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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period to .
Commission file number 0-14737
TRENWICK GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1152790
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Metro Center, One Station Place, Stamford, Connecticut 06902
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 353-5500
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
<TABLE>
<CAPTION>
Name of each exchange
Title of each class on which registered
------------------- ---------------------
<S> <C>
COMMON STOCK, $.10 PAR VALUE NASDAQ NATIONAL MARKET SYSTEM
6% CONVERTIBLE DEBENTURES DUE DECEMBER 15, 1999 NASDAQ NATIONAL MARKET SYSTEM
PREFERRED STOCK PURCHASE RIGHTS
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO ---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10K or any amendment to this
Form 10-K. [x]
The aggregate market value on February 29, 1996 of the voting stock held by
non-affiliates of the registrant was $302,039,981.
The number of shares outstanding of each of the issuer's classes of common
stock as of the close of the period covered by this report:
Class Outstanding at February 29, 1996
----- --------------------------------
Common Stock, $.10 par value 6,598,411
Certain information required by Items 1 through 8 of Form 10-K is incorporated
by reference into Parts I and II hereof from the registrant's annual report to
stockholders for the fiscal year ended December 31, 1995 and the information
required by Items 10 through 13 of Form 10-K is incorporated by reference into
Part III hereof from the registrant's proxy statement which will be filed with
the Securities and Exchange Commission within 120 days of the close of the
registrant's fiscal year ended December 31, 1995.
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<PAGE> 2
TRENWICK GROUP INC.
Table of Contents
<TABLE>
<CAPTION>
Page
Item Number
- ---- ------
PART I
<S> <C>
1. Business .................................................................... 1
2. Properties .................................................................. 17
3. Legal Proceedings ........................................................... 17
4. Submission of Matters to a Vote of Security Holders ......................... 17
PART II
5. Market for the Corporation's Common Stock and Related Stockholder Matters .. 18
6. Selected Financial Data .................................................... 19
7. Management's Discussion and Analysis of Financial Condition and
Results of Operation ....................................................... 20
8. Financial Statements and Supplementary Data ................................ 20
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ....................................................... 20
PART III
10. Directors and Executive Officers ........................................... 20
11. Executive Compensation ..................................................... 20
12. Security Ownership of Certain Beneficial Owners and Management ............. 20
13. Certain Relationships and Related Transactions ............................. 20
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............. 21
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL BACKGROUND AND HISTORY
Trenwick Group Inc. is a holding company incorporated in the state of Delaware
in 1985. Through its wholly owned subsidiary, Trenwick America Corporation, a
Delaware corporation, Trenwick owns and operates Trenwick America Reinsurance
Corporation, (Trenwick America Re), a Connecticut corporation. The term
"Trenwick", as used herein, refers to Trenwick America Re in discussions of that
company's reinsurance business and refers to Trenwick Group Inc. in all other
circumstances. Trenwick America Corporation, which acquired Trenwick America Re
in 1983, became a wholly owned subsidiary of Trenwick in 1985 as a result of a
corporate restructuring. Trenwick also owns two inactive Bermuda subsidiaries.
Trenwick primarily provides reinsurance to insurers of property and casualty
risks in the United States. Trenwick writes both treaty and facultative
reinsurance but distinguishes conventional treaty underwriting from special
program underwriting. Special program underwriting combines the actuarial
analytical methods of treaty underwriting and the individual risk assessment
skills of facultative underwriting. Like treaty reinsurance, special program
reinsurance is written for a class of risk in which statistical methods are used
to estimate future profitability. Like facultative underwriting, however,
special program underwriting also relies on the analysis of the reinsured's
risks themselves as well as insurance policy forms and rates.
Trenwick generally obtains all of its business through brokers and reinsurance
intermediaries which seek its participation on reinsurance being placed for
their customers. Reinsurance is provided both on an excess of loss and quota
share basis, which in 1995 amounted to 66% and 34% of its business,
respectively. In underwriting reinsurance, Trenwick does not target types of
clients, classes of business or types of reinsurance. Rather, it selects
transactions based upon the quality of the reinsured, the attractiveness of the
reinsured's insurance rates and policy conditions and the adequacy of the
proposed reinsurance terms.
LINES AND TYPES OF BUSINESS
Trenwick's net premiums written for its principal lines of business are set
forth in the following table for the periods indicated.
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NET PREMIUMS WRITTEN BY LINES OF BUSINESS
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Casualty
Automobile Liability $61,388 $38,323 $29,931
Errors and Omissions 50,077 32,707 25,907
General Liability 20,819 17,910 16,626
Products Liability 3,101 2,966 2,984
Medical Malpractice 6,933 3,245 1,928
Workers' Compensation 873 1,079 871
Other Casualty 12,731 6,600 4,459
-------- -------- --------
Total Casualty 155,922 102,830 82,706
Property 41,240 36,805 18,686
-------- -------- --------
Total $197,162 $139,635 $101,392
======== ======== ========
</TABLE>
The major portion of the reinsurance currently written by Trenwick is automobile
liability, errors and omissions and general liability, which account for an
aggregate of at least 64% of net premiums written in all years indicated.
Virtually all casualty lines of business experienced growth in 1995 as a result
of increased participations in renewal transactions, new business produced
through brokerage sources and growth in the original business written by several
ceding companies. In 1995, however, the amount of property business underwritten
by Trenwick declined as a percentage of total net premiums written as a result
of the non-renewal of certain national accounts. During 1995, the Company
continued its strategic reinsurance agreement with PXRE Reinsurance Company
(PXRE Re), assuming approximately 15% of PXRE Re's property business.
In 1995, 1994 and 1993, twelve programs underwritten by Trenwick accounted for
approximately 52%, 51% and 53%, respectively, of gross premiums written. One
ceding company accounted for 19%, 14% and 19% of gross premiums written for the
years ended December 31, 1995, 1994 and 1993, respectively. The majority of this
business has been in force since 1988 and involves working layer excess of loss
automobile liability for trucking risks written by Canal Insurance Company, an
established specialist in this line of business. Canal has an A.M. Best Company
rating of "A+ (Superior)" and statutory capital and surplus at December 31, 1995
in excess of $236 million. Additionally, the company's reinsurance agreement
with PXRE Re accounted for approximately 9%, 12% and 6%, respectively, of gross
premiums written in years 1995, 1994 and 1993. Trenwick also obtained
approximately 11% of gross premiums written in 1995 from Continental Casualty
Company. Trenwick expects to renew these accounts for 1996. While Trenwick
believes that the loss of any one of these accounts would have a material
adverse effect on premiums written, Trenwick does not believe that such a loss
would result in a concurrent material decrease in its earnings. Further,
Trenwick believes that it would continue to underwrite new business to replace
these accounts, in the event that they were non-renewed.
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The table set forth below shows the distribution of net premiums written by
Trenwick America Re by type of business.
NET PREMIUMS WRITTEN BY TYPE OF BUSINESS
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
CASUALTY:
Treaty $102,234 52% $ 61,071 44% $ 47,498 47%
Special Program 56,689 29 39,722 28 32,759 32
Facultative 6,035 3 4,149 3 3,943 4
-------- --- -------- --- -------- ---
164,958 84% 104,942 75% 84,200 83%
-------- --- -------- --- -------- ---
PROPERTY:
Treaty 13,024 6% 16,576 12% 11,042 11%
PXRE Re 19,180 10 18,117 13 6,150 6
-------- --- -------- --- -------- ---
32,204 16% 34,693 25% 17,192 17%
-------- --- -------- --- -------- ---
Total $197,162 100% $139,635 100% $101,392 100%
======== ==== ======== ==== ======== ====
</TABLE>
Treaty Reinsurance
Approximately 68% of Trenwick's net premiums written is currently represented by
treaty reinsurance including PXRE Re business. Net treaty premiums written
increased 40% in 1995, 48% in 1994 and 41% in 1993, respectively. In 1995,
Trenwick wrote an aggregate of 137 treaties, as compared to 166 treaties in 1994
and 222 in 1993, on a quota share and excess of loss basis. Property treaties
accounted for approximately 24% of Trenwick's treaty business in 1995 as
compared to approximately 36% and 27% in years 1994 and 1993, respectively.
Trenwick's commitment is currently limited to $ 2,000,000 per account on
casualty business and $1,500,000 on property business. Larger commitments are
subject to Trenwick's Underwriting Committee referral process.
Special Program Reinsurance
Special program reinsurance currently represents 29% of net premiums written.
Special programs underwritten by Trenwick generally include specialty coverages
and classes such as professional liability, directors' and officers' liability
and other excess and surplus lines exposures. Special programs also encompass
reinsurance of business written by managing general agents or alternative risk
mechanisms other than insurance companies. Trenwick underwrites special programs
both on a quota share and excess of loss basis. Similar to treaty reinsurance,
the current commitment size is generally limited to $2,000,000 per account. Net
premiums written in this line increased 43% in 1995, 21% in 1994 and 2% in 1993,
respectively. The number of special program reinsurance contracts was 85 in 1995
as compared to 84 in 1994.
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<PAGE> 6
Facultative Reinsurance
Facultative writings, consisting entirely of casualty business, currently
account for 3% of net premiums written. All facultative business is written on
an excess of loss basis. The average gross limit provided by Trenwick is
$638,000. Maximum facultative gross capacity per risk is $2,000,000. Trenwick
retains the first $500,000 per transaction. In 1995, casualty facultative net
premiums written represented by 318 contracts increased 45% when compared to
1994. In 1994, casualty facultative net premiums written represented by 215
contracts increased 5% when compared to 1993.
MARKETING
Trenwick generally obtains all its reinsurance business through reinsurance
brokers which represent the ceding company in negotiations for the purchase of
reinsurance. The process of effecting a brokered reinsurance placement
typically begins when a ceding company enlists the aid of a reinsurance broker
in structuring a reinsurance program. Often the ceding company and the broker
will consult with one or more lead reinsurers as to the pricing and contract
terms of the reinsurance protection being sought. Once the ceding company has
approved the terms quoted by the lead reinsurer, the broker will offer
participations to qualified reinsurers until the program is fully subscribed by
reinsurers at terms agreed to by all parties.
Trenwick pays such intermediaries or brokers commissions representing negotiated
percentages of the premium it writes. These commissions, which currently average
4%, constitute part of Trenwick's total acquisition costs and are included in
its underwriting expenses. Brokers do not have the authority to bind Trenwick
with respect to reinsurance agreements, nor does Trenwick commit in advance to
accept any portion of the business that brokers submit to it. Reinsurance
business from any ceding company, whether new or renewal, is subject to
acceptance by Trenwick.
In 1995, Trenwick's three largest broker sources accounted for 34%, 19% and 9%,
respectively, of Trenwick's gross premiums written. In 1994, the three largest
broker sources accounted for 29%, 15% and 12%, respectively. These three brokers
are among the ten largest brokers in the reinsurance industry. Trenwick's
concentration of business through a small number of sources is consistent with
the concentration of the property and casualty broker reinsurance market, in
which a majority of the business is written through the top ten brokers. Loss of
all or a substantial portion of the business provided by these brokers could
have a material adverse effect on the business and operations of Trenwick.
Trenwick does not believe, however, that the loss of such business would have a
long-term adverse effect because of Trenwick's competitive position within the
broker reinsurance market and the availability of business from other brokers.
UNDERWRITING
Trenwick's underwriting philosophy emphasizes a transactional approach to
underwriting in which any reinsurance transaction for any line of property or
casualty business is considered on its own merits. The underwriter's primary
objective is to assess the potential for an underwriting profit. The risk
assessment process undertaken by Trenwick's underwriters involves a
comprehensive analysis of historical data and estimates of future value of loss
costs which may not be evident in the historical data. The factors which
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<PAGE> 7
Trenwick considers include the type of risk, details of the underlying insurance
coverage provided, adequacy of pricing using actuarial analysis and the
reinsurance terms and conditions. Before it agrees to participate in a
transaction, Trenwick frequently conducts underwriting and claims audits of
ceding companies to assist it in evaluating the information submitted by the
ceding companies.
Trenwick's Underwriting Committee, composed of its most senior underwriters and
Chief Actuary, is responsible for its underwriting policy and quality standards.
The quality control process involves both pre-binding referral of individual
transactions and post-binding internal audits of each underwriting department.
The referral process provides a three-tiered system of checks and balances to
reduce the potential for significant loss. Accounts displaying characteristics
specified in Trenwick's Underwriting Policy Manual are subject to successive
referral to the Department Manager, Underwriting Committee representatives, and
in some cases, the Chief Executive Officer. The quality control process is
supplemented by conducting periodic internal audits of each underwriting
department to ensure compliance with underwriting policies and procedures.
COMPETITION
Trenwick competes with numerous major international and domestic reinsurance and
insurance companies. These competitors, many of which have substantially greater
financial and staff resources than Trenwick, include independent reinsurance
companies, subsidiaries or affiliates of established insurance companies,
reinsurance departments of certain commercial insurance companies and
underwriting syndicates.
The reinsurance market has two basic segments: reinsurers that primarily obtain
their business directly from insurers and those that primarily obtain business
through reinsurance intermediaries or brokers. Although Trenwick generally
obtains all of its business through reinsurance intermediaries or brokers, and
therefore, competes directly with other reinsurers that obtain their business in
this way, it also competes indirectly with reinsurers who obtain business
directly from primary insurers because Trenwick's brokers must compete with
direct reinsurers for business to be offered to Trenwick.
Competition in the types of reinsurance business which Trenwick underwrites is
based on many factors, including the perceived overall financial strength of the
reinsurer, rates charged, other terms and conditions, A.M. Best rating, service
offered, speed of service (including claims payment) and perceived technical
ability and experience of staff. The number of jurisdictions in which a
reinsurer is licensed or authorized to do business is also a factor. Trenwick is
licensed or otherwise authorized to conduct reinsurance business in every state
and the District of Columbia.
The financial security of insurers and reinsurers has emerged as a key issue of
the 1990's. To be accepted as a reinsurer by ceding companies and their brokers,
a reinsurer must demonstrate higher levels of financial security and solvency
than were previously required. Transactions tend to have fewer and larger
participants, which may negatively affect the availability of underwriting
opportunities. However, ceding companies have become more specialized, which
management believes will favor reinsurers such as Trenwick which possess
technical underwriting and risk assessment skills. The alternative risk segment
of the market has grown, thereby removing some premiums from the traditional
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<PAGE> 8
property and casualty primary insurance market. Alternative risk mechanisms,
which depend more heavily on reinsurance than the traditional companies they
have replaced, have created new opportunities for specialized reinsurers.
Trenwick's management believes that the reinsurance industry, including the
intermediary market, will continue to undergo further consolidation and that
size and financial strength will continue to be significant factors in effective
competition. Trenwick's statutory surplus was $258 million at December 31, 1995.
Based on the most recent information prepared by the Reinsurance Association of
America (RAA), this surplus placed Trenwick among the top eighteen ranked
reinsurance companies and the top twelve reinsurers in the U.S. broker market,
as measured by policyholder surplus, of those companies reporting to the RAA.
The RAA is an industry organization of professional property and casualty
reinsurers which, among other things, compiles data on reinsurers and their
reinsurance operations.
Trenwick is rated "A+ (Superior)," the second-highest classification accorded by
A.M. Best Company. A.M. Best Company is an independent insurance industry rating
organization. The "A+ (Superior)" rating is assigned to those companies which in
A.M. Best Company's opinion have achieved excellent overall performance when
compared to the norms of the property and casualty insurance industry and which
generally have demonstrated a strong ability to meet their respective
policyholder and other contractual obligations. A.M. Best Company reviews its
ratings at least annually and there is no assurance that Trenwick will be able
to maintain its current rating. In 1996, Trenwick's Standard & Poor's Insurance
Rating Services Claims-Paying Ability Rating was upgraded to "A+ (Good)".
CLAIMS ADMINISTRATION
Claims are managed by Trenwick's professional claims staff whose
responsibilities include the review of initial loss reports, creation of claim
files, determination of whether further investigation is required, establishment
and adjustment of case reserves and payment of claims. In addition, the claims
staff conducts comprehensive claims audits of both specific claims and overall
claims procedures at the offices of selected ceding companies. In certain
instances, a claims audit may be performed prior to assuming reinsurance
business as part of a comprehensive risk evaluation process.
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UNPAID CLAIMS AND CLAIMS EXPENSES
Insurers and reinsurers establish claim and claim expense reserves representing
estimates of future amounts needed to pay claims and related expenses with
respect to insured events which have occurred. Claim and claim expense reserves
have two components: case reserves, which are reserves for reported claims, and
incurred but not reported ("IBNR") reserves, which are reserves for claims not
yet reported. Significant periods of time may elapse between the occurrence of
an insured claim, the reporting of the claims to the insurer and the reinsurer,
the insurer's payment of that claim, and subsequent payments by the reinsurer.
Trenwick first establishes its case reserves for reported claims when it
receives notice of the claim. It is Trenwick's policy to establish reserves for
reported claims in an amount equal to the greater of the reserve recommended by
the ceding company or the claim as estimated by Trenwick's claims personnel.
Trenwick periodically conducts investigations to determine if the amount
reserved by the ceding company is appropriate or should be adjusted. During the
claim settlement period, which may be many years, additional facts regarding
individual claims may become known. As Trenwick learns additional facts, it may
become necessary to refine and adjust upward or downward the estimated reserves
on a claim, and even then the ultimate net reserve may be less than or greater
than the revised estimates. Trenwick does not discount any of its reserves for
reported or unreported claims in any line of its business for anticipated
investment income.
Trenwick uses a combination of actuarial methods to determine its IBNR reserves.
These methods fall into two general categories: (1) methods by which ultimate
claims are estimated based upon historical patterns of reported claim
development experienced by Trenwick, as supplemented by reported industry data,
and (2) methods in which the level of Trenwick's IBNR claim reserves are
established based upon the IBNR claim reserves relative to earned premium of
other reinsurers, applied by accident year, line of business and type of
reinsurance (excess of loss versus quota share) written by Trenwick. Trenwick's
reserve methods implicitly recognize the impact of inflation and other factors
affecting claims payments by taking into account changes in historical payment
patterns, the volume of business written, and trends in claim frequency and
severity as reflected in Trenwick's reported claim activity. Due to the inherent
uncertainties of estimating insurance company claim reserves, actual claims and
claims expenses may deviate, perhaps substantially, from estimates of Trenwick's
reserves reflected in Trenwick's consolidated financial statements. Trenwick's
management believes that its claim reserve methods are reasonable and prudent
and that Trenwick's reserves for claims and claims expenses at December 31, 1995
are adequate.
Trenwick's known exposure to environmental claims, including asbestos and
pollution liability, is primarily associated with its participation in business
written by its predecessor company between 1978 and 1983. Exposure to
environmental claims on Trenwick's business written since 1983 is generally
limited by exclusions on its own reinsurance contracts and also by exclusions on
policies issued by ceding companies. Casualty business written in 1983 and prior
is not material to Trenwick's overall book of business. As of December 31, 1995
outstanding claims including incurred but not reported claims for environmental
liability were approximately $6.5 million, less than 2% of Trenwick's total net
outstanding reserves. Under Trenwick's current interpretation of policy
language, management does not
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<PAGE> 10
believe that it has a material exposure to environmental claims that requires
additional reserves beyond its current estimates.
The following table presents an analysis of gross and net unpaid claims and
claims expenses and a reconciliation of beginning and ending gross and net
unpaid claims and claims expense balances for 1995, 1994 and 1993. The gross
unpaid claims and claims expense balances for December 31, 1995 and 1994 are
reflected in Trenwick's consolidated balance sheet. The net unpaid claims and
claims expense balances are stated on a net basis after deductions for
reinsurance recoverable on unpaid claims and claims expenses from
retrocessionaires.
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ANALYSIS OF ACTIVITY IN UNPAID CLAIMS AND CLAIMS EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Unpaid claims and claims expenses,
beginning of year $389,298 $294,008 $354,582 $268,091 $351,897 $266,685
Provision for claims and claims expenses:
for claims incurred in the current year 135,013 115,133 115,348 93,287 86,051 75,100
for claims incurred in prior years (23,666) (2,065) (995) (447) (13,393) (11,306)
-------- -------- -------- -------- -------- --------
Subtotal 111,347 113,068 114,353 92,840 72,658 63,794
-------- -------- -------- -------- -------- --------
Payments for claims and claims expenses:
for claims incurred in the current year (18,849) (18,271) (21,007) (14,623) (10,715) (10,128)
for claims incurred in prior years (69,922) (61,804) (58,630) (52,300) (59,258) (52,260)
-------- -------- -------- -------- -------- --------
Subtotal (88,771) (80,075) (79,637) (66,923) (69,973) (62,388)
-------- -------- -------- -------- -------- --------
Unpaid claims and claims expenses, end of year $411,874 $327,001 $389,298 $294,008 $354,582 $268,091
======== ======== ======== ======== ======== ========
Reinsurance recoverable on unpaid claims
and claims expenses, end of year $ 84,873 $ 95,290 $ 86,491
======== ======== ========
</TABLE>
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In 1995, 1994 and 1993, Trenwick recorded a decrease of $2,065,000, $447,000,
and $11,306,000, respectively, in estimated net claims for claims occurring in
prior accident years. The decrease over the last three years primarily reflects
the favorable development of Trenwick's casualty business written primarily
between accident years 1987 and 1993, partially offset by unfavorable
development in accident year 1994. In 1995, Trenwick recorded a decrease of
$23,666,000 in estimated gross claims for claims occurring in prior accident
years. This decrease is primarily due to a refinement in Trenwick's reserving
methods for casualty business written and a general improvement in experience
indications. In 1993, Trenwick recorded a decrease of $13,393,000 in estimated
gross claims occurring in prior accident years due to the favorable development
of Trenwick's casualty business written primarily between accident years 1987
and 1993.
The following table presents the development of Trenwick's net unpaid claims and
claims expenses for 1985 through 1995. The top line of the table shows the net
unpaid claims and claims expenses at the balance sheet date for each of the
indicated years. This reflects the net estimated amounts of claims and claims
expenses for claims arising in that year and in all prior years that are unpaid
at the balance sheet date, including claims that had been incurred but not yet
reported to Trenwick. The upper portion of the table shows the net cumulative
subsequently paid amounts as of successive years with respect to that liability.
The middle portion of the table shows the net re-estimated amount of the
previously recorded net unpaid claims and claims expenses based on experience as
of the end of each succeeding year. The estimates change as more information
becomes known about the frequency and severity of claims for individual years. A
redundancy (deficiency) exists when the net re-estimated liability at each
December 31 is less (greater) than the prior net liability estimate. The net
"Cumulative Redundancy (Deficiency)" depicted in the table for any particular
calendar year represents the aggregate change in the initial net estimates over
all subsequent calendar years.
The lower portion of the table presents a reconciliation of the net unpaid
claims and claims expenses as of the end of year with the related gross unpaid
claims and claims expenses as of December 31, 1995, 1994, 1993, 1992 and 1991.
Additionally, the table presents a reconciliation of the gross re-estimated
unpaid claims and claims expenses as of the end of the latest re-estimation
year, with separate disclosure of the related re-estimated reinsurance
recoverable on unpaid claims and claims expenses. The "gross cumulative
redundancy (deficiency)" depicted in the table for the calendar years 1994,
1993, 1992 and 1991 represents the aggregate change in the initial gross
estimates over all subsequent calendar years.
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DEVELOPMENT OF UNPAID CLAIMS AND CLAIMS EXPENSES
(in thousands)
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net unpaid claims and claims
expenses, end of year $327,001 $294,008 $268,091 $266,685 $258,774 $245,105 $214,391 $169,785
Cumulative Amount of net
Liability Paid as of:
One year later -- 61,804 52,300 52,260 44,930 42,234 29,407 19,983
Two years later -- -- 90,382 93,312 80,725 77,183 60,888 34,855
Three years later -- -- -- 118,345 111,225 102,590 84,283 53,243
Four years later -- -- -- -- 127,431 124,129 101,597 67,132
Five years later -- -- -- -- -- 134,657 116,047 77,922
Six years later -- -- -- -- -- -- 124,465 87,397
Seven years later -- -- -- -- -- -- -- 93,109
Eight years later -- -- -- -- -- -- -- --
Nine years later -- -- -- -- -- -- -- --
Ten years later -- -- -- -- -- -- -- --
Net Liability Re-estimated as of:
One year later -- 291,943 267,644 255,379 253,781 238,324 206,724 163,848
Two years later -- -- 263,473 255,379 243,488 233,565 199,864 154,646
Three years later -- -- -- 252,458 243,586 223,417 196,232 150,470
Four years later -- -- -- -- 241,600 224,171 188,052 145,457
Five years later -- -- -- -- -- 223,172 189,148 137,426
Six years later -- -- -- -- -- -- 188,884 137,818
Seven years later -- -- -- -- -- -- -- 138,255
Eight years later -- -- -- -- -- -- -- --
Nine years later -- -- -- -- -- -- -- --
Ten years later -- -- -- -- -- -- -- --
Net Cumulative Redundancy (Deficiency)
Amount of Original Liability 2,065 4,618 14,227 17,174 21,933 25,507 31,530
Percentage 1% 2% 5% 7% 9% 12% 19%
Gross liability, end of year 411,874 389,298 354,582 351,897 332,503
Reinsurance recoverable 84,873 95,290 86,491 85,212 73,729
Net liability, end of year 327,001 294,008 268,091 266,685 258,774
Gross re-estimated liability-latest 365,632 327,378 318,550 300,485
Re-estimated recoverable-latest 73,689 63,905 66,092 58,885
Net re-estimated liability-latest 291,943 263,473 252,458 241,600
Gross cumulative redundancy 23,666 27,204 33,347 32,018
</TABLE>
DEVELOPMENT OF UNPAID CLAIMS AND CLAIMS EXPENSES
(in thousands)
<TABLE>
<CAPTION>
1987(1) 1986(1) 1985(1)
------- ------ ------
<S> <C> <C> <C>
Net unpaid claims and claims
expenses, end of year $123,148 $ 99,144 $ 63,669
Cumulative Amount of net
Liability Paid as of:
One year later 21,086 46,885 12,573
Two years later 32,409 60,636 52,042
Three years later 40,285 67,093 60,539
Four years later 48,307 71,060 63,239
Five years later 53,827 74,390 65,350
Six years later 58,568 76,089 66,607
Seven years later 64,172 77,801 66,863
Eight years later 67,798 79,497 67,095
Nine years later -- 80,418 68,146
Ten years later -- -- 68,547
Net Liability Re-estimated as of:
One year later 123,978 107,025 73,852
Two years later 118,452 106,213 72,227
Three years later 109,536 104,273 76,267
Four years later 106,093 102,507 78,479
Five years later 102,436 101,524 78,709
Six years later 97,304 100,418 77,911
Seven years later 96,900 97,911 76,958
Eight years later 98,125 97,186 75,927
Nine years later -- 100,209 75,424
Ten years later -- -- 78,726
Net Cumulative Redundancy (Deficiency)
Amount of Original Liability 25,023 (1,065) (15,057)
Percentage 20% (1%) (24%)
Gross liability, end of year
Reinsurance recoverable
Net liability, end of year
Gross re-estimated liability-latest
Re-estimated recoverable-latest
Net re-estimated liability-latest
Gross cumulative redundancy
</TABLE>
(1) Includes reserves associated with a Bermuda reinsurance company which was
sold by the Company in 1987 and as to which the Company no longer carries
any reserves for outstanding claims liabilities.
11
<PAGE> 14
In evaluating the information in the table above, it should be noted that each
amount includes the effects of all changes in amounts for prior periods. For
example, if a claim determined in 1991 to be $150,000 was first reserved in 1985
at $100,000, the $50,000 deficiency (actual claim minus original estimate) would
be included in the Cumulative Redundancy (Deficiency) in each of the years
1985-1991 shown on the preceding page. This table does not present accident or
policy year development data. Conditions and trends that have affected the
development of liability in the past may not necessarily occur in the future.
Accordingly, it may not be appropriate to extrapolate future redundancies or
deficiencies based on this table.
The trend depicted in the table indicates that net unpaid claims and claims
expenses held December 31, 1994 have developed redundantly due to favorable
developments for claims occurring in 1987 through 1994. The deficiencies shown
in the table for the years 1985 and 1986 reflect adverse development for claims
occurring during that period and are widespread throughout the industry. The
industry factors which contributed to adverse claim developments during this
period included inadequate premium levels and inadequate terms attributable to
overly competitive market conditions. Trenwick's exposure to these unfavorable
market conditions is limited by the insubstantial amount of premiums it wrote
during this period.
RETROCESSION AGREEMENTS
Reinsurance companies enter into retrocessional agreements for the same reasons
insurers seek reinsurance, including reduction of net liability on individual
risks, protection against catastrophic losses and maintenance of acceptable
ratios. Trenwick has various retrocessional facilities, all of which are on a
treaty basis. These retrocessional facilities include one treaty for Trenwick's
facultative casualty reinsurance business which applies on a risk or account
basis and two for its treaty property business which protect it against multiple
claims arising out of a single occurrence or event. As a result of these
facilities, Trenwick's maximum retention generally does not exceed $500,000 per
occurrence on facultative business and $2,000,000 per occurrence on property
catastrophe business. Since 1989, Trenwick has purchased aggregated excess of
loss ratio treaties from several reinsurers. These facilities provided Trenwick
with a layer of protection against adverse results from primarily casualty
business in excess of specified loss ratios.
Trenwick remains liable with respect to reinsurance ceded in the event that the
retrocessionaire is unable to meet its obligations assumed under the reinsurance
agreement. All retrocessionaires must be formally approved by Trenwick's
Security Committee comprised of the Chief Executive Officer, as Committee
Chairman, and the Chief Financial Officer. The Security Committee re-evaluates
the financial condition of Trenwick's retrocessionaires at least annually. The
evaluation process involves financial analysis of current audited financial data
and comparative analysis of such data in accordance with guidelines established
by Trenwick. Business may not be conducted with retrocessionaires who are not
currently approved by the Security Committee.
Trenwick's principal retrocessionaires domiciled in the United States are Centre
Reinsurance Company of New York, Continental Casualty Company, Kemper
Reinsurance Company and National
12
<PAGE> 15
Indemnity Company, which are each rated "A- (Excellent)" or better by A.M. Best
Company. The principal retrocessionaires domiciled outside the United States are
syndicates at Lloyds of London and Unionamerica Insurance Company, Limited. At
December 31, 1995, Trenwick had no material uncollectible amounts due from its
retrocessionaires.
INVESTMENTS
Trenwick's investments must comply and currently do comply with the insurance
laws of the state of Connecticut, its domiciliary state, and of the other states
in which Trenwick is licensed or authorized. These laws prescribe the kind,
quality and concentration of investments which may be made by insurance
companies. In general, these laws permit investments, within specified limits
and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common stock, real estate mortgages
and real estate. The Investment Committee of Trenwick's Board of Directors
oversees investments and sets procedures and guidelines for investment strategy.
Trenwick's internal staff manages Trenwick's investments and utilizes the
services of an investment adviser.
Trenwick invests in three types of structured securities, collateralized
mortgage obligations (CMO), Commercial mortgage-back securities (CMBS) and
asset-backed securities (ABS), each accounting for 16.3 %, 2.7 % and 4.5 %,
respectively, of Trenwick's portfolio at December 31, 1995. CMOs consist of
planned amortization classes (PACs) which have been constructed with a certain
amount of call protection and CMOs that have lost their PAC protection
(sometimes called "broken" or "busted" PACs), due to actual prepayments being
significantly higher or lower than originally forecast. These agency backed CMOs
are not subject to credit risk, as all holdings are backed indirectly or
directly by the Federal government or one of its agencies. The material risk
inherent to holding these CMOs is prepayment risk, which relates to the timing
of cash flows that result from amortization, whether it accelerated, because of
lower interest rates and therefore higher than expected prepayments, or
decelerated, because of higher interest rates and therefore lower than expected
prepayments. Changes in principal repayments could negatively affect investment
income due to the timing of the reinvested funds.
CMBS are constructed primarily from the securitization of mortgages on
commercial real estate and, lacking any agency backing, are inherently subject
to credit risk. They also have an element of prepayment risk which is contingent
on the structure of each security and its underlying collateral. The CMBS issues
Trenwick has purchased have a rating of Aa or better from various Nationally
Recognized Statistical Rating Organizations.
The asset-backed securities owned by Trenwick have credit card and auto
receivables as collateral and are subject also to credit risk. These securities
have less cash flow uncertainty than CMBS' and CMOs, because the issuer has the
ability to add in new collateral should the asset-backed security experience
faster prepayments, or in the event of default on the underlying collateral. The
asset-backed securities owned by Trenwick are rated Aaa by Moody's Investors
Service as of December 31, 1995.
Trenwick also invests in agency pass through securities which account for 3.4%
of Trenwick's portfolio at December 31, 1995. As with CMOs, these securities are
subject to prepayment risk.
13
<PAGE> 16
The table below sets forth the distribution of Trenwick's investments at
December 31, 1995 by type, maturity and quality rating.
INVESTMENTS
(dollars in thousands)
<TABLE>
<CAPTION>
AVERAGE ESTIMATED
MATURITY FAIR AMORTIZED
IN YEARS VALUE COST
-------- --------- ---------
<S> <C> <C> <C>
TYPE
U.S. government bonds 3.6 $ 97,502 $ 94,024
Tax-exempt bonds(1) 5.1 318,590 308,909
Mortgage-backed and asset-backed securities 7.9 176,642 168,119
Debt securities issued by foreign governments 4.2 3,347 3,199
Public utilities 6.6 2,970 2,775
Corporate securities 5.1 33,994 32,245
Short-term securities .3 480 480
-------- --------
Total fixed maturity investments 5.6 633,525 609,751
Equity securities - 13,419 10,507
Cash and cash equivalents - 6,760 6,760
-------- --------
Total investments and cash $653,704 $627,018
======== ========
MATURITY
Due in one year or less .5 $ 43,340 $ 42,725
Due in one year through five years 2.8 247,192 239,710
Due after five years through ten years 6.7 299,494 284,759
Due after ten years 19.3 43,499 42,557
--------- ---------
Total fixed maturity investments 5.6 $633,525 $609,751
========= =========
QUALITY (FIXED MATURITY INVESTMENTS)
Aaa(2)-U.S. government bonds $ 97,502 $ 94,024
Tax-exempt bonds 267,655 259,858
Mortgage-backed and asset-backed securities 158,742 151,304
Corporate securities 3,058 2,924
-------- --------
526,957 508,110
-------- --------
Aa(2)-Tax-exempt bonds 46,279 44,695
Mortgage-backed securities 14,780 13,815
Corporate securities 5,384 5,150
-------- --------
66,443 63,660
-------- --------
A(2)-Tax-exempt bonds 4,656 4,356
Mortgage-backed securities 3,120 3,000
Debt securities issued by foreign governments 3,347 3,199
Public utilities 2,970 2,775
Corporate securities 25,552 24,171
-------- --------
39,645 37,501
-------- --------
Short-term securities 480 480
-------- --------
Total fixed maturity investments $633,525 $609,751
======== ========
</TABLE>
(1) Tax-exempt bonds include $76,310,000 escrowed in U.S. Government
Securities, $131,055,000 insured by Municipal Bond Investors Assurance
Corporation, Financial Guaranty Insurance Company or AMBAC Indemnity
Corporation, and $39,085,000 both escrowed and insured.
(2) Quality rating as assigned by Moody's Investors Service, Inc. for all
except commercial mortgage-backed securities which are as assigned by Fitch
Investors Service, Standard and Poor's or Duff and Phelps. Ratings are
generally assigned upon the issuance of the securities, subject to revision
on the basis of ongoing evaluations.
14
<PAGE> 17
REGULATION
NAIC
The National Association of Insurance Commissioners ("NAIC") is an
organization which assists state insurance supervisory officials in achieving
insurance regulatory objectives, including the maintenance and improvement of
state regulation. From time to time various regulatory and legislative changes
have been proposed in the insurance industry, some of which could have an
effect on reinsurers. Among the proposals that have in the past been or are at
present being considered are the possible introduction of federal regulation in
addition to, or in lieu of, the current system of state regulation of insurers,
and proposals in various state legislatures (some of which proposals have been
enacted) to conform portions of their insurance laws and regulations to various
model acts adopted by the NAIC. Trenwick is unable to predict what effect, if
any, these developments may have on its operations and financial condition.
See Management's Discussion and Analysis of Financial Condition and Results of
Operations.
RBC
The NAIC's initiative to establish minimum capital requirements, referred to as
Risk Based Capital ("RBC"), for property and casualty companies was completed
and adopted in 1993. This formula is used by state insurance regulators as an
early warning tool to identify, for the purpose of initiating regulatory action,
insurance companies that potentially are inadequately capitalized. The ratios
calculated for Trenwick America Re exceeded all of the RBC trigger points at
December 31, 1995. Trenwick believes its capital will continue to exceed these
RBC capital and surplus requirements for the foreseeable future. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
State Insurance Regulation
The premium rates and policy terms of reinsurance agreements generally are not
subject to regulation by any government authority. This contrasts with property
and casualty insurance where the premium rates and policy terms are generally
closely regulated by state insurance departments. As a practical matter,
however, the premium rates charged by insurers may place a limit on the rates
which can be charged by reinsurers.
The regulation and supervision to which Trenwick is subject relates primarily to
the standards of solvency that must be met and maintained, licensing
requirements for reinsurers, the nature of and limitations on investments,
restrictions on the size of risks which may be insured, deposits of securities
for the benefit of a reinsured, methods of accounting, periodic examinations of
the financial condition and affairs of reinsurers, the form and content of
reports of financial condition required to be filed, and reserves for unearned
premiums, losses and other purposes. In general, such regulation is for the
protection of the reinsureds, and ultimately, their policyholders rather than
their security holders. The Company believes that it is in compliance with all
such regulations.
15
<PAGE> 18
Trenwick America Re is subject to regulation under the insurance statutes and
insurance holding company statutes of various states, including Connecticut, the
domiciliary state of Trenwick America Re. These 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 and general business operations.
State laws also require prior notice or regulatory agency approval of direct or
indirect changes in control of an insurer, reinsurer or its holding company and
of certain significant intercorporate transfers of assets within the holding
company structure. An investor who acquires securities (including Trenwick's
convertible debentures) representing or convertible into more than 10% of the
voting power of the securities of Trenwick would become subject to at least some
of such regulations and would be subject to approval by the Connecticut
Insurance Commissioner prior to acquiring such shares. Such investor would also
be required to file certain notices and reports with the Commissioner prior to
such acquisition.
Dividends
The principal source of cash for the payment of dividends by Trenwick is the
receipt of dividends from Trenwick America Re. Under the Connecticut insurance
laws and regulations, the maximum amount of shareholder dividends or other
distributions that Trenwick America Re may declare or pay to the Company within
any twelve month period, without the permission of the Connecticut Insurance
Commissioner, is limited to the greater of 10% of policyholder surplus at
December 31 of the preceding year, or 100% of net income excluding realized
capital gains, for the twelve month period ending December 31 of the preceding
year, both determined in accordance with statutory accounting practices. For the
purpose of computing the limitation, carryforward provisions apply with respect
to net income realized in the two previous calendar years which has not already
been paid out as dividends. The maximum amount of dividends which could be paid
by Trenwick America Re in 1996 without regulatory approval would be $50,757,000.
Investment Limitations
Connecticut Law contains rules governing the types and amounts of investments
which are permissible for a Connecticut insurer or reinsurer, including Trenwick
America Re. These rules are designated to ensure the safety and liquidity of the
insurer's investment portfolio. In general, these rules only permit a
Connecticut insurer to purchase investments which are interest bearing, interest
accruing, entitled to dividends or otherwise income earning and not then in
default in any respect, and the insurer must be entitled to receive for its
exclusive account and benefit the interest or income accruing thereon. No
security or investment is eligible for purchase at a price above its fair value
or market value. In addition, these rules require investments by Trenwick to be
diversified. Trenwick believes that it is in compliance with all applicable
Connecticut insurance laws.
16
<PAGE> 19
EMPLOYEES
At December 31, 1995, Trenwick employed a total of 74 persons. Trenwick has no
employees represented by a labor union and believes that its employee relations
are good.
ITEM 2. PROPERTIES
Trenwick's offices in Stamford, Connecticut are occupied pursuant to a lease
covering approximately 27,000 square feet of office space located at Metro
Center, One Station Place. The lease expires on July 15, 1998.
ITEM 3. LEGAL PROCEEDINGS
Trenwick is party to various legal proceedings generally arising in the normal
course of its reinsurance business. Trenwick does not believe that the eventual
outcome of any such proceeding will have a material effect on its financial
condition or business. Trenwick's subsidiaries are regularly engaged in the
investigation and the defense of claims arising out of the conduct of their
reinsurance business. Pursuant to Trenwick's reinsurance arrangements, disputes
between Trenwick America Re and its ceding companies are generally required to
be finally settled by arbitration.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
17
<PAGE> 20
PART II
ITEM 5. MARKET FOR CORPORATION'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Trenwick Common Stock is listed on the NASDAQ Stock Market under the ticker
symbol TREN. Convertible Debentures are listed on NASDAQ as Trenwck 99 under the
ticker symbol TRENG. There were 128 holders of record and in excess of 1,000
beneficial owners of Common Stock as of February 29, 1996. The other information
called for by this item can be found in Note 14 of Notes to the Consolidated
Financial Statements of Trenwick on Page 70 of the Annual Report to Stockholders
and is incorporated herein by reference.
For a description of restrictions on Trenwick's ability to pay dividends,
reference is made to Item 1. Business - Regulation, Management's Discussion and
Analysis of Financial Condition and Results of Operations and Note 10 of Notes
to the Consolidated Financial Statements of Trenwick.
18
<PAGE> 21
ITEM 6. SELECTED FINANCIAL
DATA
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(in thousands except per share data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net premiums written $197,162 $139,635 $101,392 $ 81,883 $ 84,575
======== ======== ======== ======== ========
Net premiums earned $177,394 $132,683 $ 93,180 $ 81,831 $ 87,189
Net investment income 36,828 33,932 34,954 30,859 30,358
Net realized investment gains (losses) 368 (196) 1,842 181 161
Service fees - - - 206 77
-------- -------- -------- -------- --------
Total revenues $214,590 $166,419 $129,976 $113,077 $117,785
======== ======== ======== ======== ========
Net income $ 29,841 $ 20,282 $ 23,739 $ 18,539 $ 18,598
======== ======== ======== ======== ========
PER SHARE DATA
Primary earnings
Net income $ 4.44 $ 3.04 $ 3.48 $ 2.76 $ 2.79
======== ======== ======== ======== ========
Weighted average shares outstanding 6,723 6,670 6,831 6,728 6,660
======== ======== ======== ======== ========
Fully diluted earnings (assuming conversion
of dilutive convertible securities):
Net income $ 3.80 $ 2.78 $ 3.12 $ 2.75 $ 2.79
======== ======== ======== ======== ========
Weighted average shares outstanding 8,960 8,847 8,965 6,746 6,660
======== ======== ======== ======== =======
Dividends $ 1.12 $ 1.00 $ .86 $ .76 $ .63
======== ======== ======== ======== =======
BALANCE SHEET DATA
Investments and cash $653,704 $551,784 $546,303 $500,359 $409,416
Total assets 820,930 727,245 700,407 652,473 538,137
Unpaid claims and claims expenses 411,874 389,298 354,582 351,897 332,503
Notes payable - - - - 20,100
Convertible debentures 103,500 103,500 103,500 103,500 -
Total stockholders' equity 240,776 188,213 206,763 169,373 155,260
Shares of common stock outstanding 6,590 6,440 6,583 6,510 6,480
Book value per share $ 36.54 $ 29.23 $ 31.41 $ 26.02 $ 23.96
CERTAIN GAAP FINANCIAL RATIOS
Combined ratio 95.6% 103.2% 102.5% 112.3% 108.0%
Net premiums written to surplus ratio 0.82:1 0.74:1 0.49:1 0.48:1 0.54:1
Unpaid claims and claims expenses
to surplus ratio 1.71:1 2.07:1 1.71:1 2.08:1 2.14:1
</TABLE>
The other information called for by this item can be found on Pages 29 through
71 of Trenwick's 1995 Annual Report to Stockholders under the captions
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Financial Statements" and is incorporated herein by reference.
19
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The information called for by this item can be found on Pages 29 through 40 of
Trenwick's 1995 Annual Report to Stockholders under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this item can be found on Pages 42 through 71 of
Trenwick's Annual Report to Stockholders and to the items included in Item 14(a)
of this report, and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Incorporated by reference to the captions "Board of Directors", "Management",
and "Executive Compensation" in the Proxy Statement for the Annual Meeting in
1996. ("Proxy Statement")
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the caption "Executive Compensation" in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the caption "Principal Stockholders" in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the caption "Certain Relationships and Related
Transactions" in the Proxy Statement.
20
<PAGE> 23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) Documents
(1) & (2) The Financial Statements, Schedules and the Report of Independent
Accountants on the Financial Statement Schedules, listed in the
accompanying index on Page 28, are filed as part of this Report.
(3) Exhibits
3.1 Trenwick's Restated Certificate of Incorporation. Incorporated
by reference to Exhibit 3.1 to Trenwick's Registration
Statement on Form S-1, File No. 33-5085.
3.2 Certificate of Amendment of Trenwick's Restated Certificate of
Incorporation. Incorporated by reference to Exhibit 3.3 to
Trenwick's Annual Report on Form 10-K for the year ended
December 31, 1993, File No. 0-14737.
3.3 Trenwick's By-laws. Incorporated by reference to Exhibit 3.2 to
Trenwick's Registration Statement on Form S-1, File No.
33-5085.
4.1 Rights Agreement dated as of November 2, 1989 between Trenwick
and First Chicago Trust Company of New York. Incorporated by
reference to Exhibit 4 to Trenwick's Form 8-A dated June 11,
1989, File No. 0-14737.
4.2 Indenture dated as of December 28, 1992 between First National
Bank of Chicago and Trenwick. Incorporated by reference to
Exhibit 4.2 to Trenwick's Annual Report on Form 10-K for the
year ended December 31, 1992, File No. 0-14737.
10.1- Trenwick Incentive Stock Option Plan, as amended through
August 3, 1993. Incorporated by reference to Exhibit 10.1 to
Trenwick's Annual Report on Form 10-K for the year ended
December 31, 1994, File No. 0-14737.
10.2 Incentive Stock Option Agreement between Trenwick and James F.
Billett, Jr. Incorporated by reference to Exhibit 10.11 to
Trenwick's Registration Statement on Form S-1, File No.
33-5085.
10.3 Stock Option Agreement ("B Options") between Trenwick and James
F. Billett, Jr., as amended through November 14, 1995.
10.4 Trenwick 1987 Stock Incentive Plan, as amended through August
3, 1993. Incorporated by reference to Exhibit 10.5 to
Trenwick's Annual Report on Form 10-K for the year ended
December 31, 1994, File No. 0-14737.
- As required by Item 14, each of Exhibits 10.1 through 10.17 is hereby
identified as a management contract or compensatory plan or arrangement.
21
<PAGE> 24
10.5 Form of Stock Option Agreement for executive officers
(performance options). Incorporated by reference to Exhibit
10.32 to Trenwick's Annual Report on Form 10-K for the year
ended December 31, 1988, File No. 0-14737.
10.6 Form of Restricted Stock Agreement for executive officers.
Incorporated by reference to Exhibit 10.31 to Trenwick's Annual
Report on Form 10-K for the year ended December 31, 1988, File
No. 0-14737.
10.7 Trenwick 1989 Stock Plan, as amended through August 3, 1993.
Incorporated by reference to Exhibit 10.8 to Trenwick's Annual
Report on Form 10-K for the year ended December 31, 1994, File
No. 0-14737.
10.8 Form of Non-qualified Stock Option Agreement for executive
officers. Incorporated by reference to Exhibit 10.36 to
Trenwick's Annual Report on Form 10-K for the year ended
December 31, 1989, File No. 0-14737.
10.9 Trenwick 1993 Stock Option Plan. Incorporated by reference to
Exhibit 10.1 to Trenwick's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1994, File No. 0-14737.
10.10 Form of 1993 Stock Option Plan Non-qualified Stock Option
Agreement for executive officers. Incorporated by reference to
Exhibit 10.11 to Trenwick's Annual Report on Form 10-K for the
year ended December 31, 1994, File No. 0-14737.
10.11 Trenwick 1993 Stock Option Plan for Non-Employee Directors.
Incorporated by reference to Exhibit 10.2 to Trenwick's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1994, File No. 0-14737.
10.12 Trenwick Near Term Cash Bonus Plan. Incorporated by reference
to Exhibit 10.10 to Trenwick's Registration Statement on Form
S-1, File No. 33-5085.
10.13 Trenwick Unfunded Supplemental Executive Retirement Plan, as
amended through December 14, 1993. Incorporated by reference to
Exhibit 10.14 to Trenwick's Annual Report on Form 10-K for the
year ended December 31, 1994, File No. 0-14737.
10.14 Leased Automobile Policy for executive officers. Incorporated
by reference to Exhibit 10.15 to Trenwick's Annual Report on
Form 10-K for the year ended December 31, 1994, File No.
0-14737.
10.15 Description of life insurance and long-term disability
insurance coverage for executive officers. Incorporated by
reference to Exhibit 10.16 to Trenwick's Annual Report on Form
10-K for the year ended December 31, 1994, File No. 0-14737.
22
<PAGE> 25
10.16 Trenwick Directors Deferred Compensation Plan. Incorporated by
reference to Exhibit 10.17 to Trenwick's Annual Report on Form
10-K for the year ended December 31, 1994, File No. 0-14737.
10.17 Description of Trenwick Directors Retirement Plan. Incorporated
by reference to Exhibit 10.18 to Trenwick's Annual Report on
Form 10-K for the year ended December 31, 1994, File No.
0-14737.
10.18 Commercial Real Estate Lease Agreement between Trenwick and One
Station Place, Limited Partnership dated July 15, 1988.
Incorporated by reference to Exhibit 10.33 to Trenwick's Annual
Report on Form 10-K for year ended December 31, 1988, File No.
0-14737.
10.19 Aggregate Excess of Loss Reinsurance Agreement between Trenwick
and National Indemnity Company dated December 31, 1984 and
amendment thereto. Incorporated by reference to Exhibit 10.29
to Trenwick's registration statement on Form S-1, File No.
33-5085.
10.20 Automobile Liability First Excess of Loss/Quota Share
Reinsurance Agreement between Trenwick and the Canal Insurance
Company/Canal Indemnity Company.*
10.21 Interests and Liabilities Agreement between Trenwick and Kemper
Reinsurance Group and participants thereon.*
10.22 Aggregate Excess of Loss Ratio Cover between Trenwick and
Continental Casualty Company.*
10.23 Property Catastrophe Treaty between Trenwick and numerous
reinsurers.*
10.24 Special Catastrophe Excess of Loss Reinsurance Agreement
Placement Slip between Trenwick and each of Continental
Casualty Company, Zurich Reinsurance Company of New York,
Folksamerica Reinsurance Company, and Kemper Reinsurance
Company.*
10.25 Property Quota Share Retrocession Placement Slip between
Trenwick and each of Toa-Re Insurance Co. (U.K.) Ltd. and
Underwriters at Lloyd's.*
10.26 Property Pro Rata Retrocessional Agreement between PXRE
Reinsurance Company and Trenwick. Incorporated by reference to
Exhibit 10.24 to Trenwick's Annual Report on Form 10-K for the
year ended December 31, 1993, File No. 0-14737.
* Incorporated by reference to Exhibits 10.40 through and
including 10.45 to Amendment No. 1 to Trenwick's Annual Report
on Form 10-K for the year ended December 31, 1991, filed with
the Commission on December 8, 1992, File No. 0-14737.
23
<PAGE> 26
10.27 Coinsured Aggregate Excess of Loss Reinsurance Agreement
between Trenwick and Centre Reinsurance Company of New York.
Incorporated by reference to Exhibit 10.28 to Trenwick's Annual
Report on Form 10-K for the year ended December 31, 1994, File
No. 0-14737.
10.28 1995 Property Catastrophe Treaty between Trenwick and numerous
reinsurers.
10.29 1995 Special Catastrophe Excess of Loss Reinsurance Agreement
between Trenwick and Zurich Reinsurance Company of New York and
Kemper Reinsurance Company.
10.30 1995 First Facultative Casualty Excess of Loss Reinsurance
Agreement between Trenwick and numerous reinsurers.
11.0 Computation of Earnings Per Share. Reference is made to page 27
of this report.
12.0 Computation of Ratios.
13.0 Trenwick's 1995 Annual Report to Stockholders. Such report,
except for those portions thereof which are expressly
incorporated by reference in this Form 10-K, is furnished for
the information of the Commission and is not to be deemed
"filed" as part of this Form 10-K.
21.0 List of Subsidiaries.
23.0 Consent of Price Waterhouse LLP.
27.0 Financial Data Schedule.
28.0 Information from reports furnished to state insurance
regulatory authorities.
(B) Reports on Form 8-K
None
24
<PAGE> 27
SIGNATURES
Pursuant to the Requirements of Section 13 or 15(d) of Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
TRENWICK GROUP INC.
(Registrant)
By JAMES F. BILLETT, JR.
------------------------
James F. Billett, Jr.
Chairman, President and
Chief Executive Officer
Dated: March 29, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
JAMES F. BILLETT, JR. Chairman of the Board, March 29, 1996
- ----------------------- President and Chief
James F. Billett, Jr. Executive Officer and
Director (Principal
Executive Officer)
ALAN L. HUNTE Vice President and March 29, 1996
- ----------------------- Treasurer (Principal
Alan L. Hunte Financial Officer and
Accounting Officer)
ANTHONY S. BROWN Director March 29, 1996
- -----------------------
Anthony S. Brown
25
<PAGE> 28
DONALD E. CHISHOLM Director March 29, 1996
- -----------------------
Donald E. Chisholm
NEIL DUNN Director March 29, 1996
- -----------------------
Neil Dunn
ALAN R. GRUBER Director March 29, 1996
- -----------------------
Alan R. Gruber
P. ANTHONY JACOBS Director March 29, 1996
- -----------------------
P. Anthony Jacobs
HERBERT PALMBERGER Director March 29, 1996
- ----------------------
Herbert Palmberger
JOSEPH D. SARGENT Director March 29, 1996
- ----------------------
Joseph D. Sargent
FREDERICK D. WATKINS Director March 29, 1996
- ----------------------
Frederick D. Watkins
STEPHEN R. WILCOX Director March 29, 1996
- ----------------------
Stephen R. Wilcox
26
<PAGE> 29
TRENWICK GROUP INC.
ITEM 14.(A)(3) - Exhibit 11.0 -- COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
PRIMARY
Average shares outstanding 6,482 6,458 6,536
Weighted average shares of common stock
equivalents associated with
stock options, net 241 212 295
------- ------- -------
Total 6,723 6,670 6,831
======= ======= =======
Net income $29,841 $20,282 $23,739
======= ======= =======
PER SHARE AMOUNT $4.44 $3.04 $3.48
======= ======= =======
FULLY DILUTED
Average shares outstanding 6,482 6,458 6,536
Weighted average shares of common stock
equivalents associated with
stock options, net 344 255 295
Assumed conversion of 6% convertible debentures 2,134 2,134 2,134
------- ------- -------
Total 8,960 8,847 8,965
======= ======= =======
Net income $29,841 $20,282 $23,739
Add 6% convertible conversion debenture interest
net of federal income tax effect 4,216 4,270 4,228
------- -------- -------
Total $34,057 $24,552 $27,967
======= ======= =======
PER SHARE AMOUNT $3.80 $2.78 $3.12
======= ======== =======
</TABLE>
27
<PAGE> 30
TRENWICK GROUP INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Pages
Financial Statements:
<TABLE>
<CAPTION>
<S> <C>
Consolidated Balance Sheet at December 31, 1995 and 1994 ...... *
Consolidated Statement of Income
for the three years ended December 31, 1995 ............... *
Consolidated Statement of Changes in Stockholders' Equity
for the three years ended December 31, 1995 ............... *
Consolidated Statement of Cash Flows
for the three years ended December 31, 1995 ............... *
Notes to Consolidated Financial Statements .................... *
Report of Independent Accountants
on Consolidated Financial Statements .......................... *
Financial Statement Schedules:
III-Condensed Financial Information of Registrant ..... S-1/S-2
X-Supplemental Information Concerning Casualty/Property
Reinsurance Operations ................................ S-2
Report of Independent Accountants on Financial Statement
Schedules ................................................... S-3
</TABLE>
* Incorporated by reference to Trenwick's 1995 Annual Report to Stockholders.
Schedules other than those listed above are omitted since they are either not
required or are not applicable or the information required is presented in the
consolidated financial statements, including the notes thereto.
28
<PAGE> 31
TRENWICK GROUP INC. AND SUBSIDIARIES
SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET -- PARENT COMPANY ONLY
<TABLE>
<CAPTION>
December 31,
--------------------------
1995 1994
(in thousands)
Assets:
<S> <C> <C>
Investments in consolidated subsidiaries $323,221 $272,925
Fixed maturity investments available for sale
at fair value (amortized cost: $14,786 and $14,779) 15,027 14,092
Cash and cash equivalents 1,323 213
Deferred debt issuance costs 1,281 1,557
Due from consolidated subsidiaries 3,132 2,104
Net deferred income taxes 81 608
Other assets 487 490
-------- --------
Total assets $344,552 $291,989
======== ========
Liabilities:
Convertible debentures $103,500 $103,500
Other liabilities 276 276
-------- --------
Total liabilities 103,776 103,776
Stockholders' equity 240,776 188,213
-------- --------
Total liabilities and stockholders' equity $344,552 $291,989
======== ========
</TABLE>
STATEMENT OF INCOME -- PARENT COMPANY ONLY
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Revenues:
Consolidated subsidiary dividends $ 9,500 $ 9,400 $11,000
Net investment income 940 1,001 1,217
Net realized investment gains - 90 -
-------- -------- -------
Total revenues 10,440 10,491 12,217
Interest and operating expenses 6,486 6,469 6,454
-------- -------- -------
Income before income taxes 3,954 4,022 5,763
Income taxes (1,954) (1,738) (1,956)
-------- --------- --------
Income before equity in undistributed
income of consolidated subsidiaries 5,908 5,760 7,719
Equity in undistributed income of
consolidated subsidiaries 23,933 14,522 16,020
-------- -------- -------
Net income $29,841 $20,282 $23,739
======= ======= =======
</TABLE>
S-1
<PAGE> 32
TRENWICK GROUP INC. AND SUBSIDIARIES
SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS -- PARENT COMPANY ONLY
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Dividends and net investment income received $ 10,436 $ 9,949 $14,015
Interest and operating expenses paid (5,678) (5,827) (5,635)
Income taxes received 2,116 2,377 572
-------- ------- -------
Cash provided by operating activities 6,874 6,499 8,952
-------- ------- -------
Cash flows for investing activities:
Sales of fixed maturity investments - 5,280 -
Advances to subsidiaries - - (4,610)
-------- ------- -------
Cash provided by (used for) investing activities - 5,280 (4,610)
-------- ------- -------
Cash flows for financing activities (5,764) (12,294) (5,126)
-------- ------- -------
Net increase (decrease) in cash and cash equivalents 1,110 (515) (784)
Cash and cash equivalents, beginning of year 213 728 1,512
-------- ------- -------
Cash and cash equivalents, end of year $ 1,323 $ 213 $ 728
======== ======= =======
</TABLE>
SCHEDULE X -- SUPPLEMENTAL INFORMATION CONCERNING CASUALTY/PROPERTY REINSURANCE
OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Claims and claims expenses incurred related to:
Current year $115,133 $93,287 $75,100
Prior years (2,065) (447) (11,306)
-------- ------ -------
$113,068 $92,840 $63,794
======== ======== =======
Claims and claims expenses paid $ 80,075 $66,923 $62,388
======== ======== =======
</TABLE>
Note: All other information required by Schedule X is included in the
financial statements including the notes thereto. Certain reclassifications
have been made to the 1993 presentation to conform with the 1995 presentation.
S-2
<PAGE> 33
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
Trenwick Group Inc.
Our audits of the consolidated financial statements referred to in our report
dated January 31, 1996 appearing on Page 41 of the 1995 Annual Report to
Stockholders of Trenwick Group Inc. (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the Financial Statement Schedules listed in Item 14
(a) of this Form 10-K. In our opinion, these Financial Statement Schedules
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements.
Price Waterhouse LLP
New York, New York
January 31, 1996
S-3
<PAGE> 34
TRENWICK GROUP INC
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
--------------------
1995 1994
(dollars in thousands)
Assets
------
<S> <C> <C>
Fixed maturity investments available for sale at
fair value (amortized cost: $609,751and $546,620) $633,525 $532,248
Equity securities available for sale at
fair value (cost: $10,507 and $10,181) 13,419 9,752
Cash and cash equivalents 6,760 9,784
-------- --------
Total investments and cash 653,704 551,784
Accrued investment income 10,198 10,332
Receivables from ceding insurers 48,979 27,798
Reinsurance recoverable balances, net 68,449 87,972
Deferred policy acquisition costs 16,725 10,691
Net deferred income taxes 13,585 28,855
Other assets 9,290 9,813
-------- --------
Total assets $820,930 $727,245
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Unpaid claims and claims expenses $411,874 $389,298
Unearned premium income 56,050 36,306
Convertible debentures 103,500 103,500
Other liabilities 8,730 9,928
-------- --------
Total liabilities 580,154 539,032
-------- --------
Stockholders' equity:
Preferred stock, $.10 par value,
1,000,000 shares authorized; none outstanding - -
Common stock, $.10 par value, 15,000,000 shares
authorized; 6,590,411 and 6,440,123 shares outstanding 659 644
Additional paid-in capital 89,920 86,491
Retained earnings 133,949 111,395
Net unrealized appreciation (depreciation) of
investments, net of income taxes 17,346 (9,621)
Deferred compensation under stock award plan (1,098) (696)
--------- --------
Total stockholders' equity 240,776 188,213
-------- --------
Total liabilities and stockholders' equity $820,930 $727,245
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 35
TRENWICK GROUP INC
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1995 1994 1993
---- ---- ----
(in thousands except per share data)
<S> <C> <C> <C>
Revenues:
Net premiums earned $177,394 $132,683 $ 93,180
Net investment income 36,828 33,932 34,954
Net realized investment gains (losses) 368 (196) 1,842
-------- -------- --------
Total revenues 214,590 166,419 129,976
--------- -------- --------
Expenses:
Claims and claims expenses incurred 113,068 92,840 63,794
Policy acquisition costs 44,024 33,799 21,467
Underwriting expenses 12,589 10,276 10,270
Interest expense 6,496 6,469 6,486
-------- -------- --------
Total expenses 176,177 143,384 102,017
-------- -------- --------
Income before income taxes 38,413 23,035 27,959
Income taxes 8,572 2,753 4,220
-------- -------- --------
Net income $ 29,841 $ 20,282 $ 23,739
======== ======== ========
PRIMARY EARNINGS PER SHARE $ 4.44 $ 3.04 $ 3.48
======== ======== ========
Weighted average shares outstanding 6,723 6,670 6,831
======== ======== ========
FULLY DILUTED EARNINGS PER SHARE
(assuming conversion of convertible debentures as of
the date of issuance) $ 3.80 $ 2.78 $ 3.12
======== ======== ========
Weighted average shares outstanding 8,960 8,847 8,965
======== ======== ========
Dividends per common share $ 1.12 $ 1.00 $ .86
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 36
TRENWICK GROUP INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1995 1994 1993
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Stockholders' equity, beginning of year $188,213 $206,763 $169,373
Common stock, $.10 par value, and additional
paid-in capital:
Exercise of employer stock options
(132,040, 49,050 and 72,000 shares) 1,657 759 1,022
Income tax benefit resulting from
excess compensation expenses allowable
for income tax purposes 987 142 705
Restricted common stock awarded
(21,304, 4,871and 10,184 shares) 933 168 491
Restricted common stock awards cancelled
(2,359 and 4,102 shares) - (76) (120)
Common stock purchased and retired
(3,056, 194,233 and 5,207 shares) (134) (6,590) (252)
Retained earnings:
Net income 29,841 20,282 23,739
Cash dividends (7,287) (6,463) (5,627)
Net unrealized appreciation (depreciation) of
investments available for sale:
Change in unrealized appreciation (depreciation) 41,487 (41,558) 26,757
Change in applicable deferred income taxes (14,519) 14,545 (9,365)
Deferred compensation under stock award plan:
Restricted common stock awarded (933) (168) (491)
Restricted common stock awards cancelled - 76 120
Compensation expense recognized 531 333 365
Note receivable on stock purchases - collection of note - - 46
-------- -------- --------
Stockholders' equity, end of year $240,776 $188,213 $206,763
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 37
TRENWICK GROUP INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Premiums collected $144,996 $117,360 $ 79,781
Ceded premiums paid (7,908) (5,440) (12,715)
Claims and claims expenses paid (89,487) (79,216) (68,996)
Claims and claims expenses recovered 7,942 11,972 8,896
Underwriting expenses paid (11,008) (8,381) (9,268)
-------- -------- -------
Cash provided by (used for) underwriting activities 44,535 36,295 (2,302)
Net investment income received 38,829 33,952 35,652
Interest and other expenses paid (6,239) (6,231) (6,000)
Income taxes paid (9,681) (3,194) (3,572)
-------- -------- -------
Cash provided by operating activities 67,444 60,822 23,778
-------- -------- -------
Cash flows for investing activities:
Purchases of fixed maturity investments (163,262) (192,962) (110,392)
Sales of fixed maturity investments 43,859 87,090 23,700
Maturities of fixed maturity investments 55,600 70,967 70,608
Purchases of equity securities (326) (10,181) -
Sales of equity securities 37 60 -
Additions to premises and equipment (612) (123) (138)
-------- -------- -------
Cash used for investing activities (64,704) (45,149) (16,222)
-------- -------- -------
Cash flows for financing activities:
Issuance of common stock 1,657 759 1,022
Repurchase of common stock (134) (6,590) (252)
Dividends paid (7,287) (6,463) (5,627)
Debt issuance costs paid - - (314)
Collection of note receivable on stock purchase - - 46
-------- -------- -------
Cash used for financing activities (5,764) (12,294) (5,125)
-------- -------- -------
(Decrease) increase in cash and cash equivalents (3,024) 3,379 2,431
Cash and cash equivalents, beginning of year 9,784 6,405 3,974
-------- -------- -------
Cash and cash equivalents, end of year $ 6,760 $ 9,784 $ 6,405
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 38
TRENWICK GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been
prepared in conformity with generally accepted accounting
principles (GAAP), which require management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The following is a
summary of significant accounting policies.
CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of
Trenwick Group Inc. (Trenwick) and its subsidiaries.
INVESTMENTS AND CASH EQUIVALENTS
The Company has classified all of its fixed maturity investments
and equity securities as "available for sale" and reported them
at fair value with net unrealized gains and losses included in
stockholders' equity, net of related deferred income taxes. The
fair value of fixed maturity investments and equity securities is
estimated using quoted market prices or broker dealer quotes.
Cash equivalents represent investments with maturities at date of
purchase of three months or less and are carried at cost which
approximates fair value.
Realized gains or losses on disposition of investments are
determined on the basis of the specific identification method.
Investment income consisting of dividends and interest, net of
investment expenses, is recognized in income when earned. The
amortization of premiums and accretion of discount for fixed
maturity investments is computed utilizing the interest method.
Anticipated prepayments and expected maturities are used in
applying the interest method for structured securities. When
actual prepayments differ significantly from anticipated
prepayments, the effective yield is recalculated to reflect
actual payments to date and anticipated future payments. The net
investment in the security is adjusted to the amount that would
have existed had the new effective yield been applied since the
acquisition of the security. That adjustment is included in net
investment income.
REVENUES
Insurance premiums are earned on a pro rata basis over the
related contract period, which is generally one year. Unearned
premium income represents the portion of premiums applicable to
the unexpired portion of premium coverage with renewal dates
later than year end. Premiums on significant contracts are
accrued on an estimated basis throughout the term of such
contracts. These estimates may change in the near term.
- 1 -
<PAGE> 39
POLICY ACQUISITION COSTS
Policy acquisition costs are stated net of policy acquisition
costs ceded and consist of commissions and brokerage expenses
incurred at policy or contract issue date. These costs vary with,
and are primarily related to, the acquisition of business and are
deferred and amortized over the period in which the related
premiums are earned. Deferred policy acquisition costs are
reviewed periodically to determine that they do not exceed
recoverable amounts after allowing for anticipated investment
income.
RESERVE FOR UNPAID CLAIMS AND CLAIMS EXPENSES
Claims are recorded as incurred so as to match such costs with
premiums over the contract periods. The amount provided for
unpaid claims consists of any unpaid reported claims and
estimates for incurred but not reported claims, net of salvage
and subrogation. The estimates for claims incurred but not
reported were developed based on Trenwick's historical claims
experience and an actuarial evaluation of expected claims
experience. Insurance liabilities are necessarily based on
estimates and the ultimate liability may vary from such
estimates. Any adjustments to these estimates are reflected in
income when known.
INCOME TAXES
Income taxes are provided based on income reported in the
financial statements. Deferred income taxes are provided based on
an asset and liability approach which requires the recognition of
deferred income tax assets and liabilities for the expected
future tax consequences of temporary differences between the
financial statement carrying amounts and the tax bases of assets
and liabilities.
STOCK BASED COMPENSATION
The Company grants stock options for a fixed number of common
shares to employees with an exercise price equal to the market
value of the shares at the date of grant. The Company accounts
for stock option grants in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and accordingly,
recognizes no compensation expense for the stock option grants.
EARNINGS PER SHARE
Primary earnings per share are computed based on the weighted
average number of shares of common stock and common stock
equivalents outstanding during each year. Primary weighted
average shares outstanding are adjusted to reflect as
outstanding, throughout each year
- 2 -
<PAGE> 40
presented, common stock equivalents pursuant to the assumed
exercise of stock options. Fully diluted earnings per share are
computed based on the assumption that the convertible debentures
are converted into common shares as of the date of issuance.
PREMISES AND EQUIPMENT
Premises and equipment, including leasehold improvements, are
recorded at cost and are amortized or depreciated using the
straight-line method over their useful lives, which range from
three to ten years.
DEBT ISSUANCE COSTS
Debt issuance costs associated with the December 18, 1992
issuance of convertible debentures are being amortized over the
term of the related debt using the interest method. Unamortized
costs applicable to debentures converting to common stock will be
charged to common stock at the time of any conversion.
RECLASSIFICATION
Certain items in the financial statements have been reclassified
to conform with the 1995 presentation.
NOTE 2 FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Standard No. 107, "Disclosures about Fair
Value of Financial Instruments," defines the fair value of a
financial instrument as the amount at which the instrument could
be exchanged in a current transaction between willing parties and
requires disclosure of fair value information about financial
instruments for which it is practicable to estimate that value.
In the event that quoted market prices were not available, fair
values X are based on estimates using discounted cash flow or
other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rates
and estimates of the amount and timing of future cash flows.
These fair value estimates may vary in the near term.
- 3 -
<PAGE> 41
The following table presents in summary form the carrying amounts
and estimated fair values of the Company's financial instruments
at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994 RELATED
--------------- --------------- FOOTNOTE
CARRYING FAIR CARRYING FAIR CROSS
AMOUNT VALUE AMOUNT VALUE REFERENCE
-------- ----- -------- ----- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
ASSETS:
Fixed maturity investments $633,525 $633,525 $532,248 $532,248 Notes 1 & 3
Equity securities 13,419 13,419 9,752 9,752 Notes 1 & 3
Cash and cash equivalents 6,760 6,760 9,784 9,784 Note 1
Accrued premiums 38,794 37,400 15,700 14,800 Note 9
Investment in Investors
Insurance Holding
Corporation 6,300 6,300 6,300 6,300 Note 4
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Convertible debentures $103,500 $121,600 $103,500 $102,500 Note 7
</TABLE>
- 4 -
<PAGE> 42
NOTE 3 INVESTMENTS
The estimated fair values and amortized cost of fixed maturity
investments and equity securities are as follows:
<TABLE>
<CAPTION>
1995 1994
----------------------- ----------------------
ESTIMATED AMORTIZED ESTIMATED AMORTIZED
FAIR COST FAIR COST
(in thousands) VALUE VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of
U.S. government
corporations and agencies $ 97,502 $ 94,024 $109,212 $115,008
Obligations of states and
political subdivisions 318,590 308,909 271,994 276,027
Mortgage-backed and
asset-backed securities 176,642 168,119 111,123 113,017
Debt securities issued by
foreign governments 3,347 3,199 3,072 3,238
Public utilities 2,970 2,775 2,505 2,750
Corporate securities 33,994 32,245 33,912 36,150
Short-term securities 480 480 430 430
------- -------- -------- --------
Total fixed maturity
investments 633,525 609,751 532,248 546,620
Equity securities 13,419 10,507 9,752 10,181
------- -------- -------- --------
Total $646,944 $620,258 $542,000 $556,801
======== ======== ======== ========
</TABLE>
- 5 -
<PAGE> 43
The estimated fair value and amortized cost of fixed maturity
investments at December 31, 1995 are shown below by contractual
or expected maturity periods. Expected maturities will differ
from contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or prepayment
penalties. The maturities for mortgage-backed and asset-backed
securities are calculated using expected maturity dates, adjusted
for anticipated prepayments.
<TABLE>
<CAPTION>
ESTIMATED AMORTIZED
FAIR COST
(in thousands) VALUE
--------- ---------
<S> <C> <C>
Due in one year or less $ 43,340 $ 42,725
Due after one year through five years 247,192 239,710
Due after five years through ten years 299,494 284,759
Due after ten years 43,499 42,557
-------- --------
Total fixed maturity investments $633,525 $609,751
======== ========
</TABLE>
NET INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS
During the twelve months ended December 31, 1995, all investments
were income producing. The components of net investment income
for the years ended December 31 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Fixed maturity investments $37,219 $34,538 $35,723
Equity securities 289 122 -
Cash and cash equivalents 621 628 324
------- ------- -------
Gross investment income 38,129 35,288 36,047
Investment expenses (1,301) (1,356) (1,093)
------- ------- -------
Net investment income $36,828 $33,932 $34,954
======= ======= =======
</TABLE>
Net realized gains (losses) on sales of investments are as
follows:
<TABLE>
<CAPTION>
(in thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
FIXED MATURITY INVESTMENTS:
Gross realized gains $ 605 $ 2,006 $ 1,842
Gross realized losses (274) (2,262) -
EQUITY SECURITIES:
Gross realized gains 37 60 -
------- ------- -------
Net realized investment gains (losses) $ 368 $ (196) $ 1,842
======= ======= =======
</TABLE>
- 6 -
<PAGE> 44
UNREALIZED GAINS (LOSSES) ON FIXED MATURITY INVESTMENTS
At December 31, 1995 and 1994, gross unrealized gains and
losses are as follows:
<TABLE>
<CAPTION>
(in thousands) 1995 1994
---------------- ----------------
GROSS UNREALIZED GROSS UNREALIZED
GAINS LOSSES GAINS LOSSES
----- ------ ----- ------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 3,478 $ - $ 3 $ (5,799)
Obligations of states and
political subdivisions 9,848 (167) 3,557 (7,590)
Mortgage-backed and
asset-backed securities 8,523 - 401 (2,295)
Debt securities issued
by foreign governments 148 - - (166)
Public utilities 195 - - (245)
Corporate securities 1,749 - - (2,238)
Equity securities 2,912 - - (429)
------- ----- ------ --------
Total unrealized gains (losses) $26,853 $(167) $3,961 $(18,762)
======= ===== ====== ========
</TABLE>
For the years ended December 31, 1995, 1994 and 1993, changes in
net unrealized gains (losses) on fixed maturity investments and
equity securities were $41,487,000, $(41,558,000) and $5,924,000,
respectively.
INVESTMENTS HELD AS COLLATERAL OR ON DEPOSIT
Fixed maturity investments with a carrying value of $92,463,000
are being held in trust as collateral for certain reinsurance
obligations. In addition, investments with a carrying value of
$5,842,000 at December 31, 1995 were on deposit with various
state or governmental insurance departments in order to comply
with insurance laws.
- 7 -
<PAGE> 45
NOTE 4 OTHER ASSETS
Other assets comprise:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
(in thousands) 1995 1994
---- ----
<S> <C> <C>
Non-marketable equity investment, at fair value $6,300 $6,300
Deferred debt issuance costs, net of
accumulated amortization of $276 and $259 1,281 1,557
Premises and equipment, net of accumulated
depreciation and amortization of $2,050 and $2,047 889 656
Prepaid reinsurance premiums 202 227
Other 618 1,073
----- -----
Total other assets $9,290 $9,813
====== ======
</TABLE>
Trenwick owns approximately 15% of the outstanding common stock of
Investors Insurance Holding Corporation (IIHC), a property and casualty
insurer rated "A-" (Excellent) by the A.M. Best Company, an
industry-recognized rating organization. Trenwick accounts for its
interest in IIHC at fair value, which is equal to cost, until
substantive events occur, in the opinion of management, which could
indicate a diminution or appreciation in value. The shares of IIHC are
unregistered, and Trenwick does not exercise significant influence over
IIHC. At December 31, 1995, the total assets and net assets of IIHC
were $221,590,000 and $47,550,000, respectively. Total revenues and net
loss of IIHC for the year ended December 31, 1995 were $45,822,000 and
$(5,142,000), respectively.
NOTE 5 RESERVE FOR UNPAID CLAIMS AND CLAIMS EXPENSES
The following table presents an analysis of gross and net unpaid claims
and claims expenses and a reconciliation of beginning and ending net
unpaid claims and claims expense balances for 1995, 1994 and 1993. The
gross unpaid claims and claims expense balances at December 31, 1995
and 1994 are reflected in Trenwick's consolidated balance sheet. The
net unpaid claims and claims expense balances are stated on a net basis
after deductions for reinsurance recoverable on unpaid claims and
claims expenses from retrocessionaires.
- 8 -
<PAGE> 46
Activity in the reserve for unpaid claims and claims expenses,
net of reinsurance recoverables, for the years ended December 31
is summarized below:
<TABLE>
<CAPTION>
(in thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Reserve for unpaid claims and claims expenses, net of
related reinsurance recoverables, at beginning of year $294,008 $268,091 $266,685
Provision for claims and claims expenses,
net of reinsurance:
For claims incurred in the current year 115,133 93,287 75,100
For claims incurred in prior years (2,065) (447) (11,306)
--------- -------- --------
Subtotal 113,068 92,840 63,794
-------- -------- --------
Payments for claims and claims expenses,
net of reinsurance:
For claims incurred in the current year (18,271) (14,623) (10,128)
For claims incurred in prior years (61,804) (52,300) (52,260)
-------- -------- --------
Subtotal (80,075) (66,923) (62,388)
-------- -------- --------
Reserve for unpaid claims and claims expenses, net of related
reinsurance recoverables, at end of year $327,001 $294,008 $268,091
Reinsurance recoverables on unpaid claims and claims
expenses, at end of year
84,873 95,290 86,491
-------- -------- --------
Reserve for unpaid claims and claims expenses, gross of
reinsurance recoverables on unpaid claims, at end of year $411,874 $389,298 $354,582
======== ======== ========
</TABLE>
In 1995, 1994 and 1993, Trenwick recorded a decrease of
$2,065,000, $447,000 and $11,306,000, respectively, in estimates
for claims occurring in prior accident years. The reduction over
the last three years primarily reflects the favorable development
of Trenwick's casualty business written between accident years
1987 and 1993 partially offset by unfavorable development in
accident year 1994.
Trenwick's known exposure to environmental claims, including
asbestos and pollution liability, is primarily associated with
its participation in business written by its predecessor company
between 1978 and 1983. Exposure to environmental claims on
Trenwick's business written since 1983 is generally limited by
exclusions on its own reinsurance contracts and also by
exclusions on policies issued by ceding companies. Casualty
business written in 1983 and prior is not material to Trenwick's
overall book of business. As of December 31, 1995, outstanding
- 9 -
<PAGE> 47
claims including incurred but not reported claims for
environmental liability were approximately $6.5 million, less
than 2% of Trenwick's total net outstanding reserves. Under
Trenwick's current interpretation of policy language, management
does not believe that it has a material exposure to environmental
claims that requires additional reserves beyond its current
estimates.
Inflation raises the cost of economic losses and non-economic
damages covered by insurance contracts and therefore is a
significant factor in determining effective rates of reinsurance.
The methods used by Trenwick to estimate individual case reserves
and reserves for claims incurred but not yet reported implicitly
incorporate the effects of inflation in the projection of
ultimate losses.
Due to the inherent uncertainties of estimating insurance company
claim reserves, actual claims and claims expenses may deviate,
perhaps substantially, from estimates of Trenwick's reserves
reflected in Trenwick's consolidated financial statements.
Trenwick's management believes that its claim reserve methods are
reasonable and prudent and that Trenwick's reserve for claims and
claims expenses at December 31, 1995 are adequate.
NOTE 6 INCOME TAXES
Trenwick files a consolidated United States income tax return
with its United States subsidiaries. The components of the
provision for income taxes for the years ended December 31, 1995,
1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Current income tax provision $7,821 $4,635 $5,363
Deferred income tax provision 751 (1,882) (1,143)
------ ------ ------
Income tax provision $8,572 $2,753 $4,220
====== ====== ======
</TABLE>
- 10 -
<PAGE> 48
Trenwick's effective income tax rates were 22%, 12% and 15% for
the years ended December 31, 1995, 1994 and 1993, respectively.
The income tax provision for each of the years presented differs
from the amounts determined by applying the applicable U.S.
statutory federal income tax rates of 35% for 1995, 1994 and 1993
to pre-tax income as a result of the following:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Income before income taxes $38,413 $23,035 $27,959
======= ======= =======
Income taxes at statutory rates $13,445 $ 8,062 $ 9,786
Effect of tax-exempt investment income (4,963) (5,156) (4,952)
Effect of change in tax rate - - (606)
Other, net 90 (153) (8)
------- ------- -------
Income tax provision $ 8,572 $ 2,753 $ 4,220
======= ======= =======
</TABLE>
The components of the net deferred income
tax provision for the years ended December 31 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
(in thousands)
Discounting of unpaid claims $(1,369) $(1,073) $(1,396)
Unearned premium income (1,384) (522) (582)
Policy acquisition costs deferred 2,112 769 871
AMT credit carryforward 908 (908) -
Accretion of market discount 378 - -
Other, net 106 (148) (36)
------- ------- -------
Total deferred income tax provision $ 751 $(1,882) $(1,143)
======= ======= =======
</TABLE>
- 11 -
<PAGE> 49
Deferred income tax assets (liabilities) are attributable to the
following temporary differences as of December 31, 1995 and 1994:
<TABLE>
<CAPTION>
(in thousands) 1995 1994
---- ----
<S> <C> <C>
DEFERRED INCOME TAX ASSET
Discounting of unpaid claims $24,696 $23,328
Unearned premium income 3,909 2,526
Employee stock option plans 209 368
Unrealized depreciation of
investments available for sale - 5,180
AMT credit carryforward - 908
Other 440 327
------- -------
Gross deferred income tax assets 29,254 32,637
------- -------
DEFERRED INCOME TAX LIABILITY
Policy acquisition costs deferred (5,854) (3,742)
investments available for sale (9,340) -
Accretion of market discount (378) -
Other (99) (40)
-------- -------
Gross deferred income tax liabilities (15,671) (3,782)
------- -------
Net deferred income tax assets $13,583 $28,855
======= =======
</TABLE>
Trenwick's management has concluded that the deferred income tax
assets are more likely than not to be realized. Therefore, no
valuation allowance has been provided. Estimates used in the
development of the net deferred income tax assets may change in
the near term.
NOTE 7 LONG TERM DEBT AND FINANCING ARRANGEMENTS
On December 18, 1992, Trenwick completed a public
offering for $103,500,000 of convertible debentures due December
15, 1999. The convertible debentures, issued at par, bear
interest at 6% and are convertible, at any time prior to
maturity, into shares of common stock of Trenwick at a conversion
price of $48.50 per share, subject to adjustment under certain
conditions. Interest on the debentures is payable on June 15 and
December 15 of each year. The debentures are redeemable at any
time on or after December 15, 1995, in whole or in part, at the
option of Trenwick, at a redemption price of 103.43% of par,
decreasing to 100% at maturity. In the event of a change in
control of Trenwick, each debenture is redeemable at the option
of the holder, subject to certain conditions, at a price equal to
100% of its principal amount plus accrued interest to the date of
repurchase. The debentures are unsecured and unsubordinated
indebtedness of Trenwick and will rank equally and ratably with
other unsecured and
- 12 -
<PAGE> 50
unsubordinated indebtedness of Trenwick. Subject to certain
limitations, Trenwick is not restricted from incurring secured or
unsecured indebtedness and currently has no secured indebtedness
or indebtedness senior to the debentures. As of December 31,
1995, 2,134,000 shares of Trenwick's common stock are reserved
for issuance in the event of conversion of the debentures. The
fair value of Trenwick's convertible debentures at December 31,
1995 and 1994 was $121,600,000 and $102,500,000, respectively,
based on the quoted market prices reported by the NASDAQ National
Market System.
Trenwick incurred interest expense on its long-term debt of
$6,486,000, $6,469,000 and $6,454,000 for the years ended
December 31, 1995, 1994 and 1993, respectively, at effective
rates of approximately 6% for the years then ended.
Trenwick had established a line of credit under which it could
borrow up to $10,000,000 at the lending bank's base rate or at
money market rates acceptable to the lending bank. This line of
credit was available in the event that funds were required to
supplement short-term working capital. In 1995, approximately $10
million was borrowed and repaid under the terms of the facility.
There were no borrowings outstanding under this line of credit at
December 31, 1994, and the facility was not renewed upon its
anniversary in 1995.
NOTE 8 STOCKHOLDERS' EQUITY
STOCKHOLDER RIGHTS PLAN
Trenwick has adopted a stockholder rights plan under which
preferred stock purchase rights attach to all outstanding shares
of Trenwick's common stock. The rights are exercisable only if a
party acquires, or announces a tender offer to acquire, 20% or
more of Trenwick's common stock. Each right entitles a
stockholder to buy 1/100 of a share of Trenwick's Series A Junior
Participating Preferred Stock for a $96 exercise price. Each
1/100 of a share of such preferred stock will have dividend and
voting rights approximately equal to one share of common stock.
In the event that an acquiror accumulates 20% or more of
Trenwick's common stock, all rights holders except the acquiror
may purchase, for the exercise price, in lieu of the Series A
Junior Participating Preferred Stock, shares of common stock of
Trenwick having a market value of twice the exercise price of
each right. If Trenwick is acquired in a merger or other business
combination after the acquisition of 20% of Trenwick's common
stock, all rights holders except the acquiror may purchase the
acquiror's shares at a similar discount. Trenwick is
entitled to redeem the rights for one cent each, subject to
certain restrictions. Trenwick has reserved 150,000 shares of its
preferred stock for possible issuance under the plan. The
rights will expire on November 2, 1999.
-13-
<PAGE> 51
The components of the balance sheet caption "net unrealized
appreciation (depreciation) of investments, net of income taxes"
at December 31 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1995 1994
---- ----
<S> <C> <C>
Fair value of fixed maturity investments
and equity securities $646,944 $542,000
Amortized cost of fixed maturity
investments and equity securities (620,258) (556,801)
-------- --------
Unrealized appreciation (depreciation) 26,686 (14,801)
Deferred income taxes (9,340) 5,180
-------- --------
Net unrealized appreciation (depreciation)
of fixed maturity investments and equity securities,
net of income taxes $ 17,346 $ (9,621)
======== ========
</TABLE>
NOTE 9 REINSURANCE
Trenwick, through Trenwick America Reinsurance Corporation
(Trenwick America Re), primarily provides reinsurance to insurers
of property and casualty risks in the United States. Trenwick
America Re generally obtains all of its business through brokers
and reinsurance intermediaries which seek its participation on
reinsurance being placed for their customers. Trenwick America Re
writes both treaty and facultative reinsurance both on an excess
of loss and quota share basis. In underwriting reinsurance,
Trenwick America Re does not target types of clients, classes of
business or types of reinsurance. Rather, it selects transactions
based upon the quality of the reinsured, the attractiveness of
the reinsured's insurance rates and policy conditions and the
adequacy of the proposed reinsurance terms.
Trenwick America Re obtained approximately 62% of its gross
written premiums from three brokers in 1995, 57% from three
brokers in 1994 and 66% from four brokers in 1993. Trenwick
America Re's concentration of business through a small number of
sources is consistent with the concentration of the property and
casualty broker reinsurance market, in which a majority of the
business is written through the top ten largest brokers in the
reinsurance industry. Loss of all or a substantial portion of the
business provided by these brokers could have a material adverse
effect on the business and operations of Trenwick America Re.
Trenwick does not believe, however, that the loss of such
business would have a long-term adverse effect because of
Trenwick's competitive position within the broker reinsurance
market and the availability of business from other brokers. In
1995, Trenwick America Re obtained approximately 19%, 11% and 9%
of its gross written premiums from three ceding companies. In
1994, Trenwick America Re obtained approximately 14% and
12% of its gross written premiums from two ceding companies and
in 1993, approximately 19% of Trenwick America Re's gross written
premiums were obtained from one ceding company.
- 14 -
<PAGE> 52
The components of reinsurance recoverable balances, net on the
balance sheet at December 31 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1995 1994
---- ----
<S> <C> <C>
Paid claims $ 2,978 $ 2,619
Unpaid claims and claims expenses 84,873 95,290
Funds held liability (18,323) (8,301)
Reinsurance balances payable (1,079) (1,636)
------- -------
Reinsurance recoverable balances, net $68,449 $87,972
======= =======
</TABLE>
Included in receivables from ceding insurers at December 31, 1995
and 1994 are accrued premiums of approximately $38,794,000 and
$15,700,000, respectively, which have estimated payment dates
ranging from 1995 to 2000. Premium payment dates are estimated
using the anticipated payout pattern of claims which result in
the additional premium due from ceding companies. The fair value
of the accrued premiums for 1995 and 1994 is approximately
$37,400,000 and $14,800,000, respectively, which is estimated
using cash flows discounted at an interest rate of 5%.
Trenwick America Re purchases reinsurance to reduce its exposure
to catastrophe losses and the frequency of large losses in all
lines of business. Trenwick America Re, however, remains liable
in the event that its retrocessionaires do not meet their
contractual obligations.
- 15 -
<PAGE> 53
The effects of reinsurance on premiums written, premiums earned
and claims and claims expenses for the three years ended December
31 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
(in thousands)
Assumed premiums written $214,336 $153,834 $113,659
Ceded premiums written (17,174) (14,199) (12,267)
-------- -------- --------
Net premiums written $197,162 $139,635 $101,392
======== ======== ========
Assumed premiums earned $194,592 $147,129 $105,699
Ceded premiums earned (17,198) (14,446) (12,519)
-------- -------- --------
Net premiums earned $177,394 $132,683 $ 93,180
======== ======== ========
Assumed claims and claims
expenses incurred $111,351 $114,340 $ 75,544
Ceded claims and claims
expenses incurred 1,717 (21,500) (11,750)
-------- -------- --------
Net claims and claims
expenses incurred $113,068 $ 92,840 $ 63,794
======== ======== ========
</TABLE>
At December 31, 1995, letters of credit in the amount of
$2,519,000 have been arranged in favor of Trenwick America Re in
respect of certain outstanding claims recoverable and the unearned
portion of premiums ceded.
At December 31, 1995, approximately $67,551,000 and $1,891,000 of
reinsurance recoverable on unpaid claims and claims expenses and
reinsurance recoverables on paid claims, respectively, are
recoverable from three reinsurers: Centre Reinsurance Company of
N.Y., Continental Casualty Company and National Indemnity Company.
There are no prepaid reinsurance premiums which relate to these
reinsurers.
For the years ended December 31, 1995, 1994 and 1993, Trenwick
America Re earned commissions on cessions to retrocessionaires of
$13,000, $112,000 and $1,328,000, respectively.
NOTE 10 INSURANCE REGULATION
Trenwick's reinsurance subsidiary, Trenwick America Re, is
domiciled in and subject to the insurance statutes of Connecticut.
During 1995 and 1994, Trenwick America Re paid dividends of
$9,500,000 and $9,400,000, respectively. The statutory limitation
on dividends which can be paid without prior approval of the
Connecticut Insurance Commissioner, applicable to Trenwick America
Re, is the greater of 10% of policyholder surplus at December 31
of the preceding year or 100% of net income, not including
realized capital gains, for the twelve month period ending
December 31 of the preceding year, both determined in accordance
with statutory accounting practices. For the
-16-
<PAGE> 54
purpose of computing the limitation, carryforward provisions apply
with respect to net income realized in the two previous calendar
years which has not already been paid out as dividends. The amount
of dividends or other distributions that could be paid by Trenwick
America Re without prior approval as of December 31, 1995 was
$50,757,000.
The differences between GAAP and statutory accounting practices
for Trenwick America Re are the treatment of acquisition costs,
deferred income taxes, other deferred charges and the carrying
value of fixed maturity investments. The following tables set
forth a reconciliation of Trenwick America Re's net income and
statutory surplus, as filed with the insurance regulatory
authorities, to its net income and stockholders' equity as
determined in accordance with GAAP for the years ended and as of
December 31:
<TABLE>
<CAPTION>
(in thousands) 1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME
Statutory net income of
Trenwick America Re $28,060 $19,966 $23,555
Change in deferred acquisition costs 6,034 2,197 2,312
Provision for deferred income taxes (690) 1,729 1,076
Other (12) 19 -
------- ------- -------
GAAP net income of Trenwick America Re $33,392 $23,911 $26,943
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
(in thousands) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
RECONCILIATION OF SURPLUS
Statutory capital and surplus of
Trenwick America Re $257,590 $236,056 $224,902
Deferred acquisition costs 16,725 10,691 8,494
Unrealized appreciation (depreciation)
of investments 23,526 (13,685) 25,965
Deferred income taxes 13,144 28,027 12,270
Unauthorized reinsurance 2,336 2,265 4,083
Non-admitted assets 2,142 1,858 1,038
-------- -------- --------
GAAP stockholders' equity of
Trenwick America Re $315,463 $265,212 $276,752
======== ======== ========
</TABLE>
-17-
<PAGE> 55
NOTE 11 STOCK OPTIONS AND BENEFIT PLANS
Trenwick has several plans through which it makes options in
common stock available to Trenwick employees at the discretion of
the Board of Directors. Non employee directors receive automatic
grants under a separate plan. Exercise prices are generally fixed
at the market value at the date of grant. Options vest and are
exercisable on various terms, usually either over a five year
period or up to a ten year period. All options have an expiration
date not exceeding ten years. Total authorized common stock
reserved for issuance under all stock benefit plans at December
31, 1995 is 877,751. Transactions under the stock option plans are
summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
NUMBER OF SHARES
<S> <C> <C> <C>
Outstanding, beginning of year 793,892 841,442 530,942
Granted 96,500 4,000 386,000
Cancelled - (2,500) (3,500)
Exercised (132,040) (49,050) (72,000)
-------- ------- -------
Outstanding, end of year 758,352 793,892 841,442
Exercisable, end of year 340,877 435,892 455,442
AVERAGE EXERCISE PRICE
Granted 44.00 41.50 40.35
Cancelled - 40.00 17.00
Exercised 12.55 15.45 14.20
Outstanding, end of year 34.29 29.50 28.65
Exercisable, end of year 26.10 20.73 18.74
</TABLE>
Included in the above are options granted to certain senior
officers under the 1993 Stock Option Plan. The exercise and
vesting of these options are accelerated if the price of
Trenwick's common stock achieves certain specified levels, subject
to certain conditions.
During the years ended December 31, 1995, 1994 and 1993, Trenwick
awarded key employees an aggregate of 21,304, 4,871 and 10,184
shares of common stock, respectively, under the terms of the 1989
Stock Plan. Of the shares awarded in 1995, 4,654 were valued at
$44.00 per share (approximately $205,000) and vest over five
years, and 16,650 were valued at $43.75 per share (approximately
$728,000) and vest over three years. The shares awarded in 1994
and 1993 were valued at $34.50 and $48.25, respectively,
(approximately $168,000 and $491,000) and vest over a five year
period. In 1995, 1994 and 1993, respectively, 3,056, 4,233 and
5,207 shares were repurchased at $44.00, $34.50 and $48.25 per
share (aggregate $134,000, $146,000 and $251,000) in connection
with the satisfaction of withholding taxes payable upon the
vesting of shares previously awarded under the plan. Trenwick has
recognized $531,000, $333,000 and $365,000 as compensation expense
for 1995, 1994 and 1993, respectively, determined by the
-18-
<PAGE> 56
award value of the shares amortized over the applicable vesting
period.
Trenwick has a money purchase pension plan for which substantially
all full-time employees are eligible. Prior to July 1,1995,
Trenwick contributed 4% of an employee's total compensation, plus
3% of the employee's total compensation above the FICA limit.
Effective July 1, 1995, the Company contributes 8% of an
employee's total compensation to the plan. No employee
contributions are made to the plan. The plan assets are
administered by a life insurance company. Contributions were
$297,000, $235,000 and $304,000 for the years ended December 31,
1995, 1994 and 1993, respectively.
Trenwick sponsors a 401(k) savings plan to which substantially all
full-time employees are eligible. The plan assets are administered
by a life insurance company. Net contributions were $122,000,
$114,000 and $113,000 for the years ended December 31, 1995, 1994
and 1993, respectively, during which employee contributions were
matched annually at a rate of 100% up to the lesser of 6% of an
employee's total compensation or $2,000.
NOTE 12 COMMITMENTS AND CONTINGENCIES
Trenwick's minimum non-cancellable office space lease commitments
totalling $2,074,000 at December 31, 1995 are payable as follows:
1996 - $816,000; 1997 - $816,000; 1998 - $442,000.
Total office rent expense for the years ended December 31, 1995,
1994 and 1993 was $883,000, $899,000 and $713,000, respectively.
-19-
<PAGE> 57
NOTE 13 SUPPLEMENTAL CASH FLOWS INFORMATION
A reconciliation of cash provided by operations for the three
years ended December 31 is as follows:
<TABLE>
<CAPTION>
(in thousands) 1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Net income $29,841 $20,282 $23,739
ADJUSTMENTS
Amortization of premiums on investments,
net 1,003 1,169 1,170
Policy acquisition costs incurred, net of
amortization (6,034) (2,197) (2,312)
Provision for deferred income taxes 750 (1,882) (1,143)
Net realized investment (gains) losses (368) 196 (1,842)
Amortization of debt issuance costs 276 259 243
Other non-cash items, net 907 601 801
(INCREASE) DECREASE IN ASSETS
Receivables and recoverables (1,112) (3,133) (9,707)
Other 72 458 (648)
INCREASE (DECREASE) IN LIABILITIES
Unpaid claims and claims expenses 22,576 34,716 2,685
Unearned premium income 19,744 6,705 7,960
Payables (211) 3,648 2,832
------- ------- -------
Net cash provided by operating activities $67,444 $60,822 $23,778
======= ======= =======
</TABLE>
20
<PAGE> 58
NOTE 14 UNAUDITED QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data reported by Trenwick
for the years ended December 31, 1995, 1994 and 1993 are as
follows:
<TABLE>
<CAPTION>
DECEMBER SEPTEMBER JUNE MARCH
Quarter ended 31 30 30 31
(dollars in thousands, -------- --------- ------- -------
except per share data)
<S> <C> <C> <C> <C> <C>
Earned premiums 1995 $46,032 $43,200 $43,698 $44,464
1994 37,677 33,137 31,693 30,176
1993 28,559 21,147 21,226 22,248
Net investment income 1995 9,737 9,354 9,193 8,544
1994 8,852 8,596 8,303 8,181
1993 8,518 8,736 8,849 8,851
Net realized 1995 87 131 52 98
investment gains 1994 (181) - (118) 103
(losses) 1993 - - 34 1,808
Net income 1995 8,041 7,956 7,340 6,504
1994 6,626 6,402 6,097 1,157
1993 5,862 6,134 5,367 6,376
Primary earnings 1995 1.18 1.18 1.09 .97
per common share 1994 1.00 .96 .92 .17
1993 .86 .90 .79 .93
Fully diluted earnings 1995 1.01 1.01 .95 .86
per common share 1994 .87 .85 .82 .17(1)
1993 .77 .80 .72 .83
Dividends per common 1995 .28 .28 .28 .28
share 1994 .25 .25 .25 .25
1993 .22 .22 .22 .20
Common stock 1995 57.50 53.00 45.75 44.25
price range: high 1994 43.88 40.50 43.75 39.50
1993 47.50 47.75 49.75 49.25
Common stock 1995 49.50 42.75 41.75 40.75
price range: low 1994 36.50 36.00 33.75 33.25
1993 37.63 42.25 39.75 39.50
</TABLE>
(1) The conversion of the convertible debentures into common
stock was anti-dilutive at March 31, 1994.
-21-
<PAGE> 59
Net income for the quarter ended March 31, 1994 includes an
after-tax charge of $4.7 million or $.69 per share associated with
claims and other costs arising from the Southern California
Earthquake. Also included in the quarter ended March 31, 1994 is
an income tax benefit of $1.2 million or $.18 per share
attributable to the pre-tax loss adjusted for the tax-exempt
investment income earned in the quarter.
The stock price range provided on the preceding page is based on
closing prices reported by the NASDAQ National Market System.
-22-
<PAGE> 60
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INDUSTRY OVERVIEW
Since 1988, the property and casualty reinsurance industry has experienced an
extended period of increased competition, prolonging soft market conditions.
Despite these conditions, premiums as reported by the RAA for domestic
reinsurers have increased from $11.3 billion to $18.7 billion, or 65%. Growth in
statutory surplus has also kept pace, primarily as a result of an increase in
new capital through public and other financings and trading gains on invested
assets. At the same time, the overall number of reinsurance companies has
declined. The remaining companies are generally larger, offer significantly more
capacity to ceding companies and have greater access to capital markets than in
the past. Prior to 1988, the reinsurance industry was more cyclical. Cycles were
affected by changes in the demand for reinsurance, which was influenced by
general economic conditions, the profitability of insurance companies, and
fluctuations in the supply of reinsurance, which itself is primarily a function
of the overall capacity of the reinsurance industry. Capacity is determined by
both the amount of surplus in the industry and the level of risk reinsurance
companies are prepared to assume. Despite the record level of catastrophe losses
since 1989 and the continued need to significantly strengthen prior years'
reserves for exposure to environmental and asbestos losses, there has been no
widespread cyclical change in the insurance and reinsurance environments. Ready
access to capital markets, the use of both traditional and non-traditional
reinsurance products and favorable investment markets have caused the
reinsurance industry to be less cyclical and allowed soft market conditions to
continue.
The operating results of property and casualty reinsurance companies are
inherently volatile and unpredictable. These results have become less
predictable because of latent risks, including environmental risks such as
asbestos and pollution liability, expanded theories of tort and liability which
have emerged over the last twenty years and the increasing frequency and
severity of catastrophes. While the insurance industry adopted policy changes
designed to exclude latent risks in 1986, these risks continue to result in
numerous claims to the reinsurance industry under insurance policies reinsured
in prior years. Trenwick America Reinsurance Corporation's (Trenwick America Re)
premium growth occurred in 1986 and later years. Consequently, Trenwick Group
Inc. (Trenwick) believes that its exposure to environmental risks is not
material in relation to its overall book of business. Other factors adding
volatility to the industry included changes in interest rates and market values
of investment portfolios.
<PAGE> 61
Since 1989, the record number of catastrophes has significantly increased the
demand for property catastrophe reinsurance. This period includes the three
worst catastrophe years in the history of the insurance industry, led by 1992
with a total of approximately $23 billion in insured losses. In response to the
demand for additional reinsurance protection and a temporary shortage in the
supply of capacity, new reinsurance companies were formed in 1993, primarily in
Bermuda, with capital in excess of $4 billion, effectively filling the capacity
shortfall. As a result of the availability of new capacity, rates for property
catastrophe reinsurance have declined from 1993 levels, but remain significantly
higher than in the years preceding 1992. The ongoing frequency and severity of
catastrophic events is expected to maintain property catastrophe pricing at
acceptable levels for the next several years. Through its strategic alliance
with PXRE Reinsurance Company (PXRE Re), a market leader in property catastrophe
reinsurance, the Company has benefited from the favorable conditions which have
persisted in both the U.S. and international property reinsurance markets.
Increased competition and inadequate original pricing levels in certain other
property business underwritten by the Company caused it to withdraw from certain
accounts in 1994, resulting in an overall reduction in property writings in
1995.
In 1992, Trenwick implemented several strategic initiatives which have enabled
Trenwick America Re to increase its premium writings during the current soft
market conditions. The more significant of these initiatives included increasing
the Company's marketing efforts and raising additional capital through a
convertible debt offering. Both of these enabled the Company to increase its
capacity for underwriting risks and positioned the Company to take advantage of
market opportunities. The third consecutive year of growth in 1995 was primarily
a result of increased participations in renewal business and, through increased
marketing efforts, the addition of some adequately priced new business.
Insurance and reinsurance companies have continued to re-evaluate their
operations. Business has shifted from larger unfocused multi-line insurance
companies to smaller specialty or regional carriers, which are generally more
reinsurance dependent. In 1995, as in each of the last four years, additional
reinsurance companies have ceased writing business or have been deactivated.
Insurance companies and their reinsurance brokers have placed increasing
importance on size, financial strength and quality of underwriting expertise in
their selection of reinsurers. In the fourth quarter of 1994, A. M. Best Company
upgraded Trenwick America Re's rating to A+ (Superior), the highest rating
assigned to any broker segment reinsurer. At December 31, 1995, Trenwick America
Re's statutory surplus was
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<PAGE> 62
$258 million, which positioned it among the top twelve U.S. broker market
reinsurance companies. Trenwick believes these factors will enable Trenwick
America Re to further increase its premium writings under current market
conditions.
RESULTS OF OPERATIONS
Premiums
In 1995, Trenwick America Re reported net premiums written of $197.2 million, a
41% increase over 1994. This compares to a 38% increase in net premiums written
in 1994 over 1993. The growth in premium volume in 1995 resulted from a 57%
increase in casualty business, which represents 84% of the Company's business,
partially offset by a 7% decrease in its property business, including property
catastrophe business written pursuant to the Company's strategic reinsurance
agreement with PXRE Re. The increase in casualty business is attributable to
some new business and increases in participations in renewal transactions as
well as growth in the original business written by several ceding companies over
the last three years. Growth opportunities for Trenwick America Re continue to
result from the redistribution of premium among insurers, consolidation by
buyers of their reinsurance programs with a core group of high-quality
reinsurers, expanded participations in existing business and acquisition of new
programs in specialty liability areas. New casualty business, representing 25%
of total premium writings in 1995, increased 72% over 1994. Continuing casualty
business, which consists of increases in participations in renewal transactions
and growth in the original business written by ceding companies, representing
59% of total premium writings in 1995, increased 53% in 1995 over 1994. Property
business, which represented 16% of total premium writings in 1995, declined as a
result of the non-renewal of certain national accounts during 1994. During 1995,
Trenwick America Re modified its process of estimating premiums from ceding
companies, resulting in an increase in accruals for unreported premiums written
at December 31, 1995 of $16.6 million. These estimated premiums did not
materially affect the Company's earnings in 1995.
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<PAGE> 63
The following table sets forth gross premiums written, net premiums written and
net premiums earned for the periods indicated:
<TABLE>
<CAPTION>
(in thousands) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Gross premiums written $214,336 $153,834 $113,659
Ceded premiums written (17,174) (14,199) (12,267)
-------- -------- --------
Net premiums written $197,162 $139,635 $101,392
Net premiums earned $177,394 $132,683 $ 93,180
</TABLE>
Underwriting Expenses
The combined ratio is one means of measuring the profitability of a property and
casualty reinsurance company. The combined ratio reflects underwriting
experience, but does not reflect income from investments or provisions for
income taxes. A combined ratio below 100% indicates profitable underwriting, and
a combined ratio exceeding 100% indicates unprofitable underwriting. In 1995,
Trenwick recorded an underwriting profit of $7.7 million compared to
underwriting losses in 1994 and 1993 of $4.2 million and $2.4 million,
respectively. Although a reinsurer may have unprofitable underwriting results,
the reinsurer may still be profitable because of investment income earned on its
accumulated invested assets.
The following table sets forth Trenwick's combined ratios and the components
thereof calculated on a GAAP basis for the periods indicated, together with
Trenwick America Re's combined ratios calculated on a statutory basis:
<TABLE>
<CAPTION>
1995 1994 1993
---- ----- -----
<S> <C> <C> <C>
Claims and claims expense ratio 63.7% 70.0% 68.5%
Expense ratio:
Policy acquisition expense ratio 24.8 25.5 23.0
Underwriting expense ratio 7.1 7.7 11.0
---- ----- -----
Total expense ratio 31.9 33.2 34.0
---- ----- -----
Combined ratio 95.6% 103.2% 102.5%
Trenwick America Re statutory
combined ratio 95.5% 103.1% 102.2%
</TABLE>
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<PAGE> 64
The most significant underwriting cost affecting a reinsurance company's
underwriting result is represented by its claims and claims expense ratio, which
is the ratio of incurred claims and claims adjustment expenses to net earned
premiums. The claims and claims expense ratio is a function of estimates of
claims associated with business written in the current period and changes in
estimates of claims on business written in prior periods.
As indicated in the preceding table, Trenwick's claims and claims expense ratio
improved in 1995 compared to 1994, reflecting the lack of any material adverse
impact from property catastrophe claims in 1995. In 1994, catastrophe claims
included $9.4 million from the Northridge Earthquake in Southern California,
which added 7.1 percentage points to the claims and claims expense ratio. The
effect of this catastrophe on the Company's claims ratio was mitigated by a
general improvement in its other property business. In 1995, Trenwick wrote
$32.2 million of property premiums, including $19.2 million of catastrophe
business associated with PXRE Re, compared to a total of $34.7 million,
including $18.1 million of catastrophe business associated with PXRE Re, in
1994. In 1993, Trenwick wrote $17.2 million of property premiums, including $6.2
million of catastrophe business associated with PXRE Re. In 1995, 1994 and 1993,
estimates of prior accident year claims were reduced by approximately $2.1
million, $450,000 and $11.3 million, respectively. The reduction over the last
three years primarily reflects the favorable development of Trenwick's casualty
business between accident years 1987 and 1993, partially offset by unfavorable
development in accident year 1994.
Trenwick's expense ratio, which is the ratio of policy acquisition costs and
underwriting expenses to net earned premiums as determined in accordance with
GAAP, decreased in 1995 to 31.9% from 33.2% in 1994 and 34.0% in 1993. Policy
acquisition costs, which include brokerage and ceding commissions, vary directly
with premium volume and are subject to changes in the mix of business. Trenwick
writes business on both an excess of loss and quota share basis. Quota share
business generally carries higher ceding commissions than excess of loss
business. In 1995, 1994 and 1993, quota share business remained relatively
constant at approximately 35% of total premium writings. Therefore, the policy
acquisition expense ratio fluctuated nominally during all three years.
Underwriting expenses, which generally do not vary with premium volume, were
approximately $12.6 million in 1995 and $10.3 million in 1994 and 1993.
Increased expenses in 1995 included costs associated with the addition of a five
person underwriting team in May. The underwriting expense ratio, however,
decreased .6 of a percentage point
5
<PAGE> 65
in 1995 compared to 1994 and 3.3 percentage points in 1994 compared to 1993 due
to the increase in premium writings. Trenwick America Re's statutory combined
ratios for 1995, 1994 and 1993, provided in the preceding table, were 15.6, 3.6
and 5.1 percentage points better, respectively, than the weighted average
statutory combined ratios for all reinsurance companies which reported their
results to the RAA in those periods. The statutory combined ratios for this
group of reinsurance companies in 1995, 1994 and 1993 were 111.1%, 106.7% and
107.3%, respectively. The statutory combined ratios as reported to the RAA by
those companies, including Trenwick America Re, which primarily accept business
from brokers, for 1995, 1994 and 1993 were 106.9%, 108.9% and 111.5%,
respectively.
Investment Income
Net investment income in 1995 of $36.8 million increased 9% compared to net
investment income of $33.9 in 1994. Net investment income in 1994 decreased 3%
compared to net investment income of $35.0 million in 1993. Pre-tax yields on
invested assets declined to 6.4% in 1995 from 6.5% in 1994 and 7.1% in 1993.
This decline resulted primarily from the reinvestment of approximately $56
million and $71 million of maturities in 1995 and 1994, respectively, at lower
interest rates. In 1995, maturities included $18 million in principal repayments
associated with Trenwick's portfolio of collateralized mortgage obligations
compared to $48.7 million in 1994. As a result of the stabilization of interest
rates, principal repayments are expected to remain similar in 1996. Investment
income is expected to increase in 1996 as the Company's invested asset base
grows along with an increase in operating cash flow. During 1995, the Company
sold approximately $21 million of U.S. government securities and reinvested the
proceeds primarily in structured securities in order to increase the overall
yield of the portfolio. Additionally, approximately $23 million of corporate and
tax-exempt securities were sold to reduce exposure to possible downgrade and
extension risk.
Operating Results
Trenwick's consolidated net income in 1995 was $29.8 million or $4.44 per share
compared to $20.3 million or $3.04 per share in 1994. Trenwick's consolidated
net income was $23.7 million or $3.48 per share in 1993. Fully diluted earnings
per share were $3.80 in 1995,
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<PAGE> 66
$2.78 in 1994 and $3.12 in 1993. Consolidated net income in 1994 included
after-tax claims and other expenses associated with the 1994 Northridge
Earthquake. Included in Trenwick's net income were after-tax realized investment
gains of $239,000 or $.04 per share in 1995, losses of $129,000 or $.02 per
share in 1994 and gains of $1,207,000 or $.18 per share in 1993.
INVESTMENTS
At December 31, 1995, Trenwick had investments and cash of $653.7 million, an
increase of 18% compared to investments and cash of $551.8 million at December
31, 1994. This increase resulted from cash provided by operations and the
increase in the unrealized appreciation of the Company's fixed-income and equity
portfolio, reduced by dividends paid to stockholders. All fixed maturity and
equity investments are classified as "available for sale" and reported at fair
value, with the unrealized gain or loss, net of tax, reported in a separate
component of stockholders' equity. Since December 31, 1994, the market value of
the Company's fixed-income and equity investments increased approximately $41.5
million. In 1994, Trenwick's investments and cash increased by $5.5 million or
approximately 10% when compared to 1993. That increase resulted from cash
provided by operations reduced by dividends paid to stockholders, the repurchase
of 190,000 shares of its common stock and the decline in the unrealized
appreciation of its fixed-income and equity portfolio.
The average maturity of fixed maturity investments at December 31, 1995 was 5.6
years compared to 5.5 years at December 31, 1994. During 1995, the proceeds from
sales and maturities of taxable and tax-exempt securities of $99.5 million,
together with cash provided by operations, were invested primarily in taxable
securities consisting of mortgage-backed securities of $44 million, asset-backed
securities of $28 million and corporate bonds of $10 million. The proceeds were
also used to invest in $78 million of tax-exempt securities. Generally,
fixed-income securities were invested in the average maturity range of between
two to twenty years. During 1994, the proceeds from sales and maturities of
taxable and tax-exempt securities of $158 million, together with cash provided
by operations, were invested primarily in taxable securities consisting of U.S.
government securities of $34 million, mortgage-backed securities of $63 million,
corporate bonds of $36 million and asset-backed securities of $5 million. The
proceeds were also used to invest in $48 million of tax-exempt securities and
$10 million in equities.
7
<PAGE> 67
In 1994, the Company amended its investment policy to require that certain
fixed-income investments be maintained in an amount equal to the discounted
present value of net reinsurance liabilities. The policy also required that
additional fixed-income investments be maintained in an amount equal to
approximately 10 percent of total reserve liabilities to ensure adequate
liquidity in the event of a significant change in estimated payments. At
December 31, 1995, these fixed-income investments had the same average maturity
of approximately 4.1 years as that established for such liabilities. Previously,
the Company maintained investments equal to the undiscounted reserve liabilities
without consideration for either investment or reserve cash flows.
LIQUIDITY AND CAPITAL RESOURCES
Trenwick is a holding company whose principal asset is its investment in the
common stock of Trenwick America Re. As a holding company, Trenwick's principal
source of funds consists of permissible dividends and tax allocation payments
from Trenwick America Re and investment income on Trenwick's fixed-income
portfolio. Trenwick's principal uses of cash are external dividends and
servicing its debt obligations. Trenwick America Re receives cash from premiums,
investment income and proceeds from sales and maturities of portfolio
investments and utilizes cash to pay claims, purchase its own reinsurance
protections, meet operating and capital expenses and purchase fixed-income
securities.
Cash provided by operating activities was $67.4 million, $60.8 million and $23.5
million in 1995, 1994 and 1993, respectively. The increase in cash provided by
operating activities in all three years was attributable to increases in net
premium writings. Cash provided by operations in 1993 was adversely affected by
claim payments for catastrophe losses due to Hurricanes Andrew and Iniki. As
evidenced by the increase over the last three years, Trenwick expects that its
cash provided by operating activities will be sufficient to meet its operating
and financing requirements in 1996 and its longer term operating needs.
At December 31, 1995, Trenwick's investments and cash of $653.7 million exceeded
total liabilities, including gross reserves for claims and claims expenses of
$411.9 million, by $73.6 million, compared to $12.8 million and $52.7 million at
December 31, 1994 and 1993, respectively. At December 31, 1995, 1994 and 1993,
Trenwick's net book value amounted to $240.8 million, $188.2 million and $206.8
million, respectively. Trenwick maintains a portion of its investment portfolio
in cash equivalents which are available in the event of unanticipated changes in
cash requirements. At December 31,1995, Trenwick's
8
<PAGE> 68
investments consisted principally of fixed-income securities, 94% of which are
rated Aa or better. Trenwick's general policy is to hold these securities to
maturity. However, there may be business reasons which would cause all or a
portion of these securities to be made available for sale prior to maturity;
therefore, Trenwick records these investments at fair value, with market value
fluctuations reflected in stockholders' equity, net of tax (see Note 1 to
Consolidated Financial Statements).
The ratio of net premiums written to surplus, the "surplus ratio," relates to
the amount of risk to which an insurer's or reinsurer's statutory capital is
exposed, as measured by the amount of premiums written in relation to such
surplus. Property and casualty reinsurance companies currently have a surplus
ratio of approximately 0.8:1. Trenwick America Re's surplus ratios for 1995,
1994 and 1993 were 0.8:1, 0.6:1 and 0.5:1 , respectively. Accordingly, Trenwick
has sufficient surplus capacity to write additional business without
significantly exceeding the industry average.
Trenwick America Re purchases reinsurance to reduce its exposure to catastrophe
claims and the frequency and severity of claims in all lines of business. In
1995, Trenwick America Re's reinsurance treaties consisted principally of an
excess of loss treaty for its facultative casualty business and two property
catastrophe reinsurance treaties. In addition, Trenwick America Re purchased an
annual aggregate excess of loss ratio treaty for casualty business effective
January 1, 1995. These coverages were renewed effective January 1, 1996.
REGULATORY MATTERS
The National Association of Insurance Commissioners (NAIC) has adopted
Risk-Based Capital (RBC) requirements for property and casualty insurance
companies to evaluate the adequacy of statutory capital and surplus in relation
to investment and insurance risks such as asset quality, asset and liability
matching, loss reserve adequacy and other business factors. The RBC formula is
used by state insurance regulators as an early warning tool to identify, for the
purpose of initiating regulatory action, insurance companies that potentially
are inadequately capitalized. In addition, the formula defines minimum capital
standards that supplement the system of low fixed minimum capital and surplus
requirements on a state-by-state basis. Regulatory compliance is determined by a
ratio of the enterprise's regulatory total adjusted capital to its authorized
control level RBC, as defined by the NAIC. Enterprises below specific trigger
points or ratios are classified within certain levels, each of which requires
specific corrective action. The ratios of Total Adjusted Capital to Authorized
Control Level RBC for Trenwick America Re exceeded all the RBC trigger points at
December 31, 1995. Trenwick believes its capital will continue to exceed these
RBC capital and surplus requirements for the foreseeable future.
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<PAGE> 69
Under Connecticut insurance laws and regulations, the maximum amount of
shareholder dividends or other distributions that Trenwick America Re may
declare or pay to the Company within any twelve month period, without the
permission of the Connecticut Insurance Commissioner, is limited to the greater
of 10% of policyholder surplus at December 31 of the preceding year, or 100% of
net income excluding realized capital gains, for the twelve month period ending
December 31 of the preceding year, both determined in accordance with statutory
accounting practices. For the purpose of computing the limitation, carryforward
provisions apply with respect to net income realized in the two previous
calendar years which has not already been paid out as dividends. The maximum
amount of dividends which could be paid by Trenwick America Re in 1996 without
regulatory approval would be $50,757,000.
10
<PAGE> 1
EXHIBIT 10.3
STOCK OPTION AGREEMENT
("B" OPTIONS)
AGREEMENT made this 9th day of May, 1986, between Trenwick Group,
Inc., a Delaware corporation, with offices at 21 Charles Street, Westport,
Connecticut 06880 ("Trenwick") and James F. Billett, Jr., an individual with a
business address at 21 Charles Street, Westport, Connecticut 06880 ("Billett").
WITNESSETH:
WHEREAS, Billett is the Chairman and Chief Executive Officer of
Trenwick and Trenwick wishes to grant to Billett, pursuant to a resolution
adopted by the Board of Directors, a stock option to purchase shares of the
Common Stock of Trenwick (formerly Class A Common Stock and after giving effect
to the fifteen -to-one stock split) on the terms and conditions set forth in
this Agreement.
WHEREAS, such stock option shall not qualify as an incentive
stock option under the Internal Revenue Code.
IT IS THEREFORE AGREED AS FOLLOWS:
<PAGE> 2
1. GRANT AND EXERCISE OF OPTION
1.1 Trenwick hereby grants Billett an option to purchase from
Trenwick 110,852 shares of Common Stock of Trenwick (the "Option Shares") for a
purchase price of $28.80 per share (the "Option"), which price represents at
least the fair market value of the shares as of the date of this Agreement (the
"Grant Date"), determined in good faith by the Board of Directors of Trenwick.
1.2 The Option shall be vested and may be exercised according to
the following vesting schedule:
<TABLE>
<CAPTION>
After Grant Amount of Option
Date Exercisable
----------- ----------------
<S> <C>
One Year 20%
Two Years 40%
Three Years 60%
Four Years 80%
Five Years 100%
</TABLE>
The Board of Directors of Trenwick or a committee designated thereby shall have
the right to accelerate the time periods for the vesting and exercise of the
Option.
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<PAGE> 3
1.3 The Option shall expire 10 years from the Grant Date, i.e.,
May 9, 1996.
1.4 Except as provide in Article 1.5, if Billett for any reason
ceases to be a full-time executive officer of Trenwick (whether by voluntary or
involuntary termination), Billett shall have thirty (30) days to give notice of
exercise of all or a part of the Option which was vested and exercisable as of
the date of termination. Any part of the Option for which notice of exercise is
not given as required by this Article 1.4 shall expire and cease to exist.
1.5 If Billett shall die while still a full time salaried
employee of Trenwick, the amount of the Option vested and exercisable shall be
equal to the amount vested and exercisable as of the next anniversary ("Next
Anniversary") of the Grant Date and Billett's representative shall have the
greater of (i) thirty (30) days after the Next Anniversary or (ii) six (6)
months from the date of Billett's death to give notice of exercise of up to that
amount of the Option which would be vested and exercisable as of the Next
Anniversary. Any part of the Option which is not so vested and exercisable and
any part
-3-
<PAGE> 4
of the Option which is so vested and exercisable but for which notice of
exercise is not given as required by this Article 1.5, shall expire and cease to
exist.
1.6 Billett or his representative may exercise the Option by
notice to Trenwick within a reasonable time prior to the date of intended
exercise of the Option. Such notice shall describe the Option exercised and
state the number of Option Shares as to which it is exercised. Any exercise of
the Option shall be effective on the date specified in the notice, provided that
the full purchase price or an effective Exercise Notice has been tendered with
the notice of exercise. Payment of the purchase price shall be made in cash
(including check, bank draft or money order); by the delivery of full shares
of Trenwick Common Stock, valued at their Fair Market Value, provided that
Billett has held such shares for at least six (6) months; by promissory note
(containing such terms and conditions as the Board of Directors or a committee
designated thereby may in its discretion determine); or by any combination
thereof. Billett may pay any taxes which Trenwick is required to collect or
withhold with respect to the issue or transfer of Common Stock underlying the
Option by the delivery to Trenwick of full shares
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<PAGE> 5
of Trenwick Common Stock, valued at their Fair Market Value, provided that
Billett has held such shares for at least six (6) months, or by directing
Trenwick to withhold full shares of Trenwick Common Stock, valued at their Fair
Market Value, from the shares issuable upon exercise of the Option. For
purposes of this Section,
(i) the term `Exercise Notice' shall mean a written notice
from Billett to Trenwick which (A) includes Billett's irrevocable election to
exercise all or any portion of the Option and irrevocable direction to Trenwick
to deliver the common stock certificate(s) to be issued upon such exercise
directly to a "broker" or "dealer" (within the meaning of Section 3(a) of the
Securities Exchange Act of 1934, as amended from time to time), and (B) includes
or is accompanied by Billett's irrevocable instructions to the broker or dealer
to (x) promptly sell a sufficient number of shares of such common stock, or loan
Billett a sufficient amount of money, to pay the exercise price for the Option
and fund any related withholding tax obligations, and (y) promptly remit such
sums to Trenwick upon the broker's or dealer's receipt of the certificate(s);
and
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<PAGE> 6
(ii) the term `Fair Market Value' shall mean the closing
market price per share of Trenwick's Common Stock on the Nasdaq National Market
on the business day immediately prior to the date of the exercise of the Option
or, if such stock was not traded on that day, on the next preceding day on which
it was traded.
2. SUCCESSORS AND ASSIGNS
2.1 This Agreement shall be binding on, and shall inure to the benefit
of, Trenwick and Billett and their respective heirs, legal representatives,
successors and assigns; provided, however, that Billett may not pledge,
hypothecate or otherwise encumber or permit any liens to attach to the Option
granted to Billett under this Agreement nor shall he sell, transfer or dispose
of any of his interest in the Option.
3. ARBITRATION
3.1 In the event of any dispute between Billett and Trenwick, such
dispute shall be settled in New York, New York, in accordance with the rules
then obtaining of the American
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<PAGE> 7
Arbitration Association, and judgment upon the award rendered may be entered in
any court having jurisdiction thereof.
4. AGREEMENT TO PERFORM NECESSARY ACTS
4.1 Each party to this Agreement agrees to perform any further acts
and execute and deliver any documents that may be reasonably necessary to carry
out the provisions of this Agreement.
5. AMENDMENTS
5.1 The provisions of this Agreement may be waived, altered, amended,
or repealed, in whole or in part, only on the written consent of all parties to
the Agreement.
6. VALIDITY OF AGREEMENT
6.1 It is intended that each section of this Agreement shall be viewed
as separate and divisible, and in the event that any section shall be held
invalid, the remaining sections shall continue in full force and effect.
-7-
<PAGE> 8
7. NOTICE
7.1 All notices, requests, demands and other communications under this
Agreement shall be in writing and shall be deemed to have been duly given on the
date of service if served by telex, cable or personally on the party to whom
notice is given, or within five (5) days after mailing, if mailed to the party
to whom notice is to be given, by first class mail (airmail, if international),
registered or certified, postage prepaid, and properly addressed to the party,
if to Trenwick or Billett, at the address set forth on the first page of this
Agreement or any other address that Trenwick or Billett may designate by written
notice to the other party.
8. GOVERNING LAW
8.1 This Agreement shall be construed in accordance with the laws of
the State of Delaware.
9. COUNTERPARTS
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<PAGE> 9
9.1 This Agreement may be executed in one or more counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
JAMES F. BILLETT, JR.
TRENWICK GROUP INC.
-9-
<PAGE> 1
FIRST LAYER PROPERTY CATASTROPHE EXCESS OF LOSS RETROCESSIONAL
AGREEMENT AR 1570
EXHIBIT 10.28
FINAL PLACEMENT SLIP
COMPANY: Trenwick America Reinsurance Corporation
Connecticut
INCEPTION: Losses occurring during the 12-month term beginning at 12:01
a.m. Eastern Standard Time on January 1, 1990.
EFFECTIVE: Losses occurring on or after 12:01 a.m. Eastern Standard Time
on and will remain in full force and effect until 12:01 a.m.
Eastern Standard Time on January 1, 1996.
BUSINESS
COVERED: All Business classified by the Retrocedent as Property
Reinsurance Businees Assumed, including Property Portions of
Reinsurance Business underwritten and Classified by the
retrocedent as Multi-Line bu
EXCLUSIONS: As per attached.
TERRITORY: United States, District of Columbia, Canada and incidental
locations elsewhere.
RETENTION
AND LIMIT: $6,000,000 excess of $4,000,000 ultimate net loss any one
loss occurrence.
REINSTATEMENT: One full Reinstatement with additional premium at 100% as to
time, pro-rata as to amount.
LOSS EXPENSES: Included within Retrocessionaires' limit of liability.
PREMIUM: Annual minimum and deposit premium of $1,680,000, payable in
equal semi-annual installments of $840,000 on January 1 and
July 1, 1995. Adjustable at 90% of subject net written
premium (excluding reinstatement premium, if any, received by
the Retrocedent) for business classified by the Retrocedent
as catastrophe business and 7.16% of subject net written
premium (excluding reinstatement premium, if any, received by
the Retrocedent) for all other business.
OTHER
REINSURANCE: Company permitted to purchase Facultative reinsurance and to
deduct the premium thereof; Company permitted to purchase
other Treaty reinsurance, and to deduct the premium thereof
if it inures to the benefit of this Agreement.
Page 1 of 7
<PAGE> 2
Trenwick America Reinsurance Company First Layer Property Catastrophe
Excess of Loss Retrocessional
WARRANTY: 5% retained net by the Company. Two original risk warranty.
FUNDING OF
RESERVES: Letters of Credit Required from unauthorized Reinsurers for
outstanding losses and expenses and recoverables (excluding
IBNR).
REPORTS AND
REMITTANCES: Quarterly reports detailing written premium and losses.
OTHER
PROVISIONS: Extended Termination Clause
Net Retained Liability Clause
80% ECO Clause
80% XPL Clause (Domestic Reinsurers only)
Loss Notices and Settlements Clause
Salvage and Subrogation Clause
Insolvency Clause
Delays, Errors or Omissions Clause
Amendments Clause
Access to Records Clause
Arbitration Clause
Taxes Clause
Federal Excise Tax Clause (as applicable)
Currency Clause
Offset Clause (This Agreement Only)
Service of Suit Clause (NMA 1998)
Definitions Clause (to include: "Original Contracts",
"Loss Occurrence", "Ultimate Net Loss", "Net Written
Premium" as used in this Agreement will mean 100% of the
gross written premium on Property business and 5% of the
gross written premium on Workers Compensation and Employers
Liability business both the subject of and accounted for
during the term of this Agreement, less returned premiums,
and less premiums paid for reinsurance, recoveries under
which inure to the benefit of this Agreement.)
Aon Re Inc. Intermediary Clause
and others as existing
WORDING: As existing.
Page 2 of 7
<PAGE> 3
Trenwick America Reinsurance Company First Layer Property Catastrophe
Excess of Loss Retrocessional
Each Reinsurer subscribing to the coverage evidenced by this Final Placement
Slip and named in it has bound itself only for its own part and not for any
other and only for its proportion of the total coverage evidenced by this Final
Placement Slip. Written evidence of the acceptance of this reinsurance by each
Reinsurer is available at your request.
<TABLE>
<CAPTION>
DOMESTIC COMPANIES PARTICIPATION
<S> <C>
Continental Casualty Company 33.3334%
Prudential Reinsurance Company 2.0000%
Through St. Paul Reinsurance Management Corporation
St. Paul Fire and Marine Insurance Company 2.0000%
TOTAL DOMESTIC COMPANIES 37.3334%
NON-DOMESTIC COMPANIES
Global Capital Reinsurance, Ltd. 16.6666%
TOTAL NON-DOMESTIC COMPANIES 16.6666%
LONDON MARKETS
Through Ballantyne, McKean & Sullivan Limited
Kemper Reinsurance London Limited 1.5300%
Lloyd's Syndicate #0205 HGJ 1.5300%
Lloyd's Syndicate #0435 DPM 9.5400%
Lloyd's Syndicate #0570 GNR 1.5300%
Lloyd's Syndicate #0727 SAM 1.9100%
Lloyd's Syndicate #0780 BFC 3.8100%
Lloyd's Syndicate #0958 GSC 2.2900%
Lloyd's Syndicate #1096 DJN 0.5700%
Lloyd's Syndicate #1141 JEM 1.1400%
Sphere Drake Insurance Public Limited Company 3.8100%
Unionamerica Insurance Company Limited 3.8100%
Zurich Re (UK) Limited 9.5300%
TOTAL LONDON MARKETS 41.0000%
TOTAL ALL PARTICIPANTS 95.0000%
</TABLE>
Page 3 of 7
<PAGE> 4
Trenwick America Reinsurance Company First Layer Property Catastrophe
Excess of Loss Retrocessional
EXCLUSIONS
No reinsurance indemnity will be afforded under this Agreement for:
A. Loss or damage directly caused by war and/or civil war, but this
exclusion will not apply to business written in accordance with the
Market War and/or Civil War Exclusion Agreement.
B. Any loss or liability accruing to the Retrocedent directly or indirectl
and whether as insurer or reinsurer from any pool of insurers or
reinsurers formed for the purposes of covering Atomic or Nuclear Energy
Risks.
C. Nuclear risks as defined in the following:
1. Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance
(U.S.A.) attached to this Agreement, or as may be revised
hereafter by the Lloyd's Underwriters' Non-Marine Association..
2. Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance
(Canada) attached to this Agreement, or as may be revised
hereafter by the Lloyd's Underwriters' Non-Marine Association.
3. Nuclear Energy Risks Exclusion Clause (Reinsurance) (Worldwide
Excluding U.S.A. & Canada) attached to this Agreement, or as may
be revised hereafter by the Lloyd's Underwriters' Non-Marine
Association.
4. Nuclear Incident Exclusion Clause - Physical Damage and Liability
(Boiler and Machinery Policies ) - Reinsurance (U.S.A. and
Canada) attached to this Agreement, or as may be revised
hereafter by the Lloyd's Underwriters' Non-Marine Association.
D. Financial Guarantee, Insolvency, or Credit Business.
E. Fidelity and Surety.
F. Reinsurance of Coastal Pools when written as such.
G. Life business, other than Accidental Death and Dismemberment.
H. Aviation, Aerospace and Satellite business.
I. Casualty business, except as set forth in the Coverage Article.
J. Hail damage to growing or standing crops.
K. Banking or Funding Plans.
Page 4 of 7
<PAGE> 5
Trenwick America Reinsurance Company First Layer Property Catastrophe
Excess of Loss Retrocessional
EXCLUSIONS
(CONT'D)
L. Target Risks as excluded in the Retrocedent's original contracts or the
original policies of the Retrocedent's reinsureds.
M. Loss or liability excluded by the "Insolvency Funds Exclusion Clause
attached to this Agreement."
N. Reinsurance Assumed on an Excess of Loss and/or Pro Rata Reinsurance
basis issued in the name of and for the account of a Lloyd's Syndicate
or of an Insurance or Reinsurance Company, whether such liability is
accepted either directly or under any form of Reinsurance from other
Insurers and/or Reinsurers, and all such liability is excluded from the
protection of this Reinsurance and cannot be taken into account in
arriving at the amount in the excess of which this Reinsurance attaches
or the ultimate net loss sustained by the Retrocedent.
O. All losses sustained by the Retrocedent howsoever and wheresoever
arising including all Business Interruption, Consequential Loss and/or
other contingent losses proximately caused by a peril insured in respect
of the Retrocedent's exposures from:
1. All marine business when written as such; however, not to exclude
such exposures if they emanate from a multi-line insurance
contract and/or policy.
2. All Offshore exposures arising from business of any description
connected with the oil and/or gas and/or sulphur and/or uranium
exploration and production industries in all their phases and
including all associated support and/or service industries.
"Offshore" will be defined as:
(i) That area encompassing locations covered by oceans or seas
in which the water ebbs and flows
and/or
(ii) Other navigable waters or waterways which will mean any
water which is in fact navigable by ships or vessels,
whether or not the tide ebbs and flows there, and whether
or not there is a public right of navigation on that
water.
Page 5 of 7
<PAGE> 6
Trenwick America Reinsurance Company First Layer Property Catastrophe
Excess of Loss Retrocessional
EXCLUSIONS
(CONT'D)
P. Losses in respect to overhead transmission and distribution lines and
their supporting structures other than those on or within 500 feet of
the insured premises; however, public utilities extension and/or
suppliers extension and/or Contingent Business Interruption coverages
are not subject to this exclusion, provided that these are not part of a
Transmitter's or Distributor's policy.
The exclusions set forth above will not apply where the Retrocedent is obliged
to provide coverage by reason of membership in any state plan, pool, facility,
joint underwriting association or similar involuntary participation.
The Retrocedent may submit to the Retrocessionaires, for special acceptance
hereunder, business not covered by this Agreement. If said business is accepted
by the Retrocessionaires, it will be subject to the terms of this Agreement,
except as such terms are modified by such acceptance.
Page 6 of 7
<PAGE> 7
Trenwick America Reinsurance Company First Layer Property Catastrophe
Excess of Loss Retrocessional
Aon Re Inc. has established the necessary internal procedures to ensure the
substantial compliance with all applicable sections of Regulation 98 of the New
York State Insurance Department.
Acceptance of this Final Placement Slip is to be regarded as written evidence
that Aon Re Inc. is in compliance with Section 32.1 (a) of Regulation 98.
In accordance with your instructions we have placed reinsurance with the
Reinsurer(s) listed hereon, subject to the terms and conditions hereinabove
stated. We ask that you promptly advise us if the terms, conditions, or
Reinsurer(s) vary in any respect from your instructions. Aon Re Inc. will not be
responsible for the financial or other obligations of any Reinsurer(s). Should
you desire financial information regarding any of the Reinsurer(s) listed
hereon, please contact us and we will furnish it.
Assuming that you find everything in order, please indicate your acceptance and
approval by signing and returning this Final Placement Slip to Aon Re Inc.
AON RE INC.
------------------------------------
Daniel E. Dolan
Executive Vice President
Acceptance:
-----------------------
Date:
-----------------------------
Page 7 of 7
<PAGE> 1
SPECIAL CATASTROPHE EXCESS OF LOSS REINSURANCE
AGREEMENT ARA 6240 EXHIBIT 10.29
FINAL PLACEMENT SLIP
RETROCEDENT: TRENWICK AMERICA REINSURANCE CORPORATION (8880)
Stamford, Connecticut
EFFECTIVE: Losses occurring on or after 12:01 a.m. Eastern Standard Time on
January 1, 1994 and will remain in full force and effect until
12:01 a.m. Eastern Standard Time on January 1, 1997.
CANCELLATION: By either party 60 days prior to any January 1 anniversary.
BUSINESS
COVERED: All business classified by the retrocedent as Property
Reinsurance Business Assumed, including the Property portions of
reinsurance business underwritten and classified by the
retrocedent as Multi-Line business and Workers Compensation
and/or Employers Liability Losses arising from one or more of the
following perils: Fire, Lightning, Explosion, Structural
Collapse, Windstorm, Hail, Flood, Seismic Activity, Volcanic
Eruption, Collision, Riots and Strikes, Civil Commotion, or
Malicious Mischief, and any physical damage and/or consequential
loss coverage contingent thereon effected by an insured on behalf
of another party.
EXCLUSIONS: As per attached.
TERRITORY: United States, District of Columbia, Canada and incidental
locations elsewhere.
LIMIT: $8,000,000 subject to no more than $4,000,000 per year. Covering
the following:
<TABLE>
<CAPTION>
LAYER NET
----- ---
<S> <C>
100% $2,000,000 Excess of $2,000,000 $2,000,000
25% $8,000,000 Excess of $4,000,000 $2,000,000
----------
$4,000,000
</TABLE>
LOSS EXPENSE: Included within limits hereof.
PREMIUM: Year 1 Deposit Premium $1,450,000
Payable Quarterly In Advance.
Page 1 of 8
<PAGE> 2
TRENWICK AMERICA REINSURANCE CORPORATION Special Catastrophe Excess of Loss
ARA # 6240
PREMIUM
(CONT'D): Year 2 Deposit Premium $1,450,000
Payable Quarterly In Advance.
Additional Premium 33% of incurred losses
from year 1 payable at January 1, 1995.
Year 3 Deposit Premium $1,450,000
Payable Quarterly In Advance.
Additional Premium 100% of incurred losses
subject to maximum of $2,544,500 for the
entire 3 year term payable at January 1,
1996.
In no event will the total premium paid as Deposit Premium
or Additional Premiums exceed $6,894,500 for the 3 year
term.
PROFIT
COMMISSION: 100% of balance calculated as follows:
80% of Deposit Premium plus 100% of Additional Premiums
less paid losses.
The Profit Commission shall be calculated and payable by
January 31st of the year following termination. In the
event of a loss in the year proceeding the adjustment, the
profit commission shall be calculated and payable by March
31st, based on incurred losses known at that time.
FUNDING: Non-Admitted reinsurers hereon agree Letters of Credit
(Citibank N.A. Scheme) in respect of known and reported losses
only but cash O.C.A.'s for Canadian Dollars as required by the
reinsured (Excluding I.B.N.R.).
OTHER
PROVISIONS: Extended Termination Clause
Net Retained Liability
80% ECO Clause
80% ELJ Clause (Domestic Reinsurers only)
Loss Notices and Settlements Clause
Salvage and Subrogation
Service of Suite Clause
Offset Clause
Insolvency Clause
Page 2 of 8
<PAGE> 3
TRENWICK AMERICA REINSURANCE CORPORATION Special Catastrophe Excess of Loss
ARA # 6240
OTHER
PROVISIONS
(CONT'D): Errors and Omissions Clause
Amendments Clause
Access to Records Clause
Arbitration Clause
Taxes Clause
Federal Excise Tax Clause (as applicable)
Currency Clause
Aon Re Inc., Intermediary Clause
and others as expiring
Definitions Clause (to include):
"Original Contracts"
"Loss Occurrence"
"Ultimate Net Loss"
WORDING: To follow Property Catastrophe Excess of Loss.
Page 3 of 8
<PAGE> 4
TRENWICK AMERICA REINSURANCE CORPORATION Special Catastrophe Excess of Loss
ARA # 6240
Each Reinsurer subscribing to the coverage evidenced by this Final Placement
Slip and named in it has bound itself only for its own part and not for any
other and only for its proportion of the total coverage evidenced by this Final
Placement Slip. Written evidence of the acceptance of this reinsurance by each
Reinsurer is available at your request.
<TABLE>
<CAPTION>
REINSURED WITH PERCENTAGE
- -------------- ----------
<S> <C>
DOMESTIC COMPANIES
Zurich Reinsurance Centre (9985) 62.50%
69040029
Kemper Reinsurance Company (5120) 37.50%
600490015
TOTAL PLACEMENT 100.00%
</TABLE>
Page 4 of 8
<PAGE> 5
TRENWICK AMERICA REINSURANCE CORPORATION Special Catastrophe Excess of Loss
ARA # 6240
EXCLUSIONS
No reinsurance indemnity will be afforded under this Agreement for:
A. Loss or damage directly caused by war and/or civil war, but this
exclusion will not apply to business written in accordance with the
Market War and/or Civil War Exclusion Agreement.
B. Any loss or liability accruing to the Retrocedent directly or indirectly
and whether as insurer or reinsurer from any pool of insurers or
reinsurers formed for the purposes of covering Atomic or Nuclear Energy
Risks.
C. Nuclear risks as defined in the following:
1. Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance
(U.S.A.), or as may be revised hereafter by the N.M.A.
2. Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance
(Canada), or as may be revised hereafter by the N.M.A.
3. Nuclear Energy Risks Exclusion Clause (Reinsurance) (Worldwide
Excluding U.S.A & Canada), or as may be revised hereafter by the
N.M.A.
4. Nuclear Incident Exclusion Clause - Physical Damage and Liability
(Boiler and Machinery Policies) - Reinsurance (U.S.A. and
Canada), or as may be revised hereafter by the N.M.A.
D. Financial Guarantee, Insolvency, or Credit Business.
E. Fidelity and Surety.
F. Reinsurance of Coastal Pools when written as such.
G. Life business, other than Accidental Death and Dismemberment.
H. Aviation, Aerospace and Satellite business.
I. Casualty business, except as set forth in the Coverage Article.
J. Hail damage to growing or standing crops.
Page 5 of 8
<PAGE> 6
TRENWICK AMERICA REINSURANCE CORPORATION Special Catastrophe Excess of Loss
ARA # 6240
EXCLUSIONS (CONT'D):
K. Banking or Funding Plans.
L. Target Risks as excluded in the Retrocedent's original contracts or the
original policies of the Retrocedent's reinsureds.
M. Loss or liability excluded by the "Insolvency Funds Exclusion Clause."
N. Reinsurance assumed on an Excess of Loss and/or Pro Rata Reinsurance
basis issued in the name of and for the account of a Lloyd's Syndicate
or of an Insurance or Reinsurance Company, whether such liability is
accepted either directly or under any form of Reinsurance from other
Insurers and/or Reinsurers, and all such liability is excluded from the
protection of this Reinsurance and cannot be taken into account in
arriving at the amount in the excess of which this Reinsurance attaches.
The Retrocedent will be the sole judge as to which Insurance or
Reinsurance Companies come within the scope of this definition.
O. All losses sustained by the Retrocedent howsoever and wheresoever
arising including all Business Interruption, Consequential Loss and/or
other contingent losses proximately caused by a peril insured in respect
of the Retrocedent's exposures from:
1. All marine business when written as such, however not to exclude
such exposures if they emanate from a multi-line insurance
contract and/or policy.
2. All Offshore exposures arising from business of any description
connected with the oil and/or gas and/or sulphur and/or uranium
exploration and production industries in all their phrases and
including all associated support and/or service industries.
"Offshore" will be defined as:
(i) That area encompassing locations covered by oceans or seas
in which the water ebbs and flows
and/or
(ii) Other navigable waters or waterways with will mean any
water which is in fact navigable by ships or vessels,
whether or not the tide ebbs and flows there, and whether
or not there is a public right of navigations on that
water.
Page 6 of 8
<PAGE> 7
TRENWICK AMERICA REINSURANCE CORPORATION Special Catastrophe Excess of Loss
ARA # 6240
EXCLUSIONS (CONT'D):
P. Losses in respect of overhead transmission and distribution lines and
their supporting structures other than those on or within 500 feet of
the insured premises; however, public utilities extension and/or
suppliers extension and/or contingent business interruption coverages
are not subject to this exclusion, provided that these are not part of a
transmitters' or distributors' policy.
Page 7 of 8
<PAGE> 8
TRENWICK AMERICA REINSURANCE CORPORATION Special Catastrophe Excess of Loss
ARA # 6240
Aon Re Inc. has established the necessary internal procedures to ensure the
substantial compliance with all applicable sections of Regulation 98 of the New
York State Insurance Department.
Acceptance of this Final Placement Slip is to be regarded as written evidence
that Aon Re Inc. is in compliance with Section 32.1 (a) of Regulation 98.
In accordance with your instructions we have placed reinsurance with the
Reinsurer(s) listed hereon, subject to the terms and conditions hereinabove
stated. We ask that you promptly advise us if the terms, conditions, or
Reinsurer(s) vary in any respect from your instructions. Aon Re Inc. will not be
responsible for the financial or other obligations of any Reinsurer(s). Should
you desire financial information regarding any of the Reinsurer(s) listed
hereon, please contact us and we will furnish it.
Assuming that you find everything in order, please indicate your acceptance and
approval by signing and returning this Final Placement Slip to Aon Re Inc.
AON RE INC.
------------------------------------
Daniel E. Dolan
Executive Vice President
Acceptance:
------------------------
Date:
-----------------------------
Page 8 of 8
<PAGE> 1
PAGE 1
- --------------------------------------------------------------------------------
Page 1 of 4
EXHIBIT 10.30
DATE: February 16, 1995
OUR FILE NO: 2800-TOR-1
COVER NOTE NO: 15541
(Cancelling and Replacing Cover Note
No.: 15346)
Trenwick Inc.
Metro Center
One Station Place
STAMFORD, Connecticut
06902
Gentlemen:
We are in receipt of confirmation that the following reinsurance has been
effected for your account:
REINSURED: TRENWICK AMERICA REINSURANCE CORPORATION
TYPE: FIRST CASUALTY RETROCESSIONAL EXCESS OF LOSS REINSURANCE
AGREEMENT
PERIOD: 1st January, 1995 resigning of a continuous contract attaching
1st January, 1987 subject to 120 days prior notice of
cancellation to be effective at 31st December any year.
Risks Attaching Basis.
5 year Sunset Clause in respect of General Liability usiness
written on an occurrence basis but only with espect to claims
previously reported to Trenwick (i.e. 5 ears from first report to
Trenwick).
Reinsured to have the option to take back the in force business
at date of cancellation with return of unearned premium(s)
hereunder.
CLASS: All business classified by the Reinsured as Casualty Facultative
business.
Excluding:
1. Business classified by the Reinsured as Surety.
2. Business classified by the Reinsured as Financial
Guarantee and Insolvency.
3. Business classified by the Reinsured as Credit Insurance.
4. Business classified by the Reinsured as Directors and
Officers Liability.
<PAGE> 2
PAGE 2
- --------------------------------------------------------------------------------
Cover Note No.: 15451 Page 2 of 4
CLASS: (Continued)
5. Business classified by the Reinsured as Securities Exchange
Act Liability.
6. Business classified by the Reinsured as Aviation.
7. Business classified by the Reinsured as Ocean Marine.
8. Class I Railroads.
9. War Risk.
10. Nuclear Incident.
11. Surplus Relief.
12. Funding Plans.
13. Aggregate Stop Loss business.
TERRITORIAL
SCOPE: Wheresoever arising and following form with the Reinsured's
policies.
REINSURANCE
LIMIT: $1,500,000 each casualty line, each occurrence and/or in the
aggregate where applicable, each original insured
EXCESS OF
$500,000 each casualty line, each occurrence and/or in the
aggregate where applicable, each original insured.
Subject however to the Reinsured, during each annual period
retaining net hereon losses, otherwise recoverable hereunder, up
to an amount of 3.0% of the subject Gross Net Written Premium
Income.
AGGREGATE
CAP: Losses for the 1995 contract year will be capped at an Earned to
Incurred Loss Ratio of 275% or $10,000,000 whichever the greater.
REINSURANCE
RATE: 17% of Gross Net Written Premium Income.
Rate to apply to the actual subject Gross Net Written
Premium reported each quarter.
<PAGE> 3
PAGE 3
- --------------------------------------------------------------------------------
Cover Note No.: 15541 Page 3 of 4
REINSURANCE
PREMIUM: Annual Deposit Premium of $918,000 payable in quarterly
instalments in arrears as follows:
First Quarter - $183,600
Second Quarter - $183,600
Third Quarter - $275,400
Fourth Quarter - $275,400
Minimum Premium waived.
DEDUCTIONS: 1% Federal Excise Tax (where applicable).
ACCOUNTING: Reinsured to report its actual subject Gross Net Written Premium
Income for each quarter within 60 days from the end of each
quarter. If the premium due exceeds the Deposit Premium, then the
difference shall be paid forthwith.
PREMIUM AND
LOSS RESERVE: All Retrocessionaires, who are not admitted in the State of New
York, agree to provide a clean and irrevocable Letter of Credit
in respect of loss reserves and unearned premiums as required by
the Reinsured and I.B.N.R., as agreed by both parties.
GENERAL
CONDITIONS: Risk and Limit Profile to be supplied to Leading
Retrocessionaires. Reinsured permitted to purchase facultative
reinsurance to protect the gross line held against retrocessional
protection.
Ultimate Net Loss Clause.
Net Retained Lines Clause.
Pro Rata Claims Cost Clause.
Notice of Loss and Loss Settlements Clause.
Offset Clause.
Currency Clause.
Access to Records Clause.
Amendments and Alterations Clause.
Extra Contractual Obligations Clause.
Insolvency Clause.
Arbitration Clause.
Service of Suit Clause.
Guy Carpenter Intermediary Clause.
WORDING: As before and/or to be agreed.
INFORMATION: Estimated Subject Premium for 1995: $6,000,000
<PAGE> 4
PAGE 4
- --------------------------------------------------------------------------------
Cover Note No.: 15541 Page 4 of 4
REINSURANCE ACCEPTED BY:
<TABLE>
<S> <C>
Kemper Reinsurance Company 35.00%
Hannover Rueckversicherungs-Aktiengesellschaft 80%)
Eisen und Stahl Rueckversicherungs-Aktiengesellschaft 20%) 10.00%
-----
45.00% of Limit Hereon
</TABLE>
EXECUTIVE VICE PRESIDENT
<PAGE> 1
EXHIBIT 12.0
TRENWICK GROUP, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NET INCOME $29,841 $20,282 $23,739 $18,539 $18,598
INCOME TAXES 8,572 2,753 4,220 925 3,387
------ ------ ------ ------ ------
SUBTOTAL 38,413 23,035 27,959 19,464 21,985
FIXED CHARGES:
INTEREST EXPENSE 6,496 6,469 6,454 1,668 1,595
DEFERRED DEBT INSURANCE COST 276 260 244 0 0
OFFICE SPACE AND EQUIPMENT RENTAL 309 316 251 240 280
----- ----- ---- ----- -----
TOTAL FIXED CHARGES 7,081 7,045 6,949 1,908 1,875
EARNINGS BEFORE INCOME TAXES AND
FIXED CHARGES $45,494 $30,080 $34,908 $21,372 $23,860
======= ======= ======= ======= =======
RATIO OF EARNINGS TO FIXED CHARGES 6.4 4.3 5.0 11.2 12.7
</TABLE>
<PAGE> 1
ORGANIZATIONAL CHART
-----------------------------------
Trenwick Group Inc.
ID No. 06-1152790
-----------------------------------
100% ----------------------------------- 100%
- ----------------------------------- -----------------------------------
Trenwick Services, Ltd. Trenwick America Corporation
ID No. 06-1087672
- ----------------------------------- -----------------------------------
100% 100%
- ----------------------------------- -----------------------------------
Trenwick America Reinsurance
Trenwick Guaranty Insurance Corporation ID No. 06-1117063
Company, Ltd. Domicile -- Connecticut
NAIC Code - 34894
- ----------------------------------- -----------------------------------
<PAGE> 1
Exhibit 23.0
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-09245, No. 33-09248, No. 33-19833, No. 33-31115,
No. 33-68112, No 33-83092 and No. 33-83094) of our report dated January 31, 1996
appearing on page 41 of the 1995 Annual Report to Stockholders of Trenwick Group
Inc., which is incorporated by reference in this Annual Report on Form 10-K for
the year ended December 31, 1995. We also consent to the incorporation by
reference of our report dated January 31, 1996 on the Financial Statement
Schedules, which appears on page S-3 of this Form 10-K.
Price Waterhouse LLP
New York, New York
March 29, 1996
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
1995 FOR TRENWICK GROUP INC.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U. S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 633,525
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 13,419
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 646,944
<CASH> 6,760
<RECOVER-REINSURE> 68,449<F1>
<DEFERRED-ACQUISITION> 16,725
<TOTAL-ASSETS> 820,930
<POLICY-LOSSES> 411,874
<UNEARNED-PREMIUMS> 56,050
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 103,500
0
0
<COMMON> 659
<OTHER-SE> 240,117
<TOTAL-LIABILITY-AND-EQUITY> 820,930
177,394
<INVESTMENT-INCOME> 36,828
<INVESTMENT-GAINS> 368
<OTHER-INCOME> 0
<BENEFITS> 113,068
<UNDERWRITING-AMORTIZATION> 44,024
<UNDERWRITING-OTHER> 19,085
<INCOME-PRETAX> 38,413
<INCOME-TAX> 8,572
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,841
<EPS-PRIMARY> 4.44
<EPS-DILUTED> 3.80
<RESERVE-OPEN> 294,008<F2>
<PROVISION-CURRENT> 115,133
<PROVISION-PRIOR> (2,065)
<PAYMENTS-CURRENT> (18,271)
<PAYMENTS-PRIOR> (61,804)
<RESERVE-CLOSE> 327,001<F3>
<CUMULATIVE-DEFICIENCY> 23,666<F4>
<FN>
<F1>REPRESENTS NET REINSURANCE RECOVERABLE BALANCES AFTER OFFSET OF FUNDS HELD AND
REINSURANCE BALANCES PAYABLE.
<F2>= REFLECTS NET RESERVE AT BEGINNING OF YEAR FOR UNPAID CLAIMS.
<F3>= REFLECTS NET RESERVE AT END OF YEAR FOR UNPAID CLAIMS.
<F4>= REFLECTS GROSS REDUNDANCY IN RESTATED RESERVES.
</FN>
</TABLE>
