The Company's executive offices are located in approximately 10,000 square feet of leased office space in Hamilton, Bermuda. Management believes the Company's current office space is adequate for its needs.
Expressed in thousands of United States Dollars, except other data. The 2001 and 2000 years relates to a December 31 year end and the 1999, 1998, 1997 and 1996 years relates to September 30 year end.
Results of Operations - Years Ended December 31, 2001 and 2000
The effect of losses from the September 11th terrorist attacks is an increase in the underwriting loss of $97.8 million resulting from increase in claims and claims expenses incurred of $86.8 million and a decrease in net premiums earned of $10.2 million due to net reinstatement premiums on assumed and ceded contracts. This effect on the combined ratio was 96.4 percentage points principally from increases in the loss ratio.
Gross premiums ceded for 2001 were $50.5 million compared to $31.6 million for 2000. This increase was primarily due to reinstated covers of $19.3 million on ceded contracts following the September 11th terrorist attacks.
The Company recorded minimal foreign currency losses in 2001 and 2000.
Results of Operations - Year Ended December 31, 2000 and Fiscal Year Ended September 30, 1999
The underwriting loss of $7.1 million in 2000 represented a $31.0 million decrease compared to the underwriting loss of $38.1 million in the 1999 fiscal year. The underwriting loss in 2000 included both losses of $60.2 million on current year loss events and additions to prior years' reserves of $20.4 million. The underwriting results for the 1999 fiscal year included both losses of $82.5 million relating to current year events and additions to prior year loss reserves of $48.6 million.
2000 Year 1999 Year Change --------- --------- ------ (in thousands) Gross premiums written $ 130,163 $ 139,010 $ (8,847) Change in gross unearned premiums 9,966 6,070 3,896 --------- --------- -------- Gross premiums earned 140,129 145,080 (4,951) --------- --------- --------
Gross premiums ceded for 2000 were $31.6 million compared to $28.2 million for the 1999 fiscal year. The increase in amortized ceded premiums of $13.6 million was primarily attributable to a full year's cessions to the CNA property catastrophe quota share arrangement in 2000. The facility originally incepted April 1, 1999. In addition the Company also purchased several new protections in 2000.
Net premiums earned in 2000 were $108.1 million compared to $126.6 million for the 1999 fiscal year. The decrease in net premiums earned is due to the increase in amortized ceded premiums.
2000 Year 1999 Year Change --------- --------- ------ (in thousands) Policy acquisition costs $21,270 $19,844 $ 1,426 Underwriting expenses 13,342 13,733 (391) ------- ------- ------- Total underwriting expenses $34,612 $33,577 $ 1,035 ======= ======= =======
Interest expense was $1.2 million for 2000 a decrease of $0.5 million from the 1999 fiscal year. Interest expense included financing charges associated with a ceded reinsurance contract and other interest expenses related to the commitment fees payable on the Company's credit facility which was canceled effective the end of September, 2000.
As of December 31, 2001, 73% of the debt securities held in the Company's investment portfolio were rated "AA" or better and 87% were rated "A" or better by Standard and Poor's or Moody's. No single investment comprised more than 5% of the overall portfolio.
Premiums receivable were $86.2 million at December 31, 2001 compared to $77.2 million at December 31, 2000. The increase was due to reinstatement premiums generated by reinstated coverages on assumed contracts impacted by losses from the September 11th terrorist attacks.
In accordance with the terms of certain reinsurance contracts, the Company has posted letters of credit in the amount of $72.1 million as of December 31, 2001 as compared to $20.5 million as of December 31, 2000 to support outstanding loss reserves. In connection with LaSalle Re Capital's support of three Lloyd's syndicates, the Company posted letters of credit in the amount of $14.3 million (equivalent to (pound)9.8 million). All letters of credit are secured by a lien on the Company's investment portfolio equal to approximately 115% of the amount of the outstanding letters of credit.
In connection with the Company's Trenwick/LaSalle business combination, the Company cancelled its stand alone committed line of credit for $100 million effective September 27, 2000.
Concurrent with the Trenwick/LaSalle business combination, Trenwick entered into an amended and restated $490 million credit agreement with various lending institutions. The agreement consists of both a $260 million revolving credit facility and a $230 million letter of credit facility. The revolving credit facility has subsequently been converted into a four-year term loan. The primary obligors are two of Trenwick's subsidiary companies. Guarantees are provided by the Company with respect to these obligations. The letter of credit facility is scheduled to expire in November 2002. The term loan facility is subject to scheduled principal amortization over the four-year period in accordance with the following schedule: 2002, 22.5%; 2003, 27.5%; 2004, 32.5%; 2005, 17.5%. The applicable interest rate on borrowings under the credit facility is generally 2.5% above the London Interbank Offered Rate and was 4.7% at year end 2001.
The credit agreement contains general covenants and restrictions as well as financial covenants relating to, among other things, Trenwick's minimum interest coverage, debt to capital leverage, minimum earned surplus, maintenance of a minimum A.M. Best Company rating of A- and tangible net worth. As of year end 2001, Trenwick was in compliance with the credit agreement covenants.
The financial covenants relating to interest coverage, risk based capital and tangible net worth (each as defined by the financial covenants in the credit agreement) were revised downward in an amendment to the credit agreement executed following the September 11th terrorist attacks. The amendment set Trenwick's minimum interest coverage ratio at 1.5 to 1 for the fourth quarter of 2001, 2.0 to 1 for the first quarter of 2002 and 2.5
to 1 thereafter. Trenwick's interest coverage ratio at December 31, 2001 was 2.0 to 1. The amendment adjusted downward the minimum risk-based capital requirement for Trenwick's subsidiary, Chartwell Insurance Company, from 300% to 225% through December 31, 2001. Thereafter, the minimum risk-based capital for Chartwell Insurance Company returns to 300%. The risk based capital for Chartwell Insurance Company as of December 31, 2001 was 257%. The amendment lowered the base minimum tangible net worth Trenwick must maintain from $560 million to $425 million until the reporting of quarterly results of operations as of March 31, 2002, which are due no later than May 15, 2002. After May 15, 2002, Trenwick minimum tangible net worth reverts to $560 million. Trenwick's tangible net worth as of December 31, 2001 was $428 million. If Trenwick is unable to meet the credit agreement's financial covenants at the end of the first quarter of 2002, it may be required to repay the outstanding indebtedness and collateralize the outstanding letters of credit issued under the credit agreement through additional financing, asset sales, subsidiary dividends or similar transactions.
Trenwick'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's claims and claims expense liability reserve increase in the second quarter of 2001 and the losses it sustained in the September 11th terrorist attacks, its senior debt ratings were downgraded by Standard & Poors Corporation to BBB- and by Moody's Investors Service to Ba2. Trenwick'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.
Should the two Trenwick subsidiary companies or Trenwick be unable to meet the loan repayments as they fall due, and such repayments are not refinanced, the Company would become liable for such repayments under the terms of the guarantees. No liability for any such amounts has been reflected in the Company's financial statements. Because the two Trenwick subsidiary companies and Trenwick are holding companies, their principal source of funds consists of permissible dividends, tax allocation payments and other statutorily permissible payments from their respective operating subsidiaries. As a result of recent losses incurred by Trenwick's operating subsidiaries, their cash distribution capacities have been significantly reduced.
The Company establishes liability reserves 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 reinsurance contracts. These liability reserves are developed using actuarial principles and assumptions which consider a number of factors, including industry information, contact reviews and historical claims and claims expense patterns, which are described in the Notes to the