SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2002.
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
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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 November 13, 2002
----------------------------- -----------------------
Common Stock - $1.00 par value 100
TRENWICK AMERICA CORPORATION
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
Page
----
ITEM 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheet
September 30, 2002 and December 31, 2001 ........................ 1
Consolidated Statement of Operations, Comprehensive Income and
Changes in Common Stockholder's Equity
Three and Nine Months Ended September 30, 2002 and 2001 ......... 2
Consolidated Statement of Cash Flows
Three and Nine Months Ended September 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 ....................................... 10
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk ...... 26
ITEM 4. Controls and Procedures ......................................... 26
PART II - OTHER INFORMATION
ITEM 1. Legal proceedings ............................................... 27
ITEM 2. Changes in Securities and Use of Proceeds ....................... 27
ITEM 3. Defaults Upon Senior Securities ................................. 27
ITEM 4. Submission of Matters to a Vote of Security Holders ............. 28
ITEM 5. Other Information ............................................... 28
ITEM 6. Exhibits and Reports on Form 8-K ................................ 28
Signatures .............................................................. 30
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Trenwick America Corporation
Consolidated Balance Sheet
(Amounts expressed in thousands of United States dollars)
September 30, 2002 and December 31, 2001
(Unaudited)
2002 2001
---------- ----------
ASSETS
Debt securities available for sale, at fair value $1,084,764 $1,054,518
Equity securities, at fair value 24,752 24,164
Cash and cash equivalents 133,396 128,522
Accrued investment income 12,442 12,685
Premiums receivable 198,581 159,721
Reinsurance recoverable balances, net 631,509 544,202
Prepaid reinsurance premiums 105,696 83,980
Deferred policy acquisition costs 61,510 45,403
Due from parents and affiliates 84,963 68,260
Net deferred income taxes -- 65,757
Goodwill -- 52,119
Other assets 127,596 89,774
---------- ----------
Total assets $2,465,209 $2,329,105
========== ==========
LIABILITIES
Unpaid claims and claims expenses $1,589,022 $1,412,104
Unearned premium income 330,306 239,004
Reinsurance balances payable 49,948 42,424
Indebtedness 88,524 288,878
Due to affiliates 49,165 50,434
Other liabilities 60,508 33,939
---------- ----------
Total liabilities 2,167,473 2,066,783
---------- ----------
MINORITY INTEREST
Mandatorily redeemable preferred capital securities of
subsidiary trust holding solely junior subordinated
debentures of Trenwick America Corporation 87,017 86,973
---------- ----------
COMMON STOCKHOLDER'S EQUITY
Common stock and additional paid in capital 298,877 99,353
Retained earnings (accumulated deficit) (126,787) 57,104
Accumulated other comprehensive income 38,629 18,892
---------- ----------
Total common stockholder's equity 210,719 175,349
---------- ----------
Total liabilities, minority interest and common stockholder's equity $2,465,209 $2,329,105
========== ==========
The accompanying notes are an integral part of these statements.
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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 Nine Months Ended September 30, 2002 and 2001
Three Months Nine Months
----------- --------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
REVENUES
Net premiums earned $ 132,523 $ 94,574 $ 350,372 $ 255,710
Net investment income 13,363 16,005 42,695 51,765
Net realized investment losses (3,329) (4,189) (4,851) (1,833)
Other income 1,320 1,059 4,782 2,677
--------- --------- --------- ---------
Total revenues 143,877 107,449 392,998 308,319
--------- --------- --------- ---------
EXPENSES
Claims and claims expenses incurred 150,560 69,251 330,850 197,517
Policy acquisition costs 38,005 33,914 104,338 84,617
Underwriting expenses 5,826 5,285 15,585 13,663
General and administrative expenses 708 965 2,129 2,625
Interest expense and subsidiary preferred
share dividends 5,098 8,057 19,888 24,230
Foreign currency losses 2,373 965 3,705 1,948
--------- --------- --------- ---------
Total expenses 202,570 118,437 476,495 324,600
--------- --------- --------- ---------
Loss before income taxes and cumulative effect of
change in accounting principle (58,693) (10,988) (83,497) (16,281)
Applicable income taxes (benefit) 56,954 (3,919) 48,274 (8,696)
--------- --------- --------- ---------
Loss before cumulative effect of change in
accounting principle (115,647) (7,069) (131,771) (7,585)
Cumulative effect of change in accounting principle -- -- (52,119) --
--------- --------- --------- ---------
Net loss $(115,647) $ (7,069) $(183,890) $ (7,585)
========= ========= ========= =========
COMPREHENSIVE INCOME (LOSS):
Net loss $(115,647) $ (7,069) $(183,890) $ (7,585)
--------- --------- --------- ---------
Other comprehensive income (loss):
Net unrealized investment gains 10,229 15,898 19,706 18,555
Foreign currency translation adjustments (559) 597 31 (938)
--------- --------- --------- ---------
Total other comprehensive income 9,670 16,495 19,737 17,617
--------- --------- --------- ---------
Comprehensive income (loss) $(105,977) $ 9,426 $(164,153) $ 10,032
========= ========= ========= =========
CHANGES IN COMMON
STOCKHOLDER'S EQUITY:
Common stockholder's equity, beginning of period $ 316,696 $ 187,396 $ 175,349 $ 200,907
Net capital transactions with affiliates (1,377) 199,523 (13,486)
Adjustments to paid in capital related to
Trenwick/LaSalle business combination (2,008)
Comprehensive income (loss) (105,977) 9,426 (164,153) 10,032
--------- --------- --------- ---------
Common stockholder's equity, end of period $ 210,719 $ 195,445 $ 210,719 $ 195,445
========= ========= ========= =========
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 Nine Months Ended September 30, 2002 and 2001
Three Months Nine Months
------------------------ ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
CASH FROM (FOR) OPERATING ACTIVITIES $ 29,570 $ 7,812 $ 15,240 $ (37,854)
---------- ---------- ---------- ----------
INVESTING ACTIVITIES:
Purchases of debt securities (110,004) (123,196) (239,117) (541,035)
Sales of debt securities 46,541 112,734 136,752 456,452
Maturities of debt securities 44,616 5,945 107,001 25,478
Purchases of equity securities (83) (83) (83) (1,345)
Sales of equity securities -- 4,717 -- 85,798
Effect of exchange rate translation on cash (126) 13 (318) (191)
Additions to premises and equipment (439) (1,928) (3,611) (2,618)
---------- ---------- ---------- ----------
Cash (for) from investing activities (19,495) (1,798) 624 22,539
---------- ---------- ---------- ----------
FINANCING ACTIVITIES:
Issuance (repayment) of indebtedness -- -- (197,841) 14,000
Indebtedness issuance costs paid -- -- (88) --
Loans to affiliates (2,400) (5,158) (12,584) (26,220)
Capital contributions received -- -- 199,523 5,099
---------- ---------- ---------- ----------
Cash for financing activities (2,400) (5,158) (10,990) (7,121)
---------- ---------- ---------- ----------
Change in cash and cash equivalents 7,675 856 4,874 (22,436)
Cash and cash equivalents, beginning of period 125,721 110,103 128,522 133,395
---------- ---------- ---------- ----------
Cash and cash equivalents, end of period $ 133,396 $ 110,959 $ 133,396 $ 110,959
========== ========== ========== ==========
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 Nine Months Ended September 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.
Trenwick Group Ltd.'s management recently initiated an in-depth review of
Trenwick America's reserving practices, which is expected to be completed in the
fourth quarter of the current fiscal year. Management notes that Trenwick
America currently has no information that the current reserve review will result
in any material adjustments to Trenwick America's loss reserves. If the current
reserve review were to reveal any material adjustments necessary to Trenwick
America's loss reserves, Trenwick America would promptly disclose such
adjustments.
Note 2 Segment Information
Trenwick America conducted its specialty insurance and reinsurance business in
the following two business segments through the first nine months of 2002:
- United States treaty reinsurance written principally through
Trenwick America Reinsurance Corporation.
- United States specialty program insurance, written principally
through The Insurance Corporation of New York.
On October 30, 2002, Trenwick America announced that it would cease underwriting
its specialty program insurance business effective immediately.
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The following tables present business segment financial information for Trenwick
America at September 30, 2002 and December 31, 2001 and for the three and nine
months ended September 30, 2002 and 2001:
Total assets: 2002 2001
---------- ----------
Treaty reinsurance $1,696,911 $1,640,154
Specialty program insurance 723,011 579,254
Unallocated 45,287 109,697
---------- ----------
Total assets $2,465,209 $2,329,105
========== ==========
Three Months Nine Months
----------------------- -----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Total revenues:
Treaty reinsurance $ 104,683 $ 82,135 $ 287,773 $ 235,350
Specialty program insurance 39,086 24,942 104,872 67,665
Unallocated 108 372 353 5,304
---------- ---------- ---------- ----------
Total revenues $ 143,877 $ 107,449 $ 392,998 $ 308,319
========== ========== ========== ==========
Three Months Nine Months
----------------------- -----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net loss:
Treaty reinsurance $ (78,212) $ (3,163) $ (90,070) $ 11,088
Specialty program insurance (12,442) 1,872 (4,800) (4,638)
Unallocated interest expense and
subsidiary preferred share
dividends (5,050) (7,925) (19,679) (23,892)
Other unallocated (19,943) 2,147 (17,222) 9,857
Change in accounting principle -- -- (52,119) --
---------- ---------- ---------- ----------
Net loss $ (115,647) $ (7,069) $ (183,890) $ (7,585)
========== ========== ========== ==========
Transactions between operating segments have been eliminated in consolidation.
Note 3 Underwriting Activities
The components of premiums written and earned for the three and nine months
ended September 30, 2002 and 2001 are as follows:
Three Months Nine Months
----------------------- -----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Assumed premiums written $ 102,935 $ 80,591 $ 305,984 $ 242,699
Direct premiums written 108,970 78,514 309,093 222,003
---------- ---------- ---------- ----------
Gross premiums written 211,905 159,105 615,077 464,702
Ceded premiums written (56,688) (50,688) (195,488) (160,562)
---------- ---------- ---------- ----------
Net premiums written $ 155,217 $ 108,417 $ 419,589 $ 304,140
========== ========== ========== ==========
Assumed premiums earned $ 101,406 $ 75,880 $ 275,767 $ 215,104
Direct premiums earned 90,534 66,582 247,664 176,994
---------- ---------- ---------- ----------
Gross premiums earned 191,940 142,462 523,431 392,098
Ceded premiums earned (59,417) (47,888) (173,059) (136,388)
---------- ---------- ---------- ----------
Net premiums earned $ 132,523 $ 94,574 $ 350,372 $ 255,710
========== ========== ========== ==========
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Note 4 Income Taxation
Trenwick America incurred financial accounting losses in 1999 through 2001.
Additionally, Trenwick America's results during the first nine months of 2002
were less favorable than anticipated at the beginning of the year. In the
absence of specific favorable factors, application of FASB Statement No. 109,
and its subsequent interpretations require a 100% valuation allowance for any
deferred tax asset when a company has cumulative financial accounting losses,
excluding unusual items, over several years. Accordingly, in the third quarter
of 2002, a 100% valuation allowance for the U.S. deferred tax asset was
recorded, increasing our non-cash provision for income taxes and net loss for
the third quarter of 2002 by $57.0 million.
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 loss for the three and
nine months ended September 30, 2001 had this accounting standard been effective
January 1, 2001 as compared to net loss for the three and nine months ended
September 30, 2002.
Three Months Nine Months
----------------------- -----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Reported net loss $ (115,647) $ (7,069) $ (183,890) $ (7,585)
Add back: goodwill amortization -- (323) -- (969)
Cumulative effect of change
in accounting for goodwill -- -- (52,119) --
---------- ---------- ---------- ----------
Adjusted net loss $ (115,647) $ (6,746) $ (131,771) $ (6,616)
========== ========== ========== ==========
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 letter of 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 September 30, 2002, $226,000 of letters of credit remain
outstanding under the credit facility. The letter of credit facility must be
renewed November 22, 2002 in order for Trenwick to continue to utilize the
letters of credit now outstanding to support underwriting at Lloyd's in 2003. 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
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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.
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.
On October 18, 2002, A.M. Best Company lowered the financial strength ratings of
Trenwick Group Ltd.'s operating subsidiaries below A-. The lowered A.M. Best
Company ratings constitute an event of default under the credit facility. In
addition, the increase in loss reserves and the establishment of a deferred tax
asset reserve at Trenwick America in the third quarter of 2002 resulted in
Trenwick Group Ltd. violating the financial covenants requiring Trenwick Group
Ltd. to maintain a minimum tangible net worth of $525,000 and minimum risk-based
capital on November 14, 2002. If Trenwick is unable to remedy the financial
covenant violations within 30 days, a second event of default shall have
occurred under the credit facility.
On November 13, 2002, Trenwick, its subsidiaries and financial institutions
holding a majority of the outstanding letters of credit under the credit
facility executed a forbearance agreement with respect to the events of default
arising from Trenwick's lowered A.M. Best Company ratings and financial covenant
violations. In the forbearance agreement, the letter of credit providers agreed
to refrain from enforcing their rights or remedies under the credit facility
until November 22, 2002, or earlier if there is another default under the credit
facility or the forbearance agreement, a third party exercises any right of
action against Trenwick for a debt in excess of $5,000 or other material
obligation or Trenwick takes an action which the letter of credit providers
reasonably consider to be materially adverse to their interests. In
consideration for the forbearance of the letter of credit providers, Trenwick
agreed, among other things, to refrain from making certain payments or
distributions and to facilitate a meeting of the letter of credit providers and
Lloyd's.
During the terms of the forbearance agreement and thereafter, unless there is a
waiver of the event of default and potential event of default under the credit
facility, under the terms of its guaranty Trenwick Group Ltd. is prohibited from
declaring or paying any dividends on the outstanding common and preferred shares
of Trenwick Group Ltd. and its subsidiaries. In addition, Trenwick Group Ltd. is
not allowed to redeem or
-7-
repurchase its capital stock so long as the event of default under the credit
facility continues.
The event of default under the credit facility also permits the letter of credit
providers to demand that the $226,000 outstanding letters of credit be secured
with an equal amount of cash upon expiration of the forbearance agreement. At
this time, Trenwick Group Ltd. does not have sufficient available liquidity to
provide the necessary cash collateral if the letter of credit providers demand
it.
The continuation of an event of default under the credit facility, the
restrictions on Trenwick Group Ltd.'s ability to pay dividends to preferred and
common shareholders and the potential demand for cash collateral by the letter
of credit providers may cause additional events of default to occur under the
instruments governing the outstanding indebtedness and preferred shares of
Trenwick Group Ltd. and its subsidiaries.
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. During
the past year, Trenwick Group Ltd.'s senior debt and preferred share ratings
have been downgraded significantly by Standard & Poor's Corporation and by
Moody's Investors Service. At this time, Trenwick Group Ltd.s senior debt rating
from Standard & Poor's Corporation is CCC+ and from Moody's Investor Service is
B3. 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 Limited 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.
Trenwick Group Ltd. is currently in discussion with the letter of credit
providers regarding the current and potential future events of default and
letter of credit financing for Trenwick Group Ltd.'s participation at Lloyd's
for the 2003 underwriting year. If the current and potential future events of
default are not waived, the letters of credit are not renewed for the 2003
Lloyd's underwriting year or the letter of credit providers demand cash
collateral, there is substantial doubt as to Trenwick Group Ltd.'s ability to
continue underwriting at Lloyd's or continue as a going concern. Trenwick Group
Ltd. and/or one or more of its subsidiaries, including Trenwick America, may be
forced to seek protection from creditors through proceedings commenced in
Bermuda and other jurisdictions including the United States.
-8-
Note 7 Related Party Transaction
On August 27, 2002, Trenwick Group Ltd. entered into a consulting agreement with
W. Marston Becker, the Vice Chairman of Trenwick Group Ltd.'s Board of
Directors, who assumed the position of Trenwick Group Ltd.'s Acting Chairman and
Acting Chief Executive Officer. In consideration for such services, Trenwick
agreed to pay Mr. Becker a consulting fee of $50 per month. The consulting
agreement can be terminated by mutual agreement or upon 30 days prior written
notice by either party. Trenwick Group Ltd. incurred consulting fees of
approximately $75 during the quarter ended September 30, 2002 related to this
consulting agreement.
Note 8 Subsequent Event
On October 25, 2002, Trenwick America Reinsurance Corporation ("Trenwick America
Reinsurance") entered into an underwriting facility with Chubb Re, Inc. The
underwriting facility permits Trenwick America Reinsurance to underwrite up to
$400,000 of U.S. reinsurance business on behalf of Chubb Re, Inc. in the
remainder of 2002 and 2003. Chubb Re, Inc. retains final underwriting authority
and claims authority with respect to all business generated through the
underwriting facility.
Chubb Re, Inc. will receive one-third and Trenwick America Reinsurance will
receive two-thirds of the profits generated by the underwriting facility. Chubb
Re, Inc. will receive a 5% fronting fee on two-thirds of the business
underwritten through the underwriting facility. In addition, Trenwick will
reinsure Chubb Re, Inc. for 100% of the losses incurred under the underwriting
facility in excess of the premiums collected and investment income earned in the
underwriting facility. To secure its reinsurance obligations to Chubb Re, Inc.,
Trenwick America Reinsurance has posted a $50,000 security deposit with Chubb
Re, Inc. and all premiums collected from the facility shall be paid to Chubb Re,
Inc.
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion highlights material factors affecting the results of
operations of Trenwick America Corporation ("Trenwick America") for the three
and nine months ended September 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 and
quantitative and qualitative disclosure about market risk.
Overview
Trenwick America is a Delaware holding company headquartered in Stamford,
Connecticut whose principal subsidiaries underwrite specialty insurance and
reinsurance.
For the nine months ended September 30, 2002, Trenwick America operated through
the following two principal operating platforms:
- - Trenwick America Reinsurance Corporation underwrote 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. underwrote specialty program insurance
through its operating subsidiaries, The Insurance Corporation of New York,
Dakota Specialty Insurance Company and Chartwell Insurance Company.
On October 30, 2002, Trenwick America announced that it would cease underwriting
its U.S. specialty program insurance business effective immediately.
On October 25, 2002, Trenwick America Reinsurance Corporation entered into an
underwriting facility with Chubb Re, Inc. The underwriting facility permits
Trenwick America Reinsurance to underwrite up to $400 million of U.S.
reinsurance business on behalf of Chubb Re, Inc. in the remainder of 2002 and
2003. Chubb Re, Inc. retains final underwriting authority and claims authority
with respect to all business generated through the underwriting facility.
Chubb Re, Inc. will receive one-third and Trenwick America Reinsurance will
receive two-thirds of the profits generated by the underwriting facility. Chubb
Re, Inc. will receive a 5% fronting fee on two-thirds of the business
underwritten through the underwriting facility. In addition, Trenwick America
Reinsurance will reinsure Chubb Re, Inc. for 100% of the losses incurred under
the underwriting facility in excess of the premiums collected and investment
income earned in the underwriting facility. To secure its reinsurance
obligations to Chubb Re, Inc., Trenwick America Reinsurance has posted a $50
million security deposit with Chubb Re, Inc. and all premiums collected from the
facility shall be paid to Chubb Re, Inc.
Trenwick America's subsidiaries have been assigned the following ratings by
Standard and Poor's and A.M. Best:
Standard & Poor's A.M. Best
----------------- ---------
Trenwick America Reinsurance Corporation BB- B-
Canterbury Financial Group:
The Insurance Corporation of New York BB- B-
Dakota Specialty Insurance Company BB- B-
Chartwell Insurance Company B+ C++
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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.
Trenwick Group Ltd.'s management recently initiated an in-depth review of
Trenwick America's reserving practices, which is expected to be completed in the
fourth quarter of the current fiscal year. Management notes that Trenwick
America currently has no information that the current reserve review will result
in any material adjustments to Trenwick America's loss reserves. If the current
reserve review were to reveal any material adjustments necessary to Trenwick
America's loss reserves, Trenwick America would promptly disclose such
adjustments.
Results of Operations - Three Months Ended September 30, 2002 and 2001
2002 2001 Change
--------- -------- ---------
(in thousands)
Underwriting loss $ (61,868) $(13,876) $ (47,992)
Net investment income 13,363 16,005 (2,642)
Interest expense and subsidiary preferred
share dividends (5,098) (8,057) 2,959
General and administrative expenses (708) (965) 257
Foreign currency losses (2,373) (965) (1,408)
Other income, net 1,320 1,059 261
--------- -------- ---------
Pre-tax operating loss (55,364) (6,799) (48,565)
Applicable income taxes (benefit) 58,119 (2,453) 60,572
--------- -------- ---------
Operating loss (113,483) (4,346) (109,137)
Net realized investment losses,
net of income taxes (2,164) (2,723) 559
--------- -------- ---------
Net loss $(115,647) $ (7,069) $(108,578)
========= ======== =========
Trenwick America recorded an operating loss of $113.4 million in the three
months ended September 30, 2002 compared to an operating loss of $4.3 million in
the three months ended September 30, 2001. Trenwick America's operating loss for
the third quarter of 2002 resulted principally from $70.3 million of loss
reserve increases recorded in Trenwick America's operating subsidiaries,
combined with Trenwick America's recording of a full valuation reserve on its
net deferred tax asset in the third quarter of 2002. This valuation reserve was
recorded when Trenwick America determined that its cumulative financial
accounting losses do not currently support a position that Trenwick America will
be able to realize the tax benefits of past losses in the future.
Underwriting loss
Trenwick America produced an underwriting loss of $61.9 million in the third
quarter of 2002 compared to an underwriting loss of $13.9 million in the third
quarter of 2001. Details of underwriting income and loss are produced below:
-11-
2002 2001 Change
---------- ---------- ----------
(in thousands)
Net premiums earned $ 132,523 $ 94,574 $ 37,949
---------- ---------- ----------
Claims and claims expenses incurred 150,560 69,251 81,309
Acquisition costs and underwriting expenses 43,831 39,199 4,632
---------- ---------- ----------
Total expenses 194,391 108,450 85,941
---------- ---------- ----------
Net underwriting loss $ (61,868) $ (13,876) $ (47,992)
========== ========== ==========
Loss ratio 113.6% 73.2% 40.4%
Underwriting expense ratio 33.1% 41.4% (8.3)%
Combined ratio 146.7% 114.6% 32.1%
The underwriting loss of $61.9 million in the third quarter of 2002 represented
a $48.0 million greater loss compared to the same period in 2001. The increase
in the underwriting loss can be attributed to deterioration in loss reserves,
predominantly for accident years 1997 through 2000.
The increase in the combined ratio in the third quarter of 2002 compared to the
third quarter of 2001 is attributed to the third quarter 2002 adverse
development described above.
Premiums written
Gross premiums written for 2002 were $211.9 million compared to $159.1 million
for the three months ended September 30, 2001, an increase of $52.8 million or
33.2%. Details of gross premiums written are provided below:
2002 2001 Change
---------- ---------- ----------
(in thousands)
Treaty reinsurance $ 101,267 $ 80,591 $ 20,676
Specialty program insurance 110,638 78,514 32,124
---------- ---------- ----------
Gross premiums written $ 211,905 $ 159,105 $ 52,800
========== ========== ==========
Treaty reinsurance increased $20.7 million from the third quarter of 2001
primarily due to increasing rates on renewal treaties. Specialty program
insurance gross premiums written increased due to the addition of new programs
in 2002 as well as to rate increases on new and renewal policies attributed to
improving market conditions.
Premiums earned
2002 2001 Change
---------- ---------- ----------
(in thousands)
Gross premiums written $ 211,905 $ 159,105 $ 52,800
Change in gross unearned premiums (19,965) (16,643) (3,322)
---------- ---------- ----------
Gross premiums earned 191,940 142,462 49,478
---------- ---------- ----------
Gross premiums ceded (56,688) (50,688) (6,000)
Change in ceded unearned premiums (2,729) 2,800 (5,529)
---------- ---------- ----------
Ceded premiums earned (59,417) (47,888) (11,529)
---------- ---------- ----------
Net premiums earned $ 132,523 $ 94,574 $ 37,949
========== ========== ==========
Gross premiums ceded for the three months ended September 30, 2002 were $56.7
million compared to $50.7 million for the same period in 2001. The increase in
gross premiums ceded of $6.0 million was commensurate with the increase in gross
premiums written.
-12-
Net premiums earned for the three months ended September 30, 2002 were $132.5
million compared to $94.6 million for the same period in 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 September 30, 2002 were
$150.6 million, an increase of $81.3 million compared to claims and claims
expenses of $69.3 million for the same period in 2001. The increase in claims
and claims expenses in 2002 includes loss reserve increases recorded in Trenwick
America's treaty reinsurance and specialty insurance segments of $59.8 million
and $10.5 million, respectively which emanated from reported loss activity with
related increases in incurred but not reported reserves, predominantly for
accident years 1997 through 2000.
Underwriting expenses
2002 2001 Change
---------- ---------- ----------
(in thousands)
Policy acquisition costs $ 38,005 $ 33,914 $ 4,091
Underwriting expenses 5,826 5,285 541
---------- ---------- ----------
Total underwriting expenses $ 43,831 $ 39,199 $ 4,632
========== ========== ==========
Underwriting expense ratio 33.1% 41.4% (8.3)%
========== ========== ==========
Total underwriting expenses, comprising policy acquisition costs and
underwriting expenses, for 2002 increased by $4.6 million compared to
underwriting expenses for the three months ended September 30, 2001. The
increase was mainly attributable to the increases in premiums written in 2002.
Underwriting expenses for the three months ended September 30, 2002 as a
percentage of earned premium was 4.4%, a decrease of 1.2% from 5.6% for the same
period in 2001. Total underwriting expenses as a percentage of net premiums
earned, or the underwriting expense ratio, were 33.1% for the three months ended
September 30, 2002 a decrease of 8.3% from 41.4% for the same period in 2001.
The decrease in the underwriting expense ratio resulted principally from the
increase in premiums during 2002.
Net Investment Income
2002 2001 Change
----------- ----------- --------
(in thousands)
Average invested assets $ 1,173,592 $ 1,187,828 $(14,236)
Average annualized yields 5.57% 6.56% (0.99)%
Investment income $ 16,352 $ 19,490 $ (3,138)
Investment expenses:
Interest expense on funds withheld (2,257) (2,851) 594
Other (732) (634) (98)
----------- ----------- --------
Net investment income $ 13,363 $ 16,005 $ (2,642)
=========== =========== ========
Net investment income for the three months ended September 30, 2002 was $13.4
million compared to $16.0 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 during 2002, offset in part by a decrease in interest
expense on funds withheld.
Interest Expense and Subsidiary Preferred Share Dividends
Interest expense and subsidiary preferred share dividends were $5.1 million for
2002, a decrease of $3.0 million from the same period in 2001. The decrease in
interest expense in 2002 was
-13-
primarily the result of the repayment of Trenwick America's term loan facility
in the second quarter of 2002.
General and administrative expenses
General and administrative expenses were $0.7 million for the third quarter of
2002, a relatively unchanged decrease from $1.0 million for the same period in
2001.
Foreign Currency Losses
Trenwick America recorded foreign currency losses of $2.4 million for the three
months ended September 30, 2002 compared to foreign currency losses of $1.0
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.
Other Income, Net
Other income, net increased to $1.3 million for the third quarter of 2002, a
$0.2 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 $2.2 million
during the three months ended September 30, 2002, relatively unchanged from net
realized losses of $2.7 million for the three months ended September 30, 2001.
Results of Operations - Nine Months Ended September 30, 2002 and 2001
2002 2001 Change
--------- --------- ---------
(in thousands)
Underwriting loss $(100,401) $ (40,087) $ (60,314)
Net investment income 42,695 51,765 (9,070)
Interest expense and subsidiary
preferred share dividends (19,888) (24,230) 4,342
General and administrative expenses (2,129) (2,625) 496
Foreign currency losses (3,705) (1,948) (1,757)
Other income, net 4,782 2,677 2,105
--------- --------- ---------
Pre-tax operating loss (78,646) (14,448) (64,198)
Applicable income taxes (benefit) 49,972 (8,054) 58,026
--------- --------- ---------
Operating loss (128,618) (6,394) (122,224)
Net realized investment losses,
net of income taxes (3,153) (1,191) (1,962)
Cumulative effect of change in accounting principle (52,119) -- (52,119)
--------- --------- ---------
Net loss $(183,890) $ (7,585) $(176,305)
========= ========= =========
Trenwick America recorded an operating loss of $128.6 million for the nine
months ended September 30, 2002 compared to an operating loss of $6.4 million
recorded in the nine months ended September 30, 2001. Trenwick America's
operating loss for the first nine months of 2002 resulted principally from $99.6
million of loss reserve increases recorded in Trenwick America's operating
subsidiaries, combined with $20.3 million of losses incurred under Trenwick
America Reinsurance Corporation's stop loss reinsurance agreement with its U.K.
affiliate, Trenwick International Limited. Lastly, $57.0 million of Trenwick
America's operating loss resulted from the recording of a full valuation reserve
on its net deferred tax asset in the third quarter of 2002. This valuation
reserve was recorded when Trenwick America determined that its cumulative
-14-
financial accounting losses do not currently support a position that Trenwick
America will be able to realize the tax benefits of past losses in the future.
Underwriting loss
Trenwick America produced an underwriting loss of $100.4 million in the first
nine months of 2002 compared to an underwriting loss of $40.1 million in the
first nine months of 2001. Details of underwriting income and loss follow:
2002 2001 Change
--------- --------- ---------
(in thousands)
Net premiums earned $ 350,372 $ 255,710 $ 94,662
--------- --------- ---------
Claims and claims expenses incurred 330,850 197,517 133,333
Acquisition costs and underwriting expenses 119,923 98,280 21,643
--------- --------- ---------
Total expenses 450,773 295,797 154,976
--------- --------- ---------
Net underwriting loss $(100,401) $ (40,087) $ (60,314)
========= ========= =========
Loss ratio 94.4% 77.2% 17.2%
Underwriting expense ratio 34.2% 38.4% (4.2)%
Combined ratio 128.6% 115.6% 13.0%
The underwriting loss of $100.4 million in the first nine months of 2002
represented a $60.3 million greater loss compared to the first nine months of
2001, primarily the result of additional losses recorded as a result of
deterioration in loss reserves, predominantly for accident years 1997 through
2000. In addition, losses incurred under a stop loss reinsurance agreement
between Trenwick America Reinsurance Corporation and its U.K. affiliate Trenwick
International Limited were $5.0 million higher in the first nine months of 2002
compared to the same period in 2001.
Premiums written
Gross premiums written for the nine months ended September 30, 2002 were $615.1
million compared to $464.7 million for the nine months ended September 30, 2001,
an increase of $150.4 million or 32.3%. Details of gross premiums written are
provided below:
2002 2001 Change
-------- -------- --------
(in thousands)
Treaty reinsurance $303,529 $242,699 $ 60,830
Specialty program insurance 311,548 222,003 89,545
-------- -------- --------
Gross premiums written $615,077 $464,702 $150,375
======== ======== ========
Treaty reinsurance premiums increased $60.8 million from the nine months of
2001, primarily due to increasing rates on renewal treaties.
Specialty program insurance gross premiums written increased to $311.5 million
for the first nine months of 2002 due to increased volume on two of its larger
programs combined with the addition of ten new programs in 2002 and improved
market conditions.
Premiums earned
Net premiums earned for the nine months ended September 30, 2002 were $350.4
million compared to $255.7 million for 2001. Details of premiums earned are
provided below:
-15-
2002 2001 Change
--------- --------- ---------
(in thousands)
Gross premiums written $ 615,077 $ 464,702 $ 150,375
Change in gross unearned premiums (91,646) (72,603) (19,043)
--------- --------- ---------
Gross premiums earned 523,431 392,099 131,332
--------- --------- ---------
Gross premiums ceded (195,488) (160,562) (34,926)
Change in ceded unearned premiums 22,429 24,173 (1,744)
--------- --------- ---------
Ceded premiums earned (173,059) (136,389) (36,670)
--------- --------- ---------
Net premiums earned $ 350,372 $ 255,710 $ 94,662
========= ========= =========
Gross premiums ceded for the nine months ended September 30, 2002 were $195.5
million compared to $160.6 million for the same period in 2001. The increase in
gross premiums ceded of $34.9 million was commensurate with the increase in
gross premiums written.
Claims and claims expenses
Claims and claims expenses for the nine months ended September 30, 2002 were
$330.9 million, an increase of $133.4 million compared to claims and claims
expenses of $197.5 million for the same period in 2001. The increase in claims
and claims expenses in 2002 can be attributed to the increase in premiums earned
combined with additional losses recorded as a result of deterioration in
indicated loss ratios for prior accident years on the treaty reinsurance and
specialty insurance segments of approximately $85.9 million and $13.7 million,
respectively. Additionally, claims and claims expenses incurred in the nine
months ended September 30, 2002 and 2001 included $20.3 million and $15.3
million, respectively of losses incurred under a stop loss reinsurance agreement
between Trenwick America Reinsurance Corporation and its U.K. affiliate,
Trenwick International Limited. Both parties are in the process of commuting the
stop loss agreement, which is subject to approval by regulatory authorities
having jurisdiction over Trenwick America Reinsurance Corporation and Trenwick
International Limited.
Underwriting expenses
2002 2001 Change
-------- ------- --------
(in thousands)
Policy acquisition costs $104,338 $84,617 $ 19,721
Underwriting expenses 15,585 13,663 1,922
-------- ------- --------
Total underwriting expenses $119,923 $98,280 $ 21,643
======== ======= ========
Underwriting expense ratio 34.2% 38.4% (4.2)%
======== ======= ========
Total underwriting expenses, comprising policy acquisition costs and
underwriting expenses, for the nine months ended September 30, 2002 increased by
$21.6 million compared to underwriting expenses for the nine months ended
September 30, 2001. The increase in total underwriting expenses was attributable
to the increase in premium volume in both the treaty reinsurance and specialty
program segments.
Underwriting expenses for the nine months ended September 30, 2002 as a
percentage of earned premium was 4.4%, a decrease of 0.9% from 5.3% for the same
period in 2001. Total underwriting expenses as a percentage of net premiums
earned, or the underwriting expense ratio, were 34.2% for the nine months ended
September 30, 2002 compared to 38.4% 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.
-16-
Net Investment Income
2002 2001 Change
----------- ----------- --------
(in thousands)
Average invested assets $ 1,185,355 $ 1,206,494 $(21,139)
Average annualized yields 5.88% 6.88% (1.00)%
Investment income $ 52,277 $ 62,263 $ (9,986)
Investment expenses:
Interest expenses on funds withheld (7,562) (8,491) 929
Other (2,020) (2,007) (13)
----------- ----------- --------
Net investment income $ 42,695 $ 51,765 $ (9,070)
=========== =========== ========
Net investment income for the nine months ended September 30, 2002 was $42.7
million compared to $51.8 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, offset in part by a decrease of $0.9 million in
interest expense on funds withheld.
Interest Expense and Subsidiary Preferred Share Dividends
Interest expense and subsidiary preferred share dividends were $19.9 million for
2002, a decrease of $4.3 million from the same period in 2001. The decrease in
interest expense in 2002 was primarily the result of the repayment of Trenwick
America's term loan facility during the second quarter of 2002.
General and administrative expenses
General and administrative expenses were $2.1 million in the first nine months
of 2002 relatively unchanged from $2.6 million for the same period in 2001.
Foreign Currency Losses
Trenwick America recorded foreign currency losses of $3.7 million for the nine
months ended September 30, 2002, an increase of $1.8 million from foreign
currency losses of $1.9 million for the nine months ended September 30, 2001,
primarily due to the increase in the value of the British pound relative to the
U.S. dollar during 2002.
Other Income, Net
Other income, net increased to $4.8 million for the first nine months of 2002, a
$2.1 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 $3.2 million
during the nine months ended September 30, 2002, compared to net realized losses
of $1.2 million for the nine months ended September 30, 2001.
Cumulative effect of change in accounting principle
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 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 for the nine months ended September 30, 2002 by $52.1 million
and was recorded as a cumulative change in accounting principle.
-17-
Liquidity and Capital Resources
As of September 30, 2002, Trenwick America's consolidated investments and cash
totaled $1.2 billion, consistent with the balance at December 31, 2001. The cost
of Trenwick America's equity securities was $7.1 million less than fair value at
September 30, 2002 and was less than fair value by $6.7 million at December 31,
2001. The fair value of Trenwick America's debt securities exceeded amortized
cost by $54.8 million at September 30, 2002 and by $24.7 million at December 31,
2001.
As of September 30, 2002, Trenwick America's consolidated common stockholder's
equity totaled $210.7 million compared to $175.3 million at December 31, 2001.
The increase in common stockholder's equity resulted mainly from the capital
contribution of $199.5 million received during the second quarter of 2002, which
enabled Trenwick America to repay in full its term loan facility. The increase
related to the capital contribution was offset in part by the increase in loss
reserves and establishment of a deferred tax valuation reserve in the third
quarter of 2002 combined with the write-down of all of Trenwick America's
goodwill from the Trenwick-LaSalle business combination completed in 2000 as a
result of the adoption of a new accounting standard.
Cash provided by Trenwick America's operating activities for the nine months
ended September 30, 2002 was $15.2 million compared to cash used in Trenwick
America's operating activities of $37.9 million in the comparable period of
2001. The increase in cash flow from operations was due primarily to an increase
in premium writings. This increase was offset in part by a decrease in net
investment income received, a result of the decrease in interest rates over the
course of 2002.
Net cash used in financing activities during the first nine months of 2002
included $197.8 million related to the repayment of Trenwick America's term loan
facility.
Trenwick America's total debt to capital ratio (total indebtedness divided by
total indebtedness preferred capital securities and common shareholder's equity)
decreased to 22.9% at September 30, 2002 from 52.4% on December 31, 2001 due to
the repayment of the $195 million in principal amount outstanding under the term
loan portion of Trenwick America's bank credit facility.
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 must be renewed on November 22, 2002
in order for Trenwick Group Ltd. to continue to utilize the letters of credit
now outstanding to support underwriting at Lloyd's in 2003. 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
-18-
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.
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 September 30, 2002 was 3.34 to 1.0. 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, 2003 $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 $387.4 million at September 30, 2002.
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%.
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, 2003 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
September 30, 2002, $226 million of letters of credit remain outstanding under
the credit facility.
On October 18, 2002, A.M. Best Company lowered the financial strength ratings of
Trenwick Group Ltd.'s operating subsidiaries below A-. The lowered A.M. Best
Company ratings
-19-
constitute an event of default under the credit facility. In addition, the
increase in loss reserves in the third quarter of 2002 resulted in Trenwick
Group Ltd. violating the financial covenants requiring Trenwick Group Ltd. to
maintain a minimum tangible net worth and minimum risk-based capital on November
14, 2002. If Trenwick Group Ltd. is unable to remedy the financial covenant
violations within 30 days, a second event of default shall have occurred under
the credit facility.
On November 13, 2002, Trenwick, its subsidiaries and financial institutions
holding a majority of the outstanding letters of credit under the credit
facility executed a forbearance agreement with respect to the events of default
arising from Trenwick's lowered A.M. Best Company ratings and financial covenant
violations. In the forbearance agreement, the letter of credit providers agreed
to refrain from enforcing their rights or remedies under the credit facility
until November 22, 2002, or earlier if there is another default under the credit
facility or the forbearance agreement, a third party exercises any right of
action against Trenwick for a debt in excess of $5 million or other material
obligation or Trenwick takes an action which the letter of credit providers
reasonably consider to be materially adverse to their interests. In
consideration for the forbearance of the letter of credit providers, Trenwick
agreed, among other things, to refrain from making certain payments or
distributions and to facilitate a meeting of the letter of credit providers and
Lloyd's.
During the term of the forbearance agreement and thereafter, unless there is a
waiver of the event of default and potential event of default under the credit
facility, under the terms of its guaranty Trenwick Group Ltd. is prohibited from
declaring or paying any dividends on the outstanding common and preferred shares
of Trenwick Group Ltd. and its subsidiaries. In addition, Trenwick Group Ltd. is
not allowed to redeem or repurchase its capital stock so long as the event of
default under the credit facility continues.
The event of default under the credit facility also permits the letter of credit
providers to demand that the $226 million outstanding letters of credit be
secured with an equal amount of cash upon expiration of the forbearance
agreement. At this time, Trenwick Group Ltd. does not have sufficient available
liquidity to provide the necessary cash collateral if the letter of credit
providers demand it.
The continuation of an event of default under the credit facility, the
restrictions on Trenwick Group Ltd.'s ability to pay dividends to preferred and
common shareholders and the potential demand for cash collateral by the letter
of credit providers may cause additional events of default to occur under the
instruments governing the outstanding indebtedness and preferred shares of
Trenwick Group Ltd. and its subsidiaries.
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. During the past year,
Trenwick Group Ltd.'s senior debt and preferred share ratings have been
significantly downgraded by Standard & Poor's Corporation and Moody's Investors
Service. At this time, Trenwick Group Ltd.'s senior debt ratings from Standard &
Poor's Corporation is CCC+ and Moody's Investor Service is B3. 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
-20-
amounts has been reflected in Trenwick America's financial statements. Because
Trenwick America, Trenwick Holdings Limited 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.
Trenwick Group Ltd. is currently in discussion with the letter of credit
providers regarding the current and potential future events of default and
letter of credit financing for Trenwick Group Ltd.'s participation at Lloyd's
for the 2003 underwriting year. If the current and potential future events of
default are not waived, the letters of credit are not renewed for the 2003
Lloyd's underwriting year or the letter of credit providers demand cash
collateral, there is substantial doubt as to Trenwick Group Ltd.'s ability to
continue underwriting at Lloyd's or continue as a going concern. Trenwick Group
Ltd. and/or one or more of its subsidiaries, including Trenwick America, may be
forced to seek protection from creditors through proceedings commenced in
Bermuda and other jurisdictions including the United States.
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
enabled Trenwick Group Ltd. to raise up to $55 million of equity, through the
issue of convertible preferred shares to European Reinsurance Company of Zurich
("European Re"), a subsidiary of Swiss Reinsurance Company, in the event there
was a qualifying catastrophic event or events occurring prior to January 1,
2002.
As a result of the terrorist attacks of September 11, 2001, LaSalle Re Limited
incurred in excess of $140 million in catastrophe losses as defined under the
option agreement and Trenwick Group Ltd. 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 arose out of European Re's failure to
meet its obligations under the catastrophe equity put. On September 6, 2002, the
catastrophe put option was amended and restated and the pending arbitration
proceedings were terminated. Under the terms of the second restated agreement,
European Re purchased 550,000 of Trenwick Group Ltd.'s Series B Cumulative
Perpetual Preferred Shares (the "Series B Shares") with a liquidation preference
of $100 per share for an aggregate purchase price of $40 million. The Series B
Shares bear cumulative dividends, payable quarterly in arrears, based upon the
Series B Shares' Standard & Poor's rating at LIBOR plus a margin determined in
accordance with the following schedule:
Standard & Poor's Rating LIBOR Margin
----------------------------------- --------------------
BBB- or above 3.75%
BB+ 4.25%
BB 4.50%
BB- 4.75%
Below BB- 6.00%
These factors adjust upward by 0.25% on the third anniversary if the securities
are still unrated, and upward by 0.50% on the fifth anniversary if they are
still unrated. Also, if the Standard &
-21-
Poor's rating is below BBB- on the fifth anniversary, the factors adjust upward
by an additional 0.50%. The maximum adjustment based upon these circumstances is
0.75%.
The Series B Shares are convertible into common shares of Trenwick Group Ltd.
after five years or upon the occurrence of a "special conversion event" at the
greater of book value or the average thirty-day trading price of the common
shares. Special conversion events are either the occurrence of a change in
control without the written consent of the registered holders of more than 50%
of the Series B shares outstanding ("Change in Control Conversion Event"), or
the failure of Trenwick Group Ltd. to maintain a GAAP net worth equal to at
least $225 million for a period of more than sixty days ("Net Worth Conversion
Event"). The conversion price of the Series B shares is the greater of 1) the
liquidity factor times the average thirty day stock price preceding the
conversion date, 2) the liquidity factor times book value per common share or 3)
par value of a common share. The liquidity factor will be calculated as an
amount equal to 0.8 if the conversion occurs within 60 days after a Change in
Control Conversion Event or 1.0 if the conversion does not occur within 60 days
after the occurrence of a Change in Control Conversion Event.
Trenwick Group Ltd. has the option to redeem the Series B Shares after the first
anniversary of the issuance, paying an early redemption premium of $2.00 per
share if redeemed before the second anniversary, and $1.00 per share if redeemed
between the second and third anniversary. European Re will be able to transfer
the Series B Shares six months after the date of purchase.
The maximum number of Trenwick Group Ltd. common shares that could be required
to be issued upon conversion of the Series B Shares is 550 million, which would
occur when both the book value of common stock and the average thirty-day
trading price of the common shares were less than or equal to $0.10 per share.
Trenwick Group Ltd. currently has the authority to issue up to 150 million
preferred and common shares without prior authorization from the shareholders
and the Board of Directors. Trenwick Group Ltd., therefore does not currently
have the ability to control settlement of the Series B Shares and has therefore
recorded them as temporary equity in Trenwick Group Ltd.'s September 30, 2002
balance sheet. As of September 30, 2002, the Series B shares would be settled
with approximately 6.3 million common shares upon conversion. The following
table details how changes in the price of Trenwick Group Ltd.'s common shares or
changes in book value would affect the settlement amounts:
Average market value of
common shares Book value per share
- -------------------------- ---------------------------------------------------------------------------------------
$0.10-$0.50 $0.51-$1.00 $1.01-$2.00 $2.01-$5.00 $5.01-$10.00 $10.01-$15.00
----------- ----------- ----------- ----------- ------------ -------------
$0.10-$0.50 550 - 110 108 - 55 54 - 28 27 - 11 11 - 6 5 - 4
$0.51-$1.00 108 - 55 108 - 55 54 - 28 27 - 11 11 - 6 5 - 4
$1.01-$2.00 54 - 28 54 - 28 54 - 28 27 - 11 11 - 6 5 - 4
$2.01-$5.00 27 - 11 27 - 11 27 - 11 27 - 11 11 - 6 5 - 4
$5.01-$10.00 11 - 6 11 - 6 11 - 6 11 - 6 11 - 6 5 - 4
$10.01-$15.00 5 - 4 5 - 4 5 - 4 5 - 4 5 - 4 5 - 4
Range of shares issuable upon conversion (in millions)
Quantitative and Qualitative Disclosure About Market Risk
The following section addresses the significant market risks associated with
Trenwick Group Ltd.'s business activities as of September 30, 2002. Trenwick
America's primary market risk exposures are:
- foreign currency exchange risk
-22-
- interest rate risk on fixed and variable rate U.S. dollar
denominated short and long-term instruments; and
- equity price risk.
With respect to Trenwick America's investment portfolio, the risk management
strategy is to place its investments with high credit quality issuers and to
limit the amount of credit exposure with respect to particular ratings
categories and any one issuer. Trenwick America selects investments with
characteristics such as duration, yield, currency and liquidity to reflect the
underlying characteristics of related estimated claim liabilities.
As of September 30, 2002, Trenwick America's exposure to high yield investments
was minimal. While these investments are more susceptible to credit risk, their
total market value represents just 5% of total investments and cash, and
therefore management believes that the exposure to credit risk is not material.
Trenwick America has no derivatives and its investments do not contain terms
that may result in potential losses due to leverage.
Foreign currency exchange rate risk
Foreign currency risk is the risk that Trenwick America will incur economic
losses due to adverse changes in foreign currency exchange rates.
Trenwick America's reinsurance operations has exposures to movements in various
currencies around the world as such businesses are denominated in those
currencies. Therefore, changes in currency exchange rates affect Trenwick
America's balance sheet, statement of operations and statement of cash flows.
This exposure is somewhat mitigated by the fact that premiums received are
invested in the same currency portfolios, to partially offset related unpaid
claims and claims expense liabilities denominated in the same currency.
Management estimates that a 10% immediate unfavorable change in each of the
foreign currency exchange rates to which Trenwick America is exposed as of
September 30, 2002 would have decreased the fair value of Trenwick America's
foreign denominated net liability by approximately $4.7 million, which was
comprised primarily of exposure to the British pound.
Interest Rate Risk
Trenwick America's fixed maturity investments and indebtedness are subject to
interest rate risk. Increases and decreases in prevailing interest rates
generally translate into decreases and increases in the fair value of fixed
maturity investments and the interest payable on Trenwick America's outstanding
variable rate debt. Additionally, the fair value of interest rate sensitive
instruments may be affected by the creditworthiness of the issuer, a prepayment
option, relative values of alternative investments, liquidity of the investment
and other general market conditions.
Trenwick America monitors its sensitivity to interest rate risk by evaluating
the change in its financial assets and liabilities relative to hypothetical
increases and decreases in interest rates. It is assumed that the changes occur
immediately and uniformly to each category of instrument containing interest
rate risks. The hypothetical changes in market interest rates reflect what could
be deemed best or worst case scenarios. Significant variations in market
interest rates could produce changes in the timing of repayments due to
prepayment options available. The fair value of such instruments could be
affected and therefore actual results might differ from those reflected in this
summary.
A 100 basis point increase in market interest rates would have resulted in an
estimated pre-tax lass in the fair value of these instruments of $34 million at
September 30, 2002. Similarly, a
-23-
100 basis point decrease in market interest rates would have resulted in an
estimated pre-tax gain in the fair value of these instruments of $31 million at
September 30, 2002.
Equity Price Risk
The carrying values of investments subject to equity price risks are based on
quoted market prices or management's estimates of fair value as of the balance
sheet date. Market prices are subject to fluctuation and, consequently, the
amount realized in the subsequent sale of an investment may significantly differ
from the reported market value. Fluctuation in the market price of a security
may result from perceived changes in the underlying economic characteristics of
the investee, the relative price of alternative investments and general market
conditions. Furthermore, amounts realized in the sale of a particular security
may be affected by the relative quantity of the security being sold.
Of Trenwick America's $25 million equity portfolio at September 30, 2002, $10
million of common equity investments were not subject to equity risk. Trenwick
America's potential exposure on equity securities is estimated in terms of an
immediate 10% drop in equity prices across all equity securities holdings from
those prevailing at September 30, 2002 which would have resulted in a $1.5
million loss.
The fair value estimates shown are based on the composition of the equity
security portfolio at September 30, 2002 and these exposures will change as a
result of ongoing portfolio activities in response to management's assignment of
changing market conditions and available investment opportunities.
The above analyses do not take into account any correlation among foreign
currency exchange rates, or any correlation among various markets (i.e., the
fixed income markets and foreign exchange and equity markets). Trenwick
America's actual experience may differ from the results noted above due to the
correlation assumptions utilized, or if events occur that were not included in
the methodology, such as significant liquidity or market events. The selection
of the amount of increases or decreases in currency exchange rates, interest
rates and equity values in the above rate the potential impact of such events.
Deferred Income Taxes
Trenwick America incurred financial accounting losses in 1999 through the third
quarter of 2002 and in connection with such losses, recorded as an asset up to
$57.0 million of net deferred income taxes. The net deferred income tax asset
represented the future tax benefit of the losses previously incurred by Trenwick
America's U.S. operations. Because of Trenwick America's cumulative financial
accounting losses, in the absence of specific favorable factors, application of
FASB Statement No. 109 and its subsequent interpretations require Trenwick
America to establish a 100% valuation allowance against its deferred tax asset
in the third quarter of 2002. The establishment of a 100% valuation allowance
against Trenwick America's deferred tax asset increased Trenwick America's
provision for income taxes and net loss by $57.0 million in the third quarter of
2002. Trenwick America management will continue to monitor its tax position and
reassess the need for a valuation allowance on its deferred tax asset on a
periodic basis.
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.
-24-
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 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;
-25-
- - 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 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
This information called for by this item can be found in this Quarterly Report
on Form 10-Q under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Quantitative and Qualitative
Disclosures About Market Risk" and is incorporated herein by reference.
Item 4. Controls and Procedures
Within the 90 days prior to the filing date of this report, Trenwick America
carried out an evaluation, under the supervision and with the participation of
Trenwick America's management, including the Acting Chief Executive Officer (the
"Acting CEO") and the Chief Financial Officer (the "CFO"), of the effectiveness
of the design and operation of our disclosure controls and procedures pursuant
to Exchange Act Rule 13a-15. Based on that evaluation, Trenwick America's
management, including the Acting CEO and CFO, concluded that Trenwick America's
disclosure controls and procedures are effective in timely alerting them to
material information required to be included in Trenwick America's periodic SEC
reports. In addition, there have been no significant changes in Trenwick
America's internal controls or in other factors that could significantly affect
those controls subsequent to the date of their evaluation, including any
corrective actions with respect to significant deficiencies on material
weaknesses. It should be noted that the design of any system of controls is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions, regardless of how remote.
-26-
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.
On September 6, 2002, Trenwick Group Ltd. and European Re settled the
outstanding arbitration with European Re purchasing 550,000 of Trenwick Group
Ltd.'s Series B Cumulative Convertible Perpetual Preferred Shares. For a
description of the preferred shares issued by Trenwick Group Ltd. in connection
with the settlement of the arbitration between Trenwick Group Ltd. and European
Re, see Management's Discussion and Analysis of Financial Conditions and Results
of Operations - Catastrophe Equity Put.
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
On October 18, 2002, A.M. Best Company lowered the financial strength ratings of
Trenwick America's subsidiaries and affiliates below A-. The lowered A.M. Best
Company ratings constitute an event of default under Trenwick Group Ltd.'s bank
letter of credit facility. In addition, the increase in Trenwick Group Ltd.'s
loss reserves and the establishment of a Trenwick America deferred tax asset
reserve in the third quarter of 2002 resulted in Trenwick Group Ltd. violating
the financial covenants requiring Trenwick Group Ltd. to maintain a minimum
tangible net worth and minimum risk-based capital on November 14, 2002. If
Trenwick Group Ltd. is unable to remedy the financial covenant violations within
30 days, a second event of default shall have occurred under the credit
facility. Trenwick Group Ltd. is liable under a guaranty of the letter of credit
reimbursement obligations under the credit facility.
For a description of the credit facility and the events of default thereunder,
see Note 6 of the Notes to the Unaudited Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financings, Financing Capacity and Capitalization.
-27-
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Related Party Transaction
On August 27, 2002, Trenwick Group Ltd. entered into a consulting
agreement with W. Marston Becker, the Vice Chairman of Trenwick Group
Ltd.'s Board of Directors, who assumed the position of Trenwick Group
Ltd.'s Acting Chairman and Acting Chief Executive Officer. In
consideration for such services, Trenwick Group Ltd. agreed to pay Mr.
Becker a consulting fee of $50,000 per month. The consulting agreement can
be terminated by mutual agreement or upon 30 days prior written notice by
either party.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
10.1 Forbearance Agreement, dated as of November 11, 2002, among
Trenwick Group Ltd., Trenwick America Corporation, Trenwick
Holdings Limited, LaSalle Re Holdings and certain lending
institutions party to the Credit Agreement and JP Morgan Chase
Bank, as Administrative Agent.
10.2 Consulting Agreement, dated as of August 26, 2002, between
Trenwick Group Ltd. and W. Marston Becker.*
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.
*Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter
ended September 30, 2002:
Date of Report Item Reported
-------------- -------------
July 1, 2002 Commencement of the arbitration against
European Reinsurance Company of Zurich
Securities Insurance Option Agreement.
August 27, 2002 Announcement that James F. Billett, Jr.,
Trenwick's Chairman, President and Chief
Executive Officer, would be taking a
leave of absence for health reasons.
-28-
September 6, 2002 Announcement of Settlement Agreement, a
Second Amended and Restated Catastrophe
Equity Securities Issuance Option
Agreement and Amendment No. 1 to
Registration Rights Agreement, each
dated September 6, 2002 with European
Reinsurance Company of Zurich.
-29-
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: November 14, 2002 /s/ Stephen H. Binet
---------------------
Name: Stephen H. Binet
Title: President and
Chief Executive Officer
Date: November 14, 2002 /s/ Alan L. Hunte
-----------------
Name: Alan L. Hunte
Title: Executive Vice President and
Chief Financial Officer
-30-
Certification of CEO Pursuant to
Securities Exchange Act Rules 13a-14 and 15d-14
as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Stephen H. Binet, President and Chief Executive Officer of Trenwick America
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Trenwick America
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
-31-
Date: November 14, 2002
/s/ Stephen H. Binet
- ----------------------------------
Stephen H. Binet
President and
Chief Executive Officer
-32-
Certification of CFO Pursuant to
Securities Exchange Act Rules 13a-14 and 15d-14
as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Alan L. Hunte, Executive Vice President and Chief Financial Officer of
Trenwick America Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Trenwick America
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
-33-
Date: November 14, 2002
/s/ Alan L. Hunte
- ---------------------------------------
Alan L. Hunte
Executive Vice President and
Chief Financial Officer
-34-