-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SIbKdnpNAL6qnjotZLT/bQJsvCDeue63AdstagoYw9mHlRN0EkeEa1+fanHFWjNB xPztJCJubLBs0P6nQr6lcQ== 0001169232-02-002982.txt : 20021118 0001169232-02-002982.hdr.sgml : 20021118 20021114180232 ACCESSION NUMBER: 0001169232-02-002982 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRENWICK AMERICA CORP CENTRAL INDEX KEY: 0001127783 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 061087672 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-31967 FILM NUMBER: 02826978 BUSINESS ADDRESS: STREET 1: ONE CANTERBURY GREEN CITY: STAMFORD STATE: CT ZIP: 06901 BUSINESS PHONE: 2033535500 10-Q 1 d52670_10q.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended September 30, 2002. |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . ------------- ---------------- Commission file number 0-31967 TRENWICK AMERICA CORPORATION (Exact name of registrant as specified in its charter) Delaware 06-1087672 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Canterbury Green Stamford, Connecticut 06901 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: 203-353-5500 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Shares Outstanding Description of Class as of November 13, 2002 ----------------------------- ----------------------- Common Stock - $1.00 par value 100 TRENWICK AMERICA CORPORATION INDEX TO FORM 10-Q PART I - FINANCIAL INFORMATION Page ---- ITEM 1. Unaudited Consolidated Financial Statements Consolidated Balance Sheet September 30, 2002 and December 31, 2001 ........................ 1 Consolidated Statement of Operations, Comprehensive Income and Changes in Common Stockholder's Equity Three and Nine Months Ended September 30, 2002 and 2001 ......... 2 Consolidated Statement of Cash Flows Three and Nine Months Ended September 30, 2002 and 2001 ......... 3 Notes to Unaudited Consolidated Financial Statements ............ 4 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ....................................... 10 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk ...... 26 ITEM 4. Controls and Procedures ......................................... 26 PART II - OTHER INFORMATION ITEM 1. Legal proceedings ............................................... 27 ITEM 2. Changes in Securities and Use of Proceeds ....................... 27 ITEM 3. Defaults Upon Senior Securities ................................. 27 ITEM 4. Submission of Matters to a Vote of Security Holders ............. 28 ITEM 5. Other Information ............................................... 28 ITEM 6. Exhibits and Reports on Form 8-K ................................ 28 Signatures .............................................................. 30 -i- Trenwick America Corporation Consolidated Balance Sheet (Amounts expressed in thousands of United States dollars) September 30, 2002 and December 31, 2001
(Unaudited) 2002 2001 ---------- ---------- ASSETS Debt securities available for sale, at fair value $1,084,764 $1,054,518 Equity securities, at fair value 24,752 24,164 Cash and cash equivalents 133,396 128,522 Accrued investment income 12,442 12,685 Premiums receivable 198,581 159,721 Reinsurance recoverable balances, net 631,509 544,202 Prepaid reinsurance premiums 105,696 83,980 Deferred policy acquisition costs 61,510 45,403 Due from parents and affiliates 84,963 68,260 Net deferred income taxes -- 65,757 Goodwill -- 52,119 Other assets 127,596 89,774 ---------- ---------- Total assets $2,465,209 $2,329,105 ========== ========== LIABILITIES Unpaid claims and claims expenses $1,589,022 $1,412,104 Unearned premium income 330,306 239,004 Reinsurance balances payable 49,948 42,424 Indebtedness 88,524 288,878 Due to affiliates 49,165 50,434 Other liabilities 60,508 33,939 ---------- ---------- Total liabilities 2,167,473 2,066,783 ---------- ---------- MINORITY INTEREST Mandatorily redeemable preferred capital securities of subsidiary trust holding solely junior subordinated debentures of Trenwick America Corporation 87,017 86,973 ---------- ---------- COMMON STOCKHOLDER'S EQUITY Common stock and additional paid in capital 298,877 99,353 Retained earnings (accumulated deficit) (126,787) 57,104 Accumulated other comprehensive income 38,629 18,892 ---------- ---------- Total common stockholder's equity 210,719 175,349 ---------- ---------- Total liabilities, minority interest and common stockholder's equity $2,465,209 $2,329,105 ========== ==========
The accompanying notes are an integral part of these statements. -1- Trenwick America Corporation Consolidated Statement of Operations, Comprehensive Income and Changes in Common Stockholder's Equity (Unaudited) (Amounts expressed in thousands of United States dollars) Three and Nine Months Ended September 30, 2002 and 2001
Three Months Nine Months ----------- --------- ---------------------- 2002 2001 2002 2001 --------- --------- --------- --------- REVENUES Net premiums earned $ 132,523 $ 94,574 $ 350,372 $ 255,710 Net investment income 13,363 16,005 42,695 51,765 Net realized investment losses (3,329) (4,189) (4,851) (1,833) Other income 1,320 1,059 4,782 2,677 --------- --------- --------- --------- Total revenues 143,877 107,449 392,998 308,319 --------- --------- --------- --------- EXPENSES Claims and claims expenses incurred 150,560 69,251 330,850 197,517 Policy acquisition costs 38,005 33,914 104,338 84,617 Underwriting expenses 5,826 5,285 15,585 13,663 General and administrative expenses 708 965 2,129 2,625 Interest expense and subsidiary preferred share dividends 5,098 8,057 19,888 24,230 Foreign currency losses 2,373 965 3,705 1,948 --------- --------- --------- --------- Total expenses 202,570 118,437 476,495 324,600 --------- --------- --------- --------- Loss before income taxes and cumulative effect of change in accounting principle (58,693) (10,988) (83,497) (16,281) Applicable income taxes (benefit) 56,954 (3,919) 48,274 (8,696) --------- --------- --------- --------- Loss before cumulative effect of change in accounting principle (115,647) (7,069) (131,771) (7,585) Cumulative effect of change in accounting principle -- -- (52,119) -- --------- --------- --------- --------- Net loss $(115,647) $ (7,069) $(183,890) $ (7,585) ========= ========= ========= ========= COMPREHENSIVE INCOME (LOSS): Net loss $(115,647) $ (7,069) $(183,890) $ (7,585) --------- --------- --------- --------- Other comprehensive income (loss): Net unrealized investment gains 10,229 15,898 19,706 18,555 Foreign currency translation adjustments (559) 597 31 (938) --------- --------- --------- --------- Total other comprehensive income 9,670 16,495 19,737 17,617 --------- --------- --------- --------- Comprehensive income (loss) $(105,977) $ 9,426 $(164,153) $ 10,032 ========= ========= ========= ========= CHANGES IN COMMON STOCKHOLDER'S EQUITY: Common stockholder's equity, beginning of period $ 316,696 $ 187,396 $ 175,349 $ 200,907 Net capital transactions with affiliates (1,377) 199,523 (13,486) Adjustments to paid in capital related to Trenwick/LaSalle business combination (2,008) Comprehensive income (loss) (105,977) 9,426 (164,153) 10,032 --------- --------- --------- --------- Common stockholder's equity, end of period $ 210,719 $ 195,445 $ 210,719 $ 195,445 ========= ========= ========= =========
The accompanying notes are an integral part of these statements. -2- Trenwick America Corporation Consolidated Statement of Cash Flows (Unaudited) (Amounts expressed in thousands of United States dollars) Three and Nine Months Ended September 30, 2002 and 2001
Three Months Nine Months ------------------------ ------------------------ 2002 2001 2002 2001 ---------- ---------- ---------- ---------- CASH FROM (FOR) OPERATING ACTIVITIES $ 29,570 $ 7,812 $ 15,240 $ (37,854) ---------- ---------- ---------- ---------- INVESTING ACTIVITIES: Purchases of debt securities (110,004) (123,196) (239,117) (541,035) Sales of debt securities 46,541 112,734 136,752 456,452 Maturities of debt securities 44,616 5,945 107,001 25,478 Purchases of equity securities (83) (83) (83) (1,345) Sales of equity securities -- 4,717 -- 85,798 Effect of exchange rate translation on cash (126) 13 (318) (191) Additions to premises and equipment (439) (1,928) (3,611) (2,618) ---------- ---------- ---------- ---------- Cash (for) from investing activities (19,495) (1,798) 624 22,539 ---------- ---------- ---------- ---------- FINANCING ACTIVITIES: Issuance (repayment) of indebtedness -- -- (197,841) 14,000 Indebtedness issuance costs paid -- -- (88) -- Loans to affiliates (2,400) (5,158) (12,584) (26,220) Capital contributions received -- -- 199,523 5,099 ---------- ---------- ---------- ---------- Cash for financing activities (2,400) (5,158) (10,990) (7,121) ---------- ---------- ---------- ---------- Change in cash and cash equivalents 7,675 856 4,874 (22,436) Cash and cash equivalents, beginning of period 125,721 110,103 128,522 133,395 ---------- ---------- ---------- ---------- Cash and cash equivalents, end of period $ 133,396 $ 110,959 $ 133,396 $ 110,959 ========== ========== ========== ==========
The accompanying notes are an integral part of these statements. -3- TRENWICK AMERICA CORPORATION Notes to Unaudited Consolidated Financial Statements (Amounts expressed in thousands of United States dollars except share data) Three and Nine Months Ended September 30, 2002 and 2001 Note 1 Organization and Basis of Presentation Organization Trenwick America Corporation ("Trenwick America") is a United States holding company whose principal subsidiaries underwrite specialty insurance and reinsurance. Trenwick America's ultimate parent is Trenwick Group Ltd., which is a publicly traded Bermuda holding company. Basis of Presentation The interim financial statements include the accounts of Trenwick America and its subsidiaries after elimination of significant intercompany accounts and transactions. Certain items in prior financial statements have been reclassified to conform to current presentation. These interim financial statements have been prepared in conformity with accounting principles that are generally accepted in the United States of America, sometimes referred to as U.S. GAAP. To prepare these interim financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Actual amounts may differ from these estimates. The interim financial statements are unaudited; however, in the opinion of management, the interim financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for interim periods. These interim statements should be read in conjunction with the audited financial statements and related notes included in the Annual Report on Form 10-K of Trenwick America for the year ended December 31, 2001. Trenwick Group Ltd.'s management recently initiated an in-depth review of Trenwick America's reserving practices, which is expected to be completed in the fourth quarter of the current fiscal year. Management notes that Trenwick America currently has no information that the current reserve review will result in any material adjustments to Trenwick America's loss reserves. If the current reserve review were to reveal any material adjustments necessary to Trenwick America's loss reserves, Trenwick America would promptly disclose such adjustments. Note 2 Segment Information Trenwick America conducted its specialty insurance and reinsurance business in the following two business segments through the first nine months of 2002: - United States treaty reinsurance written principally through Trenwick America Reinsurance Corporation. - United States specialty program insurance, written principally through The Insurance Corporation of New York. On October 30, 2002, Trenwick America announced that it would cease underwriting its specialty program insurance business effective immediately. -4- The following tables present business segment financial information for Trenwick America at September 30, 2002 and December 31, 2001 and for the three and nine months ended September 30, 2002 and 2001: Total assets: 2002 2001 ---------- ---------- Treaty reinsurance $1,696,911 $1,640,154 Specialty program insurance 723,011 579,254 Unallocated 45,287 109,697 ---------- ---------- Total assets $2,465,209 $2,329,105 ========== ==========
Three Months Nine Months ----------------------- ----------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Total revenues: Treaty reinsurance $ 104,683 $ 82,135 $ 287,773 $ 235,350 Specialty program insurance 39,086 24,942 104,872 67,665 Unallocated 108 372 353 5,304 ---------- ---------- ---------- ---------- Total revenues $ 143,877 $ 107,449 $ 392,998 $ 308,319 ========== ========== ========== ========== Three Months Nine Months ----------------------- ----------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Net loss: Treaty reinsurance $ (78,212) $ (3,163) $ (90,070) $ 11,088 Specialty program insurance (12,442) 1,872 (4,800) (4,638) Unallocated interest expense and subsidiary preferred share dividends (5,050) (7,925) (19,679) (23,892) Other unallocated (19,943) 2,147 (17,222) 9,857 Change in accounting principle -- -- (52,119) -- ---------- ---------- ---------- ---------- Net loss $ (115,647) $ (7,069) $ (183,890) $ (7,585) ========== ========== ========== ==========
Transactions between operating segments have been eliminated in consolidation. Note 3 Underwriting Activities The components of premiums written and earned for the three and nine months ended September 30, 2002 and 2001 are as follows:
Three Months Nine Months ----------------------- ----------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Assumed premiums written $ 102,935 $ 80,591 $ 305,984 $ 242,699 Direct premiums written 108,970 78,514 309,093 222,003 ---------- ---------- ---------- ---------- Gross premiums written 211,905 159,105 615,077 464,702 Ceded premiums written (56,688) (50,688) (195,488) (160,562) ---------- ---------- ---------- ---------- Net premiums written $ 155,217 $ 108,417 $ 419,589 $ 304,140 ========== ========== ========== ========== Assumed premiums earned $ 101,406 $ 75,880 $ 275,767 $ 215,104 Direct premiums earned 90,534 66,582 247,664 176,994 ---------- ---------- ---------- ---------- Gross premiums earned 191,940 142,462 523,431 392,098 Ceded premiums earned (59,417) (47,888) (173,059) (136,388) ---------- ---------- ---------- ---------- Net premiums earned $ 132,523 $ 94,574 $ 350,372 $ 255,710 ========== ========== ========== ==========
-5- Note 4 Income Taxation Trenwick America incurred financial accounting losses in 1999 through 2001. Additionally, Trenwick America's results during the first nine months of 2002 were less favorable than anticipated at the beginning of the year. In the absence of specific favorable factors, application of FASB Statement No. 109, and its subsequent interpretations require a 100% valuation allowance for any deferred tax asset when a company has cumulative financial accounting losses, excluding unusual items, over several years. Accordingly, in the third quarter of 2002, a 100% valuation allowance for the U.S. deferred tax asset was recorded, increasing our non-cash provision for income taxes and net loss for the third quarter of 2002 by $57.0 million. Note 5 Accounting Standards Effective January 1, 2002, Trenwick America adopted a new Financial Accounting Standards Board statement which amended the accounting for goodwill and other intangible assets. This new statement suspended systematic goodwill amortization and required that Trenwick America's goodwill balance be tested for impairment under either market value or cash flow tests. As a result of these tests, it was determined that the goodwill was impaired and the entire goodwill balance of $52,119 was charged to operations as of January 1, 2002 as a cumulative effect of a change in accounting principle. The following table presents the pro forma effect on net loss for the three and nine months ended September 30, 2001 had this accounting standard been effective January 1, 2001 as compared to net loss for the three and nine months ended September 30, 2002.
Three Months Nine Months ----------------------- ----------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Reported net loss $ (115,647) $ (7,069) $ (183,890) $ (7,585) Add back: goodwill amortization -- (323) -- (969) Cumulative effect of change in accounting for goodwill -- -- (52,119) -- ---------- ---------- ---------- ---------- Adjusted net loss $ (115,647) $ (6,746) $ (131,771) $ (6,616) ========== ========== ========== ==========
Note 6 Credit Agreement On September 27, 2000, Trenwick Group Ltd., LaSalle Re Holdings Limited , LaSalle Re Limited and Trenwick Group Inc. completed a business combination whereby the common shareholders of LaSalle Re Holdings Limited, Trenwick Group Ltd., Trenwick Group Inc. and the minority shareholders of LaSalle Re Limited exchanged their shares on a one-for-one basis for shares of Trenwick Group Ltd., (the "Trenwick/LaSalle business combination"). Concurrent with the Trenwick/LaSalle business combination in September of 2000, Trenwick America and Trenwick Holdings Limited, Trenwick Group Ltd.'s U.K. holding company, entered into an amended and restated $490,000 credit agreement with various lending institutions. The credit agreement consisted of both a $260,000 revolving credit facility and a $230,000 letter of credit facility. The revolving credit facility was subsequently converted into a four-year term loan and repaid on June 17, 2002. The letter of credit facility may only be used to support the Lloyd's syndicate participations of Trenwick Group Ltd.'s subsidiaries. As of September 30, 2002, $226,000 of letters of credit remain outstanding under the credit facility. The letter of credit facility must be renewed November 22, 2002 in order for Trenwick to continue to utilize the letters of credit now outstanding to support underwriting at Lloyd's in 2003. In the event that Trenwick Group Ltd. is unable to renew the current letter of credit facility, obtain a replacement letter of credit facility, post sufficient collateral to -6- support its Lloyd's underwriting activities or obtain an alternative form of Lloyd's capital support, it will be required to reduce or cease its underwriting activities at Lloyd's for the 2003 year of account. On April 12, 2002, Trenwick Group Ltd., its subsidiaries and financial institutions holding a majority of the outstanding indebtedness under the credit facility executed an amendment to its revolving credit facility. The amendment required Trenwick Group Ltd. to pledge its shares of LaSalle Re Holdings Limited and LaSalle Re Limited in favor of the lenders under the credit facility. In addition, the amendment revised the financial covenants relating to interest coverage and tangible net worth (each as defined by the financial covenants in the credit agreement). The amendment also increased the applicable margin on the interest paid by Trenwick Group Ltd. by 1% and added an additional .5% fee payable by Trenwick Group Ltd. in the event the letters of credit outstanding are not secured in accordance with the following schedule; September 30, 2002, 40%; June 30, 2003, 60%; and June 30, 2004, 80%. The credit agreement contains general covenants and restrictions as well as financial covenants relating to, among other things, Trenwick Group Ltd.'s minimum interest coverage, debt to capital leverage, minimum earned surplus, maintenance of a minimum A.M. Best Company rating of A- and tangible net worth. On October 18, 2002, A.M. Best Company lowered the financial strength ratings of Trenwick Group Ltd.'s operating subsidiaries below A-. The lowered A.M. Best Company ratings constitute an event of default under the credit facility. In addition, the increase in loss reserves and the establishment of a deferred tax asset reserve at Trenwick America in the third quarter of 2002 resulted in Trenwick Group Ltd. violating the financial covenants requiring Trenwick Group Ltd. to maintain a minimum tangible net worth of $525,000 and minimum risk-based capital on November 14, 2002. If Trenwick is unable to remedy the financial covenant violations within 30 days, a second event of default shall have occurred under the credit facility. On November 13, 2002, Trenwick, its subsidiaries and financial institutions holding a majority of the outstanding letters of credit under the credit facility executed a forbearance agreement with respect to the events of default arising from Trenwick's lowered A.M. Best Company ratings and financial covenant violations. In the forbearance agreement, the letter of credit providers agreed to refrain from enforcing their rights or remedies under the credit facility until November 22, 2002, or earlier if there is another default under the credit facility or the forbearance agreement, a third party exercises any right of action against Trenwick for a debt in excess of $5,000 or other material obligation or Trenwick takes an action which the letter of credit providers reasonably consider to be materially adverse to their interests. In consideration for the forbearance of the letter of credit providers, Trenwick agreed, among other things, to refrain from making certain payments or distributions and to facilitate a meeting of the letter of credit providers and Lloyd's. During the terms of the forbearance agreement and thereafter, unless there is a waiver of the event of default and potential event of default under the credit facility, under the terms of its guaranty Trenwick Group Ltd. is prohibited from declaring or paying any dividends on the outstanding common and preferred shares of Trenwick Group Ltd. and its subsidiaries. In addition, Trenwick Group Ltd. is not allowed to redeem or -7- repurchase its capital stock so long as the event of default under the credit facility continues. The event of default under the credit facility also permits the letter of credit providers to demand that the $226,000 outstanding letters of credit be secured with an equal amount of cash upon expiration of the forbearance agreement. At this time, Trenwick Group Ltd. does not have sufficient available liquidity to provide the necessary cash collateral if the letter of credit providers demand it. The continuation of an event of default under the credit facility, the restrictions on Trenwick Group Ltd.'s ability to pay dividends to preferred and common shareholders and the potential demand for cash collateral by the letter of credit providers may cause additional events of default to occur under the instruments governing the outstanding indebtedness and preferred shares of Trenwick Group Ltd. and its subsidiaries. Trenwick Group Ltd.'s ability to refinance its existing letter of credit obligations or raise additional capital is dependent upon several factors, including financial conditions with respect to both the equity and debt markets and the ratings of its securities as established by the rating agencies. During the past year, Trenwick Group Ltd.'s senior debt and preferred share ratings have been downgraded significantly by Standard & Poor's Corporation and by Moody's Investors Service. At this time, Trenwick Group Ltd.s senior debt rating from Standard & Poor's Corporation is CCC+ and from Moody's Investor Service is B3. Trenwick Group Ltd.'s ability to refinance its outstanding letter of credit obligations, as well as the cost of such borrowings, could be adversely affected by these ratings downgrades or if its ratings were downgraded further. Should Trenwick Group Ltd.'s subsidiaries be unable to meet any letter of credit reimbursement obligations as they fall due, and such repayments are not refinanced, Trenwick Group Ltd. would become liable for such repayments under the terms of guarantees under the credit agreement. No liability for any such amounts has been reflected in Trenwick Group Ltd.'s financial statements. Because Trenwick America, Trenwick Holdings Limited and Trenwick Group Ltd. are holding companies, their principal source of funds consists of permissible dividends, tax allocation payments and other statutorily permissible payments from their respective operating subsidiaries. As a result of recent losses incurred by Trenwick Group Ltd.'s operating subsidiaries, their cash distribution capacities have been significantly reduced. Trenwick Group Ltd. is currently in discussion with the letter of credit providers regarding the current and potential future events of default and letter of credit financing for Trenwick Group Ltd.'s participation at Lloyd's for the 2003 underwriting year. If the current and potential future events of default are not waived, the letters of credit are not renewed for the 2003 Lloyd's underwriting year or the letter of credit providers demand cash collateral, there is substantial doubt as to Trenwick Group Ltd.'s ability to continue underwriting at Lloyd's or continue as a going concern. Trenwick Group Ltd. and/or one or more of its subsidiaries, including Trenwick America, may be forced to seek protection from creditors through proceedings commenced in Bermuda and other jurisdictions including the United States. -8- Note 7 Related Party Transaction On August 27, 2002, Trenwick Group Ltd. entered into a consulting agreement with W. Marston Becker, the Vice Chairman of Trenwick Group Ltd.'s Board of Directors, who assumed the position of Trenwick Group Ltd.'s Acting Chairman and Acting Chief Executive Officer. In consideration for such services, Trenwick agreed to pay Mr. Becker a consulting fee of $50 per month. The consulting agreement can be terminated by mutual agreement or upon 30 days prior written notice by either party. Trenwick Group Ltd. incurred consulting fees of approximately $75 during the quarter ended September 30, 2002 related to this consulting agreement. Note 8 Subsequent Event On October 25, 2002, Trenwick America Reinsurance Corporation ("Trenwick America Reinsurance") entered into an underwriting facility with Chubb Re, Inc. The underwriting facility permits Trenwick America Reinsurance to underwrite up to $400,000 of U.S. reinsurance business on behalf of Chubb Re, Inc. in the remainder of 2002 and 2003. Chubb Re, Inc. retains final underwriting authority and claims authority with respect to all business generated through the underwriting facility. Chubb Re, Inc. will receive one-third and Trenwick America Reinsurance will receive two-thirds of the profits generated by the underwriting facility. Chubb Re, Inc. will receive a 5% fronting fee on two-thirds of the business underwritten through the underwriting facility. In addition, Trenwick will reinsure Chubb Re, Inc. for 100% of the losses incurred under the underwriting facility in excess of the premiums collected and investment income earned in the underwriting facility. To secure its reinsurance obligations to Chubb Re, Inc., Trenwick America Reinsurance has posted a $50,000 security deposit with Chubb Re, Inc. and all premiums collected from the facility shall be paid to Chubb Re, Inc. -9- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion highlights material factors affecting the results of operations of Trenwick America Corporation ("Trenwick America") for the three and nine months ended September 30, 2002 and 2001. This discussion and analysis should be read in conjunction with the unaudited interim financial statements and notes thereto of Trenwick America contained in this filing as well as in conjunction with the Annual Report on Form 10-K of Trenwick America for the year ended December 31, 2001, including the audited financial statements and notes thereto as well as the discussions of critical accounting policies and quantitative and qualitative disclosure about market risk. Overview Trenwick America is a Delaware holding company headquartered in Stamford, Connecticut whose principal subsidiaries underwrite specialty insurance and reinsurance. For the nine months ended September 30, 2002, Trenwick America operated through the following two principal operating platforms: - - Trenwick America Reinsurance Corporation underwrote treaty reinsurance on United States property and casualty risks, including United States reinsurance business previously written by Chartwell Re Corporation subsidiaries; and - - Canterbury Financial Group Inc. underwrote specialty program insurance through its operating subsidiaries, The Insurance Corporation of New York, Dakota Specialty Insurance Company and Chartwell Insurance Company. On October 30, 2002, Trenwick America announced that it would cease underwriting its U.S. specialty program insurance business effective immediately. On October 25, 2002, Trenwick America Reinsurance Corporation entered into an underwriting facility with Chubb Re, Inc. The underwriting facility permits Trenwick America Reinsurance to underwrite up to $400 million of U.S. reinsurance business on behalf of Chubb Re, Inc. in the remainder of 2002 and 2003. Chubb Re, Inc. retains final underwriting authority and claims authority with respect to all business generated through the underwriting facility. Chubb Re, Inc. will receive one-third and Trenwick America Reinsurance will receive two-thirds of the profits generated by the underwriting facility. Chubb Re, Inc. will receive a 5% fronting fee on two-thirds of the business underwritten through the underwriting facility. In addition, Trenwick America Reinsurance will reinsure Chubb Re, Inc. for 100% of the losses incurred under the underwriting facility in excess of the premiums collected and investment income earned in the underwriting facility. To secure its reinsurance obligations to Chubb Re, Inc., Trenwick America Reinsurance has posted a $50 million security deposit with Chubb Re, Inc. and all premiums collected from the facility shall be paid to Chubb Re, Inc. Trenwick America's subsidiaries have been assigned the following ratings by Standard and Poor's and A.M. Best: Standard & Poor's A.M. Best ----------------- --------- Trenwick America Reinsurance Corporation BB- B- Canterbury Financial Group: The Insurance Corporation of New York BB- B- Dakota Specialty Insurance Company BB- B- Chartwell Insurance Company B+ C++ -10- These ratings are based upon factors that may be of concern to policy or contract holders, agents and intermediaries, but may not reflect the considerations applicable to an equity investment in a reinsurance or insurance company. A change in any such rating is at the discretion of the respective rating agencies. Trenwick Group Ltd.'s management recently initiated an in-depth review of Trenwick America's reserving practices, which is expected to be completed in the fourth quarter of the current fiscal year. Management notes that Trenwick America currently has no information that the current reserve review will result in any material adjustments to Trenwick America's loss reserves. If the current reserve review were to reveal any material adjustments necessary to Trenwick America's loss reserves, Trenwick America would promptly disclose such adjustments. Results of Operations - Three Months Ended September 30, 2002 and 2001 2002 2001 Change --------- -------- --------- (in thousands) Underwriting loss $ (61,868) $(13,876) $ (47,992) Net investment income 13,363 16,005 (2,642) Interest expense and subsidiary preferred share dividends (5,098) (8,057) 2,959 General and administrative expenses (708) (965) 257 Foreign currency losses (2,373) (965) (1,408) Other income, net 1,320 1,059 261 --------- -------- --------- Pre-tax operating loss (55,364) (6,799) (48,565) Applicable income taxes (benefit) 58,119 (2,453) 60,572 --------- -------- --------- Operating loss (113,483) (4,346) (109,137) Net realized investment losses, net of income taxes (2,164) (2,723) 559 --------- -------- --------- Net loss $(115,647) $ (7,069) $(108,578) ========= ======== ========= Trenwick America recorded an operating loss of $113.4 million in the three months ended September 30, 2002 compared to an operating loss of $4.3 million in the three months ended September 30, 2001. Trenwick America's operating loss for the third quarter of 2002 resulted principally from $70.3 million of loss reserve increases recorded in Trenwick America's operating subsidiaries, combined with Trenwick America's recording of a full valuation reserve on its net deferred tax asset in the third quarter of 2002. This valuation reserve was recorded when Trenwick America determined that its cumulative financial accounting losses do not currently support a position that Trenwick America will be able to realize the tax benefits of past losses in the future. Underwriting loss Trenwick America produced an underwriting loss of $61.9 million in the third quarter of 2002 compared to an underwriting loss of $13.9 million in the third quarter of 2001. Details of underwriting income and loss are produced below: -11-
2002 2001 Change ---------- ---------- ---------- (in thousands) Net premiums earned $ 132,523 $ 94,574 $ 37,949 ---------- ---------- ---------- Claims and claims expenses incurred 150,560 69,251 81,309 Acquisition costs and underwriting expenses 43,831 39,199 4,632 ---------- ---------- ---------- Total expenses 194,391 108,450 85,941 ---------- ---------- ---------- Net underwriting loss $ (61,868) $ (13,876) $ (47,992) ========== ========== ========== Loss ratio 113.6% 73.2% 40.4% Underwriting expense ratio 33.1% 41.4% (8.3)% Combined ratio 146.7% 114.6% 32.1%
The underwriting loss of $61.9 million in the third quarter of 2002 represented a $48.0 million greater loss compared to the same period in 2001. The increase in the underwriting loss can be attributed to deterioration in loss reserves, predominantly for accident years 1997 through 2000. The increase in the combined ratio in the third quarter of 2002 compared to the third quarter of 2001 is attributed to the third quarter 2002 adverse development described above. Premiums written Gross premiums written for 2002 were $211.9 million compared to $159.1 million for the three months ended September 30, 2001, an increase of $52.8 million or 33.2%. Details of gross premiums written are provided below:
2002 2001 Change ---------- ---------- ---------- (in thousands) Treaty reinsurance $ 101,267 $ 80,591 $ 20,676 Specialty program insurance 110,638 78,514 32,124 ---------- ---------- ---------- Gross premiums written $ 211,905 $ 159,105 $ 52,800 ========== ========== ==========
Treaty reinsurance increased $20.7 million from the third quarter of 2001 primarily due to increasing rates on renewal treaties. Specialty program insurance gross premiums written increased due to the addition of new programs in 2002 as well as to rate increases on new and renewal policies attributed to improving market conditions. Premiums earned
2002 2001 Change ---------- ---------- ---------- (in thousands) Gross premiums written $ 211,905 $ 159,105 $ 52,800 Change in gross unearned premiums (19,965) (16,643) (3,322) ---------- ---------- ---------- Gross premiums earned 191,940 142,462 49,478 ---------- ---------- ---------- Gross premiums ceded (56,688) (50,688) (6,000) Change in ceded unearned premiums (2,729) 2,800 (5,529) ---------- ---------- ---------- Ceded premiums earned (59,417) (47,888) (11,529) ---------- ---------- ---------- Net premiums earned $ 132,523 $ 94,574 $ 37,949 ========== ========== ==========
Gross premiums ceded for the three months ended September 30, 2002 were $56.7 million compared to $50.7 million for the same period in 2001. The increase in gross premiums ceded of $6.0 million was commensurate with the increase in gross premiums written. -12- Net premiums earned for the three months ended September 30, 2002 were $132.5 million compared to $94.6 million for the same period in 2001. The increase in net premiums earned is attributable to the increase in premiums written and rate increases as noted above. Claims and claims expenses Claims and claims expenses for the three months ended September 30, 2002 were $150.6 million, an increase of $81.3 million compared to claims and claims expenses of $69.3 million for the same period in 2001. The increase in claims and claims expenses in 2002 includes loss reserve increases recorded in Trenwick America's treaty reinsurance and specialty insurance segments of $59.8 million and $10.5 million, respectively which emanated from reported loss activity with related increases in incurred but not reported reserves, predominantly for accident years 1997 through 2000. Underwriting expenses 2002 2001 Change ---------- ---------- ---------- (in thousands) Policy acquisition costs $ 38,005 $ 33,914 $ 4,091 Underwriting expenses 5,826 5,285 541 ---------- ---------- ---------- Total underwriting expenses $ 43,831 $ 39,199 $ 4,632 ========== ========== ========== Underwriting expense ratio 33.1% 41.4% (8.3)% ========== ========== ========== Total underwriting expenses, comprising policy acquisition costs and underwriting expenses, for 2002 increased by $4.6 million compared to underwriting expenses for the three months ended September 30, 2001. The increase was mainly attributable to the increases in premiums written in 2002. Underwriting expenses for the three months ended September 30, 2002 as a percentage of earned premium was 4.4%, a decrease of 1.2% from 5.6% for the same period in 2001. Total underwriting expenses as a percentage of net premiums earned, or the underwriting expense ratio, were 33.1% for the three months ended September 30, 2002 a decrease of 8.3% from 41.4% for the same period in 2001. The decrease in the underwriting expense ratio resulted principally from the increase in premiums during 2002. Net Investment Income 2002 2001 Change ----------- ----------- -------- (in thousands) Average invested assets $ 1,173,592 $ 1,187,828 $(14,236) Average annualized yields 5.57% 6.56% (0.99)% Investment income $ 16,352 $ 19,490 $ (3,138) Investment expenses: Interest expense on funds withheld (2,257) (2,851) 594 Other (732) (634) (98) ----------- ----------- -------- Net investment income $ 13,363 $ 16,005 $ (2,642) =========== =========== ======== Net investment income for the three months ended September 30, 2002 was $13.4 million compared to $16.0 million for the same period in 2001. The decrease in net investment income in 2002 is the result of an overall decline in fixed income market yields during 2002, offset in part by a decrease in interest expense on funds withheld. Interest Expense and Subsidiary Preferred Share Dividends Interest expense and subsidiary preferred share dividends were $5.1 million for 2002, a decrease of $3.0 million from the same period in 2001. The decrease in interest expense in 2002 was -13- primarily the result of the repayment of Trenwick America's term loan facility in the second quarter of 2002. General and administrative expenses General and administrative expenses were $0.7 million for the third quarter of 2002, a relatively unchanged decrease from $1.0 million for the same period in 2001. Foreign Currency Losses Trenwick America recorded foreign currency losses of $2.4 million for the three months ended September 30, 2002 compared to foreign currency losses of $1.0 million for the same period in 2001, primarily due to the increase in the value of the British pound relative to the U.S. dollar. Other Income, Net Other income, net increased to $1.3 million for the third quarter of 2002, a $0.2 million increase over the same period in 2001, primarily a result of an increase in equity in earnings of managing general agencies through which Trenwick America underwrites its specialty program insurance business. Non-operating Income and Expenses Net realized losses on investments, net of income taxes, were $2.2 million during the three months ended September 30, 2002, relatively unchanged from net realized losses of $2.7 million for the three months ended September 30, 2001. Results of Operations - Nine Months Ended September 30, 2002 and 2001
2002 2001 Change --------- --------- --------- (in thousands) Underwriting loss $(100,401) $ (40,087) $ (60,314) Net investment income 42,695 51,765 (9,070) Interest expense and subsidiary preferred share dividends (19,888) (24,230) 4,342 General and administrative expenses (2,129) (2,625) 496 Foreign currency losses (3,705) (1,948) (1,757) Other income, net 4,782 2,677 2,105 --------- --------- --------- Pre-tax operating loss (78,646) (14,448) (64,198) Applicable income taxes (benefit) 49,972 (8,054) 58,026 --------- --------- --------- Operating loss (128,618) (6,394) (122,224) Net realized investment losses, net of income taxes (3,153) (1,191) (1,962) Cumulative effect of change in accounting principle (52,119) -- (52,119) --------- --------- --------- Net loss $(183,890) $ (7,585) $(176,305) ========= ========= =========
Trenwick America recorded an operating loss of $128.6 million for the nine months ended September 30, 2002 compared to an operating loss of $6.4 million recorded in the nine months ended September 30, 2001. Trenwick America's operating loss for the first nine months of 2002 resulted principally from $99.6 million of loss reserve increases recorded in Trenwick America's operating subsidiaries, combined with $20.3 million of losses incurred under Trenwick America Reinsurance Corporation's stop loss reinsurance agreement with its U.K. affiliate, Trenwick International Limited. Lastly, $57.0 million of Trenwick America's operating loss resulted from the recording of a full valuation reserve on its net deferred tax asset in the third quarter of 2002. This valuation reserve was recorded when Trenwick America determined that its cumulative -14- financial accounting losses do not currently support a position that Trenwick America will be able to realize the tax benefits of past losses in the future. Underwriting loss Trenwick America produced an underwriting loss of $100.4 million in the first nine months of 2002 compared to an underwriting loss of $40.1 million in the first nine months of 2001. Details of underwriting income and loss follow:
2002 2001 Change --------- --------- --------- (in thousands) Net premiums earned $ 350,372 $ 255,710 $ 94,662 --------- --------- --------- Claims and claims expenses incurred 330,850 197,517 133,333 Acquisition costs and underwriting expenses 119,923 98,280 21,643 --------- --------- --------- Total expenses 450,773 295,797 154,976 --------- --------- --------- Net underwriting loss $(100,401) $ (40,087) $ (60,314) ========= ========= ========= Loss ratio 94.4% 77.2% 17.2% Underwriting expense ratio 34.2% 38.4% (4.2)% Combined ratio 128.6% 115.6% 13.0%
The underwriting loss of $100.4 million in the first nine months of 2002 represented a $60.3 million greater loss compared to the first nine months of 2001, primarily the result of additional losses recorded as a result of deterioration in loss reserves, predominantly for accident years 1997 through 2000. In addition, losses incurred under a stop loss reinsurance agreement between Trenwick America Reinsurance Corporation and its U.K. affiliate Trenwick International Limited were $5.0 million higher in the first nine months of 2002 compared to the same period in 2001. Premiums written Gross premiums written for the nine months ended September 30, 2002 were $615.1 million compared to $464.7 million for the nine months ended September 30, 2001, an increase of $150.4 million or 32.3%. Details of gross premiums written are provided below: 2002 2001 Change -------- -------- -------- (in thousands) Treaty reinsurance $303,529 $242,699 $ 60,830 Specialty program insurance 311,548 222,003 89,545 -------- -------- -------- Gross premiums written $615,077 $464,702 $150,375 ======== ======== ======== Treaty reinsurance premiums increased $60.8 million from the nine months of 2001, primarily due to increasing rates on renewal treaties. Specialty program insurance gross premiums written increased to $311.5 million for the first nine months of 2002 due to increased volume on two of its larger programs combined with the addition of ten new programs in 2002 and improved market conditions. Premiums earned Net premiums earned for the nine months ended September 30, 2002 were $350.4 million compared to $255.7 million for 2001. Details of premiums earned are provided below: -15- 2002 2001 Change --------- --------- --------- (in thousands) Gross premiums written $ 615,077 $ 464,702 $ 150,375 Change in gross unearned premiums (91,646) (72,603) (19,043) --------- --------- --------- Gross premiums earned 523,431 392,099 131,332 --------- --------- --------- Gross premiums ceded (195,488) (160,562) (34,926) Change in ceded unearned premiums 22,429 24,173 (1,744) --------- --------- --------- Ceded premiums earned (173,059) (136,389) (36,670) --------- --------- --------- Net premiums earned $ 350,372 $ 255,710 $ 94,662 ========= ========= ========= Gross premiums ceded for the nine months ended September 30, 2002 were $195.5 million compared to $160.6 million for the same period in 2001. The increase in gross premiums ceded of $34.9 million was commensurate with the increase in gross premiums written. Claims and claims expenses Claims and claims expenses for the nine months ended September 30, 2002 were $330.9 million, an increase of $133.4 million compared to claims and claims expenses of $197.5 million for the same period in 2001. The increase in claims and claims expenses in 2002 can be attributed to the increase in premiums earned combined with additional losses recorded as a result of deterioration in indicated loss ratios for prior accident years on the treaty reinsurance and specialty insurance segments of approximately $85.9 million and $13.7 million, respectively. Additionally, claims and claims expenses incurred in the nine months ended September 30, 2002 and 2001 included $20.3 million and $15.3 million, respectively of losses incurred under a stop loss reinsurance agreement between Trenwick America Reinsurance Corporation and its U.K. affiliate, Trenwick International Limited. Both parties are in the process of commuting the stop loss agreement, which is subject to approval by regulatory authorities having jurisdiction over Trenwick America Reinsurance Corporation and Trenwick International Limited. Underwriting expenses 2002 2001 Change -------- ------- -------- (in thousands) Policy acquisition costs $104,338 $84,617 $ 19,721 Underwriting expenses 15,585 13,663 1,922 -------- ------- -------- Total underwriting expenses $119,923 $98,280 $ 21,643 ======== ======= ======== Underwriting expense ratio 34.2% 38.4% (4.2)% ======== ======= ======== Total underwriting expenses, comprising policy acquisition costs and underwriting expenses, for the nine months ended September 30, 2002 increased by $21.6 million compared to underwriting expenses for the nine months ended September 30, 2001. The increase in total underwriting expenses was attributable to the increase in premium volume in both the treaty reinsurance and specialty program segments. Underwriting expenses for the nine months ended September 30, 2002 as a percentage of earned premium was 4.4%, a decrease of 0.9% from 5.3% for the same period in 2001. Total underwriting expenses as a percentage of net premiums earned, or the underwriting expense ratio, were 34.2% for the nine months ended September 30, 2002 compared to 38.4% for the same period in 2001. The decrease in the underwriting expense ratio occurred principally because of decreasing acquisition costs related to improved terms and conditions due to improving market conditions. -16- Net Investment Income
2002 2001 Change ----------- ----------- -------- (in thousands) Average invested assets $ 1,185,355 $ 1,206,494 $(21,139) Average annualized yields 5.88% 6.88% (1.00)% Investment income $ 52,277 $ 62,263 $ (9,986) Investment expenses: Interest expenses on funds withheld (7,562) (8,491) 929 Other (2,020) (2,007) (13) ----------- ----------- -------- Net investment income $ 42,695 $ 51,765 $ (9,070) =========== =========== ========
Net investment income for the nine months ended September 30, 2002 was $42.7 million compared to $51.8 million for the same period in 2001. The decrease in net investment income resulted from an overall decline in fixed income market yields in 2002 compared to 2001, offset in part by a decrease of $0.9 million in interest expense on funds withheld. Interest Expense and Subsidiary Preferred Share Dividends Interest expense and subsidiary preferred share dividends were $19.9 million for 2002, a decrease of $4.3 million from the same period in 2001. The decrease in interest expense in 2002 was primarily the result of the repayment of Trenwick America's term loan facility during the second quarter of 2002. General and administrative expenses General and administrative expenses were $2.1 million in the first nine months of 2002 relatively unchanged from $2.6 million for the same period in 2001. Foreign Currency Losses Trenwick America recorded foreign currency losses of $3.7 million for the nine months ended September 30, 2002, an increase of $1.8 million from foreign currency losses of $1.9 million for the nine months ended September 30, 2001, primarily due to the increase in the value of the British pound relative to the U.S. dollar during 2002. Other Income, Net Other income, net increased to $4.8 million for the first nine months of 2002, a $2.1 million increase over the same period in 2001, primarily a result of an increase in equity in earnings of managing general agencies through which Trenwick America underwrites its specialty program insurance business. Non-operating Income and Expenses Net realized losses on investments, net of income taxes, were $3.2 million during the nine months ended September 30, 2002, compared to net realized losses of $1.2 million for the nine months ended September 30, 2001. Cumulative effect of change in accounting principle Trenwick America adopted Statement of Financial Accounting Standard No. 142 effective January 1, 2002. The statement required that goodwill be tested for impairment under either market value or cash flow tests. Trenwick America conducted both market value and cash flow tests and, as a result, wrote off its goodwill as of January 1, 2002. This had the effect of increasing Trenwick America's net loss for the nine months ended September 30, 2002 by $52.1 million and was recorded as a cumulative change in accounting principle. -17- Liquidity and Capital Resources As of September 30, 2002, Trenwick America's consolidated investments and cash totaled $1.2 billion, consistent with the balance at December 31, 2001. The cost of Trenwick America's equity securities was $7.1 million less than fair value at September 30, 2002 and was less than fair value by $6.7 million at December 31, 2001. The fair value of Trenwick America's debt securities exceeded amortized cost by $54.8 million at September 30, 2002 and by $24.7 million at December 31, 2001. As of September 30, 2002, Trenwick America's consolidated common stockholder's equity totaled $210.7 million compared to $175.3 million at December 31, 2001. The increase in common stockholder's equity resulted mainly from the capital contribution of $199.5 million received during the second quarter of 2002, which enabled Trenwick America to repay in full its term loan facility. The increase related to the capital contribution was offset in part by the increase in loss reserves and establishment of a deferred tax valuation reserve in the third quarter of 2002 combined with the write-down of all of Trenwick America's goodwill from the Trenwick-LaSalle business combination completed in 2000 as a result of the adoption of a new accounting standard. Cash provided by Trenwick America's operating activities for the nine months ended September 30, 2002 was $15.2 million compared to cash used in Trenwick America's operating activities of $37.9 million in the comparable period of 2001. The increase in cash flow from operations was due primarily to an increase in premium writings. This increase was offset in part by a decrease in net investment income received, a result of the decrease in interest rates over the course of 2002. Net cash used in financing activities during the first nine months of 2002 included $197.8 million related to the repayment of Trenwick America's term loan facility. Trenwick America's total debt to capital ratio (total indebtedness divided by total indebtedness preferred capital securities and common shareholder's equity) decreased to 22.9% at September 30, 2002 from 52.4% on December 31, 2001 due to the repayment of the $195 million in principal amount outstanding under the term loan portion of Trenwick America's bank credit facility. Financings, Financing Capacity and Capitalization Concurrent with the Trenwick/LaSalle business combination in September of 2000, Trenwick America and Trenwick Holdings Limited, Trenwick Group Ltd.'s U.S. and U.K. holding companies, entered into an amended and restated $490 million credit agreement with various lending institutions. The credit agreement consisted of both a $260 million revolving credit facility and a $230 million letter of credit facility. The revolving credit facility was subsequently converted into a four-year term loan. Trenwick America was the primary obligor with respect to the revolving credit facility, and Trenwick Holdings Limited is the primary obligor with respect to the letter of credit facility. Guarantees are provided by LaSalle Re Holdings Limited and Trenwick Group Ltd. with respect to both Trenwick America's and Trenwick Holdings Limited's obligations and additionally by Trenwick America with respect to Trenwick Holdings Limited's obligations. The credit agreement provides for a letter of credit facility which may only be used to support the Lloyd's syndicate participations of Trenwick Group Ltd.'s subsidiaries. The letter of credit facility must be renewed on November 22, 2002 in order for Trenwick Group Ltd. to continue to utilize the letters of credit now outstanding to support underwriting at Lloyd's in 2003. In the event that Trenwick Group Ltd. is unable to renew the current letter of credit facility, obtain a replacement letter of credit facility, post sufficient collateral to support its -18- Lloyd's underwriting activities or obtain an alternative form of Lloyd's capital support, it will be required to reduce or cease its underwriting activities at Lloyd's for the 2003 year of account. The credit agreement contains general covenants and restrictions as well as financial covenants relating to, among other things, Trenwick Group Ltd.'s minimum interest coverage, debt to capital leverage, minimum earned surplus, maintenance of a minimum A.M. Best Company rating of A- and tangible net worth. On April 12, 2002, Trenwick Group Ltd., its subsidiaries and financial institutions holding a majority of the outstanding indebtedness under the credit facility executed an amendment to the credit facility. The amendment required Trenwick Group Ltd. to pledge its shares of LaSalle Re Holdings Limited and LaSalle Re Limited in favor of the lenders under the credit facility. In addition, the amendment revised the financial covenants relating to interest coverage and tangible net worth (each as defined by the financial covenants in the credit agreement). The amendment set Trenwick Group Ltd.'s minimum interest coverage ratio at 1.25 to 1 for the first quarter of 2002, 1.5 to 1 for the second quarter of 2002, 1.75 to 1 for the third quarter of 2002 and 2.5 to 1 thereafter. Trenwick Group Ltd.'s interest coverage ratio for the three months ended September 30, 2002 was 3.34 to 1.0. The amendment adjusted the minimum tangible net worth Trenwick Group Ltd. must maintain to the following base amounts plus 50% of net income earned during the period: Time Period Minimum Tangible Net Worth ----------- -------------------------- Through May 15, 2002 $450,000,000 From May 16, 2002 to August 14, 2002 $475,000,000 From August 15, 2002 to November 14, 2002 $525,000,000 From November 15, 2002 to March 30, 2003 $550,000,000 Thereafter $560,000,000 Trenwick Group Ltd.'s consolidated tangible net worth, as defined by the terms of the credit agreement was $387.4 million at September 30, 2002. A previous amendment adjusted downward the minimum risk-based capital requirement for Trenwick America's subsidiary, Chartwell Insurance Company, from 300% to 225% through December 31, 2002. Thereafter, the minimum risk-based capital for Chartwell Insurance Company returns to 300%. The risk-based capital for Chartwell Insurance Company as of December 31, 2001 was 257%. The amendment increased the applicable margin on the interest paid by Trenwick Group Ltd. by 1% and added an additional .5% fee payable by Trenwick Group Ltd. in the event the letters of credit outstanding are not secured in accordance with the following schedule: Date Percentage of Outstanding Indebtedness ---- -------------------------------------- September 30, 2002 40% June 30, 2003 60% June 30, 2004 80% On June 17, 2002, Trenwick America repaid in full the outstanding $195 million in principal amount of term loan indebtedness under the credit facility. As of September 30, 2002, $226 million of letters of credit remain outstanding under the credit facility. On October 18, 2002, A.M. Best Company lowered the financial strength ratings of Trenwick Group Ltd.'s operating subsidiaries below A-. The lowered A.M. Best Company ratings -19- constitute an event of default under the credit facility. In addition, the increase in loss reserves in the third quarter of 2002 resulted in Trenwick Group Ltd. violating the financial covenants requiring Trenwick Group Ltd. to maintain a minimum tangible net worth and minimum risk-based capital on November 14, 2002. If Trenwick Group Ltd. is unable to remedy the financial covenant violations within 30 days, a second event of default shall have occurred under the credit facility. On November 13, 2002, Trenwick, its subsidiaries and financial institutions holding a majority of the outstanding letters of credit under the credit facility executed a forbearance agreement with respect to the events of default arising from Trenwick's lowered A.M. Best Company ratings and financial covenant violations. In the forbearance agreement, the letter of credit providers agreed to refrain from enforcing their rights or remedies under the credit facility until November 22, 2002, or earlier if there is another default under the credit facility or the forbearance agreement, a third party exercises any right of action against Trenwick for a debt in excess of $5 million or other material obligation or Trenwick takes an action which the letter of credit providers reasonably consider to be materially adverse to their interests. In consideration for the forbearance of the letter of credit providers, Trenwick agreed, among other things, to refrain from making certain payments or distributions and to facilitate a meeting of the letter of credit providers and Lloyd's. During the term of the forbearance agreement and thereafter, unless there is a waiver of the event of default and potential event of default under the credit facility, under the terms of its guaranty Trenwick Group Ltd. is prohibited from declaring or paying any dividends on the outstanding common and preferred shares of Trenwick Group Ltd. and its subsidiaries. In addition, Trenwick Group Ltd. is not allowed to redeem or repurchase its capital stock so long as the event of default under the credit facility continues. The event of default under the credit facility also permits the letter of credit providers to demand that the $226 million outstanding letters of credit be secured with an equal amount of cash upon expiration of the forbearance agreement. At this time, Trenwick Group Ltd. does not have sufficient available liquidity to provide the necessary cash collateral if the letter of credit providers demand it. The continuation of an event of default under the credit facility, the restrictions on Trenwick Group Ltd.'s ability to pay dividends to preferred and common shareholders and the potential demand for cash collateral by the letter of credit providers may cause additional events of default to occur under the instruments governing the outstanding indebtedness and preferred shares of Trenwick Group Ltd. and its subsidiaries. Trenwick Group Ltd.'s ability to refinance its existing debt obligations or raise additional capital is dependent upon several factors, including financial conditions with respect to both the equity and debt markets and the ratings of its securities as established by the rating agencies. During the past year, Trenwick Group Ltd.'s senior debt and preferred share ratings have been significantly downgraded by Standard & Poor's Corporation and Moody's Investors Service. At this time, Trenwick Group Ltd.'s senior debt ratings from Standard & Poor's Corporation is CCC+ and Moody's Investor Service is B3. Trenwick Group Ltd.'s ability to refinance its outstanding debt obligations, as well as the cost of such borrowings, could be adversely affected by these ratings downgrades or if its ratings were downgraded further. Should Trenwick Holdings Limited be unable to meet any letter of credit reimbursement obligations as they fall due, and such repayments are not refinanced, Trenwick America would become liable for such repayments under the terms of the guarantees. No liability for any such -20- amounts has been reflected in Trenwick America's financial statements. Because Trenwick America, Trenwick Holdings Limited and Trenwick Group Ltd. are holding companies, their principal source of funds consists of permissible dividends, tax allocation payments and other statutorily permissible payments from their respective operating subsidiaries. As a result of recent losses incurred by Trenwick Group Ltd.'s operating subsidiaries, their cash distribution capacities have been significantly reduced. Trenwick Group Ltd. is currently in discussion with the letter of credit providers regarding the current and potential future events of default and letter of credit financing for Trenwick Group Ltd.'s participation at Lloyd's for the 2003 underwriting year. If the current and potential future events of default are not waived, the letters of credit are not renewed for the 2003 Lloyd's underwriting year or the letter of credit providers demand cash collateral, there is substantial doubt as to Trenwick Group Ltd.'s ability to continue underwriting at Lloyd's or continue as a going concern. Trenwick Group Ltd. and/or one or more of its subsidiaries, including Trenwick America, may be forced to seek protection from creditors through proceedings commenced in Bermuda and other jurisdictions including the United States. Catastrophe Equity Put On September 27, 2000, Trenwick Group Ltd. assumed the benefits and obligations of LaSalle Re Holdings Limited under a $100 million catastrophe equity put option. The catastrophe put option was amended and restated as of January 1, 2001 and amended as of January 25, 2002. As amended, the catastrophe equity put enabled Trenwick Group Ltd. to raise up to $55 million of equity, through the issue of convertible preferred shares to European Reinsurance Company of Zurich ("European Re"), a subsidiary of Swiss Reinsurance Company, in the event there was a qualifying catastrophic event or events occurring prior to January 1, 2002. As a result of the terrorist attacks of September 11, 2001, LaSalle Re Limited incurred in excess of $140 million in catastrophe losses as defined under the option agreement and Trenwick Group Ltd. delivered notice of exercise of the catastrophe equity put on March 28, 2002. On July 1, 2002, Trenwick Group Ltd. 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 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 Group Ltd.'s Series B Cumulative Perpetual Preferred Shares (the "Series B Shares") with a liquidation preference of $100 per share for an aggregate purchase price of $40 million. The Series B Shares bear cumulative dividends, payable quarterly in arrears, based upon the Series B Shares' Standard & Poor's rating at LIBOR plus a margin determined in accordance with the following schedule: Standard & Poor's Rating LIBOR Margin ----------------------------------- -------------------- BBB- or above 3.75% BB+ 4.25% BB 4.50% BB- 4.75% Below BB- 6.00% These factors adjust upward by 0.25% on the third anniversary if the securities are still unrated, and upward by 0.50% on the fifth anniversary if they are still unrated. Also, if the Standard & -21- Poor's rating is below BBB- on the fifth anniversary, the factors adjust upward by an additional 0.50%. The maximum adjustment based upon these circumstances is 0.75%. The Series B Shares are convertible into common shares of Trenwick Group Ltd. after five years or upon the occurrence of a "special conversion event" at the greater of book value or the average thirty-day trading price of the common shares. Special conversion events are either the occurrence of a change in control without the written consent of the registered holders of more than 50% of the Series B shares outstanding ("Change in Control Conversion Event"), or the failure of Trenwick Group Ltd. to maintain a GAAP net worth equal to at least $225 million for a period of more than sixty days ("Net Worth Conversion Event"). The conversion price of the Series B shares is the greater of 1) the liquidity factor times the average thirty day stock price preceding the conversion date, 2) the liquidity factor times book value per common share or 3) par value of a common share. The liquidity factor will be calculated as an amount equal to 0.8 if the conversion occurs within 60 days after a Change in Control Conversion Event or 1.0 if the conversion does not occur within 60 days after the occurrence of a Change in Control Conversion Event. Trenwick Group Ltd. has the option to redeem the Series B Shares after the first anniversary of the issuance, paying an early redemption premium of $2.00 per share if redeemed before the second anniversary, and $1.00 per share if redeemed between the second and third anniversary. European Re will be able to transfer the Series B Shares six months after the date of purchase. The maximum number of Trenwick Group Ltd. common shares that could be required to be issued upon conversion of the Series B Shares is 550 million, which would occur when both the book value of common stock and the average thirty-day trading price of the common shares were less than or equal to $0.10 per share. Trenwick Group Ltd. currently has the authority to issue up to 150 million preferred and common shares without prior authorization from the shareholders and the Board of Directors. Trenwick Group Ltd., therefore does not currently have the ability to control settlement of the Series B Shares and has therefore recorded them as temporary equity in Trenwick Group Ltd.'s September 30, 2002 balance sheet. As of September 30, 2002, the Series B shares would be settled with approximately 6.3 million common shares upon conversion. The following table details how changes in the price of Trenwick Group Ltd.'s common shares or changes in book value would affect the settlement amounts:
Average market value of common shares Book value per share - -------------------------- --------------------------------------------------------------------------------------- $0.10-$0.50 $0.51-$1.00 $1.01-$2.00 $2.01-$5.00 $5.01-$10.00 $10.01-$15.00 ----------- ----------- ----------- ----------- ------------ ------------- $0.10-$0.50 550 - 110 108 - 55 54 - 28 27 - 11 11 - 6 5 - 4 $0.51-$1.00 108 - 55 108 - 55 54 - 28 27 - 11 11 - 6 5 - 4 $1.01-$2.00 54 - 28 54 - 28 54 - 28 27 - 11 11 - 6 5 - 4 $2.01-$5.00 27 - 11 27 - 11 27 - 11 27 - 11 11 - 6 5 - 4 $5.01-$10.00 11 - 6 11 - 6 11 - 6 11 - 6 11 - 6 5 - 4 $10.01-$15.00 5 - 4 5 - 4 5 - 4 5 - 4 5 - 4 5 - 4
Range of shares issuable upon conversion (in millions) Quantitative and Qualitative Disclosure About Market Risk The following section addresses the significant market risks associated with Trenwick Group Ltd.'s business activities as of September 30, 2002. Trenwick America's primary market risk exposures are: - foreign currency exchange risk -22- - interest rate risk on fixed and variable rate U.S. dollar denominated short and long-term instruments; and - equity price risk. With respect to Trenwick America's investment portfolio, the risk management strategy is to place its investments with high credit quality issuers and to limit the amount of credit exposure with respect to particular ratings categories and any one issuer. Trenwick America selects investments with characteristics such as duration, yield, currency and liquidity to reflect the underlying characteristics of related estimated claim liabilities. As of September 30, 2002, Trenwick America's exposure to high yield investments was minimal. While these investments are more susceptible to credit risk, their total market value represents just 5% of total investments and cash, and therefore management believes that the exposure to credit risk is not material. Trenwick America has no derivatives and its investments do not contain terms that may result in potential losses due to leverage. Foreign currency exchange rate risk Foreign currency risk is the risk that Trenwick America will incur economic losses due to adverse changes in foreign currency exchange rates. Trenwick America's reinsurance operations has exposures to movements in various currencies around the world as such businesses are denominated in those currencies. Therefore, changes in currency exchange rates affect Trenwick America's balance sheet, statement of operations and statement of cash flows. This exposure is somewhat mitigated by the fact that premiums received are invested in the same currency portfolios, to partially offset related unpaid claims and claims expense liabilities denominated in the same currency. Management estimates that a 10% immediate unfavorable change in each of the foreign currency exchange rates to which Trenwick America is exposed as of September 30, 2002 would have decreased the fair value of Trenwick America's foreign denominated net liability by approximately $4.7 million, which was comprised primarily of exposure to the British pound. Interest Rate Risk Trenwick America's fixed maturity investments and indebtedness are subject to interest rate risk. Increases and decreases in prevailing interest rates generally translate into decreases and increases in the fair value of fixed maturity investments and the interest payable on Trenwick America's outstanding variable rate debt. Additionally, the fair value of interest rate sensitive instruments may be affected by the creditworthiness of the issuer, a prepayment option, relative values of alternative investments, liquidity of the investment and other general market conditions. Trenwick America monitors its sensitivity to interest rate risk by evaluating the change in its financial assets and liabilities relative to hypothetical increases and decreases in interest rates. It is assumed that the changes occur immediately and uniformly to each category of instrument containing interest rate risks. The hypothetical changes in market interest rates reflect what could be deemed best or worst case scenarios. Significant variations in market interest rates could produce changes in the timing of repayments due to prepayment options available. The fair value of such instruments could be affected and therefore actual results might differ from those reflected in this summary. A 100 basis point increase in market interest rates would have resulted in an estimated pre-tax lass in the fair value of these instruments of $34 million at September 30, 2002. Similarly, a -23- 100 basis point decrease in market interest rates would have resulted in an estimated pre-tax gain in the fair value of these instruments of $31 million at September 30, 2002. Equity Price Risk The carrying values of investments subject to equity price risks are based on quoted market prices or management's estimates of fair value as of the balance sheet date. Market prices are subject to fluctuation and, consequently, the amount realized in the subsequent sale of an investment may significantly differ from the reported market value. Fluctuation in the market price of a security may result from perceived changes in the underlying economic characteristics of the investee, the relative price of alternative investments and general market conditions. Furthermore, amounts realized in the sale of a particular security may be affected by the relative quantity of the security being sold. Of Trenwick America's $25 million equity portfolio at September 30, 2002, $10 million of common equity investments were not subject to equity risk. Trenwick America's potential exposure on equity securities is estimated in terms of an immediate 10% drop in equity prices across all equity securities holdings from those prevailing at September 30, 2002 which would have resulted in a $1.5 million loss. The fair value estimates shown are based on the composition of the equity security portfolio at September 30, 2002 and these exposures will change as a result of ongoing portfolio activities in response to management's assignment of changing market conditions and available investment opportunities. The above analyses do not take into account any correlation among foreign currency exchange rates, or any correlation among various markets (i.e., the fixed income markets and foreign exchange and equity markets). Trenwick America's actual experience may differ from the results noted above due to the correlation assumptions utilized, or if events occur that were not included in the methodology, such as significant liquidity or market events. The selection of the amount of increases or decreases in currency exchange rates, interest rates and equity values in the above rate the potential impact of such events. Deferred Income Taxes Trenwick America incurred financial accounting losses in 1999 through the third quarter of 2002 and in connection with such losses, recorded as an asset up to $57.0 million of net deferred income taxes. The net deferred income tax asset represented the future tax benefit of the losses previously incurred by Trenwick America's U.S. operations. Because of Trenwick America's cumulative financial accounting losses, in the absence of specific favorable factors, application of FASB Statement No. 109 and its subsequent interpretations require Trenwick America to establish a 100% valuation allowance against its deferred tax asset in the third quarter of 2002. The establishment of a 100% valuation allowance against Trenwick America's deferred tax asset increased Trenwick America's provision for income taxes and net loss by $57.0 million in the third quarter of 2002. Trenwick America management will continue to monitor its tax position and reassess the need for a valuation allowance on its deferred tax asset on a periodic basis. Accounting Standards Effective January 1, 2002, Trenwick America adopted a new Financial Accounting Standards Board statement which amended the accounting for goodwill and other intangible assets. This new statement suspended systematic goodwill amortization and required that goodwill be tested for impairment under either market value or cash flow tests. Trenwick America conducted both market value and cash flow tests and, as a result, recorded a $52.1 million write off of goodwill as a cumulative effect of an accounting change as of January 1, 2002. -24- Safe Harbor Disclosure In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, Trenwick America sets forth below cautionary statements identifying important risks and uncertainties that could cause its actual results to differ materially from those that might be projected, forecasted or estimated in its "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, made by or on behalf of Trenwick America in this Quarterly Report on Form 10-Q and in press releases, written statements or documents filed with the Securities and Exchange Commission, or in its communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls. Such statements may include, but are not limited to, projections of premium revenue, investment income, other revenue, losses, expenses, earnings (including earnings per share), cash flows, plans for future operations, common shareholders' equity (including book value per share), investments, financing needs, capital plans, dividends, plans relating to products or services of Trenwick America and estimates concerning the effects of litigation or other disputes, as well as assumptions for any of the foregoing and generally expressed with words such as "believes," "estimates," "expects," "anticipates," "plans," "projects," "forecasts," "goals," "could have," "may have," and similar expressions. Forward-looking statements involve known and unknown risks and uncertainties, which may cause Trenwick America's results to differ materially from such forward-looking statements. These risks and uncertainties include, but are not limited to, the following: - - Changes in the level of competition in the domestic and international reinsurance or primary insurance markets that affect the volume or profitability of Trenwick America's property/casualty business. These changes include, but are not limited to, changes in the intensity of price competition, the entry of new competitors, existing competitors exiting the market and the development of new products by new and existing competitors; - - Changes in the demand for reinsurance, including changes in ceding companies' risk retentions and changes in the demand for excess and surplus lines insurance coverages; - - The ability of Trenwick America to execute its strategies in its property/casualty operations; - - Catastrophe losses in Trenwick America's domestic and international property/casualty businesses; - - Adverse development on property/casualty claims and claims expense liabilities related to business written in prior years, including, but not limited to, evolving case law and its effect on environmental and other latent injury claims, changing government regulations, newly identified toxins, newly reported claims, new theories of liability, or new insurance and reinsurance contract interpretations; - - Changes in Trenwick America's property/casualty retrocessional arrangements; - - Lower than estimated retrocessional or reinsurance recoveries on unpaid losses, including, but not limited to, losses due to a decline in the creditworthiness of Trenwick America's retrocessionaires or reinsurers; - - Increases in interest rates, which may cause a reduction in the market value of Trenwick America's fixed income portfolio, and its common shareholders' equity; - - Decreases in interest rates which may cause a reduction of income earned on new cash flow from operations and the reinvestment of the proceeds from sales or maturities of existing investments; - - A decline in the value of Trenwick America's equity investments; - - Changes in the composition of Trenwick America's investment portfolio; - - Credit losses on Trenwick America's investment portfolio; - - Adverse results in litigation matters, including, but not limited to, litigation related to environmental, asbestos and other potential mass tort claims; - - The impact of mergers and acquisitions; -25- - - Gains or losses related to changes in foreign currency exchange rates; - - Changes in Trenwick America's capital needs; - - The ability of Trenwick America to refinance or repay its outstanding indebtedness; and - - Changes in the financial strength ratings assigned to Trenwick America and its operating subsidiaries. In addition to the factors outlined above that are directly related to Trenwick America's businesses, Trenwick America is also subject to general business risks, including, but not limited to, adverse state, federal or foreign legislation and regulation, adverse publicity or news coverage, changes in general economic factors and the loss of key employees. The facts set forth above should be considered in connection with any forward-looking statement contained in this Quarterly Report on Form 10-Q. The important factors that could affect such forward-looking statements are subject to change, and Trenwick America does not intend to update any forward-looking statement or the foregoing list of important factors. By this cautionary note Trenwick America intends to avail itself of the safe harbor from liability with respect of forward-looking statements provided by Section 27A and Section 21E referred to above. Item 3. Quantitative and Qualitative Disclosures About Market Risk This information called for by this item can be found in this Quarterly Report on Form 10-Q under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Disclosures About Market Risk" and is incorporated herein by reference. Item 4. Controls and Procedures Within the 90 days prior to the filing date of this report, Trenwick America carried out an evaluation, under the supervision and with the participation of Trenwick America's management, including the Acting Chief Executive Officer (the "Acting CEO") and the Chief Financial Officer (the "CFO"), of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based on that evaluation, Trenwick America's management, including the Acting CEO and CFO, concluded that Trenwick America's disclosure controls and procedures are effective in timely alerting them to material information required to be included in Trenwick America's periodic SEC reports. In addition, there have been no significant changes in Trenwick America's internal controls or in other factors that could significantly affect those controls subsequent to the date of their evaluation, including any corrective actions with respect to significant deficiencies on material weaknesses. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. -26- PART II - OTHER INFORMATION Item 1. Legal Proceedings On July 1, 2002, Trenwick Group Ltd., Trenwick America's ultimate parent company, commenced an arbitration proceeding seeking $55 million in damages and other relief against European Reinsurance Company of Zurich, a subsidiary of Swiss Reinsurance Company. The claims arise out of European Re's failure to meet its obligations under a catastrophe equity put agreement, which entitled Trenwick Group Ltd. to raise up to $55 million of equity through the issuance of convertible preferred shares to European Re in the event there is a qualifying catastrophic event or events occurring prior to January 1, 2002. The terrorist attacks of September 11, 2001 constituted a qualifying catastrophic event and Trenwick Group Ltd. delivered notice of exercise of the catastrophe equity put on March 28, 2002. On September 6, 2002, Trenwick Group Ltd. and European Re settled the outstanding arbitration with European Re purchasing 550,000 of Trenwick Group Ltd.'s Series B Cumulative Convertible Perpetual Preferred Shares. For a description of the preferred shares issued by Trenwick Group Ltd. in connection with the settlement of the arbitration between Trenwick Group Ltd. and European Re, see Management's Discussion and Analysis of Financial Conditions and Results of Operations - Catastrophe Equity Put. In addition, Trenwick America is party to various legal proceedings generally arising in the normal course of its business. Trenwick America does not believe that the eventual outcome of any such proceeding will have a material effect on its financial condition or business. Trenwick America's subsidiaries are regularly engaged in the investigation and the defense of claims arising out of the conduct of their business. Pursuant to Trenwick America's insurance and reinsurance arrangements, disputes are generally required to be finally settled by arbitration. Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities On October 18, 2002, A.M. Best Company lowered the financial strength ratings of Trenwick America's subsidiaries and affiliates below A-. The lowered A.M. Best Company ratings constitute an event of default under Trenwick Group Ltd.'s bank letter of credit facility. In addition, the increase in Trenwick Group Ltd.'s loss reserves and the establishment of a Trenwick America deferred tax asset reserve in the third quarter of 2002 resulted in Trenwick Group Ltd. violating the financial covenants requiring Trenwick Group Ltd. to maintain a minimum tangible net worth and minimum risk-based capital on November 14, 2002. If Trenwick Group Ltd. is unable to remedy the financial covenant violations within 30 days, a second event of default shall have occurred under the credit facility. Trenwick Group Ltd. is liable under a guaranty of the letter of credit reimbursement obligations under the credit facility. For a description of the credit facility and the events of default thereunder, see Note 6 of the Notes to the Unaudited Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations - Financings, Financing Capacity and Capitalization. -27- Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information Related Party Transaction On August 27, 2002, Trenwick Group Ltd. entered into a consulting agreement with W. Marston Becker, the Vice Chairman of Trenwick Group Ltd.'s Board of Directors, who assumed the position of Trenwick Group Ltd.'s Acting Chairman and Acting Chief Executive Officer. In consideration for such services, Trenwick Group Ltd. agreed to pay Mr. Becker a consulting fee of $50,000 per month. The consulting agreement can be terminated by mutual agreement or upon 30 days prior written notice by either party. Item 6. Exhibits and reports on Form 8-K (a) Exhibits 10.1 Forbearance Agreement, dated as of November 11, 2002, among Trenwick Group Ltd., Trenwick America Corporation, Trenwick Holdings Limited, LaSalle Re Holdings and certain lending institutions party to the Credit Agreement and JP Morgan Chase Bank, as Administrative Agent. 10.2 Consulting Agreement, dated as of August 26, 2002, between Trenwick Group Ltd. and W. Marston Becker.* 99.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K The following reports on Form 8-K were filed during the quarter ended September 30, 2002: Date of Report Item Reported -------------- ------------- July 1, 2002 Commencement of the arbitration against European Reinsurance Company of Zurich Securities Insurance Option Agreement. August 27, 2002 Announcement that James F. Billett, Jr., Trenwick's Chairman, President and Chief Executive Officer, would be taking a leave of absence for health reasons. -28- September 6, 2002 Announcement of Settlement Agreement, a Second Amended and Restated Catastrophe Equity Securities Issuance Option Agreement and Amendment No. 1 to Registration Rights Agreement, each dated September 6, 2002 with European Reinsurance Company of Zurich. -29- Trenwick America Corporation SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 14, 2002 /s/ Stephen H. Binet --------------------- Name: Stephen H. Binet Title: President and Chief Executive Officer Date: November 14, 2002 /s/ Alan L. Hunte ----------------- Name: Alan L. Hunte Title: Executive Vice President and Chief Financial Officer -30- Certification of CEO Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Stephen H. Binet, President and Chief Executive Officer of Trenwick America Corporation, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Trenwick America Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. -31- Date: November 14, 2002 /s/ Stephen H. Binet - ---------------------------------- Stephen H. Binet President and Chief Executive Officer -32- Certification of CFO Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Alan L. Hunte, Executive Vice President and Chief Financial Officer of Trenwick America Corporation, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Trenwick America Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. -33- Date: November 14, 2002 /s/ Alan L. Hunte - --------------------------------------- Alan L. Hunte Executive Vice President and Chief Financial Officer -34- EX-10.1 3 d52670_10-1.txt FORBEARANCE AGREEMENT Exhibit 10.1 FORBEARANCE AGREEMENT FORBEARANCE AGREEMENT, dated as of November 11, 2002 (this "Forbearance Agreement"), among TRENWICK AMERICA CORPORATION ("Trenwick America"), TRENWICK HOLDINGS LIMITED (the "Account Party"), the lending institutions party to the Credit Agreement referred to below (each a "Bank," and collectively, the "Banks"), and JPMORGAN CHASE BANK, as Administrative Agent (in such capacity, the "Administrative Agent"), the Guarantors and Pledgors. All capitalized terms used herein and not otherwise defined herein shall have the meaning provided such terms in the Credit Agreement referred to below. BACKGROUND WHEREAS, Trenwick America, the Account Party, the Banks and the Administrative Agent are parties to the Credit Agreement, dated as of November 24, 1999 and Amended and Restated as of September 27, 2000 (as amended, modified and supplemented to, but not including, the date hereof, the "Credit Agreement"); WHEREAS, Trenwick Group Ltd. ("Holdings") and the Administrative Agent are parties to the Holdings Guaranty, dated as of September 27, 2000 (as amended, modified and supplemented to, but not including, the date hereof, the "Holdings Guaranty"); WHEREAS, in accordance with the Credit Agreement, Letters of Credit were issued at the request of the Account Party for the benefit of Lloyd's in an aggregate Stated Amount of $230,000,000, $225,874,000 of which are currently outstanding; WHEREAS, Holdings has informed the Banks that (i) it is not in compliance with Section 4.14 for the Holdings Guaranty as of the Forbearance Agreement Effective Date and (ii) it will continue to be out of compliance with such Section through at least the Forbearance Termination Date; WHEREAS, Holdings has informed the Banks that (i) it is not in compliance with Section 4.16 for the Holdings Guaranty as of the Forbearance Agreement Effective Date and (ii) it will continue to be out of compliance with such Section through at least the Forbearance Termination Date; WHEREAS, Holdings has informed the Banks of the occurrence of an event specified in Section 9.11 of the Credit Agreement; WHEREAS, the events described in the immediately preceding three paragraphs above are collectively referred to as the "Events" and each is individually referred to as an "Event." Each Event constitutes an Event of Default under the Credit Agreement; WHEREAS, Holdings has informed the Banks that it may not be in compliance with Section 4.15 of the Holdings Guaranty during the period from the Forbearance Agreement Effective Date to the Forbearance Termination Date; WHEREAS, to the extent a Default or Event of Default occurs due the occurrence of the event in the immediately preceding paragraph, such Default or Event of Default shall constitute an "Event" under this Forbearance Agreement; and WHEREAS, in order to provide Holdings, the Account Party and the other Guarantors with a period of time within which to develop a plan to address the Events and restructure the Obligations, Holdings, the Account Party and the other Guarantors have requested that the Banks forbear from exercising their rights and remedies under the Credit Documents as a result of the occurrence of the Events. Subject to the terms and conditions of this Forbearance Agreement, the Banks have agreed to this request. AGREEMENT NOW THEREFORE, incorporating the section in this Forbearance Agreement captioned "Background" above, and for other good and valuable consideration, the receipt and legal sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, subject to the satisfaction of Article III hereof, the Administrative Agent, the Collateral Agent, the Banks and the Credit Parties agree as of the date hereof (the "Forbearance Agreement Effective Date") as follows: ARTICLE I ACKNOWLEDGMENTS AND AGREEMENTS 1.1 Acknowledgment of Existing Events; Existing Credit Documents. The Credit Parties acknowledge and agree that: (a) the Events are material in nature and constitutes Events of Default and (b) the Credit Documents are legal, valid and binding obligations of the Credit Parties enforceable against the Credit Parties in accordance with their terms, except to the extent that enforceability thereof may be limited by applicable bankruptcy, insolvency, moratorium or similar laws affecting creditors' rights generally and general principles of equity regardless of whether enforcement is sought in a proceeding in equity or at law. The Credit Parties further acknowledge and agree that, as a result of the Events, the Banks are entitled to, among other things, exercise all rights and remedies under the Credit Documents, applicable law or otherwise, including to (i) declare the Total Unutilized L/C Commitment terminated and (ii) direct the Account Party to pay to the Administrative Agent, cash, cash equivalents and/or marketable securities to be held as security for the Account Party's reimbursement obligations in respect of all the Letters of Credit then outstanding, equal to the Stated Amount of all Letters of Credit at such time. 1.2 Acknowledgment of Current Outstanding Obligations . As of the Forbearance Agreement Effective Date, the Credit Parties acknowledge and agree that the aggregate Stated Amount of all the Letters of Credit at this time is $225,874,000 and that they are indebted to the 2 Administrative Agent and the Banks for all of the reimbursement and indemnity obligations in connection therewith, plus accrued but unpaid fees, plus the costs and expenses associated with the Obligations (which includes, without limitation, the fees, costs and expenses in connection with, and required under, the Retention Agreements (as defined below) pursuant to Section 13.01 of the Credit Agreement) and/or in connection with the occurrence of the Events, incurred by the Administrative Agent and/or the Banks, to the extent reimbursement of which is provided for in the Credit Documents but has not yet been made (the foregoing amounts are hereafter collectively referred to as the "Current Outstanding Obligations") all without offset, counterclaims or defenses of any kind. Nothing contained herein shall alter, amend, modify or extinguish the obligation of the Account Party or the Guarantors to repay the Current Outstanding Obligations or any other Obligations pursuant to the terms of the Credit Documents, and neither this Forbearance Agreement nor any of the other documents related hereto constitutes a novation or modification of any of the Credit Documents. 1.3 Acknowledgment of Liens and Priority. Pursuant to the Credit Documents and except as specifically set forth therein, the Collateral Agent, for the benefit of the Secured Creditors, holds first priority, perfected security interests in and liens upon all of the Collateral, wherever located, including all Collateral now owned or hereafter acquired, and as more specifically described in the Credit Documents. Holdings and LaSalle Re Holdings will, and each will cause its Subsidiaries to, as promptly as possible, take all actions and execute all documents requested by the Collateral Agent in regard to such security interests and liens as required by the Credit Documents. Such security interests and liens secure all of the Obligations (as defined in the Pledge Agreement), including, without limitation, the Current Outstanding Obligations. 1.4 Reaffirmation of Security Interests. The Credit Parties acknowledge and agree that Collateral pledged, assigned, conveyed, hypothecated or transferred to the Collateral Agent for the benefit of the Secured Creditors pursuant to the Credit Documents constitute (and shall continue to constitute) collateral security for all of the Obligations (as defined in the Pledge Agreement), including, without limitation, the Current Outstanding Obligations to the extent set forth in the Pledge Agreement. Each Pledgor hereby respectively reaffirms its prior conveyance to the Collateral Agent for the benefit of the Administrative Agent and/or the Secured Creditors of a continuing security interest in and lien on the Collateral described in each instrument conveying such security interest. 1.5 Reaffirmation of the Guaranties. The Guarantors reaffirm their obligations under the Guaranties and acknowledge and agree that the Guaranties remain in full force and effect. ARTICLE II FORBEARANCE 2.1 Forbearance Period. Subject to the terms and conditions of this Forbearance Agreement, and without waiving the Events or other Defaults or Events of Default that may now exist, the Banks agree to forbear from enforcing their rights or remedies pursuant to the Credit Documents, applicable law or otherwise solely because of the Events until the earliest to occur of 3 the following (the "Forbearance Termination Date"): (i) November 22, 2002, (ii) the occurrence of any Default or Event of Default under the Credit Documents (other than the Events), (iii) the occurrence of any Forbearance Event of Default (as defined below), (iv) the exercise of any rights or taking of any action by other party other than the Banks against Holdings or its Subsidiaries by any party to any loan or credit agreement or other document evidencing a debt in excess of $5,000,000 individually or in the aggregate for Holdings and its Subsidiaries or other material obligation, in each case, to which Holdings or its Subsidiaries is party or (v) the taking of any action by Holdings or any Subsidiary thereof which the Required Banks reasonably consider to be materially adverse to the interests of the Banks. 2.2 Proceeds. (a) Until the date which is five Business Days after the Forbearance Termination Date, Holdings shall not, and shall not permit any of its Subsidiaries to, pay, distribute by way of dividend or otherwise, loan, advance, disburse, pledge or hypothecate any cash, cash equivalents or securities (the "LaSalle Collateral") of LaSalle Re Holdings Limited ("LaSalle Holdings") or LaSalle Re Limited ("LaSalle Re" and, together with LaSalle Holdings, the "LaSalle Entities") (including, but is not limited to, any proceeds (the "Endurance Proceeds") received, or to be received, by, or on behalf of, the LaSalle Entities in connection with the sale (the "LaSalle Sale") pursuant to the Quota Share Retrocession Agreement, dated May 16, 2002, by and between LaSalle Re and Endurance Specialty Insurance Ltd. (the "LaSalle Sale Agreement")), other than (i) payments for past claims required under the LaSalle Sale Agreement, (ii) the payment of ordinary and usual operating expenses of the LaSalle Entities in the ordinary course of business and (iii) the payment of a dividend of $60,000,000 from LaSalle Re to LaSalle Holdings; provided that to the extent such dividend or any portion thereof is paid, such payment or payments shall be deposited in a cash collateral account in a manner satisfactory to the Administrative Agent in order to protect the security interests of the Secured Creditors and shall be maintained with, and in the sole dominion and control of, the Collateral Agent for the benefit of the Secured Creditors (collectively, the "Specified Payments"). On the Forbearance Effective Date, the LaSalle Entities maintain cash, cash equivalents and securities of approximately $282,000,000, of which approximately $142,000,000 is the LaSalle Collateral. For the purposes of this Article II.2.2(a), Endurance Proceeds shall include, but not be limited to, any surplus increase or increase in capital at LaSalle Holdings and LaSalle Re in connection with the LaSalle Sale. (b) Until the date which is five Business Days after the Forbearance Termination Date, Holdings shall not, and shall not permit any of its Subsidiaries to, pay, distribute by way of dividend or otherwise, loan, advance, disburse or pledge or hypothecate the proceeds (the "Cat E Put Proceeds") received from the issuance of the Cat E Put Securities, which amount shall not be less than approximately $40,000,000 as of the Forbearance Agreement Effective Date. (c) Holdings hereby represents and agrees that on the date hereof, (i) Holdings holds all right, title and interest in the Cat E Put Proceeds, which are maintained by Holdings in accounts at certain financial institutions (the "Specified Holdings Accounts"), (ii) the Cat E Put Proceeds are not subject to restrictions or set off other than in accordance with the terms of the account agreements entered into with respect to the Specified Holdings Accounts which agreements are listed on Annex I hereto and have been delivered to the Administrative Agent, 4 and (iii) that until the date which is five Business Days after the Forbearance Termination Date, the Cat E Put Proceeds shall remain in the Specified Holdings Accounts. (d) LaSalle Holdings hereby represents and agrees on behalf of LaSalle Re that on the date hereof, (i) LaSalle Re holds all right, title, and interest in the LaSalle Collateral which is maintained by LaSalle Re in accounts at certain financial institutions (the "Specified LaSalle Accounts"), (ii) the LaSalle Collateral is not subject to restrictions or set off other than in accordance with the terms of the account agreements entered into with respect to the Specified LaSalle Accounts which agreements are listed on Annex I hereto and have been delivered to the Administrative Agent and (iii) that until the date which is five days after the Forbearance Termination Date, the LaSalle Collateral shall remain in the Specified LaSalle Accounts other than for Specified Payments. (e) Holdings hereby acknowledges that it desires to use the LaSalle Collateral and the Cat E Put Proceeds to deposit funds at Lloyd's solely to satisfy the Account Party's solvency deficit at Lloyd's for the 2000 and earlier years of account (the "Lloyd's Solvency Deficit"). Holdings hereby agrees that, until the date which is five Business Days after the Forbearance Termination Date, it shall not, and shall not permit its Subsidiaries to, use the LaSalle Collateral or the Cat E Put Proceeds for any purpose whatsoever other than, with the consent of the Required Banks, to deposit funds at Lloyd's for the Lloyd's Solvency Deficit. 2.3 Advances, Payments, etc. Until the Forbearance Termination Date, Holdings shall not, and shall not permit any of its Subsidiaries to, (i) make any payments of interest or principal, advances or distributions in respect of any loan, credit agreement, note, mortgage or loan document, (ii) incur any indebtedness, including, without limitation, executing any guarantees, or have any letters of credit issued on its behalf (other than the Chubb security deposit on substantially the same terms contained in the Summary of Indicative Terms and Conditions, Underwriting and Reinsurance Agreement, dated October 25, 2002), or (iii) take any action that will result in, or require the creation or imposition of, any lien or encumbrance on any of the respective properties, other than in the case of clauses (i), (ii) and (iii) above, such payments, indebtedness and liens that are permitted by the Credit Agreement and will not be adverse to the interests of the Banks in any material respect. 2.4 Discussions with Lloyd's. Holdings hereby agrees that the Administrative Agent, and/or one or more Banks at the invitation of the Administrative Agent, the Administrative Agent's advisors, may meet with, or have access to, Lloyd's together with Holdings and/or subsidiary thereof to discuss matters relating to the restructuring of the Obligations and any other matters deemed reasonably necessary by the Administrative Agent. The initial meeting with Lloyd's shall take place or occur within 14 days of the Forbearance Agreement Effective Date. 2.5 Financial Statements. The Guarantors shall provide to the Banks within 5 days of the Forbearance Agreement Effective Date a consolidating balance sheet as of September 30, 2002 in a form reasonably satisfactory to the Administrative Agent showing in reasonable detail the assets, liabilities, and contingent liabilities of the Credit Parties and LaSalle Re Limited. 5 2.6 Continuing Obligations. Holdings will, and will cause its Subsidiaries to, continue to cooperate and work in good faith with the Administrative Agent, the Banks and their counsel and financial advisors, and to continue to allow the Banks, their counsel and financial advisors access to the financial and other information and any documentation reasonably requested relating to the restructuring of the Obligations as promptly as practicable; provided that such information and documentation in connection therewith remains subject to the confidentiality obligations set forth in Section 5.11 of the Holdings Guaranty. 2.7 Termination of the Total Unutilized L/C Commitment. The Required Banks hereby confirm, and the Credit Parties hereby acknowledge, that the Total Unutilized L/C Commitment will be terminated in its entirety as of the Forbearance Agreement Effective Date. 2.8 Confidential Communications. Holdings hereby confirms that it will, and will cause its Subsidiaries to, waive the confidentiality of any information between and among Holdings and its Subsidiaries on the one hand and the Banks on the other hand to permit the Banks to communicate such information between and among the Banks to the extent the Banks deem necessary; provided that such information and any documentation in connection therewith remains subject to the confidentiality obligations set forth in Section 5.11 of the Holdings Guaranty. ARTICLE III CONDITIONS TO EFFECTIVENESS The obligations of the Administrative Agent, the Collateral Agent and the Banks under this Forbearance Agreement and the occurrence of the Forbearance Agreement Effective Date are subject to the receipt by the Administrative Agent of the following: (a) this Forbearance Agreement duly executed by each Credit Party and the Required Banks; (b) the Agreement between White & Case LLP ("White & Case") and Holdings, dated as of October 29, 2002 with respect to the retention of Elliston, LLC and Elliston (UK) Ltd., (collectively "Elliston") duly executed by White & Case and Holdings and Holdings having delivered to Elliston the retainer agreed to by Holdings in the amount of $150,000 (such agreement, the "Elliston Retention Agreement"); and (c) the Agreement between White & Case and Holdings, dated as of October 29, 2002, for the retention of White & Case duly executed by White & Case and Holdings and Holdings having delivered to White & Case the retainer agreed to by Holdings in the amount of $150,000 (such agreement, the "W&C Retention Agreement," and together with the Elliston Retention Agreement, the "Retention Agreements") . 6 ARTICLE IV REPRESENTATIONS AND WARRANTIES To induce the Administrative Agent, and the Banks to enter into this Forbearance Agreement and as consideration for the terms and conditions contained herein, each Credit Party, jointly and severally, makes the following representations and warranties to the Administrative Agent and the Banks, each and all of which shall survive the execution and delivery of this Forbearance Agreement and all of the other documents executed in connection herewith: 4.1 Organization. (a) Each Credit Party is a corporation duly organized and validly existing and in good standing (where applicable) under the laws of the jurisdiction of its organization, and is duly authorized to do business and is duly qualified as a foreign corporation in all jurisdictions wherein the nature of its businesses or properties make such qualification necessary except where the failure to be so qualified is not reasonably likely to have a Material Adverse Effect, and has the corporate power and authority to own its respective properties and to carry on its respective businesses as now conducted; and (b) Each Credit Party has the requisite corporate power and authority to deliver and perform this Forbearance Agreement and Holdings has the requisite corporate power and authority to deliver and perform the Retention Agreements. 4.2 Authorization; Valid and Binding Agreement. All corporate action required to be taken by the Credit Parties and their respective officers, directors and stockholders of the Credit Parties for the authorization, execution, delivery and performance of this Forbearance Agreement and the Retention Agreements have been taken. Each person executing this Forbearance Agreement on behalf of the Credit Parties is an authorized officer of such Credit Party. This Forbearance Agreement is, and the Retention Letters are, legal, valid and binding obligations of the Credit Parties which are parties thereto, enforceable against each such party in accordance with their respective terms except to the extent that enforceability thereof may be limited by applicable bankruptcy, insolvency, moratorium or similar laws affecting creditors' rights generally and general principles of equity regardless of whether enforcement is sought in a proceeding in equity or at law. 4.3 Third Party Consents. The execution, delivery and performance, by the Credit Parties of this Forbearance Agreement, and by Holdings of the Retention Agreements will not: (a) require any consent or approval of any Person which has not been obtained prior to, and which is not in full force and effect as of, the date of this Forbearance Agreement; (b) result in the breach of, default under, or cause the acceleration of any obligation owed under any loan, credit agreement, note, security agreement, lease indenture, mortgage, loan document or other agreement by which any of them are bound or affected; or 7 (c) result in, or require the creation or imposition of, any lien or encumbrance on any of their respective properties other than those liens or security interests in favor of the Banks; except where the failure to obtain such consents or approvals, breaches, defaults, accelerations, liens or encumbrances is not reasonably likely to have a Material Adverse Effect. 4.4 No Defaults or Events of Default. No Default or Event of Default under the Credit Agreement exists on the Forbearance Agreement Effective Date (other than the Events). ARTICLE V DEFAULTS AND REMEDIES It shall constitute an immediate event of default under this Forbearance Agreement (a "Forbearance Event of Default"), if any Credit Party fails to perform or observe any covenant, term, agreement or condition in this Forbearance Agreement or the Retention Agreements or any representation or warranty made in this Forbearance Agreement or the Retention Agreements proves to be incorrect in any material respect. The Credit Parties specifically agree that, upon and at any time after the Forbearance Termination Date, the Banks, upon written notice to Holdings (although no notice shall be required in the case of an Event of Default under Section 9.05 of the Credit Agreement), may, in their sole discretion, exercise or enforce any or all of their rights and remedies under this Forbearance Agreement, the Retention Agreements, the Credit Documents, and/or applicable law, against the Account Party, the Guarantors or any other Person. ARTICLE VI MISCELLANEOUS 6.1 Submission to Jurisdiction; Selection of Forum; Judicial Proceeding. Each of the parties hereto agrees that the provisions of Section 13.08 of the Credit Agreement shall be incorporated herein by reference and shall apply to any action with respect to this Forbearance Agreement as if fully set forth herein. 6.2 Cooperation; Other Documents. At all times following the execution of this Forbearance Agreement, the Credit Parties shall execute and deliver to the Banks and the Administrative Agent, or shall cause to be executed and delivered to the Banks and the Administrative Agent, and shall do or cause to be done all such other acts and things as the Banks and the Administrative Agent may reasonably deem to be necessary or desirable to assure the Administrative Agent and the Banks of the benefit of this Forbearance Agreement and the documents comprising or relating to this Forbearance Agreement. This Forbearance Agreement is a Credit Document. 6.3 Remedies Cumulative; No Waiver. The respective rights, powers and remedies of the Administrative Agent and the Banks in this Forbearance Agreement and in the other Credit Documents are cumulative and not exclusive of any right, power or remedy provided in the Credit Documents, by law or equity and no failure or delay on the part of the 8 Administrative Agent or the Banks in the exercise of any right, power or remedy shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or remedy preclude any other or further exercise thereof, or the exercise of any other right, power or remedy. Other than as set forth in Section 2.1 of this Forbearance Agreement, nothing contained in this Forbearance Agreement or in any prior communications between or among the Credit Parties, the Administrative Agent and the Banks shall constitute a waiver or modification of any rights or remedies that the Administrative Agents or the Banks may have under the Credit Documents and applicable law. The Administrative Agent and the Banks expressly reserve and preserve all of their rights and remedies available to them under the Credit Documents, applicable law or otherwise. 6.4 Notices. Each of the parties hereto agree that the provisions of Section 13.03 of the Credit Agreement shall be incorporated herein by reference and shall apply to any action with respect to this Forbearance Agreement as if fully set forth herein. 6.5 Restructuring Negotiations. The parties hereto have informed the each other of their desire to restructure the Obligations owing to the Banks. In connection with any such restructuring, the parties hereto hereby acknowledge that (i) discussions among the Credit Parties, the Administrative Agent and the Banks do not evidence an agreement on the part of the parties hereto to modify or restructure the Obligations, (ii) any discussions, questions or comments posed or made by any of the parties hereto or their staff, consultants or advisors during any discussions or meetings should not be considered by the parties hereto to be a binding commitment by any of the parties hereto to accede to any requests or proposals made by any of the parties hereto during any such discussions or meetings, (iii) even if any understanding in principle is reached on the terms of a proposed restructuring of the Obligations at any time, none of the parties hereto shall be legally bound until the appropriate approval authority of such parties has approved such proposed restructuring, and until all requisite parties have signed definitive documents evidencing such restructuring, and (iv) any discussions concerning the terms of a proposed restructuring shall in no way invalidate, nullify or waive any party's rights and remedies under the Credit Documents or signify the Administrative Agent's or the Banks' agreement to postpone the exercise of any of their respective remedies under the Credit Documents. The parties contemplate that these discussions may be lengthy and complex and that while the parties may reach agreement on one or more preliminary matters that are part of the disputes and issues that they are trying to resolve, the parties agree that none of them shall be bound by any agreement until said agreement has been reduced to a written agreement and signed by each of the requisite parties. Thus, no party can rely upon (i) any understanding or agreement which is not reduced to a written agreement and signed or (ii) the existence of the negotiations. 6.6 Survival of Representations and Warranties. All representations and warranties of the Credit Parties contained in this Forbearance Agreement and in the Retention Agreements shall survive the execution of this Forbearance Agreement and the Retention Agreements, as the case may be, and are material and have been or will be relied upon by the Administrative Agent and the Banks, notwithstanding any investigation made by any person, entity or organization on the Administrative Agent's or the Banks' behalf. No implied representations or warranties are created or arise as a result of this Forbearance Agreement or Retention Agreements. 9 6.7 Governing Law. This Forbearance Agreement shall be construed in accordance with and governed by the internal laws of the State of New York without reference to conflict of laws principles. 6.8 Amendment and Waiver. No amendment of this Forbearance Agreement, and no waiver, discharge or termination of any one or more of the provisions thereof, shall be effective unless set forth in writing and signed by the Credit Parties and the Required Banks. 6.9 Successors and Assigns. This Forbearance Agreement and the other Credit Documents (i) shall be binding upon the Administrative Agent, the Banks and the Credit Parties, and their respective heirs, nominees, successors and assigns, and (ii) shall inure to the benefit of the Administrative Agent, the Banks and the Credit Parties, and their respective heirs, nominees, successors and assigns; provided, however, that no Credit Party may assign any rights hereunder or any interest herein without obtaining the prior written consent of the Required Banks, and any such assignment or attempted assignment without such prior written consent of the Required Banks shall be void and of no effect with respect to the Administrative Agent and the Banks. 6.10 Severability of Provisions. Any provision of this Forbearance Agreement that is held to be inoperative, unenforceable, void or invalid in any jurisdiction shall, as to that jurisdiction, be ineffective, unenforceable, void or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability or validity of that provision in any other jurisdiction, and to this end the provisions of this Forbearance Agreement are declared to be severable. 6.11 Counterparts. This Forbearance Agreement may be executed in any number of counterparts and by the different parties on separate counterparts, and each such counterpart shall be deemed to be an original (including if delivered by facsimile transmission), but all such counterparts shall together constitute one and the same Forbearance Agreement. * * * 10 IN WITNESS WHEREOF, the parties hereto have caused this Forbearance Agreement to be executed by their respective officers thereunto duly authorized, as of the date first written above. TRENWICK GROUP LTD., in its capacity as a Guarantor and Pledgor By /s/ W. Marston Becker ------------------------------------------ Name: W. Marston Becker Title: Acting Chairman & Acting Chief Executive Officer TRENWICK AMERICA CORPORATION, in its capacity as the Borrower and Guarantor By /s/ David Finkelstein ------------------------------------------ Name: David Finkelstein Title: Vice President & Treasurer TRENWICK HOLDINGS LIMITED, in its capacity as the Account Party By /s/ Alan L. Hunte ------------------------------------------ Name: Alan L. Hunte Title: Director LASALLE RE HOLDINGS LIMITED, in its capacity as a Guarantor and Pledgor By /s/ John V. Del Col ------------------------------------------ Name: John V. Del Col Title: Director NAME OF BANK: By /s/ ------------------------------------------- Name: Title: ANNEX I ACCOUNT AGREEMENTS EX-10.2 4 d52670_10-2.txt CONSULTING AGREEMENT Exhibit 10.2 Trenwick Group Ltd. LOM Building 27 Reid Street [LOGO] Hamilton HM11 Bermuda August 26, 2002 Mr. W. Marston Becker 48 Ledyard Road West Hartford, CT 06117-1708 Dear Mr. Becker: This letter agreement (this "Agreement") will confirm the understanding between Trenwick Group Ltd. (the "Company") and you, pursuant to which you have been engaged by the Company to provide services as its Acting Chairman of the Board of Directors and Acting Chief Executive Officer. You shall perform the duties and activities customarily associated with the Chairman and Chief Executive Officer of the Company and you shall have full authority to conduct the affairs of the Company during the term of this Agreement. Your duties shall include but not be limited to the ability to enter into contracts and other agreements binding the Company, hiring and dismissal of employees, engagement of independent contractors to work for the Company, and representation of the Company before regulatory authorities and rating agencies. The term of this Agreement and your engagement hereunder shall extend from August 15, 2002 through the earliest of (a) your death or disability, (b) the mutual agreement of you and the Company or (c) thirty calendar days following delivery of written notice of termination of this Agreement by you or the Company. Notwithstanding expiration or termination of this Agreement, it is agreed that the provisions concerning confidentiality (Section 6), indemnification (Sections 5 and 8), ownership of work product (Section 7), dispute resolution (Section 10) and the Company's obligations to pay fees and reimburse expenses earned or incurred prior to the termination of this Agreement (Section 3) shall survive any such expiration or termination. As compensation for the services hereunder, the Company will pay you, beginning on August 15, 2002, a monthly fee of $50,000, which shall be paid in arrears on or before the 15th calendar day of each month following the month in which such fee is earned. This monthly fee shall be reduced pro rata for (a) partial months worked and (b) the time which you spend on other activities not related to work for the Company. You shall report at the end of each calendar month the proportion of your working time spent on Company business during such calendar month. It is our mutual anticipation that you will spend at least 75% of your working time on the Company's business. The Company shall reimburse you monthly for your reasonable out-of-pocket expenses incurred or accrued during the period of or in connection with your engagement notwithstanding the termination of this Agreement. You shall report and account for your expenses monthly on the Company's standard expense account forms and be reimbursed by the Company within 30 calendar days of submission of such expense account forms to the Company. -35- You shall not be entitled to any Company benefits or other benefits as may accrue to a full or part-time employee of the Company. In performing services and duties hereunder, you shall do so as an independent contractor and you are not, and are not to be deemed, an employee of the Company or any other person acting on behalf of the Company. You shall be responsible for meeting any legal requirements imposed on you or any person acting on your behalf as a result of this Agreement, including but not limited to the filing of income tax returns and the payment of taxes; and you agree to indemnify the Company for the failure to do so, if the Company is required to make any such payment otherwise due by you. To the extent that you obtain non-public information about the Company's or its affiliates' business practices and plans, including but not limited to, business strategies, marketing strategies, technical information, systems information, product development, service development and customers ("Confidential Information"), then all such Confidential Information disclosed to you shall be received by you in confidence for purposes of this Agreement. You shall not disclose, disseminate, publish, communicate or divulge any Confidential Information to anyone outside the Company, or to any employee of the Company not having reasonable need for access to such information, unless the Company expressly consents to such disclosure in writing or as may be required by law. You agree that all Confidential Information within your possession upon termination of this Agreement shall be returned promptly to the Company. You understand and agree that money damages will not be sufficient as a remedy for any breach of this Section and that the Company shall be entitled to equitable relief, including injunction and specific performance, as a remedy for any breach of this Section. All work product created by you on behalf of the Company during the term of this Agreement shall be the sole property of the Company, and you shall not have any license or other right, express or implied, to such work product. In consideration for your work on behalf of the Company, the Company shall indemnify and hold you harmless from and against any and all claims, damages or liabilities arising out of your engagement as Acting Chairman and Acting Chief Executive Officer, unless a judgment or other final adjudication establishes that your acts or omissions were in bad faith or involved intentional misconduct or a knowing violation of law. Costs and expenses (including attorney's fees) incurred by you in defending or investigating any action, suit, proceeding or investigation shall be paid by the Company, in advance of final disposition of such matter, upon receipt of your written undertaking to repay any such amounts if it is ultimately determined that you are not entitled to indemnification hereunder. -36- For the purposes of this Agreement, notices, demands and all other communications shall be in writing and shall be deemed to have been duly given when delivered to the recipient at one of the following addresses: If to you: 48 Ledyard Road West Hartford, CT 06117 If to the Company: One Canterbury Green Stamford, Connecticut 06901 Attention: General Counsel or to such other address as any party may have furnished to the other in writing. Except as otherwise set forth in Section 6 herein with respect to the Company's remedy for any breach of Section 6, all controversies, claims, or disputes arising out of or related to this Agreement, shall be settled by arbitration in the State of Connecticut, as the sole and exclusive remedy of either party, and judgment upon such award rendered by the arbitrator(s) may be entered in any court of competent jurisdiction. In the event that a court of competent jurisdiction determines that arbitration is not appropriate for the adjudication of any claim, you hereby waive your right to a jury trial. One arbitrator shall be chosen by you, the other by the Company, and an umpire shall be chosen by the two arbitrators, all of whom shall be active or retired disinterested executive officers of insurance or reinsurance companies. In the event that either party shall fail to choose an arbitrator within 30 days following a written request by the other party to do so, the requesting party may choose two arbitrators who shall in turn choose an umpire. If the two arbitrators fail to agree on the selection of an umpire within 30 days following their appointment, each arbitrator shall name three nominees, of whom the other shall decline two, and the decision shall be made by drawing lots. Each party shall bear the expense of its own arbitrator, and shall jointly and equally bear with the other the expense of the umpire. -37- If any provision of this Agreement shall, to any extent, now or hereafter be or become invalid or unenforceable, the remainder of this Agreement shall not be affected thereby and every other provision of this Agreement shall be valid and enforceable, to the fullest extent permitted by law. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the parties. No waiver by either party at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto. Neither party to this Agreement can assign his or its rights or obligations under this Agreement without the prior written consent of the other party to this Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut without regard to the conflicts of law provisions thereof. This Agreement may be signed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one and the same instrument. If the foregoing correctly sets forth the understanding and agreement between you and the Company, please sign and return one original executed copy of this Agreement. Trenwick Group Ltd. /s/ Clement S. Dwyer, Jr. ----------------------------------------- By: Clement S. Dwyer, Jr. Chairman of the Compensation Committee Confirmed and Agreed as of the date first written above: /s/ W. Marston Becker - --------------------------------- W. Marston Becker -38- EX-99.1 5 d52670_99-1.txt CERTIFICATION CEO Exhibit 99.1 CERTIFICATION BY CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Trenwick America Corporation (the "Company") on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Stephen H. Binet, President and Chief Executive Officer of the Company, certify, pursuant to 18, U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Stephen H. Binet Stephen H. Binet President and Chief Executive Officer November 14, 2002 EX-99.2 6 d52670_99-2.txt CERTIFICATION CFO Exhibit 99.2 CERTIFICATION BY CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Trenwick America Corporation (the "Company") on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Alan L. Hunte, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18, U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Alan L. Hunte Alan L. Hunte Executive Vice President and Chief Financial Officer November 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----