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.
Trenwick America Corporation's gross and net premium writings by business segment for 2001, 2000 and 1999 are as follows.
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.
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.
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.
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.
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.
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.
Item 6.
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.
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.
Results of Operations - Years Ended December 31, 2001 and 2000 (monetary amounts in tables expressed in thousands of United States dollars)
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)
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.
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.
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
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
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
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
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):
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):
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.
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
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
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
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,
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.
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;
- 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.
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.
Item 8. Financial Statements and Supplementary Data
See the Consolidated Financial Statements and Notes thereto and the Schedules on pages through and S-1 through S-6 included in Part IV, Item 14.
Item 9.
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.
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).
Consolidated Balance Sheet at December 31, 2001 and 2000. (Page).
Consolidated Statements of Operations, Comprehensive Income and Changes in Common Stockholder's Equity for the years ended December 31, 2001, 2000 and 1999. (Page).
Consolidated Statement of Cash Flows for the years ended December 31, 2001, 2000 and 1999. (Page).
Notes to Consolidated Financial Statements. (Pages through).
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
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).
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
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.
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
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
Trenwick America Corporation Consolidated Balance Sheet (Amounts expressed in thousands of United States dollars) December 31, 2001 and 2000
The accompanying notes are an integral part of these statements.
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
The accompanying notes are an integral part of these statements.
Trenwick America Corporation Consolidated Statement of Cash Flows (Amounts expressed in thousands of United States dollars) Years ended December 31, 2001, 2000 and 1999
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.
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.
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:
Revenues from transactions between operating segments, which are not material, have been eliminated in consolidation.
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:
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.
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:
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.
Unpaid claims and claims expenses at year end 2001 and 2000 includes $11,822 and $24,479 of claims and claims expenses payable, respectively, which are not reflected in the reconciliation of beginning and ending balances of net liabilities for unpaid claims and claims expenses presented above. In addition, the 2001 and 2000 provisions for claims incurred prior to the current year presented in the reconciliation above do not include the benefits of $9,893 and $7,592, respectively related to the reduction of the contingent interest note. Workers' compensation indemnity reserves subject to discounting totaled $3,998 and $3,883 at year end 2001 and 2000, respectively.
In the 2001 year, Trenwick America Corporation recorded a net increase of $12,555 in estimates for claims occurring in prior accident years. The increase in 2001 includes $15,654 of reserve strengthening related to the treaty reinsurance segment's liability business, which was underwritten prior to 2001 and $11,530 related to prior participation in the ECRA Pool. In addition, $13,940 of the loss reserve strengthening related to the specialty program insurance segment. This reserve strengthening was offset in part by a reduction in claims and claims expenses of $28,570 incurred related to a loss sharing agreement with some of Trenwick America Corporation's U.K. affiliates, as described below.
In 2000, the net estimates of prior year loss reserves for Trenwick America Reinsurance Corporation, Chartwell Insurance Company and The Insurance Corporation of New York increased by approximately $13,171, $9,133 and $2,600, respectively. The increases for Trenwick America Reinsurance Corporation and Chartwell Insurance Company's casualty reinsurance business reflect a continued deterioration in market conditions since 1997. The increase for The Insurance Corporation of New York relates primarily to unfavorable development two specialty insurance programs that underwrite casualty and commercial auto business.
In 1999, net estimates of prior year losses increased by approximately $16,189. The increase was due to adverse development of Trenwick America Reinsurance Corporation's reserves for the 1997 and 1998 accident years.
Inflation Inflation raises the cost of economic losses and non-economic damages covered by insurance contracts and, therefore is a factor in determining effective rates of reinsurance. The methods used to estimate individual case reserves and reserves for claims incurred but not yet reported implicitly incorporate the effects of inflation in the projection of ultimate losses. Due to the inherent uncertainties of estimating unpaid claims and claims expenses, actual claims and claims expenses may deviate, perhaps substantially, from estimates reflected in these financial statements. Management believes that its claim estimation methods are reasonable and prudent and that its unpaid claims and claims expenses at year end 2001 are adequate.
Latent Injury and Toxic Tort Claims The balance of unpaid claims and claims expenses also includes provisions for latent injury or toxic tort claims that cannot be estimated with traditional techniques. Due to inconsistent court decisions in federal and state jurisdictions and the wide variation among insureds with respect to underlying facts and coverage, uncertainty exists with respect to these claims as to liabilities of ceding companies and, consequently, reinsurance coverage. With the exception of an insurer acquired in the Trenwick/ Chartwell merger, Trenwick America Corporation's exposure to such latent losses is not expected to be significant due to its relatively recent entry into the reinsurance business, its low historical levels of premium volume prior to the application of exclusions for asbestos and environmental liabilities and its retrocessional programs. To the extent that there is adverse development in that insurer's loss reserves, including its reserves for latent losses, Trenwick America Corporation's obligation under certain of its indebtedness is reduced. More details on that indebtedness are included in Note 6.
The estimate of net unpaid claims and claims expenses for asbestos and environmental claims at year end 2001 and 2000 was $91,050 and $70,547, respectively, comprising gross unpaid claims and claims expenses of $118,688 and $99,474, net of reinsurance recoverable on unpaid claims and claims expenses of $27,638 and $28,927. The above figures include liabilities emanating from Trenwick Group Ltd.'s participation in the ECRA Pool.
Reinsurance We enter into reinsurance and retrocessional agreements to reduce our exposure on individual risks, catastrophic losses and other large losses in all lines of business. We classify reinsurance contracts which do not meet insurance accounting risk transfer requirements as deposits. We treat these deposits as financing transactions and credit or charge with interest income or interest expense to them according to contract terms.
Trenwick America Reinsurance Corporation's reinsurance treaties consist principally of property catastrophe reinsurance treaties. Canterbury Financial Group Inc. purchases specific reinsurance programs for each of the programs underwritten by its insurance companies.
From 1989 to 1999, Trenwick America Reinsurance Corporation purchased aggregate excess of loss ratio treaties from several reinsurers. These facilities provided Trenwick America Reinsurance Corporation with a layer of protection against adverse results from its domestic casualty business in excess of specified loss ratios. Trenwick America Reinsurance Corporation did not purchase an aggregate excess of loss ratio treaty after 1999. Interest expense on funds held under these facilities is recorded as an investment expense, and is included in the funds held offset at year end 2001 and 2000.
At the time of the closing of the Trenwick/Chartwell merger (October 27, 1999), Chartwell Re Corporation purchased a reinsurance policy providing for up to $100,000 in coverage in order to indemnify Trenwick Group Inc. against unanticipated increases in Chartwell Re Corporation's reserves for business written on or before the date the merger was completed. Amounts recoverable under this loss sharing agreement are presented gross in the balance sheet as reinsurance recoverable balances ($91,970 at year end 2001 and 2000) and as miscellaneous accounts receivable, included in other assets ($8,030 at year end 2001 and 2000). The related benefit for losses ceded to the agreement has been reflected as a reduction to claims and claims expenses incurred ($28,570, $27,754 and $35,646 during 2001, 2000 and 1999, respectively) and the benefit related to other underwriting balances was reflected as a reduction to underwriting expenses ($8,030 for 1999). The benefit recognized through income is limited to the extent of any losses incurred by Trenwick America Corporation under the agreement. Any excess benefit from the agreement is directly reflected in net capital transactions with affiliates included in common stockholder's equity. In addition, as part of the merger, Chartwell Re Corporation commuted several aggregate stop-loss contracts.
Reinsurance Recoverable Balances, Net The components of reinsurance recoverable balances, net at year end 2001 and 2000 are as follows:
Reinsurance recoverable balances at year end 2001 and 2000 are net of allowances for doubtful accounts of $17,255 and $14,353, respectively, which includes $12,707 and $10,337 for paid claims and $4,548 and $4,016 for unpaid claims and claims expenses, respectively.
Reinsurance agreements provide for recovery of a portion of certain claims and claims expenses from reinsurers and retrocessionaires. Trenwick America Corporation remains liable in the event that the reinsurer or retrocessionaire is unable to meet its obligations; however, Trenwick America Corporation holds collateral under some of these agreements. Letters of credit, trust accounts and funds withheld in the aggregate amount of $354,011 (including interest) have been arranged in favor of Trenwick America Corporation collateralizing reinsurance recoverables with respect to certain reinsurers and retrocessionaires.
Note 5 Debt and Equity Security Investments Investing We have classified debt securities as "available for sale" Activities and reported them as well as equity securities, at estimated fair value principally using quoted market prices or broker dealer quotes. Included in equity securities are limited partnerships in which we hold greater than a 3% interest, and which are recorded at equity value.
Fair value and amortized cost or cost of debt and equity securities at year end 2001 and 2000 follow:
(1) Amounts represent cost, adjusted for changes in equity of the limited partnerships.
Gross unrealized gains and losses on debt and equity securities at year end 2001 and 2000 follow:
The fair value and amortized cost at year end 2001 are shown below by contractual maturity periods except mortgage-backed and asset-backed securities, which are included in the table based on expected maturity dates. Actual maturities will differ from contractual maturities because borrowers generally have the right to prepay obligations.
Net Investment Income and Net Investment Gains (Losses) We recognize investment income, consisting principally of interest and dividends, when earned, net of investment expenses. In computing interest income, we amortize premiums and accrete discounts on debt securities utilizing the interest method. We adjust the amortization and accretion for mortgage-backed and other asset-backed securities, when sufficient information exists to estimate the probability and timing of their prepayments, to the amount that would have existed had the new effective yield been applied since the acquisition of the security. We classify imputed interest on the funds held offset to reinsurance recoverable in investment expense.
We generally limit investments in debt securities that are rated below investment grade, as these investments are subject to a higher degree of credit risk than investment grade securities. We monitor the creditworthiness of the portfolio, including below investment grade securities, and we write down investments when fair values decline for reasons other than changes in interest rates or other perceived temporary conditions. We determine realized gains or losses on disposition of investments on the basis of specific identification.
Sources of net investment income follow:
Net realized gains (losses) on sales of investments and their effect on net income follow:
During 2001 and 1999, Trenwick America Corporation wrote down the fair value of certain debt and equity securities by $3,441 and $5,179, respectively, and reflected the writedown as realized losses of investments to recognize declines in value that were other than temporary. Trenwick America Corporation did not write down the value of any investments during 2000.
Net unrealized gains (losses) on investments and their effect on other comprehensive income (loss) follow:
Net investment gains (losses) included in other comprehensive income (loss) in 2000 are net of fair value adjustments of $1,875 on debt and equity securities recorded in connection with the Trenwick/LaSalle business combination.
Net Unrealized Investment Gains (Losses)
We calculate unrealized investment gains (losses) as the difference between recorded values (fair value) and amortized cost or cost. We include net unrealized investment gains and losses, net of applicable deferred income taxes, in common stockholder's equity as accumulated other comprehensive income.
Components of net unrealized investment gains (losses) at year end 2001 and 2000 follow:
Note 6 Indebtedness and Minority Interest Financing Activities We have recorded indebtedness and other mandatorily redeemable obligations at their fair value at the date of the Trenwick/LaSalle business combination or at principal amounts advanced subsequent thereto. We accrete the discount on these obligations utilizing the interest method. For our contingent interest note obligations, we adjust the principal amount of the notes for any adverse development in the applicable liability for claims and claims expenses.
Carrying value and fair value of indebtedness and minority interest at year end 2001 and 2000 are as follows:
Future Minimum Principal Payments on Indebtedness Future minimum principal payments on indebtedness and minority interest at year end 2001 follow: 2002, $43,883; 2003, $128,635; 2004, $63,386; 2005, $34,131; 2006, $1,000 and thereafter $110,000.
Senior Notes The senior notes, with a par value of $75,000, are due April 1, 2003, and 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 Group Ltd.'s U.S. holding company. Under the terms of the notes, Trenwick America Corporation is not restricted from incurring indebtedness, but is subject to limits on its ability to incur secured indebtedness for borrowed money. Interest on the notes is payable semi-annually at an annual rate of 6.7%; interest charged to operations is at the imputed rate of 7.9%.
In connection with the Trenwick/Chartwell merger as discussed in Note 1, Trenwick America Corporation indirectly assumed the obligations of its affiliate, Chartwell Re Holdings Corporation under the 10.25% senior notes. During the first quarter of 2000, these notes were redeemed and a loss of $825, net of income taxes of $445, was recorded by Trenwick America Corporation.
Senior Credit Facility Concurrent with the Trenwick/LaSalle business combination, Trenwick Group Ltd.'s U.S. and U.K. holding companies entered into an amended and restated $490,000 credit agreement with various lending institutions. The agreement consists of both a $260,000 revolving credit facility and a $230,000 letter of credit facility. Trenwick Group Ltd's U.S. holding company, Trenwick America Corporation, is the primary obligor with respect to the revolving credit facility, and Trenwick Group Ltd.'s U.K. holding company, 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 the U.S. and U.K. holding companies' obligations and additionally by the U.S. holding company with respect to the U.K. holding company's obligations.
On September 30, 2001, the U.S. holding company converted the outstanding borrowings under the revolving credit facility to a four year term loan facility. The applicable interest rate on the term loan is generally 2.5% above the London Interbank Offered Rate and was 4.7% at year end 2001. The scheduled principal repayments of the $195,035 outstanding at year end 2001 are as follows: 2002, $43,883; 2003, $53,635; 2004, $63,386; and 2005, $34,131. Additionally, the U.S. holding company is obligated to repay a portion or all of the term loan in the event of equity issuances, asset sales and debt issuances by Trenwick Group Ltd. or its subsidiaries.
The credit agreement also provides for a letter of credit facility to be issued for the account of Lloyd's to support the syndicate participations of Trenwick Group Ltd.'s subsidiaries. At year end
2001, the letter of credit portion of the credit facility was fully utilized at $230,000. Trenwick Group Ltd.'s letter of credit facility is scheduled to expire in November 2002. In the event that Trenwick Group Ltd. is unable to obtain a replacement letter of credit facility, it will be required to post sufficient collateral at Lloyd's or reduce or refrain from underwriting at Lloyd's in the 2003 year of account.
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.
The financial covenants relating to interest coverage, risk based capital and tangible net worth (each as defined by the financial covenants) 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 Group Ltd.'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 $560,000 to $425,000 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 $560,000. Trenwick Group Ltd.'s tangible net worth as of December 31, 2001 was $428,000. 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.
Contingent Interest Notes The contingent interest notes were issued immediately prior to Chartwell Re Corporation's acquisition of The Insurance Corporation of New York to protect Chartwell Re Corporation against the possibility of adverse development of that insurer's liability for claims and claims expenses and long-tail casualty exposures, which are more fully described in Note 4. Trenwick Group Inc. assumed the obligations of Chartwell Re Corporation under the notes in the Trenwick/Chartwell merger, described in Note 2, and Trenwick America Corporation subsequently assumed the obligations of Trenwick Group Inc. under the notes in the Trenwick/LaSalle business combination, also described in Note 2. The notes were issued in an aggregate principal amount of $1,000 with principal accruing interest at a rate of 8% per annum, compounded annually. The interest will not be payable until maturity or earlier redemption of the notes. In addition, the notes entitle the holders thereof to receive at maturity, in proportion to the principal amount of the notes held by them, an aggregate of from $1,000, up to $55,000, in contingent interest. Settlement of the notes may be made by payment of cash or, under certain specified conditions, by delivery of registered Trenwick Group Ltd. common shares. For purposes of any settlement of the notes in Trenwick Group Ltd.'s common shares, the value ascribed to each common share would be 85% of an average of the closing sales prices of the common stock prior to the settlement date. The notes mature on June 30, 2006.
At year end 2001, the notes were recorded at the present value of the amount which is reasonably determined to be payable at maturity. Trenwick America Corporation believes that the applicable liability for unpaid claims and claims expenses at year end 2001 is an appropriate estimate of
projected ultimate losses and loss adjustment expenses to be paid and therefore, the amount of contingent interest on the notes presently expected to be paid at maturity is $34,582. During the 2001 and 2000 years, Trenwick America Corporation recorded $9,893 and $7,592, respectively, of reductions to its underwriting losses incurred in connection with adverse development covered under the terms of the contingent interest notes. The notes contain covenants which relate to the maintenance of certain records and limitations on certain indebtedness. At year end 2001 Trenwick Group Ltd. was in compliance with those covenants.
Mandatorily Redeemable Preferred Capital Securities The mandatorily redeemable preferred capital securities, with a par value of $110,000, are obligations of a business trust subsidiary of Trenwick America Corporation U.S. holding company, Trenwick America Corporation. The capital securities mature in 2037, require preferential cumulative semi-annual cash distributions at an annual rate of 8.82% and are guaranteed by the U.S. holding company, within certain limits, as to distribution payments and liquidation or redemption payments. Interest charged to operations on the capital securities is at the imputed interest rate of 11.2%.
The business trust issuing the capital securities holds an investment in subordinated debentures of the U.S. holding company that have an aggregate principal amount of $113,403, and interest from that investment is the source of cash distributions on the capital securities. The capital securities are subject to mandatory redemption in certain circumstances pertaining to the U.S. holding company's prepayment or repayment of its subordinated debentures held by the trust. In the event of a default by the U.S. holding company with respect either to making required payments on the subordinated debentures or to its guarantee, holders of the capital securities may institute a direct action against the U.S. holding company. In the first quarter of 2001 and the fourth quarter of 2000, a Trenwick Group Ltd. subsidiary purchased $10,650 and $13,000, respectively, par value of the capital securities in the open market for $8,462 and $9,902, respectively.
Interest Expense and Subsidiary Preferred Share Dividends We accrue and recognize interest expense and subsidiary preferred share dividends when incurred. In computing interest expense and dividends on capital securities, we accrete the discount on certain obligations utilizing the interest method. Reductions in the liability under the contingent interest notes, which were previously included as reductions to interest expense, have been reclassified as reductions to the appropriate underwriting accounts for the 2001 and 2000 years.
Components of interest expense and dividends on preferred capital securities for 2001, 2000 and 1999 were as follows:
2001 2000 1999 ------- ------- ------- Indebtedness interest expense $19,825 $24,890 $ 8,479 Capital securities dividends 9,702 9,702 9,702 Commitment and other fees 1,809 1,177 369 ------- ------- ------- Total $31,336 $35,769 $18,550 ======= ======= =======
Interest on indebtedness of $15,563, $7,951 and $1,164 was paid during 2001, 2000 and 1999, respectively. Dividends on preferred capital securities of $2,426 were paid during 2001, 2000 and 1999.
Common Shares Trenwick America Corporation has 1,000 shares of $1.00 par value common shares authorized, 100 shares of which are outstanding. All of the outstanding shares of Trenwick America Corporation are held by a subsidiary of Trenwick Group Ltd. Dividends of $9,500 were declared and paid by
Trenwick America Corporation to its parent company during 2000. No such dividends were paid in 2001 or 1999.
Note 7 Trenwick America Corporation and its subsidiaries are Income incorporated in the United States and are subject to federal Taxation and state income taxes imposed by U.S. authorities.
We provide income taxes based upon consolidated income reported in the financial statements and the provisions of currently enacted tax laws. We allocate income taxes to operations, other comprehensive income and shareholders' equity, as applicable.
We recognize current income tax assets and liabilities, for estimated income taxes refundable or payable based on the current year's income tax returns, and deferred income tax assets and liabilities, for the estimated future income tax effects of temporary differences and carryforwards. Temporary differences are the differences between the financial statement carrying amounts of assets and liabilities and their tax bases, as well as the timing of income or expense recognition for financial reporting and tax purposes of items not related to assets and liabilities. We establish valuation allowances to reduce the carrying amount of deferred income tax assets, if necessary, to amounts that are more likely than not to be realized. We periodically review the adequacy of these valuation allowances and record any reduction in allowances through earnings or, for allowances established in the Trenwick/LaSalle business combination, as an offset to goodwill.
In 2000, the income tax provision includes an income tax benefit of $445 applicable to an extraordinary loss on debt redemption. The components of the provision for income taxes for 2001, 2000 and 1999 are as follows:
The income tax provision for each of the years presented differs from the amounts determined by applying the applicable U.S. statutory federal income tax rate of 35% to losses before income taxes as a result of the following:
Deferred income tax assets (liabilities) are attributable to the following temporary differences at year end 2001 and 2000:
At year end 2001, Trenwick America Corporation has a net operating loss carryforward of $137,091 that will be available to offset regular taxable income during the carryforward periods which expire in 2007 and between 2018 and 2021. As a result of the Trenwick/LaSalle business combination, an ownership change took place on September 27, 2000, and approximately $41,852 of the total U.S. net operating loss carryforward became limited to a cumulative annual utilization of $5,228. The remaining $95,239 in U.S. net operating loss carryforwards are not so limited. Details of the net operating loss carryforwards and the year of their expiration are described below:
U.S. Net Operating Year of Loss Carryforwards Expiration ------------------ ---------- $ 9,655 2007 32,197 2018 28,491 2020 66,748 2021 ------------------ $137,091 ==================
In connection with the Trenwick/LaSalle business combination, Trenwick America Corporation recorded a valuation allowance against its deferred income tax asset as sufficient uncertainty existed regarding the realizability of certain foreign tax credits. In evaluating the need for this valuation allowance at year end 2001, it is management's judgment that there has not been a significant change in circumstances and therefore the valuation allowance relative to its remaining foreign tax credits has been maintained. There is no valuation allowance recorded against the U.S. net operating losses because, in management's judgment, it is more likely than not that these amounts will be realized from future operations. Management's judgment is based on its assessment of business plans and related projections of future taxable income that reflect significant assumptions about increased premium volume and improved rates and profitability.
Income taxes of $17,146 and $27,766 were recovered during 2001 and 2000 respectively. Income taxes of $1,371 were paid during 1999.
Note 8 Retirement and Savings Plans Employee We recognize expenses for employee retirement and savings Benefits and plans as they are incurred. Compensation Arrangements Trenwick America Corporation has a defined contribution plan for substantially all full-time employees through which it contributes 8% of an eligible employee's total compensation to the plan; no employee contributions are made to the plan.
Additionally, Trenwick America Corporation maintains a 401(k) savings plan for substantially all full time employees, through which employees contribute up to the maximum amount allowable by the Internal Revenue Service. Trenwick America Corporation contributes up to 6% of a participating employee's compensation to the plan.
Trenwick America Corporation's provisions for employee retirement and savings plans follow:
2001 2000 1999 ------ ------ ---- Defined contribution plans $ 737 $ 823 $429 401(k) savings plan 606 625 365 ------ ------ ---- Total $1,343 $1,448 $794 ====== ====== ====
Restricted Common Share Awards Our parent company awards its restricted common shares to key employees of our company. At the time of the award, our parent company records deferred compensation for the fair value of the restricted common share awards and present deferred compensation as a separate, offsetting component of shareholders' equity. We are allocated a portion of compensation expense which is recognized over the vesting period of the restricted common shares.
Trenwick America Corporation recognized $258, $3,897 and $982, respectively, of compensation expense on restricted common share awards for the 2001, 2000 and 1999 years, respectively.
Share Options Our parent company grants options for a fixed number of common shares to employees of our company. These options have an exercise price equal to the market value of the shares at the date of grant. The current accounting standard establishes a fair value based method of accounting for stock-based compensation plans; however, it permits an entity to continue to apply the accounting provisions of a previous standard and make pro forma disclosures of net income and earnings per share, as if the fair market value based method had been applied. Our parent company continues to account for the share option grants in accordance with the previous standard and have included the pro forma disclosures required by the fair value based method below.
Trenwick Group Ltd. has several plans through which it grants options in its common shares to employees of Trenwick America Corporation at the discretion of its board of directors. Exercise prices are generally fixed at the market value at the date of grant. Options vest and are exercisable on various terms, usually either over a five year period or up to a ten year period. All options have an expiration date not exceeding ten years.
Upon completion of LaSalle Re Holdings Limited's acquisition of Trenwick Group Inc. and the minority interest of LaSalle Re Limited, all of the options granted to employees of Trenwick America Corporation prior to 2000 became fully vested.
Pro Forma Information All of the outstanding share options of Trenwick Group Ltd. that were issued to Trenwick America Corporation employees were issued at an exercise price equal to the fair market value on the date of grant; therefore no compensation expense has been recognized for these grants. Had the fair value based method been applied, net loss would have been $(20,122), $(37,622), and $(10,168) for the years 2001, 2000 and 1999, respectively.
The pro forma adjustments relate to options granted from 1995 to 2001 are based on a fair value method using the Black-Scholes option pricing model. No effect has been given to options granted prior to 1995. Valuation and related assumption information for options granted in 2001, 2000 and 1999 are as follows:
The Black-Scholes option valuation model was developed for use in estimating the fair value of options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected share price volatility. Because Trenwick Group Ltd.'s share options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable measure of the fair value of its share options.
Note 9 We record other comprehensive income for the change in the Other net unrealized appreciation of investments and the change in Compensation foreign currency translation adjustments, both net of income Income taxes.
The components of accumulated other comprehensive income at year end 2001 and 2000 are as follows:
Note 10 Trenwick America Corporation's insurance subsidiaries are Insurance subject to insurance laws and regulations in the Regulation jurisdictions in which they operate. These regulations include restrictions that limit the amount of dividends or other distributions available to be paid to Trenwick America Corporation by its insurance subsidiaries without prior approval of the insurance regulatory authorities.
Each of Trenwick America Corporation's insurance subsidiaries are subject to restrictions on the payments of dividends without prior approval from the state insurance regulator in its state of domicile. These restrictions are based upon certain measures of statutory surplus and net income. At year end 2001, Trenwick America Corporation's insurance subsidiaries had $14,482 available for the payment of dividends in 2002 without prior regulatory approval. Additionally, the insurance regulators in each of Trenwick America Corporation's subsidiaries' respective states of domicile require the insurance companies to calculate and report certain information under a risk-based capital formula which measures statutory capital and surplus needs based on the risks in a company's mix of business and investment portfolio. Based upon calculations at year end 2001, Trenwick America Corporation's insurance subsidiaries each exceeded the capital levels prescribed by the risk-based capital formula.
Trenwick America Corporation's insurance subsidiaries file financial statements prepared in accordance with statutory accounting practices prescribed or permitted by insurance regulators in each of the subsidiaries' states of domicile. Combined statutory surplus of Trenwick America Corporation's insurance subsidiaries was $374,835 and $438,738 at year end 2001 and 2000, respectively; their combined statutory net loss was $119,085, $16,157 and $47,603 for the 2001, 2000 and 1999 years, respectively.
Effective January 1, 2001, the domiciliary state insurance departments of Trenwick America Corporation's U.S. insurance subsidiaries adopted the codification of statutory accounting principles. The codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in some areas. The cumulative effect of the adoption of the codification, $14,305, was recorded as an adjustment to increase statutory surplus of the U.S. insurance subsidiaries on January 1, 2001. Additionally, one of the state insurance departments adopted certain prescribed accounting practices that differ from those found in the codification. The most significant of these practices is that deferred income tax assets and liabilities are not recorded. The monetary effect on the combined statutory capital and surplus of Trenwick America Corporation's U.S. insurance subsidiaries of using accounting practices prescribed by that state insurance department was a decrease of $9,042.
A state insurance department has permitted one of Trenwick America's insurance subsidiaries domiciled in that state to account for the reinsurance agreement purchased in connection with the Trenwick/Chartwell merger on a prospective basis in its statutory basis financial statements. This treatment is consistent with the U.S. GAAP accounting treatment of the contract. Another state insurance department has required another of Trenwick America Corporation's insurance subsidiaries, domiciled that state, to account for that reinsurance agreement on a retroactive basis. The difference in these statutory accounting practices does not have an effect on the combined statutory surplus or net income of Trenwick America Corporation's U.S. insurance subsidiaries. The terms of this reinsurance agreement are described in Note 4.
Debt securities and cash with a carrying value of $46,989 at year end 2001 were on deposit with various state or governmental insurance departments in order to comply with insurance laws.
Note 11 Goodwill represents the unamortized excess of purchase price Goodwill over the fair value of identifiable net assets of acquired entities which was pushed down to Trenwick
America Corporation by its ultimate parent Trenwick Group Ltd. Through the 2001 year, we amortized goodwill on a straight-line basis over twenty-five years. On a periodic basis, we estimate the future undiscounted cash flows of the business to which the goodwill relates in order to ensure that its carrying value has not been impaired.
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 be recorded on January 1, 2002 as the cumulative effect of an accounting change. The impairment tests must be completed by the time of 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.
The goodwill that resulted from the Trenwick/LaSalle business combination which was pushed down to Trenwick America Corporation is reflected in the consolidated financial statements at $52,119 net of accumulated amortization of $1,866 at year end 2001.
Note 12 We record our investments in managing general agencies, Other Assets through which we write primary insurance business and in and Other which we hold ownership interest of between 20% and 30%, in Liabilities other assets on the balance sheet. Based on the ownership interest and our ability to exercise significant influence on the operating and financial policies of these managing general agencies, we account for these investments under the equity method.
We record premises and equipment, including leasehold improvements and capitalized software costs, at cost and amortize or depreciate them using the straight-line method over their useful lives.
The components of other assets and other liabilities at year end 2001 and 2000 are as follows:
During the 2001, 2000 and 1999 years, Trenwick America Corporation recorded $1,944, $239 and $188, respectively, in equity income related to investments in managing general agencies.
Depreciation and amortization on items included in other assets charged to operations for the 2001, 2000 and 1999 years was $3,075, $299 and $1,006, respectively.
Operating Lease Agreements Trenwick America Corporation leases office space under non-cancelable operating leases which expire on various dates through 2008. Trenwick America Corporation's future minimum lease commitments at year end 2001 total $10,140 and are payable as follows: 2002, $1,482; 2003, $1,549; 2004, $1,597; 2005, $1,562; 2006, $1,556 and thereafter, $2,394.
Total office rent expense for 2001, 2000 and 1999 was $1,282, $2,060 and $1,405, respectively.
Note 13 We define the fair value of a financial instrument as the Fair Value of amount at which the instrument could be exchanged in a Financial current transaction between willing parties. We estimate Instruments values based upon quoted market prices or broker dealer quotes and these estimates may vary in the near term.
The carrying amounts and estimated fair values of financial instruments in summary form at year end 2001 and 2000 follow:
Note 14 Restrictions on Certain Payments within Trenwick Commitments, Because Trenwick America Corporation's operations are Contingencies, conducted through its operating subsidiaries, Trenwick Concentrations, America Corporation is dependent upon the ability of its and operating subsidiaries to transfer funds, principally in the Related-Party form of cash dividends, tax reimbursements and other Transactions statutorily permissible payments. In addition to general legal restrictions on payments of dividends and other distributions to shareholders applicable to all corporations, Trenwick America Corporation's insurance subsidiaries are subject to further regulations that, among other things, restrict the amount of dividends and other distributions that may be paid to their parent corporations, which is more fully described in Note 10. Management believes that current levels of cash flow from operations and assets held at the holding company level, together with receipt of dividends from Trenwick America Corporation's operating subsidiaries and capital contributions from Trenwick Group Ltd., will provide Trenwick America Corporation with sufficient liquidity to meet its operating needs over the next twelve months.
Litigation 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 results of operations or cash flows. 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.
Investments and Cash Held as Collateral or on Deposit Debt securities and cash with a carrying value of $140,475 are being held in trust as collateral for certain reinsurance obligations. In addition, cash in the amount of $1,713 has been pledged as collateral for letters of credit for reinsurance obligations.
Concentrations During 2001, Trenwick America Corporation received 33% of its gross written premiums from three reinsurance brokers, of which Aon Reinsurance Agency accounted for 19%, Guy Carpenter and Company, Ltd. accounted for 8%, and Reinsurance Alternatives accounted for 6%. During 2000, Aon Reinsurance Agency, E.W. Blanch and Marsh and MacLennan provided 27%, 11% and 9% of Trenwick America Corporation's gross written premiums, respectively. In 1999, Aon Reinsurance Agency, Marsh and MacLennan, and E.W. Blanch and Company provided 37%, 16%, and 8% of Trenwick America Corporation's gross written premiums, respectively.
Loss of all or a substantial portion of the business provided by these brokers could have a material adverse effect on the business and operations of Trenwick America Corporation. Trenwick America Corporation does not believe, however, that the loss of such business would have a long-term adverse effect because of Trenwick America Corporation's competitive position within the reinsurance market and the availability of business from other brokers.
During 2001, Trenwick America Corporation received 22% of its assumed written premiums from three ceding companies, of which Travelers Group accounted for 9%, Avemco Group accounted for 7% and American International Group accounted for 6%. During 2000, LDG Reinsurance Underwriters provided 21% of Trenwick America Corporation's assumed written premiums during 1999, and American International Group and Duncanson and Holt Group each accounted for 5% of assumed written premiums. In 1999, Trenwick America Corporation produced 12% of assumed written premiums from Duncanson and Holt, American International Group and CNA each accounted for 7% of assumed written premiums.
Trenwick America Corporation wrote approximately 68% of its direct written premiums during 2001 through four managing agencies of which Florida Intracoastal Underwriters, Ltd. accounted for 27%, HDR Insurance Services accounted for 16%, Inter-Reco, Inc. accounted for 14% and Risk Control Services accounted for 11%. During 2000, Florida Intracoastal Underwriters, HDR Insurance Services, Inter-Reco, Inc. and Risk Control Services provided 30%, 21%, 12% and 10% of direct written premiums, respectively.
At year end 2001, 37% of Trenwick America Corporation's reinsurance recoverables on unpaid claims and claims expenses, net of funds held offsets, are recoverable from five principal retrocessionaires. These retrocessionaires are London Life and Casualty Reinsurance Corporation ($64,378), Centre Solutions (U.S.) Limited ($50,096), UNUM Life Insurance Company of America ($33,077), Continental Casualty Co. ($28,257), and Scandinavian Reinsurance Company Ltd. ($27,591). Each of these companies is rated B++ or better by A.M. Best Company.
Related Party Transactions with Trenwick Group Ltd. and Affiliates
Trenwick America Reinsurance Corporation has entered into a stop loss agreement with Trenwick International Ltd., one of its U.K. affiliates. During 2001 and 2000, Trenwick International Ltd. ceded premiums of $10,879 and $173, respectively, and during 2001 and 2000, ceded claims and claims expenses of $31,139 and $5,039, respectively to Trenwick America Corporation under this agreement. No losses were ceded under this agreement during 1999. Unpaid claims and claims
expenses related to this agreement at year end 2001 and 2000 were $31,544 and $5,472, respectively.
Trenwick America Reinsurance Corporation has entered into a multi-layer excess of loss catastrophe reinsurance treaty with LaSalle Re Limited, a Bermuda affiliate. During 2001, 2000 and 1999, Trenwick America Reinsurance Corporation ceded $1,088, $2,175 and $2,175, respectively of premiums to LaSalle Re Limited. No losses have been ceded under this agreement and profit commissions receivable from LaSalle Re Limited was $924 at year end 2001.
In the first quarter of 2001 and the fourth quarter of 2000, a Bermuda affiliate of Trenwick America Corporation purchased $10,650 and $13,000, respectively, par value of the mandatorily redeemable capital securities in the open market. During the 2001 and 2000 years, Trenwick America Corporation incurred $1,806 and $166, respectively, of dividends on the preferred capital securities held by its affiliate.
Included in due from parent and affiliates on Trenwick America Corporation's consolidated balance sheet are recoverable expenses of $8,430 and non-interest bearing demand loans receivable of $59,830, the majority of which is receivable from Trenwick (Barbados) Ltd. and Chartwell Managing Agents Limited. Due to affiliates as reflected on Trenwick America Corporation's consolidated balance sheet includes recoverable expenses of $1,790 and a promissory note payable to Trenwick (Barbados) Ltd. of $48,644. Under terms of the promissory note, principal amounts are payable on demand. Interest on unpaid balances is at a rate equal to that generated by Trenwick Groupd Ltd.'s investment portfolio. During the 2001 year, principal repayments amounted to $26,927 with $1,108 incurred of interest expense. No interest expense was recorded in the 2000 year.
Other Related Party Transactions
Included in other assets are Trenwick America Corporation's investments in managing general agencies through which it writes primary insurance business, as more fully described in Note 12. At year end 2001 and 2000, the carrying value of these investments totaled $9,010 and $9,968. During 2001 and 2000, Trenwick America Corporation incurred $11,655 and $37,898, respectively, of commission expense to these managing general agencies. At year end 2001 and 2000, Trenwick America Corporation's balance sheet includes $19,231 and $25,494, respectively, of agents' balances receivable from these managing general agencies including installment premiums deferred and not yet due. The current portion of balances due from these managing general agencies are settled on a monthly basis.
Note 15 Unaudited Summarized unaudited quarterly financial data for 2001 and Quarterly 2000 follows: Financial Data
Report of Independent Accountants on Financial Statement Schedules
To the Board of Directors and Stockholder of Trenwick America Corporation
Our audits of the consolidated financial statements referred to in our report dated February 27, 2002 (which report and consolidated financial statements are included in this Annual Report on Form 10-K) also included an audit of the financial statement schedules listed in Item 14(a)(2) of this Annual Report on Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
New York, New York February 27, 2002
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TRENWICK AMERICA CORPORATION AND SUBSIDIARIES SCHEDULE II-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
TRENWICK AMERICA CORPORATION (Parent Company Only) BALANCE SHEET (Amounts expressed in thousands of United States dollars) December 31, 2001 and 2000
2001 2000 -------- -------- Assets: Investments in consolidated subsidiaries after minority interest of $86,973 and $87,059 $506,452 $572,021 Cash and cash equivalents 288 8,686 Due from consolidated subsidiaries 70,135 54,816 Net deferred income taxes 20,745 17,597 Other assets 71,117 51,892 -------- -------- Total assets $668,737 $705,012 -------- -------- Liabilities: Due to consolidated subsidiaries $ 80,365 $ 88,158 Other liabilities 10,742 19,255 Indebtedness 402,281 396,692 -------- -------- Total liabilities 493,388 504,105 Stockholder's equity 175,349 200,907 -------- -------- Total liabilities and stockholders' equity $668,737 $705,012 ======== ========
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TRENWICK AMERICA CORPORATION AND SUBSIDIARIES SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
TRENWICK AMERICA CORPORATION (Parent Company Only) STATEMENT OF OPERATIONS (Amounts expressed in thousands of United States dollars) Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999 -------- -------- -------- Revenues: Consolidated subsidiary dividends $ 51,300 $ 19,269 $ 53,400 Net investment income 457 1,290 43 Other income 314 1,934 132 -------- -------- -------- Total revenues 52,071 22,493 53,575 -------- -------- -------- Expenses: General and administrative expenses 4,061 18,686 5,772 Interest expense and preferred capital securities dividends 19,506 26,934 16,586 Foreign currency gains (268) (3) -- -------- -------- -------- Total expenses 23,299 45,617 22,358 -------- -------- -------- Income before equity in undistributed income of unconsolidated subsidiaries 28,772 (23,124) 31,217 Equity in undistributed income (loss) of -------- -------- -------- consolidated subsidiaries (56,012) (26,778) (48,821) -------- -------- -------- Net loss before income taxes (27,240) (49,902) (17,604) Income taxes (benefit) (7,715) (12,930) (7,709) -------- -------- -------- Net loss $(19,525) $(36,972) $ (9,895) ======== ======== ========
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TRENWICK AMERICA CORPORATION AND SUBSIDIARIES SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
TRENWICK AMERICA CORPORATION (Parent Company Only) STATEMENT OF CASH FLOWS (Amounts expressed in thousands of United States dollars) Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999 -------- -------- -------- Operating activities: Interest and operating expenses paid $(26,569) $ (6,196) $ 23 General and administrative expenses paid (34,729) (49,027) (20,874) Income taxes (paid) recovered 2,664 (72,206) 1,201 Net investment income received 457 244 -- Other income (1,944) 42,853 16,586 -------- -------- -------- Cash for operating activities (60,121) (84,332) (3,064) -------- -------- -------- Investing activities: Sales of debt securities -- 257 343 Additions to premises and equipment (4,524) (1,514) (632) Investment in subsidiaries -- 3,048 (835) -------- -------- -------- Cash from (for) investing activities (4,524) 1,791 (1,124) -------- -------- -------- Financing activities: Issuance of indebtedness 14,000 24,000 -- Issuance costs of indebtedness (1,475) (1,834) -- Net dividends received (paid) 51,300 5,100 7,300 Capital contributions received 5,099 -- -- Intercompany loans (repayments) advances (12,677) 62,361 (2,200) -------- -------- -------- Cash from financing activities 56,247 89,627 5,100 -------- -------- -------- Change in cash and cash equivalents (8,398) 7,086 912 Cash and cash equivalents, beginning of year 8,686 1,600 688 -------- -------- -------- Cash and cash equivalents, end of year $ 288 $ 8,686 $ 1,600 ======== ======== ========
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TRENWICK AMERICA CORPORATION AND SUBSIDIARIES SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION (Amounts expressed in thousands of United States dollars) Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999 ---------- ---------- ----------- Deferred policy acquisition costs Treaty reinsurance $ 36,039 $ 30,347 $ 34,757 Specialty program insurance 9,364 5,920 3,214 ---------- ---------- ----------- Total 45,403 36,267 37,971
Unpaid claims and claim expenses Treaty reinsurance 1,146,975 1,221,071 1,223,981 Specialty program insurance 233,585 169,961 142,214 Affiliate transactions 31,544 5,472 -- ---------- ---------- ----------- Total 1,412,104 1,396,504 1,366,195
Unearned premium income Treaty reinsurance 112,085 92,224 110,909 Specialty program insurance 126,919 84,950 63,133 ---------- ---------- ----------- Total 239,004 177,174 174,042
Net premiums earned Treaty reinsurance 288,760 265,934 177,542 Specialty program insurance 80,649 44,684 10,343 Affiliate transactions 10,879 173 -- ---------- ---------- ----------- Total 380,288 310,791 187,885
Net investment income Treaty reinsurance 49,868 55,466 38,679 Specialty program insurance 13,057 9,493 1,722 Unallocated 5,116 1,642 (110) ---------- ---------- ----------- Total 68,041 66,601 40,291
Claims and claims expenses incurred Treaty reinsurance 224,860 224,250 130,602 Specialty program insurance 66,530 34,037 5,766 ECRA pool runoff 11,530 -- -- Affiliate transactions 2,568 17,756 10,814 ---------- ---------- ----------- Total 305,488 276,043 147,182
Policy acquisition costs Treaty reinsurance 101,217 83,134 61,633 Specialty program insurance 20,996 9,846 917 ---------- ---------- ----------- Total 122,213 92,980 62,550
Underwriting expenses Treaty reinsurance 11,680 13,718 15,007 Specialty program insurance 7,210 7,012 2,687 ---------- ---------- ----------- Total 18,890 20,730 17,694
Net premiums written Treaty reinsurance 320,820 251,111 165,744 Specialty program insurance 99,708 54,028 5,641 Affiliate transactions 10,879 173 -- ---------- ---------- ----------- Total $ 431,407 $ 305,312 $ 171,385
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TRENWICK AMERICA CORPORATION AND SUBSIDIARIES SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS (Amounts expressed in thousands of United States dollars) Years Ended December 31, 2001, 2000 and 1999
Balance at Balance at Beginning End of of Period Period ---------- ---------- Year Ended December 31, 2001 Allowance for uncollectible reinsurance recoverable and premiums receivable $10,191 $13,334
Year Ended December 31, 2000 Allowance for uncollectible reinsurance recoverable and premiums receivable $6,569 $10,191
Year Ended December 31, 1999 Allowance for uncollectible reinsurance recoverable and premiums receivable $6,402 $6,569
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