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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 March 31, 2003.
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 0-31967
TRENWICK AMERICA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 06-1087672
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Canterbury Green
Stamford, Connecticut 06901
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: 203-353-5500
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |_| No |X|
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 May 15, 2003
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
March 31, 2003 and December 31, 2002 .......................... 1
Consolidated Statement of Operations, Comprehensive
Income and Changes in Common Stockholder's Equity ............. 2
Three Months ended March 31, 2003 and 2002
Consolidated Statement of Cash Flows
Three Months ended March 31, 2003 and 2002 .................... 3
Notes to Unaudited Consolidated Financial Statements .......... 4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 8
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk ................................................... 24
ITEM 4. Controls and Procedures ....................................... 24
PART II - OTHER INFORMATION
ITEM 1. Legal proceedings ............................................. 25
ITEM 2. Changes in Securities and Use of Proceeds ..................... 25
ITEM 3. Defaults Upon Senior Securities ............................... 25
ITEM 4. Submission of Matters to a Vote of Security Holders ........... 25
ITEM 5. Other Information ............................................. 25
ITEM 6. Exhibits and Reports on Form 8-K .............................. 25
Signatures .............................................................. 29
Trenwick America Corporation
Consolidated Balance Sheet
(Amounts expressed in thousands of United States dollars)
March 31, 2003 and December 31, 2002
(Unaudited)
2003 2002
---------- ----------
ASSETS
Debt securities available for sale, at fair value $ 826,126 $ 636,660
Equity securities, at fair value 8,821 8,849
Cash and cash equivalents 269,567 450,340
Accrued investment income 9,736 8,436
Premiums receivable 174,931 190,617
Reinsurance recoverable balances, net 673,220 641,176
Prepaid reinsurance premiums 67,453 97,647
Deferred policy acquisition costs 48,924 63,167
Due from parent and affiliates 65,633 62,828
Security deposit held by Chubb 50,482 50,207
Other assets 107,122 130,575
---------- ----------
Total assets $2,302,015 $2,340,502
========== ==========
LIABILITIES
Unpaid claims and claims expenses $1,649,615 $1,640,063
Unearned premium income 243,805 324,718
Reinsurance balances payable 42,403 48,213
Indebtedness 76,753 76,498
Due to affiliates 24,499 21,435
Other liabilities 86,558 46,790
---------- ----------
Total liabilities 2,123,633 2,157,717
---------- ----------
MINORITY INTEREST
Mandatorily redeemable preferred capital securities of
subsidiary trust holding solely junior subordinated
debentures of Trenwick America Corporation 87,048 87,032
---------- ----------
COMMON STOCKHOLDER'S EQUITY
Common stock and additional paid in capital 298,877 298,877
Retained earnings (accumulated deficit) (225,687) (218,892)
Accumulated other comprehensive income 18,144 15,768
---------- ----------
Total common stockholder's equity 91,334 95,753
---------- ----------
Total liabilities, minority interest and common
stockholder's equity $2,302,015 $2,340,502
========== ==========
The accompanying notes are an integral part of these statements.
- 1 -
Trenwick America Corporation
Consolidated Statement of Operations, Comprehensive Income and
Changes in Common Stockholder's Equity (Unaudited)
(Amounts expressed in thousands of United States dollars)
Three Months Ended March 31, 2003 and 2002
2003 2002
--------- ---------
REVENUES
Net premiums earned $ 117,984 $ 99,495
Net investment income 8,311 14,856
Net realized investment losses (234) (180)
Other income (expense) (2,076) 2,207
--------- ---------
Total revenues 123,985 116,378
--------- ---------
EXPENSES
Claims and claims expenses incurred 84,516 77,202
Policy acquisition costs 33,258 31,374
Underwriting expenses 4,488 5,121
General and administrative expenses 1,548 690
Interest expense and subsidiary preferred share
dividends 8,113 7,126
Foreign currency losses (gains) 166 (980)
--------- ---------
Total expenses 132,089 120,533
--------- ---------
Loss before income taxes and cumulative effect of
Change in accounting principle (8,104) (4,155)
Applicable income taxes (benefit) (1,309) (1,320)
--------- ---------
Loss before cumulative effect of change in
Accounting principle (6,795) (2,835)
Cumulative effect of change in accounting principle -- (52,119)
--------- ---------
Net loss $ (6,795) $ (54,954)
========= =========
COMPREHENSIVE INCOME (LOSS):
Net loss $ (6,795) $ (54,954)
--------- ---------
Other comprehensive income (loss):
Net unrealized investment gains (loss) 1,387 (4,369)
Foreign currency translation adjustments 989 (14)
--------- ---------
Total other comprehensive income (loss) 2,376 (4,383)
--------- ---------
Comprehensive income (loss) $ (4,419) $ (59,337)
========= =========
CHANGES IN COMMON STOCKHOLDER'S EQUITY:
Common stockholder's equity, beginning of period $ 95,753 $ 175,349
Comprehensive income (loss) (4,419) (59,337)
--------- ---------
Common stockholder's equity, end of period $ 91,334 $ 116,012
========= =========
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 Months Ended March 31, 2003 and 2002
2003 2002
--------- ---------
CASH FOR OPERATING ACTIVITIES $ (35,932) $ (14,948)
--------- ---------
INVESTING ACTIVITIES:
Purchases of debt securities (200,542) (95,523)
Sales of debt securities 28,636 46,076
Maturities of debt securities 24,036 39,125
Effect of exchange rate on cash (293) 212
Additions to premises and equipment (130) (2,060)
--------- ---------
Cash for investing activities (148,293) (12,170)
--------- ---------
FINANCING ACTIVITIES:
Indebtedness issuance costs paid -- (88)
Loans from (to) affiliates 3,452 (3,300)
--------- ---------
Cash from (for) financing activities 3,452 (3,388)
--------- ---------
Change in cash and cash equivalents (180,773) (30,506)
Cash and cash equivalents, beginning of period 450,340 128,522
--------- ---------
Cash and cash equivalents, end of period $ 269,567 $ 98,016
========= =========
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 Months Ended March 31, 2003 and 2002
Note 1
Organization
and Basis
of Presentation
Organization
Trenwick America Corporation ("Trenwick America") is a United States
holding company whose principal subsidiaries underwrote specialty
insurance and reinsurance. Trenwick America's ultimate parent is Trenwick
Group Ltd., ("Trenwick") which is a publicly traded Bermuda holding
company.
In 2002, Trenwick conducted several strategic reviews of its operations in
light of its capital constraints and determined that it was necessary for
Trenwick to reduce its operating leverage by reducing premium volumes to a
level more commensurate with its capital base and to concentrate its
limited financial resources on its core franchise and business, treaty
reinsurance, where it would be able to write reinsurance based on direct
or indirect financial support. As a result, Trenwick voluntarily placed
into runoff its specialty program business formerly operated through its
subsidiary, Canterbury Financial Group, Inc., effective October 30, 2002.
Trenwick America's treaty reinsurance business, formerly written through
its subsidiary, Trenwick America Reinsurance Corporation ("Trenwick
America Re"), has been limited since November 2002 to providing, through
an underwriting facility with Chubb Re, Inc. and its affiliate Federal
Insurance Company (together, "Chubb"), treaty reinsurance to insurers of
property and casualty risks. Since inception in November 2002, Trenwick
America underwrote approximately $128 million of reinsurance under the
facility. Trenwick announced on April 15, 2003 that it would cease
underwriting reinsurance business under the Chubb facility. Trenwick will
continue to be entitled to the economic benefits of existing business
under the facility, subject to the terms and conditions of the facility.
Trenwick America's ability to write reinsurance business under the
facility was severely constrained by its financial condition and concerns
arising with respect to its ongoing stability. As a result, Trenwick
America ceased underwriting activities under the facility in order to
reduce Trenwick America's costs. The effect of this cessation is that
Trenwick America Re is now in runoff. Trenwick America will continue to
service and pay claims for all business previously written through
Trenwick America Re outside of the Chubb facility and will jointly adjust
and settle with Chubb any claims arising under the business written under
the Chubb facility, subject to Chubb's final authority.
Basis of Presentation
The interim financial statements include the accounts of Trenwick America
Corporation 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
- 4 -
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, 2002.
Note 2
Segment
Information
During the first quarter of 2003, Trenwick America amended the basis in
which operating segments are determined. This change followed strategic
reviews of Trenwick America's operations which resulted in the decision to
place two of its operations into voluntary runoff. As a result, the
operations of Trenwick America and its subsidiaries will now be managed on
a legal entity basis, rather than an operating platform basis, in order to
ensure the runoff of these operations is conducted in a manner which will
maximize the economic value of these entities.
The results of Trenwick America's specialty insurance and reinsurance
business is reported in the following two business segments:
- - Trenwick America Re, now in runoff, which consists of treaty reinsurance
formerly written on United States property and casualty risks as well as
the results of the Chubb underwriting facility. Additionally, this segment
includes the runoff of specialty program insurance formerly written by
Chartwell Insurance Company, which merged with and into Trenwick America
Re on December 31, 2002; and
- - The Insurance Corporation of New York ("INSCORP"), which consists of
United States specialty program insurance, including that formerly written
through INSCORP's subsidiary, Dakota Specialty Insurance Company
("Dakota"). These entities ceased underwriting substantially all new
business effective October 30, 2002.
The following tables present business segment financial information for
Trenwick America at March 31, 2003 and December 31, 2002 and for the three
months ended March 31, 2003 and 2002:
Total assets: 2003 2002
------------ ------------
Trenwick America Re $ 1,349,824 $ 1,395,190
INSCORP 933,856 931,726
Unallocated 18,335 13,586
------------ ------------
Total assets $ 2,302,015 $ 2,340,502
============ ============
2003 2002
------------ ------------
Total revenues:
Trenwick America Re $ 81,662 $ 84,910
INSCORP 42,113 31,335
Unallocated 210 133
------------ ------------
Total revenues $ 123,985 $ 116,378
============ ============
- 5 -
Net income (loss):
Trenwick America Re $ (1,014) $ (123)
INSCORP 1,734 2,491
Unallocated interest expense
and subsidiary preferred
share dividends (8,047) (7,119)
Other unallocated 532 1,916
Change in accounting principle -- (52,119)
------------ ------------
Net loss $ (6,795) $ (54,954)
============ ============
Transactions between business segments have been eliminated in
consolidation.
Note 3
Amendment to
Senior Notes
Trenwick America's senior notes, in an outstanding principal amount of
$75,000, were initially due April 1, 2003, and pursuant to an amendment
are now due August 1, 2003. In connection with the amendment to extend the
maturity date, Trenwick America paid interest accrued through April 1,
2003 in the aggregate amount of $2,512 on April 9, 2003. Trenwick America
is engaged in continuing discussions with holders of the senior notes with
respect to a possible restructuring of the senior notes. Trenwick's
agreements entered into in connection with the renewal of its letter of
credit facility in December 2002 together with subsequent amendments
provided that Trenwick America would replace, refinance or restructure the
senior notes by July 15, 2003. Trenwick America does not have sufficient
available liquidity to pay the amount due on August 1, 2003 and is
uncertain whether it will be able to complete the restructuring by that
date if at all.
Note 4
Amendment to
Credit Facility
During the period since December 31, 2002, Trenwick and the various
lending institutions (the "Banks") extending the letter of credit facility
to support Trenwick's operations at Lloyd's of London ("Lloyd's") have
entered into additional amendments and numerous waivers. These amendments
and waivers provide for, among other things, waivers of potential covenant
defaults, reductions in certain financial covenants, additional financial
reporting, approval of certain employee and other payments, and extension
of numerous deadlines imposed under previous amendments, including that to
replace, refinance, or restructure Trenwick America's senior notes by
March 1, 2003.
Note 5
Underwriting
Activities
The components of premiums written and earned for the three months ended
March 31, 2003 and 2002 are as follows:
2003 2002
--------- ---------
Assumed premiums written $ 42,773 $ 102,988
Direct premiums written 43,452 102,134
--------- ---------
Gross premiums written 86,225 205,122
Ceded premiums written (18,961) (73,126)
--------- ---------
Net premiums written $ 67,264 $ 131,996
========= =========
Assumed premiums earned $ 87,193 $ 80,115
Direct premiums earned 88,290 75,406
--------- ---------
Gross premiums earned 175,483 155,521
Ceded premiums earned (57,499) (56,026)
--------- ---------
Net premiums earned $ 117,984 $ 99,495
========= =========
- 6 -
Note 6
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 its implementation required that the
remaining goodwill balance of $52,119 at December 31, 2001 be tested for
impairment under either market value or cash flow tests. The market value
test was performed using the Income Forecast Model, which uses discounted
cash flows. Cash flow tests were also performed, and as a result of the
tests performed, it was determined that the goodwill was impaired and the
entire remaining goodwill balance was charged to operations as of January
1, 2002 as a cumulative effect of an accounting change.
Note 7
Insurance
Regulation
On May 5, 2003, INSCORP entered into a "letter of understanding" with the
New York Insurance Department pursuant to which INSCORP agreed that it
would not take any of the following actions without the prior written
approval of the Department:
o Withdraw funds from its bank accounts, or make disbursements or
payments outside of the ordinary course of business in amounts
exceeding 3% of its aggregate cash and investments.
o Incur any debt obligation or liability for borrowed money not
related directly to the ordinary course of business.
o Settle any inter-company balances or pay any dividends.
o Enter into any new material reinsurance agreement or modify in any
material respect any existing material reinsurance agreement other
than customary renewals.
o Add new members to its board of directors other than current senior
executive officers of INSCORP or its affiliates without notification
to the department.
o Change the compensation terms for directors, officers or employees.
o Pledge or assign any of its assets to secure indebtedness for
borrowed money.
Senior management of Trenwick America has also agreed to meet with the New
York Insurance Department, in person or by conference call, with such
frequency as may be deemed necessary by the Department to provide updates
on the status of Trenwick America and any changes in the status of
INSCORP. INSCORP is also required to provide to the New York Insurance
Department a monthly financial statement consisting of a balance sheet and
income statement within 45 days following the end of such month. The above
described terms will remain in effect until such time as the New York
Insurance Department provides INSCORP written notice of its release or the
agreement is superceded by administrative or court order.
- 7 -
MANANGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion highlights material factors affecting Trenwick America
Corporation's results of operations for the three months ended March 31, 2003
and 2002. This discussion and analysis should be read in conjunction with the
unaudited interim financial statements and notes thereto of Trenwick America
Corporation contained in this filing as well as in conjunction with the audited
financial statements and related notes included in the Annual Report on Form
10-K of Trenwick America Corporation for the year ended December 31, 2002.
Overview
Trenwick America Corporation ("Trenwick America") is a Delaware holding company
headquartered in Stamford, Connecticut whose principal subsidiaries underwrote
specialty insurance and reinsurance.
In 2002, Trenwick conducted several strategic reviews of its operations in light
of its capital constraints and determined that it was necessary for Trenwick to
reduce its operating leverage by reducing premium volumes to a level more
commensurate with its capital base and to concentrate its limited financial
resources on its core franchise and business, treaty reinsurance, where it would
be able to write reinsurance based on direct or indirect financial support. As a
result, Trenwick voluntarily placed into runoff its specialty program business
formerly operated through its subsidiary, Canterbury Financial Group, Inc.,
effective October 30, 2002.
Trenwick America's treaty reinsurance business, formerly written through its
subsidiary, Trenwick America Reinsurance Corporation ("Trenwick America Re"),
has been limited since November 2002 to providing, through an underwriting
facility with Chubb Re, Inc. and its affiliate Federal Insurance Company
(together, "Chubb"), treaty reinsurance to insurers of property and casualty
risks. Since inception in November 2002, Trenwick America underwrote
approximately $128 million of reinsurance under the facility. Trenwick announced
on April 15, 2003 that it would cease underwriting reinsurance business under
the Chubb facility. Trenwick will continue to be entitled to the economic
benefits of existing business under the facility, subject to the terms and
conditions of the facility. Trenwick America's ability to write reinsurance
business under the facility was severely constrained by its financial condition
and concerns arising with respect to its ongoing stability. As a result,
Trenwick America ceased underwriting activities under the facility in order to
reduce Trenwick America's costs. The effect of this cessation is that Trenwick
America Re is now in runoff. Trenwick America will continue to service and pay
claims for all business previously written through Trenwick America Re outside
of the Chubb facility and will jointly adjust and settle with Chubb any claims
arising under the business written under the Chubb facility, subject to Chubb's
final authority.
Critical Accounting Policies
The accounting policies described below are those Trenwick America considers
critical in preparing its consolidated financial statements. These policies
include significant estimates made by management using information available at
the time the estimates are made. However, as described below, these estimates
could change materially if different information or assumptions were used.
- 8 -
Unpaid Claims and Claims Expenses
Claims and claims expenses are recorded as incurred, at management's best
estimate, in order to match claims and claims expense costs with premiums over
the contract periods. The amount provided for unpaid claims and claims expenses
consists of any unpaid reported claims and claims expenses and estimates for
incurred but not reported claims and claims expenses, net of estimated salvage
and subrogation. The estimates for claims and claims expenses incurred but not
reported were developed based on historical claims and claims expense experience
and an actuarial evaluation of expected claims and claims expense experience.
Workers' compensation indemnity liabilities that are considered fixed and
determinable are discounted using an interest rate of 3.5%. Reserves for unpaid
claims and claims expenses, by their very nature, do not represent an exact
calculation of the liability and, while Trenwick America has established
reserves equal to the current best estimate of ultimate losses, there remains a
likelihood that further changes in such claim estimates, either upward or
downward, will occur in the future. Adjustments to previously reported reserves
for unpaid claims and claims expenses are considered changes in estimates for
accounting purposes and are reflected in the income statement in the period in
which the adjustment becomes known.
Unpaid claims and claims expenses are recorded based on actuarial estimates of
losses inherent in that period's claims, including losses for which claims have
not yet been reported. Estimates of unpaid claims and claims expenses rely on
actuarial observations of ultimate loss experience for similar historical
events. Historical insurance industry experience indicates that a high degree of
inherent variability exists in assessing the ultimate amount of losses under
short-duration property and casualty contracts. This inherent variability is
particularly significant for liability-related exposures, including latent
claims issues (such as asbestos and environmental related coverage disputes),
because of the extended period of time, often many years, that transpires
between when a given claim event occurs and the ultimate full settlement of such
claim. This situation is then further exacerbated for reinsurance entities (as
opposed to primary insurers) due to coverage often being provided on an
"excess-of-loss" basis and the resulting time lags in receiving current claims
data. Additionally, the uncertainty is increased as a result of the diversity of
development patterns among different types of reinsurance and the necessary
reliance on ceding companies for information regarding reported claims and
differing reserving practices among ceding companies. Other items that have been
considered in determining reserves but may develop differently than currently
estimated include:
o Claims against insured financial services companies for certain
types of practices including alleged misallocations of shares in
initial public offerings;
o Directors and Officers liability insurance;
o Ultimate losses on business underwritten in the last four years, as
reserve estimates are inherently more uncertain on recent business,
where reported loss activity is still low relative to ultimate
losses;
o Claims liabilities also include provisions for latent injury or
toxic tort claims that cannot be estimated with traditional
reserving techniques. Due to inconsistent court decisions in federal
and state jurisdictions and the wide variation among insureds with
respect to underlying facts and coverage, uncertainty exists with
respect to these claims as to liabilities of ceding companies and,
consequently, reinsurance coverage;
- 9 -
o Reinsurance collectibility - Trenwick America reviews and monitors
its reinsurance recoverables from its reinsurers and makes provision
for uncollectible reinsurance as appropriate. However, given the
magnitude of reinsurance recoverables, $673 million at March 31,
2003, Trenwick America has a significant exposure to collectibility
issues.
Trenwick America's management continually evaluates the potential for
changes in unpaid claims and claims expenses to adjust recorded reserves
and to proactively modify underwriting criteria and product offerings. In
recent periods and continuing throughout 2002, the level of reported
claims activity related to prior year loss events, particularly for
liability-related exposures underwritten in 1997 through 2001, has been
significantly higher than anticipated. Full consideration of these trends
was incorporated into a comprehensive reserve study completed in the
fourth quarter of 2002. Insurance reserves, by their very nature, do not
represent an exact calculation of liability and, while Trenwick America
has established reserves equal to the current best estimate of ultimate
losses, there remains a likelihood that further changes in such loss
estimates, either upward or downward, will occur in the future.
Reinsurance Recoverable Balances
Trenwick America purchases reinsurance to reduce its exposure on individual
risks, catastrophic losses and other large losses. Trenwick America estimates
the amount of uncollectible receivables from its reinsurers each period and
establishes an allowance for uncollectible amounts. The amount of the allowance
is based on the age of unpaid amounts, information about the creditworthiness of
Trenwick America's reinsurers, and other relevant information. Estimates of
uncollectible reinsurance amounts are reviewed quarterly, and changes are
recorded in the period they become known. A significant change in the level of
uncollectible reinsurance amounts would have a significant effect on Trenwick
America's results of operations and financial position.
Investments
Investments are classified as available for sale and recorded at fair value, and
unrealized investment gains and losses are reflected in shareholders' equity.
Investment income is recorded when earned, and capital gains and losses are
recognized when investments are sold. Investments are reviewed periodically to
determine if they have suffered an impairment of value that is considered other
than temporary. If investments are determined to be impaired, a capital loss is
recognized at the date of determination.
Testing for impairment of investments also requires significant management
judgment. The identification of potentially impaired investments, the
determination of their fair value and the assessment of whether any decline in
value is other than temporary are the key judgment elements. The discovery of
new information and the passage of time can significantly change these
judgments. Revisions of impairment judgments are made when new information
becomes known, and any resulting impairment adjustments are made at that time.
The current economic environment and recent volatility of securities markets
increase the difficulty of determining fair value and assessing investment
impairment. The same influences tend to increase the risk of potentially
impaired assets. Trenwick America seeks to match the maturities of invested
assets with the payment of expected liabilities. By doing this, Trenwick America
attempts to make cash available as payments become due. If a significant
mismatch of the maturities of assets and liabilities were to occur and Trenwick
America had to liquidate investments prior to their
- 10 -
maturity, it may incur realized losses and the effect on Trenwick America's
results of operations could be significant.
Deferred Income Taxes
Deferred income tax assets and liabilities are computed based on temporary
differences between financial statement and income tax bases of assets and
liabilities using enacted income tax rates in effect for the year in which the
differences are expected to reverse. FASB Statement No. 109 requires a valuation
allowance to be recorded when it is more likely than not that some or all of the
deferred tax assets will not be realized. Due to Trenwick America's cumulative
losses generated in recent years and uncertainties as to the amount of taxable
income to be generated in future years, as of December 31, 2002, Trenwick
America could not support the future realizability of its net deferred tax
asset. The effects of this determination on Trenwick America's results from
operations were significant. As of March 31, 2003, Trenwick America maintained a
valuation allowance equal to the full amount of its net deferred tax asset.
Results of Operations - Three Months Ended March 31, 2003 and 2002
Trenwick America's net loss of $6.8 million in the three months ended March 31,
2003 represented a $48.2 million improvement from the net loss of $55.0 million
recorded in the three months ended March 31, 2002. The 2003 results included
adverse development in prior accident years as well as increased legal and other
fees related to Trenwick America's ongoing restructuring efforts, while the 2002
quarter included additional underwriting losses incurred related to prior
accident years combined with the writedown of goodwill resulting from the
Trenwick/LaSalle business combination, recorded as a cumulative effect of a
change in accounting principles.
Underwriting income (loss)
Trenwick America produced an underwriting loss of $4.3 million in the first
quarter of 2003 compared to an underwriting loss of $14.2 million in the first
quarter of 2002. Details of underwriting income and loss are produced below:
2003 2002 Change
---------- ---------- ----------
(in thousands)
Net premiums earned $ 117,984 $ 99,495 $ 18,489
---------- ---------- ----------
Claims and claims expenses incurred 84,516 77,202 7,314
Acquisition costs and underwriting
expenses 37,746 36,495 1,251
---------- ---------- ----------
Total expenses 122,262 113,697 8,565
---------- ---------- ----------
Net underwriting loss $ (4,278) $ (14,202) $ 9,924
========== ========== ==========
Loss ratio 71.6% 77.6% (6.0)%
Underwriting expense ratio 32.0% 36.7% (4.7)%
Combined ratio 103.6% 114.3% (10.7)%
The underwriting loss of $4.3 million in 2003 represented a $9.9 million
improvement compared to the underwriting loss of $14.2 million in 2002. The
improvement in the underwriting loss was primarily due to a greater than
expected increase in premiums related to the specialty program insurance
business following the decision to place this business in runoff. This
improvement was offset by prior year adverse development recorded on the treaty
reinsurance business.
- 11 -
Premiums written
Gross premiums written for 2003 were $86.2 million compared to $205.1 million
for the three months ended March 31, 2002, a decrease of $118.9 million or
58.0%. Details of gross premiums written are provided below:
2003 2002 Change
---------- ---------- ----------
(in thousands)
Trenwick America Re $ 42,744 $ 102,807 $ (60,063)
INSCORP 43,481 102,315 (58,834)
---------- ---------- ----------
Gross premiums written $ 86,225 $ 205,122 $ (118,897)
========== ========== ==========
The decrease in Trenwick America Re's gross written premium of $60.1 million
from the first quarter of 2002 was attributable to the current financial
condition of Trenwick America which prevented Trenwick America Re from writing
any new business outside of that written through the Chubb underwriting
facility. The decrease in INSCORP's gross premiums was due to Trenwick America's
decision to cease underwriting specialty program insurance effective October 30,
2002.
Premiums earned
Net premiums earned for the three months ended March 31, 2003 were $118.0
million compared to $99.5 million for 2002.
2003 2002 Change
--------- --------- ---------
(in thousands)
Gross premiums written $ 86,225 $ 205,122 $(118,897)
Change in gross unearned premiums 89,258 (49,601) 138,859
--------- --------- ---------
Gross premiums earned 175,483 155,521 19,962
--------- --------- ---------
Gross premiums ceded (18,961) (73,126) 54,165
Change in ceded unearned premiums (38,538) 17,100 (55,638)
--------- --------- ---------
Ceded premiums earned (57,499) (56,026) (1,473)
--------- --------- ---------
Net premiums earned $ 117,984 $ 99,495 $ 18,489
========= ========= =========
Gross premiums ceded for the three months ended March 31, 2003 were $18.9
million compared to $73.1 million for the same period in 2002. The decrease in
gross premiums ceded of $54.2 million was primarily due to the placement of
Trenwick America's insurance and reinsurance segments into voluntary runoff as
previously discussed.
Claims and claims expenses
Claims and claims expenses for the three months ended March 31, 2003 were $84.5
million, an increase of $7.3 million compared to claims and claims expenses of
$77.2 million for the three months ended March 31, 2002. The increase in claims
and claims expenses in the first quarter of 2003 includes deterioration in
indicated loss ratios in the 1999-2001 accident years on the Trenwick America
Re's and INSCORP's segments of approximately $14.3 million and $2.3 million,
respectively.
- 12 -
Underwriting expenses
2003 2002 Change
-------- -------- --------
(in thousands)
Policy acquisition costs $ 33,258 $ 31,374 $ 1,884
Underwriting expenses 4,488 5,121 (633)
-------- -------- --------
Total underwriting expenses $ 37,746 $ 36,495 $ 1,251
======== ======== ========
Underwriting expense ratio 32.0% 36.7% (4.7)%
======== ======== ========
Total underwriting expenses, comprising policy acquisition costs and
underwriting expenses, for 2003 increased by $1.3 million compared to
underwriting expenses for the three months ended March 31, 2002, commensurate
with the increase in premiums earned. Total underwriting expenses as a
percentage of net premiums earned, or the underwriting expense ratio, were 32.0%
for the three months ended March 31, 2003 compared to 36.7% for the same period
in 2002. The decrease in the underwriting expense ratio occurred principally
because of decreasing acquisition costs related to improved terms and conditions
due to the hardening of the market combined with a decrease in overhead costs.
Underwriting expenses for the three months ended March 31, 2003 as a percentage
of earned premium was 3.8%, a decrease of 1.3% from 5.1% for the same period in
2002.
Net Investment Income
2003 2002 Change
---------- ---------- ----------
(in thousands)
Average invested assets $1,072,488 $1,177,188 $ (104,700)
Average annualized yields 4.24% 6.26% (2.02)%
Investment income - portfolio 11,355 18,413 (7,058)
Investment expenses (3,044) (3,557) 513
---------- ---------- ----------
Net investment income $ 8,311 $ 14,856 $ (6,545)
========== ========== ==========
Net investment income for the three months ended March 31, 2003 was $8.3 million
compared to $14.8 million for the same period in 2002. The decrease in net
investment income in the first quarter of 2003 is due to an overall decline in
market yields during the quarter combined with a decrease in average invested
assets. Investment expense for each of the first quarters of 2003 and 2002
includes interest expense on funds withheld of $2.4 million and $2.9 million,
respectively, under the terms of stop loss reinsurance agreements purchased by
Trenwick America Re prior to 2001.
Net Realized Gains
Net realized losses on investments were $0.2 million during the three months
ended March 31, 2003, consistent with net realized losses for the three months
ended March 31, 2002.
Other income (expense)
Trenwick America recorded other expenses of $2.0 million for the quarter ended
March 31, 2003 as compared to other income of $2.2 million for the same period
in 2002. The majority of the decrease in this line item relates to the $3.0
million of fronting fees incurred in the first quarter of 2003 related to the
underwriting facility with Chubb Re. Additionally, the decrease can be
attributed to a decrease in equity in net earnings of investees as a result of
Trenwick America's
- 13 -
sale of its ownership in one of its managing general agencies at the end of 2002
as a result of the runoff status of its specialty program insurance.
General and administrative expenses
General and administrative expenses for the three months ended March 31, 2003
were $1.5 million, an increase of $0.8 million as compared to $0.7 million
incurred during the same period in 2002. The increase in 2003 is primarily the
result of the inclusion of $1.2 million of non-recurring legal and advisory fees
related to Trenwick America's ongoing efforts to restructure its outstanding
indebtedness.
Interest Expense and Subsidiary Preferred Share Dividends
Interest expense and subsidiary preferred share dividends were $8.1 million for
the first quarter of 2003, an increase of $1.0 million from the same period in
2002. The increase in 2003 resulted from the inclusion of $3.7 million in
interest expense on a loan from Trenwick America's parent, which was repaid
during the quarter. This increase was offset in part by a $2.2 million decrease
in interest in Trenwick America's term loan facility, which was repaid during
the second quarter of 2002.
Foreign Currency Gains (Losses)
Trenwick America recorded foreign currency gains of $0.2 million for the three
months ended March 31, 2003, compared to foreign currency losses of $1.0 million
for the three months ended March 31, 2002.
Liquidity and Capital Resources
Trenwick America is a holding company whose principal assets are its investments
in the common stock of its operating subsidiaries. As a holding company,
Trenwick America's principal source of ongoing funding consists of permissible
dividends, tax allocation payments and other statutorily permissible payments
from its operating subsidiaries. Trenwick America's ability to generate
operating capital is limited and its ability to meet its obligations is
dependent upon funding from its operating subsidiaries. There is substantial
uncertainty as to what amount of future funds it will receive from its operating
subsidiaries. Trenwick America's principal use of cash has been operating
expenses, repayment of loans to affiliates as well as to service its debt
obligations. Trenwick America's operating subsidiaries receive cash from
premiums, investment income and proceeds from sales and maturities of portfolio
investments. They utilize cash to pay claims, purchase their own reinsurance
protections, meet operating and capital expenses and purchase investment
securities.
Trenwick America and its insurance and reinsurance company subsidiaries are
subject to regulatory oversight under the insurance statutes and regulations of
the jurisdictions in which they conduct business, including all states of the
United States. These regulations vary from jurisdiction to jurisdiction and are
generally designed to protect ceding insurance companies and policyholders by
regulating Trenwick America's financial integrity and solvency in its business
transactions and operations. Many of the insurance statutes and regulations
applicable to Trenwick America's subsidiaries relate to reporting and enable
regulators to closely monitor Trenwick America's performance. Typical required
reports include information concerning Trenwick America's capital structure,
ownership, financial condition, and general business operations.
On May 5, 2003 INSCORP entered into a "letter of understanding" with the New
York Insurance Department pursuant to which, among other things, INSCORP is
prohibited from paying any dividends, ordinary or extraordinary, without the
prior written approval of the New York Insurance Department.
On December 3, 2002 Trenwick America Re entered into a "letter of understanding"
with the Connecticut Department of Insurance pursuant to which, among other
things, Trenwick America Re is prohibited from paying any dividends, ordinary or
extraordinary, without the prior written approval of the Connecticut Department
of Insurance.
On November 29, 2002, Trenwick announced that it had elected to suspend, with
immediate effect and for an indefinite period of time, dividends or
distributions payable, including those on the outstanding capital securities of
Trenwick's Capital Trust I and on Trenwick America's senior notes. In addition,
the December amendments to the letter of credit facility prohibit Trenwick
America from paying dividends on the capital securities.
Cash used in Trenwick America's operating activities for the three months ended
March 31, 2003 was $35.9 million compared to cash used by Trenwick America's
operating activities of $14.9 million in the comparable period of 2002. The
increase in cash used in operations was due primarily to a significant increase
in claims and claims expenses paid in 2003 over 2002 Net cash provided by
financing activities during the three months ended March 31, 2003 was $3.5
million compared to cash used for financings of $3.3 million in the three months
ended March 31, 2002.
Financings, Financing Capacity and Capitalization
Concurrently with the business combination involving LaSalle Re Holdings and
Trenwick Group Inc. in September of 2000, Trenwick America and Trenwick Holdings
Limited ("Trenwick Holdings"), Trenwick's United States and United Kingdom
holding companies, entered into an amended and restated $490 million credit
agreement with various lending institutions ("the Banks"), which was guaranteed
by LaSalle Re Holdings. 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
and repaid in full on June 17, 2002. Additionally, on December 24, 2002, the
credit agreement was amended to reduce the letter of credit facility, which is
utilized by Trenwick to support its underwriting operations at Lloyd's, to the
currently outstanding $182.5 million. The letter of credit facility is scheduled
to terminate on December 31, 2003, although the letters of credit issued
pursuant to the facility will not expire until December 31, 2006.
Pursuant to a guaranty agreement entered into concurrently with the credit
agreement, Trenwick has guaranteed the obligations of Trenwick America and
Trenwick Holdings under the credit agreement. In April of 2002, Trenwick pledged
the capital stock of LaSalle Re Holdings, which was a guarantor of the
obligations under the credit agreement, and LaSalle Re as collateral to the
Banks. In December of 2002, Trenwick, Trenwick America and Trenwick Holdings
agreed to provide the Banks additional security interests as described below.
On October 18, 2002, A.M. Best Company lowered the financial strength ratings of
Trenwick, Trenwick America and Trenwick Holdings' operating subsidiaries below
"A-". The lowered A.M. Best Company ratings constituted an event of default
under the credit agreement. In addition, increases in Trenwick's reserves for
unpaid claims and claims expenses and the establishment of a Trenwick America
deferred tax asset valuation allowance in the third quarter of 2002 resulted in
violations of the financial covenants in the credit agreement requiring
- 14 -
Trenwick, Trenwick America and Trenwick Holdings to maintain a minimum tangible
net worth and minimum risk-based capital. On November 13, 2002, Trenwick,
Trenwick America, Trenwick Holdings and the Banks executed a forbearance
agreement with respect to the events of default arising from the lowered A.M.
Best Company ratings and financial covenant violations.
Subsequently, an amendment and waiver of default under the credit agreement and
amendments to the guaranty agreement were entered into on December 24, 2002 (the
"December Amendments"). The December Amendments extended the letter of credit
facility through December 31, 2003 to support Trenwick's underwriting operation
at Lloyd's for the 2003 year of account. To those Banks extending their letters
of credit, Trenwick, Trenwick America and Trenwick Holdings agreed to pay a 5%
per annum cash letter of credit fee, issue pay-in-kind notes bearing interest at
LIBOR plus 2.5% per annum to evidence an additional 3.16% per annum letter of
credit fee, issue warrants equal to 10% of Trenwick's fully diluted equity
capital, and pay 15% of the profits earned by Trenwick and its subsidiaries for
the 2002 and 2003 Lloyd's years of account. In addition, Trenwick, Trenwick
America and Trenwick Holdings agreed to provide the Banks a security interest in
all of their respective equity interests in, and the assets and property of,
their direct and indirect subsidiaries as additional collateral for the Banks,
and to cause the subsidiaries to provide a guaranty to the Banks subject to
applicable laws and regulations and certain existing contractual rights of
holders of other indebtedness. On April 25, 2003, Trenwick issued to the Banks
an aggregate of 3,678,686 warrants to purchase common stock, representing 10% of
the fully diluted equity capital of Trenwick as of such date. The warrants have
a term of eight years from the date of issuance or have an exercise price of
$0.19 per share.
The December Amendments also prohibit Trenwick, Trenwick America and Trenwick
Holdings and their respective subsidiaries from declaring or paying any
dividends (including on Trenwick's common shares, the Series A preferred shares
of LaSalle Re Holdings and the capital securities of Trenwick Capital Trust I).
The December Amendments and the other amendments and waivers entered into in the
first quarter of 2003 waive certain other defaults, add covenants further
restricting the operation of Trenwick's, Trenwick America's and Trenwick
Holdings' business, prohibit Trenwick, Trenwick America and Trenwick Holdings
and their respective subsidiaries from making certain payments without the
Banks' approval, prohibit Trenwick, Trenwick America and Trenwick Holdings and
their respective subsidiaries from selling or otherwise disposing of any assets
or property, require Trenwick to regularly report certain financial information
to the Banks, and adjust downward certain of the financial covenants.
Pursuant to the December Amendments, Trenwick is required to collateralize with
cash, cash equivalents and marketable securities 60% of the outstanding letters
of credit by August 1, 2003. If it is unable to do so, Trenwick's insurance
company subsidiaries, including those of Trenwick America, will be prohibited
from underwriting any insurance or reinsurance without the Banks' prior
approval. In addition, Trenwick is required to use its best efforts to terminate
the letters of credit by December 31, 2003. In order to do so, the letters of
credit would need to be replaced with other letters of credit or collateral
acceptable to Lloyd's. In the event Trenwick has not terminated the letters of
credit by December 31, 2003, it is required on such date to collateralize with
cash, cash equivalents and marketable securities the full amount of the
outstanding letters of credit. At this time, Trenwick does not have sufficient
available liquidity to collateralize the letters of credit as required by the
December Amendments. Additionally, Trenwick does not believe that it will be
able to replace the letters of credit with other letters of credit or collateral
acceptable to Lloyd's.
Since December 2002, Trenwick, Trenwick America and Trenwick Holdings have
entered into additional amendments and numerous waivers with the Banks providing
for, among other things,
- 15 -
waivers of potential covenant defaults, further reductions in certain financial
covenants, additional financial reporting, approval of certain employee and
other payments, approval of the extension of Trenwick America's senior notes
from April 1, 2003 to August 1, 2003, the related payment of interest accrued
through April 1, 2003 to the holders of the Senior Notes and extension of
numerous deadlines imposed under the December Amendments.
If there is an event of default under the credit agreement, including as a
result of Trenwick failing to collateralize the letters of credit as described
above, or if there is an event of default under other outstanding indebtedness
of Trenwick or its subsidiaries, including under the senior notes of Trenwick
America resulting in a cross default under the credit agreement, Trenwick,
Trenwick America and Trenwick Holdings may be required to fully and immediately
collateralize the outstanding letters of credit under the terms of the credit
agreement and the guaranty agreement. No liability for any such amounts has been
reflected in Trenwick's, Trenwick America's or Trenwick Holdings' financial
statements for any future event of default. If the potential future events of
default are not waived, there is substantial doubt as to Trenwick America's
ability to continue as a going concern and Trenwick 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. In addition, at any time one or more of the
insurance regulatory authorities having jurisdiction over Trenwick's, Trenwick
America's and Trenwick Holdings' insurance company subsidiaries may commence
voluntary or involuntary proceedings for the formal supervision, rehabilitation
or liquidation of such subsidiaries, or one or more of the creditors of
Trenwick, Trenwick America and Trenwick Holdings or their subsidiaries may
commence proceedings against Trenwick or its unregulated subsidiaries, including
Trenwick America, seeking their liquidation.
In connection with the Trenwick/LaSalle business combination, Trenwick America
assumed, effective September 27, 2000, Trenwick Group Inc.'s obligations with
respect to $75 million aggregate principal amount of 6.70% senior notes (the
"Senior Notes"), which were initially due on April 1, 2003 and pursuant to an
amendment have been extended to August 1, 2003. They are unsecured obligations
and rank senior in right of payment to all existing and future subordinated
indebtedness of Trenwick America. Interest on the Senior Notes is payable
semi-annually at a rate of 6.7%. In connection with the amendment that extended
the maturity date of the Senior Notes from April 1, 2003 to August 1, 2003,
interest payable through April 1, 2003, in the aggregate amount of $2.5 million,
was paid. Trenwick America anticipates that it will be unable to make payment of
principal and interest on the Senior Notes on August 1, 2003 and has continued
discussions with the Senior Note holders concerning a proposed restructuring or
an additional amendment of the Senior Notes to extend the maturity thereof.
There can be no assurance that an agreement relating to this restructuring will
be reached by August 1, 2003. If such agreement cannot be reached, Trenwick
America will be in default under the terms of the Senior Notes. Additionally,
even if the Senior Notes are restructured, Trenwick America expects that, in
order to repay the principal amounts of the Senior Notes it will be required to
seek additional financing, engage in asset sales, subsidiary dividends or
similar transactions. There can be no assurance that Trenwick will be successful
in such efforts.
Trenwick America also assumed, effective September 27, 2000, Trenwick Group
Inc.'s $113.4 million 8.82% Junior Subordinated Deferrable Interest Debentures
held by Trenwick Capital Trust I in respect of the $110 million in 8.82%
Subordinated Capital Income Securities issued by the Trust. Under the terms of
the debentures, Trenwick America is not restricted from incurring indebtedness,
but is subject to limits on its ability to incur secured indebtedness for
borrowed money.
- 16 -
Upon consummation of the acquisition of Chartwell Re Corporation ("Chartwell")
in 1999, Trenwick Group Inc. became the successor obligor under Chartwell's
Contingent Interest Notes due June 30, 2006. Effective September 27, 2000,
Trenwick America assumed Trenwick Group Inc.'s obligations under the contingent
interest notes in connection with the Trenwick/LaSalle business combination. The
contingent interest notes were issued in an aggregate principal amount of $1
million, which accrues interest at a rate of 8% per annum, compounded annually.
The interest is not payable until the maturity or earlier redemption of the
contingent interest notes. In addition, the contingent interest notes entitle
their holders to receive at maturity, in proportion to the principal amount of
the contingent interest notes held by them, an aggregate of from $0 up to $55
million in contingent interest. The amount of contingent interest payable under
the contingent interest notes is dependent upon the level of unpaid claims and
claims expenses related to business written by Trenwick America's subsidiary,
INSCORP, prior to 1996. The contingent interest notes mature on June 30, 2006.
Through December 31, 2002, Trenwick America had recorded a significant amount of
adverse development related to the subject business, and as a result, the
carrying value of the contingent interest notes was reduced to the minimum
principal value of $1 million plus accrued interest, which is the present value
of the amount expected to be paid at maturity. The contingent interest notes
will continue to accrue interest at a rate of 8% per year. The contingent
interest notes contain covenants which relate to the maintenance of certain
records and limitations on certain indebtedness. At March 31, 2003, Trenwick
America was in compliance with these covenants.
Trenwick America'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. As a result of the
continued deterioration of Trenwick America's financial condition, its senior
debt ratings have been downgraded by Standard & Poor's Corporation to "D" and by
Moody's Investors Service to "Ca." Trenwick America's ability to refinance its
outstanding debt obligations, as well as the cost of such borrowings, has been
materially adversely affected by these ratings downgrades.
Because Trenwick's operations are conducted through its operating subsidiaries,
Trenwick is dependent upon the ability of its operating subsidiaries to transfer
funds, principally in the form of cash dividends, tax reimbursements and other
statutorily permissible payments. In addition to general legal restrictions on
payments of dividends and other distributions to shareholders applicable to all
corporation, Trenwick's insurance subsidiaries are subject to insurance laws and
regulations in the jurisdictions in which they operate that, among other things,
restrict the amount of dividends and other distributions that may be paid to
their parent corporations without prior approval by the insurance regulatory
authorities. Moreover, Trenwick has entered into letter agreements with the
insurance departments of the state of Connecticut and New York which restrict
Trenwick America Re and INSCORP from taking certain actions such as paying
dividends or disposing of assets. As previously discussed, the December
Amendments to Trenwick's letter of credit facility prohibit Trenwick and its
subsidiaries from declaring or paying any dividends (including on Trenwick's
common and preferred shares, the preferred shares of LaSalle Re Holdings and the
capital securities issued by Trenwick Capital Trust I). The amendments also
prohibit Trenwick from making certain payments without the Banks' approval.
Accounting Standards
In January 2003, the FASB issued Interpretation No. ("FIN") 46, Consolidation of
Variable Interest Entities, which Trenwick America intends to adopt on July 1,
2003. FIN 46's consolidation criteria are based on analysis of risks and
rewards, not control, and represent a
- 17 -
significant and complex modification of previous accounting principles. FIN 46
represents an accounting change, not a change in the underlying economics of
asset sales. Under its provisions, certain assets previously sold to special
purpose entities (SPE's) could be consolidated and, if consolidated, any assets
and liabilities now on the books related to those SPE's would be removed.
Because Trenwick America has not traditionally engaged in the types of
securitization vehicles within the scope of FIN 46, management does not believe
adoption of the interpretation will impact future results.
FUTURE BUSINESS OPERATIONS
The future operations of Trenwick America and its financial results are likely
to differ materially from those of 2002 and prior years as Trenwick has placed
into runoff several of its operations, from which a significant portion of its
reserve in 2002 and prior years were derived. Moreover, Trenwick may be required
to dispose of one or all of its operating units in order to satisfy its
obligations to creditors and regulatory requirements or take further action to
reduce the costs of ongoing operations. In addition, under the terms of Trenwick
America's agreements with the Banks, and particularly under the December
Amendments, Trenwick America and its subsidiaries are subject to financial and
operational restrictions which limit Trenwick America's flexibility to pursue
business and strategic alternatives. These restrictions will apply so long as
Trenwick America has unpaid reimbursement obligations to the Banks with respect
to the letters of credit.
The result of the foregoing is that the future operations of Trenwick America,
at least in the next several years, are likely to consist substantially of the
sale, or management in runoff, of some or all of its existing insurance and
reinsurance businesses including administration of claims, regulatory reporting,
settlement of reinsurance agreements (including commutations thereof where
appropriate), cash and investment management and related matters. The costs
involved in such operations are likely to differ significantly from those of
prior years, where a significant portion of the operating costs related to
underwriting, marketing and securing reinsurance for new business. The
reimbursement of costs as they relate directly to the insurance entities
themselves will be subject to review by regulatory authorities which may
challenge these costs or impose other restrictions with respect to the runoff
including the provision of an acceptable runoff plan. Adverse loss developments
or weakness in reinsurance recoveries, among other factors, could significantly
and negatively impact the success of any runoff. It is unlikely that any amounts
will be available to the creditors or equity holders of the direct and indirect
parent companies of any regulated insurance subsidiary of Trenwick until such
time as the regulator having jurisdiction over such subsidiary has been assured
of the solvency of such entity, which may require several years if achievable at
all. It is possible that one or more of Trenwick America's insurance company
subsidiaries may be placed under the control of the regulatory body with
jurisdiction over such entity, voluntarily or involuntarily, through
rehabilitation, liquidation or other proceedings.
- 18 -
RISK FACTORS
You should carefully consider the risks described below regarding us and our
securities. The risks and uncertainties described below are not the only ones we
face. There may be additional risks and uncertainties. If any of the following
risks actually occur or continue to occur, our business, financial condition or
results of operations could be materially and adversely affected and the trading
price of our securities could decline further.
Our auditors have expressed doubt as to our ability to continue as a going
concern.
Our independent accountants, PricewaterhouseCoopers LLP, have stated, in their
audit report with respect to our financial statements as at and for the twelve
months ended December 31, 2002, that substantial doubt exists as to our ability
to continue as a going concern.
We are unable to pay dividends on the capital securities of Trenwick Capital
Trust I and will continue to be unable to do so for the foreseeable future.
In connection with other actions being taken in the fourth quarter of 2002, on
November 29, 2002, Trenwick's Board of Directors elected to suspend the payment
of dividends, including those to holders of the capital securities of Trenwick
Capital Trust I effective immediately and for an indefinite period of time. We
do not expect to be able to pay dividends to holders of the capital securities
of Trenwick Capital Trust I for the foreseeable future.
If potential events of default under our credit facility are not cured or waived
by our lenders, there is substantial doubt as to our ability to continue as a
going concern.
We currently have outstanding $182.5 million of letters of credit issued by the
banks under our credit facility. We are obligated to reimburse the banks for any
amounts drawn on these letters of credit, and for related fees and expenses. No
amounts have been drawn on the letters of credit to date. The banks have
provided us with several waivers of potential defaults and extensions of
deadlines under the credit facility, but we presently do not have the liquidity
necessary to satisfy the banks by the deadlines that have been imposed. If the
potential events of default occur and are not waived, there is substantial doubt
as to our ability to continue as a going concern.
We are unable to repay $75 million in senior notes outstanding which are due
August 1, 2003, and are required to replace, refinance or restructure these
notes by that date.
We are engaged in continuing discussions with the holders of our senior notes
regarding a restructuring of our senior notes. At this time we do not have
sufficient liquidity to pay the principal amount of $75 million due on August 1,
2003, and it is uncertain whether we will be able to replace, refinance or
restructure the notes by that date. If we are unable to secure a waiver or
extension of this deadline, and either the banks under our credit facility or
the senior noteholders determine to exercise the rights available to them upon
this failure, we and/or one or more of our subsidiaries may be forced to seek
protection from creditors.
Our indirect parent, Trenwick Group Ltd., has issued convertible preferred
shares that may result in substantial dilution to existing common shareholders
and/or a change in control of Trenwick Group Ltd. Trenwick Group Ltd. does not
have the ability to control settlement of these convertible preferred shares.
- 19 -
As a result of the September 11, 2001 terrorist attacks, LaSalle Re incurred
large catastrophe losses that enabled Trenwick Group Ltd. to exercise its rights
under a catastrophe equity put option with European Reinsurance Company of
Zurich, a subsidiary of Swiss Reinsurance Company ("European Re"). In this
transaction, Trenwick Group Ltd. issued Series B convertible preferred shares to
European Re for a purchase price of $40 million. These Series B shares are
convertible into Trenwick Group Ltd. common shares upon the occurrence of
certain events, including Trenwick Group Ltd.'s failure to maintain a net worth
(as defined) under generally accepted accounting principles of $225 million.
Trenwick Group Ltd.'s net worth is below $225 million, and a net worth
conversion event has occurred. European Re is able to convert the Series B
Shares into common shares upon not less than 60 trading days notice to Trenwick
Group Ltd., and in the event of such conversion, substantial dilution to
existing common shareholders of Trenwick Group Ltd. will occur. As of December
31, 2002, the Series B Shares would be settled upon conversion with
approximately 12.2 million common shares, or 33% of Trenwick's common shares,
based on the year end figures for 2002. Trenwick has recently been notified by
European Re that European Re believes Trenwick's calculation of the number of
common shares to be received upon conversion of the Series B Preferred Shares is
erroneous and that under European Re's interpretation of the documentation the
Series B Preferred Shares would have been entitled to convert into approximately
48.1 million shares, or 56.6% of the common shares, based on the year end
figures for 2002. Trenwick believes its calculation is correct but intends to
discuss this issue with European Re. If European Re converts its Series B
Preferred Shares, there would be substantial dilution to the holders of the
common shares, and this conversion could result in European Re obtaining control
of Trenwick, and therefore Trenwick America, subject to compliance with
applicable insurance law and regulation.
We are a holding company and substantially all of our assets are held in our
insurance company subsidiaries. These assets are generally unavailable to pay
the debts of the holding company and there is substantial uncertainty as to
whether we will ultimately receive any value from our insurance company
subsidiaries.
We are a holding company with no material assets other than the stock of our
operating subsidiaries. Our ability to meet our debt and securities obligations
and our ability to pay dividends to our shareholders will be dependent on the
earnings and cash flows of our subsidiaries and the ability of the subsidiaries
to pay dividends or to advance or repay funds to us. Payment of dividends and
advances and repayments from our operating insurance company subsidiaries are
regulated by state and foreign insurance laws and regulatory restrictions,
including minimum solvency and liquidity thresholds. We are required to maintain
specified minimum levels of capital and surplus and risk-based capital at our
insurance subsidiaries, which could restrict their ability to pay us dividends,
even if the dividends were permitted by relevant insurance laws and regulations.
We do not expect the majority of our operating subsidiaries will be able to pay
dividends or advance or repay any funds to us in the foreseeable future, which
would prevent us from making payments on our debt or securities obligations
We are in discussions with insurance regulators concerning capital impairment
and other issues relating to our insurance company subsidiaries, and these
regulators may institute supervision, rehabilitation, conservation or
liquidation proceedings with respect to these subsidiaries.
We have been engaged in discussions with the insurance regulators of the
jurisdictions in which our insurance company subsidiaries are domiciled. We have
been required to restrict our Connecticut and New York insurance company
subsidiaries from taking certain actions such as
- 20 -
paying dividends or disposing of assets, and we have been required to submit a
plan of action to eliminate the statutory capital impairment at our New York
insurance company subsidiary. Trenwick America has also been notified by the New
York Insurance Department ("NYID") that, in the NYID's view, approximately $26
million in loans made to Trenwick America by INSCORP in 2002 were in
contravention of New York regulatory requirements. As a result, INSCORP and
Trenwick America may be the subject of regulatory action brought by the NYID.
Each of these regulators, as well as the State of North Dakota, may act
independently of one another with respect to the insurance company domiciled in
its jurisdiction. The insolvency of any of the insurance company subsidiaries or
any action by an insurance regulator, such as the commencement of voluntary or
involuntary supervision, rehabilitation, conservation or liquidation proceedings
with respect to one of these companies, could precipitate additional actions by
the other insurance regulators. In the event of any such proceedings, it is
unlikely that the assets of the insurance companies will be available to satisfy
each others' liabilities, or the liabilities of Trenwick.
Our financial strength ratings have been significantly downgraded or withdrawn
by Standard & Poor's, Moody's Investor Services and Fitch.
Our financial strength and other ratings have been downgraded significantly by
Standard & Poor's and Fitch and have been withdrawn by Moody's Investor
Services. These downgrades and withdrawal generally reflect the ratings
services' views that our business prospects and financial flexibility are very
limited and their substantial doubt as to our ability to restructure our senior
debt. In addition, these downgrades significantly and negatively affect our
ability to raise capital and to negotiate favorable terms in restructuring our
debt.
Our insurance company subsidiaries have ceased to write substantially all new
business and are in runoff.
We have placed our specialty program insurance and treaty reinsurance businesses
into runoff, therefore little or no new business is being written. Our objective
is to maximize the economic value of the runoff through effective claims
settlement, commutation of assumed obligations where appropriate, collection of
reinsurance recoverables and effective cash management. While it is possible
that some positive economic value may result over time from the runoff of this
operation, we do not expect them to contribute significantly to our revenue or
results of operations and there are significant uncertainties that could if
realized adversely affect our ability to continue a solvent runoff of this
operation. Trenwick has historically not operated in runoff and may not have
internal expertise, or may not be able to retain external support such as
experienced consultants, to do so effectively.
Our ability to attract and retain key management personnel has been negatively
affected.
We have experienced the loss of several senior executive officers in the last
nine months. A number of executive positions at Trenwick and its subsidiaries,
including Trenwick's Acting Chief Executive Officer and its Chief Actuary, are
now being filled by consultants under short term arrangements. Our ability to
operate our business has been, and will continue to be, dependent on our ability
to retain the services of our existing key senior executive officers and to
attract and retain additional qualified personnel in the future as employees and
consultants. The loss of the services of any of our key executive officers or
the inability to hire and retain other highly qualified personnel in the future
could adversely affect our ability to conduct our business. Our financial
situation and that of our subsidiaries has made it and likely will continue to
make it difficult to retain key employees.
- 21 -
Our reinsurers may not satisfy their obligations to us.
Our business model relied to a large extent on reinsurance to reduce our
underwriting risk. As of December 31, 2002, our reinsurance recoverable balance
was approximately $641.2 million. Our subsidiaries are subject to credit risk
with respect to their reinsurers because the transfer of risk to a reinsurer
does not relieve the insurers of their liability to the insureds. In addition,
reinsurers may be unwilling to pay our insurance company subsidiaries even
though they have the financial resources and are contractually obligated to do
so. Unfavorable arbitration decisions or the failure of one or more of the
reinsurers to honor their obligations or make timely payments would impact our
subsidiaries' cash flow and could cause us to incur significant losses. In the
event of the rehabilitation, supervision, conservation or liquidation of any of
our insurance company subsidiaries, we may not be able to influence the outcome
of the collectibility of reinsurance recoverables, in that it will be the
responsibility of the regulators supervising such proceedings.
If actual claims exceed our loss reserves, our financial results could be
significantly adversely affected.
We establish loss reserves to cover our estimated liability for the payment of
all losses and loss expenses incurred with respect to premiums earned on the
policies that we write. We utilize actuarial models as well as historical
insurance industry loss development patterns to establish appropriate loss
reserves, as well as estimates of future trends in claims severity, frequency
and other factors. Establishing an appropriate level of loss reserves is an
inherently uncertain process. Accordingly, actual claims and claim expenses paid
will likely deviate, perhaps substantially, from the reserve estimates reflected
in our consolidated financial statements.
In 2002 we increased our loss reserves for unpaid claims and claims expenses by
$229.4 million. The reserve increases reflect a reassessment of our reserves in
light of recent reported loss activity trends across our major business groups.
Our results of operations and financial condition depend upon our ability to
assess accurately the potential losses associated with the risks that we insure
and reinsure. To the extent actual claims continue to exceed our expectations,
we will be required to immediately recognize the less favorable experience. This
could cause a material increase in our liabilities and a reduction in our
profitability, including an operating loss and reduction of capital in the
period in which such action occurs.
The effects of emerging claim and coverage issues on our business are uncertain.
As industry practices and legal, judicial, social and other environmental
conditions change, unexpected and unintended issues related to claims and
coverage may emerge. These issues may adversely affect our business by either
extending coverage beyond our underwriting intent or by increasing the number or
size of claims. In some instances, these changes may not become apparent until
some time after we have issued insurance or reinsurance contracts that are
affected by the changes. As a result, the full extent of liability under our
insurance or reinsurance contracts may not be known for many years after a
contract is issued.
The regulatory system under which we operate, and potential changes thereto,
could have a material adverse effect on our business.
- 22 -
Our insurance and reinsurance subsidiaries may not be able to obtain or maintain
necessary licenses, permits, authorizations or accreditations in locales where
we currently engage in business, or may be able to do so only at significant
cost. In addition, we may not be able to comply fully with, or obtain
appropriate exemptions from, the wide variety of laws and regulations applicable
to insurance or reinsurance companies or holding companies. As a result of the
events of the past several months, we are presently in discussions with, or
subject to orders issued by, insurance regulators in all of the jurisdictions in
which we and our insurance company subsidiaries are domiciled. Our inability to
comply with or to obtain appropriate authorizations and/or exemptions under any
applicable laws, regulations or orders could result in further restrictions on
our ability to do business and could subject us to fines and other sanctions
including the ceasing of our ongoing operations.
Recent events may result in political, regulatory and industry initiatives which
could adversely affect our business.
The supply of insurance and reinsurance coverage has decreased due to withdrawal
of capacity and substantial reductions in capital resulting from, among other
things, the terrorist attacks of September 11, 2001. This tightening of supply
may result in governmental intervention in the insurance and reinsurance
markets, both in the United States and worldwide. For example, on November 26,
2002, the Terrorism Risk Insurance Act was enacted to ensure the availability of
insurance coverage for terrorist acts in the United States. This law requires
insurers writing certain lines of property and casualty insurance to offer
coverage against certain acts of terrorism causing damage within the United
States or to U.S. flagged vessels or aircraft. In return, the law requires the
federal government to indemnify such insurers for 90% of insured losses
resulting from covered acts of terrorism, subject to a premium-based deductible.
The law expires automatically at the end of 2005. Currently there is a great
deal of uncertainty as to what effect the law will have on the insurance
industry. We are currently unable to predict the extent to which the foregoing
and other new initiatives may affect the demand for our products or the risks
which may be available for us to consider underwriting. At the same time,
threats of further terrorist attacks and the military initiatives and political
unrest in the Middle East and Asia have adversely affected general economic,
market and political conditions, increasing many of the risks associated with
the insurance markets worldwide.
Applicable insurance laws may make it difficult to effect a change of control of
our company.
Before a person can acquire control of a U.S. insurance company, prior written
approval must be obtained from the insurance commissioner of the state where the
domestic insurer is domiciled. Prior to granting approval of an application to
acquire control of a domestic insurer, the state insurance commissioner will
consider such factors as the financial strength of the applicant, the integrity
and management of the applicant's board of directors and executive officers, the
acquiror's plans for the management of the applicant's board of directors and
executive officers, the acquiror's plans for the future operations of the
domestic insurer and any anti-competitive results that may arise from the
consummation of the acquisition of control. Generally, state statutes provide
that control over a domestic insurer is presumed to exist if any person,
directly or indirectly, owns, controls, holds with the power to vote, or holds
proxies representing, 10% or more of the voting securities of the domestic
insurer. Because a person acquiring 10% or more of our common shares would
indirectly control the same percentage of the stock of our U.S. insurance
company, the insurance change of control laws of Connecticut, New York and North
Dakota would likely apply to such a transaction.
- 23 -
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Trenwick America reviewed the change in its exposure to market risks since
December 31, 2002. In addition, the components of its investment holdings and
its risk management strategy and objectives have not materially changed.
Therefore, Trenwick America believes that the potential for loss in each market
risk sector described in its Annual Report on Form 10-K for the year ended
December 31, 2002 has not materially changed.
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
our management, including the Acting Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Rule 13a-15 promulgated under the Securities
and Exchange Act of 1934. Based on that evaluation, our management, including
the Acting Chief Executive Officer and Chief Financial Officer, concluded that
our disclosure controls and procedures are effective in timely alerting them to
material information required to be included in our periodic reports to be filed
with the Securities and Exchange Commission. In addition, there have been no
significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies or
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.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Trenwick America Corporation is party to various legal proceedings
generally arising in the normal course of its business. Trenwick America
Corporation does not believe that the eventual outcome of any such proceeding
will have a material effect on its financial condition or business. Trenwick
America Corporation'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 Corporation's insurance and reinsurance arrangements,
disputes are generally required to be finally settled by arbitration.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
10.1 Fifth Amendment to the Credit Agreement, dated as of January
16, 2003, among Trenwick America Corporation, Trenwick
Holdings Limited, Trenwick UK Holdings Limited, the lending
institutions from time to time party to the Credit Agreement,
Wachovia Bank, National Association and JPMorgan Chase Bank.
Incorporated by reference to Exhibit 99.1 to Trenwick America
Corporation's Current Report on Form 8-K, filed on March 18,
2003 (File No. 0-31967).
10.2 Fifth Amendment and Consent to the Holdings Guaranty, dated as
of January 16, 2003, among Trenwick Group, Ltd. and the
lending institutions from time to time party to the Credit
Agreement. Incorporated by reference to Exhibit 99.2 to
Trenwick America Corporation's Current Report on Form 8-K,
filed on March 18, 2003 (File No. 0-31967).
10.3 Agreement, dated January 28, 2003, between James F. Billett
and Trenwick Group Ltd. Incorporated by reference to Exhibit
99.3 to Trenwick America
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Corporation's Current Report on Form 8-K, filed on March 18,
2003 (File No. 0-31967).
10.4 Sixth Amendment and Waiver to the Credit Agreement, dated as
of January 27, 2003, among Trenwick America Corporation,
Trenwick Holdings Limited, Trenwick UK Holdings Limited, the
lending institutions from time to time party to the Credit
Agreement, Wachovia Bank, National Association and JPMorgan
Chase Bank. Incorporated by reference to Exhibit 99.4 to
Trenwick America Corporation's Current Report on Form 8-K,
filed on March 18, 2003 (File No. 0-31967).
10.5 Sixth Amendment and Consent to the Holdings Guaranty, dated as
of January 27, 2003, among Trenwick Group Ltd. and the lending
institutions form time to time party to the Credit Agreement.
Incorporated by reference to Exhibit 99.5 to Trenwick America
Corporation's Current Report on Form 8-K, filed on March 18,
2003 (File No. 0-31967).
10.6 Seventh Amendment and Waiver to the Credit Agreement, dated as
of March 7, 2003, among Trenwick America Corporation, Trenwick
Holdings Limited, Trenwick UK Holdings Limited, the lending
institutions from time to time party to the Credit Agreement,
Wachovia Bank, National Association and JPMorgan Chase Bank.
Incorporated by reference to Exhibit 99.6 to Trenwick America
Corporation's Current Report on Form 8-K, filed on March 18,
2003 (File No. 0-31967).
10.7 Seventh Amendment to the Holdings Guaranty, dated as of March
7, 2003, among Trenwick Group Ltd. and the lending
institutions form time to time party to the Credit Agreement.
Incorporated by reference to Exhibit 99.7 to Trenwick America
Corporation's Current Report on Form 8-K, filed on March 18,
2003 (File No. 0-31967).
10.8 Fourth Waiver to the Credit Agreement, dated as of March 14,
2003, among Trenwick America Corporation, Trenwick Holdings
Limited, Trenwick UK Holdings Limited, the lending
institutions from time to time party to the Credit Agreement,
Wachovia Bank, National Association and JPMorgan Chase Bank.
Incorporated by reference to Exhibit 99.8 to Trenwick America
Corporation's Current Report on Form 8-K, filed on March 18,
2003 (File No. 0-31967).
10.9 Fifth Waiver to the Credit Agreement, dated as of March 21,
2003, among Trenwick America Corporation, Trenwick Holdings
Limited, Trenwick UK Holdings Limited, the lending
institutions from time to time party to the Credit Agreement,
Wachovia Bank, National Association, Fleet National Bank and
JPMorgan Chase Bank. Incorporated by reference to Exhibit 99.1
to Trenwick America Corporation's Current Report on Form 8-K,
filed on April 10, 2003. (File No. 0-31967)
10.10 Eighth Amendment to the Holdings Guaranty, dated as of March
24, 2003, among Trenwick Group Ltd. and the lending
institutions party to the Credit Agreement. Incorporated by
reference to Exhibit 99.2 to Trenwick America
- 26 -
Corporation's Current Report on Form 8-K, filed on April 10,
2003. (File No. 0-31967)
10.11 Eighth Amendment and Waiver to the Credit Agreement, dated as
of March 28, 2003, among Trenwick America Corporation,
Trenwick Holdings Limited, Trenwick UK Holdings Limited, the
lending institutions from time to time party to the Credit
Agreement, Wachovia Bank, National Association, Fleet National
Bank and JPMorgan Chase Bank. Incorporated by reference to
Exhibit 99.3 to Trenwick America Corporation's Current Report
on Form 8-K, filed on April 10, 2003. (File No. 0-31967)
10.12 Ninth Amendment to the Holdings Guaranty, dated as of March
28, 2003, among Trenwick Group Ltd. and the lending
institutions party to the Credit Agreement. Incorporated by
reference to Exhibit 99.4 to Trenwick America Corporation's
Current Report on Form 8-K, filed on April 10, 2003. (File No.
0-31967)
10.13 Ninth Amendment and Waiver to the Credit Agreement, dated as
of April 8, 2003, among Trenwick America Corporation, Trenwick
Holdings Limited, Trenwick UK Holdings Limited, the lending
institutions from time to time party to the Credit Agreement,
Wachovia Bank, National Association, Fleet National Bank and
JPMorgan Chase Bank. Incorporated by reference to Exhibit 99.5
to Trenwick America Corporation's Current Report on Form 8-K,
filed on April 10, 2003. (File No. 0-31967)
10.14 Tenth Amendment and Consent to the Holdings Guaranty, dated as
of April 8, 2003, among Trenwick Group Ltd. and the lending
institutions party to the Credit Agreement. Incorporated by
reference to Exhibit 99.6 to Trenwick America Corporation's
Current Report on Form 8-K, filed on April 10, 2003. (File No.
0-31967)
10.15 Eleventh Amendment and Consent to the Holdings Guaranty, dated
as of April 16, 2003, among Trenwick Group Ltd. and the
lending institutions party to the Credit Agreement.*
10.16 Agreement between the New York Insurance Department and The
Insurance Corporation of New York dated May 5, 2003.*
99.1 Certification of Acting Chief Executive Officer.*
99.2 Certification of Chief Financial Officer.*
* Filed herewith
(b) Reports on Form 8-K
Trenwick America filed Current Reports on Form 8-K on the following dates during
the first quarter of 2003:
March 18, 2003, reporting (a) certain amendments to Trenwick's credit
agreement and related guaranty, (b) Trenwick's delivery of notice to the
holder of Trenwick's Series B
- 27 -
Cumulative Perpetual Preferred Shares that Trenwick's GAAP net worth had
fallen below $225 million and that a Net Worth Conversion Event would
occur on April 21, 2003 if Trenwick's GAAP net worth did not equal or
exceed $225 million on or before such date, (c) certain risk-based capital
(RBC) and statutory capital impairment issues relating to Trenwick's
subsidiaries Trenwick America Reinsurance Corporation and The Insurance
Corporation of New York, and discussions with the insurance departments of
Connecticut and New York relating thereto, (d) the receipt by Trenwick of
notice from the New York Stock Exchange of the potential suspension from
trading and delisting of Trenwick's common shares and the Series A
Preferred Shares of LaSalle Re Holdings Limited and (e) the contribution
of the Oak Entities to LaSalle Re Limited.
March 21, 2003, reporting the suspension from trading and delisting by the
New York Stock Exchange of the common shares of Trenwick and the Series A
Preferred Shares of LaSalle Re Holdings Limited.
- 28 -
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: May 15, 2003 By: /s/ W. Marston Becker
-------------------------------------
Name: W. Marston Becker
Title: Acting Chairman and
Acting Chief Executive Officer
Date: May 15, 2003 By: /s/ Alan L. Hunte
-------------------------------------
Name: Alan L. Hunte
Title: Executive Vice President and
Chief Financial Officer
- 29 -
CERTIFICATION OF ACTING CHIEF EXECUTIVE OFFICER
I, W. Marston Becker, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Trenwick America
Corporation (the "Registrant");
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 officer 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 officer 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 officer 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.
Date: May 15, 2003
/s/ W. Marston Becker
------------------------------
W. Marston Becker
Acting Chief Executive Officer
- 30 -
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Alan L. Hunte, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Trenwick America
Corporation (the "Registrant");
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 officer 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 officer 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 officer 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.
Date: May 15, 2003
/s/ Alan L. Hunte
------------------------------
Alan L. Hunte
Executive Vice President and
Chief Financial Officer
- 31 -