Trenwick America adopted Statement of Financial Accounting Standards No. 142 effective January 1, 2002. The statement required that the remaining goodwill balance 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 all of Trenwick America's remaining goodwill. These transactions increased Trenwick America's net loss in 2002 by a net amount of $52.1 million and were recorded as a cumulative effect of change in accounting principle.
Gross Unrealized Fair Value Loss ---------- ---------- 0-6 months $ 29,614 $ (2,810) 7-12 months 14,988 (2,762) Greater than 12 months 13,025 (2,999) ---------- ---------- Total $ 57,627 $ (8,571) ========== ==========
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 through April 1, 2003 to the holders of the Senior Notes and extension of numerous deadlines imposed under the December Amendments.
Because Trenwick America's operations are conducted through its operating subsidiaries, Trenwick America is dependent upon the ability of its operating subsidiaries to transfer funds, principally in the form of cash dividends, tax reimbursements, management service fees 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 America'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 and its subsidiaries, including Trenwick America from making certain payments without the Banks' approval.
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 Insurance Commissioner or her designee. On November 29, 2002, Trenwick elected to suspend, with immediate effect and for an indefinite period of time, dividends or distributions payable on on the capital securities of Trenwick Capital Trust I. Since the ability of Trenwick America to meet both its operating needs in the short term as well as its obligations in the long-term is dependent upon such factors as market changes, insurance regulatory changes and economic conditions, no assurance can be given that the available net cash flow will be sufficient to meet its operating needs.
o Claims against financial services companies for certain types of practices including alleged misallocations of shares in initial public offerings;
Trenwick America's equity portfolio at December 31, 2002 totaled $8.8 million of common equity investments. Trenwick America'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. At December 31, 2001, the same drop in equity prices would have resulted in an $2 million loss.
Our independent accountants, PricewaterhouseCoopers LLP, have stated, in their audit report with respect to our financial statements as at and for the twelve months ended December 31, 2002, that substantial doubt exists as to our ability to continue as a going concern.
As a result of the September 11, 2001 terrorist attacks, LaSalle Re incurred large catastrophe losses that enabled Trenwick Group Ltd. to exercise its rights under a catastrophe equity put option with European Reinsurance Company of Zurich, a subsidiary of Swiss Reinsurance Company ("European Re"). In this transaction, Trenwick Group Ltd. issued Series B shares to European Re for a purchase price of $40 million. These Series B shares are convertible into Trenwick Group Ltd. common shares upon the occurrence of certain events, including Trenwick Group Ltd.'s failure to maintain a net worth (as defined) under generally accepted accounting principles of $225 million. Trenwick Group Ltd.'s net worth is below $225 million, and in the event that it remains below that amount through April 19, 2003, European Re will be able to convert the Series B Shares into common shares upon not less than 60 days' notice to Trenwick Group Ltd., and substantial dilution to existing common shareholders of Trenwick Group Ltd. will occur. In addition, depending on the conversion ratio of preferred shares to common shares, which is based upon the trading price of Trenwick Group Ltd.'s common shares and the book value and number of shares converted, this conversion could result in European Re obtaining control of Trenwick Group Ltd. subject to compliance with applicable insurance regulation.
Our insurance company subsidiaries are no longer rated by A.M. Best Company.
We have written substantially all of our business in 2003 as agent for a highly rated unaffiliated insurance company under an arrangement that is terminable at will. If this arrangement is terminated, we may be unable to find a replacement carrier and would have no ongoing business in the United States.