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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998.
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.)
One Canterbury Green, Stamford, Connecticut 06901
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 353-5500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: 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. [X]
The aggregate market value on February 28, 1999 of the voting stock held by
non-affiliates of the registrant was $294,018,385.
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, 1999
----- --------------------------------
Common Stock, $.10 par value 10,714,945
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, 1998.
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TRENWICK GROUP INC.
Table of Contents
Page
Item Number
- ---- ------
PART I
1. Business ......................................................................................... 1
2. Properties ....................................................................................... 16
3. Legal Proceedings ................................................................................ 16
4. Submission of Matters to a Vote of Security Holders .............................................. 16
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
7a. Quantitative and Qualitative Disclosures About Market Risk......................................... 19
8. Financial Statements and Supplementary Data ...................................................... 19
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ............................................................................. 19
PART III
10. Directors and Executive Officers ................................................................. 19
11. Executive Compensation ........................................................................... 19
12. Security Ownership of Certain Beneficial Owners and Management ................................... 20
13. Certain Relationships and Related Transactions ................................................... 20
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .................................. 20
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PART I
ITEM 1. BUSINESS
GENERAL BACKGROUND AND HISTORY
Trenwick Group Inc. (Trenwick), incorporated in the State of Delaware in 1985,
is a holding company which owns and operates two principal subsidiaries,
Trenwick America Reinsurance Corporation (Trenwick America Re) and Trenwick
International Limited (Trenwick International). Trenwick America Re, a
Connecticut corporation was acquired in 1983 by Trenwick America Corporation,
became a wholly owned subsidiary of Trenwick in 1985 as a result of a corporate
restructuring. Trenwick America Re reinsures property and casualty risks
primarily written by U.S. insurance companies. Trenwick International, a London
based company acquired by Trenwick in February 1998, underwrites reinsurance and
specialty insurance risks primarily located outside the U.S. In addition,
Trenwick owns two inactive Bermuda subsidiaries.
Trenwick America Re, which comprised 68% of Trenwick's total net premiums
written in 1998, underwrites treaty reinsurance, which accounts for the majority
of its business, as well as facultative reinsurance. Trenwick International's
business, which accounted for 32% of Trenwick's total net premiums written,
consists principally of insurance and facultative reinsurance of specialty
classes. Trenwick International also underwrites property and casualty treaty
reinsurance. In the latter part of 1998, Trenwick International opened a branch
office in Paris which specializes in facultative reinsurance of large,
technically complex property risks. Premiums written by the Paris branch in 1998
were not material.
DOMESTIC OPERATIONS
Trenwick America Re generally obtains all of its business through brokers and
reinsurance intermediaries which seek its participation on reinsurance being
placed for their customers. In underwriting reinsurance, Trenwick 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.
The table set forth below shows the distribution of domestic net premiums
written by type which classifies the business by type of underwriting
methodology used.
DOMESTIC NET PREMIUMS WRITTEN BY TYPE OF BUSINESS
(IN THOUSANDS)
1998 1997 1996
---- ---- ----
CASUALTY
Treaty $150,678 89% $169,692 87% $190,122 84%
Facultative 3,690 2 3,254 2 6,404 3
-------- ---- -------- --- -------- ---
154,368 91 172,946 89 196,526 87
PROPERTY 14,744 9 22,284 11 29,838 13
-------- ---- -------- --- -------- --
Total $169,112 100% $195,230 100% $226,364 100%
======== === ======== === ======== ===
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Treaty Reinsurance
Treaty reinsurance involves evaluating groupings of multiple risks or segments
of a ceding company's overall business. Approximately 98% of Trenwick America
Re's net premiums written is currently represented by treaty reinsurance
including standard treaty, specialty and property business. Specialty business
underwritten by Trenwick America Re generally includes specialty coverages and
classes such as professional liability, directors' and officers' liability and
other excess and surplus lines exposures. Specialty business also encompasses
reinsurance of business written by managing general agents or alternative risk
mechanisms other than insurance companies. Net treaty premiums written decreased
14% and 13% in 1998 and 1997, respectively, and increased 15% in 1996. In 1998,
Trenwick wrote an aggregate of 233 treaties on both a quota share and excess of
loss basis, as compared to 230 treaties in 1997 and 229 treaties in 1996.
Trenwick America Re's commitment is currently limited to $2,500,000 per contract
on casualty treaty business and $1,500,000 on property business. Larger
commitments are subject to Trenwick America Re's Underwriting Committee referral
process.
Facultative Reinsurance
Facultative reinsurance is reinsurance written on a risk-by-risk basis and
consists entirely of casualty business. This business, predominantly automobile
liability, currently accounts for only 2% of net premiums written in 1998. All
facultative business is written on an excess of loss basis. The average gross
limit provided by Trenwick is $601,000. Maximum facultative gross capacity per
risk is $2,000,000. Trenwick America Re retains the first $500,000 per
transaction. In 1998 and 1997, casualty facultative net premiums written
represented by 295 and 297 contracts increased 13% and decreased 49%,
respectively. In 1996, casualty facultative net premiums written represented by
384 contracts increased 6% over the prior year.
Domestic net premiums written by line of business are set forth in the following
table for the periods indicated.
DOMESTIC NET PREMIUMS WRITTEN BY LINES OF BUSINESS
(IN THOUSANDS)
1998 1997 1996
---- ---- ----
Casualty
Automobile Liability $ 51,299 $ 50,187 $ 64,539
Errors and Omissions 36,655 40,063 48,888
General Liability 17,743 20,795 22,519
Accident and Health 11,014 6,326 205
Medical Malpractice 7,700 10,293 9,846
Workers' Compensation 3,025 18,328 20,502
Products Liability 2,312 1,743 2,595
Other Casualty 2,697 9,133 10,247
---------- ----------- ---------
Total Casualty 132,445 156,868 179,341
Property 36,667 38,362 47,023
---------- ----------- ---------
Total $169,112 $195,230 $226,364
======== ======== ========
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The major lines of reinsurance currently written by Trenwick America Re are
automobile liability, errors and omissions, general liability and accident and
health. Together these lines account for an aggregate of at least 60% of its net
premiums written in all years indicated. Except for accident and health, these
lines as well as medical malpractice, workers compensation, products liability
and other casualty, have declined since 1996 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 America Re will accept. The decline in
workers compensation is primarily due to the non-renewal of a single significant
account. Accident and health net premiums written increased by approximately 74%
as compared to 1997 resulting primarily from Trenwick America Re's strategic
alliance with Duncanson and Holt. In 1998, the amount of property business,
including automobile physical damage, underwritten by Trenwick America Re
remained constant as a percentage of total net written premiums.
In 1998, 1997 and 1996, twelve programs underwritten by Trenwick America Re
accounted for approximately 51%, 45% and 49%, respectively, of Trenwick America
Re's gross premiums written. Three ceding companies accounted for approximately
38%, 32% and 37% of Trenwick America Re's gross premiums written in 1998, 1997
and 1996, respectively. During 1998, Duncanson and Holt, American International
Group and Fort Washington Holdings accounted for 16%, 12% and 10%, respectively,
of Trenwick America Re's gross premiums written. Trenwick America Re expects to
renew these accounts for 1999. While Trenwick America Re believes that the loss
of any one of these accounts would have a material adverse effect on premiums
written, Trenwick America Re does not believe that such a loss would result in a
concurrent material decrease in its earnings. Further, Trenwick America Re
believes that it would continue to underwrite new business to replace these
accounts, in the event that they were non-renewed.
INTERNATIONAL OPERATIONS
Trenwick International also obtains all of its business through brokers.
Trenwick International's business consists of Specialist Risk Underwriting (SRU)
which includes direct insurance, facultative reinsurance and treaty reinsurance.
The following table reflects Trenwick International's net premiums written by
type of business for 1998.
INTERNATIONAL NET PREMIUMS WRITTEN BY TYPE OF BUSINESS
(IN THOUSANDS)
1998
----
SRU 72,015 89%
TREATY 9,092 11%
------- ---
Total $81,107 100%
======= ===
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SRU
SRU underwrites business in both London and Paris. The Company's branch office
in Paris was opened in September of 1998 and accordingly the contribution to
premium writings in 1998 from this office was not material. In both SRU
locations, the company employs specialty underwriters with extensive experience
in niche sectors. The principal lines of business underwritten in 1998 include
property, engineering, accident and health professional indemnity, financial
institutions, liability, extended warranty and yacht hull. Approximately 56% of
Trenwick International's net premiums were written directly as insurance.
The Company's Paris branch specializes in large, complex property risks that
require a high degree of underwriting expertise. Trenwick International
generally underwrites this business, which includes large manufacturing
facilities, construction projects as well as both onshore and offshore energy
risks, as facultative reinsurance, but can also function directly as an insurer.
Paris benefits from a pool of underwriters trained as engineers and has emerged
as a center for this type of technical underwriting.
Treaty
Trenwick International's treaty business includes liability business, which
accounted for approximately 70% of treaty business in 1998, as well as property
and credit business. Treaty is written both on a proportional and
non-proportional basis.
MARKETING
Trenwick generally obtains all its business through insurance and reinsurance
brokers which represent the ceding company and clients in negotiations for the
purchase of insurance or reinsurance. The process of effecting a brokered
placement typically begins when a client or ceding company enlists the aid of a
broker in structuring an insurance or reinsurance program. Often the various
parties will consult with one or more lead underwriters as to the pricing and
contract terms of the protection being sought. Once the terms quoted by the lead
underwriter have been approved, the broker will offer participations to
qualified insurers or reinsurers until the program is fully subscribed at terms
agreed to by all parties.
Trenwick pays such intermediaries or brokers commissions representing negotiated
percentages of the premium it writes. These commissions constitute part of
Trenwick's total acquisition costs and are included in its underwriting
expenses. Brokers do not have the authority to bind Trenwick with respect to
agreements, nor does Trenwick commit in advance to accept any portion of the
business that brokers submit to it. Business from any company, whether new or
renewal, is subject to acceptance by Trenwick.
Substantially all of Trenwick America Re's business is produced by reinsurance
brokers. During 1998, three reinsurance brokers, AON Reinsurance, Peglar and
Associates, Inc. and Willis Faber, N.A. generated 37%, 10% and 10%,
respectively, of Trenwick America Re's gross written premiums. These brokers are
among the ten largest brokers in the reinsurance industry. 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 ten largest brokers.
Contrary to the U.S. broker market concentration, Trenwick International's
business is produced from a variety of sources, including 125 insurance and
reinsurance brokerage firms. Trenwick International obtained approximately 15%
and 12% of its gross written premiums from two brokers in 1998, which were
Nelson Hurst and AON Reinsurance, respectively. Loss of all or
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a substantial portion of the business provided by Trenwick's brokers could have
a material adverse effect on the business and operations of Trenwick. Trenwick
does not believe, however, that the loss of such business would have a long-term
adverse effect because of Trenwick's competitive position within the broker
insurance and reinsurance market and the availability of business from other
brokers.
UNDERWRITING
Trenwick's underwriting philosophy emphasizes a transactional approach to
underwriting in which any insurance or reinsurance transaction for any line of
property or casualty business is considered on its own merits. The underwriter's
primary objective is to assess the potential for an underwriting profit. The
risk assessment process undertaken by Trenwick's underwriters involves a
comprehensive analysis of historical data, when available, and estimates of
future value of loss costs which may not be evident in the historical data. The
factors which Trenwick considers include the type of risk, details of the
underlying insurance coverage provided, adequacy of pricing using actuarial
analysis and the terms and conditions. With respect to its domestic operations
which comprises fewer but significantly larger accounts, Trenwick frequently
conducts underwriting and claims audits of ceding companies to assist it in
evaluating the information submitted by the ceding companies, before agreeing to
participate in a reinsurance transaction.
Trenwick has established formal underwriting policy standards for both domestic
and international operations. This process involves pre-binding reviews of
individual material transactions by its senior underwriting staff. Underwriting
policies for insurance and reinsurance transactions are supplemented by
conducting periodic internal audits of each underwriting department to ensure
compliance with underwriting policies and procedures.
COMPETITION
Trenwick competes with numerous major international and domestic insurance and
reinsurance companies. These competitors, many of which have substantially
greater financial and staff resources than Trenwick, include independent
insurance and reinsurance companies, subsidiaries or affiliates of established
insurance companies, reinsurance departments of certain commercial insurance
companies and underwriting syndicates.
Trenwick America Re's 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. Trenwick America Re's brokers
must compete with direct reinsurers for business to be offered to Trenwick
America Re. Trenwick International competes with international insurance and
reinsurance companies that generally obtain their business through brokers.
Competition in the types of business which Trenwick underwrites is based on many
factors. These factors include the perceived overall financial strength of the
insurer or reinsurer, rates charged, other terms and conditions, agency ratings
(including A.M. Best and Standard and Poor's), service offered, speed of service
(including claims payment) and perceived technical ability and experience of
staff. The number of jurisdictions in which an insurer or reinsurer is licensed
or authorized to do business is also a factor.
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The financial security of insurers and reinsurers has emerged as a key issue
throughout the 1990's. To be accepted by clients, and by ceding companies and
their brokers, insurers and reinsurers must demonstrate higher levels of
financial security and solvency than were previously required. Transactions tend
to have fewer and larger participants, which may negatively affect the
availability of underwriting opportunities. However, Trenwick's management
believes that the increased specialization of ceding companies 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 insurance and reinsurance industry,
including the broker market, will continue to undergo further consolidation and
that size and financial strength will continue to be significant factors in
effective competition. Trenwick America Re's statutory surplus was $330,496,000
at December 31, 1998. 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 professional
property and casualty reinsurers which, among other things, compiles data on
reinsurers and their reinsurance operations. Trenwick International has
approximately $132,000,000 in statutory surplus.
Trenwick America Re is domiciled in Connecticut and is licensed, authorized or
approved to write reinsurance in all 50 states and the District of Columbia. It
is rated A+ (Superior) by A.M. Best Company and also holds an A+ (Good)
Claims-Paying Ability Rating from Standard & Poor's Insurance Rating Services.
Trenwick International, domiciled in England, is authorized to write insurance
in over 30 countries and participates in the London market for worldwide
reinsurance. It is rated A (Excellent) by A.M. Best and also holds an A+ (Good)
Standard & Poor's Claims-Paying Ability Rating.
CLAIMS ADMINISTRATION
Claims are managed by Trenwick's professional claims staff whose
responsibilities include the review of initial loss reports, creation of claim
files, determination of whether further investigation is required, establishment
and adjustment of case reserves and payment of claims. In addition, the claims
staff conducts comprehensive claims audits of both specific claims and overall
claims procedures at the offices of selected brokers and ceding companies. In
certain instances, a claims audit may be performed prior to assuming reinsurance
business as part of a comprehensive risk evaluation process. For insurance
business, Trenwick's claim staff uses their own judgement as well as advice from
lawyers and loss adjusters where appropriate.
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
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between the occurrence of an insured claim, the reporting of the claims to the
insurer and the subsequent reporting of the claims to the reinsurer, the
insurer's payment of that claim, and later payments by the reinsurer.
Trenwick first establishes its case reserves for reported claims when it
receives notice of the claim. It is Trenwick's policy to establish reserves for
reported claims in an amount equal to the greater of the reserve recommended by
the ceding company or the claim as estimated by Trenwick's claims personnel.
Trenwick periodically conducts investigations to determine if the amount
reserved by the ceding company is appropriate or should be adjusted. During the
claim settlement period, which may be many years, additional facts regarding
individual claims may become known. As Trenwick learns additional facts, it may
become necessary to refine and adjust upward or downward the estimated reserves
on a claim, and even then the ultimate net reserve may be less than or greater
than the revised estimates. Trenwick does not discount any of its reserves for
reported or unreported claims in any line of its business for anticipated
investment income.
Trenwick uses a combination of actuarial methods to determine its IBNR reserves.
These methods fall into two general categories: (1) methods by which ultimate
claims are estimated based upon historical patterns of reported claim
development experienced by Trenwick, as supplemented by reported industry data,
and (2) methods in which the level of Trenwick's IBNR claim reserves are
established based upon the IBNR claim reserves relative to earned premium of
other reinsurers, applied by accident year, line of 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, 1998 are adequate.
Trenwick America Re'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 America Re'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, 1998 outstanding claims including incurred but not reported claims
for environmental liability were approximately $8,400,000, approximately 1% of
Trenwick America Re's total net outstanding reserves. Trenwick International has
no known exposure to environmental claims. 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.
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The following table presents the development of Trenwick's net unpaid claims and
claims expenses for 1988 through 1998. 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 1998.
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 1998
represents the aggregate change in the initial gross estimates over all
subsequent calendar years.
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DEVELOPMENT OF UNPAID CLAIMS AND CLAIMS EXPENSES
(in thousands)
1998 1997 1996 1995 1994
---- ------ ------ -------- --------
Net unpaid claims and claims
expenses, end of year $449,264 $379,351 $386,887 $327,001 $294,008
Cumulative amount of net
liability paid as of:
One year later 104,718 94,197 46,860 61,804
Two years later -- 162,565 110,289 81,417
Three years later -- -- 149,810 121,133
Four years later -- -- -- 142,485
Five years later -- -- -- --
Six years later -- -- -- --
Seven years later -- -- -- --
Eight years later -- -- -- --
Nine years later -- -- -- --
Ten years later -- -- -- --
Net liability re-estimated as of:
One year later 372,176 381,521 322,562 291,943
Two years later -- 374,336 317,199 279,561
Three years later -- -- 308,700 274,283
Four years later -- -- -- 265,041
Five years later -- -- -- --
Six years later -- -- -- --
Seven years later -- -- -- --
Eight years later -- -- -- --
Nine years later -- -- -- --
Ten years later -- -- -- --
Net cumulative redundancy
Amount of original liability* 7,175 12,551 18,301 28,967
Percentage -- 3% 6% 10%
Gross liability, end of year 518,387 467,177 411,874 389,298
Reinsurance recoverable 139,036 80,290 84,873 95,290
Net liability, end of year 379,351 386,887 327,001 294,008
Gross re-estimated liability-latest 510,703 456,134 393,467 338,577
Re-estimated recoverable-latest 138,527 81,798 84,767 73,536
Net re-estimated liability-latest 372,176 374,336 308,700 265,041
Gross cumulative redundancy 7,685 11,043 18,407 50,721
1993 1992 1991 1990 1989 1988
-------- -------- -------- -------- ------ -------
Net unpaid claims and claims
expenses, end of year $268,091 $266,685 $258,774 $245,105 $214,391 $169,785
Cumulative amount of net
liability paid as of:
One year later 52,300 52,260 44,930 42,234 29,407 19,983
Two years later 90,382 93,312 80,725 77,183 60,888 34,855
Three years later 89,445 118,345 111,225 102,590 84,283 53,243
Four years later 112,119 111,174 127,431 124,129 101,597 67,132
Five years later 124,096 125,847 116,224 134,657 116,047 77,922
Six years later -- 133,502 127,130 122,089 124,465 87,397
Seven years later -- -- 132,194 129,100 110,656 93,109
Eight years later -- -- -- 132,888 115,017 78,032
Nine years later -- -- -- -- 117,364 81,381
Ten years later -- -- -- -- -- 83,229
Net liability re-estimated as of:
One year later 267,644 255,379 253,781 238,324 206,724 163,848
Two years later 263,473 255,379 243,488 233,565 199,864 154,646
Three years later 246,367 252,458 243,586 223,417 196,232 150,470
Four years later 241,478 236,009 241,600 224,171 188,052 145,457
Five years later 229,742 230,488 225,592 223,172 189,148 137,426
Six years later -- 222,094 217,852 213,327 188,884 137,818
Seven years later -- -- 208,701 205,179 180,619 138,255
Eight years later -- -- -- 199,948 176,778 133,192
Nine years later -- -- -- -- 172,846 130,422
Ten years later -- -- -- -- -- 128,595
Net cumulative redundancy
Amount of original liability* 38,349 44,591 50,073 45,157 41,545 41,190
Percentage 14% 17% 19% 18% 19% 24%
Gross liability, end of year 354,582 351,897 332,503
Reinsurance recoverable 86,491 85,212 73,729
Net liability, end of year 268,091 266,685 258,774
Gross re-estimated liability-latest 293,805 288,040 266,406
Re-estimated recoverable-latest 64,063 65,946 57,705
Net re-estimated liability-latest 229,742 222,094 208,701
Gross cumulative redundancy 60,777 63,857 66,097
*Excludes Trenwick International's prior year claims in the amount of $5,381,000
acquired on date of purchase, February 27, 1998.
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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, 1997 have developed redundantly due to
Trenwick America Re's favorable development for claims occurring in accident
years 1993 and prior, partially offset by adverse development in accident years
1994 through 1997. For further discussion of unpaid claims and claims expenses
see Note 4 of Notes to the Consolidated Financial Statements of Trenwick.
REINSURANCE AND RETROCESSIONAL AGREEMENTS
Insurance and reinsurance companies enter into reinsurance and retrocessional
agreements to reduce their net liability on individual risks, protection against
catastrophic losses and maintenance of acceptable ratios. Trenwick America Re
has various retrocessional facilities, all of which are on a treaty basis. These
retrocessional facilities include one treaty for Trenwick America Re's
facultative casualty reinsurance business, which applies on a risk or account
basis, and two for its treaty property business, which protect it against
multiple claims arising out of a single occurrence or event. As a result of
these facilities, Trenwick America Re's maximum retention generally does not
exceed $500,000 per occurrence on facultative business and $2,300,000 per
occurrence on property catastrophe business. Since 1989, Trenwick America Re has
purchased aggregated excess of loss ratio treaties from several reinsurers.
These facilities provided Trenwick with a layer of protection against adverse
results from its domestic casualty business in excess of specified loss ratios.
Trenwick International, as customary with companies operating in the London
market, buys large amounts of reinsurance. Reinsurance and retrocessional
coverage is customized for each class of business. During 1998, following an
increase in its share capital, Trenwick International increased its retention of
business by reducing the amount of reinsurance it buys, principally proportional
reinsurance treaties with its former parent.
Trenwick remains liable with respect to insurance and reinsurance ceded in the
event that the insurer or retrocessionaire is unable to meet its obligations.
All reinsurers and retrocessionaires must be formally approved by Trenwick
America Re's and Trenwick International's Security Committee. The Security
Committees re-evaluate the financial condition of Trenwick reinsurers and
retrocessionaires at least annually. The evaluation process involves financial
analysis of current audited financial data and comparative analysis of such data
in accordance with guidelines established by Trenwick. Business may not be
conducted with retrocessionaires who are not currently approved by the Security
Committees.
Trenwick America Re's principal retrocessionaires domiciled in the United States
are Zurich Reinsurance, Continental Casualty Company and Unum Life Insurance
Company of America, which are rated A or better by A.M. Best Company. Trenwick
America Re's principal retrocessionaires domiciled outside the United States are
syndicates at Lloyds of London and Unionamerica Insurance Company, Limited.
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Trenwick International has two principal retrocessionaires, Societe de
Reassurance des Mutuelles Agricoles S.A., which is domiciled in France and
SOREMA North America Reinsurance Company which is domiciled in the U.S. Both
companies are rated A (Excellent) by A.M. Best Company. At December 31, 1998,
Trenwick America Re and Trenwick International had no material uncollectible
amounts due from its retrocessionaires.
INVESTMENTS
Trenwick America Re's investments comply with the insurance laws of the state of
Connecticut, its domicile state, and of the other states in which it is licensed
or authorized. These laws prescribe the kind, quality and concentration of
investments which may be made by insurance companies. In general, these laws
permit investments, within specified limits and subject to certain
qualifications, in federal, state and municipal obligations, corporate bonds,
preferred and common stock, real estate mortgages and real estate. Similarly,
Trenwick International's investments comply with the insurance laws of the
Financial Services Authority (FSA). These laws penalize high concentrations of
riskier types of assets and high exposures to certain types of issuers. The
Investment Committees of Trenwick's Boards of Directors oversee investments and
set procedures and guidelines for investment strategy. Trenwick's internal staff
manage these investments and utilize the services of investment advisers.
Trenwick's investment strategy focuses on capital preservation and income
predictability. This strategy also requires that the risks associated with these
objectives are properly managed. Accordingly, Trenwick emphasizes investment
grade debt investments. At December 31, 1998, 89% of Trenwick's domestic
companies (Trenwick America) debt investments were rated Aa or better and none
had a Moody's Investors Service quality rating less than A. In October 1998,
securities with an estimated fair value of $4,390,000 had their ratings
withdrawn by various Nationally Recognized Statistical Rating Organizations. The
servicer of these securities, Commercial Financial Services, Inc., filed for
protection under Chapter 11 of the Federal Bankruptcy Code in December 1998. At
December 31, 1998, 100% of Trenwick International's debt investments were rated
Aaa/P1 by Moody's Investors Service.
Trenwick's investment strategy permits an allocation for equity securities. At
December 31, 1998, 5% of Trenwick's total investments and cash were invested in
common and preferred equities of U.S. and United Kingdom corporations
respectively. The primary risk associated with these securities is the exposure
to daily market fluctuations.
Trenwick America 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 10%, 11% and 4%, respectively, of Trenwick America's portfolio at
December 31, 1998.
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.
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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.
The asset-backed securities owned by Trenwick have primarily credit card and
home equity receivables as collateral and are subject also to credit risk. These
securities have less cash flow uncertainty than non-agency MBS and CMO issues,
because the issuer has the ability to add in new collateral should the
asset-backed security experience faster prepayments, or in the event of default
on the underlying collateral. The asset-backed securities owned by Trenwick are
rated A or better by various Nationally Recognized Statistical Rating
Organizations, with the exception of the asset-backed securities serviced by
Commercial Financial Services, Inc. for which ratings have been withdrawn.
Trenwick also invests in agency pass-through securities which account for 3% of
Trenwick America's portfolio at December 31, 1998. As with CMOs, these
securities are subject to prepayment risk.
Trenwick International holds debt securities and cash in a number of currencies.
At December 31, 1998, approximately 81% of Trenwick International's debt
securities and cash were held in U.K. sterling, 9% in U.S. dollars, 4% in German
marks, and the remainder in eight other currencies.
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The table below sets forth the distribution of Trenwick's investments at
December 31, 1998 by type, maturity and quality rating.
INVESTMENTS
(DOLLARS IN THOUSANDS)
AVERAGE ESTIMATED
MATURITY FAIR AMORTIZED
IN YEARS VALUE COST
--------- ---------- ---------
TYPE
U.S. government bonds 4.4 $ 68,668 $ 64,831
Tax-exempt bonds(1) 5.2 394,017 380,593
Mortgage-backed and asset-backed securities 10.5 212,116 206,790
Debt securities issued by British government 1.4 46,536 45,949
Debt securities issued by other foreign governments .5 8,241 8,163
Public utilities 3.6 3,086 2,864
Corporate securities 6.0 57,310 55,364
Redeemable preferred stocks 3.6 2,048 2,000
Certificates of deposit .5 100,998 100,998
---------- ---------
Total debt securities 5.7 893,020 867,552
Equity securities 49,188 44,342
Cash and cash equivalents .1 63,003 63,003
---------- ----------
Total investments and cash $1,005,211 $974,897
========== ========
MATURITY (DEBT SECURITIES)
Due in one year or less .4 $ 146,008 $145,390
Due in one year through five years 2.8 417,662 406,249
Due after five years through ten years 7.6 207,440 197,655
Due after ten years 19.1 121,910 118,258
---------- ---------
Total debt securities 5.7 $ 893,020 $867,552
========== ========
QUALITY (DEBT SECURITIES)
Aaa(2)-U.S. government bonds $ 68,668 $ 64,831
Tax-exempt bonds 351,232 339,628
Mortgage-backed and asset-backed securities 122,282 117,117
Debt securities issued by British government 46,536 45,949
Debt securities issued by other foreign governments 5,118 5,101
Corporate securities 7,118 6,785
---------- ---------
600,954 579,411
---------- ---------
Aa(2)-Tax-exempt bonds 40,620 38,898
Mortgage-backed and asset-backed securities 50,377 48,559
Corporate securities 18,005 17,285
Redeemable preferred stocks 2,048 2,000
---------- ---------
111,050 106,742
---------- ---------
A(2)-Tax-exempt bonds 2,165 2,067
Mortgage-backed securities 35,067 34,360
Debt securities issued by foreign governments 3,123 3,062
Public utilities 3,086 2,864
Corporate securities 32,187 31,294
---------- ---------
75,628 73,647
---------- ---------
P1(2)-Certificates of deposits 100,998 100,998
---------- ---------
Withdrawn - Asset-backed securities 4,390 6,754
---------- ---------
Total debt securities $893,020 $867,552
========== =========
(1) Tax-exempt bonds include $64,540,000 escrowed in U.S. Government
Securities, $197,870,000 insured by Municipal Bond Investors Assurance
Corporation, Financial Guaranty Insurance Company, AMBAC Indemnity
Corporation, or Financial Security Assurance Corporation and $42,020,000
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.
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REGULATION
Trenwick and its domestic subsidiaries are subject to regulatory oversight under
the insurance statutes and regulations of the jurisdictions in which they
conduct business, including all states of the United States. These regulations
vary from jurisdiction to jurisdiction and are generally designed to protect
ceding insurance companies and policyholders by regulating Trenwick's financial
integrity and solvency in its business transactions and operations. Trenwick
International is subject to the regulatory authority of the United Kingdom
Financial Services Authority (FSA). Many of the insurance statutes and
regulations applicable to Trenwick's subsidiaries relate to reporting and enable
regulators to closely monitor Trenwick's performance. Typical required reports
include information concerning Trenwick's capital structure, ownership,
financial condition, and general business operations.
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, 1998. 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 America Re 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
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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.
Trenwick America Re is subject to regulation under the insurance statutes and
insurance holding company statutes of various states, including Connecticut, its
domicile. 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.
Effective January 1, 2001, the Connecticut Insurance Department will adopt the
codification of Statutory Accounting Principles. The codification provides
guidance for areas where statutory accounting has been silent and changes
current statutory accounting in some areas. Assuming Trenwick America Re adopted
codification as of January 1, 1998, the effect of adoption would have been an
increase in statutory net income of approximately $25,600,000 and a net increase
to statutory surplus of approximately $27,600,000 as a result of recording a
deferred tax benefit and a net deferred tax asset.
Dividends
Under the holding company structure, Trenwick is dependent upon the ability of
its operating subsidiaries, Trenwick America Re and Trenwick International to
transfer funds, principally in the form of cash dividends and tax
reimbursements. The statutory limitation on dividends which can be paid, within
any preceding twelve months, 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
for the twelve month period ending December 31 of the preceding year, but shall
not include pro rata distributions of any class of Trenwick America Re's own
securities, both determined in accordance with statutory accounting practices.
The amount of dividends or other distributions that could be paid by Trenwick
America Re without prior approval as of December 31, 1998 was $40,930,000.
During 1998, 1997 and 1996, Trenwick America Re paid dividends of $30,100,000,
$8,250,000 and $4,100,000, respectively.
Under the applicable laws of the United Kingdom, Trenwick International may make
shareholder distributions only from accumulated realized profits, net of
accumulated realized losses. In addition, under the U.K. Insurance Companies
Act, Trenwick International is not permitted to make any distribution that would
reduce its net assets below the minimum margin of solvency required by law. The
FSA promulgates rules for determining the required margin of solvency which is
approximately $11,451,000 as of December 31, 1998. The Company must also notify
the FSA of any proposal to declare or pay a dividend on any of its share
capital.
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Investment Limitations
Connecticut laws and regulations govern 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 permit a Connecticut
insurer to purchase only investments which are interest bearing, interest
accruing, entitled to dividends or otherwise income earning and not then in
default in any respect, and 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. The Financial Services Authority governs the types and amounts of
investments which are permissible for insurers in the United Kingdom, including
Trenwick International. These laws penalize high concentrations of riskier types
of assets and high exposures to certain types of issuers. Trenwick believes that
it is in compliance with all applicable investment laws.
EMPLOYEES
At December 31, 1998, Trenwick employed a total of 68 and 79 persons in its
domestic and international operations, respectively. Trenwick has no employees
represented by a labor union and believes that its employee relations are good.
ITEM 2. PROPERTIES
Trenwick's corporate headquarters and Trenwick America Re's offices are located
in approximately 46,000 total square feet of leased office space at One
Canterbury Green, Stamford, Connecticut. Trenwick International leases office
space in London, England and Paris, France. See Note 7 of Notes to the
Consolidated Financial Statements of Trenwick.
ITEM 3. LEGAL PROCEEDINGS
Trenwick is party to various legal proceedings generally arising in the normal
course of its business. Trenwick does not believe that the eventual outcome of
any such proceeding will have a material effect on its financial condition or
business. Trenwick's subsidiaries are regularly engaged in the investigation and
the defense of claims arising out of the conduct of their business. Pursuant to
Trenwick's insurance and reinsurance arrangements, disputes are generally
required to be finally settled by arbitration.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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. For the periods presented below, the high and low sales
price and closing prices of the common stock as reported by the NASDAQ were as
follows:
1998 1997 1996
---- ---- ----
High December 31 34.50 38.75 35.83
September 30 39.50 39.50 36.17
June 30 41.75 39.63 35.67
March 31 38.00 34.00 37.83
Low December 31 27.31 34.00 30.67
September 30 28.00 34.75 32.50
June 30 35.50 31.83 30.67
March 31 33.75 30.67 33.50
Close December 31 32.63 37.63 30.83
September 30 29.13 37.75 34.50
June 30 38.84 37.50 33.33
March 31 37.50 33.00 34.00
There were 112 holders of record and in excess of 1000 beneficial owners of
Common Stock as of February 28, 1999.
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 11 of Notes to the Consolidated Financial Statements of Trenwick.
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ITEM 6. SELECTED FINANCIAL DATA
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands except per share data)
INCOME STATEMENT DATA
Net premiums written $ 250,219 $ 195,230 $ 226,364 $ 197,162 $ 139,635
========== ========== ========== ========== ==========
Net premiums earned $ 245,561 $ 190,156 $ 211,069 $ 177,394 $ 132,683
Net investment income 56,316 48,402 41,226 36,828 33,932
Net realized investment gains (losses) 9,016 2,304 299 368 (196)
Other income 421 10 -- -- --
---------- ---------- ---------- ---------- ----------
Total revenues $ 311,314 $ 240,872 $ 252,594 $ 214,590 $ 166,419
========== ========== ========== ========== ==========
Net income $ 34,792 $ 35,252 $ 33,848 $ 29,841 $ 20,282
========== ========== ========== ========== ==========
PER SHARE DATA
Basic earnings
Income before extraordinary item $ 2.99 $ 3.12 $ 3.40 $ 3.09 $ 2.10
========== ========== ========== ========== ==========
Net income $ 2.99 $ 3.03 $ 3.40 $ 3.09 $ 2.10
========== ========== ========== ========== ==========
Weighted average shares outstanding 11,657 11,645 9,959 9,674 9,638
========== ========== ========== ========== ==========
Diluted earnings
Income before extraordinary item $ 2.95 $ 3.01 $ 2.85 $ 2.59 $ 1.88
========== ========== ========== ========== ==========
Net income $ 2.95 $ 3.01 $ 2.85 $ 2.59 $ 1.88
========== ========== ========== ========== ==========
Weighted average shares outstanding 11,779 12,265 13,352 13,149 13,056
========== ========== ========== ========== ==========
Dividends $ 1.00 $ .97 $ .83 $ .75 $ .67
========== ========== ========== ========== ==========
BALANCE SHEET DATA
Investments and cash $1,005,211 $ 864,324 $ 754,210 $ 653,704 $ 551,784
Total assets 1,392,261 1,085,956 920,804 820,930 727,245
Unpaid claims and claims expenses 682,428 518,387 467,177 411,874 389,298
6.7% senior notes due 2003 75,000 -- -- -- --
Convertible debentures -- -- 103,500 103,500 103,500
Company obligated mandatorily
redeemable preferred capital
securities of subsidiary trust holding
solely junior subordinated debentures
of Trenwick 110,000 110,000 -- -- --
Common stockholders' equity 348,029 357,649 265,753 240,776 188,213
Shares of common stock outstanding 11,051 11,951 10,088 9,886 9,660
Book value per share $ 31.49 $ 29.93 $ 26.34 $ 24.36 $ 19.48
Amounts for 1998 reflect the results of Trenwick International, accounted for as
a purchase, from February 27, 1998, date of acquisition.
All share and per share information reflects a 3 for 2 stock split, paid on
April 15, 1997.
The earnings per share amounts have been restated to comply with the accounting
standard, "Earnings per Share".
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CERTAIN GAAP FINANCIAL RATIOS
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Combined ratio 102.3% 96.5% 95.8% 95.6% 103.2%
Net premiums written to surplus ratio 0.77:1 0.55:1 0.85:1 0.82:1 0.74:1
Unpaid claims and claims expenses
to surplus ratio 1.96:1 1.45:1 1.76:1 1.71:1 2.07:1
The other information called for by this item can be found in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Item 8, Financial Statements and Supplementary Data.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information called for by this item can be found in Trenwick's 1998 Annual
Report to Stockholders under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and is incorporated herein by
reference.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This information called for by this item can be found in Trenwick's 1998 Annual
Report to Stockholders under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this item can be found in Trenwick's 1998 Annual
Report to Stockholders immediately following the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and to
the items included in Item 14(a) of this report, and is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Incorporated by reference to the captions "Board of Directors", "Management",
and "Executive Compensation" in the Proxy Statement for the Annual Meeting in
1999 ("Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the caption "Executive Compensation" in the Proxy
Statement.
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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 "Election of Directors" in the Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents
(1) & (2) The Financial Statements, Schedules and the Report of Independent
Accountants on the Financial Statement Schedules, listed in the
accompanying index on Page 26, 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.
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23
(c) Exchange Capital Securities Guarantee Agreement dated as
of July 25, 1997, between Trenwick and The Chase
Manhattan Bank, as Trustee. Incorporated by reference to
Exhibit 4.7 to Trenwick's Registration Statement on Form
S-4, File No. 333-28707.
4.3 Indenture dated as of March 27, 1998 between Trenwick and The
First National Bank of Chicago, as Trustee, with respect to
Trenwick's $75 million principal amount of 6.7% Senior Notes due
April 1, 2003, incorporated by reference to Exhibit 4.2 to
Trenwick's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998, File No. 0-14737.
+10.1 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.
10.2 Trenwick 1993 Stock Option Plan, as amended through May 21,
1998. Incorporated by reference to Appendix A to Trenwick's
Proxy Statement for the 1998 Annual Meeting of Stockholders,
File No. 0-14737.
10.3 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.
10.4 Trenwick Unfunded Supplemental Executive Retirement Plan, as
amended through December 14, 1993. Incorporated by reference to
Exhibit 10.14 to Trenwick's Annual Report on Form 10-K for the
year ended December 31, 1994, File No. 0-14737.
10.5 Leased Automobile Policy for executive officers.
10.6 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.
10.7 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.
10.8 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.
10.9 Declaration of Trust dated December 10, 1996, as amended through
September 9, 1997, establishing a retirement plan for certain
employees of Trenwick Management Services Limited.
10.10 Office lease between Trenwick and EOP-Canterbury Green, L.L.C.
dated as of January 29, 1998, with respect to office space in
Stamford, Connecticut. Incorporated by reference to Exhibit
10.16 to Trenwick's Annual Report on Form 10-K for the year
ended December 31, 1997, File No. 0-14737.
+ As required by Item 14, each of Exhibits 10.1 through 10.9 is hereby
identified as a management contract or compensatory plan or arrangement.
21
24
10.11 First amendment dated as of March 31, 1998, to office lease
between Trenwick and EOP-Canterbury Green L.L.C. dated January
29, 1998.
10.12 Underlease between Wereldhave Property Corporation PLC and
predecessors of Trenwick Management Services Limited dated May
22, 1991, with respect to office space in London, England.
10.13 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.
10.14 Automobile Liability First Excess of Loss/Quota Share
Reinsurance Agreement between Trenwick and the Canal Insurance
Company/Canal Indemnity Company. Incorporated by reference to
Exhibits 10.40 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.
10.15 Interests and Liabilities Agreement between Trenwick and Kemper
Reinsurance Group and participants thereon. Incorporated by
reference to Exhibits 10.41 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.
10.16 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.
10.17 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.
10.18 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.
10.19 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.
10.20 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.
10.21 First Layer Property Catastrophe Excess of Loss Agreement with
Trenwick and several reinsurers. Incorporated by reference to
Exhibit 10.28 to Trenwick's Annual Report on Form 10-K for the
year ended December 31, 1997, File No. 0-14737.
22
25
10.22 Special Catastrophe Excess of Loss Retrocessional Agreement
between Trenwick and several reinsurers. Incorporated by
reference to Exhibit 10.29 to Trenwick's Annual Report on Form
10-K for the year ended December 31, 1997, File No. 0-14737.
10.23 First and Second Coinsured Aggregate Excess of Loss Reinsurance
Agreement between Trenwick and Centre Reinsurance Company of New
York and CNA Re. Incorporated by reference to Exhibit 10.31 to
Trenwick's Annual Report on Form 10-K for the year ended
December 31, 1997, File No. 0-14737.
10.24 First Casualty Retrocessional Excess of Loss Reinsurance
Agreement between Trenwick and several reinsurers. Incorporated
by reference to Exhibit 10.32 to Trenwick's Annual Report on
Form 10-K for the year ended December 31, 1997, File No.
0-14737.
10.25 Reverse Franchise Catastrophe Excess of Loss Reinsurance
Agreement between Trenwick and several reinsurers. Incorporated
by reference to Exhibit 10.33 to Trenwick's Annual Report on
Form 10-K for the year ended December 31, 1997, File No.
0-14737.
10.26 Catastrophe Excess of Loss Reinsurance Agreement between
Trenwick and several reinsurers.
10.27 Coinsured Aggregate Excess of Loss Reinsurance Agreement between
Trenwick and Centre Reinsurance Company of New York and National
Union.
10.28 Quota Share Reinsurance Agreement between Trenwick and Unistar
Insurance Company.
10.29 Fronting Quota Share Reinsurance Agreement between Trenwick and
Unum Life Insurance Company.
10.30 Fronting Quota Share Reinsurance Agreement between Trenwick and
American Accident Reinsurance Group.
12.0 Computation of Ratios.
13.0 Excerpts from Trenwick's 1998 Annual Report to Stockholders
expressly incorporated by reference in this Form 10-K.
21.0 List of Subsidiaries.
23.0 Consent of PricewaterhouseCoopers LLP.
27.0 Financial Data Schedule.
(b) Reports on Form 8-K
None
23
26
SIGNATURES
Pursuant to the Requirements of Section 13 or 15(d) of Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
TRENWICK GROUP INC.
(Registrant)
By /s/ JAMES F. BILLETT, JR.
--------------------------
James F. Billett, Jr.
Chairman, President and
Chief Executive Officer
Dated: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ JAMES F. BILLETT, JR. Chairman of the Board, March 31, 1999
- ------------------------------ President and Chief
James F. Billett, Jr. Executive Officer and
Director (Principal
Executive Officer)
/s/ ALAN L. HUNTE Vice President and March 31, 1999
- ------------------------------- Treasurer (Principal
Alan L. Hunte Financial Officer and
Accounting Officer)
/s/ ANTHONY S. BROWN Director March 31, 1999
- -------------------------------
Anthony S. Brown
24
27
/s/ NEIL DUNN Director March 31, 1999
- -------------------------------
Neil Dunn
/s/ W. MARSTON BECKER Director March 31, 1999
- -------------------------------
W. Marston Becker
/s/ P. ANTHONY JACOBS Director March 31, 1999
- -------------------------------
P. Anthony Jacobs
/s/ JOSEPH D. SARGENT Director March 31, 1999
- -------------------------------
Joseph D. Sargent
/s/ FREDERICK D. WATKINS Director March 31, 1999
- -------------------------------
Frederick D. Watkins
/s/ STEPHEN R. WILCOX Director March 31, 1999
- -------------------------------
Stephen R. Wilcox
25
28
TRENWICK GROUP INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Pages
-----
Financial Statements:
Report of Independent Accountants
on Consolidated Financial Statements........................................................... *
Consolidated Balance Sheet at December 31, 1998 and 1997 ........................................ *
Consolidated Statement of Income and Comprehensive Income
for the years ended December 31, 1998, 1997 and 1996...................................... *
Consolidated Statement of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996...................................... *
Consolidated Statement of Cash Flows
for the years ended December 31, 1998, 1997 and 1996...................................... *
Notes to Consolidated Financial Statements..................................................... *
Financial Statement Schedules:
II - Condensed Financial Information of Registrant .....................................S-1-S-3
III - Supplementary Insurance Information ............................................... S-4
Report of Independent Accountants on Financial Statement
Schedules .................................................................................. S-5
* Incorporated by reference to Trenwick's 1998 Annual Report to Stockholders.
Schedules other than those listed above are omitted since they are either not
required or are not applicable or the information required is presented in the
consolidated financial statements, including the notes thereto.
26
29
TRENWICK GROUP INC. AND SUBSIDIARIES
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
TRENWICK GROUP INC.
BALANCE SHEET
(Parent company only)
December 31,
-------------------------
1998 1997
---- ----
(in thousands)
Assets:
Investments in consolidated subsidiaries $532,069 $389,604
Debt securities available for sale
at fair value (amortized cost: $71,652) - 72,032
Cash and cash equivalents 523 5,108
Due from consolidated subsidiaries 4,287 6,211
Deferred debt issuance costs 2,463 1,681
Accrued investment income 125 607
Net deferred income taxes 4,198 -
Goodwill 1,605 -
Other assets 9 8
-------- --------
Total assets $545,279 $475,251
======== ========
Liabilities:
6.70% Senior notes due 2003 $ 75,000 -
Junior subordinated debentures 113,403 $113,403
Due to consolidated subsidiaries 2,700 -
Accrued interest expense 5,424 4,168
Net deferred income taxes - 14
Other liabilities 723 17
-------- --------
Total liabilities 197,250 117,602
Stockholders' equity 348,029 357,649
-------- --------
Total liabilities and stockholders' equity $545,279 $475,251
======== ========
S-1
30
TRENWICK GROUP INC. AND SUBSIDIARIES
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT-(continued)
TRENWICK GROUP INC.
STATEMENT OF INCOME
(Parent Company only)
Year ended December 31,
--------------------------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
Revenues:
Consolidated subsidiary dividends $ 26,600 $ 8,250 $ 9,100
Net investment income 1,500 4,974 1,000
Realized gains 778 -- --
Other income 12 -- --
-------- -------- --------
Total revenues 28,890 13,224 10,100
Interest and operating expenses 13,983 10,090 6,504
-------- -------- --------
Income before income taxes, equity in undistributed
income of unconsolidated subsidiaries and extraordinary
item 14,907 3,134 3,596
Income tax benefit (3,942) (1,239) (1,997)
-------- -------- --------
Income before equity in undistributed income of
consolidated subsidiaries and extraordinary item 18,849 4,373 5,593
Equity in undistributed income of
consolidated subsidiaries 15,943 31,916 28,255
-------- -------- --------
Income before extraordinary loss on debt
redemption 34,792 36,289 33,848
Extraordinary loss on debt redemption,
net of $558 income tax benefit -- 1,037 --
-------- -------- --------
Net income $ 34,792 $ 35,252 $ 33,848
======== ======== ========
S-2
31
TRENWICK GROUP INC. AND SUBSIDIARIES
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT-(continued)
TRENWICK GROUP INC.
STATEMENT OF CASH FLOWS
(Parent Company only)
Year ended December 31,
-------------------------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
Cash flows from operating activities:
Dividends and net investment income received $ 28,548 $ 12,642 $ 10,537
Interest and operating expenses paid (11,786) (4,983) (5,642)
Income taxes received 5,035 794 2,061
--------- --------- ---------
Cash provided by operating activities 21,797 8,453 6,956
--------- --------- ---------
Cash flows for investing activities:
Purchases of debt securities (16,637) (72,932) --
Sales of debt securities 88,190 -- --
Maturities of debt securities 911 16,050 --
Investment in subsidiaries (130,582) (3,403) --
--------- --------- ---------
Cash used for investing activities (58,118) (60,285) --
--------- --------- ---------
Cash flows for financing activities:
Issuance of senior notes 75,000 -- --
Issuance of junior subordinated debentures -- 113,403 --
Issuance costs of senior notes and securities capital (922) (1,669) --
Redemption of convertible debentures -- (46,997) --
Issuance of common stock 1,536 956 4,001
Repurchase of common stock (34,880) (171) (1,031)
Dividends paid (11,698) (11,546) (8,285)
Intercompany loans 2,700 -- --
--------- --------- ---------
Cash provided by (used for) financing activities 31,736 53,976 (5,315)
--------- --------- ---------
Change in cash and cash equivalents (4,585) 2,144 1,641
Cash and cash equivalents, beginning of year 5,108 2,964 1,323
--------- --------- ---------
Cash and cash equivalents, end of year $ 523 $ 5,108 $ 2,964
========= ========= =========
S-3
32
TRENWICK GROUP, INC. AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
(in thousands)
1998 1997 1996
---- ---- ----
Deferred policy acquisition costs Domestic $ 21,023 $ 22,524 $ 21,805
International 14,238 - -
-------- -------- --------
35,261 22,524 21,805
-------- -------- --------
Unpaid claims and claim Domestic 546,292 518,387 467,177
expenses International 136,136 - -
------- -------- -------
682,428 518,387 467,177
------- -------- -------
Unearned premium income Domestic 75,206 87,020 71,448
International 76,845 - -
-------- -------- --------
152,051 87,020 71,448
-------- --------- --------
Net premiums earned Domestic 174,443 190,156 211,069
International 71,118 - -
-------- -------- --------
245,561 190,156 211,069
-------- -------- --------
Net investment income Domestic 44,490 43,692 40,215
International 10,614 - -
Unallocated 1,212 4,710 1,011
-------- -------- --------
56,316 48,402 41,226
-------- ---------- --------
Claims and claims expenses Domestic 105,478 109,554 129,316
incurred International 47,657 - -
-------- -------- --------
153,135 109,554 129,316
-------- -------- --------
Policy acquisition costs Domestic 58,310 58,549 58,757
International 15,887 - -
-------- -------- --------
74,197 58,549 58,757
-------- -------- --------
Underwriting expenses Domestic 13,822 15,425 14,190
International 10,006 - -
-------- -------- --------
23,828 15,425 14,190
-------- -------- --------
Net premiums written Domestic 169,112 195,230 226,364
International 81,107 - -
-------- -------- --------
250,219 195,230 226,364
-------- -------- --------
S-4
33
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
Trenwick Group Inc.
Our audits of the consolidated financial statements referred to in our report
dated February 3, 1999, appearing on Page 53 of this 1998 Annual Report to
Stockholders of Trenwick Group Inc. (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the financial statement schedules listed in Item 14(a)
of this Form 10-K. In our opinion, these financial statement schedules present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
New York, New York
February 3, 1999
S-5