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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2003.
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ________________.
Commission file number 1-16089
TRENWICK GROUP LTD.
(Exact name of registrant as specified in its charter)
Bermuda 98-0232340
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
LOM Building, 27 Reid Street
Hamilton HM 11, Bermuda
(Address of principal executive offices) (zip code)
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Registrant's telephone number, including area code: 441-292-4985
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934) Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Shares Outstanding
Description of Class as of August 20, 2003
- ------------------------------ ---------------------
Common Shares - $.10 par value 36,761,021
TRENWICK GROUP LTD.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
Page
----
ITEM 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheet
June 30, 2003 and December 31, 2002 .................................. 1
Consolidated Statement of Operations and Comprehensive Income
Three and Six Months ended June 30, 2003 and 2002 .................... 2
Consolidated Statement of Cash Flows
Three and Six Months ended June 30, 2003 and 2002 .................... 3
Consolidated Statement of Changes in Common Shareholders' Equity
Six Months ended June 30, 2003 and 2002 .............................. 4
Notes to Unaudited Consolidated Financial Statements ................. 5
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................ 14
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk ........... 42
ITEM 4. Controls and Procedures .............................................. 42
PART II - OTHER INFORMATION
ITEM 1. Legal proceedings .................................................... 42
ITEM 2. Changes in Securities and Use of Proceeds ............................ 42
ITEM 3. Defaults Upon Senior Securities ...................................... 43
ITEM 4. Submission of Matters to a Vote of Security Holders .................. 43
ITEM 5. Other Information .................................................... 43
ITEM 6. Exhibits and Reports on Form 8-K ..................................... 43
Signatures ................................................................... 46
Trenwick Group Ltd.
Consolidated Balance Sheet
(Amounts expressed in thousands of United States dollars,
except share and per share data)
June 30, 2003 and December 31, 2002
(Unaudited)
2003 2002
----------- -----------
ASSETS
Debt securities available for sale, at fair value $ 1,883,494 $ 1,492,834
Equity securities at fair value 8,707 8,849
Cash and cash equivalents 401,103 814,235
Accrued investment income 17,326 19,223
Premiums receivable 426,600 519,866
Reinsurance recoverable balances, net 1,794,460 1,803,011
Prepaid reinsurance premiums 195,880 262,802
Deferred policy acquisition costs 100,304 127,200
Security deposit held by Chubb 50,724 50,207
Other assets 142,006 179,755
----------- -----------
Total assets $ 5,020,604 $ 5,277,982
=========== ===========
LIABILITIES
Unpaid claims and claims expenses $ 3,724,169 $ 3,718,124
Unearned premium income 557,439 721,624
Reinsurance balances payable 259,748 374,397
Indebtedness 76,784 76,498
Other liabilities 171,158 126,549
----------- -----------
Total liabilities 4,789,298 5,017,192
----------- -----------
MINORITY INTEREST
Mandatorily redeemable preferred capital securities
of subsidiary trust holding solely junior subordinated
debentures of U.S. subsidiary 68,350 68,320
Minority interest in preferred shares of
Bermuda subsidiary 75,000 75,000
----------- -----------
Total minority interest 143,350 143,320
----------- -----------
CONVERTIBLE PREFERRED STOCK 40,000 40,000
----------- -----------
COMMON SHAREHOLDERS' EQUITY
Common shares, $0.10 par value, 36,763,041 and
36,801,545 shares issued and outstanding 3,676 3,680
Additional paid in capital 574,858 576,567
Deferred compensation under share award plans (1,174) (2,615)
Retained earnings (accumulated deficit) (545,684) (492,343)
Accumulated other comprehensive income (loss) 16,280 (7,819)
----------- -----------
Total common shareholders' equity 47,956 77,470
----------- -----------
Total liabilities, minority interest and common
shareholders' equity $ 5,020,604 $ 5,277,982
=========== ===========
The accompanying notes are an integral part of these statements.
1
Trenwick Group Ltd.
Consolidated Statement of Operations and Comprehensive Income (Unaudited)
(Amounts expressed in thousands of United States dollars,
except per share data)
Three and Six Months Ended June 30, 2003 and 2002
Three Months Six Months
------------------------ ------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
REVENUES
Net premiums earned $ 214,913 $ 277,261 $ 436,418 $ 543,285
Net investment income 18,449 27,885 38,087 57,140
Net realized investment gains (losses) (584) 3,957 (210) 5,414
Other income (expense) (9,986) 3,036 (12,019) 5,638
--------- --------- --------- ---------
Total revenues 222,792 312,139 462,276 611,477
--------- --------- --------- ---------
EXPENSES
Claims and claims expenses incurred 180,786 194,025 319,269 401,602
Policy acquisition costs 63,863 74,843 126,292 147,915
Underwriting expenses 21,125 20,681 45,119 43,688
General and administrative expenses 3,545 4,658 7,283 7,976
Loss on sale of LaSalle's in-force
reinsurance business -- 7,008 -- 7,008
Interest expense and subsidiary
preferred share dividends 9,012 10,881 20,778 20,817
Foreign currency losses (gains) (4,967) 1,838 (4,502) 1,160
--------- --------- --------- ---------
Total expenses 273,364 313,934 514,239 630,166
--------- --------- --------- ---------
Loss before income taxes and cumulative
effect of change in accounting principle (50,572) (1,795) (51,963) (18,689)
Applicable income taxes (benefit) 1,059 (5,584) (781) (9,568)
--------- --------- --------- ---------
Net income (loss) before cumulative effect
of change in accounting principle (51,631) 3,789 (51,182) (9,121)
Cumulative effect of change in accounting principle -- -- -- (41,653)
--------- --------- --------- ---------
Net income (loss) (51,631) 3,789 (51,182) (50,774)
Dividends on convertible preferred stock 1,086 -- 2,159 --
--------- --------- --------- ---------
Net income (loss) available to common shareholders $ (52,717) $ 3,789 $ (53,341) $ (50,774)
========= ========= ========= =========
EARNINGS PER SHARE:
Basic and diluted earnings (loss) per
common share before cumulative effect
of change in accounting principle $ (1.43) $ 0.10 $ (1.45) $ (0.25)
Cumulative effect of change in accounting principle -- -- -- (1.13)
--------- --------- --------- ---------
Basic and diluted earnings (loss)
per common share $ (1.43) $ 0.10 $ (1.45) $ (1.38)
========= ========= ========= =========
COMPREHENSIVE INCOME (LOSS):
Net income (loss) $ (51,631) $ 3,789 $ (51,182) $ (50,774)
--------- --------- --------- ---------
Other comprehensive income (loss):
Net unrealized investment gains (losses) 14,449 11,225 19,367 (1,530)
Foreign currency translation adjustments 5,661 1,012 4,732 2,125
--------- --------- --------- ---------
Total other comprehensive income (loss) 20,110 12,237 24,099 595
--------- --------- --------- ---------
Comprehensive income (loss) $ (31,521) $ 16,026 $ (27,083) $ (50,179)
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
2
Trenwick Group Ltd.
Consolidated Statement of Cash Flows (Unaudited)
(Amounts expressed in thousands of United States dollars)
Three and Six Months Ended June 30, 2003 and 2002
Three Months Six Months
------------------------ ------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
OPERATING ACTIVITIES
Premiums collected, net of acquisition costs $ 174,443 $ 473,721 $ 424,066 $ 774,956
Ceded premiums paid, net of acquisition costs (77,900) (102,621) (182,248) (290,843)
Claims and claims expenses paid (198,615) (369,563) (432,530) (545,487)
Claims and claims expenses recovered 81,402 (19,843) 109,687 125,389
Underwriting expenses paid (31,454) (24,985) (70,361) (56,021)
Net investment income received 26,680 35,334 51,003 69,286
Service and other income received, net of expenses 1,005 2,402 11,052 4,972
General and administrative expenses paid (4,782) (8,832) (10,063) (12,971)
Interest expense and
preferred share dividends paid (10,414) (5,381) (11,026) (12,456)
Income taxes recovered 133 986 1,015 1,046
--------- --------- --------- ---------
Cash (for) from operating activities (39,502) (18,782) (109,405) 57,871
--------- --------- --------- ---------
INVESTING ACTIVITIES
Purchases of debt securities (544,951) (487,427) (904,933) (825,493)
Sales of debt securities 102,952 495,364 217,666 703,859
Maturities of debt securities 308,175 232,057 381,842 328,182
Purchases of equity securities -- (83) -- (83)
Sales of equity securities 113 -- 113 --
Effect on cash of exchange rate translation 7,548 14,180 3,547 10,919
Additions to premises and equipment (688) (1,490) (773) (4,740)
--------- --------- --------- ---------
Cash from (for) investing activities (126,851) 252,601 (302,538) 212,644
--------- --------- --------- ---------
FINANCING ACTIVITIES
Repayment of indebtedness -- (197,841) -- (199,293)
Indebtedness issuance costs paid (806) -- (1,299) (88)
Issuance of common shares 55 39 110 96
Common share dividends paid -- (1,472) -- (2,943)
Share and option repurchases -- -- -- (161)
--------- --------- --------- ---------
Cash for financing activities (751) (199,274) (1,189) (202,389)
--------- --------- --------- ---------
Change in cash and cash equivalents (167,104) 34,545 (413,132) 68,126
Cash and cash equivalents, beginning of period 568,207 364,931 814,235 331,350
--------- --------- --------- ---------
Cash and cash equivalents, end of period $ 401,103 $ 399,476 $ 401,103 $ 399,476
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
3
Trenwick Group Ltd.
Consolidated Statement of Changes in Common Shareholders' Equity (Unaudited)
(Amounts expressed in thousands of United States dollars except share data)
Six Months Ended June 30, 2003 and 2002
2003 2002
-------- ---------
Common shareholders' equity, beginning of period $ 77,470 $ 498,326
COMMON SHARES AND ADDITIONAL PAID IN CAPITAL
Issuance of 63,881 and 11,984 common shares for cash
under employee and director plans 6 96
Purchase and retirement of 2,526 and 18,646 common shares (1) (161)
Cancellation of 99,859 and 49,316 restricted common share awards (1,717) (916)
DEFERRED COMPENSATION UNDER SHARE AWARD PLAN
Compensation expense recognized (277) 501
Cancellation of restricted common shares 1,717 916
RETAINED EARNINGS
Net loss (51,182) (50,774)
Dividends on convertible preferred stock (2,159) --
Common share dividends, $0.08 per share -- (2,943)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income 24,099 595
-------- ---------
Common shareholders' equity, end of period $ 47,956 $ 445,640
======== =========
The accompanying notes are an integral part of these statements.
4
TRENWICK GROUP LTD.
Notes to Unaudited Consolidated Financial Statements
(Amounts expressed in thousands of United States dollars except per share data)
Three and Six Months Ended June 30, 2003 and 2002
Note 1 Organization
Organization Trenwick Group Ltd. ("Trenwick") is a Bermuda-based specialty
and Basis insurance and reinsurance holding company with subsidiaries
of Presentation located in the United States and the United Kingdom, including
four runoff operations. Trenwick's operations at Lloyd's of
London ("Lloyd's") underwrite specialty property and casualty
insurance as well as treaty and facultative property and
casualty reinsurance on a worldwide basis. As indicated below,
on August 20, 2003, Trenwick and certain of its subsidiaries
that are not insurance companies filed for protection under
chapter 11 of the United States Bankruptcy Code.
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 to a level more
commensurate with its capital base and to concentrate its
limited financial resources on its core franchises and
businesses, its United States treaty reinsurance business and
its Lloyd's operations, where it would be able to write
insurance and reinsurance based on direct or indirect
financial support. As a result, Trenwick voluntarily placed
into runoff its United States specialty program business
formerly operated through its subsidiary, Canterbury Financial
Group, Inc., effective October 30, 2002, and its London-based
specialty insurance and reinsurance company, Trenwick
International Limited ("Trenwick International"), effective
November 29, 2002. Additionally, in light of the increasing
capital requirements imposed by the market on catastrophe
insurance providers, Trenwick sold the in-force property
catastrophe reinsurance business of its Bermuda subsidiary,
LaSalle Re Limited ("LaSalle Re"), to Endurance Specialty
Insurance, Ltd. ("Endurance"). Little or no new insurance or
reinsurance is presently being offered in these runoff
operations.
Trenwick's United States treaty reinsurance business, formerly
written through its subsidiary, Trenwick America Reinsurance
Corporation ("Trenwick America Re"), has been limited since
November 2002 to providing, through an underwriting facility
with Chubb Re, Inc. and its affiliate Federal Insurance
Company (together, "Chubb"), treaty reinsurance to insurers of
property and casualty risks. Since inception in November 2002,
Trenwick underwrote approximately $128 million of reinsurance
under the facility. Trenwick announced on April 15, 2003 that
it would cease underwriting reinsurance business under the
Chubb facility. Trenwick will continue to be entitled to the
economic benefits of, and will bear losses on, existing
business under the facility, subject to the terms and
conditions of the facility. Trenwick's ability to write
reinsurance business under the facility was severely
constrained by its financial condition and concerns arising
with respect to its ongoing stability. As a result, Trenwick
ceased underwriting activities under the facility in order to
reduce Trenwick's costs. The effect of this cessation is that
Trenwick America Re is now in runoff. Trenwick will continue
to service and pay claims for all business previously written
through Trenwick America Re outside of the Chubb facility and
will jointly adjust and settle with Chubb any claims arising
under the business written under the Chubb facility, subject
to Chubb's final authority.
5
Trenwick announced on August 7, 2003 that that it has entered
into a letter of intent with respect to an agreement in
principle on a long-term restructuring of its debt
obligations, the sale of its business operations at Lloyd's,
and the runoff of its remaining businesses with (i) the
majority of the beneficial holders (the "Senior Noteholders")
of its 6.70% Senior Notes (the "Senior Notes"), (ii) the
steering committee (the "Steering Committee") of the lending
institutions (the "Banks") that have issued letters of credit
under a senior secured credit facility (the "LoC Facility") on
behalf of certain subsidiaries of Trenwick in support of
Trenwick's Lloyd's operations, and (iii) a group composed of
current members of management of Trenwick's Lloyd's operations
(the "Management Team"). Trenwick did not pay principal and
interest on the Senior Notes due on August 1, 2003, which also
created an event of default with respect to the LoC Facility
and under certain other indebtedness of Trenwick.
The restructuring is intended to be implemented through
various means, including but not limited to the following: (i)
the filing by Trenwick and/or one or more of its subsidiaries
of chapter 11 bankruptcy proceedings in the United States and
the filing of similar proceedings in Bermuda, Barbados or the
United Kingdom, as the case may be; (ii) the sale by Trenwick
of substantially all of its Lloyd's operations to a company
controlled by the Management Team and with capital provided by
the Management Team, third-party investors and the Banks and
(iii) the retention of third party run-off advisors and the
continued runoff or disposition of all of Trenwick's other
insurance and reinsurance operations. In light of the
foregoing, Trenwick believes that it is unlikely that any of
the holders of the shares of Trenwick or of its wholly-owned
Bermuda subsidiary, LaSalle Re Holdings Ltd, will receive any
return on their investment in the near term if at all.
The terms of the restructuring are subject to the satisfaction
of numerous conditions precedent including, but not limited
to, the following: (i) approval of the restructuring by the
Banks; (ii) negotiation of definitive documentation (iii)
receipt of all requisite regulatory and other approvals in the
United States, Bermuda and the United Kingdom; (iv) due
diligence by Englefield Capital LLP, the proposed equity
sponsor of the Management Team, which has entered into an
exclusive negotiation agreement with Trenwick, and (v)
approval of any court having jurisdiction over the
above-referenced insolvency proceedings.
On August 20, 2003, Trenwick and its affiliates, LaSalle Re
Holdings Limited ("LaSalle Re Holdings") and Trenwick America
(collectively with LaSalle Re Holdings and Trenwick, the
"Debtors"), filed for protection from their creditors under
chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") with the United States Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court"). On that
same date, Trenwick and LaSalle Re Holdings were in the
process of filing proceedings in the Supreme Court of Bermuda
known under Bermudian law as "winding up". Trenwick and
LaSalle Re Holdings will petition the Supreme Court of Bermuda
to issue an order appointing Joint Provisional Liquidators for
Trenwick and LaSalle Re Holdings and will request that
deference be paid in the "winding up" to the jurisdiction of
the Bankruptcy Court and the Debtors' restructuring efforts in
accordance with the Bankruptcy Code. It is the intention of
the Debtors to implement the restructuring agreed to among the
Debtors and their creditor constituencies as discussed above
through the bankruptcy process. (See also Note 8)
Basis of Presentation
The interim financial statements include the accounts of
Trenwick and its subsidiaries after elimination of significant
intercompany accounts and transactions. Certain items in prior
financial statements have been reclassified to conform to the
current presentation.
These interim financial statements have been prepared in
conformity with accounting principles that are generally
accepted in the United States of America, sometimes referred
to as U.S. GAAP. To prepare these interim financial
statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, as well
as the reported amounts of revenues and expenses during the
reporting periods. Actual amounts may differ from these
estimates.
6
The accompanying financial statements have been prepared
assuming Trenwick will continue as a going concern. As
discussed above, Trenwick was unable 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 and is therefore
in default with respect to the senior notes and certain other
indebtedness. Additionally, 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. The
financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
The interim financial statements are unaudited; however, in
the opinion of management, the interim financial statements
include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for
interim periods. These interim statements should be read in
conjunction with the audited financial statements and related
notes included in the Annual Report on Form 10-K of Trenwick
for the year ended December 31, 2002.
Note 2 Effective April 1, 2002, Trenwick sold the in-force property
Sale of catastrophe reinsurance business of its subsidiary, LaSalle Re
Property Limited ("LaSalle") to Endurance Specialty Insurance, Ltd.
Catastrophe ("Endurance"). The sale was effected through a 100% quota
Business of share reinsurance agreement, with Endurance paying Trenwick a
LaSalle Re ceding commission of 25% of premiums ceded under the quota
Limited share agreement and additional profit sharing of 50% if the
losses do not exceed a loss ratio of 45%. In addition,
Endurance has the right to renew LaSalle's in-force business
as it expires in exchange for a 12.5% commission on the
business renewed. Included in the 2002 second quarter results
are $6,685 in ceding commissions earned on the quota share
with Endurance, as well as $3,930 in amortization of
acquisition costs on the related assumed business.
In connection with this transaction, Trenwick recorded the
following non-recurring revenues and expenses during the six
months ended June 30, 2002:
Minimum proceeds related to sale of renewal rights $ 8,000
Accelerated amortization of reinsurance
contracts not transferred in sale (7,824)
Legal expenses and investment banking fees (4,370)
Severance and related expenses (2,814)
-------
Net loss on sale of LaSalle's in-force
reinsurance business $(7,008)
=======
Note 3 During the first quarter of 2003, Trenwick amended the basis
Segment in which operating segments are determined. This change
Information followed strategic reviews of Trenwick's operations which
resulted in the decision to place four of its operations into
voluntary runoff. As a result, the operations of Trenwick and
its subsidiaries will now be managed on a legal entity basis
combined by region, rather than an operating platform basis,
in order to ensure the runoff of these operations is conducted
in a manner which will maximize the economic value of these
entities.
7
The results of Trenwick's specialty insurance and reinsurance
business is reported in the following three business segments:
- Lloyd's operations, written principally through five
corporate members of Lloyd's and managed by Trenwick's
United Kingdom subsidiary, Trenwick Managing Agents
Limited ("TMA");
- North American runoff, which consists of treaty
reinsurance formerly written on United States property
and casualty risks through Trenwick America Re as well
as the results of the Chubb underwriting facility.
Additionally, this segment includes the runoff of United
States specialty program insurance formerly written by
The Insurance Corporation of New York ("INSCORP") and
its subsidiary Dakota Specialty Insurance Company
("Dakota). Lastly, this segment includes property
catastrophe reinsurance written on a worldwide basis by
LaSalle Re until it ceased underwriting effective April
1, 2002 when it sold its in-force business to Endurance,
effected through a 100% quota share reinsurance
agreement; and
- United Kingdom runoff, which consists of international
specialty insurance and reinsurance written through
Trenwick International, which ceased underwriting
substantially all new business effective November 29,
2002. Subsequent to June 30, 2003, Trenwick entered into
an agreement with Bestpark Limited ("Bestpark"), a
subsidiary of Litigation Control Group Limited, for the
sale of Trenwick International. The sale of Trenwick
International is subject to the approval of the
Financial Services Authority in the United Kingdom.(See
Note 8)
The following tables present business segment financial
information for Trenwick at June 30, 2003 and December 31,
2002 and for the three and six months ended June 30, 2003 and
2002:
2003 2002
---------- ----------
Total assets:
Lloyd's operations $2,139,227 $2,135,908
North American runoff 2,356,000 2,538,326
United Kingdom runoff 504,853 568,447
Unallocated 20,524 35,301
---------- ----------
Total assets $5,020,604 $5,277,982
========== ==========
Three Months Six Months
----------------------- -----------------------
2003 2002 2003 2002
--------- -------- --------- --------
Total revenues:
Lloyd's operations $ 89,378 $117,987 $ 173,634 $216,165
North American runoff 111,448 143,965 241,333 296,469
United Kingdom runoff 22,466 50,129 48,058 98,658
Unallocated (500) 58 (749) 185
--------- -------- --------- --------
Total revenues $ 222,792 $312,139 $ 462,276 $611,477
========= ======== ========= ========
8
Three Months Six Months
---------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income (loss):
Lloyd's operations $ (5,233) $ (607) $ (3,392) $ (2,833)
North American runoff (42,488) 35,350 (38,490) 38,988
United Kingdom runoff 3,429 (9,308) 4,087 (16,318)
Unallocated interest expense and
subsidiary preferred share dividends (3,655) (6,903) (7,576) (13,524)
Other unallocated and change in
accounting principle (3,684) (14,743) (5,811) (57,087)
-------- -------- -------- --------
Net income (loss) $(51,631) $ 3,789 $(51,182) $(50,774)
======== ======== ======== ========
Transactions between operating segments have been eliminated
in consolidation.
Note 4 Effective January 1, 2002, Trenwick adopted a new Financial
Accounting Accounting Standards Board statement which amended the
Standards accounting for goodwill and other intangible assets. This new
statement suspended systematic goodwill amortization and its
implementation resulted in LaSalle Re Holdings crediting
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.
Note 5 The components of premiums written and earned for the three
Underwriting and six months ended June 30, 2003 and 2002 are as follows:
Activities
Three Months Six Months
------------------------ ------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Assumed premiums written $ 73,346 $ 149,425 $ 157,399 $ 358,308
Direct premiums written 101,838 292,722 275,577 549,409
--------- --------- --------- ---------
Gross premiums written 175,184 442,147 432,976 907,717
Ceded premiums written (18,752) (186,215) (84,201) (334,636)
--------- --------- --------- ---------
Net premiums written $ 156,432 $ 255,932 $ 348,775 $ 573,081
========= ========= ========= =========
Assumed premiums earned $ 93,527 $ 170,998 $ 209,593 $ 297,205
Direct premiums earned 182,943 248,189 402,619 515,410
--------- --------- --------- ---------
Gross premiums earned 276,470 419,187 612,212 812,615
Ceded premiums earned (61,557) (141,926) (175,794) (269,330)
--------- --------- --------- ---------
Net premiums earned $ 214,913 $ 277,261 $ 436,418 $ 543,285
========= ========= ========= =========
9
Note 6 The following table sets forth the computation of basic and
Earnings diluted earnings per share for the three and six months ended
Per Share June 30, 2003 and 2002:
Three Months Six Months
-------------------------- ----------------------------
2003 2002 2003 2002
---------- ---------- ---------- ------------
Net income (loss) available to common
shareholders $ (52,717) $ 3,789 $ (53,341) $ (50,774)
========== ========== ========== ============
Weighted average shares
outstanding - basic and diluted 36,773,865 36,786,434 36,765,462 36,800,824
========== ========== ========== ============
Basic and diluted earnings
(loss) per common share $ (1.43) $ 0.10 $ (1.45) $ (1.38)
========== ========== ========== ============
For the three and six months ended June 30, 2003 and 2002,
962,365, 962,365; 1,744,077 and 1,737,077, respectively,
aggregate share options and warrants were excluded from the
computation of diluted earnings per share because their effect
would have been antidulutive on the calculation for the
respective periods.
During the three months ended June 30, 2002, 1,365,187 share
options were cancelled pursuant to the employee stock option
exchange program. This voluntary program offered all active
employees with the exception of the Chief Executive Officer a
one-time opportunity to exchange stock options for new options
at a grant price equal to the fair market value of Trenwick
common shares on December 16, 2002, which was $0.89.
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 were as
follows:
June 30
-------------------------
2003 2002
---------- ----------
Number of shares:
Options outstanding, beginning of period 1,847,429 3,385,379
Options granted -- 7,000
Options canceled (885,064) (1,801,565)
---------- ----------
Options outstanding, end of period 962,365 1,590,814
========== ==========
Options exercisable, end of period 756,943 1,283,077
========== ==========
Range of exercise price:
Options outstanding, end of period $ 1 - $40 $ 8 - $41
Options exercisable, end of period $ 8 - $40 $ 13 - $41
========== ==========
Weighted average exercise price:
Options granted -- $ 8.00
Options outstanding, end of period $ 23.34 $ 26.56
Options exercisable, end of period $ 28.75 $ 28.44
========== ==========
10
Further details on options outstanding and exercisable at June
30, 2003 follow:
Options outstanding Options currently exercisable
----------------------------------------- -----------------------------
Weighted
Average
Weighted Remaining Weighted
Average Contractual Average
Exercise Number Life in Exercise Number
Exercise price range Price Of Options Years Price of Options
- -------------------- -------- ---------- ----------- -------- ----------
Under $10.00 $ 1.18 180,676 10 $ 8.40 7,000
$10.01-$25.00 $18.44 204,797 5 $18.69 173,051
$25.01 and over $32.02 576,892 3 $32.02 576,892
------- -------
$23.34 962,365 5 $28.75 756,943
======= =======
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.
All of the outstanding share options were issued at an
exercise price equal to fair market value on the date of
grant; therefore no compensation expense has been recognized
for these grants. Had the fair value based method described
above been applied, net income (loss) available to common
shareholders and net income (loss) per common share for the
six months ended June 30, 2003 and 2002, respectively, would
have been the pro forma amounts shown below:
Three Months Six Months
------------------- ---------------------
2003 2002 2003 2002
-------- ------ -------- --------
Net loss available to
common shareholders
As reported $(52,717) $3,789 $(53,341) $(50,774)
Pro forma $(52,737) $3,857 $(53,398) $(50,945)
Basic and diluted loss per
common share
As reported $ (1.43) $ 0.10 $ (1.45) $ (1.38)
Pro forma $ (1.43) $ 0.10 $ (1.45) $ (1.38)
11
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 and no options were granted
in 2003. Valuation and related assumption information for
options granted in 2002 are as follows:
Expected volatility 53.0%
Risk-free interest rate 4.0%
Common share dividend yield 1.2%
The Black-Scholes option valuation model was developed for use
in estimating the fair value of options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective
assumptions including the expected share price volatility.
Because Trenwick's share options have characteristics
significantly different from those of traded options, and
because changes in the subjective input assumptions can
materially affect the fair value estimate, in Trenwick's
opinion the existing models do not necessarily provide a
reliable measure of the fair value of its share options.
Note 7 On May 5, 2003, INSCORP entered into a "letter of
Insurance understanding" with the New York Insurance Department pursuant
Regulation to which INSCORP agreed that it would not take any of the
following actions without the prior written approval of the
Department:
o Withdraw funds from its bank accounts, or make
disbursements or payments outside of the ordinary course
of business in amounts exceeding 3% of its aggregate
cash and investments.
o Incur any debt obligation or liability for borrowed
money not related directly to the ordinary course of
business.
o Settle any intercompany balances or pay any dividends.
o Enter into any new material reinsurance agreement or
modify in any material respect any existing material
reinsurance agreement other than customary renewals.
o Add new members to its board of directors other than
current senior executive officers of INSCORP or its
affiliates without notification to the department.
o Change the compensation terms for directors, officers or
employees.
o Pledge or assign any of its assets to secure
indebtedness for borrowed money.
Senior management of Trenwick has also agreed to meet with the
New York Insurance Department, in person or by conference
call, with such frequency as may be deemed necessary by the
Department to provide updates on the status of Trenwick and
any changes in the status of INSCORP. INSCORP is also required
to provide to the New York Insurance Department a monthly
financial statement consisting of a balance sheet and income
statement within 45 days following the end of such month. The
above described terms will remain in effect until such time as
the New York Insurance Department provides INSCORP written
notice of its release or the agreement is superceded by
administrative or court order.
12
Note 8 On August 20, 2003, Trenwick and its affiliates, LaSalle Re
Subsequent Holdings Limited ("LaSalle Re Holdings") and Trenwick America
Events (collectively with LaSalle Re Holdings and Trenwick, the
"Debtors"), filed for protection from their creditors under
chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") with the United States Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court"). On that
same date, Trenwick and LaSalle Re Holdings were in the
process of filing proceedings in the Supreme Court of Bermuda
known under Bermudian law as "winding up". Trenwick and
LaSalle Re Holdings will petition the Supreme Court of Bermuda
to issue an order appointing Joint Provisional Liquidators for
Trenwick and LaSalle Re Holdings and will request that
deference be paid in the "winding up" to the jurisdiction of
the Bankruptcy Court and the Debtors' restructuring efforts in
accordance with the Bankruptcy Code. It is the intention of
the Debtors to implement the restructuring agreed to among the
Debtors and their creditor constituencies as discussed above
through the bankruptcy process.
Included in the accompanying consolidated balance sheet are:
i) indebtedness of $76,784, ii) mandatorily redeemable
preferred capital securities of $68,350, and iii) $75,000 in
preferred shares of Bermuda subsidiary, all of which are
expected to be subject to the bankruptcy filing.
The majority of the assets and liabilities (other than those
previously mentioned) included in the consolidated balance
sheet are assets and liabilities of the regulated insurance
company subsidiaries, which are not subject to the proceedings
in the Bankruptcy Court or the Supreme Court of Bermuda.
On August 20, 2003, Trenwick Holdings Limited, a aubsidiary of
Trenwick, entered into an agreement with Bestpark, a
subsidiary of Litigation Control Group Limited, to sell to
Bestpark all of the capital stock of Trenwick International,
as well as all of the capital stock of Trenwick Management
Services Ltd ("TMS") and Specialist Risk Underwriters Limited
("SRU"). TMS is Trenwick International's management services
company. SRU is a company that in the past has carried out
underwriting agency services for Trenwick International and
other entities. It is anticipated that substantially all of
the (pound)2.0 million in initial consideration to be paid by
Bestpark will be used to pay transactional fees and expenses.
The remaining consideration, if any, is contingent upon a
successful runoff of the Trenwick International business.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion highlights material factors affecting Trenwick Group
Ltd's results of operations for the three and six months ended June 30, 2003 and
2002. This discussion and analysis should be read in conjunction with the
unaudited interim financial statements and notes thereto of Trenwick contained
in this filing as well as in conjunction with the audited financial statements
and related notes included in the Annual Report on Form 10-K of Trenwick for the
year ended December 31, 2002.
Overview
Trenwick Group Ltd. ("Trenwick") is a Bermuda-based specialty insurance and
reinsurance holding company with subsidiaries located in the United States and
the United Kingdom, including four runoff operations. Trenwick's operations at
Lloyd's of London ("Lloyd's") underwrite specialty property and casualty
insurance as well as treaty and facultative property and casualty reinsurance on
a worldwide basis.
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 to a level more
commensurate with its capital base and to concentrate its limited financial
resources on its core franchises and businesses, its United States treaty
reinsurance business and its Lloyd's operations, where it would be able to write
insurance and reinsurance based on direct or indirect financial support. As a
result, Trenwick voluntarily placed into runoff its United States specialty
program business formerly operated through its subsidiary, Canterbury Financial
Group, Inc., effective October 30, 2002, and its London-based specialty
insurance and reinsurance company, Trenwick International Limited ("Trenwick
International"), effective November 29, 2002. Additionally, in light of the
increasing capital requirements imposed by the market on catastrophe insurance
providers, Trenwick sold the in-force property catastrophe reinsurance business
of its Bermuda subsidiary, LaSalle Re Limited ("LaSalle Re"), to Endurance
Specialty Insurance, Ltd. ("Endurance"). Little or no new insurance or
reinsurance is presently being offered in these runoff operations.
Trenwick's United States treaty reinsurance business, formerly written through
its subsidiary, Trenwick America Reinsurance Corporation ("Trenwick America
Re"), has been limited since November 2002 to providing, through an underwriting
facility with Chubb Re, Inc. and its affiliate Federal Insurance Company
(together, "Chubb"), treaty reinsurance to insurers of property and casualty
risks. Since inception in November 2002, Trenwick underwrote approximately $128
million of reinsurance under the facility. Trenwick announced on April 15, 2003
that it would cease underwriting reinsurance business under the Chubb facility.
Trenwick will continue to be entitled to the economic benefits of, and will bear
losses on, existing business under the facility, subject to the terms and
conditions of the facility. Trenwick's ability to write reinsurance business
under the facility was severely constrained by its financial condition and
concerns arising with respect to its ongoing stability. As a result, Trenwick
ceased underwriting activities under the facility in order to reduce Trenwick's
costs and on June 18, 2003 the underwriting agreement was cancelled by Chubb.
The effect of this cessation is that Trenwick America Re is now in runoff.
Trenwick will continue to service and pay claims for all business previously
written through Trenwick America Re outside of the Chubb facility and will
jointly adjust and settle with Chubb any claims arising under the business
written under the Chubb facility, subject to Chubb's final authority.
14
Trenwick announced on August 7, 2003 that that it has entered into a letter of
intent with respect to an agreement in principle on a long-term restructuring of
its debt obligations, the sale of its business operations at Lloyd's, and the
runoff of its remaining businesses with (i) the majority of the beneficial
holders (the "Senior Noteholders") of its 6.70% Senior Notes (the "Senior
Notes"), (ii) the steering committee (the "Steering Committee") of the lending
institutions (the "Banks") that have issued letters of credit under a senior
secured credit facility (the "LoC Facility") on behalf of certain subsidiaries
of Trenwick in support of Trenwick's Lloyd's operations, and (iii) a group
composed of current members of management of Trenwick's Lloyd's operations (the
"Management Team"). Trenwick did not pay principal and interest on the Senior
Notes due on August 1, 2003, which also created an event of default with respect
to the LoC Facility and under certain other indebtedness of Trenwick.
The restructuring is intended to be implemented through various means, including
but not limited to the following: (i) the filing by Trenwick and/or one or more
of its subsidiaries of chapter 11 bankruptcy proceedings in the United States
and the filing of similar proceedings in Bermuda, Barbados or the United
Kingdom, as the case may be; (ii) the sale by Trenwick of substantially all of
its Lloyd's operations to a company controlled by the Management Team and with
capital provided by the Management Team, third-party investors and the Banks and
(iii) the retention of third party run-off advisors and the continued runoff or
disposition of all of Trenwick's other insurance and reinsurance operations. In
light of the foregoing, Trenwick announced that it believes that it is unlikely
that any of the holders of the shares of Trenwick or of its wholly-owned Bermuda
subsidiary, LaSalle Re Holdings Ltd, will receive any return on their investment
in the near term if at all.
The terms of the restructuring are subject to the satisfaction of numerous
conditions precedent including, but not limited to, the following: (i) approval
of the restructuring by the Banks; (ii) negotiation of definitive documentation
(iii) receipt of all requisite regulatory and other approvals in the United
States, Bermuda and the United Kingdom; (iv) due diligence by Englefield Capital
LLP, the proposed equity sponsor of the Management Team, which has entered into
an exclusive negotiation agreement with Trenwick, and (v) approval of any court
having jurisdiction over the above-referenced insolvency proceedings.
On August 20, 2003, Trenwick and its affiliates, LaSalle Re Holdings Limited
("LaSalle Re Holdings") and Trenwick America Corporation ("Trenwick America,"
and collectively with LaSalle Re Holdings and Trenwick, the "Debtors"), filed
for protection from their creditors under chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") with the United States Bankruptcy Court
for the District of Delaware (the "Bankruptcy Court"). On that same date,
Trenwick and LaSalle Re Holdings were in the process of filing proceedings in
the Supreme Court of Bermuda known under Bermudian law as "winding up". Trenwick
and LaSalle Re Holdings will petition the Supreme Court of Bermuda to issue an
order appointing Joint Provisional Liquidators for Trenwick and LaSalle Re
Holdings and will request that deference be paid in the "winding up" to the
jurisdiction of the Bankruptcy Court and the Debtors' restructuring efforts in
accordance with the Bankruptcy Code. It is the intention of the Debtors to
implement the restructuring agreed to among the Debtors and their creditor
constituencies as discussed above through the bankruptcy process.
The majority of the assets and liabilities included in the consolidated balance
sheet, are assets and liabilities of the regulated insurance company
subsidiaries, which are not subject to the proceedings in the Bankruptcy Court
or the Supreme Court of Bermuda.
15
During the first quarter of 2003, Trenwick amended the basis in which operating
segments are determined. This change followed strategic reviews of Trenwick's
operations which resulted in the decision to place four of its operations into
voluntary runoff. As a result, the operations of Trenwick and its subsidiaries
will now be managed on a legal entity basis combined by region, rather than an
operating platform basis, in order to ensure the runoff of these operations is
conducted in a manner which will maximize the economic value of these entities.
The results of Trenwick's specialty insurance and reinsurance business is
reported in the following three business segments:
- Lloyd's operations, written principally through five corporate
members of Lloyd's and managed by TMA;
- North American runoff, which consists of treaty reinsurance formerly
written through Trenwick America Re as well as the results of the
Chubb underwriting facility, the runoff of United States specialty
program insurance formerly written by The Insurance Corporation of
New York ("INSCORP") and its subsidiary Dakota Specialty Insurance
Company ("Dakota) and property catastrophe reinsurance written on a
worldwide basis by LaSalle Re until it ceased underwriting effective
April 1, 2002 effected through a 100% quota share reinsurance
agreement; and
- United Kingdom runoff, which consists of international specialty
insurance and reinsurance written through Trenwick International,
until it ceased underwriting substantially all new business
effective November 29, 2002.
Effective April 1, 2002, Trenwick sold the in-force property catastrophe
reinsurance business of its subsidiary, LaSalle Re to Endurance. The sale was
effected through a 100% quota share reinsurance agreement, with Endurance paying
Trenwick a ceding commission of 25% of premiums ceded under the quota share
agreement and additional profit sharing of 50% if the losses do not exceed a
loss ratio of 45%. In addition, Endurance has the right to renew LaSalle Re's
in-force business as it expires in exchange for a 12.5% commission on the
business renewed. Included in the 2002 second quarter results are $6.7 million
in ceding commissions earned on the quota share with Endurance, as well as $3.9
million in amortization of acquisition costs on the related assumed business.
Critical Accounting Policies
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.
Unpaid Claims and Claims Expenses
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
16
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.
Unpaid claims and claims expenses are recorded based on actuarial estimates of
losses inherent in that period's claims, including losses for which claims have
not yet been reported. Estimates of unpaid claims and claims expenses rely on
actuarial observations of ultimate loss experience for similar historical
events. Historical insurance industry experience indicates that a high degree of
inherent variability exists in assessing the ultimate amount of losses under
short-duration property and casualty contracts. This inherent variability is
particularly significant for liability-related exposures, including latent
claims issues (such as asbestos and environmental related coverage disputes),
because of the extended period of time, often many years, that transpires
between when a given claim event occurs and the ultimate full settlement of such
claim. This situation is then further exacerbated for reinsurance entities (as
opposed to primary insurers) due to coverage often being provided on an
"excess-of-loss" basis and the resulting time lags in receiving current claims
data. Additionally, the uncertainty is increased as a result of the diversity of
development patterns among different types of reinsurance and the necessary
reliance on ceding companies for information regarding reported claims and
differing reserving practices among ceding companies. Other items that have been
considered in determining reserves but may develop differently than currently
estimated include:
o September 11, 2001 related claims, particularly with respect to
catastrophe coverage underwritten in LaSalle Re;
o United Kingdom liability claims;
o Claims against insured financial services companies for certain
types of practices including alleged misallocations of shares in
initial public offerings;
o Directors and Officers liability insurance in the United States;
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 Claims liabilities also include provisions for latent injury or
toxic tort claims that cannot be estimated with traditional
reserving techniques. Due to inconsistent court decisions in federal
and state jurisdictions and the wide variation among insureds with
respect to underlying facts and coverage, uncertainty exists with
respect to these claims as to liabilities of ceding companies and,
consequently, reinsurance coverage;
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 June 30,
2003, Trenwick has a significant exposure to collectibility issues.
Trenwick's management continually evaluates the potential for changes in unpaid
claims and claims expenses to adjust recorded reserves and to proactively modify
underwriting criteria and
17
product offerings. In recent periods and continuing throughout 2002, the level
of reported claims activity related to prior year loss events, particularly for
liability-related exposures underwritten in 1997 through 2001, has been
significantly higher than anticipated. Full consideration of these trends was
incorporated into a comprehensive reserve study completed in the fourth quarter
of 2002. Insurance reserves, by their very nature, do not represent an exact
calculation of liability and, while Trenwick has established reserves equal to
the current best estimate of ultimate losses, there remains a likelihood that
further changes in such loss estimates, either upward or downward, will occur in
the future.
Reinsurance Recoverable Balances
Trenwick has purchased reinsurance to reduce its exposure on individual risks,
catastrophic losses and other large losses. Trenwick estimates the amount of
uncollectible receivables from its reinsurers each period and establishes an
allowance for uncollectible amounts. The amount of the allowance is based on the
age of unpaid amounts, information about the creditworthiness of Trenwick's
reinsurers, and other relevant information. Estimates of uncollectible
reinsurance amounts are reviewed quarterly, and changes are recorded in the
period they become known. A significant change in the level of uncollectible
reinsurance amounts would have a significant effect on Trenwick's results of
operations and financial position.
Investments
Investments are classified as available for sale and recorded at fair value, and
unrealized investment gains and losses are reflected in shareholders' equity.
Investment income is recorded when earned, and capital gains and losses are
recognized when investments are sold. Investments are reviewed periodically to
determine if they have suffered an impairment of value that is considered other
than temporary. If investments are determined to be impaired, a capital loss is
recognized at the date of determination.
Testing for impairment of investments also requires significant management
judgment. The identification of potentially impaired investments, the
determination of their fair value and the assessment of whether any decline in
value is other than temporary are the key judgment elements. The discovery of
new information and the passage of time can significantly change these
judgments. Revisions of impairment judgments are made when new information
becomes known, and any resulting impairment adjustments are made at that time.
The current economic environment and recent volatility of securities markets
increase the difficulty of determining fair value and assessing investment
impairment. The same influences tend to increase the risk of potentially
impaired assets.
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.
Deferred Income Taxes
Deferred income tax assets and liabilities are computed based on temporary
differences between financial statement and income tax bases of assets and
liabilities using enacted income tax rates in effect for the year in which the
differences are expected to reverse. FASB Statement No. 109 requires a valuation
allowance to be recorded when it is more likely than not that some or all of the
deferred tax assets will not be realized. Due to Trenwick's cumulative losses
generated in
18
recent years and uncertainties as to the amount of taxable income to be
generated in future years, as of December 31, 2002, Trenwick could not support
the future realizability of its net deferred tax asset. The effects of this
determination on Trenwick's results from operations were significant. As of June
30, 2003, Trenwick maintained a valuation allowance for the full amount of its
net deferred tax asset. Trenwick's Bermuda operations are not subject to income
tax.
Results of Operations - Three Months Ended June 30, 2003 and 2002
Trenwick's net loss available to common shareholders was $52.7 million in the
three months ended June 30, 2003 compared to net income available to common
shareholders of $3.8 million recorded in the same period in 2002. The 2003
results included adverse development on prior year reserves for unpaid claims
and claims expenses combined with one-time charges incurred related to the
cancellation of the Chubb underwriting facility as well as continued costs for
legal and advisory fees.
Underwriting income (loss)
Trenwick produced an underwriting loss of $50.9 million in the second quarter of
2003 compared to an underwriting loss of $12.3 million in the second quarter of
2002. Details of underwriting income and loss are produced below:
2003 2002 Change
--------- --------- --------
(in thousands)
Net premiums earned $ 214,913 $ 277,261 $(62,348)
--------- --------- --------
Claims and claims expenses incurred 180,786 194,025 (13,239)
Acquisition costs and underwriting expenses 84,988 95,524 (10,536)
--------- --------- --------
Total expenses 265,774 289,549 (23,775)
--------- --------- --------
Net underwriting loss $ (50,861) $ (12,288) $(38,573)
========= ========= ========
Loss ratio 84.1% 70.0% 14.1%
Underwriting expense ratio 39.5% 34.4% 5.1%
Combined ratio 123.6% 104.4% 19.2%
The underwriting loss of $50.9 million in the second quarter of 2003 represented
a $38.6 million greater loss compared to the second quarter of 2002. The
underwriting result in 2003 is a result of a decrease in earned premiums as a
result of the runoff status of all of Trenwick's insurance and reinsurance
operations other than its Lloyd's operations, combined with adverse development
recorded on prior year reserves for unpaid claims and claims expenses.
The increase in the combined ratio in the second quarter of 2003 compared to the
second quarter of 2002 resulted mainly from the decrease in earned premiums and
adverse development noted above.
Premiums written
Gross premiums written for the three months ended June 30, 2003 were $175.2
million compared to $442.1 million for the three months ended June 30, 2002, a
decrease of $267.0 million or 60.4%. Details of gross premiums written are
provided below:
19
2003 2002 Change
-------- -------- ---------
(in thousands)
Lloyd's syndicates $109,681 $180,170 $ (70,489)
North American runoff 60,150 218,296 (158,146)
United Kingdom runoff 5,353 43,681 (38,328)
-------- -------- ---------
Gross premiums written $175,184 $442,147 $(266,963)
======== ======== =========
The decrease of $70.5 million in Lloyd's syndicates gross written premiums for
the second quarter of 2003 compared to $180.2 million in the second quarter of
2002 was due primarily to the significant decrease in premiums written on
aviation business in 2003. This decrease is a result of the decrease in the
number of airline passengers due to recent security concerns together with the
impact of SARS and the Iraq war. In addition, Trenwick ceased underwriting
aviation business during the quarter ended June 30, 2003 which resulted in
return premiums.
North American runoff gross premium writings for the three months ended June 30,
2003 decreased by $158.1 million, or 72.4% from the three months ended June 30,
2002 as a result of the sale of LaSalle Re's in-force property catastrophe
reinsurance business, effective April 1, 2002, combined with the effects of the
current financial condition of Trenwick which prevented Trenwick America Re from
writing any new business outside of that written through the Chubb underwriting
facility as well as Trenwick's decision to cease underwriting specialty program
insurance effective October 30, 2002.
The decrease of $38.3 million in United Kingdom runoff's gross premiums written
in the second quarter of 2003 compared to the second quarter of 2002 was
attributable to Trenwick's decision to discontinue writing substantially all new
business through Trenwick International effective November 29, 2002.
Premiums earned
Net premiums earned for the three months ended June 30, 2003 were $214.9 million
compared to $277.3 million for the same period in 2002. Details of premiums
earned are provided below:
2003 2002 Change
--------- --------- ---------
(in thousands)
Gross premiums written $ 175,184 $ 442,147 $(266,963)
Change in gross unearned premiums 101,286 (22,960) 124,246
--------- --------- ---------
Gross premiums earned 276,470 419,187 (142,717)
--------- --------- ---------
Gross premiums ceded (18,752) (186,215) 167,463
Change in ceded unearned premiums (42,805) 44,289 (87,094)
--------- --------- ---------
Ceded premiums earned (61,557) (141,926) 80,369
--------- --------- ---------
Net premiums earned $ 214,913 $ 277,261 $ (62,348)
========= ========= =========
Gross premiums ceded for the three months ended June 30, 2003 were $18.8 million
compared to $186.2 million for the same period in 2002. The decrease of $167.5
million in gross premiums ceded is the result of Trenwick placing all of its
insurance and reinsurance operations other than its Lloyd's syndicates into
voluntary runoff.
Claims and claims expenses
Claims and claims expenses for the three months ended June 30, 2003 were $180.8
million, a decrease of $13.2 million compared to claims and claims expenses of
$194.0 million for the same period in 2002. The decrease in claims and claims
expenses in 2003 is attributable to the runoff
20
status of Trenwick's insurance and reinsurance operations other than at Lloyd's
combined with $52.2 million of adverse development on prior year reserves for
unpaid claims and claims expenses. Approximately 38.1 million of this adverse
development related to Trenwick's North American runoff segment, and related
primarily to higher than expected reported losses on its directors and officers
and excess general liability lines of business as well as an unexpected
arbitration settlement related to a pool in which Trenwick participated in 1995.
Trenwick's United Kingdom runoff segment's liability business contributed $6.1
million to the adverse development, and its Lloyd's operations professional
indemnity and financial institutions lines of business contributed $8.0 million.
Underwriting expenses
2003 2002 Change
------- ------- --------
(in thousands)
Policy acquisition costs $63,863 $74,843 $(10,980)
Underwriting expenses 21,125 20,681 444
------- ------- --------
Total underwriting expenses $84,988 $95,524 $(10,536)
======= ======= ========
Underwriting expense ratio 39.5% 34.4% 5.1%
======= ======= ========
Total underwriting expenses, comprising policy acquisition costs and
underwriting expenses, for the second quarter of 2003 decreased by $10.5 million
compared to underwriting expenses for the second quarter of 2002. The decrease
was attributable to the decrease in premium volume as previously discussed
offset in part by increased legal and advisory fees incurred in 2003 related to
the ongoing efforts of senior management of Trenwick's Lloyd's operations to
seek alternate sources of capital to replace Trenwick's ownership of its Lloyd's
operations and the current underwriting capacity provided by Trenwick. In
addition, Trenwick's Lloyd's operations increased staffing levels in 2003 over
2002, which contributed additional expenses. Finally, severance costs of
approximately $1.5 million were incurred during the second quarter of 2003 in
connection with Trenwick's decision to cease underwriting through Trenwick
America Re and the cancellation of the Chubb facility. Total underwriting
expenses as a percentage of net premiums earned, or the underwriting expense
ratio, was 39.5% for the three months ended June 30, 2003 compared to 34.4% for
the same period in 2002. The increase in the underwriting expense ratio occurred
principally because of the decrease in premiums previously discussed.
Underwriting expenses for the three months ended June 30, 2003 as a percentage
of earned premium was 9.8%, an increase of 2.4% from 7.4% for the same period in
2002. The increase in the underwriting expense ratio resulted principally from
the decrease in earned premiums and additional costs incurred for legal and
advisory fees and severance costs, combined with the decrease in aviation
premiums in 2003, which generally carry a significantly lower rate than that of
personal lines business.
Net Investment Income
2003 2002 Change
----------- ----------- --------
(in thousands)
Average invested assets $ 2,256,068 $ 2,329,867 $(73,799)
Average annualized yields 3.52% 5.39% (1.87)%
Investment income - portfolio $ 20,297 $ 31,388 $(11,091)
Investment income - non-portfolio 735 57 678
Investment expenses (2,583) (3,560) 977
----------- ----------- --------
Net investment income $ 18,449 $ 27,885 $ (9,436)
=========== =========== ========
21
Net investment income for the three months ended June 30, 2003 was $18.4 million
compared to $27.9 million for the same period in 2002. The decrease in net
investment income in the second quarter of 2003 was due to the overall decline
in market yields during the quarter combined with a decrease in average invested
assets. Investment expenses for the second quarters of both 2003 and 2002
includes interest expense on funds withheld of $1.8 million and $2.4 million,
respectively, under the terms of stop loss reinsurance agreements purchased by
Trenwick America Re prior to 2001.
Net Realized Gains (Losses)
Net realized losses on investments were $0.6 million during the three months
ended June 30, 2003, compared to net realized gains of $4.0 million for the
three months ended June 30, 2002. The 2003 losses were primarily the result of a
write-down of an investment that was determined to be permanently impaired,
while the 2002 gains were a result of the sale of investments made in order to
repay Trenwick's term loan facility during the second quarter of 2002.
Other income (expense)
Trenwick recorded other expenses of $10.0 million for the quarter ended June 30,
2003 as compared to other income of $3.0 million for the same period in 2002.
Other expenses for the 2003 quarter consists mainly of $10.0 million in fronting
fees incurred related to the Chubb underwriting facility. As a result of the
cancellation of the agreement on June 18, 2003, the remainder of the unpaid
minimum fronting fees of $3.8 million was accrued as of June 30, 2003.
Additionally, the remaining deferred fronting fee ($6.2 million at March 31,
2003) was fully amortized, as Trenwick will no longer benefit from future
underwriting under the contract. Trenwick will continue to be entitled to the
economic benefits of, and will bear losses on, business underwritten through the
facility prior to the cancellation date.
General and administrative expenses
General and administrative expenses for the three months ended June 30, 2003
were $3.5 million, a decrease of $1.2 million as compared to $4.7 million
incurred during the same period in 2002. The decrease in 2003 is primarily the
result of the runoff status of Trenwick's insurance and reinsurance business
other than its Lloyd's operations which have led to decreasing costs offset in
part by legal and advisory fees incurred as a result of Trenwick's financial
condition.
Interest Expense and Subsidiary Preferred Share Dividends
Interest expense and subsidiary preferred share dividends were $9.0 million for
the second quarter of 2003, a decrease of $1.9 million from the same period in
2002. The decrease resulted from the inclusion of $2.4 million of interest on
Trenwick's term loan facility in the 2002 quarter, which was paid in full during
June 2002, offset in part by increased Letter of Credit fees, which were $1.5
million higher in the second quarter of 2003 than during the same period in
2002.
Foreign Currency Gains (Losses)
Trenwick recorded foreign currency gains of $5.0 million for the three months
ended June 30, 2003, compared to foreign currency losses of $1.8 million for the
three months ended June 30, 2002. The 2003 gains were a result of the
strengthening of the Euro against the British pound during the period.
Loss on sale of LaSalle Re's in-force Reinsurance Business
The loss on the sale of LaSalle Re's in-force reinsurance business recorded
during the second quarter of 2002 represents the net of the non-recurring
revenue and expense items incurred as a result of the sale of LaSalle Re's
in-force reinsurance business as of April 1, 2002.
22
Results of Operations - Six Months Ended June 30, 2003 and 2002
Trenwick's net loss available to common shareholders of $53.3 million in the six
months ended June 30, 2003 represented a $2.6 million greater loss than the net
loss available to common shareholders of $50.8 million recorded in the same
period in 2002. The loss for the six months ended June 30, 2003 included
one-time charges related to the cancellation of the Chubb underwriting
agreement, legal and advisory fees related to Trenwick's current financial
condition, as well as adverse development on prior year reserves for unpaid
claims and claims expenses. The 2002 results included underwriting losses
incurred related to the September 11th terrorist attacks.
Underwriting income (loss)
Trenwick produced an underwriting loss of $54.3 million in the first half of
2003 compared to an underwriting loss of $49.9 million in the first half of
2002. Details of underwriting income and loss follow:
2003 2002 Change
--------- --------- ---------
(in thousands)
Net premiums earned $ 436,418 $ 543,285 $(106,867)
--------- --------- ---------
Claims and claims expenses incurred 319,269 401,602 (82,333)
Acquisition costs and underwriting expenses 171,411 191,603 (20,192)
--------- --------- ---------
Total expenses 490,680 593,205 (102,525)
--------- --------- ---------
Net underwriting loss $ (54,262) $ (49,920) $ (4,342)
========= ========= =========
Loss ratio 73.2% 73.9% (0.7)%
Underwriting expense ratio 39.3% 35.3% 4.0%
Combined ratio 112.5% 109.2% 3.3%
The underwriting loss of $54.3 million in the first half of 2003 represented a
$4.3 million greater loss compared to the first half of 2002. The greater loss
is primarily due adverse development on reserves for unpaid claims and claims
expenses. This was offset in part by underwriting losses recorded during the
first half of 2002 related to the September 11th terrorist attacks.
The increase in the combined ratio in the first half of 2003 compared to the
first half of 2002 resulted mainly from a decrease in business written that
carries lower commission costs combined with the decrease in earned premiums as
a result of the runoff status of all of Trenwick's insurance and reinsurance
business other than through its Lloyd's syndicates.
Premiums written
Gross premiums written for the six months ended June 30, 2003 were $433.0
million compared to $907.7 million for the six months ended June 30, 2002, a
decrease of $474.7 million or 52.3%. Details of gross premiums written are
provided below:
2003 2002 Change
-------- -------- ---------
(in thousands)
Lloyd's syndicates $270,296 $307,610 $ (37,314)
North American runoff 148,776 503,347 (354,571)
United Kingdom runoff 13,904 96,760 (82,856)
-------- -------- ---------
Gross premiums written $432,976 $907,717 $(474,741)
======== ======== =========
23
The decrease of $37.3 million in Lloyd's syndicates gross written premiums for
the first half of 2003 compared to the first half of 2002 was due primarily to a
significant decrease in premiums from the aviation line of business. This
decrease is a result of the reduced number of airline passengers due to recent
security concerns together with the impact of SARS and the Iraq war as well as
Trenwick's decision to cease underwriting aviation business during the second
quarter of 2003 which resulted in return premiums. This decrease was offset in
part by the addition of treaty reinsurance and other casualty lines of business
formerly underwritten by Trenwick International which are now written through
Trenwick's Lloyd's syndicates.
North American runoff gross premium writings for the first six months of 2003
decreased by $354.6 million, or 70.4% from the first half of 2002 as a result of
the sale of LaSalle Re's in-force property catastrophe reinsurance business,
effective April 1, 2002, as well as the runoff status of Trenwick's United
States insurance and reinsurance business.
The decrease of $82.9 million in United Kingdom runoff's gross premiums written
in the first half of 2003 compared to the first half of 2002 was attributable to
Trenwick's decision to discontinue writing substantially all new business
through Trenwick International effective November 29, 2002.
Premiums earned
Net premiums earned for the six months ended June 30, 2003 were $436.4 million
compared to $543.3 million for the same period in 2002. Details of premiums
earned are provided below:
2003 2002 Change
--------- --------- ---------
(in thousands)
Gross premiums written $ 432,976 $ 907,717 $(474,741)
Change in gross unearned premiums 179,236 (95,102) 274,338
--------- --------- ---------
Gross premiums earned 612,212 812,615 (200,403)
--------- --------- ---------
Gross premiums ceded (84,201) (334,636) 250,435
Change in ceded unearned premiums (91,593) 65,306 (156,899)
--------- --------- ---------
Ceded premiums earned (175,794) (269,330) 93,536
--------- --------- ---------
Net premiums earned $ 436,418 $ 543,285 $(106,867)
========= ========= =========
Gross premiums ceded for the six months ended June 30, 2003 were $84.2 million
compared to $334.6 million for the same period in 2002. The decrease in gross
premiums ceded of $250.4 million was a result of the placement of all of
Trenwick's insurance and reinsurance operations other than its Lloyd's
syndicates into voluntary runoff as previously discussed.
Claims and claims expenses
Claims and claims expenses for the six months ended June 30, 2003 were $319.3
million, a decrease of $82.3 million compared to claims and claims expenses of
$401.6 million for the same period in 2002. The decrease in claims and claims
expenses in 2003 is attributable to Trenwick's decision to cease underwriting
through all of its insurance and reinsurance subsidiaries other than its Lloyd's
syndicates combined with the inclusion of $23.0 million of claims and claims
expenses in the first half of 2002 related to the September 11th terrorist
attacks. These decreases were offset in part by $74.4 million of adverse
development on prior year reserves for unpaid claims and claims expenses.
Approximately $51.7 million of this adverse development related to Trenwick's
North American runoff segment and related primarily to higher than expected
reported losses on its directors and officers and excess general liability lines
of business as well as an unexpected arbitration settlement related to a pool in
which Trenwick participated in 1995. Trenwick's United Kingdom runoff segment
contributed $8.3 million to the adverse development, which stemmed from its
liability business. Trenwick's Lloyd's operations contributed the remaining
$14.4 million of adverse development, which relates to its professional
indemnity and financial institutions business.
24
Underwriting expenses
2003 2002 Change
-------- -------- --------
(in thousands)
Policy acquisition costs $126,292 $147,915 $(21,623)
Underwriting expenses 45,119 43,688 1,431
-------- -------- --------
Total underwriting expenses $171,411 $191,603 $(20,192)
======== ======== ========
Underwriting expense ratio 39.3% 35.3% 4.0%
======== ======== ========
Total underwriting expenses, comprising policy acquisition costs and
underwriting expenses, for the first six months of 2003 decreased by $20.2
million compared to underwriting expenses for the first six months of 2002. The
decrease was attributable to the decrease in premium volume as previously
discussed offset in part by an increase in underwriting expenses. The increase
in underwriting expenses for 2003 over 2002 is mainly the result of increased
legal and advisory fees incurred in 2003 related to the ongoing efforts of
senior management of Trenwick's Lloyd's operations to seek alternate sources of
capital to replace Trenwick's ownership of its Lloyd's operations and the
current underwriting capacity provided by Trenwick. In addition, Trenwick's
Lloyd's operations increased staffing levels in 2003 over 2002, which
contributed additional expenses. Finally, severance costs of approximately $1.5
million were incurred during the second quarter of 2003 in connection with
Trenwick's decision to cease underwriting through Trenwick America Re. Total
underwriting expenses as a percentage of net premiums earned, or the
underwriting expense ratio, was 39.3% for the six months ended June 30, 2003
compared to 35.3% for the same period in 2002. The increase in the underwriting
expense ratio occurred principally because of increased underwriting expenses
and decreased earned premiums, both as described above. This increase in the
ratio was further driven by the decrease in aviation premiums in 2003, which
generally carry a significantly lower commission rate than that of personal
lines of business.
Net Investment Income
2003 2002 Change
----------- ----------- --------
(in thousands)
Average invested assets $ 2,281,758 $ 2,274,242 $ 7,516
Average annualized yields 3.77% 5.70% (1.93)%
Investment income - portfolio $ 43,039 $ 64,827 $(21,788)
Investment income - non-portfolio 1,125 (114) 1,239
Investment expenses (6,077) (7,573) 1,496
----------- ----------- --------
Net investment income $ 38,087 $ 57,140 $(19,053)
=========== =========== ========
Net investment income for the six months ended June 30, 2003 was $38.1 million
compared to $57.1 million for the same period in 2002. The decrease in net
investment income in the first half of 2003 was due to an overall decline in
market yields combined with a decrease in average invested assets. Investment
expenses for the first six months of both 2003 and 2002 included interest
expense on funds withheld of $4.2 million and $5.3 million, respectively, under
the terms of stop loss reinsurance agreements purchased by Trenwick America Re
prior to 2001.
Net Realized Gains (Losses)
Net realized losses on investments were $0.2 million during the six months ended
June 30, 2003, compared to net realized gains of $5.4 million for the six months
ended June 30, 2002. The 2003
25
losses are primarily the result of a write-down of an investment that was
determined to be permanently impaired, while the 2002 gains are a result of the
sale of investments made in order to repay Trenwick's term loan facility during
the second quarter of 2002.
Other income (expense)
Trenwick recorded other expenses of $12.0 million for the six months ended June
30, 2003 as compared to other income of $5.6 million for the same period in
2002. The 2003 amount consists primarily of $13.0 million of fronting fees
incurred related to Trenwick's underwriting facility with Chubb Re which was
cancelled in June of 2003. As a result of the cancellation of the agreement on
June 18, 2003, the remainder of the unpaid minimum fronting fee of $3.8 million
was accrued as of June 30, 2003. Additionally, the remaining deferred fronting
fee ($8.0 million at December 31, 2002) was fully amortized, as Trenwick will no
longer benefit from future underwriting under the contract. Trenwick will
continue to be entitled to the economic benefits of, and will bear losses on,
business underwritten through the facility prior to the cancellation date.
General and administrative expenses
General and administrative expenses for the six months ended June 30, 2003 were
$7.3 million, a decrease of $0.7 million as compared to $8.0 million incurred
during the same period in 2002. The decrease in 2003 is primarily the result of
the runoff status of Trenwick's insurance and reinsurance business other than
that written through its Lloyd's syndicates, offset in part by the inclusion of
$2.0 million of legal and advisory fees related to Trenwick's ongoing efforts to
restructure its outstanding indebtedness and preferred equity.
Interest Expense and Subsidiary Preferred Share Dividends
Interest expense and subsidiary preferred share dividends were $20.8 million for
the first six months of 2003, consistent with the expense from the same period
in 2002. The 2003 expense was $4.6 million less than that for 2002 as a result
of the absence of interest expense on Trenwick's term loan facility, which was
repaid during the second quarter of 2002. This decrease was offset by an
increase in letter of credit fees which were $6.2 million higher in the first
half of 2003 than during the same period in 2002.
Foreign Currency (Gains) Losses
Trenwick recorded foreign currency gains of $4.5 million for the six months
ended June 30, 2003, compared to $1.2 million of losses for the six months ended
June 30, 2002, primarily due to the strengthening of the Euro relative to the
British pound during the 2003 period.
Liquidity and Capital Resources
Trenwick is a holding company whose principal assets are its investments in the
common stock of its operating subsidiaries. As a holding company, Trenwick's
principal source of ongoing funding consists of permissible dividends, tax
allocation payments and other statutorily permissible payments from its
operating subsidiaries. Trenwick's ability to generate operating capital is
limited and its ability to meet its obligations is dependent upon funding from
its operating subsidiaries. There is substantial uncertainty as to what amount
of future funds it will receive from its operating subsidiaries. Trenwick's
principal use of cash has been operating expenses and dividends paid to its
shareholders. Trenwick America Corporation ("Trenwick America") and Trenwick
Holdings Limited ("Trenwick Holdings"), Trenwick's U.S. and U.K. holding
companies, have utilized cash in order to service their respective debt
obligations; LaSalle Re Holdings Limited ("LaSalle Re Holdings") has used cash
to pay dividends on its preferred shares. Trenwick's operating subsidiaries
receive cash from premiums, investment
26
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.
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.
As of both June 30, 2003 and December 31, 2002, Trenwick's consolidated
investments and cash totaled $2.3 billion. The fair value of Trenwick's debt
securities exceeded amortized cost by $33.1 million at June 30, 2003 and by
$12.6 million at December 31, 2002.
As of June 30, 2003, Trenwick's consolidated common shareholders' equity totaled
$48.0 million, or $1.30 per common share, compared to $77.5 million, or $2.11
per common share at December 31, 2002. During the six months ended June 30,
2003, the unrealized appreciation of debt and equity securities increased by
$19.4 million net of tax or $0.53 per share.
Cash used in Trenwick's operating activities for the six months ended June 30,
2003 was $109.4 million compared to cash provided by Trenwick's operating
activities of $57.9 million in the comparable period of 2002. The increase in
cash used in operations was due primarily to a significant decrease in premiums
collected in 2003 from 2002, a result of the runoff status of all of Trenwick's
insurance and reinsurance operations other than through its Lloyd's syndicates.
This decrease is in addition to a decrease in net investment income received, a
result of lower yields and a decrease in Trenwick's average invested assets.
Net cash used in financing activities during the six months ended June 30, 2002
included $2.9 million of dividends paid to common shareholders. Additionally,
net cash used in financing activities in 2002 included $195.2 million related to
the repayment of Trenwick's term loan facility.
Trenwick paid a dividend of $0.04 per common share in both the first and second
quarters of 2002 and LaSalle Re Holdings Limited paid a quarterly dividend of
$.55 per share on the Series A preferred shares of LaSalle Re Holdings Limited
in each of the quarters ended March 31 and June 30, 2002. In concert with other
actions being taken in the fourth quarter of 2002, on November 7, 2002,
Trenwick's Board of Directors announced that it had elected to suspend, with
immediate effect and for an indefinite period, dividends payable on Trenwick's
common and preferred shares. In December 2002, Trenwick's credit facility was
amended to prohibit the payment of dividends. On November 29, 2002, Trenwick
also ceased payment of dividends on the capital securities of Trenwick America
and on the preferred stock of LaSalle Re Holdings.
Trenwick's total debt to capital ratio (indebtedness divided by the sum of
indebtedness, minority interest, convertible preferred stock and shareholders'
equity) increased to 24.9% at June 30, 2003 from 22.7% on December 31, 2002,
mainly as a result of the decrease in common shareholders' equity.
27
Financings, Financing Capacity and Capitalization
Concurrently with the business combination involving LaSalle Re Holdings and
Trenwick Group Inc. 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 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.
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 guarant