was 257%. The amendment
lowered the base minimum tangible net worth Trenwick Group Ltd. must maintain
from $560 million to $425 million until the reporting of quarterly results of
operations as of March 31, 2002, which are due no later than May 15, 2002. After
May 15, 2002, Trenwick Group Ltd. minimum tangible net worth reverts to $560
million. Trenwick Group Ltd.'s tangible net worth as of December 31, 2001 was
$428 million. If Trenwick Group Ltd. is unable to meet the credit agreement's
financial covenants at the end of the first quarter of 2002, it may be required
to repay the outstanding indebtedness and collateralize the outstanding letters
of credit issued under the credit agreement through additional financing, asset
sales, subsidiary dividends or similar transactions.
Should Trenwick Holdings Limited be unable to meet any letter of credit
reimbursement obligations as they fall due, and such repayments are not
refinanced, Trenwick America Corporation would become liable for such
reimbursements under the terms of its guarantee. No liability for any such
amounts has been reflected in Trenwick America Corporation's financial
statements. Because Trenwick America Corporation is a holding company, its
principal source of funds consists of permissible dividends, tax allocation
payments, other statutorily permissible payments from its operating subsidiaries
and capital contributions from its parent. As a result of recent losses incurred
by Trenwick America Corporation's operating subsidiaries, their cash
distribution capacities have been significantly reduced. Other than as noted
above, Trenwick America Corporation does not have any material off-balance sheet
arrangements, trading activities involving non-exchange traded contracts
accounted for at fair value or relationships with persons or entities that
derive benefits from a non-independent relationship with Trenwick Group Ltd. or
its related parties.
In connection with the Trenwick/LaSalle business combination, Trenwick America
Corporation assumed, effective September 27, 2000, Trenwick Group Inc.'s
obligations with respect to $75 million aggregate principal amount of 6.70%
Senior Notes, which are due April 1, 2003. Interest is payable semi-annually on
April 1 and October 1 of each year; interest payments commenced on October 1,
1998. The notes are not subject to redemption prior to maturity. They are
unsecured obligations and rank senior in right of payment to all existing and
future subordinated indebtedness of Trenwick America Corporation.
Trenwick America Corporation also assumed, effective September 27, 2000,
Trenwick Group Inc.'s 8.82% Junior Subordinated Deferrable Interest Debentures
held by Trenwick Capital Trust I in respect of the $110 million in 8.82%
Subordinated Capital Income Securities issued by the Trust. Under the terms of
the debentures, Trenwick America Corporation is not restricted from incurring
indebtedness, but is subject to limits on its ability to incur secured
indebtedness for borrowed money.
Upon consummation of the acquisition of Chartwell Re Corporation in 1999,
Trenwick Group Inc. became the successor obligor under Chartwell Re
Corporation's Contingent Interest Notes due June 30, 2006. Effective September
27, 2000, Trenwick America Corporation assumed Trenwick Group Inc.'s obligations
under the contingent interest notes in connection with the Trenwick/LaSalle
business combination. The contingent interest notes were issued in an aggregate
principal amount of $1 million, which accrues interest at a rate of 8% per
annum, compounded annually. The interest is not payable until the maturity or
earlier redemption of the contingent interest notes. In addition, the contingent
interest notes entitle their holders to receive at maturity, in proportion to
the principal amount of the contingent
9
interest notes held by them, an aggregate of from $1 million up to $55 million
in contingent interest. The amount of contingent interest payable under the
contingent interest notes is dependent upon the level of loss and loss
adjustment expense reserves related to business written by Trenwick Group Ltd.'s
subsidiary, The Insurance Corporation of New York, prior to 1996. Settlement of
the contingent interest notes may be made by payment of cash or, under certain
specified conditions, by delivery of Trenwick Group Ltd.'s common shares.
Trenwick America Corporation's ability to refinance its existing debt
obligations or raise additional capital is dependent upon several factors,
including financial conditions with respect to both the equity and debt markets
and the ratings of its securities as established by the rating agencies.
Following Trenwick America Corporation's claims and claims expense liability
reserve increase in the second quarter of 2001 and the losses sustained by
Trenwick Group Ltd. in the September 11th terrorist attacks, Trenwick America
Corporation's senior debt ratings were downgraded by Standard & Poors
Corporation to BBB- and by Moody's Investors Service to Ba2. Trenwick America
Corporation's ability to refinance its outstanding debt obligations, as well as
the cost of such borrowings, could be adversely affected by these ratings
downgrades or if its ratings were downgraded further.
Critical Accounting Policies
The accounting policies described below are those Trenwick America Corporation
considers critical in preparing its consolidated financial statements. These
policies include significant estimates made by management using information
available at the time the estimates are made. However, as described below, these
estimates could change materially if different information or assumptions were
used. The descriptions below are summarized and have been simplified for
clarity. A more detailed description of the significant accounting policies used
by Trenwick America Corporation in preparing its financial statements is
included in the Notes to the Consolidated Financial Statements and the note
references are included below.
Unpaid Claims and Claims Expenses
Trenwick America Corporation establishes liabilities for claims and claims
expenses that have been reported but not paid and claims and claims expenses
that have been incurred but not reported under its insurance and reinsurance
contracts. These liabilities are developed using actuarial principles and
assumptions which consider a number of factors, including historical claims and
claims expense patterns, which are described in the Notes to the Consolidated
Financial Statements. An extensive degree of judgment is used in this estimation
process. Because the future cannot be predicted with certainty, the actual
future claims and claims expense payments are usually different from the
previously recorded liability estimates. Sometimes the differences are
significant. Any adjustments to Trenwick America Corporation's liabilities for
claims and claims expenses are included in Trenwick America Corporation's
results of operations in the period in which the need for the adjustment becomes
known. Due to the considerable variability of the insurance and reinsurance
business underwritten by Trenwick America Corporation, adjustments to its
liabilities for claims and claims expenses may occur each quarter and are
sometimes significant. Also see Note 4 of Notes to the Consolidated Financial
Statements.
Reinsurance Recoverable Balances
Trenwick America Corporation purchases reinsurance to reduce its exposure on
individual risks, catastrophic losses and other large losses. Trenwick America
Corporation estimates the amount of uncollectable receivables from its
reinsurers each period and establishes an allowance for uncollectable amounts.
The amount of the allowance is based on the age of unpaid amounts, information
about the creditworthiness of Trenwick America Corporation's reinsurers, and
other relevant information. Estimates of uncollectable reinsurance amounts
are revised each period, and changes are recorded in the period they become
known. A significant change in the level of uncollectable reinsurance amounts
10
would have a significant effect on Trenwick America Corporation's results of
operations. Also see Note 4 of Notes to the Consolidated Financial Statements.
Investments
Investments are classified as available for sale and recorded at fair value, and
unrealized investment gains and losses are reflected in shareholders' equity.
Investment income is recorded when earned, and capital gains and losses are
recognized when investments are sold. Investments are reviewed periodically to
determine if they have suffered an impairment of value that is considered other
than temporary. If investments are determined to be impaired, a capital loss is
recognized at the date of determination.
Testing for impairment of investments also requires significant management
judgment. The identification of potentially impaired investments, the
determination of their fair value and the assessment of whether any decline in
value is other than temporary are the key judgment elements. The discovery of
new information and the passage of time can significantly change these
judgments. Revisions of impairment judgments are made when new information
becomes known, and any resulting impairment adjustments are made at that time.
The current economic environment and recent volatility of securities markets
increase the difficulty of determining fair value and assessing investment
impairment. The same influences tend to increase the risk of potentially
impaired assets.
Trenwick America Corporation seeks to match the maturities of invested assets
with the payment of expected liabilities. By doing this, Trenwick America
Corporation attempts to make cash available as payments become due. If a
significant mismatch of the maturities of assets and liabilities were to occur
and Trenwick America Corporation had to liquidate investments prior to their
maturity, it may incur realized losses and, the effect on Trenwick America
Corporation's results of operations could be significant. Also see Note 5 of
Notes to the Consolidated Financial Statements.
Deferred Income Taxes
Trenwick America Corporation recorded as an asset as of December 31, 2001 $65.8
million of net deferred income taxes. The net deferred income taxes represent
the expected future tax benefit of losses previously incurred by Trenwick
America Corporation. The future tax benefit must be used on or before 2021. In
order to maintain its net deferred income taxes as an asset, Trenwick America
Corporation is required to determine that it is more likely than not that it
will be able to realize the future tax benefit of its previously incurred
losses. In making this determination, Trenwick America Corporation is required
to make estimates as to its future income. If Trenwick America Corporation's
estimates of its future income were to be revised and it became more likely than
not that Trenwick America Corporation would not be able to realize the future
tax benefit of its previously incurred losses, the effect on Trenwick America
Corporation's results of operations could be significant. Also see Note 7 of
Notes to the Consolidated Financial Statements.
Quantitative and Qualitative Disclosure About Market Risk
The following sections address the significant market risks associated with
Trenwick America Corporation's business activities as of December 31, 2001 and
2000. Trenwick America Corporation's primary market risk exposures are:
o foreign currency exchange risk;
o interest rate risk; and
o equity price risk.
With respect to Trenwick America Corporation's investment portfolio, the risk
management strategy is to place its investments with high credit quality issuers
and to limit the amount of credit exposure with respect to particular ratings
categories and any one issuer. Trenwick America Corporation selects
11
investments with characteristics such as duration, yield, currency and liquidity
to reflect the underlying characteristics of related estimated claim
liabilities.
As of December 31, 2001, Trenwick America Corporation's exposure to high yield
investments was minimal. While these investments are more susceptible to credit
risk, their total market value represents 5% of total investments and cash and
therefore management believes that the exposure to credit risk is not material.
Trenwick America Corporation has no derivatives and its investments do not
contain terms that may result in potential losses due to leverage.
The borrowings of Trenwick America Corporation are summarized in note 6 to the
financial statements.
Foreign Currency Exchange Rate Risk
Foreign currency risk is the risk that Trenwick America Corporation will incur
economic losses due to adverse changes in foreign currency exchange rates. This
risk arises from Trenwick America Corporation's debt obligations and securities
denominated in foreign currencies. Trenwick America Corporation's debt
obligations denominated in foreign currencies were $13.0 million and $13.4
million at year end 2001 and 2000, respectively.
Trenwick America Corporation's reinsurance operations have exposures to
movements in various currencies, particularly the British pound sterling and the
Canadian dollar, as some of its business is denominated in those currencies.
Therefore, changes in currency exchange rates affect Trenwick America
Corporation's balance sheet, statement of operations and statement of cash
flows. This exposure is somewhat mitigated by the fact that premiums received
are invested in the same currency portfolios, to partially offset related unpaid
claims and claims expense liabilities denominated in the same currency.
Management estimates that a 10% immediate unfavorable change in each of the
foreign currency exchange rates to which Trenwick America Corporation is exposed
at year end 2001 would have decreased the fair value of Trenwick America
Corporation's foreign denominated net liabilities by approximately $1.0 million.
At year end 2000, the same 10% shift in foreign currency exchange rates would
have resulted in a potential loss in fair value of the foreign denominated net
assets of approximately $2.8 million.
Interest Rate Risk
Trenwick America Corporation's fixed maturity investments and indebtedness are
subject to interest rate risk. Increases and decreases in prevailing interest
rates generally translate into decreases and increases in the fair value of
fixed maturity investments and the interest payable on Trenwick America
Corporation's outstanding variable rate debt. Additionally, the fair value of
interest rate sensitive instruments may be affected by the creditworthiness of
the issuer, a prepayment option, relative values of alternative investments,
liquidity of the investment and other general market conditions.
Trenwick America Corporation monitors its sensitivity to interest rate risk by
evaluating the change in its financial assets and liabilities relative to
hypothetical increases and decreases in interest rates. It is assumed that the
changes occur immediately and uniformly to each category of instrument
containing interest rate risks. The hypothetical changes in market interest
rates reflect what could be deemed best or worst case scenarios. Significant
variations in market interest rates could produce changes in the timing of
repayments due to prepayment options available. The fair value of such
instruments could be affected and therefore actual results might differ from
those reflected in this summary.
A 100 basis point increase in market interest rates would have resulted in an
estimated pre-tax loss in the fair value of these instruments of $33.9 million
and $31.1 million at year end 2001 and 2000,
12
respectively. Similarly, a 100 basis point decrease in market interest rates
would have resulted in an estimated pre-tax gain in the fair value of these
instruments of $29.8 million and $28.2 million at year end 2001 and 2000,
respectively.
Trenwick America Corporation has not experienced unrealized gains or losses to
the extent indicated above.
Equity Price Risk
The carrying values of investments subject to equity price risks are based on
quoted market prices or management's estimates of fair value as of the balance
sheet date. Market prices are subject to fluctuation and, consequently, the
amount realized in the subsequent sale of an investment may significantly differ
from the reported market value. Fluctuation in the market price of a security
may result from perceived changes in the underlying economic characteristics of
the investee, the relative price of alternative investments and general market
conditions. Furthermore, amounts realized in the sale of a particular security
may be affected by the relative quantity of the security being sold.
Of Trenwick America Corporation's $24.2 million equity portfolio at year end
2001, $14.6 million were subject to equity risk. Trenwick America Corporation's
potential exposure on equity securities is estimated in terms of an immediate
10% drop in equity prices across all equity securities holdings from those
prevailing at year end 2001 which would have resulted in a $1.5 million loss. At
year end 2000, the same drop in equity prices would have resulted in an $8.3
million loss.
The fair value estimates shown are based on the composition of the equity
security portfolio at year-end and these exposures will change as a result of
ongoing portfolio activities in response to management's assessment of changing
market conditions and available investment opportunities.
The above analyses do not take into account any correlation among foreign
currency exchange rates, or any correlation among various markets (i.e., the
fixed income markets and foreign exchange and equity markets). Trenwick America
Corporation's actual experience may differ from the results noted above due to
the correlation assumptions utilized, or if events occur that were not included
in the methodology, such as significant liquidity or market events. The
selection of the amount of increases or decreases in currency exchange rates,
interest rates and equity values in the above analyses should not be construed
as a prediction of future market events, but rather, to illustrate the potential
impact of such events.
Accounting Standards
In July 2001, the Financial Accounting Standards Board issued a statement
covering goodwill and other intangible assets, which is required to be adopted
at the beginning of 2002. The statement requires that the goodwill be tested for
impairment under either market value or cash flow tests and any impairment to be
recorded as of January 1, 2002 as the cumulative effect of an accounting change.
The impairment tests must be completed by the reporting of quarterly results of
operations as of June 30, 2002. We will conduct impairment tests on the goodwill
balance and implement the statement during the first or second quarter of 2002.
Goodwill amortization was $1.5 million in 2001.
Effective January 1, 2001, Trenwick America Corporation implemented SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The adoption of SFAS No. 133 had no significant
impact on Trenwick America Corporation's consolidated financial statements.
13
Safe Harbor Disclosure
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, Trenwick America Corporation sets forth below
cautionary statements identifying important risks and uncertainties that could
cause its actual results to differ materially from those that might be
projected, forecasted or estimated in its "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, made by or on behalf of Trenwick America
Corporation in this Annual Report on Form 10-K and in press releases, written
statements or documents filed with the Securities and Exchange Commission, or in
its communications and discussions with investors and analysts in the normal
course of business through meetings, phone calls and conference calls. Such
statements may include, but are not limited to, projections of premium revenue,
investment income, other revenue, losses, expenses, earnings (including earnings
per share), cash flows, plans for future operations, common shareholders' equity
(including book value per share), investments, financing needs, capital plans,
dividends, plans relating to products or services of Trenwick America
Corporation and estimates concerning the effects of litigation or other
disputes, as well as assumptions for any of the foregoing and generally
expressed with words such as "believes," "estimates," "expects," "anticipates,"
"plans," "projects," "forecasts," "goals," "could have," "may have," and similar
expressions.
Forward-looking statements involve known and unknown risks and uncertainties,
which may cause Trenwick America Corporation's results to differ materially from
such forward-looking statements. These risks and uncertainties include, but are
not limited to, the following:
- Changes in the level of competition in the domestic and international
reinsurance or primary insurance markets that affect the volume or
profitability of Trenwick America Corporation's property/casualty
business. These changes include, but are not limited to, changes in
the intensity of price competition, the entry of new competitors,
existing competitors exiting the market and the development of new
products by new and existing competitors:
- Changes in the demand for reinsurance, including changes in ceding
companies' risk retentions and changes in the demand for excess and
surplus lines insurance coverages;
- Changes in reinsurance purchasing and distribution patterns;
- The ability of Trenwick America Corporation to execute its strategies
in its property/casualty operations;
- Catastrophe losses in Trenwick America Corporation's property/casualty
businesses;
- Adverse development on property/casualty claims and claims expense
liabilities related to business written in prior years, including, but
not limited to, evolving case law and its effect on environmental and
other latent injury claims, changing government regulations, newly
identified toxins, newly reported claims, new theories of liability,
or new insurance and reinsurance contract interpretations;
- Changes in inflation that affect the profitability of Trenwick America
Corporation's current property/casualty business or the adequacy of
its property/casualty claims and claims expense liabilities and policy
benefit liabilities related to prior years' business;
- Changes in Trenwick America Corporation's property/casualty
retrocessional arrangements;
- Lower than estimated retrocessional or reinsurance recoveries on
unpaid losses, including, but not limited to, losses due to a decline
in the creditworthiness of Trenwick America Corporation's
retrocessionaires or reinsurers;
- Increases in interest rates, which may cause a reduction in the market
value of Trenwick America Corporation's fixed income portfolio, and
its common shareholders' equity;
- Decreases in interest rates which may cause a reduction of income
earned on new cash flow from operations and the reinvestment of the
proceeds from sales or maturities of existing investments;
- A decline in the value of Trenwick America Corporation's equity
investments;
- Changes in the composition of Trenwick America Corporation's
investment portfolio;
- Credit losses on Trenwick America Corporation's investment portfolio;
14
- Adverse results in litigation matters, including, but not limited to,
litigation related to environmental, asbestos and other potential mass
tort claims;
- The impact of mergers and acquisitions;
- Gains or losses related to changes in foreign currency exchange rates;
- Changes in Trenwick America Corporation's capital needs;
- The ability of Trenwick America Corporation to refinance or repay its
outstanding indebtedness; and
- Changes in the financial strength ratings assigned to Trenwick America
Corporation and its operating subsidiaries.
In addition to the factors outlined above that are directly related to Trenwick
America Corporation's business, it is also subject to general business risks,
including, but not limited to, adverse state, federal or foreign legislation and
regulation, adverse publicity or news coverage, changes in general economic
factors and the loss of key employees.
The facts set forth above should be considered in connection with any
forward-looking statement contained in this Annual Report on Form 10-K. The
important factors that could affect such forward-looking statements are subject
to change, and Trenwick America Corporation does not intend to update any
forward-looking statement or the foregoing list of important factors. By this
cautionary note Trenwick America Corporation intends to avail itself of the safe
harbor from liability with respect of forward-looking statements provided by
Section 27A and Section 21E referred to above.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
This information called for by this item can be found under the caption
"Quantitative and Qualitative Disclosure About Market Risk" in Management's
Discussion and Analysis of Financial Condition and Results of Operations above
and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
See the Consolidated Financial Statements and Notes thereto and the Schedules on
pages F-1 through F-28 and S-1 through S-6 included in Part IV, Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Items 10-13. Information required by Items 10 through 13 has been omitted
because Trenwick America Corporation meets the conditions set forth in General
Instruction I (1)(a) and (b) of Form 10-K and is therefore filing this Annual
Report on Form 10-K in the reduced disclosure format.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
1. Financial statements:
Report of Independent Accountants - (Page F-1).
15
Consolidated Balance Sheet at December 31, 2001 and 2000. (Page F-2).
Consolidated Statements of Operations, Comprehensive Income and
Changes in Common Stockholder's Equity for the years ended December
31, 2001, 2000 and 1999. (Page F-3).
Consolidated Statement of Cash Flows for the years ended December 31,
2001, 2000 and 1999. (Page F-4).
Notes to Consolidated Financial Statements. (Pages F-5 through F-28).
2. Financial statement schedules required to be filed by Item 8 of this
Form:
Schedule
Page Number
---- --------
S-1 Report of Independent Accountants on Financial
Statement Schedules.
S-2 II Condensed Financial Information of Registrant.
S-5 III Supplementary Insurance Information.
S-6 V Valuation and Qualifying Accounts.
(b) Exhibits
3.1 Certificate of Incorporation of Trenwick America Corporation.
Incorporated by reference to Exhibit 3.1 to Trenwick America
Corporation's Current Report on Form 8-K filed on November 16, 2000
(File No. 0-31967).
3.2 By-Laws of Trenwick America Corporation. Incorporated by reference to
Exhibit 3.2 to Trenwick America Corporation's Current Report on Form
8-K (File No.0-31967).
4.1 (a) Indenture dated as of January 31, 1997, between The Chase
Manhattan Bank and Trenwick Group Inc. Incorporated by reference
to Exhibit 4.2(a) to Trenwick Group Inc.'s Annual Report on Form
10-K for the year ended December 31, 1996 (File No. 0-14737).
(b) Amended and Restated Declaration of Trust of Trenwick Capital
Trust I dated as of January 31, 1997. Incorporated by reference
to Exhibit 4.2(b) to Trenwick Group Inc.'s Annual Report on Form
10-K for the year ended December 31, 1996 (File No. 0-14737).
(c) Exchange Capital Securities Guarantee Agreement dated as of July
25, 1997, between Trenwick Group Inc. and The Chase Manhattan
Bank, as Trustee. Incorporated by reference to Exhibit 4.7 to
Trenwick Group Inc.'s Registration Statement on Form S-4 (File
No. 333-28707).
4.2 First Supplemental Indenture, dated as of September 27, 2000, among
Trenwick Group Inc., Trenwick America Corporation and The Chase
Manhattan Bank, as Trustee, with respect to the 8.82% Junior
Subordinated Deferrable Interest Debentures. Incorporated by
16
reference to Exhibit 4.2 to Trenwick America Corporation's Current
Report on Form 8-K, filed on November 16, 2000 (File No. 0-31967).
4.3 Indenture dated as of March 27, 1998 between Trenwick and The First
National Bank of Chicago, as Trustee, with respect to Trenwick Group
Inc.'s $75 million principal amount of 6.7% Senior Notes due April 1,
2003. Incorporated by reference to Exhibit 4.2 to Trenwick Group
Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31,
1998 (File No. 1-15389).
4.4 First Supplemental Indenture, dated as of September 27, 2000, among
Trenwick Group Inc., Trenwick America Corporation, and Bank One Trust
Company, N.A., as successor to First National Bank of Chicago, as
Trustee, with respect to the $75 million principal amount of 6.7%
Senior Notes due April 1, 2003. Incorporated by reference to Exhibit
4.4 to Trenwick America Corporation's Current Report on Form 8-K,
filed on November 16, 2000 (File No. 0-31967).
4.5 Indenture, dated as of December 1, 1995, between Chartwell Re
Corporation, as the successor to Piedmont Management Company Inc., and
Fleet Bank, as Trustee, for the Contingent Interest Notes due June 30,
2006. Incorporated by reference to Exhibit 4.5 to Chartwell Re
Corporation's Registration Statement on Form S-1 (File No. 333-678).
4.6 First Supplemental Indenture, dated as of December 13, 1995, among
Piedmont Management Company, Chartwell Re Corporation and Fleet Bank,
as Trustee under the Contingent Interest Notes due June 30, 2006.
Incorporated by reference to Exhibit 4.6 to Chartwell Re Corporation's
Registration Statement on Form S-1 (File No. 333-678).
4.7 Second Supplemental Indenture, dated as of October 27, 1999, among
Chartwell Re Corporation, Trenwick Group Inc. and State Street Bank
and Trust Company, as successor to Fleet Bank, as Trustee, with
respect to the Contingent Interest Notes due June 30, 2006.
Incorporated by reference to Exhibit 4.7 to Trenwick America
Corporation's Current Report on Form 8-K, filed on November 16, 2000
(File No. 0-31967).
4.8 Third Supplemental Indenture, dated as of September 27, 2000, among
Trenwick Group Inc., Trenwick America Corporation and State Street
Bank and Trust Company, as successor to Fleet Bank, as Trustee under
the contingent Interest Notes due June 30, 2006. Incorporated by
reference to Exhibit 4.8 to Trenwick America Corporation's Current
Report on Form 8-K, filed on November 16, 2000 (File No. 0-31967).
10.1 Amended and Restated Credit Agreement, dated as of November 24, 1999
and Amended and Restated as of September 27, 2000, among Trenwick
America Corporation, Trenwick Holdings Limited, various lending
institutions, First Union National Bank, as Syndication Agent, Fleet
National Bank, as Documentation Agent, and Chase Manhattan Bank, as
Administrative Agent. Incorporated by reference to Exhibit 10.1 to
Trenwick Group Ltd,'s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000 (File No. 1-16089).
10.2 First Amendment and Waiver to the Credit Agreement, dated as of June
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 The Chase Manhattan Bank, as
Administrative Agent. Incorporated by reference to Exhibit 10.1 to
Trenwick America Corporation's First Amendment to Quarterly Report on
Form 10-Q, filed on January 11, 2002 (File No. 0-31967).
17
10.3 First Amendment to the Holdings Guaranty, dated as of June 13, 2001,
among Trenwick Group Ltd. and the lending institutions from time to
time party to the Credit Agreement. Incorporated by reference to
Exhibit 10.2 to Trenwick America Corporation's First Amendment to
Quarterly Report on Form 10-Q, filed on January 11, 2002 (File No.
0-31967).
10.4 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. Incorporated by reference to Exhibit 10.3 to
Trenwick America Corporation's First Amendment to Quarterly Report on
Form 10-Q, filed on January 11, 2002 (File No. 0-31967).
10.5 Second Amendment to the Holdings Guaranty, dated as of November 13,
2001, among Trenwick Group Ltd. and the lending institutions from time
to time party to the Credit Agreement. Incorporated by reference to
Exhibit 10.4 to Trenwick America Corporation's First Amendment to
Quarterly Report on Form 10-Q, filed on January 11, 2002 (File No.
0-31967).
10.6 Office lease between Trenwick America Corporation and EOP-Canterbury
Green, L.L.C. dated as of January 29, 1998, with respect to office
space in Stamford, Connecticut. Incorporated by reference to Exhibit
10.16 to Trenwick Group Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1997 (File No. 1-15389).
10.7 First Amendment dated as of March 31, 1998, to office lease between
Trenwick America Corporation and EOP-Canterbury Green L.L.C. dated
January 29, 1998. Incorporated by reference to Exhibit 10.11 to
Trenwick Group Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1998 (File No. 1-15389).
10.8 Coinsured Aggregate Excess of Loss Reinsurance Agreement between
Trenwick America Reinsurance Corporation and Centre Reinsurance
Company of New York. Incorporated by reference to Exhibit 10.28 to
Trenwick Group Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1994 (File No. 0-14737).
10.9 Aggregate Excess of Loss Ratio Cover between Trenwick America
Reinsurance Corporation and Continental Casualty Company. Incorporated
by reference to Exhibit 10.22 to Trenwick Group Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1995 (File No. 0-14737).
10.10 1996 Coinsured Aggregate Excess of Loss Reinsurance Agreement between
Trenwick America Reinsurance Corporation and Centre Reinsurance
Company of New York and CNA Re. Incorporated by reference to Exhibit
10.33 to Trenwick Group Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1996 (File No. 0-14737).
10.11 First and Second Coinsured Aggregate Excess of Loss Reinsurance
Agreement between Trenwick America Reinsurance Corporation and Centre
Reinsurance Company of New York and CNA Re. Incorporated by reference
to Exhibit 10.31 to Trenwick Group Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1997 (File No. 1-15389).
10.12 1998 Coinsured Aggregate Excess of Loss Reinsurance Agreement between
Trenwick America Reinsurance Corporation and Centre Reinsurance
Company of New York and
18
National Union. Incorporated by reference to Exhibit 10.27 to Trenwick
Group Inc.'s Annual Report on Form 10-K for the year ended December
31, 1998 (File No. 1-15389).
10.13 1999 Coinsured Aggregate Excess of Loss Reinsurance Agreement between
Trenwick America Reinsurance Corporation and Centre Insurance Company
and National Union. Incorporated by reference to Exhibit 10.39 to
Trenwick Group Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1999 (File No. 1-15389).
10.14 Aggregate Excess of Loss Reinsurance Agreement, dated as of October
27, 1999, by and between Chartwell Reinsurance Company, Dakota
Specialty Insurance Company, The Insurance Corporation of New York and
Drayton Company Limited, inclusive of corporate capital support of
London underwriting operations, and London Life and Casualty
Reinsurance Corporation and Scandinavian Reinsurance Company, Ltd.
Incorporated by reference to Exhibit 10.40 to Trenwick Group Inc.'s
Annual Report on Form 10-K for the year ended December 31, 1999 (File
No. 1-15389).
12.1 Computation of Ratios.
23.1 Consent of PricewaterhouseCoopers LLP
(b) Reports on Form 8-K
Trenwick America Corporation did not file any Current Reports on Form 8-K
during the fourth quarter of 2001.
19
SIGNATURES
Pursuant to the Requirements of Section 13 or 15(d) of 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 AMERICA CORPORATION
(Registrant)
By /s/ Stephen H. Binet
-----------------------------------
Stephen H. Binet
President, Chief Executive Officer,
and Director
Dated: March 18, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/Stephen H. Binet President, Chief Executive March 18, 2002
- ------------------------- Officer, and Director
Stephen H. Binet
/s/Alan L. Hunte Executive Vice President, March 18, 2002
- ------------------------- Chief Accounting Officer,
Alan L. Hunte and Director
/s/James F. Billett, Jr. Chairman of the Board March 18, 2002
- -------------------------
James F. Billett, Jr.
/s/Paul Feldsher Director March 18, 2002
- -------------------------
Paul Feldsher
/s/Robert A. Giambo Director March 18, 2002
- -------------------------
Robert A. Giambo
/s/James E. Roberts Director March 18, 2002
- -------------------------
James E. Roberts
20
Report of Independent Accountants
To the Board of Directors
and Stockholder of
Trenwick America Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, comprehensive income and changes in
common stockholder's equity and of cash flows present fairly, in all material
respects, the financial position of Trenwick America Corporation and its
subsidiaries at December 31, 2001 and December 31, 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 27, 2002
F-1
Trenwick America Corporation
Consolidated Balance Sheet
(Amounts expressed in thousands of United States dollars)
December 31, 2001 and 2000
2001 2000
---------- ----------
ASSETS:
Debt securities available for sale, at fair value $1,054,518 $1,006,161
Equity securities, at fair value 24,164 103,641
Cash and cash equivalents 128,522 133,395
Accrued investment income 12,685 14,006
Premiums receivable 159,721 158,110
Reinsurance recoverable balances, net 544,202 511,163
Prepaid reinsurance premiums 83,980 63,879
Deferred policy acquisition costs 45,403 36,267
Due from parent and affiliates 68,260 57,952
Net deferred income taxes 65,757 63,598
Goodwill 52,119 33,976
Other assets 89,774 102,874
---------- ----------
Total assets $2,329,105 $2,285,022
========== ==========
LIABILITIES:
Unpaid claims and claims expenses $1,412,104 $1,396,504
Unearned premium income 239,004 177,174
Reinsurance balances payable 42,424 26,401
Indebtedness 288,878 283,289
Due to affiliates 50,434 75,303
Other liabilities 33,939 38,385
---------- ----------
Total liabilities 2,066,783 1,997,056
---------- ----------
MINORITY INTEREST:
Mandatorily redeemable preferred capital securities
of subsidiary trust holding solely junior
subordinated debentures of Trenwick
America Corporation 86,973 87,059
---------- ----------
COMMON STOCKHOLDER'S EQUITY
Common stock and additional paid in capital 99,353 114,847
Retained earnings 57,104 76,629
Accumulated other comprehensive income 18,892 9,431
---------- ----------
Total common stockholder's equity 175,349 200,907
---------- ----------
Total liabilities, minority interest
and common stockholder's equity $2,329,105 $2,285,022
========== ==========
The accompanying notes are an integral part of these statements.
F-2
Trenwick America Corporation
Consolidated Statement of Operations, Comprehensive Income
and Changes in Common Stockholder's Equity
(Amounts expressed in thousands of United States dollars)
Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
--------- --------- ---------
Revenues:
Net premiums earned $ 380,288 $ 310,791 $ 187,885
Net investment income 68,041 66,601 40,291
Net realized investment gains (losses) (1,866) 6,768 971
Other income 2,819 2,823 569
--------- --------- ---------
Total revenues 449,282 386,983 229,716
--------- --------- ---------
Expenses:
Claims and claims expenses incurred 305,488 276,043 147,182
Policy acquisition costs 122,213 92,980 62,550
Underwriting expenses 18,890 20,730 17,694
General and administrative expenses 2,562 18,776 5,990
Goodwill amortization 1,512 355 --
Interest expense and subsidiary
preferred share dividends 31,336 35,769 18,550
Foreign currency losses 1,434 1,831 --
--------- --------- ---------
Total expenses 483,435 446,484 251,966
--------- --------- ---------
Loss before income taxes (34,153) (59,501) (22,250)
Income taxes (benefit) (14,628) (22,529) (12,355)
--------- --------- ---------
Net loss (19,525) (36,972) (9,895)
Net unrealized investment gains (losses) 11,043 14,713 (25,154)
Foreign currency translation adjustments (1,582) 1,466 (1,458)
--------- --------- ---------
Comprehensive loss $ (10,064) $ (20,793) $ (36,507)
========= ========= =========
Changes in common stockholder's equity:
Common stockholder's equity, beginning of year $ 200,907 $ 214,482 $ 208,332
Net capital transactions with affiliates (13,486) (21,076) 88,757
Adjustments related to business combination (2,008) 37,794 --
Comprehensive loss (10,064) (20,793) (36,507)
Common share dividends -- (9,500) (46,100)
--------- --------- ---------
Common stockholder's equity, end of year $ 175,349 $ 200,907 $ 214,482
========= ========= =========
The accompanying notes are an integral part of these statements.
F-3
Trenwick America Corporation Consolidated Statement of Cash Flows
(Amounts expressed in thousands of United States dollars)
Years ended December 31, 2001, 2000 and 1999
2001 2000 1999
--------- --------- ---------
Net income (loss) $(19,525) $(36,972) $(9,895)
Adjustments to reconcile net income (loss) to net
cash from (for) operating activities:
Contingent interest note adjustments (8,700) (4,675) 642
Investment premium amortization 389 633 1,832
Deferred income taxes (25,753) (289) 5,056
Net realized investment gains (losses) 1,866 (6,768) (971)
Unrealized loss (gain) on foreign exchange (1,040) 1,883 --
Uncollectable accounts provision 3,320 11,666 7,779
Other fair value adjustment accretion 458 365 --
Loss sharing agreement reallocation (28,570) 17,756 10,814
Other 760 (6,859) (4,803)
Changes in assets and liabilities, net of effects from
purchase of subsidiary:
Accrued investment income 1,321 3,847 1,354
Premiums receivable (1,611) (4,398) 59,995
Deferred policy acquisition costs (9,136) 1,704 7,032
Other assets 18,806 37,901 (58,897)
Unpaid claims and claims expenses, net of
reinsurance recoverable balances (17,440) (76,962) (61,170)
Unearned premium income, net of prepaid
reinsurance premiums 41,730 (10,351) (15,944)
Other liabilities 13,143 (26,704) (7,576)
--------- --------- ---------
Cash for operating activities (29,982) (98,223) (64,752)
--------- --------- ---------
Investing activities:
Debt and equity securities sales and maturities 646,048 481,853 272,390
Debt and equity securities purchases (599,566) (327,491) (134,381)
Cash acquired in pooling business combination -- -- 34,131
Other investing activities (5,320) (1,552) 8,424
--------- --------- ---------
Cash from investing activities 41,162 152,810 180,564
--------- --------- ---------
Financing activities:
Indebtedness proceeds 14,000 24,000 --
Indebtedness costs (1,475) (1,834) --
Indebtedness repayments -- (41,101) (48,417)
Affiliate loan proceeds (repayments) (33,677) 57,288 54,855
Affiliate capital transactions, net 5,099 (47,901)
Dividend payments -- (9,500) (46,100)
Other financing activities, net -- -- (9,056)
--------- --------- ---------
Cash for financing activities (16,053) (19,048) (48,718)
--------- --------- ---------
Change in cash and cash equivalents (4,873) 35,539 67,094
Cash and cash equivalents, beginning of year 133,395 97,856 30,762
--------- --------- ---------
Cash and cash equivalents, end of year $128,522 $133,395 $97,856
========= ========= =========
F-4
TRENWICK AMERICA CORPORATION
Notes to Consolidated Financial Statements
(Amounts expressed in thousands of United States dollars except share data)
Years Ended December 31, 2001, 2000 and 1999
Note 1 Organization
Organization Trenwick America Corporation is a United States holding
and Basis company whose principal subsidiaries underwrite specialty
of Presentation insurance and reinsurance. Trenwick America Corporation's
ultimate parent is Trenwick Group Ltd., which is a publicly
traded Bermuda holding company. Prior to September 27, 2000,
Trenwick America Corporation's parent was Trenwick Group Inc.
On September 27, 2000, Trenwick Group Ltd., a newly formed
company, acquired all of the assets and liabilities of
Trenwick Group Inc. and all of the issued and outstanding
common shares of LaSalle Re Holdings Limited and LaSalle Re
Limited in exchange for Trenwick Group Ltd. common shares.
Trenwick Group Inc. then distributed the shares received from
Trenwick Group Ltd. to its shareholders in a liquidating
distribution. Substantially all of Trenwick Group Inc.'s
assets and liabilities were transferred from Trenwick Group
Inc. to Chartwell Re Holdings Corporation (then a
wholly-owned subsidiary of Trenwick Group Inc.) immediately
prior to the Trenwick/LaSalle business combination. Chartwell
Re Holdings Corporation then sold most of its United Kingdom
and Bermuda subsidiaries to Trenwick Group Inc. at fair
value. Immediately after the Trenwick/LaSalle business
combination, Chartwell Re Holdings Corporation merged with
and into Trenwick America Corporation, with Trenwick America
Corporation as the surviving corporation. As a result of such
merger, Trenwick America Corporation acquired Chartwell
Insurance Company, The Insurance Corporation of New York and
Dakota Specialty Insurance Company. The Trenwick/LaSalle
business combination and its related transactions were
completed on September 27, 2000. On October 27, 1999,
Trenwick Group Inc. became the ultimate parent of Chartwell
Insurance Company, The Insurance Corporation of New York and
Dakota Specialty Insurance Company through its acquisition of
Chartwell Re Corporation. More details of these business
combinations are disclosed in Note 2.
Trenwick America Corporation's principal subsidiaries
underwrite specialty insurance and reinsurance through two
business platforms: Trenwick America Reinsurance Corporation,
which underwrites treaty reinsurance on United States
property and casualty risks, including reinsurance business
previously written by Chartwell Re Corporation; and
Canterbury Financial Group Inc. which underwrites specialty
insurance through The Insurance Corporation of New York,
Dakota Specialty Insurance Company and Chartwell Insurance
Company. More details on business segments are disclosed in
Note 3.
Basis of Presentation
We include the accounts of Trenwick America Corporation and
its subsidiaries in these financial statements after
elimination of significant intercompany accounts and
transactions. We have reclassified certain items in prior
year financial statements to conform to current presentation.
We prepared these financial statements in conformity with
accounting principles that are generally accepted in the
United States of America, sometimes referred to as U.S. GAAP.
In preparing these financial statements, we are required to
make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of
revenues and expenses during the reporting periods. Actual
amounts will differ from these estimates.
F-5
As discussed in Note 2, the business combination between
LaSalle Re Holdings Limited and Trenwick Group Inc. was
accounted for as a purchase by LaSalle Re Holdings Limited of
the minority interest in LaSalle Re Limited and of Trenwick
Group Inc. Accordingly, the assets and liabilities of
Trenwick America Corporation have been adjusted to reflect
their fair value, after consideration of the purchase price,
as of September 27, 2000. In addition, a portion of the
goodwill resulting from the business combination has been
pushed down to Trenwick America Corporation and was reflected
in the consolidated balance sheet.
As a result of the reorganization described above, the United
Kingdom and Bermuda subsidiaries of Trenwick Group Inc., were
sold to Trenwick Group Ltd., and the remaining net
liabilities of Trenwick Group Inc., consisting primarily of
indebtedness and preferred capital securities, were assumed
by Trenwick America Corporation. These financial statements
present the reorganization at historical cost in a manner
similar to a pooling of interests business combination.
Accordingly, the accompanying financial statements at year
end 2001 and for the 2000 and 1999 years have been restated
to reflect the combined operating results, cash flows, and
financial position of the United States operations of
Trenwick Group Inc. for all periods in which the companies
were under the common control of Trenwick Group Inc.
Other significant accounting policies are presented in
italics within the appropriate footnotes.
Note 2 Trenwick/LaSalle Business Combination
Business On December 19, 1999, LaSalle Re Holdings Limited, LaSalle
Combinations Re Limited and Trenwick Group Inc. signed a definitive
agreement to combine under a new holding company, Trenwick
Group Ltd. On September 27, 2000, following shareholder and
regulatory approval, the newly formed Trenwick Group Ltd.
issued common shares on a one-for-one, tax-free basis to
the former shareholders of LaSalle Re Holdings Limited, the
minority shareholders of LaSalle Re Limited, then a 77.5%
owned subsidiary of LaSalle Re Holdings Limited, and the
former shareholders of Trenwick Group Inc.
We accounted for the Trenwick/LaSalle business combination as
a purchase by LaSalle Re Holdings Limited of the minority
interest in LaSalle Re Limited and of Trenwick Group Inc.
Under the purchase basis of accounting, we allocated the
purchase price to the identifiable assets acquired and
liabilities assumed, based on the estimated fair values at
the date of acquisition and recorded the unallocated excess
as goodwill. A portion of the goodwill resulting from the
business combination ($33,976 at December 31, 2000) was
pushed down to Trenwick America Corporation and was reflected
in the consolidated balance sheet. During the 2001 year, we
refined our estimates used in the calculation of the fair
value of the net assets acquired in this business
combination, principally for the deferred income tax asset,
and recorded an additional $2,008 of goodwill has been pushed
down to the consolidated balance sheet of Trenwick America
Corporation. Pending changes in accounting for goodwill and
its amortization are described in Note 11.
Trenwick Group Inc./Chartwell Re Corporation Merger
On October 27, 1999, Trenwick Group Inc. issued common shares
in exchange for all of the common shares of Chartwell Re
Corporation, a publicly held insurer and reinsurer. The
merger of Chartwell Re Corporation with and into Trenwick
Group Inc. was accounted for as a purchase by Trenwick Group
Inc. of Chartwell Re Corporation, and the $153,315 excess of
the purchase price ($231,326) over the fair value of
Chartwell Re Corporation's identifiable net assets ($78,011)
was recorded as goodwill. On September 27, 2000, the
unamortized goodwill resulting from this transaction was
eliminated in connection with the Trenwick/LaSalle business
combination.
F-6
Note 3 Trenwick America Corporation conducts its specialty insurance
Segment and reinsurance business in the following two business
Information segments:
o Treaty reinsurance, principally through Trenwick America
Reinsurance Corporation; and
o Specialty insurance, principally through The Insurance
Corporation of New York and Dakota Specialty Insurance
Company
The business segment financial information excludes the
Excess Casualty Reinsurance Association Pool ("ECRA Pool")
runoff. The business segment financial information also
excludes affiliate transactions, the most significant of
which are a reinsurance contract with a U.K. affiliate of
Trenwick America Corporation that writes international
specialty insurance and reinsurance business and a loss
sharing agreement with some of Trenwick America
Corporation's U.K. affiliates, which provides for the
allocation of recoverables from reinsurance purchased in
connection with the Trenwick/Chartwell merger.
Business segment financial information for Trenwick America
Corporation at year end 2001 and 2000 and for each of the
years 2001, 2000, and 1999 follow:
Total assets: 2001 2000
---------- ----------
Treaty reinsurance $1,634,470 $1,782,808
Specialty insurance 572,138 376,994
Unallocated 122,497 125,220
---------- ----------
Total assets $2,329,105 $2,285,022
========== ==========
2001 2000 1999
--------- --------- ---------
Total revenues:
Treaty reinsurance $ 335,867 $ 328,478 $ 217,322
Specialty insurance 97,178 54,758 12,234
Affiliate transactions 10,879 173 --
Unallocated 5,358 3,574 160
--------- --------- ---------
Total revenues $ 449,282 $ 386,983 $ 229,716
========= ========= =========
2001 2000 1999
--------- --------- ---------
Net income (loss)
Treaty reinsurance $ 4,863 $ 7,404 $ 7,473
Specialty insurance 44 2,339 1,680
Affiliate transactions 5,417 (14,817) --
ECRA pool runoff (7,495) -- --
Unallocated interest expense and
subsidiary preferred
share dividends (30,824) (35,540) (18,362)
Other unallocated 8,470 3,642 (686)
--------- --------- ---------
Net loss $ (19,525) $ (36,972) $ (9,895)
========= ========= =========
Revenues from transactions between operating segments, which
are not material, have been eliminated in consolidation.
F-7
Note 4 Premiums
Underwriting We accrue insurance and reinsurance premiums on contracts on
Activities an estimated basis throughout the term of such contracts. For
retrospectively rated and other experience rated reinsurance
contracts, we estimate and accrue premiums based on the
difference between total costs before and after the
experience under the contract (the with-and-without method).
We make premium estimates based on statistical and other data
and record subsequent adjustments in the period in which they
become known. We account for short-duration contracts as
reinsurance when they provide indemnification against loss or
liability relating to insurance risk and as deposits when
they do not.
We earn insurance and reinsurance premiums (net of
reinsurance ceded) on a pro-rata basis over the related
contract period. We record unearned premium income for the
portion of premiums applicable to the unexpired portion of
premium coverage with renewal dates later than year-end. We
compute premium income for direct business and excess of loss
reinsurance using pro-rata methods; for proportional
business, we compute premium income based on reports received
from ceding companies. We record reinsurance premiums as
prepaid expenses and amortize them over the contract period
in proportion to the amount of reinsurance protection
provided. Where the contract provides for return premiums, we
make accruals based on loss experience through the date of
the balance sheet.
The components of premiums written and earned follow:
2001 2000 1999
--------- --------- ---------
Assumed premiums written $ 350,134 $ 338,794 $ 210,921
Direct premiums written 291,433 187,545 38,088
--------- --------- ---------
Gross premiums written 641,567 526,339 249,009
Ceded premiums written (210,160) (221,027) (77,624)
--------- --------- ---------
Net premiums written $ 431,407 $ 305,312 $ 171,385
========= ========= =========
Assumed premiums earned $ 321,882 $ 352,607 $ 255,164
Direct premiums earned 250,047 165,728 10,343
--------- --------- ---------
Gross premiums earned 571,929 518,335 265,507
Ceded premiums earned (191,641) (207,544) (77,622)
--------- --------- ---------
Net premiums earned $ 380,288 $ 310,791 $ 187,885
========= ========= =========
Policy acquisition costs
Policy acquisition costs primarily consist of commissions and
brokerage expenses that vary with, and are primarily related
to, the acquisition of business. We defer and amortize policy
acquisition costs over the period in which the related
premiums are earned. We periodically review deferred policy
acquisition costs to determine that they do not exceed
recoverable amounts after allowing for anticipated investment
income.
The components of policy acquisition costs are as follows:
2001 2000 1999
--------- --------- ---------
Gross policy acquisition costs deferred $ 194,429 $ 156,910 $ 106,617
Ceded policy acquisition costs deferred (63,080) (65,634) (27,119)
--------- --------- ---------
Net policy acquisition costs deferred $ 131,349 $ 91,276 $ 79,498
========= ========= =========
Policy acquisition costs expensed $ 122,213 $ 92,980 $ 62,550
========= ========= =========
Trenwick America Corporation earned commissions on cessions
to retrocessionaires of $152,564, $64,883, and $18,928 for
the 2001, 2000 and 1999 years, respectively.
F-8
Claims and Claims Expenses
We record claims and claims expenses as incurred, at
management's best estimate, in order to match claims and
claims expense costs with premiums over the contract periods.
The amount provided for unpaid claims and claims expenses
consists of any unpaid reported claims and claims expenses
and estimates for incurred but not reported claims and claims
expenses, net of salvage and subrogation. We developed the
estimates for claims and claims expenses incurred but not
reported based on historical claims and claims expense
experience and an actuarial evaluation of expected claims and
claims expense experience. In connection with the
Trenwick/LaSalle business combination, Trenwick America
Corporation adopted LaSalle Re Holdings Limited's policy of
using tabular reserving for workers' compensation indemnity
liabilities that are considered fixed and determinable, and
discounted such reserves using an interest rate of 3.5%.
Insurance liabilities are based on estimates, and the
ultimate liability will vary from our estimates. Adjustments
to these estimates are reflected in income when known.
The components of net claims and claims expenses incurred
follow:
2001 2000 1999
--------- --------- ---------
Gross claims and claims expenses incurred $ 430,702 $ 455,093 $ 268,066
Ceded claims and claims expenses incurred (125,214) (179,050) (120,884)
--------- --------- ---------
Net claims and claims expenses incurred $ 305,488 $ 276,043 $ 147,182
========= ========= =========
F-9
The following table presents a reconciliation of the
beginning and ending balances of net liabilities for unpaid
claims and claims expenses. The gross liabilities for unpaid
claims and claims expenses at period ends are as reflected in
the balance sheet. The net liabilities for unpaid claims and
claims expenses are after deductions for reinsurance
recoverable on unpaid claims and claims expenses, also as
reflected in the balance sheet.
2001 2000 1999
----------- ----------- -----------