Exhibit 13.1
MANANGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion highlights material factors affecting Trenwick Group
Ltd.'s results of operations for the three years ended December 31, 2001,
December 31, 2000, and September 30, 1999. This discussion and analysis should
be read in conjunction with the consolidated financial statements and notes
thereto of Trenwick Group Ltd. for the calendar years ended December 31, 2001
and December 31, 2000 and the fiscal year ended September 30, 1999 contained in
this annual report.
Trenwick Group Ltd. discloses operating and non-operating income to enable the
reader to understand how management evaluates Trenwick Group Ltd.'s results of
operations. These disclosures are not defined under accounting principles
generally accepted in the United States of America; accordingly the use of these
disclosures may not be comparable to other registrants.
Overview
Trenwick Group Ltd. is a Bermuda holding company headquartered in Hamilton,
Bermuda whose principal subsidiaries underwrite specialty insurance and
reinsurance. Trenwick Group Ltd. was formed in 1999 to acquire Trenwick Group
Inc., LaSalle Re Holdings Limited and LaSalle Re Limited. The transaction was
completed on September 27, 2000. Shareholders of Trenwick Group Inc., LaSalle Re
Holdings Limited and LaSalle Re Limited exchanged their shares on a one-for-one
basis for newly-issued shares of Trenwick Group Ltd. LaSalle Re Holdings Limited
was the accounting acquiror in the Trenwick/LaSalle business combination, and as
such the financial statements reflect the results of operations of LaSalle Re
Holdings Limited prior to September 27, 2000 and the combined results of
operations of LaSalle Re Holdings Limited and Trenwick Group Inc. on and after
September 27, 2000.
Trenwick Group Ltd. conducts its specialty insurance and reinsurance business in
the following five business segments:
o Worldwide property catastrophe reinsurance;
o United States treaty reinsurance;
o International specialty insurance and reinsurance;
o Lloyd's insurance and reinsurance; and
o United States specialty program insurance.
Trenwick Group Ltd. operates through the following five principal operating
platforms:
o LaSalle Re Limited, which is located in Hamilton, Bermuda, underwrites
property catastrophe reinsurance on a worldwide basis;
o Trenwick America Reinsurance Corporation, which is located in Stamford
Connecticut, underwrites treaty reinsurance on United States property
and casualty risks, including United States reinsurance business
previously written by Chartwell Re Corporation subsidiaries;
o Trenwick International Limited, which is located in London, England,
underwrites specialty insurance and treaty and facultative reinsurance
on a worldwide basis;
1
o Chartwell Managing Agents Limited, which is located in London,
England, manages underwriting syndicates in the Lloyd's market,
principally for Trenwick Group Ltd.'s own account; and
o Canterbury Financial Group Inc., which is located in Stamford,
Connecticut, underwrites specialty insurance through its operating
subsidiaries, Chartwell Insurance Company, The Insurance Corporation
of New York and Dakota Specialty Insurance Company.
All of Trenwick Group Ltd.'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. All of Chartwell Managing Agents Limited's
syndicates enjoy the benefit of the ratings of Lloyd's which is rated "A-"
(Excellent) by A.M. Best Company and has an A financial strength rating from
Standard & Poor's. These ratings are based upon factors that may be of concern
to policy or contract holders, agents and intermediaries, but may not reflect
the considerations applicable to an equity investment in a reinsurance or
insurance company. A change in any such rating is at the discretion of the
respective rating agencies.
Results of Operations - Years Ended December 31, 2001 and 2000
(monetary amounts in tables expressed in thousands of United States dollars)
2001 2000
Year Year Change
--------------- --------------- --------------
Underwriting loss $(289,981) $(35,452) $(254,529)
Net investment income 129,114 58,715 70,399
Interest expense and dividends on
preferred stock of subsidiaries (39,142) (11,775) (27,367)
General and administrative expenses (15,926) (5,897) (10,029)
Other income, net 3,389 1,477 1,912
--------- -------- ---------
Pretax operating income (loss) (212,546) 7,068 (219,614)
Applicable income taxes (benefit) (56,123) (5,905) (50,218)
--------- -------- ---------
Operating income (loss) (156,423) 12,973 (169,396)
Minority interest in operating (income) loss of
subsidiary -- (1,297) 1,297
Net realized investment gains (losses), net of
minority interest and income taxes 8,520 (1,040) 9,560
Foreign currency gains (losses), net of minority
interest and income taxes (1,679) (733) (946)
Restructuring costs (4,815) (452) (4,363)
--------- -------- ---------
Net income (loss) $(154,397) $ 9,451 $(163,848)
========= ======== =========
The operating loss of $156.4 million in 2001 represented a $169.4 million
decrease from the operating income of $13.0 million recorded in 2000. This
decline was principally the result of abnormal catastrophe losses resulting from
the September 11th terrorist attacks and reserve strengthening. The $154.4
million net loss in 2001 compared to the $9.5 million in net income in 2000 was
the result of the net operating losses offset in part by realized investment
gains which are discussed on page [6] under the caption "Non-Operating Income
and Expenses."
2
Underwriting Income (Loss)
The underwriting result for 2000 included the results of LaSalle Re Holdings
Limited alone for the first nine months of 2000 and the combined results of
LaSalle Re Holdings Limited and Trenwick Group Inc. for the fourth quarter of
2000.
2001 2000
Year Year Change
----------- --------- ---------
Net premiums earned $ 889,506 $ 302,749 $ 586,757
----------- --------- ---------
Claims and claims expenses incurred (827,406) (227,707) (599,699)
Acquisition costs and underwriting expenses (352,082) (110,494) (241,588)
----------- --------- ---------
Total expenses (1,179,488) (338,201) (841,287)
----------- --------- ---------
Net underwriting loss $ (289,982) $ (35,452) $(254,530)
=========== ========= =========
Loss ratio 93.0% 75.2% 17.8%
Underwriting expense ratio 39.6% 36.5% 3.1%
Combined ratio 132.6% 111.7 % 20.9%
The underwriting loss of $290.0 million in 2001 represented a $254.5 million
increase compared to the underwriting loss of $35.5 million in 2000. The
underwriting results for 2001 included catastrophe losses of $158.0 million and
additions to loss reserves of $120.9 million, which is further discussed on page
[4] under the caption "Claims and Claims Expenses." The underwriting loss in
2000 included both catastrophe losses of $6.5 million and additions to prior
years' reserves of $20.4 million on business underwritten by LaSalle Re Limited,
together with underwriting losses of $28.4 million associated with Trenwick
Group Inc. business acquired through the Trenwick/LaSalle business combination.
The increase in the combined ratio in 2001 compared to 2000 resulted from the
significant increase in the loss ratio due to the unusual level of catastrophic
losses and reserve strengthening in 2001.
Premiums Written
Gross premiums written for 2001 were $1.5 billion compared to $428.6 million for
2000 an increase of $1.0 billion or 239%. Details of gross premiums written are
provided below:
2001 2000
Year Year Change
---------- -------- -----------
Worldwide property catastrophe reinsurance $ 138,173 $101,026 $ 37,147
U.S. treaty reinsurance 339,257 92,703 246,554
International specialty insurance and reinsurance 234,966 51,145 183,821
Lloyd's syndicates:
Continuing 443,977 121,279 322,698
Runoff 4,449 18,270 (13,821)
U.S. specialty program insurance 291,433 44,221 247,212
---------- -------- -----------
Gross premiums written $1,452,255 $428,644 $ 1,023,611
========== ======== ===========
The increase in worldwide property catastrophe reinsurance gross premium
writings for 2001 compared to 2000 resulted primarily from an increase in new
property catastrophe business and reinstatement premiums following the
catastrophe losses from the September 11th terrorist attack.
The increase in Lloyd's gross written premiums for 2001 compared to 2000 was due
to the addition of Trenwick Group Inc.'s Lloyd's operations managed by Chartwell
Managing Agents Limited from the Trenwick/LaSalle business combination. A
majority of the Lloyd's syndicate gross written premiums in 2000 represent the
fourth quarter bookings of business managed by
3
Chartwell Managing Agents Limited. The majority of Lloyd's business underwritten
by LaSalle Re Holdings Limited prior to the combination with Trenwick Group Inc.
was not renewed as of December 31, 2000 and have been classified as runoff.
Additionally, results of operations from Lloyd's syndicates which were sold by
Trenwick Group Inc. in 1999 have also been classified as runoff.
U.S. treaty reinsurance, international specialty insurance and reinsurance and
U.S. specialty program insurance gross premiums written increased from $92.7
million, $51.1 million and $44.2 million, respectively, for 2000 to $339.3
million, $235.0 million and $291.4 million, respectively, for 2001. Trenwick
Group Ltd. did not underwrite these businesses prior to the Trenwick/LaSalle
business combination in September of 2000.
Premiums Earned
2001 2000
Year Year Change
----------- --------- -----------
Gross premiums written $ 1,452,255 $ 428,644 $ 1,023,611
Change in gross unearned premiums (130,260) (10,006) (120,254)
----------- --------- -----------
Gross premiums earned 1,321,995 418,638 903,357
----------- --------- -----------
Gross premiums ceded (481,937) (126,012) (355,925)
Change in ceded unearned premiums 49,448 10,123 39,325
----------- --------- -----------
Ceded premiums earned (432,489) (115,889) (316,600)
----------- --------- -----------
Net premiums earned $ 889,506 $ 302,749 $ 586,757
=========== ========= ===========
Gross premiums ceded for 2001 were $481.9 million compared to $126.0 million for
2000. The increase in gross premiums ceded of $355.9 million was due primarily
to cessions relating to business acquired in the Trenwick/LaSalle business
combination and reinstatement premiums. Businesses acquired in the
Trenwick/LaSalle business combination included Lloyd's syndicates, international
specialty insurance and reinsurance and U.S. specialty program insurance, all of
which have significantly larger reinsurance and retrocessional programs than
LaSalle Re Limited.
Net premiums earned for 2001 were $889.5 million compared to $302.7 million for
2000. The increase in net premiums earned is commensurate with the increase in
net premiums written.
Claims and Claims Expenses
Claims and claims expenses for 2001 were $827.4 million, an increase of $599.7
million compared to claims and claims expenses of $227.7 million for 2000. The
increase in claims and claims expenses in 2001 resulted from an increase in
business acquired in the Trenwick/LaSalle business combination in September
2000, a significant increase in catastrophe losses, in particular losses
stemming from the September 11th terrorist attacks and reserve strengthening.
Trenwick Group Ltd.'s estimated loss from the September 11th terrorist attacks
is approximately $366.3 million before reinsurance recoverable of approximately
$268.1 million. The principal losses related to aviation risks underwritten by
Trenwick Group Ltd.'s operations at Lloyd's and property and related risks
including business interruption, underwritten by LaSalle Re. Of the $268.1
million of reinsurance recoverables, 93% are from reinsurers rated A or better
by Standard & Poor's or, alternatively, A.M. Best Company. Trenwick Group Ltd.
also incurred premium costs of approximately $25.2 million to reinstate various
reinsurance protections in its property catastrophe business and to purchase
back-up reinsurance covers for its aviation business at Lloyd's to minimize any
further deterioration in its results following the September 11th terrorist
attacks. Trenwick Group Ltd.'s estimate of its losses from aviation risks from
this event is based on two maximum losses and two partial losses. Estimates of
its property and related losses is based on an assessment of individual policies
which it has determined has exposure to the World
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Trade Center loss. This assessment included market share analysis, probable
maximum loss analysis, independent risk modeling analysis and cedant loss
estimates.
Trenwick Group Ltd.'s 2001 results also included other catastrophe losses
totaling $24 million. The largest of these losses was tropical storm Allison and
storms affecting the Midwest United States amounting to $10.5 million and the
November 12, 2001 American Airlines crash in Queens, New York of $7.8 million.
Trenwick strengthened its prior year loss reserves in 2001 by $110.9 million.
This reserve strengthening includes $15.7 million related to the treaty
reinsurance segment's liability business, which was underwritten prior to 2001
and $11.5 million related to prior participation in the Excess and Casualty
Reinsurance Association Pool. In addition, $13.9 million of the loss reserve
strengthening related to the specialty program insurance segment. Also included
in the reserve strengthening was $20.4 million relating principally to the
Lloyd's segment directors and officers liability business. Lastly, the reserve
strengthening included $48.3 million stemming from deterioration in discontinued
businesses and reviews of the property insurance and small premium liability
business lines at the international specialty insurance and reinsurance segment.
LaSalle Re Limited's claims and claims expenses incurred in the 2000 year
included $6.5 million of catastrophe losses relating to U.K. floods and an
increase of $20.4 million in prior period occurrences, principally losses
relating to two storms, Martin and Anatol, which hit Europe in late December
1999.
Acquisition Costs and Underwriting Expenses
2001 2000
Year Year Change
-------- -------- --------
Policy acquisition costs $273,066 $ 78,603 $194,463
Underwriting expenses 79,016 31,891 47,125
-------- -------- --------
Total acquisition costs and
underwriting expenses $352,082 $110,494 $241,588
======== ======== ========
Expense ratio 39.6% 36.5% 3.1%
======== ======== ========
Policy acquisition costs and underwriting expenses for 2001 increased by $241.6
million compared to 2000. Similar to claims and claims expenses, the increase
was attributable to expenses incurred on business acquired in the
Trenwick/LaSalle business combination. Acquisition costs and underwriting
expenses as a percentage of net premiums earned, or the expense ratio, were
39.6% for the 2001 year compared to 36.5% for the 2000 year. The increase in the
expense ratio occurred principally because of an increase in policy acquisition
costs relating to casualty business. A majority of the premium writings
resulting from the Trenwick/LaSalle business combination was casualty business.
This business, which consisted of both treaty insurance and reinsurance,
generally has a higher policy acquisition cost ratio than property catastrophe
business.
Underwriting expenses for the 2001 year as a percentage of earned premium was
8.9%, a modest decrease from 10.5% for 2000.
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Net Investment Income
2001 2000
Year Year Change
----------- --------- -----------
Average invested assets $ 2,250,261 $ 979,468 $ 1,270,793
Average annualized yields 6.3% 6.2% 0.1%
----------- --------- -----------
Investment income - portfolio 141,959 60,727 81,232
Investment income - non-portfolio 2,601 2,805 (204)
Investment expenses (15,446) (4,817) (10,629)
----------- --------- -----------
Net investment income $ 129,114 $ 58,715 $ 70,399
=========== ========= ===========
Net investment income for 2001 was $129.1 million compared to $58.7 million for
2000. The principal reason for the increase in net investment income in 2001 was
the increase in invested assets resulting from the Trenwick/LaSalle business
combination. Investment expense for 2001 includes interest expense on funds
withheld of $11.3 million under the terms of stop loss reinsurance agreements
purchased by Trenwick America Reinsurance Corporation prior to 2000. The balance
of the increase in investment expense in 2001 results from the increase in
Trenwick Group Ltd.'s invested assets under management following the
Trenwick/LaSalle business combination.
Interest Expense and Subsidiary Preferred Share Dividends
Interest expense and subsidiary preferred share dividends was $39.1 million for
2001, an increase of $27.4 million from the 2000 fiscal year. The increase
resulted from the increase in debt outstanding as a result of the Trenwick Group
Inc. debt assumed by Trenwick Group Ltd.'s subsidiaries in the Trenwick/LaSalle
business combination.
Non-Operating Income and Expenses
Minority interest represents the minority interest in common shares of LaSalle
Re Limited held by third party investors prior to the Trenwick/LaSalle business
combination on September 27, 2000. Net income attributed to the minority
interest was calculated as 23.5% of net income in 2000 prior to the
Trenwick/LaSalle business combination.
Net realized gains on investments, net of minority interest and income taxes,
were $8.5 million during 2001, compared to net realized losses of $1.0 million
for 2000. Both the losses and gains were made as a result of security sales
executed pursuant to an investment policy designed to protect the total returns
on the portfolio. The 2001 amount is net of $3.4 million of realized losses on
investments to recognize declines in value that were other than temporary.
Trenwick Group Ltd. recorded foreign currency losses, net of minority interest
and income taxes, of $1.7 million for 2001, compared to foreign currency losses
of $0.7 million for 2000 due to the decline in the value of European currencies
in 2001 and 2000, principally the British pound sterling, against the US dollar.
Restructuring costs incurred in 2001 and 2000 were $4.8 million and $0.5
million, respectively. The 2001 costs primarily relate to non-recurring
severance costs, and the 2000 costs represent non-recurring expenses related to
the Trenwick/LaSalle business combination.
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Results of Operations - Year Ended December 31, 2000 and Year Ended
September 30, 1999
(monetary amounts in tables expressed in thousands of United States dollars)
2000 1999
Year Year Change
----------- ---------------- ---------------
Underwriting income (loss) $(35,452) $(38,109) $ 2,657
Net investment income 58,715 33,847 24,868
Interest expense and dividends on
preferred stock of subsidiaries (11,775) (1,714) (10,061)
General and administrative expenses (5,897) (788) (5,109)
Other income, net 1,477 -- 1,477
-------- -------- --------
Pretax operating income (loss) 7,068 (6,764) 13,832
Applicable income taxes (benefit) (5,905) -- (5,905)
-------- -------- --------
Operating income (loss) 12,973 (6,764) 19,737
Minority interest in operating (income) loss of subsidiary (1,297) 3,099 (4,396)
Net realized investment gains (losses), net of minority
interest and income taxes (1,040) 471 (1,511)
Foreign currency gains (losses), net of minority interest
and income taxes (733) 360 (1,093)
Restructuring costs (452) -- (452)
-------- -------- --------
Net income (loss) $ 9,451 $ (2,834) $ 12,285
======== ======== ========
Operating income of $13.0 million in 2000 represented a $19.7 million increase
over the operating loss of $6.8 million recorded in fiscal year 1999. This
improvement was principally the result of an increase in net investment income
in 2000, which was due to the increase in the size of the investment portfolio
from the Trenwick/LaSalle business combination. The increase of $12.3 million in
net income in 2000 when compared to fiscal year 1999 was the result of the
increase in net operating income, offset in part by minority interest, realized
investment losses and foreign exchange losses which are discussed on page [11]
under the caption "Non-Operating Income and Expenses."
Underwriting Income (Loss)
The underwriting result for 2000 included the results of LaSalle Re Holdings
Limited alone for the first nine months of 2000 and the combined results of
LaSalle Re Holdings Limited and Trenwick Group Inc. for the fourth quarter of
2000. The underwriting results for the 1999 fiscal year only included those of
LaSalle Re Holdings Limited.
2000 1999
Year Year Change
--------- --------- ---------
Net premiums earned $ 302,749 $ 126,615 $ 176,134
--------- --------- ---------
Claims and claims expenses incurred (227,707) (131,147) (96,560)
Acquisition costs and underwriting expenses (110,494) (33,577) (76,917)
--------- --------- ---------
Total expenses (338,201) (164,724) (173,477)
--------- --------- ---------
Net underwriting loss $ (35,452) $ (38,109) $ 2,657
========= ========= =========
Loss ratio 75.2% 103.6% (28.4)%
Underwriting expense ratio 36.5% 26.5% 10.0%
Combined ratio 111.7% 130.1% (18.4)%
7
The underwriting loss of $35.5 million in 2000 represented a $2.7 million
decrease compared to the underwriting loss of $38.1 million in fiscal year 1999.
The underwriting loss in 2000 included both catastrophe losses of $6.5 million
and additions to prior years' reserves of $20.4 million on business underwritten
by LaSalle Re Limited, together with underwriting losses of $28.4 million
associated with Trenwick Group Inc. business acquired through the
Trenwick/LaSalle business combination. Also included in 2000 is a $5.4 million
benefit recovered under the terms of the contingent interest notes. The
underwriting results for 1999 included both catastrophe losses of $25.6 million
and additions to loss reserves of $44.5 million on business underwritten by
LaSalle Re Limited, which is further discussed on pages [9 and 10] under the
caption "Claims and Claims Expenses."
The decrease in the combined ratio in 2000 compared to fiscal year 1999 resulted
from a significant change in Trenwick Group Ltd.'s mix of business following the
Trenwick/LaSalle business combination. While the combined ratio was lower in
2000, the premium volume on business acquired effective September 27, 2000 was
significantly greater, which resulted in a higher dollar amount of underwriting
loss. Both the decrease in the loss ratio and the increase in the underwriting
expense ratio in 2000 compared to fiscal year 1999 resulted from the inclusion
of Trenwick Group Inc.'s casualty business in the underwriting results in the
fourth quarter of 2000. The decline in the loss ratio in 2000 also occurred due
to the lower number of catastrophic events compared to fiscal year 1999.
Premiums Written
Gross premiums written for 2000 were $428.6 million compared to $139.0 million
for the 1999 fiscal year, an increase of $289.6 million or 208%. Details of
gross premiums written are provided below:
2000 1999
Year Year Change
-------- -------- ---------
Worldwide property
catastrophe reinsurance $101,026 $116,621 $ (15,595)
U.S. treaty reinsurance 92,703 -- 92,703
International specialty insurance and reinsurance 51,145 -- 51,145
Lloyd's syndicates:
Continuing 121,279 6,430 114,849
Runoff 18,270 15,959 2,311
U.S. specialty program insurance 44,221 -- 44,221
-------- -------- ---------
Gross premiums written $428,644 $139,010 $ 289,634
======== ======== =========
The decrease in worldwide property catastrophe reinsurance gross premium
writings for 2000 compared to the 1999 fiscal year resulted primarily from the
non-renewal of certain accounts following a re-evaluation of LaSalle Re
Limited's worldwide aggregate exposures. The most significant reduction in
aggregate exposures came from a reduction in accounts covering European risks.
The increase in Lloyd's gross written premiums for 2000 compared to the 1999
fiscal year was due to the addition of Trenwick Group Inc.'s Lloyd's operations
managed by Chartwell Managing Agents Limited from the Trenwick/LaSalle business
combination. A majority of the Lloyd's syndicate gross written premiums in 2000
represent the fourth quarter bookings of business managed by Chartwell Managing
Agents Limited. The majority of Lloyd's business underwritten by LaSalle Re
Holdings Limited prior to the combination with Trenwick Group Inc.
8
was not renewed as of December 31, 2000 and have been classified as runoff.
Additionally, results of operations from Lloyd's syndicates which were sold by
Trenwick Group Inc. in 1999 have also been classified as runoff.
U.S. treaty reinsurance, international specialty insurance and reinsurance and
U.S. specialty program insurance gross premiums written increased from $0 for
the 1999 fiscal year to $92.7 million, $51.1 million and $44.2 million,
respectively, for 2000. Trenwick Group Ltd. did not underwrite these businesses
prior to the Trenwick/LaSalle business combination.
Premiums Earned
2000 1999
Year Year Change
--------- --------- ---------
Gross premiums written $ 428,644 $ 139,010 $ 289,634
Change in gross unearned premiums (10,006) 6,070 (16,076)
--------- --------- ---------
Gross premiums earned 418,638 145,080 273,558
--------- --------- ---------
Gross premiums ceded (126,012) (28,191) (97,821)
Change in ceded unearned premiums 10,123 9,726 397
--------- --------- ---------
Ceded premiums earned (115,889) (18,465) (97,424)
--------- --------- ---------
Net premiums earned $ 302,749 $ 126,615 $ 176,134
========= ========= =========
Gross premiums ceded for 2000 were $126.0 million compared to $28.2 million for
the 1999 fiscal year. The increase in gross premiums ceded of $97.8 million was
due primarily to cessions relating to business acquired in the Trenwick/LaSalle
business combination. Businesses acquired in the Trenwick/LaSalle business
combination included Lloyd's syndicates, international specialty insurance and
reinsurance and U.S. specialty program insurance, all of which have
significantly larger reinsurance and retrocessional programs than LaSalle Re
Limited.
Net premiums earned for 2000 were $302.7 million compared to $126.6 million for
the 1999 fiscal year. The increase in net premiums earned is commensurate with
the increase in net premiums written.
Claims and Claims Expenses
Claims and claims expenses for 2000 were $227.7 million, an increase of $96.6
million compared to claims and claims expenses of $131.1 million for the 1999
fiscal year. The increase in claims and claims expenses in 2000 resulted from
claim activity of $152.5 million relating to business acquired in the
Trenwick/LaSalle business combination. Excluding these losses, claims and claims
expenses incurred by LaSalle Re Limited in 2000 were $80.6 million. This
compares to $131.1 million in claims and claims expenses incurred during the
1999 fiscal year. The reduction in claims and claims expenses incurred by
LaSalle Re Limited in 2000 was due to the reduced number of catastrophe losses
in 2000 and the absence of the significant prior year reserve strengthening that
occurred in the 1999 fiscal year. LaSalle Re Limited's claims and claims
expenses incurred in the 2000 year included $6.5 million of catastrophe losses
relating to U.K. floods and an increase of $20.4 million in prior period
occurrences, principally losses relating to two storms, Martin and Anatol, which
hit Europe in late December 1999. During the 1999 fiscal year, LaSalle Re
Limited incurred net losses of $25.6 million from five catastrophic events,
including Hurricane Floyd, an earthquake which hit Turkey and Typhoon Olga which
hit North Korea. During that same year, LaSalle Re Limited recorded additions to
prior year reserves of $14.5 million in respect of Hurricane Georges, which
occurred in September 1998, due to an increase from prior market estimates of
the aggregate damage caused by the hurricane. LaSalle Re Limited also incurred
$16.0 million of additional reserves in 1999 following the completion of
9
an evaluation of its catastrophe reserving methodology. In addition, LaSalle Re
Limited recorded approximately $14.0 million of additional reserves in the 1999
fiscal year relating to contracts written in prior years, including contracts
relating to its Lloyd's extended warranty business.
Acquisition Costs and Underwriting Expenses
2000 1999
Year Year Change
-------- ------- -------
Policy acquisition costs $ 78,603 $19,844 $58,759
Underwriting expenses 31,891 13,733 18,158
-------- ------- -------
Total acquisition costs and underwriting expenses $110,494 $33,577 $76,917
======== ======= =======
Expense ratio 36.5% 26.5% 10.0%
======== ======= =======
Policy acquisition costs and underwriting expenses for 2000 increased by $76.9
million compared to policy acquisition costs and underwriting expenses for the
1999 fiscal year. Similar to claims and claims expenses, the increase was
attributable to expenses incurred on business acquired in the Trenwick/LaSalle
business combination. Acquisition costs and underwriting expenses as a
percentage of net premiums earned, or the expense ratio, were 36.5% for the year
ended December 31, 2000 compared to 26.5% for the fiscal year ended September
30, 1999. The increase in the expense ratio occurred principally because of an
increase in policy acquisition costs relating to casualty business. A majority
of the premium writings resulting from the Trenwick/LaSalle business combination
was casualty business. This business, which consisted of both treaty insurance
and reinsurance, generally has a higher policy acquisition cost ratio than
property catastrophe business.
Underwriting expenses for the 2000 year as a percentage of earned premium was
10.5%, a modest decrease from 10.8% for the 1999 fiscal year.
Net Investment Income
2000 1999
Year Year Change
--------- --------- ---------
Average invested assets $ 979,468 $ 575,571 $ 403,897
Average annualized yields 6.2% 5.7% 0.5%
Investment income - portfolio 60,727 32,776 27,951
Investment income - non-portfolio 2,805 1,937 868
Investment expenses (4,817) (866) (3,951)
========= ========= =========
Net investment income $ 58,715 $ 33,847 $ 24,868
========= ========= =========
Net investment income for 2000 was $58.7 million compared to $33.8 million for
the 1999 fiscal year. The principal reason for the increase in net investment
income in 2000 was the increase in invested assets resulting from the
Trenwick/LaSalle business combination. Investment expense for 2000 includes
interest expense on funds withheld of $2.9 million under the terms of stop loss
reinsurance agreements purchased by Trenwick America Reinsurance Corporation
prior to 2000. The balance of the increase in investment expense in 2000 results
from the increase in Trenwick Group Ltd.'s invested assets under management
following the Trenwick/LaSalle business combination.
Interest Expense and Dividends on Preferred Stock of Subsidiaries
Interest expense and dividends on preferred stock of subsidiaries was $11.8
million for 2000, an increase of $10.1 million from the 1999 fiscal year. The
increase resulted from the increase in
10
debt outstanding as a result of the Trenwick Group Inc. debt assumed by Trenwick
Group Ltd.'s subsidiaries in the Trenwick/LaSalle business combination.
Non-Operating Income and Expenses
Minority interest represents the minority interest in common shares of LaSalle
Re Limited held by third party investors prior to the Trenwick/LaSalle business
combination on September 27, 2000. Net income attributed to the minority
interest was calculated as 23.5% of net income in 2000 prior to the
Trenwick/LaSalle business combination and was calculated as 23.2% of net income
in fiscal 1999.
Net realized losses on investments, net of minority interest and income taxes,
were $1.0 million during 2000, compared to net realized gains of $0.5 million
for the 1999 fiscal year. Both the losses and gains were made as a result of
security sales executed pursuant to an investment policy designed to protect the
total returns on the portfolio.
Trenwick Group Ltd. recorded foreign currency losses, net of minority interest
and income taxes, of $0.7 million for 2000, compared to foreign currency gains
of $0.4 million for the 1999 fiscal year due to the decline in the value of
European currencies in 2000, principally the British pound sterling, against the
US dollar.
Restructuring costs of $0.5 million incurred in 2001 related to non-recurring
expenses incurred in connection with the Trenwick/LaSalle business combination.
Investments
Trenwick Group Ltd.'s investment objective is to fund policyholder and other
liabilities in a manner that enhances shareholder value, subject to appropriate
risk constraints. Trenwick Group Ltd. seeks to meet this investment objective
through a mix of investments that reflect the characteristics of the liabilities
they support; diversify the types of investment risks by interest rate,
liquidity, credit and equity price risk; and achieve asset diversification by
investment type, industry, issuer and geographic location. Trenwick Group Ltd.
regularly projects duration and cash flow characteristics of its liabilities and
makes appropriate adjustments in its investment portfolios. At December 31,
2001, Trenwick Group Ltd. had investments, cash and cash equivalents of $2.3
billion, an increase of 3% compared to combined investments, cash and cash
equivalents of LaSalle Re Holdings Limited and Trenwick Group Inc. of $2.2
billion at December 31, 2000. This increase resulted principally from positive
operating cash flow and an increase in the market value of its portfolio of debt
securities. All debt and publicly traded equity investments are classified as
available for sale and reported at fair value with the unrealized gain or loss,
net of income taxes, reported in other comprehensive income. During 2001, the
market value of Trenwick Group Ltd.'s debt and equity investments increased by
$16.4 million principally as a result of the declining interest rate environment
in 2001.
Trenwick Group Ltd.'s debt securities consisted primarily of investment grade
securities, with 74% having a quality rating of Aa or better at December 31,
2001. High yield, or non-investment grade debt securities carry a rating of
below BBB-/Baa3. These securities, along with unrated securities, represented
approximately 5% of the portfolio at December 31, 2001 and 4% of the portfolio
at December 31, 2000.
The average maturity of Trenwick Group Ltd.'s debt securities at December 31,
2001 was 4.8 years compared to 5.1 years at December 31, 2000 and 5.3 years for
the combined portfolio of
11
LaSalle Re Holdings Limited and Trenwick Group Inc. at December 31, 1999. The
shortening of the average maturity during 2001 resulted from the sale of longer
maturity municipal securities and the decline in the expected maturity of
mortgage backed securities resulting from declining interest rates.
During the first quarter of 2001, Trenwick Group Ltd. sold almost all of its
equity securities and reinvested the proceeds in debt securities to increase
operating earnings and decrease the volatility of unrealized investment gains
and losses. Trenwick Group Ltd. also liquidated the remainder of its tax
advantaged municipal government portfolio in early 2001 to increase its taxable
yield. Both of these actions were taken to maximize taxable income following the
significant losses incurred by Trenwick Group Ltd.'s U.S. operations in recent
years.
Trenwick Group Ltd. has not invested in derivative financial instruments such as
futures, forward contracts, swaps, options or other financial instruments with
similar characteristics such as interest rate caps or floors and fixed-rate loan
commitments. Trenwick Group Ltd.'s portfolio includes market sensitive
instruments, such as mortgage-backed and asset-backed securities, which amounted
to approximately $670 million at December 31, 2001 or 25.8% of cash and invested
assets. There are various categories of mortgage-backed and asset-backed
securities that are subject to different degrees of risk from changes in
interest rates and, for those mortgage-backed and asset-backed securities that
are not agency-backed, defaults. Approximately 54% of Trenwick Group Ltd.'s
mortgage-backed and asset-backed securities holdings were backed by government
agencies, such as GNMA, FNMA and FHLMC, at December 31, 2001. The principal
risks inherent in holding mortgage-backed and asset-backed securities are
prepayment and extension risks related to dramatic decreases and increases in
interest rates, resulting in the repayment of principal from the underlying
mortgages either earlier or later than originally anticipated. At December 31,
2001, Trenwick Group Ltd. does not have any mortgage-backed and asset-backed
securities that are subject to more prepayment and extension risk (such as
interest-or principal-only strips) than traditional mortgage-backed and
asset-backed securities.
Deferred Income Tax Assets
At year end 2001, Trenwick Group Ltd. had net deferred income tax assets of
$139.9 million, which is attributable to the estimated future income tax effects
of temporary differences and carryforwards. These net deferred income taxes
arise principally from operations in the United States and the United Kingdom.
Trenwick Group Ltd. also has operations in other jurisdictions, principally
Bermuda; Bermuda operations are not currently subject to income taxation.
Net deferred income tax assets for U.S. operations totaled $66.6 million at year
end 2001 (assets of $116.8 million, net of liabilities of $50.3 million), of
which $48.8 million relates to net operating loss carryforwards totaling $139.4
million. These net operating loss carryforwards are available to offset U.S.
taxable income prior to their expirations between 2007 and 2021. Details of U.S
net operating loss carryforwards, the year of their expiration and any annual
limitations on their utilization are described in Note 7 of the Notes to the
Consolidated Financial Statements.
At year end 2001, no valuation allowance was established against the U.S.
carryforwards, as management has concluded that is more likely than not that the
results of future U.S. operations will generate sufficient taxable income to
realize the carryforwards in the near term and prior to their expiration.
Trenwick Group Inc. began its U.S. operations in 1984. Historically, there has
been a positive correlation between U.S. pre-tax accounting income and U.S.
taxable income. Between 1984 and
12
1998 Trenwick Group Inc. had U.S. taxable income of $232 million, excluding an
additional $150 million of investment income that was not taxable due to its
nature.
For 2001 and 2000, a reconciliation of U.S. accounting income (loss) before
federal income taxes to U.S. taxable follows (monetary amounts in table
expressed in thousands of United States dollars; 2000 balances include amounts
incurred by Trenwick Group Ltd. subsequent to September 27, 2000, the effective
date of the Trenwick/LaSalle business combination):
2001 2000
-------- --------
U.S. pre-tax income (loss) $(63,822) $(19,030)
Tax-exempt investment income (2,813) (3,645)
Amortization of goodwill 1,512 355
Claims and claim expense and unearned premium reserve
discounting, net of policy acquisition cost expensing 6,037 (728)
Contingent interest note adjustments (8,962) (4,704)
Other book-tax differences (987) (739)
-------- --------
U.S. taxable income (loss) $(69,035) $(28,491)
======== ========
During the 2000 year and 2001 first quarter, Trenwick Group Ltd. management
liquidated its portfolio of tax-exempt securities and substantially all of its
portfolio of equity securities. The proceeds of approximately $500 million were
then reinvested in taxable debt securities in order to increase the taxable
investment income and decrease volatility of unrealized investment gains and
losses.
At year end 2001, management prepared business plans, including plans for its
U.S. operations. Projections in the plans support the utilization of all
available U.S. net operating loss carryforwards ($119.7 million of $139.4
million) by year end 2004, at which time, the U.S. operations could begin to
utilize its alternative minimum tax credit carryforwards. The alternative
minimum tax credits of $5.9 million have no expiration or annual limitations.
The remaining $19.6 million of U.S. net operating loss carryforwards are subject
to annual limitations, and can be utilized over the next four years in annual
amounts of $5.2 million, prior to their expiration in 2018. The business plans
used to prepare these projections give effect to the increased taxable
investment income resulting from restructuring of the investment portfolio of
approximately $25 million annually and also to the January 1, 2002 reinsurance
renewal season, which reflects significant assumptions about increased premium
volume and improved rates and profitability. In the January 1, 2001 renewal
season, the U.S. operations have participated in a manner consistent with its
plans.
While not considered in the business plans, the U.S. operations currently have
$47.5 million in unrealized gains on debt and equity securities for income tax
purposes. These gains, if realized, are available to increase its taxable income
with the sales proceeds being reinvested at current market yields.
Net deferred income tax assets for U.K. operations totaled $73.4 million at year
end 2001 (assets of $74.9 million, net of liabilities of $1.5 million), of which
$0.9 million relates to net operating loss carryforwards totaling $3.1 million.
An additional $36.0 million relates to operating losses of Lloyd's syndicates
totaling $119.9 million for their open years of account. (Lloyd's syndicates do
not report taxable income or loss until a year of account is closed, typically
after three years. Thus the 2001, 2000 and 1999 years of account are considered
open years of account at year end 2001.)
13
Unlike the U.S. operating losses, the U.K. operating losses have no expiration
and no annual limitation on their utilization. Also, through ownership transfer,
they may be available to be utilized by another entity that engages in the same
trade, insurance.
At year end 2001, management concluded there was not sufficient evidence to
support the realization of the U.K. net operating losses of $3.1 million and
established a valuation allowance of $0.9 million against the recorded value of
the deferred income tax asset. For the remaining U.K. operating losses for open
years of account totaling $119.9 million, management has concluded that it is
more likely than not that the results of future U.K. operations will generate
sufficient taxable income to realize the carryforwards in the near term.
New U.K. legislation was recently enacted which makes it possible to group the
current year profit and losses of U.K. companies that have a common ultimate
parent. Pursuant to this legislation, the U.K. operations of Trenwick
International Limited and Chartwell Managing Agents Limited may offset their
current year separate company profits and loss. In addition, new legislation was
introduced effective for tax years beginning on or after January 1, 2000, which
permits U.K. insurers and Lloyd's members to disclaim claims and claims expense
liabilities for tax purposes. By electing to disclaim these liabilities, current
year taxable income is increased. The disclaimed liabilities are temporary
differences and will give rise to future taxable deductions. The new legislation
also provides a calculation whereby additional receipts or expense may be
included in taxable income depending upon the payout of claims relative to the
liabilities taken into account for tax purposes within a margin of error. We are
amending our 2000 U.K. returns and electing to disclaim a portion of our
technical liabilities.
Due to the disclaiming of claim and claim expense liabilities for U.K./ income
tax purposes, there is not a positive correlation between U.K. pre-tax
accounting income and U.K. taxable income for the 2001 and 2000 years. A
reconciliation of U.K. pre-tax accounting income (loss) to taxable income for
2001 and 2000 follows (monetary amounts in table expressed in thousands of
United States dollars; 2000 balances include amounts incurred by Trenwick Group
Ltd. subsequent to September 27, 2000, the effective date of the
Trenwick/LaSalle business combination):
2001 2000
--------- --------
U.K. pre-tax income (loss) $(112,652) $ 1,456
Pre-tax loss prior to business combination -- (74,021)
Pre-tax losses on open years of account, net 24,054 39,695
Disclaimed claim and claim expenses 88,598 37,388
Utilization of net operating loss carryforward -- (4,518)
--------- --------
U.K. taxable income (loss) -- --
========= ========
At year end 2001 business plans prepared by management also included plans for
its U.K operations. Projections in the plans support the utilization of U.K. net
operating loss carryforwards from open years of account by year end 2005,
together with a return to normal levels of disclaimed claim and claim expense
liabilities by year end 2008. The business plans used to prepare these
projections give effect to the discontinuation of unprofitable lines of business
and the October 1, 2001 renewal season, which reflects significant assumptions
about increased premium volume and improved rates and profitability. In the
October 1, 2001 renewal season, the U.K. operations have participated in a
manner consistent with its plans. The projections are based on the assumption
that the company will provide LOC capacity at levels sufficient to support the
projected increased premium volume. The letter of credit facility is scheduled
to expire in November 2002. In the event that Trenwick Group Ltd. is unable to
obtain
14
a replacement letter of credit facility or post sufficient collateral to support
its Lloyd's underwriting activities, it will be required to reduce or cease its
underwriting activities at Lloyd's for the 2003 year of account.
Liquidity and Capital Resources
Cash Flows
Trenwick Group Ltd. is a holding company whose principal assets are its
investments in the common stock of its operating subsidiaries. As a holding
company, Trenwick Group Ltd.'s principal source of funds consists of permissible
dividends, tax allocation payments and other statutorily permissible payments
from its operating subsidiaries. Trenwick Group Ltd.'s principal use of cash is
dividends to its shareholders. Trenwick Group Ltd.'s United States and United
Kingdom intermediate holding companies utilize cash in order to service their
respective debt obligations; its Bermuda subsidiary uses cash to pay dividends
on its preferred shares. Trenwick Group Ltd.'s operating subsidiaries receive
cash from premiums, investment income and proceeds from sales and maturities of
portfolio investments. They utilize cash to pay claims, purchase their own
reinsurance protections, meet operating and capital expenses and purchase debt
and equity securities.
Cash from Trenwick Group Ltd.'s operating activities in 2001 was $63.2 million
compared to cash used in Trenwick Group Ltd.'s operating activities of $16.7
million in 2000 and cash provided by Trenwick Group Ltd.'s operating activities
of $19.9 million in the 1999 fiscal year. The increase in cash flow from
operations was due to several factors. 2001 includes the full year results of
Trenwick Group Ltd. following the Trenwick/LaSalle Business Combination. Growth
in premium writings in Trenwick Group Ltd.'s U.S. and U.K. operations and the
reduced effect from run-off operations have significantly improved cash flow
from operations. Catastrophe loss payments in LaSalle following the September
11th terrorist attack have not been significant in 2001. Loss payments from this
event are expected to be significant in 2002 and 2003. Aviation losses from
Trenwick Group Ltd.'s operations pertaining to the liability portion of the risk
are expected to be paid over several years. Cash from financing activities in
2001 included $14 million borrowed under Trenwick Group Ltd.'s bank credit
facility. The borrowed funds were used for general corporate purposes.
Trenwick Group Ltd.'s current liquidity objectives are to maximize the use of
available cash to fund ongoing operating needs, pay shareholder dividends and
strategically invest in core businesses. Net cash used in financing activities
in 2001 included $5.9 million of dividends paid to common shareholders. Net cash
used in financing and operating activities in 2000 included $1.5 million of
dividends paid to common shareholders and $6.6 million of dividends paid to
LaSalle Re Holdings Limited's preferred shareholders. In the 1999 fiscal year,
net cash used in financing and operating activities included $37.5 million of
dividends to common shareholders and $6.6 million to preferred shareholders.
Trenwick Group Ltd.'s ability to service its debt obligations is highly
dependent upon dividends and other statutorily permissible payments from its
operating subsidiaries in the United States and Bermuda. As a result of recent
losses incurred by Trenwick Group Ltd.'s United States and Bermuda operating
companies, their respective cash distribution capacities have been significantly
reduced. Refer to Note 11 of consolidated financial statements. Further,
maintaining the current dividend capacity is dependent upon the future
profitability of these operating subsidiaries. If Trenwick Group Ltd.'s
operating subsidiaries generated future losses instead of
15
profits, the impact on Trenwick Group Ltd.'s ability to service its outstanding
debt obligations could be significant.
Dividends
Trenwick Group Ltd. paid a dividend of $0.04 per common share in each quarter of
2001 and the fourth quarter of 2000. Trenwick Group Inc. paid a quarterly
dividend of $.26 per common share in the first three quarters of 2000 and in
each quarter of 1999. LaSalle Re Holdings Limited paid dividends on its common
shares of $0.38 per share in each of January, April and July 1999. LaSalle Re
Holdings Limited did not pay any dividends on its common shares subsequent to
July 1999. LaSalle Re Holdings Limited paid a quarterly dividend of $.55 per
share on its Series A preferred shares in each of the four quarters of 2001,
2000 and 1999. Trenwick Group Ltd.'s Board of Directors reviews Trenwick Group
Ltd.'s common share dividend each quarter. Among the factors considered by the
Board of Directors in determining the amount of each dividend are Trenwick Group
Ltd.'s results of operations and the capital requirements, growth and other
characteristics of its businesses.
Financings, Financing Capacity and Capitalization
Trenwick Group Ltd. continually monitors existing and alternative financing
sources to support Trenwick Group Ltd.'s capital and liquidity needs, including,
but not limited to, debt issuance, preferred or common stock issuance,
intercompany borrowings and pledging or selling of assets. Trenwick Group Ltd.'s
total debt to capital ratio (indebtedness divided by the sum of indebtedness,
minority interest and shareholders' equity) was 31.2% on December 31, 2001 and
26.3% on December 31, 2000. The increase is primarily due to an increase of
$14.0 million of borrowings under its senior credit facilities, combined with a
decrease in shareholders' equity.
Trenwick Group Ltd.'s financing obligations generally include debt and lease
payment obligations. At December 31, 2001, annual principal payments required by
Trenwick Group Ltd., through 2006, relating to these financing obligations are
as follows (monetary amounts in tables expressed in thousands of United States
dollars):
Payments Due by Period
-------------------------------------------------------------------
Contractual Less than 1-3 4-5 After 5
Obligations Total 1 Year Years Years Years
-------- ------- -------- ------- -------
Indebtedness and minority
interest $359,770 $46,268 $192,021 $35,131 $86,350
Operating leases 21,628 4,951 9,256 5,027 2,394
-------- ------- -------- ------- -------
Total contractual cash
obligations $381,398 $51,219 $201,277 $40,158 $88,744
======== ======= ======== ======= =======
16
Trenwick Group Ltd.'s other commercial commitments principally consist of
reimbursement obligations for standby letters of credit issued in support of its
underwriting activities at Lloyd's. The amounts and expiration of Trenwick Group
Ltd.'s other commercial commitments are as follows (monetary amounts in table
expressed in thousands of United States dollars):
Expiration Periods
----------------------------------------------------------------
Other Commercial Less than 1-3 4-5 After 5
Commitments Total 1 Year Years Years Years
-------- ------- -------- ------- -------
Lines of credit $ 5,091 $ 5,091 $ -- $ -- $ --
Standby letters of credit 332,177 18,784 299,138 14,255 --
-------- ------- -------- ------- --
Total commercial
commitments $337,268 $23,875 $299,138 $14,255 $ --
======== ======= ======== ======= ====
Other than as noted above, Trenwick Group Ltd. does not have any material
off-balance sheet arrangements, trading activities involving non-exchange traded
contracts accounted for at fair value or relationships with persons or entities
that derive benefits from a non-independent relationship with Trenwick Group
Ltd. or its related parties.
Concurrent with the Trenwick/LaSalle business combination, Trenwick America
Corporation and Trenwick Holdings Limited, Trenwick Group Ltd.'s U.S. and U.K.
holding companies, entered into an amended and restated $490 million credit
agreement with various lending institutions. The credit agreement consisted of
both a $260 million revolving credit facility and a $230 million letter of
credit facility. The revolving credit facility has subsequently been converted
into a four-year term loan. Trenwick America Corporation is the primary obligor
with respect to the revolving credit facility, and Trenwick Holdings Limited is
the primary obligor with respect to the letter of credit facility. Guarantees
are provided by LaSalle Re Holdings Limited and Trenwick Group Ltd. with respect
to both Trenwick America Corporation's and Trenwick Holdings Limited's
obligations and additionally by Trenwick America Corporation with respect to
Trenwick Holdings Limited's obligations. The credit agreement provides for a
letter of credit facility which may only be used to support the Lloyd's
syndicate participations of Trenwick Group Ltd.'s subsidiaries. The letter of
credit facility is scheduled to expire in November 2002. In the event that
Trenwick Group Ltd. is unable to obtain a replacement letter of credit facility
or post sufficient collateral to support its Lloyd's underwriting activities, it
will be required to reduce or cease its underwriting activities at Lloyd's for
the 2003 year of account. The applicable interest rate on borrowings under the
credit facility is generally 2.5% above the London Interbank Offered Rate and
was 4.7% at year end 2001. The term loan facility is subject to scheduled
principal amortization over the four-year period in accordance with the
following schedule: 2002, 22.5%; 2003, 27.5%; 2004, 32.5%; 2005, 17.5%.
Trenwick America Corporation is obligated to repay a portion or all of the term
loan in the event of equity issuances, asset sales or debt issuances by Trenwick
Group Ltd. or its subsidiaries. At year end 2001, $195.0 million of term loans
were outstanding, and $230.0 million of letters of credit were outstanding under
the credit facility.
The credit agreement contains general covenants and restrictions as well as
financial covenants relating to, among other things, Trenwick Group Ltd.'s
minimum interest coverage, debt to capital leverage, minimum earned surplus,
maintenance of a minimum A.M. Best Company rating of A- and tangible net worth.
As of year end 2001, Trenwick Group Ltd. was in compliance with the credit
agreement covenants.
17
The financial covenants relating to interest coverage, risk based capital and
tangible net worth (each as defined by the financial covenants in the credit
agreement) were revised downward in an amendment to the credit agreement
executed following the September 11th terrorist attacks. The amendment set
Trenwick Group Ltd.'s minimum interest coverage ratio at 1.5 to 1 for the fourth
quarter of 2001, 2.0 to 1 for the first quarter of 2002 and 2.5 to 1 thereafter.
Trenwick Group Ltd.'s interest coverage ratio at December 31, 2001 was 2.0 to 1.
The amendment adjusted downward the minimum risk-based capital requirement for
Trenwick Group Ltd.'s subsidiary, Chartwell Insurance Company, from 300% to 225%
through December 31, 2002. Thereafter, the minimum risk-based capital for
Chartwell Insurance Company returns to 300%. The risk based capital for
Chartwell Insurance Company as of December 31, 2001 was 257%. The amendment
lowered the base minimum tangible net worth Trenwick Group Ltd. must maintain
from $560 million to $425 million until the reporting of quarterly results of
operations as of March 31, 2002, which are due no later than May 15, 2002. After
May 15, 2002, Trenwick Group Ltd. minimum tangible net worth reverts to $560
million. Trenwick Group Ltd.'s tangible net worth as of December 31, 2001 was
$428 million. If Trenwick Group Ltd. is unable to meet the credit agreement's
financial covenants at the end of the first quarter of 2002, it may be required
to repay the outstanding indebtedness and collateralize the outstanding letters
of credit issued under the credit agreement through additional financing, asset
sales, subsidiary dividends or similar transactions.
In connection with the Trenwick/LaSalle business combination, Trenwick America
Corporation assumed, effective September 27, 2000, Trenwick Group Inc.'s
obligations with respect to $75 million aggregate principal amount of 6.70%
Senior Notes, which are due April 1, 2003. Interest is payable semi-annually on
April 1 and October 1 of each year; interest payments commenced on October 1,
1998. The notes are not subject to redemption prior to maturity. They are
unsecured obligations and rank senior in right of payment to all existing and
future subordinated indebtedness of Trenwick America Corporation.
Trenwick America Corporation also assumed, effective September 27, 2000,
Trenwick Group Inc.'s 8.82% Junior Subordinated Deferrable Interest Debentures
held by Trenwick Capital Trust I in respect of the $110 million in 8.82%
Subordinated Capital Income Securities issued by the Trust. Under the terms of
the debentures, Trenwick America Corporation is not restricted from incurring
indebtedness, but is subject to limits on its ability to incur secured
indebtedness for borrowed money.
Upon consummation of the acquisition of Chartwell Re Corporation in 1999,
Trenwick Group Inc. became the successor obligor under Chartwell Re
Corporation's Contingent Interest Notes due June 30, 2006. Effective September
27, 2000, Trenwick America Corporation assumed Trenwick Group Inc.'s obligations
under the contingent interest notes in connection with the Trenwick/LaSalle
business combination. The contingent interest notes were issued in an aggregate
principal amount of $1 million, which accrues interest at a rate of 8% per
annum, compounded annually. The interest is not payable until the maturity or
earlier redemption of the contingent interest notes. In addition, the contingent
interest notes entitle their holders to receive at maturity, in proportion to
the principal amount of the contingent interest notes held by them, an aggregate
of from $1 million up to $55 million in contingent interest. The amount of
contingent interest payable under the contingent interest notes is dependent
upon the level of loss and loss adjustment expense reserves related to business
written by Trenwick Group Ltd.'s subsidiary, The Insurance Corporation of New
York, prior to 1996. Settlement of the contingent interest notes may be made by
payment of cash or, under certain specified conditions, by delivery of Trenwick
Group Ltd.'s common shares.
18
Trenwick Group Ltd.'s ability to refinance its existing debt obligations or
raise additional capital is dependent upon several factors, including financial
conditions with respect to both the equity and debt markets and the ratings of
its securities as established by the rating agencies. Following Trenwick Group
Ltd.'s claims and claims expense liability reserve increase in the second
quarter of 2001 and the losses it sustained in the September 11th terrorist
attacks, its senior debt ratings were downgraded by Standard & Poors Corporation
to BBB- and by Moody's Investors Service to Ba2. Trenwick Group Ltd.'s ability
to refinance its outstanding debt obligations, as well as the cost of such
borrowings, could be adversely affected by these ratings downgrades or if its
ratings were downgraded further.
Catastrophe Equity Put
On September 27, 2000, Trenwick Group Ltd. assumed the benefits and obligations
of LaSalle Re Holdings Limited under a $100 million catastrophe equity put
option. The catastrophe put option was amended and restated as of January 1,
2001 and amended as of January 25, 2002. As amended, the catastrophe equity put
enables Trenwick Group Ltd. to raise up to $55 million of equity, through the
issue of convertible preferred shares to the option writer in the event there is
a qualifying catastrophic event or events occurring prior to January 1, 2002.
The preferred shares can be redeemed by Trenwick Group Ltd. at any time
following their issuance. In addition, the option writer can convert its
preferred shares into common shares of Trenwick Group Ltd. at any time after
they have been outstanding for five years or upon a change in control of
Trenwick Group Ltd. or a decline in Trenwick Group Ltd.'s net worth below a
specified level. Conversion is at the greater of the book value of Trenwick
Group Ltd. at the date of conversion or the market value of the common shares
based on the 30-day trading average prior to conversion. The annual net option
premium for the catastrophe equity put has been charged to additional paid in
capital.
As a result of the terrorist attacks of September 11, 2001, Trenwick Group Ltd.
has incurred $120 million in catastrophe losses as defined under the option
agreement. If these losses develop to $140 million prior to March 11, 2003,
Trenwick Group Ltd. will be entitled to exercise the catastrophe equity put and
raise $55 million of equity, subject to regulatory approvals.
Common Share Transactions
In November 2000, Trenwick Group Ltd.'s Board of Directors authorized the
repurchase of one million common shares. Trenwick Group Ltd. did not repurchase
any of its common shares in 2000 or 2001 other than 397 shares repurchased in
connection with the vesting of restricted shares in 2001.
Trenwick Group Ltd. issued 209,954 and 1,405 common shares in 2001 and 2000,
respectively, pursuant to employee compensation, direct compensation, stock
purchase and stock option plans and on exercises of warrants. Prior to the
Trenwick/LaSalle business combination, LaSalle Re Holdings Limited issued 22,167
and 79,481 common shares during the 2000 and 1999 years, respectively, under
employee compensation, stock purchase and stock option plans.
Restrictions on Certain Payments within Trenwick
Because Trenwick Group Ltd.'s operations are conducted through its operating
subsidiaries, Trenwick Group Ltd. 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 Group Ltd.'s insurance
19
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. Management believes that current levels of cash flow
from operations and assets held at the holding company level will provide
Trenwick Group Ltd. with sufficient liquidity to meet its operating needs in the
short-term (over the next twelve months). Since the ability of Trenwick Group
Ltd. to meet its obligations in the long-term (beyond such twelve month period)
is dependent upon such factors as market changes, insurance regulatory changes
and economic conditions, no assurance can be given that the available net cash
flow will be sufficient to meet its operating needs. Trenwick Group Ltd. expects
that, in order to repay the principal amount of certain currently outstanding
indebtedness at maturity or otherwise, it will be required to seek additional
financing, engage in asset sales, subsidiary dividends or similar transactions.
Reinsurance
Trenwick Group Ltd.'s operating subsidiaries purchase reinsurance to reduce its
exposure to catastrophe claims and the frequency and severity of claims in all
lines of business. In 2001, 2000 and 1999, Trenwick America Reinsurance
Corporation's reinsurance treaties consisted principally of property catastrophe
reinsurance treaties. In 1999, Trenwick America Reinsurance Corporation also
entered into an excess of loss treaty for its facultative casualty business. In
addition, Trenwick America Reinsurance Corporation purchased an annual aggregate
excess of loss ratio treaty for casualty business effective January 1, 1999.
Trenwick Group Ltd. ceased buying aggregate excess of loss ratio treaties in
subsequent years. Trenwick International Limited and Chartwell Managing Agents
Limited, as is customary with companies operating in the London market and at
Lloyd's, buy larger amounts of reinsurance to protect themselves. Reinsurance
and retrocessional coverage is customized for each class of business. LaSalle Re
Limited purchased various reinsurance protections in order to reduce its
exposure to large catastrophe losses. LaSalle Re Limited's reinsurance
principally consisted of non-proportional excess of loss treaties. On December
31, 2000, LaSalle Re Limited terminated a quota share arrangement with CNA,
which incepted April 1, 1999. Canterbury Financial Group Inc. purchased specific
reinsurance programs for each of the programs underwritten by its insurance
companies.
As part of its merger with Trenwick Group Inc., Chartwell Re Corporation
purchased, on October 27, 1999, a reinsurance policy providing for up to $100
million 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 Trenwick/Chartwell merger was completed. The
reinsurance policy applied to all of Chartwell Re Corporation's business,
including its operations at Lloyd's and was fully utilized as of year end 2000.
In addition, as part of the merger, Chartwell Re Corporation commuted several
aggregate stop-loss reinsurance treaties.
Reinsurance agreements provide for recovery of a portion of certain claims and
claims expenses from reinsurers. Trenwick Group Ltd. remains liable in the event
that the reinsurer is unable to meet its obligation; however, Trenwick Group
Ltd. holds partial collateral under several of these agreements in order to
mitigate the risk. Letters of credit, trust accounts and funds withheld in the
aggregate amount of $332.2 million (including interest) have been arranged in
favor of Trenwick Group Ltd. collateralizing reinsurance recoverables with
respect to certain retrocessionaires.
20
Critical Accounting Policies
The accounting policies described below are those Trenwick Group Ltd. considers
critical in preparing its consolidated financial statements. These policies
include significant estimates made by management using information available at
the time the estimates are made. However, as described below, these estimates
could change materially if different information or assumptions were used. The
descriptions below are summarized and have been simplified for clarity. A more
detailed description of the significant accounting policies used by Trenwick
Group Ltd. in preparing its financial statements is included in the Notes to the
Consolidated Financial Statements and the note references are included below.
Unpaid Claims and Claims Expenses
Trenwick Group Ltd. establishes liabilities for claims and claims expenses that
have been reported but not paid and claims and claims expenses that have been
incurred but not reported under its insurance and reinsurance contracts. These
liabilities are developed using actuarial principles and assumptions which
consider a number of factors, including historical claims and claims expense
patterns, which are described in the Notes to the Consolidated Financial
Statements. An extensive degree of judgment is used in this estimation process.
Because the future cannot be predicted with certainty, the actual future claims
and claims expense payments are usually different from the previously recorded
liability estimates. Sometimes the differences are significant. Any adjustments
to Trenwick Group Ltd.'s liabilities for claims and claims expenses are included
in Trenwick Group Ltd.'s results of operations in the period in which the need
for the adjustment becomes known. Due to the considerable variability of the
insurance and reinsurance business underwritten by Trenwick Group Ltd.,
adjustments to its liabilities for claims and claims expenses may occur each
quarter and are sometimes significant.
In particular, Trenwick Group Ltd. cautions that the unpaid claims and claims
expenses related to the September 11th terrorist attacks remain subject to
future adjustment. Because of the scope and uniqueness of these events, standard
loss modeling and assessment methodologies have limited relevance. As a result,
the expected Trenwick Group Ltd. losses reflect the industry's and Trenwick
Group Ltd.'s current estimates. As additional information regarding the claims
and claims expenses related to the September 11th terrorist attacks becomes
available, Trenwick Group Ltd. may be required to adjust its estimate in the
future. If the unpaid claims and claims expenses develop to $140 million prior
to March 11, 2003, Trenwick Group Ltd. will be entitled to exercise a
catastrophe equity put and raise $55 million of equity, subject to regulatory
approvals. Also see Note 4 and 6 of Notes to the Consolidated Financial
Statements.
Reinsurance Recoverable Balances
Trenwick Group Ltd. purchases reinsurance to reduce its exposure on individual
risks, catastrophic losses and other large losses. Trenwick Group Ltd. estimates
the amount of uncollectable receivables from its reinsurers each period and
establishes an allowance for uncollectable amounts. The amount of the allowance
is based on the age of unpaid amounts, information about the creditworthiness of
Trenwick Group Ltd.'s reinsurers, and other relevant information. Estimates of
uncollectable reinsurance amounts are revised each period, and changes are
recorded in the period they become known. A significant change in the level of
uncollectable reinsurance amounts would have a significant effect on Trenwick
Group Ltd.'s results of operations. Also see Note 4 of Notes to the Consolidated
Financial Statements.
21
Investments
Investments are classified as available for sale and recorded at fair value, and
unrealized investment gains and losses are reflected in shareholders' equity.
Investment income is recorded when earned, and capital gains and losses are
recognized when investments are sold. Investments are reviewed periodically to
determine if they have suffered an impairment of value that is considered other
than temporary. If investments are determined to be impaired, a capital loss is
recognized at the date of determination.
Testing for impairment of investments also requires significant management
judgment. The identification of potentially impaired investments, the
determination of their fair value and the assessment of whether any decline in
value is other than temporary are the key judgment elements. The discovery of
new information and the passage of time can significantly change these
judgments. Revisions of impairment judgments are made when new information
becomes known, and any resulting impairment adjustments are made at that time.
The current economic environment and recent volatility of securities markets
increase the difficulty of determining fair value and assessing investment
impairment. The same influences tend to increase the risk of potentially
impaired assets.
Trenwick Group Ltd. seeks to match the maturities of invested assets with the
payment of expected liabilities. By doing this, Trenwick Group Ltd. attempts to
make cash available as payments become due. If a significant mismatch of the
maturities of assets and liabilities were to occur and Trenwick Group Ltd. had
to liquidate investments prior to their maturity, it may incur realized losses
and, the effect on Trenwick Group Ltd.'s results of operations could be
significant. Also see Note 5 of Notes to the Consolidated Financial Statements.
Deferred Income Taxes
Trenwick Group Ltd. recorded as an asset as of December 31, 2001 $139.9 million
of net deferred income taxes. The net deferred income taxes represent the
expected future tax benefit of losses previously incurred by Trenwick Group
Ltd.'s United States and United Kingdom operations. Trenwick Group Ltd.'s
Bermuda operations are not subject to income tax. The future tax benefit in the
United States must be used on or before 2021. The future tax benefit in the
United Kingdom is not limited by time. In order to maintain its net deferred
income taxes as an asset, Trenwick Group Ltd. is required to determine that it
is more likely than not that it will be able to realize the future tax benefit
of its previously incurred losses in the United States and the United Kingdom.
In making this determination, Trenwick Group Ltd. is required to make estimates
as to its future income. If Trenwick Group Ltd.'s estimates of its future income
in the United States and the United Kingdom were to be revised and it became
more likely than not that Trenwick Group Ltd. would not be able to realize the
future tax benefit of its previously incurred losses, the effect on Trenwick
Group Ltd.'s results of operations could be significant. Also see Note 7 of
Notes to the Consolidated Financial Statements.
Regulatory Matters
Trenwick Group Ltd. and its subsidiaries are subject to regulatory oversight
under the insurance statutes and regulations of the jurisdictions in which they
conduct business, including all states of the United States, the United Kingdom
and Bermuda. These regulations vary from jurisdiction to jurisdiction and are
generally designed to protect ceding insurance companies and policyholders by
regulating Trenwick Group Ltd.'s financial integrity and solvency in its
business transactions and operations. Many of the insurance statutes and
regulations applicable to Trenwick Group
22
Ltd.'s subsidiaries relate to reporting and enable regulators to closely monitor
their performance. Reports typically require the inclusion of information
concerning Trenwick Group Ltd.'s capital structure, ownership, financial
condition and general business operations.
Quantitative and Qualitative Disclosure About Market Risk
The following sections address the significant market risks associated with
Trenwick Group Ltd.'s business activities as of December 31, 2001 and 2000.
Trenwick Group Ltd.'s primary market risk exposures are:
o foreign currency exchange risk, in particular the U.S. dollar to the
British pound sterling;
o interest rate risk on fixed and variable rate U.S. dollar and British pound
sterling denominated short and long-term instruments; and
o equity price risk.
With respect to Trenwick Group Ltd.'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 Group Ltd. selects investments with
characteristics such as duration, yield, currency and liquidity to reflect the
underlying characteristics of related estimated claim liabilities.
As of December 31, 2001, Trenwick Group Ltd.'s exposure to high yield
investments was minimal. While these investments are more susceptible to credit
risk, their total market value represents less than 5% of total investments and
cash, and therefore management believes that the exposure to credit risk is not
material. Trenwick Group Ltd. has no derivatives and its investments do not
contain terms that may result in potential losses due to leverage.
The borrowings of Trenwick Group Ltd. are summarized in note 6 to the financial
statements, and "Financings, Financing Capacity and Capitalization" on page [16]
of this management's discussion and analysis of financial condition and results
of operations.
Foreign Currency Exchange Rate Risk
Foreign currency risk is the risk that Trenwick Group Ltd. will incur economic
losses due to adverse changes in foreign currency exchange rates. This risk
arises from Trenwick Group Ltd.'s international operations, debt obligations and
securities denominated in foreign currencies and foreign equity investments.
Trenwick Group Ltd. generally conducts its international businesses through
foreign operating entities which generally maintain assets and liabilities in
local currencies, substantially limiting exchange rate risk to net assets
denominated in the foreign currency. Trenwick Group Ltd.'s foreign currency
denominated net assets are principally in British pound sterling. At December
31, 2001 and December 31, 2000, Trenwick Group Ltd.'s net liabilities of foreign
subsidiaries was approximately $43.5 million and $(39.1) million, respectively.
Debt obligations denominated in foreign currencies were $13.0 million at
December 31, 2001. Foreign debt securities and foreign cash on deposit were $2.2
million and $14.2 million, respectively, at December 31, 2001.
Trenwick Group Ltd.'s reinsurance, international insurance and Lloyd's
operations all have exposures to movements in various currencies around the
world (particularly the British pound sterling, the Euro and the Canadian
dollar) as such businesses are denominated in those currencies. Therefore,
changes in currency exchange rates affect Trenwick Group Ltd.'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.
23
Management estimates that a 10% immediate unfavorable change in each of the
foreign currency exchange rates to which Trenwick Group Ltd. is exposed as of
December 31, 2001 would have decreased the fair value of Trenwick Group Ltd.'s
foreign denominated net assets by approximately $4.0 million, which was
comprised primarily of exposure to the British pound sterling. At December 31,
2000, the same 10% shift in foreign currency exchange rates would have resulted
in a potential loss in fair value of approximately $8.5 million.
Interest Rate Risk
Trenwick Group Ltd.'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 Group Ltd.'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 Group Ltd. 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 $60.2 million
and $50.4 million at December 31, 2001 and December 31, 2000, respectively.
Similarly, a 100 basis point decrease in market interest rates would have
resulted in an estimated pre-tax gain in the fair value of these instruments of
$56.0 million and $48.4 million at December 31, 2001 and December 31, 2000,
respectively.
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 Group Ltd.'s $24.2 million equity portfolio at December 31, 2001,
$9.5 million of common equity investments were not subject to equity risk.
Trenwick Group Ltd.'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 December 31, 2001 which would have resulted in
a $1.5 million loss. An immediate 10% drop in equity prices across all equity
securities holdings from those prevailing at December 31, 2000 would have
resulted in a $9.5 million loss.
24
The fair value estimates shown are based on the composition of the equity
security portfolio at year-end and these exposures will change as a result of
ongoing portfolio activities in response to management's assessment of changing
market conditions and available investment opportunities.
The above analyses do not take into account any correlation among foreign
currency exchange rates, or any correlation among various markets (i.e., the
fixed income markets and foreign exchange and equity markets). Trenwick Group
Ltd.'s actual experience may differ from the results noted above due to the
correlation assumptions utilized, or if events occur that were not included in
the methodology, such as significant liquidity or market events. The selection
of the amount of increases or decreases in currency exchange rates, interest
rates and equity values in the above analyses should not be construed as a
prediction of future market events, but rather, to illustrate the potential
impact of such events.
Effects of Inflation
The potential exists, after a catastrophe loss, for the development of
inflationary pressures in a local economy. The effects of inflation are
considered in pricing and in estimating reserves for unpaid claims and claim
expenses. The actual effects of inflation on Trenwick Group Ltd.'s results
cannot be accurately known until claims are ultimately settled.
Accounting Standards
In July 2001, the Financial Accounting Standards Board issued a statement
covering goodwill and other intangible assets, which is required to be adopted
at the beginning of 2002. The statement requires that the goodwill be tested for
impairment under either market value or cash flow tests and any impairment be
recorded as of January 1, 2002 as the cumulative effect of an accounting change.
The impairment tests must be completed by the reporting of quarterly results of
operations as of June 30, 2002. The new statement also requires that negative
goodwill balances not be tested, but be credited to operations as of January 1,
2002 as the cumulative effect of an accounting change. We will conduct
impairment tests on the remaining goodwill and implement the statement during
the first or second quarter of 2002.
Effective January 1, 2001, Trenwick Group Ltd. implemented a new accounting
standard for accounting for derivative instruments and hedging activities. The
standard 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 the
standard had no significant effect on Trenwick Group Ltd.'s consolidated
financial statements.
Safe Harbor Disclosure
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, Trenwick Group Ltd. sets forth below cautionary
statements identifying important risks and uncertainties that could cause its
actual results to differ materially from those that might be projected,
forecasted or estimated in its "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, made by or on behalf of Trenwick Group Ltd. in this 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,
25
dividends, plans relating to products or services of Trenwick Group Ltd. and
estimates concerning the effects of litigation or other disputes, as well as
assumptions for any of the foregoing and generally expressed with words such as
"believes," "estimates," "expects," "anticipates," "plans," "projects,"
"forecasts," "goals," "could have," "may have," and similar expressions.
Forward-looking statements involve known and unknown risks and uncertainties,
which may cause Trenwick Group Ltd.'s results to differ materially from such
forward-looking statements. These risks and uncertainties include, but are not
limited to, the following:
- Changes in the level of competition in the domestic and international
reinsurance or primary insurance markets that affect the volume or
profitability of Trenwick Group Ltd.'s property/casualty business.
These changes include, but are not limited to, changes in the
intensity of price competition, the entry of new competitors, existing
competitors exiting the market and the development of new products by
new and existing competitors;
- Changes in the demand for reinsurance, including changes in ceding
companies' risk retentions and changes in the demand for excess and
surplus lines insurance coverages;
- Changes in reinsurance purchasing and distribution patterns;
- The ability of Trenwick Group Ltd. to execute its strategies in its
property/casualty operations;
- Catastrophe losses in Trenwick Group Ltd.'s domestic and international
property/casualty businesses;
- Adverse development on property/casualty claims and claims expense
liabilities related to business written in prior years, including, but
not limited to, evolving case law and its effect on environmental and
other latent injury claims, changing government regulations, newly
identified toxins, newly reported claims, new theories of liability,
or new insurance and reinsurance contract interpretations;
- Changes in Trenwick Group Ltd.'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 Group Ltd.'s retrocessionaires or
reinsurers;
- Increases in interest rates, which may cause a reduction in the market
value of Trenwick Group Ltd.'s fixed income portfolio, and its common
shareholders' equity;
- 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 Group Ltd.'s equity investments;
- Changes in the composition of Trenwick Group Ltd.'s investment
portfolio;
- Credit losses on Trenwick Group Ltd.'s investment portfolio;
26
- Adverse results in litigation matters, including, but not limited to,
litigation related to environmental, asbestos and other potential mass
tort claims;
- The passage of federal or state legislation subjecting LaSalle Re
Limited to United States taxation or regulation;
- A contention by the United States Internal Revenue Service that
LaSalle Re Limited is subject to United States taxation;
- The impact of mergers and acquisitions;
- Gains or losses related to changes in foreign currency exchange rates;
- Changes in Trenwick Group Ltd.'s capital needs;
- The ability of Trenwick Group Ltd. to obtain the necessary letters of
credit or collateral to support its Lloyd's underwriting operation;
- The ability of Trenwick Group Ltd. to refinance or repay its
outstanding indebtedness; and
- Changes in the financial strength ratings assigned to Trenwick Group
Ltd. and its operating subsidiaries or Lloyd's.
In addition to the factors outlined above that are directly related to Trenwick
Group Ltd.'s businesses, Trenwick Group Ltd. is also subject to general business
risks, including, but not 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. The important factors
that could affect such forward-looking statements are subject to change, and
Trenwick Group Ltd. does not intend to update any forward-looking statement or
the foregoing list of important factors. By this cautionary note Trenwick Group
Ltd. intends to avail itself of the safe harbor from liability with respect of
forward-looking statements provided by Section 27A and Section 21E referred to
above.
27
Report of Independent Accountants
To the Board of Directors and
Shareholders of Trenwick Group Ltd.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive income, of changes in
shareholders' equity and of cash flows present fairly, in all material respects,
the financial position of Trenwick Group Ltd. and its subsidiaries at December
31, 2001 and December 31, 2000, 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 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.
The financial statements of Trenwick Group Ltd. as of December 31, 1999 and for
the period from October 31, 1999 to December 31, 1999, and for the year ended
September 30, 1999 were audited by other independent accountants whose report
dated November 10, 2000 expressed an unqualified opinion on those statements.
PricewaterhouseCoopers LLP
New York, New York
February 27, 2002
-1-
Trenwick Group Ltd.
Consolidated Balance Sheet
(Amounts expressed in thousands of United States dollars,
except share and per share data)
December 31, 2001 and 2000
2001 2000
----------- -----------
Assets:
Debt securities available for sale, at fair value $ 1,960,600 $ 1,813,678
Equity securities, at fair value 24,164 115,901
Cash and cash equivalents 331,350 311,001
Accrued investment income 38,278 38,171
Premiums receivable 535,281 478,729
Reinsurance recoverable balances, net 1,411,469 932,051
Prepaid reinsurance premiums 197,169 147,399
Deferred policy acquisition costs 115,870 100,423
Net deferred income taxes 139,926 104,889
Goodwill 41,653 20,939
Other assets 132,795 166,315
----------- -----------
Total assets $ 4,928,555 $ 4,229,496
=========== ===========
Liabilities:
Unpaid claims and claims expenses $ 3,032,748 $ 2,408,926
Unearned premium income 612,290 496,338
Reinsurance balances payable 225,255 137,120
Indebtedness 291,263 286,805
Other liabilities 125,554 96,350
----------- -----------
Total liabilities 4,287,110 3,425,539
----------- -----------
Minority interest:
Mandatorily redeemable preferred capital securities of subsidiary
trust holding solely junior subordinated debentures of U.S. subsidiary 68,119 76,770
Minority interest in preferred shares of Bermuda subsidiary 75,000 75,000
----------- -----------
Total minority interest 143,119 151,770
----------- -----------
Common shareholders' equity:
Common shares, $0.10 par value, 36,845,141
and 36,665,103 shares issued and outstanding 3,685 3,667
Additional paid in capital 578,018 575,401
Deferred compensation under share award plans (4,766) (2,660)
Retained earnings (accumulated deficit) (101,830) 58,485
Accumulated other comprehensive income 23,219 17,294
----------- -----------
Total common shareholders' equity 498,326 652,187
----------- -----------
Total liabilities, minority interest and shareholders' equity $ 4,928,555 $ 4,229,496
=========== ===========
The accompanying notes are an integral part of these statements.
-2-
Trenwick Group Ltd.
Consolidated Statement of Operations and Comprehensive Income
(Amounts expressed in thousands of United States dollars,
except per share data)
Years Ended December 31, 2001 and 2000,
Three Month Period Ended December 31, 1999 and Year Ended September 30, 1999
2001 2000 1999 1999
Year Year Period Year
----------- --------- -------- ---------
Revenues:
Net premiums earned $ 889,506 $ 302,749 $ 30,391 $ 126,615
Net investment income 129,114 58,715 8,588 33,847
Net realized investment gains (losses) 8,796 (1,386) -- 615
Other income 3,389 1,477 -- --
----------- --------- -------- ---------
Total revenues 1,030,805 361,555 38,979 161,077
----------- --------- -------- ---------
Expenses:
Claims and claims expenses incurred 827,405 227,707 46,642 131,147
Policy acquisition costs 273,066 78,603 5,878 19,844
Underwriting expenses 79,016 31,891 4,533 13,733
General and administrative expenses 20,855 6,090 1,383 788
Goodwill amortization 1,071 259 -- --
Interest expense and subsidiary
preferred share dividends 39,142 11,775 346 1,714
Foreign currency losses (gains) 2,452 1,015 28 (470)
----------- --------- -------- ---------
Total expenses 1,243,007 357,340 58,810 166,756
----------- --------- -------- ---------
Income (loss) before income taxes
and other minority interest (212,202) 4,215 (19,831) (5,679)
Other minority interest in
subsidiary net income (loss) -- 839 (4,990) (2,845)
----------- --------- -------- ---------
Income (loss) before income taxes (212,202) 3,376 (14,841) (2,834)
Applicable income taxes (benefit) (57,805) (6,075) -- --
----------- --------- -------- ---------
Net income (loss) (154,397) 9,451 (14,841) (2,834)
Preferred share dividends
prior to business combination -- 4,923 1,641 6,563
----------- --------- -------- ---------
Net income (loss) available to
common shareholders $ (154,397) $ 4,528 $(16,482) $ (9,397)
=========== ========= ======== =========
Earnings per COMMON share:
Basic and diluted earnings (loss) per share $ (4.19) $ 0.21 $ (1.06) $ (0.60)
=========== ========= ======== =========
Comprehensive income (loss):
Net income (loss) $ (154,397) $ 9,451 $(14,841) $ (2,834)
----------- --------- -------- ---------
Other comprehensive income (loss):
Net unrealized investment gains (losses) 10,299 26,956 (3,429) (17,886)
Foreign currency translation adjustments (4,374) (1,253) -- --
----------- --------- -------- ---------
Total other comprehensive income (loss) 5,925 25,703 (3,429) (17,886)
----------- --------- -------- ---------
Comprehensive income (loss) $ (148,472) $ 35,154 $(18,270) $ (20,720)
=========== ========= ======== =========
The accompanying notes are an integral part of these statements.
-3-
Trenwick Group Ltd.
Consolidated Statement of Cash Flows
(Amounts expressed in thousands of United States dollars)
Years Ended December 31, 2001 and 2000,
Three Month Period Ended December 31, 1999 and Year Ended September 30, 1999
2001 2000 1999 1999
Year Year Period Year
----------- --------- -------- ---------
Operating activities:
Premiums collected, net of acquisition costs $ 1,037,848 $ 294,874 $ 22,609 $ 114,315
Ceded premiums paid, net of acquisition costs (311,272) (101,519) (7,050) (21,326)
Claims and claims expenses paid (865,288) (266,991) (12,048) (93,622)
Claims and claims expenses recovered 182,453 66,270 531 1,985
Underwriting expenses paid (91,304) (50,837) 500 (13,736)
----------- --------- -------- ---------
Cash from (for) underwriting activities (47,563) (58,203) 4,542 (12,384)
Net investment income received 147,822 57,176 5,756 34,828
Other income received, net of expenses 1,891 (2,671) -- --
General and administrative expenses paid (22,707) (3,002) (1,383) (788)
Interest expense and subsidiary
preferred share dividends paid (33,565) (10,280) (346) (1,714)
Income taxes recovered 17,349 278 -- --
----------- --------- -------- ---------
Cash from (for) operating activities 63,227 (16,702) 8,569 19,942
----------- --------- -------- ---------
Investing activities:
Debt securities sales 1,062,125 393,235 49,980 305,671
Debt securities maturities 284,017 92,596 10,000 24,710
Equity securities sales 99,359 29,337 -- --
Debt securities purchases (1,469,136) (370,680) (62,430) (299,882)
Equity securities purchases (2,597) (29,270) -- --
Cash acquired in business combination -- 188,917 -- --
Cash effect of exchange rate translation (4,372) 2,239 -- --
Other investing activities (8,475) (867) -- --
----------- --------- -------- ---------
Cash from (for) investing activities (39,079) 305,507 (2,450) 30,499
----------- --------- -------- ---------
Financing activities:
Indebtedness proceeds 14,000 24,000 -- --
Indebtedness issuance costs paid (1,474) (1,834) -- --
Indebtedness repayment (647) -- -- --
Capital securities purchases (8,462) (9,902) -- --
Common share sales proceeds 418 460 74 412
Share and option repurchases (397) (3,176) -- (1,346)
Equity put option premium payments (1,319) (825) (611) (1,850)
Preferred share dividends paid
prior to business combination -- (4,923) (1,641) (6,563)
Common share dividends paid (5,918) (1,468) -- (37,533)
----------- --------- -------- ---------
Cash from (for) financing activities (3,799) 2,332 (2,178) (46,880)
----------- --------- -------- ---------
Change in cash and cash equivalents 20,349 291,137 3,941 3,561
Cash and cash equivalents, beginning of period 311,001 19,864 15,923 12,362
----------- --------- -------- ---------
Cash and cash equivalents, end of period $ 331,350 $ 311,001 $ 19,864 $ 15,923
=========== ========= ======== =========
The accompanying notes are an integral part of these statements.
-4-
Trenwick Group Ltd.
Consolidated Statement of Changes in Shareholders' Equity
(Amounts expressed in thousands of United States dollars except share data)
Years Ended December 31, 2001 and 2000,
Three Month Period Ended December 31, 1999 and Year Ended September 30, 1999
2001 2000 1999 1999
Year Year Period Year
--------- --------- --------- ---------
Shareholders' equity, beginning
of period $ 652,187 $ 361,960 $ 382,197 $ 430,053
Preferred and common shares and
and additional paid in capital:
Common shares issued in business combination -- 343,005 -- --
Preferred shares reclassified to minority
interest in business combination -- (75,000) -- --
Common shares sold under employee
stock purchase plan 174 247 37 300
Common shares issued on exercise of
options and warrants 243 143 -- 660
Common shares issued under director
and employee compensation plan 29 7 -- 81
Restricted common shares awarded 4,119 -- -- 1,092
Common shares repurchased (397) -- -- (1,097)
Restricted common shares canceled (619) (64) -- --
Compensation recognized under employee plans 405 247 22 4
Equity put option cost recognized,
net of applicable minority interest (1,319) (742) (469) (1,420)
Minority interest change -- (684) 10 (1,068)
Deferred compensation under share award plan
Compensation deferred, net of
applicable minority interest (4,119) (2,803) -- (1,092)
Compensation expense recognized,
net of applicable minority interest 1,394 597 69 576
Restricted common shares canceled 619 64 -- --
Minority interest change -- 2 -- --
Minority interest acquired in business combination -- (73) -- --
Retained earnings (accumulated deficit):
Net income (loss) (154,397) 9,451 (14,841) (2,834)
Preferred share dividends declared
prior to business combination -- (4,923) (1,641) (6,563)
Common share dividends declared (5,918) (1,468) -- (17,543)
Shares repurchased on exercise of share options -- (2,439) -- (712)
Minority interest change -- (176) 5 (289)
Accumulated other comprehensive income:
Other comprehensive income (loss) 5,925 25,703 (3,429) (17,886)
Minority interest change -- 24 -- (65)
Minority interest acquired in business combination -- (891) -- --
--------- --------- --------- ---------
Common shareholders' equity, end of period $ 498,326 $ 652,187 $ 361,960 $ 382,197
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
-5-
TRENWICK GROUP LTD.
Notes to Consolidated Financial Statements
(Amounts expressed in thousands of United States dollars
except share and per share data)
Years Ended December 31, 2001 and 2000,
Three Month Period Ended December 31, 1999 and Year Ended September 30, 1999
Note 1 Organization
Organization Trenwick Group Ltd. was formed as a holding company in
and Basis of Bermuda to acquire two publicly held companies and the
Presentation minority interest in a subsidiary of one of those companies.
That transaction, in which Trenwick Group Ltd. issued common
shares to acquire LaSalle Re Holdings Limited, Trenwick
Group Inc. and the minority interest in LaSalle Re Limited,
was completed on September 27, 2000. Trenwick Group Inc. had
earlier acquired another publicly held company, Chartwell Re
Corporation, on October 27, 1999. More details of these
transactions are disclosed in Note 2.
Trenwick Group Ltd.'s principal subsidiaries underwrite
specialty insurance and reinsurance through five business
platforms: LaSalle Re Limited, Trenwick America Reinsurance
Corporation, Trenwick International Limited, Chartwell
Managing Agents Limited and Canterbury Financial Group Inc.
More details on business segments and geographic information
are disclosed in Note 3.
Basis of Presentation
We include the accounts of Trenwick Group Ltd. and its
subsidiaries in these financial statements after elimination
of significant intercompany accounts and transactions.
Subsidiaries' accounts include the percentage of the assets,
liabilities, revenues and expenses of those Lloyd's
syndicates managed for our own account. We have reclassified
certain items in prior financial statements to conform to
current presentation.
We prepared these financial statements in conformity with
accounting principles that are generally accepted in the
United States of America, sometimes referred to as U.S.
GAAP. In preparing these financial statements, we are
required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of
revenues and expenses during the reporting periods. Actual
amounts will differ from these estimates.
We translate the assets and liabilities of operations whose
functional currency is other than the U.S. dollar at the
rates of exchange at the balance sheet dates. We translate
revenues and expenses of these operations at the average
exchange rates during each period. We record the effects of
these translation adjustments, net of applicable income
taxes, as a cumulative translation adjustment within other
comprehensive income; we include transaction gains and
losses on currencies other than the U.S. dollar in
operations.
We accounted for the business combination between LaSalle Re
Holdings Limited and Trenwick Group Inc. as a purchase by
LaSalle Re Holdings Limited of Trenwick Group Inc. and of
the minority interest in LaSalle Re Limited. Accordingly, in
these financial statements:
o We have included the assets and liabilities and the
revenues and expenses of LaSalle Re Holdings Limited
for all periods presented;
o We have eliminated the minority interest in common
shares and minority interest in net income of LaSalle
Re Limited as of September 30, 2000 and from October 1,
2000, respectively;
-6-
o We have included the assets and liabilities and the
revenues and expenses of Trenwick Group Inc. as of
September 30, 2000 and from October 1, 2000,
respectively.
On September 18, 2000, LaSalle Re Holdings Limited changed
its fiscal year end from September 30 to December 31,
effective for the calendar year beginning January 1, 2000. A
three month transition period from October 1, 1999 through
December 31, 1999 which preceded the start of the new fiscal
year is presented separately in these financial statements.
Other significant accounting policies are presented in
italics within the appropriate footnotes.
Note 2 Trenwick/LaSalle Business Combination
Business On December 19, 1999, LaSalle Re Holdings Limited, LaSalle
Combinations Re Limited and Trenwick Group Inc. signed a definitive
agreement to combine under a new holding company, Trenwick
Group Ltd. On September 27, 2000, following shareholder and
regulatory approval, the newly formed Trenwick Group Ltd.
issued 36,668,599 of its common shares on a one-for-one,
tax-free basis to the former shareholders of LaSalle Re
Holdings Limited (15,634,394 shares, including 26,656
restricted shares issued under share award plans), the
minority shareholders of LaSalle Re Limited, then a 77.5%
owned subsidiary of LaSalle Re Holdings (4,797,649 shares),
and the former shareholders of Trenwick Group Inc.
(16,236,551 shares, including 224,331 restricted shares
issued under share award plans).
We accounted for the Trenwick/LaSalle business combination
as a purchase by LaSalle Re Holdings Limited of the minority
interest in LaSalle Re Limited and of Trenwick Group Inc.
Under the purchase basis of accounting, we allocated the
purchase price ($346,178) to the identifiable assets
acquired and liabilities assumed, based on their estimated
fair values at the date of acquisition and recorded the
unallocated excess ($21,198 as of year end 2001) as
goodwill. During the 2001 year, we refined our estimates
used in the calculation of the fair value of the net assets
acquired in this business combination, principally for the
deferred income tax asset, and recorded an additional
$21,663 of goodwill. Pending changes in accounting for
goodwill and its amortization are described in Note 12.
Trenwick Group Inc. / Chartwell Re Corporation Merger
On October 27, 1999, Trenwick Group Inc. issued 7,964,998 of
its 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 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 as noted above.
Note 3 Segment Information
Segment Trenwick Group Ltd. conducts its specialty insurance and
And Geographic reinsurance business in the following five business
Information segments:
o Worldwide property catastrophe reinsurance, principally
through its Bermuda subsidiary, LaSalle Re Limited;
o United States treaty reinsurance, principally through
its U.S. subsidiary, Trenwick America Reinsurance
Corporation;
o International specialty insurance and reinsurance,
principally through its U.K. subsidiary, Trenwick
International Limited;
o Lloyd's insurance and reinsurance, principally through
its U.K. subsidiary, Chartwell Managing Agents Limited;
and
-7-
o United States specialty program insurance, principally
through its U.S. subsidiary, Canterbury Financial
Group, Inc., and its operating subsidiaries, including
the Insurance Corporation of New York.
Lloyd's syndicates and Excess and Casualty Reinsurance
Association Pool ("ECRA Pool") runoff, which includes
insurance and reinsurance that was either sold or
non-renewed are excluded from the aforementioned segments.
The following tables present business segment financial
information for Trenwick Group Ltd. at year end 2001 and
2000 and for the other periods presented:
2001 2000
------------- ------------
Total assets:
Worldwide property catastrophe reinsurance $667,442 $557,401
U.S. treaty reinsurance 1,611,359 1,769,122
International specialty insurance and reinsurance 553,801 473,612
Lloyd's syndicates continuing 1,393,057 808,483
Lloyd's syndicates and ECRA Pool runoff 99,021 157,627
U.S. specialty program insurance 554,874 372,933
Unallocated 49,001 90,318
------------- ------------
Total assets $4,928,555 $4,229,496
============= ============
2001 2000 1999 1999
Year Year Period Year
----------- --------- -------- ---------
Total revenues:
Worldwide property
catastrophe reinsurance $ 121,479 $ 119,638 $ 35,855 $ 147,808
U.S. treaty reinsurance 335,867 100,276 -- --
International specialty
insurance and reinsurance 193,532 41,168 -- --
Lloyd's syndicates continuing 268,947 71,268 604 4,142
Lloyd's syndicates and
ECRA Pool runoff 9,482 14,239 2,520 9,127
U.S. specialty program insurance 97,178 14,696 -- --
Unallocated 4,320 270 -- --
----------- --------- -------- ---------
Total revenues $ 1,030,805 $ 361,555 $ 38,979 $ 161,077
=========== ========= ======== =========
Net income (loss):
Worldwide property
catastrophe reinsurance $ (13,644) $ 32,678 $(13,893) $ (1,043)
U.S. treaty reinsurance 4,863 (2,850) -- --
International specialty
insurance and reinsurance (38,646) (6,365) -- --
Lloyd's syndicates continuing (55,650) (3,467) (575) (412)
Lloyd's syndicates and
ECRA Pool runoff (17,256) (5,396) (373) (1,379)
U.S. specialty program insurance 44 (135) -- --
Unallocated interest expense and
subsidiary preferred share dividends (27,944) (6,404) -- --
Other unallocated (6,164) 1,390 -- --
----------- --------- -------- ---------
Net income (loss) $ (154,397) $ 9,451 $(14,841) $ (2,834)
=========== ========= ======== =========
-8-
Revenues from transactions between operating segments have
been eliminated in consolidation. Unallocated net income
(loss) consists mainly of interest expense, net of income
taxes.
Geographic Information
The following table presents Trenwick Group Ltd.'s gross
premiums written allocated to the geographic region in which
the risks originate:
2001 2000 1999 1999
Year Year Period Year
---------- -------- ------- --------
Gross premiums written:
United States $ 797,262 $205,819 $ 719 $ 60,074
United Kingdom 317,895 115,273 3,337 32,161
Europe, excluding United Kingdom 133,762 20,429 -- 9,555
Australia, New Zealand and Far East 31,578 13,934 647 7,383
Worldwide 171,758 73,189 5,604 29,837
---------- -------- ------- --------
Gross premiums written $1,452,255 $428,644 $10,307 $139,010
========== ======== ======= ========
Note 4 Premiums
Underwriting We accrue insurance and reinsurance premiums on contracts on
Activities an estimated basis throughout the term of such contracts.
For retrospectively rated and other experience rated
reinsurance contracts, we estimate and accrue premiums based
on the difference between total costs before and after the
experience under the contract (the with-and-without method).
We make premium estimates based on statistical and other
data and record subsequent adjustments in the period in
which they become known. We account for short-duration
contracts as reinsurance when they provide indemnification
against loss or liability relating to insurance risk and as
deposits when they do not.
We earn insurance and reinsurance premiums (net of
reinsurance ceded) on a pro-rata basis over the related
contract period. We record unearned premium income for the
portion of premiums applicable to the unexpired portion of
premium coverage with renewal dates later than year-end. We
compute premium income for direct business and excess of
loss reinsurance using pro-rata methods; for proportional
business, we compute premium income based on reports
received from ceding companies. We record reinsurance
premiums as prepaid expenses and amortize them over the
contract period in proportion to the amount of reinsurance
protection provided. Where the contract provides for return
premiums, we make accruals based on loss experience through
the date of the balance sheet.
The components of premiums written and earned follow:
2001 2000 1999 1999
Year Year Period Year
----------- --------- -------- ---------
Assumed premiums written $ 579,000 $ 249,910 $ 10,307 $ 139,010
Direct premiums written 873,255 178,734 -- --
----------- --------- -------- ---------
Gross premiums written 1,452,255 428,644 10,307 139,010
Ceded premiums written (481,937) (126,012) (897) (28,191)
----------- --------- -------- ---------
Net premiums written $ 970,318 $ 302,632 $ 9,410 $ 110,819
=========== ========= ======== =========
Assumed premiums earned $ 490,126 $ 301,640 $ 37,460 $ 145,080
Direct premiums earned 831,869 116,998 -- --
----------- --------- -------- ---------
Gross premiums earned 1,321,995 418,638 37,460 145,080
Ceded premiums earned (432,489) (115,889) (7,069) (18,465)
----------- --------- -------- ---------
Net premiums earned $ 889,506 $ 302,749 $ 30,391 $ 126,615
=========== ========= ======== =========
-9-
Policy Acquisition Costs
Policy acquisition costs primarily consist of commissions
and brokerage expenses that vary with and are primarily
related to the acquisition of business. We defer and
amortize policy acquisition costs over the period in which
the related premiums are earned. We periodically review
deferred policy acquisition costs to determine that they do
not exceed recoverable amounts after allowing for
anticipated investment income.
The components of policy acquisition costs follow:
2001 2000 1999 1999
Year Year Period Year
--------- --------- ------ -------
Gross policy acquisition costs deferred $ 358,564 $ 209,764 $9,319 $21,377
Ceded policy acquisition costs deferred (70,051) (39,208) -- --
--------- --------- ------ -------
Net policy acquisition costs deferred $ 288,513 $ 170,556 $9,319 $21,377
========= ========= ====== =======
Policy acquisition costs expensed $ 273,066 $ 78,603 $5,878 $19,844
========= ========= ====== =======
Trenwick Group Ltd. earned commissions on cessions to
retrocessionaires of $180,308 and $13,959 for the 2001 and
2000 years, respectively. Prior to the Trenwick/LaSalle
business combination, earned commissions on cessions to
retrocessionaires were not material.
Claims and Claims Expenses
We record claims and claims expenses as incurred, at
management's best estimate, in order to match claims and
claims expense costs with premiums over the contract
periods. The amount provided for unpaid claims and claims
expenses consists of any unpaid reported claims and claims
expenses and estimates for incurred but not reported claims
and claims expenses, net of salvage and subrogation. We
developed the estimates for claims and claims expenses
incurred but not reported based on historical claims and
claims expense experience and an actuarial evaluation of
expected claims and claims expense experience. We discount
workers' compensation indemnity liabilities that are
considered fixed and determinable using an interest rate of
3.5%. Insurance liabilities are based on estimates, and the
ultimate liability will vary from our estimates. Adjustments
to these estimates are reflected in income when known.
The components of net claims and claims expenses incurred
are as follows:
2001 2000 1999 1999
Year Year Period Year
----------- --------- -------- ---------
Gross claims and claims $ 1,554,813 $ 325,761 $ 55,849 $ 142,232
expenses incurred
Ceded claims and claims
expenses incurred (727,408) (98,054) (9,207) (11,085)
----------- --------- -------- ---------
Net claims and claims
expenses incurred $ 827,405 $ 227,707 $ 46,642 $ 131,147
=========== ========= ======== =========
-10-
The following table presents a reconciliation of the
beginning and ending balances of net liabilities for unpaid
claims and claims expenses. The gross liabilities for unpaid
claims and claims expenses at period ends are as reflected
in the balance sheet. The net liabilities for unpaid claims
and claims expenses are after deductions for reinsurance
recoverable on unpaid claims and claims expenses, also as
reflected in the balance sheet.
2001 2000 1999 1999
Year Year Period Year
----------- ----------- --------- ---------
Net unpaid claims and claims expenses,
beginning of period $ 1,375,156 $ 172,576 $ 137,452 $ 97,942
----------- ----------- --------- ---------
Net unpaid claims and claims expenses
of Trenwick Group Inc. at date of acquisition -- 1,220,989 -- --
----------- ----------- --------- ---------
Provision, net of reinsurance recoverable:
Claims incurred in the current period 716,525 215,555 50,244 82,537
Claims incurred prior to the current
period 120,773 17,523 (3,602) 48,610
----------- ----------- --------- ---------
Total provision 837,298 233,078 46,642 131,147
----------- ----------- --------- ---------
Payments, net of reinsurance:
Claims incurred in the current period (142,475) (54,826) (899) (12,821)
Claims incurred prior to the current period (439,799) (204,484) (10,619) (78,816)
----------- ----------- --------- ---------
Total payments (582,274) (259,310) (11,518) (91,637)
----------- ----------- --------- ---------
Foreign currency translation adjustment to net
unpaid claims and claims expenses (8,210) 7,823 -- --
----------- ----------- --------- ---------
End of period:
Net unpaid claims and claims expenses 1,621,970 1,375,156 172,576 137,452
Reinsurance recoverable on unpaid claims and
claims expenses 1,390,955 999,968 17,776 9,100
----------- ----------- --------- ---------
Gross unpaid claims and claims expenses $ 3,012,925 $ 2,375,124 $ 190,352 $ 146,552
=========== =========== ========= =========
Unpaid claims and claims expense at year end 2001 and 2000
of $3,032,748 and $2,408,926, respectively, include amounts
approved for payment but unpaid at year end 2001 and 2000
($19,823 and $33,802, respectively). These amounts are
reflected in the above table as payments within the period
when approved. Reinsurance recoverables on unpaid claims and
claims expenses at year end 2001 and 2000 of $1,411,469 and
$932,051, respectively, include amounts recoverable from
ceding companies which have been approved for payment but
not received at year end 2001 and 2000 ($156,373 and
$71,083, respectively). These amounts are reflected in the
above table as receipts within the period when approved. In
addition, the 2001 and 2000 provisions for claims and claims
expenses incurred of $827,405 and $227,707, respectively,
include benefits related to reductions in the liability
under the contingent interest notes ($9,893 and $5,371,
respectively). These amounts are not reflected in the above
table. Workers' compensation claims subject to discounting
were $3,998 and $3,883, respectively, at year end 2001 and
2000.
Claims in the current period in 2001 include an estimated
loss from the September 11th terrorist attacks of $366,300
before reinsurance recoverable of approximately $268,100.
The principal osses related to aviation risks underwritten
by Trenwick Group Ltd.'s operations at Lloyd's and property
and related risks including business interruption,
underwritten by LaSalle Re Limited. Of the $268,100 of
reinsurance recoverables, 93% are from reinsurers rated A or
better by Standard & Poor's or, alternatively, A.M. Best
Company. Trenwick Group Ltd.'s estimate of its losses from
aviation risks from this event is based on two maximum
losses and two partial losses. Estimates of its property and
related losses is based on two maximum losses and two
partial losses. Estimates of its property and related losses
is based on an assessment of
-11-
individual policies which it has determined has exposure to
the World Trade Center loss. This assessment included market
share analysis, probable maximum loss analysis, independent
risk modeling analysis and cedant loss estimates.
Claims in the current period in 2001 also included other
catastrophe losses totaling $24,000. The largest of these
losses was tropical storm Allison and storms affecting the
Midwest United States amounting to $10,500 and the November
12, 2001 American Airlines crash in Queens, New York of
$7,800.
In the 2001 and 2000 years, Trenwick Group Ltd. recorded a
net increase of $110,880 and $12,152, respectively, in
estimates for claims occurring in prior accident years. In
the 1999 period and the 1999 year, LaSalle Re Holdings
Limited recorded a net decrease of $3,602, and a net
increase of $48,610, respectively, in estimates for claims
occurring in prior accident years. The increase in 2001 is
principally due to reserve strengthening recorded on
business acquired in the Trenwick/LaSalle business
combination. This reserve strengthening includes $15,654
related to the treaty reinsurance segment's liability
business, which was underwritten prior to 2001 and $11,530
related to prior participation in the ECRA Pool. In
addition, $13,940 of the loss reserve strengthening related
to the specialty program insurance segment. Also included in
the reserve strengthening was $20,463 relating principally
to the Lloyd's segment directors and officers liability
business. Lastly, the reserve strengthening included $48,293
stemming from deterioration in discontinued businesses and
reviews of the property insurance and small premium
liability business lines at the international specialty
insurance and reinsurance segment. The increase in 2000 is
principally due to unfavorable development of prior year
estimates for LaSalle Re Holdings Limited and Trenwick
America Reinsurance Corporation offset in part by favorable
development of prior year reserves at the Lloyd's syndicates
managed by Chartwell Managing Agents Limited. The increase
in 2000 reflects a deterioration in market conditions since
1997.
Inflation
Inflation raises the cost of economic losses and
non-economic damages covered by insurance contracts and
therefore is a factor in determining effective rates of
reinsurance. The methods used to estimate individual case
reserves and reserves for claims incurred but not yet
reported implicitly incorporate the effects of inflation in
the projection of ultimate losses. Due to the inherent
uncertainties of estimating unpaid claims and claims
expenses, actual claims and claims expenses may deviate,
perhaps substantially, from estimates reflected in these
financial statements. Management believes that its claim
estimation methods are reasonable and prudent and that its
unpaid claims and claims expenses at year end 2001 are
adequate.
Latent Injury And Toxic Tort Claims
The balance of unpaid claims and claims expenses also
includes provisions for latent injury or toxic tort claims
that cannot be estimated with traditional techniques. Due to
inconsistent court decisions in federal and state
jurisdictions and the wide variation among insureds with
respect to underlying facts and coverage, uncertainty exists
with respect to these claims as to liabilities of ceding
companies and, consequently, reinsurance coverage. With the
exception of an insurer acquired in the Trenwick/Chartwell
merger, Trenwick Group Ltd.'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 Group
Ltd.'s obligation under the contingent interest notes,
included in indebtedness, is reduced. More details on that
indebtedness are included in Note 6.
-12-
The estimate of net unpaid claims and claims expenses for
asbestos and environmental claims at year end 2001 and 2000
was $91,050 and $70,547, respectively, comprising gross
unpaid claims and claims expenses of $118,688 and $99,474,
net of reinsurance recoverable on unpaid claims and claims
expenses of $27,638 and $28,927. The above figures include
liabilities emanating from Trenwick Group Ltd.'s
participation in the ECRA Pool.
Reinsurance
We enter into reinsurance and retrocessional agreements to
reduce our exposure on individual risks, catastrophic losses
and other large losses in all lines of business. We classify
reinsurance contracts which do not meet insurance accounting
risk transfer requirements as deposits. We treat these
deposits as financing transactions and credit or charge
interest income or interest expense to them according to
contract terms.
Trenwick America Reinsurance Corporation's reinsurance
treaties consist principally of property catastrophe
reinsurance treaties. Trenwick International Limited and
Chartwell Managing Agents Limited, as is customary with
companies operating in the London Market and Lloyd's, buy
larger amounts of reinsurance to protect themselves.
Canterbury Financial Group Inc. purchases specific
reinsurance programs for each of the programs underwritten
by its insurance companies.
From 1989 to 1999, Trenwick America Reinsurance Corporation
purchased aggregate excess of loss ratio treaties from
several reinsurers. These facilities provided Trenwick
America Reinsurance Corporation with a layer of protection
against adverse results from its domestic casualty business
in excess of specified loss ratios. Trenwick America
Reinsurance Corporation did not purchase an aggregate excess
of loss ratio treaty after 1999. Interest expense on funds
held under these facilities is recorded as an investment
expense, and is included in the funds held offset at year
end 2001 and 2000.
At the time of the closing of the Trenwick/Chartwell merger
(October 27, 1999), Chartwell Re Corporation purchased a
reinsurance policy providing for up to $100,000 in coverage
in order to indemnify Trenwick Group Inc. against
unanticipated increases in Chartwell Re Corporation's
reserves for business written on or before the date the
merger was completed. Amounts recoverable under the
agreement are presented gross in the balance sheet at year
end 2001 and 2000 as reinsurance recoverable on unpaid
claims and claims expenses ($91,970) and miscellaneous
accounts receivable, included in other assets ($8,030). The
related benefit for losses ceded to the agreement was
reflected as a reduction to claims and claims expenses
incurred and the benefit related to other underwriting
balances was reflected as a reduction to underwriting
expenses in the historical financial statements of Trenwick
Group Inc. In addition, as part of the merger, Chartwell Re
Corporation commuted several aggregate stop-loss contracts.
During 2000 and 1999, LaSalle Re Limited purchased an excess
of loss reinsurance program which provided various limits
for first, second and third loss occurrences. This contract
was cancelled, effective December 31, 2000.
-13-
Reinsurance recoverable balances, net
The components of reinsurance recoverable balances, net at
year end 2001 and 2000 are as follows:
2001 2000
---------- --------
Paid claims $ 156,373 $ 71,083
Unpaid claims and claims expenses,
net of funds held offset of $135,859 and $139,000 1,255,096 860,968
---------- --------
Reinsurance recoverable balances, net $1,411,469 $932,051
========== ========
Reinsurance recoverable balances at year end 2001 and 2000
are net of allowances for doubtful accounts of $54,580 and
$22,785, respectively, which includes $22,896 and $8,479 for
paid claims and $31,684 and $14,306 for unpaid claims and
claims expenses, respectively.
Reinsurance agreements provide for recovery of a portion of
certain claims and claims expenses from reinsurers. Trenwick
Group Ltd. remains liable in the event that the reinsurer is
unable to meet its obligation; however, Trenwick Group Ltd.
holds collateral under some of these agreements. Letters of
credit, trust accounts and funds withheld in the aggregate
amount of $354,011 (including interest) have been arranged
in favor of Trenwick Group Ltd. collateralizing reinsurance
recoverables with respect to certain retrocessionaires.
Note 5 Debt and Equity Security Investments
Investing
Activities We have classified debt securities as "available for sale"
and reported them, as well as equity securities, at
estimated fair value principally using quoted market prices
or broker dealer quotes. Included in debt security
investments at year end 2001 and 2000 are the pro rata
shares of Lloyd's syndicates' debt securities managed for
our own account ($203,827 and $161,935, respectively).
Included in equity securities are limited partnerships in
which we hold greater than a 3% interest, and which are
reported at their equity value.
Fair value and amortized cost or cost of debt and equity
securities at year end 2001 and 2000 follow:
2001 2000
------------------------- -------------------------
Fair Fair
Value Cost Value Cost
---------- ---------- ---------- ----------
U.S. and U.K. federal government
securities, including agencies $ 443,683 $ 435,994 $ 453,640 $ 445,492
Other foreign government securities 79,369 77,693 101,134 99,488
U.S. municipal government securities 125 125 249,700 244,234
Mortgage and other asset-backed securities 670,279 652,908 378,931 371,601
Corporate and other debt securities 767,144 759,309 630,273 625,847
---------- ---------- ---------- ----------
Debt securities fair value and amortized cost $1,960,600 $1,926,029 $1,813,678 $1,786,662
========== ========== ========== ==========
Publicly traded common and preferred stock $ 14,619 $ 7,865 $ 95,179 $ 97,243
Limited partnerships 9,545 9,5451 19,722 19,722(1)
Private placement stock -- -- 1,000 1,000
---------- ---------- ---------- ----------
Equity securities fair value and cost $ 24,164 $ 17,410 $ 115,901 $ 117,965
========== ========== ========== ==========
(1) Amounts represent cost adjusted for changes in equity of the limited partnerships.
-14-
Gross unrealized gains and losses on debt and equity
securities at year end 2001 and 2000 follow:
2001 2000
-------------------- -------------------
Gains Losses Gains Losses
------- -------- ------- -------
U.S. and U.K. federal government
securities, including agencies $ 9,812 $ (2,123) $ 8,266 $ (117)
Other foreign government securities 1,946 (270) 1,787 (142)
U.S. municipal government securities -- -- 5,466 --
Mortgage and other asset-backed securities 17,842 (471) 7,448 (118)
Corporate and other debt securities 23,111 (15,276) 10,763 (6,337)
------- -------- ------- -------
Debt securities gross gains and losses $52,711 $(18,140) $33,730 $(6,714)
======= ======== ======= =======
Equity securities gross gains and losses $ 6,754 $ -- $ 3,892 $(5,956)
======= ======== ======= =======
The fair value and amortized cost for debt securities at
year end 2001 are shown below by contractual maturity
periods, except mortgage-backed and asset-backed securities
which are included based on expected maturity dates. Actual
maturities will differ from contractual maturities because
borrowers generally have the right to prepay obligations.
Fair Amortized
Value Cost
---------- ----------
Due in one year or less $ 160,664 $ 157,451
Due after one year through five years 1,020,835 989,324
Due after five years through ten years 591,733 588,201
Due after ten years 187,368 191,053
---------- ----------
Debt securities total maturities $1,960,600 $1,926,029
========== ==========
Net Investment Income and Net Investment Gains (Losses)
We recognize investment income, consisting principally of
interest and dividends, when earned, net of investment
expenses. In computing interest income, we amortize premiums
and accrete discounts on debt securities utilizing the
interest method. We adjust the amortization and accretion
for mortgage-backed and other asset-backed securities, when
sufficient information exists to estimate the probability
and timing of their prepayments, to the amount that would
have existed had the new effective yield been applied since
the acquisition of the security. We classify imputed
interest on the funds held offset to reinsurance recoverable
in investment expense.
We generally limit investments in debt securities that are
rated below investment grade, as these investments are
subject to a higher degree of credit risk than investment
grade securities. We monitor the creditworthiness of the
portfolio, including below investment grade securities, and
we write down investments when fair values decline for
reasons other than changes in interest rates or other
perceived temporary conditions. We determine realized gains
or losses on disposition of investments on the basis of
specific identification.
-15-
Sources of net investment income follow:
2001 2000 1999 1999
Year Year Period Year
--------- -------- ------- --------
Debt securities interest $ 120,866 $ 49,518 $ 6,100 $ 26,299
Equity securities dividends and earnings 5,366 421 -- --
Cash and cash equivalents interest 15,727 10,788 2,332 6,477
Other investment income 2,602 2,805 375 1,937
--------- -------- ------- --------
Gross investment income 144,561 63,532 8,807 34,713
Imputed interest expense (11,342) (2,850) -- --
Other investment expenses (4,105) (1,967) (219) (866)
--------- -------- ------- --------
Net investment income $ 129,114 $ 58,715 $ 8,588 $ 33,847
========= ======== ======= ========
Net realized gains (losses) on sales of investments and
their effect on net income follow:
2001 2000 1999
Year Year Year
-------- ------- -------
Debt securities realized gains $ 24,487 $ 1,221 $ 4,082
Equity securities realized gains 1,132 97 --
Debt securities realized losses (9,159) (2,658) (3,467)
Equity securities realized losses (7,664) (46) --
-------- ------- -------
Net realized investment gains (losses) 8,796 (1,386) 615
Applicable minority interest -- (450) 144
-------- ------- -------
Net realized investment gains (losses)
included in income before income taxes 8,796 (936) 471
Applicable income taxes 276 104 --
-------- ------- -------
Net realized investment gains (losses)
included in net income $ 8,520 $(1,040) $ 471
======== ======= =======
During 2001, Trenwick Group Ltd. wrote down the fair value
of certain securities by $3,441 and reflected the
write-downs as realized losses on investments to recognize
declines in value that were other than temporary. No
securities were written down during the 2000 year, the 1999
period or the 1999 year.
Net unrealized gains (losses) on investments and their
effect on other comprehensive income (loss) follow:
2001 2000 1999 1999
Year Year Period Year
------- -------- ------- --------
Debt securities net gains (losses) $22,904 $ 35,404 $(4,471) $(22,684)
Equity securities net gains (losses) 2,285 (2,013) -- --
------- -------- ------- --------
Net investment gains (losses) 25,189 33,391 (4,471) (22,684)
Applicable minority interest -- 966 (1,042) (5,269)
------- -------- ------- --------
Net investment gains (losses) included in
comprehensive income before income taxes 25,189 32,425 (3,429) (17,415)
Applicable income taxes 6,370 6,509 -- --
------- -------- ------- --------
Net investment gains (losses) included
in comprehensive income (loss) 18,819 25,916 (3,429) (17,415)
Less net realized investment gains (losses)
included in net income (loss) 8,520 (1,040) -- 471
------- -------- ------- --------
Net unrealized investment gains (losses)
included in other comprehensive income (loss) $10,299 $ 26,956 $(3,429) $(17,886)
======= ======== ======= ========
-16-
Net Unrealized Investment Gains (Losses)
We calculate unrealized investment gains (losses) as the
difference between recorded values (fair value) and
amortized cost or cost. We include net unrealized investment
gains and losses, net of applicable deferred income taxes,
in common shareholders' equity as accumulated other
comprehensive income.
Components of net unrealized investment gains (losses) at
year end 2001 and 2000 follow:
2001 2000
------- --------
Debt securities net unrealized gains $34,571 $ 27,016
Equity securities net unrealized gains (losses) 6,754 (2,064)
------- --------
Net unrealized gains before income taxes 41,325 24,952
Applicable deferred income taxes 12,479 6,405
------- --------
Net unrealized investment gains $28,846 $ 18,547
======= ========
Note 6 Indebtedness and Minority Interest
Financing
Activities We have recorded indebtedness and other mandatorily
redeemable obligations at their fair value at the date of
the Trenwick/LaSalle business combination or at principal
amounts advanced subsequent thereto. We accrete discount on
these obligations utilizing the interest method. For our
contingent interest note obligations, we adjust the
principal amount of the notes for any adverse development in
the applicable liability for claims and claims expenses. For
mandatorily redeemable preferred capital securities, we
eliminate in consolidation the capital securities held as an
investment by a subsidiary.
Carrying value and fair value of indebtedness and minority
interest at year end 2001 and 2000 follow:
2001 2000
--------------------- ---------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- -------- -------- --------
Senior notes $ 73,920 $ 63,750 $ 73,143 $ 73,155
Senior credit facility 195,035 195,035 181,379 181,379
Contingent interest notes 19,923 19,923 28,767 28,767
Other debt 2,385 2,385 3,516 3,516
-------- -------- -------- --------
Total indebtedness 291,263 281,093 286,805 286,817
-------- -------- -------- --------
Mandatorily redeemable preferred
capital securities of U.S. subsidiary 68,119 43,175 76,770 74,777
Preferred shares of
Bermuda subsidiary 75,000 67,530 75,000 64,500
-------- -------- -------- --------
Total minority interest 143,119 110,705 151,770 139,277
-------- -------- -------- --------
Total indebtedness and
minority interest $434,382 $391,798 $438,575 $426,094
======== ======== ======== ========
Future Minimum Principal Payments on Indebtedness and
Minority Interest
Future minimum principal payments on indebtedness and
minority interest at year end 2001 follow: 2002, $46,268;
2003, $128,635; 2004, $63,386; 2005, $34,131; 2006, $1,000
and thereafter $86,350.
-17-
Senior Notes
The senior notes, with a par value of $75,000, are due April
1, 2003, and are not subject to redemption prior to
maturity. They are unsecured obligations and rank senior in
right of payment to all existing and future subordinated
indebtedness of Trenwick America Corporation, Trenwick Group
Ltd.'s U.S. holding company. Under the terms of the notes,
Trenwick America Corporation is not restricted from
incurring indebtedness, but is subject to limits on its
ability to incur secured indebtedness for borrowed money.
Interest on the notes is payable semi-annually at an annual
rate of 6.7%; interest charged to operations is at the
imputed rate of 7.9%.
Senior Credit Facility
Concurrent with the Trenwick/LaSalle business combination,
Trenwick Group Ltd.'s U.S. and U.K. holding companies
entered into an amended and restated $490,000 credit
agreement with various lending institutions. The agreement
consists of both a $260,000 revolving credit facility and a
$230,000 letter of credit facility. Trenwick Group Ltd's
U.S. holding company, Trenwick America Corporation, is the
primary obligor with respect to the revolving credit
facility, and Trenwick Group Ltd.'s U.K. holding company,
Trenwick Holdings Limited, is the primary obligor with
respect to the letter of credit facility. Guarantees are
provided by LaSalle Re Holdings Limited and Trenwick Group
Ltd. with respect to both the U.S. and U.K. holding
companies' obligations and additionally by the U.S. holding
company with respect to the U.K. holding company's
obligations.
On September 30, 2001, the U.S. holding company converted
the outstanding borrowings under the revolving credit
facility to a four year term loan facility. The applicable
interest rate on the term loan is generally 2.5% above the
London Interbank Offered Rate and was 4.7% at year end 2001.
The scheduled principal repayments of the $195,035
outstanding at year end 2001 are as follows: 2002, $43,883;
2003, $53,635; 2004, $63,386; and 2005, $34,131.
Additionally, the U.S. holding company is obligated to repay
a portion or all of the term loan in the event of equity
issuances, asset sales and debt issuances by Trenwick Group
Ltd. or its subsidiaries.
The credit agreement also provides for a letter of credit
facility to be issued for the account of Lloyd's to support
the syndicate participations of Trenwick Group Ltd.'s
subsidiaries. At year end 2001, the letter of credit portion
of the credit facility was fully utilized at $230,000.
Trenwick Group Ltd.'s letter of credit facility is scheduled
to expire in November, 2002. In the event that Trenwick
Group Ltd. is unable to obtain a replacement letter of
credit facility, it will be required to post sufficient
collateral at Lloyd's or reduce or refrain from underwriting
at Lloyd's in the 2003 year of account.
The credit agreement contains general covenants and
restrictions as well as financial covenants relating to,
among other things, Trenwick Group Ltd.'s minimum interest
coverage, debt to capital leverage, minimum earned surplus,
maintenance of a minimum A.M. Best Company rating of A- and
tangible net worth. As of year end 2001, Trenwick Group Ltd.
was in compliance with the credit agreement covenants.
The financial covenants relating to interest coverage, risk
based capital and tangible net worth (each as defined by the
financial covenants) were revised downward in an amendment
to the credit agreement executed following the September
11th terrorist attacks. The amendment set Trenwick Group
Ltd.'s minimum interest coverage ratio at 1.5 to 1 for the
fourth quarter of 2001, 2.0 to 1 for the first quarter of
2002 and 2.5 to 1 thereafter. Trenwick Group Ltd.'s interest
coverage ratio at December 31, 2001 was 2.0 to 1. The
amendment adjusted downward the minimum risk-based capital
requirement for Trenwick Group Ltd.'s subsidiary, Chartwell
Insurance Company, from 300% to 225% through December 31,
2002. Thereafter, the minimum risk-based capital for
Chartwell Insurance Company returns to 300%. The risk based
-18-
capital for Chartwell Insurance Company as of December 31,
2001 was 257%. The amendment lowered the base minimum
tangible net worth Trenwick Group Ltd. must maintain from
$560,000 to $425,000 until the reporting of quarterly
results of operations as of March 31, 2002, which are due no
later than May 15, 2002. After May 15, 2002, Trenwick Group
Ltd. minimum tangible net worth reverts to $560,000.
Trenwick Group Ltd.'s tangible net worth as of December 31,
2001 was $428,000. If Trenwick Group Ltd. is unable to meet
the credit agreement's financial covenants at the end of the
first quarter of 2002, it may be required to repay the
outstanding indebtedness and collateralize the outstanding
letters of credit issued under the credit agreement through
additional financing, asset sales, subsidiary dividends or
similar transactions.
Contingent Interest Notes
The contingent interest notes were issued immediately prior
to Chartwell Re Corporation's acquisition of The Insurance
Corporation of New York to protect Chartwell Re Corporation
against the possibility of adverse development of that
insurer's liability for claims and claims expenses and
long-tail casualty exposures, which are more fully described
in Note 4. Trenwick Group Inc. assumed the obligations of
Chartwell Re Corporation under the notes in the
Trenwick/Chartwell merger, described in Note 2, and Trenwick
Group Ltd.'s U.S. holding company subsequently assumed the
obligations of Trenwick Group Inc. under the notes in the
Trenwick/LaSalle business combination, also described in
Note 2. The notes were issued in an aggregate principal
amount of $1,000 with principal accruing interest at a rate
of 8% per annum, compounded annually. The interest will not
be payable until maturity or earlier redemption of the
notes. In addition, the notes entitle the holders thereof to
receive at maturity, in proportion to the principal amount
of the notes held by them, an aggregate of from $1,000, up
to $55,000, in contingent interest. Settlement of the notes
may be made by payment of cash or, under certain specified
conditions, by delivery of registered Trenwick Group Ltd.
common shares. For purposes of any settlement of the notes
in Trenwick Group Ltd.'s common shares, the value ascribed
to each common share would be 85% of an average of the
closing sales prices of the common stock prior to the
settlement date. The notes mature on June 30, 2006.
At year end 2001, the notes were recorded at the present
value of the amount which is reasonably determined to be
payable at maturity. Trenwick Group Ltd. believes that the
applicable liability for unpaid claims and claims expenses
at year end 2001 is an appropriate estimate of projected
ultimate losses and loss adjustment expenses to be paid and
therefore, the amount of contingent interest on the notes
presently expected to be paid at maturity is $34,582. During
the 2001 and 2000 years, Trenwick Group Ltd. recorded $9,893
and $5,371, respectively, of reductions to its underwriting
losses incurred in connection with adverse development
covered under the terms of the contingent interest notes.
The notes contain covenants which relate to the maintenance
of certain records and limitations on certain indebtedness.
At year end 2001 Trenwick Group Ltd. was in compliance with
those covenants.
Letters of Credit
At year end 2001, Trenwick Group Ltd. has $332,177 in
letters of credit outstanding. This amount includes $259,255
in letters of credit outstanding to provide capital to
support the participation in certain Lloyd's syndicates, of
which $230,000 of the letters of credit are outstanding
under the senior credit facility. The remaining balance of
the letters of credit outstanding relates primarily to the
worldwide property catastrophe segment's United States
business.
-19-
Lines of Credit
A Trenwick Group Ltd. subsidiary has established a line of
credit under which it can borrow up to $3,636 at a rate of
1.25% above the lending bank's base rate. Another subsidiary
has established a line of credit under which it can borrow
up to $1,455 at a rate of 1.0% above the lending bank's base
rate. There were no borrowings outstanding under these lines
of credit during the 2001 year.
Mandatorily Redeemable Preferred Capital Securities
The mandatorily redeemable preferred capital securities,
with a par value of $110,000, are obligations of a business
trust subsidiary of Trenwick Group Ltd.'s U.S. holding
company, Trenwick America Corporation. The capital
securities mature in 2037, require preferential cumulative
semi-annual cash distributions at an annual rate of 8.82%
and are guaranteed by the U.S. holding company, within
certain limits, as to distribution payments and liquidation
or redemption payments. Interest charged to operations on
the capital securities is at the imputed interest rate of
11.2%.
The business trust issuing the capital securities holds an
investment in subordinated debentures of the U.S. holding
company that have an aggregate principal amount of $113,403,
and interest from that investment is the source of cash
distributions on the capital securities. The capital
securities are subject to mandatory redemption in certain
circumstances pertaining to the U.S. holding company's
prepayment or repayment of its subordinated debentures held
by the trust. In the event of a default by the U.S. holding
company with respect either to making required payments on
the subordinated debentures or to its guarantee, holders of
the capital securities may institute a direct action against
the U.S. holding company. In the first quarter of 2001 and
the fourth quarter of 2000, a Trenwick Group Ltd. subsidiary
purchased $10,650 and $13,000, respectively, par value of
the capital securities in the open market for $8,462 and
$9,902, respectively. The carrying value of these securities
and the related dividends have been eliminated in
consolidation.
Preferred Shares of Subsidiary
In connection with the Trenwick/LaSalle business
combination, as described in Note 2, the outstanding Series
A preferred shares of LaSalle Re Holdings Limited have been
classified as minority interest in Trenwick Group Ltd.'s
balance sheet at their liquidation preference value. The
preferred shares have a par value of $1.00 per share and are
entitled to a liquidation preference of $25.00 per share
($75,000 aggregate). Dividends on the preferred shares are
cumulative at 8.75% of the liquidation preference per annum
($2.1875 per share or $6,563 aggregate). Subsequent to the
Trenwick/LaSalle business combination, preferred share
dividends which were previously deducted from retained
earnings have been deducted from Trenwick Group Ltd.'s
operations and are reflected as subsidiary preferred share
dividends. On or after March 27, 2007, the preferred shares
may be redeemed, in whole or in part, at a redemption price
of $25.00 per share. Prior thereto, under certain
circumstances, the preferred shares may be redeemed in whole
at a redemption price of $26.00 per share ($78,000
aggregate).
Interest Expense and Subsidiary Preferred Share Dividends
We accrue and recognize interest expense and subsidiary
preferred share dividends when incurred. In computing
interest expense and dividends on capital securities, we
accrete discount on certain obligations utilizing the
interest method. For our mandatorily redeemable preferred
capital securities, we eliminated in consolidation the
dividends on capital securities held as an investment by a
subsidiary. Reductions in the liability under the contingent
interest notes, which were previously included as reductions
to interest expense, have been reclassified as reductions to
the appropriate underwriting accounts for the 2001 and 2000
years.
-20-
Components of interest expense and subsidiary preferred
share dividends for the 2001 and 2000 years follow:
2001 2000
Year Year
------- -------
Senior notes interest $ 5,803 $ 1,462
Senior credit facility interest 11,162 3,641
Contingent interest notes accretion 2,860 696
Other indebtedness interest 147 14
------- -------
Interest expense 19,972 5,813
U.S. subsidiary capital securities dividends 7,815 2,419
Bermuda subsidiary preferred share dividends 6,563 1,640
Letter of credit fees 3,809 724
Commitment and other fees 983 1,179
------- -------
Total $39,142 $11,775
======= =======
Share Capital
At year end 2001, the authorized share capital of Trenwick
Group Ltd. was 150,000,000 shares of par value $.10 each,
which includes both common and preferred shares. At year end
2001 Trenwick Group Ltd. had outstanding 36,845,141 issued
and fully paid common shares and no preferred shares. Shares
reserved for future issuance at year end 2001 totaled
3,748,361, including shares reserved for the future exercise
of warrants (153,843), options (3,394,518) and the
shareholder rights plan (200,000).
For matters that are put to shareholder vote, common
shareholders of Trenwick Group Ltd. are generally entitled
to one vote per common share owned. Trenwick Group Ltd.'s
bye-laws limit the voting rights of those shareholders
holding 10% or more of Trenwick Group Ltd.'s outstanding
common shares. The voting limitation is to prevent Trenwick
Group Ltd. from being characterized as a U.S. controlled
foreign corporation and the adverse tax consequences that
can result.
At year end 2001, there were warrants outstanding for the
purchase of 153,843 common shares at prices of $25.45 and
$26.67 per share ($4,017 aggregate). Warrants for 70,125
shares at an exercise price of $25.45 per share expire on
March 6, 2002 and warrants for 83,718 shares having an
average exercise price of $26.67 per share expire on January
15, 2003. Warrants for 580 common shares at a price of
$25.45 per share were exercised in December 2000.
During the 2001 and 2000 years, Trenwick Group Ltd. issued
224,539 and 1,405 common shares, respectively, under
employee compensation, director compensation, stock purchase
and stock option plans and on exercises of warrants. Prior
to the Trenwick/LaSalle business combination, LaSalle Re
Holdings Limited issued 22,167, 3,390 and 798,481 common
shares during the 2000 year, the 1999 period and the 1999
year, respectively, under employee compensation, stock
purchase and stock option plans. See note 8 for additional
information on restricted common share awards and employee
share purchase plan purchases.
During the 2001 and 2000 years, Trenwick Group Ltd. paid
dividends of $0.16 and $0.04, respectively, per common
share. During the 1999 year, LaSalle Re Holdings paid
dividends of $1.13 per common share in addition to the
dividends it paid on its preferred stock.
-21-
Catastrophe Equity Put
On September 27, 2000, Trenwick Group Ltd. assumed the
benefits and obligations of LaSalle Re Holdings under a
$100,000 catastrophe equity put option. The catastrophe
equity put option was amended and restated as of January 1,
2001 and amended as of January 25, 2002. As amended, the
catastrophe equity put option enables Trenwick Group Ltd. to
raise up to $55,000 of equity, through the issue of Trenwick
Group Ltd. convertible preferred shares to the option
writer, in the event there is a qualifying catastrophic
event or events occurring prior to January 1, 2002. The
preferred shares can be redeemed by Trenwick Group Ltd. at
any time after the one year anniversary of their issue. In
addition, the option writer can convert its preferred shares
into common shares of Trenwick Group Ltd. at any time after
they have been outstanding for five years or upon a change
in control of Trenwick Group Ltd. or a decline in Trenwick
Group Ltd.'s net worth below a specified level. Conversion
is at the greater of the book value of Trenwick Group Ltd.
at the date of conversion or the market value of the common
shares based on the 30-day trading average prior to
conversion. The net option premium has been charged to
additional paid in capital.
As a result of the terrorist attacks of September 11, 2001,
Trenwick Group Ltd. has incurred $120,000 in catastrophe
losses, as defined under the option agreement. If these
losses develop to $140,000 prior to March 11, 2003, Trenwick
Group Ltd. will be entitled to exercise the catastrophe
equity put and raise $55,000 of equity, subject to
regulatory approvals.
Shareholder Rights Plan
In September 2000, Trenwick Group Ltd. adopted a new
shareholder rights plan. Shareholders of record received one
right for each common share held. The rights are exercisable
only if a person or group acquires beneficial ownership of
15% or more of Trenwick Group Ltd.'s common shares or
commences a tender or exchange offer for 15% or more of
Trenwick Group Ltd.'s common shares. Each right entitles a
common shareholder to buy 1/200th of a junior participating
preferred share at an exercise price of $85.00.
In the event that an acquirer accumulates 15% or more of
Trenwick Group Ltd.'s common shares, all rights holders
except the acquirer may purchase, for the exercise price, in
lieu of the preferred shares, Trenwick Group Ltd. common
shares having a market value of twice the exercise price of
each right. If Trenwick Group Ltd. is acquired in a merger
or other business combination after the acquisition of 15%
of Trenwick Group Ltd.'s common shares, all rights holders
except the acquirer may purchase the acquirer's shares at a
similar discount. Trenwick Group Ltd. is entitled to redeem
the rights at $0.01 per right, subject to certain
restrictions. The rights will expire on September 27, 2010.
Note 7 Trenwick Group Ltd. and certain of its subsidiaries are
Income incorporated under the laws of Bermuda and are subject to
Taxation Bermuda law with respect to taxation. Under current Bermuda
law, they are not taxed on any Bermuda income or capital
gains taxes and they have received an undertaking from the
Bermuda Minister of Finance that, in the event of any
Bermuda income or capital gains taxes being imposed, they
will be exempt from those taxes until 2016. Trenwick Group
Ltd.'s U.S. subsidiaries are subject to federal, and state
income taxes imposed by U.S. authorities; its UK
subsidiaries, including its Lloyd's corporate names,
are subject to U.K. corporation taxes and the Lloyd's
corporate names are also subject to U.S. taxation on
their U.S. connected income. Other branches of Trenwick
Group Ltd.'s subsidiaries are subject to the
relevant local income taxes.
We provide income taxes based upon amounts reported in the
financial statements and the provisions of currently enacted
tax laws. We allocate income taxes to operations, other
comprehensive income and shareholders' equity, as
applicable.
-22-
We recognize current income tax assets and liabilities, for
estimated income taxes refundable or payable based on the
current year's income tax returns, and deferred income tax
assets and liabilities, for the estimated future income tax
effects of temporary differences and carryforwards.
Temporary differences are the differences between the
financial statement carrying amounts of assets and
liabilities and their tax bases, as well as the timing of
income or expense recognition for financial reporting and
tax purposes of items not related to assets and liabilities.
We establish valuation allowances to reduce the carrying
amount of deferred income tax assets, if necessary, to
amounts that are more likely than not to be realized. We
periodically review the adequacy of these valuation
allowances and record any reduction in allowances through
earnings or, for allowances established in the
Trenwick/LaSalle business combination, as an offset to
goodwill.
Income (loss) before income taxes and the provision for
income taxes by jurisdiction and by allocation between
current and deferred for the 2001 and 2000 years follow
(2000 balances include amounts incurred by Trenwick Group
Ltd. subsequent to September 27, 2000, the effective date of
the Trenwick/LaSalle business combination):
2001 2000
--------- --------
Income (loss) before income taxes
by jurisdiction:
Bermuda $ (36,747) $ 20,950
United States (63,822) (19,030)
United Kingdom (112,652) 1,456
Other 1,019 --
--------- --------
Total $(212,202) $ 3,376
========= ========
Income taxes by jurisdiction:
U.S. federal income tax expense (benefit) $ (26,671) $ (7,236)
U.S. state income tax expense 1,512 441
U.K. federal income tax expense (benefit) (32,418) 750
Other jurisdictions income tax expense (benefit) (228) (30)
--------- --------
Total income tax benefit $ (57,805) $ (6,075)
========= ========
Current and deferred income taxes:
Current income tax expense (benefit) $ 1,355 $(17,218)
Deferred income tax expense (benefit) (59,160) 11,143
--------- --------
Total income tax benefit $ (57,805) $ (6,075)
========= ========
For jurisdictions other than the U.S. and UK, there are no
significant differences between the effective tax rates for
each jurisdiction and the applicable statutory tax rates.
For the 2001 and 2000 years, the U.S. federal effective tax
rates of 40.8% and 37.2%, respectively, and the U.K.
effective tax rates of 28.8% and 51.5%, respectively,
differs from the statutory tax rates of 35% (U.S.) and 30%
(U.K.) as follows:
-23-
2001 2000
--------- --------
U.S. loss before income taxes $ (63,822) $(19,030)
State income taxes (1,521) (441)
--------- --------
U.S. loss before U.S. federal income taxes $ (65,343) $(19,471)
--------- --------
Income tax benefit at 35% statutory rate $ (22,870) $ (6,815)
Tax-exempt investment income effect (984) (951)
Non-deductible goodwill amortization effect 529 124
Adjustment for prior year income taxes (3,039) --
Other book-tax differences (307) 406
--------- --------
Total U.S. federal income tax benefit $ (26,671) $ (7,236)
========= ========
2001 2000
--------- --------
U.K. income (loss) before U.K. income taxes $(112,652) $ 1,456
--------- --------
Income tax expense (benefit) at 30% statutory rate $ (33,796) $ 437
Valuation allowance 945 --
Other U.K. differences 433 313
--------- --------
Total U.K. federal income tax expense (benefit) $ (32,418) $ 750
========= ========
At year-end 2001, Trenwick Group Ltd. has net operating loss
carryforwards in the U.S. and the U.K. The U.S. subsidiaries
have a U.S. net operating loss carryforward of $139,378 that
will be available to offset regular taxable income during
the carryforward periods, which expire between 2007 through
2021. As a result of the Trenwick/LaSalle business
combination, an ownership change took place on September 27,
2000, and approximately $41,852 of the total U.S. net
operating loss carryforward became limited to a cumulative
annual utilization of $5,228. The remaining $97,526 in U.S.
net operating loss carryforwards are not so limited. Details
of the U.S. net operating loss carryforwards and the year of
their expiration are described below:
Net Operating
Loss Year of
Carryforwards Expiration
------------- ----------
$ 9,655 2007
32,197 2018
28,491 2020
69,035 2021
--------
$139,378
========
The U.K. subsidiaries' net operating loss carryforwards are
a result of Lloyd's underwriting losses in both open and
closed years of accounts. The trading losses that have been
declared on closed years of accounts through 1997 amount to
approximately $3,149. These underwriting losses may be
carried forward indefinitely to offset future trading
profits of the specific U.K. company that generated the
loss. At year-end 2001, management concluded that there was
not sufficient evidence to support the realization of this
deferred tax asset as more likely than not and consequently
established a valuation allowance in the amount of $945.
The remaining U.K. net operating loss carryforwards from
open years of account have been determined on a loss reserve
accrual basis and will not be finalized until the close of
the underwriting year of account. At year end 2001, these
losses totaled $119,859.
In April 2000, it became possible to group the current year
profits and losses of U.K. companies that have a common
worldwide parent. Pursuant to this legislation, Trenwick
Group Ltd. may group its profits and losses among its London
insurer and Lloyd's members. In addition, new legislation
was introduced effective for tax years beginning on or after
January 1, 2000, which
-24-
permits U.K. insurers and Lloyd's members to disclaim claims
and claims expense liabilities for tax purposes. The new
legislation also provides a calculation whereby additional
receipts or expense may be included in taxable income
depending upon the payout of claims relative to the reserves
taken into account for tax purposes within a margin of
error. Management has reviewed the new legislation and is
amending its 2000 U.K. returns and electing to disclaim a
portion of its claims and claims expense liabilities. Each
year management will re-evaluate the appropriateness of the
amount of disclaimed claims and claims expense liabilities.
At year end 2001, disclaimed liabilities the 2000 and 2001
tax years totals $125,986. Disclaimed claims and claims
expense liabilities are temporary differences that represent
future tax deductions.
Deferred income tax assets (liabilities) attributable to
temporary differences at year end 2001 and 2000,
respectively, follow:
2001 2000
--------- ---------
U.S. deferred income tax assets:
Claims and claim expenses discounted $ 37,950 $ 33,947
Unearned premium income discounted 10,845 7,930
Contingent interest note adjustments, net of interest accreted 6,416 9,552
Investment securities, purchase accounting adjustments 1,309 7,419
U.S. net operating losses 48,782 33,711
Alternative minimum tax credits 5,859 5,256
Foreign tax credits 410 4,579
Unrealized foreign exchange loss 855 --
Other 4,676 5,751
Valuation allowance (267) (2,976)
--------- ---------
Total U.S. deferred income tax assets 116,835 105,169
--------- ---------
U.S. deferred income tax liabilities:
Deferred policy acquisition costs (15,890) (12,693)
Unrealized investment gains (11,020) (5,074)
Equity securities, purchase accounting adjustments (4,489) (2,781)
Debt securities market discount accretion (2,362) (1,796)
Indebtedness purchase accounting adjustment (8,437) (8,679)
Deferred gain from purchase accounting (7,510) (8,549)
Unrealized foreign exchange loss -- (4)
Other (567) (1,995)
--------- ---------
Total U.S. deferred income tax liabilities (50,275) (41,571)
--------- ---------
Total U.S. net deferred income tax asset $ 66,560 $ 63,598
========= =========
U.K. deferred income tax assets:
Claims and claims expenses disclaimed $ 37,796 $ --
Net operating losses 945 12,161
Open years of account operating losses 35,958 33,822
Unrealized foreign exchange loss 421 125
Other 712 --
Valuation allowance (945) --
--------- ---------
Total U.K. deferred income tax assets 74,887 46,108
--------- ---------
U.K. deferred income tax liabilities:
Unrealized investment gains (1,521) (1,331)
Other -- (3,486)
--------- ---------
Total U.K. deferred income tax liabilities (1,521) (4,817)
--------- ---------
Total U.K. net deferred income tax assets $ 73,366 $ 41,291
========= =========
Total net deferred income tax asset $ 139,926 $ 104,889
========= =========
-25-
In connection with the Trenwick/LaSalle business
combination, Trenwick Group Ltd. recorded a valuation
allowance against its deferred income tax asset relating to
its foreign tax credits in the U.S. In evaluating the need
for this valuation allowance at year end 2001, it is
management's judgment that there has not been a significant
change in circumstances and therefore the valuation
allowance relative to its remaining foreign tax credits has
been maintained. As mentioned above, at year end 2001, an
additional valuation allowance of $945 was established
through income against the U.K. trading losses. There is no
valuation allowance recorded against the U.S. net operating
losses or the U.K. operating losses on open years of account
because, in management's judgment, it is more likely than
not that these amounts will be realized from future
operations. Management's judgment is based on its assessment
of business plans and related projections of future taxable
income that reflect significant assumptions about increased
premium volume and improved rates and profitability and, for
U.K. operations, the ability to secure letters of credits or
other funding sufficient to support the assumptions about
increased premium volume.
Note 8 Retirement and Savings Plans
Employee We recognize expenses for employee retirement and savings
Benefits and plans as they are incurred.
Compensation
Arrangements Trenwick Group Ltd. has defined contribution plans for
substantially all full-time employees, through which it
contributes between 5% and 20% of an eligible employee's
total compensation to the plan, dependent upon each
employee's salary and age. No employee contributions are
made to these plans.
Additionally, Trenwick Group Ltd. maintains a 401(k) savings
plan for substantially all U.S. full-time employees, through
which employees contribute up to the maximum amount
allowable by the Internal Revenue Service. Trenwick Group
Ltd. contributes up to 6% of a participating employee's
compensation to the plan.
Trenwick Group Ltd.'s provisions for employee retirement and
savings plans were as follows:
2001 2000 1999 1999
Year Year Period Year
------ ------ ------ ----
Defined contribution plans $4,054 $ 956 $33 $200
401(k) savings plan 660 99 -- --
------ ------ --- ----
Total $4,714 $1,055 $33 $200
====== ====== === ====
Restricted Common Share Awards
We record deferred compensation for the fair value of
restricted common share awards and present deferred
compensation as a separate, offsetting component of
shareholders' equity. We recognize compensation expense over
the vesting period of the restricted common shares.
Trenwick Group Ltd. awards restricted common shares to key
employees. During the 2001 year, Trenwick Group Ltd. awarded
194,116 restricted common shares at an average fair value of
$21.22 per share. On September 27, 2000, Trenwick Group Ltd.
awarded 224,331 restricted common shares in exchange for
restricted common shares previously awarded by Trenwick
Group Inc. at an average fair value of $13.05. During the
2000 year, 4,896 restricted common shares were canceled due
to employee terminations. LaSalle Re Holdings Limited
awarded 58,643 restricted common shares during the 1999 year
at a fair value of $18.62 per share.
The scheduled vesting of the 346,586 restricted common
shares outstanding at year end 2001 is as follows: 2002,
78,762 shares; 2003, 83,487 shares; 2004, 74,602 shares;
2005, 74,051
-26-
shares; and 2006, 35,684 shares. Trenwick Group Ltd.
recognized $1,394, $597, $69 and $576, respectively, of
compensation expense for the 2001 and 2000 years, and the
1999 period and year.
Prior to the Trenwick/LaSalle business combination, LaSalle
Re Holdings Limited granted common shares to employees on
the fifth anniversary date of their hire. At the time of the
award, the market value of the shares was recognized as
compensation expense. During the 2000 and 1999 years, 635
and 1,379 shares were awarded to employees, and $9, $28,
respectively, was recognized as compensation expense.
Employee Share Purchase Plan
We record shares sold to employees in connection with
employee share purchase plans at fair value; we recognize
compensation expense for the difference between fair value
and the discounted sales price.
Trenwick Group Ltd. is authorized to sell up to 300,000
common shares to its employees at a 15% discount from market
value under an employee share purchase plan adopted as of
February 1, 2001. During the 2001 year, Trenwick Group Ltd.
issued 15,840 shares under the plan and recognized $26 of
compensation expense.
LaSalle Re Holdings Limited had a similar plan which it
terminated in connection with the Trenwick/LaSalle business
combination. Prior to termination, LaSalle Re Holdings
issued 21,532, 3,390 shares and 19,459 shares, respectively,
under the plan during the 2000 year and the 1999 period and
year, and recognized $47, $7 and $59, respectively, of
compensation expense.
Share Options
We grant options for a fixed number of common shares to
employees and non-employee directors. These options have an
exercise price equal to the market value of the shares at
the date of grant. The current accounting standard
establishes a fair value based method of accounting for
stock-based compensation plans; however, it permits an
entity to continue to apply the accounting provisions of a
previous standard and make pro forma disclosures of net
income and earnings per share, as if the fair market value
based method had been applied. We continue to account for
the share option grants in accordance with the previous
standard and have included the pro forma disclosures
required by the fair value based method below.
-27-
Trenwick Group Ltd. has several plans through which it makes
options in common shares available to employees at the
discretion of its board of directors. Non-employee directors
receive automatic grants under a separate plan. 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. Transactions under the share option plans during
the periods presented follow:
2001 2000 1999 1999
Year Year Period Year
----------- ---------- ---------- --------
Number of shares:
Options outstanding, beginning of period 2,824,616 459,436 466,436 401,436
Options granted in exchange for
Trenwick Group Inc. options -- 2,435,042 -- --
Other options granted 687,398 -- -- 233,000
Options canceled (106,054) (69,037) (7,000) (148,200)
Options exercised (11,442) (825) -- (19,800)
----------- ---------- ---------- --------
Options outstanding, end of period 3,394,518 2,824,616 459,436 466,436
=========== ========== ========== ========
Options exercisable, and of period 2,369,598 2,311,678 237,986 168,943
=========== ========== ========== ========
Range of exercise price:
Options granted $20 - $22 $13 - $41 -- $19 - $26
Options exercised $21 $18 - $19 -- $19 - $20
Options outstanding, end of period $13 - $41 $13 - $41 $19 - $32 $19 - $32
Options exercisable, end of period $13 - $41 $19 - $41 $19 - $32 $19 - $32
=========== ========== ========== =========
Weighted average exercise price:
Options granted $ 21.02 $ 26.51 -- $ 23.87
Options exercised $ 21.30 $ 18.56 -- $ 19.25
Options outstanding, end of period $ 25.28 $ 26.29 $ 24.89 $ 24.90
Options exercisable, end of period $ 28.39 $ 29.20 $ 24.10 $ 24.39
=========== ========== ========== ========
Concurrent with the Trenwick/LaSalle business combination,
all of the options under LaSalle Re Holdings Limited's plans
and all of the options granted under Trenwick Group Inc.'s
plans prior to the 2000 year became fully vested.
Pro Forma Information
All of the outstanding share options were issued at an
exercise price equal to fair market value on the date of
grant; therefore no compensation expense has been recognized
for these grants. Had the fair value based method described
above been applied, net income (loss) available to common
shareholders and net income (loss) per common share would
have been the pro forma amounts shown below:
2001 2000 1999 1999
Year Year Period Year
----------- --------- ---------- ----------
Net income (loss) available to
common shareholders:
As reported $ (154,397) $ 4,528 $ (16,482) $ (9,397)
Pro forma $ (155,264) $ 3,743 $ (16,585) $ (10,021)
Basic and diluted earnings (loss)
per common share:
As reported $ (4.19) $ 0.21 $ (1.06) $ (0.60)
Pro forma $ (4.22) $ 0.18 $ (1.06) $ (0.64)
-28-
The pro forma adjustments relating to options granted from
1995 to 2001 are based on a fair value method using the
Black-Scholes option pricing model; no effect has been given
to options granted prior to 1995. Valuation and related
assumption information are for options granted in each of
the periods below are as follows:
2001 2000 1999 Period
Year Year and Year
-------------- -------------- -----------
Expected volatility 38.0% to 59.8% 32.0% to 34.4% 27.0%
Risk-free interest rate 4.1% 5.0% 6.2%
Common share dividend yield 0.9% 0.6% 4.0%
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 Trenwick Group Ltd.'s opinion the
existing models do not necessarily provide a reliable
measure of the fair value of its share options.
Stock Appreciation Rights
Under a plan now terminated, we recorded a liability for
stock appreciation rights at each period end based on the
excess of the current fair value of the underlying common
stock over the fair value at the time of grant. We
recognized compensation expense for adjustments to the
liability.
In consideration for entering into an employment agreement,
LaSalle Re Holdings Limited granted stock appreciation
rights to its former chairman and chief executive officer.
During the 2001 year, Trenwick Group Ltd. paid $1,451 in
settlement of his exercisable rights. During the 2001 and
2000 years, and the 1999 period and year, Trenwick Group
Ltd. recognized $(278), $765, $242 and $1,490, respectively,
of compensation expense under this agreement. At year end
2001, there are no stock appreciation rights outstanding.
Note 9 We record other comprehensive income for the change in the
Other net unrealized appreciation of investments and the change in
Comprehensive foreign currency translation adjustments, both net of income
Income taxes.
The components of accumulated other comprehensive income at
year end 2001 and 2000 follow:
2001 2000
-------- --------
Unrealized investment gains (losses), net of
applicable deferred income taxes of $12,479 and $6,405 $ 28,846 $ 18,547
Foreign currency translation adjustment, net of
applicable deferred income taxes of $(1,277) and $(122) (5,627) (1,253)
-------- --------
Accumulated other comprehensive income $ 23,219 $ 17,294
======== ========
Note 10 The computation of basic and diluted earnings per common
Earnings Per share follows:
Common
Share
-29-
2001 2000 1999 1999
Year Year Period Year
------------ ----------- ------------ ------------
Income available to common shareholders:
Net income (loss) available to common
shareholders - basic and diluted $ (154,397) $ 4,528 $ (16,482) $ (9,397)
============ =========== ============ ============
Weighted average common shares outstanding:
Weighted average shares outstanding - basic 36,825,637 21,084,030 15,603,503 15,628,650
Net weighted average shares issuable
(when dilutive):
Stock options and warrants exercise -- 121,901 -- --
Stock appreciation rights exercise -- 65,168 -- --
------------ ----------- ------------ ------------
Weighted average shares outstanding - diluted 36,825,637 21,271,099 15,603,503 15,628,650
============ =========== ------------ ------------
Basic and diluted earnings (loss)
per common share $ (4.19) $ 0.21 $ (1.06) $ (0.60)
============ =========== ============ ============
As of year end 2001 and 2000, period end 1999 and year end
1999, 3,061,151, 2,474,521, 5,172,400 and 5,213,098,
respectively, aggregate share options, stock appreciation
rights, contingently issuable shares and warrants were
excluded from the computation of diluted earnings per share
because their effect would have been antidilutive on the
calculation for the respective period.
Note 11 Trenwick Group Ltd.'s insurance subsidiaries are subject to
Insurance insurance laws and regulations in the jurisdictions in which
Regulation they operate. These regulations include restrictions that
limit the amount of dividends or other distributions
available to be paid to Trenwick Group Ltd. by its insurance
subsidiaries without prior approval of the insurance
regulatory authorities.
Bermuda Regulation
LaSalle Re Limited, Trenwick Group Ltd.'s Bermuda insurance
subsidiary, is subject to Bermuda insurance regulations,
which mandate minimum solvency margins and liquidity ratios.
LaSalle Re Limited must maintain a minimum statutory capital
and surplus level of the greater of $100,000, 50% of net
premiums written ($47,478 for 2001), or 15% of net loss
reserves ($33,496 at year end 2001). In addition, Bermuda
insurance regulations restrict the payment of dividends from
retained earnings or additional paid-in-capital which exceed
certain thresholds without prior approval from the Bermuda
Minister of Finance. At year end 2001, LaSalle Re Limited
had $63,166 available for the payment of dividends.
Statutory capital and surplus of LaSalle Re Limited was
$430,463 and $453,766 at year end 2001 and 2000,
respectively; statutory net income (loss) was $(13,757),
$9,992 and $(7,013) for the 2001 year, the fifteen months
ended December 31, 2000 and the 1999 year, respectively.
U.S. Regulation
Each of Trenwick Group Ltd.'s U.S. insurance subsidiaries
are subject to restrictions on the payment of dividends
without prior approval from the state insurance regulator in
their respective state of domicile. These restrictions are
based upon certain measures of statutory surplus and net
income. At year end 2001, the U.S. insurance subsidiaries
had $14,482 available for the payment of dividends in 2002
without prior regulatory approval. Additionally, the
insurance regulators in each of the U.S. insurance
subsidiaries' states of domicile require insurance companies
to calculate and report certain information under a
risk-based capital formula which measures statutory capital
and surplus needs based on the risks in a company's mix of
business and investment portfolio. Based upon calculations
at year end 2001, the U.S.
-30-
insurance subsidiaries each exceeded the capital levels
prescribed by the risk-based capital formula.
Trenwick Group Ltd.'s U.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 the U.S. insurance
subsidiaries was $374,835 and $438,738 at year end 2001 and
2000; their combined statutory net loss was $119,085,
$16,157 and $47,603 for the 2001, 2000 and 1999 years,
respectively.
Effective January 1, 2001, the domiciliary state insurance
departments of Trenwick Group Ltd.'s U.S. insurance
subsidiaries adopted the codification of statutory
accounting principles. The codification provides guidance
for areas where statutory accounting has been silent and
changes current statutory accounting in some areas. The
cumulative effect of the adoption of the codification,
$14,305, was recorded as an adjustment to increase statutory
surplus of the U.S. insurance subsidiaries on January 1,
2001, primarily due to the recording of net deferred income
tax assets. Additionally, one of the state insurance
departments adopted certain prescribed accounting practices
that differ from those found in the codification. The most
significant of these practices is that deferred income tax
assets and liabilities are not recorded. The monetary effect
on the combined statutory capital and surplus of Trenwick
Group Ltd.'s U.S. insurance subsidiaries of using accounting
practices prescribed by that state insurance department was
a decrease of $9,042.
A state insurance department has permitted one of Trenwick
Group Ltd.'s insurance subsidiaries domiciled in that state
to account for the reinsurance agreement purchased in
connection with the Trenwick/Chartwell merger on a
prospective basis in its statutory basis financial
statements. This treatment is consistent with the U.S. GAAP
accounting treatment of the contract. Another state
insurance department has required another of Trenwick Group
Ltd.'s insurance subsidiaries, domiciled that state, to
account for that reinsurance agreement on a retroactive
basis. The difference in these statutory accounting
practices does not have an effect on the combined statutory
surplus or net income of Trenwick 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 $47,585 at
year end 2001 were on deposit with various state or
governmental insurance departments in order to comply with
insurance laws.
U.K. Regulation
Under the applicable U.K. laws, Trenwick Group Ltd.'s U.K.
insurance subsidiaries may make distributions only from
accumulated realized profits, net of accumulated realized
losses. In addition, Trenwick International Limited is not
permitted to make any distribution that would reduce its net
assets ($83,677 at year end 2001) below the required minimum
margin of solvency which, as determined under the applicable
rules, is approximately $27,000 at year end 2001. Trenwick
International Limited must also notify its U.K. regulator of
any proposal to declare or pay a dividend on any of its
share capital. Under Lloyd's regulations, Chartwell Managing
Agents Limited is not permitted to make any distribution
that would cause its net assets to fall below a specified
level, which was $1,018 at year end 2001.
Note 12 Goodwill represents the unamortized excess of purchase price
Goodwill over the fair value of identifiable net assets of acquired
entities. Through the 2001 year, we amortized goodwill on a
straight-line basis over twenty-five years. On a periodic
basis, we estimate the future undiscounted cash flows of the
business to which the goodwill relates in order to ensure
that its carrying value has not been impaired.
-31-
In July 2001, the Financial Accounting Standards Board
issued a statement covering goodwill and other intangible
assets, which is required to be adopted at the beginning of
2002. The statement requires that the goodwill be tested for
impairment under either market value or cash flow tests and
any impairment be recorded as of January 1, 2002 as the
cumulative effect of an accounting change. The impairment
tests must be completed by the reporting of quarterly
results of operations as of June 30, 2002. The new statement
also requires that negative goodwill balances not be tested,
but be credited to operations as of January 1, 2002 as the
cumulative effect of an accounting change. We will conduct
impairment tests on the remaining goodwill and implement the
statement during the first or second quarter of 2002.
The goodwill resulting from the Trenwick/LaSalle Re business
combination is recorded by Trenwick Group Ltd., ($1,120, net
of accumulated amortization of $73) Trenwick Group Ltd.'s
U.S. holding company, Trenwick America Corporation,
($52,119, net of accumulated amortization of $1,866 at year
end 2001) and by its Bermuda holding company, LaSalle Re
Holdings Limited, ($(11,586) net of accumulated accretion of
$610 at year end 2001). The net amount ($41,653 at year end
2001) is presented as goodwill in these financial
statements.
Note 13 We record our investments in managing general agencies,
Other Assets through which we write primary insurance business and in
and Other which we hold ownership interests of between 20% and 30%, in
Liabilities other assets on the balance sheet. Based on the ownership
interest and our ability to exercise significant influence
on the operating and financial policies of these managing
general agencies, we account for these investments under the
equity method.
We record premises and equipment, including leasehold
improvements and capitalized software costs, at cost and
amortize or depreciate them using the straight-line method
over their useful lives.
The components of other assets and other liabilities at year
end 2001 and 2000 follow:
Other assets: 2001 2000
-------- --------
Investments in managing general agencies $ 9,010 $ 9,968
Premises and equipment, net of accumulated
depreciation of $7,462 and $1,220 20,506 10,035
Funds held by insurers and other insurance deposits 44,424 68,597
Prepaid expenses and other deposits 15,135 17,477
Current income taxes recoverable 5,229 24,389
Contingent commissions receivable 8,666 3,960
Other receivables 13,262 15,952
Other 16,563 15,937
-------- --------
Total $132,795 $166,315
-------- --------
Other liabilities:
Accounts payable and accrued expenses $ 98,400 $ 71,467
Security deposits for insureds 9,548 7,788
Contingent commission payable 4,746 5,484
Other 12,860 11,611
-------- --------
Total $125,554 $ 96,350
======== ========
During the 2001 and 2000 years, Trenwick Group Ltd. recorded
$1,944 and $239, respectively, in equity income related to
investments in managing general agencies. Depreciation and
-32-
amortization on items included in other assets charged to
operations for the 2001, 2000 and 1999 years was $7,158,
$1,229 and $354, respectively.
Operating Lease Agreements
Trenwick Group Ltd. leases office space under non-cancelable
operating leases which expire at various dates through 2015.
Trenwick Group Ltd.'s future minimum lease commitments at
year end 2001 total $21,628 and are payable as follows:
2002, $4,951; 2003, $4,816; 2004, $4,440; 2005, $2,833;
2006, $2,194; and thereafter, $2,394.
Total office rent expense for the 2001 and 2000 years, and
the 1999 period and year was $4,963, $2,113, $227 and $328,
respectively.
Note 14 We define the fair value of a financial instrument as the
Fair Value of amount at which the instrument could be exchanged in a
Financial current transaction between willing parties. We estimate
Instruments fair values based upon quoted market prices or broker dealer
quotes and these estimates may vary in the near term.
The carrying amounts and estimated fair values of financial
instruments in summary form at year end 2001 and 2000
follow:
2001 2000
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Assets:
Debt securities (Note 5) $1,960,600 $1,960,600 $1,813,678 $1,813,678
Equity securities (Note 5) 24,164 24,164 115,901 115,901
Cash and cash equivalents 331,350 331,350 311,001 311,001
Deposits 7,800 7,800 48,969 48,969
Liabilities:
Indebtedness (Note 6) 291,263 281,093 286,805 286,817
Preferred capital securities (Note 6) 68,119 43,175 76,770 74,777
Note 15 Restrictions on Certain Payments within Trenwick Because
Commitments, Trenwick Group Ltd.'s operations are conducted through its
Contingencies, operating subsidiaries, Trenwick Group Ltd. is dependent
Concentrations upon the ability of its operating subsidiaries to transfer
and funds, principally in the form of cash dividends, tax
Related-Party reimbursements and other statutorily permissible payments.
Transactions In addition to general legal restrictions on payments of
dividends and other distributions to shareholders applicable
to all corporations, Trenwick Group Ltd.'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,
as more fully described in Note 11. 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 Group Ltd.'s operating subsidiaries,
will provide Trenwick Group Ltd. with sufficient liquidity
to meet its operating needs over the next twelve months.
Litigation
Trenwick Group Ltd. is party to various legal proceedings
generally arising in the normal course of its business.
Trenwick Group Ltd. does not believe that the eventual
outcome of any such proceeding will have a material effect
on its financial condition or results of operations or cash
flows. Trenwick Group Ltd.'s subsidiaries are regularly
engaged in the investigation and the defense of claims
arising out of the conduct of their business. Pursuant to
Trenwick Group
-33-
Ltd.'s insurance and reinsurance arrangements, disputes are
generally required to be finally settled by arbitration.
Investments and Cash Held as Collateral or on Deposit
Debt securities and cash with a carrying value of $145,981
are being held in trust as collateral for certain
reinsurance obligations. In addition, cash in the amount of
$2,054 has been pledged as collateral for letters of credit
for reinsurance obligations.
At year end 2001 Trenwick Group Ltd. had cash of $2,384 held
in a collateral account in conjunction with a loan
guarantee, and funds held as collateral for sponsored names
guarantees of $185.
Additionally, Trenwick Group Ltd. has debt securities and
cash with a carrying value of $30,506 being held as
collateral for Lloyd's syndicates operations.
Concentrations
During 2001, Trenwick Group Ltd. received 50.7% of its gross
written premiums through five brokers of which Aon
Reinsurance Agency accounted for 19.4%, Marsh and McLennan
accounted for 16.0%, Reinsurance Alternatives accounted for
7.5%, Heath Lambert accounted for 5.8%, and Benfield Blanch
accounted for 1.9%. During 2000, Aon Reinsurance Agency
accounted for 18%, Marsh and McLennan accounted for 13%,
Heath Lambert accounted for 6%, Reinsurance Alternatives
accounted for 5% and Benfield Blanch accounted for 3%.
During the 1999 period and the 1999 year, Marsh and McLennan
provided 40% and 20% of Trenwick Group Ltd.'s gross written
premiums, respectively, and Aon Reinsurance Agency provided
4% and 18%, respectively.
Loss of all or a substantial portion of the business
provided by these brokers could have a material adverse
effect on the business and operations of Trenwick Group Ltd.
Trenwick Group Ltd. does not believe, however, that the loss
of such business would have a long-term adverse effect
because of Trenwick Group Ltd.'s competitive position within
the reinsurance market and the availability of business from
other brokers.
No one ceding company accounted for more than 3% of Trenwick
Group Ltd.'s gross written premiums in the 2001 or 2000
years, or the 1999 period or year.
At year end 2001, 26% of Trenwick Group Ltd.'s net
reinsurance recoverable is recoverable from five principal
retrocessionaires. The reinsurance recoverable balances, net
of funds held liabilities, were from ERC Frankona Ltd.
($118,205), London Life and Casualty Reinsurance Corporation
($81,878), AIOI Insurance Company of Europe Limited
($68,235), Centre Solutions (U.S.) Limited ($50,096), and
Transatlantic Reinsurance Company ($48,374). Each of these
companies is rated A or better by A.M. Best Company.
Related Party Transactions
Included in other assets are Trenwick Group Ltd.'s
investments in managing general agencies through which it
writes primary insurance business, as more fully described
in Note 13. At year end 2001 and 2000, the carrying value of
these investments totaled $9,010 and $9,968, respectively.
During 2001 and 2000, Trenwick Group Ltd. incurred $11,655
and $8,059 of commission expense to these managing general
agencies, respectively. At year end 2001 and 2000, Trenwick
Group Ltd.'s balance sheet includes $19,231 and $25,494,
respectively, of agents' balances receivable from these
managing general agencies including installment premiums
deferred and not yet due. The current portion of balances
due from these managing general agencies are settled on a
monthly basis.
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Two of LaSalle Re Holdings Limited's founding shareholders
were CNA Financial and Aon. Their ownership of LaSalle Re
Holdings Limited during the period prior to the
Trenwick/LaSalle business combination was between 15.6% and
18.3% for CNA and 15.3% and 18.0% for Aon. LaSalle Re
Holdings Limited had numerous business relationships with
both companies, the principal ones of which are summarized
below:
2000 1999 Period
Year and Year
------- -----------
Premiums assumed through Aon $30,340 $25,448
Brokerage costs on premiums assumed through Aon 3,034 2,544
Investment management services from Aon 821 1,000
Premiums assumed from CNA 668 8,386
Premiums ceded to CNA 6,556 7,909
Override and profit commissions on premiums
ceded to CNA 1,244 644
Underwriting support services from CNA 685 1,634
At year end 2000, the net amount receivable from CNA and Aon
related to these business relationships was $608 and the
amount payable to CNA and Aon under these agreements was
$7,351.
While the 2001 underwriting support services agreement
between LaSalle Re Holdings Limited and CNA did not
terminate until September 30, 2001, LaSalle Re Holdings
Limited did not utilize CNA's underwriting support services
following the Trenwick/LaSalle business combination.
Consequently, all fees payable between September 30, 2000
and September 30, 2001 were accrued and expensed at the date
of the business combination.
The investment management services agreement between LaSalle
Re Holdings Limited and Aon terminated at year end 2000.
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Note 16 Operating activities are presented in the consolidated
Additional statement of cash flows on a direct basis. The indirect
Operating basis reconciles net income (loss) to cash from (for)
Cash Flows operating activities. This reconciliation follows:
Information
2001 2000 1999 1999
Year Year Period Year
--------- --------- -------- --------
Net income (loss) $(154,397) $ 9,451 $(14,841) $ (2,834)
Adjustments to reconcile net income (loss)
to net cash from (for) operating activities:
Investment premium amortization, net 2,991 (786) (692) 154
Net realized investment losses (gains) (8,796) 1,386 -- (615)
Unrealized loss (gain) on foreign exchange (2,196) 419 193 193
Minority interest in undistributed
net income (loss) of subsidiaries -- 839 (4,990) (2,845)
Contingent interest note adjustments (8,700) (4,675) -- --
Deferred income taxes (59,160) 11,143 -- --
Uncollectible accounts provision 3,320 4,081 -- --
Other fair value adjustment accretion 458 365 -- --
Other 4,448 (3,546) 91 751
Changes in assets and liabilities, net
of effect from purchases of subsidiary:
Accrued investment income (945) (3,697) (2,139) 981
Premiums receivable (111,729) 10,449 14,770 (6,354)
Reinsurance recoverable balances, net (475,833) (102,861) (8,676) (9,100)
Prepaid reinsurance premiums (51,289) (10,141) 6,172 (9,726)
Deferred policy acquisition costs (16,876) (5,743) 3,441 1,533
Other assets 22,741 751 (1,000) (5,916)
Unpaid claims and claims expenses 662,661 70,570 43,593 48,403
Unearned premium income 122,713 8,964 (27,154) (6,070)
Reinsurance balances payable 101,575 (15,055) (2,243) 9,778
Other liabilities 32,241 11,384 2,044 1,609
--------- --------- -------- --------
Cash from (for) operating activities $ 63,227 $ (16,702) $ 8,569 $ 19,942
========= ========= ======== ========
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Note 17 Summarized unaudited quarterly financial data for the years
Unaudited presented follow:
Quarterly
Financial
Data
Quarter 2001 2000
-------------- -------- --------
Net premiums earned Fourth quarter $222,298 $220,010
Third quarter 239,862 26,751
Second quarter 224,571 28,776
First quarter 202,774 27,212
Net investment income Fourth quarter $32,973 30,937
Third quarter 30,770 9,591
Second quarter 33,186 9,251
First quarter 32,184 8,936
Net realized investment Fourth quarter $ 968 530
gains (losses) Third quarter (3,302) 270
Second quarter 2,272 38
First quarter 8,859 (2,224)
Net income (loss) Fourth quarter $(26,397) 1,795
Third quarter (96,107) 8,552
Second quarter (50,806) 12,912
First quarter 18,913 (13,808)
Net income (loss) Fourth quarter $(26,397) 1,795
available to common Third quarter (96,107) 6,911
shareholders Second quarter (50,806) 11,271
First quarter 18,913 (15,449)
Diluted income (loss) Fourth quarter $(0.72) $0.05
per common share Third quarter $(2.61) $0.44
Second quarter $(1.38) $0.71
First quarter $0.51 $(0.98)
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TRENWICK GROUP LTD.
FIVE YEAR SUMMARY
Year Ended December 31, 2001 and 2000 and
Years Ended September 30, 1999, 1998 and 1997
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
Income Statement Data
New Premiums written $ 970,318 $ 302,632 $ 110,819 $147,501 $163,693
New investment income 129,114 58,715 33,847 34,288 33,109
Net income (loss) available
common shareholders (154,397) 4,528 (9,397) 45,243 93,723
GAAP combined ratio 132.6% 113.5% 130.1% 82.2% 42.6%
Per Share Data
Net income (loss) per
common share:
Basic earnings (loss) per
common share $ (4.19) $ 0.21 $ (0.60) $ 2.99 $ 6.02
Diluted earnings (loss)
per common share (4.19) 0.21 (0.60) 2.68 5.14
Dividends per common share 0.16 0.04 1.13 3.00 2.84
Book Value per common share 13.52 17.79 19.69 23.39 23.23
Balance Sheet Data
Total Assets $ 4,928,555 $4,229,496 $ 736,107 $757,290 $686,088
Total investments and cash 2,316,114 2,240,580 556,976 606,757 553,043
Unpaid claims and
claims expenses 3,032,748 2,408,926 146,552 97,942 45,491
Indebtedness 291,263 286,805 -- -- --
Minority interest 143,119 151,770 93,055 105,569 93,355
Common shareholders' equity 498,326 652,187 307,197 355,053 350,226
Common shares outstanding 36,845 36,665 15,600 15,179 15,074
Amounts for 2001 and 2000 reflect the results of Trenwick Group Inc. and its
subsidiaries, accounted for as a purchase, from September 27, 2000, the date of
the acquisition.
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