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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the quarterly period ended June 30, 2002.
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ________________ .
Commission file number 0-31967
TRENWICK AMERICA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 06-1087672
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Canterbury Green
Stamford, Connecticut 06901
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: 203-353-5500
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 the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Shares Outstanding
Description of Class as of August 13, 2002
-------------------- ---------------------
Common Stock - $1.00 par value 100
The registrant meets the conditions set forth in General Instruction H (1)(a)
and (b) of Form 10-Q and is therefore filing this Form 10-Q in the reduced
disclosure format.
TRENWICK AMERICA CORPORATION
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
Page
----
ITEM 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheet
June 30, 2002 and December 31, 2001 ............................... 1
Consolidated Statement of Operations, Comprehensive
Income and Changes in Common Stockholder's Equity
Three and Six Months Ended June 30, 2002 and 2001 ................. 2
Consolidated Statement of Cash Flows
Three and Six Months Ended June 30, 2002 and 2001 ................. 3
Notes to Unaudited Consolidated Financial Statements .............. 4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................... 8
PART II - OTHER INFORMATION
ITEM 1. Legal proceedings ................................................. 20
ITEM 2. Changes in Securities and Use of Proceeds ......................... 20
ITEM 3. Defaults Upon Senior Securities ................................... 20
ITEM 4. Submission of Matters to a Vote of Security Holders ............... 20
ITEM 5. Other Information ................................................. 20
ITEM 6. Exhibits and Reports on Form 8-K .................................. 21
Signatures ................................................................ 22
-i-
Trenwick America Corporation
Consolidated Balance Sheet
(Amounts expressed in thousands of United States dollars)
June 30, 2002 and December 31, 2001
(Unaudited)
2002 2001
----------- ----------
ASSETS
Debt securities available for sale, at fair value $ 1,037,871 $1,054,518
Equity securities, at fair value 29,617 24,164
Cash and cash equivalents 125,721 128,522
Accrued investment income 12,190 12,685
Premiums receivable 200,010 159,721
Reinsurance recoverable balances, net 587,781 544,202
Prepaid reinsurance premiums 116,087 83,980
Deferred policy acquisition costs 56,061 45,403
Due from parents and affiliates 80,316 68,260
Net deferred income taxes 66,121 65,757
Goodwill -- 52,119
Other assets 120,154 89,774
----------- ----------
Total assets $ 2,431,929 $2,329,105
=========== ==========
LIABILITIES
Unpaid claims and claims expenses $ 1,472,332 $1,412,104
Unearned premium income 318,003 239,004
Reinsurance balances payable 49,639 42,424
Indebtedness 90,648 288,878
Due to affiliates 49,087 50,434
Other liabilities 48,522 33,939
----------- ----------
Total liabilities 2,028,231 2,066,783
----------- ----------
MINORITY INTEREST
Mandatorily redeemable preferred capital securities of
subsidiary trust holding solely junior subordinated
debentures of Trenwick America Corporation 87,002 86,973
----------- ----------
COMMON STOCKHOLDER'S EQUITY
Common stock and additional paid in capital 298,877 99,353
Retained earnings (accumulated deficit) (11,140) 57,104
Accumulated other comprehensive income 28,959 18,892
----------- ----------
Total common stockholder's equity 316,696 175,349
----------- ----------
Total liabilities, minority interest and common stockholder's equity $ 2,431,929 $2,329,105
=========== ==========
The accompanying notes are an integral part of these statements.
-1-
Trenwick America Corporation
Consolidated Statement of Operations, Comprehensive Income and
Changes in Common Stockholder's Equity (Unaudited)
(Amounts expressed in thousands of United States dollars)
Three and Six Months Ended June 30, 2002 and 2001
Three Months Six Months
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
REVENUES
Net premiums earned $ 118,354 $ 87,214 $ 217,849 $ 161,136
Net investment income 14,476 18,311 29,332 35,760
Net realized investment gains (losses) (1,342) 252 (1,522) 2,356
Other income 1,255 789 3,462 1,618
--------- --------- --------- ---------
Total revenues 132,743 106,566 249,121 200,870
--------- --------- --------- ---------
EXPENSES
Claims and claims expenses incurred 103,088 77,038 180,290 128,266
Policy acquisition costs 34,959 25,104 66,333 50,703
Underwriting expenses 4,638 4,277 9,759 8,378
General and administrative expenses 731 864 1,421 1,660
Interest expense and subsidiary preferred share dividends 7,664 7,670 14,790 16,173
Foreign currency losses 2,312 632 1,332 983
--------- --------- --------- ---------
Total expenses 153,392 115,585 273,925 206,163
--------- --------- --------- ---------
Loss before income taxes and cumulative effect of
change in accounting principle (20,649) (9,019) (24,804) (5,293)
Applicable income taxes (benefit) (7,360) (1,755) (8,680) (4,777)
--------- --------- --------- ---------
Loss before cumulative effect of change in
accounting principle (13,289) (7,264) (16,124) (516)
Cumulative effect of change in accounting principle -- -- (52,119) --
--------- --------- --------- ---------
Net loss $ (13,289) $ (7,264) $ (68,243) $ (516)
========= ========= ========= =========
COMPREHENSIVE INCOME (LOSS):
Net loss $ (13,289) $ (7,264) $ (68,243) $ (516)
--------- --------- --------- ---------
Other comprehensive income (loss):
Net unrealized investment gains (losses) 13,846 (4,056) 9,477 2,657
Foreign currency translation adjustments 604 384 590 (1,535)
--------- --------- --------- ---------
Total other comprehensive income (loss) 14,450 (3,672) 10,067 1,122
--------- --------- --------- ---------
Comprehensive income (loss) $ 1,161 $ (10,936) $ (58,176) $ 606
========= ========= ========= =========
CHANGES IN COMMON
STOCKHOLDER'S EQUITY:
Common stockholder's equity, beginning of period $ 116,012 $ 209,973 $ 175,349 $ 200,907
Net capital transactions with affiliates 199,523 (11,641) 199,523 (12,109)
Adjustment to paid in capital related to -- --
Trenwick/LaSalle business combination -- -- -- (2,008)
Comprehensive income (loss) 1,161 (10,936) (58,176) 606
--------- --------- --------- ---------
Common stockholder's equity, end of period $ 316,696 $ 187,396 $ 316,696 $ 187,396
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
-2-
Trenwick America Corporation
Consolidated Statement of Cash Flows (Unaudited)
(Amounts expressed in thousands of United States dollars)
Three and Six Months Ended June 30, 2002 and 2001
Three Months Six Months
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
CASH FROM (FOR) OPERATING ACTIVITIES $ 618 $ (12,079) $ (14,330) $ (45,666)
--------- --------- --------- ---------
INVESTING ACTIVITIES:
Purchases of debt securities (33,590) (137,088) (129,113) (417,666)
Sales of debt securities 44,135 82,034 90,211 343,718
Maturities of debt securities 23,260 4,469 62,385 19,533
Purchases of equity securities -- (85) -- (1,435)
Sales of equity securities -- 9,133 -- 81,081
Effect of exchange rate translation on cash (404) 5 (192) (204)
Additions to premises and equipment (1,112) (502) (3,172) (690)
--------- --------- --------- ---------
Cash from (for) investing activities 32,289 (42,034) 20,119 24,337
--------- --------- --------- ---------
FINANCING ACTIVITIES:
Issuance (repayment) of indebtedness (197,841) 14,000 (197,841) 14,000
Indebtedness issuance costs paid -- -- (88) --
Loans to affiliates (6,884) (19,900) (10,184) (21,062)
Capital contributions received 199,523 5,099 199,523 5,099
--------- --------- --------- ---------
Cash for financing activities (5,202) (801) (8,590) (1,963)
--------- --------- --------- ---------
Change in cash and cash equivalents 27,705 (54,914) (2,801) (23,292)
Cash and cash equivalents, beginning of period 98,016 165,017 128,522 133,395
--------- --------- --------- ---------
Cash and cash equivalents, end of period $ 125,721 $ 110,103 $ 125,721 $ 110,103
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
-3-
TRENWICK AMERICA CORPORATION
Notes to Unaudited Consolidated Financial Statements
(Amounts expressed in thousands of United States dollars except share data)
Three and Six Months Ended June 30, 2002 and 2001
Note 1 Organization and Basis of Presentation
Organization
Trenwick America Corporation ("Trenwick America") is a United States holding
company whose principal subsidiaries underwrite specialty insurance and
reinsurance. Trenwick America's ultimate parent is Trenwick Group Ltd., which is
a publicly traded Bermuda holding company.
Basis of Presentation
The interim financial statements include the accounts of Trenwick America and
its subsidiaries after elimination of significant intercompany accounts and
transactions. Certain items in prior financial statements have been reclassified
to conform to current presentation.
These interim financial statements have been prepared in conformity with
accounting principles that are generally accepted in the United States of
America, sometimes referred to as U.S. GAAP. To prepare these interim financial
statements, management is required 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, as well as the
reported amounts of revenues and expenses during the reporting periods. Actual
amounts may differ from these estimates.
The interim financial statements are unaudited; however, in the opinion of
management, the interim financial statements include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair statement of the
results for interim periods. These interim statements should be read in
conjunction with the audited financial statements and related notes included in
the Annual Report on Form 10-K of Trenwick America for the year ended December
31, 2001.
Note 2 Segment Information
The following tables present business segment financial information for Trenwick
America at June 30, 2002 and December 31, 2001 and for the three and six months
ended June 30, 2002 and 2001:
Total assets: 2002 2001
---------- ----------
Treaty reinsurance $1,665,591 $1,640,154
Specialty program insurance 691,960 579,254
Unallocated 74,378 109,697
---------- ----------
Total assets $2,431,929 $2,329,105
========== ==========
Three Months Six Months
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Total revenues:
Treaty reinsurance $ 96,365 $ 81,007 $183,090 $153,215
Specialty program insurance 36,260 23,152 65,780 42,723
Unallocated 118 2,407 251 4,932
-------- -------- -------- --------
Total revenues $132,743 $106,566 $249,121 $200,870
======== ======== ======== ========
-4-
Three Months Six Months
------------------- --------------------
2002 2001 2002 2001
-------- ------- -------- --------
Net income (loss):
Treaty reinsurance $(13,054) $ 4,520 $(11,858) $ 14,251
Specialty program insurance 6,470 (8,302) 7,642 (6,510)
Unallocated interest expense
preferred share dividends (7,510) (7,509) (14,629) (15,967)
Other unallocated 805 4,027 2,721 7,710
Change in accounting principle -- -- (52,119) --
-------- ------- -------- --------
Net income (loss) $(13,289) $(7,264) $(68,243) $ (516)
======== ======= ======== ========
Transactions between operating segments have been eliminated in consolidation.
Note 3 Underwriting Activities
The components of premiums written and earned for the three and six months ended
June 30, 2002 and 2001 are as follows:
Three Months Six Months
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Assumed premiums written $ 100,061 $ 79,511 $ 203,049 $ 162,108
Direct premiums written 97,989 74,898 200,123 143,489
--------- --------- --------- ---------
Gross premiums written 198,050 154,409 403,172 305,597
Ceded premiums written (65,674) (57,152) (138,800) (109,874)
--------- --------- --------- ---------
Net premiums written $ 132,376 $ 97,257 $ 264,372 $ 195,723
========= ========= ========= =========
Assumed premiums earned $ 94,247 $ 75,917 $ 174,362 $ 139,224
Direct premiums earned 81,724 57,203 157,130 110,412
--------- --------- --------- ---------
Gross premiums earned 175,971 133,120 331,492 249,636
Ceded premiums earned (57,617) (45,906) (113,643) (88,500)
--------- --------- --------- ---------
Net premiums earned $ 118,354 $ 87,214 $ 217,849 $ 161,136
========= ========= ========= =========
Note 4 Income Taxation
As of June 30, 2002, Trenwick America has not recorded a valuation allowance
against the U.S. net operating losses because presently, in management's
judgment, it is more likely than not that these amounts will be realized from
future operations. Management's judgment is based on its assessment of business
plans and related projections of future taxable income that reflect significant
assumptions about increased premium volume and improved rates and profitability.
Such assumptions may be adversely affected by market conditions, changes in
financial strength ratings,
-5-
as determined by nationally recognized security ratings organization, for
Trenwick America's operating subsidiaries or Trenwick America's ability to
secure sufficient funding to support its underwriting operations. In the event
that, in management's judgment, it is no longer more likely than not that its
net operating losses will be realized from future operations, Trenwick America
will be required to record a valuation allowance against its deferred income tax
asset.
Note 5 Accounting Standards
Effective January 1, 2002, Trenwick America adopted a new Financial Accounting
Standards Board statement which amended the accounting for goodwill and other
intangible assets. This new statement suspended systematic goodwill amortization
and required that Trenwick America's goodwill balance be tested for impairment
under either market value or cash flow tests. As a result of these tests, it was
determined that the goodwill was impaired and the entire goodwill balance of
$52,119 was charged to operations as of January 1, 2002 as a cumulative effect
of a change in accounting principle.
The following table presents the pro forma effect on net income (loss) for the
quarter and six months ended June 30, 2001 had this accounting standard been
effective January 1, 2001 as compared to net loss for the quarter and six months
ended June 30, 2002.
Three Months Six Months
------------------- -----------------
2002 2001 2002 2001
-------- ------- -------- -----
Reported net income (loss) $(13,289) $(7,264) $(68,243) $(516)
Add back: goodwill amortization -- (323) -- (646)
Cumulative effect of change
in accounting for goodwill -- -- (52,119) --
-------- ------- -------- -----
Adjusted net income (loss) $(13,289) $(6,941) $(16,124) $ 130
======== ======= ======== =====
Note 6 Credit Agreement
On September 27, 2000, Trenwick Group Ltd., LaSalle Re Holdings Limited ,
LaSalle Re Limited and Trenwick Group Inc. completed a business combination
whereby the common shareholders of LaSalle Re Holdings Limited, Trenwick Group
Ltd., Trenwick Group Inc. and the minority shareholders of LaSalle Re Limited
exchanged their shares on a one-for-one basis for shares of Trenwick Group Ltd.,
(the "Trenwick/LaSalle business combination").
Concurrent with the Trenwick/LaSalle business combination in September of 2000,
Trenwick America and Trenwick Holdings Limited, Trenwick Group Ltd.'s U.K.
holding company, entered into an amended and restated $490,000 credit agreement
with various lending institutions. The credit agreement consisted of both a
$260,000 revolving credit facility and a $230,000 credit facility. The revolving
credit facility was subsequently converted into a four-year term loan and repaid
on June 17, 2002. The letter of credit facility may only be used to support the
Lloyd's syndicate participations of Trenwick Group Ltd.'s subsidiaries. As of
June 30, 2002, $230,000 of letters of credit remain outstanding under the credit
facility. The letter of credit facility is scheduled to expire in November 2002.
In the event that Trenwick Group Ltd. is unable to renew the current letter of
credit facility, obtain a replacement letter of credit facility, post sufficient
collateral to support its Lloyd's underwriting activities or obtain an
alternative form of Lloyd's capital support, it will
-6-
be required to reduce or cease its underwriting activities at Lloyd's for the
2003 year of account.
On April 12, 2002, Trenwick Group Ltd., its subsidiaries and financial
institutions holding a majority of the outstanding indebtedness under the credit
facility executed an amendment to its revolving credit facility. The amendment
required Trenwick Group Ltd. to pledge its shares of LaSalle Re Holdings Limited
and LaSalle Re Limited in favor of the lenders under the credit facility. In
addition, the amendment revised the financial covenants relating to interest
coverage and tangible net worth (each as defined by the financial covenants in
the credit agreement).
The amendment also increased the applicable margin on the interest paid by
Trenwick Group Ltd. by 1% and added an additional .5% fee payable by Trenwick
Group Ltd. in the event the letters of credit outstanding are not secured in
accordance with the following schedule; September 30, 2002, 40%; June 30, 2003,
60%; and June 30, 2004, 80%.
The credit agreement contains general covenants and restrictions as well as
financial covenants relating to, among other things, Trenwick Group Ltd.'s
minimum interest coverage, debt to capital leverage, minimum earned surplus,
maintenance of a minimum A.M. Best Company rating of A- and tangible net worth.
As of June 30, 2002, Trenwick Group Ltd. was in compliance with the credit
agreement covenants.
If Trenwick Group Ltd.is unable to meet the credit agreement's financial
covenants, it may be required to collateralize the outstanding letters of credit
issued under the credit agreement through additional financing, asset sales,
subsidiary dividends or similar transactions.
Trenwick Group Ltd.'s ability to refinance its existing letter of credit
obligations or raise additional capital is dependent upon several factors,
including financial conditions with respect to both the equity and debt markets
and the ratings of its securities as established by the rating agencies.
Following Trenwick Group Ltd.'s claims and claims expense liability reserve
increase in the second quarter of 2001 and the losses it sustained in the
September 11th terrorist attacks, its senior debt ratings were downgraded by
Standard & Poor's Corporation to BBB- and by Moody's Investors Service to Ba2.
On August 2, 2002, Standard & Poor's Corporation further lowered Trenwick Group
Ltd.'s senior debt ratings to BB. Trenwick Group Ltd.'s ability to refinance its
outstanding letter of credit obligations, as well as the cost of such
borrowings, could be adversely affected by these ratings downgrades or if its
ratings were downgraded further.
Should Trenwick Group Ltd.'s subsidiaries be unable to meet any letter of credit
reimbursement obligations as they fall due, and such repayments are not
refinanced, Trenwick Group Ltd. would become liable for such repayments under
the terms of guarantees under the credit agreement. No liability for any such
amounts has been reflected in Trenwick Group Ltd.'s financial statements.
Because Trenwick America, Trenwick Holdings Ltd. and Trenwick Group Ltd. are
holding companies, their principal source of funds consists of permissible
dividends, tax allocation payments and other statutorily permissible payments
from their respective operating subsidiaries. As a result of recent losses
incurred by Trenwick Group Ltd.'s operating subsidiaries, their cash
distribution capacities have been significantly reduced.
-7-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion highlights material factors affecting results of the
operations of Trenwick America Corporation ("Trenwick America") for the three
and six months ended June 30, 2002 and 2001. This discussion and analysis should
be read in conjunction with the unaudited interim financial statements and notes
thereto of Trenwick America contained in this filing as well as in conjunction
with the Annual Report on Form 10-K of Trenwick America for the year ended
December 31, 2001, including the audited financial statements and notes thereto
as well as the discussions of critical accounting policies. Trenwick America
meets the conditions set forth in the General Instructions (H) (I) (a) and (b)
of Form 10-Q and is therefore omitting certain information otherwise required by
Item 2.
Overview
Trenwick America is a Delaware holding company headquartered in Stamford,
Connecticut whose principal subsidiaries underwrite specialty insurance and
reinsurance.
Trenwick America operates through the following two principal operating
platforms:
- - Trenwick America Reinsurance Corporation underwrites treaty reinsurance on
United States property and casualty risks, including United States
reinsurance business previously written by Chartwell Re Corporation
subsidiaries; and
- - Canterbury Financial Group Inc. underwrites specialty insurance through
its operating subsidiaries, Chartwell Insurance Company, The Insurance
Corporation of New York and Dakota Specialty Insurance Company.
All of Trenwick America's principal operating subsidiaries are rated A-
(Excellent) by A.M. Best Company and have been assigned the following financial
strength ratings by Standard and Poor's:
Trenwick America Reinsurance Corporation A-
Canterbury Financial Group:
The Insurance Corporation of New York BBB
Dakota Specialty Insurance Company BBB
Chartwell Insurance Company BB
These ratings are based upon factors that may be of concern to policy or
contract holders, agents and intermediaries, but may not reflect the
considerations applicable to an equity investment in a reinsurance or insurance
company. A change in any such rating is at the discretion of the respective
rating agencies.
Results of Operations - Three Months Ended June 30, 2002 and 2001
2002 2001 Change
-------- -------- --------
(in thousands)
Underwriting loss $(24,331) $(19,205) $ (5,126)
Net investment income 14,476 18,311 (3,835)
Interest expense and subsidiary preferred
share dividends (7,664) (7,670) 6
General and administrative expenses (731) (864) 133
Foreign currency losses (2,312) (632) (1,680)
Other income, net 1,255 789 466
-------- -------- --------
Pre-tax operating income (loss) (19,307) (9,271) (10,036)
Applicable income taxes (benefit) (6,890) (1,843) (5,047)
-------- -------- --------
Operating income (loss) (12,417) (7,428) (4,989)
Net realized investment gains (losses),
net of income taxes (872) 164 (1,036)
-------- -------- --------
Net loss $(13,289) $ (7,264) $ (6,025)
======== ======== ========
-8-
The operating loss of $12.4 million in the three months ended June 30, 2002
represented an $5.0 million increase from an operating loss of $7.4 million
recorded in the three months ended June 30, 2001.
Underwriting loss
Trenwick America produced an underwriting loss of $24.3 million in the second
quarter of 2002 compared to an underwriting loss of $19.2 million in the second
quarter of 2001. Details of underwriting income and loss are produced below:
2002 2001 Change
--------- --------- --------
(in thousands)
Net premiums earned $ 118,354 $ 87,214 $ 31,140
--------- --------- --------
Claims and claims expenses incurred 103,088 77,038 26,050
Acquisition costs and underwriting expenses 39,597 29,381 10,216
--------- --------- --------
Total expenses 142,685 106,419 36,266
--------- --------- --------
Net underwriting loss $ (24,331) $ (19,205) $ (5,126)
========= ========= ========
Loss ratio 87.1% 88.3% (1.2)%
Underwriting expense ratio 33.5% 33.7% (0.2)%
Combined ratio 120.6% 122.0% (1.4)%
The underwriting loss of $24.3 million in the second quarter of 2002 represented
a $5.1 million decrease compared to the same period in 2001. The 2002
underwriting loss includes $20.0 million of losses incurred under a stop loss
agreement between Trenwick America Reinsurance Corporation and its affiliate,
Trenwick International Limited. The 2001 underwriting loss includes $32.2
million of loss reserve strengthening arising from business written in prior
years.
The decrease in the combined ratio in 2002 compared to 2001 relates primarily to
an increase in premium volume offset by the intercompany stop loss cessions as
noted above in 2002, as well as the 2001 loss reserve strengthening as noted
above.
Premiums written
Gross premiums written for 2002 were $198.0 million compared to $154.4 million
for the three months ended June 30, 2001, an increase of $43.6 million or 28.2%.
Details of gross premiums written are provided below:
2002 2001 Change
-------- -------- -------
(in thousands)
Treaty reinsurance $100,061 $ 79,478 $20,583
Specialty program insurance 97,989 74,931 23,058
-------- -------- -------
Gross premiums written $198,050 $154,409 $43,641
======== ======== =======
Treaty reinsurance increased $20.6 million from the second quarter of 2001
primarily due to increasing rates on renewal treaties. Specialty program
insurance gross premiums written
-9-
increased from $74.9 million for the second quarter of 2001 to $97.9 million for
the second quarter of 2002 due to the addition of new programs as well as rate
increases on new and renewal policies attributed to improving market conditions.
Premiums earned
2002 2001 Change
--------- --------- --------
(in thousands)
Gross premiums written $ 198,050 $ 154,409 $ 43,641
Change in gross unearned premiums (22,079) (21,289) (790)
--------- --------- --------
Gross premiums earned 175,971 133,120 42,851
--------- --------- --------
Gross premiums ceded (65,674) (57,152) (8,522)
Change in ceded unearned premiums 8,057 11,246 (3,189)
--------- --------- --------
Ceded premiums earned (57,617) (45,906) (11,711)
--------- --------- --------
Net premiums earned $ 118,354 $ 87,214 $ 31,140
========= ========= ========
Gross premiums ceded for the three months ended June 30, 2002 were $65.6 million
compared to $57.1 million for the same period in 2001. The increase in gross
premiums ceded of $8.5 million was commensurate with the increase in gross
premiums written.
Net premiums earned for the three months ended June 30, 2002 were $118.4 million
compared to $87.2 million for 2001. The increase in net premiums earned is
attributable to the increase in premiums written and rate increases as noted
above.
Claims and claims expenses
Claims and claims expenses for the three months ended June 30, 2002 were $103.1
million, an increase of $26.1 million compared to claims and claims expenses of
$77.0 million for 2001. The increase in claims and claims expenses in 2002 is
consistent with the increase in premium volume.
Claims and claims expenses for the six months ended June 30, 2002 and 2001
included losses incurred of $20.0 million and $10.5 million, respectively, under
a stop loss agreement between Trenwick America Reinsurance Corporation and
Trenwick International Limited. Trenwick America Reinsurance Corporation and
Trenwick International Limited are in the process of commuting the stop loss
agreement effective January 1, 2002. The commutation is subject to approval by
regulatory authorities having jurisdiction over Trenwick America Reinsurance
Corporation and Trenwick International Limited. If approved in its present form,
the effect of the commutation will be to reverse losses recorded in 2002.
Underwriting expenses
2002 2001 Change
------- ------- --------
(in thousands)
Policy acquisition costs $34,959 $25,104 $ 9,855
Underwriting expenses 4,638 4,277 361
------- ------- --------
Total underwriting expenses $39,597 $29,381 $ 10,216
======= ======= ========
Underwriting expense ratio 33.5% 33.7% (0.2)%
======= ======= ========
Total underwriting expenses, comprising policy acquisition costs and
underwriting expenses, for 2002 increased by $10.2 million compared to
underwriting expenses for the three months ended June 30, 2001. The increase was
mainly attributable to the increases in premiums written in 2002. Underwriting
expenses for the three months ended June 30, 2002 as a percentage of earned
-10-
premium was 3.9%, a decrease of 1.0% from 4.9% for the same period in 2001.
Total underwriting expenses as a percentage of net premiums earned, or the
underwriting expense ratio, were 33.5% for the three months ended June 30, 2002
a slight decrease from 33.7% for the same period in 2001.
Net Investment Income
2002 2001 Change
----------- ----------- --------
(in thousands)
Average invested assets $ 1,165,425 $ 1,193,634 $(28,209)
Average annualized yields 6.01% 7.28% (1.27)%
Investment income $ 17,514 $ 21,688 $ (4,174)
Investment expenses (3,038) (3,377) 339
----------- ----------- --------
Net investment income $ 14,476 $ 18,311 $ (3,835)
=========== =========== ========
Net investment income for the three months ended June 30, 2002 was $14.4 million
compared to $18.3 million for the same period in 2001. The decrease in net
investment income in 2002 is the result of an overall decline in fixed income
market yields compared to 2001.
Interest Expense and Subsidiary Preferred Share Dividends
Interest expense and subsidiary preferred share dividends was $7.7 million for
both the 2002 and 2001 quarters.
Foreign Currency Losses
Trenwick America recorded foreign currency losses, of $2.3 million for the three
months ended June 30, 2002, compared to foreign currency losses of $0.6 million
for the same period in 2001, primarily due to the increase in the value of the
British pound relative to the U.S. dollar in the second quarter of 2002.
Other Income, Net
Other income, net increased to $1.3 million for the second quarter of 2002, a
$0.5 million increase over the same period in 2001, primarily a result of an
increase in equity in earnings of managing general agencies through which
Trenwick America underwrites its specialty program insurance business.
Non-operating Income and Expenses
Net realized losses on investments, net of income taxes, were $0.9 million
during the three months ended June 30, 2002, compared to net realized gains of
$0.2 million for the three months ended June 30, 2001.
Results of Operations - Six Months Ended June 30, 2002 and 2001
2002 2001 Change
-------- -------- --------
(in thousands)
Underwriting loss $(38,533) $(26,211) $(12,322)
Net investment income 29,332 35,760 (6,428)
Interest expense and subsidiary
preferred share dividends (14,790) (16,173) 1,383
General and administrative expenses (1,421) (1,660) 239
Foreign currency losses (1,332) (983) (349)
Other income, net 3,462 1,618 1,844
-------- -------- --------
Pre-tax operating loss (23,282) (7,649) (15,633)
Applicable income taxes (benefit) (8,147) (5,602) (2,545)
-------- -------- --------
Operating loss (15,135) (2,047) (13,088)
Net realized investment gains (losses),
net of income taxes (989) 1,531 (2,520)
Cumulative effect of change in accounting principle (52,119) -- (52,119)
-------- -------- --------
Net loss $(68,243) $ (516) $(67,727)
======== ======== ========
-11-
The operating loss of $15.1 million in the six months ended June 30, 2002
represented a $13.1 million increase from the operating loss of $2.0 million
recorded in the six months ended June 30, 2001.
Underwriting loss
Trenwick America produced an underwriting loss of $38.5 million in the first
half of 2002 compared to an underwriting loss of $26.2 million in the first half
of 2001. Details of underwriting income and loss follow:
2002 2001 Change
--------- --------- --------
(in thousands)
Net premiums earned $ 217,849 $ 161,136 $ 56,713
--------- --------- --------
Claims and claims expenses incurred 180,290 128,266 52,024
Acquisition costs and underwriting expenses 76,092 59,081 17,011
--------- --------- --------
Total expenses 256,382 187,347 69,035
--------- --------- --------
Net underwriting loss $ (38,533) $ (26,211) $(12,322)
========= ========= ========
Loss ratio 82.8% 79.6% (3.2)%
Underwriting expense ratio 34.9% 36.7% (1.8)%
Combined ratio 117.7% 116.3% (1.4)%
The underwriting loss of $38.5 million in the first half of 2002 represented a
$12.3 million increase compared to the first half of 2001. The decline in both
the underwriting loss and combined ratio in 2002 compared to 2001 were both
primarily the result of improved underwriting results, offset by $20.0 million
of losses incurred under a stop loss agreement between Trenwick America
Reinsurance Corporation and its affiliate Trenwick International Limited.
The increase in the combined ratio in the first half of 2002 compared to the
first half of 2001 resulted mainly from the decrease in losses as previously
noted.
Premiums written
Gross premiums written for the six months ended June 30, 2002 were $403.2
million compared to $305.6 million for the six months ended June 30, 2001, an
increase of $97.6 million or 31.9%. Details of gross premiums written are
provided below:
2002 2001 Change
-------- -------- -------
(in thousands)
Treaty reinsurance $203,049 $162,108 $40,941
Specialty program insurance 200,123 143,489 56,634
-------- -------- -------
Gross premiums written $403,172 $305,597 $97,575
======== ======== =======
Treaty reinsurance premiums increased $40.9 million from the six months of 2001,
primarily due to increasing rates on renewal treaties.
-12-
Specialty program insurance gross premiums written increased from $143.5 million
for the first six months of 2001 to $200.1 million for the first six months of
2002 due to increased volume on two of its larger programs combined with the
addition of four new programs in 2002.
Premiums earned
Net premiums earned for the six months ended June 30, 2002 were $217.8 million
compared to $161.1 million for 2001. Details of premiums earned are provided
below:
2002 2001 Change
--------- --------- --------
(in thousands)
Gross premiums written $ 403,172 $ 305,597 $ 97,575
Change in gross unearned premiums (71,680) (55,961) (15,719)
--------- --------- --------
Gross premiums earned 331,492 249,636 81,856
--------- --------- --------
Gross premiums ceded (138,800) (109,874) (28,926)
Change in ceded unearned premiums 25,157 21,374 3,783
--------- --------- --------
Ceded premiums earned (113,643) (88,500) (25,143)
--------- --------- --------
Net premiums earned $ 217,849 $ 161,136 $ 56,713
========= ========= ========
Gross premiums ceded for the six months ended June 30, 2002 were $138.8 million
compared to $109.9 million for the same period in 2001. The increase in gross
premiums ceded of $28.9 million was commensurate with the increase in gross
premiums written.
Claims and claims expenses
Claims and claims expenses for the six months ended June 30, 2002 were $180.3
million, an increase of $52.0 million compared to claims and claims expenses of
$128.3 million for 2001. The increase in claims and claims expenses in 2002 is a
result of the increase in premiums combined with deterioration in indicated loss
ratios for prior accident years on the treaty reinsurance and specialty
insurance segments of approximately $26.1 million and $3.2 million,
respectively.
Claims and claims expenses for the six months ended June 30, 2002 and 2001
included losses incurred of $20.0 million and $10.5 million, respectively under
a stop loss agreement between Trenwick America Reinsurance Corporation and
Trenwick International Limited. Trenwick America Reinsurance Corporation and
Trenwick International Limited are in the process of commuting the stop loss
agreement effective January 1, 2002. The commutation is subject to approval by
regulatory authorities having jurisdiction over Trenwick America Reinsurance
Corporation and Trenwick International Limited. If approved in its present form,
the effect of the commutation will be to reverse losses recorded in 2002.
Underwriting expenses
2002 2001 Change
------- ------- --------
(in thousands)
Policy acquisition costs $66,333 $50,703 $ 15,630
Underwriting expenses 9,759 8,378 1,381
------- ------- --------
Total underwriting expenses $76,092 $59,081 $ 17,011
======= ======= ========
Underwriting expense ratio 34.9% 36.7% (1.8)%
======= ======= ========
Total underwriting expenses, comprising policy acquisition costs and
underwriting expenses, for the six months ended June 30, 2002 increased by $17.0
million compared to underwriting expenses for the six months ended June 30,
2001. The increase in total underwriting expenses
-13-
was attributable to the increase in premium volume in both the treaty
reinsurance and specialty program segments.
Underwriting expenses for the six months ended June 30, 2002 as a percentage of
earned premium was 4.5%, a slight decrease from 5.2% for the same period in
2001. Total underwriting expenses as a percentage of net premiums earned, or the
underwriting expense ratio, were 34.9% for the six months ended June 30, 2002
compared to 36.7% for the same period in 2001. The decrease in the underwriting
expense ratio occurred principally because of decreasing acquisition costs
related to improved terms and conditions due to improving market conditions.
Net Investment Income
2002 2001 Change
----------- ----------- --------
(in thousands)
Average invested assets $ 1,170,772 $ 1,204,649 $(33,877)
Average annualized yields 6.14% 7.10% (0.96)%
Investment income $ 35,924 $ 42,774 $ (6,850)
Investment expenses (6,592) (7,014) 422
----------- ----------- --------
Net investment income $ 29,332 $ 35,760 $ (6,428)
=========== =========== ========
Net investment income for the six months ended June 30, 2002 was $29.3 million
compared to $35.8 million for the same period in 2001. The decrease in net
investment income resulted from an overall decline in fixed income market yields
in 2002 compared to 2001. Investment expenses for the first six months of both
2002 and 2001 included interest expense on funds withheld of $5.3 million and
$5.6 million, respectively, under the terms of stop loss reinsurance agreements
purchased by Trenwick America Reinsurance Corporation prior to 2001.
Interest Expense and Subsidiary Preferred Share Dividends
Interest expense and subsidiary preferred share dividends were $14.8 million for
2002, a decrease of $1.4 million from the same period in 2001. The decrease in
interest expense in 2002 was primarily the result of declining interest rates in
2002.
Foreign Currency Losses
Trenwick America Corporation recorded foreign currency losses of $1.3 million
for the six months ended June 30, 2002, relatively unchanged from foreign
currency losses of $1.0 million for the six months ended June 30, 2001.
Other Income, Net
Other income, net increased to $3.5 million for the first half of 2002, a $1.8
million increase over the same period in 2001, primarily a result of an increase
in equity in earnings of managing general agencies through which Trenwick
America underwrites its specialty program insurance business.
Non-operating Income and Expenses
Net realized losses on investments, net of income taxes, were $1.0 million
during the six months ended June 30, 2002, compared to net realized gains of
$1.5 million for the six months ended June 30, 2001. The 2001 gains were the
result of a repositioning of Trenwick America Corporation's debt securities
portfolio from municipal securities to corporate securities in the first half of
2001.
Trenwick America adopted Statement of Financial Accounting Standard No. 142
effective January 1, 2002. The statement required that goodwill be tested for
impairment under either
-14-
market value or cash flow tests. Trenwick America conducted both market value
and cash flow tests and, as a result, wrote off its goodwill as of January 1,
2002. This had the effect of increasing Trenwick America's net loss by $52.1
million and was recorded as a cumulative change in accounting principle.
Financings, Financing Capacity and Capitalization
Concurrent with the Trenwick/LaSalle business combination in September of 2000,
Trenwick America and Trenwick Holdings Limited, Trenwick Group Ltd.'s U.S. and
U.K. holding companies, entered into an amended and restated $490 million credit
agreement with various lending institutions. The credit agreement consisted of
both a $260 million revolving credit facility and a $230 million letter of
credit facility. The revolving credit facility was subsequently converted into a
four-year term loan. Trenwick America was the primary obligor with respect to
the revolving credit facility, and Trenwick Holdings Limited is the primary
obligor with respect to the letter of credit facility. Guarantees are provided
by LaSalle Re Holdings Limited and Trenwick Group Ltd. with respect to both
Trenwick America's and Trenwick Holdings Limited's obligations and additionally
by Trenwick America with respect to Trenwick Holdings Limited's obligations. The
credit agreement provides for a letter of credit facility which may only be used
to support the Lloyd's syndicate participations of Trenwick Group Ltd.'s
subsidiaries. The letter of credit facility is scheduled to expire in November
2002. In the event that Trenwick Group Ltd. is unable to renew the current
letter of credit facility, obtain a replacement letter of credit facility, post
sufficient collateral to support its Lloyd's underwriting activities or obtain
an alternative form of Lloyd's capital support, it will be required to reduce or
cease its underwriting activities at Lloyd's for the 2003 year of account.
The credit agreement contains general covenants and restrictions as well as
financial covenants relating to, among other things, Trenwick Group Ltd.'s
minimum interest coverage, debt to capital leverage, minimum earned surplus,
maintenance of a minimum A.M. Best Company rating of A- and tangible net worth.
As of June 30, 2002, Trenwick Group Ltd. was in compliance with the credit
agreement covenants.
On April 12, 2002, Trenwick Group Ltd., its subsidiaries and financial
institutions holding a majority of the outstanding indebtedness under the credit
facility executed an amendment to the credit facility. The amendment required
Trenwick Group Ltd. to pledge its shares of LaSalle Re Holdings Limited and
LaSalle Re Limited in favor of the lenders under the credit facility. In
addition, the amendment revised the financial covenants relating to interest
coverage and tangible net worth (each as defined by the financial covenants in
the credit agreement). The amendment set Trenwick Group Ltd.'s minimum interest
coverage ratio at 1.25 to 1 for the first quarter of 2002, 1.5 to 1 for the
second quarter of 2002, 1.75 to 1 for the third quarter of 2002 and 2.5 to 1
thereafter. Trenwick Group Ltd.'s interest coverage ratio for the three months
ended March 31, 2002 was 2.1 to 1. The amendment adjusted the minimum tangible
net worth Trenwick Group Ltd. must maintain to the following base amounts plus
50% of net income earned during the period:
Time Period Minimum Tangible Net Worth
----------- --------------------------
Through May 15, 2002 $450,000,000
From May 16, 2002 to August 14, 2002 $475,000,000
From August 15, 2002 to November 14, 2002 $525,000,000
From November 15, 2002 to March 30, 2002 $550,000,000
Thereafter $560,000,000
Trenwick Group Ltd.'s consolidated tangible net worth, as defined by the terms
of the credit agreement was $493.3 million at June 30, 2002.
-15-
A previous amendment adjusted downward the minimum risk-based capital
requirement for Trenwick America's subsidiary, Chartwell Insurance Company, from
300% to 225% through December 31, 2002. Thereafter, the minimum risk-based
capital for Chartwell Insurance Company returns to 300%. The risk-based capital
for Chartwell Insurance Company as of December 31, 2001 was 257%.
If Trenwick Group Ltd. is unable to meet the credit agreement's financial
covenants, it may be required to collateralize the outstanding letters of credit
issued under the credit agreement through additional financing, asset sales,
subsidiary dividends or similar transactions.
The amendment increased the applicable margin on the interest paid by Trenwick
Group Ltd. by 1% and added an additional .5% fee payable by Trenwick Group Ltd.
in the event the letters of credit outstanding are not secured in accordance
with the following schedule:
Date Percentage of Outstanding Indebtedness
---- --------------------------------------
September 30, 2002 40%
June 30, 2002 60%
June 30, 2004 80%
On June 17, 2002, Trenwick America repaid in full the outstanding $195 million
in principal amount of term loan indebtedness under the credit facility. As of
June 30, 2002, $230 million of letters of credit remain outstanding under the
credit facility.
Trenwick Group Ltd.'s ability to refinance its existing debt obligations or
raise additional capital is dependent upon several factors, including financial
conditions with respect to both the equity and debt markets and the ratings of
its securities as established by the rating agencies. Following Trenwick Group
Ltd.'s claims and claims expense liability reserve increase in the second
quarter of 2001 and the losses it sustained in the September 11th terrorist
attacks, its senior debt ratings were downgraded by Standard & Poor's
Corporation to BBB- and by Moody's Investors Service to Ba2. On August 2, 2002,
Standard & Poor's Corporation further lowered Trenwick Group Ltd.'s senior debt
ratings to BB. Trenwick Group Ltd.'s ability to refinance its outstanding debt
obligations, as well as the cost of such borrowings, could be adversely affected
by these ratings downgrades or if its ratings were downgraded further.
Should Trenwick Holdings Limited be unable to meet any letter of credit
reimbursement obligations as they fall due, and such repayments are not
refinanced, Trenwick America would become liable for such repayments under the
terms of the guarantees. No liability for any such amounts has been reflected in
Trenwick America's financial statements. Because Trenwick America, Trenwick
Holdings Ltd. and Trenwick Group Ltd. are holding companies, their principal
source of funds consists of permissible dividends, tax allocation payments and
other statutorily permissible payments from their respective operating
subsidiaries. As a result of recent losses incurred by Trenwick Group Ltd.'s
operating subsidiaries, their cash distribution capacities have been
significantly reduced.
Catastrophe Equity Put
On September 27, 2000, Trenwick Group Ltd. assumed the benefits and obligations
of LaSalle Re Holdings Limited under a $100 million catastrophe equity put
option. The catastrophe put option was amended and restated as of January 1,
2001 and amended as of January 25, 2002. As amended, the catastrophe equity put
enables Trenwick Group Ltd. to raise up to $55 million of equity, through the
issue of convertible preferred shares to European Reinsurance Company of
-16-
Zurich ("European Re"), a subsidiary of Swiss Reinsurance Company, in the event
there is a qualifying catastrophic event or events occurring prior to January 1,
2002. The preferred shares can be redeemed by Trenwick Group Ltd. at any time
following their issuance. In addition, European Re can convert its preferred
shares into common shares of Trenwick Group Ltd. at any time after they have
been outstanding for five years or upon a change in control of Trenwick Group
Ltd. or a decline in Trenwick Group Ltd.'s net worth below a specified level.
Conversion is at the greater of the book value of Trenwick Group Ltd. at the
date of conversion or the market value of the common shares based on the 30-day
trading average prior to conversion. The annual net option premium for the
catastrophe equity put has been charged to additional paid in capital.
As a result of the terrorist attacks of September 11, 2001, Trenwick Group Ltd.
has incurred in excess of $140 million in catastrophe losses as defined under
the option agreement and delivered notice of exercise of the catastrophe equity
put on March 28, 2002.
On July 1, 2002, Trenwick Group Ltd. commenced an arbitration proceeding seeking
$55 million in damages and other relief against European Re. The claims arise
out of European Re's failure to meet its obligations under the catastrophe
equity put. European Re has named an arbitrator and Trenwick Group Ltd. is
required to name an arbitrator on or before August 30, 2002.
Deferred Income Taxes
Trenwick America recorded as an asset as of June 30, 2002 of $66.1 million of
net deferred income taxes. The net deferred income taxes represent the expected
future tax benefit of losses previously incurred by Trenwick America's United
States operations. The future tax benefit in the United States must be used on
or before 2021. In order to maintain its net deferred income taxes as an asset,
Trenwick America is required to determine that it is more likely than not that
it will be able to realize the future tax benefit of its previously incurred
losses in the United States. In making this determination, Trenwick America is
required to make estimates as to its future income. Such estimates may be
adversely affected by market conditions, changes in financial strength ratings,
as determined by nationally recognized security ratings organizations, for
Trenwick America's operating subsidiaries or Trenwick America's ability to
secure sufficient funding to support its underwriting operations. If Trenwick
America's estimates of future income in the United States were to be revised and
it became more likely than not that Trenwick America would not be able to
realize the future tax benefit of its previously incurred losses, the effect on
Trenwick America's results of operations could be significant. See also Note 4
of Notes to the Unaudited Consolidated Financial Statements.
Accounting Standards
Effective January 1, 2002, Trenwick America adopted a new Financial Accounting
Standards Board statement which amended the accounting for goodwill and other
intangible assets. This new statement suspended systematic goodwill amortization
and required that goodwill be tested for impairment under either market value or
cash flow tests. Trenwick America conducted both market value and cash flow
tests and, as a result, recorded a $52.1 million write off of goodwill as a
cumulative effect of an accounting change as of January 1, 2002.
Safe Harbor Disclosure
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, Trenwick America sets forth below cautionary
statements identifying important risks and uncertainties that could cause its
actual results to differ materially from those that might be projected,
forecasted or estimated in its "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, made by or on behalf of Trenwick America in this Quarterly
Report on Form 10-Q and in press releases, written statements or documents filed
with the Securities and Exchange
-17-
Commission, or in its communications and discussions with investors and analysts
in the normal course of business through meetings, phone calls and conference
calls. Such statements may include, but are not limited to, projections of
premium revenue, investment income, other revenue, losses, expenses, earnings
(including earnings per share), cash flows, plans for future operations, common
shareholders' equity (including book value per share), investments, financing
needs, capital plans, dividends, plans relating to products or services of
Trenwick America and estimates concerning the effects of litigation or other
disputes, as well as assumptions for any of the foregoing and generally
expressed with words such as "believes," "estimates," "expects," "anticipates,"
"plans," "projects," "forecasts," "goals," "could have," "may have," and similar
expressions.
Forward-looking statements involve known and unknown risks and uncertainties,
which may cause Trenwick America's results to differ materially from such
forward-looking statements. These risks and uncertainties include, but are not
limited to, the following:
- - Changes in the level of competition in the domestic and international
reinsurance or primary insurance markets that affect the volume or
profitability of Trenwick America's property/casualty business. These
changes include, but are not limited to, changes in the intensity of price
competition, the entry of new competitors, existing competitors exiting
the market and the development of new products by new and existing
competitors;
- - Changes in the demand for reinsurance, including changes in ceding
companies' risk retentions and changes in the demand for excess and
surplus lines insurance coverages;
- - The ability of Trenwick America to execute its strategies in its
property/casualty operations;
- - Catastrophe losses in Trenwick America's domestic and international
property/casualty businesses;
- - Adverse development on property/casualty claims and claims expense
liabilities related to business written in prior years, including, but not
limited to, evolving case law and its effect on environmental and other
latent injury claims, changing government regulations, newly identified
toxins, newly reported claims, new theories of liability, or new insurance
and reinsurance contract interpretations;
- - Changes in Trenwick America's property/casualty retrocessional
arrangements;
- - Lower than estimated retrocessional or reinsurance recoveries on unpaid
losses, including, but not limited to, losses due to a decline in the
creditworthiness of Trenwick America's retrocessionaires or reinsurers;
- - Increases in interest rates, which may cause a reduction in the market
value of Trenwick America's fixed income portfolio, and its common
shareholders' equity;
- - Decreases in interest rates which may cause a reduction of income earned
on new cash flow from operations and the reinvestment of the proceeds from
sales or maturities of existing investments;
- - A decline in the value of Trenwick America's equity investments;
- - Changes in the composition of Trenwick America's investment portfolio;
- - Credit losses on Trenwick America's investment portfolio;
- - Adverse results in litigation matters, including, but not limited to,
litigation related to environmental, asbestos and other potential mass
tort claims;
- - The impact of mergers and acquisitions;
- - Gains or losses related to changes in foreign currency exchange rates;
- - Changes in Trenwick America's capital needs;
- - The ability of Trenwick America to refinance or repay its outstanding
indebtedness; and
- - Changes in the financial strength ratings assigned to Trenwick America and
its operating subsidiaries.
In addition to the factors outlined above that are directly related to Trenwick
America's businesses, Trenwick America is also subject to general business
risks, including, but not limited
-18-
to, adverse state, federal or foreign legislation and regulation, adverse
publicity or news coverage, changes in general economic factors and the loss of
key employees.
The facts set forth above should be considered in connection with any
forward-looking statement contained in this Quarterly Report on Form 10-Q. The
important factors that could affect such forward-looking statements are subject
to change, and Trenwick America does not intend to update any forward-looking
statement or the foregoing list of important factors. By this cautionary note
Trenwick America intends to avail itself of the safe harbor from liability with
respect of forward-looking statements provided by Section 27A and Section 21E
referred to above.
-19-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On July 1, 2002, Trenwick Group Ltd., Trenwick America's ultimate parent
company, commenced an arbitration proceeding seeking $55 million in damages and
other relief against European Reinsurance Company of Zurich, a subsidiary of
Swiss Reinsurance Company. The claims arise out of European Re's failure to meet
its obligations under a catastrophe equity put agreement, which entitled
Trenwick Group Ltd. to raise up to $55 million of equity through the issuance of
convertible preferred shares to European Re in the event there is a qualifying
catastrophic event or events occurring prior to January 1, 2002. The terrorist
attacks of September 11, 2001 constituted a qualifying catastrophic event and
Trenwick Group Ltd. delivered notice of exercise of the catastrophe equity put
on March 28, 2002. Since commencement of the arbitration, European Re has named
its arbitrator. Trenwick Group Ltd. is required to name its arbitrator by August
30, 2002.
In addition, Trenwick America is party to various legal proceedings generally
arising in the normal course of its business. Trenwick America does not believe
that the eventual outcome of any such proceeding will have a material effect on
its financial condition or business. Trenwick America's subsidiaries are
regularly engaged in the investigation and the defense of claims arising out of
the conduct of their business. Pursuant to Trenwick America's insurance and
reinsurance arrangements, disputes are generally required to be finally settled
by arbitration.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
-20-
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
99.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter ended June
30, 2002:
Date of Report Item Reported
-------------- -------------
May 16, 2002 Sale of the business of LaSalle Re Limited
to Endurance Specialty Insurance Ltd.
June 17, 2002 Repayment by Trenwick of $195 million
principal amounts of outstanding term loans
under its bank credit facility.
July 1, 2002 Commencement of arbitration against
European Reinsurance Company of Zurich
related to Catastrophe Equity Securities
Issuance Option Agreement
-21-
Trenwick America Corporation
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 2002 /s/ Stephen H. Binet
-----------------------------------
Name: Stephen H. Binet
Title: President and
Chief Executive Officer
Date: August 14, 2002 /s/ Alan L. Hunte
-----------------------------------
Name: Alan L. Hunte
Title: Executive Vice President and
Chief Financial Officer
-22-