Trenwick America Corporation's operations are located in approximately 46,000 total square feet of leased office space at Stamford, Connecticut. Management believes Trenwick America Corporation's current office space is adequate for its needs.
Trenwick America Corporation is a Delaware holding company headquartered in Stamford, Connecticut whose principal subsidiaries underwrite specialty insurance and reinsurance.
Trenwick America Corporation conducts its specialty insurance and reinsurance business in the United States through the following two business segments:
Trenwick America Corporation operates through the following two principal operating platforms:
All of Trenwick America Corporation's principal operating subsidiaries are rated A- (Excellent) by A.M. Best Company and have been assigned a financial strength rating of A- by Standard and Poor's. These ratings are based upon factors that may be of concern to policy or contract holders, agents and intermediaries, but may not reflect the considerations applicable to an equity investment in a reinsurance or insurance company. A change in any such rating is at the discretion of the respective rating agencies.
The operating loss of $17.4 million in 2001 represented a $22.8 million decrease from the operating loss of $40.2 million in 2000. The decrease in operating loss was principally the result of a modest improvement in underwriting results in the U.S. treaty reinsurance business and a reduction in general and administrative expenses. General and administrative expenses for 2000 included expenses assumed by Trenwick Group Ltd. subsequent to the Trenwick/LaSalle business combination. The decrease in net loss of 2001 of $17.5 million compared to the 2000 loss was the result of the improvement in underwriting results and decrease in general and administrative expenses noted above, offset in part by a decrease in realized investment gains of $5.6 million.
The improvement in the combined ratio in 2001 compared to 2000 resulted from less adverse development on prior years' reserves.
A majority of gross premiums ceded in both 2001 and 2000 relates to the specialty insurance business, which cedes a greater portion of its business written than the treaty reinsurance business. The increase in gross premiums ceded in 2001 compared to 2000 was offset by a decrease in gross premiums ceded by treaty reinsurance relating to fronted business previously underwritten by Chartwell Insurance Company which was discontinued during 2000.
Included in claims and claims expenses in 2001 and 2000 were prior year reserve additions of $22.4 million and $32.5 million, respectively. In 2001, prior year treaty reinsurance reserves were increased by $29.4 million, principally relating to liability business and $11.5 million related to prior participation in the Excess and Casualty Reinsurance Association Pool. Similarly, in 2001 prior year specialty insurance reserves were increased by $13.9 million, principally relating to a discontinued program. In 2000, prior year reserve increases were $39.8 million on treaty reinsurance business and $(7.3) million on specialty insurance business. Excluding amounts relating to increases in prior year reserves, claims and claims expenses increased from $251.1 million in 2000 to $292.9 million in 2001, or $41.8 million. This increase is commensurate with the increase in business underwritten in 2001 compared to 2000. The
claims and claims expenses in 2001 include $4.0 million incurred as a result of the September 11th terrorist attacks.
Net investment income for 2001 was $68.0 million compared to $66.6 million for 2000. The increase in net investment income in 2001 was due to an overall increase in yields. Investment expense for 2001 and 2000 includes interest expense on funds withheld of $11.3 million and $11.9 million, respectively, relating to stop loss reinsurance agreements purchased by Trenwick America Reinsurance Corporation prior to 2000.
Trenwick America Corporation is obligated to repay a portion or all of the term loan in the event of equity issuances, asset sales or debt issuances by Trenwick Group Ltd. or its subsidiaries. At year end 2001, $195.0 million of term loans were outstanding, and $230.0 million of letters of credit were outstanding under the credit facility.
Trenwick America Corporation also assumed, effective September 27, 2000, Trenwick Group Inc.'s 8.82% Junior Subordinated Deferrable Interest Debentures held by Trenwick Capital Trust I in respect of the $110 million in 8.82% Subordinated Capital Income Securities issued by the Trust. Under the terms of the debentures, Trenwick America Corporation is not restricted from incurring indebtedness, but is subject to limits on its ability to incur secured indebtedness for borrowed money.
interest notes held by them, an aggregate of from $1 million up to $55 million in contingent interest. The amount of contingent interest payable under the contingent interest notes is dependent upon the level of loss and loss adjustment expense reserves related to business written by Trenwick Group Ltd.'s subsidiary, The Insurance Corporation of New York, prior to 1996. Settlement of the contingent interest notes may be made by payment of cash or, under certain specified conditions, by delivery of Trenwick Group Ltd.'s common shares.
Trenwick America Corporation's ability to refinance its existing debt obligations or raise additional capital is dependent upon several factors, including financial conditions with respect to both the equity and debt markets and the ratings of its securities as established by the rating agencies. Following Trenwick America Corporation's claims and claims expense liability reserve increase in the second quarter of 2001 and the losses sustained by Trenwick Group Ltd. in the September 11th terrorist attacks, Trenwick America Corporation's senior debt ratings were downgraded by Standard & Poors Corporation to BBB- and by Moody's Investors Service to Ba2. Trenwick America Corporation's ability to refinance its outstanding debt obligations, as well as the cost of such borrowings, could be adversely affected by these ratings downgrades or if its ratings were downgraded further.
Trenwick America Corporation establishes liabilities for claims and claims expenses that have been reported but not paid and claims and claims expenses that have been incurred but not reported under its insurance and reinsurance contracts. These liabilities are developed using actuarial principles and assumptions which consider a number of factors, including historical claims and claims expense patterns, which are described in the Notes to the Consolidated Financial Statements. An extensive degree of judgment is used in this estimation process. Because the future cannot be predicted with certainty, the actual future claims and claims expense payments are usually different from the previously recorded liability estimates. Sometimes the differences are significant. Any adjustments to Trenwick America Corporation's liabilities for claims and claims expenses are included in Trenwick America Corporation's results of operations in the period in which the need for the adjustment becomes known. Due to the considerable variability of the insurance and reinsurance business underwritten by Trenwick America Corporation, adjustments to its liabilities for claims and claims expenses may occur each quarter and are sometimes significant. Also see Note 4 of Notes to the Consolidated Financial Statements.
Trenwick America Corporation purchases reinsurance to reduce its exposure on individual risks, catastrophic losses and other large losses. Trenwick America Corporation estimates the amount of uncollectable receivables from its reinsurers each period and establishes an allowance for uncollectable amounts. The amount of the allowance is based on the age of unpaid amounts, information about the creditworthiness of Trenwick America Corporation's reinsurers, and other relevant information. Estimates of uncollectable reinsurance amounts are revised each period, and changes are recorded in the period they become known. A significant change in the level of uncollectable reinsurance amounts
Trenwick America Corporation seeks to match the maturities of invested assets with the payment of expected liabilities. By doing this, Trenwick America Corporation attempts to make cash available as payments become due. If a significant mismatch of the maturities of assets and liabilities were to occur and Trenwick America Corporation had to liquidate investments prior to their maturity, it may incur realized losses and, the effect on Trenwick America Corporation's results of operations could be significant. Also see Note 5 of Notes to the Consolidated Financial Statements.
Trenwick America Corporation recorded as an asset as of December 31, 2001 $65.8 million of net deferred income taxes. The net deferred income taxes represent the expected future tax benefit of losses previously incurred by Trenwick America Corporation. The future tax benefit must be used on or before 2021. In order to maintain its net deferred income taxes as an asset, Trenwick America Corporation is required to determine that it is more likely than not that it will be able to realize the future tax benefit of its previously incurred losses. In making this determination, Trenwick America Corporation is required to make estimates as to its future income. If Trenwick America Corporation's estimates of its future income were to be revised and it became more likely than not that Trenwick America Corporation would not be able to realize the future tax benefit of its previously incurred losses, the effect on Trenwick America Corporation's results of operations could be significant. Also see Note 7 of Notes to the Consolidated Financial Statements.
With respect to Trenwick America Corporation's investment portfolio, the risk management strategy is to place its investments with high credit quality issuers and to limit the amount of credit exposure with respect to particular ratings categories and any one issuer. Trenwick America Corporation selects
As of December 31, 2001, Trenwick America Corporation's exposure to high yield investments was minimal. While these investments are more susceptible to credit risk, their total market value represents 5% of total investments and cash and therefore management believes that the exposure to credit risk is not material. Trenwick America Corporation has no derivatives and its investments do not contain terms that may result in potential losses due to leverage.
Trenwick America Corporation's reinsurance operations have exposures to movements in various currencies, particularly the British pound sterling and the Canadian dollar, as some of its business is denominated in those currencies. Therefore, changes in currency exchange rates affect Trenwick America Corporation's balance sheet, statement of operations and statement of cash flows. This exposure is somewhat mitigated by the fact that premiums received are invested in the same currency portfolios, to partially offset related unpaid claims and claims expense liabilities denominated in the same currency.
A 100 basis point increase in market interest rates would have resulted in an estimated pre-tax loss in the fair value of these instruments of $33.9 million and $31.1 million at year end 2001 and 2000,
The above analyses do not take into account any correlation among foreign currency exchange rates, or any correlation among various markets (i.e., the fixed income markets and foreign exchange and equity markets). Trenwick America Corporation's actual experience may differ from the results noted above due to the correlation assumptions utilized, or if events occur that were not included in the methodology, such as significant liquidity or market events. The selection of the amount of increases or decreases in currency exchange rates, interest rates and equity values in the above analyses should not be construed as a prediction of future market events, but rather, to illustrate the potential impact of such events.
In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, Trenwick America Corporation sets forth below cautionary statements identifying important risks and uncertainties that could cause its actual results to differ materially from those that might be projected, forecasted or estimated in its "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, made by or on behalf of Trenwick America Corporation in this Annual Report on Form 10-K and in press releases, written statements or documents filed with the Securities and Exchange Commission, or in its communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls. Such statements may include, but are not limited to, projections of premium revenue, investment income, other revenue, losses, expenses, earnings (including earnings per share), cash flows, plans for future operations, common shareholders' equity (including book value per share), investments, financing needs, capital plans, dividends, plans relating to products or services of Trenwick America Corporation and estimates concerning the effects of litigation or other disputes, as well as assumptions for any of the foregoing and generally expressed with words such as "believes," "estimates," "expects," "anticipates," "plans," "projects," "forecasts," "goals," "could have," "may have," and similar expressions.
Forward-looking statements involve known and unknown risks and uncertainties, which may cause Trenwick America Corporation's results to differ materially from such forward-looking statements. These risks and uncertainties include, but are not limited to, the following:
- Changes in the level of competition in the domestic and international reinsurance or primary insurance markets that affect the volume or profitability of Trenwick America Corporation's property/casualty business. These changes include, but are not limited to, changes in the intensity of price competition, the entry of new competitors, existing competitors exiting the market and the development of new products by new and existing competitors:
- Changes in inflation that affect the profitability of Trenwick America Corporation's current property/casualty business or the adequacy of its property/casualty claims and claims expense liabilities and policy benefit liabilities related to prior years' business;
- Increases in interest rates, which may cause a reduction in the market value of Trenwick America Corporation's fixed income portfolio, and its common shareholders' equity;
- Adverse results in litigation matters, including, but not limited to, litigation related to environmental, asbestos and other potential mass tort claims;
- Gains or losses related to changes in foreign currency exchange rates;
See the Consolidated Financial Statements and Notes thereto and the Schedules on pages through and S-1 through S-6 included in Part IV, Item 14.