-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fx1VXRhEy07VEuvRkvqPRBhJ9QqyoT/j1J/r1ewn3l1kdDb2IwuWUKKwoVkh68Mx 0T8YJil9w2a2GA3qa/5YUw== 0001169232-02-002928.txt : 20021114 0001169232-02-002928.hdr.sgml : 20021114 20021114154543 ACCESSION NUMBER: 0001169232-02-002928 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRENWICK GROUP LTD CENTRAL INDEX KEY: 0001122211 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 980232340 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-16089 FILM NUMBER: 02825027 BUSINESS ADDRESS: STREET 1: LOM BLDG STREET 2: 27 REID STREET CITY: HAMILTON, BERMUDA STATE: D0 ZIP: HM 11 MAIL ADDRESS: STREET 1: 27 REID STREET LOM BLDG STREET 2: HAMILTON HM 11 BERMUNDA 10-Q 1 d52669_10-q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended September 30, 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 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) 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 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 November 12, 2002 - ------------------------------ ---------------------------- Common Shares - $.10 par value 36,787,063 TRENWICK GROUP LTD. INDEX TO FORM 10-Q PART I - FINANCIAL INFORMATION Page ---- ITEM 1. Unaudited Consolidated Financial Statements Consolidated Balance Sheet September 30, 2002 and December 31, 2001 ............................ 1 Consolidated Statement of Operations and Comprehensive Income Three and Nine Months Ended September 30, 2002 and 2001 ............. 2 Consolidated Statement of Cash Flows Three and Nine Months Ended September 30, 2002 and 2001 ............. 3 Consolidated Statement of Changes in Common Shareholders' Equity Nine Months Ended September 30, 2002 and 2001 ............................ 4 Notes to Unaudited Consolidated Financial Statements ................ 5 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................................... 18 ITEM 3. Quantitative and Qualtitative Disclosures about Market Risk ......... 36 ITEM 4. Controls and Procedures ............................................. 36 PART II - OTHER INFORMATION ITEM 1. Legal proceedings ................................................... 38 ITEM 2. Changes in Securities and Use of Proceeds ........................... 38 ITEM 3. Defaults Upon Senior Securities ..................................... 38 ITEM 4. Submission of Matters to a Vote of Security Holders ................. 39 ITEM 5. Other Information ................................................... 39 ITEM 6. Exhibits and Reports on Form 8-K .................................... 39 Signatures .................................................................. 40 -i- Trenwick Group Ltd. Consolidated Balance Sheet (Amounts expressed in thousands of United States dollars, except share and per share data) September 30, 2002 and December 31, 2001
(Unaudited) 2002 2001 ----------- ----------- ASSETS Debt securities available for sale, at fair value $ 2,024,147 $ 1,960,600 Equity securities at fair value 24,752 24,164 Cash and cash equivalents 320,514 331,350 Accrued investment income 25,867 38,278 Premiums receivable 608,835 535,281 Reinsurance recoverable balances, net 1,941,285 1,411,469 Prepaid reinsurance premiums 278,103 197,169 Deferred policy acquisition costs 127,112 115,870 Net deferred income taxes 83,030 139,926 Goodwill -- 41,653 Other assets 178,571 132,795 ----------- ----------- Total assets $ 5,612,216 $ 4,928,555 =========== =========== LIABILITIES Unpaid claims and claims expenses $ 3,728,112 $ 3,032,748 Unearned premium income 738,011 612,290 Reinsurance balances payable 426,548 225,255 Indebtedness 88,524 291,263 Other liabilities 125,829 125,554 ----------- ----------- Total liabilities 5,107,024 4,287,110 ----------- ----------- MINORITY INTEREST Mandatorily redeemable preferred capital securities of subsidiary trust holding solely junior subordinated debentures of U.S. subsidiary 68,308 68,119 Minority interest in preferred shares of Bermuda subsidiary 75,000 75,000 ----------- ----------- Total minority interest 143,308 143,119 ----------- ----------- CONVERTIBLE PREFERRED SHARES 40,000 -- ----------- ----------- COMMON SHAREHOLDERS' EQUITY Common shares, $0.10 par value, 36,787,063 and 36,845,141 shares issued and outstanding 3,679 3,685 Additional paid in capital 576,800 578,018 Deferred compensation under share award plans (2,968) (4,766) Accumulated deficit (294,228) (101,830) Accumulated other comprehensive income 38,601 23,219 ----------- ----------- Total common shareholders' equity 321,884 498,326 ----------- ----------- Total liabilities, minority interest convertible preferred shares and common shareholders' equity $ 5,612,216 $ 4,928,555 =========== ===========
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 Nine Months Ended September 30, 2002 and 2001
Three Months Nine Months ---------------------- ---------------------- 2002 2001 2002 2001 --------- --------- --------- --------- REVENUES Net premiums earned $ 194,823 $ 239,862 $ 738,108 $ 667,208 Net investment income 24,401 30,770 81,541 96,141 Net realized investment gains (losses) (3,119) (3,302) 2,295 7,828 Other income 2,191 1,233 7,829 3,285 --------- --------- --------- --------- Total revenues 218,296 268,563 829,773 774,462 --------- --------- --------- --------- EXPENSES Claims and claims expenses incurred 192,947 264,344 594,549 638,176 Policy acquisition costs 69,577 75,017 217,492 197,473 Underwriting expenses 20,122 21,352 63,810 56,892 General and administrative expenses 6,005 3,845 13,981 15,122 Loss on sale of LaSalle's in-force reinsurance business before commission income on quota share contract -- -- 7,008 -- Interest expense and subsidiary preferred share dividends 8,289 9,601 29,106 30,054 Foreign currency losses 3,805 1,397 4,965 2,932 --------- --------- --------- --------- Total expenses 300,745 375,556 930,911 940,649 --------- --------- --------- --------- Loss before income taxes and cumulative effect of change in accounting principle (82,449) (106,993) (101,138) (166,187) Applicable income taxes (benefit) 54,463 (10,886) 44,894 (38,187) --------- --------- --------- --------- Net loss before cumulative effect of change in accounting principle (136,912) (96,107) (146,032) (128,000) Cumulative effect of change in accounting principle -- -- (41,653) -- --------- --------- --------- --------- Net loss (136,912) (96,107) (187,685) (128,000) Dividends on convertible preferred shares 298 -- 298 -- --------- --------- --------- --------- Net loss available to common shareholders $(137,210) $ (96,107) $(187,983) $(128,000) ========= ========= ========= ========= EARNINGS PER SHARE: Basic and diluted loss per common share before cumulative effect of change in accounting principle $ (3.73) $ (2.61) $ (3.98) $ (3.48) Cumulative effect of change in accounting principle -- -- (1.13) -- --------- --------- --------- --------- Basic and diluted loss per common share $ (3.73) $ (2.61) $ (5.11) $ (3.48) ========= ========= ========= ========= COMPREHENSIVE INCOME (LOSS): Net loss $(136,912) $ (96,107) $(187,685) $(128,000) --------- --------- --------- --------- Other comprehensive income (loss): Net unrealized investment gains 22,215 28,314 20,685 29,607 Foreign currency translation adjustments (7,428) 2,121 (5,303) (2,562) --------- --------- --------- --------- Total other comprehensive income 14,787 30,435 15,382 27,045 --------- --------- --------- --------- Comprehensive loss $(122,125) $ (65,672) $(172,303) $(100,955) ========= ========= ========= =========
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 Nine Months Ended September 30, 2002 and 2001
Three Months Nine Months -------------------------- -------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- OPERATING ACTIVITIES Premiums collected, net of acquisition costs $ 296,769 $ 278,413 $ 1,071,725 $ 741,435 Ceded premiums paid, net of acquisition costs (91,752) (64,293) (382,596) (226,382) Claims and claims expenses paid (239,433) (220,720) (784,920) (621,610) Claims and claims expenses recovered 74,502 58,626 199,892 139,179 Underwriting expenses paid (24,598) (18,079) (80,619) (71,620) ----------- ----------- ----------- ----------- Cash (for) from underwriting activities 15,488 33,947 23,482 (38,998) Net investment income received 30,309 36,491 99,595 116,607 Service and other income received, net of expenses 1,070 332 6,042 112 General and administrative expenses paid (6,881) (6,683) (19,853) (15,682) Interest expense and preferred share dividends paid (5,278) (14,486) (17,735) (27,164) Income taxes (paid) recovered 160 (310) 1,208 (1,007) ----------- ----------- ----------- ----------- Cash from operating activities 34,868 49,291 92,739 33,868 ----------- ----------- ----------- ----------- INVESTING ACTIVITIES Purchases of debt securities (608,176) (369,031) (1,433,669) (1,250,816) Sales of debt securities 149,966 269,351 853,826 1,002,121 Maturities of debt securities 304,299 33,688 632,480 86,472 Purchases of equity securities -- 90 (83) (2,514) Sales of equity securities -- 4,718 -- 97,926 Effect on cash of exchange rate translation 3,330 5,773 14,249 (2,625) Additions to premises and equipment (860) (3,100) (5,600) (5,088) ----------- ----------- ----------- ----------- Cash (for) from investing activities (151,441) (58,511) 61,203 (74,524) ----------- ----------- ----------- ----------- FINANCING ACTIVITIES Issuance (repayment) of indebtedness (958) -- (200,252) 14,000 Indebtedness issuance costs paid -- (618) (88) (647) Purchase of capital securities -- -- -- (8,462) Issuance of common shares 40 36 137 364 Common share dividends paid (1,471) (1,495) (4,415) (4,442) Issuance of convertible preferred shares 40,000 -- 40,000 -- Share and option repurchases -- -- (160) (311) Equity put option premium payments -- -- -- (1,319) ----------- ----------- ----------- ----------- Cash from (for) financing activities 37,611 (2,077) (164,778) (817) ----------- ----------- ----------- ----------- Change in cash and cash equivalents (78,962) (11,297) (10,836) (41,473) Cash and cash equivalents, beginning of period 399,476 280,825 331,350 311,001 ----------- ----------- ----------- ----------- Cash and cash equivalents, end of period $ 320,514 $ 269,528 $ 320,514 $ 269,528 =========== =========== =========== ===========
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) Nine Months Ended September 30, 2002 and 2001
2002 2001 --------- --------- Common shareholders' equity, beginning of period $ 498,326 $ 652,187 COMMON SHARES AND ADDITIONAL PAID IN CAPITAL Issuance of 194,116 restricted common shares -- 4,119 Issuance of 19,637 and 20,366 common shares for cash under employee and director plans 137 363 Purchase and retirement of 18,646 and 14,609 common shares (161) (311) Cancellation of 59,069 and 5,134 restricted common share awards (1,200) (70) Compensation recognized under employee program -- 405 Equity put option premiums -- (1,319) DEFERRED COMPENSATION UNDER SHARE AWARD PLAN Restricted common shares awarded -- (4,119) Compensation expense recognized 683 1,121 Cancellation of shares 1,115 70 ACCUMULATED DEFICIT Net loss (187,685) (128,000) Common share dividends, $0.12 per share (4,415) (4,443) Dividends on convertible preferred shares (298) -- ACCUMULATED OTHER COMPREHENSIVE INCOME Other comprehensive income 15,382 27,045 --------- --------- Common shareholders' equity, end of period $ 321,884 $ 547,048 ========= =========
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 share and per share data) Three and Nine Months Ended September 30, 2002 and 2001 Note 1 Organization and Basis of Presentation Organization Trenwick Group Ltd. ("Trenwick") was formed as a holding company in Bermuda on December 10, 1999 to acquire two publicly held companies and the minority interest in a subsidiary of one of those companies (the "business combination"). That transaction was completed on September 27, 2000. Trenwick's principal subsidiaries underwrite specialty insurance and reinsurance. 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 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 for the year ended December 31, 2001. Mr. W. Marston Becker, who was appointed Acting Chairman and Acting Chief Executive Officer of Trenwick in August 2002, has certified Trenwick's Form 10-Q Report for the third quarter of 2002 in accordance with the requirements of Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. Because Mr. Becker has been employed by Trenwick as its Acting Chairman and Acting Chief Executive Officer for less then three months, Trenwick emphasizes that his signature is subject to all of the qualifications and precautionary statements incorporated in this Form 10-Q Report. Mr. Becker has not been at Trenwick long enough to have conducted an in-depth review of Trenwick's accounting and reserving practices. However, Mr. Becker has initiated an in-depth review of Trenwick's reserving practices, which is expected to be completed in the fourth quarter of the current fiscal year. Management notes that Trenwick currently has no information that the current reserve review will result in any material adjustments to Trenwick's reserves for losses. If the current reserve review were to reveal any material adjustments necessary to Trenwick's loss reserves, Trenwick would promptly disclose such adjustments. -5- Note 2 Sale of Property Catastrophe Business of LaSalle Re Limited Effective April 1, 2002, Trenwick sold the in-force property catastrophe reinsurance business of its subsidiary, LaSalle Re Limited ("LaSalle") to Endurance Specialty Insurance, Ltd. ("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 will have 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 results for the nine months ended September 30, 2002 are $10,745 in ceding commissions earned on the quota share with Endurance, as well as $6,907 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 nine months ended September 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 before commission income on quota share contract $(7,008) ======= Note 3 Lloyd's Capital Transaction On September 19, 2002, Trenwick Managing Agents Limited entered into an agreement with National Indemnity Company, a member of the Berkshire Hathaway group of insurance companies, to increase the total premium capacity of Trenwick Managing Agents' Syndicate 839 at Lloyd's for the 2002 year of account. National Indemnity Company provided (pound)62,500 ($99,325) in premium capacity to Trenwick's Syndicate 839 through (pound)25,000 ($39,730) of additional Lloyd's funding and (pound)78,750 ($125,150) in premium capacity through a qualifying quota share reinsurance facility. In return for its capital support, National Indemnity Company will receive a 41.4% share of the net underwriting result of Syndicate 839 for the 2002 year of account before ceding commissions and profit sharing. The qualifying quota share reinsurance facility served to decrease net earned premiums for the three and nine months ended September 30, 2002 by $41,322 and increase the net loss for the three and nine months ended September 30, 2002 by $5,520. Note 4 Segment Information During the first quarter of 2002, Trenwick amended the basis in which operating segments are determined. This change followed a realignment of certain lines of business in Trenwick's international operations in London, which led to the combining of these operations into one operating segment operating through two distribution platforms. In addition, consistent with its operational structure, Trenwick combined its property and casualty reinsurance and property catastrophe reinsurance into one segment called reinsurance operations. Trenwick conducted its specialty insurance and reinsurance business in the following three business segments through the first nine months of 2002: - - Reinsurance, which includes U.S. treaty reinsurance written principally through its U.S. subsidiary, Trenwick America Reinsurance Corporation; and property -6- catastrophe reinsurance, through its subsidiary LaSalle, which ceased underwriting effective April 1, 2002. - - International operations, which consists of international specialty insurance primarily written through its U.K. subsidiary, Trenwick International Limited, as well as Lloyd's insurance and reinsurance written principally through its U.K. subsidiary, Trenwick Managing Agents Limited (formerly Chartwell Managing Agents Limited); and - - United States specialty program insurance, written principally through The Insurance Corporation of New York. On October 30, 2002, Trenwick announced that it would cease underwriting its U.S. specialty program insurance business effective immediately. Lloyd's syndicates runoff and Excess Casualty Reinsurance Association Pool ("ECRA Pool") runoff, which includes insurance and reinsurance that was either sold or non-renewed, are excluded from the aforementioned segments. The following tables present business segment financial information for Trenwick at September 30, 2002 and December 31, 2001 and for the three and nine months ended September 30, 2002 and 2001: September 30 December 31 2002 2001 ------------ ----------- Total assets: Reinsurance $ 2,145,201 $2,259,616 International operations 2,681,644 1,915,314 U.S. specialty program insurance 681,054 561,991 Lloyd's syndicates runoff and ECRA pool runoff 38,375 99,021 Unallocated 65,942 92,613 ------------ ----------- Total assets $ 5,612,216 $4,928,555 ============ ===========
Three Months Nine Months --------------------- ---------------------- 2002 2001 2002 2001 --------- --------- --------- --------- Total revenues: Reinsurance $ 110,472 $ 115,891 $ 341,154 $ 331,277 International operations 68,217 125,424 384,982 361,244 U.S. specialty program insurance 39,086 24,944 104,872 67,666 Lloyd's syndicates runoff and ECRA pool runoff 391 1,550 (1,550) 9,052 Unallocated 130 754 315 5,223 --------- --------- --------- --------- Total revenues $ 218,296 $ 268,563 $ 829,773 $ 774,462 ========= ========= ========= =========
-7-
Three Months Nine Months ---------------------- ---------------------- 2002 2001 2002 2001 --------- --------- --------- --------- Net income (loss): Reinsurance $ (59,398) $ (65,009) $ (32,009) $ (30,406) International operations (29,030) (16,706) (43,931) (56,889) U.S. specialty program insurance (12,442) 1,872 (4,800) (4,638) Lloyd's syndicates runoff and ECRA pool runoff (5,668) (7,763) (10,614) (9,978) Unallocated interest expense and subsidiary preferred share dividends (4,558) (8,315) (18,074) (26,696) Other unallocated (25,816) (186) (36,604) 607 Change in accounting principle -- -- (41,653) -- --------- --------- --------- --------- Net loss $(136,912) $ (96,107) $(187,685) $(128,000) ========= ========= ========= =========
Transactions between operating segments have been eliminated in consolidation. Note 5 Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2002 and 2001:
Three Months Nine Months ------------------------ -------------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ------------ Net loss available to common shareholders $ (137,210) $ (96,107) $ (187,983) $ (128,000) ========== ========== ========== ============ Weighted average shares outstanding - basic and diluted 36,781,973 36,855,579 36,794,471 36,810,031 ========== ========== ========== ============ Basic and diluted loss per common share $ (3.73) $ (2.61) $ (5.11) $ (3.48) ========== ========== ========== ============
For the three and nine months ended September 30, 2002 and 2001, 1,603,319; 1,603,319; 2,934,980 and 2,742,754, 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 nine months ended September 30, 2002, 1,365,181 share options were cancelled pursuant to the employee stock option exchange program. This voluntary program offered eligible employees 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 the new grant date, which is expected to be on or about December 16, 2002. Note 6 Underwriting Activities The components of premiums written and earned for the three and nine months ended September 30, 2002 and 2001 are as follows:
Three Months Nine Months -------------------------- -------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Assumed premiums written $ 116,136 $ 225,439 $ 482,268 $ 456,928 Direct premiums written 273,615 142,104 823,024 603,794 ----------- ----------- ----------- ----------- Gross premiums written 389,751 367,543 1,305,292 1,060,722 Ceded premiums written (207,445) (124,709) (542,081) (312,273) ----------- ----------- ----------- ----------- Net premiums written $ 182,306 $ 242,834 $ 763,211 $ 748,449 =========== =========== =========== ===========
-8-
Three Months Nine Months -------------------------- -------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Assumed premiums earned $ 152,304 $ 156,806 $ 457,333 $ 409,144 Direct premiums earned 233,991 190,813 749,401 537,802 ----------- ----------- ----------- ----------- Gross premiums earned 386,295 347,619 1,206,734 946,946 Ceded premiums earned (191,472) (107,757) (468,626) (279,738) ----------- ----------- ----------- ----------- Net premiums earned $ 194,823 $ 239,862 $ 738,108 $ 667,208 =========== =========== =========== ===========
Note 7 Convertible Preferred Shares On September 27, 2000, Trenwick assumed the benefits and obligations of LaSalle Re Holdings Limited under a $100,000 catastrophe equity put option. The catastrophe put option was amended and restated as of January 1, 2001 and amended as of January 25, 2002. As amended, the catastrophe equity put enabled Trenwick to raise up to $55,000 of equity, through the issue of convertible preferred shares to European Reinsurance Company of Zurich ("European Re"), a subsidiary of Swiss Reinsurance Company, in the event there was a qualifying catastrophic event or events occurring prior to January 1, 2002. As a result of the terrorist attacks of September 11, 2001, LaSalle Re Limited incurred in excess of $140,000 in catastrophe losses as defined under the option agreement and Trenwick delivered notice of exercise of the catastrophe equity put on March 28, 2002. On July 1, 2002, Trenwick commenced an arbitration proceeding seeking $55,000 in damages and other relief against European Re. The claims arose out of European Re's failure to meet its obligations under the catastrophe equity put. On September 6, 2002, the catastrophe put option was amended and restated and the pending arbitration proceedings were terminated. Under the terms of the second restated agreement, European Re purchased 550,000 of Trenwick's Series B Cumulative Perpetual Preferred Shares (the "Series B Shares") with a liquidation preference of $100 per share for an aggregate purchase price of $40,000. The Series B Shares bear cumulative dividends, payable quarterly in arrears, based upon the Series B Shares' Standard & Poor's rating at LIBOR plus a margin determined in accordance with the following schedule: Standard & Poor's Rating LIBOR Margin BBB- or above 3.75% BB+ 4.25% BB 4.50% BB- 4.75% Below BB- 6.00% These factors adjust upward by 0.25% on the third anniversary if the securities are still unrated, and upward by 0.50% on the fifth anniversary if they are still unrated. Also, if the Standard & Poor's rating is below BBB- on the fifth anniversary, the factors adjust upward by an additional 0.50%. The maximum adjustment based upon these circumstances is 0.75%. The Series B Shares are convertible into common shares of Trenwick after five years or upon the occurrence of a "special conversion event" at the greater of book value or the average thirty-day trading price of the common shares. Special conversion events are either the occurrence of a change in control without the written consent of the registered holders of more than 50% of the Series B shares outstanding ("Change in -9- Control Conversion Event"), or the failure of Trenwick to maintain a GAAP net worth equal to at least $225,000 for a period of more than sixty days ("Net Worth Conversion Event"). The conversion price of the Series B shares is the greater of 1) the liquidity factor times the average thirty day stock price preceding the conversion date, 2) the liquidity factor times book value per common share or 3) par value of a common share. The liquidity factor will be calculated as an amount equal to 0.8 if the conversion occurs within 60 days after a Change in Control Conversion Event or 1.0 if the conversion does not occur within 60 days after the occurrence of a Change in Control Conversion Event. Trenwick has the option to redeem the Series B Shares after the first anniversary of the issuance, paying an early redemption premium of $2.00 per share if redeemed before the second anniversary, and $1.00 per share if redeemed between the second and third anniversary. European Re will be able to transfer the Series B Shares six months after the date of purchase. The maximum number of Trenwick common shares that could be required to be issued upon conversion of the Series B Shares is 550,000,000 which would occur when both the book value of common stock and the average thirty-day trading price of the common shares were less than or equal to $0.10 per share. Trenwick currently has the authority to issue up to 150,000,000 preferred and common shares without prior authorization from the shareholders and the Board of Directors. Trenwick, therefore does not currently have the ability to control settlement of the Series B Shares and has therefore recorded them as temporary equity in the September 30, 2002 balance sheet. As of September 30, 2002, the Series B shares would be settled with 6,285,714 common shares upon conversion. The following table details how changes in the price of Trenwick's common shares or changes in book value would affect the settlement amounts:
Average market value of common shares Book value per share - -------------------------- -------------------------------------------------------------------------------------- $0.10-$0.50 $0.51-$1.00 $1.01-$2.00 $2.01-$5.00 $5.01-$10.00 $10.01-$15.00 ----------- ----------- ----------- ----------- ------------ ------------- $0.10-$0.50 550 - 110 108 - 55 54 - 28 27 - 11 11 - 6 5 - 4 $0.51-$1.00 108 - 55 108 - 55 54 - 28 27 - 11 11 - 6 5 - 4 $1.01-$2.00 54 - 28 54 - 28 54 - 28 27 - 11 11 - 6 5 - 4 $2.01-$5.00 27 - 11 27 - 11 27 - 11 27 - 11 11 - 6 5 - 4 $5.01-$10.00 11 - 6 11 - 6 11 - 6 11 - 6 11 - 6 5 - 4 $10.01-$15.00 5 - 4 5 - 4 5 - 4 5 - 4 5 - 4 5 - 4
Range of shares issuable upon conversion (in millions) -10- Note 8 Income Taxation Trenwick's U.S. operations incurred financial accounting losses in 1999 through 2001. Additionally, Trenwick's results during the first nine months of 2002 were less favorable than anticipated at the beginning of the year. In the absence of specific favorable factors, application of FASB Statement No. 109, and its subsequent interpretations require a 100% valuation allowance for any deferred tax asset when a company has cumulative financial accounting losses, excluding unusual items, over several years. Accordingly, in the third quarter of 2002, a 100% valuation allowance for the U.S. deferred tax asset was recorded, increasing our non-cash provision for income taxes and net loss for the third quarter of 2002 by $57.0 million. As of September 30, 2002, Trenwick has not recorded a valuation allowance against the U.K. operating losses on Lloyd's open years of account because presently, in management's judgment, it is more likely than not that these amounts will be realized from future operations. Management's judgment is based on its assessment of business plans and related projections of future taxable income that reflect significant assumptions about increased premium volume and improved rates and profitability and the ability to secure letters of credit or other funding sufficient to support the assumptions about increased premium volume and profitability. Additionally, management believes it has the ability to implement tax planning strategies in order to realize these assets. Such assumptions may be adversely affected by market conditions or Trenwick's ability to secure sufficient funding to support its underwriting operations. In the event that, in management's judgment, it is no longer more likely than not that its net operating losses will be realized from future operations, Trenwick will be required to record a valuation allowance against its remaining deferred income tax asset. Note 9 Accounting Standards Effective January 1, 2002, Trenwick adopted a new Financial Accounting Standards Board statement which amended the accounting for goodwill and other intangible assets. This new statement suspended systematic goodwill amortization and its implementation resulted in Trenwick's Bermuda holding company, LaSalle Re Holdings Limited, 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 prior to the reporting of results for the quarter ended June 30, 2002. As a result of these tests, 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. The following table presents the pro forma effect on net loss and loss per common share for the three and nine months ended September 30, 2001 had this accounting standard been effective January 1, 2001 as compared to net loss available to common shareholders and loss per common share for the three and nine months ended September 30, 2002.
Three Months Nine Months -------------------------- -------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Net loss available to common shareholders: Reported net loss available to common shareholders $ (137,210) $ (96,107) $ (187,983) $ (128,000) Add back: goodwill amortization -- (213) -- (638) Cumulative effect of change in accounting for goodwill -- -- (41,653) -- ----------- ----------- ----------- ----------- Adjusted net loss available to common shareholders $ (137,210) $ (95,894) $ (146,330) $ (127,362) =========== =========== =========== =========== BASIC AND DILUTED LOSS PER SHARE: Reported basic and diluted loss per share $ (3.73) $ (2.61) $ (5.11) $ (3.48) Add back: goodwill amortization -- (0.01) -- (0.02) Cumulative effect of change in accounting for goodwill -- -- (1.13) -- Adjusted basic and diluted ----------- ----------- ----------- ----------- loss per share $ (3.73) $ (2.60) $ (3.98) $ (3.46) =========== =========== =========== ===========
-11- Note 10 Credit Agreement Concurrent with the Trenwick/LaSalle business combination in September of 2000, Trenwick America Corporation and Trenwick Holdings Limited, Trenwick's U.S. and U.K. holding companies, entered into an amended and restated $490,000 credit agreement with various lending institutions. The credit agreement consisted of both a $260,000 revolving credit facility and a $230,000 letter of credit facility. The revolving credit facility was subsequently converted into a four-year term loan and repaid on June 17, 2002. The letter of credit facility may only be used to support the Lloyd's syndicate participations of Trenwick's subsidiaries. As of September 30, 2002, $226,000 of letters of credit remain outstanding under the credit facility. The letter of credit facility must be renewed on November 22, 2002 in order for Trenwick to continue to utilize the letters of credit now outstanding to support underwriting at Lloyd's in 2003. In the event that Trenwick is unable to renew the current letter of credit facility, obtain a replacement letter of credit facility, post sufficient collateral to support its Lloyd's underwriting activities or obtain an alternative form of Lloyd's capital support, it will be required to reduce or cease its underwriting activities at Lloyd's for the 2003 year of account. On November 4, 2002, Trenwick Managing Agents entered into an agreement with National Indemnity Company to provide Trenwick's Lloyd's Syndicate 839 up to $150,000 of premium capacity for the 2003 year of account. In addition, National Indemnity Company has agreed to provide a qualifying quota share reinsurance facility of up to $45,000 to Syndicate 839 for the 2003 year of account. The capital is to be applied to the aviation insurance segment of Syndicate 839's business. Trenwick paid to National Indemnity Company a $4,500 non-refundable fee in connection with the commitment of National Indemnity Company to provide capital to Syndicate 839 for the 2003 year of account. The fee was paid through an adjustment to the terms of National Indemnity Company's 2002 profit participation in Syndicate 839. On April 12, 2002, Trenwick, 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 to pledge its shares of LaSalle Re Holdings Limited and LaSalle 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 by 1% and added an additional .5% fee payable by Trenwick in the event -12- the letters of credit outstanding are not secured in accordance with the following schedule; September 30, 2002, 40%; June 30, 2003, 60%; and June 30, 2004, 80%. The credit agreement contains general covenants and restrictions as well as financial covenants relating to, among other things, Trenwick's minimum interest coverage, debt to capital leverage, minimum earned surplus, maintenance of a minimum A.M. Best Company rating of A- and tangible net worth. On October 18, 2002, A.M. Best Company lowered the financial strength ratings of Trenwick's operating subsidiaries below A-. The lowered A.M. Best Company ratings constitute an event of default under the credit facility. In addition, the increase in loss reserves and the establishment of a Trenwick deferred tax asset reserve in the third quarter of 2002 resulted in Trenwick violating the financial covenants requiring Trenwick to maintain a minimum tangible net worth of $525,000 and minimum risk-based capital on November 14, 2002. If Trenwick is unable to remedy the financial covenant violations within 30 days, a second event of default shall have occurred under the credit facility. On November 13, 2002, Trenwick, its subsidiaries and financial institutions holding a majority of the outstanding letters of credit under the credit facility executed a forbearance agreement with respect to the events of default arising from Trenwick's lowered A.M. Best Company ratings and financial covenant violations. In the forbearance agreement, the letter of credit providers agreed to refrain from enforcing their rights or remedies under the credit facility until November 22, 2002, or earlier if there is another default under the credit facility or the forbearance agreement, a third party exercises any right of action against Trenwick for a debt in excess of $5,000 or other material obligation or Trenwick takes an action which the letter of credit providers reasonably consider to be materially adverse to their interests. In consideration for the forbearance of the letter of credit providers, Trenwick agreed, among other things, to refrain from making certain payments or distributions and to facilitate a meeting of the letter of credit providers and Lloyd's. During the term of the forbearance agreement and thereafter, unless there is a waiver of the event of default and potential event of default under the credit facility, under the terms of its guaranty Trenwick is prohibited from declaring or paying any dividends on the outstanding common and preferred shares of Trenwick and its subsidiaries. In addition, Trenwick is not allowed to redeem or repurchase its capital stock so long as the event of default under the credit facility continues. The event of default under the credit facility also permits the letter of credit providers to demand that the $226,000 outstanding letters of credit be secured with an equal amount of cash upon expiration of the forbearance agreement. At this time, Trenwick does not have sufficient available liquidity to provide the necessary cash collateral if the letter of credit providers demand it. The continuation of an event of default under the credit facility, the restrictions on Trenwick's ability to pay dividends to preferred and common shareholders and the potential demand for cash collateral by the letter of credit providers may cause additional events of default to occur under the instruments governing the outstanding indebtedness and preferred shares of Trenwick and its subsidiaries. -13- Trenwick's ability to refinance its existing letter of credit 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. During the past year, Trenwick's senior debt and preferred share ratings have been downgraded significantly by Standard & Poor's Corporation and Moody's Investors Service. At this time, Trenwick's senior debt rating from Standard & Poor's Corporation is CCC+ and from Moody's Investors Service is B3. Trenwick's ability to refinance its outstanding letter of credit obligations, as well as the cost of such borrowings, could be adversely affected by these ratings downgrades or if its ratings were downgraded further. Should Trenwick's subsidiaries be unable to meet any letter of credit reimbursement obligations as they fall due, and such repayments are not refinanced, Trenwick would become liable for such repayments under the terms of guarantees under the credit agreement. No liability for any such amounts has been reflected in Trenwick's financial statements. Because Trenwick America Corporation, Trenwick Holdings Limited and Trenwick are holding companies, their principal source of funds consists of permissible dividends, tax allocation payments and other statutorily permissible payments from their respective operating subsidiaries. As a result of losses incurred by Trenwick's operating subsidiaries, their cash distribution capacities have been significantly reduced. Trenwick is currently in discussion with the letter of credit providers regarding the current and potential future events of default and letter of credit financing for Trenwick's participation at Lloyd's for the 2003 underwriting year. If the current and potential future events of default are not waived, the letters of credit are not renewed for the 2003 Lloyd's underwriting year or the letter of credit providers demand cash collateral, there is substantial doubt as to Trenwick's ability to continue underwriting at Lloyd's or continue as a going concern. Trenwick and/or one or more of its subsidiaries may be forced to seek protection from creditors through proceedings commenced in Bermuda and other jurisdictions including the United States. Note 11 Related Party Transaction On August 27, 2002, Trenwick entered into a consulting agreement with W. Marston Becker, the Vice Chairman of Trenwick's Board of Directors, who assumed the position of Trenwick's Acting Chairman and Acting Chief Executive Officer. In consideration for such services, Trenwick agreed to pay Mr. Becker a consulting fee of $50 per month. The consulting agreement can be terminated by mutual agreement or upon 30 days prior written notice by either party. Trenwick incurred consulting fees of approximately $75 during the quarter ended September 30, 2002 related to this consulting agreement. -14- Note 12 Subsequent Events On October 25, 2002, Trenwick America Reinsurance Corporation entered into an underwriting facility with Chubb Re, Inc. The underwriting facility permits Trenwick to underwrite up to $400,000 of U.S. reinsurance business on behalf of Chubb Re, Inc. in the remainder of 2002 and 2003. Chubb Re, Inc. retains final underwriting authority and claims authority with respect to all business generated through the underwriting facility. Chubb Re, Inc. will receive one-third and Trenwick will receive two-thirds of the profits generated by the underwriting facility. Chubb Re, Inc. will receive a 5% fronting fee on two-thirds of the business underwritten through the underwriting facility. In addition, Trenwick will reinsure Chubb Re, Inc. for 100% of the losses incurred under the underwriting facility in excess of the premiums collected and investment income earned in the underwriting facility. To secure its reinsurance obligations to Chubb Re, Inc., Trenwick has posted a $50,000 security deposit with Chubb Re, Inc. and all premiums collected from the facility shall be paid to Chubb Re, Inc. On November 4, 2002, Trenwick Managing Agents entered into an agreement with National Indemnity Company to provide Trenwick's Lloyd's Syndicate 839 up to $150,000 of premium capacity for the 2003 year of account. In addition, National Indemnity Company has agreed to provide a qualifying quota share reinsurance facility of up to $45,000 to Syndicate 839 for the 2003 year of account. The capital is to be applied to the aviation insurance segment of Syndicate 839's business. Trenwick paid National Indemnity Company a $4,500 non-refundable fee in connection with the commitment of National Indemnity Company to provide capital to Syndicate 839 for the 2003 year of account. The fee was paid through an adjustment to the terms of National Indemnity Company's 2002 profit participation in Syndicate 839. -15- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion highlights material factors affecting the results of operations of Trenwick Group Ltd. ("Trenwick") for the three and nine months ended September 30, 2002 and 2001. 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 Annual Report on Form 10-K of Trenwick for the year ended December 31, 2001, including the audited financial statements and notes thereto as well as the discussions of critical accounting policies and quantitative and qualitative disclosure about market risk. Overview Trenwick is a Bermuda holding company headquartered in Hamilton, Bermuda whose principal subsidiaries underwrite specialty insurance and reinsurance. Trenwick was formed in 1999 to acquire Trenwick Group Inc., LaSalle Re Holdings Limited and LaSalle Re Limited ("LaSalle"). The transaction was completed on September 27, 2000. Shareholders of Trenwick Group Inc., LaSalle Re Holdings Limited and LaSalle Re Limited exchanged their shares on a one-for-one basis for newly-issued shares of Trenwick (the "Trenwick/LaSalle business combination"). Trenwick operated three principal businesses through the first nine months of 2002: - - Reinsurance, which includes U.S. treaty reinsurance written principally through its U.S. subsidiary, Trenwick America Reinsurance Corporation; - - International operations, which consists of international specialty insurance primarily written through its U.K. subsidiary, Trenwick International Limited, as well as Lloyd's insurance and reinsurance written principally through its U.K. subsidiary, Trenwick Managing Agents Limited (formerly Chartwell Managing Agents Limited); and - - United States specialty program insurance, written principally through The Insurance Corporation of New York. On October 30, 2002, Trenwick announced that it would cease underwriting its United States specialty program insurance effective immediately. Lloyd's syndicates runoff and Excess Casualty Reinsurance Association Pool ("ECRA Pool") runoff, which includes insurance and reinsurance that was either sold or non-renewed, are excluded from the aforementioned segments. Effective April 1, 2002, Trenwick sold the in-force property catastrophe reinsurance business of its subsidiary, LaSalle to Endurance Specialty Insurance, Ltd. ("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 will have 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 nine month results are $10.7 million in ceding commissions earned on the quota share with Endurance, as well as $6.9 million in amortization of acquisition costs on the related assumed business. -16- On October 25, 2002, Trenwick America Reinsurance Corporation entered into an underwriting facility with Chubb Re, Inc. The underwriting facility permits Trenwick to underwrite up to $400 million of U.S. reinsurance business on behalf of Chubb Re, Inc. in the remainder of 2002 and 2003. Chubb Re, Inc. retains final underwriting authority and claims authority with respect to all business generated through the underwriting facility. Chubb Re, Inc. will receive one-third and Trenwick will receive two-thirds of the profits generated by the underwriting facility. Chubb Re, Inc. will receive a 5% fronting fee on two-thirds of the business underwritten through the underwriting facility. In addition, Trenwick will reinsure Chubb Re, Inc. for 100% of the losses incurred under the underwriting facility in excess of the premiums collected and investment income earned in the underwriting facility. To secure its reinsurance obligations to Chubb Re, Inc., Trenwick has posted a $50 million security deposit with Chubb Re, Inc. and all premiums collected from the facility shall be paid to Chubb Re, Inc. On September 19, 2002, Trenwick Managing Agents Limited entered into an agreement with National Indemnity Company, a member of the Berkshire Hathaway group of insurance companies, to increase the total premium capacity of Trenwick Managing Agents' Syndicate 839 at Lloyd's for the 2002 year of account. National Indemnity Company provided (pound)62.5 million ($99.3 million) in premium capacity to Trenwick's Syndicate 839 through (pound)25.0 million ($39.7 million) of additional Lloyd's funding and (pound)78.8 million ($125.1 million) in premium capacity through a qualifying quota share reinsurance facility. In return for its capital support, National Indemnity Company will receive a 41.4% share of the net underwriting result of Syndicate 839 for the 2002 year of account before ceding commissions and profit sharing. On November 4, 2002, Trenwick Managing Agents entered into an agreement with National Indemnity Company to provide Trenwick's Lloyd's Syndicate 839 up to $150.0 million of premium capacity for the 2003 year of account. In addition, National Indemnity Company has agreed to provide a qualifying quota share reinsurance facility of up to $45 million to Syndicate 839 for the 2003 year of account. The capital is to be applied to the aviation insurance segment of Syndicate 839's business. Trenwick paid to National Indemnity Company a $4.5 million non-refundable fee in connection with the commitment of National Indemnity Company to provide capital to Syndicate 839 for the 2003 year of account. The fee was paid through an adjustment to the terms of National Indemnity Company's 2002 profit participation in Syndicate 839. Trenwick's subsidiaries have been assigned the following financial strength ratings by Standard & Poor's and A.M. Best: Standard Reinsurance: & Poor's A.M. Best Trenwick America Reinsurance Corporation BB- B- LaSalle Re Limited BB B- International Operations: Trenwick International B+ B- United States Specialty Program Insurance: The Insurance Corporation of New York BB- B- Dakota Specialty Insurance Company BB- B- Chartwell Insurance Company B+ C++ -17- All of Trenwick Managing Agents Limited's syndicates enjoy the benefit of the ratings of Lloyd's which is rated "A-" (Excellent) by A.M. Best Company and has an A financial strength rating from Standard & Poor's. The ratings listed above 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. Mr. W. Marston Becker, who was appointed Acting Chairman and Acting Chief Executive Officer of Trenwick in August 2002, has certified Trenwick's Form 10-Q Report for the third quarter of 2002 in accordance with the requirements of Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. Because Mr. Becker has been employed by Trenwick as its Acting Chairman and Acting Chief Executive Officer for less then three months, Trenwick emphasizes that his signature is subject to all of the qualifications and precautionary statements incorporated in this Form 10-Q Report. Mr. Becker has not been at Trenwick long enough to have conducted an in-depth review of Trenwick's accounting and reserving practices. However, Mr. Becker has initiated an in-depth review of Trenwick's reserving practices, which is expected to be completed in the fourth quarter of the current fiscal year. Management notes that Trenwick currently has no information that the current reserve review will result in any material adjustments to Trenwick's loss reserves. If the current reserve review were to reveal any material adjustments necessary to Trenwick's loss reserves, Trenwick would promptly disclose such adjustments. Results of Operations - Three Months Ended September 30, 2002 and 2001 2002 2001 Change --------- --------- --------- (in thousands) Underwriting loss $ (87,823) $(120,851) $ 33,028 Net investment income 24,401 30,770 (6,369) Interest expense and subsidiary preferred share dividends (8,289) (9,601) 1,312 General and administrative expenses (6,005) (3,845) (2,160) Foreign currency losses (3,805) (1,396) (2,409) Other income, net 2,191 1,233 958 --------- --------- --------- Pre-tax operating loss (79,330) (103,690) 24,360 Applicable income taxes (benefit) 55,695 (9,281) 64,976 --------- --------- --------- Operating loss (135,025) (94,409) (40,616) Net realized investment losses, net of income taxes (1,887) (1,698) (189) --------- --------- --------- Net loss (136,912) (96,107) (40,805) Dividends on convertible preferred shares 298 -- 298 --------- --------- --------- Net loss available to common shareholders $(137,210) $ (96,107) $ (41,103) ========= ========= ========= Trenwick recorded an operating loss of $135.0 million in the three months ended September 30, 2002 compared to an operating loss of $94.4 million recorded in the three months ended September 30, 2001. Trenwick's operating loss for the third quarter of 2002 resulted principally from $90.7 million of loss reserve increases recorded in Trenwick's United States operating -18- subsidiaries and Trenwick International Limited. The loss reserve increases emanate from reported loss activity with related increases in incurred but not reported reserves, predominantly for accident years 1997 through 2000, as well as a reassessment of reserve levels. In addition, Trenwick fully reserved its $57.0 million U.S. net deferred tax asset in the third quarter of 2002, when Trenwick determined that its cumulative financial accounting losses do not currently support a position that Trenwick will be able to realize the tax benefits of past losses in the future. The operating loss in the third quarter of 2001 was mainly due to the recording of catastrophe losses of $99.0 million arising from the September 11th terrorist attacks. Underwriting loss Trenwick produced an underwriting loss of $87.8 million in the third quarter of 2002 compared to an underwriting loss of $120.9 million in the third quarter of 2001. Details of underwriting income and loss are produced below:
2002 2001 Change --------- --------- --------- (in thousands) Net premiums earned $ 194,823 $ 239,862 $ (45,039) --------- --------- --------- Claims and claims expenses incurred 192,947 264,344 (71,397) Acquisition costs and underwriting expenses 89,699 96,369 (6,670) --------- --------- --------- Total expenses 282,646 360,713 (78,067) --------- --------- --------- Net underwriting loss $ (87,823) $(120,851) $ 33,028 ========= ========= ========= Loss ratio 99.0% 110.2% (11.2)% Underwriting expense ratio 46.0% 40.2% 5.8% Combined ratio 145.0% 150.4% (5.4)%
The underwriting loss of $87.8 million in the third quarter of 2002 represented a $33.0 million improvement compared to the third quarter of 2001. The principal cause of the improved underwriting result in 2002 was the absence of significant catastrophe losses arising from the September 11th terrorist attacks recorded in the third quarter of 2001 offset in part by the $90.7 million of loss reserve increases recorded in Trenwick's United States operating subsidiaries and Trenwick International Limited, combined with the effects of Trenwick's agreement with Berkshire Hathaway, which served to increase the underwriting loss for the third quarter of 2002 by $5.5 million. The decrease in the combined ratio in the third quarter of 2002 compared to the third quarter of 2001 resulted mainly from the decrease in losses previously noted. Premiums written Gross premiums written for the three months ended September 30, 2002 were $389.8 million compared to $367.5 million for the three months ended September 30, 2001, an increase of $22.2 million or 6.0%. Details of gross premiums written are provided below: 2002 2001 Change --------- --------- --------- (in thousands) Worldwide property catastrophe reinsurance $ (1,019) $ 36,865 $ (37,884) U.S. treaty reinsurance 101,268 80,567 20,701 --------- --------- --------- Total reinsurance 100,249 117,432 (17,183) International specialty insurance 35,527 55,003 (19,476) Lloyd's syndicates continuing 142,277 112,965 29,312 --------- --------- --------- Total international operations 177,804 167,968 9,836 U.S. specialty program insurance 110,638 78,536 32,102 Lloyd's syndicates runoff 1,060 3,607 (2,547) --------- --------- --------- Gross premiums written $ 389,751 $ 367,543 $ 22,208 ========= ========= ========= -19- Worldwide property catastrophe reinsurance gross premium writings for the three months ended September 30, 2002 decreased by $37.9 million, or 102.8% below the three months ended September 30, 2001 due to the sale of LaSalle's in-force reinsurance as of April 1, 2002. The increase in U.S. treaty reinsurance gross premiums written in the third quarter of 2002 of $20.7 million compared to the third quarter of 2001 was mainly attributable to increasing rates on renewal treaties. The decrease in international specialty insurance gross premiums written in the third quarter of 2002 compared to the third quarter of 2001 of $55.0 million is attributable to the transfer of treaty, professional indemnity and financial institutions business to Trenwick Managing Agents, a result of the restructuring of Trenwick's international operations. The increase in Lloyd's syndicates continuing gross written premiums of $29.3 million for the third quarter of 2002 compared to the third quarter of 2001 was due to an increase in new business, which includes the addition of the treaty, professional indemnity and financial institutions business from the international specialty insurance segment as noted above, as well as to rate increases on aviation business. The increase in U.S. specialty program insurance gross premiums in the third quarter of 2002 of $32.1 million compared to the third quarter of 2001 was due to the addition of new programs as well as rate increases on new and renewal policies attributed to improving market conditions. Premiums earned Net premiums earned for the three months ended September 30, 2002 were $194.8 million compared to $239.9 million for the same period in 2001. Details of premiums earned are provided below: 2002 2001 Change --------- --------- --------- (in thousands) Gross premiums written $ 389,751 $ 367,543 $ 22,208 Change in gross unearned premiums (3,456) (19,924) 16,468 --------- --------- --------- Gross premiums earned 386,295 347,619 38,676 --------- --------- --------- Gross premiums ceded (207,445) (124,709) (82,736) Change in ceded unearned premiums 15,973 16,952 (979) --------- --------- --------- Ceded premiums earned (191,472) (107,757) 83,715 --------- --------- --------- Net premiums earned $ 194,823 $ 239,862 $ (45,039) ========= ========= ========= Gross premiums ceded for the three months ended September 30, 2002 were $207.4 million compared to $124.7 million for the same period in 2001. The increase in premiums ceded during 2002 was due in part to $93.8 million of cessions made to Berkshire Hathaway under its agreements with Trenwick's Lloyd's Syndicate 839. The increase in ceded premiums earned was also attributable to the transactions with Berkshire Hathaway, under which ceded premiums earned for the three months ended September 30, 2002 were $41.2 million. -20- Claims and claims expenses Claims and claims expenses for the three months ended September 30, 2002 were $192.9 million, a decrease of $71.4 million compared to claims and claims expenses of $264.3 million for the same period in 2001. Trenwick recorded an increase in its loss reserves of $90.7 million in its United States operating subsidiaries and Trenwick International in the third quarter of 2002. The loss reserve increase emanated from reported loss activity, with related increases in incurred but not reported loss reserves, predominantly for accident years 1997 through 2000, as well as a reassessment of reserve levels. The claims and claims expenses incurred by Trenwick in the third quarter of 2001 arose from the September 11th terrorist attacks. Additionally, claims and claims expenses were reduced by approximately $30.0 million of losses ceded to Berkshire Hathaway under its agreements with Trenwick's Lloyd's Syndicate 839 during the three months ended September 30, 2002. Underwriting expenses 2002 2001 Change ------- ------- ------- (in thousands) Policy acquisition costs $69,577 $75,017 $(5,440) Underwriting expenses 20,122 21,352 (1,230) ------- ------- ------- Total underwriting expenses $89,699 $96,369 $(6,670) ======= ======= ======= Underwriting expense ratio 46.0% 40.2% 5.8% ======= ======= ======= Total underwriting expenses, comprising policy acquisition costs and underwriting expenses, for the third quarter of 2002 decreased by $6.7 million compared to underwriting expenses for the third quarter of 2001. The decrease was primarily attributable to the cession of $7.4 million of policy acquisition costs to Berkshire Hathaway during the quarter ended September 30, 2002 under its agreement with Trenwick's Lloyd's Syndicate 839. Total underwriting expenses as a percentage of net premiums earned, or the underwriting expense ratio, was 46.0% for the three months ended September 30, 2002 compared to 40.2% for the same period in 2001. The increase in the underwriting expense ratio occurred principally due to the decrease in premiums earned in the 2002 third quarter as compared to the 2001 third quarter as previously discussed. Underwriting expenses for the three months ended September 30, 2002 as a percentage of earned premium was 10.3%, an increase of 1.4% from 8.9% for the same period in 2001. The increase in the underwriting expense ratio was a result of the decrease in earned premiums. Net investment income
2002 2001 Change ----------- ----------- ----------- (in thousands) Average invested assets $ 2,240,368 $ 2,228,875 $ 11,493 Average annualized yields 4.97% 6.06% (1.09)% Investment income - portfolio $ 27,860 $ 33,782 $ (5,922) Investment income - non-portfolio (189) 724 (913) Investment expenses (3,270) (3,736) 466 ----------- ----------- ----------- Net investment income $ 24,401 $ 30,770 $ (6,369) =========== =========== ===========
Net investment income for the three months ended September 30, 2002 was $24.4 million compared to $30.8 million for the same period in 2001. The decrease in net investment income in the third quarter of 2002 was due to the decrease in invested assets in 2002, a result of Trenwick's repayment of its term loan facility during the second quarter of 2002, combined with a continued -21- decline in market yields during 2002. Investment expenses for the third quarters of both 2002 and 2001 includes interest expense on funds withheld of $2.3 million and $2.9 million, respectively, under the terms of stop loss reinsurance agreements purchased by Trenwick America Reinsurance Corporation prior to 2001. Interest expense and subsidiary preferred share dividends Interest expense and subsidiary preferred share dividends were $8.3 million for the third quarter of 2002, a decrease of $1.3 million from the same period in 2001. The decrease is a result of the repayment of Trenwick's term loan facility during the second quarter of 2002, offset in part by an increase in the rate charged for maintaining letters of credit to support Trenwick's operations at Lloyd's. General and administrative expenses General and administrative expenses were $6.0 million for the third quarter of 2002, an increase of $2.2 million from the same period in 2001. The increase in 2002 is primarily the result of non-recurring consulting fees incurred in 2002 in connection with the exploration of strategic alternatives for Trenwick's operations. Foreign currency losses Trenwick recorded foreign currency losses of $3.8 million for the three months ended September 30, 2002, compared to foreign currency losses of $1.4 million for the three months ended September 30, 2001 primarily due to the increase in the value of the British pound relative to the U.S. dollar during the third quarter of 2002. Other income, net Other income, net increased to $2.2 million for the third quarter of 2002, a $1.0 million increase over the same period in 2001, primarily a result of an increase in equity in earnings of managing general agencies through which Trenwick wrote its U.S. specialty program insurance business. Non-operating income and expenses Net realized losses on investments, net of applicable income taxes, were $1.9 million during the three months ended September 30, 2002, compared to net realized losses of $1.7 million for the three months ended September 30, 2001. The 2002 third quarter losses were a result of actions taken to reposition the investment portfolio into higher quality fixed income securities, while the 2001 third quarter losses were a result of losses on the sale of equity securities and the write-down of certain investments. Results of Operations - Nine Months Ended September 30, 2002 and 2001
2002 2001 Change --------- --------- --------- (in thousands) Underwriting loss $(137,743) $(225,333) $ 87,590 Net investment income 81,541 96,141 (14,600) Interest expense and subsidiary preferred share dividends (29,106) (30,054) 948 General and administrative expenses (13,981) (11,449) (2,532) Foreign currency losses (4,965) (2,932) (2,033) Other income, net 7,829 3,285 4,544 --------- --------- --------- Pre-tax operating loss (96,425) (170,342) 73,917 Applicable income taxes (benefit) 46,151 (37,190) 83,341 --------- --------- --------- Operating loss (142,576) (133,152) (9,424) Net realized investment gains, net of income taxes 3,552 7,886 (4,334) Restructuring costs, net of income taxes -- (2,734) 2,734 Loss on sale of LaSalle's in-force reinsurance business before commission income on quota share contract (7,008) -- (7,008) Cumulative effect of change in accounting principle (41,653) -- (41,653) --------- --------- --------- Net loss (187,685) (128,000) (59,685) Dividends on convertible preferred shares 298 -- 298 --------- --------- --------- Net loss available to common shareholders $(187,983) $(128,000) $ (59,983) ========= ========= =========
-22- Trenwick recorded an operating loss of $142.6 million in the nine months ended September 30, 2002 compared to an operating loss of $133.2 million recorded in the nine months ended September 30, 2001. The greater loss in 2002 is principally the result of the establishment of a reserve of $57.0 million against Trenwick's U.S. deferred tax asset during the third quarter of 2002, $90.7 million of loss reserve increases recorded in Trenwick's United States operating subsidiaries and Trenwick International Limited in the third quarter of 2002 and $23.0 million of additional September 11th loss reserves recorded at LaSalle Re Limited in the first quarter of 2002. Trenwick's third quarter loss reserve increases resulted from reported loss activity with related increases in incurred but not reported reserves, predominantly for accident years 1997 through 2000, as well as a reassessment of reserve levels. Trenwick's valuation reserve on its U.S. deferred tax asset in the third quarter of 2002 occurred when Trenwick determined that its cumulative financial accounting losses do not currently support a position that Trenwick will be able to realize the tax benefits of past losses in the future. The operating loss in the first nine months of 2001 was mainly due to $99.0 million of September 11th catastrophe losses and $76.7 million of loss reserve strengthening recorded in the second quarter of 2001. Underwriting loss Trenwick produced an underwriting loss of $137.7 million in the first nine months of 2002 compared to an underwriting loss of $225.3 million for the same period of 2001. Details of underwriting income and loss follow:
2002 2001 Change --------- --------- --------- (in thousands) Net premiums earned $ 738,108 $ 667,208 $ 70,900 --------- --------- --------- Claims and claims expenses incurred 594,549 638,176 (43,627) Acquisition costs and underwriting expenses 281,302 254,365 26,937 --------- --------- --------- Total expenses 875,851 892,541 (16,690) --------- --------- --------- Net underwriting loss $(137,743) $(225,333) $ 87,590 ========= ========= ========= Loss ratio 80.6% 95.6% (15.0)% Underwriting expense ratio 38.1% 38.1% -- Combined ratio 118.7% 133.7% (15.0)%
The underwriting loss of $137.7 million for the first nine months of 2002 represented a $87.6 million improvement compared to the same period of 2001. The underwriting loss incurred in the first nine months of 2001 included approximately $118.4 million of unusual catastrophe losses, including $99.0 million related to the September 11th terrorist attacks. The improvement in the first nine months of 2002 as compared to the same period in 2001 is primarily the result of the absence of catastrophes in 2002, offset in part by the inclusion of an additional $23.6 million of -23- losses recorded related to the September 11th terrorist attacks. Additionally, loss reserve strengthening of $163.6 million was recorded during the first nine months of 2002 as compared to $76.7 million of loss reserve strengthening during the same period of 2001. The decrease in the combined ratio for the nine months of 2002 compared to the nine months of 2001 resulted mainly from the decrease in catastrophe losses for 2002 as previously noted. Premiums written Gross premiums written for the nine months ended September 30, 2002 were $1.3 billion compared to $1.1 billion for the nine months ended September 30, 2001, a increase of $244.6 million or 23.1%. Details of gross premiums written are provided below:
2002 2001 Change ----------- ----------- ----------- (in thousands) Worldwide property catastrophe reinsurance $ 106,978 $ 131,499 $ (24,521) U.S. treaty reinsurance 303,529 242,665 60,864 ----------- ----------- ----------- Total reinsurance 410,507 374,164 36,343 International specialty insurance 132,288 174,914 (42,626) Lloyd's syndicates continuing 451,977 285,349 166,628 ----------- ----------- ----------- Total international operations 584,265 460,263 124,002 U.S. specialty program insurance 311,547 222,037 89,510 Lloyd's syndicates runoff (1,027) 4,258 (5,285) ----------- ----------- ----------- Gross premiums written $ 1,305,292 $ 1,060,722 $ 244,570 =========== =========== ===========
Worldwide property catastrophe reinsurance gross premium writings for the nine months ended September 30, 2002 decreased by $24.5 million, or 18.6% from the nine months ended September 30, 2001 due to the sale of LaSalle Re's in-force reinsurance as of April 1, 2002. The increase in U.S. treaty reinsurance gross premiums written in 2002 of $60.9 million compared to 2001 was mainly attributable to increasing rates on renewal treaties. The decrease in international specialty insurance gross premiums written for the first nine months of 2002 compared to the same period in 2001 of $174.9 million is attributable to the transfer of treaty, professional indemnity and financial institutions business to Trenwick Managing Agents, a result of the restructuring of Trenwick's international operations, offset in part by increases in liability premiums. The increase in Lloyd's syndicates continuing gross written premiums for the first nine months of 2002 compared to $285.3 million in the nine months of 2001 was due to both the addition of the treaty, professional indemnity and financial institutions business from the international specialty insurance segment as noted above as well as to rate increases on aviation business. The increase in U.S. specialty program insurance gross premiums of $89.5 million in the first nine months of 2002 compared to the same period in 2001 was due to increased volume on two of its larger programs combined with the addition of ten new programs in 2002. Premiums earned Net premiums earned for the nine months ended September 30, 2002 were $738.1 million compared to $667.2 million for the same period in 2001. Details of premiums earned are provided below: -24- 2002 2001 Change ----------- ----------- ----------- (in thousands) Gross premiums written $ 1,305,292 $ 1,060,722 $ 244,570 Change in gross unearned premiums (98,558) (113,776) 15,218 ----------- ----------- ----------- Gross premiums earned 1,206,734 946,946 259,788 ----------- ----------- ----------- Gross premiums ceded (542,081) (312,273) (229,808) Change in ceded unearned premiums 73,455 32,535 40,920 ----------- ----------- ----------- Ceded premiums earned (468,626) (279,738) (188,888) ----------- ----------- ----------- Net premiums earned $ 738,108 $ 667,208 $ 70,900 =========== =========== =========== Gross premiums ceded for the nine months ended September 30, 2002 were $542.1 million compared to $312.3 million for the same period in 2001. The increase in gross premiums ceded of $229.8 million is attributed to the cession of $93.8 million to Berkshire Hathaway under its agreements with Trenwick's Lloyd's Syndicate 839 as well as to the cession of $68.8 million to the 100% quota share contract effected in connection with the sale of LaSalle's in-force business. The remainder of the increase in gross premiums ceded resulted from the increase in gross premiums written, coupled with reinsurance programs designed by Trenwick to control risk levels relative to its capitalization. Claims and claims expenses Claims and claims expenses for the nine months ended September 30, 2002 were $594.6 million, a decrease of $43.6 million compared to claims and claims expenses of $638.2 million for the same period in 2001. The decrease in claims and claims expenses in 2002 was principally due to the absence in 2002 of claims and claims expenses recorded in the third quarter of 2001 in connection with the September 11th terrorist attacks and the increase in loss reserves recorded in the second quarter of 2001 in connection with deterioration in indicated loss ratios for prior accident years in the U.S. treaty reinsurance and U.S. specialty program insurance segments. The decrease in the first three quarters of 2002 in claims and claims expenses was offset in part by the $90.7 million increase in loss reserves in its United States operating subsidiaries and Trenwick International Limited in the third quarter of 2002 and the additional $23.6 million of loss reserves recorded in the first quarter of 2002 in connection with the September 11th terrorist attacks. The third quarter 2002 loss reserve increase in Trenwick's U.S. operating subsidiaries and Trenwick International Limited emanate from reported loss activity, with related increases in incurred but not reported loss reserves, predominantly for accident years 1997 through 2000, as well as a reassessment of reserve levels. Underwriting expenses 2002 2001 Change -------- -------- -------- (in thousands) Policy acquisition costs $217,492 $197,473 $ 20,019 Underwriting expenses 63,810 56,892 6,918 -------- -------- -------- Total underwriting expenses $281,302 $254,365 $ 26,937 ======== ======== ======== Underwriting expense ratio 38.1% 38.1% -- ======== ======== ======== Total underwriting expenses, comprising policy acquisition costs and underwriting expenses, for the first nine months of 2002 increased by $26.9 million compared to underwriting expenses for the same period in 2001. The increase was attributable to the increase in premium volume as previously discussed as well as premium levies from Lloyd's which are new for 2002. Total underwriting expenses as a percentage of net premiums earned, or the underwriting expense ratio, was 38.1% for the nine months ended September 30, 2002 unchanged from the same period in 2001. -25- Underwriting expenses for the nine months ended September 30, 2002 as a percentage of earned premium were 8.6%, relatively unchanged from 8.5% for the same period in 2001. Net investment income
2002 2001 Change ----------- ----------- ----------- (in thousands) Average invested assets $ 2,283,358 $ 2,236,609 $ 46,749 Average annualized yields 5.41% 6.30% (0.89)% Investment income - portfolio $ 92,701 $ 105,711 $ (13,010) Investment income - non-portfolio (317) 1,938 (2,255) Investment expenses (10,843) (11,508) 665 ----------- ----------- ----------- Net investment income $ 81,541 $ 96,141 $ (14,600) =========== =========== ===========
Net investment income for the nine months ended September 30, 2002 was $81.5 million compared to $96.1 million for the same period in 2001. The decrease in net investment income in the first nine months of 2002 was due to the continued overall decline in market yields during the first nine months of 2002. Investment expenses for the first nine months of 2002 and 2001 included interest expense on funds withheld of $7.6 million and $8.5 million, respectively, under the terms of stop loss reinsurance agreements purchased by Trenwick America Reinsurance Corporation prior to 2001. Interest expense and subsidiary preferred share dividends Interest expense and subsidiary preferred share dividends were $29.1 million for the first nine months of 2002, a decrease of $1.0 million from the same period in 2001. The decrease resulted from the repayment of Trenwick's term loan facility in the second quarter of 2002, offset in part by an increase in fees related to maintaining letters of credit to support Trenwick's operations at Lloyd's. General and administrative expenses General and administrative expenses were $14.0 million for the first nine months of 2002, an increase of $2.5 million over the same period in 2001. The increase in general and administrative expenses is attributed to non-recurring consulting fees incurred in connection with the exploration of Trenwick's strategic alternatives. Foreign currency losses Trenwick recorded foreign currency losses of $5.0 million for the nine months ended September 30, 2002, compared to $2.9 million of losses for the nine months ended September 30, 2001. The increase is primarily due to the increase in the value of the British pound relative to the U.S. dollar during 2002. Other income, net Other income, net increased to $7.8 million for the first nine months of 2002, a $4.5 million increase over the same period in 2001, primarily a result of an increase in equity in earnings of managing general agencies through which Trenwick underwrote its U.S. specialty program insurance business. Non-operating income and expenses Net realized gains on investments, net of applicable income taxes, were $3.6 million during the nine months ended September 30, 2002, compared to net realized gains of $7.9 million for the nine months ended September 30, 2001. The 2001 gains reflect actions taken to reposition -26- Trenwick's debt security portfolio, partially offset by losses recognized on the sale of equity securities. Cumulative effect of change in accounting principle Trenwick adopted Statement of Financial Accounting Standards No. 142 effective January 1, 2002. This new statement suspended systematic goodwill amortization and required Trenwick's Bermuda holding company, LaSalle Re Holdings Limited to credit the negative goodwill balance of $11.6 million to operations as of January 1, 2002 as a cumulative effect of an accounting change. The statement also required that the remaining goodwill balance be tested for impairment under either market value or cash flow tests. Trenwick conducted both market value and cash flow tests and, as a result, recorded a $53.2 million write off of all of Trenwick's remaining goodwill. These transactions increased Trenwick's net loss in the first nine months of 2002 by a net amount of $41.7 million and were recorded as a cumulative effect of change in accounting principle. Liquidity and Capital Resources As of September 30, 2002, Trenwick's consolidated investments and cash totaled $2.4 billion, a slight increase from the balance of $2.3 billion at December 31, 2001. The cost of Trenwick's equity securities was $4.6 million less than fair value at September 30, 2002 and was less than fair value by $6.8 million at December 31, 2001. The fair value of Trenwick's debt securities exceeded amortized cost by $44.9 million at September 30, 2002 and by $34.6 million at December 31, 2001. As of September 30, 2002, Trenwick's consolidated common shareholders' equity totaled $321.9 million, or $8.75 per common share, compared to $498.3 million, or $13.52 per common share at December 31, 2001. The decrease in common shareholders' equity resulted mainly from the increase in loss reserves and establishment of a deferred tax valuation reserve in the third quarter of 2002 combined with the write-down of all of Trenwick's goodwill from the Trenwick-LaSalle business combination completed in 2000 as a result of the adoption of a new accounting standard. Cash provided by Trenwick's operating activities for the nine months ended September 30, 2002 was $92.7 million compared to cash provided by Trenwick's operating activities of $33.9 million in the comparable period of 2001. The increase in cash flow from operations was due primarily to an increase in premium writings. This increase was offset in part by an increase in ceded premiums paid for reinstatement premiums related to the September 11th terrorist attacks which were included in Trenwick's 2001 operating results combined with a decrease in net investment income received, a result of the decrease in interest rates over the course of 2002. Net cash used in financing activities during the nine months ended September 30, 2002 and 2001 both included $4.4 million of dividends paid to common shareholders. Additionally, net cash used in financing activities during 2002 included $195.2 million related to the repayment of Trenwick's term loan facility. Cash used in financing for the nine months ended September 30, 2002 was offset in part by $40.0 million in proceeds from the issuance of Trenwick's Series B Cumulative Convertible Perpetual Preferred Shares to European Reinsurance Company of Zurich, a subsidiary of Swiss Reinsurance Company. Trenwick paid a dividend of $0.04 per common share in the first three quarters of 2002 and 2001 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, June 30 and September 30, 2002 and 2001. On November 7, 2002, Trenwick announced that its Board of Directors suspended Trenwick's common share dividend with immediate effect and for an -27- indefinite period. Trenwick's Board of Directors will continue to review Trenwick's common share dividend policy each quarter. Trenwick's total debt to capital ratio (total indebtedness divided by total indebtedness, preferred capital securities, preferred shares and common shareholders' equity) decreased to 14.9% at September 30, 2002 from 31.2% on December 31, 2001 due to the repayment of the $195 million in principal amount outstanding under the term loan portion of Trenwick's bank credit facility. Financings, financing capacity and capitalization Concurrent with the Trenwick/LaSalle business combination in September of 2000, 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 was subsequently converted into a four-year term loan. Trenwick America Corporation was 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 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's subsidiaries. The letter of credit facility must be renewed on November 22, 2002 in order for Trenwick to continue to utilize the letters of credit now outstanding to support underwriting at Lloyd's in 2003. In the event that Trenwick is unable to renew the current letter of credit facility, obtain a replacement letter of credit facility, post sufficient collateral to support its Lloyd's underwriting activities or obtain an alternative form of Lloyd's capital support, it will be required to reduce or cease its underwriting activities at Lloyd's for the 2003 year of account. The credit agreement contains general covenants and restrictions as well as financial covenants relating to, among other things, Trenwick's minimum interest coverage, debt to capital leverage, minimum earned surplus, maintenance of a minimum A.M. Best Company rating of A- and tangible net worth. On April 12, 2002, Trenwick, 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 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'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's interest coverage ratio for the quarter ending September 30, 2002 was 3.34 to 1. The amendment adjusted the minimum tangible net worth Trenwick 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 -28- Trenwick's consolidated tangible net worth as defined by the terms of the credit facility was $387.4 million as of September 30, 2002. A previous amendment adjusted downward the minimum risk-based capital requirement for Trenwick'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% The amendment increased the applicable margin on the interest paid by Trenwick by 1% and added an additional .5% fee payable by Trenwick in the event the letters of credit outstanding are not secured in accordance with the following schedule: Date Percentage of Outstanding Indebtedness ---- -------------------------------------- September 30, 2002 40% June 30, 2003 60% June 30, 2004 80% On June 17, 2002, Trenwick repaid in full the outstanding $195 million in principal amount of term loan indebtedness under the credit facility. As of September 30, 2002, $226 million of letters of credit remain outstanding under the credit facility. On October 18, 2002, A.M. Best Company lowered the financial strength ratings of Trenwick's operating subsidiaries below A-. The lowered A.M. Best Company ratings constitute an event of default under the credit facility. In addition, the increase in Trenwick loss reserves and the establishment of a Trenwick deferred tax asset reserve in the third quarter of 2002 resulted in Trenwick violating the financial covenants requiring Trenwick to maintain a minimum tangible net worth and minimum risk-based capital on November 14, 2002. If Trenwick is unable to remedy the financial covenant violations within 30 days, a second event of default shall have occurred under the credit facility. On November 13, 2002, Trenwick, its subsidiaries and financial institutions holding a majority of the outstanding letters of credit under the credit facility executed a forbearance agreement with respect to the events of default arising from Trenwick's lowered A.M. Best Company ratings and financial covenant violations. In the forbearance agreement, the letter of credit providers agreed to refrain from enforcing their rights or remedies under the credit facility until November 22, 2002, or earlier if there is another default under the credit facility or the forbearance agreement, a third party exercises any right of action against Trenwick for a debt in excess of $5 million or other material obligation or Trenwick takes an action which the letter of credit providers reasonably consider to be materially adverse to their interests. In consideration for the forbearance of the letter of credit providers, Trenwick agreed, among other things, to refrain from making certain payments or distributions and to facilitate a meeting of the letter of credit providers and Lloyd's. During the term of the forbearance agreement and thereafter, unless there is a waiver of the event of default and potential event of default under the credit facility, under the terms of its guaranty Trenwick is prohibited from declaring or paying any dividends on the outstanding common and preferred shares of Trenwick and its subsidiaries. In addition, Trenwick is not allowed to redeem or repurchase its capital stock so long as the event of default under the credit facility continues. The event of default under the credit facility also permits the letter of credit providers to demand that the $226 million outstanding letters of credit be secured with an equal amount of cash upon -29- expiration of the forbearance agreement. At this time, Trenwick does not have sufficient available liquidity to provide the necessary cash collateral if the letter of credit providers demand it. The continuation of an event of default under the credit facility, the restrictions on Trenwick's ability to pay dividends to preferred and common shareholders and the potential demand for cash collateral by the letter of credit providers may cause additional events of default to occur under the instruments governing the outstanding indebtedness and preferred shares of Trenwick and its subsidiaries. Trenwick's ability to refinance its existing letter of credit 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. During the past year, Trenwick's senior and preferred share debt ratings have been downgraded significantly by Standard & Poor's Corporation and by Moody's Investors Service. At this time, Trenwick's senior debt rating from Standard & Poor's Corporation is CCC+ and Moody's Investors Service is B3. Trenwick's ability to refinance its outstanding letter of credit and 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. Should Trenwick's subsidiaries be unable to meet any letter of credit reimbursement obligations as they fall due, and such repayments are not refinanced, Trenwick would become liable for such repayments under the terms of the guarantees. No liability for any such amounts has been reflected in Trenwick's financial statements. Because Trenwick America Corporation, Trenwick Holdings Limited and Trenwick are holding companies, their principal source of funds consists of permissible dividends, tax allocation payments and other statutorily permissible payments from their respective operating subsidiaries. As a result of recent losses incurred by Trenwick's operating subsidiaries, their cash distribution capacities have been significantly reduced. Trenwick is currently in discussion with the letter of credit providers regarding the current and potential future events of default and letter of credit financing for Trenwick's participation at Lloyd's for the 2003 underwriting year. If the current and potential future events of default are not waived, the letters of credit are not renewed for the 2003 Lloyd's underwriting year or the letter of credit providers demand cash collateral, there is substantial doubt as to Trenwick's ability to continue underwriting at Lloyd's or continue as a going concern. Trenwick and/or one or more of its subsidiaries may be forced to seek protection from creditors through proceedings commenced in Bermuda and other jurisdictions including the United States. Catastrophe Equity Put On September 27, 2000, Trenwick assumed the benefits and obligations of LaSalle Re Holdings Limited under a $100 million catastrophe equity put option. The catastrophe put option was amended and restated as of January 1, 2001 and amended as of January 25, 2002. As amended, the catastrophe equity put enabled Trenwick to raise up to $55 million of equity, through the issue of convertible preferred shares to European Reinsurance Company of Zurich ("European Re"), a subsidiary of Swiss Reinsurance Company, in the event there was a qualifying catastrophic event or events occurring prior to January 1, 2002. As a result of the terrorist attacks of September 11, 2001, LaSalle Re Limited incurred in excess of $140 million in catastrophe losses as defined under the option agreement and Trenwick delivered notice of exercise of the catastrophe equity put on March 28, 2002. On July 1, 2002, Trenwick commenced an arbitration proceeding seeking $55 million in damages and other relief -30- against European Re. The claims arose out of European Re's failure to meet its obligations under the catastrophe equity put. On September 6, 2002, the catastrophe put option was amended and restated and the pending arbitration proceedings were terminated. Under the terms of the second restated agreement, European Re purchased 550,000 of Trenwick's Series B Cumulative Perpetual Preferred Shares (the "Series B Shares") with a liquidation preference of $100 per share for an aggregate purchase price of $40 million. The Series B Shares bear cumulative dividends, payable quarterly in arrears, based upon the Series B Shares' Standard & Poor's rating at LIBOR plus a margin determined in accordance with the following schedule: Standard & Poor's Rating LIBOR Margin BBB- or above 3.75% BB+ 4.25% BB 4.50% BB- 4.75% Below BB- 6.00% These factors adjust upward by 0.25% on the third anniversary if the securities are still unrated, and upward by 0.50% on the fifth anniversary if they are still unrated. Also, if the Standard & Poor's rating is below BBB- on the fifth anniversary, the factors adjust upward by an additional 0.50%. The maximum adjustment based upon these circumstances is 0.75%. The Series B Shares are convertible into common shares of Trenwick after five years or upon the occurrence of a "special conversion event" at the greater of book value or the average thirty-day trading price of the common shares. Special conversion events are either the occurrence of a change in control without the written consent of the registered holders of more than 50% of the Series B shares outstanding ("Change in Control Conversion Event"), or the failure of Trenwick to maintain a GAAP net worth equal to at least $225 million for a period of more than sixty days ("Net Worth Conversion Event"). The conversion price of the Series B shares is the greater of 1) the liquidity factor times the average thirty day stock price preceding the conversion date, 2) the liquidity factor times book value per common share or 3) par value of a common share. The liquidity factor will be calculated as an amount equal to 0.8 if the conversion occurs within 60 days after a Change in Control Conversion Event or 1.0 if the conversion does not occur within 60 days after the occurrence of a Change in Control Conversion Event. Trenwick has the option to redeem the Series B Shares after the first anniversary of the issuance, paying an early redemption premium of $2.00 per share if redeemed before the second anniversary, and $1.00 per share if redeemed between the second and third anniversary. European Re will be able to transfer the Series B Shares six months after the date of purchase. The maximum number of Trenwick common shares that could be required to be issued upon conversion of the Series B Shares is 550 million, which would occur when both the book value of common stock and the average thirty-day trading price of the common shares were less than or equal to $0.10 per share. Trenwick currently has the authority to issue up to 150 million preferred and common shares without prior authorization from the shareholders and the Board of Directors. Trenwick therefore does not currently have the ability to control settlement of the Series B Shares and has therefore recorded them as temporary equity in the September 30, 2002 balance sheet. As of September 30, 2002, the Series B shares would be settled with approximately 6.3 million common shares upon conversion. The following table details how changes in the price of Trenwick's common shares or changes in book value would affect the settlement amounts: -31-
Average market value of common shares Book value per share - -------------------------- ------------------------------------------------------------------------------------------ $0.10-$0.50 $0.51-$1.00 $1.01-$2.00 $2.01-$5.00 $5.01-$10.00 $10.01-$15.00 ----------- ----------- ----------- ----------- ------------ ------------- $0.10-$0.50 550 - 110 108 - 55 54 - 28 27 - 11 11 - 6 5 - 4 $0.51-$1.00 108 - 55 108 - 55 54 - 28 27 - 11 11 - 6 5 - 4 $1.01-$2.00 54 - 28 54 - 28 54 - 28 27 - 11 11 - 6 5 - 4 $2.01-$5.00 27 - 11 27 - 11 27 - 11 27 - 11 11 - 6 5 - 4 $5.01-$10.00 11 - 6 11 - 6 11 - 6 11 - 6 11 - 6 5 - 4 $10.01-$15.00 5 - 4 5 - 4 5 - 4 5 - 4 5 - 4 5 - 4 Range of shares issuable upon conversion (in millions)
Quantitative and qualitative disclosure about market risk Trenwick reviewed the change in its exposure to market risks since December 31, 2001. In addition, the components of its investment holdings and its risk management strategy and objectives have not materially changed. Therefore, Trenwick believes that the potential for loss in each market risk sector described in the 2001 Annual Report on Form 10-K has not materially changed. Deferred income taxes Trenwick's U.S. operations incurred financial accounting losses in 1999 through the third quarter of 2002 and in connection with such losses, recorded as an asset up to $57.0 of net deferred income taxes. The net deferred income tax asset represented the future tax benefit of the losses previously incurred by Trenwick's U.S. operations. Because of Trenwick's cumulative financial accounting losses, in the absence of specific favorable factors, application of FASB Statement No. 109 requires Trenwick to establish a 100% valuation allowance against its deferred tax asset related to its U.S. operations in the third quarter of 2002. The establishment of a 100% valuation allowance against Trenwick's U.S. operations deferred tax asset increased Trenwick's provision for income taxes and net loss by $57.0 million in the third quarter of 2002. Trenwick management will continue to monitor its tax position and reassess the need for a valuation allowance on its deferred tax asset on a periodic basis As of September 30, 2002, Trenwick has not recorded a valuation allowance against the U.K. operating losses on Lloyd's open years of account because presently, in management's judgment, it is more likely than not that these amounts will be realized from future operations. Management's judgment is based on its assessment of business plans and related projections of future taxable income that reflect significant assumptions about increased premium volume and improved rates and profitability and the ability to secure letters of credit or other funding sufficient to support the assumptions about increased premium volume and profitability. Additionally, management believes it has the ability to implement tax planning strategies in order to realize these assets. Additionally, management believes it has the ability to implement tax planning strategies in order to realize these assets. Such assumptions may be adversely affected by market conditions or Trenwick's ability to secure sufficient funding to support its underwriting operations. In the event that, in management's judgment, it is no longer more likely than not that its net operating losses will be realized from future operations, Trenwick will be required to record a valuation allowance against its remaining deferred income tax asset. -32- Accounting Standards Effective January 1, 2002, Trenwick adopted a new Financial Accounting Standards Board statement which amended the accounting for goodwill and other intangible assets. This new statement suspended systematic goodwill amortization and required Trenwick's Bermuda holding company, LaSalle Re Holdings Limited to credit the negative goodwill balance of $11.6 million to operations as of January 1, 2002 as a cumulative effect of an accounting change. The statement also required that the remaining goodwill balance be tested for impairment under either market value or cash flow tests. Trenwick conducted both market value and cash flow tests and, as a result, recorded a $53.2 million write off of all of Trenwick's remaining goodwill 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 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 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 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'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'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 to execute its strategies in its property/casualty operations; - - Catastrophe losses in Trenwick'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's property/casualty retrocessional arrangements; - - 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's retrocessionaires or reinsurers; -33- - - Increases in interest rates, which may cause a reduction in the market value of Trenwick'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's equity investments; - - Changes in the composition of Trenwick's investment portfolio; - - Credit losses on Trenwick'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 passage of federal or state legislation subjecting LaSalle Re Limited to United States taxation or regulation; - - A contention by the United States Internal Revenue Service that LaSalle Re Limited is subject to United States taxation; - - The impact of mergers and acquisitions; - - Gains or losses related to changes in foreign currency exchange rates; - - Changes in Trenwick's capital needs; - - The ability of Trenwick to obtain the necessary letters of credit or collateral to support its Lloyd's underwriting operation; - - The ability of Trenwick to refinance or repay its outstanding indebtedness; and - - Changes in the financial strength ratings assigned to Trenwick and its operating subsidiaries or Lloyd's. In addition to the factors outlined above that are directly related to Trenwick's businesses, Trenwick 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 does not intend to update any forward-looking statement or the foregoing list of important factors. By this cautionary note Trenwick 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk This information called for by this item can be found in this Quarterly Report on Form 10-Q under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Disclosure About Market Risk" and is incorporated herein by reference. Item 4. Controls and Procedures Within the 90 days prior to the filing date of this report, Trenwick carried out an evaluation, under the supervision and with the participation of Trenwick's management, including the Acting Chief Executive Officer (the "Acting CEO") and the Chief Financial Officer (the "CFO"), of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based on that evaluation, Trenwick's management, including the Acting CEO and CFO, concluded that Trenwick's disclosure controls and procedures are effective in timely alerting them to material information required to be included in Trenwick's periodic SEC reports. In addition, there have been no significant changes in Trenwick's internal -34- controls or in other factors that could significantly affect those controls subsequent to the date of their evaluation, including any corrective actions with respect to significant deficiencies or material weaknesses. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. -35- PART II - OTHER INFORMATION Item 1. Legal Proceedings On July 1, 2002, Trenwick commenced an arbitration proceeding seeking $55 million in damages and other relief against European Reinsurance Company of Zurich, a subsidiary of Swiss Reinsurance Company. The claims arose out of European Re's failure to meet its obligations under a catastrophe equity put agreement, which entitled Trenwick to raise up to $55 million of equity through the issuance of convertible preferred shares to European Re in the event there was a qualifying catastrophic event or events occurring prior to January 1, 2002. The terrorist attacks of September 11, 2001 constituted a qualifying catastrophic event and Trenwick delivered notice of exercise of the catastrophe equity put on March 28, 2002. On September 6, 2002, Trenwick and European Re settled the outstanding arbitration with European Re purchasing 550,000 of Trenwick's Series B Cumulative Convertible Perpetual Preferred Shares. For a description of the preferred shares issued by Trenwick in connection with the settlement of the arbitration between Trenwick and European Re, see Note 7 of the Notes to the Unaudited Consolidated Financial Statements and Management's Discussion and Analysis of Financial Conditions and Results of Operations - Catastrophe Equity Put. In addition, Trenwick is party to various legal proceedings generally arising in the normal course of its business. Trenwick does not believe that the eventual outcome of any such proceeding will have a material effect on its financial condition or business. Trenwick's subsidiaries are regularly engaged in the investigation and the defense of claims arising out of the conduct of their business. Pursuant to Trenwick's insurance and reinsurance arrangements, disputes are generally required to be finally settled by arbitration. Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities On October 18, 2002, A.M. Best Company lowered the financial strength ratings of Trenwick's subsidiaries and affiliates below A-. The lowered A.M. Best Company ratings constitute an event of default under Trenwick's bank letter of credit facility. In addition, the increase in Trenwick's loss reserves and the establishment of a U.S. deferred tax asset reserve in the third quarter of 2002 resulted in Trenwick violating the financial covenants requiring Trenwick to maintain a minimum tangible net worth and minimum risk-based capital on November 14, 2002. If Trenwick is unable to remedy the financial covenant violations within 30 days, a second event of default shall have occurred under the credit facility. Trenwick is liable under a guaranty of the letter of credit reimbursement obligations under the credit facility. For a description of the credit facility and the events of default thereunder, see Note 10 of the Notes to the Unaudited Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations - Financings, Financing Capacity and Capitalization. -36- Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information Related Party Transaction On August 27, 2002, Trenwick entered into a consulting agreement with W. Marston Becker, the Vice Chairman of Trenwick's Board of Directors, who assumed the position of Trenwick's Acting Chairman and Acting Chief Executive Officer. In consideration for such services, Trenwick agreed to pay Mr. Becker a consulting fee of $50,000 per month. The consulting agreement can be terminated by mutual agreement or upon 30 days prior written notice by either party. Item 6. Exhibits and reports on Form 8-K (a) Exhibits 10.1 Forbearance Agreement, dated as of November 11, 2002, among Trenwick Group Ltd., Trenwick America Corporation, Trenwick Holdings Limited, LaSalle Re Holdings and certain lending institutions party to the Credit Agreement and JP Morgan Chase Bank as Administrative Agent. 10.2 Consulting Agreement, dated as of August 26, 2002, between Trenwick Group Ltd. and W. Marston Becker.* 99.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K The following reports on Form 8-K were filed during the quarter ended September 30, 2002: Date of Report Item Reported July 1, 2002 Commencement of the arbitration against European Reinsurance Company of Zurich Securities Insurance Option Agreement. August 27, 2002 Announcement that James F. Billett, Jr., Trenwick's Chairman, President and Chief Executive Officer, would be taking a leave of absence for health reasons. -37- September 6, 2002 Announcement of Settlement Agreement, a Second Amended and Restated Catastrophe Equity Securities Issuance Option Agreement and Amendment No. 1 to Registration Rights Agreement, each dated September 6, 2002 with European Reinsurance Company of Zurich. -38- 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. TRENWICK Date: November 14, 2002 By: /s/ W. Marston Becker -------------------------------------------- Name: W. Marston Becker Title: Acting Chairman and Acting Chief Executive Officer Date: November 14, 2002 By: /s/ Alan L. Hunte -------------------------------------------- Name: Alan L. Hunte Title: Executive Vice President and Chief Financial Officer -39- Certification of CEO Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, W. Marston Becker, the Acting Chairman and Acting Chief Executive Officer of Trenwick Group Ltd., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Trenwick Group Ltd.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. -40- Date: November 14, 2002 /s/ W. Marston Becker - ------------------------------ W. Marston Becker Acting Chairman and Acting Chief Executive Officer -41- Certification of CFO Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Alan L. Hunte, Executive Vice President and Chief Financial Officer of Trenwick Group Ltd., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Trenwick Group Ltd.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. -42- Date: November 14, 2002 /s/ Alan L. Hunte - ---------------------------- Alan L. Hunte Executive Vice President and Chief Financial Officer -43- EX-10.1 3 d52670_ex10-1.txt FORBEARANCE AGREEMENT Exhibit 10.1 FORBEARANCE AGREEMENT FORBEARANCE AGREEMENT, dated as of November 11, 2002 (this "Forbearance Agreement"), among TRENWICK AMERICA CORPORATION ("Trenwick America"), TRENWICK HOLDINGS LIMITED (the "Account Party"), the lending institutions party to the Credit Agreement referred to below (each a "Bank," and collectively, the "Banks"), and JPMORGAN CHASE BANK, as Administrative Agent (in such capacity, the "Administrative Agent"), the Guarantors and Pledgors. All capitalized terms used herein and not otherwise defined herein shall have the meaning provided such terms in the Credit Agreement referred to below. BACKGROUND WHEREAS, Trenwick America, the Account Party, the Banks and the Administrative Agent are parties to the Credit Agreement, dated as of November 24, 1999 and Amended and Restated as of September 27, 2000 (as amended, modified and supplemented to, but not including, the date hereof, the "Credit Agreement"); WHEREAS, Trenwick Group Ltd. ("Holdings") and the Administrative Agent are parties to the Holdings Guaranty, dated as of September 27, 2000 (as amended, modified and supplemented to, but not including, the date hereof, the "Holdings Guaranty"); WHEREAS, in accordance with the Credit Agreement, Letters of Credit were issued at the request of the Account Party for the benefit of Lloyd's in an aggregate Stated Amount of $230,000,000, $225,874,000 of which are currently outstanding; WHEREAS, Holdings has informed the Banks that (i) it is not in compliance with Section 4.14 for the Holdings Guaranty as of the Forbearance Agreement Effective Date and (ii) it will continue to be out of compliance with such Section through at least the Forbearance Termination Date; WHEREAS, Holdings has informed the Banks that (i) it is not in compliance with Section 4.16 for the Holdings Guaranty as of the Forbearance Agreement Effective Date and (ii) it will continue to be out of compliance with such Section through at least the Forbearance Termination Date; WHEREAS, Holdings has informed the Banks of the occurrence of an event specified in Section 9.11 of the Credit Agreement; WHEREAS, the events described in the immediately preceding three paragraphs above are collectively referred to as the "Events" and each is individually referred to as an "Event." Each Event constitutes an Event of Default under the Credit Agreement; WHEREAS, Holdings has informed the Banks that it may not be in compliance with Section 4.15 of the Holdings Guaranty during the period from the Forbearance Agreement Effective Date to the Forbearance Termination Date; WHEREAS, to the extent a Default or Event of Default occurs due the occurrence of the event in the immediately preceding paragraph, such Default or Event of Default shall constitute an "Event" under this Forbearance Agreement; and WHEREAS, in order to provide Holdings, the Account Party and the other Guarantors with a period of time within which to develop a plan to address the Events and restructure the Obligations, Holdings, the Account Party and the other Guarantors have requested that the Banks forbear from exercising their rights and remedies under the Credit Documents as a result of the occurrence of the Events. Subject to the terms and conditions of this Forbearance Agreement, the Banks have agreed to this request. AGREEMENT NOW THEREFORE, incorporating the section in this Forbearance Agreement captioned "Background" above, and for other good and valuable consideration, the receipt and legal sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, subject to the satisfaction of Article III hereof, the Administrative Agent, the Collateral Agent, the Banks and the Credit Parties agree as of the date hereof (the "Forbearance Agreement Effective Date") as follows: ARTICLE I ACKNOWLEDGMENTS AND AGREEMENTS 1.1 Acknowledgment of Existing Events; Existing Credit Documents. The Credit Parties acknowledge and agree that: (a) the Events are material in nature and constitutes Events of Default and (b) the Credit Documents are legal, valid and binding obligations of the Credit Parties enforceable against the Credit Parties in accordance with their terms, except to the extent that enforceability thereof may be limited by applicable bankruptcy, insolvency, moratorium or similar laws affecting creditors' rights generally and general principles of equity regardless of whether enforcement is sought in a proceeding in equity or at law. The Credit Parties further acknowledge and agree that, as a result of the Events, the Banks are entitled to, among other things, exercise all rights and remedies under the Credit Documents, applicable law or otherwise, including to (i) declare the Total Unutilized L/C Commitment terminated and (ii) direct the Account Party to pay to the Administrative Agent, cash, cash equivalents and/or marketable securities to be held as security for the Account Party's reimbursement obligations in respect of all the Letters of Credit then outstanding, equal to the Stated Amount of all Letters of Credit at such time. 1.2 Acknowledgment of Current Outstanding Obligations . As of the Forbearance Agreement Effective Date, the Credit Parties acknowledge and agree that the aggregate Stated Amount of all the Letters of Credit at this time is $225,874,000 and that they are indebted to the 2 Administrative Agent and the Banks for all of the reimbursement and indemnity obligations in connection therewith, plus accrued but unpaid fees, plus the costs and expenses associated with the Obligations (which includes, without limitation, the fees, costs and expenses in connection with, and required under, the Retention Agreements (as defined below) pursuant to Section 13.01 of the Credit Agreement) and/or in connection with the occurrence of the Events, incurred by the Administrative Agent and/or the Banks, to the extent reimbursement of which is provided for in the Credit Documents but has not yet been made (the foregoing amounts are hereafter collectively referred to as the "Current Outstanding Obligations") all without offset, counterclaims or defenses of any kind. Nothing contained herein shall alter, amend, modify or extinguish the obligation of the Account Party or the Guarantors to repay the Current Outstanding Obligations or any other Obligations pursuant to the terms of the Credit Documents, and neither this Forbearance Agreement nor any of the other documents related hereto constitutes a novation or modification of any of the Credit Documents. 1.3 Acknowledgment of Liens and Priority. Pursuant to the Credit Documents and except as specifically set forth therein, the Collateral Agent, for the benefit of the Secured Creditors, holds first priority, perfected security interests in and liens upon all of the Collateral, wherever located, including all Collateral now owned or hereafter acquired, and as more specifically described in the Credit Documents. Holdings and LaSalle Re Holdings will, and each will cause its Subsidiaries to, as promptly as possible, take all actions and execute all documents requested by the Collateral Agent in regard to such security interests and liens as required by the Credit Documents. Such security interests and liens secure all of the Obligations (as defined in the Pledge Agreement), including, without limitation, the Current Outstanding Obligations. 1.4 Reaffirmation of Security Interests. The Credit Parties acknowledge and agree that Collateral pledged, assigned, conveyed, hypothecated or transferred to the Collateral Agent for the benefit of the Secured Creditors pursuant to the Credit Documents constitute (and shall continue to constitute) collateral security for all of the Obligations (as defined in the Pledge Agreement), including, without limitation, the Current Outstanding Obligations to the extent set forth in the Pledge Agreement. Each Pledgor hereby respectively reaffirms its prior conveyance to the Collateral Agent for the benefit of the Administrative Agent and/or the Secured Creditors of a continuing security interest in and lien on the Collateral described in each instrument conveying such security interest. 1.5 Reaffirmation of the Guaranties. The Guarantors reaffirm their obligations under the Guaranties and acknowledge and agree that the Guaranties remain in full force and effect. ARTICLE II FORBEARANCE 2.1 Forbearance Period Subject to the terms and conditions of this Forbearance Agreement, and without waiving the Events or other Defaults or Events of Default that may now exist, the Banks agree to forbear from enforcing their rights or remedies pursuant to the Credit Documents, applicable law or otherwise solely because of the Events until the earliest to occur of 3 the following (the "Forbearance Termination Date"): (i) November 22, 2002, (ii) the occurrence of any Default or Event of Default under the Credit Documents (other than the Events), (iii) the occurrence of any Forbearance Event of Default (as defined below), (iv) the exercise of any rights or taking of any action by other party other than the Banks against Holdings or its Subsidiaries by any party to any loan or credit agreement or other document evidencing a debt in excess of $5,000,000 individually or in the aggregate for Holdings and its Subsidiaries or other material obligation, in each case, to which Holdings or its Subsidiaries is party or (v) the taking of any action by Holdings or any Subsidiary thereof which the Required Banks reasonably consider to be materially adverse to the interests of the Banks. 2.2 Proceeds. (a) Until the date which is five Business Days after the Forbearance Termination Date, Holdings shall not, and shall not permit any of its Subsidiaries to, pay, distribute by way of dividend or otherwise, loan, advance, disburse, pledge or hypothecate any cash, cash equivalents or securities (the "LaSalle Collateral") of LaSalle Re Holdings Limited ("LaSalle Holdings") or LaSalle Re Limited ("LaSalle Re" and, together with LaSalle Holdings, the "LaSalle Entities") (including, but is not limited to, any proceeds (the "Endurance Proceeds") received, or to be received, by, or on behalf of, the LaSalle Entities in connection with the sale (the "LaSalle Sale") pursuant to the Quota Share Retrocession Agreement, dated May 16, 2002, by and between LaSalle Re and Endurance Specialty Insurance Ltd. (the "LaSalle Sale Agreement")), other than (i) payments for past claims required under the LaSalle Sale Agreement, (ii) the payment of ordinary and usual operating expenses of the LaSalle Entities in the ordinary course of business and (iii) the payment of a dividend of $60,000,000 from LaSalle Re to LaSalle Holdings; provided that to the extent such dividend or any portion thereof is paid, such payment or payments shall be deposited in a cash collateral account in a manner satisfactory to the Administrative Agent in order to protect the security interests of the Secured Creditors and shall be maintained with, and in the sole dominion and control of, the Collateral Agent for the benefit of the Secured Creditors (collectively, the "Specified Payments"). On the Forbearance Effective Date, the LaSalle Entities maintain cash, cash equivalents and securities of approximately $282,000,000, of which approximately $142,000,000 is the LaSalle Collateral. For the purposes of this Article II.2.2(a), Endurance Proceeds shall include, but not be limited to, any surplus increase or increase in capital at LaSalle Holdings and LaSalle Re in connection with the LaSalle Sale. (b) Until the date which is five Business Days after the Forbearance Termination Date, Holdings shall not, and shall not permit any of its Subsidiaries to, pay, distribute by way of dividend or otherwise, loan, advance, disburse or pledge or hypothecate the proceeds (the "Cat E Put Proceeds") received from the issuance of the Cat E Put Securities, which amount shall not be less than approximately $40,000,000 as of the Forbearance Agreement Effective Date. (c) Holdings hereby represents and agrees that on the date hereof, (i) Holdings holds all right, title and interest in the Cat E Put Proceeds, which are maintained by Holdings in accounts at certain financial institutions (the "Specified Holdings Accounts"), (ii) the Cat E Put Proceeds are not subject to restrictions or set off other than in accordance with the terms of the account agreements entered into with respect to the Specified Holdings Accounts which agreements are listed on Annex I hereto and have been delivered to the Administrative Agent, 4 and (iii) that until the date which is five Business Days after the Forbearance Termination Date, the Cat E Put Proceeds shall remain in the Specified Holdings Accounts. (d) LaSalle Holdings hereby represents and agrees on behalf of LaSalle Re that on the date hereof, (i) LaSalle Re holds all right, title, and interest in the LaSalle Collateral which is maintained by LaSalle Re in accounts at certain financial institutions (the "Specified LaSalle Accounts"), (ii) the LaSalle Collateral is not subject to restrictions or set off other than in accordance with the terms of the account agreements entered into with respect to the Specified LaSalle Accounts which agreements are listed on Annex I hereto and have been delivered to the Administrative Agent and (iii) that until the date which is five days after the Forbearance Termination Date, the LaSalle Collateral shall remain in the Specified LaSalle Accounts other than for Specified Payments. (e) Holdings hereby acknowledges that it desires to use the LaSalle Collateral and the Cat E Put Proceeds to deposit funds at Lloyd's solely to satisfy the Account Party's solvency deficit at Lloyd's for the 2000 and earlier years of account (the "Lloyd's Solvency Deficit"). Holdings hereby agrees that, until the date which is five Business Days after the Forbearance Termination Date, it shall not, and shall not permit its Subsidiaries to, use the LaSalle Collateral or the Cat E Put Proceeds for any purpose whatsoever other than, with the consent of the Required Banks, to deposit funds at Lloyd's for the Lloyd's Solvency Deficit. 2.3 Advances, Payments, etc. Until the Forbearance Termination Date, Holdings shall not, and shall not permit any of its Subsidiaries to, (i) make any payments of interest or principal, advances or distributions in respect of any loan, credit agreement, note, mortgage or loan document, (ii) incur any indebtedness, including, without limitation, executing any guarantees, or have any letters of credit issued on its behalf (other than the Chubb security deposit on substantially the same terms contained in the Summary of Indicative Terms and Conditions, Underwriting and Reinsurance Agreement, dated October 25, 2002), or (iii) take any action that will result in, or require the creation or imposition of, any lien or encumbrance on any of the respective properties, other than in the case of clauses (i), (ii) and (iii) above, such payments, indebtedness and liens that are permitted by the Credit Agreement and will not be adverse to the interests of the Banks in any material respect. 2.4 Discussions with Lloyd's. Holdings hereby agrees that the Administrative Agent, and/or one or more Banks at the invitation of the Administrative Agent, the Administrative Agent's advisors, may meet with, or have access to, Lloyd's together with Holdings and/or subsidiary thereof to discuss matters relating to the restructuring of the Obligations and any other matters deemed reasonably necessary by the Administrative Agent. The initial meeting with Lloyd's shall take place or occur within 14 days of the Forbearance Agreement Effective Date. 2.5 Financial Statements. The Guarantors shall provide to the Banks within 5 days of the Forbearance Agreement Effective Date a consolidating balance sheet as of September 30, 2002 in a form reasonably satisfactory to the Administrative Agent showing in reasonable detail the assets, liabilities, and contingent liabilities of the Credit Parties and LaSalle Re Limited. 5 2.6 Continuing Obligations. Holdings will, and will cause its Subsidiaries to, continue to cooperate and work in good faith with the Administrative Agent, the Banks and their counsel and financial advisors, and to continue to allow the Banks, their counsel and financial advisors access to the financial and other information and any documentation reasonably requested relating to the restructuring of the Obligations as promptly as practicable; provided that such information and documentation in connection therewith remains subject to the confidentiality obligations set forth in Section 5.11 of the Holdings Guaranty. 2.7 Termination of the Total Unutilized L/C Commitment. The Required Banks hereby confirm, and the Credit Parties hereby acknowledge, that the Total Unutilized L/C Commitment will be terminated in its entirety as of the Forbearance Agreement Effective Date. 2.8 Confidential Communications. Holdings hereby confirms that it will, and will cause its Subsidiaries to, waive the confidentiality of any information between and among Holdings and its Subsidiaries on the one hand and the Banks on the other hand to permit the Banks to communicate such information between and among the Banks to the extent the Banks deem necessary; provided that such information and any documentation in connection therewith remains subject to the confidentiality obligations set forth in Section 5.11 of the Holdings Guaranty. ARTICLE III CONDITIONS TO EFFECTIVENESS The obligations of the Administrative Agent, the Collateral Agent and the Banks under this Forbearance Agreement and the occurrence of the Forbearance Agreement Effective Date are subject to the receipt by the Administrative Agent of the following: (a) this Forbearance Agreement duly executed by each Credit Party and the Required Banks; (b) the Agreement between White & Case LLP ("White & Case") and Holdings, dated as of October 29, 2002 with respect to the retention of Elliston, LLC and Elliston (UK) Ltd., (collectively "Elliston") duly executed by White & Case and Holdings and Holdings having delivered to Elliston the retainer agreed to by Holdings in the amount of $150,000 (such agreement, the "Elliston Retention Agreement"); and (c) the Agreement between White & Case and Holdings, dated as of October 29, 2002, for the retention of White & Case duly executed by White & Case and Holdings and Holdings having delivered to White & Case the retainer agreed to by Holdings in the amount of $150,000 (such agreement, the "W&C Retention Agreement," and together with the Elliston Retention Agreement, the "Retention Agreements") . 6 ARTICLE IV REPRESENTATIONS AND WARRANTIES To induce the Administrative Agent, and the Banks to enter into this Forbearance Agreement and as consideration for the terms and conditions contained herein, each Credit Party, jointly and severally, makes the following representations and warranties to the Administrative Agent and the Banks, each and all of which shall survive the execution and delivery of this Forbearance Agreement and all of the other documents executed in connection herewith: 4.1 Organization. (a) Each Credit Party is a corporation duly organized and validly existing and in good standing (where applicable) under the laws of the jurisdiction of its organization, and is duly authorized to do business and is duly qualified as a foreign corporation in all jurisdictions wherein the nature of its businesses or properties make such qualification necessary except where the failure to be so qualified is not reasonably likely to have a Material Adverse Effect, and has the corporate power and authority to own its respective properties and to carry on its respective businesses as now conducted; and (b) Each Credit Party has the requisite corporate power and authority to deliver and perform this Forbearance Agreement and Holdings has the requisite corporate power and authority to deliver and perform the Retention Agreements. 4.2 Authorization; Valid and Binding Agreement. All corporate action required to be taken by the Credit Parties and their respective officers, directors and stockholders of the Credit Parties for the authorization, execution, delivery and performance of this Forbearance Agreement and the Retention Agreements have been taken. Each person executing this Forbearance Agreement on behalf of the Credit Parties is an authorized officer of such Credit Party. This Forbearance Agreement is, and the Retention Letters are, legal, valid and binding obligations of the Credit Parties which are parties thereto, enforceable against each such party in accordance with their respective terms except to the extent that enforceability thereof may be limited by applicable bankruptcy, insolvency, moratorium or similar laws affecting creditors' rights generally and general principles of equity regardless of whether enforcement is sought in a proceeding in equity or at law. 4.3 Third Party Consents. The execution, delivery and performance, by the Credit Parties of this Forbearance Agreement, and by Holdings of the Retention Agreements will not: (a) require any consent or approval of any Person which has not been obtained prior to, and which is not in full force and effect as of, the date of this Forbearance Agreement; (b) result in the breach of, default under, or cause the acceleration of any obligation owed under any loan, credit agreement, note, security agreement, lease indenture, mortgage, loan document or other agreement by which any of them are bound or affected; or 7 (c) result in, or require the creation or imposition of, any lien or encumbrance on any of their respective properties other than those liens or security interests in favor of the Banks; except where the failure to obtain such consents or approvals, breaches, defaults, accelerations, liens or encumbrances is not reasonably likely to have a Material Adverse Effect. 4.4 No Defaults or Events of Default. No Default or Event of Default under the Credit Agreement exists on the Forbearance Agreement Effective Date (other than the Events). ARTICLE V DEFAULTS AND REMEDIES It shall constitute an immediate event of default under this Forbearance Agreement (a "Forbearance Event of Default"), if any Credit Party fails to perform or observe any covenant, term, agreement or condition in this Forbearance Agreement or the Retention Agreements or any representation or warranty made in this Forbearance Agreement or the Retention Agreements proves to be incorrect in any material respect. The Credit Parties specifically agree that, upon and at any time after the Forbearance Termination Date, the Banks, upon written notice to Holdings (although no notice shall be required in the case of an Event of Default under Section 9.05 of the Credit Agreement), may, in their sole discretion, exercise or enforce any or all of their rights and remedies under this Forbearance Agreement, the Retention Agreements, the Credit Documents, and/or applicable law, against the Account Party, the Guarantors or any other Person. ARTICLE VI MISCELLANEOUS 6.1 Submission to Jurisdiction; Selection of Forum; Judicial Proceeding. Each of the parties hereto agrees that the provisions of Section 13.08 of the Credit Agreement shall be incorporated herein by reference and shall apply to any action with respect to this Forbearance Agreement as if fully set forth herein. 6.2 Cooperation; Other Documents. At all times following the execution of this Forbearance Agreement, the Credit Parties shall execute and deliver to the Banks and the Administrative Agent, or shall cause to be executed and delivered to the Banks and the Administrative Agent, and shall do or cause to be done all such other acts and things as the Banks and the Administrative Agent may reasonably deem to be necessary or desirable to assure the Administrative Agent and the Banks of the benefit of this Forbearance Agreement and the documents comprising or relating to this Forbearance Agreement. This Forbearance Agreement is a Credit Document. 6.3 Remedies Cumulative; No Waiver. The respective rights, powers and remedies of the Administrative Agent and the Banks in this Forbearance Agreement and in the other Credit Documents are cumulative and not exclusive of any right, power or remedy provided in the Credit Documents, by law or equity and no failure or delay on the part of the 8 Administrative Agent or the Banks in the exercise of any right, power or remedy shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or remedy preclude any other or further exercise thereof, or the exercise of any other right, power or remedy. Other than as set forth in Section 2.1 of this Forbearance Agreement, nothing contained in this Forbearance Agreement or in any prior communications between or among the Credit Parties, the Administrative Agent and the Banks shall constitute a waiver or modification of any rights or remedies that the Administrative Agents or the Banks may have under the Credit Documents and applicable law. The Administrative Agent and the Banks expressly reserve and preserve all of their rights and remedies available to them under the Credit Documents, applicable law or otherwise. 6.4 Notices. Each of the parties hereto agree that the provisions of Section 13.03 of the Credit Agreement shall be incorporated herein by reference and shall apply to any action with respect to this Forbearance Agreement as if fully set forth herein. 6.5 Restructuring Negotiations The parties hereto have informed the each other of their desire to restructure the Obligations owing to the Banks. In connection with any such restructuring, the parties hereto hereby acknowledge that (i) discussions among the Credit Parties, the Administrative Agent and the Banks do not evidence an agreement on the part of the parties hereto to modify or restructure the Obligations, (ii) any discussions, questions or comments posed or made by any of the parties hereto or their staff, consultants or advisors during any discussions or meetings should not be considered by the parties hereto to be a binding commitment by any of the parties hereto to accede to any requests or proposals made by any of the parties hereto during any such discussions or meetings, (iii) even if any understanding in principle is reached on the terms of a proposed restructuring of the Obligations at any time, none of the parties hereto shall be legally bound until the appropriate approval authority of such parties has approved such proposed restructuring, and until all requisite parties have signed definitive documents evidencing such restructuring, and (iv) any discussions concerning the terms of a proposed restructuring shall in no way invalidate, nullify or waive any party's rights and remedies under the Credit Documents or signify the Administrative Agent's or the Banks' agreement to postpone the exercise of any of their respective remedies under the Credit Documents. The parties contemplate that these discussions may be lengthy and complex and that while the parties may reach agreement on one or more preliminary matters that are part of the disputes and issues that they are trying to resolve, the parties agree that none of them shall be bound by any agreement until said agreement has been reduced to a written agreement and signed by each of the requisite parties. Thus, no party can rely upon (i) any understanding or agreement which is not reduced to a written agreement and signed or (ii) the existence of the negotiations. 6.6 Survival of Representations and Warranties. All representations and warranties of the Credit Parties contained in this Forbearance Agreement and in the Retention Agreements shall survive the execution of this Forbearance Agreement and the Retention Agreements, as the case may be, and are material and have been or will be relied upon by the Administrative Agent and the Banks, notwithstanding any investigation made by any person, entity or organization on the Administrative Agent's or the Banks' behalf. No implied representations or warranties are created or arise as a result of this Forbearance Agreement or Retention Agreements. 9 6.7 Governing Law. This Forbearance Agreement shall be construed in accordance with and governed by the internal laws of the State of New York without reference to conflict of laws principles. 6.8 Amendment and Waiver. No amendment of this Forbearance Agreement, and no waiver, discharge or termination of any one or more of the provisions thereof, shall be effective unless set forth in writing and signed by the Credit Parties and the Required Banks. 6.9 Successors and Assigns This Forbearance Agreement and the other Credit Documents (i) shall be binding upon the Administrative Agent, the Banks and the Credit Parties, and their respective heirs, nominees, successors and assigns, and (ii) shall inure to the benefit of the Administrative Agent, the Banks and the Credit Parties, and their respective heirs, nominees, successors and assigns; provided, however, that no Credit Party may assign any rights hereunder or any interest herein without obtaining the prior written consent of the Required Banks, and any such assignment or attempted assignment without such prior written consent of the Required Banks shall be void and of no effect with respect to the Administrative Agent and the Banks. 6.10 Severability of Provisions. Any provision of this Forbearance Agreement that is held to be inoperative, unenforceable, void or invalid in any jurisdiction shall, as to that jurisdiction, be ineffective, unenforceable, void or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability or validity of that provision in any other jurisdiction, and to this end the provisions of this Forbearance Agreement are declared to be severable. 6.11 Counterparts. This Forbearance Agreement may be executed in any number of counterparts and by the different parties on separate counterparts, and each such counterpart shall be deemed to be an original (including if delivered by facsimile transmission), but all such counterparts shall together constitute one and the same Forbearance Agreement. * * * 10 IN WITNESS WHEREOF, the parties hereto have caused this Forbearance Agreement to be executed by their respective officers thereunto duly authorized, as of the date first written above. TRENWICK GROUP LTD., in its capacity as a Guarantor and Pledgor By /s/ W. Marston Becker ------------------------------------------ Name: W. Marston Becker Title: Acting Chairman & Acting Chief Executive Officer TRENWICK AMERICA CORPORATION, in its capacity as the Borrower and Guarantor By /s/ David Finkelstein ------------------------------------------ Name: David Finkelstein Title: Vice President & Treasurer TRENWICK HOLDINGS LIMITED, in its capacity as the Account Party By /s/ Alan L. Hunte ------------------------------------------ Name: Alan L. Hunte Title: Director LASALLE RE HOLDINGS LIMITED, in its capacity as a Guarantor and Pledgor By /s/ John V. Del Col ------------------------------------------ Name: John V. Del Col Title: Director NAME OF BANK: By /s/ ------------------------------------------- Name: Title: ANNEX I ACCOUNT AGREEMENTS EX-10.2 4 d52670_ex10-2.txt CONSULTING AGREEMENT Exhibit 10.2 [Letterhead of Trenwick Group Ltd.] August 26, 2002 Mr. W. Marston Becker 48 Ledyard Road West Hartford, CT 06117-1708 Dear Mr. Becker: This letter agreement (this "Agreement") will confirm the understanding between Trenwick Group Ltd. (the "Company") and you, pursuant to which you have been engaged by the Company to provide services as its Acting Chairman of the Board of Directors and Acting Chief Executive Officer. You shall perform the duties and activities customarily associated with the Chairman and Chief Executive Officer of the Company and you shall have full authority to conduct the affairs of the Company during the term of this Agreement. Your duties shall include but not be limited to the ability to enter into contracts and other agreements binding the Company, hiring and dismissal of employees, engagement of independent contractors to work for the Company, and representation of the Company before regulatory authorities and rating agencies. The term of this Agreement and your engagement hereunder shall extend from August 15, 2002 through the earliest of (a) your death or disability, (b) the mutual agreement of you and the Company or (c) thirty calendar days following delivery of written notice of termination of this Agreement by you or the Company. Notwithstanding expiration or termination of this Agreement, it is agreed that the provisions concerning confidentiality (Section 6), indemnification (Sections 5 and 8), ownership of work product (Section 7), dispute resolution (Section 10) and the Company's obligations to pay fees and reimburse expenses earned or incurred prior to the termination of this Agreement (Section 3) shall survive any such expiration or termination. As compensation for the services hereunder, the Company will pay you, beginning on August 15, 2002, a monthly fee of $50,000, which shall be paid in arrears on or before the 15th calendar day of each month following the month in which such fee is earned. This monthly fee shall be reduced pro rata for (a) partial months worked and (b) the time which you spend on other activities not related to work for the Company. You shall report at the end of each calendar month the proportion of your working time spent on Company business during such calendar month. It is our mutual anticipation that you will spend at least 75% of your working time on the Company's business. The Company shall reimburse you monthly for your reasonable out-of-pocket expenses incurred or accrued during the period of or in connection with your engagement notwithstanding the termination of this Agreement. You shall report and account for your expenses monthly on the Company's standard expense account forms and be reimbursed by the Company within 30 calendar days of submission of such expense account forms to the Company. You shall not be entitled to any Company benefits or other benefits as may accrue to a full or part-time employee of the Company. In performing services and duties hereunder, you shall do so as an independent contractor and you are not, and are not to be deemed, an employee of the Company or any other person acting on behalf of the Company. You shall be responsible for meeting any legal requirements imposed on you or any person acting on your behalf as a result of this Agreement, including but not limited to the filing of income tax returns and the payment of taxes; and you agree to indemnify the Company for the failure to do so, if the Company is required to make any such payment otherwise due by you. To the extent that you obtain non-public information about the Company's or its affiliates' business practices and plans, including but not limited to, business strategies, marketing strategies, technical information, systems information, product development, service development and customers ("Confidential Information"), then all such Confidential Information disclosed to you shall be received by you in confidence for purposes of this Agreement. You shall not disclose, disseminate, publish, communicate or divulge any Confidential Information to anyone outside the Company, or to any employee of the Company not having reasonable need for access to such information, unless the Company expressly consents to such disclosure in writing or as may be required by law. You agree that all Confidential Information within your possession upon termination of this Agreement shall be returned promptly to the Company. You understand and agree that money damages will not be sufficient as a remedy for any breach of this Section and that the Company shall be entitled to equitable relief, including injunction and specific performance, as a remedy for any breach of this Section. All work product created by you on behalf of the Company during the term of this Agreement shall be the sole property of the Company, and you shall not have any license or other right, express or implied, to such work product. In consideration for your work on behalf of the Company, the Company shall indemnify and hold you harmless from and against any and all claims, damages or liabilities arising out of your engagement as Acting Chairman and Acting Chief Executive Officer, unless a judgment or other final adjudication establishes that your acts or omissions were in bad faith or involved intentional misconduct or a knowing violation of law. Costs and expenses (including attorney's fees) incurred by you in defending or investigating any action, suit, proceeding or investigation shall be paid by the Company, in advance of final disposition of such matter, upon receipt of your written undertaking to repay any such amounts if it is ultimately determined that you are not entitled to indemnification hereunder. For the purposes of this Agreement, notices, demands and all other communications shall be in writing and shall be deemed to have been duly given when delivered to the recipient at one of the following addresses: If to you: 48 Ledyard Road West Hartford, CT 06117 If to the Company: One Canterbury Green Stamford, Connecticut 06901 Attention: General Counsel or to such other address as any party may have furnished to the other in writing. Except as otherwise set forth in Section 6 herein with respect to the Company's remedy for any breach of Section 6, all controversies, claims, or disputes arising out of or related to this Agreement, shall be settled by arbitration in the State of Connecticut, as the sole and exclusive remedy of either party, and judgment upon such award rendered by the arbitrator(s) may be entered in any court of competent jurisdiction. In the event that a court of competent jurisdiction determines that arbitration is not appropriate for the adjudication of any claim, you hereby waive your right to a jury trial. One arbitrator shall be chosen by you, the other by the Company, and an umpire shall be chosen by the two arbitrators, all of whom shall be active or retired disinterested executive officers of insurance or reinsurance companies. In the event that either party shall fail to choose an arbitrator within 30 days following a written request by the other party to do so, the requesting party may choose two arbitrators who shall in turn choose an umpire. If the two arbitrators fail to agree on the selection of an umpire within 30 days following their appointment, each arbitrator shall name three nominees, of whom the other shall decline two, and the decision shall be made by drawing lots. Each party shall bear the expense of its own arbitrator, and shall jointly and equally bear with the other the expense of the umpire. If any provision of this Agreement shall, to any extent, now or hereafter be or become invalid or unenforceable, the remainder of this Agreement shall not be affected thereby and every other provision of this Agreement shall be valid and enforceable, to the fullest extent permitted by law. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the parties. No waiver by either party at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto. Neither party to this Agreement can assign his or its rights or obligations under this Agreement without the prior written consent of the other party to this Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut without regard to the conflicts of law provisions thereof. This Agreement may be signed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one and the same instrument. If the foregoing correctly sets forth the understanding and agreement between you and the Company, please sign and return one original executed copy of this Agreement. Trenwick Group Ltd. /s/ Clement S. Dwyer, Jr. ----------------------------------------- By: Clement S. Dwyer, Jr. Chairman of the Compensation Committee Confirmed and Agreed as of the date first written above: /s/ W. Marston Becker - --------------------------------- W. Marston Becker EX-99.1 5 d52670_ex99-1.txt CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER Exhibit 99.1 CERTIFICATION BY CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Trenwick Group Ltd. (the "Company") on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, W. Marston Becker, Acting Chairman and Acting Chief Executive Officer of the Company, certify, pursuant to 18, U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ W. Marston Becker W. Marston Becker Acting Chairman and Acting Chief Executive Officer November 14, 2002 EX-99.2 6 d52670_ex99-2.txt CERTIFICATION OF THE CHIEF FINANCIAL OFFICER Exhibit 99.2 CERTIFICATION BY CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Trenwick Group Ltd. (the "Company") on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Alan L. Hunte, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18, U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Alan L. Hunte Alan L. Hunte Executive Vice President and Chief Financial Officer November 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----