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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period _______________ to _______________.
Commission file number 1-15389
TRENWICK GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1152790
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Canterbury Green, Stamford, Connecticut 06901
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 353-5500
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Common Stock, par value $.10 per share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value on March 24, 2000 of the voting stock held by
non-affiliates of the registrant was $224,696,190.
The number of shares outstanding of each of the issuer's classes of common
stock as of the close of the period covered by this report:
Class Outstanding at March 24, 2000
----- -----------------------------
Common Stock, $.10 par value 16,295,207
Certain portions of the registrant's definitive proxy statement relating to its
annual meeting of stockholders scheduled to be held on May 18, 2000 are
incorporated by reference into Part III of this report and certain portions of
the registrant's annual report to stockholders are incorporated by reference
into Parts II and IV of this report.
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TRENWICK GROUP INC.
Table of Contents
Page
Item Number
- - ---- ------
PART I
1. Business ......................................................................................... 1
2. Properties ....................................................................................... 22
3. Legal Proceedings ................................................................................ 23
4. Submission of Matters to a Vote of Security Holders .............................................. 23
PART II
5. Market for the Corporation's Common Stock and Related Stockholder Matters ........................ 24
6. Selected Financial Data .......................................................................... 25
7. Management's Discussion and Analysis of Financial Condition and
Results of Operation ............................................................................. 27
7a. Quantitative and Qualitative Disclosures About Market Risk......................................... 27
8. Financial Statements and Supplementary Data ...................................................... 27
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ............................................................................. 27
PART III
10. Directors and Executive Officers ................................................................. 27
11. Executive Compensation ........................................................................... 28
12. Security Ownership of Certain Beneficial Owners and Management ................................... 28
13. Certain Relationships and Related Transactions ................................................... 28
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .................................. 28
PART I
Item 1. Business
General Background and History
Trenwick Group Inc. ("Trenwick") is a specialty insurance underwriting
organization with multiple distribution platforms in insurance and reinsurance
operating through its subsidiaries located in the United States and the United
Kingdom. Trenwick's four principal operating units are Trenwick America
Reinsurance Corporation ("Trenwick America Re"), which provides treaty
reinsurance to insurers of property and casualty risks in the United States;
Trenwick International Limited ("Trenwick International"), which underwrites
treaty and facultative reinsurance as well as specialty insurance on a worldwide
basis; Chartwell Managing Agents Limited ("Chartwell Managing Agents"),
Trenwick's managing agency at Lloyd's; and Canterbury Financial Group Inc.
("Canterbury Financial"), which underwrites U.S. property and casualty insurance
through specialty program administrators.
Trenwick was incorporated in the State of Delaware in 1985. Trenwick America Re,
a Connecticut corporation, operated as a subsidiary of Trenwick America
Corporation from 1983 through 1985 and was acquired by Trenwick in 1985 as a
result of a corporate restructuring. Trenwick acquired Trenwick International in
February 1998 and Chartwell Re Corporation ("Chartwell") in October 1999. In
connection with the acquisition of Chartwell, Trenwick acquired Chartwell
Managing Agents, Chartwell Reinsurance Company ("Chartwell Reinsurance"), whose
reinsurance business was assumed by Trenwick America Re, and The Insurance
Corporation of New York ("INSCORP") and Dakota Specialty Insurance Company
("Dakota"), both of which are operating companies for Canterbury Financial. In
addition, Trenwick owns several inactive Bermuda subsidiaries.
On December 19, 1999, Trenwick announced that it had entered into a definitive
agreement to combine with LaSalle Re Holdings Limited, with shareholders of each
company to receive shares in a new Bermuda holding company to be named Trenwick
Group Ltd. This transaction is expected to be completed in the second quarter of
2000.
Each of Trenwick's operating insurance company subsidiaries is rated "A"
(Excellent) by A.M. Best Company and has been assigned an A+ financial strength
rating by Standard & Poor's. All of Chartwell Managing Agents' syndicates enjoy
the benefit of the ratings of Lloyd's, which is rated "A" (Excellent) by A.M.
Best Company and has an A+ claims paying ability 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.
Trenwick's gross and net premium writings for its operational units are as
follows:
1999 1998 1997
-------- -------- --------
Gross Premiums Written
Trenwick America Re $210,921(1) $218,249 $248,662
Trenwick International 171,698 105,114(2) --
Chartwell Managing Agents 84,834(3) -- --
Canterbury Financial 38,088(4) -- --
-------- -------- --------
Total $505,541 $323,363 $248,662
======== ======== ========
Net Premiums Written
Trenwick America Re $155,108(1) $169,112 $195,230
Trenwick International 129,399 81,107(2) --
Chartwell Managing Agents 64,462(3) -- --
Canterbury Financial 5,641(4) -- --
-------- -------- --------
Total $354,610 $250,219 $195,230
======== ======== ========
(1) Includes reinsurance business of Chartwell Reinsurance and its subsidiaries
since its acquisition on October 27, 1999.
(2) Includes Trenwick International business since its acquisition on February
27, 1998.
(3) Includes Chartwell Managing Agents business since its acquisition on
October 27, 1999.
(4) Includes Canterbury Financial business since its acquisition on October 27,
1999.
Trenwick America Reinsurance Corporation
Trenwick America Re, which comprised 44% of Trenwick's total net premiums
written in 1999, underwrites United States treaty reinsurance, which accounts
for the majority of its business, as well as a small amount of facultative
reinsurance. In this section, Trenwick America Re's 1999 results include the
reinsurance business of Chartwell Reinsurance and its subsidiaries since its
acquisition on October 27, 1999.
Trenwick America Re generally obtains all of its business through brokers and
reinsurance intermediaries which seek its participation on reinsurance being
placed for their customers. In underwriting reinsurance, Trenwick America Re
does not target types of clients, classes of business or types of reinsurance.
Rather, it selects transactions based upon the quality of the reinsured, the
attractiveness of the reinsured's insurance rates and policy conditions and the
adequacy of the proposed reinsurance terms.
Trenwick America Re's commitment is currently limited to $2,500,000 per contract
on casualty treaty business and $1,500,000 on property business. Larger
commitments are subject to Trenwick's Underwriting Committee referral process.
2
Trenwick America Re's net premiums written by line of business are set forth in
the following table for the periods indicated.
Trenwick America Reinsurance Corporation
Net Premiums Written By Lines of Business
(in thousands)
1999(1) 1998 1997
--------- --------- ---------
Casualty
Automobile Liability $ 17,831 $ 51,299 $ 50,187
Errors and Omissions 45,557 36,655 40,063
General Liability 22,170 17,743 20,795
Accident and Health 17,922 11,014 6,326
Medical Malpractice 3,422 7,700 10,293
Workers' Compensation 8,297 3,025 18,328
Products Liability 1,834 2,312 1,743
Other Casualty 12,431 2,697 9,133
--------- --------- ---------
Total Casualty 129,464 132,445 156,868
--------- --------- ---------
Property 25,644 36,667 38,362
--------- --------- ---------
Total $ 155,108 $ 169,112 $ 195,230
========= ========= =========
(1) Includes reinsurance business of Chartwell Reinsurance and its subsidiaries
since its acquisition on October 27, 1999.
The major lines of reinsurance currently written by Trenwick America Re are
automobile liability, errors and omissions, general liability and accident and
health. Together these lines account for an aggregate of at least 67% of its net
premiums written in all years indicated. The overall decline in net premiums
written since 1997 is a result of three principal causes. Competition among
primary companies has caused cedants to reduce their own premium writings or
restructure their reinsurance programs, reducing the amount of reinsurance they
purchase. As a result of consolidation within the industry, many ceding
companies are now larger and financially stronger, enabling them to retain more
risk. In addition, increasingly intense competition in the reinsurance markets
has driven reinsurance prices on a number of accounts below pricing levels which
Trenwick America Re will accept. The 65% decline in automobile liability net
premium writings in 1999 resulted from the non-renewal of two significant
accounts, one of which was commuted in the fourth quarter of 1999. Accident and
health net premiums written increased by 63% compared to 1998 as a result of
Trenwick America Re's strategic alliance with Duncanson and Holt. This account
was non-renewed in 2000 following the sale of Duncanson and Holt. In 1999, the
amount of property business, including automobile physical damage, underwritten
by Trenwick America Re remained constant as a percentage of total net written
premiums.
Three ceding companies accounted for approximately 25%, 38%, and 32% of Trenwick
America Re's gross premiums written in 1999, 1998 and 1997, respectively. During
1999, Duncanson and Holt, American International Group and CNA Insurance
Companies accounted for 11%, 7% and 7%, respectively, of Trenwick America Re's
gross premiums written. While Trenwick America Re believes that the loss of
these accounts will not have a material adverse effect on the business and
operations of Trenwick, Trenwick does not believe that such a loss would have a
long-term adverse effect because of Trenwick's
3
competitive position within the reinsurance market and the availability of
business from other brokers and ceding companies. Further, Trenwick believes
that it will continue to underwrite new business to replace the accounts.
Trenwick International Limited
Trenwick International's business, which accounted for 36% of Trenwick's total
net premiums written in 1999, consists principally of insurance and facultative
reinsurance of specialty classes. Trenwick International also underwrites
property and casualty treaty reinsurance. In the latter part of 1998, Trenwick
International opened a branch office in Paris which specializes in facultative
reinsurance of large, technically complex property risks. Premiums written by
the Paris branch in 1999 were not material.
Trenwick International also obtains all of its business through brokers.
Trenwick International's business consists of Specialist Risk Underwriting
("SRU") which includes direct insurance, facultative reinsurance and treaty
reinsurance. The following table reflects Trenwick International's net premiums
written by type of business for 1999 and 1998.
International Net Premiums Written By Type of Business
(dollars in thousands)
1999 1998
----------------- -----------------
SRU 98,926 76% 83,397 83%
Treaty 30,473 24% 17,385 17%
----------------- -----------------
Total $129,399 100% 100,782 100%
================= =================
Specialist Risk Underwriting
SRU underwrites business in both London and Paris. Trenwick's branch office in
Paris was opened in September of 1998. The principal lines of business
underwritten in 1999 and 1998 include property, engineering, accident and health
professional indemnity, financial institutions, liability, extended warranty and
yacht hull. In 1999, approximately 53% of Trenwick International's net premiums
were written directly as insurance.
Trenwick's Paris branch specializes in large, complex property risks that
require a high degree of underwriting expertise. Trenwick International
generally underwrites this business, which includes large manufacturing
facilities, construction projects as well as both onshore and offshore energy
risks, as facultative reinsurance, but can also function directly as an insurer.
The Paris branch benefits from a pool of underwriters trained as engineers and
has emerged as a center for this type of technical underwriting.
Treaty
Trenwick International's treaty business includes liability business, which
accounted for approximately 51% of treaty business in 1999, as well as property
and credit business. Treaty is written both on a proportional and
non-proportional basis.
4
Chartwell Managing Agents
Trenwick participates in the Lloyd's market through Chartwell Managing Agents,
which is a managing agent at Lloyd's and through four Lloyd's corporate members.
Chartwell Managing Agents receives fees and profit commissions in respect of the
underwriting and administrative services it provides to the Lloyd's underwriting
syndicates that it manages. For the 2000 year of account, Chartwell Managing
Agents manages three syndicates with a total underwriting capacity of
approximately $377.1 million. In 1998 and 1999, Chartwell Managing Agents sold
to third parties the rights to manage syndicates 866 (motor), 947 (non-marine)
and 994 (non-marine) and combined into a single syndicate for the 2000 year of
account the remaining non-life syndicates. Trenwick retains the benefits and
obligations with respect to its Lloyd's corporate member participation interests
in those syndicates for the open years of account at the time of the sale.
Trenwick's Lloyd's corporate members participated on three Lloyd's syndicates
for the 2000 year of account, providing an aggregate of approximately $350.1
million of capacity to those syndicates. Approximately 93% of Chartwell Managing
Agents syndicates' 2000 year of account capacity was supplied by Trenwick.
Classes of business covered by Chartwell Managing Agents' syndicates include
marine, non-marine property, non-marine liability, motor, aviation and life. The
table set forth below shows the gross premiums written for Trenwick's Lloyd's
corporate members for the periods indicated. All amounts in the table below are
presented in accordance with U.S. generally accepted accounting principles
("GAAP").
Trenwick's Lloyd's Corporate Members
Gross Premiums Written by Lloyd's Market Segment
(dollars in thousands)(1)
Year Ended December 31,
---------------------------------------------------
1999 1998
------------------------ -----------------------
Amount % of Total Amount % of Total
-------- ---------- -------- ----------
Motor $ 37,370 17.7% $ 36,212 49.9%
Non-Marine 140,337 66.5 31,121 42.9
Aviation 19,802 9.4 3,194 4.4
Marine 12,350 5.9 1,757 2.4
Life 1,092 .5 289 0.4
-------- ----- -------- -----
Total $210,951 100.0% $ 72,573 100.0%
======== ===== ======== =====
(1)Business at Lloyd's is conducted in pounds sterling. The dollar amounts shown
here have been converted from pounds sterling at the average exchange rate for
each of the years presented. Data shown for 1998 and that portion of 1999 prior
to October 27, 1999 is not included in Trenwick's financial statements because
Trenwick acquired Chartwell Managing Agents and its related Lloyd's corporate
members on October 27, 1999.
Canterbury Financial Group
Canterbury Financial Group develops insurance programs through specialty
production sources with a focus on a specific line or lines of business, with a
limited geographic emphasis, and where the program administrator's compensation
is adjusted based on the underwriting results of the business. Canterbury
Financial Group evaluates each business relationship based upon the underwriting
experience and operational expertise of the production source. Canterbury
Financial Group periodically performs underwriting, claims and operational
audits of each of its production sources.
Canterbury Financial Group's gross written premiums grew 32.7%, 4.3% and 81.3%
for the years ended December 31, 1999, 1998 and 1997, respectively, over the
prior year. The increases in premium reflect the
5
geographic expansion of existing programs as well as the development of new
programs during the periods shown.
The table set forth below shows the gross premiums written for Canterbury
Financial Group for the periods indicated:
Canterbury Financial Group
Gross Premiums Written by Line of Business
(dollars in thousands)(1)
Year Ended December 31,
----------------------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ----------------------
Amount Total Amount Total Amount Total
-------- ----- -------- ----- -------- ------
Commercial Multiple Peril $ 41,909 28.4% $ 45,737 41.2% $ 48,404 45.4%
General Liability 36,743 25.0 31,575 28.4 30,418 28.6
Automobile 46,471 31.5 23,354 21.0 22,267 20.9
Workers Compensation 12,589 8.5 4,224 3.8 4,169 3.9
Homeowners and Other 9,786 6.6 6,241 5.6 1,285 1.2
-------- ----- -------- ----- -------- -----
Total $147,498 100.0% $111,131 100.0% $106,543 100.0%
======== ===== ======== ===== ======== =====
(1) Data shown for 1998 and that portion of 1999 prior to October 27, 1999 is
not included in Trenwick's financial statements because Trenwick acquired
Canterbury Financial on October 27, 1999.
During the year ended December 31, 1999, Canterbury Financial Group underwrote
approximately 64% of its gross premiums through three managing general agents,
of which Florida Intracoastal Underwriters accounted for approximately 31%, HDR
Insurance Services accounted for approximately 22% and Inter-Reco accounted for
approximately 11%. No other managing general agent accounted for more than 10%
of Canterbury Financial Group's gross insurance premiums written for such
period.
In order to reduce the potential adverse effect arising from the termination of
any specific business relationship, Canterbury Financial Group continues to seek
to establish and develop relationships with a large number of managing general
agents. While management believes that its relationships with its managing
general agents are satisfactory, the termination of all or a substantial number
of these relationships could have a material adverse effect on the business and
operations of Canterbury Financial Group.
Marketing
Trenwick generally obtains its business through insurance and reinsurance
brokers which represent the ceding company and clients in negotiations for the
purchase of insurance or reinsurance. The process of effecting a brokered
placement typically begins when a client or ceding company enlists the aid of a
broker in structuring an insurance or reinsurance program. Often the various
parties will consult with one or more lead underwriters as to the pricing and
contract terms of the protection being sought. Once the terms quoted by the lead
underwriter have been approved, the broker will offer participation to qualified
insurers or reinsurers until the program is fully subscribed at terms agreed to
by all parties.
Trenwick pays such intermediaries or brokers commissions representing negotiated
percentages of the premium it writes. These commissions constitute part of
Trenwick's total acquisition costs and are included
6
in its underwriting expenses. Brokers do not have the authority to bind Trenwick
America Re with respect to agreements. Under certain limited circumstances,
selected administrators have the authority to bind Trenwick International,
Chartwell Managing Agents and Canterbury Financial Group business. These
administrators are subject to periodic financial and operational reviews.
Trenwick does not commit in advance to accept any portion of the business that
brokers submit to it. Business from any company, whether new or renewal, is
subject to acceptance by Trenwick.
During 1999, three reinsurance brokers, AON Reinsurance Agency, Guy Carpenter
and E. W. Blanch generated 37%, 16% and 8%, respectively, of Trenwick America
Re's gross written premiums. These brokers are among the ten largest brokers in
the insurance and reinsurance industry. Loss of all or a substantial portion of
the business provided by Trenwick's brokers could have a material adverse effect
on the business and operations of Trenwick. Trenwick does not believe, however,
that the loss of such business would have a long-term adverse effect because of
Trenwick's competitive position within the broker insurance and reinsurance
market and the availability of business from other brokers.
Underwriting
Trenwick's underwriting philosophy emphasizes a transactional approach to
underwriting in which any insurance or reinsurance transaction for any line of
property or casualty business is considered on its own merits. The underwriter's
primary objective is to assess the potential for an underwriting profit. The
risk assessment process undertaken by Trenwick's underwriters involves a
comprehensive analysis of historical data, when available, and estimates of
future value of loss costs which may not be evident in the historical data. The
factors which Trenwick considers include the type of risk, details of the
underlying insurance coverage provided, adequacy of pricing using actuarial
analysis and the terms and conditions. With respect to its domestic operations
which comprises fewer but significantly larger accounts, Trenwick frequently
conducts underwriting and claims audits of ceding companies to assist it in
evaluating the information submitted by the ceding companies, before agreeing to
participate in a reinsurance transaction.
Trenwick has established formal underwriting policy standards for both domestic
and international operations. This process involves pre-binding reviews of
individual material transactions by its senior underwriting staff. Underwriting
policies for insurance and reinsurance transactions are supplemented by
conducting periodic internal audits of each underwriting department to ensure
compliance with underwriting policies and procedures.
Competition
Trenwick competes with numerous major international and domestic insurance and
reinsurance companies. These competitors, many of which have substantially
greater financial and staff resources than Trenwick, include independent
insurance and reinsurance companies, subsidiaries or affiliates of established
insurance companies, reinsurance departments of certain commercial insurance
companies and underwriting syndicates.
Competition in the types of business which Trenwick underwrites is based on many
factors. These factors include the perceived overall financial strength of the
insurer or reinsurer, rates charged, other terms and conditions, agency ratings
(including A.M. Best Company and Standard & Poor's), service offered, speed of
service (including claims payment) and perceived technical ability and
experience of staff. The number of jurisdictions in which an insurer or
reinsurer is licensed or authorized to do business is also a factor.
7
The financial security of insurers and reinsurers has emerged as a key issue
throughout the 1990's. To be accepted by clients, and by ceding companies and
their brokers, insurers and reinsurers must demonstrate higher levels of
financial security and solvency than were previously required. Transactions tend
to have fewer and larger participants, which may negatively affect the
availability of underwriting opportunities for Trenwick.
Trenwick's management believes that the insurance and reinsurance industry,
including the broker market, will continue to undergo further consolidation and
that size and financial strength will continue to be significant factors in
effective competition.
Claims Administration
Claims are managed by Trenwick's professional claims staff whose
responsibilities include the review of initial loss reports, creation of claim
files, determination of whether further investigation is required, establishment
and adjustment of case reserves and payment of claims. In addition, the claims
staff conducts comprehensive claims audits of both specific claims and overall
claims procedures at the offices of selected brokers and ceding companies. In
certain instances, a claims audit may be performed prior to assuming reinsurance
business as part of a comprehensive risk evaluation process. For insurance
business, Trenwick's claim staff uses their own judgement as well as advice from
lawyers and loss adjusters where appropriate.
In connection with the acquisition of Chartwell, Trenwick acquired an
environmental claims unit to evaluate the complex toxic tort and latent injury
claims resident in one of Chartwell's subsidiaries, The Insurance Corporation of
New York.
Unpaid Claims and Claims Expenses
General
Insurers and reinsurers establish claims and claims expense reserves
representing estimates of future amounts needed to pay claims and related
expenses with respect to insured events which have occurred. Claims and claims
expense reserves have two components: case reserves, which are reserves for
reported claims, and incurred but not reported ("IBNR") reserves, which are
reserves for claims not yet reported. Significant periods of time may elapse
between the occurrence of an insured claim, the reporting of the claims to the
insurer and the subsequent reporting of the claims to the reinsurer, the
insurer's payment of that claim, and later payments by the reinsurer.
Trenwick first establishes its case reserves for reported claims when it
receives notice of the claim. It is Trenwick's policy to establish reserves for
reported claims in an amount equal to the greater of the reserve recommended by
the ceding company or the claim as estimated by Trenwick's claims personnel.
Trenwick periodically conducts investigations to determine if the amount
reserved by the ceding company is appropriate or should be adjusted. During the
claim settlement period, which may be many years, additional facts regarding
individual claims may become known. As Trenwick learns additional facts, it may
become
8
necessary to refine and adjust upward or downward the estimated reserves on a
claim, and even then the ultimate net reserve may be less than or greater than
the revised estimates. Trenwick does not discount any of its reserves for
reported or unreported claims in any line of its business for anticipated
investment income.
Actuarial Methods
Trenwick utilizes the two most common methods of actuarial evaluation used
within the insurance industry, the Bornhuetter-Ferguson method and the loss
development method. The Bornhuetter-Ferguson method involves the application of
selected loss ratios to Trenwick's earned premiums to determine estimates of
ultimate expected loss and loss adjustment expenses for each underwriting year.
Multiplying expected losses by underwriting year by a selected loss reporting
pattern gives an estimate of reported and unreported IBNR losses. When the IBNR
is added to the loss and loss adjustment expense amounts with respect to claims
that have been reported to date, an estimated ultimate expected loss results.
This method provides a more stable estimate of IBNR that is insulated from wide
variations in reported losses. In contrast, the loss development method
extrapolates the current value of reported losses to ultimate expected losses by
using selected reporting patterns of losses over time. The selected reporting
patterns are based on historical information (organized into loss development
triangles) and are adjusted to reflect the changing characteristics of the book
of business written by Trenwick.
Trenwick provides capital to its Lloyd's corporate members, which support the
underwriting capacity of the Lloyd's syndicates managed by Chartwell Managing
Agents. Loss reserves for this business are established using methods similar to
those used by Trenwick for its operating insurance company subsidiaries.
Chartwell Managing Agents has engaged Bacon & Woodrow London Market Services
Ltd. ("B&W"), an independent actuarial consulting firm, to review the loss
reserves and prepare an actuarial opinion for each of its syndicates, including
the actuarial opinion required by Lloyd's solvency regulations. The B&W
opinions, which are prepared solely for the use of Lloyd's regulators and are
only to be relied upon by Chartwell Managing Agents, assist its syndicates in
establishing appropriate reserve estimates for both the reinsurance to close and
the open years of account.
In the reserve setting process, Trenwick includes provisions for inflation and
"social inflation" if appropriate, as losses are generally not determined until
some time in the future. Trenwick continually monitors legislative activity and
evaluates the potential effect of any legislative changes on its reserve
liabilities.
Trenwick's reserves are carried at the full amount estimated for ultimate
expected losses and loss adjustment expense without any discount to reflect the
time value of money in accordance with both statutory accounting practices and
GAAP. Trenwick's actuarial department regularly performs loss reserve analyses
for its operating insurance company subsidiaries.
9
Reserve Analysis
The following table presents the development of Trenwick's net unpaid claims and
claims expenses for 1989 through 1999. The top line of the table shows the net
unpaid claims and claims expenses at the balance sheet date for each of the
indicated years. This reflects the net estimated amounts of claims and claims
expenses for claims arising in that year and in all prior years that are unpaid
at the balance sheet date, including claims that had been incurred but not yet
reported to Trenwick. The upper portion of the table shows the net cumulative
subsequently paid amounts as of successive years with respect to that liability.
The middle portion of the table shows the net re-estimated amount of the
previously recorded net unpaid claims and claims expenses based on experience as
of the end of each succeeding year. The estimates change as more information
becomes known about the frequency and severity of claims for individual years. A
redundancy (deficiency) exists when the net re-estimated liability at each
December 31 is less (greater) than the prior net liability estimate. The net
"Cumulative Redundancy (Deficiency)" depicted in the table for any particular
calendar year represents the aggregate change in the initial net estimates over
all subsequent calendar years.
The lower portion of the table presents a reconciliation of the net unpaid
claims and claims expenses as of the end of the year with the related gross
unpaid claims and claims expenses as of December 31, 1991 through 1999.
Additionally, the table presents a reconciliation of the gross re-estimated
unpaid claims and claims expenses as of the end of the latest re-estimation
year, with separate disclosure of the related re-estimated reinsurance
recoverable on unpaid claims and claims expenses. The "gross cumulative
redundancy" depicted in the table for the calendar years 1991 through 1999
represents the aggregate change in the initial gross estimates over all
subsequent calendar years.
10
DEVELOPMENT OF UNPAID CLAIMS AND CLAIMS EXPENSES
(in thousands)
- - ----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994 1993 1992
- - ----------------------------------------------------------------------------------------------------------------------------------
Net unpaid claims and claims
expenses, end of year $1,207,436 $449,264 $ 379,351 $386,887 $327,001 $294,008 $268,091 $266,685
Cumulative amount of net
liability paid as of:
One year later 172,674 104,718 94,197 46,860 61,804 52,300 52,260
Two years later 194,188 162,565 110,289 81,417 90,382 93,312
Three years later -- 215,803 149,810 121,133 89,445 118,345
Four years later -- -- 178,919 142,485 112,119 111,174
Five years later -- -- -- 156,204 124,096 125,847
Six years later -- -- -- -- 134,535 133,502
Seven years later -- -- -- -- -- 139,779
Eight years later -- -- -- -- -- --
Nine years later -- -- -- -- -- --
Ten years later -- -- -- -- -- --
Net liability re-estimated as of:
One year later 463,892 372,176 381,521 322,562 291,943 267,644 255,379
Two years later 383,584 374,336 317,199 279,561 263,473 255,379
Three years later 381,463 308,700 274,283 246,367 252,458
Four years later -- -- 309,282 265,041 241,478 236,009
Five years later -- -- -- 266,583 229,742 230,488
Six years later -- -- -- -- 230,824 222,094
Seven years later -- -- -- -- -- 223,473
Eight years later -- -- -- -- -- --
Nine years later -- -- -- -- -- --
Ten years later -- -- -- -- -- --
Net cumulative redundancy (deficiency) (14,628) (4,233) 5,424 17,719 27,425 37,267 43,212
Percentage (1)% 1% 5% 9% 14% 16%
Gross Liability, end of year 682,428 518,387 467,177 411,874 389,298 354,582 351,897
Reinsurance recoverable 233,164 139,036 80,290 84,873 95,290 86,491 85,212
Net liability, end of year 449,264 379,351 386,887 327,001 294,008 268,091 266,685
Gross re-estimated liability-latest 719,143 521,011 462,384 393,765 339,514 293,613 288,355
Re-estimated recoverable-latest 255,251 137,427 80,921 84,483 72,931 62,789 64,882
Net re-estimated liability-latest 463,892 383,584 381,463 309,282 266,583 230,824 223,473
Gross cumulative redundancy (deficiency) (36,715) (2,624) 4,793 18,109 49,784 60,969 63,542
- - --------------------------------------------------------------------------
1991 1990 1989
- - --------------------------------------------------------------------------
Net unpaid claims and claims
expenses, end of year $258,774 $245,105 $214,391
Cumulative amount of net
liability paid as of:
One year later 44,930 42,234 29,407
Two years later 80,725 77,183 60,888
Three years later 111,225 102,590 84,283
Four years later 127,431 124,129 101,597
Five years later 116,224 134,657 116,047
Six years later 127,130 122,089 124,465
Seven years later 132,194 129,100 110,656
Eight years later 137,401 132,888 115,017
Nine years later -- 136,959 117,364
Ten years later -- -- 120,895
Net liability re-estimated as of:
One year later 253,781 238,324 206,724
Two years later 243,488 233,565 199,864
Three years later 243,586 223,417 196,232
Four years later 241,600 224,171 188,052
Five years later 225,592 223,172 189,148
Six years later 217,852 213,327 188,884
Seven years later 208,701 205,179 180,619
Eight years later 211,487 199,948 176,778
Nine years later -- 202,578 172,846
Ten years later -- -- 175,362
Net cumulative redundancy (deficiency) 47,287 42,527 39,029
Percentage 18% 17% 18%
Gross Liability, end of year 332,503
Reinsurance recoverable 73,729
Net liability, end of year 258,774
Gross re-estimated liability-latest 268,217
Re-estimated recoverable-latest 56,730
Net re-estimated liability-latest 211,487
Gross cumulative redundancy (deficiency) 64,286
11
In evaluating the information in the table on the preceding page, it should be
noted that each amount includes the effects of all changes in amounts for prior
periods. For example, if a claim determined in 1991 to be $150,000 was first
reserved in 1986 at $100,000, the $50,000 deficiency (actual claim minus
original estimate) would be included in the gross cumulative redundancy
(deficiency) in each of the years 1986-1991 shown on the preceding page. This
table does not present accident or policy year development data. Conditions and
trends that have affected the development of liability in the past may not
necessarily occur in the future. Accordingly, it may not be appropriate to
extrapolate future redundancies or deficiencies based on this table.
The trend depicted in the table indicates that net unpaid claims and claims
expense liability at December 31, 1998 and 1997 have developed unfavorably due
to Trenwick America Re's unfavorable development for claims occurring in
accident years 1996 through 1998. For further discussion of unpaid claims and
claims expenses, see Note 4 of Notes to the Consolidated Financial Statements of
Trenwick.
Management believes that Trenwick's reserves are adequate. However, the process
of estimating reserves is inherently imprecise and involves an evaluation of
many variables, including potentially unpredictable social and economic
conditions. Accordingly, there can be no assurance that Trenwick's ultimate
liability will not vary significantly from amounts reserved. The inherent
uncertainties of estimating such reserves are greater for reinsurers than for
primary insurers, primarily due to the longer-term reporting nature of the
reinsurance business, the diversity of development patterns among different
types of reinsurance, the necessary reliance on ceding companies for information
regarding reported claims and differing reserving practices among ceding
companies. Reserves also include provisions for latent injury or toxic tort
claims that cannot be estimated with traditional reserving 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. Management believes that
Trenwick's exposure to such latent losses is lessened because of its relatively
recent entry into the reinsurance business (other than INSCORP), its low
historical levels of premium volume prior to the application of exclusions for
asbestos and environmental liabilities, its retrocessional programs and the
protection afforded by Trenwick's Contingent Interest Notes due June 30, 2006
(the "Contingent Interest Notes") the payment of which is subject to reduction
in the event of such adverse reserve development related to INSCORP's business.
Reserves for Trenwick's participation in Lloyd's syndicates through its Lloyd's
corporate members are included in the 1999 year end reserves. Part of the
reserve represents reinsurance to close balances brought forward to the open
years of account (for example, 1996 reinsured into the 1997 open year).
Favorable or unfavorable development of the prior year's reserves can influence
the results of the open years of 1997, 1998 and 1999. Consequently, there can be
no assurance as to the adequacy of reserves and the risk of future developments,
both favorable and unfavorable, exists.
12
Trenwick's reserves include an estimate of Trenwick's ultimate liability for
asbestos and environmental claims. The gross and net unpaid claims and claims
expenses for asbestos and environmental claims are as follows:
1999 1998 1997
- - ------------------------------------------------------------------------------------------------
(in thousands)
Unpaid claims and claims expenses gross of
reinsurance recoverable, end of year $ 100,131 $ 8,476 $ 8,924
Unpaid claims and claims expenses, net of
reinsurance recoverable, end of year 72,092 8,428 8,814
Reinsurance recoverable on unpaid claims and
claims expenses, end of year 28,039 48 110
The increase of the gross and net unpaid claims and claims expenses reflect the
inclusion of the reserves related to the Chartwell acquisition. Under Trenwick's
current interpretation of policy language, management does not believe that it
has a material exposure to environmental claims that requires additional
reserves beyond its current estimates.
Contingent Interest Notes
Upon consummation of the acquisition of Chartwell, Trenwick assumed all of
Chartwell's obligations under the Contingent Interest Notes, which were
originally issued by Piedmont Management Company Inc. to its stockholders just
prior to its acquisition by Chartwell in 1995. The Contingent Interest Notes,
which mature on June 30, 2006, are designed to provide Trenwick with protection
against adverse development of INSCORP's reserves for losses and loss adjustment
expenses. In the event there is no adverse development, Trenwick will be
required to pay the holders of the CI Notes approximately $55 million in
contingent interest. This contingent interest payment is in addition to the $1
million principal amount of the Contingent Interest Notes and interest on such
principal amount at 8% per annum (collectively, the "Fixed Amount") which
Trenwick in any event must pay at maturity or earlier redemption of the
Contingent Interest Notes.
In general, assuming the Contingent Interest Notes are settled at maturity, the
contingent interest will be equal to $55 million (a) less an amount equal to (i)
the amount of any adverse development of the loss and loss adjustment expense
reserves and related accounts (including certain reinsurance recoverable,
commissions and unearned premiums) of INSCORP recorded as of March 31, 1995,
minus (ii) $25 million, (b) plus the amount of certain tax benefits received or
recorded by Trenwick as a result of the amount determined pursuant to clause (a)
above. The amount so calculated may not be greater than $55 million nor less
than a minimum amount equal to the lesser of (a) $10 million less the Fixed
Amount and (b) the tax benefits referred to above. In the event that the
Contingent Interest Notes are settled prior to maturity, the foregoing formula
will in general apply, except that the $55 million maximum amount of the
Contingent Interest Notes will be reduced to an amount equal to $55 million
discounted back from June 30, 2006 at a discount rate of 8% per annum,
compounded annually, and the tax benefits will be calculated in a prescribed
manner.
The carrying value of the Contingent Interest Notes on Trenwick's consolidated
financial statements at December 31, 1999 was $34.7 million, representing the
sum of the aggregate principal amount of the Contingent Interest Notes and the
present value as of such date of the maximum amount of contingent interest
payable on the Contingent Interest Notes at their stated maturity in 2006.
During the term of the Contingent Interest Notes, the discounted carrying value
of the Contingent Interest Notes will be increased to reflect accretion of (i)
interest on the principal amount and (ii) the discounted contingent interest. To
the
13
extent that adverse development of INSCORP's reserves (including IBNR reserves)
occurs prior to the maturity or redemption of the Contingent Interest Notes, the
contingent interest payable on the Contingent Interest Notes (and, therefore,
the then-current carrying value of such Contingent Interest Notes) will be
reduced. Such reductions in the carrying value of the Contingent Interest Notes
would offset in part, in the period in which such adverse development occurs,
any reduction in Trenwick's GAAP net income and stockholders' equity resulting
from such adverse reserve development (that would, however, still be reflected
in Trenwick's statutory underwriting results and in the policyholders' surplus
of INSCORP and any parent insurer of INSCORP).
At its option, Trenwick may settle the Contingent Interest Notes with shares of
common stock of Trenwick instead of payment of cash. For purposes of settlement
of the Contingent Interest Notes, such common stock would be valued at 85% of
its average closing market price over a specified period prior to the settlement
date. However, Trenwick may not settle the Contingent Interest Notes in its
common stock unless (i) such stock is registered under the Securities Act of
1933 (or is otherwise freely tradeable other than by certain affiliates of
Trenwick), (ii) such stock is listed on a national securities exchange or the
NASDAQ National Market and (iii) all Contingent Interest Notes are settled in
such common stock. Moreover, Trenwick may not settle the Contingent Interest
Notes in its common stock if the Contingent Interest Notes are being settled
following acceleration thereof due to an event of default under the Contingent
Interest Notes.
Reinsurance and Retrocessional Agreements
Trenwick enters into reinsurance and retrocessional agreements to reduce its net
liability on individual risks, protect against catastrophic losses and maintain
acceptable ratios.
Trenwick America Re has various retrocessional facilities, all of which are on a
treaty basis. These retrocessional facilities include one treaty for Trenwick
America Re's facultative casualty reinsurance business, which applies on a risk
or account basis, and two for its treaty property business, which protect it
against multiple claims arising out of a single occurrence or event. As a result
of these facilities, Trenwick America Re's maximum retention generally does not
exceed $500,000 per occurrence on facultative business and $2,300,000 per
occurrence on property catastrophe business. From 1989 to 1999, Trenwick America
Re has purchased aggregated excess of loss ratio treaties from several
reinsurers. These facilities provided Trenwick with a layer of protection
against adverse results from its domestic casualty business in excess of
specified loss ratios. Trenwick did not purchase an aggregate excess of loss
ratio treaty for 2000.
Trenwick International, as customary with companies operating in the London
market, buys large amounts of reinsurance. Reinsurance and retrocessional
coverage is customized for each class of business. During 1998, following an
increase in its share capital, Trenwick International increased its retention of
business by reducing the amount of reinsurance it buys, principally proportional
reinsurance treaties with its former parent.
Chartwell Managing Agency, as part of its business strategy, has historically
purchased a significant amount of reinsurance for the Lloyd's syndicates it
manages. Reinsurance is generally purchased to protect the syndicates against
extraordinary loss or loss involving one or more underwriting classes. The
amount purchased is determined with reference to the syndicates' aggregate
exposure and potential loss scenarios.
Canterbury Financial Group purchases reinsurance specifically tailored to each
of the specialty programs underwritten by its insurance subsidiaries.
14
In connection with the acquisition of Chartwell by Trenwick, Chartwell's
insurance company subsidiaries purchased an aggregate excess of loss reinsurance
agreement providing up to $100 million in coverage against unanticipated
increases in Chartwell's reserves for business written on or before October 27,
1999, the date of completion of the acquisition of Chartwell. Within the $100
million maximum, the protection is limited to $100 million for increased
reserves attributable to Chartwell's Lloyd's operations, $25 million for
increased reserves attributable to catastrophe and year 2000 losses and $50
million for increased reserves attributable to asbestos and environmental
coverage losses. The aggregate excess of loss reinsurance agreement is not
cancelable by the reinsurers, London Life and Scandanavian Re and their
obligations have been secured by a trust account. The premium payable for this
aggregate excess of loss reinsurance agreement was approximately $56 million.
Trenwick remains liable with respect to insurance and reinsurance ceded in the
event that the insurer or retrocessionaire is unable to meet its obligations.
All reinsurers and retrocessionaires must be formally approved by the operating
company's Security Committee. The Security Committees re-evaluate the financial
condition of Trenwick reinsurers and retrocessionaires at least annually. The
evaluation process involves financial analysis of current audited financial data
and comparative analysis of such data in accordance with guidelines established
by Trenwick. Business may not be conducted with retrocessionaires who are not
currently approved by the Security Committees.
Trenwick America Re's principal retrocessionaires are Zurich Reinsurance,
Continental Casualty Company, Unum Life Insurance Company of America and
National Union Fire Insurance Company. Chartwell Re's principal
retrocessionaires are Centre Reinsurance (Bermuda) Limited and London Life and
Casualty Reinsurance Corp. and Scandinavian Reinsurance Company Limited.
INSCORP's largest reinsurers in 1999 were American Reinsurance company,
Navigators Insurance Company and European International Reinsurance Company
Limited. Trenwick International has two principal retrocessionaires, Lloyds of
London and Transatlantic Re. All these retrocessionaires are rated A (Excellent)
or better by A.M. Best Company. At December 31, 1999, Trenwick had no material
uncollectible amounts due from its retrocessionaires.
Investments
The Investment Committee of Trenwick's Board of Directors oversees investments
and sets procedures and guidelines for investment strategy. Trenwick's internal
staff manage these investments and utilize the services of investment advisers.
Trenwick's investment strategy focuses on capital preservation and income
predictability. This strategy also requires that the risks associated with these
objectives are properly managed. Accordingly, Trenwick emphasizes investment
grade debt investments. At December 31, 1999, 79% of Trenwick's investments in
debt securities were rated Aa or better. In October 1998, certain securities had
their ratings withdrawn by various nationally recognized statistical rating
organizations. The servicer of these securities, Commercial Financial Services,
Inc., filed for protection under Chapter 11 of the Federal Bankruptcy Code in
December 1998. During 1999, Trenwick wrote down the value of these securities by
$5.2 million.
Trenwick's investment strategy permits an allocation for equity securities. At
December 31, 1999, 6% of Trenwick's total investments and cash were invested in
common and preferred equities, which consist primarily of securities issued by
U.S. and United Kingdom corporations. The primary risk associated with these
securities is the exposure to daily market fluctuations.
15
The investments of each of Trenwick's insurance company subsidiaries must comply
with the respective insurance laws of the jurisdiction of domicile of that
insurance company, and of the other jurisdictions in which it is licensed or
authorized. These laws prescribe the kind, quality and concentration of
investments which may be made by insurance companies. In general, these laws
permit investments, within specified limits and subject to certain
qualifications, in federal, state and municipal obligations, corporate bonds,
preferred and common stock, real estate mortgages and real estate. These laws
generally penalize high concentrations of riskier types of assets and high
exposures to certain types of issuers.
Trenwick invests in three types of structured securities, collateralized
mortgage obligations ("CMO"), mortgage-backed securities not backed by U.S.
government agencies ("non-agency MBS") and asset-backed securities ("ABS"), each
accounting for 5%, 5% and 2%, respectively, of Trenwick's portfolio at December
31, 1999.
CMOs consist of planned amortization classes ("PACs") which have been
constructed with a certain amount of call protection and CMOs that have lost
their PAC protection (sometimes called "broken" or "busted" PACs), due to actual
prepayments being significantly higher or lower than originally forecast. These
agency backed CMOs are not subject to credit risk, as all holdings are backed
indirectly or directly by the Federal government or one of its agencies. The
material risk inherent to holding these CMOs is prepayment risk, which relates
to the timing of cash flows that result from amortization, whether it
accelerated, because of lower interest rates and therefore higher than expected
prepayments, or decelerated, because of higher interest rates and therefore
lower than expected prepayments. Changes in principal repayments could
negatively affect investment income due to the timing of the reinvested funds.
Non-agency MBSs are constructed primarily from the securitization of mortgages
on commercial or residential real estate and, lacking any agency backing, are
inherently subject to credit risk. They also have an element of prepayment risk
which is contingent on the structure of each security and its underlying
collateral. 93% of the non-agency MBS issues Trenwick has purchased have a
rating of A or better from various Nationally Recognized Statistical Rating
Organizations.
The asset-backed securities owned by Trenwick have primarily credit card and
home equity receivables as collateral and are subject also to credit risk. These
securities have less cash flow uncertainty than non-agency MBS and CMO issues,
because the issuer has the ability to add in new collateral should the
asset-backed security experience faster prepayments, or in the event of default
on the underlying collateral. 94% of the asset-backed securities owned by
Trenwick are rated A or better by various Nationally Recognized Statistical
Rating Organizations. The remaining 6% include the asset-backed securities
serviced by Commercial Financial Services, Inc. for which ratings have been
withdrawn.
Trenwick also invests in agency pass-through securities which account for 7% of
Trenwick's portfolio at December 31, 1999. As with CMOs, these securities are
subject to prepayment risk.
Trenwick holds debt securities and cash in a number of currencies. At December
31, 1999, approximately 16% of Trenwick's debt securities and cash were held in
U.K. sterling, and the remainder in six other currencies.
16
The table below sets forth the distribution of Trenwick's investments available
for sale at December 31, 1999 by type, maturity and quality rating.
Investments
(dollars in thousands)
Average Estimated
Maturity Fair Amortized
In Years Value Cost
-------- ----- ----
Type (debt securities)
U.S. Government bonds 4.3 $ 114,537 $ 114,839
Obligations of states and political subdivisions(1) 6.3 454,993 460,176
Mortgage-backed and asset-backed securities 8.1 288,535 290,801
Debt securities issued by British government 3.7 115,023 117,165
Debt securities issued by other foreign governments 4.9 54,996 55,436
Public utilities 14.7 20,891 21,229
Corporate securities 8.3 259,446 262,855
Certificates of deposit .2 2,940 2,937
---------- ----------
Total debt securities 6.8 $1,311,361 $1,325,438
========== ==========
Maturity (debt securities)
Due in one year or less .5 94,546 93,913
Due in one year through five years 2.9 544,077 545,161
Due after five years through ten years 7.3 482,652 490,465
Due after ten years 19.1 190,086 195,899
---------- ----------
Total debt securities 6.8 $1,311,361 $1,325,438
========== ==========
Quality (debt securities)
Aaa(2)-U.S. government bonds $ 114,537 $ 114,839
Obligations of states and political subdivisions 349,474 352,936
Mortgage-backed and asset-backed securities 211,980 211,775
Debt securities issued by British government 115,023 117,165
Debt securities issued by other foreign governments 31,402 31,783
Corporate securities 14,585 14,959
Certificates of deposit 1,991 1,988
---------- ----------
838,992 845,445
---------- ----------
Aa(2)-Obligations of states and political subdivisions 77,762 78,661
Mortgage-backed and asset-backed securities 44,554 45,923
Corporate securities 58,250 58,558
Debt securities issued by other foreign governments 16,707 16,715
Public utilities 2,438 2,483
---------- ----------
199,711 202,340
---------- ----------
A(2)-Obligations of states and political subdivisions 16,006 16,232
Mortgage-backed and asset-backed securities 24,522 25,465
Debt securities issued by other foreign governments 6,887 6,938
Public utilities 13,065 13,152
Corporate securities 105,932 106,928
Certificates of deposit 809 809
---------- ----------
167,221 169,524
---------- ----------
Baa(2)-Obligations of states and political subdivisions 11,751 12,347
Mortgage-backed and asset-backed securities 5,983 6,142
Public utilities 4,335 4,469
Corporate securities 56,631 57,476
---------- ----------
78,700 80,434
---------- ----------
Ba(2)-Public utilities 1,053 1,125
Corporate securities 12,543 13,032
---------- ----------
13,596 14,157
---------- ----------
B(2)-Corporate securities 11,143 11,495
---------- ----------
Caa(2)-Corporate securities 138 183
---------- ----------
P1(2)-Certificates of deposits 140 140
---------- ----------
Non-rated Corporate security 224 224
---------- ----------
Withdrawn - Asset-backed securities 1,496 1,496
========== ==========
Total debt securities $1,311,361 $1,325,438
---------- ----------
17
(1) Obligations of states and political subdivisions include $38,240,000
escrowed in U.S. Government Securities, $242,320,000 insured by Municipal
Bond Investors Assurance Corporation, Financial Guaranty Insurance
Company, AMBAC Indemnity Corporation, or Financial Security Assurance
Corporation and $29,940,000 both escrowed and insured.
(2) Quality rating as assigned by Moody's Investors Service, Inc. for all
except certain mortgage-backed securities not backed by U.S. government
agencies and certain asset-backed securities. Quality ratings for these
other securities are as assigned by Fitch Investors Service,
Standard and Poor's or Duff and Phelps. Ratings are generally assigned upon
the issuance of the securities, subject to revision on the basis of ongoing
evaluations.
18
Regulation
Trenwick and its insurance company 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 and the
United Kingdom. These regulations vary from jurisdiction to jurisdiction and are
generally designed to protect ceding insurance companies and policyholders by
regulating Trenwick's financial integrity and solvency in its business
transactions and operations. Many of the insurance statutes and regulations
applicable to Trenwick's subsidiaries relate to reporting and enable regulators
to closely monitor Trenwick's performance. Typical required reports include
information concerning Trenwick's capital structure, ownership, financial
condition, and general business operations.
Trenwick International is subject to the regulatory authority of the United
Kingdom Financial Services Authority. Both Chartwell Managing Agents and
Trenwick's dedicated Lloyd's underwriting entities, as a Lloyd's managing
general agent and Lloyd's corporate members, respectively, are subject to
regulation and supervision by the Council of Lloyd's. Lloyd's operates under a
self-regulatory regime under the Lloyd's Act 1982 and has the power to set,
interpret and change the rules which govern the operation of the Lloyd's market,
subject to regulation for solvency purposes by the Financial Services Authority.
Lloyd's prescribes, in respect of its managing agents and corporate members,
certain minimum standards relating to their management and control, solvency and
various other requirements. In addition, Lloyd's imposes restrictions against
persons becoming controllers and major shareholders of managing agents and
corporate members without the consent of Lloyd's first having been obtained. The
United Kingdom government has established the Financial Services Authority as a
single regulator to supervise securities, banking and insurance business,
including Lloyd's. When the Financial Services and Market Bill becomes law,
probably in late 2000, the Financial Services Authority will have wide
authorization and intervention powers in relation to Lloyd's. A consultation
process has commenced in relation to Lloyd's regulatory framework.
NAIC
The National Association of Insurance Commissioners ("NAIC") is an organization
which assists state insurance supervisory officials in achieving insurance
regulatory objectives, including the maintenance and improvement of state
regulation. From time to time various regulatory and legislative changes have
been proposed in the insurance industry, some of which could have an effect on
reinsurers. Among the proposals that have in the past been or are at present
being considered are the possible introduction of federal regulation in addition
to, or in lieu of, the current system of state regulation of insurers, and
proposals in various state legislatures (some of which proposals have been
enacted) to conform portions of their insurance laws and regulations to various
model acts adopted by the NAIC. Trenwick is unable to predict what effect, if
any, these developments may have on its operations and financial condition. See
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Risk Based Capital
The NAIC has adopted Risk-Based Capital ("RBC") requirements for property and
casualty insurance companies to evaluate the adequacy of statutory capital and
surplus in relation to investment and insurance risks such as asset quality,
asset and liability matching, loss reserve adequacy and other business factors.
The RBC formula is used by state insurance regulators as an early warning tool
to identify, for the purpose of initiating regulatory action, insurance
companies that potentially are inadequately capitalized. In addition, the
formula defines minimum capital standards that supplement the system of low
fixed minimum capital and surplus requirements on a state-by-state basis.
Regulatory compliance is determined by a ratio of the enterprise's regulatory
total adjusted capital to its authorized control level RBC, as defined by the
NAIC. Enterprises below specific trigger points or ratios are classified within
certain levels, each of which
19
requires specific corrective action. The ratios of Total Adjusted Capital to
Authorized Control Level RBC for each of Trenwick's United States insurance
company subsidiaries exceeded all the RBC trigger points at December 31, 1999,
1998 and 1997.
State Insurance Regulation
The premium rates and policy terms of Trenwick's reinsurance agreements
generally are not subject to regulation by any government authority. This
contrasts with Trenwick's property and casualty insurance operations where the
premium rates and policy terms are generally closely regulated by state
insurance departments. As a practical matter, however, the premium rates charged
by insurers may place a limit on the rates which can be charged by reinsurers.
The regulation and supervision to which Trenwick's insurance subsidiaries are
subject relate primarily to the standards of solvency that must be met and
maintained, licensing requirements for reinsurers, the nature of and limitations
on investments, restrictions on the size of risks which may be insured, deposits
of securities for the benefit of insureds or reinsureds, methods of accounting,
periodic examinations of the financial condition and affairs of reinsurers, the
form and content of reports of financial condition required to be filed, and
reserves for unearned premiums, losses and other purposes. In general, such
regulation is for the protection of the insureds and reinsureds, rather than
Trenwick's security holders. Trenwick believes that it is in compliance with all
such material regulations.
Trenwick is subject to regulation under the insurance statutes and insurance
holding company statutes of various states, including Connecticut, New York and
North Dakota, the domicile states of its U.S. insurance companies. These laws
and regulations vary from state to state, but generally require an insurance
holding company, and insurers and reinsurers that are subsidiaries of an
insurance holding company, to register with the state regulatory authorities and
to file with those authorities certain reports including information concerning
their capital structure, ownership, financial condition and general business
operations.
State laws also require prior notice or regulatory agency approval of direct or
indirect changes in control of an insurer, reinsurer or its holding company and
of certain significant intercorporate transfers of assets within the holding
company structure. An investor who acquires securities representing or
convertible into more than 10% of the voting power of the securities of Trenwick
would become subject to at least some of such regulations and would be subject
to approval by the Connecticut, New York and North Dakota Insurance
Commissioners prior to acquiring such shares. Such investor would also be
required to file certain notices and reports with the Insurance Commissioners
prior to such acquisition.
Codification of Statutory Accounting Principles
In March 1998, the NAIC adopted the Codification of Statutory Accounting
Principles ("Codification"). The Codification, which is intended to standardize
regulatory accounting and reporting for the insurance industry, is proposed to
be January 1, 2001. The Codification provides guidance for areas where statutory
accounting has been silent and changes current statutory accounting in some
areas. However, statutory accounting principles will continue to be established
by individual state laws and permitted practices. Effective January 1, 2001, the
states of Connecticut (domicile of Trenwick America Re), Minnesota (domicile of
Chartwell Reinsurance), New York (domicile of INSCORP and ReCor) and North
Dakota (domicile of Dakota) will adopt the Codification. It is uncertain what
effect adoption of the Codification for the preparation of statutory financial
statements would have on those statutory financial statements.
20
Dividends
Because Trenwick's operations are conducted through its operating subsidiaries,
Trenwick 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'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.
Under the applicable provisions of the insurance holding company laws of the
states of domicile of Trenwick America Re, Chartwell Reinsurance and Dakota,
such companies may only pay dividends without the approval of the applicable
state insurance regulator, if such dividends, together with other dividends paid
within the preceding twelve months, are less than the greater of (i) 10% of the
insurer's policyholders' surplus as of the end of the prior calendar year or
(ii) the insurer's statutory net income, excluding realized capital gains, for
the prior calendar year. As a further restriction, the maximum amount of
dividends most U.S. insurers may pay is limited to its earned surplus, also
known as its unassigned funds. Any dividend in excess of the amount determined
pursuant to the foregoing formula would be characterized as an "extraordinary
dividend" requiring the prior approval of the state insurance regulator.
Under New York law, which is applicable to INSCORP and ReCor Insurance Company
Inc. ("ReCor") the maximum ordinary dividend payable in any twelve month period
without the approval of the New York Insurance Department is the lesser of (i)
10% of policyholders surplus as shown on the company's last annual statement or
any more recent quarterly statement or (ii) the company's adjusted net
investment income. Adjusted net investment income is defined as net investment
income for the twelve months preceding the declaration of the dividend plus the
excess, if any, of net investment income over dividends declared or distributed
during the period commencing thirty-six months prior to the declaration or
distribution of the current dividend and ending twelve months prior thereto. In
any case, New York law permits the payment of an ordinary dividend by an insurer
or reinsurer only out of earned surplus.
In addition to the foregoing limitations, the New York Insurance Department, as
is its practice in any change of control situation, required Trenwick to commit
to preclude the acquired New York-domiciled insurers, INSCORP and ReCor, from
paying any dividends for two years after the merger with Chartwell without prior
regulatory approval. The foregoing restriction will expire on October 27, 2001.
Neither INSCORP nor ReCor paid any dividends in 1997, 1998 or 1999.
Moreover, insurance holding company laws generally provide that, notwithstanding
the receipt of any dividend from a subsidiary insurer, an insurer may make
dividend payments to its parent only to the extent it is permitted to do so
under its applicable dividend restrictions. In other words, the ability of a
subsidiary insurer to pay dividends without restriction may be impaired if its
parent insurer cannot pay dividends without restriction.
The maximum dividend permitted by law may not be indicative of an insurer's
actual ability to pay dividends, which may be constrained by business and other
regulatory considerations, such as the impact of dividends on surplus, which
could affect an insurer's ratings or competitive position, the amount of
premiums that can be written and the ability to pay future dividends.
Furthermore, beyond the limits described in the preceding paragraph, insurance
regulatory authorities often have the discretion to limit the payment of
dividends by insurance companies domiciled in their jurisdictions.
In 2000, of Trenwick's U.S. insurance subsidiaries, only Dakota could pay a
dividend or other distribution without prior approval of the applicable
insurance regulatory authority. In 2000, Dakota Specialty could pay a dividend
of $2.8 milion without prior approval. During 1999, 1998 and 1997, Trenwick
America Re paid dividends of $53.4 million, $30.1
21
million and $8.3 million,respectively. Chartwell Reinsurance paid dividends of
$30.3 million in 1999 and $3.0 million in 1997. Chartwell Reinsurance did not
pay any dividends in 1998. None of Trenwick's other U.S. insurance subsidiaries
paid any dividends in 1999, 1998 or 1997.
Under the applicable laws of the United Kingdom, Trenwick's U.K. subsidiaries
may make shareholder distributions only from accumulated realized profits, net
of accumulated realized losses. In addition, under the UK Insurance Companies
Act, Trenwick International is not permitted to make any distribution that would
reduce its net assets below the required minimum margin of solvency which, as
determined under the U.K. Financial Service Authority's rules, is approximately
$16.7 million as of December 31, 1999. Trenwick International must also notify
the United Kingdom Financial Services Authority of any proposal to declare or
pay a dividend on any of its share capital. Under Lloyd's regulations, Chartwell
Managing Agents is not permitted to make any distribution that would cause its
assets to fall below any of Chartwell Managing Agents' share capital, minimum
net current asset margin or minimum net asset margin. As of December 31, 1999,
the highest of the three tests required Chartwell Managing Agents to maintain
approximately $1.1 million of capital.
Investment Limitations
Connecticut, New York and North Dakota laws and regulations govern the types and
amounts of investments which are permissible for Trenwick's insurance company
subsidiaries. These rules are designated to ensure the safety and liquidity of
the insurers' investment portfolio. In general, these rules permit insurers to
purchase only investments which are interest bearing, interest accruing,
entitled to dividends or otherwise income earning and not then in default in any
respect, and insurers must be entitled to receive for its exclusive account and
benefit the interest or income accruing thereon. No security or investment is
eligible for purchase at a price above its fair value or market value. In
addition, these rules require investments by Trenwick to be diversified. The
U.K. Financial Services Authority governs the types and amounts of investments
which are permissible for insurers in the United Kingdom, including Trenwick
International. Likewise, Lloyd's regulations govern the types and amounts of
investments that are permissible for Chartwell Managing Agents to make with the
assets of the Lloyd's syndicates that it manages. These laws penalize high
concentrations of riskier types of assets and high exposures to certain types of
issuers. Trenwick believes that it is in compliance with all material applicable
investment laws.
Employees
At December 31, 1999, Trenwick employed a total of 124 and 284 persons in its
domestic and international operations, respectively. Trenwick has no employees
represented by a labor union and believes that its employee relations are good.
Item 2. Properties
Trenwick's corporate headquarters and Trenwick America Re's offices are located
in approximately 46,000 total square feet of leased office space at One
Canterbury Green, Stamford, Connecticut. In connection with the acquisition of
Chartwell, Trenwick assumed a lease of approximately 53,000 square feet of space
at Four Stamford Plaza in Stamford, Connecticut. Chartwell Managing Agents
leases approximately 39,000 square feet of space in London, England and Trenwick
International leases office space in London, England and Paris, France.
Management believes Trenwick's current office space is adequate for its needs.
See Note 8 of Notes to the Consolidated Financial Statements of Trenwick.
22
Item 3. Legal Proceedings
Trenwick is party to various legal proceedings generally arising in the normal
course of its business. Trenwick does not believe that the eventual outcome of
any such proceeding will have a material effect on its financial condition or
business. Trenwick's subsidiaries are regularly engaged in the investigation and
the defense of claims arising out of the conduct of their business. Pursuant to
Trenwick's insurance and reinsurance arrangements, disputes are generally
required to be finally settled by arbitration.
Item 4. Submission of Matters to a Vote of Security Holders
A special meeting of stockholders of Trenwick was held in Old Greenwich,
Connecticut on October 7, 1999. Shareholders holding 8,680,216 shares of
Trenwick's common stock, 82.8% of the then outstanding shares, were represented
in person or by proxy.
The proposal to adopt the merger agreement between Trenwick and Chartwell and
approve the merger of Chartwell with and into Trenwick and the issuance of
Trenwick common stock to Chartwell stockholders upon completion of the merger
was approved: 7,881,754 shares voted in favor; 7,884 shares voted against; and
1,155 shares abstained (including broker non-votes).
The proposal to amend Trenwick 1993 Stock Option Plan to increase the aggregate
number of shares of Common Stock subject to awards under such plan by 125,000
shares was approved: 7,584,123 shares voted in favor; 294,381 shares voted
against; and 801,712 shares abstained (including broker non-votes).
23
PART II
Item 5. Market for Corporation's Common Stock and Related Stockholder Matters
As of October 28, 1999, Trenwick Common Stock commenced trading on the New York
Stock Exchange under the ticker symbol TWK. Prior to such date, Trenwick Common
Stock traded on the NASDAQ National Market System under the ticker symbol TREN.
The following table sets forth for the periods presented below, the high and low
sales price of the Trenwick Common Stock as reported by the NASDAQ through
October 27, 1999 and as reported by the NYSE from October 28, 1999 through
December 31, 1999. On March 27, 2000, the last reported sales price of Trenwick
Common Stock on the NYSE was $13.81 per share.
Year ended December 31, 1998 High Low
---- ---
First Quarter $38.00 $33.75
Second Quarter 41.75 35.50
Third Quarter 39.50 28.00
Fourth Quarter 34.50 27.31
Year ended December 31, 1999
First Quarter 35.00 25.50
Second Quarter 31.94 24.66
Third Quarter 25.06 16.56
Fourth Quarter 21.25 14.75
There were 327 holders of record and in excess of 2,700 beneficial owners of
Trenwick Common Stock as of March 24, 2000.
Trenwick paid a quarterly cash dividend of $.25 per share in each quarter of
1998 and a quarterly cash dividend of $.26 per share in each quarter of 1999.
The declaration and payment of future dividends will be at the discretion of
Trenwick's Board of Directors and is subject to certain legal, regulatory and
other restrictions. For a description of restrictions on Trenwick's ability to
pay dividends, reference is made to Item 1, Business - Regulation, Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Item 8, Note 12 of Notes to the Consolidated Financial Statements
of Trenwick.
24
Item 6. Selected Financial Data
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(in thousands except per share data)
Statement of Operations Data
Net premiums written $ 354,610 $ 250,219 $ 195,230 $ 226,364 $ 197,162
=========== =========== =========== =========== ===========
Net premiums earned $ 325,114 $ 245,561 $ 190,156 $ 211,069 $ 177,394
Net investment income 66,394 56,316 48,402 41,226 36,828
Net realized investment gains 1,916 9,016 2,304 299 368
Other income 861 421 10 -- --
----------- ----------- ----------- ----------- -----------
Total revenues $ 394,285 $ 311,314 $ 240,872 $ 252,594 $ 214,590
=========== =========== =========== =========== ===========
Net income (loss) $ (11,048) $ 34,792 $ 35,252 $ 33,848 $ 29,841
=========== =========== =========== =========== ===========
Per Share Data
Basic Earnings
Income (loss) before extraordinary item $ (.94) $ 2.99 $ 3.12 $ 3.40 $ 3.09
=========== =========== =========== =========== ===========
Net income (loss) $ (.94) $ 2.99 $ 3.03 $ 3.40 $ 3.09
=========== =========== =========== =========== ===========
Weighted average shares outstanding 11,762 11,657 11,645 9,959 9,674
=========== =========== =========== ===========
Diluted earnings
Income (loss) before extraordinary item $ (.94) $ 2.95 $ 3.01 $ 2.85 $ 2.59
=========== =========== =========== =========== ===========
Net income (loss) $ (.94) $ 2.95 $ 3.01 $ 2.85 $ 2.59
=========== =========== =========== =========== ===========
Weighted average shares outstanding 11,762 11,779 12,265 13,352 13,149
=========== =========== =========== =========== ===========
Dividends $ 1.04 $ 1.00 $ .97 $ .83 $ .75
=========== =========== =========== =========== ===========
Balance Sheet Data
Investments and cash $ 1,749,859 $ 1,005,211 $ 864,324 $ 754,210 $ 653,704
Total assets 3,240,599 1,392,261 1,085,956 920,804 820,930
Unpaid claims and claims expenses 1,964,139 682,428 518,387 467,177 411,874
Long term debt 248,905 75,000 -- 103,500 103,500
Company obligated mandatorily
redeemable preferred capital
securities of subsidiary trust
holding solely junior subordinated
debentures of Trenwick 110,000 110,000 110,000 -- --
Common stockholders' equity 462,249 348,029 357,649 265,753 240,776
Shares of common stock outstanding 16,889 11,051 11,951 10,088 9,886
Book value per share $ 27.37 $ 31.49 $ 29.93 $ 26.34 $ 24.36
25
Amounts for 1999 reflect the results of Chartwell and its subsidiaries,
accounted for as a purchase, from October 27, 1999, the date of acquisition.
Amounts for 1998 reflect the results of Trenwick International, accounted for as
a purchase, from February 27, 1998, the date of acquisition.
All share and per share information reflects a 3 for 2 stock split, paid on
April 15, 1997.
The earnings per share amounts have been restated to comply with the accounting
standard, "Earnings per Share"
26
CERTAIN FINANCIAL RATIOS
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
GAAP Combined ratio 119.4% 102.3% 96.5% 95.8% 95.6%
Net premiums written to statutory surplus
ratio 0.62:1 0.77:1 0.55:1 0.85:1 0.82:1
Unpaid claims and claims expenses to
statutory surplus ratio 1.75:1 1.96:1 1.45:1 1.76:1 1.71:1
The other information called for by this item can be found in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Item 8, Financial Statements and Supplementary Data.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information called for by this item can be found in Trenwick's 1999 Annual
Report to Stockholders under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and is incorporated herein by
reference.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
This information called for by this item can be found in Trenwick's 1999 Annual
Report to Stockholders under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data
The information called for by this item can be found in Trenwick's 1999 Annual
Report to Stockholders immediately following the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and to
the items included in Item 14(a) of this report, and is incorporated herein by
reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers
The information called for by Item 10 is incorporated herein by reference to the
sections captioned "Board of Directors", "Management", and "Executive
Compensation" of Trenwick's proxy statement for its 2000 Annual Meeting of
Stockholders (the "Proxy Statement").
27
Item 11. Executive Compensation
The information called for by Item 11 is incorporated herein by reference to the
section captioned "Executive Compensation" of the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information called for by Item 12 is incorporated herein by reference to the
section captioned "Principal Stockholders" of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information called for by Item 13 is incorporated herein by reference to the
section captioned "Election of Directors" of the Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents
(1)&(2) The Financial Statements, Schedules and the Report of Independent
Accountants on the Financial Statement Schedules, listed in the
accompanying index on Page 34, are filed as part of this Report.
(3) Exhibits
3.1 Restated Certificate of Incorporation of Trenwick with
Certificates of Amendment thereto. Incorporated by reference to
Exhibit 3.1 to Trenwick's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 (File No. 0-14737).
3.2 (a) Certificate of Elimination amending Trenwick's Restated
Certificate of Incorporation to eliminate all reference
to Series A Junior Participating Preferred Stock.
Incorporated by reference to Exhibit 3.1(a) to
Trenwick's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997 (File No. 1-15389).
(b) Certificate of Designation amending the Restated
Certificate of Incorporation of Trenwick to create
Series B Junior Participating Preferred Stock.
Incorporated by reference to Exhibit 3.2(b) to
Trenwick's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997 (File No. 1-15389).
3.3 Trenwick's By-laws. Incorporated by reference to Exhibit 3.2 to
Trenwick's Registration Statement on Form S-1 (File No.
33-5085).
4.1 Rights Agreement, dated as of September 24, 1997, between
Trenwick and First Chicago Trust Company of New York including,
as Exhibit A thereto, a form of Rights Certificate. Incorporated
by reference to Exhibit 1 to Trenwick's Form 8-A filed September
24, 1997 (File No. 1-15389).
28
4.2 Amendment No. 1 to Rights Agreement, dated as of December 19,
1999, between Trenwick and First Chicago Trust Company of New
York. Incorporated by reference to Exhibit 1 to Trenwick's Form
8-A filed January 13, 2000 (File No. 1-15389).
4.3 (a) Indenture dated as of January 31, 1997, between The
Chase Manhattan Bank and Trenwick. Incorporated by
reference to Exhibit 4.2(a) to Trenwick's Annual Report
on Form 10-K for the year ended December 31, 1996 (File
No. 0-14737).
(b) Amended and Restated Declaration of Trust of Trenwick
Capital Trust I dated as of January 31, 1997.
Incorporated by reference to Exhibit 4.2(b) to
Trenwick's Annual Report on Form 10-K for the year ended
December 31, 1996 (File No. 0-14737).
(c) Exchange Capital Securities Guarantee Agreement dated as
of July 25, 1997, between Trenwick and The Chase
Manhattan Bank, as Trustee. Incorporated by reference to
Exhibit 4.7 to Trenwick's Registration Statement on Form
S-4 (File No. 333-28707).
4.4 Indenture dated as of March 27, 1998 between Trenwick and The
First National Bank of Chicago, as Trustee, with respect to
Trenwick's $75 million principal amount of 6.7% Senior Notes due
April 1, 2003, incorporated by reference to Exhibit 4.2 to
Trenwick's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998 (File No. 1-15389).
4.5 Indenture, dated as of March 17, 1994, between Chartwell Re
Corporation and Bankers Trust Company, as Trustee, for the 10
1/4% Senior Notes due 2004. Incorporated by reference to Exhibit
4.1 to Chartwell Re Corporation's Registration Statement on Form
S-1 (File No. 33-75386).
4.6 First Supplemental Indenture, dated as of December 12, 1995,
among Chartwell Re Corporation, Chartwell Re Holdings
Corporation and Bankers Trust Company, as Trustee, for the 10
1/4Senior Notes due 2004. Incorporated by reference to Exhibit
4.3 to Chartwell Re Corporation's Registration Statement on Form
S-1 (File No. 333-678).
4.7 Second Supplemental Indenture, dated as of December 12, 1995,
between Chartwell Re Holdings Corporation and Bankers Trust
Company, as Trustee, for the 10 1/4 Senior Notes due 2004.
Incorporated by reference to Exhibit 4.4 to Chartwell Re
Corporation's Registration Statement on Form S-1 (File No.
333-678).
4.8 Indenture, dated as of December 1, 1995, between Chartwell Re
Corporation, as the successor to Piedmont Management Company
Inc., and Fleet Bank, as Trustee, for the Contingent Interest
Notes due June 30, 2006. Incorporated by reference to Exhibit
4.5 to Chartwell Re Corporation's Registration Statement on Form
S-1 (File No. 333-678).
4.9 First Supplemental Indenture, dated as of December 13, 1995,
among Piedmont Management Company, Chartwell Re Corporation and
Fleet Bank, as Trustee under the Contingent Interest Notes due
June 30, 2006. Incorporated by reference to Exhibit 4.6 to
Chartwell Re Corporation's Registration Statement on Form S-1
(File No. 333-678).
29
10.1 Credit Agreement, dated as of November 24, 1999, among Trenwick,
various lending institutions, First Union National Bank, as
Syndication Agent, Fleet National Bank, as Documentation Agent,
and Chase Manhattan Bank, as Administrative Agent.
10.2 Amendment No. 1 to Credit Agreement, dated as of December 31,
1999 among Trenwick, various lending institutions, First Union
National Bank, as Syndication Agent, Fleet National Bank, as
Documentation Agent, and Chase Manhattan Bank, as Administrative
Agent.
10.3 Stockholders Agreement, dated as of December 13, 1995, between
Chartwell Re Corporation and the security holders named in the
schedule of holders attached thereto. Incorporated by reference
to Exhibit 10.3 to Chartwell Re Corporation's Registration
Statement on Form S-1 (File No. 333-678).
10.4 Registration Rights Agreement, dated as of December 13, 1995,
between Chartwell Re Corporation and the security holders named
in the schedule of holders attached thereto. Incorporated by
reference to Exhibit 10.4 to Chartwell Re Corporation's
Registration Statement on Form S-1 (File No. 333-678).
10.5 Common Stock Purchase Warrant, dated March 6, 1992, issued by
Chartwell Re Corporation to Wand Partners (Chartwell) L.P.
Incorporated by reference to Exhibit 10.34 to Chartwell Re
Corporation's Registration Statement on Form S-1 (File No.
33-75386).
10.6 Common Stock Purchase Warrant, dated December 31, 1992, issued
by Chartwell to Wand Partners (Chartwell) L.P. Incorporated by
reference as Exhibit 10.35 to Chartwell Re Corporation's
Registration Statement on Form S-1 (File No. 33-75386).
10.7 Common Stock Purchase Warrant, dated December 31, 1992, issued
by Chartwell to John Sagan. Incorporated by reference to Exhibit
10.36 to Chartwell Re Corporation's Registration Statement on
Form S-1 (File No. 33-75386).
10.8 Form of Common Stock Purchase Warrants, dated March 17, 1994,
issued by Chartwell Re Corporation to Wand/Chartwell Investments
L.P. and to the holders of the Series A Stock, the Series B
Stock and the Series C Stock of Chartwell Re Corporation.
Incorporated by reference to Exhibit 4.2 to Chartwell Re
Corporation's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1994 (File No. 1-12502).
10.9 Trenwick 1989 Stock Plan, as amended through August 3, 1993.
Incorporated by reference to Exhibit 10.8 to Trenwick's Annual
Report on Form 10-K for the year ended December 31, 1994 (File
No. 0-14737).*
10.10 Trenwick 1993 Stock Option Plan, as amended through May 21,
1998. Incorporated by reference to Appendix A to Trenwick's
Proxy Statement for the 1998 Annual Meeting of Stockholders
(File No. 1-15389).*
10.11 Trenwick 1993 Stock Option Plan for Non-Employee Directors.
Incorporated by reference to Exhibit 10.2 to Trenwick's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1994 ( File No. 0-14737).*
10.12 Trenwick Unfunded Supplemental Executive Retirement Plan, as
amended through December 14, 1993. Incorporated by reference to
Exhibit 10.14 to Trenwick's Annual Report on Form 10-K for the
year ended December 31, 1994 (File No. 0-14737).*
30
10.13 Leased Automobile Policy for executive officers. Incorporated by
reference to Exhibit 10.5 to Trenwick's Annual Report on Form
10-K for the year ended December 31, 1998. (File No. 1-15389).*
10.14 Description of life insurance and long-term disability insurance
coverage for executive officers. Incorporated by reference to
Exhibit 10.16 to Trenwick's Annual Report on Form 10-K for the
year ended December 31, 1994 (File No. 0-14737).*
10.15 Trenwick Directors Deferred Compensation Plan. Incorporated by
reference to Exhibit 10.17 to Trenwick's Annual Report on Form
10-K for the year ended December 31, 1994 (File No. 0-14737).*
10.16 Description of Trenwick Directors Retirement Plan. Incorporated
by reference to Exhibit 10.18 to Trenwick's Annual Report on
Form 10-K for the year ended December 31, 1994 (File No.
0-14737).*
10.17 Declaration of Trust dated December 10, 1996, as amended through
September 9, 1997, establishing a retirement plan for certain
employees of Trenwick Management Services Limited. Incorporated
by reference to Exhibit 10.9 to Trenwick's Annual Report on Form
10-K for the year ended December 31, 1998. (File No. 1-15389).*
10.18 1993 Stock Option Plan of Chartwell Re Corporation. Incorporated
by reference to Exhibit 10.14 to Chartwell Re Corporation's
Registration Statement on Form S-4 (File No. 33-97010).*
10.19 Chartwell Re Corporation 1996 Non-Employee Director Stock Option
Plan. Incorporated by reference to Exhibit 4(c) to Chartwell Re
Corporation's Registration Statement on Form S-8 (File No.
333-12203).*
10.20 Chartwell Re Corporation 1997 Omnibus Stock Incentive Plan.
Incorporated by reference to Exhibit A to Chartwell Re
Corporation's Definitive Proxy Statement on Schedule 14A filed
with the Securities and Exchange Commission on April 11, 1997.
(File No. 1-12502).*
10.21 Employment Agreement, dated as of March 31, 1993, between
Chartwell Re Corporation and Steven J. Bensinger . Incorporated
by reference to Exhibit 10.20 to Chartwell Re Corporation's
Registration Statement on Form S-1 (File No. 33-75386).*
10.22 Fourth Amendment to the Employment Agreement, dated as of
December 31, 1997, between Chartwell Re Corporation and Steven
J. Bensinger. Incorporated by reference to Exhibit 10.34 to
Chartwell Re Corporation's Annual Report on Form 10-K for the
year ended December 31, 1997 (File No. 1-12502).*
10.23 Fifth Amendment to the Employment Agreement, dated as of August
4, 1998, between Chartwell Re Corporation and Steven J.
Bensinger. Incorporated by reference to Exhibit 10.23 to
Chartwell Re Corporation's Annual Report on Form 10-K for the
year ended December 31, 1998 (File No. 1-12502).*
10.24 Sixth Amendment to the Employment Agreement, dated as of
December 30, 1998, between Chartwell Re Corporation and Steven
J. Bensinger. Incorporated by reference to Exhibit 10.26 to
Chartwell Re Corporation's Annual Report on Form 10-K for the
year ended December 31, 1998 (File No. 1-12502).*
31
10.25 Employment Assumption and Amendment Agreement, dated as of
October 25, 1999, between Trenwick and Steven J. Bensinger.*
10.26 Service Agreement, dated October 26, 1995, between Sorema
Underwriting Management Limited, Sorema (UK) Reinsurance Limited
and Russell John English, as amended by the Deed of Waiver,
dated February 27, 1998.*
10.27 Change of Control Agreement, dated November 3, 1999, between
Trenwick and James F. Billett, Jr.*
10.28 Form of Change of Control Agreement, dated November 3, 1999,
between Trenwick and senior officers of Trenwick.*
10.29 Office lease between Trenwick and EOP-Canterbury Green, L.L.C.
dated as of January 29, 1998, with respect to office space in
Stamford, Connecticut. Incorporated by reference to Exhibit
10.16 to Trenwick's Annual Report on Form 10-K for the year
ended December 31, 1997 (File No. 1-15389).
10.30 First Amendment dated as of March 31, 1998, to office lease
between Trenwick and EOP-Canterbury Green L.L.C. dated January
29, 1998. Incorporated by reference to Exhibit 10.11 to
Trenwick's annual Report on Form 10-K for the year ended
December 31, 1998 (File No. 1-15389).
10.31 Office Lease Agreement between AML-Four Stamford Plaza Limited
Partnership and Chartwell Re Corporation, dated March 29, 1996,
of the premises located at Four Stamford Plaza, Stamford,
Connecticut.
10.32 Lease of the premises located at 2 Minster Court, London,
England, by and between Chartwell UK Management Services Limited
(as Tenant) and The Prudential Assurance Company Limited (as
Landlord).
10.33 Underlease between Wereldhave Property Corporation PLC and
predecessors of Trenwick Management Services Limited dated May
22, 1991, with respect to office space located at 16 Eastcheap,
London, England. Incorporated by reference to Exhibit 10.12 to
Trenwick's Annual Report on Form 10-K for the year ended
December 31, 1998 (File No. 1-15389).
10.34 Coinsured Aggregate Excess of Loss Reinsurance Agreement between
Trenwick and Centre Reinsurance Company of New York.
Incorporated by reference to Exhibit 10.28 to Trenwick's Annual
Report on Form 10-K for the year ended December 31, 1994 (File
No. 0-14737).
10.35 Aggregate Excess of Loss Ratio Cover between Trenwick and
Continental Casualty Company. Incorporated by reference to
Exhibit 10.22 to Trenwick's Annual Report on Form 10-K for the
year ended December 31, 1995 (File No. 0-14737).
10.36 1996 Coinsured Aggregate Excess of Loss Reinsurance Agreement
between Trenwick and Centre Reinsurance Company of New York and
CNA Re. Incorporated by reference to Exhibit 10.33 to Trenwick's
Annual Report on Form 10-K for the year ended December 31, 1996
(File No. 0-14737).
32
10.37 First and Second Coinsured Aggregate Excess of Loss Reinsurance
Agreement between Trenwick and Centre Reinsurance Company of New
York and CNA Re. Incorporated by reference to Exhibit 10.31 to
Trenwick's Annual Report on Form 10-K for the year ended
December 31, 1997 (File No. 1-15389).
10.38 1998 Coinsured Aggregate Excess of Loss Reinsurance Agreement
between Trenwick and Centre Reinsurance Company of New York and
National Union. Incorporated by reference to Exhibit 10.27 to
Trenwick's Annual Report on Form 10-K for the year ended
December 31, 1998 (File No. 1-15389).
10.39 1999 Coinsured Aggregate Excess of Loss Reinsurance Agreement
between Trenwick and Centre Insurance Company and National
Union.
10.40 Aggregate Excess of Loss Reinsurance Agreement, dated as of
October 27, 1999, by and between Chartwell Reinsurance Company,
Dakota Specialty Insurance Company, The Insurance Corporation of
New York and Drayton Company Limited, inclusive of corporate
capital support of London underwriting operations, and London
Life and Casualty Reinsurance Corporation and Scandinavian
Reinsurance Company, Ltd.
12.1 Computation of Ratios.
13.1 Excerpts from Trenwick's 1999 Annual Report to Stockholders
expressly incorporated by reference in this Form 10-K.
21.1 List of Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule.
*Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
A Report on Form 8-K was filed on December 22, 1999, which stated that
Trenwick and the LaSalle Re Holdings Limited had entered into an
Agreement, Scheme of Arrangement, Plan of Merger and Plan of
Reorganization, dated as of December 19, 1999, and that in connection
with this Agreement, Trenwick and LaSalle Re Holdings Limited had
entered into Stock Option Agreement with each other, each dated December
19, 1999 and Trenwick and certain shareholders of LaSalle Re Holdings
Limited and LaSalle Re Limited had entered into a Shareholders
Agreement. The Report on Form 8-K also stated that Trenwick and LaSalle
Re Holdings Limited had issued a joint press release announcing the
signing of the agreements.
33
SIGNATURES
Pursuant to the Requirements of Section 13 or 15(d) of Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
TRENWICK GROUP INC.
(Registrant)
By /s/ James F. Billett, Jr.
---------------------------------
James F. Billett, Jr.
Chairman, President and
Chief Executive Officer
Dated: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- - --------- ----- ----
/s/James F. Billett, Jr. Chairman of the Board, March 30, 2000
- - ------------------------------- President and Chief
James F. Billett, Jr. Executive Officer and
Director (Principal
Executive Officer)
/s/Alan L. Hunte Vice President and March 30, 2000
- - ------------------------------- Treasurer (Principal
Alan L. Hunte Financial Officer and
Accounting Officer)
/s/W. Marston Becker Director March 30, 2000
- - -------------------------------
W. Marston Becker
/s/Anthony S. Brown Director March 30, 2000
- - -------------------------------
Anthony S. Brown
/s/Richard E. Cole Director March 30, 2000
- - -------------------------------
Richard E. Cole
34
/s/Robert M. DeMichele Director March 30, 2000
- - -------------------------------
Robert M. De Michele
/s/Neil Dunn Director March 30, 2000
- - -------------------------------
Neil Dunn
/s/Frank E. Grzelecki Director March 30, 2000
- - -------------------------------
Frank E. Grzelecki
/s/P. Anthony Jacobs Director March 30, 2000
- - -------------------------------
P. Anthony Jacobs
/s/Joseph D. Sargent Director March 30, 2000
- - -------------------------------
Joseph D. Sargent
/s/Frederick D. Watkins Director March 30, 2000
- - -------------------------------
Frederick D. Watkins
/s/Stephen R. Wilcox Director March 30, 2000
- - -------------------------------
Stephen R. Wilcox
35
TRENWICK GROUP INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Pages
-----
Financial Statements:
Report of Independent Accountants
on Consolidated Financial Statements........................................................... *
Consolidated Balance Sheet at December 31, 1999 and 1998 ...................................... *
Consolidated Statement of Income and Comprehensive Income
for the years ended December 31, 1999, 1998 and 1997...................................... *
Consolidated Statement of Changes in Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997...................................... *
Consolidated Statement of Cash Flows
for the years ended December 31, 1999, 1998 and 1997...................................... *
Notes to Consolidated Financial Statements..................................................... *
Financial Statement Schedules:
II - Condensed Financial Information of Registrant ..................................... S-1-S-3
III - Supplementary Insurance Information ............................................... S-4
IV - Valuation and Qualifying Accounts.................................................. S-5
Report of Independent Accountants on Financial Statement
Schedules .................................................................................. S-6
* Incorporated by reference to Trenwick's 1999 Annual Report to Stockholders.
Schedules other than those listed above are omitted since they are either not
required or are not applicable or the information required is presented in the
consolidated financial statements, including the notes thereto.
TRENWICK GROUP INC. AND SUBSIDIARIES
SCHEDULE II-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
TRENWICK GROUP INC.
BALANCE SHEET
(Parent Company Only)
December 31,
1999 1998
-------- --------
(in thousands)
Assets:
Investments in consolidated subsidiaries $607,343 $532,069
Cash and cash equivalents 2,331 523
Due from consolidated subsidiaries 177 4,287
Deferred debt issuance costs 6,388 2,463
Accrued investment income 128 125
Net deferred income taxes 15,000 4,198
Goodwill 153,824 1,605
Other assets 17,578 9
-------- --------
Total assets $802,769 $545,279
======== ========
Liabilities:
6.70% Senior notes due 2003 $ 75,000 $ 75,000
Junior subordinated debentures 113,403 113,403
Contingent interest notes 34,699 --
Due to consolidated subsidiaries 10,965 2,700
Accrued interest expense 5,497 5,424
Chase syndicated senior credit facilities 94,501 --
Other liabilities 6,455 723
-------- --------
Total liabilities 340,520 197,250
Stockholders' equity 462,249 348,029
-------- --------
Total liabilities and stockholders' equity $802,769 $545,279
======== ========
S-1
TRENWICK GROUP INC. AND SUBSIDIARIES
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT-(continued)
TRENWICK GROUP INC.
STATEMENT OF INCOME
(Parent Company Only)
Year ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
Revenues:
Consolidated subsidiary dividends $ 46,100 $ 26,600 $ 8,250
Net investment income 358 1,500 4,974
Net realized investment gains -- 778 --
Other income 1 12 --
-------- -------- --------
Total revenues 46,459 28,890 13,224
Interest and operating expenses 16,938 13,950 10,090
Amortization expense 1,423 33 --
Income before income taxes, equity in undistributed
income of unconsolidated subsidiaries and
extraordinary item 28,098 14,907 3,134
Income tax benefit (5,077) (3,942) (1,239)
-------- -------- --------
Income before equity in undistributed income of
consolidated subsidiaries 33,175 18,849 4,373
Equity in undistributed income (loss) of consolidated
subsidiaries (44,223) 15,943 31,916
-------- -------- --------
Income (loss) before extraordinary loss on
debt redemption (11,048) 34,792 36,289
Extraordinary loss on debt redemption, net of $558
income tax benefit -- -- 1,037
-------- -------- --------
Net income (loss) $(11,048) $ 34,792 $ 35,252
========= ======== ========
S-2
TRENWICK GROUP INC. AND SUBSIDIARIES
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT-(continued)
TRENWICK GROUP INC.
STATEMENT OF CASH FLOWS
(Parent Company Only)
Year ended December 31,
-----------------------------------------------
1999 1998 1997
--------- --------- ---------
(in thousands)
Cash flows from operating activities:
Dividends and net investment income received $ 46,466 $ 28,548 $ 12,642
Interest and operating expenses paid (14,979) (11,786) (4,983)
Income taxes received 3,669 5,035 794
--------- --------- ---------
Cash provided by operating activities 35,156 21,797 8,453
--------- --------- ---------
Cash flows from investing activities:
Purchases of debt securities -- (16,637) (72,932)
Sales of debt securities -- 88,190 --
Maturities of debt securities -- 911 16,050
Investment in subsidiaries (57,474) (130,582) (3,403)
--------- --------- ---------
Cash used for investing activities (57,474) (58,118) (60,285)
--------- --------- ---------
Cash flows from financing activities:
Issuance of senior notes -- 75,000 --
Issuance of junior subordinated debentures -- -- 113,403
Issuance costs of senior notes and capital securities (4,055) (922) (1,669)
Long term debt proceeds 94,473 -- --
Redemption of convertible debentures -- -- (46,997)
Issuance of common stock -- 1,536 956
Repurchase of common stock (44,604) (34,880) (171)
Dividends paid (12,787) (11,698) (11,546)
Intercompany loans (8,901) 2,700 --
--------- --------- ---------
Cash provided by financing activities 24,126 31,736 53,976
--------- --------- ---------
Change in cash and cash equivalents 1,808 (4,585) 2,144
Cash and cash equivalents, beginning of year 523 5,108 2,964
--------- --------- ---------
Cash and cash equivalents, end of year $ 2,331 $ 523 $ 5,108
========= ========= =========
S-3
TRENWICK GROUP INC. AND SUBSIDIARIES
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
(in thousands)
1999 1998 1997
--------- ------- -------
Deferred policy acquisition costs Trenwick America Re $34,757 $21,023 $22,524
Canterbury Financial Group 3,215 -- --
Trenwick International 19,982 14,238 --
Chartwell Managing Agents 20,942 -- --
--------- ------- -------
78,896 35,261 22,524
Unpaid claims and claim expenses Trenwick America Re 1,201,954 546,292 518,387
Canterbury Financial Group 142,215 -- --
Trenwick International 164,264 136,136 --
Chartwell Managing Agents 455,706 -- --
--------- ------- -------
1,964,139 682,428 518,387
Unearned premium income Trenwick America Re 110,909 75,206 87,020
Canterbury Financial Group 63,133
Trenwick International 100,336 76,845 --
Chartwell Managing Agents 105,306
--------- ------- -------
379,684 152,051 87,020
Net premiums earned Trenwick America Re 166,906 174,443 190,156
Canterbury Financial Group 10,343
Trenwick International 107,911 71,118 --
Chartwell Managing Agents 39,954
--------- ------- -------
325,114 245,561 190,156
Net Investment Income Trenwick America Re 49,315 44,490 43,692
Canterbury Financial Group 1,722
Trenwick International 11,253 10,614 --
Chartwell Managing Agents 3,845
Unallocated 259 1,212 4,710
--------- ------- -------
66,394 56,316 48,402
Claims and claims expenses incurred Trenwick America Re 130,603 105,478 109,554
Canterbury Financial Group 5,766
Trenwick International 80,866 47,657 --
Chartwell Managing Agents 37,303
--------- ------- -------
254,538 153,135 109,554
Policy acquisition costs Trenwick America Re 61,633 58,310 58,549
Canterbury Financial Group 916
Trenwick International 22,627 15,887 --
Chartwell Managing Agents 10,919
--------- ------- -------
96,095 74,197 58,549
Underwriting expenses Trenwick America Re 13,790 13,789 15,425
Canterbury Financial Group 2,687
Trenwick International 15,364 10,006 --
Chartwell Managing Agents 5,548
--------- ------- -------
37,389 23,795 15,425
Net premiums written Trenwick America Re 155,108 169,112 195,230
Canterbury Financial Group 5,641
Trenwick International 129,399 81,107 --
Chartwell Managing Agents 64,462
--------- ------- -------
354,610 250,219 195,230
S-4
TRENWICK GROUP INC. AND SUBSIDIARIES
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(in thousands)
Balance at Charged to Balance at
Beginning of Costs and End of
Period Expenses Period
------------ ---------- ----------
Year Ended December 31, 1999
Reinsurance recoverable:
Allowance for Uncollectible
Reinsurance (1) .............. $6,402 $ 167 $6,569
Year Ended December 31, 1998
Reinsurance recoverable:
Allowance for Uncollectible
Reinsurance (1) .............. $6,394 $ 8 $6,402
Year Ended December 31, 1997
Reinsurance recoverable:
Allowance for Uncollectible
Reinsurance (1) .............. $5,731 $ 663 $6,394
(1) Trenwick has a reinsurance agreement which protects Trenwick from certain
uncollectible reinsurance balances. Uncollectible amounts have been ceded
to said contract and are reflected as reinsurance recoverable in the
balance sheet. Deductions to reserve represent subsequent collections of
amounts deemed uncollectible.
S-5
Report of Independent Accountants on
Financial Statement Schedules
To the Board of Directors of
Trenwick Group Inc.
Our audits of the consolidated financial statements referred to in our report
dated February 29, 2000, appearing in the 1999 Annual Report to Stockholders of
Trenwick Group Inc. (which report and consolidated financial statements are
incorporated by reference in the Annual Report on Form 10-K) also included an
audit of the financial statement schedules listed in this Form 10-K. In our
opinion, these financial statement schedules present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PricewaterhouseCoopers LLP
New York, New York
February 29, 2000
S-6