10-Q 1 d56755_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 June 30, 2003. |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to ________________. Commission file number 1-16089 TRENWICK GROUP LTD. (Exact name of registrant as specified in its charter) Bermuda 98-0232340 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) LOM Building, 27 Reid Street Hamilton HM 11, Bermuda (Address of principal executive offices) (zip code) ---------- Registrant's telephone number, including area code: 441-292-4985 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934) Yes |_| No |X| Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Shares Outstanding Description of Class as of August 20, 2003 ------------------------------ --------------------- Common Shares - $.10 par value 36,761,021 TRENWICK GROUP LTD. INDEX TO FORM 10-Q PART I - FINANCIAL INFORMATION
Page ---- ITEM 1. Unaudited Consolidated Financial Statements Consolidated Balance Sheet June 30, 2003 and December 31, 2002 .................................. 1 Consolidated Statement of Operations and Comprehensive Income Three and Six Months ended June 30, 2003 and 2002 .................... 2 Consolidated Statement of Cash Flows Three and Six Months ended June 30, 2003 and 2002 .................... 3 Consolidated Statement of Changes in Common Shareholders' Equity Six Months ended June 30, 2003 and 2002 .............................. 4 Notes to Unaudited Consolidated Financial Statements ................. 5 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................ 14 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk ........... 42 ITEM 4. Controls and Procedures .............................................. 42 PART II - OTHER INFORMATION ITEM 1. Legal proceedings .................................................... 42 ITEM 2. Changes in Securities and Use of Proceeds ............................ 42 ITEM 3. Defaults Upon Senior Securities ...................................... 43 ITEM 4. Submission of Matters to a Vote of Security Holders .................. 43 ITEM 5. Other Information .................................................... 43 ITEM 6. Exhibits and Reports on Form 8-K ..................................... 43 Signatures ................................................................... 46
Trenwick Group Ltd. Consolidated Balance Sheet (Amounts expressed in thousands of United States dollars, except share and per share data) June 30, 2003 and December 31, 2002
(Unaudited) 2003 2002 ----------- ----------- ASSETS Debt securities available for sale, at fair value $ 1,883,494 $ 1,492,834 Equity securities at fair value 8,707 8,849 Cash and cash equivalents 401,103 814,235 Accrued investment income 17,326 19,223 Premiums receivable 426,600 519,866 Reinsurance recoverable balances, net 1,794,460 1,803,011 Prepaid reinsurance premiums 195,880 262,802 Deferred policy acquisition costs 100,304 127,200 Security deposit held by Chubb 50,724 50,207 Other assets 142,006 179,755 ----------- ----------- Total assets $ 5,020,604 $ 5,277,982 =========== =========== LIABILITIES Unpaid claims and claims expenses $ 3,724,169 $ 3,718,124 Unearned premium income 557,439 721,624 Reinsurance balances payable 259,748 374,397 Indebtedness 76,784 76,498 Other liabilities 171,158 126,549 ----------- ----------- Total liabilities 4,789,298 5,017,192 ----------- ----------- MINORITY INTEREST Mandatorily redeemable preferred capital securities of subsidiary trust holding solely junior subordinated debentures of U.S. subsidiary 68,350 68,320 Minority interest in preferred shares of Bermuda subsidiary 75,000 75,000 ----------- ----------- Total minority interest 143,350 143,320 ----------- ----------- CONVERTIBLE PREFERRED STOCK 40,000 40,000 ----------- ----------- COMMON SHAREHOLDERS' EQUITY Common shares, $0.10 par value, 36,763,041 and 36,801,545 shares issued and outstanding 3,676 3,680 Additional paid in capital 574,858 576,567 Deferred compensation under share award plans (1,174) (2,615) Retained earnings (accumulated deficit) (545,684) (492,343) Accumulated other comprehensive income (loss) 16,280 (7,819) ----------- ----------- Total common shareholders' equity 47,956 77,470 ----------- ----------- Total liabilities, minority interest and common shareholders' equity $ 5,020,604 $ 5,277,982 =========== ===========
The accompanying notes are an integral part of these statements. 1 Trenwick Group Ltd. Consolidated Statement of Operations and Comprehensive Income (Unaudited) (Amounts expressed in thousands of United States dollars, except per share data) Three and Six Months Ended June 30, 2003 and 2002
Three Months Six Months ------------------------ ------------------------ 2003 2002 2003 2002 --------- --------- --------- --------- REVENUES Net premiums earned $ 214,913 $ 277,261 $ 436,418 $ 543,285 Net investment income 18,449 27,885 38,087 57,140 Net realized investment gains (losses) (584) 3,957 (210) 5,414 Other income (expense) (9,986) 3,036 (12,019) 5,638 --------- --------- --------- --------- Total revenues 222,792 312,139 462,276 611,477 --------- --------- --------- --------- EXPENSES Claims and claims expenses incurred 180,786 194,025 319,269 401,602 Policy acquisition costs 63,863 74,843 126,292 147,915 Underwriting expenses 21,125 20,681 45,119 43,688 General and administrative expenses 3,545 4,658 7,283 7,976 Loss on sale of LaSalle's in-force reinsurance business -- 7,008 -- 7,008 Interest expense and subsidiary preferred share dividends 9,012 10,881 20,778 20,817 Foreign currency losses (gains) (4,967) 1,838 (4,502) 1,160 --------- --------- --------- --------- Total expenses 273,364 313,934 514,239 630,166 --------- --------- --------- --------- Loss before income taxes and cumulative effect of change in accounting principle (50,572) (1,795) (51,963) (18,689) Applicable income taxes (benefit) 1,059 (5,584) (781) (9,568) --------- --------- --------- --------- Net income (loss) before cumulative effect of change in accounting principle (51,631) 3,789 (51,182) (9,121) Cumulative effect of change in accounting principle -- -- -- (41,653) --------- --------- --------- --------- Net income (loss) (51,631) 3,789 (51,182) (50,774) Dividends on convertible preferred stock 1,086 -- 2,159 -- --------- --------- --------- --------- Net income (loss) available to common shareholders $ (52,717) $ 3,789 $ (53,341) $ (50,774) ========= ========= ========= ========= EARNINGS PER SHARE: Basic and diluted earnings (loss) per common share before cumulative effect of change in accounting principle $ (1.43) $ 0.10 $ (1.45) $ (0.25) Cumulative effect of change in accounting principle -- -- -- (1.13) --------- --------- --------- --------- Basic and diluted earnings (loss) per common share $ (1.43) $ 0.10 $ (1.45) $ (1.38) ========= ========= ========= ========= COMPREHENSIVE INCOME (LOSS): Net income (loss) $ (51,631) $ 3,789 $ (51,182) $ (50,774) --------- --------- --------- --------- Other comprehensive income (loss): Net unrealized investment gains (losses) 14,449 11,225 19,367 (1,530) Foreign currency translation adjustments 5,661 1,012 4,732 2,125 --------- --------- --------- --------- Total other comprehensive income (loss) 20,110 12,237 24,099 595 --------- --------- --------- --------- Comprehensive income (loss) $ (31,521) $ 16,026 $ (27,083) $ (50,179) ========= ========= ========= =========
The accompanying notes are an integral part of these statements. 2 Trenwick Group Ltd. Consolidated Statement of Cash Flows (Unaudited) (Amounts expressed in thousands of United States dollars) Three and Six Months Ended June 30, 2003 and 2002
Three Months Six Months ------------------------ ------------------------ 2003 2002 2003 2002 --------- --------- --------- --------- OPERATING ACTIVITIES Premiums collected, net of acquisition costs $ 174,443 $ 473,721 $ 424,066 $ 774,956 Ceded premiums paid, net of acquisition costs (77,900) (102,621) (182,248) (290,843) Claims and claims expenses paid (198,615) (369,563) (432,530) (545,487) Claims and claims expenses recovered 81,402 (19,843) 109,687 125,389 Underwriting expenses paid (31,454) (24,985) (70,361) (56,021) Net investment income received 26,680 35,334 51,003 69,286 Service and other income received, net of expenses 1,005 2,402 11,052 4,972 General and administrative expenses paid (4,782) (8,832) (10,063) (12,971) Interest expense and preferred share dividends paid (10,414) (5,381) (11,026) (12,456) Income taxes recovered 133 986 1,015 1,046 --------- --------- --------- --------- Cash (for) from operating activities (39,502) (18,782) (109,405) 57,871 --------- --------- --------- --------- INVESTING ACTIVITIES Purchases of debt securities (544,951) (487,427) (904,933) (825,493) Sales of debt securities 102,952 495,364 217,666 703,859 Maturities of debt securities 308,175 232,057 381,842 328,182 Purchases of equity securities -- (83) -- (83) Sales of equity securities 113 -- 113 -- Effect on cash of exchange rate translation 7,548 14,180 3,547 10,919 Additions to premises and equipment (688) (1,490) (773) (4,740) --------- --------- --------- --------- Cash from (for) investing activities (126,851) 252,601 (302,538) 212,644 --------- --------- --------- --------- FINANCING ACTIVITIES Repayment of indebtedness -- (197,841) -- (199,293) Indebtedness issuance costs paid (806) -- (1,299) (88) Issuance of common shares 55 39 110 96 Common share dividends paid -- (1,472) -- (2,943) Share and option repurchases -- -- -- (161) --------- --------- --------- --------- Cash for financing activities (751) (199,274) (1,189) (202,389) --------- --------- --------- --------- Change in cash and cash equivalents (167,104) 34,545 (413,132) 68,126 Cash and cash equivalents, beginning of period 568,207 364,931 814,235 331,350 --------- --------- --------- --------- Cash and cash equivalents, end of period $ 401,103 $ 399,476 $ 401,103 $ 399,476 ========= ========= ========= =========
The accompanying notes are an integral part of these statements. 3 Trenwick Group Ltd. Consolidated Statement of Changes in Common Shareholders' Equity (Unaudited) (Amounts expressed in thousands of United States dollars except share data) Six Months Ended June 30, 2003 and 2002
2003 2002 -------- --------- Common shareholders' equity, beginning of period $ 77,470 $ 498,326 COMMON SHARES AND ADDITIONAL PAID IN CAPITAL Issuance of 63,881 and 11,984 common shares for cash under employee and director plans 6 96 Purchase and retirement of 2,526 and 18,646 common shares (1) (161) Cancellation of 99,859 and 49,316 restricted common share awards (1,717) (916) DEFERRED COMPENSATION UNDER SHARE AWARD PLAN Compensation expense recognized (277) 501 Cancellation of restricted common shares 1,717 916 RETAINED EARNINGS Net loss (51,182) (50,774) Dividends on convertible preferred stock (2,159) -- Common share dividends, $0.08 per share -- (2,943) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Other comprehensive income 24,099 595 -------- --------- Common shareholders' equity, end of period $ 47,956 $ 445,640 ======== =========
The accompanying notes are an integral part of these statements. 4 TRENWICK GROUP LTD. Notes to Unaudited Consolidated Financial Statements (Amounts expressed in thousands of United States dollars except per share data) Three and Six Months Ended June 30, 2003 and 2002 Note 1 Organization Organization Trenwick Group Ltd. ("Trenwick") is a Bermuda-based specialty and Basis insurance and reinsurance holding company with subsidiaries of Presentation located in the United States and the United Kingdom, including four runoff operations. Trenwick's operations at Lloyd's of London ("Lloyd's") underwrite specialty property and casualty insurance as well as treaty and facultative property and casualty reinsurance on a worldwide basis. As indicated below, on August 20, 2003, Trenwick and certain of its subsidiaries that are not insurance companies filed for protection under chapter 11 of the United States Bankruptcy Code. In 2002, Trenwick conducted several strategic reviews of its operations in light of its capital constraints and determined that it was necessary for Trenwick to reduce its operating leverage by reducing premium volumes to a level more commensurate with its capital base and to concentrate its limited financial resources on its core franchises and businesses, its United States treaty reinsurance business and its Lloyd's operations, where it would be able to write insurance and reinsurance based on direct or indirect financial support. As a result, Trenwick voluntarily placed into runoff its United States specialty program business formerly operated through its subsidiary, Canterbury Financial Group, Inc., effective October 30, 2002, and its London-based specialty insurance and reinsurance company, Trenwick International Limited ("Trenwick International"), effective November 29, 2002. Additionally, in light of the increasing capital requirements imposed by the market on catastrophe insurance providers, Trenwick sold the in-force property catastrophe reinsurance business of its Bermuda subsidiary, LaSalle Re Limited ("LaSalle Re"), to Endurance Specialty Insurance, Ltd. ("Endurance"). Little or no new insurance or reinsurance is presently being offered in these runoff operations. Trenwick's United States treaty reinsurance business, formerly written through its subsidiary, Trenwick America Reinsurance Corporation ("Trenwick America Re"), has been limited since November 2002 to providing, through an underwriting facility with Chubb Re, Inc. and its affiliate Federal Insurance Company (together, "Chubb"), treaty reinsurance to insurers of property and casualty risks. Since inception in November 2002, Trenwick underwrote approximately $128 million of reinsurance under the facility. Trenwick announced on April 15, 2003 that it would cease underwriting reinsurance business under the Chubb facility. Trenwick will continue to be entitled to the economic benefits of, and will bear losses on, existing business under the facility, subject to the terms and conditions of the facility. Trenwick's ability to write reinsurance business under the facility was severely constrained by its financial condition and concerns arising with respect to its ongoing stability. As a result, Trenwick ceased underwriting activities under the facility in order to reduce Trenwick's costs. The effect of this cessation is that Trenwick America Re is now in runoff. Trenwick will continue to service and pay claims for all business previously written through Trenwick America Re outside of the Chubb facility and will jointly adjust and settle with Chubb any claims arising under the business written under the Chubb facility, subject to Chubb's final authority. 5 Trenwick announced on August 7, 2003 that that it has entered into a letter of intent with respect to an agreement in principle on a long-term restructuring of its debt obligations, the sale of its business operations at Lloyd's, and the runoff of its remaining businesses with (i) the majority of the beneficial holders (the "Senior Noteholders") of its 6.70% Senior Notes (the "Senior Notes"), (ii) the steering committee (the "Steering Committee") of the lending institutions (the "Banks") that have issued letters of credit under a senior secured credit facility (the "LoC Facility") on behalf of certain subsidiaries of Trenwick in support of Trenwick's Lloyd's operations, and (iii) a group composed of current members of management of Trenwick's Lloyd's operations (the "Management Team"). Trenwick did not pay principal and interest on the Senior Notes due on August 1, 2003, which also created an event of default with respect to the LoC Facility and under certain other indebtedness of Trenwick. The restructuring is intended to be implemented through various means, including but not limited to the following: (i) the filing by Trenwick and/or one or more of its subsidiaries of chapter 11 bankruptcy proceedings in the United States and the filing of similar proceedings in Bermuda, Barbados or the United Kingdom, as the case may be; (ii) the sale by Trenwick of substantially all of its Lloyd's operations to a company controlled by the Management Team and with capital provided by the Management Team, third-party investors and the Banks and (iii) the retention of third party run-off advisors and the continued runoff or disposition of all of Trenwick's other insurance and reinsurance operations. In light of the foregoing, Trenwick believes that it is unlikely that any of the holders of the shares of Trenwick or of its wholly-owned Bermuda subsidiary, LaSalle Re Holdings Ltd, will receive any return on their investment in the near term if at all. The terms of the restructuring are subject to the satisfaction of numerous conditions precedent including, but not limited to, the following: (i) approval of the restructuring by the Banks; (ii) negotiation of definitive documentation (iii) receipt of all requisite regulatory and other approvals in the United States, Bermuda and the United Kingdom; (iv) due diligence by Englefield Capital LLP, the proposed equity sponsor of the Management Team, which has entered into an exclusive negotiation agreement with Trenwick, and (v) approval of any court having jurisdiction over the above-referenced insolvency proceedings. On August 20, 2003, Trenwick and its affiliates, LaSalle Re Holdings Limited ("LaSalle Re Holdings") and Trenwick America (collectively with LaSalle Re Holdings and Trenwick, the "Debtors"), filed for protection from their creditors under chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). On that same date, Trenwick and LaSalle Re Holdings were in the process of filing proceedings in the Supreme Court of Bermuda known under Bermudian law as "winding up". Trenwick and LaSalle Re Holdings will petition the Supreme Court of Bermuda to issue an order appointing Joint Provisional Liquidators for Trenwick and LaSalle Re Holdings and will request that deference be paid in the "winding up" to the jurisdiction of the Bankruptcy Court and the Debtors' restructuring efforts in accordance with the Bankruptcy Code. It is the intention of the Debtors to implement the restructuring agreed to among the Debtors and their creditor constituencies as discussed above through the bankruptcy process. (See also Note 8) Basis of Presentation The interim financial statements include the accounts of Trenwick and its subsidiaries after elimination of significant intercompany accounts and transactions. Certain items in prior financial statements have been reclassified to conform to the current presentation. These interim financial statements have been prepared in conformity with accounting principles that are generally accepted in the United States of America, sometimes referred to as U.S. GAAP. To prepare these interim financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Actual amounts may differ from these estimates. 6 The accompanying financial statements have been prepared assuming Trenwick will continue as a going concern. As discussed above, Trenwick was unable to repay certain senior notes by April 1, 2003 and collateralize, with cash or cash equivalents, 60% of the outstanding letters of credit under its senior credit facility by August 1, 2003 and is therefore in default with respect to the senior notes and certain other indebtedness. Additionally, certain insurance subsidiaries of Trenwick do not meet risk based capital levels or levels of surplus required by various insurance regulations to which they are subject. These matters raise substantial doubt about Trenwick's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. The interim financial statements are unaudited; however, in the opinion of management, the interim financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for interim periods. These interim statements should be read in conjunction with the audited financial statements and related notes included in the Annual Report on Form 10-K of Trenwick for the year ended December 31, 2002. Note 2 Effective April 1, 2002, Trenwick sold the in-force property Sale of catastrophe reinsurance business of its subsidiary, LaSalle Re Property Limited ("LaSalle") to Endurance Specialty Insurance, Ltd. Catastrophe ("Endurance"). The sale was effected through a 100% quota Business of share reinsurance agreement, with Endurance paying Trenwick a LaSalle Re ceding commission of 25% of premiums ceded under the quota Limited share agreement and additional profit sharing of 50% if the losses do not exceed a loss ratio of 45%. In addition, Endurance has the right to renew LaSalle's in-force business as it expires in exchange for a 12.5% commission on the business renewed. Included in the 2002 second quarter results are $6,685 in ceding commissions earned on the quota share with Endurance, as well as $3,930 in amortization of acquisition costs on the related assumed business. In connection with this transaction, Trenwick recorded the following non-recurring revenues and expenses during the six months ended June 30, 2002: Minimum proceeds related to sale of renewal rights $ 8,000 Accelerated amortization of reinsurance contracts not transferred in sale (7,824) Legal expenses and investment banking fees (4,370) Severance and related expenses (2,814) ------- Net loss on sale of LaSalle's in-force reinsurance business $(7,008) =======
Note 3 During the first quarter of 2003, Trenwick amended the basis Segment in which operating segments are determined. This change Information followed strategic reviews of Trenwick's operations which resulted in the decision to place four of its operations into voluntary runoff. As a result, the operations of Trenwick and its subsidiaries will now be managed on a legal entity basis combined by region, rather than an operating platform basis, in order to ensure the runoff of these operations is conducted in a manner which will maximize the economic value of these entities. 7 The results of Trenwick's specialty insurance and reinsurance business is reported in the following three business segments: - Lloyd's operations, written principally through five corporate members of Lloyd's and managed by Trenwick's United Kingdom subsidiary, Trenwick Managing Agents Limited ("TMA"); - North American runoff, which consists of treaty reinsurance formerly written on United States property and casualty risks through Trenwick America Re as well as the results of the Chubb underwriting facility. Additionally, this segment includes the runoff of United States specialty program insurance formerly written by The Insurance Corporation of New York ("INSCORP") and its subsidiary Dakota Specialty Insurance Company ("Dakota). Lastly, this segment includes property catastrophe reinsurance written on a worldwide basis by LaSalle Re until it ceased underwriting effective April 1, 2002 when it sold its in-force business to Endurance, effected through a 100% quota share reinsurance agreement; and - United Kingdom runoff, which consists of international specialty insurance and reinsurance written through Trenwick International, which ceased underwriting substantially all new business effective November 29, 2002. Subsequent to June 30, 2003, Trenwick entered into an agreement with Bestpark Limited ("Bestpark"), a subsidiary of Litigation Control Group Limited, for the sale of Trenwick International. The sale of Trenwick International is subject to the approval of the Financial Services Authority in the United Kingdom.(See Note 8) The following tables present business segment financial information for Trenwick at June 30, 2003 and December 31, 2002 and for the three and six months ended June 30, 2003 and 2002: 2003 2002 ---------- ---------- Total assets: Lloyd's operations $2,139,227 $2,135,908 North American runoff 2,356,000 2,538,326 United Kingdom runoff 504,853 568,447 Unallocated 20,524 35,301 ---------- ---------- Total assets $5,020,604 $5,277,982 ========== ==========
Three Months Six Months ----------------------- ----------------------- 2003 2002 2003 2002 --------- -------- --------- -------- Total revenues: Lloyd's operations $ 89,378 $117,987 $ 173,634 $216,165 North American runoff 111,448 143,965 241,333 296,469 United Kingdom runoff 22,466 50,129 48,058 98,658 Unallocated (500) 58 (749) 185 --------- -------- --------- -------- Total revenues $ 222,792 $312,139 $ 462,276 $611,477 ========= ======== ========= ========
8
Three Months Six Months ---------------------- ---------------------- 2003 2002 2003 2002 -------- -------- -------- -------- Net income (loss): Lloyd's operations $ (5,233) $ (607) $ (3,392) $ (2,833) North American runoff (42,488) 35,350 (38,490) 38,988 United Kingdom runoff 3,429 (9,308) 4,087 (16,318) Unallocated interest expense and subsidiary preferred share dividends (3,655) (6,903) (7,576) (13,524) Other unallocated and change in accounting principle (3,684) (14,743) (5,811) (57,087) -------- -------- -------- -------- Net income (loss) $(51,631) $ 3,789 $(51,182) $(50,774) ======== ======== ======== ========
Transactions between operating segments have been eliminated in consolidation. Note 4 Effective January 1, 2002, Trenwick adopted a new Financial Accounting Accounting Standards Board statement which amended the Standards accounting for goodwill and other intangible assets. This new statement suspended systematic goodwill amortization and its implementation resulted in LaSalle Re Holdings crediting negative goodwill of $11,586 to operations as of January 1, 2002 as a cumulative effect of an accounting change. The statement also required that the remaining goodwill balance of $53,239 at December 31, 2001 be tested for impairment under either market value or cash flow tests. The market value test was performed using the Income Forecast Model, which uses discounted cash flows. Cash flow tests were also performed, and as a result of the tests performed, it was determined that the goodwill was impaired and the entire remaining goodwill balance was charged to operations as of January 1, 2002 as a cumulative effect of an accounting change. Note 5 The components of premiums written and earned for the three Underwriting and six months ended June 30, 2003 and 2002 are as follows: Activities
Three Months Six Months ------------------------ ------------------------ 2003 2002 2003 2002 --------- --------- --------- --------- Assumed premiums written $ 73,346 $ 149,425 $ 157,399 $ 358,308 Direct premiums written 101,838 292,722 275,577 549,409 --------- --------- --------- --------- Gross premiums written 175,184 442,147 432,976 907,717 Ceded premiums written (18,752) (186,215) (84,201) (334,636) --------- --------- --------- --------- Net premiums written $ 156,432 $ 255,932 $ 348,775 $ 573,081 ========= ========= ========= ========= Assumed premiums earned $ 93,527 $ 170,998 $ 209,593 $ 297,205 Direct premiums earned 182,943 248,189 402,619 515,410 --------- --------- --------- --------- Gross premiums earned 276,470 419,187 612,212 812,615 Ceded premiums earned (61,557) (141,926) (175,794) (269,330) --------- --------- --------- --------- Net premiums earned $ 214,913 $ 277,261 $ 436,418 $ 543,285 ========= ========= ========= =========
9 Note 6 The following table sets forth the computation of basic and Earnings diluted earnings per share for the three and six months ended Per Share June 30, 2003 and 2002:
Three Months Six Months -------------------------- ---------------------------- 2003 2002 2003 2002 ---------- ---------- ---------- ------------ Net income (loss) available to common shareholders $ (52,717) $ 3,789 $ (53,341) $ (50,774) ========== ========== ========== ============ Weighted average shares outstanding - basic and diluted 36,773,865 36,786,434 36,765,462 36,800,824 ========== ========== ========== ============ Basic and diluted earnings (loss) per common share $ (1.43) $ 0.10 $ (1.45) $ (1.38) ========== ========== ========== ============
For the three and six months ended June 30, 2003 and 2002, 962,365, 962,365; 1,744,077 and 1,737,077, respectively, aggregate share options and warrants were excluded from the computation of diluted earnings per share because their effect would have been antidulutive on the calculation for the respective periods. During the three months ended June 30, 2002, 1,365,187 share options were cancelled pursuant to the employee stock option exchange program. This voluntary program offered all active employees with the exception of the Chief Executive Officer a one-time opportunity to exchange stock options for new options at a grant price equal to the fair market value of Trenwick common shares on December 16, 2002, which was $0.89. Trenwick has several plans through which it makes options in common shares available to employees at the discretion of its board of directors. Non-employee directors receive automatic grants under a separate plan. Exercise prices are generally fixed at the market value at the date of grant. Options vest and are exercisable on various terms, usually either over a five year period or up to a ten year period. All options have an expiration date not exceeding ten years. Transactions under the share option plans during the periods presented were as follows:
June 30 ------------------------- 2003 2002 ---------- ---------- Number of shares: Options outstanding, beginning of period 1,847,429 3,385,379 Options granted -- 7,000 Options canceled (885,064) (1,801,565) ---------- ---------- Options outstanding, end of period 962,365 1,590,814 ========== ========== Options exercisable, end of period 756,943 1,283,077 ========== ========== Range of exercise price: Options outstanding, end of period $ 1 - $40 $ 8 - $41 Options exercisable, end of period $ 8 - $40 $ 13 - $41 ========== ========== Weighted average exercise price: Options granted -- $ 8.00 Options outstanding, end of period $ 23.34 $ 26.56 Options exercisable, end of period $ 28.75 $ 28.44 ========== ==========
10 Further details on options outstanding and exercisable at June 30, 2003 follow:
Options outstanding Options currently exercisable ----------------------------------------- ----------------------------- Weighted Average Weighted Remaining Weighted Average Contractual Average Exercise Number Life in Exercise Number Exercise price range Price Of Options Years Price of Options -------------------- -------- ---------- ----------- -------- ---------- Under $10.00 $ 1.18 180,676 10 $ 8.40 7,000 $10.01-$25.00 $18.44 204,797 5 $18.69 173,051 $25.01 and over $32.02 576,892 3 $32.02 576,892 ------- ------- $23.34 962,365 5 $28.75 756,943 ======= =======
The current accounting standard establishes a fair value based method of accounting for stock-based compensation plans; however, it permits an entity to continue to apply the accounting provisions of a previous standard and make pro forma disclosures of net income and earnings per share as if the fair market value based method had been applied. Trenwick continues to account for the share option grants in accordance with the previous standard; the pro forma disclosures required by the fair value based method are presented below. All of the outstanding share options were issued at an exercise price equal to fair market value on the date of grant; therefore no compensation expense has been recognized for these grants. Had the fair value based method described above been applied, net income (loss) available to common shareholders and net income (loss) per common share for the six months ended June 30, 2003 and 2002, respectively, would have been the pro forma amounts shown below:
Three Months Six Months ------------------- --------------------- 2003 2002 2003 2002 -------- ------ -------- -------- Net loss available to common shareholders As reported $(52,717) $3,789 $(53,341) $(50,774) Pro forma $(52,737) $3,857 $(53,398) $(50,945) Basic and diluted loss per common share As reported $ (1.43) $ 0.10 $ (1.45) $ (1.38) Pro forma $ (1.43) $ 0.10 $ (1.45) $ (1.38)
11 The pro forma adjustments relating to options granted from 1995 to 2002 are based on a fair value method using the Black-Scholes option pricing model; no effect has been given to options granted prior to 1995 and no options were granted in 2003. Valuation and related assumption information for options granted in 2002 are as follows: Expected volatility 53.0% Risk-free interest rate 4.0% Common share dividend yield 1.2% The Black-Scholes option valuation model was developed for use in estimating the fair value of options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected share price volatility. Because Trenwick's share options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in Trenwick's opinion the existing models do not necessarily provide a reliable measure of the fair value of its share options. Note 7 On May 5, 2003, INSCORP entered into a "letter of Insurance understanding" with the New York Insurance Department pursuant Regulation to which INSCORP agreed that it would not take any of the following actions without the prior written approval of the Department: o Withdraw funds from its bank accounts, or make disbursements or payments outside of the ordinary course of business in amounts exceeding 3% of its aggregate cash and investments. o Incur any debt obligation or liability for borrowed money not related directly to the ordinary course of business. o Settle any intercompany balances or pay any dividends. o Enter into any new material reinsurance agreement or modify in any material respect any existing material reinsurance agreement other than customary renewals. o Add new members to its board of directors other than current senior executive officers of INSCORP or its affiliates without notification to the department. o Change the compensation terms for directors, officers or employees. o Pledge or assign any of its assets to secure indebtedness for borrowed money. Senior management of Trenwick has also agreed to meet with the New York Insurance Department, in person or by conference call, with such frequency as may be deemed necessary by the Department to provide updates on the status of Trenwick and any changes in the status of INSCORP. INSCORP is also required to provide to the New York Insurance Department a monthly financial statement consisting of a balance sheet and income statement within 45 days following the end of such month. The above described terms will remain in effect until such time as the New York Insurance Department provides INSCORP written notice of its release or the agreement is superceded by administrative or court order. 12 Note 8 On August 20, 2003, Trenwick and its affiliates, LaSalle Re Subsequent Holdings Limited ("LaSalle Re Holdings") and Trenwick America Events (collectively with LaSalle Re Holdings and Trenwick, the "Debtors"), filed for protection from their creditors under chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). On that same date, Trenwick and LaSalle Re Holdings were in the process of filing proceedings in the Supreme Court of Bermuda known under Bermudian law as "winding up". Trenwick and LaSalle Re Holdings will petition the Supreme Court of Bermuda to issue an order appointing Joint Provisional Liquidators for Trenwick and LaSalle Re Holdings and will request that deference be paid in the "winding up" to the jurisdiction of the Bankruptcy Court and the Debtors' restructuring efforts in accordance with the Bankruptcy Code. It is the intention of the Debtors to implement the restructuring agreed to among the Debtors and their creditor constituencies as discussed above through the bankruptcy process. Included in the accompanying consolidated balance sheet are: i) indebtedness of $76,784, ii) mandatorily redeemable preferred capital securities of $68,350, and iii) $75,000 in preferred shares of Bermuda subsidiary, all of which are expected to be subject to the bankruptcy filing. The majority of the assets and liabilities (other than those previously mentioned) included in the consolidated balance sheet are assets and liabilities of the regulated insurance company subsidiaries, which are not subject to the proceedings in the Bankruptcy Court or the Supreme Court of Bermuda. On August 20, 2003, Trenwick Holdings Limited, a aubsidiary of Trenwick, entered into an agreement with Bestpark, a subsidiary of Litigation Control Group Limited, to sell to Bestpark all of the capital stock of Trenwick International, as well as all of the capital stock of Trenwick Management Services Ltd ("TMS") and Specialist Risk Underwriters Limited ("SRU"). TMS is Trenwick International's management services company. SRU is a company that in the past has carried out underwriting agency services for Trenwick International and other entities. It is anticipated that substantially all of the (pound)2.0 million in initial consideration to be paid by Bestpark will be used to pay transactional fees and expenses. The remaining consideration, if any, is contingent upon a successful runoff of the Trenwick International business. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion highlights material factors affecting Trenwick Group Ltd's results of operations for the three and six months ended June 30, 2003 and 2002. This discussion and analysis should be read in conjunction with the unaudited interim financial statements and notes thereto of Trenwick contained in this filing as well as in conjunction with the audited financial statements and related notes included in the Annual Report on Form 10-K of Trenwick for the year ended December 31, 2002. Overview Trenwick Group Ltd. ("Trenwick") is a Bermuda-based specialty insurance and reinsurance holding company with subsidiaries located in the United States and the United Kingdom, including four runoff operations. Trenwick's operations at Lloyd's of London ("Lloyd's") underwrite specialty property and casualty insurance as well as treaty and facultative property and casualty reinsurance on a worldwide basis. In 2002, Trenwick conducted several strategic reviews of its operations in light of its capital constraints and determined that it was necessary for Trenwick to reduce its operating leverage by reducing premium volumes to a level more commensurate with its capital base and to concentrate its limited financial resources on its core franchises and businesses, its United States treaty reinsurance business and its Lloyd's operations, where it would be able to write insurance and reinsurance based on direct or indirect financial support. As a result, Trenwick voluntarily placed into runoff its United States specialty program business formerly operated through its subsidiary, Canterbury Financial Group, Inc., effective October 30, 2002, and its London-based specialty insurance and reinsurance company, Trenwick International Limited ("Trenwick International"), effective November 29, 2002. Additionally, in light of the increasing capital requirements imposed by the market on catastrophe insurance providers, Trenwick sold the in-force property catastrophe reinsurance business of its Bermuda subsidiary, LaSalle Re Limited ("LaSalle Re"), to Endurance Specialty Insurance, Ltd. ("Endurance"). Little or no new insurance or reinsurance is presently being offered in these runoff operations. Trenwick's United States treaty reinsurance business, formerly written through its subsidiary, Trenwick America Reinsurance Corporation ("Trenwick America Re"), has been limited since November 2002 to providing, through an underwriting facility with Chubb Re, Inc. and its affiliate Federal Insurance Company (together, "Chubb"), treaty reinsurance to insurers of property and casualty risks. Since inception in November 2002, Trenwick underwrote approximately $128 million of reinsurance under the facility. Trenwick announced on April 15, 2003 that it would cease underwriting reinsurance business under the Chubb facility. Trenwick will continue to be entitled to the economic benefits of, and will bear losses on, existing business under the facility, subject to the terms and conditions of the facility. Trenwick's ability to write reinsurance business under the facility was severely constrained by its financial condition and concerns arising with respect to its ongoing stability. As a result, Trenwick ceased underwriting activities under the facility in order to reduce Trenwick's costs and on June 18, 2003 the underwriting agreement was cancelled by Chubb. The effect of this cessation is that Trenwick America Re is now in runoff. Trenwick will continue to service and pay claims for all business previously written through Trenwick America Re outside of the Chubb facility and will jointly adjust and settle with Chubb any claims arising under the business written under the Chubb facility, subject to Chubb's final authority. 14 Trenwick announced on August 7, 2003 that that it has entered into a letter of intent with respect to an agreement in principle on a long-term restructuring of its debt obligations, the sale of its business operations at Lloyd's, and the runoff of its remaining businesses with (i) the majority of the beneficial holders (the "Senior Noteholders") of its 6.70% Senior Notes (the "Senior Notes"), (ii) the steering committee (the "Steering Committee") of the lending institutions (the "Banks") that have issued letters of credit under a senior secured credit facility (the "LoC Facility") on behalf of certain subsidiaries of Trenwick in support of Trenwick's Lloyd's operations, and (iii) a group composed of current members of management of Trenwick's Lloyd's operations (the "Management Team"). Trenwick did not pay principal and interest on the Senior Notes due on August 1, 2003, which also created an event of default with respect to the LoC Facility and under certain other indebtedness of Trenwick. The restructuring is intended to be implemented through various means, including but not limited to the following: (i) the filing by Trenwick and/or one or more of its subsidiaries of chapter 11 bankruptcy proceedings in the United States and the filing of similar proceedings in Bermuda, Barbados or the United Kingdom, as the case may be; (ii) the sale by Trenwick of substantially all of its Lloyd's operations to a company controlled by the Management Team and with capital provided by the Management Team, third-party investors and the Banks and (iii) the retention of third party run-off advisors and the continued runoff or disposition of all of Trenwick's other insurance and reinsurance operations. In light of the foregoing, Trenwick announced that it believes that it is unlikely that any of the holders of the shares of Trenwick or of its wholly-owned Bermuda subsidiary, LaSalle Re Holdings Ltd, will receive any return on their investment in the near term if at all. The terms of the restructuring are subject to the satisfaction of numerous conditions precedent including, but not limited to, the following: (i) approval of the restructuring by the Banks; (ii) negotiation of definitive documentation (iii) receipt of all requisite regulatory and other approvals in the United States, Bermuda and the United Kingdom; (iv) due diligence by Englefield Capital LLP, the proposed equity sponsor of the Management Team, which has entered into an exclusive negotiation agreement with Trenwick, and (v) approval of any court having jurisdiction over the above-referenced insolvency proceedings. On August 20, 2003, Trenwick and its affiliates, LaSalle Re Holdings Limited ("LaSalle Re Holdings") and Trenwick America Corporation ("Trenwick America," and collectively with LaSalle Re Holdings and Trenwick, the "Debtors"), filed for protection from their creditors under chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). On that same date, Trenwick and LaSalle Re Holdings were in the process of filing proceedings in the Supreme Court of Bermuda known under Bermudian law as "winding up". Trenwick and LaSalle Re Holdings will petition the Supreme Court of Bermuda to issue an order appointing Joint Provisional Liquidators for Trenwick and LaSalle Re Holdings and will request that deference be paid in the "winding up" to the jurisdiction of the Bankruptcy Court and the Debtors' restructuring efforts in accordance with the Bankruptcy Code. It is the intention of the Debtors to implement the restructuring agreed to among the Debtors and their creditor constituencies as discussed above through the bankruptcy process. The majority of the assets and liabilities included in the consolidated balance sheet, are assets and liabilities of the regulated insurance company subsidiaries, which are not subject to the proceedings in the Bankruptcy Court or the Supreme Court of Bermuda. 15 During the first quarter of 2003, Trenwick amended the basis in which operating segments are determined. This change followed strategic reviews of Trenwick's operations which resulted in the decision to place four of its operations into voluntary runoff. As a result, the operations of Trenwick and its subsidiaries will now be managed on a legal entity basis combined by region, rather than an operating platform basis, in order to ensure the runoff of these operations is conducted in a manner which will maximize the economic value of these entities. The results of Trenwick's specialty insurance and reinsurance business is reported in the following three business segments: - Lloyd's operations, written principally through five corporate members of Lloyd's and managed by TMA; - North American runoff, which consists of treaty reinsurance formerly written through Trenwick America Re as well as the results of the Chubb underwriting facility, the runoff of United States specialty program insurance formerly written by The Insurance Corporation of New York ("INSCORP") and its subsidiary Dakota Specialty Insurance Company ("Dakota) and property catastrophe reinsurance written on a worldwide basis by LaSalle Re until it ceased underwriting effective April 1, 2002 effected through a 100% quota share reinsurance agreement; and - United Kingdom runoff, which consists of international specialty insurance and reinsurance written through Trenwick International, until it ceased underwriting substantially all new business effective November 29, 2002. Effective April 1, 2002, Trenwick sold the in-force property catastrophe reinsurance business of its subsidiary, LaSalle Re to Endurance. The sale was effected through a 100% quota share reinsurance agreement, with Endurance paying Trenwick a ceding commission of 25% of premiums ceded under the quota share agreement and additional profit sharing of 50% if the losses do not exceed a loss ratio of 45%. In addition, Endurance has the right to renew LaSalle Re's in-force business as it expires in exchange for a 12.5% commission on the business renewed. Included in the 2002 second quarter results are $6.7 million in ceding commissions earned on the quota share with Endurance, as well as $3.9 million in amortization of acquisition costs on the related assumed business. Critical Accounting Policies The accounting policies described below are those Trenwick considers critical in preparing its consolidated financial statements. These policies include significant estimates made by management using information available at the time the estimates are made. However, as described below, these estimates could change materially if different information or assumptions were used. Unpaid Claims and Claims Expenses Claims and claims expenses are recorded as incurred, at management's best estimate, in order to match claims and claims expense costs with premiums over the contract periods. The amount provided for unpaid claims and claims expenses consists of any unpaid reported claims and claims expenses and estimates for incurred but not reported claims and claims expenses, net of 16 estimated salvage and subrogation. The estimates for claims and claims expenses incurred but not reported were developed based on historical claims and claims expense experience and an actuarial evaluation of expected claims and claims expense experience. Workers' compensation indemnity liabilities that are considered fixed and determinable are discounted using an interest rate of 3.5%. Reserves for unpaid claims and claims expenses, by their very nature, do not represent an exact calculation of the liability and, while Trenwick has established reserves equal to the current best estimate of ultimate losses, there remains a likelihood that further changes in such claim estimates, either upward or downward, will occur in the future. Adjustments to previously reported reserves for unpaid claims and claims expenses are considered changes in estimates for accounting purposes and are reflected in the income statement in the period in which the adjustment becomes known. Unpaid claims and claims expenses are recorded based on actuarial estimates of losses inherent in that period's claims, including losses for which claims have not yet been reported. Estimates of unpaid claims and claims expenses rely on actuarial observations of ultimate loss experience for similar historical events. Historical insurance industry experience indicates that a high degree of inherent variability exists in assessing the ultimate amount of losses under short-duration property and casualty contracts. This inherent variability is particularly significant for liability-related exposures, including latent claims issues (such as asbestos and environmental related coverage disputes), because of the extended period of time, often many years, that transpires between when a given claim event occurs and the ultimate full settlement of such claim. This situation is then further exacerbated for reinsurance entities (as opposed to primary insurers) due to coverage often being provided on an "excess-of-loss" basis and the resulting time lags in receiving current claims data. Additionally, the uncertainty is increased as a result of the diversity of development patterns among different types of reinsurance and the necessary reliance on ceding companies for information regarding reported claims and differing reserving practices among ceding companies. Other items that have been considered in determining reserves but may develop differently than currently estimated include: o September 11, 2001 related claims, particularly with respect to catastrophe coverage underwritten in LaSalle Re; o United Kingdom liability claims; o Claims against insured financial services companies for certain types of practices including alleged misallocations of shares in initial public offerings; o Directors and Officers liability insurance in the United States; o Ultimate losses on business underwritten in the last four years, as reserve estimates are inherently more uncertain on recent business, where reported loss activity is still low relative to ultimate losses; o Claims liabilities also include provisions for latent injury or toxic tort claims that cannot be estimated with traditional reserving techniques. Due to inconsistent court decisions in federal and state jurisdictions and the wide variation among insureds with respect to underlying facts and coverage, uncertainty exists with respect to these claims as to liabilities of ceding companies and, consequently, reinsurance coverage; o Reinsurance collectibility - Trenwick reviews and monitors its reinsurance recoverables from its reinsurers and makes provision for uncollectible reinsurance as appropriate. However, given the magnitude of reinsurance recoverables, $1.8 billion at June 30, 2003, Trenwick has a significant exposure to collectibility issues. Trenwick's management continually evaluates the potential for changes in unpaid claims and claims expenses to adjust recorded reserves and to proactively modify underwriting criteria and 17 product offerings. In recent periods and continuing throughout 2002, the level of reported claims activity related to prior year loss events, particularly for liability-related exposures underwritten in 1997 through 2001, has been significantly higher than anticipated. Full consideration of these trends was incorporated into a comprehensive reserve study completed in the fourth quarter of 2002. Insurance reserves, by their very nature, do not represent an exact calculation of liability and, while Trenwick has established reserves equal to the current best estimate of ultimate losses, there remains a likelihood that further changes in such loss estimates, either upward or downward, will occur in the future. Reinsurance Recoverable Balances Trenwick has purchased reinsurance to reduce its exposure on individual risks, catastrophic losses and other large losses. Trenwick estimates the amount of uncollectible receivables from its reinsurers each period and establishes an allowance for uncollectible amounts. The amount of the allowance is based on the age of unpaid amounts, information about the creditworthiness of Trenwick's reinsurers, and other relevant information. Estimates of uncollectible reinsurance amounts are reviewed quarterly, and changes are recorded in the period they become known. A significant change in the level of uncollectible reinsurance amounts would have a significant effect on Trenwick's results of operations and financial position. Investments Investments are classified as available for sale and recorded at fair value, and unrealized investment gains and losses are reflected in shareholders' equity. Investment income is recorded when earned, and capital gains and losses are recognized when investments are sold. Investments are reviewed periodically to determine if they have suffered an impairment of value that is considered other than temporary. If investments are determined to be impaired, a capital loss is recognized at the date of determination. Testing for impairment of investments also requires significant management judgment. The identification of potentially impaired investments, the determination of their fair value and the assessment of whether any decline in value is other than temporary are the key judgment elements. The discovery of new information and the passage of time can significantly change these judgments. Revisions of impairment judgments are made when new information becomes known, and any resulting impairment adjustments are made at that time. The current economic environment and recent volatility of securities markets increase the difficulty of determining fair value and assessing investment impairment. The same influences tend to increase the risk of potentially impaired assets. Trenwick seeks to match the maturities of invested assets with the payment of expected liabilities. By doing this, Trenwick attempts to make cash available as payments become due. If a significant mismatch of the maturities of assets and liabilities were to occur and Trenwick had to liquidate investments prior to their maturity, it may incur realized losses and the effect on Trenwick's results of operations could be significant. Deferred Income Taxes Deferred income tax assets and liabilities are computed based on temporary differences between financial statement and income tax bases of assets and liabilities using enacted income tax rates in effect for the year in which the differences are expected to reverse. FASB Statement No. 109 requires a valuation allowance to be recorded when it is more likely than not that some or all of the deferred tax assets will not be realized. Due to Trenwick's cumulative losses generated in 18 recent years and uncertainties as to the amount of taxable income to be generated in future years, as of December 31, 2002, Trenwick could not support the future realizability of its net deferred tax asset. The effects of this determination on Trenwick's results from operations were significant. As of June 30, 2003, Trenwick maintained a valuation allowance for the full amount of its net deferred tax asset. Trenwick's Bermuda operations are not subject to income tax. Results of Operations - Three Months Ended June 30, 2003 and 2002 Trenwick's net loss available to common shareholders was $52.7 million in the three months ended June 30, 2003 compared to net income available to common shareholders of $3.8 million recorded in the same period in 2002. The 2003 results included adverse development on prior year reserves for unpaid claims and claims expenses combined with one-time charges incurred related to the cancellation of the Chubb underwriting facility as well as continued costs for legal and advisory fees. Underwriting income (loss) Trenwick produced an underwriting loss of $50.9 million in the second quarter of 2003 compared to an underwriting loss of $12.3 million in the second quarter of 2002. Details of underwriting income and loss are produced below:
2003 2002 Change --------- --------- -------- (in thousands) Net premiums earned $ 214,913 $ 277,261 $(62,348) --------- --------- -------- Claims and claims expenses incurred 180,786 194,025 (13,239) Acquisition costs and underwriting expenses 84,988 95,524 (10,536) --------- --------- -------- Total expenses 265,774 289,549 (23,775) --------- --------- -------- Net underwriting loss $ (50,861) $ (12,288) $(38,573) ========= ========= ======== Loss ratio 84.1% 70.0% 14.1% Underwriting expense ratio 39.5% 34.4% 5.1% Combined ratio 123.6% 104.4% 19.2%
The underwriting loss of $50.9 million in the second quarter of 2003 represented a $38.6 million greater loss compared to the second quarter of 2002. The underwriting result in 2003 is a result of a decrease in earned premiums as a result of the runoff status of all of Trenwick's insurance and reinsurance operations other than its Lloyd's operations, combined with adverse development recorded on prior year reserves for unpaid claims and claims expenses. The increase in the combined ratio in the second quarter of 2003 compared to the second quarter of 2002 resulted mainly from the decrease in earned premiums and adverse development noted above. Premiums written Gross premiums written for the three months ended June 30, 2003 were $175.2 million compared to $442.1 million for the three months ended June 30, 2002, a decrease of $267.0 million or 60.4%. Details of gross premiums written are provided below: 19 2003 2002 Change -------- -------- --------- (in thousands) Lloyd's syndicates $109,681 $180,170 $ (70,489) North American runoff 60,150 218,296 (158,146) United Kingdom runoff 5,353 43,681 (38,328) -------- -------- --------- Gross premiums written $175,184 $442,147 $(266,963) ======== ======== ========= The decrease of $70.5 million in Lloyd's syndicates gross written premiums for the second quarter of 2003 compared to $180.2 million in the second quarter of 2002 was due primarily to the significant decrease in premiums written on aviation business in 2003. This decrease is a result of the decrease in the number of airline passengers due to recent security concerns together with the impact of SARS and the Iraq war. In addition, Trenwick ceased underwriting aviation business during the quarter ended June 30, 2003 which resulted in return premiums. North American runoff gross premium writings for the three months ended June 30, 2003 decreased by $158.1 million, or 72.4% from the three months ended June 30, 2002 as a result of the sale of LaSalle Re's in-force property catastrophe reinsurance business, effective April 1, 2002, combined with the effects of the current financial condition of Trenwick which prevented Trenwick America Re from writing any new business outside of that written through the Chubb underwriting facility as well as Trenwick's decision to cease underwriting specialty program insurance effective October 30, 2002. The decrease of $38.3 million in United Kingdom runoff's gross premiums written in the second quarter of 2003 compared to the second quarter of 2002 was attributable to Trenwick's decision to discontinue writing substantially all new business through Trenwick International effective November 29, 2002. Premiums earned Net premiums earned for the three months ended June 30, 2003 were $214.9 million compared to $277.3 million for the same period in 2002. Details of premiums earned are provided below: 2003 2002 Change --------- --------- --------- (in thousands) Gross premiums written $ 175,184 $ 442,147 $(266,963) Change in gross unearned premiums 101,286 (22,960) 124,246 --------- --------- --------- Gross premiums earned 276,470 419,187 (142,717) --------- --------- --------- Gross premiums ceded (18,752) (186,215) 167,463 Change in ceded unearned premiums (42,805) 44,289 (87,094) --------- --------- --------- Ceded premiums earned (61,557) (141,926) 80,369 --------- --------- --------- Net premiums earned $ 214,913 $ 277,261 $ (62,348) ========= ========= ========= Gross premiums ceded for the three months ended June 30, 2003 were $18.8 million compared to $186.2 million for the same period in 2002. The decrease of $167.5 million in gross premiums ceded is the result of Trenwick placing all of its insurance and reinsurance operations other than its Lloyd's syndicates into voluntary runoff. Claims and claims expenses Claims and claims expenses for the three months ended June 30, 2003 were $180.8 million, a decrease of $13.2 million compared to claims and claims expenses of $194.0 million for the same period in 2002. The decrease in claims and claims expenses in 2003 is attributable to the runoff 20 status of Trenwick's insurance and reinsurance operations other than at Lloyd's combined with $52.2 million of adverse development on prior year reserves for unpaid claims and claims expenses. Approximately 38.1 million of this adverse development related to Trenwick's North American runoff segment, and related primarily to higher than expected reported losses on its directors and officers and excess general liability lines of business as well as an unexpected arbitration settlement related to a pool in which Trenwick participated in 1995. Trenwick's United Kingdom runoff segment's liability business contributed $6.1 million to the adverse development, and its Lloyd's operations professional indemnity and financial institutions lines of business contributed $8.0 million. Underwriting expenses 2003 2002 Change ------- ------- -------- (in thousands) Policy acquisition costs $63,863 $74,843 $(10,980) Underwriting expenses 21,125 20,681 444 ------- ------- -------- Total underwriting expenses $84,988 $95,524 $(10,536) ======= ======= ======== Underwriting expense ratio 39.5% 34.4% 5.1% ======= ======= ======== Total underwriting expenses, comprising policy acquisition costs and underwriting expenses, for the second quarter of 2003 decreased by $10.5 million compared to underwriting expenses for the second quarter of 2002. The decrease was attributable to the decrease in premium volume as previously discussed offset in part by increased legal and advisory fees incurred in 2003 related to the ongoing efforts of senior management of Trenwick's Lloyd's operations to seek alternate sources of capital to replace Trenwick's ownership of its Lloyd's operations and the current underwriting capacity provided by Trenwick. In addition, Trenwick's Lloyd's operations increased staffing levels in 2003 over 2002, which contributed additional expenses. Finally, severance costs of approximately $1.5 million were incurred during the second quarter of 2003 in connection with Trenwick's decision to cease underwriting through Trenwick America Re and the cancellation of the Chubb facility. Total underwriting expenses as a percentage of net premiums earned, or the underwriting expense ratio, was 39.5% for the three months ended June 30, 2003 compared to 34.4% for the same period in 2002. The increase in the underwriting expense ratio occurred principally because of the decrease in premiums previously discussed. Underwriting expenses for the three months ended June 30, 2003 as a percentage of earned premium was 9.8%, an increase of 2.4% from 7.4% for the same period in 2002. The increase in the underwriting expense ratio resulted principally from the decrease in earned premiums and additional costs incurred for legal and advisory fees and severance costs, combined with the decrease in aviation premiums in 2003, which generally carry a significantly lower rate than that of personal lines business. Net Investment Income 2003 2002 Change ----------- ----------- -------- (in thousands) Average invested assets $ 2,256,068 $ 2,329,867 $(73,799) Average annualized yields 3.52% 5.39% (1.87)% Investment income - portfolio $ 20,297 $ 31,388 $(11,091) Investment income - non-portfolio 735 57 678 Investment expenses (2,583) (3,560) 977 ----------- ----------- -------- Net investment income $ 18,449 $ 27,885 $ (9,436) =========== =========== ======== 21 Net investment income for the three months ended June 30, 2003 was $18.4 million compared to $27.9 million for the same period in 2002. The decrease in net investment income in the second quarter of 2003 was due to the overall decline in market yields during the quarter combined with a decrease in average invested assets. Investment expenses for the second quarters of both 2003 and 2002 includes interest expense on funds withheld of $1.8 million and $2.4 million, respectively, under the terms of stop loss reinsurance agreements purchased by Trenwick America Re prior to 2001. Net Realized Gains (Losses) Net realized losses on investments were $0.6 million during the three months ended June 30, 2003, compared to net realized gains of $4.0 million for the three months ended June 30, 2002. The 2003 losses were primarily the result of a write-down of an investment that was determined to be permanently impaired, while the 2002 gains were a result of the sale of investments made in order to repay Trenwick's term loan facility during the second quarter of 2002. Other income (expense) Trenwick recorded other expenses of $10.0 million for the quarter ended June 30, 2003 as compared to other income of $3.0 million for the same period in 2002. Other expenses for the 2003 quarter consists mainly of $10.0 million in fronting fees incurred related to the Chubb underwriting facility. As a result of the cancellation of the agreement on June 18, 2003, the remainder of the unpaid minimum fronting fees of $3.8 million was accrued as of June 30, 2003. Additionally, the remaining deferred fronting fee ($6.2 million at March 31, 2003) was fully amortized, as Trenwick will no longer benefit from future underwriting under the contract. Trenwick will continue to be entitled to the economic benefits of, and will bear losses on, business underwritten through the facility prior to the cancellation date. General and administrative expenses General and administrative expenses for the three months ended June 30, 2003 were $3.5 million, a decrease of $1.2 million as compared to $4.7 million incurred during the same period in 2002. The decrease in 2003 is primarily the result of the runoff status of Trenwick's insurance and reinsurance business other than its Lloyd's operations which have led to decreasing costs offset in part by legal and advisory fees incurred as a result of Trenwick's financial condition. Interest Expense and Subsidiary Preferred Share Dividends Interest expense and subsidiary preferred share dividends were $9.0 million for the second quarter of 2003, a decrease of $1.9 million from the same period in 2002. The decrease resulted from the inclusion of $2.4 million of interest on Trenwick's term loan facility in the 2002 quarter, which was paid in full during June 2002, offset in part by increased Letter of Credit fees, which were $1.5 million higher in the second quarter of 2003 than during the same period in 2002. Foreign Currency Gains (Losses) Trenwick recorded foreign currency gains of $5.0 million for the three months ended June 30, 2003, compared to foreign currency losses of $1.8 million for the three months ended June 30, 2002. The 2003 gains were a result of the strengthening of the Euro against the British pound during the period. Loss on sale of LaSalle Re's in-force Reinsurance Business The loss on the sale of LaSalle Re's in-force reinsurance business recorded during the second quarter of 2002 represents the net of the non-recurring revenue and expense items incurred as a result of the sale of LaSalle Re's in-force reinsurance business as of April 1, 2002. 22 Results of Operations - Six Months Ended June 30, 2003 and 2002 Trenwick's net loss available to common shareholders of $53.3 million in the six months ended June 30, 2003 represented a $2.6 million greater loss than the net loss available to common shareholders of $50.8 million recorded in the same period in 2002. The loss for the six months ended June 30, 2003 included one-time charges related to the cancellation of the Chubb underwriting agreement, legal and advisory fees related to Trenwick's current financial condition, as well as adverse development on prior year reserves for unpaid claims and claims expenses. The 2002 results included underwriting losses incurred related to the September 11th terrorist attacks. Underwriting income (loss) Trenwick produced an underwriting loss of $54.3 million in the first half of 2003 compared to an underwriting loss of $49.9 million in the first half of 2002. Details of underwriting income and loss follow:
2003 2002 Change --------- --------- --------- (in thousands) Net premiums earned $ 436,418 $ 543,285 $(106,867) --------- --------- --------- Claims and claims expenses incurred 319,269 401,602 (82,333) Acquisition costs and underwriting expenses 171,411 191,603 (20,192) --------- --------- --------- Total expenses 490,680 593,205 (102,525) --------- --------- --------- Net underwriting loss $ (54,262) $ (49,920) $ (4,342) ========= ========= ========= Loss ratio 73.2% 73.9% (0.7)% Underwriting expense ratio 39.3% 35.3% 4.0% Combined ratio 112.5% 109.2% 3.3%
The underwriting loss of $54.3 million in the first half of 2003 represented a $4.3 million greater loss compared to the first half of 2002. The greater loss is primarily due adverse development on reserves for unpaid claims and claims expenses. This was offset in part by underwriting losses recorded during the first half of 2002 related to the September 11th terrorist attacks. The increase in the combined ratio in the first half of 2003 compared to the first half of 2002 resulted mainly from a decrease in business written that carries lower commission costs combined with the decrease in earned premiums as a result of the runoff status of all of Trenwick's insurance and reinsurance business other than through its Lloyd's syndicates. Premiums written Gross premiums written for the six months ended June 30, 2003 were $433.0 million compared to $907.7 million for the six months ended June 30, 2002, a decrease of $474.7 million or 52.3%. Details of gross premiums written are provided below: 2003 2002 Change -------- -------- --------- (in thousands) Lloyd's syndicates $270,296 $307,610 $ (37,314) North American runoff 148,776 503,347 (354,571) United Kingdom runoff 13,904 96,760 (82,856) -------- -------- --------- Gross premiums written $432,976 $907,717 $(474,741) ======== ======== ========= 23 The decrease of $37.3 million in Lloyd's syndicates gross written premiums for the first half of 2003 compared to the first half of 2002 was due primarily to a significant decrease in premiums from the aviation line of business. This decrease is a result of the reduced number of airline passengers due to recent security concerns together with the impact of SARS and the Iraq war as well as Trenwick's decision to cease underwriting aviation business during the second quarter of 2003 which resulted in return premiums. This decrease was offset in part by the addition of treaty reinsurance and other casualty lines of business formerly underwritten by Trenwick International which are now written through Trenwick's Lloyd's syndicates. North American runoff gross premium writings for the first six months of 2003 decreased by $354.6 million, or 70.4% from the first half of 2002 as a result of the sale of LaSalle Re's in-force property catastrophe reinsurance business, effective April 1, 2002, as well as the runoff status of Trenwick's United States insurance and reinsurance business. The decrease of $82.9 million in United Kingdom runoff's gross premiums written in the first half of 2003 compared to the first half of 2002 was attributable to Trenwick's decision to discontinue writing substantially all new business through Trenwick International effective November 29, 2002. Premiums earned Net premiums earned for the six months ended June 30, 2003 were $436.4 million compared to $543.3 million for the same period in 2002. Details of premiums earned are provided below: 2003 2002 Change --------- --------- --------- (in thousands) Gross premiums written $ 432,976 $ 907,717 $(474,741) Change in gross unearned premiums 179,236 (95,102) 274,338 --------- --------- --------- Gross premiums earned 612,212 812,615 (200,403) --------- --------- --------- Gross premiums ceded (84,201) (334,636) 250,435 Change in ceded unearned premiums (91,593) 65,306 (156,899) --------- --------- --------- Ceded premiums earned (175,794) (269,330) 93,536 --------- --------- --------- Net premiums earned $ 436,418 $ 543,285 $(106,867) ========= ========= ========= Gross premiums ceded for the six months ended June 30, 2003 were $84.2 million compared to $334.6 million for the same period in 2002. The decrease in gross premiums ceded of $250.4 million was a result of the placement of all of Trenwick's insurance and reinsurance operations other than its Lloyd's syndicates into voluntary runoff as previously discussed. Claims and claims expenses Claims and claims expenses for the six months ended June 30, 2003 were $319.3 million, a decrease of $82.3 million compared to claims and claims expenses of $401.6 million for the same period in 2002. The decrease in claims and claims expenses in 2003 is attributable to Trenwick's decision to cease underwriting through all of its insurance and reinsurance subsidiaries other than its Lloyd's syndicates combined with the inclusion of $23.0 million of claims and claims expenses in the first half of 2002 related to the September 11th terrorist attacks. These decreases were offset in part by $74.4 million of adverse development on prior year reserves for unpaid claims and claims expenses. Approximately $51.7 million of this adverse development related to Trenwick's North American runoff segment and related primarily to higher than expected reported losses on its directors and officers and excess general liability lines of business as well as an unexpected arbitration settlement related to a pool in which Trenwick participated in 1995. Trenwick's United Kingdom runoff segment contributed $8.3 million to the adverse development, which stemmed from its liability business. Trenwick's Lloyd's operations contributed the remaining $14.4 million of adverse development, which relates to its professional indemnity and financial institutions business. 24 Underwriting expenses 2003 2002 Change -------- -------- -------- (in thousands) Policy acquisition costs $126,292 $147,915 $(21,623) Underwriting expenses 45,119 43,688 1,431 -------- -------- -------- Total underwriting expenses $171,411 $191,603 $(20,192) ======== ======== ======== Underwriting expense ratio 39.3% 35.3% 4.0% ======== ======== ======== Total underwriting expenses, comprising policy acquisition costs and underwriting expenses, for the first six months of 2003 decreased by $20.2 million compared to underwriting expenses for the first six months of 2002. The decrease was attributable to the decrease in premium volume as previously discussed offset in part by an increase in underwriting expenses. The increase in underwriting expenses for 2003 over 2002 is mainly the result of increased legal and advisory fees incurred in 2003 related to the ongoing efforts of senior management of Trenwick's Lloyd's operations to seek alternate sources of capital to replace Trenwick's ownership of its Lloyd's operations and the current underwriting capacity provided by Trenwick. In addition, Trenwick's Lloyd's operations increased staffing levels in 2003 over 2002, which contributed additional expenses. Finally, severance costs of approximately $1.5 million were incurred during the second quarter of 2003 in connection with Trenwick's decision to cease underwriting through Trenwick America Re. Total underwriting expenses as a percentage of net premiums earned, or the underwriting expense ratio, was 39.3% for the six months ended June 30, 2003 compared to 35.3% for the same period in 2002. The increase in the underwriting expense ratio occurred principally because of increased underwriting expenses and decreased earned premiums, both as described above. This increase in the ratio was further driven by the decrease in aviation premiums in 2003, which generally carry a significantly lower commission rate than that of personal lines of business. Net Investment Income 2003 2002 Change ----------- ----------- -------- (in thousands) Average invested assets $ 2,281,758 $ 2,274,242 $ 7,516 Average annualized yields 3.77% 5.70% (1.93)% Investment income - portfolio $ 43,039 $ 64,827 $(21,788) Investment income - non-portfolio 1,125 (114) 1,239 Investment expenses (6,077) (7,573) 1,496 ----------- ----------- -------- Net investment income $ 38,087 $ 57,140 $(19,053) =========== =========== ======== Net investment income for the six months ended June 30, 2003 was $38.1 million compared to $57.1 million for the same period in 2002. The decrease in net investment income in the first half of 2003 was due to an overall decline in market yields combined with a decrease in average invested assets. Investment expenses for the first six months of both 2003 and 2002 included interest expense on funds withheld of $4.2 million and $5.3 million, respectively, under the terms of stop loss reinsurance agreements purchased by Trenwick America Re prior to 2001. Net Realized Gains (Losses) Net realized losses on investments were $0.2 million during the six months ended June 30, 2003, compared to net realized gains of $5.4 million for the six months ended June 30, 2002. The 2003 25 losses are primarily the result of a write-down of an investment that was determined to be permanently impaired, while the 2002 gains are a result of the sale of investments made in order to repay Trenwick's term loan facility during the second quarter of 2002. Other income (expense) Trenwick recorded other expenses of $12.0 million for the six months ended June 30, 2003 as compared to other income of $5.6 million for the same period in 2002. The 2003 amount consists primarily of $13.0 million of fronting fees incurred related to Trenwick's underwriting facility with Chubb Re which was cancelled in June of 2003. As a result of the cancellation of the agreement on June 18, 2003, the remainder of the unpaid minimum fronting fee of $3.8 million was accrued as of June 30, 2003. Additionally, the remaining deferred fronting fee ($8.0 million at December 31, 2002) was fully amortized, as Trenwick will no longer benefit from future underwriting under the contract. Trenwick will continue to be entitled to the economic benefits of, and will bear losses on, business underwritten through the facility prior to the cancellation date. General and administrative expenses General and administrative expenses for the six months ended June 30, 2003 were $7.3 million, a decrease of $0.7 million as compared to $8.0 million incurred during the same period in 2002. The decrease in 2003 is primarily the result of the runoff status of Trenwick's insurance and reinsurance business other than that written through its Lloyd's syndicates, offset in part by the inclusion of $2.0 million of legal and advisory fees related to Trenwick's ongoing efforts to restructure its outstanding indebtedness and preferred equity. Interest Expense and Subsidiary Preferred Share Dividends Interest expense and subsidiary preferred share dividends were $20.8 million for the first six months of 2003, consistent with the expense from the same period in 2002. The 2003 expense was $4.6 million less than that for 2002 as a result of the absence of interest expense on Trenwick's term loan facility, which was repaid during the second quarter of 2002. This decrease was offset by an increase in letter of credit fees which were $6.2 million higher in the first half of 2003 than during the same period in 2002. Foreign Currency (Gains) Losses Trenwick recorded foreign currency gains of $4.5 million for the six months ended June 30, 2003, compared to $1.2 million of losses for the six months ended June 30, 2002, primarily due to the strengthening of the Euro relative to the British pound during the 2003 period. Liquidity and Capital Resources Trenwick is a holding company whose principal assets are its investments in the common stock of its operating subsidiaries. As a holding company, Trenwick's principal source of ongoing funding consists of permissible dividends, tax allocation payments and other statutorily permissible payments from its operating subsidiaries. Trenwick's ability to generate operating capital is limited and its ability to meet its obligations is dependent upon funding from its operating subsidiaries. There is substantial uncertainty as to what amount of future funds it will receive from its operating subsidiaries. Trenwick's principal use of cash has been operating expenses and dividends paid to its shareholders. Trenwick America Corporation ("Trenwick America") and Trenwick Holdings Limited ("Trenwick Holdings"), Trenwick's U.S. and U.K. holding companies, have utilized cash in order to service their respective debt obligations; LaSalle Re Holdings Limited ("LaSalle Re Holdings") has used cash to pay dividends on its preferred shares. Trenwick's operating subsidiaries receive cash from premiums, investment 26 income and proceeds from sales and maturities of portfolio investments. They utilize cash to pay claims, purchase their own reinsurance protections, meet operating and capital expenses and purchase investment securities. Trenwick and its insurance and reinsurance company subsidiaries are subject to regulatory oversight under the insurance statutes and regulations of the jurisdictions in which they conduct business, including all states of the United States, Bermuda and the United Kingdom. These regulations vary from jurisdiction to jurisdiction and are generally designed to protect ceding insurance companies and policyholders by regulating Trenwick's financial integrity and solvency in its business transactions and operations. Many of the insurance statutes and regulations applicable to Trenwick's subsidiaries relate to reporting and enable regulators to closely monitor Trenwick's performance. Typical required reports include information concerning Trenwick's capital structure, ownership, financial condition, and general business operations. As of both June 30, 2003 and December 31, 2002, Trenwick's consolidated investments and cash totaled $2.3 billion. The fair value of Trenwick's debt securities exceeded amortized cost by $33.1 million at June 30, 2003 and by $12.6 million at December 31, 2002. As of June 30, 2003, Trenwick's consolidated common shareholders' equity totaled $48.0 million, or $1.30 per common share, compared to $77.5 million, or $2.11 per common share at December 31, 2002. During the six months ended June 30, 2003, the unrealized appreciation of debt and equity securities increased by $19.4 million net of tax or $0.53 per share. Cash used in Trenwick's operating activities for the six months ended June 30, 2003 was $109.4 million compared to cash provided by Trenwick's operating activities of $57.9 million in the comparable period of 2002. The increase in cash used in operations was due primarily to a significant decrease in premiums collected in 2003 from 2002, a result of the runoff status of all of Trenwick's insurance and reinsurance operations other than through its Lloyd's syndicates. This decrease is in addition to a decrease in net investment income received, a result of lower yields and a decrease in Trenwick's average invested assets. Net cash used in financing activities during the six months ended June 30, 2002 included $2.9 million of dividends paid to common shareholders. Additionally, net cash used in financing activities in 2002 included $195.2 million related to the repayment of Trenwick's term loan facility. Trenwick paid a dividend of $0.04 per common share in both the first and second quarters of 2002 and LaSalle Re Holdings Limited paid a quarterly dividend of $.55 per share on the Series A preferred shares of LaSalle Re Holdings Limited in each of the quarters ended March 31 and June 30, 2002. In concert with other actions being taken in the fourth quarter of 2002, on November 7, 2002, Trenwick's Board of Directors announced that it had elected to suspend, with immediate effect and for an indefinite period, dividends payable on Trenwick's common and preferred shares. In December 2002, Trenwick's credit facility was amended to prohibit the payment of dividends. On November 29, 2002, Trenwick also ceased payment of dividends on the capital securities of Trenwick America and on the preferred stock of LaSalle Re Holdings. Trenwick's total debt to capital ratio (indebtedness divided by the sum of indebtedness, minority interest, convertible preferred stock and shareholders' equity) increased to 24.9% at June 30, 2003 from 22.7% on December 31, 2002, mainly as a result of the decrease in common shareholders' equity. 27 Financings, Financing Capacity and Capitalization Concurrently with the business combination involving LaSalle Re Holdings and Trenwick Group Inc. in September of 2000, Trenwick America and Trenwick Holdings, Trenwick's United States and United Kingdom holding companies, entered into an amended and restated $490 million credit agreement with various lending institutions ("the Banks"), which was guaranteed by LaSalle Re Holdings. The credit agreement consisted of both a $260 million revolving credit facility and a $230 million letter of credit facility. The revolving credit facility was subsequently converted into a four-year term loan and repaid in full on June 17, 2002. Additionally, on December 24, 2002, the credit agreement was amended to reduce the letter of credit facility, which is utilized by Trenwick to support its underwriting operations at Lloyd's, to the currently outstanding $182.5 million. The letter of credit facility is scheduled to terminate on December 31, 2003, although the letters of credit issued pursuant to the facility will not expire until December 31, 2006. Pursuant to a guaranty agreement entered into concurrently with the credit agreement, Trenwick has guaranteed the obligations of Trenwick America and Trenwick Holdings under the credit agreement. In April of 2002, Trenwick pledged the capital stock of LaSalle Re Holdings, which was a guarantor of the obligations under the credit agreement, and LaSalle Re as collateral to the Banks. In December of 2002, Trenwick, Trenwick America and Trenwick Holdings agreed to provide the Banks additional security interests as described below. 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 constituted an event of default under the credit agreement. In addition, increases in Trenwick's reserves for unpaid claims and claims expenses and the establishment of a deferred tax asset valuation allowance in the third quarter of 2002 resulted in violations of the financial covenants in the credit agreement requiring Trenwick to maintain a minimum tangible net worth and minimum risk-based capital. On November 13, 2002, Trenwick, its subsidiaries and the Banks executed a forbearance agreement with respect to the events of default arising from the lowered A.M. Best Company ratings and financial covenant violations. Subsequently, an amendment and waiver of default under the credit agreement and amendments to the guaranty agreement were entered into on December 24, 2002 (the "December Amendments"). The December Amendments extended the letter of credit facility through December 31, 2003 to support Trenwick's underwriting operations at Lloyd's for the 2003 year of account. To those Banks extending their letters of credit, Trenwick agreed to pay a 5% per annum cash letter of credit fee, issue pay-in-kind notes bearing interest at LIBOR plus 2.5% per annum to evidence an additional 3.16% per annum letter of credit fee, issue warrants equal to 10% of Trenwick's fully diluted equity capital, and pay 15% of the profits earned by Trenwick and its subsidiaries for the 2002 and 2003 Lloyd's years of account. In addition, Trenwick, Trenwick America and Trenwick Holdings agreed to provide the Banks a security interest in all of their respective equity interests in, and the assets and property of, their direct and indirect subsidiaries as additional collateral for the Banks, and to cause the subsidiaries to provide a guaranty to the Banks subject to applicable laws and regulations and certain existing contractual rights of holders of other indebtedness. On April 25, 2003, Trenwick issued to the Banks an aggregate of 3,678,686 warrants to purchase common stock, representing 10% of the fully diluted equity capital of Trenwick as of such date. The warrants have a term of eight years from the date of issuance and have an exercise price of $0.19 per share. 28 The December Amendments also prohibit Trenwick and its subsidiaries from declaring or paying any dividends (including on Trenwick's common shares, the Series A preferred shares of LaSalle Re Holdings and the capital securities of Trenwick Capital Trust I). The December Amendments and the other amendments and waivers entered into in the first and second quarters of 2003 waive certain other defaults, add covenants further restricting the operation of business, prohibit Trenwick and its respective subsidiaries from making certain payments without the Banks' approval, prohibit Trenwick and its respective subsidiaries from selling or otherwise disposing of any assets or property, require Trenwick to regularly report certain financial information to the Banks, and adjust downward certain of the financial covenants. Pursuant to the December Amendments, Trenwick was required to collateralize with cash, cash equivalents and marketable securities 60% of the outstanding letters of credit by August 1, 2003. As it was unable to do so, Trenwick's insurance company subsidiaries are now prohibited from underwriting any insurance or reinsurance without the Banks' prior approval. In addition, Trenwick is required to use its best efforts to terminate the letters of credit by December 31, 2003. In order to do so, the letters of credit would need to be replaced with other letters of credit or collateral acceptable to Lloyd's. In the event Trenwick has not terminated the letters of credit by December 31, 2003, it is required on such date to collateralize with cash, cash equivalents and marketable securities the full amount of the outstanding letters of credit. At this time, Trenwick does not have sufficient available liquidity to collateralize the letters of credit as required by the December Amendments. Since December 2002, Trenwick has entered into additional amendments and numerous waivers with the Banks providing for, among other things, waivers of potential covenant defaults, further reductions in certain financial covenants, additional financial reporting, approval of certain employee and other payments, approval of the extension of Trenwick America's senior notes from April 1, 2003 to August 1, 2003, the related payment of interest accrued through April 1, 2003 to the holders of the senior notes and extension of numerous deadlines imposed under the December Amendments. Trenwick America did not pay principal and interest on its Senior Notes due on August 1, 2003, which also created an event of default with respect to the letter of credit facility and under certain other indebtedness of Trenwick. Therefore, Trenwick may be required to fully and immediately collateralize the outstanding letters of credit under the terms of the credit agreement and the guaranty agreement. No liability for any such amounts has been reflected in Trenwick's financial statements. As announced on August 7, 2003, Trenwick has entered into an agreement in principle on a long-term restructuring of its debt obligations, the sale of its business operations at Lloyd's, and the runoff of its remaining businesses with (i) the majority of the beneficial holders of its Senior Notes, (ii) the steering committee of the Banks, and (iii) a group composed of current members of management of Trenwick's Lloyd's operations (the "Management Team"). The restructuring is intended to be implemented through various means, including but not limited to the following: (i) the filing by Trenwick and/or one or more of its subsidiaries of chapter 11 bankruptcy proceedings in the United States and the filing of similar proceedings in Bermuda, Barbados or the United Kingdom, as the case may be; (ii) the sale by Trenwick of substantially all of its Lloyd's operations to a company controlled by the Management Team and with capital provided by the Management Team, third-party investors and the Banks and (iii) the retention of third party run-off advisors and the continued runoff or disposition of all of Trenwick's other insurance and reinsurance operations. In light of the foregoing, Trenwick believes that it is unlikely that any of the holders of the shares of Trenwick or of its wholly-owned Bermuda 29 subsidiary, LaSalle Re Holdings Ltd, will receive any return on their investment in the near term if at all. The terms of the restructuring are subject to the satisfaction of numerous conditions precedent including, but not limited to, the following: (i) approval of the restructuring by the Banks; (ii) negotiation of definitive documentation (iii) receipt of all requisite regulatory and other approvals in the United States, Bermuda and the United Kingdom; (iv) due diligence by Englefield Capital LLP, the proposed equity sponsor of the Management Team, which has entered into an exclusive negotiation agreement with Trenwick, and (v) approval of any court having jurisdiction over the above-referenced insolvency proceedings. On August 20, 2003, Trenwick and its affiliates, LaSalle Re Holdings and Trenwick America (collectively with LaSalle Re Holdings and Trenwick, the "Debtors"), filed for protection from their creditors under chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). On that same date, Trenwick and LaSalle Re Holdings were in the process of filing proceedings in the Supreme Court of Bermuda known under Bermudian law as "winding up". Trenwick and LaSalle Re Holdings will petition the Supreme Court of Bermuda to issue an order appointing Joint Provisional Liquidators for Trenwick and LaSalle Re Holdings and will request that deference be paid in the "winding up" to the jurisdiction of the Bankruptcy Court and the Debtors' restructuring efforts in accordance with the Bankruptcy Code. It is the intention of the Debtors to implement the restructuring agreed to among the Debtors and their creditor constituencies as discussed above through the bankruptcy process. The majority of the assets of, and claims against, the Trenwick subsidiaries lie at the regulated insurance company subsidiaries, which are not subject to the proceedings in the Bankruptcy Court or the Supreme Court of Bermuda. In addition to the foregoing, at any time, one or more of the insurance regulatory authorities having jurisdiction over Trenwick's insurance company subsidiaries may commence voluntary or involuntary proceedings for the formal supervision, rehabilitation or liquidation of such subsidiaries, or one or more of the creditors of Trenwick or its subsidiaries may commence proceedings against Trenwick or its unregulated subsidiaries seeking their liquidation. The accompanying financial statements have been prepared assuming Trenwick will continue as a going concern. As discussed above, Trenwick was unable to repay certain senior notes by April 1, 2003 and collateralize, with cash or cash equivalents, 60% of the outstanding letters of credit under its senior credit facility by August 1, 2003 and is therefore in default with respect to the senior notes and certain other indebtedness. Additionally, certain insurance subsidiaries of Trenwick do not meet risk based capital levels or levels of surplus required by various insurance regulations to which they are subject. These matters raise substantial doubt about Trenwick's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. In connection with the Trenwick/LaSalle business combination, Trenwick America assumed, effective September 27, 2000, Trenwick Group Inc.'s obligations with respect to $75 million aggregate principal amount of 6.70% senior notes (the "Senior Notes"), which were initially due on April 1, 2003 and pursuant to an amendment were extended to August 1, 2003. They are unsecured obligations and rank senior in right of payment to all existing and future subordinated indebtedness of Trenwick America. Interest on the Senior Notes is payable semi-annually at a rate of 6.7%. In connection with the amendment that extended the maturity date of the Senior 30 Notes from April 1, 2003 to August 1, 2003, interest payable through April 1, 2003, in the aggregate amount of $2.5 million, was paid. Trenwick was unable to make payment of principal and interest on the Senior Notes on August 1, 2003 and is therefore currently in default under the terms of the Senior Notes. As discussed, Trenwick has entered into an agreement in principle to restructure the Senior Notes in addition to its other outstanding indebtedness. Trenwick America also assumed, effective September 27, 2000, Trenwick Group Inc.'s $113.4 million 8.82% Junior Subordinated Deferrable Interest Debentures held by Trenwick Capital Trust I in respect of the $110 million in 8.82% Subordinated Capital Income Securities issued by the Trust. Under the terms of the debentures, Trenwick America is not restricted from incurring indebtedness, but is subject to limits on its ability to incur secured indebtedness for borrowed money. Upon consummation of the acquisition of Chartwell Re Corporation ("Chartwell") in 1999, Trenwick Group Inc. became the successor obligor under Chartwell's Contingent Interest Notes due June 30, 2006. Effective September 27, 2000, Trenwick America assumed Trenwick Group Inc.'s obligations under the contingent interest notes in connection with the Trenwick/LaSalle business combination. The contingent interest notes were issued in an aggregate principal amount of $1 million, which accrues interest at a rate of 8% per annum, compounded annually. The interest is not payable until the maturity or earlier redemption of the contingent interest notes. In addition, the contingent interest notes entitle their holders to receive at maturity, in proportion to the principal amount of the contingent interest notes held by them, an aggregate of from $0 up to $55 million in contingent interest. The amount of contingent interest payable under the contingent interest notes is dependent upon the level of unpaid claims and claims expenses related to business written by Trenwick America's subsidiary, INSCORP, prior to 1996. The contingent interest notes mature on June 30, 2006. Trenwick America's failure to pay principal and interest on the Senior Notes constituted an event of default with respect to the contingent interest notes which would enable the trustee or the required amount of contingent interest noteholders to accelerate the maturity of the contingent interest notes. During the year ended December 31, 2002 and prior, Trenwick recorded significant adverse development related to the subject business, and as a result, the carrying value of the contingent interest notes at June 30, 2003 is equal to the minimum principal value of $1 million plus accrued interest, which is the present value of the amount expected to be paid at maturity. The contingent interest notes will continue to accrue interest at a rate of 8% per year. The contingent interest notes contain covenants which relate to the maintenance of certain records and limitations on certain indebtedness. At June 30, 2003, Trenwick was in compliance with these covenants. Trenwick's ability to refinance its existing debt obligations or raise additional capital is dependent upon several factors, including financial conditions with respect to both the equity and debt markets and the ratings of its securities as established by the rating agencies. As a result of the continued deterioration of Trenwick's financial condition, its senior debt ratings have been downgraded by Standard & Poor's Corporation to "D" and withdrawn by Moody's Investors Service. Trenwick's ability to refinance its outstanding debt obligations, as well as the cost of such borrowings, has been materially adversely affected by these ratings downgrades and withdrawals. Because Trenwick's operations are conducted through its operating subsidiaries, Trenwick is dependent upon the ability of its operating subsidiaries to transfer funds, principally in the form of cash dividends, tax reimbursements and other statutorily permissible payments. In addition to general legal restrictions on payments of dividends and other distributions to shareholders 31 applicable to all corporations, Trenwick's insurance subsidiaries are subject to insurance laws and regulations in the jurisdictions in which they operate that, among other things, restrict the amount of dividends and other distributions that may be paid to their parent corporations without prior approval by the insurance regulatory authorities. Moreover, Trenwick has entered into letter agreements with the insurance departments of the states of Connecticut and New York which restrict Trenwick America Re and INSCORP from taking certain actions such as paying dividends or dispensing of assets. As previously discussed, the December Amendments to Trenwick's letter of credit facility prohibit Trenwick and its subsidiaries from declaring or paying any dividends (including on Trenwick's common and preferred shares, the preferred shares of LaSalle Re Holdings and the capital securities issued by Trenwick Capital Trust I). The amendments also prohibit Trenwick from making certain payments without the Banks' approval. Series B Preferred Shares On September 27, 2000, Trenwick assumed the benefits and obligations of LaSalle Re Limited under a $100 million catastrophe equity put option. The catastrophe equity put option was amended and restated as of January 1, 2001 and amended as of January 25, 2002. As amended, the catastrophe equity put option 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 incurred in excess of $140 million in catastrophe losses as defined under the catastrophe equity put 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 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 equity 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. At March 31, 2003, the Series B Shares were rated "D" by Standard & Poor's, therefore the current dividend rate is 6.0%. If the Standard & Poor's rating remains below BBB- on the fifth anniversary, the factors adjust upward by an additional 0.50%. The Series B Shares are convertible into common shares of Trenwick after five years or upon the occurrence of certain "special conversion events" or the failure of Trenwick to maintain certain levels of capital. On February 20, 2003, Trenwick delivered a notice to European Re that Trenwick's GAAP Net Worth (as defined in the Certificate of Designation, Preferences and Rights (the "Certificate of Designation") of the Series B Shares) had fallen below $225 million. Trenwick's GAAP Net Worth did not equal or exceed $225 million during the period from February 20, 2003 through April 21, 2003 (which is 60 days after the date of notice). As a result, a Net Worth Conversion Event (as defined in the Certificate of Designation) occurred on April 21, 2003, and the Series B Shares are now convertible at the option of European Re into Trenwick common shares upon no less than 60 trading days advance notice to Trenwick. European Re has not delivered to Trenwick such a notice of conversion. As of December 31, 2002, the Series B Shares would be settled upon conversion with approximately 12.2 million common shares, or 33% of Trenwick's common shares, based on the year end figures for 2002. Trenwick has been notified by European Re that European Re believes Trenwick's calculation of the number of common shares to be received upon conversion of the Series B Preferred Shares is 32 erroneous and that under European Re's interpretation of the documentation the Series B Preferred Shares would have been entitled to convert into approximately 48.1 million shares, or 56.6% of the common shares, based on the year end figures for 2002. Trenwick believes its calculation is correct but intends to discuss this issue with European Re. If European Re converts its Series B Preferred Shares, there would be substantial dilution to the holders of the common shares, and this conversion could result in European Re obtaining control of Trenwick, subject to compliance with applicable insurance law and regulation. Accounting Standards In January 2003, the FASB issued Interpretation No. ("FIN") 46, Consolidation of Variable Interest Entities, which Trenwick intends to adopt on July 1, 2003. FIN 46's consolidation criteria are based on analysis of risks and rewards, not control, and represent a significant and complex modification of previous accounting principles. FIN 46 represents an accounting change, not a change in the underlying economics of asset sales. Under its provisions, certain assets previously sold to special purpose entities (SPEs) could be consolidated and, if consolidated, any assets and liabilities now on the books related to those SPEs would be removed. Because Trenwick America has not traditionally engaged in the types of securitization transactions within the scope of FIN 46, management does not believe adoption of the interpretation will impact future results. FUTURE BUSINESS OPERATIONS The future operations of Trenwick and its financial results are likely to differ materially from those of 2002 and prior years as Trenwick has placed into runoff several of its operations, from which a significant portion of its revenue in 2002 and prior years were derived. As described above in "Management's Discussion and Analysis of Financial Condition and Results of Operations", Trenwick, Trenwick America and LaSalle Re Holdings on August 20, 2003 filed for protection from their creditors under chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the District of Delaware and Trenwick and LaSalle Re Holdings were in the process of filing proceedings in the Supreme Court of Bermuda known under Bermudian law as "winding up." Trenwick, Trenwick America and LaSalle Re Holdings will be operating under the supervision of the Bankruptcy Court (and, in the case of Trenwick and LaSalle Re Holdings, also under the Supreme Court of Bermuda), and, as a result, certain of their expenditures will be subject to the approval of such court or courts, as the case may be. The result of the foregoing is that the future operations of Trenwick are likely to consist substantially of the sale, or management in runoff, of some or all of its existing insurance and reinsurance businesses including administration of claims, regulatory reporting, settlement of reinsurance agreements (including commutations thereof where appropriate), cash and investment management and related matters. The costs involved in such operations are likely to differ significantly from those of prior years, where a significant portion of the operating costs related to underwriting, marketing and securing reinsurance for new business. The reimbursement of costs as they relate directly to the insurance entities themselves will be subject to review by regulatory authorities which may challenge these costs, impose other restrictions with respect to the runoff including the provision of an acceptable runoff plan and retention of advisors who specialize in various aspects of runoff operation. Adverse loss developments or weakness in reinsurance recoveries, among other factors, could significantly and negatively impact the success of any runoff. It is unlikely that any amounts will be available to the creditors or equity holders of the direct and indirect parent companies of any regulated insurance subsidiary of Trenwick until such time as the regulator having jurisdiction over such subsidiary has been assured of the solvency of such entity, which may require several years if achievable at all. It is possible that one or more of 33 Trenwick's insurance company subsidiaries may be placed under the control of the regulatory body with jurisdiction over such entity, voluntarily or involuntarily, through rehabilitation, liquidation or other proceedings. RISK FACTORS You should carefully consider the risks described below regarding us and our securities. The risks and uncertainties described below are not the only ones we face. There may be additional risks and uncertainties. If any of the following risks actually occur or continue to occur, our business, financial condition or results of operations could be materially and adversely affected and the trading price of our securities could decline further. Our auditors have expressed doubt as to our ability to continue as a going concern. Our independent accountants, PricewaterhouseCoopers LLP, have stated, in their audit report with respect to our financial statements as at and for the twelve months ended December 31, 2002, that substantial doubt exists as to our ability to continue as a going concern. We are in default under our senior credit facility and our subsidiary Trenwick America has defaulted on its Senior Notes. We have filed for protection under chapter 11 of the United States Bankruptcy Code and are in the process of filing "winding up" proceedings in the Supreme Court of Bermuda. We currently have outstanding $182.5 million of letters of credit issued by the banks under our credit facility. We are obligated to reimburse the banks for any amounts drawn on these letters of credit, and for related fees and expenses. No amounts have been drawn on the letters of credit to date. However, Trenwick America was unable to make payment of principal and interest due on its Senior Notes on August 1, 2003 and is therefore currently in default under the terms of the Senior Notes. This default constituted an event of default under our letter of credit facility and we are required under that facility to collateralize, with cash or cash equivalents, 60% of the letters of credit. We are unable to provide such security. On August 20, 2003, we and our affiliates LaSalle Re Holdings and Trenwick America Corporation filed for protection under chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the District of Delaware. On that same date, we and LaSalle Re Holdings were in the process of filing proceedings in the Supreme Court of Bermuda known under Bermudian law as "winding up." We and LaSalle Re Holdings will petition the Supreme Court of Bermuda to issue an order appointing Joint Provisional Liquidators for us and LaSalle Re Holdings and will request that deference be paid in the "winding up" to the jurisdiction of the Bankruptcy Court and our restructuring efforts in accordance with the Bankruptcy Code. It is our intention to implement the restructuring agreed to among us, Trenwick America, LaSalle Re Holdings and our and their creditor constituencies as discussed above through the bankruptcy process. Our common shares and the Series A Preferred Shares of LaSalle Re Holdings Limited have been delisted and deregistered by the New York Stock Exchange The New York Stock Exchange's application for removal from listing of our common shares and the Series A Preferred Shares of our subsidiary LaSalle Re Holdings was granted by the Securities and Exchange Commission by order dated April 29, 2003, and the removal from listing and registration became effective prior to the opening of the New York Stock Exchange on April 34 30, 2003. Our common shares and the Series A Preferred Shares of LaSalle Re Holdings were quoted on the Over-The-Counter (OTC) Bulletin Board beginning on Tuesday, March 25, 2003. In light of the significant developments and other factors referred to in this Report, which have materially and adversely impacted Trenwick, its operations and its future prospects, it is unlikely that the common shares of Trenwick will realize significant value in the near term, if at all. As a result, it is possible that a market will not continue in the common shares of Trenwick, in which case the liquidity of the securities may be severely limited. We are unable to pay dividends and will continue to be unable to do so for the foreseeable future. In connection with other actions being taken in the fourth quarter of 2002, on November 7, 2002, our Board of Directors elected to suspend the payment of dividends to holders of our common shares effective immediately and for an indefinite period of time. In addition, our credit agreement has been amended to prohibit us from paying dividends without the approval of our lenders, and we are prohibited from paying dividends as the result of the deferral of dividend payments on our Series A Preferred Shares, Series B Preferred Shares and the capital securities of Trenwick America. We do not expect to be able to pay dividends to holders of our common shares for the foreseeable future. Covenants in our senior credit facility significantly limit our financial and operational flexibility. We have entered into many covenants in our senior credit facility and related agreements that limit our ability to take certain actions without the consent of the banks, including our ability to borrow money, to make particular types of investments or other restricted payments (including dividend payments), to sell our assets, or to merge or consolidate. These restrictions significantly limit our financial and operational flexibility. We have issued convertible preferred shares that may result in substantial dilution to existing common shareholders and/or a change in control. We do not have the ability to control settlement of these convertible preferred shares. As a result of the September 11, 2001 terrorist attacks, LaSalle Re incurred large catastrophe losses that enabled us to exercise our rights under a catastrophe equity put option with European Reinsurance Company of Zurich, a subsidiary of Swiss Reinsurance Company ("European Re"). In this transaction, we issued Series B convertible preferred shares to European Re for a purchase price of $40 million. These Series B shares are convertible into our common shares upon the occurrence of certain events, including our failure to maintain a net worth (as defined) under generally accepted accounting principles of $225 million. Our net worth is below $225 million, and a net worth conversion event has occurred. European Re is able to convert the Series B Shares into common shares upon not less than 60 trading days' notice to us, and in the event of such conversion, substantial dilution to our existing common shareholders will occur. As of December 31, 2002, the Series B Shares would be settled upon conversion with approximately 12.2 million common shares, or 33% of Trenwick's common shares, based on the year end figures for 2002. We have recently been notified by European Re that European Re believes our calculation of the number of common shares to be received upon conversion of the Series B Preferred Shares is erroneous and that under European Re's interpretation of the documentation the Series B Preferred Shares would have been entitled to convert into approximately 48.1 million shares, or 56.6% of the common shares, based on the year end figures 35 for 2002. We believe its calculation is correct but intend to discuss this issue with European Re. If European Re converts its Series B Preferred Shares, there would be substantial dilution to the holders of the common shares, and this conversion could result in European Re obtaining control of Trenwick, subject to compliance with applicable insurance law and regulation. We are a holding company and substantially all of our assets are held in our insurance company subsidiaries. These assets are generally unavailable to pay the debts of the holding company and there is substantial uncertainty as to whether we will ultimately receive any value from our insurance company subsidiaries. We are a holding company with intermediate holding companies between us and our operating insurance company subsidiaries. Neither we, nor our intermediary holding companies, have material assets other than direct or indirect ownership of the stock of our operating subsidiaries. Our ability to meet our operating expenses, as well as debt and securities obligations and those of our subsidiaries and the ability to pay dividends will be dependent on the earnings and cash flows of our subsidiaries and the ability of the subsidiaries to pay dividends or to advance or repay funds to us. Payment of dividends and advances and repayments from our operating insurance company subsidiaries are regulated by state and foreign insurance laws and regulatory restrictions, including minimum solvency and liquidity thresholds. We are required to maintain specified minimum levels of capital and surplus and risk-based capital at our insurance subsidiaries, which could restrict their ability to pay dividends, even if the dividends were permitted by relevant insurance laws and regulations. We do not expect the majority of our operating subsidiaries will be able to pay dividends or advance or repay any funds to us in the foreseeable future, which would prevent us from paying our operating expenses or making payments on our debt or securities obligations. We are in discussions with insurance regulators concerning capital impairment and other issues relating to our insurance company subsidiaries, and these regulators may institute supervision, rehabilitation, conservation or liquidation proceedings with respect to these subsidiaries. We have been engaged in discussions with the insurance regulators of the jurisdictions in which our insurance company subsidiaries are domiciled. We have been required to restrict our Connecticut and New York insurance company subsidiaries from taking certain actions such as paying dividends or disposing of assets, and we have been required to submit a plan of action to eliminate the statutory capital impairment at our New York insurance company subsidiary. Trenwick has also been notified by the New York Insurance Department ("NYID") that, in the NYID's view, approximately $26 million in loans made to Trenwick America by INSCORP in 2002 were in contravention of New York regulatory requirements. As a result, INSCORP and Trenwick may be the subject of regulatory action brought by the NYID. Each of these regulators, as well as the State of North Dakota, may act independently of one another with respect to the insurance company domiciled in its jurisdiction. The insolvency of any of the insurance company subsidiaries or any action by an insurance regulator, such as the commencement of voluntary or involuntary supervision, rehabilitation, conservation or liquidation proceedings with respect to one of these companies, could precipitate additional actions by the other insurance regulators. In the event of any such proceedings, it is unlikely that the assets of the insurance companies will be available to satisfy each others' liabilities, or the liabilities of Trenwick. 36 Our financial strength ratings have been significantly downgraded or withdrawn by Standard & Poor's, Moody's Investor Services and Fitch. Our financial strength and other ratings have been downgraded significantly by Standard & Poor's and Fitch and have been withdrawn by Moody's Investor Services. These downgrades and withdrawal generally reflect the ratings services' views that our business prospects and financial flexibility are very limited and their substantial doubt as to our ability to restructure our senior debt. In addition, these downgrades significantly and negatively affect our ability to raise capital and to negotiate favorable terms in restructuring our debt. Several of the business lines from which we historically derived a significant portion of our revenue have ceased to write new business and are in runoff. We have placed four of our operating businesses, worldwide property catastrophe reinsurance, international specialty insurance and reinsurance, United States specialty program insurance and United States treaty reinsurance, into runoff. Little or no new business is being written in these lines. These four lines provided approximately 73% of our gross premiums written in 2002. Our objective is to maximize the economic value of the runoff through effective claims settlement, commutation of assumed obligations where appropriate, collection of reinsurance recoverables and effective cash management. While it is possible that some positive economic value may result over time from the runoff of these operations, we do not expect them to contribute significantly to our revenue or results of operations and there are significant uncertainties that could if realized adversely affect our ability to continue a solvent runoff of these operations. Trenwick has historically not operated in runoff and may not have internal expertise, or may not be able to retain external support such as experienced consultants, to do so effectively. We do not have adequate capital to continue to support our Lloyd's operations and if our proposed restructuring is not completed in the near future it is likely that our Lloyd's operations will be placed into runoff. We do not currently have sufficient capital to provide continued financial support to permit us to continue to operate Syndicates 839 and 44 at Lloyd's. Trenwick has entered into a letter of intent with respect to an agreement in principle which includes the sale of substantially all of its Lloyd's operations to a company controlled by the current members of management of Trenwick's Lloyd's operations and with capital provided by the Management Team, third-party investors and the Banks. In the event that we are unable to complete the proposed restructuring or raise substitute capital or to transfer our ownership to an entity with adequate financial strength to support the continued operations, it is likely that Lloyd's will withdraw the authority of these syndicates to continue to write business and we will place these syndicates in runoff. There can be no assurance that there will be any proceeds derived from Trenwick's Lloyd's operations in the event that they are placed in runoff. Our ability to attract and retain key management personnel has been negatively affected. We have experienced the loss of several senior executive officers in the last year. A number of executive positions at Trenwick and its subsidiaries, including Trenwick's Chief Executive Officer and Chief Actuary positions, are now being filled by consultants under short term arrangements. Our ability to operate our business has been, and will continue to be, dependent on our ability to retain the services of our existing key senior executive officers and to attract and retain additional qualified personnel in the future as employees and consultants. The loss of the services of any of our key executive officers or the inability to hire and retain other highly qualified personnel in the future could adversely affect our ability to conduct our business. Our 37 financial situation and that of our subsidiaries has accelerated turnover of our experienced employees and has made it and likely will continue to make it difficult to retain key employees. Our reinsurers may not satisfy their obligations to us. Our business model relied to a large extent on reinsurance to reduce our underwriting risk. As of June 30, 2003, our reinsurance recoverable balance was approximately $1.8 billion. Our subsidiaries are subject to credit risk with respect to their reinsurers because the transfer of risk to a reinsurer does not relieve the insurers of their liability to the insureds. In addition, reinsurers may be unwilling to pay our insurance company subsidiaries even though they have the financial resources and are contractually obligated to do so. Unfavorable arbitration decisions or the failure of one or more of the reinsurers to honor their obligations or make timely payments would impact our subsidiaries' cash flow and could cause us to incur significant losses. In the event of the rehabilitation, supervision, conservation or liquidation of any of our insurance company subsidiaries, we may not be able to influence the outcome of the collectibility of reinsurance recoverables, in that it will be the responsibility of the regulators supervising such proceedings. If actual claims exceed our loss reserves, our financial results could be significantly adversely affected. We establish loss reserves to cover our estimated liability for the payment of all losses and loss expenses incurred with respect to premiums earned on the policies that we write. We utilize actuarial models as well as historical insurance industry loss development patterns to establish appropriate loss reserves, as well as estimates of future trends in claims severity, frequency and other factors. Establishing an appropriate level of loss reserves is an inherently uncertain process. Accordingly, actual claims and claim expenses paid will likely deviate, perhaps substantially, from the reserve estimates reflected in our consolidated financial statements. In 2002 we increased our loss reserves for unpaid claims and claims expenses by $285.1 million. The reserve increases reflect a reassessment of our reserves in light of recent reported loss activity trends across our major business groups. Our results of operations and financial condition depend upon our ability to assess accurately the potential losses associated with the risks that we insure and reinsure. To the extent actual claims continue to exceed our expectations, we will be required to immediately recognize the less favorable experience. This could cause a material increase in our liabilities and a reduction in our profitability, including an operating loss and reduction of capital in the period in which such action occurs. The effects of emerging claim and coverage issues on our business are uncertain. As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims. In some instances, these changes may not become apparent until some time after we have issued insurance or reinsurance contracts that are affected by the changes. As a result, the full extent of liability under our insurance or reinsurance contracts may not be known for many years after a contract is issued. 38 The regulatory system under which we operate, and potential changes thereto, could have a material adverse effect on our business. Our insurance and reinsurance subsidiaries may not be able to obtain or maintain necessary licenses, permits, authorizations or accreditations in locales where we currently engage in business, or may be able to do so only at significant cost. In addition, we may not be able to comply fully with, or obtain appropriate exemptions from, the wide variety of laws and regulations applicable to insurance or reinsurance companies or holding companies. As a result of the events of the past several months, we are presently in discussions with, or subject to orders issued by, insurance regulators in all of the jurisdictions in which we and our insurance company subsidiaries are domiciled. Our inability to comply with or to obtain appropriate authorizations and/or exemptions under any applicable laws, regulations or orders could result in further restrictions on our ability to do business and could subject us to fines and other sanctions including the ceasing of our ongoing operations. Recent events may result in political, regulatory and industry initiatives which could adversely affect our business. The supply of insurance and reinsurance coverage has decreased due to withdrawal of capacity and substantial reductions in capital resulting from, among other things, the terrorist attacks of September 11, 2001. This tightening of supply may result in governmental intervention in the insurance and reinsurance markets, both in the United States and worldwide. For example, on November 26, 2002, the Terrorism Risk Insurance Act was enacted to ensure the availability of insurance coverage for certain specific terrorist acts in the United States. This law requires insurers writing certain lines of property and casualty insurance to offer coverage against certain acts of terrorism causing damage within the United States or to United States flagged vessels or aircraft. In return, the law requires the federal government to indemnify such insurers for 90% of insured losses resulting from covered acts of terrorism, subject to a premium-based deductible. The law expires automatically at the end of 2005. Currently there is a great deal of uncertainty as to what effect the law will have on the insurance industry. We are currently unable to predict the extent to which the foregoing and other new initiatives may affect the demand for our products or the risks which may be available for us to consider underwriting. At the same time, threats of further terrorist attacks and the military initiatives and political unrest in the Middle East and Asia have adversely affected general economic, market and political conditions, increasing many of the risks associated with the insurance markets worldwide. The insurance and reinsurance business is historically cyclical, and we expect to experience periods with excess underwriting capacity and unfavorable premium rates. Currently, only our Lloyd's operations continue to actively pursue new insurance business. Historically, insurers and reinsurers have experienced significant fluctuations in operating results due to competition, frequency of occurrence or severity of catastrophic events, levels of capacity, general economic conditions and other factors. The supply of insurance and reinsurance is related to prevailing prices, the level of insured losses and the level of industry surplus which, in turn, may fluctuate in response to changes in rates of return on investments being earned in the insurance and reinsurance industry. As a result, the property and casualty insurance and reinsurance industry historically has been a cyclical industry characterized by periods of intense price competition due to excessive underwriting capacity as well as periods when shortages of capacity permitted favorable premium levels. Although premium levels for many products have increased recently, the supply of insurance and reinsurance may increase, either by capital provided by new entrants or by the commitment of additional capital by existing insurers or reinsurers, which may cause prices to decrease. Any of these factors could lead to a significant reduction in premium rates, less favorable policy terms and fewer submissions for our 39 underwriting services. In addition to these considerations, changes in the frequency and severity of losses suffered by insureds and insurers may affect the cycles of the insurance and reinsurance business significantly, and we expect to experience the effects of such cyclicality. Applicable insurance laws may make it difficult to effect a change of control of our company. Before a person can acquire control of a U.S. insurance company, prior written approval must be obtained from the insurance commissioner of the state where the domestic insurer is domiciled. Prior to granting approval of an application to acquire control of a domestic insurer, the state insurance commissioner will consider such factors as the financial strength of the applicant, the integrity and management of the applicant's board of directors and executive officers, the acquiror's plans for the management of the applicant's board of directors and executive officers, the acquiror's plans for the future operations of the domestic insurer and any anti-competitive results that may arise from the consummation of the acquisition of control. Generally, state statutes provide that control over a domestic insurer is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, 10% or more of the voting securities of the domestic insurer. Because a person acquiring 10% or more of our common shares would indirectly control the same percentage of the stock of our U.S. insurance company, the insurance change of control laws of Connecticut, New York and North Dakota would likely apply to such a transaction. U.S. persons who own our common shares may have more difficulty in protecting their interests than U.S. persons who are shareholders of a U.S. corporation. The Bermuda Companies Act, which applies to us, differs in certain material respects from laws generally applicable to U.S. corporations and their shareholders. Set forth below is a summary of certain significant provisions of the Companies Act which includes, where relevant, information on modifications thereto adopted pursuant to our bye-laws, applicable to us, which differ in certain respects from provisions of Delaware corporate law. Because the following statements are summaries, they do not discuss all aspects of Bermuda law that may be relevant to us and our shareholders. Interested Directors. Under Bermuda law and our bye-laws, a transaction entered into by us, in which a director has an interest, will not be voidable by us, and such director will not be liable to us for any profit realized pursuant to such transaction, provided the nature of the interest is disclosed at the first opportunity at a meeting of directors, or in writing to the directors. In addition, our bye-laws allow a director to be taken into account in determining whether a quorum is present and to vote on a transaction in which that director has an interest following a declaration of the interest pursuant to the Companies Act provided that the director is not disqualified from doing so by the chairman of the meeting. Under Delaware law, such transaction would not be voidable if: o The material facts as to such interested director's relationship or interests were disclosed or were known to the board of directors and the board of directors in good faith authorized the transaction by the affirmative vote of a majority of the disinterested directors; o Such material facts were disclosed or were known to the shareholders entitled to vote on such transaction and the transaction was specifically approved in good faith by vote of the majority of shares entitled to vote thereon; or 40 o The transaction was fair as to the corporation as of the time it was authorized, approved or ratified. Certain Transactions with Significant Shareholders. As a Bermuda company, we may enter into certain business transactions with our significant shareholders, including asset sales, in which a significant shareholder receives, or could receive, a financial benefit that is greater than that received, or to be received, by other shareholders with prior approval from our board of directors but without obtaining prior approval from our shareholders. Shareholders' Suits. The rights of shareholders under Bermuda law are not as extensive as the rights of shareholders in many U.S. jurisdictions. Class actions and derivative actions are generally not available to shareholders under the laws of Bermuda. However, the Bermuda courts ordinarily would be expected to follow English case law precedent, which would permit a shareholder to commence an action in the name of the company to remedy a wrong done to the company where an act is alleged to be beyond the corporate power of the company, is illegal or would result in the violation of our memorandum of association or bye-laws. Furthermore, courts would review acts that are alleged to constitute a fraud against the minority shareholders or where an act requires the approval of a greater percentage of our shareholders than actually approved it. The winning party in such an action generally would be able to recover a portion of attorneys' fees incurred in connection with such action. Our bye-laws provide that shareholders waive all claims or rights of action that they might have, individually or in the right of the company, against any director or officer for any act or failure to act in the performance of such director's or officer's duties, except with respect to any fraud or dishonesty of such director or officer. Indemnification of Directors and Officers. Under Bermuda law and our bye-laws, we may indemnify our directors, officers or any other person appointed to a committee of the board of directors (and their respective heirs, executors or administrators) to the full extent permitted by law against all actions, costs, charges, liabilities, loss, damage or expense incurred or sustained by such person by reason of any act done, concurred in or omitted in the conduct of our business or in the discharge of his/her duties; provided that such indemnification shall not extend to any matter in which any of such persons is found, in a final judgment or decree not subject to appeal, to have committed fraud or dishonesty. Trenwick is a Bermuda company and it may be difficult for you to enforce judgments against it or its directors and executive officers. We are incorporated pursuant to the laws of Bermuda and our business is based in Bermuda. In addition, certain of our current and former directors and officers may reside outside the United States, and all or a substantial portion of our assets and the assets of such persons are located in jurisdictions outside the United States. As such, it may be difficult or impossible to effect service of process within the United States upon us or those persons or to recover against us or them on judgments of U.S. courts, including judgments predicated upon civil liability provisions of the U.S. federal securities laws. Further, no claim may be brought in Bermuda against us or our directors and officers in the first instance for violation of U.S. federal securities laws because these laws have no extraterritorial jurisdiction under Bermuda law and do not have force of law in Bermuda. A Bermuda court may, however, impose civil liability on us or our directors and officers if the facts alleged in a complaint constitute or give rise to a cause of action under Bermuda law. Further, there is no treaty in effect between the United States and Bermuda providing for the enforcement of judgments of U.S. courts, and there are grounds upon which Bermuda courts may not enforce judgments of U.S. courts. Because judgments of U.S. courts are not automatically enforceable in Bermuda, it may be difficult for you to recover against us based upon such judgments. 41 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the information concerning market risk as stated in Trenwick's 2002 Annual Report on Form 10-K. ITEM 4. CONTROLS AND PROCEDURES (a) The Acting Chief Executive Officer and Chief Financial Officer of Trenwick have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report. Based on that evaluation, such officers have concluded that Trenwick's disclosure controls and procedures are effective as of the end of such period. (b) There have been no changes during the period covered by this Quarterly Report in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Trenwick's internal control over financial reporting. PART II - OTHER INFORMATION Item 1. Legal Proceedings 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 As discussed above in Part I, Item 2 -- "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financings, Financing Capacity and Capitalization," the December 2002 amendments to Trenwick's credit agreement prohibit Trenwick from declaring or paying any dividends on its common shares. 42 Item 3. Defaults Upon Senior Securities Trenwick America, a wholly owned subsidiary of Trenwick, did not pay principal and interest on its 6.70% senior notes, due on August 1, 2003, which also created an event of default with respect to Trenwick's letter of credit facility and under certain other indebtedness of Trenwick. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information On May 5, 2003, Clement S. Dwyer, Jr. resigned as a member of Trenwick's Board of Directors. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1 Fifth Waiver to the Credit Agreement, dated as of March 21, 2003, among Trenwick America Corporation, Trenwick Holdings Limited, Trenwick UK Holdings Limited, the lending institutions from time to time party to the Credit Agreement, Wachovia Bank, National Association, Fleet National Bank and JPMorgan Chase Bank. Incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K, filed on April 10, 2003. (File No. 1-16089) 10.2 Eighth Amendment to the Holdings Guaranty, dated as of March 24, 2003, among Trenwick Group Ltd. and the lending institutions party to the Credit Agreement. Incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K, filed on April 10, 2003. (File No. 1-16089) 10.3 Eighth Amendment and Waiver to the Credit Agreement, dated as of March 28, 2003, among Trenwick America Corporation, Trenwick Holdings Limited, Trenwick UK Holdings Limited, the lending institutions from time to time party to the Credit Agreement, Wachovia Bank, National Association, Fleet National Bank and JPMorgan Chase Bank. Incorporated by reference to Exhibit 99.3 to the Company's Current Report on Form 8-K, filed on April 10, 2003. (File No. 1-16089) 10.4 Ninth Amendment to the Holdings Guaranty, dated as of March 28, 2003, among Trenwick Group Ltd. and the lending institutions party to the Credit Agreement. Incorporated by reference to Exhibit 99.4 to the Company's Current Report on Form 8-K, filed on April 10, 2003. (File No. 1-16089) 10.5 Ninth Amendment and Waiver to the Credit Agreement, dated as of April 8, 2003, among Trenwick America Corporation, Trenwick Holdings Limited, Trenwick UK Holdings Limited, the lending institutions from time to time party to the Credit Agreement, Wachovia Bank, National Association, Fleet National 43 Bank and JPMorgan Chase Bank. Incorporated by reference to Exhibit 99.5 to the Company's Current Report on Form 8-K, filed on April 10, 2003. (File No. 1-16089) 10.6 Tenth Amendment and Consent to the Holdings Guaranty, dated as of April 8, 2003, among Trenwick Group Ltd. and the lending institutions party to the Credit Agreement. Incorporated by reference to Exhibit 99.6 to the Company's Current Report on Form 8-K, filed on April 10, 2003. (File No. 1-16089) 10.7 Eleventh Amendment and Consent to the Holdings Guaranty, dated as of April 16, 2003, among Trenwick Group Ltd. and the lending institutions party to the Credit Agreement. 10.8 Amendment No. 1 to the Rights Agreement, dated as of April 18, 2003, by and between Trenwick Group Ltd. and EquiServe Trust Company, N.A. (successor to First Chicago Trust Company of New York). Incorporated by Reference to Exhibit 99.1 to the Company's Current Report on Form 8-K, filed on April 22, 2003. (File no. 1-16089) 10.9 Agreement between the New York Insurance Department and The Insurance Corporation of New York dated May 5, 2003. Incorporated by reference to Exhibit 10.16 of the Company's Quarterly Report on Form 10-Q, filed on May 14, 2003. (File no. 1-16089) 10.10 Sixth Waiver to the Credit Agreement, dated as of July 16, 2003, by and among Trenwick America Corporation, Trenwick Holdings Limited, Trenwick UK Holdings Limited, the lending institutions from time to time party to the Credit Agreement, Wachovia Bank, National Association, as Syndication Agent, Fleet National Bank, as Documentation Agent, and JPMorgan Chase Bank, as Administrative Agent. Incorporated by Reference to Exhibit 99.1 to the Company's Current Report on Form 8-K, filed on July 18, 2003. (File no. 1-16089) 10.11 Third Consent to the Holdings Guaranty, dated as of July 16, 2003, by and among Trenwick Group Ltd. and the lending institutions from time to time party to the Credit Agreement. Incorporated by Reference to Exhibit 99.2 to the Company's Current Report on Form 8-K, filed on July 18, 2003. (File no. 1-16089) 10.12 Letter of Intent, dated as of August 6, 2003, by and among Trenwick and its subsidiaries, LaSalle Re Limited, Trenwick America and Trenwick Managing Agents Limited, the majority of the beneficial holders of the 6.70% Senior Notes of Trenwick America, the steering committee of the lending institutions that have issued letters of credit under a senior secured credit facility on behalf of certain subsidiaries of Trenwick in support of Trenwick's Lloyd's operations and a group composed of current members of management of Trenwicks Lloyd's operations. Incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K, filed on August 18, 2003. (File no. 1-16089) 31.1 Certification of Acting CEO Per Section 302 of the Sarbanes - Oxley Act 44 31.2 Certification of CFO Per Section 302 of the Sarbanes- Oxley Act 32.1 Certification of Acting CEO Per Section 906 of the Sarbanes- Oxley Act (This exhibit is intended to be furnished in accordance with regulation S-K item 601(b)(32)(ii) and shall not be deemed to be filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference.) 32.2 Certification of Acting CFO Per Section 906 of the Sarbanes-Oxley Act (This exhibit is intended to be furnished in accordance with regulation S-K item 601(b)(32)(ii) and shall not be deemed to be filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference.) (b) Reports on Form 8-K Trenwick filed Current Reports on Form 8-K on the following dates during the second quarter of 2003: April 10, 2003, reporting (a) certain amendments to Trenwick's credit agreement and related guaranty, and a waiver agreement under Trenwick's credit agreement to provide for, among other things, waivers of potential covenant defaults and extension of a number of deadlines imposed under the credit agreement and related guaranty. (b) Trenwick's delivery of notice to the holder of Trenwick's Series B Cumulative Perpetual Preferred Shares that Trenwick's GAAP net worth had fallen below $225 million and that a Net Worth Conversion Event would occur on April 21, 2003 if Trenwick's GAAP net worth did not equal or exceed $225 million on or before such date, (c) certain risk-based capital (RBC) and statutory capital impairment issues relating to Trenwick's subsidiaries Trenwick America Reinsurance Corporation and The Insurance Corporation of New York, and discussions with the insurance departments of Connecticut and New York relating thereto, (d) the receipt by Trenwick of notice from the New York Stock Exchange of the potential suspension from trading and delisting of Trenwick's common shares and the Series A Preferred Shares of LaSalle Re Holdings Limited and (e) the contribution of the Oak Entities to LaSalle Re Limited. April 22, 2003, reporting an amendment to the Rights Agreement with Equiserve Trust Company. July 18, 2003, reporting a Sixth Waiver and Third Consent to Trenwick's credit agreement. August 18, 2003, reporting that Trenwick, Trenwick America, LaSalle Re Holdings Limited and Trenwick Managing Agents Limited had entered into a letter of intent, dated August 6, 2003, with respect to an agreement in principle on a long-term restructuring of Trenwick's debt obligations. 45 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 GROUP LTD. Date: August 20, 2003 By: /s/ W. Marston Becker ---------------------------------------- Name: W. Marston Becker Title: Acting Chairman and Acting Chief Executive Officer Date: August 20, 2003 By: /s/ Alan L. Hunte ---------------------------------------- Name: Alan L. Hunte Title: Executive Vice President and Chief Financial Officer 46