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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, 1996.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period to .
Commission file number 0-14737
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.)
Metro Center, One Station Place, Stamford, Connecticut 06902
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 353-5500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Name of each exchange
Title of each class on which registered
------------------- -------------------
COMMON STOCK, $.10 PAR VALUE NASDAQ NATIONAL MARKET SYSTEM
6% CONVERTIBLE DEBENTURES DUE DECEMBER 15, 1999 NASDAQ NATIONAL MARKET SYSTEM
PREFERRED STOCK PURCHASE RIGHTS
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 10K or any amendment to this
Form 10-K. / /
The aggregate market value on February 28, 1997 of the voting stock held by
non-affiliates of the registrant was $356,141,427
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 February 28, 1997
Common Stock, $.10 par value 7,954,501
Certain information required by Items 1 through 8 of Form 10-K is incorporated
by reference into Parts I and II hereof from the registrant's annual report to
stockholders for the fiscal year ended December 31, 1996 and the information
required by Items 10 through 13 of Form 10-K is incorporated by reference into
Part III hereof from the registrant's proxy statement which will be filed with
the Securities and Exchange Commission within 120 days of the close of the
registrant's fiscal year ended December 31, 1996.
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TRENWICK GROUP INC.
Table of Contents
Page
Item Number
- - ---- ------
PART I
1. Business .................................................................. 1
2. Properties ................................................................ 17
3. Legal Proceedings ......................................................... 17
4. Submission of Matters to a Vote of Security Holders ....................... 17
PART II
5. Market for the Corporation's Common Stock and Related Stockholder Matters... 18
6. Selected Financial Data ................................................... 19
7. Management's Discussion and Analysis of Financial Condition and
Results of Operation ...................................................... 20
8. Financial Statements and Supplementary Data ............................... 20
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ...................................................... 20
PART III
10. Directors and Executive Officers .......................................... 20
11. Executive Compensation .................................................... 20
12. Security Ownership of Certain Beneficial Owners and Management ............ 20
13. Certain Relationships and Related Transactions ............................ 20
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ........... 21
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PART I
ITEM 1. BUSINESS
GENERAL BACKGROUND AND HISTORY
Trenwick Group Inc. is a holding company incorporated in the state of Delaware
in 1985. Through its wholly owned subsidiary, Trenwick America Corporation, a
Delaware corporation, Trenwick owns and operates Trenwick America Reinsurance
Corporation, (Trenwick America Re), a Connecticut corporation. The term
"Trenwick", as used herein, refers to Trenwick America Re in discussions of that
company's reinsurance business and refers to Trenwick Group Inc. in all other
circumstances. Trenwick America Corporation, which acquired Trenwick America Re
in 1983, became a wholly owned subsidiary of Trenwick in 1985 as a result of a
corporate restructuring. Trenwick also owns two inactive Bermuda subsidiaries.
Trenwick primarily provides reinsurance to insurers of property and casualty
risks in the United States. Trenwick writes both treaty and facultative
reinsurance. Treaty is divided into conventional treaty and specialty business.
Specialty underwriting combines the actuarial analytical methods of treaty
underwriting and the individual risk assessment skills of facultative
underwriting. Like treaty reinsurance, specialty reinsurance is written for a
class of risk in which statistical methods are used to estimate future
profitability. Like facultative underwriting, however, specialty underwriting
also relies on the analysis of the reinsured's risks themselves as well as
insurance policy forms and rates.
Trenwick generally obtains all of its business through brokers and reinsurance
intermediaries which seek its participation on reinsurance being placed for
their customers. Reinsurance is provided both on an excess of loss and quota
share basis, which in 1996 amounted to 57% and 43% of its business,
respectively. In underwriting reinsurance, Trenwick 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.
LINES AND TYPES OF BUSINESS
Trenwick's net premiums written for its principal lines of business are set
forth in the following table for the periods indicated.
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NET PREMIUMS WRITTEN BY LINES OF BUSINESS
(IN THOUSANDS)
1996 1995 1994
-------- -------- --------
Casualty
Automobile Liability $ 64,539 $ 61,388 $ 38,323
Errors and Omissions 48,888 50,077 32,707
General Liability 22,519 20,819 17,910
Workers' Compensation 20,502 873 1,079
Medical Malpractice 9,846 6,933 3,245
Products Liability 2,595 3,101 2,966
Other Casualty 10,452 12,731 6,600
-------- -------- --------
Total Casualty 179,341 155,922 102,830
Property 47,023 41,240 36,805
-------- -------- --------
Total $226,364 $197,162 $139,635
======== ======== ========
The major lines of reinsurance currently written by Trenwick are automobile
liability, errors and omissions, general liability and workers' compensation
which account for an aggregate of at least 64% of net premiums written in all
years indicated. Casualty business increased by 15% as a result of an increase
in new casualty business developed through existing and new relationships with
various reinsurance brokers. The growth in new casualty business is primarily
attributable to an increase in workers compensation as a result of two new
contracts. In 1996, the amount of property business underwritten by Trenwick
remained constant as a percentage of total net written premiums.
In 1996, insurance companies continued to increase their retentions, thereby
reducing the amount of reinsurance placed with reinsurers. As a result, errors
and omissions, products liability and other casualty lines of business decreased
in 1996. In addition, Trenwick declined to renew certain accounts which did not
meet it's pricing standards.
In 1996, 1995 and 1994, twelve programs underwritten by Trenwick accounted for
approximately 49%, 52% and 51%, respectively, of gross premiums written. One
ceding company accounted for 15%, 19%, and 14% of gross premiums written for
years 1996, 1995 and 1994, respectively. The majority of this business has been
in force since 1988 and involves working layer excess of loss automobile
liability for trucking risks written by Canal Insurance Company, an established
specialist in this line of business. Canal has an A.M. Best Company rating of A+
and statutory capital and surplus at December 31, 1996 in excess of $277
million. During 1996, Trenwick continued its strategic reinsurance agreement
with PXRE Reinsurance Company (PXRE Re), assuming approximately 15% of PXRE Re's
property business. This program with PXRE Re accounted for approximately 6%, 9%
and 12%, respectively, of gross premiums written in years 1996, 1995 and 1994.
Trenwick also obtained approximately 10% and 12% of gross premiums written in
1996 from Continental Casualty Company and American International Group,
respectively. Trenwick expects to renew these accounts for 1997. While Trenwick
believes that the loss of any one of these accounts would have a material
adverse effect on premiums written, Trenwick does not believe that such a loss
would result in a concurrent material decrease in its earnings. Further,
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Trenwick believes that it would continue to underwrite new business to replace
these accounts, in the event that they were non-renewed.
The table set forth below shows the distribution of net premiums written by type
which classifies the business by type of underwriting methodology used.
NET PREMIUMS WRITTEN BY TYPE OF BUSINESS
(IN THOUSANDS)
1996 1995 1994
---- ---- ----
CASUALTY
Standard treaty $144,074 64% $108,330 55% $ 61,071 44%
Specialty treaty 46,048 20 50,593 26 39,722 28
Facultative 6,404 3 6,035 3 4,149 3
-------- --- -------- --- -------- ---
196,526 87% 164,958 84% 104,942 75%
PROPERTY 29,838 13% 32,204 16% 34,693 25%
-------- --- -------- --- -------- ---
Total $226,364 100% $197,162 100% $139,635 100%
======== === ======== === ======== ===
Treaty Reinsurance
Approximately 97% of Trenwick's net premiums written is currently represented by
treaty reinsurance including standard treaty, specialty and property business.
Specialty business underwritten by Trenwick generally includes specialty
coverages and classes such as professional liability, directors' and officers'
liability and other excess and surplus lines exposures. Specialty also
encompasses reinsurance of business written by managing general agents or
alternative risk mechanisms other than insurance companies. Net treaty premiums
written increased 15%, 41% and 39% in 1996, 1995 and 1994, respectively. In
1996, Trenwick wrote on a quota share and excess of loss basis an aggregate of
229 treaties, as compared to 222 treaties in 1995 and 250 treaties in 1994.
Trenwick's commitment is currently limited to $2,000,000 per account on casualty
treaty business and $1,500,000 on property business. Larger commitments are
subject to Trenwick's Underwriting Committee referral process.
Facultative Reinsurance
Facultative writings, consisting entirely of casualty business, currently
account for 3% of net premiums written. All facultative business is written on
an excess of loss basis. The average gross limit provided by Trenwick is
$592,000. Maximum facultative gross capacity per risk is $2,000,000. Trenwick
retains the first $500,000 per transaction. In 1996, casualty facultative net
premiums written represented by 384 contracts increased 6% when compared to
1995. In 1995 and 1994, casualty facultative net premiums written represented by
318 and 215 contracts increased 45% and 5%, respectively, when compared to 1994
and 1993.
MARKETING
Trenwick generally obtains all its reinsurance business through reinsurance
brokers which represent the ceding company in negotiations for the purchase of
reinsurance. The process of effecting a brokered
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reinsurance placement typically begins when a ceding company enlists the aid of
a reinsurance broker in structuring a reinsurance program. Often the ceding
company and the broker will consult with one or more lead reinsurers as to the
pricing and contract terms of the reinsurance protection being sought. Once the
ceding company has approved the terms quoted by the lead reinsurer, the broker
will offer participations to qualified reinsurers until the program is fully
subscribed by reinsurers at terms agreed to by all parties.
Trenwick pays such intermediaries or brokers commissions representing negotiated
percentages of the premium it writes. These commissions, which currently average
3%, constitute part of Trenwick's total acquisition costs and are included in
its underwriting expenses. Brokers do not have the authority to bind Trenwick
with respect to reinsurance agreements, nor does Trenwick commit in advance to
accept any portion of the business that brokers submit to it. Reinsurance
business from any ceding company, whether new or renewal, is subject to
acceptance by Trenwick.
In 1996, Trenwick's three largest broker sources accounted for 31%, 18% and 12%,
respectively, of Trenwick's gross premiums written. In 1995, the three largest
broker sources accounted for 34%, 19% and 9%, respectively. These three brokers
are among the ten largest brokers in the reinsurance industry. Trenwick's
concentration of business through a small number of sources is consistent with
the concentration of the property and casualty broker reinsurance market, in
which a majority of the business is written through the ten largest brokers.
Loss of all or a substantial portion of the business provided by these brokers
could have a material adverse effect on the business and operations of Trenwick.
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 reinsurance market and the availability of business from other brokers.
UNDERWRITING
Trenwick's underwriting philosophy emphasizes a transactional approach to
underwriting in which any 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 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
reinsurance terms and conditions. Before it agrees to participate in a
transaction, Trenwick frequently conducts underwriting and claims audits of
ceding companies to assist it in evaluating the information submitted by the
ceding companies.
Trenwick's Underwriting Committee, composed of its most senior underwriters and
Chief Actuary, is responsible for its underwriting policy and quality standards.
The quality control process involves both pre-binding referral of individual
transactions and post-binding internal audits of each underwriting department.
The referral process provides a three-tiered system of checks and balances to
reduce the potential for significant loss. Accounts displaying characteristics
specified in Trenwick's Underwriting Policy Manual are subject to successive
referral to the Department Manager, Underwriting Committee representatives, and
in some cases, the Chief Executive Officer. The quality control process is
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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 reinsurance and
insurance companies. These competitors, many of which have substantially greater
financial and staff resources than Trenwick, include independent reinsurance
companies, subsidiaries or affiliates of established insurance companies,
reinsurance departments of certain commercial insurance companies and
underwriting syndicates.
The reinsurance market has two basic segments: reinsurers that primarily obtain
their business directly from insurers and those that primarily obtain business
through reinsurance intermediaries or brokers. Although Trenwick generally
obtains all of its business through reinsurance intermediaries or brokers, and
therefore, competes directly with other reinsurers that obtain their business in
this way, it also competes indirectly with reinsurers who obtain business
directly from primary insurers because Trenwick's brokers must compete with
direct reinsurers for business to be offered to Trenwick.
Competition in the types of reinsurance business which Trenwick underwrites is
based on many factors, including the perceived overall financial strength of the
reinsurer, rates charged, other terms and conditions, A.M. Best rating, service
offered, speed of service (including claims payment) and perceived technical
ability and experience of staff. The number of jurisdictions in which a
reinsurer is licensed or authorized to do business is also a factor. Trenwick is
licensed or otherwise authorized to conduct reinsurance business in every state
and the District of Columbia.
The financial security of insurers and reinsurers has emerged as a key issue of
the 1990's. To be accepted as a reinsurer by ceding companies and their brokers,
a reinsurer 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. However, ceding companies have become more specialized, which
management believes will favor reinsurers such as Trenwick which possess
technical underwriting and risk assessment skills. The alternative risk segment
of the market has grown, thereby removing some premiums from the traditional
property and casualty primary insurance market. Alternative risk mechanisms,
which depend more heavily on reinsurance than the traditional companies they
have replaced, have created new opportunities for specialized reinsurers.
Trenwick's management believes that the reinsurance industry, including the
intermediary market, will continue to undergo further consolidation and that
size and financial strength will continue to be significant factors in effective
competition. Trenwick's statutory surplus was $286 million at December 31, 1996.
Based on the most recent information prepared by the Reinsurance Association of
America (RAA), this surplus placed Trenwick among the top nineteenth ranked
reinsurance companies and the top fourteen reinsurers in the U.S. broker market,
as measured by policyholder surplus, of those companies reporting to the RAA.
The RAA is an industry organization of professional property and casualty
reinsurers which, among other things, compiles data on reinsurers and their
reinsurance operations.
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Trenwick is rated "A+ (Superior)," the second-highest classification accorded by
A.M. Best Company. A.M. Best Company is an independent insurance industry rating
organization. The "A+ (Superior)" rating is assigned to those companies which in
A.M. Best Company's opinion have achieved excellent overall performance when
compared to the norms of the property and casualty insurance industry and which
generally have demonstrated a strong ability to meet their respective
policyholder and other contractual obligations. A.M. Best Company reviews its
ratings at least annually and there is no assurance that Trenwick will be able
to maintain its current rating. Trenwick's Standard & Poor's Insurance Rating
Services Claims-Paying Ability Rating is "A+ (Good)".
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 ceding companies. In certain
instances, a claims audit may be performed prior to assuming reinsurance
business as part of a comprehensive risk evaluation process.
UNPAID CLAIMS AND CLAIMS EXPENSES
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 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.
Trenwick uses a combination of actuarial methods to determine its IBNR reserves.
These methods fall into two general categories: (1) methods by which ultimate
claims are estimated based upon historical patterns of reported claim
development experienced by Trenwick, as supplemented by reported industry data,
and (2) methods in which the level of Trenwick's IBNR claim reserves are
established based upon the IBNR claim reserves relative to earned premium of
other reinsurers, applied by accident year, line of
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business and type of reinsurance (excess of loss versus quota share) written by
Trenwick. Reserve methods implicitly recognize the impact of inflation and other
factors affecting claims payments by taking into account changes in historical
payment patterns, the volume of business written, and trends in claim frequency
and severity as reflected in Trenwick's reported claim activity. Due to the
inherent uncertainties of estimating insurance company claim reserves, actual
claims and claims expenses may deviate, perhaps substantially, from estimates of
Trenwick's reserves reflected in the consolidated financial statements.
Management believes that its claim reserve methods are reasonable and prudent
and that Trenwick's reserves for claims and claims expenses at December 31, 1996
are adequate.
Trenwick's known exposure to environmental claims, including asbestos and
pollution liability, is primarily associated with its participation in business
written by its predecessor company between 1978 and 1983. Exposure to
environmental claims on Trenwick's business written since 1983 is generally
limited by exclusions on its own reinsurance contracts and also by exclusions on
policies issued by ceding companies. Casualty business written in 1983 and prior
is not material to Trenwick's overall book of business. As of December 31, 1996
outstanding claims including incurred but not reported claims for environmental
liability were approximately $9.2 million, approximately 2% of Trenwick's total
net outstanding reserves. 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.
The following table presents an analysis of gross and net unpaid claims and
claims expenses and a reconciliation of beginning and ending gross and net
unpaid claims and claims expense balances for 1996, 1995 and 1994. The gross
unpaid claims and claims expense balances for December 31, 1996 and 1995 are
reflected in Trenwick's consolidated balance sheet. The net unpaid claims and
claims expense balances are stated on a net basis after deductions for
reinsurance recoverable on unpaid claims and claims expenses from
retrocessionaires.
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ANALYSIS OF ACTIVITY IN UNPAID CLAIMS AND CLAIMS EXPENSES
(IN THOUSANDS)
1996 1995 1994
---- ---- ----
Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
Unpaid claims and claims expenses,
beginning of year $ 411,874 $327,001 $389,298 $294,008 $354,582 $268,091
Provision for claims and claims expenses:
for claims incurred in the current year 161,061 133,755 135,013 115,133 115,348 93,287
for claims incurred in prior years (3,669) (4,439) (23,666) (2,065) (995) (447)
--------- -------- -------- -------- -------- --------
Subtotal 157,392 129,316 111,347 113,068 114,353 92,840
--------- -------- -------- -------- -------- --------
Payments for claims and claims expenses:
for claims incurred in the current year (22,603) (22,570) (18,849) (18,271) (21,007)
(14,623)
for claims incurred in prior years (79,486) (46,860) (69,922) (61,804) (58,630) (52,300)
--------- -------- -------- -------- -------- --------
Subtotal (102,089) (69,430) (88,771) (80,075) (79,637) (66,923)
--------- -------- -------- -------- -------- --------
Unpaid claims and claims expenses, end of year $ 467,177 $386,887 $411,874 $327,001 $389,298 $294,008
========= ======== ======== ======== ======== ========
Reinsurance recoverable on unpaid claims
and claims expenses, end of year $ 80,290 $ 84,873 $ 95,290
======== ======== ========
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In 1996, Trenwick agreed to commute an aggregate excess of loss reinsurance
agreement covering the years 1989 through 1993. As a result of the commutation,
Trenwick received a total consideration of $29.7 million representing
outstanding reserves of approximately the same amount. The commutation was
recorded in 1996 as a paid loss recovery.
In 1996, 1995 and 1994, Trenwick recorded a decrease of $4,439,000, $2,065,000,
and $447,000, respectively, in estimated net claims for claims occurring in
prior accident years. The decrease over the last three years primarily reflects
the favorable development of Trenwick's casualty business written primarily
between accident years 1987 and 1992, partially offset by unfavorable
development in accident years 1993 through 1995. In 1996, Trenwick recorded a
decrease of $3,669,000 in estimated gross claims for claims occurring in prior
accident years.
The following table presents the development of Trenwick's net unpaid claims and
claims expenses for 1986 through 1996. 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 year with the related gross unpaid
claims and claims expenses as of December 31, 1992 through 1996. 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 1996 represents the aggregate change in the
initial gross estimates over all subsequent calendar years.
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DEVELOPMENT OF UNPAID CLAIMS AND CLAIMS EXPENSES
(in thousands)
1996 1995 1994 1993 1992 1991 1990 1989
------ -------- -------- -------- -------- -------- -------- --------
Net unpaid claims and claims
expenses, end of year $386,887 $327,001 $294,008 $268,091 $266,685 $258,774 $245,105 $214,391
Cumulative amount of net
liability paid as of:
One year later -- 46,860 61,804 52,300 52,260 44,930 42,234 29,407
Two years later -- -- 81,417 90,382 93,312 80,725 77,183 60,888
Three years later -- -- -- 89,445 118,345 111,225 102,590 84,283
Four years later -- -- -- -- 111,174 127,431 124,129 101,597
Five years later -- -- -- -- -- 116,224 134,657 116,047
Six years later -- -- -- -- -- -- 122,089 124,465
Seven years later -- -- -- -- -- -- -- 110,656
Eight years later -- -- -- -- -- -- -- --
Nine years later -- -- -- -- -- -- -- --
Ten years later -- -- -- -- -- -- -- --
Net liability re-estimated
as of:
One year later -- 322,562 291,943 267,644 255,379 253,781 238,324 206,724
Two years later -- -- 279,561 263,473 255,379 243,488 233,565 199,864
Three years later -- -- -- 246,367 252,458 243,586 223,417 196,232
Four years later -- -- -- -- 236,009 241,600 224,171 188,052
Five years later -- -- -- -- -- 225,592 223,172 189,148
Six years later -- -- -- -- -- -- 213,327 188,884
Seven years later -- -- -- -- -- -- -- 180,619
Eight years later -- -- -- -- -- -- -- --
Nine years later -- -- -- -- -- -- -- --
Ten years later -- -- -- -- -- -- -- --
Net cumulative redundancy
(deficiency)
Amount of original liability 4,439 14,447 21,724 30,676 33,182 31,778 33,772
Percentage 1% 5% 8% 12% 13% 13% 16%
Gross liability, end of year 467,177 411,874 389,298 354,582 351,897 332,503
Reinsurance recoverable 80,290 84,873 95,290 86,491 85,212 73,729
Net liability, end of year 386,887 327,001 294,008 268,091 266,685 258,774
Gross re-estimated
liability-latest 408,205 353,464 310,255 301,714 282,978
Re-estimated recoverable-latest 85,643 73,903 63,888 65,705 57,386
Net re-estimated
liability-latest 322,562 279,561 246,367 236,009 225,592
Gross cumulative redundancy 3,669 35,834 44,327 50,183 49,525
1988 1987(1) 1986(1)
-------- -------- ---------
Net unpaid claims and claims
expenses, end of year $169,785 $123,148 $ 99,144
Cumulative amount of net
liability paid as of:
One year later 19,983 21,086 46,885
Two years later 34,855 32,409 60,636
Three years later 53,243 40,285 67,093
Four years later 67,132 48,307 71,060
Five years later 77,922 53,827 74,390
Six years later 87,397 58,568 76,089
Seven years later 93,109 64,172 77,801
Eight years later 78,032 67,798 79,497
Nine years later -- 53,974 80,418
Ten years later -- -- 66,878
Net liability re-estimated
as of:
One year later 163,848 123,978 107,025
Two years later 154,646 118,452 106,213
Three years later 150,470 109,536 104,273
Four years later 145,457 106,093 102,507
Five years later 137,426 102,436 101,524
Six years later 137,818 97,304 100,418
Seven years later 138,255 96,900 97,911
Eight years later 133,192 98,125 97,186
Nine years later -- 97,785 100,209
Ten years later -- -- 100,053
Net cumulative redundancy
(deficiency)
Amount of original liability 36,593 25,363 (909)
Percentage 22% 21% (1)%
Gross liability, end of year
Reinsurance recoverable
Net liability, end of year
Gross re-estimated
liability-latest
Re-estimated recoverable-latest
Net re-estimated
liability-latest
Gross cumulative redundancy
(1) Amounts for 1986 and 1987 include claims activity associated with a Bermuda
subsidiary, prior to its sale by Trenwick in 1987.
10
13
In evaluating the information in the table above, 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, 1995 have developed redundantly due to
favorable developments for claims occurring between accident years 1987 and
1992, partially offset by unfavorable development in accident years 1993 through
1995. The deficiency shown in the table for the year 1986 reflects adverse
development for claims occurring during that period and are widespread
throughout the industry. The industry factors which contributed to adverse claim
developments during this period included inadequate premium levels and
inadequate terms attributable to overly competitive market conditions.
Trenwick's exposure to these unfavorable market conditions is limited by the
insubstantial amount of premiums it wrote during this period.
RETROCESSION AGREEMENTS
Reinsurance companies enter into retrocessional agreements for the same reasons
insurers seek reinsurance, including reduction of net liability on individual
risks, protection against catastrophic losses and maintenance of acceptable
ratios. Trenwick has various retrocessional facilities, all of which are on a
treaty basis. These retrocessional facilities include one treaty for Trenwick'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's maximum retention generally does not exceed $500,000 per
occurrence on facultative business and $2,000,000 per occurrence on property
catastrophe business. Since 1989, Trenwick has purchased aggregated excess of
loss ratio treaties from several reinsurers. These facilities provided Trenwick
with a layer of protection against adverse results from primarily casualty
business in excess of specified loss ratios.
Trenwick remains liable with respect to reinsurance ceded in the event that the
retrocessionaire is unable to meet its obligations assumed under the reinsurance
agreement. All retrocessionaires must be formally approved by Trenwick's
Security Committee comprising of the Chief Executive Officer, as Committee
Chairman, and the Chief Financial Officer. The Security Committee re-evaluates
the financial condition of Trenwick's 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 Committee.
Trenwick's principal retrocessionaires domiciled in the United States are Centre
Reinsurance Company of New York, Continental Casualty Company, Kemper
Reinsurance Company and National Indemnity Company, which are rated A or better
by A.M. Best Company. The principal retrocessionaires domiciled outside the
United States are syndicates at Lloyds of London and Unionamerica Insurance
Company,
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14
Limited. At December 31, 1996, Trenwick had no material uncollectible amounts
due from its retrocessionaires.
INVESTMENTS
Trenwick's investments comply with the insurance laws of the state of
Connecticut, its domiciliary state, and of the other states in which Trenwick 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. The
Investment Committee of Trenwick's Board of Directors oversees investments and
sets procedures and guidelines for investment strategy. Trenwick's internal
staff manages Trenwick's investments and utilizes the services of an investment
adviser. 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, the Company emphasizes
investment grade fixed maturity investments. At December 31, 1996, 92% of
Trenwick's fixed income investments were rated Aa or better and none had a
Moody's Investors Service quality rating less than A.
The Company's investment strategy permits an allocation for equity securities.
At December 31, 1996, 3% of the Company's total investments and cash were
invested in common and preferred equities of U.S. corporations. The primary risk
associated with these securities is the exposure to daily market fluctuations.
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 12%, 7% and 6%, respectively, of Trenwick's portfolio at December
31, 1996.
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. The non-agency MBS issues Trenwick has purchased have a rating of A
or better from various Nationally Recognized Statistical Rating Organizations.
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15
The asset-backed securities owned by Trenwick have primarily credit card, auto
and equipment 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. The asset-backed securities owned by Trenwick are
rated Aaa by Moody's Investors Service as of December 31, 1996.
Trenwick also invests in agency pass-through securities which account for 3% of
Trenwick's portfolio at December 31, 1996. As with CMOs, these securities are
subject to prepayment risk.
13
16
The table below sets forth the distribution of Trenwick's investments at
December 31, 1996 by type, maturity and quality rating.
INVESTMENTS
(DOLLARS IN THOUSANDS)
AVERAGE ESTIMATED
MATURITY FAIR AMORTIZED
IN YEARS VALUE COST
-------- --------- ---------
TYPE
U.S. government bonds 3.5 $ 91,702 $ 90,421
Tax-exempt bonds(1) 4.9 367,029 360,201
Mortgage-backed and asset-backed securities 9.4 211,228 206,774
Debt securities issued by foreign governments 3.2 3,227 3,156
Public utilities 5.6 2,918 2,803
Corporate securities 4.2 37,774 37,001
Short-term securities .5 120 120
-------- ---------
Total fixed maturity investments 6.0 713,998 700,476
Equity securities - 25,959 21,346
Cash and cash equivalents - 14,253 14,253
-------- ---------
Total investments and cash $754,210 $ 736,075
======== =========
MATURITY
Due in one year or less .6 $ 64,268 $ 63,899
Due in one year through five years 3.3 314,690 308,687
Due after five years through ten years 6.8 273,802 266,533
Due after ten years 21.6 61,238 61,357
-------- ---------
Total fixed maturity investments 6.0 $713,998 $ 700,476
======== ==========
QUALITY (FIXED MATURITY INVESTMENTS)
Aaa(2)-U.S. government bonds $ 91,702 $ 90,421
Tax-exempt bonds 325,545 319,998
Mortgage-backed and asset-backed securities 167,701 163,725
Corporate securities 2,964 2,902
-------- ---------
587,912 577,046
-------- ---------
Aa(2)-Tax-exempt bonds 37,901 36,833
Mortgage-backed securities 28,592 27,850
Corporate securities 5,178 5,130
-------- ---------
71,671 69,813
-------- ---------
A(2)-Tax-exempt bonds 3,583 3,370
Mortgage-backed securities 14,935 15,199
Debt securities issued by foreign governments 3,227 3,156
Public utilities 2,918 2,803
Corporate securities 29,632 28,969
-------- ---------
54,295 53,497
-------- ---------
Short-term securities 120 120
-------- ---------
Total fixed maturity investments $713,998 $ 700,476
======== =========
(1) Tax-exempt bonds include $83,515,000 escrowed in U.S. Government
Securities, $166,140,000 insured by Municipal Bond Investors Assurance
Corporation, Financial Guaranty Insurance Company, AMBAC Indemnity
Corporation, or Financial Security Assurance Corporation and $41,895,000
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 which 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.
14
17
REGULATION
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
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
RBC
The NAIC's initiative to establish minimum capital requirements, referred to as
Risk Based Capital ("RBC"), for property and casualty companies was completed
and adopted in 1993. This 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. The ratios
calculated for Trenwick America Re exceeded all of the RBC trigger points at
December 31, 1996. Trenwick believes its capital will continue to exceed these
RBC capital and surplus requirements for the foreseeable future. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
State Insurance Regulation
The premium rates and policy terms of reinsurance agreements generally are not
subject to regulation by any government authority. This contrasts with property
and casualty insurance 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 is subject relates 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 a reinsured, 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 reinsureds, and ultimately, their policyholders rather than
their security holders. Trenwick believes that it is in compliance with all such
regulations.
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18
Trenwick America Re is subject to regulation under the insurance statutes and
insurance holding company statutes of various states, including Connecticut, the
domiciliary state of Trenwick America Re. 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 Insurance Commissioner prior to acquiring such
shares. Such investor would also be required to file certain notices and reports
with the Commissioner prior to such acquisition.
Dividends
The principal source of cash for the payment of dividends by Trenwick is the
receipt of dividends from Trenwick America Re. Under the Connecticut insurance
laws and regulations, the maximum amount of shareholder dividends or other
distributions that Trenwick America Re may declare or pay to the Company within
any twelve month period, without the permission of the Connecticut Insurance
Commissioner, is limited to the greater of 10% of policyholder surplus at
December 31 of the preceding year, or 100% of net income excluding realized
capital gains, for the twelve month period ending December 31 of the preceding
year, both determined in accordance with statutory accounting practices. For the
purpose of computing the limitation, carryforward provisions apply with respect
to net income realized in the two previous calendar years which has not already
been paid out as dividends. The maximum amount of dividends which could be paid
by Trenwick America Re in 1997 without regulatory approval would be $62,901,000.
Investment Limitations
Connecticut Law contains rules governing the types and amounts of investments
which are permissible for a Connecticut insurer or reinsurer, including Trenwick
America Re. These rules are designated to ensure the safety and liquidity of the
insurer's investment portfolio. In general, these rules only permit a
Connecticut insurer to purchase investments which are interest bearing, interest
accruing, entitled to dividends or otherwise income earning and not then in
default in any respect, and the insurer 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. Trenwick believes that it is in compliance with all applicable
Connecticut insurance laws.
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EMPLOYEES
At December 31, 1996, Trenwick employed a total of 71 persons. Trenwick has no
employees represented by a labor union and believes that its employee relations
are good.
ITEM 2. PROPERTIES
Trenwick's offices in Stamford, Connecticut are occupied pursuant to a lease
covering approximately 27,000 square feet of office space located at Metro
Center, One Station Place. Although the lease expires on July 15, 1998, Trenwick
has the option to extend and renew the terms of the lease.
ITEM 3. LEGAL PROCEEDINGS
Trenwick is party to various legal proceedings generally arising in the normal
course of its reinsurance 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
reinsurance business. Pursuant to Trenwick's reinsurance arrangements, disputes
between Trenwick America Re and its ceding companies are generally required to
be finally settled by arbitration.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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20
PART II
ITEM 5. MARKET FOR CORPORATION'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Trenwick Common Stock is listed on the NASDAQ Stock Market under the ticker
symbol TREN. There were 134 holders of record and in excess of 1,200 beneficial
owners of Common Stock as of February 28, 1997. The other information called for
by this item can be found in Note 12 of Notes to the Consolidated Financial
Statements of Trenwick on Page 72 of the Annual Report to Stockholders and is
incorporated herein by reference.
For a description of restrictions on Trenwick's ability to pay dividends,
reference is made to Item 1. Business - Regulation, Management's Discussion and
Analysis of Financial Condition and Results of Operations and Note 6 of Notes to
the Consolidated Financial Statements of Trenwick.
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ITEM 6. SELECTED FINANCIAL DATA
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands except per share data)
INCOME STATEMENT DATA
Net premiums written $226,364 $197,162 $139,635 $101,392 $ 81,883
======== ======== ======== ======== ========
Net premiums earned $211,069 $177,394 $132,683 $ 93,180 $ 81,831
Net investment income 41,226 36,828 33,932 34,954 30,859
Net realized investment gains (losses) 299 368 (196) 1,842 181
Service fees - - - - 206
-------- -------- -------- -------- --------
Total revenues $252,594 $214,590 $166,419 $129,976 $113,077
======== ======== ======== ======== ========
Net income $ 33,848 $ 29,841 $ 20,282 $ 23,739 $ 18,539
======== ======== ======== ======== ========
PER SHARE DATA
Primary earnings
Net income $ 4.95 $ 4.44 $ 3.04 $ 3.48 $ 2.76
======== ======== ======== ======== ========
Weighted average shares outstanding 6,832 6,723 6,670 6,831 6,728
======== ======== ======== ======== ========
Fully diluted earnings (assuming conversion
of dilutive convertible securities):
Net income $ 4.25 $ 3.80 $ 2.78 $ 3.12 $ 2.75
======== ======== ======== ======== =-======
Weighted average shares outstanding 8,966 8,960 8,847 8,965 6,746
======== ======== ======== ======== ========
Dividends $ 1.24 $ 1.12 $ 1.00 $ .86 $ .76
======== ======== ======== ======== ========
BALANCE SHEET DATA
Investments and cash $754,210 $653,704 $551,784 $546,303 $500,359
Total assets 920,804 820,930 727,245 700,407 652,473
Unpaid claims and claims expenses 467,177 411,874 389,298 354,582 351,897
Convertible debentures 103,500 103,500 103,500 103,500 103,500
Total stockholders' equity 265,753 240,776 188,213 206,763 169,373
Shares of common stock outstanding 6,725 6,590 6,440 6,583 6,510
Book value per share $ 39.52 $ 36.54 $ 29.23 $ 31.41 $ 26.02
CERTAIN GAAP FINANCIAL RATIOS
Combined ratio 95.8% 95.6% 103.2% 102.5% 112.3%
Net premiums written to surplus ratio 0.85:1 0.82:1 0.74:1 0.49:1 0.48:1
Unpaid claims and claims expenses
to surplus ratio 1.76:1 1.71:1 2.07:1 1.71:1 2.08:1
The other information called for by this item can be found on Pages 31 through
73 of Trenwick's 1996 Annual Report to Stockholders under the captions
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Financial Statements" and is incorporated herein by reference.
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22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The information called for by this item can be found on Pages 31 through 42 of
Trenwick's 1996 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 on Pages 44 through 73 of
Trenwick's Annual Report to Stockholders and to the items included in Item 14(a)
of this report, and are 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
Incorporated by reference to the captions "Board of Directors", "Management",
and "Executive Compensation" in the Proxy Statement for the Annual Meeting in
1997 ("Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the caption "Executive Compensation" in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the caption "Principal Stockholders" in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the caption "Certain Relationships and Related
Transactions" in the Proxy Statement.
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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 28, are filed as part
of this Report.
(3) Exhibits
3.1 Trenwick's Restated Certificate of Incorporation.
Incorporated by reference to Exhibit 3.1 to Trenwick's
Registration Statement on Form S-1, File No. 33-5085.
3.2 Certificate of Amendment of Trenwick's Restated
Certificate of Incorporation. Incorporated by
reference to Exhibit 3.3 to Trenwick's Annual Report
on Form 10-K for the year ended December 31, 1993,
File No. 0-14737.
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 November 2, 1989 between
Trenwick and First Chicago Trust Company of New York.
Incorporated by reference to Exhibit 4 to Trenwick's
Form 8-A dated June 11, 1989, File No. 0-14737.
4.2 (a) Indenture dated as of January 31, 1997, between
The Chase Manhattan Bank and Trenwick.
(b) Amended and Restated Declaration of Trust of
Trenwick Capital Trust I dated as of January 31,
1997.
+10.1 Trenwick Incentive Stock Option Plan, as amended
through August 3, 1993. Incorporated by reference to
Exhibit 10.1 to Trenwick's Annual Report on Form 10-K
for the year ended December 31, 1994, File No.
0-14737.
10.2 Incentive Stock Option Agreement between Trenwick and
James F. Billett, Jr. Incorporated by reference to
Exhibit 10.11 to Trenwick's Registration Statement on
Form S-1, File No. 33-5085.
10.3 Trenwick 1987 Stock Incentive Plan, as amended through
August 3, 1993. Incorporated by reference to Exhibit
10.5 to Trenwick's Annual Report on Form 10-K for the
year ended December 31, 1994, File No. 0-14737.
+ As required by Item 14, each of Exhibits 10.1 through 10.17 is hereby
identified as a management contract or compensatory plan or arrangement.
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24
10.4 Form of Stock Option Agreement for executive officers
(performance options). Incorporated by reference to
Exhibit 10.32 to Trenwick's Annual Report on Form 10-K
for the year ended December 31, 1988, File No.
0-14737.
10.5 Form of Restricted Stock Agreement for executive
officers. Incorporated by reference to Exhibit 10.31
to Trenwick's Annual Report on Form 10-K for the year
ended December 31, 1988, File No. 0-14737.
10.6 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.
10.7 Form of Non-qualified Stock Option Agreement for
executive officers. Incorporated by reference to
Exhibit 10.36 to Trenwick's Annual Report on Form 10-K
for the year ended December 31, 1989, File No.
0-14737.
10.8 Trenwick 1993 Stock Option Plan. Incorporated by
reference to Exhibit 10.1 to Trenwick's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1994, File No. 0-14737.
10.9 Form of 1993 Stock Option Plan Non-qualified Stock
Option Agreement for executive officers. Incorporated
by reference to Exhibit 10.11 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 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.
10.11 Trenwick Near Term Cash Bonus Plan. Incorporated by
reference to Exhibit 10.10 to Trenwick's Registration
Statement on Form S-1, File No. 33-5085.
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.
10.13 Leased Automobile Policy for executive officers.
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.
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25
10.17 Commercial Real Estate Lease Agreement between
Trenwick and One Station Place, Limited Partnership
dated July 15, 1988. Incorporated by reference to
Exhibit 10.33 to Trenwick's Annual Report on Form 10-K
for year ended December 31, 1988, File No. 0-14737.
10.18 Aggregate Excess of Loss Reinsurance Agreement between
Trenwick and National Indemnity Company dated December
31, 1984 and amendment thereto. Incorporated by
reference to Exhibit 10.29 to Trenwick's registration
statement on Form S-1, File No. 33-5085.
10.19 Automobile Liability First Excess of Loss/Quota Share
Reinsurance Agreement between Trenwick and the Canal
Insurance Company/Canal Indemnity Company.*
10.20 Interests and Liabilities Agreement between Trenwick
and Kemper Reinsurance Group and participants
thereon.*
10.21 Aggregate Excess of Loss Ratio Cover between Trenwick
and Continental Casualty Company.*
10.22 Property Catastrophe Treaty between Trenwick and
numerous reinsurers.*
10.23 Special Catastrophe Excess of Loss Reinsurance
Agreement Placement Slip between Trenwick and each of
Continental Casualty Company, Zurich Reinsurance
Company of New York, Folksamerica Reinsurance Company,
and Kemper Reinsurance Company.*
10.24 Property Quota Share Retrocession Placement Slip
between Trenwick and each of Toa-Re Insurance Co.
(U.K.) Ltd. and Underwriters at Lloyd's.*
10.25 Property Pro Rata Retrocessional Agreement between
PXRE Reinsurance Company and Trenwick. Incorporated by
reference to Exhibit 10.24 to Trenwick's Annual Report
on Form 10-K for the year ended December 31, 1993,
File No. 0-14737.
* Incorporated by reference to Exhibits 10.40 through and including 10.45 to
Amendment No. 1 to Trenwick's Annual Report on Form 10-K for the year
ended December 31, 1991, filed with the Commission on December 8, 1992,
File No. 0-14737.
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26
10.26 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.
10.27 1995 Property Catastrophe Treaty between Trenwick and
numerous reinsurers.
10.28 1995 Special Catastrophe Excess of Loss Reinsurance
Agreement between Trenwick and Zurich Reinsurance
Company of New York and Kemper Reinsurance Company.
10.29 1995 First Facultative Casualty Excess of Loss
Reinsurance Agreement between Trenwick and numerous
reinsurers.
10.30 1995 First Facultative Excess of Loss Reinsurance
Agreement between Trenwick and numerous reinsurers.
10.31 1996 First Facultative Casualty Excess of Loss
Reinsurance Agreement between Trenwick and numerous
reinsurers.
10.32 1996 Property Catastrophe Excess of Loss Agreement
between Trenwick and numerous reinsurers.
10.33 1996 Coinsured Aggregate Excess of Loss Reinsurance
Agreement between Trenwick and Centre Reinsurance
Company of New York and CNA Re.
10.34 1996 Special Catastrophe Excess of Loss Retrocession
Agreement between Tarco and several reinsurers.
11.0 Computation of Earnings Per Share. Reference is made
to page 27 of this report.
12.0 Computation of Ratios.
13.0 Trenwick's 1996 Annual Report to Stockholders. Such
report, except for those portions thereof which are
expressly incorporated by reference in this Form 10-K,
is furnished for the information of the Commission and
is not to be deemed "filed" as part of this Form 10-K.
21.0 List of Subsidiaries.
23.0 Consent of Price Waterhouse LLP.
27.0 Financial Data Schedule.
28.0 Information from reports furnished to state insurance
regulatory authorities.
(B) Reports on Form 8-K
None
24
27
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 JAMES F. BILLETT, JR.
---------------------------
James F. Billett, Jr.
Chairman, President and
Chief Executive Officer
Dated: March 28, 1997
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
- - --------- ----- ----
JAMES F. BILLETT, JR. Chairman of the Board, March 28, 1997
- - ---------------------------- President and Chief
James F. Billett, Jr. Executive Officer and
Director (Principal
Executive Officer)
ALAN L. HUNTE Vice President and March 28, 1997
- - ------------------------------- Treasurer (Principal
Alan L. Hunte Financial Officer and
Accounting Officer)
ANTHONY S. BROWN Director March 28, 1997
- - -------------------------------
Anthony S. Brown
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28
NEIL DUNN Director March 28, 1997
- - -------------------------------
Neil Dunn
ALAN R. GRUBER Director March 28, 1997
- - -------------------------------
Alan R. Gruber
P. ANTHONY JACOBS Director March 28, 1997
- - -------------------------------
P. Anthony Jacobs
HERBERT PALMBERGER Director March 28, 1997
- - -------------------------------
Herbert Palmberger
JOSEPH D. SARGENT Director March 28, 1997
- - -------------------------------
Joseph D. Sargent
FREDERICK D. WATKINS Director March 28, 1997
- - -------------------------------
Frederick D. Watkins
STEPHEN R. WILCOX Director March 28, 1997
- - -------------------------------
Stephen R. Wilcox
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TRENWICK GROUP INC.
ITEM 14.(A)(3) - Exhibit 11.0 -- COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share amounts)
Year Ended December 31
-----------------------------------------------------------------
Pro forma 1996 1996 1995 1994
-------------- ---- ---- ----
INCOME AVAILABLE TO COMMON STOCKHOLDERS:
Net income (primary) $36,204 $33,848 $29,841 $20,282
=======
Add interest on convertible debentures, net
of applicable income taxes 4,228 4,216 4,270
------- ------- -------
Income available (fully diluted) $38,076 $34,057 $24,552
======= ======= =======
WEIGHTED AVERAGE SHARES OF COMMON
STOCK OUTSTANDING:
Common shares 7,860 6,671 6,482 6,458
Equivalent shares associated with
employee stock options 161 161 241 212
------- ------- ------- -------
Common and common equivalent shares
(primary) 8,021 6,832 6,723 6,670
=======
Additional fully diluted equivalent shares
associated with employee stock options - 103 43
Shares associated with debenture
conversions 2,134 2,134 2,134
------- ------- -------
Common and common equivalent shares
(fully diluted) 8,966 8,960 8,847
======= ======= =======
PER SHARE AMOUNTS:
Primary $ 4.51 $ 4.95 $ 4.44 $ 3.04
======= ======= ======= =======
Fully diluted $ 4.25 $ 3.80 $ 2.78
======= ======= =======
1996 pro forma amounts for net income and weighted average common shares
reflect, as of January 1, 1996, the February 20, 1997 debenture conversion by
adding back to net income the applicable interest expense, net of income taxes,
and increasing the average shares for the shares issued on conversion.
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TRENWICK GROUP INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Pages
-----
Financial Statements:
Consolidated Balance Sheet at December 31, 1996 and 1995 ............. *
Consolidated Statement of Income
for the three years ended December 31, 1996...................... *
Consolidated Statement of Changes in Stockholders' Equity
for the three years ended December 31, 1996...................... *
Consolidated Statement of Cash Flows
for the three years ended December 31, 1996...................... *
Notes to Consolidated Financial Statements............................ *
Report of Independent Accountants
on Consolidated Financial Statements.................................. *
Financial Statement Schedules:
III - Condensed Financial Information of Registrant ............ S-1/S-2
Report of Independent Accountants on Financial Statement
Schedules ......................................................... S-3
* Incorporated by reference to Trenwick's 1996 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.
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TRENWICK GROUP INC. AND SUBSIDIARIES
SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
December 31,
-------------------
1996 1995
---- ----
(in thousands)
Assets:
Investments in consolidated subsidiaries $346,060 $323,221
Fixed maturity investments available for sale
at fair value (amortized cost: $14,793 and $14,786) 14,814 15,027
Cash and cash equivalents 2,964 1,323
Deferred debt issuance costs 986 1,281
Due from consolidated subsidiaries 4,303 3,132
Net deferred income taxes 391 81
Other assets 11 487
-------- --------
Total assets $369,529 $344,552
======== ========
Liabilities:
Convertible debentures $103,500 $103,500
Other liabilities 276 276
-------- --------
Total liabilities 103,776 103,776
Stockholders' equity 265,753 240,776
-------- --------
Total liabilities and stockholders' equity $369,529 $344,552
======== ========
STATEMENT OF INCOME -- PARENT COMPANY ONLY
Year ended December 31,
----------------------------------
1996 1995 1994
---- ---- ----
(in thousands)
Revenues:
Consolidated subsidiary dividends $ 9,100 $ 9,500 $ 9,400
Net investment income 1,000 940 1,001
Net realized investment gains -- -- 90
------- ------- -------
Total revenues 10,100 10,440 10,491
Interest and operating expenses 6,504 6,486 6,469
------- ------- -------
Income before income taxes 3,596 3,954 4,022
Income taxes (1,997) (1,954) (1,738)
------- ------- -------
Income before equity in undistributed
income of consolidated subsidiaries 5,593 5,908 5,760
Equity in undistributed income of
consolidated subsidiaries 28,255 23,933 14,522
------- ------- -------
Net income $33,848 $29,841 $20,282
======= ======= =======
S-1
32
TRENWICK GROUP INC. AND SUBSIDIARIES
SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS -- PARENT COMPANY ONLY
Year ended December 31,
------------------------------------
1996 1995 1994
---- ---- ----
(in thousands)
Cash flows from operating activities:
Dividends and net investment income received $ 10,537 $ 10,436 $ 9,949
Interest and operating expenses paid (5,642) (5,678) (5,827)
Income taxes received 2,061 2,116 2,377
-------- -------- --------
Cash provided by operating activities 6,956 6,874 6,499
Cash flows for investing activities:
Sales of fixed maturity investments -- -- 5,280
Cash flows for financing activities (5,315) (5,764) (12,294)
-------- -------- --------
Change in cash and cash equivalents 1,641 1,110 (515)
Cash and cash equivalents, beginning of year 1,323 213 728
-------- -------- --------
Cash and cash equivalents, end of year $ 2,964 $ 1,323 $ 213
======== ======== ========
S-2
33
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 January 27, 1997, appearing on Page 43 of the 1996 Annual Report to
Stockholders of Trenwick Group Inc. (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the Financial Statement Schedules listed in Item 14
(a) of 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.
Price Waterhouse LLP
New York, New York
January 27, 1997
S-3