Trenwick's corporate headquarters and LaSalle Re's operations are located in approximately 3,900 square feet of leased office space in Hamilton, Bermuda. Trenwick's United States operations are located in approximately 46,000 total square feet of leased office space at Stamford, Connecticut. Trenwick International and Trenwick Managing Agents lease approximately 29,000 square feet of space in London, England and Trenwick International also leases 875 square feet of office space in Paris, France. Management believes Trenwick's current office space is adequate for its needs.
Amounts for 2002, 2001 and 2000 reflect the results of Trenwick Group Inc. and its subsidiaries, accounted for as a purchase, from September 27, 2000, the date of the acquisition.
Trenwick Group Ltd. discloses operating and non-operating income as well as underwriting income to enable the reader to understand how management evaluates Trenwick Group Ltd.'s results of operations. These disclosures are not defined under accounting principles generally accepted in the United States of America; accordingly the use of these disclosures may not be comparable to other registrants.
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, through either sales or discontinuance of certain lines of business, to a level more commensurate with its capital base and to concentrate its limited financial resources on its core franchises and businesses, United States treaty reinsurance and its Lloyd's operations, where it would be able to write insurance and reinsurance based on direct or indirect financial support. Trenwick assessed in alternatives and voluntarily placed into runoff its United States specialty program business formerly operated through its subsidiary, Canterbury Financial Group, Inc. ("Canterbury") and its London-based specialty insurance and reinsurance company, Trenwick International Limited ("Trenwick International"), and, in light of the increasing capital requirements imposed by the market on catastrophe insurance providers, sold the in-force property catastrophe reinsurance business of its Bermuda subsidiary LaSalle Re Limited ("LaSalle Re"). Little or no new insurance or reinsurance is presently being offered in these runoff operations.
current businesses, if at all, and they should carefully review the "Risk Factors" and "Forward-Looking Statements" sections, as well as other sections, of this Report.
Concurrently with the business combination involving LaSalle Re Holdings and Trenwick Group Inc. in September of 2000, Trenwick America Corporation ("Trenwick America") and Trenwick Holdings Limited ("Trenwick Holdings"), Trenwick's 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 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.
Subsequently, an amendment and waiver of default under the credit agreement and amendment 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 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's Lloyd's operations 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.
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, 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 guaranty agreement. No liability for any such amounts has been reflected in Trenwick's financial statements. If the potential future events of default occur and are not waived, there is substantial doubt as to Trenwick's ability to continue as a going concern and Trenwick and/or one or more of its subsidiaries 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 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 or its subsidiaries may commence proceedings against Trenwick or its unregulated subsidiaries seeking their liquidation.
The accompanying financial statements have been prepared assuming Trenwick will continue as a going concern. As discussed in Note 9 to the financial statements, Trenwick is currently required to repay certain senior notes by April 1, 2003 and collateralize with cash or cash equivalents 60% of the outstanding letters of credit under its senior credit facility by August 1, 2003. At this time, Trenwick does not have sufficient available liquidity to collateralize the letters of credit or repay the senior notes. As discussed in Note 14 to the financial statements, certain insurance subsidiaries of Trenwick do not meet risk based capital levels or levels of surplus required by various insurance regulations to which they are subject. These matters raise substantial doubt about Trenwick's ability to continue as a going concern. Management's plans and other circumstances in regard to these matters are also described in Note 9 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
announcement that it would post a fourth quarter 2002 reserve charge of $107 million. Moody's Investors Service noted that the $107 million reserve charge was significant in relation to the $322 million book value reported by Trenwick at the end of the third quarter of 2002 and also Trenwick's market capitalization, which is well below that amount. Moody's Investors Service also noted that, in its opinion, the $107 million charge further diminishes the value that creditors will be able to extract from Trenwick in its restructuring efforts, and that currently virtually all of Trenwick's financial assets are held by regulated insurance subsidiaries, limiting resources available to meet debt and preferred stock obligations.
In the absence of the permission granted by the BMA discussed in the previous paragraph, as a consequence of the suspension of trading, all transfers of shares involving holders of Trenwick's or LaSalle Re Holdings' securities would be required to be approved by the BMA before they could be entered into Trenwick's or LaSalle Re Holdings' share register. This procedure would only apply to share transfers
involving shareholders who hold shares in their own name on Trenwick's or LaSalle Re Holdings' share register (a "record holder"). Shareholders who hold through nominees, brokers, or banks, which in turn have accounts through other nominees, would not be affected by this approval procedure unless one of the parties to the transfer becomes a record holder on Trenwick's or LaSalle Re Holdings' share register or the number of shares held by an existing record holder is increased or decreased by the transfer. If the BMA's free transferability permission is rescinded, this pre-approval process will cause a delay in share transfers.
Trenwick has been notified by the 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 may be the subject of regulatory action brought by the NYID.
On October 4, 2002, Trenwick Managing Agents Limited (formerly Chartwell Managing Agents Limited) ("Trenwick Managing Agents"), Trenwick's managing agent at Lloyd's of London, entered into an agreement with National Indemnity Company, a member of the Berkshire Hathaway group of insurance companies ("NICO"). This agreement enabled Trenwick Managing Agents to increase the total premium capacity of Syndicate 839, its primary managed syndicate at Lloyd's, by (pound)141.25 million ($227.4 million) for the 2002 year of account. On November 4, 2002, Trenwick Managing Agents entered into a second agreement with NICO, which was amended on December 23, 2002, to provide Syndicate 839 with premium capacity of up to (pound)113.1 million ($182.1 million) via Syndicate 2750 for the 2003 year of account. The 2003 year of account capital is principally being applied to the aviation insurance segment of Syndicate 839's business.
Effective April 1, 2002, Trenwick sold the in-force property catastrophe reinsurance business of its subsidiary, LaSalle Re, to Endurance Specialty Insurance, Ltd. ("Endurance"). The sale was effected through a 100% quota share reinsurance agreement. In addition, Endurance will have the right to renew LaSalle Re's in-force business as it expires in return for a renewal fee payable to LaSalle Re of 12.5% of business written.
On December 8, 2002, Trenwick announced that Trenwick International, its London based specialty insurance company, had ceased to underwrite new insurance, effective November 29, 2002. A draft scheme of operations with respect to the runoff of Trenwick International was presented to the Financial Services Authority ("FSA") in the U.K. on December 31, 2002 and a final version will be presented to the FSA for approval by March 31, 2003. See Item 1 - "Business--International Specialty Insurance and Facultative Reinsurance."
America Re effective December 31, 2002) and Inscorp. In addition, the reinsurance segment includes the results of the Chubb underwriting facility. The remainder of Trenwick's reinsurance segment consists of property catastrophe reinsurance written by LaSalle Re on a worldwide basis until it ceased underwriting effective April 1, 2002 when it sold its in force property catastrophe reinsurance business to Endurance.
The International operations segment includes Trenwick's Lloyd's operations as well as U.K. specialty insurance and treaty and facultative reinsurance. Trenwick's Lloyd's operations are conducted through Trenwick Managing Agents located in London, England, which manages underwriting syndicates at Lloyd's, principally for Trenwick's own account. The U.K. specialty insurance and treaty and facultative reinsurance was principally written by Trenwick International Ltd., also located in London, England, which wrote business on a worldwide basis until it ceased underwriting effective December 8, 2002. During 2002, renewals of certain lines of business previously underwritten by Trenwick International including, among others, general aviation and commercial property, were underwritten by Trenwick's Lloyd's operations following downgrades in Trenwick International's financial strength ratings by Standard & Poor's.
Excluded from the aforementioned segments are Trenwick's Lloyd's syndicates in runoff and Excess and Casualty Reinsurance Association Pool ("ECRA Pool") runoff, which includes insurance and reinsurance that was either sold or non-renewed. The ECRA Pool was a New York state licensed pool that underwrote multi-line property and casualty business until it ceased underwriting in 1983. Trenwick America Re participated in the ECRA pool during years 1978 to 1982, while Inscorp participated in the ECRA pool during years 1950 to 1967.
The underwriting loss of $260.4 million in 2002 represented a $29.5 million improvement compared to the underwriting loss of $290.0 million in 2001. The 2002 underwriting loss included $303.4 million of reserve strengthening as a result of prior years' reserve development, while the underwriting results for 2001 included catastrophe losses of $122.2 million and additions to unpaid claims and claims expenses of $110.9 million as a result of prior years' reserve development. Claims and claims expenses incurred in both 2002 and 2001 are discussed further under the caption "Claims and Claims Expenses."
Trenwick's U.S. treaty reinsurance gross premium writings in 2002 increased $63.3 million, or 18.7% over 2001, primarily as a result of increasing rates on renewal treaties. The 45.5% reduction in worldwide property catastrophe gross written premiums is due to the sale of LaSalle Re's in-force reinsurance as of April 1, 2002.
Gross written premiums by Trenwick's continuing Lloyd's syndicates increased by $97.4 million, or 21.9% in 2002 when compared to 2001. This increase can be attributed to both the addition of the treaty, professional indemnity and financial institutions business formerly written by Trenwick International Limited, which accounted for $44.2 million of the increase, as well as rate increases on renewed lines of business, particularly aviation.
During the year ended December 31, 2002, gross premium writings by Trenwick's U.S. specialty program insurance segment increased by $110.1 million over 2001 as a result of increased volume on two of its larger programs combined with the addition of ten new programs during 2002. Effective October 25, 2002, Trenwick ceased underwriting substantially all new United States specialty program insurance.
Gross premiums ceded for 2002 were $583.0 million compared to $481.9 million for 2001. The increase in gross premiums ceded of $101.1 million was due primarily to the increase in gross written premiums by Trenwick's Lloyd's syndicates and U.S. specialty program insurance, both of which rely heavily on reinsurance for the business they underwrite. Included in gross premiums ceded during the year ended December 31, 2001 are approximately $25.2 million incurred to reinstate various reinsurance protections in Trenwick's property catastrophe business and to purchase back-up reinsurance covers for its aviation business at Lloyd's both as a result of the September 11, 2001 terrorist attacks.
Trenwick's net unpaid claims and claims expenses of $2.0 billion and $1.6 billion at December 31, 2002 and 2001, respectively, include amounts approved for payment but unpaid at the balance sheet date as well as the net estimated amounts of claims and claim expenses for claims arising in 2002 and 2001 and in all
As a result of deterioration in loss reserve indications during the first nine months of 2002, Trenwick engaged external actuarial consultants during the fourth quarter to assist management in reviewing reserves for December 31, 2002. Based on the results of our external and internal actuarial studies, significant reserve adjustments of $106.6 million were made during the fourth quarter of 2002.
With respect to the year end 2001 deficiency, approximately 87% related to claims occurring between 1998 and 2001 and was spread across multiple lines of business. The period from 1998 to 2001 represents a period of weak insurance and reinsurance pricing and the actual loss results for business written during that period have turned out to be significantly worse than originally estimated by Trenwick when it originally wrote the business and subsequently re-estimated reserves for this business.
Claims and claims expenses incurred during the year ended December 31, 2001 included $122.2 million of catastrophe losses, which includes losses resulting from the September 11, 2001 terrorist attacks of $98.2 million. The principal losses related to aviation risks underwritten by Trenwick's operations at Lloyd's and property and related risks, including business interruption underwritten by LaSalle Re. Trenwick's estimate of its losses from aviation risks from the September 11, 2001 terrorist attacks is based on two maximum losses and two partial losses. Estimates of Trenwick's property and related losses are based on an assessment of individual policies which it has determined have exposure to the September 11, 2001 terrorist attacks. This assessment included market share analysis, probable maximum loss analysis, independent risk modeling analysis and cedant loss estimates. Combined with the reinstatement premiums incurred as previously discussed, Trenwick incurred a total of $123.4 million in underwriting losses in 2001 in connection with the September 11, 2001 terrorist attacks.
Policy acquisition costs which consist primarily of commissions and brokerage expenses and underwriting expenses for 2002 increased by $5.7 million compared to 2001. The increase was primarily attributable to the increase in premiums written during 2002 offset in part by a decrease in policy acquisition costs at LaSalle Re as a result of the sale of the in-force business to Endurance. Acquisition costs and underwriting expenses as a percentage of net premiums earned, or the expense ratio, were 36.6% for the 2002 year compared to 39.6% for the 2001 year. The decrease in the expense ratio occurred principally as a result of improved terms and conditions in the insurance market.
Net investment income for 2002 was $105.0 million compared to $129.1 million for 2001. The principal reason for the decrease in net investment income in 2002 was the decrease in market yields over the course of 2002 combined with a decrease in the investment portfolio for a portion of 2002 as a result of the repayment of Trenwick's term loan facility during the second quarter of 2002. Investment expenses for both the years ended December 31, 2002 and 2001 includes interest expense on funds withheld of $9.8 and $11.3 million, respectively, under the terms of stop loss reinsurance agreements purchased by Trenwick America Re prior to 2000. As a result of significant gains realized on Trenwick's investment portfolio in the fourth quarter of 2002 (refer to "Non-operating Income and Expenses" below), Trenwick anticipates a reduction in future investment income.
Interest expense and subsidiary preferred share dividends was $36.0 million for 2002, a decrease of $3.1 million from 2001. The decrease resulted from the repayment of Trenwick's term loan facility during the second quarter of 2002, offset in part by an increase in fees related to maintaining letters of credit to support Trenwick's operations at Lloyd's.
Trenwick recorded foreign currency losses of $8.9 million for 2002, compared to foreign currency losses of $2.5 million for 2001. The increase in foreign exchange losses during the year ended December 31, 2002 compared to the year ended December 31, 2001 was primarily associated with an intercompany stop loss treaty denominated in British pounds. The foreign exchange loss in 2002, which was not eliminated in consolidation, resulted from a higher level of loss reserves ceded under the intercompany stop loss agreement in 2002 relative to 2001, coupled with an increase in the U.S. dollar to British pounds exchange rate from 2001 to 2002. The intercompany stop loss treaty was commuted effective December 31, 2002.
Trenwick adopted Statement of Financial Accounting Standards No. 142 effective January 1, 2002. This new statement suspended systematic goodwill amortization and required Trenwick's Bermuda holding company, LaSalle Re Holdings, 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 statement also required that the remaining goodwill balance be tested for impairment under either market value or cash flow tests. Trenwick conducted both market value and cash flow tests and, as a result, recorded a $53.2 million write off of all of Trenwick's remaining goodwill. These transactions increased Trenwick's net loss in 2002 by a net amount of $41.7 million and were recorded as a cumulative effect of change in accounting principle.
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.
The operating loss of $158.1 million in 2001 represented a $170.3 million decrease from the operating income of $12.2 million recorded in 2000. This decline was principally the result of catastrophe losses resulting from the September 11, 2001 terrorist attacks and reserve strengthening. The $154.4 million net loss in 2001 compared to the $9.5 million in net income in 2000 was the result of the net operating losses offset in part by realized investment gains which are discussed under the caption "Non-Operating Income and Expenses."
The underwriting loss of $290.0 million in 2001 represented a $254.5 million increase compared to the underwriting loss of $35.5 million in 2000. The underwriting results for 2001 included catastrophe losses
U.S. treaty reinsurance, international specialty insurance and reinsurance and U.S. specialty program insurance gross premiums written increased from $92.7 million, $51.1 million and $44.2 million, respectively, for 2000 to $339.3 million, $235.0 million and $291.4 million, respectively, for 2001. Trenwick did not underwrite these businesses prior to the Trenwick/LaSalle business combination in September of 2000.
2001 2000 Year Year Change ----------- ----------- ----------- Gross premiums written $ 1,452,255 $ 428,644 $ 1,023,611 Change in gross unearned premiums (130,260) (10,006) (120,254) ----------- ----------- ----------- Gross premiums earned 1,321,995 418,638 903,357 ----------- ----------- -----------
Net premiums earned for 2001 were $889.5 million compared to $302.7 million for 2000. The increase in net premiums earned is commensurate with the increase in net premiums written.
Trenwick strengthened its prior year loss reserves in 2001 by $110.9 million. This reserve strengthening includes $15.7 million related to U.S. casualty treaty reinsurance business, which was underwritten prior to 2001 and $11.5 million related to prior participation in the ECRA Pool. In addition, $13.9 million of the loss reserve strengthening related to the U.S. specialty program insurance segment. Also included in the reserve strengthening was $20.4 million relating principally to directors and officers liability business written by Trenwick's Lloyd's syndicates. Lastly, the reserve strengthening included $48.3 million stemming from deterioration in discontinued businesses and reviews of the property insurance and liability business lines of Trenwick International.
Policy acquisition costs and underwriting expenses for 2001 increased by $241.6 million compared to 2000. Similar to claims and claims expenses, the increase was attributable to expenses incurred on business acquired in the Trenwick/LaSalle business combination. Acquisition costs and underwriting expenses as a percentage of net premiums earned, or the expense ratio, were 39.6% for the 2001 year compared to 36.5% for the 2000 year. The increase in the expense ratio occurred principally because of an increase in policy acquisition costs in 2001 relating to casualty business. A majority of the premium writings resulting from the Trenwick/LaSalle business combination was casualty business. This business, which consisted of both treaty insurance and reinsurance, generally has a higher policy acquisition cost ratio than property catastrophe business.
Underwriting expenses for the 2001 year as a percentage of earned premium was 8.9%, decrease from 10.5% for 2000, a result of the inclusion of a full year of Trenwick Group Inc.'s premiums in 2001.
Net investment income for 2001 was $129.1 million compared to $58.7 million for 2000. The principal reason for the increase in net investment income in 2001 was the increase in invested assets resulting from the Trenwick/LaSalle business combination. Investment expense for 2001 includes interest expense on funds withheld of $11.3 million under the terms of stop loss reinsurance agreements purchased by Trenwick America Re prior to 2000. The balance of the increase in investment expense in 2001 results from the increase in Trenwick's invested assets under management following the Trenwick/LaSalle business combination.
Interest expense and subsidiary preferred share dividends was $39.1 million for 2001, an increase of $27.4 million from the 2000 fiscal year. The increase resulted from the increase in debt outstanding as a result of the Trenwick Group Inc. debt assumed by Trenwick's subsidiaries in the Trenwick/LaSalle business combination.
Trenwick's investment objective is to fund policyholder and other liabilities in a manner that enhances shareholder value, subject to appropriate risk constraints. Trenwick seeks to meet this investment objective through a mix of investments that reflect the characteristics of the liabilities they support; diversify the types of investment risks by interest rate, liquidity, credit and equity price risk; and achieve asset diversification by investment type, industry, issuer and geographic location. Trenwick regularly projects duration and cash flow characteristics of its liabilities and makes appropriate adjustments in its investment portfolios. At December 31, 2002, Trenwick had investments, cash and cash equivalents of $2.3 billion, consistent with the balance at December 31, 2001. All debt and equity investments are classified as available for sale and reported at fair value with the unrealized gain or loss, net of income taxes, reported in other comprehensive income. During 2002, the net unrealized gain on Trenwick's debt and equity investments decreased by $28.8 million principally as a result of the gains realized on investment sales during the year offset in part by the declining interest rate environment in 2002.
Trenwick's investments in debt securities consisted primarily of investment grade securities, with 82% having a quality rating of Aa or better at December 31, 2002. High yield, or non-investment grade debt securities carrying a rating of below BBB-/Baa3 along with unrated securities, represented approximately 6% of the portfolio at December 31, 2002. The following table provides an aging of the unrealized losses on Trenwick's investment in debt securities at December 31, 2002.
The aging of unrealized investment losses and fair value of the related investments at December 31, 2002 are summarized, by stated maturity, as follows:
The foregoing data is presented based upon the stated maturities of the securities. Actual maturities may defer for some securities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.
The average maturity of Trenwick's debt securities at December 31, 2002 was 3.4 years compared to 4.8 years at December 31, 2001. The shortening of the average maturity during 2002 resulted from the sale of longer maturity securities and the decline in the expected maturity of mortgage backed securities resulting from declining interest rates.
During the first quarter of 2001, Trenwick sold almost all of its equity securities and reinvested the proceeds in debt securities to increase operating earnings and decrease the volatility of unrealized investment gains and losses. Trenwick also liquidated the remainder of its tax advantaged municipal government portfolio in early 2001 to increase its taxable yield. Both of these actions were taken to maximize Trenwick's taxable income.
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 on its outstanding common and convertible preferred shares, the preferred shares of LaSalle Re Holdings, and on the capital securities of Trenwick's U.S. capital trust.
Cash provided by Trenwick's operating activities in 2002 was $106.6 million compared to $63.2 million in 2001 and cash used in operating activities of $16.7 million in 2000. The increase in cash flow from operations can be mainly attributed to the growth in premium writings in Trenwick's U.S. and U.K. operations. Additionally, catastrophe loss payments in LaSalle following the events of September 11, 2001 were not significant in 2002. Loss payments from this event are expected to be significant in 2003 and 2004. The liability portion of aviation losses arising from the events of September 11, 2001 are expected to be paid over an extended period. The increases over 2000 cash flows from operations can be attributed to the inclusion in 2002 and 2001 of the full year results of Trenwick following the Trenwick/LaSalle business combination. Trenwick expects that cash flow from operations will decrease significantly in future years.
Cash for financing activities in 2002 included $195.2 million related to the repayment of Trenwick's term loan facility, offset in part by $40.0 million in proceeds from the issuance of Trenwick's Series B Cumulative Convertible Perpetual Preferred Shares to European Reinsurance Company of Zurich, a subsidiary of Swiss Reinsurance Company.
Trenwick paid a dividend of $0.04 per common share in each of the first three quarters of 2002, in each of the four quarters of 2001 and in the fourth quarter of 2000. Trenwick Group Inc. paid a quarterly dividend of $.26 per common share in the first three quarters of 2000. LaSalle Re Holdings paid a quarterly dividend of $.55 per share on its Series A preferred shares in each of the first three quarters of 2002 and in each of the four quarters of both 2001 and 2000. On November 29, 2002, Trenwick announced that it had suspended Trenwick's common share dividend and LaSalle Re Holdings' preferred stock dividend with immediate effect and for an indefinite period.
Trenwick's financing obligations generally include debt and lease payment obligations. At December 31, 2002, annual principal payments required by Trenwick, through 2007, relating to these financing obligations are as follows (monetary amounts in tables expressed in thousands of United States dollars):
Trenwick's other commercial commitments principally consist of a secured letter of credit facility under which letters of credit totaling $91.0 million at year end 2002 have been issued in favor of ceding insurance companies to secure LaSalle Re's obligations under various reinsurance contracts. In connection with the support of three Lloyd's syndicates, LaSalle Re has posted letters of credit in the amount of $13.9 million at year-end 2002. At year-end 2002, $120.7 million of debt securities were pledged as collateral for these letters of credit. To the extent that liabilities at Lloyd's are paid in the ordinary course of business, the standby letters of credit included in the table below will not be drawn upon and will expire without creating a liability to Trenwick. The amounts and expiration of Trenwick's other commercial commitments are as follows (monetary amounts in table expressed in thousands of United States dollars):
Concurrently with the business combination involving LaSalle Re Holdings and Trenwick Group Inc. in September of 2000, Trenwick America Corporation ("Trenwick America") and Trenwick Holdings Limited ("Trenwick Holdings"), Trenwick's 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 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.
The December Amendments also prohibit Trenwick and its 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 issued by 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 business, prohibit Trenwick from making certain payments without the Banks' approval, prohibit Trenwick and its 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.
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, 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 guaranty agreement. No liability for any such amounts has been reflected in Trenwick's financial statements for any future event of default. If the potential future events of default occur and are not waived, there is substantial doubt as to Trenwick's ability to continue as a going concern and Trenwick and/or one or more of its subsidiaries 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 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 or its subsidiaries may commence proceedings against Trenwick or its unregulated subsidiaries 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, which are due April 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 notes is payable semi-annually at a rate of 6.7%. Effective November 29, 2002, Trenwick America suspended payment of interest on these obligations, however interest continues to be charged to operations. Trenwick anticipates that it will be unable to make the principal payment due on April 1, 2003 and has entered into discussions with the senior note holders concerning a proposed restructuring or amendment of the senior notes to extend the maturity thereof. There can be no assurance that an agreement will be reached by April 1, 2003. If such agreement cannot be reached, the Company will be in default under the terms of the senior notes. Additionally, even if the senior notes are restructured, Trenwick expects that, in order to repay the principal amount 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'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's financial condition, its senior debt ratings have been downgraded by Standard & Poor's Corporation to CCC- and by Moody's Investors Service to Ca. Trenwick'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.
These factors adjust upward by 0.25% on the third anniversary if the securities are still unrated, and upward by 0.50% on the fifth anniversary if they are still unrated. Also, if the Standard & Poor's rating is below BBB- on the fifth anniversary, the factors adjust upward by an additional 0.50%. The maximum adjustment based upon these circumstances is 0.75%. At December 31, 2002, the Series B Shares were rated D by Standard & Poor's.
The Series B Shares are convertible into common shares of Trenwick after five years or upon the occurrence of certain events or the failure of Trenwick to maintain certain levels of capital. As of December 31, 2002, the Series B Shares would be settled with approximately 12.2 million common shares upon conversion.
In November 2000, Trenwick's Board of Directors authorized the repurchase of one million common shares. Trenwick did not repurchase any of its common shares in 2002, 2001 or 2000 other than 18,646 and 18,162 shares repurchased in connection with the vesting of restricted shares in 2002 and 2001, respectively.
Trenwick issued 48,464, 209,954 and 1,405 common shares in 2002, 2001 and 2000, respectively, pursuant to employee compensation, direct compensation, stock purchase and stock option plans and on exercises of warrants. In the year ended December 31, 2000, prior to the Trenwick/LaSalle business combination, LaSalle Re Holdings issued 22,167 common shares under employee compensation, stock purchase and stock option plans.
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 corporations, 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. 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.
Reinsurance agreements provide for recovery of a portion of certain claims and claims expenses from reinsurers. Trenwick enters into reinsurance and retrocessional agreements to reduce its net liability on individual risks, protect against catastrophic losses and maintain acceptable loss ratios. Trenwick remains liable in the event that the reinsurer is unable to meet its obligation; however, Trenwick holds 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 collateralizing reinsurance recoverables with respect to certain retrocessionaires.
Trenwick America Re has various retrocessional facilities, all of which are on a treaty basis. These retrocessional facilities include three treaties for its treaty property business, which protect it against multiple claims arising out of a single occurrence or event. As a result of these facilities, Trenwick
Trenwick Managing Agents, as part of its business strategy, has historically purchased a significant amount of reinsurance for the Lloyd's syndicates it manages. Reinsurance is generally purchased to protect the syndicates against extraordinary loss or loss involving one or more underwriting classes. The amount purchased is determined with reference to the syndicates' aggregate exposure and potential loss scenarios.
In 2002, LaSalle Re purchased two excess of loss programs that provided coverage of $20 million in excess of the first $30 million of losses per occurrence and $5 million in excess of the first $50 million of losses per occurrence both of which, as of April 1, 2002, were retroceded as part of the sale of LaSalle Re's in-force reinsurance business. A third excess of loss program, which provided coverage of $25 million in excess of the first $100 million of losses per occurrence for a four year period with a yearly aggregate limit of $50 million and a contract aggregate limit of $150 million, was commuted by LaSalle Re in December 2002.
In 2001, LaSalle Re purchased three excess of loss programs which provide coverage of $20 million in excess of the first $30 million of losses per occurrence, $5 million in excess of the first $50 million of losses per occurrence and $25 million in excess of the first $75 million of losses per occurrence.
LaSalle Re had purchased an excess of loss program which provides coverage of $75.0 million in excess of the first $75.0 million of losses per occurrence for a first loss event and $60.0 million excess of $75.0 million per occurrence on the second loss event and $52.5 million excess of $125.0 million per occurrence on the third loss event over a three-year period ended December 31, 2001 subject to a maximum aggregate recovery of $187.5 million. This contract was cancelled effective December 31, 2000.
Trenwick International, as is customary with companies operating in the London market, purchased large amounts of reinsurance. Reinsurance and retrocessional coverage was customized for each class of business. During 1998, following an increase in its share capital, Trenwick International increased its retention of business by reducing the amount of reinsurance it buys, principally proportional reinsurance treaties with its former parent.
Of Trenwick's $1.8 billion in reinsurance recoverable balances as of December 31, 2002, $1.0 billion relates to Trenwick Managing Agents' insurance underwriting operations at Lloyd's, which rely heavily on reinsurance in its insurance underwriting, particularly for the aviation business it underwrites. Approximately $221.2 million of this balance comes directly from the aviation losses from the September 11, 2001 terrorist attacks. Of LaSalle Re's $40.1 million in reinsurance recoverable balances, $25.0 million relates to the September 11, 2001 terrorist attacks. Trenwick's United States specialty program insurance segment has $225.5 million in reinsurance recoverable balances. Finally, $173.2 million of the total relates to finite reinsurance coverage and $333.1 million relates to operational reinsurance for Trenwick America Re ($242.5 million) and Trenwick International ($90.6 million).
The operational reinsurance balances are recoverable from a broadly diversified group of companies with 61 reinsurers comprising 96% of the total of $1.6 billion as of December 31, 2002. Of these 61 reinsurers, 74% are rated A- or better by Standard & Poor's, or A.M. Best if no Standard & Poor's rating is available. The decrease from prior years in the percentage of Trenwick's reinsurers which are rated A- or higher reflects a significant number of downgrades by the rating agencies of insurance and reinsurance companies in recent years.
The accounting policies described below are those Trenwick 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. The descriptions below are summarized and have been simplified for clarity. A more detailed description of the significant accounting policies used by Trenwick in preparing its financial statements is included in the Notes to the Consolidated Financial Statements and the note references are included below.
o Claims against insured financial services companies for certain types of practices including alleged misallocations of shares in initial public offerings;
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 Reinsurance collectibility - Trenwick reviews and monitors its reinsurance recoverables from its reinsurers and makes provision for uncollectible reinsurance as appropriate. However, given the magnitude of reinsurance recoverables, $1.8 billion at year-end 2002, Trenwick has a significant exposure to collectibility issues.
Trenwick seeks to match the maturities of invested assets with the payment of expected liabilities. By doing this, Trenwick 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 had to liquidate investments prior to their maturity, it may incur realized losses and the effect on Trenwick's results of operations could be significant. Also see Note 8 of Notes to the Consolidated Financial Statements.
The following sections address the significant market risks associated with Trenwick's business activities as of December 31, 2002 and 2001. Trenwick's primary market risk exposures are:
As of December 31, 2002, Trenwick's exposure to high yield investments was minimal. While these investments are more susceptible to credit risk, their total market value represents less than 4% of total investments and cash, and therefore management believes that the exposure to credit risk is not material. Trenwick 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 Trenwick will incur economic losses due to adverse changes in foreign currency exchange rates. This risk arises from Trenwick's international operations and securities denominated in foreign currencies. Trenwick generally conducts its international businesses through foreign operating entities which generally maintain assets and liabilities in local currencies, substantially limiting exchange rate risk to net assets denominated in the foreign currency. Trenwick's foreign currency denominated net assets are principally in British pounds sterling. At December 31, 2002 and December 31, 2001, Trenwick's net assets of foreign subsidiaries was approximately $45 million and $(44) million, respectively. Foreign debt securities and foreign cash on deposit were $17 million and $5 million, respectively, at December 31, 2002.
Trenwick's reinsurance, international insurance 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 Trenwick's balance sheet, statement of operations and statement of cash flows. This exposure is somewhat mitigated by the fact that premiums received are invested in the same currency portfolios, to partially offset related unpaid claims and claims expense liabilities denominated in the same currency.
Management estimates that a 10% immediate unfavorable change in each of the foreign currency exchange rates to which Trenwick is exposed as of December 31, 2002 would have decreased the fair value of Trenwick's foreign denominated net assets by approximately $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 loss in fair value of approximately $4 million.
Trenwick 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 $21.0 million and $60.2 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 $19.0 million and $56.0 million at December 31, 2002 and December 31, 2001, respectively.
Trenwick's equity portfolio at December 31, 2002, totaled $9 million of common equity investments. Trenwick's potential exposure on equity securities is estimated in terms of an immediate 10% drop in equity prices across all equity securities holdings from those prevailing at December 31, 2002 which would have resulted in a $1 million loss. An immediate 10% drop in equity prices across all equity securities holdings from those prevailing at December 31, 2001 would have resulted in a $2 million loss.
In January 2003, the FASB issued Interpretation No. ("FIN") 46, Consolidation of Variable Interest Entities, which Trenwick 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 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 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.
The future operations of Trenwick 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. In addition, under the terms of Trenwick's agreements with the Banks, and particularly under the December Amendments, Trenwick and its subsidiaries are subject to financial and operational restrictions which limit Trenwick's flexibility to pursue business and strategic alternatives. These restrictions will apply so long as Trenwick and its subsidiaries have unpaid reimbursement obligations to the Banks with respect to the letters of credit.
You should carefully consider the risks described below regarding us and our common shares. 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 common shares could decline further.
Trading of our common shares and the Series A Preferred Shares of LaSalle Re Holdings has been suspended by the New York Stock Exchange.
In light of the significant developments and other factors referred to in this Report, which have materially and adversely impacted Trenwick, its operations and its future prospects as well as the amount of indebtedness versus the capital base of Trenwick, it is unlikely that the common shares of Trenwick will realize significant value in the near term, if at all. As a result, it is possible that a market will not continue in the common shares of Trenwick, in which case the liquidity of the securities may be severely limited.
We are unable to pay dividends 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 7, 2002, our Board of Directors elected to suspend the payment of dividends to holders of our common shares effective immediately and for an indefinite period of time. In addition, our credit agreement has been amended to prohibit us from paying dividends without the approval of our lenders, and we are prohibited from paying dividends as the result of the deferral of dividend payments on our Series A Preferred Shares, Series B Preferred Shares and the capital securities of Trenwick America. We do not expect to be able to pay dividends to holders of our common shares for the foreseeable future.
We are unable to repay $75 million in senior notes outstanding which are due April 1, 2003, and are required to replace, refinance or restructure these notes by that date.
We have issued convertible preferred shares that may result in substantial dilution to existing common shareholders and/or a change in control of the Company. We do not have the ability to control settlement of these convertible preferred shares.
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 U.S. 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 have been engaged in discussions with the insurance regulators of the jurisdictions in which our United States and Bermuda insurance company subsidiaries are domiciled, and with the FSA in the United Kingdom. We have been required to restrict our Connecticut insurance company subsidiary from taking certain actions such as 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. The New York Insurance Department ("NYID") has indicated that the NYID would expect to impose
Our financial strength ratings have been significantly downgraded by Standard & Poor's, Moody's Investor Services and Fitch.
We have placed three of our operating businesses, worldwide property catastrophe reinsurance, international specialty insurance and reinsurance and United States specialty program insurance, into runoff. Little or no new business is being written in these lines. These three lines provided approximately 40% of our gross premiums written in 2002. 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 these operations, we do not expect them to contribute
In the fourth quarter of 2002 we increased our loss reserves for unpaid claims and claims expenses by $107 million, which followed other reserve increases earlier in 2002. The reserve increases reflect a reassessment of our reserves in light of recent reported loss activity trends across our major business groups.
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.
Historically, insurers and reinsurers have experienced significant fluctuations in operating results due to competition, frequency of occurrence or severity of catastrophic events, levels of capacity, general economic conditions and other factors. The supply of insurance and reinsurance is related to prevailing prices, the level of insured losses and the level of industry surplus which, in turn, may fluctuate in response to changes in rates of return on investments being earned in the insurance and reinsurance industry. As a result, the insurance and reinsurance business historically has been a cyclical industry characterized by periods of intense price competition due to excessive underwriting capacity as well as periods when shortages of capacity permitted favorable premium levels. Although premium levels for many products have increased in recent months, the supply of insurance and reinsurance may increase, either by capital provided by new entrants or by the commitment of additional capital by existing insurers or reinsurers, which may cause prices to decrease. Any of these factors could lead to a significant reduction in premium rates, less favorable policy terms and fewer submissions for our underwriting services. In addition to these
considerations, changes in the frequency and severity of losses suffered by insureds and insurers may affect the cycles of the insurance and reinsurance business significantly, and we expect to experience the effects of such cyclicality. Applicable insurance laws may make it difficult to effect a change of control of our company.
U.S. persons who own our common shares may have more difficulty in protecting their interests than U.S. persons who are shareholders of a U.S. corporation.
Interested Directors. Under Bermuda law and our bye-laws, a transaction entered into by us, in which a director has an interest, will not be voidable by us, and such director will not be liable to us for any profit realized pursuant to such transaction, provided the nature of the interest is disclosed at the first opportunity at a meeting of directors, or in writing to the directors. In addition, our bye-laws allow a director to be taken into account in determining whether a quorum is present and to vote on a transaction in which that director has an interest following a declaration of the interest pursuant to the Companies Act provided that the director is not disqualified from doing so by the chairman of the meeting. Under Delaware law, such transaction would not be voidable if:
o Such material facts were disclosed or were known to the shareholders entitled to vote on such transaction and the transaction was specifically approved in good faith by vote of the majority of shares entitled to vote thereon; or
o The transaction was fair as to the corporation as of the time it was authorized, approved or ratified.
Shareholders' Suits. The rights of shareholders under Bermuda law are not as extensive as the rights of shareholders in many U.S. jurisdictions. Class ctions 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.
Indemnification of Directors and Officers. Under Bermuda law and our bye-laws, we may indemnify our directors, officers or any other person appointed to a committee of the board of directors (and their respective heirs, executors or administrators) to the full extent permitted by law against all actions, costs, charges, liabilities, loss, damage or expense incurred or sustained by such person by reason of any act done, concurred in or omitted in the conduct of our business or in the discharge of his/her duties; provided that such indemnification shall not extend to any matter in which any of such persons is found, in a final judgment or decree not subject to appeal, to have committed fraud or dishonesty.
Trenwick is a Bermuda company and it may be difficult for you to enforce judgments against it or its directors and executive officers.
Further, there is no treaty in effect between the United States and Bermuda providing for the enforcement of judgments of U.S. courts, and there are grounds upon which Bermuda courts may not enforce judgments of U.S. courts. Because judgments of U.S. courts are not automatically enforceable in Bermuda, it may be difficult for you to recover against us based upon such judgments.
To the Board of Directors and Shareholders of Trenwick Group Ltd.:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15 (a) 1 on page 144, present fairly, in all material respects, the financial position of Trenwick Group Ltd. and its subsidiaries at December 31, 2002 and December 31, 2001, and the results of their operations and cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15 (a) 2 on page 144, present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 9 to the financial statements, the Company is currently required to repay certain senior notes by April 1, 2003 and collateralize with cash or cash equivalents, 60% of the outstanding letters of credit under its senior credit facility by August 1, 2003. At this time, the Company does not have sufficient available liquidity to repay the senior notes or collateralize the letters of credit. As discussed in Note 14 to the financial statements, certain insurance subsidiaries of the Company do not meet risk based capital levels or levels of surplus required by various insurance regulations to which they are subject. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans and other circumstances in regard to these matters are also described in Note 9 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
As discussed in Note 15 to the financial statements, the Company changed its method of accounting for goodwill in 2002.
Trenwick Group Ltd. Consolidated Statement of Operations and Comprehensive Income (Amounts expressed in thousands, except per share data) Years Ended December 31, 2002, 2001 and 2000,
Trenwick Group Ltd. Consolidated Statement of Cash Flows (Amounts expressed in thousands) Years Ended December 31, 2002, 2001 and 2000,
Trenwick Group Ltd. Consolidated Statement of Changes in Shareholders' Equity (Amounts expressed in thousands, except share data) Years Ended December 31, 2002, 2001 and 2000,
Trenwick Group Ltd. ("Trenwick") was formed as a holding company in Bermuda to acquire two publicly held companies and the minority interest in a subsidiary of one of those companies. That transaction, in which Trenwick issued common shares to acquire LaSalle Re Holdings Limited ("LaSalle Re Holdings"), Trenwick Group Inc. and the minority interest in LaSalle Re Limited ("LaSalle Re"), was completed on September 27, 2000. Trenwick Group Inc. had earlier acquired another publicly held company, Chartwell Re Corporation ("Chartwell"), on October 27, 1999 (the "Trenwick/Chartwell business combination"). More details of the Trenwick/LaSalle business combination are disclosed in Note 2.
These financial statements include the accounts of Trenwick and its subsidiaries after elimination of significant intercompany accounts and transactions. Trenwick's subsidiary, Trenwick Managing Agents, acts as a managing agent at Lloyd's for syndicates to which capital is primarily provided by Trenwick through its wholly owned subsidiaries. Trenwick does not hold an ownership interest in the Lloyd's syndicates it manages, however due to the fact that Trenwick manages the operations of the syndicates to which it provides capital and therefore has the ability to exert significant influence over the results of operations, Trenwick includes in its financial statements the assets and liabilities and revenues and expenses of the Lloyd's syndicates which Trenwick Managing Agents manages in proportion to the percent of capital provided by Trenwick through its wholly owned subsidiaries (i.e., for the 2002 year of account, Trenwick through its wholly owned subsidiaries provided 100% of the capital to syndicate 839 and therefore consolidated 100% of the syndicates' assets, liabilities, and results of operations). Certain items in prior years' financial statements have been reclassified to conform to the current presentation.
The business combination between LaSalle Re Holdings and Trenwick Group Inc. has been treated as a purchase by LaSalle Re Holdings of Trenwick Group Inc. and of the minority interest in LaSalle Re. Accordingly, in these financial statements, the minority interest in net income of LaSalle Re has been eliminated from October 1, 2000, and the revenues and expenses of Trenwick Group Inc. are included from October 1, 2000.
On October 4, 2002, Trenwick Managing Agents Limited (formerly Chartwell Managing Agents Limited) ("Trenwick Managing Agents"), Trenwick's managing agent at Lloyd's of London, entered into an agreement with National Indemnity Company ("NICO"), a member of the Berkshire Hathaway group of insurance companies. This agreement enabled Trenwick Managing Agents to increase the total premium capacity of Syndicate 839, its primary managed syndicate at Lloyd's, by (pound)141,250 ($227,413) for the 2002 year of account. NICO provided (pound)62,500 ($99,325) in premium capacity through (pound)25,000 ($39,730) of additional Lloyd's funding and (pound)78,750 ($125,150) in premium capacity through a qualifying quota share reinsurance facility, (an outward reinsurance arrangement placed by a Lloyd's syndicate that has the effect of increasing the written premium capacity of that syndicate and which is subject to certain regulatory criteria and guidelines, including minimum standards for the rating, net assets and jurisdiction of the reinsurer) both for the 2002 year of account. In return for its capital support, NICO will receive a 41.4% share of the net underwriting result of Syndicate 839 for the 2002 year of account before ceding commissions and profit sharing. Under the terms of its capital support, NICO is not exposed to losses in prior years of account. Refer to Note 9 for a description of the letter of credit agreement supporting Trenwick's Lloyd's operations.
(pound)13,100 ($20,818) is being applied to most of the remaining property and casualty insurance and reinsurance lines. The amended agreement also provides Trenwick Managing Agents an option for the premium capacity being supplied by NICO to the aviation line of Syndicate 839 to be increased to (pound)100,000 ($158,920), for which NICO will be required to deposit further additional funding at Lloyd's. Exercise of the option is contingent upon certain conditions having been satisfied at the time of the exercise of the option, including the retention of certain key employees, the obtaining of independent broker verification as to the size of the aviation market, and the approval of final contract wording. NICO will receive shares of the net underwriting results from each of these lines of Syndicate 839's business in proportion to the premium capacity provided. Trenwick Managing Agents paid NICO non-refundable fees totaling (pound)3,100 ($4,926) in connection with NICO's commitment to provide capital for the 2003 year of account.
Pursuant to the underwriting facility, which was effective November 1, 2002, the parties will jointly adjust and settle any claims arising under the business underwritten, provided that Chubb will retain final claim settling authority. Trenwick America Re has agreed that during the term of the underwriting facility Trenwick America Re will not underwrite on behalf of any other third party without Chubb's approval. Chubb has entered into a non-competition agreement with Trenwick America Re restricting Chubb from renewing certain business underwritten through the facility for one year following the termination of the underwriting facility. Either party may terminate the underwriting facility prospectively at any time. Termination of the facility or any modification thereof that is deemed by Trenwick's letter of credit agreement providers to be materially adverse constitutes an event of default under the credit agreement (refer to Note 9 for details of the credit agreement). All premiums collected from the underwriting facility are required to be paid directly to Chubb.
The notional "experience account" established with respect to the underwriting facility equals premiums collected (net of ceding commission and reinsurance brokerage), plus investment credit on the experience account balance, plus recoverable reinsurance payment, less paid losses and loss adjustment expenses, expense reimbursements, Chubb's fronting fee, and reinsurance premiums paid (net of ceding commission). The experience account will earn an investment credit at a rate equal to the three-year United States Treasury bill as of the close of business on the first business day of the applicable time period. The investment credit will be calculated each March 31, June 30, September 30 and December 31 and will be based upon the average daily balance in the experience account during the applicable three-month time period.
For purposes of calculating the profit commission, the experience account will be adjusted to account for unpaid claims and claims expenses (case reserves, incurred but not reported and additional case reserves.)
Trenwick America Re has also agreed to reinsure Chubb for 100% of all losses in excess of premiums collected less certain expenses. To secure its reinsurance obligations to Chubb, Trenwick America Re has posted a $50,000 security deposit with Chubb. Trenwick America Re is required to pay additional amounts to Chubb for the security deposit, so that the security deposit is equal to the greater of $50,000 or the amount of Trenwick America Re's reinsurance obligations. Given the long-term nature of the stop-loss reinsurance agreement, the amount of the cash deposit may be greater than Trenwick America Re's obligations under the stop-loss reinsurance agreement. The security deposit will earn an investment credit at a rate equal to the three-year United States Treasury bill as of the close of business on the first business day of the applicable time period. The amount of the security deposit in excess of certain decreasing amounts over time will be returned to Trenwick America Re on a payment schedule beginning March 31, 2006, provided that at such times Trenwick America Re has an A.M. Best rating of "A-" or better. On January 12, 2012, regardless of whether Trenwick
America Re has reacquired an "A-" rating from A.M. Best, that portion of the security deposit that exceeds the positive difference (if any) of Trenwick America Re's obligations minus the amount in the experience fund, will be returned to Trenwick America Re.
Since November 1, 2002, the effective date of the Chubb facility, Trenwick America Re has written approximately, $126,890 in gross premiums under the facility. To date, almost all of the bound premiums have been renewal business.
For the years ended December 31, 2002, 2001 and 2000, Trenwick reported its specialty property and casualty insurance and reinsurance business in the following business segments:
o Reinsurance, which includes treaty reinsurance on United States property and casualty risks and worldwide property catastrophe reinsurance. United States treaty reinsurance is written principally through Trenwick America Re and includes the run-off of reinsurance business formerly written by Chartwell Insurance Company (which merged with and into Trenwick America Re effective December 31, 2002) and The Insurance Corporation of New York. In addition, the Reinsurance segment includes the results of the Chubb underwriting facility. The remainder of Trenwick's reinsurance segment consists of property catastrophe reinsurance written by LaSalle Re on a worldwide basis until it ceased underwriting effective April 1, 2002. (See Note 3)
o International operations, which includes Trenwick's Lloyd's operations as well as United Kingdom specialty insurance and treaty and facultative reinsurance. Trenwick's Lloyd's operations are conducted through its wholly owned subsidiary Trenwick Managing Agents, which manages underwriting syndicates at Lloyd's, almost exclusively for Trenwick's own account. The United Kingdom specialty insurance and facultative reinsurance was principally written by Trenwick International Limited ("Trenwick International"), which wrote business on a worldwide basis until it ceased underwriting new business effective November 29, 2002. During 2002, renewals of certain lines of business previously underwritten by Trenwick International including, among others, general aviation and commercial property, were underwritten by Trenwick's Lloyd's entities following downgrades in Trenwick International's financial strength ratings by Standard & Poor's.
Excluded from the aforementioned segments are Trenwick's Lloyd's syndicates in runoff and Excess and Casualty Reinsurance Association Pool ("ECRA Pool") runoff, which includes insurance and reinsurance that was either sold or non-renewed. The ECRA Pool was a New York state licensed insurance pool that underwrote multi-line property and casualty business until it ceased underwriting in 1983. The losses incurred by the ECRA pool included asbestos and environmental risks for those periods. Trenwick America Re participated in the ECRA Pool during pool years 1978 to 1982, while The Insurance Corporation of New York participated during pool years 1950 to 1967.
December 31, 2002 2001 ---------- ---------- Total assets: Reinsurance $1,780,339 $2,259,616 International operations 2,645,332 1,915,314 U.S. specialty program insurance 757,988 561,991 Lloyd's syndicates runoff and ECRA pool runoff 59,023 99,021 Unallocated 35,300 92,613 ---------- ---------- Total assets $5,277,982 $4,928,555 ========== ==========
The following table presents Trenwick's gross premiums written allocated to the geographic region in which the risks originated:
Insurance and reinsurance premiums (net of reinsurance ceded) are earned on a pro-rata basis over the related contract period. A liability for unearned premium income is recorded for the portion of premiums applicable to the unexpired portion of premium coverage with renewal dates later than the date of the balance sheet. Premium income for insurance business and excess of loss reinsurance is computed using pro-rata methods. With respect to proportional business, our estimates of future coverage and the related premium are computed based on reports received from ceding companies. Premium recognition on this business is matched on a pro-rata basis to the applicable period of coverage based upon these reports. Reinsurance premiums are recorded as prepaid expenses amortized over the contract period in proportion to the amount of reinsurance protection provided. Where the contract provides for return premiums, accruals are made based on loss experience through the date of the balance sheet.
Assumed premiums earned $ 525,786 $ 490,126 $ 301,640 Direct premiums earned 974,120 831,869 116,998 ----------- ----------- --------- Gross premiums earned 1,499,906 1,321,995 418,638 Ceded premiums earned (521,001) (432,489) (115,889) ----------- ----------- --------- Net premiums earned $ 978,905 $ 889,506 $ 302,749 =========== =========== =========
Commissions on cessions to retrocessionaires earned by Trenwick of $83,041, $69,142 and $13,959 for the 2002, 2001 and 2000 years, respectively, were recorded as a reduction to gross policy acquisition costs.
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 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.
The components of net claims and claims expenses incurred are as follows:
Unpaid claims and claims expense at year end 2002 and 2001 of $3,718,124 and $3,032,748, respectively, include amounts approved for payment but unpaid at year end 2002 and 2001 ($19,220 and $19,823, respectively). These amounts are reflected in the above table as
During the year ended December 31, 2002, Trenwick recorded increases in claims and claims expenses related to prior years of $303,379. Of this amount, approximately $27,408 related to adverse development on property losses stemming from the September 11, 2001 terrorist attacks. The remaining $275,971 of loss reserve increases are a result of the reassessment of reserve levels, a culmination of work completed by both Trenwick's internal actuaries and independent actuarial consultants in all of Trenwick's businesses, described in detail below. Of the reserve increases recorded, approximately $169,422 or 61.4%, relates to Trenwick's U.S. treaty reinsurance operations and principally impacts the most recent accident years, 1999 to 2001, where deterioration has occurred across all lines of business. A significant portion of the deterioration arose in the general liability and asbestos and environmental lines of business. Trenwick's U.S. specialty program insurance, now in runoff, contributed approximately $45,527, or 16.5% of the reserve increases recorded in 2002. This deterioration was concentrated in a small number of programs and related primarily to general liability business. Of the remaining reserve increases recorded, $51,573 emanated from Trenwick's international liability business written through Trenwick International, now in runoff. The last significant component of the increases on prior years' reserves for unpaid claims and claims expenses was recorded by Trenwick Managing Agents, which contributed $30,826 of the reserve increases. These increases related primarily to the financial institutions and professional indemnity lines of business written through Trenwick's Lloyd's syndicates. These reserve increases were offset in part by a decrease in reserves for prior years' claims at LaSalle Re of $15,477.
As a result of deterioration in loss reserve indications during the first nine months of 2002, Trenwick engaged external actuarial consultants during the fourth quarter to assist management in reviewing reserves for December 31, 2002. Based on the results of our external and internal actuarial studies, significant reserve adjustments of $106,600 were recorded in the fourth quarter of 2002.
Claims incurred in 2001 also included other catastrophe losses totaling $24,000. The largest of these losses was tropical storm Allison and storms affecting the Midwest United States amounting to $10,500 and the November 12, 2001 American Airlines crash in Queens, New York of $7,800.
The balance of unpaid claims and claims expenses also includes provisions for latent injury or toxic tort claims such as asbestos that cannot be estimated with traditional techniques. Due to inconsistent court decisions in federal and state jurisdictions and the wide variation among
At the time of the closing of the merger of Trenwick Group Inc. and Chartwell (October 27, 1999), Chartwell purchased a reinsurance policy from London Life and Casualty Reinsurance Co. Ltd. and Scandinavian Reinsurance Co. Ltd. providing for up to $100,000 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 merger was completed. Amounts recoverable under the agreement are presented gross in the balance sheet at both year end 2002 and 2001 as reinsurance recoverable on unpaid claims and claims expenses ($91,970) and miscellaneous accounts receivable, included in other assets ($8,030). The related benefit for losses ceded to the agreement was reflected as a reduction to claims and claims expenses incurred and the benefit related to other underwriting balances was reflected as a reduction to underwriting expenses in the historical financial statements of Trenwick Group Inc.
The components of reinsurance recoverable balances, net at year end 2002 and 2001 are as follows:
Letters of credit, trust accounts and funds withheld in the aggregate amount of $294,595 (including interest) have been arranged in favor of Trenwick collateralizing reinsurance recoverables with respect to certain retrocessionaires.
(1) Amounts represent cost adjusted for changes in equity of the limited partnerships.
Gross unrealized gains and losses on debt and equity securities at December 31, 2002 and 2001 follow:
The fair value and amortized cost for debt securities at year end 2002 are shown below by contractual maturity periods, except mortgage-backed and asset-backed securities which are included based on expected maturity dates. Actual maturities will differ from contractual maturities because borrowers generally have the right to prepay obligations.
Investment income, consisting principally of interest and dividends, is recognized when earned, net of investment expenses. In computing interest income, premiums are amortized and discounts are accreted on debt securities utilizing the interest method. The amortization and accretion for mortgage-backed and other asset-backed securities is adjusted, when sufficient information exists to estimate the probability and timing of their prepayments, to the amount that would have existed had the new effective yield been applied since the acquisition of the security. Imputed interest on the funds held offset to reinsurance recoverable is included in investment expense.
Trenwick generally limits investments in debt securities that are rated below investment grade, as these investments are subject to a higher degree of credit risk than investment grade securities. Trenwick also monitors the creditworthiness of the portfolio, including below investment grade securities, and writes down investments when fair values decline for reasons other than changes in interest rates or other perceived temporary conditions. Realized gains or losses on disposition of investments are determined on the basis of specific identification.
Net unrealized gains (losses) on investments and their effect on other comprehensive income (loss) follow:
Components of net unrealized investment gains at year end 2002 and 2001 follow:
On November 29, 2002 Trenwick announced that it had elected to suspend, with immediate effect and for an indefinite period, payment of dividends on the mandatorily redeemable preferred capital securities of its U.S. subsidiary, on the preferred shares of its Bermuda subsidiary and on its Series B convertible preferred stock.
The carrying values of indebtedness, minority interest and convertible preferred stock at December 31, 2002 and 2001 follow:
On September 27, 2000, Trenwick assumed the benefits and obligations of LaSalle Re Holdings under a $100,000 catastrophe equity put option. The catastrophe equity put option was amended and restated as of January 1, 2001 and amended as of January 25, 2002. As amended, the catastrophe equity put option enabled Trenwick to raise up to $55,000 of equity, through the issue of convertible preferred shares to European Reinsurance Company of Zurich ("European Re"), a subsidiary of Swiss Reinsurance Company, in the event there was a qualifying catastrophic event or events occurring prior to January 1, 2002.
As a result of the terrorist attacks of September 11, 2001, LaSalle Re incurred in excess of $140,000 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 $55,000 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 option agreement. On September 6, 2002, the catastrophe put option was amended and restated and the pending arbitration proceedings were terminated. Under the terms of the second restated agreement, European Re purchased 550,000 of Trenwick's Series B Cumulative Perpetual Preferred Shares (the "Series B Shares") with a liquidation preference of $100 per share for an aggregate purchase price of $40,000 ($72.73 per share). The Series B Shares bear cumulative dividends, payable quarterly in arrears, based upon the Series B Shares' Standard & Poor's rating at LIBOR plus a margin determined in accordance with the following schedule:
BBB- or above 3.75% BB+ 4.25% BB 4.50% BB- 4.75% Below BB- 6.00%
These factors adjust upward by 0.25% on the third anniversary if the securities are still unrated, and upward by 0.50% on the fifth anniversary if they are still unrated. Also, if the Standard & Poor's rating is below BBB- on the fifth anniversary, the factors adjust upward by an additional 0.50%. The maximum adjustment based upon these circumstances is 0.75%.
During the year ended December 31, 2002, Trenwick incurred $1,384 of dividends on the convertible preferred stock. At December 31, 2002, the Series B Shares were rated D by Standard & Poor's.
The Series B Shares are convertible into common shares of Trenwick after five years or upon the occurrence of a "special conversion event" at the greater of book value or the average thirty-day trading price of the common shares. Special conversion events are either the occurrence of a change in control without the written consent of the registered holders of more than 50% of the Series B shares outstanding ("Change in Control Conversion Event"), or the failure of Trenwick to maintain a GAAP net worth as defined under the terms of the Certificate of Designation with respect to Series B Cumulative Convertible Perpetual Preferred Shares equal to at least $225,000 for a period of more than sixty days ("Net Worth Conversion Event"). On February 20, 2003, Trenwick notified European Re that its GAAP net worth at
Trenwick has the option to redeem the Series B Shares after the first anniversary of the issuance, paying an early redemption premium of $2.00 per share if redeemed before the second anniversary, and $1.00 per share if redeemed between the second and third anniversary. This option expires on the fifth anniversary of issuance of the Series B Shares.
The maximum number of Trenwick common shares that could be required to be issued upon conversion of the Series B Shares is 550,000,000 which would occur when both the book value of common stock and the average thirty-day trading price of the common shares were less than or equal to $0.10 per share. Trenwick currently has the authority to issue up to 150,000,000 preferred and common shares without prior authorization from the shareholders. Trenwick, therefore does not currently have the ability to control settlement of the Series B Shares and has therefore recorded them as temporary equity in the accompanying balance sheet. As of December 31, 2002, the Series B shares would be settled with 12,188,756 common shares upon conversion. The following table details how changes in the price of Trenwick's common shares or changes in book value would affect the settlement amounts:
Future minimum principal payments on indebtedness and minority interest at December 31, 2002 follow: 2003, $75,000; 2004, $0; 2005, $0; 2006, $1,000, 2007, $0 and thereafter $86,350. The foregoing amounts include a principal payment of $75,000 due to the senior note holders on April 1, 2003. Trenwick anticipates that it will be unable to make this payment and has entered into discussions with the senior note holders concerning a proposed restructuring or amendment of the senior notes. There can be no assurance that an agreement relating to this restructuring will be reached by April 1, 2003. If such an agreement is not reached, or a waiver thereof obtained, Trenwick would be in default under the terms of the senior notes.
Concurrent with the Trenwick/LaSalle business combination in September of 2000, Trenwick America and Trenwick Holdings, Trenwick's United States and United Kingdom holding companies, entered into an amended and restated $490,000 credit agreement with various lending institutions (the "Banks"), which was guaranteed by LaSalle Re Holdings. The credit agreement consisted of both a $260,000 revolving credit facility and a $230,000 letter of credit facility. The revolving credit facility was subsequently converted into a four-year term loan and repaid in full on June 17, 2002. 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 $182,500. 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.
Subsequently, an amendment and waiver of default under the credit agreement and amendment 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 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's Lloyd's operations for the 2002 and 2003 Lloyd's years of account. 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.
The December Amendments also prohibit Trenwick and its 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 issued by Trenwick Capital Trust I). The December Amendments and 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 business, prohibit Trenwick from making certain payments without the Banks' approval, prohibit Trenwick and its 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.
contingent interest notes. In addition, the contingent interest notes entitle the holders thereof 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 $55,000 in contingent interest. The actual amount of contingent interest paid will depend on the outcome of certain contingencies, the most significant of which is the development over time of The Insurance Corporation of New York's reserves for unpaid claims and claims expenses.
During the years ended December 31, 2002 and 2001, Trenwick recorded $18,320 and $9,893, respectively, of adverse development related to the subject business, and as a result, the carrying value of the contingent interest notes at December 31, 2002 has been reduced to the principal value of $1,000 plus accrued interest with no contingent interest, which is the present value of the amount expected to be paid at maturity. The notes will continue to accrue interest at a rate of 8% per year.
Trenwick International has established a line of credit under which it can borrow up to $4,025 at a rate of 1.0% above the lending bank's base rate. Additionally, Trenwick Managing Agents has established a line of credit under which it can borrow up to $403 at a rate of 2.5% above the lending bank's base rate. There were no borrowings outstanding under either of these lines of credit during the 2002 year.
The mandatorily redeemable preferred capital securities, with a face value of $110,000, are obligations of a business trust subsidiary of Trenwick America. The capital securities mature in February 2037, require preferential cumulative semi-annual cash distributions at an annual rate of 8.82% and are guaranteed by Trenwick America, within certain limits, as to distribution payments and liquidation or redemption payments. On November 9, 2002, Trenwick ceased payment of dividends on the capital securities. Trenwick America is prohibited from incurring future collateralized indebtedness without equally and ratably collateralizing the amounts due under the capital securities. The terms of the capital securities permit Trenwick America to defer payments of interest at any time and from time to time for a period not exceeding ten consecutive semi-annual periods, provided that no extension period may extend beyond the stated maturity date. Trenwick continues to record interest expense on the capital securities at the imputed interest rate of 11.2%.
The business trust issuing the capital securities holds an investment in subordinated debentures of Trenwick America that have an aggregate principal amount of $113,403, and interest from that investment is the source of cash distributions on the capital securities. The capital securities are subject to mandatory redemption in certain circumstances pertaining to Trenwick
America's prepayment or repayment of its subordinated debentures held by the trust. In the event of a default by Trenwick America with respect either to making required payments on the subordinated debentures or to its guarantee under certain circumstances, holders of the capital securities may institute a direct action against Trenwick America. On January 15, 2003, Trenwick America gave notice of its right to defer payment of interest due by its selection of an extension period extending the commencement of the next semi-annual interest payment period to August 1, 2003. In the first quarter of 2001 and the fourth quarter of 2000, a Trenwick subsidiary purchased $10,650 and $13,000, respectively, par value of the capital securities in the open market for $8,462 and $9,902, respectively. The carrying value of these securities and the related dividends have been eliminated in consolidation.
In connection with the Trenwick/LaSalle business combination, as described in Note 2, the outstanding Series A preferred shares of LaSalle Re Holdings have been classified as minority interest in Trenwick's balance sheet at their liquidation preference value. The preferred shares have a par value of $1.00 per share and are entitled to a liquidation preference of $25.00 per share ($75,000 aggregate), plus accrued and unpaid dividends to the date of liquidation. Dividends on the preferred shares are cumulative at 8.75% of the liquidation preference per annum ($2.1875 per share or $6,563 aggregate). Subsequent to the Trenwick/LaSalle business combination, preferred share dividends which were previously deducted from retained earnings have been reflected as subsidiary preferred share dividends in Trenwick's statement of operations. On or after March 27, 2007, the preferred shares may be redeemed, in whole or in part, at a redemption price of $25.00 per share, plus accrued and unpaid dividends to the date of liquidation. Prior thereto, under certain circumstances, the preferred shares may be redeemed in whole at a redemption price of $26.00 per share ($78,000 aggregate), plus accrued and unpaid dividends to the date of liquidation. The payment of dividends on LaSalle Re Holdings' preferred shares was suspended for an indefinite period effective November 2, 2002. In the event that the dividends on the preferred shares of LaSalle Re Holdings are not paid for six quarters, the holders of these shares will have the right to elect two special representatives who will be entitled to receive notice of and take part in all board meetings, with the privilege of voice but not vote, until all dividends in arrears have been paid.
Interest expense and subsidiary preferred share dividends are accrued and recognized when incurred. Interest expense and dividends on capital securities are computed by the accretion of discount on certain obligations utilizing the interest method. The dividends on our mandatorily redeemable preferred capital securities held as an investment by a subsidiary are eliminated in consolidation.
At year end 2002, the authorized share capital of Trenwick was 150,000,000 shares of par value $.10 each, which includes both common and preferred shares. At year end 2002 Trenwick had outstanding 36,801,545 issued and fully paid common shares and 550,000 of Series B Cumulative Perpetual Preferred Shares. Shares reserved for future issuance at year end 2002 totaled 2,200,692, including shares reserved for the future exercise of warrants (153,263), options (1,847,429) and the shareholder rights plan (200,000).
For matters that are put to shareholder vote, common shareholders of Trenwick are generally entitled to one vote per common share owned. Trenwick's by-laws limit the voting rights of those shareholders holding 10% or more of Trenwick's outstanding common shares. The voting limitation is to prevent Trenwick from being characterized as a U.S. controlled foreign corporation and the adverse tax consequences that can result.
During years ended December 31, 2002, 2001 and 2000, Trenwick issued 48,464, 224,539 and 1,405 common shares, respectively, under employee compensation, director compensation, stock purchase and stock option plans and on exercises of warrants. Prior to the Trenwick/LaSalle business combination, LaSalle Re Holdings issued 22,167 common shares during the year ended December 31, 2000 under employee compensation, stock purchase and stock option plans. See note 11 for additional information on restricted common share awards and employee share purchase plan purchases.
Trenwick and certain of its subsidiaries are incorporated under the laws of Bermuda and are subject to Bermuda law with respect to taxation. Under current Bermuda law, they are not taxed on any Bermuda income or capital gains taxes and they have received an undertaking from the Bermuda Minister of Finance that, in the event of any Bermuda income or capital gains taxes being imposed, they will be exempt from those taxes until 2016. Trenwick's U.S. subsidiaries are subject to federal, and state income taxes imposed by U.S. authorities; its UK subsidiaries, including its Lloyd's corporate names, are subject to U.K. corporation taxes and the Lloyd's corporate names are also subject to U.S. taxation on their U.S. connected income. Other branches of Trenwick's subsidiaries are subject to the relevant local income taxes.
Income (loss) before income taxes and the provision for income taxes by jurisdiction and by allocation between current and deferred for the years ended 2002, 2001 and 2000 follow:
For jurisdictions other than the U.S. and UK, there are no significant differences between the effective tax rates for each jurisdiction and the applicable statutory tax rates.
For the years ended December 31, 2002, 2001 and 2000, the U.S. federal effective tax rate of (27.9)%, 40.8% and 37.2% respectively differs from the statutory tax rate of 35% as follows (2000 balances represent amounts incurred by Trenwick subsequent to September 27, 2000, the effective date of the Trenwick/LaSalle business combination):
The U.K. subsidiaries' net operating loss carryforwards are a result of underwriting losses generated by Trenwick International and Trenwick's Lloyd's operations. Those underwriting losses from Trenwick's Lloyd's members are from both open and closed years of accounts. The trading losses that have been declared by Trenwick International and Lloyd's members, including closed years of accounts through 1999, amount to approximately $269,316. These underwriting losses may be carried forward indefinitely to offset future trading profits of the specific U.K. company that generated the loss. The remaining U.K. net operating loss carryforwards from the open years of account of Trenwick's Lloyd's operations have been determined on a loss reserve accrual basis and will not be finalized until the close of the underwriting year of account. At December 31, 2002, these losses totaled $14,205.
As of April 2000, it became legally possible to group the current year profits and losses of U.K. companies that have a common worldwide parent. Pursuant to this legislation, Trenwick may group its profits and losses among Trenwick International and its Lloyd's members. In addition, new legislation was introduced effective for tax years beginning on or after January 1, 2000, which permits U.K. insurers and Lloyd's members to disclaim technical reserves for tax purposes. The new legislation also provides a calculation whereby additional receipts or expense may be included in taxable income depending upon the payout of claims relative to the reserves taken into account for tax purposes within a margin of error. Management has reviewed the new legislation and during 2002 amended its 2000 U.K. returns and elected to disclaim a portion of its technical reserves. Each year management will re-evaluate the appropriateness of the amount of disclaimed reserves. At December 31, 2002, disclaimed technical reserves for the 2002 tax year were estimated at $39,807. Disclaimed loss reserves are temporary differences that represent future tax deductions.
Deferred income tax assets (liabilities) attributable to temporary differences at December 31, 2002 and 2001, respectively, follow:
Expenses for employee retirement and savings plans are recognized as they are incurred.
Trenwick's provisions for employee retirement and savings plans for the years ended December 31, 2002, 2001 and 2000 were as follows:
Defined contribution plans $4,712 $4,054 $ 956 401(k) savings plan 653 660 99 ------ ------ ------ Total $5,365 $4,714 $1,055 ====== ====== ======
Deferred compensation is recorded for the fair value of restricted common share awards and deferred compensation is presented as a separate, offsetting component of shareholders' equity. Compensation expense is recognized over the vesting period of the restricted common shares.
Trenwick awards restricted common shares to key employees. During the 2002 year, no restricted common shares were awarded and 73,414, restricted common shares were canceled due to employee terminations. During the 2001 year, Trenwick awarded 194,116 restricted common shares at an average fair value of $21.22 per share and 38,463 restricted common shares were canceled due to employee terminations. On September 27, 2000, Trenwick awarded 224,331 restricted common shares in exchange for restricted common shares previously awarded by Trenwick Group Inc. at an average fair value of $13.05. During the 2000 year, 4,896 restricted common shares were canceled due to employee terminations.
Prior to the Trenwick/LaSalle business combination, LaSalle Re Holdings granted common shares to employees on the fifth anniversary date of their hire. At the time of the award, the market value of the shares was recognized as compensation expense. During the year ended December 31, 2000, 635 shares were awarded to employees, and $9, was recognized as compensation expense.
Shares sold to employees in connection with employee share purchase plans are recorded at fair value; compensation expense is recognized for the difference between fair value and the discounted sales price.
Trenwick is authorized to sell up to 300,000 common shares to its employees at a 15% discount from market value under an employee share purchase plan adopted as of February 1, 2001. During the years ended December 31, 2002 and 2001, Trenwick issued 48,464 and 15,840 shares under the plan and recognized $24 and $26 of compensation expense, respectively. Effective April 1, 2003, Trenwick will cease accepting new contributions to this plan.
Options are granted for a fixed number of common shares to employees and non-employee directors. These options have an exercise price equal to the market value of the shares at the date of grant. The current accounting standard establishes a fair value based method of accounting for stock-based compensation plans; however, it permits an entity to continue to apply the accounting provisions of a previous standard and make pro forma disclosures of net income and earnings per share, as if the fair market value based method had been applied. Trenwick continues to account for the share option grants in accordance with the previous standard; the pro forma disclosures required by the fair value based method are presented below.
Trenwick has several plans through which it makes options in common shares available to employees at the discretion of its board of directors. Non-employee directors receive automatic grants under a separate plan. Exercise prices are generally fixed at the market value at the date of grant. Options vest and are exercisable on various terms, usually either over a five year period or up to a ten year period. All options have an expiration date not exceeding ten years. Transactions under the share option plans during the periods presented follow:
Concurrent with the Trenwick/LaSalle business combination, all of the options under LaSalle Re Holdings' plans and all of the options granted under Trenwick Group Inc.'s plans prior to the 2000 year became fully vested.
The pro forma adjustments relating to options granted from 1995 to 2002 are based on a fair value method using the Black-Scholes option pricing model; no effect has been given to options granted prior to 1995. Valuation and related assumption information for options granted in each of the periods below are as follows:
Under a plan now terminated, a liability for stock appreciation rights was recorded at each period end based on the excess of the current fair value of the underlying common stock over the fair value at the time of grant. Compensation expense was recognized for adjustments to the liability.
The computation of basic and diluted earnings per common share follows:
Because Trenwick, Trenwick America and Trenwick Holdings are holding companies, their principal sources of funds consist of permissible dividends, tax allocation payments and other statutorily permissible payments from their respective regulated operating insurance company subsidiaries, each of which is subject to oversight and regulatory supervision by insurance regulators in its jurisdiction of domicile. As a result of recent losses incurred by these operating insurance company subsidiaries, their cash distribution capacities have been significantly reduced. Each insurance regulatory body, including those of Bermuda, New York, Connecticut, North Dakota, the United Kingdom and Lloyd's, may act independently with respect to the company or companies domiciled in its jurisdiction. To the extent that any such regulator takes action with respect to an insurance company domiciled in its jurisdiction, such action could adversely impact the ability of Trenwick to continue to function, or could precipitate other actions by other insurance regulators with respect to the particular Trenwick company or companies under their primary jurisdiction. Additionally, although these financial statements are prepared on a consolidated basis, the actual assets and liabilities shown in the financial statements which are held by the insurance company subsidiaries generally will not be available to satisfy the obligations of other companies within the Trenwick group of companies. Insurance regulators may also review certain payments made to Trenwick by its insurance company subsidiaries, such as payments for administrative services, and could attempt to seek return of such payments to the insurance company subsidiaries.
Trenwick's United States operations are subject to extensive regulation under state statutes that delegate regulatory, supervisory and administrative powers to state insurance commissioners. The extent of regulation varies from state to state, but generally has its source in statutes that delegate regulatory, supervisory and administrative authority to a department of insurance in each state. Among other things, state insurance commissioners regulate insurer solvency standards, insurer licensing, authorized investments, premium rates, restrictions on the size of risks that may be insured under a single policy, loss and expense reserves and provisions for unearned premiums, deposits of securities for the benefit of policyholders, policy form approval, and market conduct regulation, including the use of credit information in underwriting and other underwriting and claims practices. State insurance departments also conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating to the financial condition of companies and other matters. In general, regulated insurers must file all rates for directly underwritten insurance with the insurance department of each state in which they operate on an admitted basis; however, reinsurance generally is not subject to rate regulation.
On December 3, 2002, Trenwick America Re entered into a "letter of understanding" with the State of Connecticut Insurance Department pursuant to which Trenwick America Re agreed that it would not take any of the following actions without the prior written approval of the Connecticut Insurance Commissioner or her designee:
o Dispose of, convey or encumber any of its assets or business in force;
o Incur any debt, obligation or liability, except liabilities in the ordinary course of business;
o Move any books and records from its office in Stamford, Connecticut;
Senior management of Trenwick America Re has also agreed to meet with the State of Connecticut Insurance Department, in person or by conference call, with such frequency as may be deemed necessary by the Connecticut Insurance Commissioner or her designee, to provide updates on the status of Trenwick and any changes in the status of Trenwick America Re. Trenwick America Re is also required to provide to the State of Connecticut Insurance Department a monthly financial statement consisting of a balance sheet and income statement on the 15th day of each month as of the prior month end. The above described terms will remain in effect until such time as the Connecticut Insurance Commissioner deems that they are no longer necessary or issues an order that supercedes the letter of understanding.
On January 24, 2003, Trenwick met with the State of Connecticut Insurance Department to present preliminary 2002 financial statements of the regulated entities and provided the Connecticut Department of Insurance with an overview of Trenwick's proposed restructuring plan. Trenwick also discussed with the State of Connecticut Insurance Department the reserve charges taken for the fourth quarter of 2002. Trenwick America Re's significant reserve increases in the fourth quarter of 2002 had an adverse impact on its RBC rating, which was at the "Regulatory Action Level Event" at December 31, 2002. At this level, Trenwick America Re is required to submit a Comprehensive Plan of Action to the State of Connecticut Insurance Department. Such a plan was submitted to the State of Connecticut Insurance Department on January 23, 2003. In addition, the State of Connecticut Insurance Department, at its discretion, is also able to take any action deemed necessary under the circumstances. Trenwick America Re is subject to a statutory requirement that it maintain a minimum capital and surplus to policyholders equal to the RBC "Company Action Level Event," which was $237,237 at December 31, 2002. As of December 31, 2002, Trenwick America Re was not in compliance with this requirement.
Trenwick has been notified by the NYID that, in the NYID's view, approximately $26,000 in loans made to Trenwick America by The Insurance Corporation of New York in 2002 were in contravention of New York regulatory requirements. As a result, The Insurance Corporation of New York and Trenwick may be the subject of regulatory action brought by the NYID.
Trenwick's United States insurance subsidiaries are subject to guaranty fund laws which can result in assessments, up to prescribed limits, for losses incurred by policyholders as a result of the impairment or insolvency of unaffiliated insurance companies. Typically, an insurance
Trenwick's U.S. insurance subsidiaries file financial statements prepared in accordance with statutory accounting practices prescribed or permitted by insurance regulators in each subsidiary's states of domicile. Combined statutory surplus of the U.S. insurance subsidiaries was $125,939 and $374,835 at year end 2002 and 2001; their combined statutory net income (loss) was $(183,247), $12,438 and $(16,157) for the 2002, 2001 and 2000 years, respectively.
In March 1998, the NAIC adopted the Codification of Statutory Accounting Principles ("Codification"), which is intended to standardize regulatory accounting and reporting for the insurance industry. Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in some areas. However, statutory accounting principles will continue to be established by individual state laws and permitted practices. Effective January 1, 2001, the states of Connecticut (domicile of Trenwick America Re), and North Dakota (domicile of Dakota Specialty Insurance Company) adopted Codification. The cumulative effect of adoption of Codification was an increase in aggregate
LaSalle Re and LaSalle Re Corporate Capital Ltd. are regulated by the Insurance Act 1978 of Bermuda and related regulations (the "Insurance Act"), which provides that no person shall carry on an insurance business in or from within Bermuda unless registered as an insurer under the Insurance Act by the Minister of Finance. Under the Insurance Act, insurance business includes reinsurance business. The Minister of Finance, in deciding whether to grant
registration, has broad discretion to act as he thinks fit in the public interest. The Minister of Finance is required by the Insurance Act to determine whether the applicant is a fit and proper body to be engaged in the insurance business and, in particular, whether it has, or has available to it, adequate knowledge and expertise. The continued registration of an applicant as an insurer is subject to its complying with the terms of its registration and such other conditions as the Minister of Finance may impose from time to time. An Insurance Advisory Committee appointed by the Bermuda Minister of Finance advises the Bermuda Monetary Authority ("BMA") on matters connected with the discharge of the BMA's functions. Sub-committees of the Insurance Advisory Committee supervise and review the law and practice of insurance in Bermuda, including reviews of accounting and administrative procedures. The day-to-day supervision of insurers is the responsibility of the BMA.
Trenwick 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, Bermuda and the United Kingdom. These regulations vary from jurisdiction to jurisdiction and are generally designed to protect ceding insurance companies and policyholders by regulating Trenwick's financial integrity and solvency in its business transactions and operations. Many of the insurance statutes and regulations applicable to Trenwick's subsidiaries relate to reporting and enable regulators to closely monitor Trenwick's performance. Typical required reports include information concerning Trenwick's capital structure, ownership, financial condition, and general business operations.
Under the applicable U.K. laws, Trenwick's U.K. insurance subsidiaries may make distributions only from accumulated realized profits, net of accumulated realized losses. In addition, under the U.K. Interim Prudential Sourcebook, Trenwick International Limited is not permitted to make any distribution that would reduce its net assets below the required minimum margin of solvency which, as determined under the FSA's rules, is approximately $38,822 at year end 2002. The net assets of Trenwick International Limited were $30,165 at December 31, 2002. Trenwick International Limited must also notify the FSA of any proposal to declare or pay a dividend on any of its share capital. Under Lloyd's regulations, Trenwick Managing Agents is not permitted to make any distribution that would cause its net assets to fall below any of its Share Capital, minimum net current asset margin or minimum net asset margin. As of December 31, 2002, the highest of the three tests required Trenwick Managing Agents to maintain approximately (pound)800 ($1,288) of capital. The net assets of Trenwick Managing Agents were $16,301 at December 31, 2002.
For the years ended December 31, 2001 and 2000, goodwill was amortized on a straight-line basis over twenty-five years.
Effective January 1, 2002, Trenwick 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 resulted in Trenwick's Bermuda holding company, LaSalle Re Holdings, creating negative goodwill of $11,586 to operations as of January 1, 2002 as a cumulative effect of an accounting change. The statement also required that the remaining goodwill balance of $53,239 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.
Investments in managing general agencies, through which Trenwick wrote primary insurance business and in which Trenwick holds ownership interests of between 20% and 30% are recorded in other assets on the balance sheet. Based on the ownership interest and Trenwick's ability to exercise significant influence on the operating and financial policies of these managing general agencies, these investments are accounted for under the equity method.
Trenwick leases office space under non-cancelable operating leases which expire at various dates through 2015. Trenwick's future minimum lease commitments at year end 2002 total $16,757, and are payable as follows: 2003, $5,669; 2004, $3,930; 2005, $2,959; 2006, $1,772; 2007, $1,726 and thereafter, $701.
As previously discussed in Note 9, 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 shares, the perpetual 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.
Trenwick is party to various legal proceedings generally arising in the normal course of its business. Trenwick does not believe that the eventual outcome of any such proceeding will have a material effect on its financial condition or results of operations or cash flows. Trenwick's subsidiaries are regularly engaged in the investigation and the defense of claims arising out of the conduct of their business. Pursuant to Trenwick's insurance and reinsurance arrangements, disputes are generally required to be finally settled by arbitration.
Additionally, Trenwick has debt securities and cash with a carrying value of $136,166 being held as collateral for Lloyd's syndicates operations.
No one ceding company accounted for more than 3% of Trenwick's gross written premiums in the 2002 or 2001 years, or the 2000 year.
While the 2001 underwriting support services agreement between LaSalle Re Holdings and CNA did not terminate until September 30, 2001, LaSalle Re Holdings did not utilize CNA's underwriting support services following the Trenwick/LaSalle business combination. Consequently, all fees payable between September 30, 2000 and September 30, 2001 were accrued and expensed at the date of the business combination (October 27, 2000).
Assets: 2002 2001 -------- -------- Investments in consolidated subsidiaries, after minority interest of $143,320 and $143,119 $152,866 $542,855 Cash and cash equivalents 11,088 634 Due from consolidated subsidiaries 10,867 51,183 Other assets 7,408 9,316 -------- --------
Liabilities: Due to consolidated subsidiaries $ 97,909 $100,976 Other liabilities 6,850 4,686 -------- -------- Total liabilities 104,759 105,662
TRENWICK GROUP LTD. (Parent Company Only) STATEMENT OF CASH FLOWS (Amounts expressed in thousands of United States dollars) Years Ended December 31, 2002, 2001 and 2000
TRENWICK GROUP LTD. (Amounts expressed in thousands of United States dollars) Years Ended December 31, 2002, 2001 and 2000
TRENWICK GROUP LTD. AND SUBSIDIARIES SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION -(continued)
Balance at Balance at Beginning of End of Period Period ------------ ------------ Year Ended December 31, 2002 Allowances for uncollectible reinsurance recoverable and premiums receivable $ 51,114 $ 77,194