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 its subsidiary Chartwell Insurance Company (formerly Chartwell Reinsurance Company); and
o Canterbury Financial Group Inc., which is located in Stamford, Connecticut, underwrites specialty insurance in the United States through its operating subsidiaries, The Insurance Corporation of New York and Dakota Specialty Insurance Company.
Results of Operations - Years Ended December 31, 2001 and 2000 (monetary amounts in tables expressed in thousands of United States dollars)
The underwriting loss of $66.3 million incurred in 2001 represented a $12.7 million decrease compared to the underwriting loss of $79.0 million in 2000. The decrease in the net underwriting loss in 2001 resulted from an improvement in the current year results of both the reinsurance and specialty insurance businesses. The effect of this improvement was offset in part by additional reserve strengthening in both businesses which is further discussed on page 6 under the caption "Claims and Claims Expenses."
Gross premiums written for 2001 were $641.6 million compared to $526.3 million for 2000, an increase of $115.2 million or 21.9%. Details of gross premiums written are provided below.
Treaty reinsurance and specialty insurance gross premiums written increased from $338.8 million and $187.5 million, respectively, for 2000, to $350.1 million, and $291.4 million, respectively, for 2001. The modest increase in gross premiums written for treaty reinsurance was due primarily to new business, offset by the non-renewal of business written in both Trenwick America Reinsurance Corporation and Chartwell Insurance Company. In 2001, treaty reinsurance includes $34.6 million in gross premiums previously underwritten by Chartwell Insurance Company compared to $128.9 million in 2000. Approximately $52.5 million of the gross premiums written in 2000 was fronted business. The increase in gross premiums written for specialty insurance was due to an increase in the number of programs underwritten and growth in business in existing programs.
Net premiums earned for 2001 were $380.3 million compared to $310.8 million for 2000. The increase in net premiums earned is commensurate with the increase in net premiums written.
Total underwriting expenses, comprising policy acquisition costs and underwriting expenses, for the 2001 year increased by $27.4 compared to total underwriting expenses for 2000. The increase in total underwriting expenses in 2001 was commensurate with the increase in premium writings. Total underwriting expenses as a percentage of net premiums earned were 37.1% for 2001 a modest increase compared to 2000.
Net realized investment losses, net of income taxes, were $1.2 million during the 2001 year, compared to net realized gains of $4.4 million for 2000. The 2001 losses include $3.4 million of realized losses on investments to recognize declines in value that were other than temporary. The gains recognized in 2000 were 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 $0.9 million for 2001, compared to foreign currency losses, net of income taxes, of $1.2 million for 2000.
Trenwick America Corporation's financing obligations generally include debt and lease payment obligations. At December 31, 2001, annual principal payments required by Trenwick America Corporation through 2006 relating to these financing obligations are as follows (monetary amounts in tables expressed in thousands of United States dollars):
Trenwick America Corporation's other commercial commitments principally consist of reimbursement obligations for standby letters of credit. The amounts and expiration of Trenwick America Corporation's other commercial commitments are as follows (monetary amounts in table expressed in thousands of United States dollars):
Concurrent with the Trenwick/LaSalle business combination, Trenwick America Corporation and Trenwick Holdings Limited, Trenwick Group Ltd.'s U.S. and U.K. holding companies, entered into an amended and restated $490 million credit agreement with various lending institutions. The credit agreement consisted 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. Trenwick America Corporation is the primary obligor with respect to the revolving credit facility, and Trenwick Holdings Limited is the primary obligor with respect to the letter of credit facility. Guarantees are provided by LaSalle Re Holdings Limited and Trenwick Group Ltd. with respect to both Trenwick America Corporation's and Trenwick Holdings Limited's obligations and additionally by Trenwick America Corporation with respect to Trenwick Holdings Limited's obligations. The credit agreement provides for a letter of credit facility which may only be used to support the Lloyd's syndicate participations of Trenwick Group Ltd.'s subsidiaries. The letter of credit facility is scheduled to expire in November 2002. 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 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 credit agreement contains general covenants and restrictions as well as financial covenants relating to, among other things, Trenwick Group Ltd.'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 Group Ltd. 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 Group Ltd.'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 Group Ltd.'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 America Corporation's subsidiary, Chartwell Insurance Company, from 300% to 225% through December 31, 2002. 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 Group Ltd. 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 Group Ltd. minimum tangible net worth reverts to $560 million. Trenwick Group Ltd.'s tangible net worth as of December 31, 2001 was $428 million. If Trenwick Group Ltd. 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.
Should Trenwick Holdings Limited be unable to meet any letter of credit reimbursement obligations as they fall due, and such repayments are not refinanced, Trenwick America Corporation would become liable for such reimbursements under the terms of its guarantee. No liability for any such amounts has been reflected in Trenwick America Corporation's financial statements. Because Trenwick America Corporation is a holding company, its principal source of funds consists of permissible dividends, tax allocation payments, other statutorily permissible payments from its operating subsidiaries and capital contributions from its parent. As a result of recent losses incurred by Trenwick America Corporation's operating subsidiaries, their cash distribution capacities have been significantly reduced. Other than as noted above, Trenwick America Corporation 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 Group Ltd. or its related parties.
In connection with the Trenwick/LaSalle business combination, Trenwick America Corporation assumed, effective September 27, 2000, Trenwick Group Inc.'s obligations with respect to $75 million aggregate principal amount of 6.70% Senior Notes, which are due April 1, 2003. Interest is payable semi-annually on April 1 and October 1 of each year; interest payments commenced on October 1, 1998. The notes are not subject to redemption prior to maturity. They are unsecured obligations and rank senior in right of payment to all existing and future subordinated indebtedness of Trenwick America Corporation.
Upon consummation of the acquisition of Chartwell Re Corporation in 1999, Trenwick Group Inc. became the successor obligor under Chartwell Re Corporation's Contingent Interest Notes due June 30, 2006. Effective September 27, 2000, Trenwick America Corporation assumed Trenwick Group Inc.'s obligations under the contingent interest notes in connection with the Trenwick/LaSalle business combination. The contingent interest notes were issued in an aggregate principal amount of $1 million, which accrues interest at a rate of 8% per annum, compounded annually. The interest is not payable until the maturity or earlier redemption of the contingent interest notes. In addition, the contingent interest notes entitle their holders to receive at maturity, in proportion to the principal amount of the contingent
The accounting policies described below are those Trenwick America Corporation considers critical in preparing its consolidated financial statements. These policies include significant estimates made by management using information available at the time the estimates are made. However, as described below, these estimates could change materially if different information or assumptions were used. The descriptions below are summarized and have been simplified for clarity. A more detailed description of the significant accounting policies used by Trenwick America Corporation in preparing its financial statements is included in the Notes to the Consolidated Financial Statements and the note references are included below.
would have a significant effect on Trenwick America Corporation's results of operations. Also see Note 4 of Notes to the Consolidated Financial Statements.
The following sections address the significant market risks associated with Trenwick America Corporation's business activities as of December 31, 2001 and 2000. Trenwick America Corporation's primary market risk exposures are:
Management estimates that a 10% immediate unfavorable change in each of the foreign currency exchange rates to which Trenwick America Corporation is exposed at year end 2001 would have decreased the fair value of Trenwick America Corporation's foreign denominated net liabilities by approximately $1.0 million. At year end 2000, the same 10% shift in foreign currency exchange rates would have resulted in a potential loss in fair value of the foreign denominated net assets of approximately $2.8 million.
respectively. Similarly, a 100 basis point decrease in market interest rates would have resulted in an estimated pre-tax gain in the fair value of these instruments of $29.8 million and $28.2 million at year end 2001 and 2000, respectively.
Of Trenwick America Corporation's $24.2 million equity portfolio at year end 2001, $14.6 million were subject to equity risk. Trenwick America Corporation's potential exposure on equity securities is estimated in terms of an immediate 10% drop in equity prices across all equity securities holdings from those prevailing at year end 2001 which would have resulted in a $1.5 million loss. At year end 2000, the same drop in equity prices would have resulted in an $8.3 million loss.
In July 2001, the Financial Accounting Standards Board issued a statement covering goodwill and other intangible assets, which is required to be adopted at the beginning of 2002. The statement requires that the goodwill be tested for impairment under either market value or cash flow tests and any impairment to be recorded as of January 1, 2002 as the cumulative effect of an accounting change. The impairment tests must be completed by the reporting of quarterly results of operations as of June 30, 2002. We will conduct impairment tests on the goodwill balance and implement the statement during the first or second quarter of 2002. Goodwill amortization was $1.5 million in 2001.
Effective January 1, 2001, Trenwick America Corporation implemented SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The adoption of SFAS No. 133 had no significant impact on Trenwick America Corporation's consolidated financial statements.
- Changes in the demand for reinsurance, including changes in ceding companies' risk retentions and changes in the demand for excess and surplus lines insurance coverages;
- Decreases in interest rates which may cause a reduction of income earned on new cash flow from operations and the reinvestment of the proceeds from sales or maturities of existing investments;
- A decline in the value of Trenwick America Corporation's equity investments;
- Changes in the composition of Trenwick America Corporation's investment portfolio;
- The ability of Trenwick America Corporation to refinance or repay its outstanding indebtedness; and
- Changes in the financial strength ratings assigned to Trenwick America Corporation and its operating subsidiaries.