================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 2000.
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period __________________ to __________________.
Commission file number 0-31967
TRENWICK AMERICA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 06-1087672
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Canterbury Green, Stamford, Connecticut 06901
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 203-353-5500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |_| No |X|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K |X|
There was no voting stock held by non-affiliates of the registrant on March
12, 2001.
The number of shares outstanding of each of the issuer's classes of common
stock as of the close of the period covered by this report:
Class Outstanding at March 12, 2001
----- -----------------------------
Common Stock, $1.00 par value 100
The registrant meets the conditions set forth in General Instruction I (1)(a)
and (b) of Form 10-K and is therefore filing this Form 10-K in the reduced
disclosure format.
TRENWICK AMERICA CORPORATION
Table of Contents
Page
Item Number
PART I
1. Business ........................................................... 1
2. Properties ......................................................... 3
3. Legal Proceedings .................................................. 3
4. Submission of Matters to a Vote of Security Holders ................ 3
PART II
5. Market for the Corporation's Common Stock and Related Stockholder
Matters ............................................................ 3
6. Selected Financial Data ............................................ 4
7. Management's Discussion and Analysis of Financial Condition and
Results of Operation ............................................... 4
7a. Quantitative and Qualitative Disclosures About Market Risk........... 11
8. Financial Statements and Supplementary Data ........................ 11
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ............................................... 11
PART III
10. Directors and Executive Officers ................................... 12
11. Executive Compensation ............................................. 12
12. Security Ownership of Certain Beneficial Owners and Management ..... 12
13. Certain Relationships and Related Transactions ..................... 12
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ..... 12
i
PART I
Item 1. Business
Trenwick America Corporation, a Delaware corporation, was formed in 1983 and in
1985 became a wholly-owned direct subsidiary of Trenwick Group Inc., the
ultimate controlling entity, for the purposes of serving as a United States
holding company.
On September 27, 2000, Trenwick Group Ltd., a newly formed Bermuda holding
company, issued common shares to acquire Trenwick Group Inc. and another
publicly held Bermuda company, LaSalle Re Holdings Limited, and the minority
interest in LaSalle Re Limited, a Bermuda subsidiary of LaSalle Re Holdings
Limited. Trenwick Group Inc. then distributed the shares received from Trenwick
Group Ltd. to its shareholders in a liquidating distribution. As a part of the
transaction, Trenwick Group Inc. completed a concurrent internal reorganization
of its subsidiary companies in which substantially all of Trenwick Group Inc.'s
assets and liabilities were transferred from Trenwick Group Inc. to a
subsidiary, which then merged with and into Trenwick America Corporation, with
Trenwick America Corporation as the surviving corporation. The result of the
restructuring was that Trenwick America Corporation became the intermediate
holding company for Trenwick Group Ltd.'s United States subsidiaries. This
abbreviated Annual Report on Form 10-K is required as a result of debt assumed
by Trenwick America Corporation in connection with the restructuring.
Each of Trenwick America Corporation's operating insurance company subsidiaries
is rated "A" (Excellent) by A.M. Best Company and has been assigned an A+
financial strength rating by Standard & Poor's. These ratings are based upon
factors that may be of concern to policy or contract holders, agents and
intermediaries, but may not reflect the considerations applicable to an equity
investment in a reinsurance or insurance company. A change in any such rating is
at the discretion of the respective rating agencies.
Trenwick America Corporation conducts its specialty insurance and reinsurance
business in the following two business segments:
o treaty reinsurance; and
o specialty program insurance.
Trenwick America Corporation operates through the following two principal
operating platforms:
o Trenwick America Reinsurance Corporation, which is located in Stamford
Connecticut, underwrites treaty reinsurance on United States property and
casualty risks, including United States reinsurance business previously
written by Chartwell Re Corporation subsidiaries; and
o Canterbury Financial Group Inc., which is located in Stamford, Connecticut,
underwrites specialty insurance in the United States through its operating
subsidiaries, Chartwell Insurance Company, The Insurance Corporation of New
York and Dakota Specialty Insurance Company.
1
Trenwick America Corporation's gross and net premium writings by business
segment for 2000, 1999 and 1998 are as follows.
2000 1999 1998
-------- -------- --------
(expressed in thousands of United States dollars)
Gross Premiums Written
Treaty reinsurance $339,361 $210,921 $218,249
Specialty program insurance 187,545 38,088 --
-------- -------- --------
Total $526,906 $249,009 $218,249
======== ======== ========
Net Premiums Written
Treaty reinsurance $251,851 $165,744 $176,112
Specialty program insurance 54,028 5,641 --
-------- -------- --------
Total $305,879 $171,385 $176,122
======== ======== ========
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
$2,500,000 per contract on casualty treaty business and $1,500,000 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 automobile liability, errors and omissions, general
liability and accident and health. Together these lines accounted for an
aggregate of at least 67% of its net premiums written in each of 2000, 1999 and
1998. Trenwick America Reinsurance Corporation also underwrites medical
malpractice, workers' compensation, products liability and property lines of
reinsurance. Premiums in 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 31%, 25%, and 38%
of this segment's gross premiums written in 2000, 1999 and 1998, respectively.
During 2000, LDG Reinsurance Underwriters, American International Group and
Duncanson and Holt accounted for 21%, 5% and 5%, 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 it's competitive position within the reinsurance market and the availability
of business from other brokers and ceding companies. Further, Trenwick America
Reinsurance Corporation believes that it would continue to underwrite new
business to replace the accounts.
2
Specialty Program Insurance
Specialty program insurance, written through Canterbury Financial Group Inc.,
develops insurance programs in the United States through specialty production
sources with a focus on a specific line or lines of business, with a limited
geographic emphasis, and where the program administrator's compensation is
adjusted based on the underwriting results of the business. Canterbury Financial
Group Inc. evaluates each business relationship based upon the underwriting
experience and operational expertise of the production source and periodically
performs underwriting, claims and operational audits of each of its production
sources.
During the 2000 calendar year, the specialty insurance segment underwrote
approximately 73% of its gross premiums through four managing general agents, of
which Florida Intracoastal Underwriters accounted for 30%, HDR Insurance
Services accounted for 21%, Inter-Reco accounted for 12% and Risk Control
Services accounted for 10%. No other managing general agent accounted for more
than 10% of Canterbury Financial Group Inc.'s gross insurance premiums written
for such period.
In order to reduce the potential adverse effect arising from the termination of
any specific business relationship, Canterbury Financial Group Inc. continues to
seek to establish and develop relationships with a large number of managing
general agents. While management believes that its relationships with its
managing general agents are satisfactory, the termination of all or a
substantial number of these relationships could have a material adverse effect
on the business and operations of the specialty program insurance segment.
Item 2. Properties
Trenwick America Corporation's operations are located in approximately 46,000
total square feet of leased office space at Stamford, Connecticut. Management
believes Trenwick America Corporation's current office space is adequate for its
needs.
Item 3. Legal Proceedings
Trenwick America Corporation is party to various legal proceedings generally
arising in the normal course of its business. Trenwick America Corporation does
not believe that the eventual outcome of any such proceeding will have a
material effect on its financial condition or business. Trenwick America
Corporation's subsidiaries are regularly engaged in the investigation and the
defense of claims arising out of the conduct of their business. Pursuant to
Trenwick America Corporation's insurance and reinsurance arrangements, disputes
are generally required to be finally settled by arbitration.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of shareholders of Trenwick America
Corporation during the fourth quarter of 2000.
PART II
Item 5. Market for Corporation's Common Stock and Related Stockholder Matters
There is no established public trading market for Trenwick America Corporation's
stock. All of the outstanding shares of Trenwick America Corporation's common
stock are owned by Trenwick (Barbados) Ltd., which in turn is a wholly-owned
subsidiary of Trenwick Group Ltd.
3
Item 6. Selected Financial Data
Information required by Item 6 has been omitted because Trenwick America
Corporation meets the conditions set forth in General Instruction I (1)(a) and
(b) of Form 10-K and is therefore filing this Annual Report on Form 10-K in the
reduced disclosure format.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion highlights material factors affecting Trenwick America
Corporation's results of operations for the years ended December 31, 2000 and
1999. 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, 2000, 1999 and 1998, 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.
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 Chartwell Re Corporation subsidiaries; and
o Canterbury Financial Group Inc., which is located in Stamford, Connecticut,
underwrites specialty insurance through its operating subsidiaries,
Chartwell Insurance Company, The Insurance Corporation of New York and
Dakota Specialty Insurance Company.
All of Trenwick America Corporation's principal operating subsidiaries are rated
A (Excellent) by A.M. Best Company and have been assigned a financial strength
rating of A+ by Standard and Poor's. These ratings are based upon factors that
may be of concern to policy or contract holders, agents and intermediaries, but
may not reflect the considerations applicable to an equity investment in a
reinsurance or insurance company. A change in any such rating is at the
discretion of the respective rating agencies.
4
Results of Operations - Year Ended December 31, 2000 and Year Ended December 31,
1999
2000 1999 Change
-------- -------- --------
(in thousands)
Underwriting loss $(87,678) $(39,541) $(48,137)
Net investment income 66,601 40,291 26,310
Interest expense and dividends on preferred (27,053) (18,550) (8,503)
capital securities
General and administrative expenses (17,861) (5,990) (11,871)
Other income, net 2,823 569 2,254
-------- -------- --------
Pretax operating loss (63,168) (23,221) (39,947)
Applicable income tax benefit (23,812) (12,643) (11,169)
-------- -------- --------
Operating loss (39,356) (10,578) (28,778)
Net realized investment gains, net of income taxes 4,399 683 3,716
Foreign currency losses, net of income taxes (1,190) -- (1,190)
-------- -------- --------
Loss before extraordinary item (36,147) (9,895) (26,252)
Extraordinary loss on debt redemption, net
of $445 income tax benefit 825 -- 825
======== ======== ========
Net loss $(36,972) $ (9,895) $(27,077)
======== ======== ========
For the year ended December 31, 2000, Trenwick America Corporation incurred an
operating loss of $39.4 million compared to an operating loss of $10.6 million
for the year ended December 31, 1999. The increase in operating loss of $28.8
million was primarily the result of additions to prior year reserves relating to
both the United States treaty reinsurance and specialty program insurance
operations. In 1999, Trenwick America Reinsurance Corporation also benefited
from a stop loss reinsurance agreement, which was not renewed in 2000. The
increase in net loss in 2000 of $27.1 million compared to the 1999 loss was the
result of the deterioration in operating results described above offset in part
by an increase in realized investment gains, net of foreign exchange losses of
$2.5 million.
Underwriting Income (Loss)
The underwriting result for 2000 included the consolidated results of Trenwick
America Corporation and its subsidiaries for the full year. The underwriting
results for 1999 included the results of Trenwick America Corporation and
Trenwick America Reinsurance Corporation for the full year and the results of
Canterbury Financial Group Inc.'s subsidiaries from October 27, 1999, the date
of their acquisition.
2000 1999 Change
----------- ----------- -----------
(in thousands)
Net premiums earned $ 311,358 $ 187,885 $ 123,473
----------- ----------- -----------
Claims and claims expenses incurred (283,635) (147,182) (136,453)
Acquisition costs and underwriting expenses (115,401) (80,244) (35,157)
----------- ----------- -----------
Total expenses (399,036) (227,426) (171,610)
----------- ----------- -----------
Net underwriting loss $ (87,678) $ (39,541) $ (48,137)
=========== =========== ===========
Loss ratio 91.1% 78.3% (12.8)%
Underwriting expense ratio 37.0% 42.7% 5.7%
Combined ratio 128.1% 121.0% (7.1)%
The underwriting loss of $87.7 million incurred in 2000 represented a $48.1
million increase compared to the underwriting loss of $39.5 million in 1999. The
increase in the underwriting loss in 2000 resulted
5
primarily from additions to prior years' reserves in both the reinsurance and
program insurance businesses, together with the non-renewal of a stop loss
reinsurance cover which benefited the result of Trenwick America Reinsurance
Corporation in 1999 and prior years. During 2000, additions to prior years'
reserves were approximately $32.5 million and provisions for uncollectible
reinsurance were approximately $2.4 million.
The increase in the combined ratio in 2000 compared to 1999 resulted from the
increase in prior years' reserves and other provisions described above.
Additionally, 1999 only includes the U.S. reinsurance and primary insurance
operations of Chartwell Re Corporation subsequent to October 27, 1999. Any prior
year loss development on this business was covered by an adverse loss
development reinsurance agreement purchased by Chartwell Re Corporation prior to
October 27, 1999.
Premiums Written
Gross premiums written for 2000 were $526.9 million compared to $249.0 million
for 1999, an increase of $277.9 million or 111%. Details of gross premiums
written are provided below.
2000 1999 Change
---------- ---------- ----------
(in thousands)
Treaty reinsurance $ 339,361 $ 210,921 $ 128,440
Specialty program insurance 187,545 38,088 149,457
---------- ---------- ----------
Total $ 526,906 $ 249,009 $ 277,897
========== ========== ==========
Treaty reinsurance and specialty program insurance gross premiums written
increased from $210.9 and $38.1, respectively, for 1999, to $339.4 million, and
$187.5 million, respectively, for 2000. The increase in gross premiums written
for both treaty reinsurance and specialty program insurance was primarily due to
inclusion of U.S. operations acquired in the Chartwell Re Corporation
acquisition from October 27, 1999. In 2000, treaty reinsurance includes $125.5
million in gross premiums previously underwritten by Chartwell Insurance Company
and The Insurance Corporation of New York compared to $3.9 million in 1999. In
2000, specialty program insurance includes a full year of premium writings
compared to one quarter in 1999.
Premiums Earned
2000 1999 Change
---------- ---------- ----------
(in thousands)
Gross premiums written $ 526,906 $ 249,009 $ 277,897
Change in gross unearned premiums (8,004) 16,498 (24,502)
---------- ---------- ----------
Gross premiums earned 518,902 265,507 253,395
---------- ---------- ----------
Gross premiums ceded (221,027) (77,624) (143,403)
Change in gross unearned premiums ceded 13,483 2 13,481
---------- ---------- ----------
Ceded premiums earned (207,544) (77,622) (129,922)
---------- ---------- ----------
Net premiums earned $ 311,358 $ 187,885 $ 123,473
========== ========== ==========
The increase in gross premiums ceded of $143.4 million was due primarily to the
inclusion of specialty program insurance for the 2000 year. Specialty program
insurance cedes a greater proportion of its business written than the treaty
reinsurance business. The balance of the increase in gross premiums ceded
results from an increase in fronted business previously underwritten by
Chartwell Insurance Company.
Net premiums earned for 2000 were $311.4 million compared to $187.9 million for
1999. The increase in net premiums earned is commensurate with the increase in
net premiums written.
6
Claims and Claims Expenses
Claims and claims expenses for 2000 were $283.6 million, an increase of $136.5
million compared to claims and claims expenses of $147.2 million for 1999. The
increase in claims and claims expenses resulted from the inclusion of treaty
reinsurance previously underwritten by Chartwell Insurance Company and specialty
program insurance for the full year 2000 compared to one quarter in 1999. This
accounted for approximately $105 million of the increase. The balance was due to
an increase in unpaid claims and claims expense liabilities recorded by Trenwick
America Reinsurance Corporation in 2000 due to adverse development of prior year
liabilities compared to 1999.
Underwriting Expenses
2000 1999 Change
-------- -------- --------
(in thousands)
Policy acquisition costs $ 93,097 $ 62,550 $ 30,547
Underwriting expenses 22,304 17,694 4,610
-------- -------- --------
Total underwriting expenses $115,401 $ 80,244 $ 35,157
======== ======== ========
Total underwriting expense ratio 37.0% 42.7% 5.7%
======== ======== ========
Total underwriting expenses, comprising policy acquisition costs and
underwriting expenses, for the 2000 year increased by $35.2 compared to total
underwriting expenses for 1999. Similar to claims and claims expenses, the
increase in total underwriting expense in 2000 was due to the inclusion of the
U.S. operations acquired in the Chartwell Re Corporation acquisition effective
from October 27, 1999. Total underwriting expenses as a percentage of net
premiums earned were 37.0% for 2000 compared to 42.7% for 1999. The decrease in
the total underwriting expense ratio occurred principally because of a decrease
in policy acquisition costs relating to U.S. primary insurance business and a
decrease in underwriting expenses following the merger of the U.S. treaty
reinsurance operations of Trenwick America Reinsurance Corporation and Chartwell
Insurance Company.
Net Investment Income
2000 1999 Change
----------- ----------- -----------
(in thousands)
Average invested assets $ 1,284,027 $ 896,610 $ 387,417
Average annualized yields 6.3% 5.9% 0.4%
Investment income - portfolio 81,506 52,900 28,606
Investment expenses (14,905) (12,609) (2,296)
=========== =========== ===========
Net investment income $ 66,601 $ 40,291 $ 26,310
=========== =========== ===========
Net investment income for 2000 was $66.6 million compared to $40.3 million for
1999. The increase in net investment income in 2000 was due to the increase in
invested assets resulting from the acquisition of Chartwell Re Corporation on
October 27, 1999. Investment expense for 2000 and 1999 includes interest expense
on funds withheld of $11.9 million and $10.6 million, respectively, relating to
stop loss reinsurance agreements purchased by Trenwick America Reinsurance
Corporation prior to 2000.
Interest Expense and Dividends on Preferred Capital Securities
Interest expense and dividends on preferred capital securities were $27.1
million for 2000, an increase of $8.5 million from 1999. The increase resulted
from the increase in indebtedness as a result of the acquisition of Chartwell Re
Corporation and the increase in borrowings under Trenwick America Corporation's
credit facility.
7
Non-Operating Income and Expenses
Net realized investment gains, net of income taxes, were $4.4 million during the
2000 year, compared to net realized gains of $0.7 million for 1999. The gains
were recognized 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 $1.2 million for 2000. No foreign currency gains or losses were
recorded for 1999.
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, 2000 and
1999. 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, 2000, 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 less than 4% of total investments, 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
and cash deposits denominated in foreign currencies. Trenwick America
Corporation's debt obligations denominated in foreign currencies were $13.4
million at year end 2000.
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 2000 would have decreased the fair value of Trenwick America
Corporation's foreign denominated net assets by approximately $2.8 million. At
8
year end 1999, the same 10% shift in foreign currency exchange rates would have
resulted in a potential loss in fair value of approximately $3.3 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 $31.1 million
and $43.4 million at year end 2000 and 1999, 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 $28.2 million
and $46.8 million at year end 2000 and 1999, 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 $103.6 million equity portfolio at year end
2000, $82.9 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 2000 which would have resulted in a $8.3 million loss. At
year end 1999, the same drop in equity prices would have resulted in a $9.4
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
9
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 an event.
Accounting Standards
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 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;
- 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;
10
- 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;
and
- Changes in Trenwick America Corporation's capital needs.
In addition to the factors outlined above that are directly related to Trenwick
America Corporation's business, it is also subject to general business risks,
including, but not limited to, adverse state, federal or foreign legislation and
regulation, adverse publicity or news coverage, changes in general economic
factors and the loss of key employees.
The facts set forth above should be considered in connection with any
forward-looking statement contained in this Annual Report on Form 10-K. The
important factors that could affect such forward-looking statements are subject
to change, and Trenwick America Corporation does not intend to update any
forward-looking statement or the foregoing list of important factors. By this
cautionary note Trenwick America Corporation intends to avail itself of the safe
harbor from liability with respect of forward-looking statements provided by
Section 27A and Section 21E referred to above.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
This information called for by this item can be found under the caption
"Quantitative and Qualitative Disclosure About Market Risk" in Management's
Discussion and Analysis of Financial Condition and Results of Operations above
and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
See the Consolidated Financial Statements and Notes thereto and the Schedules on
pages F-1 through F- 26 and S-1 through S-6 included in Part IV, Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
11
PART III
Items 10-13. Information required by Items 10 through 13 has been omitted
because Trenwick America Corporation meets the conditions set forth in General
Instruction I (1)(a) and (b) of Form 10-K and is therefore filing this Annual
Report on Form 10-K in the reduced disclosure format.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
1. Financial statements:
Report of Independent Accountants - (Page F-1).
Consolidated Balance Sheet at December 31, 2000 and 1999. (Page F-2).
Consolidated Statement of Operations and Comprehensive Income and
Changes in Common Stockholder's Equity for the years ended December
31, 2000, 1999 and 1998. (Page F-3).
Consolidated Statement of Cash Flows for the years ended December 31,
2000, 1999 1998. (Page F-4).
Notes to Consolidated Financial Statements. (Pages F-5 through F-29).
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).
12
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).
13
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 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).
10.3 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).
10.4 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).
10.5 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).
10.6 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).
10.7 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).
10.8 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).
14
10.9 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).
10.10 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.
(b) Reports on Form 8-K
Trenwick America Corporation filed a Current Report on Form 8-K on
November 16, 2000. The Current Report on Form 8-K stated that Trenwick
America Corporation would succeed Trenwick Group Inc. as the obligor with
respect to Trenwick Group Inc.'s outstanding indebtedness, including the
6.7% Senior Notes due April 1, 2003, the Contingent Interest Notes due
June 30, 2006, the 8.82% Subordinated Capital Income Securities issued by
a subsidiary trust and the 8.82% Junior Subordinated Deferrable Interest
Debentures supporting the Capital Income Securities. The Current Report on
Form 8-K further stated that, as a result of the assumption of Trenwick
Group Inc.'s outstanding indebtedness, Trenwick America Corporation would
report under the Securities Exchange Act of 1934 as a successor issuer to
Trenwick Group Inc. pursuant to Rule 15d-5 under the Securities Exchange
Act.
15
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 29, 2001
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 29, 2001
- ------------------------- Officer, and Director
Stephen H. Binet
/s/ Alan L. Hunte Executive Vice President, March 29, 2001
- ------------------------- Chief Accounting Officer,
Alan L. Hunte and Director
/s/ James F. Billett, Jr. Chairman of the Board March 29, 2001
- -------------------------
James F. Billett, Jr.
/s/ Paul Feldsher Director March 29, 2001
- -------------------------
Paul Feldsher
/s/ Robert A. Giambo Director March 29, 2001
- -------------------------
Robert A. Giambo
/s/ James E. Roberts Director March 29, 2001
- -------------------------
James E. Roberts
16
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 (an indirect
wholly-owned subsidiary of Trenwick Group Ltd.) and its subsidiaries at December
31, 2000 and 1999, and the results of their operations and their cash flows for
the years then ended 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 financial 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 7, 2001
F-1
Trenwick America Corporation
Consolidated Balance Sheet
(Amounts expressed in thousands of United States dollars)
December 31, 2000 and 1999
2000 1999
----------- -----------
Assets:
Debt securities available for sale, at fair value $ 1,006,161 $ 1,119,914
Equity securities, at fair value 103,641 113,409
----------- -----------
Total investments 1,109,802 1,233,323
Cash and cash equivalents 133,395 97,856
Accrued investment income 14,006 17,853
Premiums receivable 152,626 148,228
Reinsurance recoverable balances, net 511,163 402,757
Prepaid reinsurance premiums 63,879 50,396
Deferred policy acquisition costs 36,267 37,971
Deposits 21,547 20,227
Due from affiliates 57,952 60,095
Net deferred income taxes 63,598 71,234
Other assets 115,303 72,921
----------- -----------
Total assets $ 2,279,538 $ 2,212,861
=========== ===========
Liabilities:
Unpaid claims and claims expenses $ 1,396,504 $ 1,366,195
Unearned premium income 177,174 174,042
Reinsurance balances payable 26,401 19,613
Indebtedness 283,289 244,031
Due to affiliates 75,303 57,336
Other liabilities 32,901 27,162
----------- -----------
Total liabilities 1,991,572 1,888,379
----------- -----------
Minority interest:
Subsidiary company-obligated mandatorily redeemable preferred
capital securities of subsidiary trust holding solely
junior subordinated debentures of Trenwick America Corporation 87,059 110,000
----------- -----------
Common stockholder's equity:
Common stock and additional paid in capital 114,847 98,129
Retained earnings 76,629 123,101
Accumulated other comprehensive income (loss) 9,431 (6,748)
----------- -----------
Total common stockholder's equity 200,907 214,482
----------- -----------
Total liabilities, minority interest and common stockholder's equity $ 2,279,538 $ 2,212,861
=========== ===========
The accompanying notes are an integral part of these statements.
F-2
Trenwick America Corporation
Consolidated Statement of Operations, Comprehensive Income and
Changes in Common Stockholder's Equity
(Amounts expressed in thousands of United States dollars)
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
--------- --------- ---------
Revenues:
Net premiums earned $ 311,358 $ 187,885 $ 181,451
Net investment income 66,601 40,291 37,181
Net realized investment gains 6,768 971 6,444
Other income (loss) 2,823 569 (26)
--------- --------- ---------
Total revenues 387,550 229,716 225,050
--------- --------- ---------
Expenses:
Claims and claims expenses incurred 283,635 147,182 105,477
Policy acquisition costs 93,097 62,550 58,310
Underwriting expenses 22,304 17,694 13,777
General and administrative expenses 17,861 5,990 3,461
Interest expense and dividends on
capital securities of subsidiary trust 27,053 18,550 13,656
Foreign currency losses 1,831 -- --
--------- --------- ---------
Total expenses 445,781 251,966 194,681
--------- --------- ---------
Income (loss) before income taxes
and extraordinary item (58,231) (22,250) 30,369
Applicable income taxes (benefit) (22,084) (12,355) 4,761
--------- --------- ---------
Income (loss) before extraordinary item (36,147) (9,895) 25,608
Extraordinary loss on debt redemption,
net of $445 income tax benefit 825 -- --
--------- --------- ---------
Net income (loss) $ (36,972) $ (9,895) $ 25,608
========= ========= =========
Comprehensive income (loss):
Net income (loss) $ (36,972) $ (9,895) $ 25,608
--------- --------- ---------
Other comprehensive income (loss):
Net unrealized investment gains (losses) 14,713 (25,154) (136)
Foreign currency translation adjustments 1,466 (1,458) --
--------- --------- ---------
Total other comprehensive income (loss) 16,179 (26,612) (136)
--------- --------- ---------
Comprehensive income (loss) $ (20,793) $ (36,507) $ 25,472
========= ========= =========
Changes in common stockholder's equity:
Common stockholder's equity,
beginning of year $ 214,482 $ 208,332 $ 271,808
Net capital transactions with affiliates (21,076) 88,757 (62,348)
Adjustments related to business combination 37,794 -- --
Comprehensive income (loss) (20,793) (36,507) 25,472
Dividends on common stock (9,500) (46,100) (26,600)
--------- --------- ---------
Common stockholder's equity, end of year $ 200,907 $ 214,482 $ 208,332
========= ========= =========
The accompanying notes are an integral part of these statements.
F-3
Trenwick America Corporation
Consolidated Statement of Cash Flows
(Amounts expressed in thousands of United States dollars)
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
--------- --------- ---------
Net income (loss) $ (36,972) $ (9,895) $ 25,608
Adjustments to reconcile net income (loss) to net
cash from (for) operating activities:
Contingent interest (4,675) 642 --
Amortization of premiums on investments, net 633 1,832 2,569
Deferred income taxes (289) 5,056 (2,190)
Net realized investment gains (6,767) (971) (6,444)
Unrealized loss on foreign exchange 1,883 -- --
Depreciation and amortization expense 1,725 1,123 461
Extraordinary loss on debt redemption 1,270 -- --
Compensation expense on restricted stock 3,897 983 774
Provision for doubtful accounts receivable 11,666 7,779 --
Accretion on fair value adjustments 365 -- --
Other (2,210) 135 92
Changes in assets and liabilities, net of effects from
purchase of subsidiary:
Accrued investment income 3,847 1,354 130
Premiums receivable (4,398) 59,995 19,235
Deferred policy acquisition costs 1,704 7,032 1,501
Current income taxes receivable/payable -- (39,378) (5,956)
Other assets 44,115 (15,749) (856)
Unpaid claims and claims expenses, net of
reinsurance recoverable balances (76,962) (61,170) 2,411
Unearned premium income, net of prepaid
reinsurance premiums (10,351) (15,944) (5,330)
Other liabilities (26,704) (7,576) 2,987
--------- --------- ---------
Cash from (for) operating activities (98,223) (64,752) 34,922
--------- --------- ---------
Investing activities:
Purchases of debt securities (265,366) (118,072) (95,587)
Sales of debt securities 327,334 203,600 38,894
Maturities of debt securities 79,070 60,209 72,195
Purchases of equity securities (62,125) (16,309) (4,001)
Sales of equity securities 75,449 8,581 9,664
Cash acquired in pooling business combination -- 34,131 --
Sales (purchases) of premises and equipment (1,552) 8,424 (3,591)
--------- --------- ---------
Cash from investing activities 152,810 180,564 17,554
--------- --------- ---------
Financing activities:
Net capital transactions with affiliates (47,901) -- --
Issuance of long term debt 24,000 -- --
Issuance costs of long term debt (1,834) -- --
Redemption of long term debt (41,101) (48,417) --
Loans from (to) affiliates 57,288 54,855 (2,700)
Dividends paid on common stock (9,500) (46,100) (26,600)
Other, net -- (9,056) --
--------- --------- ---------
Cash for financing activities (19,048) (48,718) (29,300)
--------- --------- ---------
Change in cash and cash equivalents 35,539 67,094 23,246
Cash and cash equivalents, beginning of year 97,856 30,762 7,516
--------- --------- ---------
Cash and cash equivalents, end of year $ 133,395 $ 97,856 $ 30,762
========= ========= =========
The accompanying notes are an integral part of these statements.
F-4
TRENWICK AMERICA CORPORATION
Notes to Consolidated Financial Statements
(Amounts expressed in thousands of United States dollars except share data)
Years Ended December 31, 2000, 1999 and 1998
Note 1 Organization and Basis of Presentation
Organization
Trenwick America Corporation is a United States holding company whose principal
subsidiaries underwrite specialty insurance and reinsurance. Trenwick America
Corporation's ultimate parent is Trenwick Group Ltd., which is a publicly traded
Bermuda holding company. Prior to September 27, 2000, Trenwick America
Corporation's parent was Trenwick Group Inc.
On 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. Effective
December 19, 1999, Trenwick Group Inc. entered into an Agreement, Schemes of
Arrangement and Plan of Reorganization with Trenwick Group Ltd., LaSalle Re
Holdings Limited, and LaSalle Re Limited, which was amended and restated as of
March 20, 2000 and amended as of June 28, 2000. Under the terms of the business
combination agreement, 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 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. More details of these business combinations are
disclosed in Note 2.
Basis of Presentation
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 of September 27, 2000.
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
F-5
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 2000 and 1999 and
for the 2000 year, the 1999 year and the 1998 year 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.
The consolidated financial statements include the accounts of Trenwick America
Corporation and its subsidiaries after elimination of significant intercompany
accounts and transactions. Certain items in the prior year financial statements
have been reclassified to conform to the current presentation.
These financial statements have been prepared in conformity with accounting
principles that are generally accepted in the United States of America,
sometimes referred to as U.S. GAAP. To prepare these financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting periods. Actual amounts
will differ from these estimates.
Other significant accounting policies are presented in italics within the
appropriate footnotes.
Note 2 Business Combinations
Trenwick/LaSalle Business Combination
On December 19, 1999, LaSalle Re Holdings Limited, LaSalle 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.
The Trenwick/LaSalle business combination was accounted for 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, the purchase
price was allocated to the assets acquired and liabilities assumed based on the
estimated fair values at the date of acquisition. The excess of the purchase
price over the estimated fair value of the identifiable net assets acquired was
recorded as goodwill.
Trenwick Group Inc./Chartwell Re Corporation Merger
On October 27, 1999, Trenwick Group Inc. issued common shares in exchange for
all of the common shares of Chartwell Re Corporation, a publicly held insurer
and reinsurer. The merger of Chartwell Re Corporation with and into Trenwick
Group Inc. was accounted for as a purchase by Trenwick Group Inc. of Chartwell
Re Corporation, and the $153,315 excess of the purchase price ($231,326) over
the fair value of Chartwell Re Corporation's identifiable net assets ($78,011)
was recorded as goodwill. On September 27, 2000, the unamortized goodwill
resulting from this transaction was eliminated in connection with the
Trenwick/LaSalle business combination.
F-6
Pro Forma Results of Operations
The following table presents actual and unaudited pro forma consolidated results
of operations for 2000 and 1999 as if the above business combinations had
occurred on January 1, 1999. The pro forma information is not necessarily
indicative of the results of operations that would have occurred had these
transactions been consummated at such date nor of future results of operations.
2000 1999
-------------------------------------------------------
Actual Pro Forma Actual Pro Forma
--------- --------- --------- ---------
Total revenues $ 387,550 $ 387,198 $ 229,716 $ 325,080
Net income (loss) $ (36,972) $ (37,333) $ (9,895) $ (61,566)
Note 3 Segment Information
Trenwick America Corporation's principal subsidiaries operate through two
business platforms located in Stamford, Connecticut: Trenwick America
Reinsurance Corporation, which underwrites treaty reinsurance on United States
property and casualty risks, including United States reinsurance business
previously written by Chartwell Re Corporation, and Canterbury Financial Group
Inc., which underwrites specialty insurance through its operating subsidiaries,
Chartwell Insurance Company, The Insurance Corporation of New York and Dakota
Specialty Insurance Company.
The following tables present business segment financial information for Trenwick
America Corporation at year end 2000 and 1999 and for each of the years 2000,
1999 and 1998:
Total assets: 2000 1999
----------- -----------
Treaty reinsurance $ 1,777,324 $ 1,871,528
Specialty program insurance 376,994 262,233
Unallocated 125,220 79,100
----------- -----------
Total assets $ 2,279,538 $ 2,212,861
=========== ===========
2000 1999 1998
----------- ----------- -----------
Total revenues:
Treaty reinsurance $ 329,218 $ 217,322 $ 225,351
Specialty program insurance 54,758 12,234 --
Unallocated 3,574 160 (301)
----------- ----------- -----------
Total revenues $ 387,550 $ 229,716 $ 225,050
=========== =========== ===========
2000 1999 1998
----------- ----------- -----------
Net income (loss)
Treaty reinsurance $ (15,184) $ 7,473 $ 34,676
Specialty program insurance 1,394 1,680 --
Unallocated (23,182) (19,048) (9,068)
----------- ----------- -----------
Net income (loss) $ (36,972) $ (9,895) $ 25,608
=========== =========== ===========
Revenues from transactions between operating segments, which are not material,
have been eliminated in consolidation. Unallocated net loss consists mainly of
interest expense and dividends on preferred capital securities of subsidiary
trust, net of applicable income taxes.
F-7
Note 4 Underwriting Activities
Premiums
Insurance and reinsurance premiums on contracts are accrued on an estimated
basis throughout the term of such contracts. Premiums for retrospectively rated
and other experience rated reinsurance contracts are estimated and accrued based
on the difference between total costs before and after the experience under the
contract (the with-and-without method). Premium estimates are based on
statistical and other data with subsequent adjustments recorded in the period in
which they become known. Short-duration contracts providing indemnification
against loss or liability relating to insurance risk have been accounted for as
reinsurance.
Insurance and reinsurance premiums are earned (net of reinsurance ceded) on a
pro-rata basis over the related contract period. Unearned premium income
represents the portion of premiums applicable to the unexpired portion of
premium coverage with renewal dates later than year-end. Such reserves are
computed by pro-rata methods for direct business and excess of loss reinsurance
and are established based on reports received from ceding companies for
proportional reinsurance. Reinsurance premiums are reported as prepaid
reinsurance premiums and amortized over the contract period in proportion to the
amount of reinsurance protection provided. Where the contract provides for
return premiums, these are accrued based on loss experience through the date of
the balance sheet.
The components of premiums written and earned for the years 2000, 1999 and 1998
are as follows:
2000 1999 1998
--------- --------- ---------
Assumed premiums written $ 339,361 $ 210,921 $ 218,249
Direct premiums written 187,545 38,088 --
--------- --------- ---------
Gross premiums written 526,906 249,009 218,249
Ceded premiums written (221,027) (77,624) (42,127)
--------- --------- ---------
Net premiums written $ 305,879 $ 171,385 $ 176,122
========= ========= =========
Assumed premiums earned $ 353,174 $ 255,164 $ 230,063
Direct premiums earned 165,728 10,343 --
--------- --------- ---------
Gross premiums earned 518,902 265,507 230,063
Ceded premiums earned (207,544) (77,622) (48,612)
--------- --------- ---------
Net premiums earned $ 311,358 $ 187,885 $ 181,451
========= ========= =========
Policy acquisition costs
Policy acquisition costs are stated net of policy acquisition costs ceded and
primarily consist of commissions and brokerage expenses incurred at policy or
contract issue date. These costs vary with, and are primarily related to, the
acquisition of business and are deferred and amortized over the period in which
the related premiums are earned. Deferred policy acquisition costs are reviewed
periodically to determine that they do not exceed recoverable amounts after
allowing for anticipated investment income.
F-8
The components of policy acquisition costs are as follows:
2000 1999 1998
--------- --------- ---------
Gross policy acquisition costs deferred $ 157,027 $ 106,617 $ 63,042
Ceded policy acquisition costs deferred (65,634) (27,119) (6,233)
--------- --------- ---------
Net policy acquisition costs deferred $ 91,393 $ 79,498 $ 56,809
========= ========= =========
Policy acquisition costs expensed $ 93,097 $ 62,550 $ 58,310
========= ========= =========
For the years ended December 31, 2000, 1999 and 1998, Trenwick America
Corporation earned commissions on cessions to retrocessionaires of $64,883,
$18,928, and $6,119, respectively.
Claims and Claims Expenses
Claims and claims expenses are recorded as incurred so as 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. The estimates for claims
and claims expenses incurred but not reported were developed 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 may vary from such estimates. Any
adjustments to these estimates are reflected in income when known.
The components of claims and claims expenses incurred for the years 2000, 1999
and 1998 were as follows:
2000 1999 1998
--------- --------- ---------
Gross claims and claims expenses incurred $ 462,685 $ 268,066 $ 167,068
Ceded claims and claims expenses incurred (179,050) (120,884) (61,591)
--------- --------- ---------
Net claims and claims expenses incurred $ 283,635 $ 147,182 $ 105,477
========= ========= =========
F-9
The following table presents a reconciliation of the beginning and ending
balances of net liabilities for unpaid claims and claims expenses. The gross
liabilities for unpaid claims and claims expenses at period ends are as
reflected in the balance sheet. The net liabilities for unpaid claims and claims
expenses are after deductions for reinsurance recoverable on unpaid claims and
claims expenses, also as reflected in the balance sheet.
2000 1999 1998
----------- ----------- -----------
Beginning of year:
Gross unpaid claims and claims expenses $ 1,344,168 $ 546,292 $ 518,387
Reinsurance recoverable on unpaid claims
and claims expenses 502,787 194,242 139,036
----------- ----------- -----------
Net unpaid claims and claims expenses 841,381 352,050 379,351
----------- ----------- -----------
Net unpaid claims and claims
expenses of companies acquired -- 564,829 --
----------- ----------- -----------
Provision, net of reinsurance recoverable:
Claims incurred in the current year 251,139 130,993 112,653
Claims incurred prior to the current year 32,496 16,189 (7,176)
----------- ----------- -----------
Total provision 283,635 147,182 105,477
----------- ----------- -----------
Payments, net of reinsurance:
Claims incurred in the current year (66,574) (38,320) (28,057)
Claims incurred prior to the current year (279,717) (173,546) (104,721)
----------- ----------- -----------
Total payments (346,291) (211,866) (132,778)
----------- ----------- -----------
Adoption of accounting policy for workers'
compensation discounting (1,135) -- --
----------- ----------- -----------
Effect of loss sharing agreement with affiliates (17,756) (10,814)
----------- ----------- -----------
Foreign currency translation adjustment to net
unpaid claims and claims expenses 237 -- --
----------- ----------- -----------
End of year:
Net unpaid claims and claims expenses 760,071 841,381 352,050
Reinsurance recoverable on unpaid claims
and claims expenses 611,954 502,787 194,242
----------- ----------- -----------
Gross unpaid claims and claims expenses $ 1,372,025 $ 1,344,168 $ 546,292
=========== =========== ===========
Unpaid Claims and Claims Expenses
The components of unpaid claims and claims expenses on the balance sheet at year
end 2000 and 1999 are as follows:
2000 1999
---------- ----------
Reserves for unpaid claims and claims expenses $1,372,025 $1,344,168
Claims and claims expenses payable 24,479 22,027
---------- ----------
Unpaid claims and claims expenses $1,396,504 $1,366,195
========== ==========
The estimates of prior year losses were reduced by approximately $7,176 on a net
basis in 1998. The decrease resulted from favorable development in accident
years 1993 and prior for Trenwick America Reinsurance Corporation, which was
partially offset by adverse development in accident years 1994 through 1997.
F-10
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.
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 $10,192,
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.
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 reserves for 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 reserves for
unpaid claims and claims expenses at year end 2000 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 will be 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 2000 and 1999 are as follows:
2000 1999
-------- --------
Gross unpaid claims and claims expenses $ 99,474 $ 96,493
Reinsurance recoverable on unpaid claims and
claims expenses (28,927) (27,847)
-------- --------
Net unpaid claims and claims expenses $ 70,547 $ 68,646
======== ========
F-11
Reinsurance
Trenwick America Corporation enters into reinsurance and retrocessional
agreements to reduce its exposure on individual risks, catastrophic losses and
other large losses in all lines of business. Reinsurance contracts which do not
meet insurance accounting risk transfer requirements are classified as deposits.
These deposits are treated as financing transactions and are credited or charged
with interest income or expense according to contract terms.
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 for each accident year. Trenwick America Reinsurance Corporation did not
purchase an aggregate excess of loss ratio treaty after 1999.
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 the agreement are presented gross in the balance sheet as reinsurance
recoverable balances ($91,970 and $46,460 at year end 2000 and 1999,
respectively) and as miscellaneous accounts receivable, included in other assets
($8,030 at year end 2000 and 1999). The related benefit for losses ceded to the
agreement has been reflected as a reduction to claims and claims expenses
incurred ($38,568 and $35,646 during 2000 and 1999, respectively) and the
benefit related to other underwriting balances has been reflected as a reduction
to underwriting expenses ($0 and $8,030 for 2000 and 1999, respectively). In
addition, as part of the merger, Chartwell Re Corporation commuted several
aggregate stop-loss contracts.
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
partial collateral under some of these agreements. Letters of credit, trust
accounts and funds withheld in the aggregate amount of $291,303 (including
interest) have been arranged in favor of Trenwick America Corporation
collateralizing reinsurance recoverables with respect to certain reinsurers and
retrocessionaires.
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.
F-12
Reinsurance Recoverable Balances, Net
The components of reinsurance recoverable balances, net at year end 2000 and
1999 are as follows:
2000 1999
-------- --------
Paid claims $ 38,209 $ 26,191
Unpaid claims and claims expenses, net of
funds held offset of $139,000 and $126,222 472,954 376,566
-------- --------
Reinsurance recoverable balances, net $511,163 $402,757
======== ========
Reinsurance recoverable balances at year end 2000 and 1999 are net of allowances
for doubtful accounts of $8,940 and $6,569, respectively. Interest expense on
funds held, incurred during the 2000, 1999 and 1998 years was recorded as a
reduction to investment income and as an addition to the funds held offset.
Note 5 Investing Activities
Debt Security Investments
Trenwick America Corporation has classified all of its debt securities as
"available for sale" and reported them at estimated fair value using quoted
market prices or broker dealer quotes.
Fair value and amortized cost of debt securities at year end 2000 and 1999 are
as follows:
2000 1999
---------------------------- ----------------------------
Fair Amortized Fair Amortized
Value Cost Value Cost
---------- ---------- ---------- ----------
U.S. federal and U.K. government
securities, including agencies $ 136,396 $ 133,447 $ 104,928 $ 98,557
Other foreign government securities 18,223 17,908 16,418 22,886
U.S. municipal government securities 249,700 244,234 454,993 460,176
Mortgage and other asset-backed securities 337,184 330,204 286,313 288,589
Corporate and other debt securities 264,658 263,847 257,262 260,918
---------- ---------- ---------- ----------
Total $1,006,161 $ 989,640 $1,119,914 $1,131,126
========== ========== ========== ==========
Gross and net unrealized gains and losses on debt securities at year end 2000
and 1999 are as follows:
2000 1999
------------------------- -------------------------
Gains Losses Gains Losses
-------- -------- -------- --------
U.S. federal and U.K. government
securities, including agencies $ 2,949 $ -- $ 379 $ (465)
Other foreign government securities 315 -- 42 (53)
U.S. municipal government securities 5,466 -- 2,221 (7,404)
Mortgage and other asset-backed securities 7,097 (117) 1,244 (3,521)
Corporate and other debt securities 5,000 (4,189) 434 (4,089)
-------- -------- -------- --------
Gross unrealized gains (losses) $ 20,827 $ (4,306) $ 4,320 $(15,532)
-------- ======== ======== ========
Net unrealized gains (losses) $ 16,521 $(11,212)
======== ========
The fair value and amortized cost at year end 2000 are shown below by
contractual maturity periods for all debt securities except mortgage-backed and
asset-backed securities, which are included in the table based on expected
maturity dates. Actual
F-13
maturities may differ from contractual maturities because certain borrowers have
the right to call or prepay obligations with or without penalty.
Fair Value Amortized Cost
---------- --------------
Due in one year or less $ 48,354 $ 48,119
Due after one year through five years 397,595 393,211
Due after five years through ten years 390,463 383,573
Due after ten years 169,749 164,737
---------- ----------
Total maturities of debt securities $1,006,161 $ 989,640
========== ==========
Equity Security Investments
Trenwick America Corporation has classified all of its publicly traded equity
securities as "available for sale" and reported them at estimated fair value
using quoted market prices; non publicly traded equity securities, consisting
principally of limited partnerships in which Trenwick America Corporation holds
greater than 3% interest, are also reported at their equity value.
Fair value and cost of equity securities at year end 2000 and 1999 are as
follows:
2000 1999
-------------------------- --------------------------
Fair Amortized Fair Amortized
Value Cost Value Cost
-------- -------- -------- --------
Publicly traded common and preferred stock $ 82,919 $ 84,943 $ 97,075 $ 94,004
Limited partnerships 19,722 19,722 15,334 15,334
Private placement 1,000 1,000 1,000 1,000
-------- -------- -------- --------
Total $103,641 $105,665 $113,409 $110,338
======== ======== ======== ========
Gross and net unrealized gains and losses on equity securities at year end 2000
and 1999 are as follows:
2000 1999
------------------------- ------------------------
Gains Losses Gains Losses
------- ------- ------- -------
Publicly traded common and preferred stock $ 3,160 $(5,184) $ 6,690 $(3,619)
------- ------- ------- -------
Gross unrealized gains (losses) $ 3,160 $(5,184) $ 6,690 $(3,619)
======= ======= ======= =======
Net unrealized gains (losses) $(2,024) $ 3,071
======= =======
Net Investment Income and Net Realized Investment Gains
Investment income, consisting of dividends and interest, is recognized in income
when earned, net of investment expenses. The amortization of premiums and
accretion of discount for debt securities is computed utilizing the interest
method. The effective yield utilized in the interest method is adjusted when
sufficient information exists to estimate the probability and timing of
prepayments on mortgage-backed and other asset-backed securities. The net
investment in the security is adjusted to the amount that would have existed had
the new effective yield been applied since the acquisition of the security, and
that adjustment is included in net investment income.
F-14
The sources of net investment income for the years ended December 31 are as
follows:
2000 1999 1998
-------- -------- --------
Debt securities $ 68,264 $ 49,468 $ 43,466
Equity securities 7,063 2,146 1,473
Cash and cash equivalents 6,179 1,286 697
-------- -------- --------
Gross investment income 81,506 52,900 45,636
Investment expenses (14,905) (12,609) (8,455)
-------- -------- --------
Net investment income $ 66,601 $ 40,291 $ 37,181
======== ======== ========
Included in investment expense is imputed interest on Trenwick America
Corporation's funds held offset to reinsurance recoverable, which was $11,940,
$10,636 and $7,009 for 2000, 1999 and 1998, respectively.
Realized gains or losses on disposition of investments are determined on the
basis of the specific identification method. When fair values decline for
reasons other than changes in interest rates or other perceived temporary
conditions, the security is written down to its net realizable value.
The sources of net realized gains on sales of investments at year end 2000 and
1999 were as follows:
2000 1999 1998
------- ------- -------
Debt security gains $ 2,124 $ 2,558 $ 475
Equity security gains 7,143 4,896 5,969
Debt security losses (2,423) (6,483) --
Equity security losses (76) -- --
------- ------- -------
Net realized investment gains 6,768 971 6,444
Applicable income taxes 2,369 288 2,201
------- ------- -------
Net realized investment gains
Included in net income $ 4,399 $ 683 $ 4,243
======= ======= =======
Trenwick America Corporation generally limits its 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. Trenwick America
Corporation closely monitors its below investment grade securities as well as
the creditworthiness of the portfolio as a whole. During 1999, Trenwick America
Corporation wrote down the fair value of certain debt securities by $5,179 and
reflected the write down as realized losses on investments. Trenwick America
Corporation did not write down the value of any investments during 2000 or 1998.
F-15
The changes in net unrealized gains (losses) on investments and their effects on
other comprehensive income (loss) for 2000, 1999 and 1998 were as follows:
2000 1999 1998
-------- -------- --------
Net gains (losses) on debt securities $ 27,431 $(39,932) $ 2,054
Net gains (losses) on equity securities 1,972 2,195 4,181
-------- -------- --------
Net investment gains (losses) included
in comprehensive income before income taxes 29,403 (37,737) 6,235
Applicable income taxes (benefit) 10,291 (13,266) 2,128
-------- -------- --------
Net investment gains (losses) included in
comprehensive income (loss) 19,112 (24,471) 4,107
Net realized investment (gains) losses
included in net income (loss) (4,399) 683 (4,243)
-------- -------- --------
Net unrealized investment gains (losses) included in
other comprehensive income (loss) $ 14,713 $(25,154) $ (136)
======== ======== ========
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.
Unrealized Investment Gains (Losses)
Net unrealized gains and losses on debt and equity securities are included in
other comprehensive income, net of related deferred income taxes.
The components of net unrealized investment gains (losses) included in
accumulated other comprehensive income, net of applicable deferred income taxes
at year end 2000 and 1999 are as follows:
2000 1999
-------- --------
Net unrealized gains (losses) on debt securities $ 16,521 $(11,212)
Net unrealized gains (losses) on equity securities (2,024) 3,071
-------- --------
Net unrealized investment gains (losses)
before income taxes 14,497 (8,141)
Applicable income taxes 5,074 (2,851)
-------- --------
Total $ 9,423 $ (5,290)
======== ========
F-16
Note 6 Financing Activities
Indebtedness and Minority Interest
Par value and carrying value of indebtedness and minority interest at year end
2000 and 1999 are as follows:
2000 1999
----------------------------- -----------------------------
Par Value Carrying Value Par Value Carrying Value
----------- -------------- ----------- --------------
Senior notes, 6.7% $ 75,000 $ 73,143 $ 75,000 $ 75,000
Senior notes, 10.25% -- -- 40,075 39,831
Senior credit facility 181,379 181,379 94,501 94,501
Contingent interest notes 1,000 28,767 1,000 34,699
----------- ----------- ----------- -----------
Total indebtedness 257,379 283,289 210,576 244,031
Mandatorily redeemable
preferred capital securities 110,000 87,059 110,000 110,000
----------- ----------- ----------- -----------
Total indebtedness and
minority interest $ 367,379 $ 370,348 $ 320,576 $ 354,031
=========== =========== =========== ===========
Senior Notes
The 6.7% senior notes 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. 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; the imputed rate of interest on the notes is 6.9%.
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 deferred income taxes of $445, was recorded by Trenwick America
Corporation.
Senior Credit Facility
Concurrent with the Trenwick/LaSalle business combination, Trenwick America
Corporation and Trenwick Group Ltd.'s U.K. holding company 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 America Corporation
is the primary obligor with respect to the revolving credit facility, and
Trenwick Group Ltd.'s U.K. holding company 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 Group Ltd.'s U.K. holding company's obligations and
additionally by Trenwick America Corporation with respect to Trenwick Group
Ltd.'s U.K. holding company's obligations.
The credit agreement provides for a 364-day revolving credit facility with any
outstanding borrowings converting to a four year term loan facility following
the expiration of the 364 day period. In addition, the credit agreement provides
for a five year letter of credit facility which may only be issued for the
account of Lloyd's to support the syndicate participations of Trenwick Group
Ltd.'s U.K. subsidiaries. The applicable interest rate on borrowings under the
credit facility is generally 1.3% above
F-17
the London Interbank Offered Rate and was 7.99% at year end 2000. A commitment
fee of 0.25% is charged on the unused portion of the letter of credit facility.
At the end of the revolving period, all outstanding revolving loans will convert
to a four-year term loan facility, 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 under the credit facility to repay a
portion or all of the revolving credit facility or term loan facility in the
event of equity issuances, asset sales and debt issuances by Trenwick Group Ltd.
or its subsidiaries. At year end 2000, $181,379 of revolving loans were
outstanding, and the utilized portion of the letter of credit facility was
$230,000.
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 and
tangible net worth. At year end 2000, Trenwick Group Ltd. is in compliance with
the credit agreement covenants.
Prior to September 27, 2000, Trenwick America Corporation's credit agreement
provided for a $170,000, 364 day revolving credit facility and a $230,000 five
year letter of credit facility. As of December 31, 1999, Trenwick America
Corporation had $94,501 of revolving loans outstanding, and the utilized portion
of the letter of credit facility was $208,000.
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 reserves for losses and loss adjustment 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, and Trenwick America Corporation subsequently assumed
the obligations of Trenwick Group Inc. under the notes in the Trenwick/LaSalle
business combination. 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 $10,000 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. shares. For purposes of any
settlement of the notes in Trenwick Group Ltd.'s common stock, the value
ascribed to each share of common stock shall 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 December 31, 2000, 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 insurer's liability for unpaid claims and claims
expenses at year end 2000 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
$46,306. The notes contain covenants, which relate to the maintenance of certain
records and limitations on certain
F-18
indebtedness. At December 31, 2000 Trenwick America Corporation is in compliance
with those covenants.
Letter of Credit
An insurance subsidiary of Trenwick America Corporation has a $2,837 letter of
credit to provide capital to support the participation in certain Lloyd's
syndicates.
Future Minimum Indebtedness Payments
Future minimum payments on long term debt at year end 2000, assuming conversion
of the revolving credit portion of the credit agreement to a four year term loan
are as follows: 2001, $0; 2002, $40,810; 2003, $124,879; 2004, $58,948; 2005,
$31,742; 2006, $1,000.
Mandatorily Redeemable Preferred Capital Securities
The mandatorily redeemable preferred capital securities are obligations of a
business trust subsidiary of 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 Trenwick America
Corporation, 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 Trenwick America Corporation 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 Trenwick America
Corporation's prepayment or repayment of its subordinated debentures held by the
trust. In the event of a default by Trenwick America Corporation 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 Trenwick America Corporation.
In November 2000, LaSalle Re Limited, a Bermuda affiliate of Trenwick America
Corporation, purchased $13,000 par value of the preferred capital securities in
the open market for $9,902. The carrying value of the preferred capital
securities at year end 2000 was $87,059. Interest expense of $162 was incurred
by Trenwick America Corporation on the capital securities held by LaSalle Re
Limited during 2000 and was included in interest payable at year end 2000.
Interest Expense and Dividends on Preferred Capital Securities
The components of interest expense and dividends on preferred capital securities
for 2000, 1999 and 1998 were as follows:
2000 1999 1998
------- ------- -------
Interest expense on indebtedness $16,174 $ 8,479 $ 3,943
Dividends on capital securities 9,702 9,702 9,702
Commitment and other fees 1,177 369 11
------- ------- -------
Total $27,053 $18,550 $13,656
======= ======= =======
Interest on indebtedness of $7,951, $1,164 and $6 was paid during 2000, 1999 and
1998, respectively. Dividends on preferred capital securities of $2,426 was paid
during 2000, 1999 and 1998.
F-19
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.
Note 7 Income Taxation
Trenwick America Corporation provides for income taxes based upon consolidated
income reported in the financial statements.
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 2000, 1999 and 1998 are as follows:
2000 1999 1998
-------- -------- --------
Current and deferred components:
Current income taxes (benefit) $(22,239) $(17,411) $ 6,952
Deferred income taxes (benefit) (289) 5,056 (2,190)
-------- -------- --------
Total income taxes (benefit) $(22,528) $(12,355) $ 4,762
======== ======== ========
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 income (losses) before income taxes as a result of the following:
2000 1999 1998
-------- -------- --------
Income (loss) before income taxes $(59,501) $(22,250) $ 30,369
-------- -------- --------
Expected income taxes (benefit) (20,826) (7,788) 10,629
at statutory rate of 35%
Effect of tax-exempt investment income (5,077) (6,227) (6,049)
Effect of non-deductible goodwill and other expenses 388 252 52
True-up for prior year returns 2,103 682 --
Change in valuation allowance -- 770 --
State income taxes 411 (44) 130
Foreign income taxes 473 -- --
-------- -------- --------
Total U.S. federal income taxes (benefit) $(22,528) $(12,355) $ 4,762
======== ======== ========
Deferred income taxes are provided for based on an asset and liability approach
that requires the recognition of deferred income tax assets and liabilities for
the expected future tax consequences of temporary differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities.
F-20
Deferred income tax assets (liabilities) are attributable to the following
temporary differences at year end 2000 and 1999:
2000 1999
--------- ---------
Deferred income tax assets:
Discounting and other loss reserve adjustments $ 33,947 $ 38,599
Unearned premium income 7,930 8,657
U.S. net operating losses 33,711 17,257
Contingent interest note 9,552 11,514
Tax basis difference on investment securities 7,419 4,866
Employee stock option and compensation plans 1,211 687
Foreign tax credits 4,579 4,979
Alternative minimum tax credits 5,256 71
Debt issuance costs 1,688 770
Allowance for uncollectible reinsurance -- 905
Unrealized depreciation of investments available for sale -- 2,851
Other deferred tax assets 2,852 4,056
Valuation allowance (2,976) (4,979)
--------- ---------
Net deferred tax asset 105,169 90,233
--------- ---------
Deferred income tax liabilities:
Deferred policy acquisition costs (12,693) (13,289)
Unrealized appreciation of investments available for sale (5,074) --
Earned but not reported premiums, net of loss and expense (310) (2,358)
Accretion of market discount on debt securities (1,796) (1,416)
Equity investment adjustments (2,781) (1,102)
Fair value adjustment of debt obligations (8,679) --
Deferred intercompany transactions (8,549) --
Other deferred tax liabilities (1,689) (834)
--------- ---------
Gross deferred income tax liabilities (41,571) (18,999)
--------- ---------
Net deferred income tax asset $ 63,598 $ 71,234
========= =========
At year end 2000, Trenwick America Corporation has net operating loss
carryforwards of approximately $96,318 that will be available (subject to the
annual limitation discussed below) to offset regular taxable income during the
carryforward period which expires between 2007 and 2020. The amount that will
expire in 2007 is $15,717; the remaining balance begins to expire in 2018. As a
result of the Trenwick/LaSalle business combination, an ownership change took
place on September 27, 2000, and approximately $65,479 of the total U.S. net
operating loss carryforward became limited to an annual utilization of $5,228.
The remaining $30,839 in U.S. net operating loss carryforwards are not so
limited.
In connection with the Trenwick/LaSalle business combination, Trenwick America
Corporation recorded a valuation allowance of $2,976 to reduce its deferred tax
asset as sufficient uncertainty exists regarding the realizability of certain
foreign tax credits.
Trenwick America Corporation periodically reviews the adequacy of valuation
allowances and recognizes benefits only as the reassessment indicates that it is
more likely than not that these benefits will be realized. Any reduction in the
valuation allowance will be offset against goodwill. Realization of the related
tax benefits will depend upon the recognition of future earnings from non-U.S.
sources within the U.S.
F-21
operations or a change in circumstances that cause the recognition of these
benefits to be more likely than not.
Income taxes of $27,766 were recovered during 2000; income taxes of $1,371 and
$12,500 were paid during 1999 and 1998, respectively.
Note 8 Employee Benefits and Compensation Arrangements
Retirement Plans
Provisions for employee retirement plans are expensed as incurred.
Trenwick America Corporation has both a defined contribution pension plan and a
401(k) savings plan for substantially all full-time employees; the plans are
administered by a life insurance company. Trenwick America Corporation
contributes 8% of an eligible employee's total compensation to the pension plan;
no employee contributions are made to the plan. Contributions to the pension
plan were $823, $429, and $463 for the 2000, 1999 and 1998 years, respectively.
Trenwick America Corporation matches 100% of employees' contributions to the
savings plan up to 6% of each eligible employee's total compensation. During the
years 2000, 1999 and 1998, Trenwick America Corporation contributed $625, $365,
and $351, respectively, to the savings plan.
Restricted Common Share Awards
Trenwick Group Ltd. awards its restricted common shares to key employees of
Trenwick America Corporation. At the time of the award, the market value of the
shares is recorded as deferred compensation and is presented as a separate
component of Trenwick Group Ltd.'s shareholders' equity. The deferred
compensation is charged to Trenwick Group Ltd.'s income statement over the
vesting period.
Compensation expense on restricted stock of $3,897, $982 and $744 was allocated
to Trenwick America Corporation by Trenwick Group Ltd. in 2000, 1999 and 1998,
respectively.
Share Options
Trenwick Group Ltd. grants share options for a fixed number of its common shares
to employees of Trenwick America Corporation. 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. Trenwick America Corporation continues to account for the share option
grants in accordance with the previous standard and has included the pro forma
disclosures required by the fair value based method below.
Trenwick Group Ltd. has several plans through which it makes options in its
common shares available 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.
F-22
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. 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 income (loss) would have been $(37,622),
$(10,168), and $25,388 for the years 2000, 1999 and 1998, respectively.
The pro forma adjustments relate to options granted from 1995 to 2000 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 2000, 1999 and 1998 are as
follows:
2000 1999 1998
---- ---- ----
Expected volatility 33.5% 28.0% 23.0%
Risk-free interest rate 5.0% 6.1% 5.6%
Dividend yield on Trenwick Group Ltd. common shares 0.6% 3.0% 3.1%
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 Comprehensive Income
Other comprehensive income consists of the change in the net unrealized
appreciation of investments and the change in foreign currency translation
adjustments, both net of income taxes.
The components of accumulated other comprehensive income at year end 2000 and
1999 are as follows:
2000 1999
------- -------
Unrealized investment gains (losses), net of applicable
deferred income taxes of $5,074 and $(2,851) $ 9,423 $(5,290)
Foreign currency translation adjustment, net of applicable
deferred income taxes of $4 and $(784) 8 (1,458)
------- -------
Accumulated other comprehensive income (loss) $ 9,431 $(6,748)
======= =======
Note 10 Insurance Regulation
Trenwick America Corporation's insurance subsidiaries are subject to insurance
laws and regulations in the 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 is subject to
restrictions on the payments of dividends without prior approval from the state
insurance regulator
F-23
in its respective state of domicile. These restrictions are based upon certain
measures of statutory surplus and net income. At year end 2000, Trenwick America
Corporation's insurance subsidiaries had $48,299 available for the payment of
dividends in 2001 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 its calculation at year end 2000, 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 $438,738 and $458,824 at year end 2000 and 1999, respectively.
Combined statutory net income (loss) was $(16,192), $(47,603) and $40,930 for
the 2000, 1999 and 1998 years, respectively.
Effective January 1, 2001, the domiciliary state insurance departments of
Trenwick America Corporation's insurance subsidiaries, Connecticut, New York and
North Dakota, 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, which is expected to be
approximately $21,000, primarily due to the recording of net deferred tax
assets, will be recorded as an adjustment to increase statutory surplus of the
Trenwick America Corporation's insurance subsidiaries.
The State of Connecticut Insurance Department has permitted one of Trenwick
America Corporation's insurance subsidiaries domiciled in Connecticut 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. The New York State Insurance Department has required
another of Trenwick Group Ltd.'s insurance subsidiaries, domiciled in New York,
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 Group Ltd.'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 $46,209 at year end 2000 were
on deposit with various state or governmental insurance departments in order to
comply with insurance laws.
F-24
Note 11 Other Assets and Other Liabilities
Investments in managing general agencies through which Trenwick America
Corporation writes primary insurance business and in which it holds ownership
interest of between 20% and 30% are recorded in other assets on the balance
sheet. Based on the ownership interest and Trenwick America Corporation's
ability to exercise significant influence on the operating and financial
policies of these managing general agencies, these investments are accounted for
under the equity method.
Premises and equipment, including leasehold improvements and capitalized
software costs, are recorded at cost and are amortized or depreciated using the
straight-line method over their useful lives.
Goodwill represents the unamortized excess of purchase price over the fair value
of identifiable net assets of acquired entities. Trenwick America Corporation
amortizes goodwill on a straight-line basis over twenty-five years. On a
periodic basis, Trenwick America Corporation estimates 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.
The components of other assets and other liabilities at year end 2000 and 1999
are as follows:
2000 1999
-------- --------
Other assets:
Funds held $ 14,556 $ 11,402
Investments in managing general agencies 9,968 2,214
Premises and equipment, net of accumulated
depreciation of $299 and $2,330, respectively 6,304 5,368
Deposits, prepaid expenses and loss funds 9,179 746
Goodwill, net of accumulated amortization of $355 33,976 --
Miscellaneous accounts receivable 13,019 13,273
Current income taxes receivable 21,386 33,367
Other 6,915 6,551
-------- --------
Total 115,303 $ 72,921
======== ========
Other liabilities:
Accounts payable and accrued expenses $ 21,234 $ 18,100
Security deposits for insureds 7,788 5,858
Other 3,879 3,204
-------- --------
Total $ 32,901 $ 27,162
======== ========
Goodwill amortization of $355 was charged to operations during 2000.
Operating Lease Agreements
Trenwick America Corporation leases office space under non-cancelable operating
leases which expire on various dates through 2008. Trenwick Group Ltd.'s future
minimum lease commitments at year end 2000 total $11,621 and are payable as
follows: 2001, $1,481; 2002, $1,482; 2003, $1,549; 2004, $1,597; 2005, $1,562
and thereafter, $3,950.
Total office rent expense for 2000, 1999 and 1998 was $2,060, $1,405 and $1,247,
respectively.
F-25
Note 12 Fair Value of Financial Instruments
The fair value of a financial instrument is defined as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
Fair values have been estimated based upon quoted market prices or broker dealer
quotes and may vary in the near term.
The following table presents in summary form the carrying amounts and estimated
fair values of Trenwick America Corporation's financial instruments at year end
2000 and 1999:
2000 1999
--------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Assets:
Debt securities $1,006,161 $1,006,161 $1,119,914 $1,119,914
Equity securities 103,641 103,641 113,409 113,409
Cash and cash equivalents 133,395 133,395 97,856 97,856
Deposits 21,547 21,547 20,227 20,227
Liabilities:
Senior notes 6.7% 73,143 73,155 75,000 74,153
Senior notes 10.25% -- -- 39,831 42,778
Senior credit facility 181,379 181,379 94,501 96,524
Contingent interest notes 28,767 28,767 34,699 34,699
Preferred capital securities 87,059 84,799 110,000 91,982
Note 13 Commitments, Contingencies, Concentrations, and Related-Party
Transactions
Restrictions on Certain Payments within Trenwick
Because Trenwick America Corporation's operations are conducted through its
operating subsidiaries, Trenwick America Corporation is dependent upon the
ability of its operating subsidiaries to transfer funds, principally in the form
of cash dividends, tax reimbursements and other 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, will
provide Trenwick America Corporation with sufficient liquidity to meet its
operating needs over the next 12 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.
F-26
Investments and Cash Held as Collateral or on Deposit
Debt securities and cash with a carrying value of $121,887 are being held in
trust as collateral for certain reinsurance obligations. In addition, cash in
the amount of $3,602 has been pledged as collateral for letters of credit for
reinsurance obligations.
Concentrations
During 2000, Trenwick America Corporation received 47% of its gross written
premiums from three reinsurance brokers, of which Aon Reinsurance Agency
accounted for 27%, E. W. Blanch and Company accounted for 11%, and Marsh and
MacLennan accounted for 9%. During 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. Aon Reinsurance
Agency provided 37% of Trenwick America Corporation's gross written premiums
during 1998, and Peglar and Associates, Inc. and Willis Faber each provided 10%.
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, however management does not believe 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 2000, Trenwick America Corporation received 31% of its assumed written
premiums from three ceding companies, of which LDG Reinsurance Underwriters
accounted for 21%, American International Group accounted for 5% and Duncanson
and Holt Group accounted for 5%. Duncanson and Holt Group provided 12% of
Trenwick America Corporation's assumed written premiums during 1999, and
American International Group and CNA each accounted for 7% of assumed written
premiums. In 1998, Trenwick America Corporation produced 11%, 11% and 10% of
assumed written premiums from Duncanson and Holt, American International Group
and Fort Washington Holdings, respectively.
Trenwick America Corporation wrote approximately 73% of its direct written
premiums during 2000 through four managing agencies of which Florida
Intracoastal Underwriters, Ltd. accounted for 30%, HDR Insurance Services
accounted for 21%, Inter-Reco, Inc. accounted for 12% and Risk Control Services
accounted for 10%. During 1999, HDR Insurance Services, Florida Intracoastal
Underwriters, Ltd., Inter-Reco, Inc. and Professional Insurance Underwriters,
Inc. provided 23%, 19%, 13% and 11% of direct written premiums, respectively.
At year end 2000, 47% 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 ($64,379), Zurich Reinsurance N.A.
($63,368), UNUM Life Insurance Company of America ($39,295), Centre Re-Insurance
Ltd. ($37,201), and Continental Casualty Company ($17,505). Each of these
companies is rated A or better by A.M. Best Company.
Included in deposits in the balance sheet at year end 2000 are $14,270 deposited
with European International Reinsurance Limited and $7,277 deposited with Centre
Reinsurance (Bermuda) Limited. Both of these deposits are collateralized by
letters of credit.
F-27
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 11. At year end 2000 and 1999, the carrying value
of these investments totaled $9,968 and $2,214. During 2000 and 1999, Trenwick
America Corporation incurred $37,898 and $6,238, respectively, of commission
expense to these managing general agencies. At year end 2000 and 1999, Trenwick
Group Ltd.'s balance sheet includes $25,494 and $28,740, 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.
Trenwick America Reinsurance Corporation has entered into a stop loss agreement
with Trenwick International Ltd., one of its U.K. affiliates. During 2000,
Trenwick International Ltd. ceded claims and claims expenses of $5,039 to
Trenwick America Corporation under this agreement. No losses were ceded under
this agreement during 1999 or 1998. Unpaid claims and claims expenses related to
this agreement at year end 2000 were $5,472.
Trenwick America Reinsurance Corporation has entered into a multi-layer excess
of loss catastrophe reinsurance treaty with LaSalle Re Limited, a Bermuda
affiliate. During 2000 and 1999, Trenwick America Reinsurance Corporation ceded
$2,175 of premiums to LaSalle Re Limited. No losses have been ceded under this
agreement and profit commissions receivable from LaSalle Re Limited was $1,849
at year end 2000.
F-28
Note 14 Unaudited Quarterly Financial Data
Summarized unaudited quarterly financial data for 2000, 1999, and 1998 is as
follows:
Quarter ended 2000 1999 1998
--------- --------- ---------
Earned premiums December 31 $ 99,381 $ 70,655 $ 41,797
September 30 114,574 35,589 44,942
June 30 48,333 42,163 47,137
March 31 49,070 39,478 47,575
Net investment income December 31 14,751 16,767 9,443
September 30 13,838 7,812 8,885
June 30 27,977 7,883 9,513
March 31 10,035 7,829 9,340
Net realized investment December 31 192 (1,207) 6,196
gains (losses) September 30 6,931 (409) 28
June 30 (315) 139 118
March 31 (40) 2,448 102
Net income (loss) December 31 (7,082) (999) 6,727
September 30 (37,835) (18,594) 3,601
June 30 19,830 3,509 7,025
March 31 (11,885) 6,189 8,255
Amounts for 1999 reflect the results of Chartwell Re Corporation from October
27, 1999, the date of acquisition.
F-29
Report of Independent Accountants on
Financial Statement Schedules
To the Board of Directors of
Trenwick America Corporation
Our audits of the consolidated financial statements referred to in our report
dated February 7, 2001, (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 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 7, 2001
S-1
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, 2000 and 1999
2000 1999
-------- --------
Assets:
Investments in consolidated subsidiaries
after minority interest of $87,059 and $110,000 $572,021 $523,963
Cash and cash equivalents 8,686 1,600
Due from consolidated subsidiaries 54,816 4,730
Net deferred income taxes 17,597 6,167
Other assets 51,892 6,430
-------- --------
Total assets $705,012 $542,890
-------- --------
Liabilities:
Due to consolidated subsidiaries $ 88,158 $ 225
Other liabilities 19,255 10,580
Indebtedness 396,692 317,603
-------- --------
Total liabilities 504,105 328,408
Stockholder's equity 200,907 214,482
-------- --------
Total liabilities and stockholders' equity $705,012 $542,890
======== ========
S-2
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, 2000, 1999 and 1998
2000 1999 1998
---------- ---------- ----------
Revenues:
Consolidated subsidiary dividends $ 19,269 $ 53,400 $ 30,100
Net investment income 1,290 43 82
Other income 1,934 132 24
---------- ---------- ----------
Total revenues 22,493 53,575 30,206
General and administrative expenses 17,858 5,772 3,461
Interest expense and dividends
on preferred capital securities 26,934 16,586 14,056
---------- ---------- ----------
Total expenses 44,792 22,358 17,517
---------- ---------- ----------
Income before equity in undistributed
income of unconsolidated subsidiaries (22,299) 31,217 12,689
Equity in undistributed income (loss) of
consolidated subsidiaries (26,778) (48,821) 6,865
---------- ---------- ----------
Net income (loss) before income taxes
and extraordinary loss on debt (49,077) (17,604) 19,554
Extraordinary loss on debt 825 -- --
---------- ---------- ----------
Net income (loss) before income taxes (49,902) (17,604) 19,554
Income taxes (benefit) (12,930) (7,709) (6,054)
---------- ---------- ----------
Net income (loss) $ (36,972) $ (9,895) $ 25,608
========== ========== ==========
S-3
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, 2000, 1999 and 1998
2000 1999 1998
---------- ---------- ----------
(in thousands)
Operating activities:
Interest and operating expenses paid $ (6,196) $ 23 $ --
General and administrative expenses paid (17,506) (5,772) (3,461)
Income taxes (paid) recovered (72,206) 1,201 (83)
Underwriting expenses paid (31,521) (15,102) (15,455)
Net investment income received 244 -- 84
Other income 42,853 16,586 16,243
---------- ---------- ----------
Cash for operating activities (84,332) (3,064) (2,672)
---------- ---------- ----------
Investing activities:
Maturities of debt securities -- -- 160
Sales of debt securities 257 343 172
Additions to premises and equipment (1,514) (632) (3,591)
Investment in subsidiaries 3,048 (835) --
---------- ---------- ----------
Cash from (for) investing activities 1,791 (1,124) (3,259)
---------- ---------- ----------
Financing activities:
Issuance of indebtedness 24,000 -- --
Issuance costs of indebtedness (1,834) -- --
Net dividends received (paid) 5,100 7,300 3,500
Intercompany loans 62,361 (2,200) --
---------- ---------- ----------
Cash from financing activities 89,627 5,100 3,500
---------- ---------- ----------
Change in cash and cash equivalents 7,086 912 (2,431)
Cash and cash equivalents, beginning of year 1,600 688 3,119
---------- ---------- ----------
Cash and cash equivalents, end of year $ 8,686 $ 1,600 $ 688
========== ========== ==========
S-4
TRENWICK AMERICA CORPORATION AND SUBSIDIARIES
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
(Amounts expressed in thousands of United States dollars)
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
----------- ----------- -----------
Deferred policy acquisition costs
Treaty reinsurance $ 30,347 $ 34,757
Specialty program insurance 5,920 3,214
----------- -----------
Total 36,267 37,971
Unpaid claims and claim expenses
Treaty reinsurance 1,226,543 1,223,981
Specialty program insurance 169,961 142,214
----------- -----------
Total 1,396,504 1,366,195
Unearned premium income
Treaty reinsurance 92,224 110,909
Specialty program insurance 84,950 63,133
----------- -----------
Total 177,174 174,042
Net premiums earned
Treaty reinsurance 266,674 177,546 181,451
Specialty program insurance 44,684 10,343 --
----------- ----------- -----------
Total 311,358 187,885 181,451
Net investment income
Treaty reinsurance 55,466 38,679 37,181
Specialty program insurance 9,493 1,722 --
Unallocated 1,642 (110) --
----------- ----------- -----------
Total 66,601 40,291 37,181
Claims and claims expenses incurred
Treaty reinsurance 248,653 141,416 105,477
Specialty program insurance 34,982 5,766 --
----------- ----------- -----------
Total 283,635 147,182 105,477
Policy acquisition costs
Treaty reinsurance 83,251 61,633 58,310
Specialty program insurance 9,846 917 --
----------- ----------- -----------
Total 93,097 62,550 58,310
Underwriting expenses
Treaty reinsurance 15,292 15,007 13,777
Specialty program insurance 7,012 2,687
----------- ----------- -----------
Total 22,304 17,694 13,777
Net premiums written
Treaty reinsurance 251,851 165,744 176,122
Specialty program insurance 54,028 5,641 --
----------- ----------- -----------
Total $ 305,879 $ 171,385 $ 176,122
S-5
TRENWICK AMERICA CORPORATION AND SUBSIDIARIES
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
(Amounts expressed in thousands of United States dollars)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Balance at Balance at
Beginning of End of
Period Period
------------ ----------
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
Year Ended December 31, 1998
Allowance for uncollectible
reinsurance recoverable and premiums receivable $ 6,394 $ 6,402
S-6