As a result of a significant deterioration in Trenwick's financial condition, more fully described in "Significant Developments" below, Trenwick hired Greenhill & Co., LLC as its financial advisor to assist in the evaluation and implementation of a possible restructuring of Trenwick America's outstanding indebtedness and its preferred equity as well as other strategic alternatives.
various lending institutions (the "Banks"). 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 of London ("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.
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 perpetual 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 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.
addition, at any time the insurance regulatory authorities having jurisdiction over Trenwick America's insurance company operating 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 America or its subsidiaries may commence proceedings against Trenwick America or its unregulated subsidiaries seeking their liquidation.
Moody's Investors Service announced on January 31, 2003 that it had lowered the senior debt rating of Trenwick from "Caa3" to "Ca", and had lowered the ratings of the trust preferred securities of Trenwick America from "Ca" to "C", following Trenwick's announcement that it would post a fourth quarter 2002 reserve charge. Moody's Investors Service noted that the reserve charge was significant in relation to the book value reported by Trenwick at the end of the third quarter of 2002 and also in relation to Trenwick's market capitalization, which is well below that amount. Moody's Investors Service also noted that, in its opinion, the charge further diminishes the value that creditors will be able to extract from Trenwick America and its affiliates in its restructuring efforts, and that currently virtually all of Trenwick America's financial assets are held by regulated insurance subsidiaries, limiting resources available to meet debt obligations.
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.
Reinsurance agreements provide for recovery of a portion of certain claims and claims expenses from reinsurers. Trenwick America Re and its subsidiaries enter into reinsurance and retrocessional agreements to reduce their net liability on individual risks, protect against catastrophic losses and maintain acceptable loss ratios. Trenwick America Re and its subsidiaries remain liable in the event that reinsurers are unable to meet their obligations; however, Trenwick America Re and its subsidiaries hold partial collateral under several of these agreements in order to mitigate the risk. Letters of credit, trust accounts and funds withheld in the aggregate amount of $294.6 million (including interest) have been arranged in favor of Trenwick America Re and its subsidiaries collateralizing reinsurance recoverables with respect to certain retrocessionaires.
As part of its merger with Trenwick Group Inc., Chartwell purchased, on October 27, 1999, a reinsurance policy providing for up to $100 million in coverage in order to indemnify Trenwick Group Inc. against unanticipated increases in Chartwell's reserves for business written on or before the date the Trenwick/Chartwell merger was completed. The reinsurance policy applied to all of Chartwell's business, including its operations at Lloyd's and was fully utilized as of year end 2000. In addition, as part of the merger, Chartwell commuted several aggregate stop-loss reinsurance treaties.
estimate of ultimate losses, there remains a likelihood that further changes in such loss estimates, either upward or downward, will occur in the future.
Management believes that Trenwick America's claim and claim expense liabilities are adequate. However, the process of estimating claims and claim expense liabilities is inherently imprecise and involves an evaluation of many variables, including potentially unpredictable social and economic conditions. Accordingly, there can be no assurance that Trenwick America's ultimate liability will not vary significantly from amounts reserved. The uncertainties in and the risk factors associated with the claims reserves at December 31, 2002 are similar to the uncertainties at prior year ends. However, given Trenwick America's current surplus levels, it is now less financially equipped to handle these uncertainties should there be adverse development in the loss reserves.
As of December 31, 2002, Trenwick America's exposure to high yield investments was minimal. While these investments are more susceptible to credit risk, their total market value represents 6% of total investments and cash and therefore management believes that the exposure to credit risk is not material. Trenwick America has no derivatives and its investments do not contain terms that may result in potential losses due to leverage.
Trenwick America monitors its sensitivity to interest rate risk by evaluating the change in its financial assets and liabilities relative to hypothetical increases and decreases in interest rates. It is assumed that the changes occur immediately and uniformly to each category of instrument containing interest rate risks. Significant variations in market interest rates could produce changes in the timing of repayments due to prepayment options available. The fair value of such instruments could be affected and therefore actual results might differ from those reflected in this summary.
The future operations of Trenwick America and its financial results are likely to differ materially from those of 2002 and prior years as 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.
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.
expect to be able to pay dividends to holders of the capital securities of Trenwick Capital Trust I for the foreseeable future.
Our specialty program insurance segment, from which we historically derived a significant portion of our revenue, has ceased to write substantially all new business and is in runoff.
We have experienced the loss of several senior executive officers in the last nine months. A number of executives 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.
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.