Information required by Item 6 has been omitted because Trenwick America Corporation meets the conditions set forth in General Instruction I (1)(a) and (b) of Form 10-K and is therefore filing this Annual Report on Form 10-K in the reduced disclosure format.
In 2002, Trenwick Group Ltd. ("Trenwick"), Trenwick America's ultimate parent company, conducted several strategic reviews of its operations in light of its capital constraints and determined that it was necessary for Trenwick America 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 that of Trenwick and to concentrate its limited financial resources on its core franchise and business, treaty reinsurance where it would be able to write insurance and reinsurance based on direct or indirect financial support. Trenwick America assessed its alternatives and voluntarily placed into runoff its specialty program business formerly operated through its subsidiary, Canterbury Financial Group, Inc. ("Canterbury").
Trenwick announced on October 25, 2002 that it had engaged independent actuaries to conduct a review of reserves for unpaid claims and claims expenses at each of Trenwick's operating subsidiaries, including Trenwick America's subsidiaries. Based upon the study conducted by independent actuarial consultants and additional work performed during the quarter by Trenwick's internal actuaries, Trenwick America increased its reserves for unpaid claims and claims expenses in the fourth quarter of 2002 by $100.4 million, which followed reserve increases made by Trenwick America earlier in 2002. The aggregate reserve increase for Trenwick America during 2002 was $229.4 million. Both the fourth quarter and year to date 2002 reserve increases are net of benefits related to reductions in the liability under Trenwick America's contingent interest notes. The reserve increases reflect a reassessment of Trenwick America's reserves for unpaid claims and claims expenses in light of recent reported loss activity trends across its major business groups and principally impacts the 1998 to 2001 accident years. Included in the fourth quarter 2002 reserve increase was $20 million relating to Trenwick America's exposure to asbestos and environmental liabilities. Following this increase to Trenwick America's asbestos and environmental reserves, Trenwick America's three year survival ratio (i.e., number of years that existing reserves will last if the current level of average annual payments for the last three years repeats itself indefinitely) for this type of exposure will be approximately 13 years. See "-- Unpaid Claims and Claims Expenses," below.
Trenwick America incurred financial accounting losses in the years 1999 through 2002 and, in connection with such losses, recorded as an asset up to $119.2 million of net deferred income taxes (before application of a valuation allowance). The net deferred income tax asset represented the future tax benefit of the losses previously incurred by Trenwick America. Because of Trenwick America's cumulative financial accounting losses, in the absence of specific favorable factors, application of FASB Statement No. 109 required Trenwick America to establish, during the third quarter of 2002, a 100% valuation allowance against its deferred tax asset. The initial establishment of a 100% valuation allowance against Trenwick America's deferred tax asset increased Trenwick America's provision for income taxes and net loss by $54.5 million for the year ended December 31, 2002. The maintenance of a full valuation allowance against Trenwick America's net deferred tax asset through December 31, 2002 further increased Trenwick America's provision for income taxes and net loss by $64.4 million for the year ended December 31, 2002. Trenwick America's management will continue to monitor its tax position and reassess the need for a valuation allowance on its deferred tax asset on a periodic basis.
Pursuant to a guaranty agreement entered into concurrently with the credit agreement, Trenwick has guaranteed the obligations of Trenwick America and Trenwick Holdings under the credit agreement. In April of 2002, Trenwick pledged the capital stock of LaSalle Re Holdings, which was a guarantor of the obligations under the credit agreement, and LaSalle Re as collateral to the Banks. In December of 2002, Trenwick, Trenwick America and Trenwick Holdings agreed to provide the Banks additional security interests as described below.
Since December, 2002, Trenwick, Trenwick America and Trenwick Holdings have entered into additional amendments and numerous waivers with the Banks providing for, among other things, waivers of potential covenant defaults, further reductions in certain financial covenants, additional financial reporting, approval of certain employee and other payments, approval of the extension of Trenwick America's senior notes from April 1, 2003 to August 1, 2003, the related payment of interest accrued to April 1, 2003 to the senior note holders and extension of numerous deadlines imposed under the December Amendments.
If there is an event of default under the credit agreement, including as a result of Trenwick failing to collateralize the letters of credit as described above, or if there is an event of default under other outstanding indebtedness of Trenwick or its subsidiaries, including under the Senior Notes of Trenwick America, resulting in a cross default under the credit agreement, Trenwick, Trenwick America and Trenwick Holdings may be required to fully and immediately collateralize the outstanding letters of credit under the terms of the credit agreement and the guaranty agreement. No liability for any such amounts has been reflected in Trenwick's, Trenwick Holdings' or Trenwick America's financial statements. If the potential future events of default occur and are not waived, there is substantial doubt as to Trenwick's and Trenwick America's ability to continue as going concerns, and Trenwick and/or one or more of its subsidiaries, including Trenwick America, may be forced to seek protection from creditors through proceedings commenced in Bermuda and other jurisdictions including the United States. In addition, at any time one or more of the insurance regulatory authorities having jurisdiction over Trenwick's, Trenwick America's or Trenwick Holdings' insurance company subsidiaries may commence voluntary or involuntary proceedings for the formal supervision, rehabilitation or liquidation of such subsidiaries, or one or more of the creditors of Trenwick or its subsidiaries may commence proceedings against Trenwick or its unregulated subsidiaries, including Trenwick America, seeking their liquidation.
INSCORP's reported RBC was at the "Mandatory Control Level Event" at December 31, 2002. New York Insurance Law requires that New York domiciled insurers report their risk-based capital based on a formula calculated by applying factors to various asset, premium and reserve items. Recently, INSCORP has been informed by the New York Insurance Department ("NYID") that it will be required to submit a plan by April 10, 2003 to cure the existing statutory capital impairment. If the NYID is not satisfied that INSCORP has proposed a suitable plan to eliminate the impairment or does not accept the plan, the Superintendent of the NYID may proceed, or Trenwick America may of its own volition determine that it is in its best interest for the NYID to proceed, against INSCORP pursuant to the provisions of Article 74 of the New York Insurance Law, the statute authorizing supervision, conservation, rehabilitation, liquidation and dissolution of insurers, including domestic insurers. A plan to eliminate the capital impairment of INSCORP was submitted on April 7, 2003. There can be no assurance that the plan will be determined to be acceptable by the NYID.
During the year ended December 31, 2002, Trenwick America Re and INSCORP loaned $33.3 million and $26.3 million, respectively, to Trenwick America. The funds received through these loans were used to service Trenwick America's debt obligations and to fund affiliate transactions. At this time, Trenwick America does not have sufficient available liquidity to repay these loans.
During the years ended December 31, 2002, 2001 and 2000, Trenwick America conducted its specialty insurance and reinsurance business in the following business segments which are described in further detail below:
Excluded from the aforementioned segments is the Excess and Casualty Reinsurance Association Pool ("ECRA Pool") runoff, which includes reinsurance that was 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
Results of Operations - Years Ended December 31, 2002 and 2001 (monetary amounts in tables expressed in thousands of United States dollars)
In addition to providing net income (loss) information, when comparing the results of operations for the years ended December 31, 2002 and 2001, Trenwick America has also provided operating income (loss) and underwriting income (loss) as management believes they are both meaningful measures of Trenwick America's results. Operating income (loss) differs from net income (loss) under accounting principles generally accepted in the United States of America, sometimes referred to as U.S. GAAP, and does not replace net income (loss) as the GAAP measure of our results of operations. In arriving at operating income (loss), we start with GAAP net income (loss) and exclude net realized investment gains and losses, as well as non-recurring charges because i) net realized investment gains and losses are unpredictable and not necessarily indicative of current or future results and ii) charges such as reorganization expenses and the cumulative effect of changes in accounting principles are non-recurring in nature and are also not necessarily indicative of future results of operations. Underwriting income (loss), also a non-GAAP financial measure, is net premiums earned less claims and claims expenses incurred, acquisition costs and underwriting expenses.
The underwriting loss of $204.5 million in 2002 represented a $138.2 million greater loss compared to the underwriting loss of $66.3 million in 2001. The 2002 underwriting loss included $229.4 million of reserve strengthening as a result of prior years' reserve development, while the underwriting results for 2001 included additions to unpaid claims and claims expenses of $22.4 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."
The deterioration in the combined ratio in 2002 compared to 2001 resulted from the increase in development on prior years' reserves.
A majority of gross premiums ceded in both 2002 and 2001 relates to the specialty program insurance business, which cedes a greater portion of its business written than the treaty reinsurance business. The increase in gross premiums ceded in 2002 compared to 2001 can be attributed to the increase in gross premiums written by the specialty program insurance segment.
Net premiums earned for 2002 were $489.7 million compared to $380.3 million for 2001. The increase in net premiums earned is commensurate with the increase in net premiums written.
Trenwick America's net unpaid claims and claims expenses of $973.1 million and $789.4 million 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 prior years that are unpaid as of the balance sheet date, including claims that have been incurred but not yet reported to Trenwick America. Claims and claims expenses incurred during the year ended December 31, 2002 were $528.2 million, an increase of $222.7 million compared to claims and claims expenses of $305.5 million for 2001, which includes adverse development across all business units of $229.4 million and $22.4 million of development for year end 2001 and 2000 reserves, respectively. The increase in claims and claims expenses incurred in 2002 resulted mainly from the $229.4 million of loss reserve strengthening recorded. The 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, described in detail below. Of the reserve increases recorded, approximately $183.9 million or 80.2%, relates to Trenwick America's treaty reinsurance operations and principally impacts the most recent accident years, 1998 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 specialty program insurance, now in runoff, contributed approximately $45.5 million, or 19.8% of the reserve increases recorded in 2002. This deterioration was concentrated in a small number of programs and related primarily to general liability business.
The year end 2001 deficiency related to claims occurring between 1998 and 2001 and the deficiency 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 America when it originally wrote the business and subsequently re-estimated reserves for this business.
Trenwick America strengthened its prior year loss reserves in 2001 by $22.4 million. This reserve strengthening includes $15.7 million related to the treaty reinsurance segment's liability 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 specialty program insurance segment.
Policy acquisition costs which consist primarily of commissions and brokerage expenses and underwriting expenses for 2002 increased by $24.9 million compared to 2001. The increase was primarily attributable to the increase in premiums written during 2002. Acquisition costs and underwriting expenses as a percentage of net premiums earned, or the expense ratio, were 33.9% for the 2002 year compared to 37.1% for the 2001 year. The decrease in the expense ratio occurred principally as a result of improved terms and conditions in the insurance market.
Underwriting expenses for the year ended December 31, 2002 as a percentage of earned premium decreased to 4.6%, as compared to 5.0% for the same period in 2001 The decrease in the underwriting expense ratio resulted principally from the increase in premiums in 2002.
Net investment income for 2002 was $53.6 million compared to $68.0 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. In addition, there was a decrease in the average invested assets as a result of cash used in operations and the payment of a $50.0 million security deposit to Chubb. 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 America's investment portfolio in the fourth quarter of 2002 (refer to "Non-operating Income and Expenses"), Trenwick America anticipates a reduction in future investment income.
Trenwick America recorded foreign currency losses of $5.5 million for 2002, compared to foreign currency losses of $1.4 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
Reorganization expenses incurred in 2002 of $8.6 million include non-recurring severance costs; additionally the 2002 amount includes other non-recurring costs related to Trenwick America's decision to cease underwriting specialty program insurance.
Trenwick America's investment objective is to fund policyholder and other liabilities in a manner that enhances shareholder value, subject to appropriate risk constraints. Trenwick America 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 America regularly projects duration and cash flow characteristics of its liabilities and makes appropriate adjustments in its investment portfolios. At December 31, 2002, Trenwick America had investments, cash and cash equivalents of $1.1 billion, compared to $1.2 billion 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 America's debt and equity investments decreased by $3.3 million principally as a result of the gains realized on investment sales during the year combined with the declining interest rate environment in 2002.
Trenwick America's investments in debt securities consisted primarily of investment grade securities, with 65% 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 11% 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.
None of these unrealized losses were determined to be other than temporarily impaired and therefore no permanent impairment has been recognized at year end 2002. In the event that circumstances surrounding the potential impairment of these investments change and management concludes the losses are other than temporary, there could be a material impact on the earnings of Trenwick America.
The average maturity of Trenwick America's debt securities at December 31, 2002 was 6.5 years, relatively unchanged when compared to 6.3 years at December 31, 2001.
Trenwick America incurred financial accounting losses in 1999 through 2002 and in connection with such losses, recorded as an asset up to $119.2 million of net deferred income taxes (before application of a valuation allowance). The net deferred income tax asset represented the future tax benefit of the losses previously incurred by Trenwick America's operations. Because of Trenwick America's cumulative financial accounting losses, in the absence of specific favorable factors, application of FASB Statement No. 109 required Trenwick America to establish a 100% valuation allowance against its deferred tax asset during 2002. The initial establishment of a 100% valuation allowance against Trenwick America's deferred tax asset during 2002 increased Trenwick America's provision for income taxes and net loss by $54.5 million. The maintenance of a full valuation allowance against Trenwick America's deferred tax asset through December 31, 2002 further increased Trenwick America's provision for income taxes and net loss by $64.4 million for the year ended December 31, 2002. Trenwick management will continue to monitor its tax position and reassess the need for a valuation allowance on its deferred tax asset on a periodic basis.
Trenwick America is a holding company whose principal assets are its investments in the common stock of its operating subsidiaries. As a holding company, Trenwick America's principal source of ongoing funding consists of permissible dividends, tax allocation payments and other statutorily permissible payments from its operating subsidiaries. At this time, and for the foreseeable future, in the absence of external funding, it is likely that Trenwick America's sole source of funding will arise from reimbursements and service fees paid to it under its management agreement with its insurance subsidiaries and its affiliates. All such reimbursements are subject to review and challenge by the insurance departments of the domiciliary jurisdiction of the respective insurance subsidiary.
Trenwick America's principal use of cash has been operating expenses, repayment of loans to affiliates as well as to service its debt obligations. Trenwick America's operating subsidiaries receive cash from premiums, investment income and proceeds from sales and maturities of portfolio investments. They utilize cash to pay claims, purchase their own reinsurance protections, meet operating and capital expenses and purchase investment securities.
On November 29, 2002, Trenwick announced that it had elected to suspend, with immediate effect and for an indefinite period of time, dividends or distributions payable, including those on the outstanding capital securities of Trenwick's Capital Trust I and on Trenwick America's senior notes. In addition, the December amendments to the letter of credit facility prohibit Trenwick America from paying dividends on the capital securities.
Cash for financing activities in 2002 included $195.2 million related to the repayment of Trenwick America's term loan facility, offset by the receipt of a capital contribution of $199.5 million from its parent for the purpose of repaying the debt.
On October 18, 2002, A.M. Best Company lowered the financial strength ratings of Trenwick's, Trenwick America's and Trenwick Holdings' operating subsidiaries below "A-". The lowered A.M. Best Company ratings constituted an event of default under the credit agreement. In addition, increases in Trenwick, Trenwick America and Trenwick Holdings' reserves for unpaid claims and claims expenses and the establishment of a Trenwick America deferred tax asset valuation allowance in the third quarter of 2002 resulted in violations of the financial covenants in the credit agreement requiring Trenwick, Trenwick America and Trenwick Holdings to maintain a minimum tangible net worth and minimum risk-based capital. On November 13, 2002, Trenwick, Trenwick America, Trenwick Holdings, and the Banks executed a forbearance agreement with respect to the events of default arising from the lowered A.M. Best Company ratings and financial covenant violations.
Pursuant to the December Amendments, Trenwick is required to collateralize with cash, cash equivalents and marketable securities 60% of the outstanding letters of credit by August 1, 2003. If it is unable to do so, Trenwick's insurance company subsidiaries, including those of Trenwick America, will be prohibited from underwriting any insurance or reinsurance without the Banks' prior approval. In addition, Trenwick is required to use its best efforts to terminate the letters of credit by December 31, 2003. In order to do so, the letters of credit would need to be replaced with other letters of credit or collateral acceptable to Lloyd's. In the event Trenwick has not terminated the letters of credit by December 31, 2003, it is required on such date to collateralize with cash, cash equivalents and marketable securities the full amount of the outstanding letters of credit. At this time, Trenwick does not have sufficient available liquidity to collateralize the letters of credit as required by the December Amendments. Additionally, Trenwick does not believe that it will be able to replace the letters of credit with other letters of credit or collateral acceptable to Lloyd's.
If there is an event of default under the credit agreement, including as a result of Trenwick failing to collateralize the letters of credit as described above, or if there is an event of default under other outstanding indebtedness of Trenwick or its subsidiaries, including under the senior notes of Trenwick America resulting in a cross default under the credit agreement, Trenwick, Trenwick America and Trenwick Holdings may be required to fully and immediately collateralize the outstanding letters of credit under the terms of the credit agreement and the guaranty agreement. No liability for any such amounts has been reflected in Trenwick's, Trenwick America's or Trenwick Holdings' financial statements for any future event of default. If the
potential future events of default are not waived, there is substantial doubt as to Trenwick America's ability to continue as a going concern and Trenwick and/or one or more of its subsidiaries, including Trenwick America may be forced to seek protection from creditors through proceedings commenced in Bermuda and other jurisdictions including the United States. In addition, at any time one or more of the insurance regulatory authorities having jurisdiction over Trenwick's, Trenwick America's and Trenwick Holdings' insurance company subsidiaries may commence voluntary or involuntary proceedings for the formal supervision, rehabilitation or liquidation of such subsidiaries, or one or more of the creditors of Trenwick, Trenwick America and Trenwick Holdings or their subsidiaries may commence proceedings against Trenwick or its unregulated subsidiaries, including Trenwick America, seeking their liquidation.
Upon consummation of the acquisition of Chartwell Re Corporation ("Chartwell") in 1999, Trenwick Group Inc. became the successor obligor under Chartwell's Contingent Interest Notes due June 30, 2006. Effective September 27, 2000, Trenwick America assumed Trenwick Group Inc.'s obligations under the contingent interest notes in connection with the Trenwick/LaSalle business combination. The contingent interest notes were issued in an aggregate principal amount of $1 million, which accrues interest at a rate of 8% per annum, compounded annually. The interest is not payable until the maturity or earlier redemption of the contingent interest notes. In addition, the contingent interest notes entitle their holders to receive at maturity, in proportion to the principal amount of the contingent interest notes held by them, an aggregate of from $0 up to $55 million in contingent interest. The amount of contingent interest payable under the contingent interest notes is dependent upon the level of unpaid claims and claims expenses related to business written by Trenwick America's subsidiary, INSCORP, prior to 1996. The contingent interest notes mature on June 30, 2006.
notes contain covenants which relate to the maintenance of certain records and limitations on certain indebtedness. At December 31, 2002, Trenwick America was in compliance with these covenants.
Trenwick America's ability to refinance its existing debt obligations or raise additional capital is dependent upon several factors, including financial conditions with respect to both the equity and debt markets and the ratings of its securities as established by the rating agencies. As a result of the continued deterioration of Trenwick America's financial condition, its senior debt ratings have been downgraded by Standard & Poor's Corporation to "D" and by Moody's Investors Service to "Ca." Trenwick America's ability to refinance its outstanding debt obligations, as well as the cost of such borrowings, has been materially adversely affected by these ratings downgrades.
During the year ended December 31, 2002, Trenwick America Re and INSCORP loaned $33.3 million and $26.3 million, respectively, to Trenwick America. The funds received through these demand loans were used to service Trenwick America's debt obligations and to fund affiliate transactions. At this time, Trenwick America does not have sufficient available liquidity to repay these loans. At December 31, 2002, Trenwick America's consolidated balance sheet reflected demand loans receivable from its United Kingdom affiliates of $48.2 million. These loans were funded prior to 2002, and no repayment has been received by Trenwick America since the inception of these loans. At this time, Trenwick America's United Kingdom affiliates from which the loans are receivable do not have sufficient liquidity available to repay these loans. The repayment of these loans is contingent upon profitable operations at Lloyd's during 2003 and beyond.
Trenwick America's operating subsidiaries purchase reinsurance to reduce their exposure to catastrophe claims and the frequency and severity of claims in all lines of business. In 2002, 2001 and 2000, Trenwick America Re's reinsurance treaties consisted principally of property catastrophe reinsurance treaties. In 1999, Trenwick America Re also entered into an excess of loss treaty for its facultative casualty business. In addition, Trenwick America Re purchased an annual aggregate excess of loss ratio treaty for casualty business effective January 1, 1999. Subsequent to 1999, Trenwick America's reinsurance philosophy was to utilize specific retrocessional and property catastrophe protections to manage its underwriting results, and to eliminate the use of aggregate stop loss coverages to provide capital enhancement. Canterbury purchased specific reinsurance programs for each of the programs underwritten by its insurance companies.
Trenwick America purchases reinsurance to reduce its exposure on individual risks, catastrophic losses and other large losses. Trenwick America estimates the amount of uncollectable receivables from its reinsurers each period and establishes an allowance for uncollectable amounts. The amount of the allowance is based on the age of unpaid amounts, information about the creditworthiness of Trenwick America's reinsurers, and other relevant information. Estimates of uncollectable reinsurance amounts are revised each period, and changes are recorded in the period they become known. A significant change in the level of uncollectable reinsurance amounts would have a significant effect on Trenwick America's results of operations. Also see Note 5 of Notes to the Consolidated Financial Statements.
o foreign currency exchange in particular the United States dollar to the Canadian dollar and British pound sterling;
Foreign currency risk is the risk that Trenwick America will incur economic losses due to adverse changes in foreign currency exchange rates. This risk arises from Trenwick America's securities denominated in foreign currencies.
Management estimates that a 10% immediate unfavorable change in each of the foreign currency exchange rates to which Trenwick America is exposed at year end 2002 would have decreased the fair value of Trenwick America's foreign denominated net assets by approximately $1 million. At year end 2001, the same
The fair value estimates shown are based on the composition of the equity security portfolio at year-end and these exposures will change as a result of ongoing portfolio activities in response to management's assessment of changing market conditions and available investment opportunities.
The above analyses do not take into account any correlation among foreign currency exchange rates, or any correlation among various markets (i.e., the fixed income markets and foreign exchange and equity markets). Trenwick America's actual experience may differ from the results noted above due to the correlation assumptions utilized, or if events occur that were not included in the methodology, such as significant liquidity or market events. The selection of the amount of increases or decreases in currency exchange rates, interest rates and equity values in the above analyses should not be construed as a prediction of future market
Effective January 1, 2002, Trenwick America adopted a new Financial Accounting Standards Board statement which amended the accounting for goodwill and other intangible assets. This new statement suspended systematic goodwill amortization and required that goodwill be tested for impairment under either market value or cash flow tests. Trenwick America conducted both market value and cash flow tests and, as a result, recorded a $52.1 million write off of goodwill as a cumulative effect of an accounting change as of January 1, 2002.
Our auditors have expressed doubt as to our ability to continue as a going concern.
In connection with other actions being taken in the fourth quarter of 2002, on November 29, 2002, Trenwick's Board of Directors elected to suspend the payment of dividends, including those to holders of the capital securities of Trenwick Capital Trust I effective immediately and for an indefinite period of time. We do not
We are engaged in continuing discussions with the holders of our senior notes regarding a restructuring of our senior notes. At this time we do not have sufficient liquidity to pay the principal amount of $75 million due on August 1, 2003, and it is uncertain whether we will be able to replace, refinance or restructure the notes by that date. If we are unable to secure a waiver or extension of this deadline, and either the banks under our credit facility or the senior noteholders determine to exercise the rights available to them upon this failure, we and/or one or more of our subsidiaries may be forced to seek protection from creditors.
Our indirect parent, Trenwick Group Ltd., has issued convertible preferred shares that may result in substantial dilution to existing common shareholders and/or a change in control of Trenwick Group Ltd. Trenwick Group Ltd. does not have the ability to control settlement of these convertible preferred shares.
Ratings have become an increasingly important factor in establishing the competitive position of insurance companies. As a result of recent events, our insurance company subsidiaries are no longer rated by A.M. Best. These ratings reflect A.M. Best's opinion of an insurance company's financial strength, operating performance, strategic position and ability to meet its obligations to policyholders. The lack of ratings will adversely affect our ability to market our insurance and reinsurance products and will have a significant and adverse effect on our future prospects for growth and profitability.
The Chubb underwriting facility, under which Trenwick America Re is acting as agent for Chubb, represents virtually all of our ongoing business. The facility is terminable at will by either party, and there can be no assurance that upon its expiration it will be renewed, or that we would be able to enter into similar
arrangements with another highly rated carrier were the Chubb facility to terminate. In addition, the facility is structured in such a way that we will not derive any profit commissions from it until 2006, if at all.
Our senior debt and other ratings have been downgraded significantly by Standard & Poor's, Moody's Investor Services and Fitch, to "D", "Ca" and "D", respectively. These ratings generally reflect the ratings services' views that our business prospects and financial flexibility are very limited and their substantial doubt as to our ability to restructure our senior debt. In addition, these downgrades significantly and negatively affect our ability to raise capital and to negotiate favorable terms in restructuring our debt.
If our loss reserves are determined to be inadequate, we will be required to increase loss reserves at the time of such determination with a corresponding reduction in our net income or increase our net loss in the period in which the deficiency is rectified. It is possible that claims in respect of events that have occurred could exceed our loss reserves and have a material adverse effect on our results of operations or our financial condition in general.
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.