S&P, Moody’s Lower Trenwick Group’s Ratings

February 3, 2003

Both Standard & Poor’s Ratings Services and Moody’s Investors Service announced that they have lowered their ratings on the Bermuda-based Trenwick Group Ltd. and its subsidiaries, following the company’s announcement that it had added an additional $107 million to its reserves in the fourth quarter of 2002 (See IJ Website Jan. 31).

S&P said it had lowered Trenwick’s counterparty and financial strength ratings, and those of its sub-holding companies, LaSalle Re Holdings Ltd. and Trenwick America Corp, to ‘CCC-‘ from ‘CCC+’ and had removed them from CreditWatch.

Moody’s said it had lowered Trenwick’s senior debt rating, which it noted is an obligation of its subsidiary Trenwick America Corp., to Ca from Caa3. It also said that “the ratings of the trust preferred securities of Trenwick America Corporation, and the preferred stock of subsidiary LaSalle Holdings Ltd. have been moved to C from Ca.”

S&P further noted that it had “lowered its counterparty credit and financial strength ratings on Trenwick America Reinsurance Corp., Dakota Specialty Insurance Co., LaSalle Re Ltd., and Insurance Corp. of NY to ‘CCC’ from ‘BB-‘ and removed them from CreditWatch.” It added that it had also lowered its counterparty credit and financial strength ratings on Chartwell Insurance Co. and Trenwick International Ltd. to ‘CCC’ from ‘B+’ and removed them from CreditWatch. The outlook on all the ratings is negative.

Moody’s announcement noted that the “$107 million reserve charge is significant in relation to the $322 million book value reported at the end of the 3rd quarter 2002 and also the company’s current market capitalization, which is well below that figure.” The charge “further diminishes the likely value that creditors will be able to extract from the company in its restructuring efforts, which are now focused on the upcoming April 1, 2003 maturity of Trenwick’s $75 million in senior debt.” Moody’s also warned that “Currently, virtually all of Trenwick’s financial assets are held by regulated insurance subsidiaries, limiting resources available to meet debt and preferred stock obligations.” Its opinion is that “the severity of loss for all classes of creditors could be high.”

“Following the reserve additions, tangible capital at year-end 2002 will be marginally positive, and Trenwick’s ability to service its remaining obligations is increasingly uncertain,” stated S&P credit analyst Karole Dill Barkley. “The reserve additions are expected to bring regulatory capital adequacy close to regulatory action levels, which further threatens the likelihood of repayment of senior creditors.”

S&P explained that the April 1 deadline on the $75 million in senior notes is critical, as a default could trigger a covenant default to the recently renewed bank letter of credit facility, that enables Trenwick to continue its Lloyd’s operations. “The emergence of earnings and dividend capacity to service existing creditors in the near-term is uncertain,” said S&P.

Moody’s report noted that “Factors that help mitigate some of these concerns include the aggressive steps being taken by management to stabilize and restore confidence in Trenwick’s operations, including the successful funding of the company’s Lloyd’s business and the implementation of a fronting agreement with Chubb to continue writing business at its Trenwick America Corp. subsidiary.” It also noted improving market conditions in many of the lines of business in which the company operates.

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