The Company's executive offices are located in approximately 3,870 square feet of leased office space in Hamilton, Bermuda. Management believes the Company's current office space is adequate for its needs.
The 2002, 2001 and 2000 years presented below relate to a December 31 year end, and the 1999 and 1998 years relate to a September 30 year end.
The Company was incorporated in Bermuda in September 1995 to act as a holding company for LaSalle Re Limited ("LaSalle Re"), which was incorporated in Bermuda in October 1993 and commenced operations on November 22, 1993. It primarily acted as a multi-line reinsurance company with emphasis on property catastrophe business.
From LaSalle Re's incorporation in 1993 until April 1, 2002, its primary business activity was as a property and casualty reinsurer underwriting worldwide specialty products with an emphasis on catastrophe reinsurance. Catastrophe reinsurance contracts cover unpredictable events such as hurricanes, windstorms, hailstorms, earthquakes, fires, industrial explosions, freezes, riots, floods and other man-made or natural disasters. Following losses sustained in the September 11, 2001 terrorist attacks, Trenwick determined that without additional capital LaSalle Re could no longer compete effectively in this business nor could Trenwick remain in a business that was inherently unpredictable and which could result in additional significant losses. Effective April 1, 2002, LaSalle Re was placed into runoff following the sale of its in-force catastrophe reinsurance business to Endurance Specialty Insurance Ltd. ("Endurance") (See "Significant Developments," below).
which could make it extremely difficult to continue in their current businesses, if at all, and they should carefully review this annual report on Form 10-K as well as Trenwick's annual report on Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission, including the "Significant Developments," "Risk Factors" and "Forward-Looking Statements" sections thereof, as well as other sections of this Report and Trenwick's Report.
The Company's independent accountants, PricewaterhouseCoopers LLP, have stated, in their audit report with respect to the Company's financial statements as at and for the twelve months ended December 31, 2002, that substantial doubt exists as to the Company's ability to continue as a going concern. Trenwick's and the Company's ability to operate continue to be adversely impacted by the deterioration in Trenwick's financial condition and its lack of available financial resources to meet its obligations.
Trenwick and the Company's wholly owned subsidiary, LaSalle Re, entered into a Transfer and Purchase Agreement, a Quota Share Retrocession Agreement, a Bill of Sale, an Assignment Agreement, an Administrative Services Agreement and an Assignment of Reinsurance Recoverables and Other Receivables, each dated as of May 16, 2002, pursuant to which Trenwick and LaSalle Re sold to Endurance the in-force property catastrophe business of LaSalle Re as of April 1, 2002. Concurrent with the sale, substantially all of LaSalle Re's employees became employees of Endurance. The Quota Share Retrocession Agreement was a 100% quota share reinsurance agreement, with Endurance paying LaSalle Re a ceding commission of 25% of premiums ceded and additional profit sharing of 50% if the losses do not exceed a loss ratio of 45%. In addition, Endurance will have the right to renew LaSalle Re's in-force business as it expires in exchange for a 12.5% commission on the business renewed. Included in the Company's results for the year ended December 31, 2002 are $11.6 million in ceding commissions earned on the quota share agreement with Endurance as well as $6.0 million in amortization of acquisition costs on the related assumed business. The loss on sale of in-force business recorded during 2002 of $20.1 million is net of the non-recurring revenue and expense items incurred as a result of the sale, as detailed in the table below (in millions).
Realization of any additional revenue from the renewal commission in excess of the $8.0 million previously received, or future revenue from profit sharing related to the loss ratio, is not known at this time; however, the Company and LaSalle Re do not expect to receive significant revenues in 2003 from this transaction.
Subsequent to LaSalle Re being placed into runoff, Trenwick borrowed $258 million from LaSalle Re in June 2002. Of the funds borrowed Trenwick used approximately $195 million to repay the outstanding term indebtedness under Trenwick's bank credit facility which had been guaranteed by the Company and utilized the remaining portion primarily for capital support of Trenwick's Lloyd's operations (including the Oak Entities, which became wholly owned subsidiaries of LaSalle Re effective December 10, 2002).
On November 29, 2002, the Company suspended the payment of dividends on its Series A Preferred Shares as a result of restrictions on the Company under Trenwick's credit agreement with various lending institutions, under which the Company is a guarantor. The Company intends to accrue the dividends until payment is reinstated, if ever. The date of dividend payment reinstatement has not been determined by the Company. The Company does not expect to be able to pay dividends to the holders of the Series A Preferred Shares for the foreseeable future, if ever.
In 2000, Trenwick borrowed $75 million from LaSalle Re. The proceeds of the loan were used primarily for capital support of Trenwick's Lloyd's operations, including those of the Oak Entities, and for general corporate purposes. The BMA recently confirmed to the Company that it will allow LaSalle Re's existing $75 million loan to Trenwick, plus accrued interest, to continue to be recorded as an admitted asset on LaSalle Re's balance sheet. LaSalle Re's statutory capital and surplus is estimated to be $133 million, which is above the $100 million minimum required as a Class 4 insurer in Bermuda. In light of Trenwick's current financial condition, there is significant uncertainty as to whether Trenwick will be able, financially, to pay principal and interest on this loan. Should the loan and related interest and other related intercompany receivables be determined to not be realizable, LaSalle Re would fall below the minimum required statutory capital and surplus amount of $100 million. The Company is required by Trenwick's credit agreement (discussed below) to use its best efforts to obtain a reduction in its insurance license classification from the BMA. LaSalle Re has notified the BMA that it intends to file with the BMA an application during 2003 for a reduction in class from a Class 4 insurer to a Class 3 insurer, which would reduce its statutory capital and surplus requirement to $29.4 million if applied to its December 31, 2002 statutory balance sheet. There can be no assurance that such an application would be approved by the BMA, or if approved, that the BMA would not impose more restrictive capital and surplus and other financial requirements on LaSalle than those generally established for Class 3 insurers.
Pledge by Trenwick of the Company's Stock and Assets, Including the Stock of LaSalle Re
Pursuant to a guaranty agreement entered into concurrently with the credit agreement, the Company has guaranteed the obligations of Trenwick America and Trenwick Holdings under the credit agreement. In April of 2002, Trenwick pledged the capital stock of the Company, and the Company and Trenwick pledged the capital stock of LaSalle Re as collateral to the Banks. In December of 2002, Trenwick 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 the Company and Trenwick's other operating subsidiaries below "A-". The lowered A.M. Best Company ratings constituted an event of default under Trenwick's credit agreement. In addition, increases in Trenwick's reserves for unpaid claims and claims expenses and the establishment of a deferred tax asset reserve related to Trenwick's United States subsidiaries in the third quarter of 2002 resulted in violations of the financial covenants in the credit agreement requiring Trenwick to maintain a minimum tangible net worth and minimum risk-based
capital. On November 13, 2002, Trenwick, its subsidiaries (including the Company) 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.
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 the Company), including under Trenwick America's senior notes, resulting in a cross default under the credit agreement, Trenwick 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 financial statements. If events of default occur and are not waived, there is substantial doubt as to Trenwick's ability to continue
Pursuant to the December Amendments, the Company is also required, among other things, to (1) use its best efforts to convert LaSalle Re to Class 3 insurer status in Bermuda, (2) use its best efforts to secure loss portfolio transfers at LaSalle Re and its subsidiaries in form and substance satisfactory to the Banks, (3) use its best efforts to secure stop-loss reinsurance treaties satisfactory to the Banks for the 2001, 2002 and 2003 years of account at Lloyd's and (4) promptly pay, upon receipt of notice from Lloyd's, any solvency deficit or cash call for the 2002 and prior years of account at Lloyd's.
Moody's Investor Services announced on April 10, 2003 that it had withdrawn all debt and preferred stock ratings of Trenwick Group Ltd. and its subsidiaries. The action reflects the failure of Trenwick America to pay the $75 million principal payment in its Senior Notes due April 1, 2003 and the ongoing effort to restructure Trenwick's debt obligations. The senior debt rating of Trenwick and the rating of Trenwick America's trust preferred securities and previously been lowered to "Ca" and "C," respectively, on January 31, 2003.
On April 3, 2003, Fitch Ratings announced that it had lowered its long term and senior debt rating on Trenwick America to "D" from "C". In addition, Fitch lowered its long term ratings on Trenwick and the Company to "D" from "C". Fitch's "C" ratings on the Company's Series A Preferred Shares and the capital securities of Trenwick Capital Trust I were unchanged. Fitch's rating action also followed the announced non-payment of principal and interest on the Senior Notes. Fitch's "D" rating indicates that Fitch believes that the recovery value to the holders of Trenwick America's Senior Notes, is unlikely to exceed fifty percent.
In addition to providing net income (loss) information, when comparing the results of operations for the years ended December 31, 2002 and 2001, the Company has also provided operating income (loss) and underwriting income (loss) as management believes they are both meaningful measures of the Company's results. Operating income (loss) differs from net income (loss) under accounting principles generally accepted in the United States of America, sometimes referred to as U.S. GAAP, and does not replace net income (loss) as the GAAP measure of our results of operations. In arriving at operating income (loss), we start with GAAP net income (loss) and exclude net realized investment gains and losses, as well as non-recurring charges because i) net realized investment gains and losses are unpredictable and not necessarily indicative of current or future results and ii) charges such as reorganization expenses, and the cumulative effect of changes in accounting principles and loss on sale of business are non-recurring in nature and are also not necessarily indicative of future results of operations. Underwriting income (loss), also a non-GAAP financial measure, is net premiums earned less claims and claims expenses incurred, acquisition costs and underwriting expenses.
On December 10, 2002, the capital stock of the Oak Entities was contributed by Trenwick to the Company. As the Company and the Oak Entities were under common control, this transaction was accounted for at historical cost, in a manner similar to a pooling of interests business combination, accordingly, the results of operations for the 2002 and 2001 years have been restated to reflect the combined operating results of the Company and the Oak Entities.
Underwriting loss $ (9,800) $(133,587) $ 123,787 Net investment income 29,439 50,446 (21,007) Interest expense (7,402) (2,849) (4,553) Foreign currency losses (1,725) (113) (1,612) Other income (expense) (661) (17) (644) Goodwill accretion -- 488 (488) --------- --------- --------- Pre-tax operating income (loss) 9,851 (85,632) 95,483 Applicable income taxes (benefit) 44,313 (19,553) 63,866 --------- --------- --------- Operating income (loss) (34,462) (66,079) 31,617 Net realized investment (losses) gains 820 9,209 (8,389) Forgiveness of debt by Trenwick 127,698 -- 127,698 Loss on sale of LaSalle Re's in-force reinsurance business (20,133) -- (20,133) Cumulative effect of change in accounting principle 11,586 -- 11,586 --------- --------- --------- Net income (loss) 85,509 (56,870) 142,379 Dividends on preferred stock (6,563) (6,563) -- --------- --------- --------- Net income (loss) available to common shareholders $ 78,946 $ (63,433) $ 142,379 ========= ========= =========
The underwriting loss of $9.8 million in 2002 represented a $123.8 million improvement compared to the underwriting loss of $133.6 million in 2001. The improvement is due primarily to the absence of major catastrophe events in 2002, which included only $21.5 million in losses related to the September 11, 2001 terrorist attacks, while 2001 results included $114.1 in catastrophe losses. Claims and claims expenses incurred in both 2002 and 2001 are discussed further below under the caption "Claims and Claims Expenses".
Worldwide property catastrophe reinsurance gross premium writings for 2002 compared to 2001 decreased by $63.9 million. The decrease is a result of the sale of LaSalle Re's in-force business to Endurance effective April 1, 2002, after which LaSalle Re ceased underwriting operations, combined with the inclusion of $14.4 million of reinstatement premiums written in 2001 as a result of the September 11, 2001 terrorist attacks.
The increase in Lloyd's syndicates continuing gross premium written can be attributed to both the addition of treaty, professional indemnity and financial institutional business, formerly written by Trenwick International, a United Kingdom affiliate of the Oak Entities, as well as to rate increases on renewed lines of business written through the Oak Entities, particularly aviation. Premiums written through the Lloyd's syndicates in runoff continue to decrease as the open years of account run out.
Premiums ceded (266,884) (202,653) (64,231) Change in premiums ceded 40,590 23,639 16,951 --------- --------- --------- Amortized ceded premiums (226,294) (179,014) (47,280) --------- --------- --------- Net premiums earned $ 291,289 $ 302,989 $ (11,700) ========= ========= =========
2002 2001 Change --------- --------- --------- (in thousands) Policy acquisition costs $ 72,173 $ 97,376 $ (25,203) Underwriting expenses 50,696 33,640 17,056 --------- --------- --------- Total expenses $ 122,869 $ 131,016 $ (8,147) ========= ========= ========= Underwriting expense ratio 42.2% 43.2% (1.0)% ========= ========= =========
Underwriting expenses for 2002 were $50.7 million compared to $33.6 million for 2001, an increase of $17.1 million. The increase can be attributed to the increase in premium volume from the transfer of business from affiliate, combined with an increase in premium levies from Lloyd's, both occurring in the Oak Entities. These increases were offset in part by a decrease in underwriting expenses at LaSalle Re as a result of the sale of LaSalle Re's inforce business to Endurance.
Investment income - portfolio $ 35,061 $ 44,152 $ (9,091) Investment income - non-portfolio 17 2,548 (2,531) Intercompany investment income 4,350 4,688 (338) Reserve for affiliate interest income (9,038) -- (9,038) Investment expenses (951) (942) (9) --------- --------- --------- Net investment income $ 29,439 $ 50,446 $ (21,007) ========= ========= =========
Net investment income for 2002 was $29.4 million compared to $50.4 million for 2001. The decrease in net investment income in 2002 was primarily due to the reduction in invested assets for a portion of the year as a result of the Company's dividend of $258 million to Trenwick in June 2002, combined with an overall decrease in market yields over the course of 2002. In addition, the Company recorded a 100% valuation reserve on its interest receivable on loans to Trenwick at December 31, 2002, which was recorded as a reduction to net investment income.
In connection with its contribution of the capital stock of the Oak Entities to the Company in December 2002, Trenwick agreed to forgive $127.7 million of indebtedness due from the Oak Entities, which was recorded as other income.
On December 10, 2002, the capital stock of the Oak Entities was contributed by Trenwick to the Company. As the Company and the Oak Entities were under common control, this transaction was accounted for at historical cost, in a manner similar to a pooling of interests business combination. Accordingly, the results of operations for the 2001 and 2000 years have been restated to reflect the combined operating results of the Company and the Oak Entities.
The operating loss of $66.1 million in 2001 represented a $58.4 million increase in operating loss compared to a $7.7 million operating loss recorded in 2000. This increase was primarily due to the deterioration of underwriting results in 2001 caused primarily by losses incurred related to the September 11, 2001 terrorist attacks ($141.8 million gross and $86.8 million net of reinsurance recoverable) combined with the occurrence of other catastrophes during the year.
Losses incurred from the September 11, 2001 terrorist attacks of $114.7 million consist of claims and claims expenses incurred of $92.0 million and $22.7 million of net reinstatement premiums on assumed and ceded contracts.
Total expenses, comprising policy acquisition costs and underwriting expenses, for 2001 increased by $17.5 million compared to total underwriting expenses for 2000. Total expenses as a percentage of net premiums earned were 43.2% for 2001 compared to 41.8% for 2000. The increase in the ratio occurred principally because of an increase in the amount of amortized ceded premiums.
Underwriting expenses for 2001 were $33.6 million compared to $37.4 million for 2000, a decrease of $3.8 million. The decrease is due to a reduction in business written by LaSalle Re following its acquisition by Trenwick.
Investment income - portfolio $ 44,152 $ 45,049 $ (897) Investment income - non-portfolio 2,548 2,805 (257) Intercompany investment income 4,688 -- 4,688 Investment expenses (942) (1,173) 231 --------- --------- --------- Net investment income $ 50,446 $ 46,681 $ 3,765 ========= ========= =========
Net investment income for 2001 was $50.4 million compared to $46.7 million for 2000. The increase in net investment income in 2001 was primarily due to changes in the allocation of investments to higher yielding debt securities following a change in investment managers.
The Company did not record any corporate expenses for 2001. The expenses of $3.3 million for 2000 relate primarily to the Company's decision to cancel the implementation of new reinsurance software as a result of the Trenwick/LaSalle business combination.
Net realized gains on investments were $9.2 million during 2001, compared to net realized losses of $1.7 million for 2000. The gains in 2001 resulted from a change in investment managers and a consequential re-positioning of the portfolio to reflect a new investment philosophy.
LaSalle Re's sources of funds consist of investment income and proceeds from sales and redemptions of investments. Cash is used primarily to pay losses and loss expenses, commissions, excise taxes, administrative expenses and dividends. Under the Insurance Act, LaSalle Re is prohibited from paying dividends of more than 25% of its opening statutory capital and surplus unless it files with the Bermuda Supervisor of Companies an affidavit (at least 7 days before payment of such dividends) stating that it will continue to meet the required minimum solvency margin and minimum liquidity ratio requirements and from declaring or paying any dividends without the prior approval of the Bermuda Minister of Finance if it failed
to meet its required margins on the last day of the previous fiscal year. The Insurance Act also requires LaSalle Re to maintain a minimum solvency margin and minimum liquidity ratio and prohibits dividends that would result in a breach of these requirements. In addition, LaSalle Re is prohibited under the Insurance Act from reducing its opening total statutory capital by 15% or more without the approval of the Minister of Finance. LaSalle Re currently meets these requirements.
As of December 31, 2002, the Company's consolidated investments and cash totaled $806.3 million as compared to $861.4 million at December 31, 2001. Both balances include a loan to Trenwick of $75.0 million. Interest is charged on this loan at a variable rate equal to that generated by the Company's investment portfolio and the loan is repayable upon demand. In light of Trenwick's current financial condition there is significant uncertainty as to whether Trenwick will be able, financially, to pay principal or interest on this loan. At December 31, 2002, the Company established a 100% valuation reserve for the cumulative intercompany interest receivable of $9.0 million. The decrease in consolidated investments and cash of $55.1 million primarily resulted from a special dividend of $258.0 million paid to Trenwick in the second quarter of 2002, offset by cash flows from operations.
As of December 31, 2002, the Company's consolidated shareholders' equity totaled $134.9 million compared to $309.5 million at December 31, 2001. The decrease of $174.6 million was primarily a result of the special dividend to Trenwick referred to above.
As of December 31, 2002, the Company had $261,727 in letters of credit outstanding. This amount includes $170,698 in letters of credit outstanding to provide capital to support the participation in certain Lloyd's syndicates, of which $156,751 of the letters of credit are outstanding under the senior credit facility (described in the immediately following paragraph). The remaining letters of credit balance is outstanding primarily under a secured letter of credit facility under which letters of credit totaling $91,029 at December 31, 2002 have been issued in favor of ceding insurance companies to secure LaSalle Re's obligations under various reinsurance contracts. At year end 2002, LaSalle Re had pledged $120,722 of debt securities as collateral for its letters of credit of the letters of credit outstanding relates primarily to the United States business formerly written by LaSalle Re.
U.S. and U.K. holding companies, entered into an amended and restated $490 million credit agreement with various lending institutions (the "Banks"), which was guaranteed by the Company. 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 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 will be prohibited from underwriting any insurance or reinsurance business 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
As a result of the terrorist attacks of September 11, 2001, LaSalle Re incurred in excess of $140 million in catastrophe losses as defined under the catastrophe equity put option agreement and Trenwick delivered notice of exercise of the catastrophe equity put on March 28, 2002. On July 1, 2002, Trenwick commenced an arbitration proceeding seeking $55 million in damages and other relief against European Re. The claims arose out of European Re's failure to meet its obligations under the catastrophe equity put. On September 6, 2002, the catastrophe equity put option was amended and restated and the pending arbitration proceedings were terminated. Under the terms of the second restated agreement, European Re purchased 550,000 of Trenwick's Series B Cumulative Perpetual Preferred Shares (the "Series B Shares") with a liquidation
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 year-end reserves but may develop differently than currently estimated include:
The Company'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 the Company 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.
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 the Company's cumulative losses generated in recent years by the Oak Entities and uncertainties as to the amount of taxable income to be generated in future years, as of December 31, 2002, the Company could not support the future realizability of its net deferred tax asset. The effects of this determination on the Company's results from operations are significant. As of December 31, 2002, the Company established a valuation allowance of $44.8 million, so as to record a valuation allowance for the full amount of its net deferred tax asset applicable to the Oak Entities. The Company's Bermuda operations are not subject to income tax. Also see Note 9 of the Notes to the Consolidated Financial Statements.
The following sections address the significant market risks associated with The Company's business activities as of December 31, 2002 and 2001. The Company's primary market risk exposures are:
As of December 31, 2002, the Company's exposure to high yield investments was minimal. While these investments are more susceptible to credit risk, their total market value represents less than 1% of total investments and cash, and therefore management believes that the exposure to credit risk is not material. The Company has no derivatives and its investments do not contain terms that may result in potential losses due to leverage.
Foreign currency risk is the risk that the Company will incur economic losses due to adverse changes in foreign currency exchange rates. This risk arises principally from Oak Entities' operations and securities denominated in foreign currencies. The Company's international businesses generally maintain assets and liabilities in local currencies, substantially limiting exchange rate risk to net assets denominated in the foreign currency. The Company's foreign currency denominated net assets are principally in British pounds sterling. At December 31, 2002 and December 31, 2001, the Company's net assets of foreign subsidiaries was approximately $45.8 million and $(24.8) million, respectively. Foreign debt securities and foreign cash on deposit were $4.1 million and $5 million, respectively, at December 31, 2002.
The Company's reinsurance and Lloyd's operations all have exposures to movements in various currencies around the world (particularly the British pound sterling, the Euro and the Canadian dollar) as such businesses are denominated in those currencies. Therefore, changes in currency exchange rates affect the Company's balance sheet, statement of operations and statement of cash flows. This exposure is somewhat mitigated by the fact that premiums received are invested in the same currency portfolios, to partially offset related unpaid claims and claims expense liabilities denominated in the same currency.
Management estimates that a 10% immediate unfavorable change in each of the foreign currency exchange rates to which the Company is exposed as of December 31, 2002 would have decreased the fair value of the Company's foreign denominated net assets by approximately $4.6 million, which was comprised primarily of exposure to the British pound sterling. At December 31, 2001, the same 10% shift in foreign currency exchange rates would have resulted in a potential gain in fair value of approximately $2.5 million.
The Company 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.
A 100 basis point increase in market interest rates would have resulted in an estimated pre-tax loss in the fair value of these instruments of $4.3 million and $14.0 million at December 31, 2002 and December 31, 2001, respectively. Similarly, a 100 basis point decrease in market interest rates would have resulted in an estimated pre-tax gain in the fair value of these instruments of $4.2 million and $14.0 million at December 31, 2002 and December 31, 2001, respectively.
Effective January 1, 2002, the Company adopted a new Financial Accounting Standards Board statement which amended the accounting for goodwill and other intangible assets. This new statement suspended systematic goodwill amortization and required the Company to credit the negative goodwill balance of $11.6 million to operations as of January 1, 2002 as a cumulative effect of an accounting change.
The future operations of the Company and its financial results will differ materially from those of 2002 and prior years as the Company has sold the in-force business of its primary operating subsidiary, LaSalle Re, and has placed LaSalle Re into runoff. In addition, under the terms of Trenwick's agreements with the Banks, and particularly under the December Amendments, Trenwick and its subsidiaries, including the Company, are subject to financial and operational restrictions which limit their flexibility to pursue business and strategic alternatives. These restrictions will apply so long as Trenwick and its subsidiaries (including the Company) have unpaid reimbursement obligations to the Banks with respect to the letters of credit. In addition, the Company and LaSalle Re have material receivables from Trenwick, as described above in "-Transactions with Affiliates," which may not be realizable because of the current uncertainties of Trenwick's financial condition.
The New York Stock Exchange has suspended from trading, pending application to the Securities and Exchange Commission, our Series A Preferred Shares for failure to meet the New York Stock Exchange's
In light of the significant developments and other factors referred to in this Report, which have materially and adversely impacted the Company, its operations and its future prospects, it is unlikely that our Series A Preferred Shares will realize significant value in the near term, if at all. As a result, it is possible that a market will not continue in our Series A Preferred Shares, in which case the liquidity of the securities may be severely limited.
By letter dated March 24, 2003, the BMA issued permission for the free transferability on an interim basis of Trenwick's and the Company's shares while they are quoted on the OTC Bulletin Board. This permission is contingent on the condition that the BMA is notified promptly of any instances in which Trenwick or the Company become aware that a new shareholder has obtained 5% or more of either company's shares, including background information on any such new 5% shareholder.
In connection with other actions being taken in the fourth quarter of 2002, on November 29, 2002, the Company elected to suspend the payment of dividends to holders of our Series A Preferred Shares effective immediately, as a result of restrictions on the Company under Trenwick's credit agreement with various lending institutions. The Company intends to accrue the dividends until payment is reinstated. We do not expect to be able to pay dividends to holders of our Series A Preferred Shares for the foreseeable future.
Trenwick currently has outstanding $182.5 million of letters of credit issued by the banks under its credit facility. Trenwick is 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 Trenwick with several waivers of potential defaults and extensions of deadlines under the credit facility, but Trenwick does not presently have the liquidity necessary to satisfy the banks by the deadlines that have been imposed. The Company has guaranteed the obligations of Trenwick and Trenwick Holdings under the credit facility and has pledged as security all of its shares of LaSalle Re. If potential events of default under the credit facility are not cured or waived by its lenders, the Banks could exercise their rights under the pledge. As a result, upon the occurrence of an event of default, there is substantial doubt as to our ability to continue as a going concern.
Trenwick has issued convertible preferred shares that may result in substantial dilution to existing Trenwick common shareholders and/or a change in control of Trenwick, and therefore the Company. Neither we nor Trenwick have the ability to control settlement of Trenwick's convertible preferred shares.
We are in discussions with the BMA concerning capital adequacy and other issues relating to LaSalle Re, and the BMA may institute supervision, rehabilitation, conservation or liquidation proceedings with respect to LaSalle Re.
We have been engaged in discussions with the BMA and with LaSalle Re's consent, the BMA has restricted the license of LaSalle Re to prohibit it from writing any new business without its prior written approval. The BMA, as well as regulators in the United Kingdom and the United States, which regulate Trenwick's other insurance company subsidiaries, may act independently of one another with respect to the insurance company domiciled in its jurisdiction. 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 other's liabilities, or the liabilities of Trenwick or the Company.
Our financial strength ratings have been significantly downgraded or withdrawn by Rating Agencies.
We have placed LaSalle Re's catastrophe, liability and other insurance business into runoff and no new business is being written in LaSalle Re. 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 LaSalle Re's business, we do not expect it to contribute significantly to our revenue or results of operations in the near term, if at all, and there are significant uncertainties that could if realized adversely affect our ability to continue a solvent runoff of LaSalle Re.
We have experienced the loss of most of our personnel in the last year, including a majority of our senior executives. A number of executives positions at the Company, including the position of Acting Chief Executive Officer, are now being filled by consultants under short term arrangements or by employees or consultants of Trenwick. Our ability to operate our business has been, and will continue to be, dependent on our ability and the ability of Trenwick to retain the services of 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 and consultants.
The insurance and reinsurance business is historically cyclical, and we expect to experience periods with excess underwriting capacity and unfavorable premium rates.
U.S. persons who own our shares may have more difficulty in protecting their interests than U.S. persons who are shareholders of a U.S. corporation.
The Bermuda Companies Act, which applies to us, differs in certain material respects from laws generally applicable to U.S. corporations and their shareholders. Set forth below is a summary of certain significant provisions of the Companies Act which includes, where relevant, information on modifications thereto adopted pursuant to our bye-laws, applicable to us, which differ in certain respects from provisions of Delaware corporate law. Because the following statements are summaries, they do not discuss all aspects of Bermuda law that may be relevant to us and our shareholders.
Shareholders' Suits. The rights of shareholders under Bermuda law are not as extensive as the rights of shareholders in many U.S. jurisdictions. Class actions and derivative actions are generally not available to shareholders under the laws of Bermuda. However, the Bermuda courts ordinarily would be expected to follow English case law precedent, which would permit a shareholder to commence an action in the name of the company to remedy a wrong done to the company where an act is alleged to be beyond the corporate power of the company, is illegal or would result in the violation of our memorandum of association or bye-laws. Furthermore, courts would review acts that are alleged to constitute a fraud against the minority shareholders or where an act requires the approval of a greater percentage of our shareholders than actually approved it. The winning party in such an action generally would be able to recover a portion of attorneys' fees incurred in connection with such action. Our bye-laws provide that shareholders waive all claims or rights of action that they might have, individually or in the right of the company, against any director or officer for any act or failure to act in the performance of such director's or officer's duties, except with respect to any fraud or dishonesty of such director or officer.
We are incorporated pursuant to the laws of Bermuda and our business is based in Bermuda. In addition, certain of our current and former directors and officers may reside outside the United States, and all or a substantial portion of our assets and the assets of such persons are located in jurisdictions outside the United States. As such, it may be difficult or impossible to effect service of process within the United States upon us or those persons or to recover against us or them on judgments of U.S. courts, including judgments predicated upon civil liability provisions of the U.S. federal securities laws. Further, no claim may be brought in Bermuda against us or our directors and officers in the first instance for violation of U.S. federal