of $158.0 million and additions to loss reserves of $120.9 million, which is further discussed under the caption "Claims and Claims Expenses." The underwriting loss in 2000 included both catastrophe losses of $6.5 million and additions to prior years' reserves of $20.4 million on business underwritten by LaSalle Re, together with underwriting losses of $28.4 million associated with Trenwick Group Inc. business acquired through the Trenwick/LaSalle business combination.
Trenwick is a holding company whose principal assets are its investments in the common stock of its operating subsidiaries. As a holding company, Trenwick's principal source of ongoing funding consists of permissible dividends, tax allocation payments and other statutorily permissible payments from its operating subsidiaries. Trenwick's principal use of cash has been operating expenses and dividends paid to
its shareholders. Trenwick America Corporation ("Trenwick America") and Trenwick Holdings Limited, Trenwick's U.S. and U.K. holding companies, have utilized cash in order to service their respective debt obligations; LaSalle Re Holdings has used cash to pay dividends on its preferred shares. Trenwick's operating subsidiaries receive cash from premiums, investment income and proceeds from sales and maturities of portfolio investments. They utilize cash to pay claims, purchase their own reinsurance protections, meet operating and capital expenses and purchase investment securities.
Trenwick does not have any material off-balance sheet arrangements, trading activities involving non-exchange traded contracts accounted for at fair value or relationships with persons or entities that derive benefits from a non-independent relationship with Trenwick or its related parties.
Pursuant to the December Amendments, Trenwick is required to collateralize with cash, cash equivalents and marketable securities 60% of the outstanding letters of credit by August 1, 2003. In addition, Trenwick is required to use its best efforts to terminate the letters of credit by December 31, 2003. In order to do so, the letters of credit would need to be replaced with other letters of credit or collateral acceptable to Lloyd's. In the event Trenwick has not terminated the letters of credit by December 31, 2003, it is required on such date to collateralize with cash, cash equivalents and marketable securities the full amount of the outstanding letters of credit. At this time, Trenwick does not have sufficient available liquidity to collateralize the letters of credit as required by the December Amendments. Additionally, Trenwick does not believe that it will be able to replace the letters of credit with other letters of credit or collateral acceptable to Lloyd's.
LaSalle Re has also purchased other non-proportional excess of loss protections, which provide for the recovery of losses from reinsurers in excess of certain retentions that are related to the magnitude of market losses.
Claims and claims expenses are recorded as incurred, at management's best estimate, in order to match claims and claims expense costs with premiums over the contract periods. The amount provided for unpaid claims and claims expenses consists of any unpaid reported claims and claims expenses and estimates for incurred but not reported claims and claims expenses, net of estimated salvage and subrogation. The estimates for claims and claims expenses incurred but not reported were developed based on historical claims and claims expense experience and an actuarial evaluation of expected claims and claims expense experience. Workers' compensation indemnity liabilities that are considered fixed and determinable are discounted using an interest rate of 3.5%. Reserves for unpaid claims and claims expenses, by their very
o Claims liabilities also include provisions for latent injury or toxic tort claims that cannot be estimated with traditional reserving techniques. Due to inconsistent court decisions in federal and state jurisdictions and the wide variation among insureds with respect to underlying facts and coverage, uncertainty exists with respect to these claims as to liabilities of ceding companies and, consequently, reinsurance coverage;
o foreign currency exchange risk, in particular the U.S. dollar to the British pound sterling;
o interest rate risk on fixed and variable rate U.S. dollar and British pound sterling denominated short and long-term instruments; and
Trenwick's fixed maturity investments and indebtedness are subject to interest rate risk. Increases and decreases in prevailing interest rates generally translate into decreases and increases in the fair value of fixed maturity investments and the interest payable on Trenwick's outstanding variable rate debt. Additionally, the fair value of interest rate sensitive instruments may be affected by the creditworthiness of the issuer, a prepayment option, relative values of alternative investments, liquidity of the investment and other general market conditions.
economy. The effects of inflation are considered in pricing and in estimating reserves for unpaid claims and claim expenses. The actual effects of inflation on Trenwick's results cannot be accurately known until claims are ultimately settled.
We have experienced the loss of several senior executive officers in the last nine months. A number of executives positions at Trenwick, including our Acting Chief Executive Officer, are now being filled by consultants under short term arrangements. Our ability to operate our business has been, and will continue to be, dependent on our ability to retain the services of our existing key senior executive officers and to attract and retain additional qualified personnel in the future as employees and consultants. The loss of the services of any of our key executive officers or the inability to hire and retain other highly qualified personnel in the future could adversely affect our ability to conduct our business. Our financial situation and that of our subsidiaries has made it and likely will continue to make it difficult to retain key employees.
Recent events may result in political, regulatory and industry initiatives which could adversely affect our business.
We are incorporated pursuant to the laws of Bermuda and our business is based in Bermuda. In addition, certain of our current and former directors and officers may reside outside the United States, and all or a substantial portion of our assets and the assets of such persons are located in jurisdictions outside the United States. As such, it may be difficult or impossible to effect service of process within the United States upon us or those persons or to recover against us or them on judgments of U.S. courts, including judgments predicated upon civil liability provisions of the U.S. federal securities laws. Further, no claim may be brought in Bermuda against us or our directors and officers in the first instance for violation of U.S. federal securities laws because these laws have no extraterritorial jurisdiction under Bermuda law and do not have force of law in Bermuda. A Bermuda court may, however, impose civil liability on us or our directors and officers if the facts alleged in a complaint constitute or give rise to a cause of action under Bermuda law.
On December 19, 1999, LaSalle Re Holdings, LaSalle Re and Trenwick Group Inc. signed a definitive agreement to combine under a new holding company, Trenwick. On September 27, 2000, following shareholder and regulatory approval, the newly formed Trenwick issued 36,668,594 of its common shares on a one-for-one, tax-free basis to the former shareholders of LaSalle Re Holdings (15,634,394 shares, including 26,656 restricted shares issued under share award plans), the minority shareholders of LaSalle Re, then a 77.5% owned subsidiary of LaSalle Re Holdings (4,797,649 shares), and the former shareholders of Trenwick Group Inc. (16,236,551 shares, including 224,331 restricted shares issued under share award plans).
On December 24, 2002, Trenwick announced that it had entered into a definitive agreement with its Lloyd's letter of credit providers with respect to the renewal of $182,500 of letters of credit supporting Trenwick's participation at Lloyd's for the 2003 year of account. The agreement with the letter of credit providers states that Trenwick must pay to the letter of credit providers certain fees and 15% of the profits earned on the 2002 and 2003 Lloyd's years of account. Refer to Note 9 for a description of the letter of credit agreement supporting Trenwick's Lloyd's operations.
September 30, 2007 100% of cumulative indicated profit commission, less prior profit commission paid
Assumed premiums written $ 562,752 $ 579,000 $ 249,910 Direct premiums written 1,011,770 873,255 178,734 ----------- ----------- --------- Gross premiums written 1,574,522 1,452,255 428,644 Ceded premiums written (583,021) (481,937) (126,012) ----------- ----------- --------- Net premiums written $ 991,501 $ 970,318 $ 302,632 =========== =========== =========
During the year ended December 31, 2001, claims in the current period include an estimated loss from the September 11, 2001 terrorist attacks of $366,300 before reinsurance recoverable of approximately $268,100. The principal losses related to aviation risks underwritten by Trenwick's operations at Lloyd's and property and related risks, including business interruption, underwritten by LaSalle Re. Trenwick's estimate of its losses from aviation risks from the September 11, 2001 terrorist attacks is based on two maximum losses and two partial losses. Estimates of its property and related losses is based on two maximum losses and two partial losses. Estimates of Trenwick's property and related losses are based on an assessment of individual policies which it has determined have exposure to the September 11, 2001 terrorist attacks. This assessment included market share analysis, probable maximum loss analysis, independent risk modeling analysis and cedant loss estimates.
insureds with respect to underlying facts and coverage, uncertainty exists with respect to these claims as to liabilities of ceding companies and, consequently, reinsurance coverage. During the year ended December 31, 2002, Trenwick increased its asbestos and environmental ("A&E") reserves by $28,997. In making its reserve estimates, management considered that this addition to A&E reserves resulted in a three-year survival ratio (calculated as the A&E reserves at year-end divided by the average annual A&E payments over the previous 3 calendar years and represents the number of years that existing reserves will last if the current level of average annual payments for the last three years repeats itself indefinitely) of 12.9, which is higher than the property and casualty insurance ratio at December 31, 2001 as reported by A.M. Best and which Trenwick believes is consistent with levels of companies that have recorded A&E adjustments in 2002.
The estimate of net unpaid claims and claims expenses for asbestos and environmental claims at year end 2002 and 2001 was $112,006 and $91,050, respectively, comprising gross unpaid claims and claims expenses of $145,048 and $118,688, net of reinsurance recoverable on unpaid claims and claims expenses of $33,042 and $27,638. During the years ended December 31, 2002, 2001 and 2000, payments of A&E related claims and claims expenses were $7,025, $10,110 and $10,457, respectively. The above figures include liabilities emanating from Trenwick's participation in the ECRA Pool.
All of Trenwick's debt securities have been classified as "available for sale." Both debt and equity securities are reported at estimated fair value principally using quoted market prices or broker dealer quotes. Included in equity securities are limited partnerships in which Trenwick holds greater than a 3% interest, and which are reported at their equity value.
Fair Amortized Value Cost ---------- ---------- Due in one year or less $ 667,665 $ 666,754 Due after one year through five years 491,306 474,874 Due after five years through ten years 236,267 226,333 Due after ten years 97,596 112,252 ---------- ---------- Debt securities total maturities $1,492,834 $1,480,213 ========== ==========
As of December 31, 2002, Trenwick had $288,151 in letters of credit outstanding. This amount includes $196,447 in letters of credit outstanding to provide capital to support the participation in certain Lloyd's syndicates, of which $182,500 of the letters of credit are outstanding under the senior credit facility. The remaining letters of credit balance is outstanding primarily under a secured letter of credit facility under which letters of credit totaling $91,029 at December 31, 2002 have been issued in favor of ceding insurance companies to secure LaSalle Re's obligations under various reinsurance contracts.
Deferred policy acquisition costs (22,107) (15,890) Unrealized investment gains (10,359) (12,541) Accretion of market discount on debt securities (2,067) (2,362) Equity investment adjustments (3,182) (4,489) Fair value adjustment of debt obligations (8,117) (8,437) Deferred intercompany transactions -- (7,510) Other U.S. and U.K. items (4,372) (568) --------- --------- Gross deferred income tax liabilities (50,204) (51,797) --------- --------- Net deferred income tax asset $ -- $ 139,926 ========= =========
Trenwick has defined contribution plans for substantially all full-time employees, through which it contributes between 5% and 20% of an eligible employee's total compensation to the plan, dependent upon each employee's salary and age. No employee contributions are made to these plans.
Further details on options outstanding and exercisable at December 31, 2002 follow:
Trenwick is subject to regulation under the insurance holding company statutes of various states, including Connecticut, New York and North Dakota, the domicile states of its United States insurance companies. The insurance holding company 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, affiliate transactions and general business operations.
State laws also require prior notice or regulatory agency approval of direct or indirect changes in control or deemed control of an insurer, reinsurer or its holding company and of certain significant intercorporate transfers of assets within the holding company structure. The acquisition of securities representing or convertible into more than 10% of the voting power of the securities of Trenwick by an investor would be subject to prior approval by the Connecticut, New York and North Dakota insurance commissioners. Such investor would also be required to file certain notices and reports with the insurance commissioners prior to such acquisition.
LaSalle Re, Trenwick's Bermuda insurance subsidiary, is subject to Bermuda insurance regulations, which mandate minimum solvency margins and liquidity ratios. As a Class 4 Insurer, LaSalle Re must maintain a minimum statutory capital and surplus level of the greater of $100,000, 50% of net premiums written ($2,262 for 2002), or 15% of net loss reserves ($29,405 at year end 2002). In addition, Bermuda insurance regulations restrict the payment of dividends from retained earnings or additional paid-in-capital which exceed certain thresholds without prior approval from the Bermuda Minister of Finance. At December 31, 2002, LaSalle Re had negative retained earnings and is therefore precluded from paying dividends. Statutory capital and surplus of LaSalle Re was $127,756 and $430,463 at year end 2002 and 2001, respectively; statutory net income (loss) was $21,461, $(13,757) and $9,992 for the years ended December 31, 2002 and 2001, and for the fifteen months ended December 31, 2000, respectively.
The Insurance Act also imposes on Bermuda insurance companies solvency and liquidity standards and auditing and reporting requirements and grants to the Minister of Finance powers to supervise, investigate, require information and the production of documents and intervene in the affairs of insurance companies. Although LaSalle Re Corporate Capital Ltd. is governed by the Insurance Act, it is exempted from complying with most of the filings required to be made by insurance companies by section 57 of the Insurance Act.
The components of other assets and other liabilities at December 31, 2002 and 2001 follow: