o Trenwick America Reinsurance Corporation, which is located in Stamford, Connecticut, underwrites treaty reinsurance on United States property and casualty risks, including United States reinsurance business previously written by Chartwell Re Corporation subsidiaries; and
o Canterbury Financial Group Inc., which is located in Stamford, Connecticut, underwrites specialty insurance through its operating subsidiaries, Chartwell Insurance Company, The Insurance Corporation of New York and Dakota Specialty Insurance Company.
For the year ended December 31, 2000, Trenwick America Corporation incurred an operating loss of $39.4 million compared to an operating loss of $10.6 million for the year ended December 31, 1999. The increase in operating loss of $28.8 million was primarily the result of additions to prior year reserves relating to both the United States treaty reinsurance and specialty program insurance operations. In 1999, Trenwick America Reinsurance Corporation also benefited from a stop loss reinsurance agreement, which was not renewed in 2000. The increase in net loss in 2000 of $27.1 million compared to the 1999 loss was the result of the deterioration in operating results described above offset in part by an increase in realized investment gains, net of foreign exchange losses of $2.5 million.
The underwriting result for 2000 included the consolidated results of Trenwick America Corporation and its subsidiaries for the full year. The underwriting results for 1999 included the results of Trenwick America Corporation and Trenwick America Reinsurance Corporation for the full year and the results of Canterbury Financial Group Inc.'s subsidiaries from October 27, 1999, the date of their acquisition.
The underwriting loss of $87.7 million incurred in 2000 represented a $48.1 million increase compared to the underwriting loss of $39.5 million in 1999. The increase in the underwriting loss in 2000 resulted
primarily from additions to prior years' reserves in both the reinsurance and program insurance businesses, together with the non-renewal of a stop loss reinsurance cover which benefited the result of Trenwick America Reinsurance Corporation in 1999 and prior years. During 2000, additions to prior years' reserves were approximately $32.5 million and provisions for uncollectible reinsurance were approximately $2.4 million.
Gross premiums written for 2000 were $526.9 million compared to $249.0 million for 1999, an increase of $277.9 million or 111%. Details of gross premiums written are provided below.
Treaty reinsurance and specialty program insurance gross premiums written increased from $210.9 and $38.1, respectively, for 1999, to $339.4 million, and $187.5 million, respectively, for 2000. The increase in gross premiums written for both treaty reinsurance and specialty program insurance was primarily due to inclusion of U.S. operations acquired in the Chartwell Re Corporation acquisition from October 27, 1999. In 2000, treaty reinsurance includes $125.5 million in gross premiums previously underwritten by Chartwell Insurance Company and The Insurance Corporation of New York compared to $3.9 million in 1999. In 2000, specialty program insurance includes a full year of premium writings compared to one quarter in 1999.
Claims and claims expenses for 2000 were $283.6 million, an increase of $136.5 million compared to claims and claims expenses of $147.2 million for 1999. The increase in claims and claims expenses resulted from the inclusion of treaty reinsurance previously underwritten by Chartwell Insurance Company and specialty program insurance for the full year 2000 compared to one quarter in 1999. This accounted for approximately $105 million of the increase. The balance was due to an increase in unpaid claims and claims expense liabilities recorded by Trenwick America Reinsurance Corporation in 2000 due to adverse development of prior year liabilities compared to 1999.
Underwriting Expenses 2000 1999 Change -------- -------- -------- (in thousands) Policy acquisition costs $ 93,097 $ 62,550 $ 30,547 Underwriting expenses 22,304 17,694 4,610 -------- -------- -------- Total underwriting expenses $115,401 $ 80,244 $ 35,157 ======== ======== ========
Total underwriting expenses, comprising policy acquisition costs and underwriting expenses, for the 2000 year increased by $35.2 compared to total underwriting expenses for 1999. Similar to claims and claims expenses, the increase in total underwriting expense in 2000 was due to the inclusion of the U.S. operations acquired in the Chartwell Re Corporation acquisition effective from October 27, 1999. Total underwriting expenses as a percentage of net premiums earned were 37.0% for 2000 compared to 42.7% for 1999. The decrease in the total underwriting expense ratio occurred principally because of a decrease in policy acquisition costs relating to U.S. primary insurance business and a decrease in underwriting expenses following the merger of the U.S. treaty reinsurance operations of Trenwick America Reinsurance Corporation and Chartwell Insurance Company.
Net investment income for 2000 was $66.6 million compared to $40.3 million for 1999. The increase in net investment income in 2000 was due to the increase in invested assets resulting from the acquisition of Chartwell Re Corporation on October 27, 1999. Investment expense for 2000 and 1999 includes interest expense on funds withheld of $11.9 million and $10.6 million, respectively, relating to stop loss reinsurance agreements purchased by Trenwick America Reinsurance Corporation prior to 2000.
Interest expense and dividends on preferred capital securities were $27.1 million for 2000, an increase of $8.5 million from 1999. The increase resulted from the increase in indebtedness as a result of the acquisition of Chartwell Re Corporation and the increase in borrowings under Trenwick America Corporation's credit facility.
Net realized investment gains, net of income taxes, were $4.4 million during the 2000 year, compared to net realized gains of $0.7 million for 1999. The gains were recognized pursuant to an investment policy designed to protect the total returns on the portfolio.
Trenwick America Corporation recorded foreign currency losses, net of income taxes, of $1.2 million for 2000. No foreign currency gains or losses were recorded for 1999.
The following sections address the significant market risks associated with Trenwick America Corporation's business activities as of December 31, 2000 and 1999. Trenwick America Corporation's primary market risk exposures are:
The borrowings of Trenwick America Corporation are summarized in note 6 to the financial statements.
Foreign currency risk is the risk that Trenwick America Corporation will incur economic losses due to adverse changes in foreign currency exchange rates. This risk arises from Trenwick America Corporation's debt obligations and securities and cash deposits denominated in foreign currencies. Trenwick America Corporation's debt obligations denominated in foreign currencies were $13.4 million at year end 2000.
year end 1999, the same 10% shift in foreign currency exchange rates would have resulted in a potential loss in fair value of approximately $3.3 million.
Trenwick America Corporation'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 America Corporation'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.
Trenwick America Corporation monitors its sensitivity to interest rate risk by evaluating the change in its financial assets and liabilities relative to hypothetical increases and decreases in interest rates. It is assumed that the changes occur immediately and uniformly to each category of instrument containing interest rate risks. The hypothetical changes in market interest rates reflect what could be deemed best or worst case scenarios. Significant variations in market interest rates could produce changes in the timing of repayments due to prepayment options available. The fair value of such instruments could be affected and therefore actual results might differ from those reflected in this summary.
- Adverse development on property/casualty claims and claims expense liabilities related to business written in prior years, including, but not limited to, evolving case law and its effect on environmental and other latent injury claims, changing government regulations, newly identified toxins, newly reported claims, new theories of liability, or new insurance and reinsurance contract interpretations;
- Lower than estimated retrocessional or reinsurance recoveries on unpaid losses, including, but not limited to, losses due to a decline in the creditworthiness of Trenwick America Corporation's retrocessionaires or reinsurers;