1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December
31, 1997.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period
to .
Commission file number 0-14737
TRENWICK GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1152790
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Metro Center, One Station Place, Stamford, Connecticut 06902
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 353-5500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.10 PAR VALUE
PREFERRED STOCK PURCHASE RIGHTS
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES ...X.... NO .......
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10K or any
amendment to this Form 10-K. [ ]
The aggregate market value on February 28, 1998 of the voting stock
held by non-affiliates of the registrant was 419,105,702.
The number of shares outstanding of each of the issuer's classes of
common stock as of the close of the period covered by this report:
Class Outstanding at February 28, 1998
Common Stock, $.10 par value 12,018,010
The information required by Items 10 through 13 of Form 10-K is incorporated by
reference into Part III hereof from the registrant's proxy statement which will
be filed with the Securities and Exchange Commission within 120 days of the
close of the registrant's fiscal year ended December 31, 1997.
2
TRENWICK GROUP INC.
Table of Contents
Page
Item Number
PART I
1. Business .............................................................. 1
2. Properties ............................................................ 17
3. Legal Proceedings ..................................................... 17
4. Submission of Matters to a Vote of Security Holders ................... 17
PART II
5. Market for the Corporation's Common Stock and Related Stockholder Matters 17
6. Selected Financial Data ............................................... 18
7. Management's Discussion and Analysis of Financial Condition and
Results of Operation .................................................. 19
8. Financial Statements and Supplementary Data ........................... 27
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .................................................. 55
PART III
10. Directors and Executive Officers ..................................... 55
11. Executive Compensation ............................................... 55
12. Security Ownership of Certain Beneficial Owners and Management ....... 55
13. Certain Relationships and Related Transactions ....................... 55
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ...... 56
3
PART I
ITEM 1. BUSINESS
GENERAL BACKGROUND AND HISTORY
Trenwick Group Inc. is a holding company incorporated in the state of Delaware
in 1985. Through its wholly owned subsidiary, Trenwick America Corporation, a
Delaware corporation, Trenwick owns and operates Trenwick America Reinsurance
Corporation, (Trenwick America Re), a Connecticut corporation. The term
"Trenwick", as used herein, refers to Trenwick America Re in discussions of that
company's reinsurance business and refers to Trenwick Group Inc. in all other
circumstances. Trenwick America Corporation, which acquired Trenwick America Re
in 1983, became a wholly owned subsidiary of Trenwick in 1985 as a result of a
corporate restructuring. Trenwick also owns two inactive Bermuda subsidiaries.
Trenwick primarily provides reinsurance to insurers of property and casualty
risks in the United States. Trenwick writes both facultative and treaty
reinsurance. Facultative is underwritten on a risk-by-risk basis where Trenwick
applies its own pricing to the individual exposure. Treaty business involves
evaluating groupings of multiple risks or segments of an insurance company's
overall portfolio. Trenwick underwrites treaty business utilizing a variety of
techniques. Blocks of risks where the type of business or the size and longevity
of the account generate credible data are primarily evaluated by actuarial
methods. Specialty classes or lines of business which are less statistically
predictable require a more detailed analysis of the original risks, rates and
coverages within the block of business in addition to quantitative tests.
Trenwick generally obtains all of its business through brokers and reinsurance
intermediaries which seek its participation on reinsurance being placed for
their customers. Reinsurance is provided both on an excess of loss and quota
share basis, which in 1997 amounted to 45% and 55% of its business,
respectively. In underwriting reinsurance, Trenwick does not target types of
clients, classes of business or types of reinsurance. Rather, it selects
transactions based upon the quality of the reinsured, the attractiveness of the
reinsured's insurance rates and policy conditions and the adequacy of the
proposed reinsurance terms.
On February 27, 1998, Trenwick expanded its product mix through the acquisition
of SOREMA (UK) Limited (renamed Trenwick International Limited), a London market
company, which underwrites specialty types of insurance and reinsurance on a
worldwide basis.
LINES AND TYPES OF BUSINESS
Trenwick's net premiums written for its principal lines of business are set
forth in the following table for the periods indicated.
1
4
NET PREMIUMS WRITTEN BY LINES OF BUSINESS
(IN THOUSANDS)
1997 1996 1995
-------- -------- --------
Casualty
Automobile Liability $ 50,187 $ 64,539 $ 61,388
Errors and Omissions 40,063 48,888 50,077
General Liability 20,795 22,519 20,819
Workers' Compensation 18,328 20,502 873
Medical Malpractice 10,293 9,846 6,933
Products Liability 1,743 2,595 3,101
Accident and Health 6,326 205 4
Other Casualty 9,133 10,247 12,727
-------- -------- --------
Total Casualty 156,868 179,341 155,922
Property 38,362 47,023 41,240
-------- -------- --------
Total $195,230 $226,364 $197,162
======== ======== ========
The major lines of reinsurance currently written by Trenwick are automobile
liability, errors and omissions, general liability and workers' compensation
which account for an aggregate of at least 66% of net premiums written in all
years indicated. These lines as well as products liability and other casualty
have declined as a result of three principal causes. Competition among primary
companies has caused cedants to reduce their own premium writings or restructure
their reinsurance programs, reducing the amount of reinsurance they purchase. As
a result of consolidation within the industry, many ceding companies are now
larger and financially stronger, enabling them to retain more risk. In addition,
increasingly intense competition in the reinsurance markets has driven
reinsurance prices on a number of accounts below pricing levels which Trenwick
will accept. Medical malpractice and accident and health increased by
approximately 65%, as compared to 1996. These increases resulted primarily from
the strategic alliances with Transatlantic Re and Duncanson and Holt,
respectively. In 1997, the amount of property business underwritten by Trenwick
remained constant as a percentage of total net written premiums.
In 1997, 1996 and 1995, twelve programs underwritten by Trenwick accounted for
approximately 45%, 49% and 52%, respectively, of gross premiums written. One
ceding company accounted for 11%, 15% and 19% of gross premiums written for
years 1997, 1996 and 1995, respectively. The majority of this business has been
in force since 1988 and involves working layer excess of loss automobile
liability for trucking risks written by Canal Insurance Company, an established
specialist in this line of business. Canal has an A.M. Best Company rating of A+
and statutory capital and surplus at December 31, 1997 in excess of
$316,000,000. During 1997, Trenwick continued its strategic reinsurance
agreement with PXRE Reinsurance Company (PXRE Re), assuming approximately 15% of
PXRE Re's property business. This program with PXRE Re accounted for
approximately 4%, 6% and 9%, respectively, of gross premiums written in years
1997, 1996 and 1995. Trenwick also obtained approximately 11% and 10% of gross
premiums written in 1997 from American International Group and Travelers Group,
respectively. Trenwick expects to renew these accounts for 1998. While Trenwick
believes that the loss of any one of these accounts would have a material
adverse effect on premiums written, Trenwick does not believe
2
5
that such a loss would result in a concurrent material decrease in its earnings.
Further, Trenwick believes that it would continue to underwrite new business to
replace these accounts, in the event that they were non-renewed.
The table set forth below shows the distribution of net premiums written by type
which classifies the business by type of underwriting methodology used.
NET PREMIUMS WRITTEN BY TYPE OF BUSINESS
(IN THOUSANDS)
1997 1996 1995
------------------------ ------------------------ ------------------------
CASUALTY
Treaty $169,692 87% $190,122 84% $158,923 81%
Facultative 3,254 2 6,404 3 6,035 3
-------- -------- -------- -------- -------- --------
172,946 89% 196,526 87% 164,958 84%
PROPERTY 22,284 11% 29,838 13% 32,204 16%
-------- -------- -------- -------- -------- --------
Total $195,230 100% $226,364 100% $197,162 100%
======== ======== ======== ======== ======== ========
Treaty Reinsurance
Approximately 98% of Trenwick's net premiums written is currently represented by
treaty reinsurance including standard treaty, specialty and property business.
Specialty business underwritten by Trenwick generally includes specialty
coverages and classes such as professional liability, directors' and officers'
liability and other excess and surplus lines exposures. Specialty also
encompasses reinsurance of business written by managing general agents or
alternative risk mechanisms other than insurance companies. Net treaty premiums
written decreased 13% in 1997 and increased 15% and 41% in 1996 and 1995,
respectively. In 1997, Trenwick wrote on a quota share and excess of loss basis
an aggregate of 230 treaties, as compared to 229 treaties in 1996 and 222
treaties in 1995. Trenwick's commitment is currently limited to $2,000,000 per
account on casualty treaty business and $1,500,000 on property business. Larger
commitments are subject to Trenwick's Underwriting Committee referral process.
Facultative Reinsurance
Facultative writings, consisting entirely of casualty business, currently
account for 2% of net premiums written. All facultative business is written on
an excess of loss basis. The average gross limit provided by Trenwick is
$579,000. Maximum facultative gross capacity per risk is $2,000,000. Trenwick
retains the first $500,000 per transaction. In 1997, casualty facultative net
premiums written represented by 297 contracts decreased 49% when compared to
1996. In 1996 and 1995, casualty facultative net premiums written represented by
384 and 318 contracts increased 6% and 45%, respectively, when compared to 1995
and 1994, respectively.
3
6
MARKETING
Trenwick generally obtains all its reinsurance business through reinsurance
brokers which represent the ceding company in negotiations for the purchase of
reinsurance. The process of effecting a brokered reinsurance placement typically
begins when a ceding company enlists the aid of a reinsurance broker in
structuring a reinsurance program. Often the ceding company and the broker will
consult with one or more lead reinsurers as to the pricing and contract terms of
the reinsurance protection being sought. Once the ceding company has approved
the terms quoted by the lead reinsurer, the broker will offer participations to
qualified reinsurers until the program is fully subscribed by reinsurers at
terms agreed to by all parties.
Trenwick pays such intermediaries or brokers commissions representing negotiated
percentages of the premium it writes. These commissions, which currently average
4%, constitute part of Trenwick's total acquisition costs and are included in
its underwriting expenses. Brokers do not have the authority to bind Trenwick
with respect to reinsurance agreements, nor does Trenwick commit in advance to
accept any portion of the business that brokers submit to it. Reinsurance
business from any ceding company, whether new or renewal, is subject to
acceptance by Trenwick.
In 1997, Trenwick's three largest broker sources accounted for 41%, 14% and 10%,
respectively, of Trenwick's gross premiums written. In 1996, the three largest
broker sources accounted for 31%, 18% and 12%, respectively. These brokers are
among the ten largest brokers in the reinsurance industry. Trenwick's
concentration of business through a small number of sources is consistent with
the concentration of the property and casualty broker reinsurance market, in
which a majority of the business is written through the ten largest brokers.
Loss of all or a substantial portion of the business provided by these brokers
could have a material adverse effect on the business and operations of Trenwick.
Trenwick does not believe, however, that the loss of such business would have a
long-term adverse effect because of Trenwick's competitive position within the
broker reinsurance market and the availability of business from other brokers.
UNDERWRITING
Trenwick's underwriting philosophy emphasizes a transactional approach to
underwriting in which any reinsurance transaction for any line of property or
casualty business is considered on its own merits. The underwriter's primary
objective is to assess the potential for an underwriting profit. The risk
assessment process undertaken by Trenwick's underwriters involves a
comprehensive analysis of historical data and estimates of future value of loss
costs which may not be evident in the historical data. The factors which
Trenwick considers include the type of risk, details of the underlying insurance
coverage provided, adequacy of pricing using actuarial analysis and the
reinsurance terms and conditions. Before it agrees to participate in a
transaction, Trenwick frequently conducts underwriting and claims audits of
ceding companies to assist it in evaluating the information submitted by the
ceding companies.
Trenwick's Underwriting Committee, composed of its most senior underwriters and
Chief Actuary, is responsible for its underwriting policy and quality standards.
The quality control process involves both pre-binding referral of individual
transactions and post-binding internal audits of each underwriting department.
The referral process provides a three-tiered system of checks and balances to
reduce the potential for significant loss. Accounts
4
7
displaying characteristics specified in Trenwick's Underwriting Policy Manual
are subject to successive referral to the Department Manager, Underwriting
Committee representatives, and in some cases, the Chief Executive Officer. The
quality control process is supplemented by conducting periodic internal audits
of each underwriting department to ensure compliance with underwriting policies
and procedures.
COMPETITION
Trenwick competes with numerous major international and domestic reinsurance and
insurance companies. These competitors, many of which have substantially greater
financial and staff resources than Trenwick, include independent reinsurance
companies, subsidiaries or affiliates of established insurance companies,
reinsurance departments of certain commercial insurance companies and
underwriting syndicates.
The reinsurance market has two basic segments: reinsurers that primarily obtain
their business directly from insurers and those that primarily obtain business
through reinsurance intermediaries or brokers. Although Trenwick generally
obtains all of its business through reinsurance intermediaries or brokers, and
therefore, competes directly with other reinsurers that obtain their business in
this way, it also competes indirectly with reinsurers who obtain business
directly from primary insurers because Trenwick's brokers must compete with
direct reinsurers for business to be offered to Trenwick.
Competition in the types of reinsurance business which Trenwick underwrites is
based on many factors, including the perceived overall financial strength of the
reinsurer, rates charged, other terms and conditions, A.M. Best rating, service
offered, speed of service (including claims payment) and perceived technical
ability and experience of staff. The number of jurisdictions in which a
reinsurer is licensed or authorized to do business is also a factor. Trenwick is
licensed or otherwise authorized to conduct reinsurance business in every state
and the District of Columbia.
The financial security of insurers and reinsurers has emerged as a key issue of
the 1990's. To be accepted as a reinsurer by ceding companies and their brokers,
a reinsurer must demonstrate higher levels of financial security and solvency
than were previously required. Transactions tend to have fewer and larger
participants, which may negatively affect the availability of underwriting
opportunities. However, ceding companies have become more specialized, which
management believes will favor reinsurers such as Trenwick which possess
technical underwriting and risk assessment skills. The alternative risk segment
of the market has grown, thereby removing some premiums from the traditional
property and casualty primary insurance market. Alternative risk mechanisms,
which depend more heavily on reinsurance than the traditional companies they
have replaced, have created new opportunities for specialized reinsurers.
Trenwick's management believes that the reinsurance industry, including the
intermediary market, will continue to undergo further consolidation and that
size and financial strength will continue to be significant factors in effective
competition. Trenwick's statutory surplus was $322,850,000 at December 31, 1997.
Based on the most recent information prepared by the Reinsurance Association of
America (RAA), this surplus placed Trenwick among the top sixteen ranked
reinsurance companies and the top thirteen reinsurers in the U.S. broker market,
as measured by policyholder surplus, of those companies reporting to the RAA.
The RAA is an industry organization of
5
8
professional property and casualty reinsurers which, among other things,
compiles data on reinsurers and their reinsurance operations.
Trenwick is rated "A+ (Superior)," the second-highest classification accorded by
A.M. Best Company. A.M. Best Company is an independent insurance industry rating
organization. The "A+ (Superior)" rating is assigned to those companies which in
A.M. Best Company's opinion have achieved excellent overall performance when
compared to the norms of the property and casualty insurance industry and which
generally have demonstrated a strong ability to meet their respective
policyholder and other contractual obligations. A.M. Best Company reviews its
ratings at least annually and there is no assurance that Trenwick will be able
to maintain its current rating. Trenwick's Standard & Poor's Insurance Rating
Services Claims-Paying Ability Rating is "A+ (Good)".
CLAIMS ADMINISTRATION
Claims are managed by Trenwick's professional claims staff whose
responsibilities include the review of initial loss reports, creation of claim
files, determination of whether further investigation is required, establishment
and adjustment of case reserves and payment of claims. In addition, the claims
staff conducts comprehensive claims audits of both specific claims and overall
claims procedures at the offices of selected ceding companies. In certain
instances, a claims audit may be performed prior to assuming reinsurance
business as part of a comprehensive risk evaluation process.
UNPAID CLAIMS AND CLAIMS EXPENSES
Insurers and reinsurers establish claims and claims expense reserves
representing estimates of future amounts needed to pay claims and related
expenses with respect to insured events which have occurred. Claims and claims
expense reserves have two components: case reserves, which are reserves for
reported claims, and incurred but not reported ("IBNR") reserves, which are
reserves for claims not yet reported. Significant periods of time may elapse
between the occurrence of an insured claim, the reporting of the claims to the
insurer and the subsequent reporting of the claims to the reinsurer, the
insurer's payment of that claim, and later payments by the reinsurer.
Trenwick first establishes its case reserves for reported claims when it
receives notice of the claim. It is Trenwick's policy to establish reserves for
reported claims in an amount equal to the greater of the reserve recommended by
the ceding company or the claim as estimated by Trenwick's claims personnel.
Trenwick periodically conducts investigations to determine if the amount
reserved by the ceding company is appropriate or should be adjusted. During the
claim settlement period, which may be many years, additional facts regarding
individual claims may become known. As Trenwick learns additional facts, it may
become necessary to refine and adjust upward or downward the estimated reserves
on a claim, and even then the ultimate net reserve may be less than or greater
than the revised estimates. Trenwick does not discount any of its reserves for
reported or unreported claims in any line of its business for anticipated
investment income.
Trenwick uses a combination of actuarial methods to determine its IBNR reserves.
These methods fall into two general categories: (1) methods by which ultimate
claims are estimated based upon historical patterns of reported claim
development experienced by Trenwick, as supplemented by reported industry data,
and (2) methods in which the level of Trenwick's IBNR claim reserves are
established based upon the IBNR claim reserves relative to
6
9
earned premium of other reinsurers, applied by accident year, line of business
and type of reinsurance (excess of loss versus quota share) written by Trenwick.
Reserve methods implicitly recognize the effect of inflation and other factors
affecting claims payments by taking into account changes in historical payment
patterns, the volume of business written, and trends in claim frequency and
severity as reflected in Trenwick's reported claim activity. Due to the inherent
uncertainties of estimating insurance company claim reserves, actual claims and
claims expenses may deviate, perhaps substantially, from estimates of Trenwick's
reserves reflected in the consolidated financial statements. Management believes
that its claim reserve methods are reasonable and prudent and that Trenwick's
reserves for claims and claims expenses at December 31, 1997 are adequate.
Trenwick's known exposure to environmental claims, including asbestos and
pollution liability, is primarily associated with its participation in business
written by its predecessor company between 1978 and 1983. Exposure to
environmental claims on Trenwick's business written since 1983 is generally
limited by exclusions on its own reinsurance contracts and also by exclusions on
policies issued by ceding companies. Casualty business written in 1983 and prior
is not material to Trenwick's overall book of business. As of December 31, 1997
outstanding claims including incurred but not reported claims for environmental
liability were approximately $8,800,000, approximately 2% of Trenwick's total
net outstanding reserves. Under Trenwick's current interpretation of policy
language, management does not believe that it has a material exposure to
environmental claims that requires additional reserves beyond its current
estimates.
The following table presents an analysis of gross and net unpaid claims and
claims expenses and a reconciliation of beginning and ending gross and net
unpaid claims and claims expense balances for 1997, 1996 and 1995. The gross
unpaid claims and claims expense balances for December 31, 1997 and 1996 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.
7
10
ANALYSIS OF ACTIVITY IN UNPAID CLAIMS AND CLAIMS EXPENSES
(IN THOUSANDS)
1997 1996 1995
----------------------- ----------------------- -----------------------
Gross Net Gross Net Gross Net
--------- --------- --------- --------- --------- ---------
Unpaid claims and claims expenses,
beginning of year $ 467,177 $ 386,887 $ 411,874 $ 327,001 $ 389,298 $ 294,008
--------- --------- --------- --------- --------- ---------
Provision for claims and claims expenses:
for claims incurred in the current year 175,133 114,920 161,061 133,755 135,013 115,133
for claims incurred in prior years (4,098) (5,366) (3,669) (4,439) (23,666) (2,065)
--------- --------- --------- --------- --------- ---------
Subtotal 171,035 109,554 157,392 129,316 111,347 113,068
--------- --------- --------- --------- --------- ---------
Payments for claims and claims expenses:
for claims incurred in the current year (22,914) (22,893) (22,603) (22,570) (18,849) (18,271)
for claims incurred in prior years (96,911) (94,197) (79,486) (46,860) (69,922) (61,804)
--------- --------- --------- --------- --------- ---------
Subtotal (119,825) (117,090) (102,089) (69,430) (88,771) (80,075)
--------- --------- --------- --------- --------- ---------
Unpaid claims and claims expenses, end of year $ 518,387 $ 379,351 $ 467,177 $ 386,887 $ 411,874 $ 327,001
========= ========= ========= ========= ========= =========
Reinsurance recoverable on unpaid claims
and claims expenses, end of year $ 139,036 $ 80,290 $ 84,873
========= ========= =========
8
11
In 1996, Trenwick commuted an aggregate excess of loss reinsurance agreement
covering the years 1989 through 1993. As a result of the commutation, Trenwick
received a total consideration of $29,700,000 representing outstanding reserves
of approximately the same amount. The commutation was recorded in 1996 as a paid
loss recovery.
In 1997, 1996 and 1995, Trenwick recorded decreases of $5,366,000, $4,439,000,
and $2,065,000, respectively, in estimated net claims for claims occurring in
prior accident years. The decrease in 1997 is primarily due to the favorable
development in accident years 1990 and prior, partially offset by unfavorable
development in accident years 1991 through 1993. In 1997, Trenwick recorded a
decrease of $4,098,000 in estimated gross claims for claims occurring in prior
accident years.
The following table presents the development of Trenwick's net unpaid claims and
claims expenses for 1987 through 1997. The top line of the table shows the net
unpaid claims and claims expenses at the balance sheet date for each of the
indicated years. This reflects the net estimated amounts of claims and claims
expenses for claims arising in that year and in all prior years that are unpaid
at the balance sheet date, including claims that had been incurred but not yet
reported to Trenwick. The upper portion of the table shows the net cumulative
subsequently paid amounts as of successive years with respect to that liability.
The middle portion of the table shows the net re-estimated amount of the
previously recorded net unpaid claims and claims expenses based on experience as
of the end of each succeeding year. The estimates change as more information
becomes known about the frequency and severity of claims for individual years. A
redundancy (deficiency) exists when the net re-estimated liability at each
December 31 is less (greater) than the prior net liability estimate. The net
"Cumulative Redundancy (Deficiency)" depicted in the table for any particular
calendar year represents the aggregate change in the initial net estimates over
all subsequent calendar years.
The lower portion of the table presents a reconciliation of the net unpaid
claims and claims expenses as of the end of the year with the related gross
unpaid claims and claims expenses as of December 31, 1991 through 1997.
Additionally, the table presents a reconciliation of the gross re-estimated
unpaid claims and claims expenses as of the end of the latest re-estimation
year, with separate disclosure of the related re-estimated reinsurance
recoverable on unpaid claims and claims expenses. The "gross cumulative
redundancy" depicted in the table for the calendar years 1991 through 1997
represents the aggregate change in the initial gross estimates over all
subsequent calendar years.
9
12
DEVELOPMENT OF UNPAID CLAIMS AND CLAIMS EXPENSES
(in thousands)
1997 1996 1995 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ---- ---- ----
Net unpaid claims and claims
expenses, end of year 379,351 $386,887 $327,001 $294,008 $268,091 $266,685 $258,774 $245,105 $214,391
Cumulative amount of net
liability paid as of:
One year later -- 94,197 46,860 61,804 52,300 52,260 44,930 42,234 29,407
Two years later -- -- 110,289 81,417 90,382 93,312 80,725 77,183 60,888
Three years later -- -- 121,133 89,445 118,345 111,225 102,590 84,283
Four years later -- -- -- -- 112,119 111,174 127,431 124,129 101,597
Five years later -- -- -- -- -- 125,847 116,224 134,657 116,047
Six years later -- -- -- -- -- -- 127,130 122,089 124,465
Seven years later -- -- -- -- -- -- -- 129,100 110,656
Eight years later -- -- -- -- -- -- -- -- 115,017
Nine years later -- -- -- -- -- -- -- -- --
Ten years later -- -- -- -- -- -- -- -- --
Net liability re-estimated as of:
One year later -- 381,521 322,562 291,943 267,644 255,379 253,781 238,324 206,724
Two years later -- -- 317,199 279,561 263,473 255,379 243,488 233,565 199,864
Three years later -- -- -- 274,283 246,367 252,458 243,586 223,417 196,232
Four years later -- -- -- -- 241,478 236,009 241,600 224,171 188,052
Five years later -- -- -- -- -- 230,488 225,592 223,172 189,148
Six years later -- -- -- -- -- -- 217,852 213,327 188,884
Seven years later -- -- -- -- -- -- -- 205,179 180,619
Eight years later -- -- -- -- -- -- -- -- 176,778
Nine years later -- -- -- -- -- -- -- -- --
Ten years later -- -- -- -- -- -- -- -- --
Net cumulative redundancy
Amount of original liability -- 5,366 9,802 19,725 26,613 36,197 40,922 39,926 37,613
Percentage -- 1% 3% 7% 10% 14% 16% 16% 18%
Gross liability, end of year 518,387 467,177 411,874 389,298 354,582 351,897 332,503
Reinsurance recoverable 139,036 80,290 84,873 95,290 86,491 85,212 73,729
Net liability, end of year 379,351 386,887 327,001 294,008 268,091 266,685 258,774
Gross re-estimated liability-latest 463,079 402,561 348,453 305,121 296,260 275,234
Re-estimated recoverable-latest 81,558 85,362 74,170 63,643 65,772 57,382
Net re-estimated liability-latest 381,521 317,199 274,283 241,478 230,488 217,852
Gross cumulative redundancy 4,098 9,313 40,845 49,461 55,637 57,269
1988 1987(1)
---- ------
Net unpaid claims and claims
expenses, end of year $169,785 $123,148
Cumulative amount of net
liability paid as of:
One year later 19,983 21,086
Two years later 34,855 32,409
Three years later 53,243 40,285
Four years later 67,132 48,307
Five years later 77,922 53,827
Six years later 87,397 58,568
Seven years later 93,109 64,172
Eight years later 78,032 67,798
Nine years later 81,381 53,974
Ten years later -- 55,816
Net liability re-estimated as of:
One year later 163,848 123,978
Two years later 154,646 118,452
Three years later 150,470 109,536
Four years later 145,457 106,093
Five years later 137,426 102,436
Six years later 137,818 97,304
Seven years later 138,255 96,900
Eight years later 133,192 98,125
Nine years later 130,422 97,785
Ten years later -- 95,700
Net cumulative redundancy
Amount of original liability 39,363 27,448
Percentage 23% 22%
Gross liability, end of year
Reinsurance recoverable
Net liability, end of year
Gross re-estimated liability-latest
Re-estimated recoverable-latest
Net re-estimated liability-latest
Gross cumulative redundancy
(1) Amounts for 1987 include claims activity associated with a Bermuda
subsidiary, prior to its sale by Trenwick in 1987.
10
13
In evaluating the information in the table on the preceding page, it should be
noted that each amount includes the effects of all changes in amounts for prior
periods. For example, if a claim determined in 1991 to be $150,000 was first
reserved in 1986 at $100,000, the $50,000 deficiency (actual claim minus
original estimate) would be included in the gross cumulative redundancy
(deficiency) in each of the years 1986-1991 shown on the preceding page. This
table does not present accident or policy year development data. Conditions and
trends that have affected the development of liability in the past may not
necessarily occur in the future. Accordingly, it may not be appropriate to
extrapolate future redundancies or deficiencies based on this table.
The trend depicted in the table indicates that net unpaid claims and claims
expense liability at December 31, 1996 have developed redundantly due to
favorable development for claims occurring in accident years 1990 and prior,
partially offset by unfavorable development in accident years 1991 through 1993.
RETROCESSION AGREEMENTS
Reinsurance companies enter into retrocessional agreements for the same reasons
insurers seek reinsurance, including reduction of net liability on individual
risks, protection against catastrophic losses and maintenance of acceptable
ratios. Trenwick has various retrocessional facilities, all of which are on a
treaty basis. These retrocessional facilities include one treaty for Trenwick's
facultative casualty reinsurance business which applies on a risk or account
basis and two for its treaty property business which protect it against multiple
claims arising out of a single occurrence or event. As a result of these
facilities, Trenwick's maximum retention generally does not exceed $500,000 per
occurrence on facultative business and $2,000,000 per occurrence on property
catastrophe business. Since 1989, Trenwick has purchased aggregated excess of
loss ratio treaties from several reinsurers. These facilities provided Trenwick
with a layer of protection against adverse results from primarily casualty
business in excess of specified loss ratios.
Trenwick remains liable with respect to reinsurance ceded in the event that the
retrocessionaire is unable to meet its obligations assumed under the reinsurance
agreement. All retrocessionaires must be formally approved by Trenwick's
Security Committee comprising the Chief Executive Officer, as Committee
Chairman, and the Chief Financial Officer. The Security Committee re-evaluates
the financial condition of Trenwick's retrocessionaires at least annually. The
evaluation process involves financial analysis of current audited financial data
and comparative analysis of such data in accordance with guidelines established
by Trenwick. Business may not be conducted with retrocessionaires who are not
currently approved by the Security Committee.
Trenwick's principal retrocessionaires domiciled in the United States are Centre
Reinsurance Company of New York, Continental Casualty Company, Kemper
Reinsurance Company and National Indemnity Company, which are rated A or better
by A.M. Best Company. The principal retrocessionaires domiciled outside the
United States are syndicates at Lloyds of London and Unionamerica Insurance
Company, Limited. At December 31, 1997, Trenwick had no material uncollectible
amounts due from its retrocessionaires.
11
14
INVESTMENTS
Trenwick's investments comply with the insurance laws of the State of
Connecticut, its domiciliary state, and of the other states in which Trenwick is
licensed or authorized. These laws prescribe the kind, quality and concentration
of investments which may be made by insurance companies. In general, these laws
permit investments, within specified limits and subject to certain
qualifications, in federal, state and municipal obligations, corporate bonds,
preferred and common stock, real estate mortgages and real estate. The
Investment Committee of Trenwick's Board of Directors oversees investments and
sets procedures and guidelines for investment strategy. Trenwick's internal
staff manages Trenwick's investments and utilizes the services of an investment
adviser. Trenwick's investment strategy focuses on capital preservation and
income predictability. This strategy also requires that the risks associated
with these objectives are properly managed. Accordingly, the Company emphasizes
investment grade debt investments. At December 31, 1997, 88% of Trenwick's debt
investments were rated Aa or better and none had a Moody's Investors Service
quality rating less than A.
The Company's investment strategy permits an allocation for equity securities.
At December 31, 1997, 5% of the Company's total investments and cash were
invested in common and preferred equities of U.S. corporations. The primary risk
associated with these securities is the exposure to daily market fluctuations.
Trenwick invests in three types of structured securities, collateralized
mortgage obligations (CMO), mortgage-backed securities not backed by U.S.
government agencies (non-agency MBS) and asset-backed securities (ABS), each
accounting for 12%, 9% and 7%, respectively, of Trenwick's portfolio at December
31, 1997.
CMOs consist of planned amortization classes (PACs) which have been constructed
with a certain amount of call protection and CMOs that have lost their PAC
protection (sometimes called "broken" or "busted" PACs), due to actual
prepayments being significantly higher or lower than originally forecast. These
agency backed CMOs are not subject to credit risk, as all holdings are backed
indirectly or directly by the Federal government or one of its agencies. The
material risk inherent to holding these CMOs is prepayment risk, which relates
to the timing of cash flows that result from amortization, whether it
accelerated, because of lower interest rates and therefore higher than expected
prepayments, or decelerated, because of higher interest rates and therefore
lower than expected prepayments. Changes in principal repayments could
negatively affect investment income due to the timing of the reinvested funds.
Non-agency MBSs are constructed primarily from the securitization of mortgages
on commercial or residential real estate and, lacking any agency backing, are
inherently subject to credit risk. They also have an element of prepayment risk
which is contingent on the structure of each security and its underlying
collateral. The non-agency MBS issues Trenwick has purchased have a rating of A
or better from various Nationally Recognized Statistical Rating Organizations.
12
15
The asset-backed securities owned by Trenwick have primarily credit card, auto
and home equity receivables as collateral and are subject also to credit risk.
These securities have less cash flow uncertainty than non-agency MBS and CMO
issues, because the issuer has the ability to add in new collateral should the
asset-backed security experience faster prepayments, or in the event of default
on the underlying collateral. The asset-backed securities owned by Trenwick are
rated A or better by various Nationally Recognized Statistical Rating
Organizations.
Trenwick also invests in agency pass-through securities which account for 5% of
Trenwick's portfolio at December 31, 1997. As with CMOs, these securities are
subject to prepayment risk.
13
16
The table below sets forth the distribution of Trenwick's investments at
December 31, 1997 by type, maturity and quality rating.
INVESTMENTS
(DOLLARS IN THOUSANDS)
AVERAGE ESTIMATED
MATURITY FAIR AMORTIZED
IN YEARS VALUE COST
-------- -------- --------
TYPE
U.S. government bonds 4.9 $ 64,814 $ 62,418
Tax-exempt bonds(1) 4.4 384,854 373,867
Mortgage-backed and asset-backed securities 8.8 286,228 278,271
Debt securities issued by foreign governments 2.2 3,175 3,111
Public utilities 4.6 2,970 2,832
Corporate securities 6.4 68,138 66,108
Redeemable preferred stocks 4.6 2,015 2,000
Short-term securities .5 120 120
-------- --------
Total debt securities 6.2 812,314 788,727
Equity securities 39,163 31,603
Cash and cash equivalents -- 12,847 12,847
-------- --------
Total investments and cash $864,324 $833,177
======== ========
MATURITY(DEBT SECURITIES)
Due in one year or less .6 $ 65,473 $ 65,096
Due in one year through five years 3.3 404,906 395,373
Due after five years through ten years 7.3 254,518 244,294
Due after ten years 21.1 87,417 83,964
-------- --------
Total debt securities 6.2 $812,314 $788,727
======== ========
QUALITY (DEBT SECURITIES)
Aaa(2)-U.S. government bonds $ 64,814 $ 62,418
Tax-exempt bonds 351,751 342,156
Mortgage-backed and asset-backed securities 201,464 196,100
Corporate securities 7,213 6,810
Redeemable preferred stocks 2,015 2,000
-------- --------
627,257 609,484
-------- --------
Aa(2)-Tax-exempt bonds 33,103 31,711
Mortgage-backed securities 41,556 39,899
Corporate securities 10,596 10,109
-------- --------
85,255 81,719
-------- --------
A(2)-Mortgage-backed securities 43,208 42,272
Debt securities issued by foreign governments 3,175 3,111
Public utilities 2,970 2,832
Corporate securities 50,329 49,189
-------- --------
99,682 97,404
-------- --------
Short-term securities 120 120
-------- --------
Total debt securities $812,314 $788,727
======== ========
(1) Tax-exempt bonds include $98,625,000 escrowed in U.S. Government
Securities, $166,090,000 insured by Municipal Bond Investors Assurance
Corporation, Financial Guaranty Insurance Company, AMBAC Indemnity
Corporation, or Financial Security Assurance Corporation and
$45,155,000 both escrowed and insured.
(2) Quality rating as assigned by Moody's Investors Service, Inc. for all
except certain mortgage-backed securities not backed by U.S. government
agencies and certain asset-backed securities. Quality ratings for these
other securities are as assigned by Fitch Investors Service, Standard
and Poor's or Duff and Phelps. Ratings are generally assigned upon the
issuance of the securities, subject to revision on the basis of ongoing
evaluations.
14
17
REGULATION
NAIC
The National Association of Insurance Commissioners ("NAIC") is an organization
which assists state insurance supervisory officials in achieving insurance
regulatory objectives, including the maintenance and improvement of state
regulation. From time to time various regulatory and legislative changes have
been proposed in the insurance industry, some of which could have an effect on
reinsurers. Among the proposals that have in the past been or are at present
being considered are the possible introduction of federal regulation in addition
to, or in lieu of, the current system of state regulation of insurers, and
proposals in various state legislatures (some of which proposals have been
enacted) to conform portions of their insurance laws and regulations to various
model acts adopted by the NAIC. Trenwick is unable to predict what effect, if
any, these developments may have on its operations and financial condition. See
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RBC
The NAIC's initiative to establish minimum capital requirements, referred to as
Risk Based Capital ("RBC"), for property and casualty companies was completed
and adopted in 1993. This formula is used by state insurance regulators as an
early warning tool to identify, for the purpose of initiating regulatory action,
insurance companies that potentially are inadequately capitalized. The ratios
calculated for Trenwick America Re exceeded all of the RBC trigger points at
December 31, 1997. Trenwick believes its capital will continue to exceed these
RBC capital and surplus requirements for the foreseeable future. See Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
State Insurance Regulation
The premium rates and policy terms of reinsurance agreements generally are not
subject to regulation by any government authority. This contrasts with property
and casualty insurance where the premium rates and policy terms are generally
closely regulated by state insurance departments. As a practical matter,
however, the premium rates charged by insurers may place a limit on the rates
which can be charged by reinsurers.
The regulation and supervision to which Trenwick is subject relate primarily to
the standards of solvency that must be met and maintained, licensing
requirements for reinsurers, the nature of and limitations on investments,
restrictions on the size of risks which may be insured, deposits of securities
for the benefit of a reinsured, methods of accounting, periodic examinations of
the financial condition and affairs of reinsurers, the form and content of
reports of financial condition required to be filed, and reserves for unearned
premiums, losses and other purposes. In general, such regulation is for the
protection of the reinsureds, and ultimately, their policyholders rather than
their security holders. Trenwick believes that it is in compliance with all such
regulations.
15
18
Trenwick America Re is subject to regulation under the insurance statutes and
insurance holding company statutes of various states, including Connecticut, the
domiciliary state of Trenwick America Re. These laws and regulations vary from
state to state, but generally require an insurance holding company, and insurers
and reinsurers that are subsidiaries of an insurance holding company, to
register with the state regulatory authorities and to file with those
authorities certain reports including information concerning their capital
structure, ownership, financial condition and general business operations.
State laws also require prior notice or regulatory agency approval of direct or
indirect changes in control of an insurer, reinsurer or its holding company and
of certain significant intercorporate transfers of assets within the holding
company structure. An investor who acquires securities representing or
convertible into more than 10% of the voting power of the securities of Trenwick
would become subject to at least some of such regulations and would be subject
to approval by the Connecticut Insurance Commissioner prior to acquiring such
shares. Such investor would also be required to file certain notices and reports
with the Commissioner prior to such acquisition.
Dividends
The principal source of cash for the payment of dividends by Trenwick is the
receipt of dividends from Trenwick America Re. Under the Connecticut insurance
laws and regulations, the maximum amount of shareholder dividends or other
distributions that Trenwick America Re may declare or pay to the Company within
any twelve month period, without the permission of the Connecticut Insurance
Commissioner, is limited to the greater of 10% of policyholder surplus at
December 31 of the preceding year, or 100% of net income excluding realized
capital gains, for the twelve month period ending December 31 of the preceding
year, both determined in accordance with statutory accounting practices. For the
purpose of computing the limitation, carryforward provisions apply with respect
to net income realized in the two previous calendar years which has not already
been paid out as dividends. The maximum amount of dividends which could be paid
by Trenwick America Re in 1998 without regulatory approval would be $84,392,000.
Investment Limitations
Connecticut Law contains rules governing the types and amounts of investments
which are permissible for a Connecticut insurer or reinsurer, including Trenwick
America Re. These rules are designated to ensure the safety and liquidity of the
insurer's investment portfolio. In general, these rules only permit a
Connecticut insurer to purchase investments which are interest bearing, interest
accruing, entitled to dividends or otherwise income earning and not then in
default in any respect, and the insurer must be entitled to receive for its
exclusive account and benefit the interest or income accruing thereon. No
security or investment is eligible for purchase at a price above its fair value
or market value. In addition, these rules require investments by Trenwick to be
diversified. Trenwick believes that it is in compliance with all applicable
Connecticut insurance laws.
16
19
EMPLOYEES
At December 31, 1997, Trenwick employed a total of 72 persons. Trenwick has no
employees represented by a labor union and believes that its employee relations
are good.
ITEM 2. PROPERTIES
Trenwick's offices in Stamford, Connecticut are occupied pursuant to a lease
covering approximately 27,000 square feet of office space located at Metro
Center, One Station Place. This lease terminates in 1998, and upon its
termination Trenwick will relocate its offices to approximately 46,000 square
feet of space located at One Canterbury Green, Stamford, Connecticut. Trenwick
has entered into a ten-year lease for the new space.
ITEM 3. LEGAL PROCEEDINGS
Trenwick is party to various legal proceedings generally arising in the normal
course of its reinsurance business. Trenwick does not believe that the eventual
outcome of any such proceeding will have a material effect on its financial
condition or business. Trenwick's subsidiaries are regularly engaged in the
investigation and the defense of claims arising out of the conduct of their
reinsurance business. Pursuant to Trenwick's reinsurance arrangements, disputes
between Trenwick America Re and its ceding companies are generally required to
be finally settled by arbitration.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR CORPORATION'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Trenwick Common Stock is listed on the NASDAQ National Market System under the
ticker symbol TREN. There were 126 holders of record and in excess of 1000
beneficial owners of Common Stock as of February 28, 1998. The other information
called for by this item can be found in Item 8, Note 12 of Notes to the
Consolidated Financial Statements.
For a description of restrictions on Trenwick's ability to pay dividends,
reference is made to Item 1, Business - Regulation, Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Item 8, Note 6 of Notes to the Consolidated Financial Statements of Trenwick.
17
20
ITEM 6. SELECTED FINANCIAL DATA
1997 1996 1995 1994 1993
---------- -------- -------- --------- --------
(in thousands except per share data)
INCOME STATEMENT DATA
Net premiums written $ 195,230 $226,364 $197,162 $ 139,635 $101,392
========== ======== ======== ========= ========
Net premiums earned $ 190,156 $211,069 $177,394 $ 132,683 $ 93,180
Net investment income 48,402 41,226 36,828 33,932 34,954
Net realized investment gains (losses) 2,304 299 368 (196) 1,842
Other income 10 -- -- -- --
---------- -------- -------- --------- --------
Total revenues $ 240,872 $252,594 $214,590 $ 166,419 $129,976
========== ======== ======== ========= ========
Net income $ 35,252 $ 33,848 $ 29,841 $ 20,282 $ 23,739
========== ======== ======== ========= ========
PER SHARE DATA
Basic earnings
Income before extraordinary item $ 3.12 $ 3.40 $ 3.09 $ 2.10 $ 2.44
========== ======== ======== ========= ========
Net income $ 3.03 $ 3.40 $ 3.09 $ 2.10 $ 2.44
========== ======== ======== ========= ========
Weighted average shares outstanding 11,645 9,959 9,674 9,638 9,736
========== ======== ======== ========= ========
Diluted earnings
Income before extraordinary item $ 3.01 $ 2.85 $ 2.59 $ 1.88 $ 2.11
========== ======== ======== ========= ========
Net income $ 3.01 $ 2.85 $ 2.59 $ 1.88 $ 2.11
========== ======== ======== ========= ========
Weighted average shares outstanding 12,265 13,352 13,149 13,056 13,261
========== ======== ======== ========= ========
Dividends $ .97 $ .83 $ .75 $ .67 $ .57
========== ======== ======== ========= ========
BALANCE SHEET DATA
Investments and cash $ 864,324 $754,210 $653,704 $ 551,784 $546,303
Total assets 1,087,923 920,804 820,930 727,245 700,407
Unpaid claims and claims expenses 518,387 467,177 411,874 389,298 354,582
Convertible debentures -- 103,500 103,500 103,500 103,500
Company obligated mandatorily
redeemable preferred capital
securities of subsidiary trust holding
solely junior subordinated debentures
of Trenwick 110,000 -- -- -- --
Common stockholders' equity 357,649 265,753 240,776 188,213 206,763
Shares of common stock outstanding 11,951 10,088 9,886 9,660 9,874
Book value per share $ 29.93 $ 26.34 $ 24.36 $ 19.48 $ 20.94
18
21
CERTAIN GAAP FINANCIAL RATIOS
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Combined ratio 96.5% 95.8% 95.6% 103.2% 102.5%
Net premiums written to surplus ratio 0.55:1 0.85:1 0.82:1 0.74:1 0.49:1
Unpaid claims and claims expenses
to surplus ratio 1.45:1 1.76:1 1.71:1 2.07:1 1.71:1
All share and per share information reflects a 3 for 2 stock split, paid on
April 15, 1997.
The earnings per share amounts have been restated to comply with the newly
adopted accounting standard, "Earnings Per Share."
The other information called for by this item can be found in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operation and Item 8, Financial Statements and Supplementary Data.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
INDUSTRY OVERVIEW
The property and casualty reinsurance industry is currently in its ninth
consecutive year of soft market conditions. Competition has increased in recent
years as a result of the ability of companies to raise additional capital
through public and other financing and the use of both traditional and
non-traditional reinsurance products. The level of excess capital has also been
aided by favorable financial markets and the lower than normal number of major
catastrophe losses in the last several years. These factors have mitigated any
positive impact which may have occurred from the decline in the number of
reinsurance companies through withdrawal or acquisition. Companies are now
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 1997, domestic premiums as reported by the RAA amounted to
$19.9 billion, an increase of 5.3% compared to $18.9 billion, in 1996.
Despite soft market conditions, Trenwick has taken advantage of both the
availability of capital in the financial markets and new opportunities in the
business. Trenwick has raised additional capital for its reinsurance operation
to increase its capacity for underwriting risks and to position the Company to
take advantage of market opportunities. Over the past several years, Trenwick
has implemented several strategic initiatives which have enabled it to write new
business during the current soft market. Until 1997, this has resulted in an
overall increase in premium writings. These initiatives included increased
participation in renewal business through increased marketing efforts as
reinsurance buyers consolidated their business within a smaller number of higher
quality reinsurers, such as Trenwick. Growth was further augmented by hiring a
team of senior underwriters in 1995. 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
19
22
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. On
February 27, 1998, the Company expanded its product mix through the acquisition
of SOREMA (UK) Limited (renamed Trenwick International Limited), a London market
company, which underwrites specialty types of insurance and reinsurance on a
worldwide basis.
RESULTS OF OPERATIONS
Premiums
In 1997, Trenwick reported net premiums written of $195.2 million, a 14%
decrease compared to 1996. This compares to a 15% increase in premiums written
in 1996 over 1995. The decline in premium volume is due to Trenwick's decision
not to participate in the continuing downward spiral of rates in the U.S.
property/casualty reinsurance market. This decline is magnified by Trenwick's
decision to buy more reinsurance protection in 1997 in light of the continued
general deterioration in reinsurance pricing and the opportunity to buy
additional protection at more favorable terms than in prior years. Trenwick's
net casualty premium writings declined 12% as a result of three principal
causes. Competition among primary companies has caused cedants to reduce their
own premium writings or restructure their reinsurance programs, reducing the
amount of reinsurance they purchase. As a result of consolidation within the
industry, many ceding companies are now larger and financially stronger,
enabling them to retain more risk. In addition, increasingly intense competition
in the reinsurance markets has driven reinsurance prices on a number of accounts
below pricing levels which the Company will accept.
New casualty business on a gross basis increased 8% for the year ended December
31, 1997 over the same period in 1996 and represented approximately 35% of total
premium writings during the period. Continuing casualty business on a gross
basis increased 2% for the year ended December 31, 1997 over the same period in
1996 and represented 55% of the total premium writings during the period.
Net and gross property business declined primarily as a result of PXRE Re's (the
Company's strategic partner in the writing of catastrophe reinsurance)
conservative response to continued erosion in pricing in that segment of the
reinsurance business and represented approximately 10% of total premium writings
for the year ended December 31, 1997. 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, 1997 of $14.1 million
as compared to 1996, and an increase of $15.1 million in 1996 over 1995. These
estimated premiums did not materially affect the Company's earnings in 1997,
1996 or 1995.
The following table sets forth gross premiums written, net premiums written and
net premiums earned for the periods indicated:
(in thousands) 1997 1996 1995
--------- --------- ---------
Gross premiums written $ 248,662 $ 247,358 $ 214,336
Ceded premiums written (53,432) (20,994) (17,174)
--------- --------- ---------
Net premiums written $ 195,230 $ 226,364 $ 197,162
========= ========= =========
Net premiums earned $ 190,156 $ 211,069 $ 177,394
========= ========= =========
20
23
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 1997, 1996 and 1995, Trenwick recorded an underwriting profit of $6.6
million, $8.8 million and $7.7 million, respectively.
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:
1997 1996 1995
---- ---- ----
Claims and claims expense ratio 57.6% 61.3% 63.7%
---- ---- ----
Expense ratio:
Policy acquisition expense ratio 30.8 27.8 24.8
Underwriting expense ratio 8.1 6.7 7.1
---- ---- ----
Total expense ratio 38.9 34.5 31.9
---- ---- ----
Combined ratio 96.5% 95.8% 95.6%
==== ==== ====
Trenwick America Re statutory
combined ratio 95.9% 95.7% 95.5%
==== ==== ====
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 and claims expense ratio
has improved since 1995, reflecting the lack of any material adverse impact from
property catastrophe claims and favorable development of prior year reserves for
claims and claims expense. Trenwick's property premium writings, including
catastrophe business associated with PXRE Re, amounted to $22.3 million, $29.8
million and $32.2 million in 1997, 1996 and 1995, respectively. In 1997, 1996
and 1995, estimates of prior accident year claims were reduced by approximately
$5.4 million, $4.4 million and $2.1 million, respectively. The reduction in 1997
is primarily due to favorable development in accident years 1990 and prior,
partially offset by unfavorable development in accident years 1991 through 1993.
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 1997 to 38.9% as compared to 34.5% in 1996 and 31.9% in 1995.
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 1997, quota share business
21
24
increased to 55% of total premium writings as compared to approximately 43% and
35% for 1996 and 1995, respectively. Underwriting expenses, which generally do
not vary with premium volume, were approximately $15.4 million, $14.2 million
and $12.6 million in 1997, 1996 and 1995, respectively. The underwriting expense
ratio increased 1.4 percentage points in 1997 compared to 1996 primarily as a
result of the decrease in premium writings.
Trenwick America Re's statutory combined ratios for 1997, 1996 and 1995,
provided in the preceding table, were 6.8, 8.1 and 15.6 percentage points
better, respectively, than the weighted average statutory combined ratios for
all reinsurance companies which reported their results to the RAA in those
periods. The statutory combined ratios for this group of reinsurance companies
in 1997, 1996 and 1995 were 102.7%, 103.8% and 111.1%, respectively. The
statutory combined ratios as reported to the RAA by those companies, including
Trenwick America Re, which primarily accept business from brokers, for 1997,
1996 and 1995 were 104.6%, 107.6% and 106.9%, respectively.
Investment Income
Net investment income in 1997 of $48.4 million increased 17% compared to net
investment income of $41.2 million in 1996. Net investment income in 1996
increased 12% compared to net investment income of $36.8 million in 1995.
Pre-tax yields on invested assets, excluding equity securities, increased to
6.4% in 1997 from 6.3% in 1996 and decreased from 6.5% in 1995. The fluctuation
in yield reflected the composition of the maturing securities. During 1997,
yields on the approximately $79 million of maturities were lower than yields on
the approximately $63 million of maturities in 1996. In 1997, maturities
included $31 million in principal repayments associated with Trenwick's
portfolio of structured and agency pass-through securities compared to $24
million in 1996. As a result of the decrease in interest rates during 1997,
principal repayments are expected to remain similar or increase marginally in
1998. The increase in investment income from 1996 to 1997 is due to the
continued growth in Trenwick's invested asset base. This growth resulted
primarily from funds received of $29.7 million from the aggregate excess of loss
commutation recorded in December 1996, coupled with approximately $61 million of
net funds received in January 1997 from Trenwick's private offering of $110
million in 8.82% Subordinated Capital Income Securities. The remaining proceeds
were used to redeem the Company's convertible debentures. Investment income is
expected to increase in 1998 as the Company's invested asset base continues to
grow. During 1997, the Company sold approximately $31 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.
Operating Results
Trenwick's income before extraordinary item was $36.3 million, or $3.12 per
share compared to $33.8 million, or $3.40 per share for 1996. Weighted average
shares outstanding for 1997 were increased by 1,784,000 common shares issued in
February 1997 when $57.7 million of Trenwick's debentures converted. On a
diluted basis, income before extraordinary item for 1997 was $3.01 per share,
compared to $2.85 per share for 1996. In 1997, Trenwick recorded an
extraordinary loss of $1.0 million, net of income taxes, associated with the
redemption of $45.8 million principal amount of its 6% convertible debentures.
There were no extraordinary items in 1996.
22
25
Included in Trenwick's net income were after-tax realized investment gains of
$1.5 million, or $.13 per share, $194,000 or $.02 per share and $239,000 or $.03
per share in 1997, 1996 and 1995, respectively.
Year 2000 Issue
Trenwick completed the modification of its internally developed software to be
year 2000 compliant during 1996, and is currently in the process of monitoring
the compliance of its outside vendors. The total cost of achieving such
compliance is not anticipated to have a material impact on Trenwick's financial
condition or results of operations.
INVESTMENTS
At December 31, 1997, Trenwick had investments and cash of $864.3 million, an
increase of 15% compared to investments and cash of $754.2 million at December
31, 1996. This increase resulted principally from cash provided by financing and
operations. In addition to dividends paid to stockholders, financing cash flow
included $61 million of net funds received in January 1997 from Trenwick's
private offering of $110 million in 8.82% Subordinated Capital Income
Securities. The remaining proceeds were used to redeem the Company's convertible
debentures. All debt and equity investments are classified as "available for
sale" and reported at fair value, with the unrealized gain or loss, net of
income taxes, reported in a separate component of stockholders' equity. Since
December 31, 1996, the market value of the Company's debt and equity investments
increased approximately $13.0 million. In 1996, Trenwick's investments and cash
increased by $100.5 million or approximately 15% when compared to 1995. That
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.
The average maturity of debt securities at December 31, 1997 was 6.2 years
compared to 6.0 years at December 31, 1996. During 1997, the proceeds from sales
and maturities of taxable and tax-exempt securities of $117.8 million, together
with cash provided by financing and operations, were invested primarily in
taxable securities consisting of mortgage-backed securities of $72 million,
asset-backed securities of $33 million, U.S. government and agency securities of
$28 million and corporate bonds of $30 million. In addition, $39 million of
tax-exempt securities were purchased along with $9 million of preferred stock
and $6 million of common stock. Debt securities were invested in the average
maturity range of between two to fifteen years. 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.
The Company's investment policy requires that certain debt investments be
maintained in an amount equal to the discounted present value of net reinsurance
liabilities. The policy also requires that additional debt investments be
maintained in an amount equal to approximately 10% of total reserve liabilities
to ensure adequate liquidity in the event of a significant change in estimated
payments. At December 31, 1997, the debt investments held under this policy had
an average maturity of approximately 4.6 years, as compared to approximately 4.5
years estimated for such liabilities.
23
26
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.
In January 1997, Trenwick completed a private offering of $110 million in 8.82%
Subordinated Capital Income Securities due February 1, 2037 through Trenwick
Capital Trust I, a Delaware statutory business trust. In connection with this
offering, on February 20, 1997, Trenwick called for redemption all $103.5
million aggregate principal amount of the Company's 6% convertible debentures
due December 15, 1999, at a redemption price of 102.57% principal amount plus
accrued interest to the redemption date. Of the $103.5 million principal amount
of debentures outstanding on that date, $45.8 million principal amount were
redeemed and $57.7 million principal amount were converted into an aggregate of
1.8 million shares of Trenwick's common stock.
Cash provided by operating activities of $47 million in 1997 decreased
approximately 57% as compared to $110.5 million in 1996. In 1996, Trenwick
commuted an aggregate excess of loss retrocessional agreement covering the years
1989 through 1993 for which 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. Trenwick expects that
its cash provided by operating activities will be sufficient to meet its
operating and financing requirements in 1998 and its longer term operating
needs.
Cash provided by financing activities increased to $50.6 million compared to
cash used for financing activities of $5.3 million in 1996. This increase
primarily resulted from funds received from the aforementioned private offering
partially offset by the debt redemption.
At December 31, 1997, Trenwick's investments and cash of $864.3 million exceeded
total liabilities, including gross reserves for claims and claims expenses of
$518.4 million, by $244.1 million, compared to $99.2 million and $73.6 million
at December 31, 1996 and 1995, respectively. At December 31, 1997, 1996 and
1995, Trenwick's net book value amounted to $357.6 million, $265.8 million and
$240.8 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, 1997, Trenwick's investments
consisted principally of fixed-income securities, 88% 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 income taxes (see Note 1 to
Consolidated Financial Statements).
24
27
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 were 0.6:1
for 1997 and 0.8:1 for both 1996 and 1995. 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 1997,
Trenwick's reinsurance treaties consisted principally of an excess of loss
treaty for its facultative casualty business and property catastrophe
reinsurance treaties. In addition, Trenwick purchased an annual aggregate excess
of loss ratio treaty for casualty business effective January 1, 1997. These
coverages were renewed effective January 1, 1998.
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, 1997. 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 1998 without
regulatory approval would be $84.4 million.
25
28
SUBSEQUENT EVENT
On February 27, 1998, Trenwick completed the acquisition of SOREMA (UK) Limited
(renamed Trenwick International Limited) from SOREMA S.A. for cash in the amount
of $60.6 million, which approximated book value. Trenwick International Limited
is based in London and underwrites specialty treaty and facultative insurance
and reinsurance on a worldwide basis. For the year ended December 31, 1997,
Trenwick International Limited had gross and net premiums written of
approximately $102 million and $70 million, respectively. The acquisition will
be accounted for as a purchase and its capital will be doubled to over $125
million. Trenwick believes that the acquisition is an excellent means of
diversifying its current business. Trenwick International Limited's experienced
team of underwriters specializes in shorter-tail classes of insurance and
reinsurance of risks located outside the United States. Trenwick also believes
that the acquisition of an established company in the London insurance market
provides an opportune platform for further international expansion. Pierre
Croizat (former Chief Executive Officer of SOREMA Group), who joined the Company
last September to initiate an international expansion plan, will head Trenwick's
international operations.
26
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TRENWICK GROUP INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Pages
Financial Statements:
Report of Independent Accountants
on Consolidated Financial Statements.......................................28
Consolidated Balance Sheet at December 31, 1997 and 1996......................29
Consolidated Statement of Income
for the three years ended December 31, 1997................................30
Consolidated Statement of Changes in Stockholders' Equity
for the three years ended December 31, 1997................................31
Consolidated Statement of Cash Flows
for the three years ended December 31, 1997................................32
Notes to Consolidated Financial Statements.................................33-54
Financial Statement Schedules:
III - Condensed Financial Information of Registrant .....................S-1-S-3
Report of Independent Accountants on Financial Statement
Schedules..................................................................S-4
Schedules other than those listed above are omitted since they are either not
required or are not applicable or the information required is presented in the
consolidated financial statements, including the notes thereto.
27
30
REPORT OF INDEPENDENT ACCOUNTANTS
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, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, 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.
PRICE WATERHOUSE LLP
New York, New York
January 27, 1998
28
31
TRENWICK GROUP INC.
CONSOLIDATED BALANCE SHEET
December 31,
-----------------------
1997 1996
----------- ---------
(dollars in thousands)
Assets
Securities available for sale at fair value:
Debt securities (amortized cost: $788,727 and $700,476) $ 812,314 $ 713,998
Equity securities (cost: $31,603 and $21,346) 39,163 25,959
Cash and cash equivalents 12,847 14,253
----------- ---------
Total investments and cash 864,324 754,210
Accrued investment income 10,969 10,386
Receivables from ceding insurers 91,867 62,689
Reinsurance recoverable balances, net 66,361 47,772
Deferred policy acquisition costs 22,524 21,805
Net deferred income taxes 12,451 20,231
Other assets 19,427 3,711
----------- ---------
Total assets $ 1,087,923 $ 920,804
=========== =========
Liabilities and Stockholders' Equity
Liabilities:
Unpaid claims and claims expenses $ 518,387 $ 467,177
Unearned premium income 87,020 71,448
Convertible debentures -- 103,500
Other liabilities 14,867 12,926
----------- ---------
Total liabilities 620,274 655,051
----------- ---------
Company-obligated mandatorily redeemable preferred
capital securities of subsidiary trust holding solely junior
subordinated debentures of Trenwick Group Inc. 110,000 --
----------- ---------
Common stockholders' equity:
Common stock, $.10 par value, 30,000,000 shares
authorized; 11,951,060 and 10,087,826 shares outstanding 1,195 1,009
Additional paid-in capital 153,714 94,423
Retained earnings 183,218 159,512
Net unrealized appreciation of securities available for
sale, net of income taxes 20,245 11,789
Deferred compensation under stock award plan (723) (980)
----------- ---------
Total common stockholders' equity 357,649 265,753
----------- ---------
Total liabilities and stockholders' equity $ 1,087,923 $ 920,804
=========== =========
All share and per share information reflects a 3 for 2 stock split, paid on
April 15, 1997.
The accompanying notes are an integral part of these statements.
29
32
TRENWICK GROUP INC.
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31,
-----------------------
1997 1996 1995
--------- -------- --------
(in thousands except per share data)
Revenues:
Net premiums earned $ 190,156 $211,069 $177,394
Net investment income 48,402 41,226 36,828
Net realized investment gains 2,304 299 368
Other income 10 -- --
--------- -------- --------
Total revenues 240,872 252,594 214,590
--------- -------- --------
Expenses:
Claims and claims expenses incurred 109,554 129,316 113,068
Policy acquisition costs 58,549 58,757 44,024
Underwriting expenses 15,425 14,190 12,589
Interest expense 894 6,503 6,496
Minority interest in subsidiary trust 8,920 -- --
--------- -------- --------
Total expenses 193,342 208,766 176,177
--------- -------- --------
Income before income taxes and
extraordinary item 47,530 43,828 38,413
Income taxes 11,241 9,980 8,572
--------- -------- --------
Income before extraordinary item 36,289 33,848 29,841
Extraordinary loss on debt redemption,
net of $558 income tax benefit (1,037) -- --
--------- -------- --------
Net income $ 35,252 $ 33,848 $ 29,841
========= ======== ========
BASIC EARNINGS PER SHARE
Income before extraordinary item $ 3.12 $ 3.40 $ 3.09
Extraordinary loss (.09) -- --
--------- -------- --------
Net income $ 3.03 $ 3.40 $ 3.09
========= ======== ========
DILUTED EARNINGS PER SHARE
Income before extraordinary item $ 3.01 $ 2.85 $ 2.59
========= ======== ========
Net income $ 3.01 $ 2.85 $ 2.59
========= ======== ========
DIVIDENDS PER COMMON SHARE $ .97 $ .83 $ .75
========= ======== ========
All share and per share information reflects a 3 for 2 stock split, paid on
April 15, 1997.
The earnings per share amounts prior to 1997 have been restated to comply with
the newly adopted accounting standard, "Earnings Per Share".
The accompanying notes are an integral part of these statements.
30
33
TRENWICK GROUP INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Year Ended December 31,
-----------------------
1997 1996 1995
--------- --------- ---------
(dollars in thousands)
Stockholders' equity, beginning of year $ 265,753 $ 240,776 $ 188,213
Common stock, $.10 par value, and additional
paid-in capital:
Conversion of debentures (1,783,926 shares) 57,780 -- --
Exercise of employer stock options
(76,750, 221,028 and 198,060 shares) 956 4,001 1,657
Income tax benefits from additional
compensation deductions allowable
for income tax purposes 626 1,467 987
Restricted common stock awarded
(9,782, 15,030 and 31,956 shares) 327 507 933
Restricted common stock awards cancelled
(2,133 and 3,150 shares) (42) (91) --
Common stock purchased and retired
(5,091, 30,699 and 4,584 shares) (171) (1,031) (134)
Retained earnings:
Net income 35,252 33,848 29,841
Cash dividends (11,546) (8,285) (7,287)
Net unrealized appreciation of
investments available for sale:
Change in unrealized appreciation 13,012 (8,551) 41,487
Change in applicable deferred income taxes (4,556) 2,994 (14,519)
Deferred compensation under stock award plan:
Restricted common stock awarded (327) (507) (933)
Restricted common stock awards cancelled 42 91 --
Compensation expense recognized 543 534 531
--------- --------- ---------
Common stockholders' equity, end of year $ 357,649 $ 265,753 $ 240,776
========= ========= =========
All share and per share information reflects a 3 for 2 stock split, paid on
April 15, 1997.
The accompanying notes are an integral part of these statements.
31
34
TRENWICK GROUP INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
-----------------------
1997 1996 1995
--------- --------- ---------
(in thousands)
Cash flows from operating activities:
Premiums collected $ 149,351 $ 171,017 $ 144,996
Ceded premiums paid (10,026) (6,254) (7,908)
Claims and claims expenses paid (117,916) (102,759) (89,487)
Claims and claims expenses recovered 2,841 34,156 7,942
Underwriting expenses paid (13,753) (12,765) (11,008)
--------- --------- ---------
Cash provided by underwriting activities 10,497 83,395 44,535
Net investment income received 50,469 42,654 38,829
Interest and other expenses paid (5,364) (6,190) (6,239)
Income taxes paid (8,592) (9,381) (9,681)
--------- --------- ---------
Cash provided by operating activities 47,010 110,478 67,444
--------- --------- ---------
Cash flows for investing activities:
Purchases of debt securities (203,554) (177,611) (163,262)
Sales of debt securities 33,980 22,460 43,859
Maturities of debt securities 78,770 62,983 55,600
Purchases of equity securities (12,967) (12,529) (326)
Sales of equity securities 5,009 7,638 37
Additions to premises and equipment (227) (611) (612)
--------- --------- ---------
Cash used for investing activities (98,989) (97,670) (64,704)
--------- --------- ---------
Cash flows for financing activities:
Issuance of mandatorily redeemable preferred
capital securities 110,000 -- --
Redemption of convertible debentures (46,997) -- --
Issuance costs of capital securities (1,669) -- --
Issuance of common stock 956 4,001 1,657
Repurchase of common stock (171) (1,031) (134)
Dividends paid (11,546) (8,285) (7,287)
--------- --------- ---------
Cash provided by (used for) financing activities 50,573 (5,315) (5,764)
--------- --------- ---------
Change in cash and cash equivalents (1,406) 7,493 (3,024)
Cash and cash equivalents, beginning of year 14,253 6,760 9,784
--------- --------- ---------
Cash and cash equivalents, end of year $ 12,847 $ 14,253 $ 6,760
========= ========= =========
The accompanying notes are an integral part of these statements.
32
35
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 OF 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 POLICIES
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
Trenwick has classified all of its debt 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 debt securities 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.
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 debt
securities 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.
33
36
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.
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 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
and non-employee directors with an exercise price equal to the market value of
the shares at the date of grant. The 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 has included the pro forma disclosures required by the fair value
based method in Note 7.
34
37
EARNINGS PER SHARE
Effective December 31, 1997, Trenwick adopted a new accounting standard,
"Earnings Per Share", which specifies the computation, presentation and
disclosure requirements of earnings per share and supersedes the previous
standard. It requires a dual presentation of basic and diluted earnings per
share. Basic earnings per share, which excludes the effect of common stock
equivalents, replaces primary earnings per share. Diluted earnings per share,
which utilizes the average market price per share as opposed to the greater of
the average market price per share or ending market price per share when
applying the treasury stock method in determining common stock equivalents,
replaces fully-diluted earnings per share. In this report, all per share amounts
prior to 1997 have been restated to comply with this standard.
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.
ISSUANCE COSTS OF CAPITAL SECURITIES AND DEBT
The issuance costs of the capital securities are being amortized over the term
of the junior subordinated debentures.
Debt issuance costs associated with the issuance of convertible debentures were
being amortized over the term of the related debt using the interest method. The
unamortized costs applicable to debentures converted to common stock were
charged to stockholders' equity at the time of conversion.
COMPREHENSIVE INCOME
A new accounting standard, "Reporting Comprehensive Income", which is effective
for Trenwick's interim and annual periods beginning after December 15, 1997,
establishes standards for reporting and presentation of comprehensive income and
its components. Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources and includes all changes in equity during a
period except those resulting from investments by owners and distributions to
owners. Adoption of this standard will have no material effect on the earnings
of Trenwick.
35
38
NOTE 2
INVESTMENTS
The fair value and amortized cost of debt securities at December 31 are as
follows:
1997 1996
----------------------- -----------------------
FAIR AMORTIZED FAIR AMORTIZED
(in thousands) VALUE COST VALUE COST
-------- --------- -------- ---------
U.S. Treasury securities
and obligations of
U.S. government
corporations and agencies $ 64,814 $ 62,418 $ 91,702 $ 90,421
Obligations of states and
political subdivisions 384,854 373,867 367,029 360,201
Mortgage-backed and
asset-backed securities 286,228 278,271 211,228 206,774
Debt securities issued by
foreign governments 3,175 3,111 3,227 3,156
Public utilities 2,970 2,832 2,918 2,803
Corporate securities 68,138 66,108 37,774 37,001
Redeemable preferred stock 2,015 2,000 -- --
Short-term securities 120 120 120 120
-------- -------- -------- --------
Total debt securities $812,314 $788,727 $713,998 $700,476
======== ======== ======== ========
The fair value and amortized cost of debt securities at December 31, 1997 are
shown below by contractual or expected maturity periods. Expected maturities
will differ from contractual 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 $ 65,473 $ 65,096
Due after one year through five years 404,906 395,373
Due after five years through ten years 254,518 244,294
Due after ten years 87,417 83,964
-------- --------
Total debt securities $812,314 $788,727
======== ========
36
39
NET INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS
During the twelve months ended December 31, 1997, all investments were income
producing. The sources of net investment income for the years ended December 31
are as follows:
(in thousands) 1997 1996 1995
---- ---- ----
Debt securities $ 47,400 $ 41,332 $ 37,219
Equity securities 1,257 393 289
Cash and cash equivalents 1,228 719 621
-------- -------- --------
Gross investment income 49,885 42,444 38,129
Investment expenses (1,483) (1,218) (1,301)
-------- -------- --------
Net investment income $ 48,402 $ 41,226 $ 36,828
======== ======== ========
Net realized gains (losses) on sales of investments are as follows:
(in thousands) 1997 1996 1995
---- ---- ----
Debt securities:
Gross realized gains $ 151 $ 137 $ 605
Gross realized losses (146) (1) (274)
Equity securities:
Gross realized gains 2,299 862 37
Gross realized losses -- (699) --
------- ----- -----
Net realized investment gains $ 2,304 $ 299 $ 368
======= ===== =====
37
40
UNREALIZED GAINS (LOSSES) ON DEBT AND EQUITY SECURITIES
Unrealized gains and losses at December 31 are as follows:
(in thousands) 1997 1996
------------------- -------------------
GAINS LOSSES GAINS LOSSES
----- ------ ----- ------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 2,396 $ -- $1,319 $ (38)
Obligations of states and
political subdivisions 11,022 (35) 7,173 (345)
Mortgage-backed and
asset-backed securities 7,994 (37) 4,958 (504)
Debt securities issued
by foreign governments 64 -- 71 --
Public utilities 138 -- 115 --
Corporate securities 2,030 -- 775 (2)
Redeemable preferred stock 15 -- -- --
------- ---- ------- -----
Total debt securities $23,659 $(72) $14,411 $(889)
======= ==== ======= =====
Equity securities $ 7,560 $-- $ 4,616 $ (3)
======= ==== ======= =====
NET UNREALIZED APPRECIATION OF INVESTMENTS AVAILABLE FOR SALE
The components of the net unrealized appreciation of investments available for
sale at December 31 are as follows:
(in thousands) 1997 1996
---- ----
Unrealized appreciation of debt securities $ 23,587 $ 13,522
Unrealized appreciation of equity securities 7,560 4,613
-------- --------
Unrealized appreciation of investments 31,147 18,135
Deferred income taxes (10,902) (6,346)
-------- --------
Net unrealized appreciation
of investments available for sale,
net of income taxes $ 20,245 $ 11,789
======== ========
INVESTMENTS HELD AS COLLATERAL OR ON DEPOSIT
Debt securities with a carrying value of $102,921,000 are being held
in trust as collateral for certain reinsurance obligations. In
addition, investments with a carrying value of $7,962,000 at December
31, 1997 were on deposit with various state or governmental insurance
departments in order to comply with insurance laws.
38
41
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 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.
Trenwick America Re obtained approximately 65% of its gross written premiums
from three brokers in 1997 and 62% from three brokers in 1996 and 1995. 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 1997, 1996 and 1995, Trenwick America Re obtained approximately 11%, 11% and
10%; 15%, 12% and 10%; 19%, 11% and 9%, respectively, of its gross written
premiums from three ceding companies.
Included in receivables from ceding insurers at December 31, 1997 and 1996 are
accrued premiums of approximately $77,115,000 and $59,070,000, respectively,
which have estimated payment dates ranging from 1997 to 2002. 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 1997 and 1996 is approximately $74,739,000 and $57,300,000,
respectively, which is estimated using cash flows discounted at an interest rate
of 5%.
39
42
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) 1997 1996 1995
---- ---- ----
Assumed premiums written $ 248,662 $ 247,358 $ 214,336
Ceded premiums written (53,432) (20,994) (17,174)
--------- --------- ---------
Net premiums written $ 195,230 $ 226,364 $ 197,162
========= ========= =========
Assumed premiums earned $ 233,090 $ 231,960 $ 194,592
Ceded premiums earned (42,934) (20,891) (17,198)
--------- --------- ---------
Net premiums earned $ 190,156 $ 211,069 $ 177,394
========= ========= =========
Assumed claims and claims
expenses incurred $ 170,343 $ 156,819 $ 111,351
Ceded claims and claims
expenses incurred (60,789) (27,503) 1,717
--------- --------- ---------
Net claims and claims
expenses incurred $ 109,554 $ 129,316 $ 113,068
========= ========= =========
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 1997, 1996 and 1995. The gross unpaid claims and
claims expense balances at December 31, 1997 and 1996 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.
40
43
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) 1997 1996 1995
---- ---- ----
Reserve for unpaid claims and claims expenses, net of
related reinsurance recoverable, at beginning of year $ 386,887 $ 327,001 $ 294,008
Provision for claims and claims expenses, net of reinsurance:
For claims incurred in the current year 114,920 133,755 115,133
For claims incurred in prior years (5,366) (4,439) (2,065)
--------- --------- ---------
Subtotal 109,554 129,316 113,068
--------- --------- ---------
Payments for claims and claims expenses, net of reinsurance:
For claims incurred in the current year (22,893) (22,570) (18,271)
For claims incurred in prior years (94,197) (46,860) (61,804)
--------- --------- ---------
Subtotal (117,090) (69,430) (80,075)
--------- --------- ---------
Reserve for unpaid claims and claims expenses, net of
related reinsurance recoverable, at end of year 379,351 386,887 327,001
Reinsurance recoverable on unpaid claims and
claims expenses, at end of year 139,036 80,290 84,873
--------- --------- ---------
Reserve for unpaid claims and claims expenses, gross of
reinsurance recoverable on unpaid claims, at end of year $ 518,387 $ 467,177 $ 411,874
========= ========= =========
In 1997, 1996 and 1995, Trenwick recorded decreases of $5,366,000, $4,439,000
and $2,065,000, respectively, in estimates for claims occurring in prior
accident years. The reduction in 1997 is primarily due to favorable development
in 1990 and prior years, partially offset by unfavorable development in 1991
through 1993.
In 1996, Trenwick commuted an aggregate excess of loss retrocessional agreement
covering the years 1989 through 1993 for which Trenwick received a total
consideration of $29,700,000 representing outstanding reserves of approximately
the same amount. The commutation was recorded in 1996 as a paid loss recovery.
41
44
Inflation raises the cost of economic losses and non-economic damages covered by
insurance contracts and therefore is a factor in determining effective rates of
reinsurance. The methods used 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.
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, 1997 are adequate.
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, 1997, outstanding claims
including incurred but not reported claims for environmental liability were
approximately $8,800,000, 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.
REINSURANCE RECOVERABLE
The components of reinsurance recoverable balances, net on the balance sheet at
December 31 are as follows:
(in thousands) 1997 1996
---- ----
Paid claims $ 1,267 $ 1,505
Unpaid claims and claims expenses 139,036 80,290
Funds held liability (60,967) (33,353)
Reinsurance balances payable (12,975) (670)
--------- --------
Reinsurance recoverable balances, net $ 66,361 $ 47,772
========= ========
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, 1997, letters of credit in the amount of $1,945,000 have been
arranged in favor of Trenwick America Re in respect of certain outstanding
claims recoverable and the unearned portion of premiums ceded.
42
45
At December 31, 1997, approximately $76,346,000 and $33,517,000 of reinsurance
recoverables on unpaid claims and claims expenses are recoverable from Centre
Reinsurance Company of New York and Continental Casualty Company, respectively.
There are no prepaid reinsurance premiums which relate to these reinsurers.
For the years ended December 31, 1997, 1996 and 1995, Trenwick America Re earned
commissions on cessions to retrocessionaires of $4,503,000, $1,235,000 and
$13,000, respectively.
NOTE 4 INCOME TAXES
Trenwick files a consolidated United States income tax return with its United
States subsidiaries. In 1997, the income tax provision includes an income tax
benefit of $558,000 applicable to an extraordinary loss on debt redemption. The
components of the provision for income taxes for the years ended December 31 are
as follows:
(in thousands) 1997 1996 1995
---- ---- ----
Current income tax provision $ 7,459 $ 13,633 $7,821
Deferred income tax provision 3,224 (3,653) 751
------- -------- ------
Income tax provision $10,683 $ 9,980 $8,572
======= ======== ======
Trenwick's effective income tax rates were 23% for the years ended December 31,
1997 and 1996 and 22% for the year ended December 31, 1995. 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) 1997 1996 1995
---- ---- ----
Income before income taxes $ 45,935 $ 43,828 $ 38,413
======== ======== ========
Income taxes at statutory rate $ 16,077 $ 15,340 $ 13,445
Effect of tax-exempt investment income (5,757) (5,286) (4,963)
Other, net 363 (74) 90
-------- -------- --------
Income tax provision $ 10,683 $ 9,980 $ 8,572
======== ======== ========
The components of the net deferred income tax provision for the years
ended December 31 are as follows:
(in thousands) 1997 1996 1995
---- ---- ----
Discounting of unpaid claims $ 2,782 $(4,541) $(1,369)
Unearned premium income (355) (1,071) (1,384)
Policy acquisition costs deferred 251 1,778 2,112
Alternative minimum taxes 10 (10) 908
Accretion of market discount on
fixed maturity investments 315 518 378
Other, net 221 (327) 106
------- ------- -------
Total deferred income tax provision $ 3,224 $(3,653) $ 751
======= ======= =======
43
46
Deferred income tax assets (liabilities) are attributable to the following
temporary differences as of December 31:
(in thousands) 1997 1996
---- ----
DEFERRED INCOME TAX ASSET
Discounting of unpaid claims $ 26,455 $ 29,237
Unearned premium income 5,335 4,980
Employee stock option plans 120 439
Alternative minimum taxes -- 10
Other 652 524
-------- --------
Gross deferred income tax assets 32,562 35,190
-------- --------
DEFERRED INCOME TAX LIABILITY
Policy acquisition costs deferred (7,883) (7,632)
Unrealized appreciation of
investments available for sale (10,902) (6,346)
Accretion of market discount on fixed
maturity investments (1,211) (896)
Other (115) (85)
-------- --------
Gross deferred income tax liabilities (20,111) (14,959)
-------- --------
Net deferred income tax assets $ 12,451 $ 20,231
======== ========
44
47
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 MANDATORILY REDEEMABLE PREFERRED CAPITAL SECURITIES
On January 28, 1997, Trenwick completed a private offering of $110,000,000 in
8.82% Subordinated Capital Income Securities through Trenwick Capital Trust I, a
Delaware statutory business trust. Trenwick owns all of the common securities of
the trust. Concurrently with the issuance of the capital securities, the trust
invested the proceeds of their sale, together with the consideration paid to the
trust by Trenwick for the common securities, in Trenwick's junior subordinated
debentures, whose terms are similar to those of the capital securities.
The trust was formed for the sole purpose of issuing the capital securities and
the common securities, investing the proceeds thereof in the junior subordinated
debentures and making distributions to the holders of the capital securities.
The capital securities mature on February 1, 2037; require preferential
cumulative cash distributions at an annual rate of 8.82%, payable semiannually
on February 1 and August 1 (beginning August 1, 1997) from the payment of
interest on the junior subordinated debentures; and are guaranteed by Trenwick,
within certain limits, as to the payment of distributions and liquidation or
redemption payments. They are subject to mandatory redemption, (i) in whole but
not in part at maturity, upon repayment of the junior subordinated debentures,
at a redemption price equal to the principal amount plus accrued and unpaid
interest; (ii) in whole but not in part at any time, contemporaneously with the
optional prepayment of the junior subordinated debentures upon the occurrence
and continuation of certain events, at a redemption price equal to the greater
of the principal amount or the present value of principal and interest payable
to February 1, 2007, plus accrued and unpaid interest and possible additional
sums; and (iii) in whole or in part, after February 1, 2007, contemporaneously
with the optional prepayment of the junior subordinated debentures, at a
redemption price equal to the principal amount plus accrued and unpaid interest
and possible additional sums. Upon the occurrence and continuation of an event
of default with respect to the junior subordinated debentures, the capital
securities shall have a preference over the common securities. Upon the
occurrence of an event of default with respect to the junior subordinated
debentures which is attributable to Trenwick's failure to make required payments
or with respect to Trenwick's guarantee, the holders of the capital securities
may institute a direct action against Trenwick.
In accordance with their terms, the capital securities were subsequently
exchanged for fully registered capital securities, which are not subject to
restrictions on transfer.
NOTE 6 INSURANCE REGULATION
Trenwick's reinsurance subsidiary, Trenwick America Re, is domiciled in and
subject to the insurance statutes of Connecticut.
During 1997, 1996 and 1995, Trenwick America Re paid dividends of $8,250,000,
$4,100,000 and $9,500,000, 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
45
48
which has 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, 1997 was $84,392,000.
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 debt securities. 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) 1997 1996 1995
-------- --------- ---------
RECONCILIATION OF NET INCOME
Statutory net income of
Trenwick America Re $ 42,797 $ 29,555 $ 28,060
Change in deferred policy acquisition costs 719 5,080 6,034
Provision for deferred income taxes (3,021) 3,307 (690)
Other -- (6) (12)
-------- --------- ---------
GAAP net income of Trenwick America Re $ 40,495 $ 37,936 $ 33,392
======== ========= =========
(in thousands) 1997 1996 1995
-------- --------- ---------
RECONCILIATION OF SURPLUS
Statutory capital and surplus of
Trenwick America Re $322,850 $ 286,284 $ 257,590
Deferred policy acquisition costs 22,524 21,805 16,725
Unrealized appreciation
of investments 23,981 13,556 23,526
Net deferred income taxes 11,914 19,365 13,144
Unauthorized reinsurance 2,878 2,669 2,336
Non-admitted assets 210 208 2,142
-------- --------- ---------
GAAP stockholders' equity of
Trenwick America Re $384,357 $ 343,887 $ 315,463
======== ========= =========
NOTE 7 STOCKHOLDERS' EQUITY
PREFERRED STOCK
Trenwick has 2,000,000 shares of $.10 par value preferred stock authorized and
none outstanding.
COMMON STOCK
On May 21, 1997, Trenwick's Board of Directors approved a stock repurchase
program covering up to 1,000,000 shares of the Company's common stock; no shares
have been repurchased to date.
46
49
On March 6, 1997, Trenwick's Board of Directors approved a three-for-two common
stock split which was paid on April 15, 1997 to stockholders of record at the
close of business on March 18, 1997. An amount equal to the par value of the
additional shares issued has been transferred from additional paid-in capital to
common stock. All share and per share data have been retroactively restated to
reflect the common stock split.
CONVERTIBLE DEBENTURES
Trenwick called for redemption all $103,500,000 aggregate principal amount of
Trenwick'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 1,783,926
shares of Trenwick's common stock.
As a result of the redemption, Trenwick recorded an extraordinary loss of
$1,037,000, net of a tax benefit of $558,000.
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, 1997 is 999,362. Transactions under the
stock option plans are summarized as follows:
1997 1996 1995
---- ---- ----
NUMBER OF SHARES
Outstanding, beginning of year 981,195 1,137,528 1,190,838
Granted 8,250 81,750 144,750
Cancelled (1,500) (17,055) --
Exercised (76,750) (221,028) (198,060)
-------- ---------- ----------
Outstanding, end of year 911,195 981,195 1,137,528
======== ========== ==========
Exercisable, end of year 312,807 337,770 511,316
======== ========== ==========
AVERAGE EXERCISE PRICE
Granted $ 32.88 $ 31.63 $ 29.33
Cancelled 30.92 19.43 --
Exercised 12.46 18.10 8.37
Outstanding, end of year 25.82 24.73 22.86
Exercisable, end of year 21.81 18.79 17.40
47
50
Included in the table on the preceding page 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.
Trenwick applies the provisions of the previous opinion and related
interpretations in accounting for its stock-based compensation plans. Since
stock options under Trenwick's plans are issued at fair market value on the date
of grant, no compensation expense has been recognized for these stock options.
Had Trenwick applied the fair value based method, net income and net income per
share would have been the pro forma amounts indicated below:
1997 1996 1995
---- ---- ----
Net income
As reported $ 35,252 $ 33,848 $ 29,841
Pro forma $ 35,056 $ 33,694 $ 29,760
Basic earnings per share
As reported $ 3.03 $ 3.40 $ 3.09
Pro forma $ 3.01 $ 3.38 $ 3.08
The pro forma adjustments relate to options granted during 1995, 1996, and 1997
for which a fair value on the date of grant was determined using the
Black-Scholes option pricing model. No effect has been given to options granted
prior to 1995. Valuation and related assumption information are presented below:
1997 1996 1995
---- ---- ----
Valuation Assumptions:
Expected volatility
Employees -- 27% 29%
Non-employee directors 18% 16% 21%
Risk-Free interest rate
Employees -- 6.5% 6.8%
Non-employee directors 5.8% 5.7% 6.1%
Dividend Yield 2.6% 2.7% 2.0%
The Black-Scholes option valuation model was developed for use in estimating the
fair value of options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
Trenwick's stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its stock options.
RESTRICTED COMMON STOCK AWARDS
Trenwick awards restricted common stock to key employees, primarily under the
terms of the 1989 Stock Plan. In 1997, 9,782 shares were awarded at an average
value of $33.42 per share (approximately
48
51
$327,000), which vest over five years. Shares awarded in 1996 and 1995 vest over
three to seven years. Shares repurchased in 1997, 1996 and 1995 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 $543,000, $534,000 and $531,000 for 1997, 1996 and 1995,
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 an
eligible employee's total compensation to the pension plan. Prior to this date,
Trenwick contributed 4% of an eligible employee's total compensation, plus 3% of
the eligible employee's 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 life
insurance companies. Trenwick's contributions to the pension plan were $503,000,
$432,000 and $297,000 for 1997, 1996 and 1995, respectively; its contributions
to the savings plan were $330,000, $314,000 and $122,000 for 1997, 1996 and
1995, respectively.
STOCKHOLDER RIGHTS PLAN
During 1997, Trenwick adopted a new stockholder rights plan, replacing the plan
adopted in 1989, and redeemed the rights issued under the 1989 plan.
Stockholders of record at the close of business on September 24, 1997 received
$0.01 for each redeemed right (equivalent to $0.00667 per share) and received
one new right for each share of common stock held. The rights are exercisable
only if a person or group acquires beneficial ownership of 15% or more of
Trenwick's common stock or commences a tender or exchange offer upon
consummation of which such person or group would beneficially own 15% or more of
Trenwick's common stock. Each right entitles a stockholder to buy 1/200 of a
share of Trenwick's Series B Junior Participating Preferred Stock at an exercise
price of $125, subject to adjustment. Trenwick has reserved 200,000 shares of
such preferred stock for possible issuance under the plan.
In the event that an acquiror accumulates 15% or more of Trenwick's common
stock, all rights holders except the acquiror may purchase, for the exercise
price, in lieu of the Series B 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 15% 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 at $0.01 per right, subject to certain
restrictions. The rights will expire on September 23, 2007.
49
52
NOTE 8 SUPPLEMENTAL CASH FLOWS INFORMATION
A reconciliation of cash provided by operations for the three years ended
December 31 is as follows:
(in thousands) 1997 1996 1995
---- ---- ----
Net income $ 35,252 $ 33,848 $ 29,841
Adjustments to reconcile net income
to net cash provided by operating
activities:
Extraordinary loss on debt redemption 1,595 -- --
Amortization of premiums on
investments, net 2,557 1,579 1,003
Deferred income taxes 3,224 (3,653) 750
Net realized investment gains (2,304) (299) (368)
Amortization of debt issuance costs 32 295 276
Other 929 900 907
Change in:
Receivables from ceding insurers (29,178) (13,710) (21,181)
Deferred policy acquisition costs (719) (5,080) (6,034)
Accrued interest (583) (188) 134
Other assets (4,685) (152) 459
Unpaid claims and claims expenses,
net of reinsurance recoverable balances 32,621 75,980 42,099
Unearned premium income, net of
prepaid reinsurance premiums 5,073 15,295 19,769
Other liabilities 3,196 5,663 (211)
-------- --------- --------
Net cash provided by operating activities $ 47,010 $ 110,478 $ 67,444
======== ========= ========
NOTE 9 OTHER ASSETS AND LIABILITIES
Other assets comprise:
DECEMBER 31,
(in thousands) 1997 1996
---- ----
Prepaid reinsurance premiums $10,804 $ 305
Deferred issuance costs of capital
securities, net of accumulated amortization of $5 1,681 --
Deferred debt issuance costs, net of
accumulated amortization of $1,075 -- 986
Premises and equipment, net of accumulated
depreciation and amortization of $2,693 and $2,373 972 1,135
Funds held in escrow 515 515
Deposits 4,712 177
Other 743 593
------- ------
Total other assets $19,427 $3,711
======= ======
50
53
Trenwick entered into a new ten-year operating lease agreement for office space
as its current operating lease agreement expires on July 15, 1998. Assuming
the new operating lease commences on July 16, 1998, Trenwick's minimum
non-cancellable office space lease commitments totalling $15,317,000 would be
payable as follows: 1998 - $1,094,000; 1999 - $1,419,000; 2000 - $1,419,000;
2001 $1,419,000; 2002 - $1,419,000; thereafter - $8,547,000.
Total office rent expense for the years ended December 31, 1997, 1996 and 1995
was $917,000, $918,000 and $883,000, respectively.
NOTE 10 FAIR VALUE FINANCIAL INSTRUMENTS
Accounting literature defines the fair value of a financial instrument as the
amount at which the OF 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 were 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:
RELATED
1997 1996 FOOTNOTE
CARRYING FAIR CARRYING FAIR CROSS
AMOUNT VALUE AMOUNT VALUE REFERENCE
------ ----- ------ ----- ---------
(in thousands)
ASSETS:
Debt securities $812,314 $812,314 $713,998 $713,998 Notes 1&2
Equity securities 39,163 39,163 25,959 25,959 Notes 1&2
Cash and cash equivalents 12,847 12,847 14,253 14,253 Note 1
Accrued premiums 77,115 74,739 59,070 57,300 Note 3
Funds held in escrow 515 515 515 515 Note 9
LIABILITIES:
Convertible debentures $ - $ - $103,500 $108,675 Note 7
COMPANY-OBLIGATED
MANDATORILY REDEEMABLE
PREFERRED CAPITAL SECURITIES
OF SUBSIDIARY TRUST HOLDING
SOLELY JUNIOR SUBORDINATED
DEBENTURES OF TRENWICK $110,000 $112,160 $ - $ - Note 5
51
54
NOTE 11 EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
(in thousands) 1997 1996 1995
---- ---- ----
INCOME AVAILABLE TO COMMON STOCKHOLDERS:
Income before extraordinary item (basic) $36,289 $33,848 $29,841
Add interest on convertible debentures,
net of income taxes 578 4,228 4,216
------- ------- -------
Income before extraordinary item (diluted) $36,867 $38,076 $34,057
======= ======= =======
Net income (basic) $35,252 $33,848 $29,841
Add interest on convertible debentures and
loss on debt redemption, net of income taxes 1,615 4,228 4,216
------- ------- -------
Net income (diluted) $36,867 $38,076 $34,057
======= ======= =======
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:
Weighted average shares outstanding (basic) 11,645 9,959 9,674
Weighted average shares issuable on
conversion of debt 447 3,201 3,201
Weighted average shares issuable on exercise of
employee stock options, net of assumed
repurchases 173 192 274
------- ------- -------
Weighted average shares outstanding (diluted) 12,265 13,352 13,149
======= ======= =======
PER SHARE AMOUNTS:
Basic
Income before extraordinary item $ 3.12 $ 3.40 $ 3.09
======= ======= =======
Net income $ 3.03 $ 3.40 $ 3.09
======= ======= =======
Diluted
Income before extraordinary item $ 3.01 $ 2.85 $ 2.59
======= ======= =======
Net income $ 3.01 $ 2.85 $ 2.59
======= ======= =======
52
55
NOTE 12 UNAUDITED QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data reported by Trenwick for the years
ended December 31, 1997, 1996 and 1995 are as follows:
DECEMBER SEPTEMBER JUNE MARCH
Quarter ended 31 30 30 31
-- -- -- --
(dollars in thousands,
except per share data)
Earned premiums 1997 $ 45,414 $ 43,723 $ 47,105 $ 53,914
1996 54,994 55,008 53,376 47,691
1995 46,032 43,200 43,698 44,464
Net investment income 1997 12,372 12,178 12,123 11,729
1996 10,840 10,332 10,185 9,869
1995 9,737 9,354 9,193 8,544
Net realized 1997 388 -- 1 1,915
investment gains 1996 281 (21) (11) 50
(losses) 1995 87 131 52 98
Net income 1997 9,122 8,773 8,593 8,764
1996 8,819 8,520 8,327 8,182
1995 8,041 7,956 7,340 6,504
Basic earnings 1997 .77 .74 .72 .81
per common share 1996 .88 .85 .84 .83
1995 .83 .82 .76 .68
Diluted earnings 1997 .75 .73 .71 .81
per common share 1996 .74 .72 .70 .69
1995 .69 .68 .64 .58
Dividends per common 1997 .24 .25 .24 .24
share 1996 .21 .21 .21 .21
1995 .19 .19 .19 .19
Common stock 1997 38.75 39.50 39.63 34.00
price: high 1996 35.83 36.17 35.67 37.83
1995 38.33 35.33 30.50 29.50
Common stock 1997 34.00 34.75 31.83 30.67
price: low 1996 30.67 32.50 30.67 33.50
1995 33.00 28.50 27.83 27.17
All share and per share information reflects a 3-for-2 stock split, paid on
April 15, 1997.
The earnings per share amounts prior to 1997 have been restated to comply with
the newly adopted accounting standard, "Earnings Per Share".
The stock prices are based on closing prices reported by the NASDAQ National
Market System.
53
56
NOTE 13 SUBSEQUENT EVENT (UNAUDITED)
On February 27, 1998, Trenwick completed the acquisition of SOREMA (UK) Limited
(renamed Trenwick International Limited) from SOREMA S.A. for cash in the
amount of $60,619,000 which approximated book value. Trenwick International
Limited is based in London and underwrites specialty treaty and facultative
insurance and reinsurance on a worldwide basis. For the year ended December 31,
1997, Trenwick International Limited had gross and net premiums written of
approximately $101,811,000 and $70,035,000, respectively. The acquisition will
be accounted for as a purchase.
54
57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Incorporated by reference to the captions "Board of Directors", "Management",
and "Executive Compensation" in the Proxy Statement for the Annual Meeting in
1998 ("Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the caption "Executive Compensation" in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the caption "Principal Stockholders" in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the caption "Certain Relationships and Related
Transactions" in the Proxy Statement.
55
58
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) Documents
(1)&(2) The Financial Statements, Schedules and the Report of Independent
Accountants on the Financial Statement Schedules, listed in the
accompanying index on Page 27, are filed as part of this Report.
(3) Exhibits
3.1 Restated Certificate of Incorporation of Trenwick Group Inc.
with Certificates of Amendment thereto. Incorporated by
reference to Exhibit 3.1 to Trenwick's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997. File No.
0-14737.
3.2 (a) Certificate of Elimination amending Trenwick's
Restated Certificate of Incorporation to eliminate
all reference to Series A Junior Participating
Preferred Stock. Incorporated by reference to Exhibit
3.1(a) to Trenwick's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997. File No.
0-14737.
(b) Certificate of Designation amending the Restated
Certificate of Incorporation of Trenwick Group Inc.
to create Series B Junior Participating Preferred
Stock. Incorporated by reference to Exhibit 3.2(b) to
Trenwick's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997. File No. 0-14737.
3.3 Trenwick's By-laws. Incorporated by reference to Exhibit 3.2
to Trenwick's Registration Statement on Form S-1, File No.
33-5085.
4.1 Rights Agreement dated as of September 24, 1997 between
Trenwick and First Chicago Trust Company of New York
including, as Exhibit A thereto, a form of Rights Certificate.
Incorporated by reference to Exhibit 1 to Trenwick's Form 8-A
filed September 24, 1997, File No. 0-14737.
4.2 (a) Indenture dated as of January 31, 1997, between The
Chase Manhattan Bank and Trenwick. Incorporated by
reference to Exhibit 4.2(a) to Trenwick's Annual
Report on Form 10-K for the year ended December 31,
1996, File No. 0-14737.
(b) Amended and Restated Declaration of Trust of Trenwick
Capital Trust I dated as of January 31, 1997.
Incorporated by reference to Exhibit 4.2(b) to
Trenwick's Annual Report on Form 10-K for the year
ended December 31, 1996, File No. 0-14737.
(c) Exchange Capital Securities Guarantee Agreement dated
as of July 25, 1997, between Trenwick and The Chase
Manhattan Bank, as Trustee. Incorporated by reference
to Exhibit 4.7 to Trenwick's Registration Statement
on Form S-4, File No. 333-28707.
56
59
+10.1 Trenwick Incentive Stock Option Plan, as amended through
August 3, 1993. Incorporated by reference to Exhibit 10.1 to
Trenwick's Annual Report on Form 10-K for the year ended
December 31, 1994, File No. 0-14737.
10.2 Incentive Stock Option Agreement between Trenwick and James F.
Billett, Jr. Incorporated by reference to Exhibit 10.11 to
Trenwick's Registration Statement on Form S-1, File No.
33-5085.
10.3 Form of Stock Option Agreement for executive officers
(performance options). Incorporated by reference to Exhibit
10.32 to Trenwick's Annual Report on Form 10-K for the year
ended December 31, 1988, File No. 0-14737.
10.4 Form of Restricted Stock Agreement for executive officers.
Incorporated by reference to Exhibit 10.31 to Trenwick's
Annual Report on Form 10-K for the year ended December 31,
1988, File No. 0-14737.
10.5 Trenwick 1989 Stock Plan, as amended through August 3, 1993.
Incorporated by reference to Exhibit 10.8 to Trenwick's Annual
Report on Form 10-K for the year ended December 31, 1994, File
No. 0-14737.
10.6 Form of Non-qualified Stock Option Agreement for executive
officers. Incorporated by reference to Exhibit 10.36 to
Trenwick's Annual Report on Form 10-K for the year ended
December 31, 1989, File No. 0-14737.
10.7 Trenwick 1993 Stock Option Plan, as amended. Incorporated by
reference to Appendix A to Trenwick's Proxy Statement for the
1997 Annual Meeting of Stockholders, File No. 0-14737.
10.8 Form of 1993 Stock Option Plan Non-qualified Stock Option
Agreement for executive officers. Incorporated by reference to
Exhibit 10.11 to Trenwick's Annual Report on Form 10-K for the
year ended December 31, 1994, File No. 0-14737.
10.9 Trenwick 1993 Stock Option Plan for Non-Employee Directors.
Incorporated by reference to Exhibit 10.2 to Trenwick's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1994, File No. 0-14737.
10.10 Trenwick Near Term Cash Bonus Plan. Incorporated by reference
to Exhibit 10.10 to Trenwick's Registration Statement on Form
S-1, File No. 33-5085.
10.11 Trenwick Unfunded Supplemental Executive Retirement Plan, as
amended through December 14, 1993. Incorporated by reference
to Exhibit 10.14 to Trenwick's Annual Report on Form 10-K for
the year ended December 31, 1994, File No. 0-14737.
+ As required by Item 14, each of Exhibits 10.1 through 10.15 is hereby
identified as a management contract or compensatory plan or
arrangement.
57
60
10.12 Leased Automobile Policy for executive officers. Incorporated
by reference to Exhibit 10.15 to Trenwick's Annual Report on
Form 10-K for the year ended December 31, 1994, File No.
0-14737.
10.13 Description of life insurance and long-term disability
insurance coverage for executive officers. Incorporated by
reference to Exhibit 10.16 to Trenwick's Annual Report on Form
10-K for the year ended December 31, 1994, File No. 0-14737.
10.14 Trenwick Directors Deferred Compensation Plan. Incorporated by
reference to Exhibit 10.17 to Trenwick's Annual Report on Form
10-K for the year ended December 31, 1994, File No. 0-14737.
10.15 Description of Trenwick Directors Retirement Plan.
Incorporated by reference to Exhibit 10.18 to Trenwick's
Annual Report on Form 10-K for the year ended December 31,
1994, File No. 0-14737.
10.16 Office lease between Trenwick and EOP-Canterbury Green, L.L.C.
dated as of January 29, 1998.
10.17 Aggregate Excess of Loss Reinsurance Agreement between
Trenwick and National Indemnity Company dated December 31,
1984 and amendment thereto. Incorporated by reference to
Exhibit 10.29 to Trenwick's registration statement on Form
S-1, File No. 33-5085.
10.18 Automobile Liability First Excess of Loss/Quota Share
Reinsurance Agreement between Trenwick and the Canal Insurance
Company/Canal Indemnity Company.*
10.19 Interests and Liabilities Agreement between Trenwick and
Kemper Reinsurance Group and participants thereon.*
10.20 Property Catastrophe Treaty between Trenwick and numerous
reinsurers.*
10.21 Special Catastrophe Excess of Loss Reinsurance Agreement
Placement Slip between Trenwick and each of Continental
Casualty Company, Zurich Reinsurance Company of New York,
Folksamerica Reinsurance Company, and Kemper Reinsurance
Company.*
10.22 Property Quota Share Retrocession Placement Slip between
Trenwick and each of Toa-Re Insurance Co. (U.K.) Ltd. and
Underwriters at Lloyd's.*
10.23 Property Pro Rata Retrocessional Agreement between PXRE
Reinsurance Company and Trenwick. Incorporated by reference to
Exhibit 10.24 to Trenwick's Annual Report on Form 10-K for the
year ended December 31, 1993, File No. 0-14737.
* Incorporated by reference to Exhibits 10.40, 10.41, 10.43, 10.44 and
10.45 to Amendment No. 1 to Trenwick's Annual Report on Form 10-K for
the year ended December 31, 1991, filed with the Commission on December
8, 1992, File No. 0-14737.
58
61
10.24 Coinsured Aggregate Excess of Loss Reinsurance Agreement
between Trenwick and Centre Reinsurance Company of New York.
Incorporated by reference to Exhibit 10.28 to Trenwick's
Annual Report on Form 10-K for the year ended December 31,
1994, File No. 0-14737.
10.25 1995 First Facultative Casualty Excess of Loss Reinsurance
Agreement between Trenwick and numerous reinsurers.
Incorporated by reference to Exhibit 10.3 to Trenwick's Annual
Report on Form 10-K for the year ended December 31, 1995, File
No. 0-14737.
10.26 1996 First Facultative Casualty Excess of Loss Reinsurance
Agreement between Trenwick and numerous reinsurers.
Incorporated by reference to Exhibit 10.31 to Trenwick's
Annual Report on Form 10-K for the year ended December 31,
1996, File No. 0-14737.
10.27 1996 Coinsured Aggregate Excess of Loss Reinsurance Agreement
between Trenwick and Centre Reinsurance Company of New York
and CNA Re. Incorporated by reference to Exhibit 10.32 to
Trenwick's Annual Report on Form 10-K for the year ended
December 31, 1996, File No. 0-14737.
10.28 1997 First Layer Property Catastrophe Excess of Loss Agreement
with Trenwick and several reinsurers.
10.29 1997 Special Catastrophe Excess of Loss Retrocessional
Agreement between Trenwick and several reinsurers.
10.30 1997 Catastrophe Excess of Loss Reinsurance Agreement
Placement Slip between Trenwick and several reinsurers.
10.31 1997 First and Second Coinsured Aggregate Excess of Loss
Reinsurance Agreement between Trenwick and Centre Reinsurance
Company of New York and CNA Re.
10.32 1997 First Casualty Retrocessional Excess of Loss Reinsurance
Agreement between Trenwick and several reinsurers.
10.33 1997 Reverse Franchise Catastrophe Excess of Loss Reinsurance
Agreement between Trenwick and several reinsurers.
12.0 Computation of Ratios.
21.0 List of Subsidiaries.
23.0 Consent of Price Waterhouse LLP.
27.0 Financial Data Schedule.
28.0 Information from reports furnished to state insurance
regulatory authorities.
(B) Reports on Form 8-K
None
59
62
SIGNATURES
Pursuant to the Requirements of Section 13 or 15(d) of Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
TRENWICK GROUP INC.
(Registrant)
By JAMES F. BILLETT, JR.
----------------------
James F. Billett, Jr.
Chairman, President and
Chief Executive Officer
Dated: March 19, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
JAMES F. BILLETT, JR. Chairman of the Board, March 19, 1998
- ----------------------------
James F. Billett, Jr. President and Chief
Executive Officer and
Director (Principal
Executive Officer)
ALAN L. HUNTE Vice President and March 19, 1998
- ----------------------------
Alan L. Hunte Treasurer (Principal
Financial Officer and
Accounting Officer)
ANTHONY S. BROWN Director March 19, 1998
- ----------------------------
Anthony S. Brown
60
63
NEIL DUNN Director March 19, 1998
- -----------------------------
Neil Dunn
W. MARSTON BECKER Director March 19, 1998
- -----------------------------
W. Marston Becker
P. ANTHONY JACOBS Director March 19, 1998
- -----------------------------
P. Anthony Jacobs
HERBERT PALMBERGER Director March 19, 1998
- -----------------------------
Herbert Palmberger
JOSEPH D. SARGENT Director March 19, 1998
- -----------------------------
Joseph D. Sargent
FREDERICK D. WATKINS Director March 19, 1998
- -----------------------------
Frederick D. Watkins
STEPHEN R. WILCOX Director March 19, 1998
- -----------------------------
Stephen R. Wilcox
61
64
TRENWICK GROUP INC. AND SUBSIDIARIES
SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET
December 31,
------------
1997 1996
---- ----
(in thousands)
Assets:
Investments in consolidated subsidiaries $ 389,604 $346,060
Debt securities available for sale
at fair value (amortized cost: $71,652 and $14,793) 72,032 14,814
Cash and cash equivalents 5,108 2,964
Due from consolidated subsidiaries 6,211 4,303
Deferred debt issuance costs 1,681 986
Accrued investment income 607 2
Net deferred income taxes -- 391
Other assets 8 9
--------- --------
Total assets $ 475,251 $369,529
========= ========
Liabilities:
Convertible debentures -- $103,500
Junior subordinated debentures $ 113,403 --
Accrued interest expense 4,168 276
Net deferred income taxes 14 --
Other liabilities 17 --
--------- --------
Total liabilities 117,602 103,776
Stockholders' equity 357,649 265,753
--------- --------
Total liabilities and stockholders' equity $ 475,251 $369,529
========= ========
S-1
65
TRENWICK GROUP INC. AND SUBSIDIARIES
SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF
REGISTRANT STATEMENT OF INCOME -- PARENT COMPANY ONLY
Year ended December 31,
1997 1996 1995
---- ---- ----
(in thousands)
Revenues:
Consolidated subsidiary dividends $ 8,250 $ 9,100 $ 9,500
Net investment income 4,974 1,000 940
-------- -------- --------
Total revenues 13,224 10,100 10,440
Interest and operating expenses 10,090 6,504 6,486
-------- -------- --------
Income before income taxes, extraordinary item and
equity in undistributed income of unconsolidated
subsidiaries 3,134 3,596 3,954
Income tax benefit (1,239) (1,997) (1,954)
-------- -------- --------
Income before extraordinary item and equity in
undistributed income of consolidated subsidiaries 4,373 5,593 5,908
Extraordinary loss on debt redemption,
net of $558 income tax benefit 1,037 -- --
-------- -------- --------
Income before equity in undistributed
income of consolidated subsidiaries 3,336 5,593 5,908
Equity in undistributed income of
consolidated subsidiaries 31,916 28,255 23,933
-------- -------- --------
Net income $ 35,252 $ 33,848 $ 29,841
======== ======== ========
S-2
66
TRENWICK GROUP INC. AND SUBSIDIARIES
SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS -- PARENT COMPANY ONLY
Year ended December 31,
1997 1996 1995
---- ---- ----
(in thousands)
Cash flows from operating activities:
Dividends and net investment income received $ 12,642 $ 10,537 $ 10,436
Interest and operating expenses paid (4,983) (5,642) (5,678)
Income taxes received 794 2,061 2,116
--------- -------- --------
Cash provided by operating activities 8,453 6,956 6,874
--------- -------- --------
Cash flows for investing activities:
Purchases of debt securities (72,932) -- --
Maturities of debt securities 16,050 -- --
Investment in Trenwick Capital Trust I (3,403) -- --
--------- -------- --------
Cash used for investing activities (60,285) -- --
--------- -------- --------
Cash flows for financing activities:
Issuance of mandatorily redeemable preferred
capital securities 113,403 -- --
Redemption of convertible debentures (46,997) -- --
Issuance costs of capital securities (1,669) -- --
Issuance of common stock 956 4,001 1,657
Repurchase of common stock (171) (1,031) (134)
Dividends paid (11,546) (8,285) (7,287)
--------- -------- --------
Cash provided by (used for) financing activities 53,976 (5,315) (5,764)
--------- -------- --------
Change in cash and cash equivalents 2,144 1,641 1,110
Cash and cash equivalents, beginning of year 2,964 1,323 213
--------- -------- --------
Cash and cash equivalents, end of year $ 5,108 $ 2,964 $ 1,323
========= ======== ========
S-3
67
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
Trenwick Group Inc.
Our audits of the consolidated financial statements referred to in our report
dated January 27, 1998, appearing on Page 28 of this Annual Report on Form 10-K
also included an audit of the Financial Statement Schedules listed in Item 14
of this Form 10-K. In our opinion, these Financial Statement Schedules
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements.
PRICE WATERHOUSE LLP
New York, New York
January 27, 1998
S-4