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What differentiates Trenwick from other companies...is the combination of the
level of our talent and the way we've organized and leveraged it.
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TRENWICK GROUP INC.
Trenwick Group Inc. is a publicly traded holding company whose principal
subsidiary, Trenwick America Reinsurance Corporation (Trenwick America Re),
underwrites reinsurance.
Trenwick America Re reinsures property and casualty risks primarily written by
U.S. insurance companies. Substantially all of Trenwick America Re's business is
produced by reinsurance brokers. The bulk of the business underwritten is
treaty, including standard and specialty business. Trenwick America Re also
underwrites facultative reinsurance.
Trenwick America Re is domiciled in Connecticut and is licensed, authorized or
approved to write reinsurance in all 50 states and the District of Columbia. It
had statutory surplus of approximately $286 million as of December 31, 1996.
Based on the most recent information prepared by the Reinsurance Association of
America (RAA), there are over 50 active U.S. property/casualty reinsurers.
Trenwick America Re ranked nineteenth among professional reinsurers at year-end
1996 when measured in terms of capital and surplus. By the same measure,
Trenwick America Re ranked fourteenth among brokerage market reinsurers. Among
independent reinsurers, those companies neither owned by nor affiliated with
large U.S. or foreign insurance or financial institutions, Trenwick America Re
ranked fourth.
Trenwick America Re is rated A+ (Superior) by A.M. Best Company, an
industry-recognized rating organization. Trenwick America Re is one of only six
brokerage market reinsurers to hold this rating, the highest currently awarded
to any company in the brokerage segment. In 1996, Standard & Poor's Insurance
Rating Services upgraded Trenwick America Re's Claims-Paying Ability Rating to
A+ (Good).
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FULLY DILUTED
EARNINGS PER SHARE
[BAR GRAPH]
BOOK VALUE PER SHARE
[BAR GRAPH]
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FIVE YEAR SUMMARY
Year ended December 31, 1996 1995 1994 1993 1992
- - ------------------------------------------------------------------------------------------------------------------
(in thousands except per share data)
INCOME STATEMENT DATA
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Net premiums written $226,364 $197,162 $139,635 $101,392 $ 81,883
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Net investment income 41,226 36,828 33,932 34,954 30,859
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Net income 33,848 29,841 20,282 23,739 18,539
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GAAP combined ratio 95.8% 95.6% 103.2% 102.5% 112.3%
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PER SHARE DATA
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Net income per share
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Primary $ 4.95 $ 4.44 $ 3.04 $ 3.48 $ 2.76
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Fully diluted 4.25 3.80 2.78 3.12 2.75
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Dividends per share 1.24 1.12 1.00 .86 .76
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Book value per share 39.52 36.54 29.23 31.41 26.02
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BALANCE SHEET DATA
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Total assets $920,804 $820,930 $727,245 $700,407 $652,473
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Investments and cash 754,210 653,704 551,784 546,303 500,359
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Unpaid claims and claims expenses 467,177 411,874 389,298 354,582 351,897
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Convertible debentures 103,500 103,500 103,500 103,500 103,500
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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
- - ------------------------------------------------------------------------------------------------------------------
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CHAIRMAN'S LETTER
[PHOTO OF JAMES F. BILLETT, JR, CHAIRMAN]
DEAR FELLOW STOCKHOLDER:
Once again, I'm pleased to report that Trenwick Group Inc.'s operating
performance was excellent last year. The highlights included record earnings of
$4.25 per share and double-digit premium and EPS growth of 15% and 12%,
respectively. The Company reported record operating cash flows of $110.5 million
and growth in investment income of 12%. In addition, we achieved a superior
combined ratio of 95.8%, and Trenwick's ROE of 13.4% once again exceeded our
hurdle of twice the risk-free rate by better than 100 basis points.
All of this was difficult to accomplish in a marketplace that was oversaturated
with capital and where demand for reinsurance shrank appreciably. We continued
to prosper because we have an abundance of the industry's only scarce resource -
talented people. I'll expand on our advantage and address our focus on this
resource throughout my letter.
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Notwithstanding our strong operating performance, Trenwick's shares
underperformed the market in 1996. A negative return of 15.6% for the year,
including dividends, was far below my expectations. The property/casualty
insurance business, of which the reinsurance industry is a subset, also
underperformed the overall market and, excluding the pricey take-outs of
National Re (by General Re) and American Re (by Munich Re), the reinsurance
segment underperformed the market, too.
By design, there is a relatively high level of inside ownership, including
restricted stock and stock options, at Trenwick. This feature distinguishes us
from other companies in our industry. I've always believed it's fundamental to
align the interests of management and key employees with those of stockholders.
Sharing the wealth is generally the theme, but sharing the pain, from time to
time, is a real character builder. Disappointing share performance in 1996 had a
tangible impact on the fortunes of our key people. Our longer term total return
to stockholders had been top tier (e.g., through 1995, 21.26% compounded over
five years), but last year's reversal of that trend got everyone's attention.
While we can't directly control the price of our stock, we've recently taken
some steps which I believe will result in a higher correlation between the
consistently fine operating performance of the Company and its valuation in the
market.
In January 1997, we successfully completed a $110 million private offering of
8.82% Subordinated Capital Income Securities with a 40 year maturity.
Substantially all
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the proceeds of this financing were to be used to redeem Trenwick's outstanding
convertible debentures, to the extent holders of the debentures didn't exercise
their right to convert them into Trenwick common stock.
In February 1997, we called our outstanding convertible debentures, redeemed
$45.8 million and issued 1.2 million shares of Trenwick common stock to those
debenture-holders who elected conversion.
The combined result of these two undertakings was accretive to stockholders.
Trenwick, in effect, repurchased 944,741 shares at a price of $49.75 per share
with funds provided by opportunistic long-term financing at a competitive fixed
interest rate. Because less than 100% of the debentureholders redeemed their
debentures, Trenwick now has investments and cash at the holding company level
in excess of $75 million available for general corporate purposes, including
business expansion and share repurchases. In addition, the Company's debt to
total capitalization ratio improved to 25% from 28%.
In March 1997, Trenwick's Board approved a 3-for-2 stock split, the first in our
history. The distribution will be paid on April 15, 1997 to stockholders of
record on March 18, 1997. As a result of the conversion of nearly 56% of the
Company's convertible debentures and the subsequent stock split, the float in
Trenwick shares will increase to 11.9 million shares from 6.7 million shares,
improving liquidity for stockholders. Also in March 1997, Trenwick's Board of
Directors increased the Company's thirty-seventh consecutive quarterly dividend
by 16% over the prior quarter.
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The financial engineering discussed above is consistent with our historical
comprehensive approach to running the business for the benefit of stockholders.
Capital management is one of several tools we've previously employed to build
value.
We faced many challenges as a growth company in a maturing industry last year.
Price competition and consolidation in the underlying property/casualty
insurance business squeezed reinsurance margins and generally reduced demand for
reinsurance. While our premium growth exceeded comparable reinsurance industry
growth rates, our rate of growth declined to 15% from 41% in 1995 and 38% in
1994. I expect our rate of growth to remain in double digits in 1997, but to be
lower than last year's rate.
Strategic hiring is another important tool we use to build value. We grew at a
faster pace in 1996 than the rest of the pack because of our investment in
additional talent in 1995, which I wrote to you about in some detail last year.
The experienced team we acquired caused our core casualty treaty business to
increase at a net rate of 20%, including both voluntary and involuntary
shrinkage in our renewal business. This investment delivered immediate returns
last year and will improve our longer term prospects, as well.
Our initiatives toward new strategic hires in 1996 were either unsuccessful or
incomplete. We're in the market, as I write, to attract talented individuals or
teams of individuals who are prepared to trade their
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intellectual assets or proprietary skills and relationships for a seat at
Trenwick's collaborative management table and a stake in the incremental value
they contribute. I want to increase our already disproportionate share of this
scarce resource. I believe it's the lowest risk/highest return consolidation
strategy in our industry.
For the past few years, I've written to you about our tactic of engaging in
strategic alliances. We've defined strategic alliances as reinsurance
relationships with reinsurance market leaders in lines of business where we
don't have expertise, or don't have current plans to build the infrastructure
necessary to compete successfully as a leader in those lines ourselves. Call it
the "join'em rather than fight'em" approach. As a rule of thumb, we believe
strategic alliances must be long-term in intent, quota share in form and have
the potential to contribute $1 per share (pre-split) in GAAP earnings within 36
months. In 1996, we celebrated the fourth successive year of our very profitable
strategic alliance with PXRE Re. In addition, we entered into two new strategic
alliances last year; one with Transatlantic Reinsurance Company and another with
Duncanson & Holt, a wholly-owned subsidiary of UNUM Corporation. Details of
these new partnerships are outlined in the 1996 Operations Review in this Annual
Report. In 1996, strategic alliances accounted for 9% of Trenwick's net
premiums. I expect our three fully operational alliances will represent 12% of
our net writings in 1997.
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There is a common thread that connects our predilection for strategic hiring and
strategic alliances: talented people. Whether we acquire them or ally with them,
I believe they're the key ingredient for profitable long-term growth.
We also looked to build value last year through continued efforts on the
merger/acquisition front. We had several discussions, none of which developed
into a feasible plan. As with the other value-building tools we use, we remain
open to discussions with potential partners who need the strengths or structure
we bring and who offer an opportunity for us to build more value jointly than
independently. We believe the best opportunities for expediting growth in value
are with organizations whose talents are complementary to our own.
While I believe there is a dearth of talented people in our industry, I don't
mean to suggest that we're the only company that has any. What differentiates
Trenwick from other companies, however, is the combination of the level of our
talent and the way we've organized and leveraged it.
Frankly, not one of us is totally capable of performing all functions at the
highest skill level. But, we've designed a unique series of integrated
marketing, underwriting and operational processes that interface our best
talents at their respective strongest points. The result is a better answer for
all constituencies. For long-term stockholders, Trenwick's systematic and
multidimensional approach to the business, its unim-
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peachable balance sheet and its superior track record represents more than a
safe haven in uncertain times. Trenwick is a company that's growing
deliberately, both by acquiring talented people and by creating an environment
where those talents can produce real gains.
Before I close, I'd like to ask that you remember Donald E. Chisholm, a director
of Trenwick since 1995 and a member of the Board's Compensation Committee since
1996. Don died on March 1, 1997 after an extended illness. He was 58 years old.
While his tenure at Trenwick was far too brief, his experience in the industry
was considerable. In over three decades of service, Don was associated with
three reinsurance companies in addition to ours, one as a founder and two as
Chief Executive. Don had a wry sense of humor and was a wily negotiator and
loyal friend. I'll miss his savvy advice and good company.
I'll write to you throughout the year to discuss our plans and results. I'll be
available at our Annual Meeting in May or at other mutually convenient times to
answer your questions or receive your input.
/s/ James F. Billett, Jr.
James F. Billett, Jr.
Chairman, President and
Chief Executive Officer
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1996 OPERATIONS REVIEW
[PHOTO OF
Left to Right Paul Feldsher, Stephen H. Binet, Robert A. Giambo, James F.
Billett, Jr., James E. Roberts, Alan L. Hunte]
Trenwick increased net written premiums to $226.4 million in 1996, despite a
softening of market conditions. This increase represents the Company's fourth
consecutive year of premium growth. Although changes in the reinsurance
environment slowed the rate of premium growth to 15% from the previous year's
41% pace, Trenwick succeeded in surpassing the domestic reinsurance industry's
overall premium growth rate of 4.5% for the year.
The property and casualty industry, of which reinsurance is a part, struggled
through the eighth year of prolonged price competition. Lower rates, broadened
coverage and an abundance of capacity were evident in most lines of insurance.
Some ceding companies sought to sustain growth by buying less reinsurance and
retaining more premium. Others, challenged by shrinking margins
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and fierce competition, pushed for reductions in their reinsurance costs through
rate decreases or higher ceding commissions on the reinsurance they continued to
place.
In mid-year, Lloyd's of London successfully completed its Reconstruction and
Renewal plan, ending several years of uncertainty over its ability to continue
as a viable market. As new sources of capital rushed to enter Lloyd's, its
underwriters embarked on an aggressive attempt to recapture business, including
specialty reinsurance business, that had fled the London market in favor of
domestic reinsurers.
The increasingly competitive climate was a significant factor in prolonging the
consolidation of the reinsurance industry which began in the early 1990's.
Eleven reinsurance companies were acquired, merged or withdrew from the U.S.
market in 1996. While the previous restructuring of the business had been
confined to the brokerage segment of the market, the most recent wave of
activity breached the direct segment. Two of the six U.S. direct reinsurers were
acquired in 1996. A third underwent a major capital and structural
reorganization.
Continued attrition in the industry, including disruption in the direct segment,
created openings for those broker market reinsurers with the credentials to meet
reinsurance buyers' increasingly stringent financial criteria. Trenwick, with
statutory surplus of approximately $286 million at the end of 1996, an A+
(Superior) rating from A.M. Best Company and an A+ (Good) Claims-Paying Ability
Rating from Standard & Poor's Insurance Rating Services, was well qualified to
benefit from those opportunities.
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In 1996, Trenwick worked to grow its premium writings by solidifying its
relationships within the reinsurance brokerage community and by enhancing its
reputation as a significant participant in lower-layer casualty placements.
Trenwick added a substantial number of new casualty accounts and created
incremental growth by entering into new strategic alliances with market leaders
in product lines in which it did not materially participate. The Company also
worked to further boost productivity, strengthening its ability to compete even
more efficiently in an increasingly difficult environment.
OPERATIONS
For the fourth straight year, Trenwick performed at a record level of
productivity. While overhead costs rose $1.6 million, including the first full
year of expenses associated with the addition of a team of senior underwriters
in mid-1995, net earned premiums grew by $33.7 million and the overhead ratio
(calculated by dividing underwriting expenses by net earned premium) declined by
6%.
Through attrition, the number of people employed by Trenwick declined 4% during
1996 as the Company remained committed to rethinking positions rather than
replacing them. The Company also continued its efforts to maximize the average
premium associated with each transaction. Net written premiums expanded by 15%
while the number of treaty casualty contracts, which account for most of
Trenwick's business, shrank by 2%.
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One component of the Company's ability to write and process more business with a
relatively stable head count has been a continuous review of its information and
support systems. In 1996, Trenwick concluded a company-wide upgrade of computer
hardware and software. During the year, the Information Systems Department also
initiated and completed an extensive project to address the "Millennium Problem"
involving recognition of the year 2000 by all the Company's software, a task
many companies have not yet tackled, without disrupting operations and with
minimal use of outside assistance.
The revenue per employee and overhead ratio graphs below further illustrate
Trenwick's consistent progress in controlling costs and infrastructure. The
ability to significantly expand its business while utilizing existing
resources, which Trenwick has cultivated over the last five years, is an
increasingly valuable skill in an environment where profit margins are under
increasing pressure.
REVENUE PER EMPLOYEE OVERHEAD RATIO
(in thousands)
[BAR GRAPH] [BAR GRAPH]
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UNDERWRITING
Trenwick's underwriting methodology combines transactional analysis with a
formal control process. Underwriters review transactions from a broad spectrum
of classes and lines of business. Their decision to participate or decline is
based on an assessment of the profit potential of the individual transaction
rather than on a predetermined profile of the Company's overall portfolio.
Overlying the transactional review is a formal system of collaborative
referrals, actuarial reviews and audits that evaluates the Company's
underwriting practices, ensures that exposures are properly identified and
guards against significant losses. A committee composed of the Company's senior
underwriters and its chief actuary periodically reviews underwriting policy and
monitors accumulations and concentrations of risk in both the property and
casualty segments of Trenwick's business.
As market conditions softened during 1996, Trenwick continued to measure
individual transactions against a standard of current or reasonably foreseeable
underwriting profit - i.e. premium that exceeds projected claims and expenses.
Consequently, Trenwick was willing to participate in less than half the
transactions offered to it in 1996, and the Company withdrew from a number of
renewal accounts that did not offer the prospect of underwriting profitability.
Statutory combined ratio for 1996 rose nominally to 95.7% from 95.5% in 1995,
assisted by favorable development in prior years' reserves, the absence of major
catastrophes which would have impacted Trenwick primarily through its strategic
alliance with PXRE Reinsurance Company (PXRE Re), and the prudent purchase of
outgoing reinsurance to protect results in a declining market.
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Trenwick underwrites three types of business. Facultative is underwritten on a
risk-by-risk basis where Trenwick applies its own pricing to the individual
exposure. Treaty is divided into standard treaty business and specialty treaty
business. Standard treaty involves blocks of risks where the class of business
or the size and longevity of the account generate sufficient data for analysis
by a variety of actuarial techniques. Specialty treaty business also entails
grouping multiple risks, but generally involves classes or coverages which are
less statistically predictable. Trenwick underwrites this business with a hybrid
methodology combining quantitative tests with a more detailed examination of the
original risks, rates and coverages within the block of business.
In April 1993, shortly after Trenwick initiated the controlled growth strategy
it continues to pursue, the Company embarked on a strategic alliance with PXRE
Re. By aligning with a leader in property catastrophe reinsurance with a
worldwide spread of business, Trenwick was able to immediately benefit from the
rise in catastrophe rates that followed Hurricane Andrew in 1992 and augment its
own expertise in an area of the business in which it was a minor participant.
Trenwick and PXRE Re continued as strategic partners through 1996. Although
property catastrophe rates have drifted downward since 1993 and PXRE Re has
responded by reducing its premium writings, Trenwick continued to derive
significant profits from the relationship.
Trenwick added to the premium it underwrites on its own behalf by forging two
additional strategic alliances in 1996. Early in the year, Trenwick brought
additional capacity to the expertise provided by Transatlantic
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Reinsurance Company (Transatlantic Re), the recognized domestic leader in
reinsurance of health care professional liability. This type of specialty
reinsurance generally involves large limits, and those reinsurers with
significant capacity enjoy commensurate pricing advantages.
In October, Trenwick entered into a partnership with Duncanson & Holt (D&H), a
wholly-owned subsidiary of UNUM Corporation. Duncanson & Holt, which functions
as an underwriting manager for a number of pools and reinsurance facilities, is
the largest provider of accident and health reinsurance in the United States.
Trenwick assumes a portion of the reinsurance from a broad base of the business
underwritten by Duncanson & Holt. In addition, the Company allows D&H to issue
reinsurance in Trenwick's name to those D&H property and casualty clients who
feel more comfortable buying from a reinsurer in the same segment of the
industry, like Trenwick, than from life reinsurers who constitute the majority
of the participants in D&H's syndicated facilities.
Both of these new strategic alliances extended Trenwick's activities into areas
in which it did not previously participate. Because of the accounting provisions
that characterize reinsurance transactions, only a portion of the annualized
premiums associated with the Transatlantic relationship was reported in 1996.
Premiums and fees derived from the Duncanson & Holt alliance, which began in the
fourth quarter, will not be reflected until 1997.
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The table below compares Trenwick's total net premiums written, including
premiums from the PXRE Re and Transatlantic alliances, by type of business for
the last two years:
(in thousands) 1996 1995
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CASUALTY
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Standard Treaty $144,074 $108,330
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Specialty Treaty 46,048 50,593
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Facultative 6,404 6,035
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196,526 164,958
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PROPERTY 29,838 32,204
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TOTAL $226,364 $197,162
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The 19% increase in casualty premiums was the result of a 62% rise in new
business over 1995 and a 3% advance in renewal premiums. Trenwick added 48 new
treaty casualty accounts in 1996, causing new casualty premiums to surge. The
influx in new business reflects the momentum of the Company's marketing program,
augmented by the success of a team of four senior underwriters, who joined the
Company during 1995, in attracting incremental business to Trenwick.
Specialty renewal business was adversely impacted by the decision of several
large ceding companies to buy less reinsurance on maturing programs where
sufficient data now allows the ceding company to predict future results with a
higher degree of certainty.
For the past four years, Trenwick has lobbied for larger shares on selected
existing casualty accounts. The Company boosted its participations on 30 treaty
transactions in 1994 and 26 in 1995. Over time, Trenwick's
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ability to garner greater shares of existing transactions diminishes as buyers
consolidate their placements among a handful of high quality incumbent
reinsurers. Expanding limits of some reinsurance programs and continuing
attrition among reinsurers afforded a number of opportunities in 1996, and
Trenwick broadened its participation on 20 renewal accounts during the year.
However, the effect of these larger shares on the level of 1996 renewal premiums
was essentially offset by increased retentions by ceding companies, Trenwick's
withdrawal from several renewals which did not meet its underwriting criteria
and the difficulties experienced by many insurance company cedants as they
struggled to maintain market share in the face of fierce competition.
Consequently, continuing casualty business increased by only 3% over 1995.
Trenwick increased its facultative premiums by 6% in 1996. Competition in this
commodity line closely mirrored the contentious conditions prevalent in the
general insurance market. The Company continued to focus its facultative
activities in the lower layers of commercial auto liability. Trenwick applies
its own pricing to this type of business and can quickly select from a large
number of submissions, increasing the likelihood of profitability. Facultative
business is exclusively casualty and constitutes approximately 3% of Trenwick's
net premiums.
In the absence of large natural disasters producing significant losses to the
U.S. reinsurance market in 1996, property reinsurance rates continued their
downward slide. Guy Carpenter & Co., a leading reinsurance brokerage firm,
recently estimated the reduction in property reinsurance costs at approximately
17%. As a result, Trenwick's total property premiums, including those obtained
from its
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partnership with PXRE Re, dropped 7% to $29.8 million. The Company quoted only
13% of new transactions offered to it and added only two new accounts over the
year.
The graphs below display the distribution of the types and lines of business
that comprised Trenwick's underwriting portfolio at the end of 1996:
1996 NET PREMIUMS WRITTEN BY TYPE
[PIE CHART]
Standard Treaty Casualty 63.7%
Facultative 2.8%
Treaty Property 13.2%
Specialty Treaty Casualty 20.3%
1996 NET PREMIUMS WRITTEN BY LINE
[PIE CHART]
Property 20.8%
Medical Malpractice 4.3%
Products Liability 1.1%
Workers' Compensation 9.1%
Miscellaneous 4.6%
Auto Liability 28.5%
General Liability 10.0%
Errors & Omissions 21.6%
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By type of business, casualty represented 87% of total net written premiums in
1996, up from 84% in 1995, reflecting deteriorating property pricing. By line of
business, auto liability and errors and omissions liability for professionals
each showed small proportional decreases but totaled slightly more than half of
Trenwick's business. Medical malpractice rose from 3.5% of the portfolio in 1995
to 4.3% in 1996 directly as a result of the new strategic alliance with
Transatlantic Re. Workers' compensation, which had been negligible in prior
years, jumped to a 9.1% share in 1996. This business was derived from several
new transactions with regional writers of this line. Like the bulk of Trenwick's
casualty business, the Company participated in lower layers of these reinsurance
placements. The combination of relatively low attachment points, narrow
reinsurance limits and the characteristics of lines such as workers'
compensation and auto liability allows for more meaningful actuarial analysis
and generally produces more stable and predictable results than more volatile
types of reinsurance.
New casualty business represented approximately one third of Trenwick's total
premiums in 1996. Because of the time required for premium to flow through the
pipeline between insurance company and reinsurer, new casualty premiums first
recorded in any given year include premiums from accounts first written up to
two years before. The growth in 1996 new casualty was the cumulative product of
several years of controlled expansion. The senior underwriters who joined the
Company in mid-1995 from Re Capital Corporation, which was acquired by another
reinsurer, created new opportunities for Trenwick on accounts which were already
familiar to them and were a major factor in fueling the premium pipeline.
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Included in the new business attracted by the ex-Re Capital underwriters were
several large transactions with regional or smaller ceding companies. Business
from these sources, which are generally more reinsurance dependent than larger
companies, more than offset business lost to increased retentions by
multinational cedants.
Smaller ceding companies often buy quota share, or proportional, reinsurance.
While the level of quota share business increased somewhat from 1995, more than
half of Trenwick's 1996 premiums were written on an excess of loss basis. Excess
business affords reinsurers direct control of the reinsurance pricing for any
transaction and some degree of insulation from competitive conditions in the
underlying insurance market.
The way in which reinsurance is bought and distributed is in the midst of a
dramatic transformation. Buyers have concentrated their placements within a
small group of top-tier trading partners that often includes a mix of direct and
broker market reinsurers. Consolidation among brokers has created large,
well-integrated intermediaries which are becoming increasingly adept at
generating reinsurance opportunities from related retail insurance operations or
underwriting managers farther down the distribution chain.
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The goal of Trenwick's marketing effort has been to establish the Company among
the handful of broker markets considered for the most desirable transactions.
Recently, several broker market reinsurers have attempted to short-circuit the
distribution system by establishing or acquiring insurance subsidiaries.
Trenwick chooses not to compete with its clients and relies on independent
reinsurance intermediaries to supply its business from non-related sources. In
1996, Trenwick realigned its systematic marketing process, magnifying its focus
on cementing or creating relationships with those individual brokers who handle
or have access to desirable business. Trenwick's underwriters spent a record
total of 882 working days making 449 personal visits updating market and account
intelligence, ensuring the broadest possible selection of new business
opportunities and positioning the Company at the top of the list for additional
shares of desirable transactions.
In the last four years, Trenwick has secured a position in the top tier of
broker market reinsurers and as a market of choice for lower-layer casualty
business. In 1996, Trenwick expanded its business in size as well as scope, and
worked both smarter and harder to exploit opportunities created by an evolving
distribution system. Despite turbulent market conditions, Trenwick successfully
leveraged relationships into growth and expertise into earnings.
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INVESTMENTS
Trenwick manages its fixed-income portfolio using an investment process that
matches the duration of a segregated portion of the Company's invested assets to
the duration of its expected liabilities. The balance of the Company's invested
assets are managed to maximize overall yield within the constraints of
Trenwick's conservative investment guidelines. The process allows for better
management of the risks on both sides of the balance sheet.
During 1996, the performance of Trenwick's investment portfolio met its
objectives, both in terms of investment yield, credit quality and
diversification. Since 1994, the Company's improved risk management capabilities
have enabled it to reduce the potential volatility of its fixed-income
securities primarily through additional diversification. Greater emphasis has
also been given to investments with minimal call risk to further reduce the
impact lower interest rates might have on the portfolio's overall performance.
The investment climate in 1996 posed several challenges for the Company.
Maintaining the Company's objectives of a conservatively run portfolio while at
the same time producing consistent growth in income was increasingly difficult
given current relatively low interest rates, lack of adequate supply of
acceptable securities and the highly competitive insurance and reinsurance
market.
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Declining underwriting margins often require companies to revisit their
investment guidelines to explore ways of generating additional income. Such
changes in portfolio strategy can result in an unacceptable level of investment
risk. Trenwick's investment guidelines remained unchanged in 1996. These
guidelines allowed Trenwick to continue to employ conservative investment
strategies which better balance issues such as liquidity, credit risk, interest
rate risk and volatility.
In 1996, net investment income increased 12% to $41.2 million compared to $36.8
million in 1995, primarily as a result of the sustained growth in Trenwick's
invested asset base. After-tax investment income was $32.1 million versus $28.9
million. Despite the rising interest rate environment, as evidenced by an
increase of 83 basis points in the five-year treasury yield, the overall
pre-tax investment yield declined by 20 basis points, as a result of lower
reinvestment rates on maturities. As of year-end 1995, the Company had net
unrealized gains in its portfolio of $26.7 million. At year-end 1996, the
Company had unrealized gains in its portfolio of $18.1 million, a decrease in
the fair value of the Company's invested assets of $8.6 million, primarily
attributable to lower interest rates. This decline of $5.6 million after-tax, or
$.83 per share, reduced the overall increase in the Company's book value during
1996.
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Trenwick's fixed-income investment portfolio consisted entirely of investment
grade securities, with 92% having a quality rating of Aa or better. The
following graphs illustrate the composition of Trenwick's investment portfolio
and the quality of its fixed-income investments as of December 31, 1996:
INVESTMENT ASSET ALLOCATION
[PIE CHART]
Corporate Securities 5.0%
Other 6.1%
U.S. Government Bonds 12.2%
Mortgage & Asset-backed Securities 28.0%
Tax-exempt Bonds 48.7%
ASSET QUALITY RATINGS
[PIE CHART]
A 7.6%
Aa 10.0%
Aaa 82.4%
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REPORT OF MANAGEMENT
The management of Trenwick is responsible for the 1996 consolidated financial
statements and all other information presented in this Annual Report. The
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP), determined by management to be
appropriate, and include amounts based on management's informed estimates and
judgements. Financial information presented elsewhere in this Annual Report is
consistent with the consolidated financial statements. The appropriateness of
data underlying such financial information is monitored through internal
accounting controls, independent accountants and the Board of Directors acting
through an Audit Committee.
Trenwick maintains a system of internal accounting controls designed to
reasonably assure the integrity and reliability of financial reporting and to
provide reasonable assurance to management and the Board of Directors that
assets are safeguarded and that transactions are executed in accordance with
management's authorization and recorded properly. The system of internal
accounting controls is supported by the selection and training of qualified
personnel, by the appropriate division of responsibilities and by written
policies and procedures.
The Audit Committee of the Board of Directors is composed solely of outside
directors who oversee management's financial reporting responsibilities. The
Committee is responsible for recommending to the Board of Directors the
appointment of the independent accountants, which is subject to the ratification
of stockholders. The Committee
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meets periodically with management and the independent accountants to review
reports of management and the independent accountants regarding accounting
policies and practices, audit results and internal accounting controls. The
Committee has direct access to the independent accountants and meets with them
without management present to discuss the results of the audit.
The 1996 consolidated financial statements have been audited by Trenwick's
independent accountants, Price Waterhouse LLP, in accordance with generally
accepted auditing standards and have been reviewed by the Audit Committee of the
Board of Directors. This audit by Price Waterhouse LLP includes an evaluation of
the internal control structure to the extent necessary to determine the audit
procedures required to express their opinion on the consolidated financial
statements.
/s/James F. Billett, Jr.
- - ------------------------
James F. Billett, Jr.
Chairman, President and
Chief Executive Officer
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INDUSTRY OVERVIEW
The property and casualty reinsurance industry is currently in its eighth
consecutive year of soft market conditions. Despite the record level of
catastrophes since 1989 and the continued strengthening of reserves for exposure
to environmental and asbestos losses, there has been little overall rate
improvement in the reinsurance environment. Competition has, in fact, increased
in recent years as a result of the ability of companies to raise additional
capital through public and other financing, the use of both traditional and
non-traditional reinsurance products and realized gains on invested assets.
These factors have mitigated any positive impact which may have occurred from
the decline in the number of reinsurance companies through withdrawal or
acquisition. The remaining companies are larger, offer significantly more
capacity to ceding companies and have greater access to capital through capital
markets or their parent organizations. Further, Lloyd's of London has rebounded
from a period of uncertainty and is now aggressively competitive. The result is
an oversupply of capacity in the reinsurance industry, which is more than
capable of writing the current level of domestic premiums. In 1996, domestic
premiums as reported by the RAA amounted to $18.9 billion, an increase of 4.5%
compared to $18.1 billion in 1995.
During this period of soft market conditions, Trenwick has taken advantage of
both the availability of capital in the financial markets and new opportunities
in the business. In 1992, Trenwick raised additional capital through a
convertible debt offering, thereby increasing its capacity for underwriting
risks and positioning the Company to take advantage of market opportunities.
Having written
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a majority of its business since 1986, Trenwick has not had to materially
strengthen its reserves for any exposure to environmental or asbestos claims,
enabling the Company to focus all of its resources on the development of future
business. Over the following several years, Trenwick implemented several
strategic initiatives which enabled it to increase its premium writings during
the current soft market. These included increased participations in renewal
business through increased marketing efforts as reinsurance buyers consolidated
their business within a smaller number of higher quality reinsurers such as
Trenwick. This result was augmented by the hiring of a team of senior
underwriters in 1995 from a company purchased by another reinsurer. Trenwick
also initiated several strategic alliances as an entry into lines of business
not then written by the Company. Partners in these alliances include PXRE Re, a
leader in property catastrophe reinsurance, Transatlantic Re, a leading
reinsurer in healthcare professional liability and Duncanson & Holt (a
wholly-owned subsidiary of UNUM Corporation), the largest provider of accident
and health reinsurance in the United States. As a result of these initiatives,
Trenwick has established itself as one of the leading broker market reinsurers
in the United States. Trenwick America Re is rated A+ (Superior) by A.M. Best
Company, the highest rating assigned to any broker segment reinsurer, and is
assigned a Claims-Paying Ability Rating of A+ (Good) by Standard & Poor's.
RESULTS OF OPERATIONS
Premiums
In 1996, Trenwick reported net premiums written of $226.4 million, a 15%
increase over 1995. This compares to a 41% increase in net premiums written in
1995 over 1994. The growth in premium volume in 1996 resulted from a 19%
increase in casualty business, which represents 87% of the Company's business.
This growth was partially offset by a 7% decrease in property business,
including property catastrophe business written pursuant to the Company's
strategic reinsurance agreement with PXRE Re. The increase in casualty business
is attributable to an increase in new casualty business. This business was
developed primarily by the senior underwriting executives
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hired in 1995 through existing and new relationships with various reinsurance
brokers. New casualty business, representing 33% of total premium writings in
1996, increased 62% over 1995. Continuing casualty business, which consists of
increases in participations in renewal transactions and growth in the original
business written by ceding companies, representing 54% of total premium writings
in 1996, increased 3% in 1996 over 1995. In 1996, insurance companies continued
to increase their retentions, thereby reducing the amount of reinsurance placed
with reinsurers. This reduction has primarily affected the Company's specialty
business and reduced the overall rate of growth in casualty business. In
addition, the Company declined to renew certain accounts which did not meet its
pricing standards. Property business, which represented 13% of total premium
writings in 1996, decreased as a result of continued price deterioration
experienced throughout the year. During 1995, Trenwick modified its process of
estimating premiums from ceding companies, resulting in an increase in accruals
for unreported premiums written at December 31, 1996 of $15.1 million as
compared to 1995, and an increase of $16.6 million in 1995 over 1994. These
estimated premiums did not materially affect the Company's earnings either in
1996 or 1995.
The following table sets forth gross premiums written, net premiums written and
net premiums earned for the periods indicated:
(in thousands) 1996 1995 1994
Gross premiums written $ 247,358 $ 214,336 $ 153,834
Ceded premiums written (20,994) (17,174) (14,199)
Net premiums written $ 226,364 $ 197,162 $ 139,635
Net premiums earned $ 211,069 $ 177,394 $ 132,683
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Underwriting Expenses
The combined ratio is one means of measuring the profitability of a property and
casualty reinsurance company. The combined ratio reflects underwriting
experience, but does not reflect income from investments or provisions for
income taxes. A combined ratio below 100% indicates profitable underwriting, and
a combined ratio exceeding 100% indicates unprofitable underwriting. Although a
reinsurer may have unprofitable underwriting results, the reinsurer may still be
profitable because of investment income earned on its accumulated invested
assets. In 1996 and 1995, Trenwick recorded an underwriting profit of $8.8
million and $7.7 million, respectively, compared to an underwriting loss in 1994
of $4.2 million.
The following table sets forth Trenwick's combined ratios and the components
thereof calculated on a GAAP basis for the periods indicated, together with
Trenwick America Re's combined ratios calculated on a statutory basis:
1996 1995 1994
Claims and claims
expense ratio 61.3% 63.7% 70.0%
Expense ratio
Policy acquisition
expense ratio 27.8 24.8 25.5
Underwriting expense ratio 6.7 7.1 7.7
Total expense ratio 34.5 31.9 33.2
Combined ratio 95.8% 95.6% 103.2%
Trenwick America Re
statutory combined ratio 95.7% 95.5% 103.1%
The most significant underwriting cost affecting a reinsurance company's
underwriting result is represented by its claims and claims expense ratio, which
is the ratio of incurred claims and claims adjustment expenses to net earned
premiums. The claims and claims expense ratio is a function of estimates of
claims associated with business written in the current period and changes in
estimates of claims on business written in prior periods. As indicated in the
preceding table, Trenwick's claims
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and claims expense ratio improved in 1996 and 1995 compared to 1994, reflecting
the lack of any material adverse impact from property catastrophe claims in 1996
or 1995. In 1994, catastrophe claims included $9.4 million from the Northridge
Earthquake in Southern California, which added 7.1 percentage points to the
claims and claims expense ratio. The effect of this catastrophe on the Company's
claims ratio was partially mitigated by a general improvement in its other
property business. Trenwick's property premium writings, including catastrophe
business associated with PXRE Re, amounted to $29.8 million, $32.2 million and
$34.7 million in 1996, 1995 and 1994, respectively. In 1996, 1995 and 1994,
estimates of prior accident year claims were reduced by approximately $4.4
million, $2.1 million and $450,000, respectively. The reduction over the last
three years primarily reflects the favorable development of Trenwick's casualty
business between accident years 1987 and 1992, partially offset by unfavorable
development in accident years 1993 through 1995.
Trenwick's expense ratio, which is the ratio of policy acquisition costs and
underwriting expenses to net earned premiums as determined in accordance with
GAAP, increased in 1996 to 34.5% as compared to 31.9% in 1995 and 33.2% in 1994.
Policy acquisition costs, which include brokerage and ceding commissions, vary
directly with premium volume and are subject to changes in the mix of business.
Trenwick writes business on both an excess of loss and quota share basis. Quota
share business generally carries higher ceding commissions than excess of loss
business. In 1996, quota share business increased to 43% of total premium
writings as compared to approximately 35% for 1995 and 1994. Therefore, the
policy acquisition expense ratio increased in 1996 and fluctuated nominally from
1994 to 1995. Underwriting expenses, which generally do not vary with premium
volume, were approximately $14.2 million, $12.6 million and $10.3 million in
1996, 1995 and 1994, respectively. Increased expenses in 1996 and
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35
1995 included costs associated with the addition of a five person underwriting
team in May 1995. The underwriting expense ratio, however, decreased .4 of a
percentage point in 1996 compared to 1995 and .6 of a percentage point in 1995
as a result of the increase in premium writings.
Trenwick America Re's statutory combined ratios for 1996, 1995 and 1994,
provided in the preceding table, were 8.1, 15.6 and 3.6 percentage points
better, respectively, than the weighted average statutory combined ratios for
all reinsurance companies that reported their results to the RAA in those
periods. The statutory combined ratios for this group of reinsurance companies
in 1996, 1995 and 1994 were 103.8%, 111.1% and 106.7%, respectively. The
statutory combined ratios as reported to the RAA by those companies, including
Trenwick America Re, which primarily accept business from brokers, for 1996,
1995 and 1994 were 107.6%, 106.9% and 108.9%, respectively.
Investment Income
Net investment income in 1996 of $41.2 million increased 12% compared to net
investment income of $36.8 million in 1995. Net investment income in 1995
increased 9% compared to net investment income of $33.9 million in 1994. Pre-tax
yields on invested assets, excluding equity securities, declined to 6.3% in 1996
from 6.5% in both 1995 and 1994. This decline resulted primarily from the
reinvestment of approximately $63 million and $56 million of maturities in 1996
and 1995, respectively, at lower interest rates. In 1996, maturities included
$24 million in principal repayments associated with Trenwick's portfolio of
structured and agency pass-through securities compared to $18 million in 1995.
As a result of the stabilization of interest rates and a trend toward purchasing
structured securities with less prepayment risk, principal repayments are
expected to remain similar in 1997. Investment income is expected to increase in
1997 as the Company's invested asset base grows along with
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36
an increase in operating cash flow. During 1996, the Company sold approximately
$19 million of U.S. government and agency securities and reinvested the proceeds
primarily in structured securities in order to increase the overall yield of the
portfolio. Additionally, approximately $3 million of structured securities were
sold to reduce exposure to possible downgrade and credit risk.
Operating Results
Trenwick's consolidated net income in 1996 was $33.8 million or $4.95 per share
compared to $29.8 million or $4.44 per share in 1995. Trenwick's consolidated
net income was $20.3 million or $3.04 per share in 1994. Fully diluted earnings
per share were $4.25 in 1996, $3.80 in 1995 and $2.78 in 1994. Consolidated net
income in 1994 included after-tax claims of $9.4 million associated with the
1994 Northridge Earthquake. Included in Trenwick's net income were after-tax
realized investment gains of $194,000 or $.03 per share and $239,000 or $.04 per
share in 1996 and 1995, respectively, and losses of $129,000 or $.02 per share
in 1994.
INVESTMENTS
At December 31, 1996, Trenwick had investments and cash of $754.2 million, an
increase of 15% compared to investments and cash of $653.7 million at December
31, 1995. This increase resulted principally from cash provided by operations
reduced by dividends paid to stockholders. Operating cash flow included $29.7
million received in December 1996 for the commutation of a reinsurance agreement
covering the years 1989 through 1993. All fixed maturity and equity investments
are classified as "available for sale" and reported at fair value, with the
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37
unrealized gain or loss, net of tax, reported in a separate component of
stockholders' equity. Since December 31, 1995, the market value of the Company's
fixed-income and equity investments decreased approximately $8.6 million. In
1995, Trenwick's investments and cash increased by $101.9 million or
approximately 18% when compared to 1994. That increase resulted principally from
cash provided by operations and the increase in the unrealized appreciation of
its fixed-income and equity portfolio, reduced by dividends paid to
stockholders.
The average maturity of fixed maturity investments at December 31, 1996 was 6.0
years compared to 5.6 years at December 31, 1995. During 1996, the proceeds from
sales and maturities of taxable and tax-exempt securities of $93.1 million,
together with cash provided by operations, were invested primarily in taxable
securities consisting of mortgage-backed securities of $41 million, asset-backed
securities of $24 million, U.S. government securities of $18 million, preferred
stock of $12 million and corporate bonds of $5 million. The proceeds were also
used to invest in $87 million of tax-exempt securities. Fixed-income securities
were invested in the average maturity range of between two to fifteen years.
During 1995, the proceeds from sales and maturities of taxable and tax-exempt
securities of $99.5 million, together with cash provided by operations, were
invested primarily in taxable securities consisting of mortgage-backed
securities of $44 million, asset-backed securities of $28 million and corporate
bonds of $10 million. The proceeds were also used to invest in $78 million of
tax-exempt securities.
The Company's investment policy requires that certain fixed-income investments
be maintained in an amount equal to the discounted present value of net
reinsurance liabilities. The policy also requires that additional fixed-income
investments be maintained in an amount equal to approximately 10 percent of
total reserve liabilities to ensure adequate liquidity in the event of a
significant change in estimated payments. At December 31, 1996, the fixed-income
investments held under this policy had the same average maturity of
approximately 4.1 years as that established for such liabilities.
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LIQUIDITY AND CAPITAL RESOURCES
Trenwick is a holding company whose principal asset is its investment in the
common stock of Trenwick America Re. As a holding company, Trenwick's principal
source of funds consists of permissible dividends and tax allocation payments
from Trenwick America Re and investment income on Trenwick's fixed-income
portfolio. Trenwick's principal uses of cash are dividends to its stockholders
and servicing its debt obligations. Trenwick America Re receives cash from
premiums, investment income and proceeds from sales and maturities of portfolio
investments and utilizes cash to pay claims, purchase its own reinsurance
protections, meet operating and capital expenses and purchase fixed-income and
equity securities.
Cash provided by operating activities of $110.5 million in 1996 increased
approximately 64% as compared to $67.4 million in 1995. In 1996, Trenwick agreed
to commute an aggregate excess of loss retrocessional 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 addition, cash provided by operating activities in 1996 also
increased as a result of an overall increase in premium writings. In 1995, cash
provided by operating activities increased by 11% from $60.8 million in 1994.
The increases in cash provided by operating activities in 1994 and 1995 are
attributable to increases in net premium writings. As evidenced by the increase
over the last three years, Trenwick expects that its cash provided by operating
activities will be sufficient to meet its operating and financing requirements
in 1997 and its longer term operating needs.
At December 31, 1996, Trenwick's investments and cash of $754.2 million exceeded
total liabilities, including gross reserves for claims and claims expenses of
$467.2 million, by $99.2 million, compared to $73.6 million and $12.8 million at
December 31, 1995 and 1994, respectively.
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At December 31, 1996, 1995 and 1994, Trenwick's net book value amounted to
$265.8 million, $240.8 million and $188.2 million, respectively. Trenwick
maintains a portion of its investment portfolio in cash equivalents which are
available in the event of unanticipated changes in cash requirements. At
December 31, 1996, Trenwick's investments consisted principally of fixed-income
securities, 92% of which are rated Aa or better. Trenwick's general policy is to
hold these securities to maturity. However, there may be business reasons which
would cause all or a portion of these securities to be made available for sale
prior to maturity; therefore, Trenwick records these investments at fair value,
with market value fluctuations reflected in stockholders' equity, net of tax
(see Note 1 to Consolidated Financial Statements).
The ratio of net premiums written to surplus, the "surplus ratio," relates to
the amount of risk to which an insurer's or reinsurer's statutory capital is
exposed, as measured by the amount of premiums written in relation to such
surplus. Property and casualty reinsurance companies currently have a surplus
ratio of approximately 0.7:1. Trenwick America Re's surplus ratios for both 1996
and 1995 were 0.8:1 and 0.6:1 for 1994, respectively. Accordingly, Trenwick has
sufficient surplus capacity to write additional business without significantly
exceeding the industry average.
Trenwick purchases reinsurance to reduce its exposure to catastrophe claims and
the frequency and severity of claims in all lines of business. In 1996,
Trenwick's reinsurance treaties consisted principally of an excess of loss
treaty for its facultative casualty business and two property catastrophe
reinsurance treaties. In addition, Trenwick purchased an annual aggregate excess
of loss ratio treaty for casualty business effective January 1, 1996. These
coverages were renewed effective January 1, 1997.
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REGULATORY MATTERS
The National Association of Insurance Commissioners (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 requires
specific corrective action. The ratios of Total Adjusted Capital to Authorized
Control Level RBC for Trenwick America Re exceeded all 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.
Under Connecticut insurance laws and regulations, the maximum amount of
shareholder dividends or other distributions that Trenwick America Re may
declare or pay to Trenwick 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.
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SUBSEQUENT EVENT
In January 1997, the Company made a private offering of $110 million in 8.82%
Subordinated Capital Income Securities ("Capital Securities") through Trenwick
Capital Trust I, a Delaware statutory business trust. In connection with this
offering, the Company called for redemption all $103.5 million aggregate
principal amount of the Company's 6% convertible debentures due December 15,
1999 on February 20, 1997, at a redemption price of 102.57% principal amount
plus accrued interest to the redemption date. As a result of the redemption
call, $45,819,000 principal amount were redeemed and $57,681,000 principal
amount were converted into an aggregate of 1,189,284 shares of the Company's
common stock, par value $.10 per share. The remaining net proceeds from the
offering of the Capital Securities will be used for general corporate purposes,
which may include investments in and advances to subsidiaries, the financing of
growth and expansion, the financing of possible future acquisitions and other
corporate purposes.
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REPORT OF INDEPENDENT ACCOUNTANTS
[LETTERHEAD PRICE WATERHOUSE LLP]
To the Board of Directors
and Stockholders of
Trenwick Group Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Trenwick Group Inc. and its subsidiaries at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/PRICE WATERHOUSE LLP
New York, New York
January 27, 1997, except for Note 13,
which is as of February 20, 1997
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TRENWICK GROUP INC.
CONSOLIDATED BALANCE SHEET
December 31, 1996 1995
- - -------------------------------------------------------- -------- ----------
(dollars in thousands)
ASSETS
- - -------------------------------------------------------- -------- ----------
Fixed maturity investments available for sale at
fair value (amortized cost: $700,476 and $609,751) $713,998 $633,525
- - -------------------------------------------------------- -------- ----------
Equity securities available for sale at fair value
(cost: $21,346 and $10,507) 25,959 13,419
- - -------------------------------------------------------- -------- ----------
Cash and cash equivalents 14,253 6,760
- - -------------------------------------------------------- -------- ----------
Total investments and cash 754,210 653,704
- - -------------------------------------------------------- -------- ----------
Accrued investment income 10,386 10,198
- - -------------------------------------------------------- -------- ----------
Receivables from ceding insurers 62,689 48,979
- - -------------------------------------------------------- -------- ----------
Reinsurance recoverable balances, net 47,772 68,449
- - -------------------------------------------------------- -------- ----------
Deferred policy acquisition costs 21,805 16,725
- - -------------------------------------------------------- -------- ----------
Net deferred income taxes 20,231 13,585
- - -------------------------------------------------------- -------- ----------
Other assets 3,711 9,290
- - -------------------------------------------------------- -------- ----------
Total assets $920,804 $820,930
- - -------------------------------------------------------- -------- ----------
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44
December 31, 1996 1995
- - -------------------------------------------------------- -------- ----------
(dollars in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
- - -------------------------------------------------------- -------- ----------
LIABILITIES
- - -------------------------------------------------------- -------- ----------
Unpaid claims and claims expenses $467,177 $411,874
- - -------------------------------------------------------- -------- ----------
Unearned premium income 71,448 56,050
- - -------------------------------------------------------- -------- ----------
Convertible debentures 103,500 103,500
- - -------------------------------------------------------- -------- ----------
Other liabilities 12,926 8,730
- - -------------------------------------------------------- -------- ----------
Total liabilities 655,051 580,154
- - -------------------------------------------------------- -------- ----------
STOCKHOLDERS' EQUITY
- - -------------------------------------------------------- -------- ----------
Preferred stock, $.10 par value,
1,000,000 shares authorized; none outstanding -- --
- - -------------------------------------------------------- -------- ----------
Common stock, $.10 par value, 15,000,000 shares
authorized; 6,725,217 and 6,590,411 shares outstanding 673 659
- - -------------------------------------------------------- -------- ----------
Additional paid-in capital 94,759 89,920
- - -------------------------------------------------------- -------- ----------
Retained earnings 159,512 133,949
- - -------------------------------------------------------- -------- ----------
Net unrealized appreciation of investments
available for sale, net of income taxes 11,789 17,346
- - -------------------------------------------------------- -------- ----------
Deferred compensation under stock award plan (980) (1,098)
- - -------------------------------------------------------- -------- ----------
Total stockholders' equity 265,753 240,776
- - -------------------------------------------------------- -------- ----------
Total liabilities and stockholders' equity $920,804 $820,930
- - -------------------------------------------------------- -------- ----------
The accompanying notes are an integral part of these statements.
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TRENWICK GROUP INC.
CONSOLIDATED STATEMENT OF INCOME
Year ended December 31, 1996 1995 1994
- - --------------------------------------------- -------- -------- --------
(in thousands except per share data)
Revenues
- - --------------------------------------------- -------- -------- --------
Net premiums earned $211,069 $177,394 $132,683
- - --------------------------------------------- -------- -------- --------
Net investment income 41,226 36,828 33,932
- - ------------------------------------------------------------------------------
Net realized investment gains (losses) 299 368 (196)
- - ------------------------------------------------------------------------------
Total revenues 252,594 214,590 166,419
- - --------------------------------------------- -------- -------- --------
Expenses
- - --------------------------------------------- -------- -------- --------
Claims and claims expenses incurred 129,316 113,068 92,840
- - --------------------------------------------- -------- -------- --------
Policy acquisition costs 58,757 44,024 33,799
- - --------------------------------------------- -------- -------- --------
Underwriting expenses 14,190 12,589 10,276
- - ------------------------------------------------------------------------------
Interest expense 6,503 6,496 6,469
- - --------------------------------------------- -------- -------- --------
Total expenses 208,766 176,177 143,384
- - --------------------------------------------- -------- -------- --------
Income before income taxes 43,828 38,413 23,035
- - --------------------------------------------- -------- -------- --------
Income taxes 9,980 8,572 2,753
- - --------------------------------------------- -------- -------- --------
Net income $ 33,848 $ 29,841 $ 20,282
- - --------------------------------------------- -------- -------- --------
Primary earnings per share $4.95 $4.44 $3.04
- - --------------------------------------------- -------- -------- --------
Weighted average shares outstanding 6,832 6,723 6,670
- - --------------------------------------------- -------- -------- --------
Fully diluted earnings per share
(assuming conversion of dilutive
convertible debentures) $4.25 $3.80 $2.78
- - --------------------------------------------- -------- -------- --------
Weighted average shares outstanding 8,966 8,960 8,847
- - --------------------------------------------- -------- -------- --------
Dividends per common share $1.24 $1.12 $1.00
- - --------------------------------------------- -------- -------- --------
The accompanying notes are an integral part of these statements.
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46
TRENWICK GROUP INC.
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
Year ended December 31, 1996 1995 1994
- - ---------------------------------------------------- -------- -------- --------
(dollars in thousands)
Stockholders' equity, beginning of year $240,776 $188,213 $206,763
- - ---------------------------------------------------- -------- -------- --------
COMMON STOCK, $.10 PAR VALUE, AND ADDITIONAL
PAID-IN CAPITAL
- - ---------------------------------------------------- -------- -------- --------
Exercise of employer stock options
(147,352, 132,040 and 49,050 shares) 4,001 1,657 759
- - ---------------------------------------------------- -------- -------- --------
Income tax benefits from additional compensation
deductions allowable for income tax purposes 1,467 987 142
- - ---------------------------------------------------- -------- -------- --------
Restricted common stock awarded
(10,020, 21,304 and 4,871 shares) 507 933 168
- - ---------------------------------------------------- -------- -------- --------
Restricted common stock awards cancelled
(2,100 and 2,359 shares) (91) -- (76)
- - ---------------------------------------------------- -------- -------- --------
Common stock purchased and retired
(20,466, 3,056 and 194,233 shares) (1,031) (134) (6,590)
- - ---------------------------------------------------- -------- -------- --------
RETAINED EARNINGS
- - ---------------------------------------------------- -------- -------- --------
Net income 33,848 29,841 20,282
- - ---------------------------------------------------- -------- -------- --------
Cash dividends (8,285) (7,287) (6,463)
- - ---------------------------------------------------- -------- -------- --------
NET UNREALIZED APPRECIATION OF INVESTMENTS
AVAILABLE FOR SALE
- - ---------------------------------------------------- -------- -------- --------
Change in unrealized appreciation (8,551) 41,487 (41,558)
- - ---------------------------------------------------- -------- -------- --------
Change in applicable deferred income taxes 2,994 (14,519) 14,545
- - ---------------------------------------------------- -------- -------- --------
DEFERRED COMPENSATION UNDER STOCK AWARD PLAN
- - ---------------------------------------------------- -------- -------- --------
Restricted common stock awarded (507) (933) (168)
- - ---------------------------------------------------- -------- -------- --------
Restricted common stock awards cancelled 91 -- 76
- - ---------------------------------------------------- -------- -------- --------
Compensation expense recognized 534 531 333
- - ---------------------------------------------------- -------- -------- --------
Stockholders' equity, end of year $265,753 $240,776 $188,213
- - ---------------------------------------------------- -------- -------- --------
The accompanying notes are an integral part of these statements.
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TRENWICK GROUP INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31, 1996 1995 1994
- - ---------------------------------------------------- -------- -------- --------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
- - ---------------------------------------------------- -------- -------- --------
Premiums collected $171,017 $144,996 $117,360
- - ---------------------------------------------------- -------- -------- --------
Ceded premiums paid (6,254) (7,908) (5,440)
- - ---------------------------------------------------- -------- -------- --------
Claims and claims expenses paid (102,759) (89,487) (79,216)
- - ---------------------------------------------------- -------- -------- --------
Claims and claims expenses recovered 34,156 7,942 11,972
- - ---------------------------------------------------- -------- -------- --------
Underwriting expenses paid (12,765) (11,008) (8,381)
- - ---------------------------------------------------- -------- -------- --------
Cash provided by underwriting activities 83,395 44,535 36,295
- - ---------------------------------------------------- -------- -------- --------
Net investment income received 42,654 38,829 33,952
- - ---------------------------------------------------- -------- -------- --------
Interest and other expenses paid (6,190) (6,239) (6,231)
- - ---------------------------------------------------- -------- -------- --------
Income taxes paid (9,381) (9,681) (3,194)
- - ---------------------------------------------------- -------- -------- --------
Cash provided by operating activities 110,478 67,444 60,822
- - ---------------------------------------------------- -------- -------- --------
CASH FLOWS FOR INVESTING ACTIVITIES
- - ---------------------------------------------------- -------- -------- --------
Purchases of fixed maturity investments (177,611) (163,262) (192,962)
- - ---------------------------------------------------- -------- -------- --------
Sales of fixed maturity investments 22,460 43,859 87,090
- - ---------------------------------------------------- -------- -------- --------
Maturities of fixed maturity investments 62,983 55,600 70,967
- - ---------------------------------------------------- -------- -------- --------
Purchases of equity securities (12,529) (326) (10,181)
- - ---------------------------------------------------- -------- -------- --------
Sales of equity securities 7,638 37 60
- - ---------------------------------------------------- -------- -------- --------
Additions to premises and equipment (611) (612) (123)
- - ---------------------------------------------------- -------- -------- --------
Cash used for investing activities (97,670) (64,704) (45,149)
- - ---------------------------------------------------- -------- -------- --------
CASH FLOWS FOR FINANCING ACTIVITIES
- - ---------------------------------------------------- -------- -------- --------
Issuance of common stock 4,001 1,657 759
- - ---------------------------------------------------- -------- -------- --------
Repurchase of common stock (1,031) (134) (6,590)
- - ---------------------------------------------------- -------- -------- --------
Dividends paid (8,285) (7,287) (6,463)
- - ---------------------------------------------------- -------- -------- --------
Cash used for financing activities (5,315) (5,764) (12,294)
- - ---------------------------------------------------- -------- -------- --------
Change in cash and cash equivalents 7,493 (3,024) 3,379
- - ---------------------------------------------------- -------- -------- --------
Cash and cash equivalents, beginning of year 6,760 9,784 6,405
- - ---------------------------------------------------- -------- -------- --------
Cash and cash equivalents, end of year $ 14,253 $ 6,760 $ 9,784
- - ---------------------------------------------------- -------- -------- --------
The accompanying notes are an integral part of these statements.
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48
TRENWICK GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles (GAAP), which require
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The following is a summary of significant accounting policies.
CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of Trenwick Group
Inc. (Trenwick) and its subsidiaries. Trenwick's principal subsidiary, Trenwick
America Reinsurance Corporation (Trenwick America Re), underwrites reinsurance.
INVESTMENTS AND CASH EQUIVALENTS
The Company has classified all of its fixed maturity investments and equity
securities as "Available for sale" and reported them at fair value with net
unrealized gains and losses included in stockholders' equity, net of related
deferred income taxes. The fair value of fixed maturity investments and equity
securities is estimated using quoted market prices or broker dealer quotes. Cash
equivalents represent investments with maturities at date of purchase of three
months or less and are carried at cost which approximates fair value.
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49
Realized gains or losses on disposition of investments are determined on the
basis of the specific identification method. Investment income consisting of
dividends and interest, net of investment expenses, is recognized in income when
earned. The amortization of premiums and accretion of discount for fixed
maturity investments is computed utilizing the interest method. Structured
securities, anticipated prepayments and expected maturities are used in applying
the interest method. When actual prepayments differ significantly from
anticipated prepayments, the effective yield is recalculated to reflect actual
payments to date and anticipated future payments. The net investment in the
security is adjusted to the amount that would have existed had the new effective
yield been applied since the acquisition of the security and that adjustment is
included in net investment income.
REVENUES
Insurance premiums are earned on a pro rata basis over the related contract
period, which is generally one year. Unearned premium income represents the
portion of premiums applicable to the unexpired portion of premium coverage with
renewal dates later than year end. Premiums on contracts are accrued on an
estimated basis throughout the term of such contracts. These estimates may
change in the near term.
POLICY ACQUISITION COSTS
Policy acquisition costs are stated net of policy acquisition costs ceded and
consist of commissions and brokerage expenses incurred at policy or contract
issue date. These costs vary with, and are primarily related to, the acquisition
of business and are deferred and amortized over the period in which the related
premiums are earned. Deferred policy acquisition costs are reviewed periodically
to determine that they do not exceed recoverable amounts after allowing for
anticipated investment income.
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50
RESERVE FOR UNPAID CLAIMS AND CLAIMS EXPENSES
Claims are recorded as incurred so as to match such costs with premiums over the
contract periods. The amount provided for unpaid claims consists of any unpaid
reported claims and estimates for incurred but not reported claims, net of
salvage and subrogation. The estimates for claims incurred but not reported were
developed based on Trenwick's historical claims experience and an actuarial
evaluation of expected claims experience. Insurance liabilities are necessarily
based on estimates and the ultimate liability may vary from such estimates. Any
adjustments to these estimates are reflected in income when known.
INCOME TAXES
Income taxes are provided based on income reported in the financial statements.
Deferred income taxes are provided based on an asset and liability approach
which requires the recognition of deferred income tax assets and liabilities for
the expected future tax consequences of temporary differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities.
STOCK-BASED COMPENSATION
Trenwick grants stock options for a fixed number of common shares to employees
with an exercise price equal to the market value of the shares at the date of
grant. A newly adopted accounting standard, "Accounting for Stock-Based
Compensation," supersedes the previous opinion and establishes a fair value
based method of accounting for stock-based compensation plans. However, it
permits an entity to continue to apply the accounting provisions of the previous
opinion and make pro forma disclosures of net income and earnings per share, as
if the fair market value based method had been applied. Trenwick continues to
account for the stock option grants in accordance with the previous opinion, and
accordingly, recognizes no compensation expense for the stock option grants.
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51
The effect of applying the new standard's fair value method to Trenwick's stock
option awards results in pro forma net income and earnings per share that are
not materially different from amounts reported.
EARNINGS PER SHARE
Primary earnings per share are computed based on the weighted average number of
shares of common stock and common stock equivalents outstanding during each
year. Primary weighted average shares outstanding are adjusted to reflect as
outstanding, throughout each year presented, common stock equivalents pursuant
to the assumed exercise of stock options. Fully diluted earnings per share are
computed based on the assumption that the convertible debentures are converted
into common shares.
PREMISES AND EQUIPMENT
Premises and equipment, including leasehold improvements, are recorded at cost
and are amortized or depreciated using the straight-line method over their
useful lives, which range from three to ten years.
DEBT ISSUANCE COSTS
Debt issuance costs associated with the issuance of convertible debentures are
being amortized over the term of the related debt using the interest method.
Unamortized costs applicable to debentures converting to common stock will be
charged to stockholders' equity at the time of any conversion.
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52
The fair value and amortized cost of fixed maturity investments at December 31,
1996 and 1995 are as follows:
1996 1995
- - ------------------ -------- --------- ------- ---------
FAIR AMORTIZED FAIR AMORTIZED
(in thousands) VALUE COST VALUE COST
- - ------------------ -------- -------- -------- --------
U.S. Treasury
securities and
obligations of
U.S. government
corporations
and agencies $ 91,702 $ 90,421 $ 97,502 $ 94,024
-------- -------- -------- --------
Obligations of
states and
political
subdivisions 367,029 360,201 318,590 308,909
-------- -------- -------- --------
Mortgage-backed
and asset-backed
securities 211,228 206,774 176,642 168,119
-------- -------- -------- --------
Debt securities
issued by for-
eign governments 3,227 3,156 3,347 3,199
-------- -------- -------- --------
Public utilities 2,918 2,803 2,970 2,775
-------- -------- -------- --------
Corporate
securities 37,774 37,001 33,994 32,245
-------- -------- -------- --------
Short-term
securities 120 120 480 480
-------- -------- -------- --------
Total fixed matur-
ity investments $713,998 $700,476 $633,525 $609,751
-------- -------- -------- --------
The fair value and amortized cost of fixed maturity investments at December 31,
1996 are shown on the following page by contractual or expected maturity
periods. Expected maturities will differ from contractual
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53
maturities because borrowers may have the right to call or prepay obligations
with or without penalty. The maturities for mortgage-backed and asset-backed
securities are calculated using expected maturity dates, adjusted for
anticipated prepayments.
FAIR AMORTIZED
(in thousands) VALUE COST
-------- --------
Due in one year or less $ 64,268 $ 63,899
-------- --------
Due after one year through five years 314,690 308,687
-------- --------
Due after five years through ten years 273,802 266,533
-------- --------
Due after ten years 61,238 61,357
-------- --------
Total fixed maturity investments $713,998 $700,476
-------- --------
NET INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS
During the twelve months ended December 31, 1996, all investments were income
producing. The components of net investment income for the years ended December
31 are as follows:
(in thousands) 1996 1995 1994
-------- -------- --------
Fixed maturity investments $ 41,332 $ 37,219 $ 34,538
-------- -------- --------
Equity securities 393 289 122
-------- -------- --------
Cash and cash equivalents 719 621 628
-------- -------- --------
Gross investment income 42,444 38,129 35,288
-------- -------- --------
Investment expenses (1,218) (1,301) (1,356)
-------- -------- --------
Net investment income $ 41,226 $ 36,828 $ 33,932
-------- -------- --------
Net realized gains (losses) on sales of investments are as follows:
(in thousands) 1996 1995 1994
------- ------- -------
FIXED MATURITY INVESTMENTS
Gross realized gains $ 137 $ 605 $ 2,006
------- ------- -------
Gross realized losses (1) (274) (2,262)
------- ------- -------
EQUITY SECURITIES
Gross realized gains 862 37 60
------- ------- -------
Gross realized losses (699) -- --
------- ------- -------
Net realized investment
gains (losses) $ 299 $ 368 $ (196)
------- ------- -------
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UNREALIZED GAINS (LOSSES) ON FIXED MATURITY INVESTMENTS AND EQUITY SECURITIES
At December 31, 1996 and 1995, unrealized gains and losses are as follows:
(in thousands) 1996 1995
- - -------------- --------------------- ----------------------
GAINS LOSSES GAINS LOSSES
------- ------- ------- -------
U.S. Treasury
securities and
obligations of
U.S. government
corporations
and agencies $ 1,319 $ (38) $ 3,478 $ --
------- ------- ------- -------
Obligations of
states and
political
subdivisions 7,173 (345) 9,848 (167
------- ------- ------- -------
Mortgage-backed
and asset-backed
securities 4,958 (504) 8,523 --
------- ------- ------- -------
Debt securities
issued by for-
eign governments 71 -- 148 --
------- ------- ------- -------
Public utilities 115 -- 195 --
------- ------- ------- -------
Corporate
securities 775 (2) 1,749 --
------- ------- ------- -------
Total fixed matur-
ity investments $14,411 $ (889) $23,941 $ (167)
------- ------- ------- -------
Equity securities $ 4,616 $ (3) $ 2,912 --
------- ------- ------- -------
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NET UNREALIZED APPRECIATION OF INVESTMENTS AVAILABLE FOR SALE
The components of the net unrealized appreciation of investments available for
sale at December 31, 1996 and 1995 are as follows:
(in thousands) 1996 1995
-------- --------
Unrealized appreciation of
fixed maturity investments $ 13,522 $ 23,774
-------- --------
Unrealized appreciation of
equity securities 4,613 2,912
-------- --------
Unrealized appreciation
of investments 18,135 26,686
-------- --------
Deferred income taxes (6,346) (9,340)
-------- --------
Net unrealized appreciation
of investments available
for sale, net of income taxes $ 11,789 $ 17,346
-------- --------
INVESTMENTS HELD AS COLLATERAL OR ON DEPOSIT
Fixed maturity investments with a carrying value of $104,271,000 are being held
in trust as collateral for certain reinsurance obligations. In addition,
investments with a carrying value of $7,225,000 at December 31, 1996 were on
deposit with various state or governmental insurance departments in order to
comply with insurance laws.
NOTE 3 REINSURANCE ACTIVITY AND RESERVE FOR UNPAID CLAIMS AND CLAIMS EXPENSES
REINSURANCE ACTIVITY
Trenwick's subsidiary, Trenwick America Re, primarily provides reinsurance to
insurers of property and casualty risks in the United States. 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. Trenwick America Re writes both treaty and facultative
reinsurance both on an excess of loss and quota share basis. 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.
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Trenwick America Re obtained approximately 62% of its gross written premiums
from three brokers in 1996 and 1995, and 57% from three brokers in 1994.
Trenwick America Re'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
top ten largest brokers in the reinsurance industry. Loss of all or a
substantial portion of the business provided by these brokers could have a
material adverse effect on the business and operations of Trenwick America Re.
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.
In 1996, Trenwick America Re obtained approximately 15%, 12% and 10% of its
gross written premiums from three ceding companies. In 1995, Trenwick America Re
obtained approximately 19%, 11% and 9% of its gross written premiums from three
ceding companies and in 1994, approximately 14% and 12% of Trenwick America Re's
gross written premiums were obtained from two ceding companies.
Included in receivables from ceding insurers at December 31, 1996 and 1995 are
accrued premiums of approximately $59,070,000 and $38,794,000, respectively,
which have estimated payment dates ranging from 1996 to 2001. Premium payment
dates are estimated using the anticipated payout pattern of claims which result
in the additional premium due from ceding companies. The fair value of the
accrued premiums for 1996 and 1995 is approximately $57,300,000 and $37,400,000,
respectively, which is estimated using cash flows discounted at an interest rate
of 5%.
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The effects of reinsurance on premiums written, premiums earned and claims and
claims expenses incurred for the three years ended December 31 are as follows:
(in thousands) 1996 1995 1994
--------- --------- ---------
Assumed premiums written $ 247,358 $ 214,336 $ 153,834
--------- --------- ---------
Ceded premiums written (20,994) (17,174) (14,199)
--------- --------- ---------
Net premiums written $ 226,364 $ 197,162 $ 139,635
--------- --------- ---------
Assumed premiums earned $ 231,960 $ 194,592 $ 147,129
--------- --------- ---------
Ceded premiums earned (20,891) (17,198) (14,446)
--------- --------- ---------
Net premiums earned $ 211,069 $ 177,394 $ 132,683
--------- --------- ---------
Assumed claims and claims
expenses incurred $ 156,819 $ 111,351 $ 114,340
--------- --------- ---------
Ceded claims and claims
expenses incurred (27,503) 1,717 (21,500)
--------- --------- ---------
Net claims and claims
expenses incurred $ 129,316 $ 113,068 $ 92,840
--------- --------- ---------
UNPAID CLAIMS AND CLAIMS EXPENSES
The following table presents an analysis of gross and net unpaid claims and
claims expenses and a reconciliation of beginning and ending net unpaid claims
and claims expense balances for 1996, 1995 and 1994. The gross unpaid claims and
claims expense balances at 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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Activity in the reserve for unpaid claims and claims expenses, net of
reinsurance recoverable, for the years ended December 31 is summarized below:
(in thousands) 1996 1995 1994
--------- --------- ---------
Reserve for unpaid claims
and claims expenses, net
of related reinsurance
recoverable, at
beginning of year $ 327,001 $ 294,008 $ 268,091
--------- --------- ---------
Provision for claims and
claims expenses, net of
reinsurance
--------- --------- ---------
For claims incurred in
the current year 133,755 115,133 93,287
--------- --------- ---------
For claims incurred in
prior years (4,439) (2,065) (447)
--------- --------- ---------
Subtotal 129,316 113,068 92,840
--------- --------- ---------
Payments for claims and
claims expenses, net of
reinsurance
--------- --------- ---------
For claims incurred in
the current year (22,570) (18,271) (14,623)
--------- --------- ---------
For claims incurred in
prior years (46,860) (61,804) (52,300)
--------- --------- ---------
Subtotal (69,430) (80,075) (66,923)
--------- --------- ---------
Reserve for unpaid claims
and claims expenses, net
of related reinsurance
recoverable, at end
of year 386,887 327,001 294,008
--------- --------- ---------
Reinsurance recoverable on
unpaid claims and claims
expenses, at end of year 80,290 84,873 95,290
--------- --------- ---------
Reserve for unpaid claims
and claims expenses,
gross of reinsurance
recoverable on unpaid
claims, at end of year $ 467,177 $ 411,874 $ 389,298
--------- --------- ---------
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In 1996, 1995 and 1994, Trenwick recorded a decrease of $4,439,000, $2,065,000
and $447,000, respectively, in estimates for claims occurring in prior accident
years. The reduction over the last three years primarily reflects the favorable
development of Trenwick's casualty business written between accident years 1987
and 1992 partially offset by unfavorable development in accident years 1993
through 1995.
EXPOSURE TO ENVIRONMENTAL CLAIMS
Trenwick's 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.
Inflation raises the cost of economic losses and noneconomic damages covered
by insurance contracts and therefore is a factor in determining effective rates
of reinsurance. The methods used by Trenwick to estimate individual case
reserves and reserves for claims incurred but not yet reported implicitly
incorporate the effects of inflation in the projection of ultimate losses.
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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 Trenwick's consolidated
financial statements. Trenwick's management believes that its claim reserve
methods are reasonable and prudent and that Trenwick's reserve for claims and
claims expenses at December 31, 1996 are adequate.
REINSURANCE RECOVERABLE
The components of reinsurance recoverable balances net on the balance sheet at
December 31 are as follows:
(in thousands) 1996 1995
-------- --------
Paid claims $ 1,505 $ 2,978
-------- --------
Unpaid claims and claims expenses 80,290 84,873
-------- --------
Funds held liability (33,353) (18,323)
-------- --------
Reinsurance balances payable (670) (1,079)
-------- --------
Reinsurance recoverable
balances, net $ 47,772 $ 68,449
-------- --------
Trenwick America Re purchases reinsurance to reduce its exposure to catastrophe
losses and the frequency of large losses in all lines of business. Trenwick
America Re, however, remains liable in the event that its retrocessionaires do
not meet their contractual obligations.
At December 31, 1996, letters of credit in the amount of $2,103,000 have been
arranged in favor of Trenwick America Re in respect of certain outstanding
claims recoverable and the unearned portion of premiums ceded.
At December 31, 1996, approximately $50,951,000 of reinsurance recoverable on
unpaid claims and claims expenses is recoverable from one reinsurer, Centre
Reinsurance Company of New York. There is no prepaid reinsurance premium which
relates to this reinsurer.
For the years ended December 31, 1996, 1995 and 1994, Trenwick America Re earned
commissions on cessions to retrocessionaires of $29,000, $13,000 and $112,000,
respectively.
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NOTE 4 INCOME TAXES
Trenwick files a consolidated United States income tax return with its United
States subsidiaries. The components of the provision for income taxes for the
years ended December 31, 1996, 1995 and 1994 are as follows:
(in thousands) 1996 1995 1994
-------- -------- --------
Current income tax provision $ 13,633 $ 7,821 $ 4,635
-------- -------- --------
Deferred income tax
provision (3,653) 751 (1,882)
-------- -------- --------
Income tax provision $ 9,980 $ 8,572 $ 2,753
-------- -------- --------
Trenwick's effective income tax rates were 23%, 22% and 12% for the years ended
December 31, 1996, 1995 and 1994, respectively. The income tax provision for
each of the years presented differs from the amounts determined by applying the
applicable U.S. statutory federal income tax rate of 35% to income before income
taxes as a result of the following:
(in thousands) 1996 1995 1994
-------- -------- --------
Income before income taxes $ 43,828 $ 38,413 $ 23,035
-------- -------- --------
Income taxes at
statutory rate $ 15,340 $ 13,445 $ 8,062
-------- -------- --------
Effect of tax-exempt
investment income (5,286) (4,963) (5,156)
-------- -------- --------
Other, net (74) 90 (153)
-------- -------- --------
Income tax provision $ 9,980 $ 8,572 $ 2,753
-------- -------- --------
The components of the net deferred income tax provision for the years ended
December 31 are as follows:
(in thousands) 1996 1995 1994
------- ------- -------
Discounting of unpaid
claims $(4,541) $(1,369) $(1,073)
------- ------- -------
Unearned premium income (1,071) (1,384) (522)
------- ------- -------
Policy acquisition
costs deferred 1,778 2,112 769
------- ------- -------
Alternative minimum taxes (10) 908 (908)
------- ------- -------
Accretion of market discount
on fixed maturity
investments 518 378 --
------- ------- -------
Other, net (327) 106 (148)
------- ------- -------
Total deferred income
tax provision $(3,653) $ 751 $(1,882)
------- ------- -------
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Deferred income tax assets (liabilities) are attributable to the following
temporary differences as of December 31, 1996 and 1995:
(in thousands) 1996 1995
-------- --------
DEFERRED INCOME TAX ASSET
Discounting of unpaid claims $ 29,237 $ 24,696
-------- --------
Unearned premium income 4,980 3,909
-------- --------
Employee stock option plans 439 209
-------- --------
Alternative minimum taxes 10 --
-------- --------
Other 524 440
-------- --------
Gross deferred income
tax assets 35,190 29,254
-------- --------
DEFERRED INCOME TAX LIABILITY
Policy acquisition
costs deferred (7,632) (5,854)
-------- --------
Unrealized appreciation of
investments available for sale (6,346) (9,340)
-------- --------
Accretion of market discount
on fixed maturity investments (896) (378)
-------- --------
Other (85) (97)
-------- --------
Gross deferred income
tax liabilities (14,959) (15,669)
-------- --------
Net deferred income tax assets $ 20,231 $ 13,585
-------- --------
Trenwick's management has concluded that the deferred income tax assets are more
likely than not to be realized. Therefore, no valuation allowance has been
provided. Estimates used in the development of the net deferred income tax
assets may change in the near term.
NOTE 5 LONG-TERM DEBT AND FINANCING ARRANGEMENTS
Trenwick's $103,500,000 convertible debentures due December 15, 1999, issued at
par, bear interest at 6% and are convertible, at any time prior to maturity,
into shares of common stock of Trenwick at a conversion price of $48.50 per
share, subject to adjustment under certain conditions. Interest on the
debentures is payable on June 15 and December 15 of each year. The debentures
are redeemable at any time on or after December 15, 1995, in
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whole or in part, at the option of Trenwick, at a redemption price of 103.43% of
par, decreasing to 100% at maturity. In January 1997, Trenwick called for
redemption on February 20, 1997 all then outstanding debentures at a redemption
price of 102.57% of the principal amount, $106,160,000, plus accrued interest to
the redemption date. See Note 13 for further disclosures with respect to the
redemption of this debt.
Subject to certain limitations, Trenwick is not restricted from incurring
secured or unsecured indebtedness and currently has no secured indebtedness or
indebtedness senior to the debentures. As of December 31, 1996, 2,134,000 shares
of Trenwick's common stock are reserved for issuance in the event of conversion
of the debentures. The fair value of Trenwick's convertible debentures at
December 31, 1996 and 1995 was $108,675,000 and $121,600,000, respectively,
based on the quoted market prices reported by the NASDAQ National Market System.
Trenwick incurred interest expense on its long-term debt of $6,504,000,
$6,486,000 and $6,469,000 for the years ended December 31, 1996, 1995 and 1994,
respectively, at effective rates of approximately 6% for the years then ended.
NOTE 6 INSURANCE REGULATION
Trenwick's reinsurance subsidiary, Trenwick America Re, is domiciled in and
subject to the insurance statutes of Connecticut.
During 1996, 1995 and 1994, Trenwick America Re paid dividends of $4,100,000,
$9,500,000 and $9,400,000, respectively. The statutory limitation on dividends
which can be paid without prior approval of the Connecticut Insurance
Commissioner, applicable to Trenwick America Re, is the greater of 10% of
policyholder surplus at December 31 of the preceding year or 100% of net income,
not including 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
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not already been paid out as dividends. The amount of dividends or other
distributions that could be paid by Trenwick America Re without prior approval
as of December 31, 1996 was $62,901,000.
The differences between GAAP and statutory accounting practices for Trenwick
America Re are the treatment of acquisition costs, deferred income taxes, other
deferred charges and the carrying value of fixed maturity investments. The
following tables set forth a reconciliation of Trenwick America Re's net income
and statutory surplus, as filed with the insurance regulatory authorities, to
its net income and stockholders' equity as determined in accordance with GAAP
for the years ended and as of December 31:
(in thousands) 1996 1995 1994
--------- --------- ---------
RECONCILIATION OF NET INCOME
Statutory net income of
Trenwick America Re $ 29,555 $ 28,060 $ 19,966
--------- --------- ---------
Change in deferred policy
acquisition costs 5,080 6,034 2,197
--------- --------- ---------
Provision for net deferred
income taxes 3,307 (690) 1,729
--------- --------- ---------
Other (6) (12) 19
--------- --------- ---------
GAAP net income of
Trenwick America Re $ 37,936 $ 33,392 $ 23,911
--------- --------- ---------
1996 1995 1994
--------- --------- ---------
RECONCILIATION OF SURPLUS
Statutory capital and
surplus of Trenwick
America Re $ 286,284 $ 257,590 $ 236,056
--------- --------- ---------
Deferred acquisition costs 21,805 16,725 10,691
--------- --------- ---------
Unrealized appreciation
(depreciation) of
investments 13,556 23,526 (13,685)
--------- --------- ---------
Net deferred income taxes 19,365 13,144 28,027
--------- --------- ---------
Unauthorized reinsurance 2,669 2,336 2,265
--------- --------- ---------
Non-admitted assets 208 2,142 1,858
--------- --------- ---------
GAAP stockholders' equity of
Trenwick America Re $ 343,887 $ 315,463 $ 265,212
--------- --------- ---------
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NOTE 7 STOCK OPTIONS AND BENEFIT PLANS
STOCK OPTIONS
Trenwick has several plans through which it makes options
in common stock available to Trenwick employees at the discretion of the Board
of Directors. Non-employee directors receive automatic grants under a separate
plan. Exercise prices are generally fixed at the market value at the date of
grant. Options vest and are exercisable on various terms, usually either over a
five year period or up to a ten year period. All options have an expiration date
not exceeding ten years. Total authorized common stock reserved for issuance
under all stock benefit plans at December 31, 1996 is 723,963. Transactions
under the stock option plans are summarized as follows:
1996 1995 1994
-------- -------- --------
NUMBER OF SHARES
Outstanding, beginning
of year 758,352 793,892 841,442
-------- -------- --------
Granted 54,500 96,500 4,000
-------- -------- --------
Cancelled (11,370) -- (2,500)
-------- -------- --------
Exercised (147,352) (132,040) (49,050)
-------- -------- --------
Outstanding, end of year 654,130 758,352 793,892
-------- -------- --------
Exercisable, end of year 225,180 340,877 435,892
-------- -------- --------
AVERAGE EXERCISE PRICE
Granted $ 47.44 $ 44.00 $ 41.50
-------- -------- --------
Cancelled 29.14 -- 40.00
-------- -------- --------
Exercised 27.15 12.55 15.45
-------- -------- --------
Outstanding, end of year 37.09 34.29 29.50
-------- -------- --------
Exercisable, end of year 28.18 26.10 20.73
-------- -------- --------
Included in the above are options granted to certain senior officers under the
1993 Stock Option Plan. The exercise and vesting of these options are
accelerated if the price of Trenwick's common stock achieves certain specified
levels, subject to certain conditions.
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RESTRICTED COMMON STOCK AWARDS
Trenwick awarded restricted common stock to key employees, primarily under the
terms of the 1989 Stock Plan. In 1996, 10,020 shares were awarded at values of
$48.75 to $53.50 (approximately $507,000), which vest over five to seven years.
Shares awarded in 1995 and 1994 vest over three to five years. Shares
repurchased in 1996, 1995 and 1994 have been in connection with the satisfaction
of employees' withholding taxes payable upon the vesting of previously awarded
shares. Trenwick has recognized compensation expense of $534,000, $531,000 and
$333,000 for 1996, 1995 and 1994, respectively, determined by the award value of
the shares amortized over the applicable vesting period.
RETIREMENT PLANS
Trenwick has a pension plan and a 401(k) savings plan for substantially all
full-time employees. Effective July 1, 1995, Trenwick contributes 8% of eligible
employees' total compensation to the pension plan. Prior to this date, Trenwick
contributed 4% of an eligible employees' total compensation, plus 3% of the
eligible employees' total compensation above the FICA limit. No employee
contributions are made to the plan. Effective January 1, 1996, Trenwick matches
100% of employees' contributions to the savings plan up to 6% of each eligible
employee's total compensation. Prior to January 1, 1996, Trenwick matched 100%
of employees' contributions up to the lesser of 6% of an eligible employee's
total compensation or $2,000. Assets of both plans are administered by a life
insurance company. Trenwick's contributions to the pension plan were $432,000,
$297,000 and $235,000 for 1996, 1995 and 1994, respectively; its contributions
to the savings plan were $314,000, $122,000 and $114,000 for 1996, 1995 and
1994, respectively.
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NOTE 8 STOCKHOLDER RIGHTS PLAN
Trenwick has adopted a stockholder rights plan under which preferred stock
purchase rights attach to all outstanding shares of Trenwick's common stock. The
rights are exercisable only if a party acquires, or announces a tender offer to
acquire, 20% or more of Trenwick's common stock. Each right entitles a
stockholder to buy 1/100 of a share of Trenwick's Series A Junior Participating
Preferred Stock for a $96 exercise price. Each 1/100 of a share of such
preferred stock will have dividend and voting rights approximately equal to one
share of common stock.
In the event that an acquiror accumulates 20% or more of Trenwick's common
stock, all rights holders except the acquiror may purchase, for the exercise
price, in lieu of the Series A Junior Participating Preferred Stock, shares of
common stock of Trenwick having a market value of twice the exercise price of
each right. If Trenwick is acquired in a merger or other business combination
after the acquisition of 20% of Trenwick's common stock, all rights holders
except the acquiror may purchase the acquiror's shares at a similar discount.
Trenwick is entitled to redeem the rights for one cent each, subject to certain
restrictions. Trenwick has reserved 150,000 shares of its preferred stock for
possible issuance under the plan. The rights will expire on November 2, 1999.
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NOTE 9 SUPPLEMENTAL CASH FLOWS INFORMATION
A reconciliation of cash provided by operations for the three years ended
December 31 is as follows:
(in thousands) 1996 1995 1994
--------- --------- ---------
Net income $ 33,848 $ 29,841 $ 20,282
--------- --------- ---------
ADJUSTMENTS
Amortization of premiums on
investments, net 1,579 1,003 1,169
--------- --------- ---------
Policy acquisition
costs incurred, net of
amortization (5,080) (6,034) (2,197)
--------- --------- ---------
Provision for deferred
income taxes (3,653) 750 (1,882)
--------- --------- ---------
Net realized investment
(gains) losses (299) (368) 196
--------- --------- ---------
Amortization of debt
issuance costs 295 276 259
--------- --------- ---------
Other non-cash items, net 900 907 601
--------- --------- ---------
(INCREASE) DECREASE IN
ASSETS
Receivables and recoverables 6,623 (1,112) (3,133)
--------- --------- ---------
Other (99) 72 458
--------- --------- ---------
INCREASE (DECREASE) IN
LIABILITIES
Unpaid claims and
claims expenses 55,303 22,576 34,716
--------- --------- ---------
Unearned premium income 15,398 19,744 6,705
--------- --------- ---------
Payables 5,663 (211) 3,648
--------- --------- ---------
Net cash provided by
operating activities $ 110,478 $ 67,444 $ 60,822
--------- --------- ---------
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NOTE 10 OTHER ASSETS AND LIABILITIES
Other assets comprise:
December 31, 1996 1995
------ ------
(in thousands)
Non-marketable equity investment,
at fair value $ -- $6,300
------ ------
Deferred debt issuance costs, net
of accumulated amortization of
$1,075 and $780 986 1,281
------ ------
Premises and equipment, net of
accumulated depreciation and
amortization of $2,373 and $2,050 1,135 889
------ ------
Prepaid reinsurance premiums 305 202
------ ------
Funds held in escrow 515 --
------ ------
Other 770 618
------ ------
Total other assets $3,711 $9,290
------ ------
At December 31, 1995, Trenwick owned approximately 15% of common stock of
Investors Insurance Holding Corporation, a property and casualty insurer. The
shares were unregistered and Trenwick did not exercise significant influence
over the investment. Consequently, Trenwick accounted for its investment at fair
value, which was equal to cost until substantive events occurred which could
indicate a diminution or appreciation in value. During 1996, Trenwick sold its
investment for $5,601,000, including $515,000 of funds held in escrow, and
recognized a loss of $699,000, which is included in realized investment losses
for the year 1996.
Trenwick's minimum non-cancellable office space lease commitments totalling
$1,258,000 at December 31, 1996 are payable as follows: 1997 - $816,000; 1998 -
$442,000.
Total office rent expense for the years ended December 31, 1996, 1995 and 1994
was $918,000, $883,000 and $899,000, respectively.
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NOTE 11 FAIR VALUE OF FINANCIAL INSTRUMENTS
Accounting literature defines the fair value of a financial instrument as the
amount at which the instrument could be exchanged in a current transaction
between willing parties and requires disclosure of fair value information about
financial instruments for which it is practicable to estimate that value. In the
event that quoted market prices were not available, fair values are based on
estimates using discounted cash flow or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rates and estimates of the amount and timing of future cash flows.
These fair value estimates may vary in the near term. The following table
presents in summary form the carrying amounts and estimated fair values of
Trenwick's financial instruments at December 31, 1996 and 1995:
1996 1995 Related
----------------------- -------------------- Footnote
Carrying Fair Carrying Fair Cross
(in thousands) Amount Value Amount Value Reference
-------- -------- -------- -------- -----------
ASSETS
-------- -------- -------- -------- ------------
Fixed maturity investments $713,998 $713,998 $633,525 $633,525 Notes 1 & 2
-------- -------- -------- -------- ------------
Equity securities 25,959 25,959 13,419 13,419 Notes 1 & 2
-------- -------- -------- -------- ------------
Cash and cash equivalents 14,253 14,253 6,760 6,760 Note 1
-------- -------- -------- -------- ------------
Accrued premiums 59,070 57,300 38,794 37,400 Note 3
-------- -------- -------- -------- ------------
Non-marketable equity investment -- -- 6,300 6,300 Note 10
-------- -------- -------- -------- ------------
Funds held in escrow 515 515 -- -- Note 10
-------- -------- -------- -------- ------------
LIABILITIES
-------- -------- -------- -------- ------------
Convertible debentures $103,500 $108,675 $103,500 $121,600 Notes 5 & 13
-------- -------- -------- -------- ------------
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NOTE 12 UNAUDITED QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data reported by Trenwick for the years
ended December 31, 1996, 1995 and 1994 are as follows:
December September June March
Quarter ended 31 30 30 31
-------- --------- ------- -------
(dollars in thousands, except per share data)
Earned premiums 1996 $54,994 $55,008 $53,376 $47,691
---- -------- --------- ------- -------
1995 46,032 43,200 43,698 44,464
---- -------- --------- ------- -------
1994 37,677 33,137 31,693 30,176
---- -------- --------- ------- -------
Net investment income 1996 10,840 10,332 10,185 9,869
---- -------- --------- ------- -------
1995 9,737 9,354 9,193 8,544
---- -------- --------- ------- -------
1994 8,852 8,596 8,303 8,181
---- -------- --------- ------- -------
Net realized investment 1996 281 (21) (11) 50
gains (losses) ---- -------- --------- ------- -------
1995 87 131 52 98
---- -------- --------- ------- -------
1994 (181) -- (118) 103
---- -------- --------- ------- -------
Net income 1996 8,819 8,520 8,327 8,182
---- -------- --------- ------- -------
1995 8,041 7,956 7,340 6,504
---- -------- --------- ------- -------
1994 6,626 6,402 6,097 1,157
---- -------- --------- ------- -------
Primary earnings 1996 1.29 1.24 1.22 1.20
per common share ---- -------- --------- ------- -------
1995 1.18 1.18 1.09 .97
---- -------- --------- ------- -------
1994 1.00 .96 .92 .17
---- -------- --------- ------- -------
Fully diluted earnings 1996 1.10 1.06 1.05 1.03
per common share ---- -------- --------- ------- -------
1995 1.01 1.01 .95 .86
---- -------- --------- ------- -------
1994 .87 .85 .82 .17(1)
---- -------- --------- ------- -------
Dividends per common 1996 .31 .31 .31 .31
share ---- -------- --------- ------- -------
1995 .28 .28 .28 .28
---- -------- --------- ------- -------
1994 .25 .25 .25 .25
---- -------- --------- ------- -------
Common stock 1996 53.75 54.25 53.50 56.75
price range: high ---- -------- --------- ------- -------
1995 57.50 53.00 45.75 44.25
---- -------- --------- ------- -------
1994 43.88 40.50 43.75 39.50
---- -------- --------- ------- -------
Common stock 1996 46.00 48.75 46.00 50.25
price range: low ---- -------- --------- ------- -------
1995 49.50 42.75 41.75 40.75
---- -------- --------- ------- -------
1994 36.50 36.00 33.75 33.25
---- -------- --------- ------- -------
(1) The conversion of the convertible debentures into common stock was
anti-dilutive at March 31, 1994.
The stock price range is based on closing prices reported by the NASDAQ
National Market System.
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NOTE 13 SUBSEQUENT EVENT
In January 1997, the Company made a private offering of $110,000,000 in 8.82%
Subordinated Capital Income Securities due February 20, 2037 through Trenwick
Capital Trust I, a Delaware statutory business trust. In connection with this
offering, the Company called for redemption all $103,500,000 aggregate principal
amount of the Company's 6% convertible debentures due December 15, 1999, on
February 20, 1997, at a redemption price of 102.57% principal amount plus
accrued interest to the redemption date. Of the $103,500,000 principal amount of
debentures outstanding on that date, $45,819,000 principal amount were redeemed
and $57,681,000 principal amount were converted into an aggregate of 1,189,284
shares of the Company's common stock, par value $.10 per share. The remaining
net proceeds from the offering of the Capital Securities will be used for
general corporate purposes, which may include investments in and advances to
subsidiaries, the financing of growth and expansion, the financing of possible
future acquisitions and other corporate purposes.
The following table sets forth the consolidated income statement and earnings
per share data for the year ended December 31, 1996, and the pro forma income
statement and earnings per share data for the year ended December 31, 1996, as
adjusted to provide pro forma effect as if the conversion had been consummated
at January 1, 1996. Pro forma data excludes extraordinary loss on extinguishment
of debt of $1,049,000, net of tax.
AS
(in thousands except per share data) ACTUAL ADJUSTED
---------- ----------
Net income $ 33,848 $ 36,204
---------- ----------
Primary earnings per share $ 4.95 $ 4.51
---------- ----------
Fully diluted earnings per share $ 4.25 --
---------- ----------
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TRENWICK GROUP INC.
BOARD OF DIRECTORS
[PHOTO]
Standing Left to Right:
Sargent, Dunn, Billett,
Jacobs, Gruber
Seated Left to Right:
Wilcox, Watkins, Palmberger,
Brown
(A) Audit Committee
(C) Compensation Committee
(E) Executive Committee
(I) Investment Committee
(*) Committee Chairman
JAMES F. BILLETT, JR. (E*,I*) Chairman,
President and
Chief Executive Officer
Trenwick Group Inc.
ANTHONY S. BROWN (A)
Professor
Terry Sanford Institute
of Public Policy
Duke University
NEIL DUNN (C,E,I)
Managing Director
Voyageur International
Asset Managers Ltd
ALAN R. GRUBER (C*,E)
Chairman of the Executive
and Investment Committees;
Chairman and Chief Executive
Officer (Retired)
Orion Capital Corporation
P. ANTHONY JACOBS (C,E,I)
President and
Chief Operating Officer
Seafield Capital
Corporation
HERBERT PALMBERGER (A)
General Manager
Chubb Insurance Company
of Europe, S.A.
JOSEPH D. SARGENT (C,E)
Chairman, Treasurer and
Chief Financial Officer
Connecticut Surety
Corporation
FREDERICK D. WATKINS (A,C,E)
Executive Vice President
(Retired) Connecticut
General Corporation
STEPHEN R. WILCOX (A*,I)
President
The Wilcox Group, Inc.
OFFICERS
JAMES F. BILLETT, JR.
Chairman, President and
Chief Executive Officer
ALAN L. HUNTE
Vice President and Treasurer
JANE T. WIZNITZER
Vice President - Legal
Affairs and Secretary
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74
TRENWICK AMERICA REINSURANCE CORPORATION
BOARD OF DIRECTORS
(E) Executive Committee
(*) Committee Chairman
JAMES F. BILLETT, JR. (E*)
Chairman, President and
Chief Executive Officer
Trenwick America
Reinsurance Corporation
STEPHEN H. BINET
Executive Vice President
Trenwick America
Reinsurance Corporation
PAUL FELDSHER
Executive Vice President
Trenwick America
Reinsurance Corporation
ROBERT A. GIAMBO
Executive Vice President
and Chief Actuary
Trenwick America
Reinsurance Corporation
ALAN R. GRUBER (E)
Chairman of the Executive
and Investment Committees;
Chairman and
Chief Executive Officer
(Retired)
Orion Capital Corporation
ALAN L. HUNTE
Executive Vice President,
Chief Financial Officer
and Treasurer
Trenwick America
Reinsurance Corporation
MICHAEL F. MATHER
Senior Vice President
Trenwick America
Reinsurance Corporation
JAMES E. ROBERTS
Vice Chairman
Trenwick America
Reinsurance Corporation
FREDERICK D. WATKINS (E)
Executive Vice President
(Retired)
Connecticut General
Corporation
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TRENWICK AMERICA REINSURANCE CORPORATION OFFICERS
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
JAMES F. BILLETT, JR.
VICE CHAIRMAN
JAMES E. ROBERTS
EXECUTIVE VICE PRESIDENTS
STEPHEN H. BINET
PAUL FELDSHER
ROBERT A. GIAMBO
ALAN L. HUNTE
DAVID C. SMITH
SENIOR VICE PRESIDENTS
JEFFREY A. ENGLANDER
LYNN M. HALPER
FRANCIS J. LOCKWOOD
MICHAEL F. MATHER
WILLIAM L. PIERCE
MOLLY P. SANDERS
PETER R. ZIESING
VICE PRESIDENTS
GARY W. DANIELS
KURT A. KRAUSHAAR
EUGENE R. LOCK
YVONNE M. POSTER
JOHN R. PREZZANO
JOSEPH P. SAYDLOWSKI
JOSEPH W. WALSH
JANE T. WIZNITZER
ASSISTANT VICE PRESIDENTS
MICHAEL J. BRENNAN
WILLIAM A. CAMPERLENGO
LYNN Q. S. DEMAN
MICHELLE R. DIENER
ELLEN L. HAY
JOYCE D. HESKE
DONALD R. MASSO
ANDREA S. O'HAGAN
JOHN R. SENESAC, JR.
JODEE P. SOLTES
LORI J. STALOWICZ
RICHARD R. THOMAS, III
JAMES J. WILSON, III
ASSISTANT SECRETARIES
THOMAS P. BOYLE
JOYCE P. CHIMBOLE
DONNA M. INSLEY
MAUREEN M. POIRIER
MARY BETH RAUSER
MARYBETH M. RICE
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STOCKHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Stockholders of the Company will be held at 10:00 a.m.
local time May 22, 1997 at the Company's corporate headquarters, Metro Center,
One Station Place, Stamford, Connecticut. As of February 28, 1997 there were 134
holders of record and in excess of 1,200 beneficial owners of Trenwick Group
Inc. common stock.
MARKET LISTING
The common stock is listed by the NASDAQ National Market System under the ticker
symbol TREN.
REGISTRAR AND TRANSFER AGENT FOR COMMON STOCK
First Chicago Trust Company of New York
14 Wall Street, Mail Suite 4680
New York, New York 10005
(201) 324-0498
10-K
A copy of the Company's 1996 Form 10-K as filed with the Securities and Exchange
Commission may be obtained without charge by writing to the Office of the
Corporate Secretary, Trenwick Group Inc., Metro Center, One Station Place,
Stamford, Connecticut 06902.
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77
CORPORATE ADDRESS
Trenwick Group Inc.
Metro Center
One Station Place
Stamford, Connecticut 06902
Telephone: (203) 353-5500
Facsimile: (203) 353-5550
79