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 March 31, 2002.
|_| 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 0-31967
TRENWICK AMERICA CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware 06-1087672
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Canterbury Green
Stamford, Connecticut 06901
(Address of principal executive offices) (zip code)
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Registrant's telephone number, including area code: 203-353-5500
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 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 May 13, 2002
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Common Stock - $1.00 par value 100
The registrant meets the conditions set forth in General Instruction H (1)(a)
and (b) of Form 10-Q and is therefore filing this Form 10-Q in the reduced
disclosure format.
TRENWICK AMERICA CORPORATION
INDEX TO FORM 10-Q
Page
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PART I - FINANCIAL INFORMATION
ITEM 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheet
March 31, 2002 and December 31, 2001 ............................................... 1
Consolidated Statement of Operations, Comprehensive Income and Changes in Common
Stockholder's Equity
Three Months ended March 31, 2002 and 2001 ......................................... 2
Consolidated Statement of Cash Flows
Three Months ended March 31, 2002 and 2001 ......................................... 3
Notes to Unaudited Consolidated Financial Statements ............................... 4
Management's Discussion and Analysis of Financial Condition and Results of
ITEM 2. Operations ......................................................................... 7
PART II - OTHER INFORMATION
ITEM 1. Legal proceedings .................................................................. 14
ITEM 2. Changes in Securities and Use of Proceeds .......................................... 14
ITEM 3. Defaults Upon Senior Securities .................................................... 14
ITEM 4. Submission of Matters to a Vote of Security Holders ................................ 14
ITEM 5. Other Information .................................................................. 14
ITEM 6. Exhibits and Reports on Form 8-K ................................................... 14
Signatures .......................................................................................... 15
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Trenwick America Corporation
Consolidated Balance Sheet
(Amounts expressed in thousands of United States dollars)
March 31, 2002 and December 31, 2001
(Unaudited)
2002 2001
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ASSETS
Debt securities available for sale, at fair value $1,059,128 $1,054,518
Equity securities, at fair value 28,576 24,164
Cash and cash equivalents 98,016 128,522
Accrued investment income 12,733 12,685
Premiums receivable 206,669 159,721
Reinsurance recoverable balances, net 578,737 544,202
Prepaid reinsurance premiums 104,045 83,980
Deferred policy acquisition costs 51,220 45,403
Due from parent and affiliates 72,750 68,260
Net deferred income taxes 69,595 65,757
Goodwill 52,119 52,119
Other assets 98,419 89,774
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Total assets $2,432,007 $2,329,105
========== ==========
LIABILITIES
Unpaid claims and claims expenses $1,447,053 $1,412,104
Unearned premium income 291,572 239,004
Reinsurance balances payable 59,181 42,424
Indebtedness 288,490 288,878
Due to affiliates 50,132 50,434
Other liabilities 40,460 33,939
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Total liabilities 2,176,888 2,066,783
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MINORITY INTEREST
Mandatorily redeemable preferred capital securities of
subsidiary trust holding solely junior subordinated
debentures of Trenwick America Corporation 86,988 86,973
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COMMON STOCKHOLDER'S EQUITY
Common stock and additional paid in capital 99,353 99,353
Retained earnings 54,269 57,104
Accumulated other comprehensive income 14,509 18,892
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Total common stockholder's equity 168,131 175,349
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Total liabilities, minority interest and common stockholder's equity $2,432,007 $2,329,105
========== ==========
The accompanying notes are an integral part of these statements.
Trenwick America Corporation
Consolidated Statement of Operations, Comprehensive Income and
Changes in Common Stockholder's Equity (Unaudited)
(Amounts expressed in thousands of United States dollars)
Three Months Ended March 31, 2002 and 2001
2002 2001
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REVENUES
Net premiums earned $ 99,495 $ 73,922
Net investment income 14,856 17,449
Net realized investment gains (losses) (180) 2,104
Other income 2,207 829
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Total revenues 116,378 94,304
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EXPENSES
Claims and claims expenses incurred 77,202 51,228
Policy acquisition costs 31,374 25,599
Underwriting expenses 5,121 4,101
General and administrative expenses 690 796
Interest expense and subsidiary preferred share dividends 7,126 8,504
Foreign currency (gains) losses (980) 351
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Total expenses 120,533 90,579
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Income (loss) before income taxes (4,155) 3,725
Applicable income taxes (benefit) (1,320) (3,022)
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Net income (loss) $ (2,835) $ 6,747
========= =========
COMPREHENSIVE INCOME (LOSS):
Net income (loss) $ (2,835) $ 6,747
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Other comprehensive income (loss):
Net unrealized investment gains (loss) (4,369) 6,714
Foreign currency translation adjustments (14) (1,919)
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Total other comprehensive income (loss) (4,383) 4,795
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Comprehensive income (loss) $ (7,218) $ 11,542
========= =========
CHANGES IN COMMON STOCKHOLDER'S EQUITY:
Common stockholder's equity, beginning of year $ 175,349 $ 200,907
Net capital transactions with affiliates -- (468)
Adjustment to paid in capital related to Trenwick/LaSalle
business combination -- (2,008)
Comprehensive income (loss) (7,218) 11,542
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Common stockholder's equity, end of period $ 168,131 $ 209,973
========= =========
The accompanying notes are an integral part of these statements.
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Trenwick America Corporation
Consolidated Statement of Cash Flows (Unaudited)
(Amounts expressed in thousands of United States dollars)
Three Months Ended March 31, 2002 and 2001
2002 2001
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CASH FOR OPERATING ACTIVITIES $ (14,948) $ (33,587)
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INVESTING ACTIVITIES:
Purchases of debt securities (95,523) (280,578)
Sales of debt securities 46,076 261,684
Maturities of debt securities 39,125 15,064
Purchases of equity securities -- (1,350)
Sales of equity securities -- 71,948
Effect of exchange rate on cash 212 (209)
Additions to premises and equipment (2,060) (188)
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Cash (for) from investing activities (12,170) 66,371
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FINANCING ACTIVITIES:
Indebtedness issuance costs paid (88) --
Loans from (to) affiliates (3,300) (1,162)
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Cash for financing activities (3,388) (1,162)
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Change in cash and cash equivalents (30,506) 31,622
Cash and cash equivalents, beginning of year 128,522 133,395
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Cash and cash equivalents, end of period $ 98,016 $ 165,017
========= =========
The accompanying notes are an integral part of these statements.
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TRENWICK AMERICA CORPORATION
Notes to Unaudited Consolidated Financial Statements
(Amounts expressed in thousands of United States dollars except share data)
Three Months Ended March 31, 2002 and 2001
Note 1 Organization and Basis of Presentation
Organization
Trenwick America Corporation is a United States holding company whose
principal subsidiaries underwrite specialty insurance and reinsurance.
Trenwick America Corporation's ultimate parent is Trenwick Group Ltd.,
which is a publicly traded Bermuda holding company.
Basis of Presentation
The interim financial statements include the accounts of Trenwick America
Corporation and its subsidiaries after elimination of significant
intercompany accounts and transactions. Certain items in prior financial
statements have been reclassified to conform to 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.
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
America Corporation for the year ended December 31, 2001.
Note 2 Segment Information
Trenwick America Corporation conducts its specialty insurance and
reinsurance business in the following two business segments:
- Reinsurance, which includes U.S. treaty reinsurance written
principally through its U.S. subsidiary, Trenwick America
Reinsurance Corporation; and
- United States specialty program insurance, written principally
through The Insurance Corporation of New York.
The following tables present business segment financial information for
Trenwick America Corporation at March 31, 2002 and December 31, 2001 and
for the three months ended March 31, 2002 and 2001:
Total assets: 2002 2001
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Reinsurance $1,647,551 $1,634,470
U.S. specialty program insurance 649,588 572,138
Unallocated 134,868 122,497
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Total assets $2,432,007 $2,329,105
========== ==========
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2002 2001
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Total revenues:
Reinsurance $ 86,725 $ 72,206
U.S. specialty program insurance 29,520 19,571
Unallocated 133 2,527
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Total revenues $ 116,378 $ 94,304
========= ========
Net income (loss):
Reinsurance $ 1,196 $ 9,729
U.S. specialty program insurance 1,172 1,792
Unallocated interest expense and subsidiary
preferred share dividends (7,119) (8,458)
Other unallocated 1,916 3,684
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Net income (loss) $ (2,835) $ 6,747
========= ========
Transactions between operating segments have been eliminated in
consolidation.
Note 3 Underwriting Activities
The components of premiums written and earned for the three months ended
March 31, 2002 and 2001 are as follows:
2002 2001
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Assumed premiums written $ 102,988 $ 82,597
Direct premiums written 102,134 68,591
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Gross premiums written 205,122 151,188
Ceded premiums written (73,126) (52,722)
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Net premiums written $ 131,996 $ 98,466
========= =========
Assumed premiums earned $ 80,115 $ 63,307
Direct premiums earned 75,406 53,209
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Gross premiums earned 155,521 116,516
Ceded premiums earned (56,026) (42,594)
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Net premiums earned $ 99,495 $ 73,922
========= =========
Note 4 Accounting Standards
Effective January 1, 2002, Trenwick America Corporation adopted a new
Financial Accounting Standards Board statement which amended the
accounting for goodwill and other intangible assets. This new statement
suspended systematic goodwill amortization and requires that Trenwick
America Corporation' goodwill balance be tested for impairment under
either market value or cash flow tests prior to the reporting of quarterly
results of operations as of June 30, 2002. Any impairment noted as a
result of these tests must be recorded as a cumulative effect of an
accounting change as of January 1, 2002. Trenwick America Corporation will
conduct impairment tests on the remaining goodwill balance during the
second quarter of 2002 and record impairments as deemed necessary.
-5-
Note 5 Amendment to Credit Facility
On April 12, 2002, Trenwick Group Ltd., its subsidiaries and financial
institutions holding a majority of the outstanding indebtedness under the
credit facility executed an amendment to its revolving credit facility.
The amendment required Trenwick Group Ltd. to pledge its shares of LaSalle
Re Holdings Limited and LaSalle Re Limited in favor of the lenders under
the credit facility. In addition, the amendment revised the financial
covenants relating to interest coverage and tangible net worth (each as
defined by the financial covenants in the credit agreement).
The amendment also increased the applicable margin on the interest paid by
Trenwick Group Ltd.by 1% and added an additional .5% fee payable by
Trenwick Group Ltd. in the event the loans and letters of credit
outstanding are not repaid or secured in accordance with the following
schedule; September 30, 2002, 40%; June 30, 2003, 60%; and June 30, 2004,
80%.
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MANANGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion highlights material factors affecting Trenwick America
Corporation's results of operations for the three months ended March 31, 2002
and 2001. This discussion and analysis should be read in conjunction with the
unaudited interim financial statements and notes thereto of Trenwick America
Corporation 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 America Corporation for the year ended December 31, 2001.
Trenwick America Corporation meets the conditions set forth in the General
Instructions (H) (I) (a) and (b) of Form 10-Q and is therefore omitting certain
information otherwise required by Item 2.
Overview
Trenwick America Corporation is a Delaware holding company headquartered in
Stamford, Connecticut whose principal subsidiaries underwrite specialty
insurance and reinsurance.
Trenwick America Corporation operates through the following two businesses:
o Reinsurance, which includes U.S. treaty reinsurance written principally
through its U.S. subsidiary, Trenwick America Reinsurance Corporation; and
o United States specialty program insurance, written principally through The
Insurance Corporation of New York.
All of Trenwick America Corporation's principal operating subsidiaries are rated
"A-" (Excellent) by A.M. Best Company and have been assigned a financial
strength rating of A- by Standard and Poor's. These ratings are based upon
factors that may be of concern to policy or contract holders, agents and
intermediaries, but may not reflect the considerations applicable to an equity
investment in a reinsurance or insurance company. A change in any such rating is
at the discretion of the respective rating agencies.
Results of Operations - Three Months Ended March 31, 2002 and 2001
2002 2001 Change
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(in thousands)
Underwriting loss $(14,202) $ (7,006) $(7,196)
Net investment income 14,856 17,449 (2,593)
Interest expense and subsidiary
preferred share dividends (7,126) (8,504) 1,378
General and administrative expenses (690) (796) 106
Foreign currency gains (losses) 980 (351) 1,331
Other income, net 2,207 829 1,378
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Pre-tax operating income (loss) (3,975) 1,621 (5,596)
Applicable income taxes (benefit) (1,257) (3,758) 2,501
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Operating income (loss) (2,718) 5,379 (8,097)
Net realized investment gains (losses),
net of income taxes (117) 1,368 (1,485)
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Net income (loss) $ (2,835) $ 6,747 $(9,582)
======== ======== =======
The operating loss of $2.7 million in the three months ended March 31, 2002
represented a $8.1 million decrease from operating income of $5.4 million
recorded in the three months ended March 31, 2001. The decrease is principally
the result of deterioration on loss ratios for prior
-7-
accident years offset in part by a decrease in interest expense and subsidiary
preferred share dividends and increases in both other income and foreign
currency gains in 2002 over 2001.
Underwriting income (loss)
2002 2001 Change
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(in thousands)
Net premiums earned $ 99,495 $ 73,922 $ 25,573
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Claims and claims expenses incurred 77,202 51,228 25,974
Acquisition costs and underwriting expenses 36,495 29,700 6,795
--------- -------- --------
Total expenses 113,697 80,928 32,769
--------- -------- --------
Net underwriting loss $ (14,202) $ (7,006) $ (7,196)
========= ======== ========
Loss ratio 77.6% 69.3% 8.3%
Underwriting expense ratio 36.7% 40.2% (3.5)%
Combined ratio 114.3% 109.5% 4.8%
The underwriting loss of $14.2 million in 2002 represented a $7.2 million
greater loss compared to the underwriting loss of $7.0 million in 2001.
The increase in the underwriting loss was primarily due to the
deterioration in loss ratios for prior accident years as previously noted.
The increase in the combined ratio in 2002 compared to 2001 is also
attributable to the adverse development previously noted combined with
commission adjustments on treaties in runoff which were acquired in a
previous business combination.
Premiums written
Gross premiums written for 2002 were $205.1 million compared to $151.1
million for the three months ended March 31, 2001, an increase of $54.0
million or 35.7%. Details of gross premiums written are provided below:
2002 2001 Change
-------- -------- -------
(in thousands)
Reinsurance $102,968 $ 82,630 $20,338
U.S. specialty program insurance 102,156 68,558 33,598
-------- -------- -------
Gross premiums written $205,124 $151,188 $53,936
======== ======== =======
Reinsurance increased $20.3 million from the first quarter of 2001
primarily due to increasing rates on renewal treaties. U.S. specialty
program insurance gross premiums written increased from $68.6 million for
the first quarter of 2001 to $102.1 million for the first quarter of 2002
due to rate increases on new and renewal policies attributed to the
improving insurance market conditions.
Premiums earned
Net premiums earned for the three months ended March 31, 2002 were $99.5
million compared to $73.9 million for 2001.
-8-
Details of premiums earned are provided below:
2002 2001 Change
--------- --------- --------
(in thousands)
Gross premiums written $ 205,122 $ 151,188 $ 53,934
Change in gross unearned premiums (49,601) (34,672) (14,929)
--------- --------- --------
Gross premiums earned 155,521 116,516 39,005
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Gross premiums ceded (73,126) (52,722) (20,404)
Change in ceded unearned premiums 17,100 10,128 6,972
--------- --------- --------
Ceded premiums earned (56,026) (42,594) (13,432)
--------- --------- --------
Net premiums earned $ 99,495 $ 73,922 $ 25,573
========= ========= ========
Gross premiums ceded for the three months ended March 31, 2002 were $73.1
million compared to $52.7 million for the same period in 2001. The increase in
gross premiums ceded of $20.4 million was commensurate with the increase in
gross premiums written.
The increase in net premiums earned is attributable to the increase in premiums
written, slightly offset by the delay in earnings on the new and renewal
contract which bear higher rates.
Claims and claims expenses
Claims and claims expenses for the three months ended March 31, 2002 were $77.2
million, an increase of $25.9 million compared to claims and claims expenses of
$51.2 million for 2001. The increase in claims and claims expenses in 2002
includes deterioration in indicated loss ratios in the 1999-2001 accident years
on the Reinsurance and U.S. specialty program insurance segments of
approximately $7.2 million and $1.8 million, respectively.
Underwriting expenses
2002 2001 Change
------- ------- -------
(in thousands)
Policy acquisition costs $31,374 $25,599 $ 5,775
Underwriting expenses 5,121 4,101 1,020
------- ------- -------
Total underwriting expenses $36,495 $29,700 $ 6,795
======= ======= =======
Underwriting expense ratio 36.7% 40.2% (3.5)%
======= ======= =======
Total underwriting expenses, comprising policy acquisition costs and
underwriting expenses, for 2002 increased by $6.8 million compared to
underwriting expenses for the three months ended March 31, 2001. Similar to
claims and claims expenses, a portion of the increase was attributable to the
increase in premiums written. Total underwriting expenses as a percentage of net
premiums earned, or the underwriting expense ratio, were 36.7% for the three
months ended March 31, 2002 compared to 40.2% for the same period in 2001. The
decrease in the underwriting expense ratio occurred principally because of
decreasing acquisition costs related to improved terms and conditions due to the
hardening of the market.
Underwriting expenses for the three months ended March 31, 2002 as a percentage
of earned premium was 5.1%, relatively unchanged from 5.5% for the same period
in 2001.
Net Investment Income
2002 2001 Change
----------- ----------- --------
(in thousands)
Average invested assets $ 1,177,188 $ 1,212,293 $(35,105)
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Average annualized yields 6.26% 6.96% (0.7)%
----------- ----------- --------
Investment income - portfolio 18,413 21,086 (2,673)
Investment expenses (3,557) (3,637) 80
----------- ----------- --------
Net investment income $ 14,856 $ 17,449 $ (2,593)
=========== =========== ========
Net investment income for the three months ended March 31, 2002 was $14.8
million compared to $17.4 million for the same period in 2001. The decrease in
net investment income in 2002 was due to both an overall decline in market
yields during the quarter as well as to a decrease in the average invested
assets as compared to the 2001 quarter as a result of cash used in operations.
Interest Expense and Subsidiary Preferred Share Dividends
Interest expense and subsidiary preferred share dividends was $7.1 million for
2002, a decrease of $1.4 million from the same period in 2001. The decrease is
primarily a result of the decrease in interest rates since the first quarter of
2001.
Non-operating Income and Expenses
Net realized losses on investments, net of income taxes, were $0.1 million
during the three months ended March 31, 2002, compared to net realized gains of
$1.4 million for the three months ended March 31, 2001. The 2001 gains reflect
actions taken to reposition Trenwick America Corporation's debt security
portfolio, offset in part by losses recognized on the sale of equity securities.
Financings, Financing Capacity and Capitalization
Concurrent with the Trenwick/LaSalle business combination, Trenwick America
Corporation and Trenwick Holdings Limited, Trenwick Group Ltd.'s U.S. and U.K.
holding companies, entered into an amended and restated $490 million credit
agreement with various lending institutions. The credit agreement consisted of
both a $260 million revolving credit facility and a $230 million letter of
credit facility. The revolving credit facility has subsequently been converted
into a four-year term loan. Trenwick America Corporation is the primary obligor
with respect to the revolving credit facility, and Trenwick Holdings Limited is
the primary obligor with respect to the letter of credit facility. Guarantees
are provided by LaSalle Re Holdings Limited and Trenwick Group Ltd. with respect
to both Trenwick America Corporation's and Trenwick Holdings Limited's
obligations and additionally by Trenwick America Corporation with respect to
Trenwick Holdings Limited's obligations. The credit agreement provides for a
letter of credit facility which may only be used to support the Lloyd's
syndicate participations of Trenwick Group Ltd.'s subsidiaries. The letter of
credit facility is scheduled to expire in November 2002. In the event that
Trenwick Group Ltd. is unable to obtain a replacement letter of credit facility
or post sufficient collateral to support its Lloyd's underwriting activities, it
will be required to reduce or cease its underwriting activities at Lloyd's for
the 2003 year of account. The applicable interest rate on borrowings under the
credit facility is generally 2.5% above the London Interbank Offered Rate and
was 4.6% at March 31, 2002. The term loan facility is subject to scheduled
principal amortization over the four-year period in accordance with the
following schedule: 2002, 22.5%; 2003, 27.5%; 2004, 32.5%; 2005, 17.5%.
Trenwick America Corporation is obligated to repay a portion or all of the term
loan in the event of equity issuances, asset sales or debt issuances by Trenwick
Group Ltd. or its subsidiaries. At March 31, 2002, $195.0 million of term loans
were outstanding, and $230.0 million of letters of credit were outstanding under
the credit facility.
The credit agreement contains general covenants and restrictions as well as
financial covenants relating to, among other things, Trenwick Group Ltd.'s
minimum interest coverage, debt to
-10-
capital leverage, minimum earned surplus, maintenance of a minimum A.M. Best
Company rating of A- and tangible net worth. As of March 31, 2002, Trenwick
Group Ltd. was in compliance with the credit agreement covenants.
On April 12, 2002, Trenwick Group Ltd., its subsidiaries and financial
institutions holding a majority of the outstanding indebtedness under the credit
facility executed an amendment to the credit facility. The amendment required
Trenwick Group Ltd. to pledge its shares of LaSalle Re Holdings Limited and
LaSalle Re Limited in favor of the lenders under the credit facility. In
addition, the amendment revised the financial covenants relating to interest
coverage and tangible net worth (each as defined by the financial covenants in
the credit agreement). The amendment set Trenwick Group Ltd.'s minimum interest
coverage ratio at 1.25 to 1 for the first quarter of 2002, 1.5 to 1 for the
second quarter of 2002, 1.75 to 1 for the third quarter of 2002 and 2.5 to 1
thereafter. Trenwick Group Ltd.'s interest coverage ratio for the three months
ended March 31, 2002 was 2.1 to 1. The amendment adjusted the minimum tangible
net worth Trenwick Group Ltd. must maintain to the following base amounts plus
50% of net income earned during the period:
Time Period Minimum Tangible Net Worth
----------- --------------------------
Through May 15, 2002 $450,000,000
From May 16, 2002 to August 14, 2002 $475,000,000
From August 15, 2002 to November 14, 2002 $525,000,000
From November 15, 2002 to March 30, 2003 $550,000,000
Thereafter $560,000,000
Trenwick Group Ltd.'s tangible net worth as of March 31, 2002 was $489.4
million.
A previous amendment adjusted downward the minimum risk-based capital
requirement for Trenwick Group Ltd.'s subsidiary, Chartwell Insurance Company,
from 300% to 225% through December 31, 2002. Thereafter, the minimum risk-based
capital for Chartwell Insurance Company returns to 300%. The risk-based capital
for Chartwell Insurance Company as of December 31, 2001 was 257%.
If Trenwick Group Ltd. is unable to meet the credit agreement's financial
covenants, it may be required to repay the outstanding indebtedness and
collateralize the outstanding letters of credit issued under the credit
agreement through additional financing, asset sales, subsidiary dividends or
similar transactions.
The amendment increased the applicable margin on the interest paid by Trenwick
Group Ltd. by 1% and added an additional .5% fee payable by Trenwick Group Ltd.
in the event the loans and letters of credit outstanding are not repaid or
secured in accordance with the following schedule:
Date Percentage of Outstanding Indebtedness
---- --------------------------------------
September 30, 2002 40%
June 30, 2003 60%
June 30, 2004 80%
Trenwick Group Ltd.'s ability to refinance its existing debt obligations or
raise additional capital is dependent upon several factors, including financial
conditions with respect to both the equity and debt markets and the ratings of
its securities as established by the rating agencies. Following Trenwick Group
Ltd.'s claims and claims expense liability reserve increase in the second
quarter of 2001 and the losses it sustained in the September 11th terrorist
attacks, its senior debt ratings were downgraded by Standard & Poor's
Corporation to BBB- and by Moody's Investors Service
-11-
to Ba2. Trenwick Group Ltd.'s ability to refinance its outstanding debt
obligations, as well as the cost of such borrowings, could be adversely affected
by these ratings downgrades or if its ratings were downgraded further.
Accounting Standards
Effective January 1, 2002, Trenwick America Corporation adopted a new Financial
Accounting Standards Board statement which amended the accounting for goodwill
and other intangible assets. This new statement suspended systematic goodwill
amortization and requires that goodwill be tested for impairment under either
market value or cash flow tests prior to the reporting of quarterly results of
operations as of June 30, 2002. Any impairment noted as a result of these tests
will be recorded as a cumulative effect of an accounting change as of January 1,
2002.
Safe Harbor Disclosure
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, Trenwick America Corporation sets forth below
cautionary statements identifying important risks and uncertainties that could
cause its actual results to differ materially from those that might be
projected, forecasted or estimated in its "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, made by or on behalf of Trenwick America
Corporation in this Quarterly Report on Form 10-Q and in press releases, written
statements or documents filed with the Securities and Exchange Commission, or in
its communications and discussions with investors and analysts in the normal
course of business through meetings, phone calls and conference calls. Such
statements may include, but are not limited to, projections of premium revenue,
investment income, other revenue, losses, expenses, earnings (including earnings
per share), cash flows, plans for future operations, common shareholders' equity
(including book value per share), investments, financing needs, capital plans,
dividends, plans relating to products or services of Trenwick America
Corporation and estimates concerning the effects of litigation or other
disputes, as well as assumptions for any of the foregoing and generally
expressed with words such as "believes," "estimates," "expects," "anticipates,"
"plans," "projects," "forecasts," "goals," "could have," "may have," and similar
expressions.
Forward-looking statements involve known and unknown risks and uncertainties,
which may cause Trenwick America Corporation's results to differ materially from
such forward-looking statements. These risks and uncertainties include, but are
not limited to, the following:
- - Changes in the level of competition in the domestic and international
reinsurance or primary insurance markets that affect the volume or
profitability of Trenwick America Corporation's property/casualty
business. These changes include, but are not limited to, changes in the
intensity of price competition, the entry of new competitors, existing
competitors exiting the market and the development of new products by new
and existing competitors;
- - Changes in the demand for reinsurance, including changes in ceding
companies' risk retentions and changes in the demand for excess and
surplus lines insurance coverages;
- - The ability of Trenwick America Corporation to execute its strategies in
its property/casualty operations;
- - Catastrophe losses in Trenwick America Corporation's domestic and
international property/casualty businesses;
- - Adverse development on property/casualty claims and claims expense
liabilities related to business written in prior years, including, but not
limited to, evolving case law and its effect on environmental and other
latent injury claims, changing government regulations, newly identified
toxins, newly reported claims, new theories of liability, or new insurance
and reinsurance contract interpretations;
- - Changes in Trenwick America Corporation's property/casualty retrocessional
arrangements;
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- - Lower than estimated retrocessional or reinsurance recoveries on unpaid
losses, including, but not limited to, losses due to a decline in the
creditworthiness of Trenwick America Corporation's retrocessionaires or
reinsurers;
- - Increases in interest rates, which may cause a reduction in the market
value of Trenwick America Corporation's fixed income portfolio, and its
common shareholders' equity;
- - Decreases in interest rates which may cause a reduction of income earned
on new cash flow from operations and the reinvestment of the proceeds from
sales or maturities of existing investments;
- - A decline in the value of Trenwick America Corporation's equity
investments;
- - Changes in the composition of Trenwick America Corporation's investment
portfolio;
- - Credit losses on Trenwick America Corporation's investment portfolio;
- - Adverse results in litigation matters, including, but not limited to,
litigation related to environmental, asbestos and other potential mass
tort claims;
- - The impact of mergers and acquisitions;
- - Gains or losses related to changes in foreign currency exchange rates;
- - Changes in Trenwick America Corporation's capital needs;
- - The ability of Trenwick America Corporation to refinance or repay its
outstanding indebtedness; and
- - Changes in the financial strength ratings assigned to Trenwick America
Corporation and its operating subsidiaries.
In addition to the factors outlined above that are directly related to Trenwick
America Corporation's businesses, Trenwick America Corporation is also subject
to general business risks, including, but not limited to, adverse state, federal
or foreign legislation and regulation, adverse publicity or news coverage,
changes in general economic factors and the loss of key employees.
The facts set forth above should be considered in connection with any
forward-looking statement contained in this Quarterly Report on Form 10-Q. The
important factors that could affect such forward-looking statements are subject
to change, and Trenwick America Corporation does not intend to update any
forward-looking statement or the foregoing list of important factors. By this
cautionary note Trenwick America Corporation intends to avail itself of the safe
harbor from liability with respect of forward-looking statements provided by
Section 27A and Section 21E referred to above.
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PART II - OTHER INFORMATION
Item 1 Legal Proceedings
Trenwick America Corporation is party to various legal proceedings
generally arising in the normal course of its business. Trenwick America
Corporation does not believe that the eventual outcome of any such proceeding
will have a material effect on its financial condition or business. Trenwick
America Corporation's subsidiaries are regularly engaged in the investigation
and the defense of claims arising out of the conduct of their business. Pursuant
to Trenwick America Corporation's insurance and reinsurance arrangements,
disputes are generally required to be finally settled by arbitration.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
10.1 Third Amendment to the Credit Agreement, dated as of April 12,
2002, among Trenwick America Corporation, Trenwick Holdings
Limited, the lending institutions from time to time party
thereto, Wachovia Bank, National Association, as Syndication
Agent, Fleet National Bank, as Documentation Agent, and JP
Morgan Chase Bank, as Administrative Agent.
10.2 Third Amendment to the Holdings Guaranty, dated as of April
12, 2002, among Trenwick Group Ltd., and the lending
institutions from time to time party to the Credit Agreement.
(b) Reports on Form 8-K
None
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Trenwick America Corporation
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 2002 /s/ James F. Billett, Jr.
--------------------------------------
Name: James F. Billett, Jr.
Title: Chairman, President and
Chief Executive Officer
Date: May 15, 2002 /s/ Alan L. Hunte
--------------------------------------
Name: Alan L. Hunte
Title: Executive Vice President and
Chief Financial Officer
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