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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
COMMISSION FILE NUMBER 1-12823
LASALLE RE HOLDINGS LIMITED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
BERMUDA NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
CONTINENTAL BUILDING, 25 CHURCH STREET, HAMILTON HM 12, BERMUDA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
TELEPHONE NUMBER: 441-292-3339
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
Common Shares, par value $1.00 per
share The New York Stock Exchange, Inc.
Series A Preferred Shares, par value
$1.00 per share The New York Stock Exchange, Inc.
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. [X] Yes [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S) 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [_]
The aggregate market value of the shares of all classes of voting stock of
the registrant held by non-affiliates of the registrant on December 1, 1997
was approximately $360,544,414, computed upon the basis of the closing sales
price of the Common Shares on that date. For the purposes of this computation,
shares held by directors (and shares held by any entities in which they serve
as officers) and officers of the registrant have been excluded. Such exclusion
is not intended, nor shall it be deemed, to be an admission that such persons
are affiliates of the registrant.
As of December 1, 1997, there were outstanding 15,084,396 Common Shares of
$1.00 par value, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the registrant's annual report to shareholders for the fiscal
year ended September 30, 1997 (the "1997 Annual Report").
2. Portions of the registrant's definitive proxy statement (the "1998 Proxy
Statement") to be filed with the Securities and Exchange Commission not
later than 120 days after the end of the Registrant's fiscal year pursuant
to Regulation 14A relating to the Annual General Meeting of Shareholders
scheduled to be held on February 26, 1998.
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LASALLE RE HOLDINGS LIMITED
TABLE OF CONTENTS
ITEM PAGE NUMBER
---- -----------
PART I
1. BUSINESS.................................................... 10K-2
2. PROPERTIES.................................................. 10K-17
3. LEGAL PROCEEDINGS........................................... 10K-17
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 10K-17
EXECUTIVE OFFICERS OF THE COMPANY........................... 10K-17
PART II
5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS........................................ 10K-18
6. SELECTED FINANCIAL DATA..................................... 10K-19
7. MANAGEMENTS' DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION......................... 10K-19
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 10K-26
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE................................... 10K-49
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS............................ 10K-49
11. EXECUTIVE COMPENSATION...................................... 10K-49
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................. 10K-49
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 10K-49
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K................................................... 10K-49
10K-1
PART I
Unless the context otherwise requires, references herein to the "Company"
include LaSalle Re Holdings Limited and its subsidiary, LaSalle Re Limited
("LaSalle Re"), and its subsidiaries LaSalle Re Corporate Capital Ltd.
("LaSalle Re Capital") and LaSalle Re (Services) Limited ("LaSalle Re
Services").
NOTE ON FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning
of Section 27A of the United States Securities Act of 1933, as amended, and
Section 21E of the United States Securities Exchange Act of 1934, as amended.
Forward-looking statements are statements other than historical information or
statements of current condition. Some forward-looking statements may be
identified by use of terms such as "believes", "anticipates", "intends", or
"expects". These statements relate to the plans of the Company for future
operations, including the dividend policy pursuant to which the Company
intends to distribute as dividends to holders of common shares of the Company
("Common Shares") and exchangeable non-voting shares of LaSalle Re
("Exchangeable Non-Voting Shares") in each fiscal year 50% to 60% of the
amount by which its net income (before minority interest) from the prior
fiscal year exceeds the amount of dividends payable on preferred shares of the
Company in the current fiscal year. In light of the risks and uncertainties
inherent in all future projections, these statements should not be regarded as
a representation that the objectives will be achieved. Many factors could
cause actual results to differ materially from those in the forward-looking
statements, including, but not limited, to the following: catastrophic events
of unanticipated frequency or severity; changes in the demand for or supply of
property catastrophe reinsurance; actions of competitors; changes in the
Company's financial ratings; changes in insurance or tax laws or regulations
or governmental interpretations thereof; changes in foreign economic
conditions including currency rate fluctuations; a major decrease in the
cession of business from CNA Financial Corporation ("CNA"); or the termination
of the Underwriting Services Agreement (as defined below) with an affiliate of
CNA. The Company undertakes no obligation to release publicly the results of
any future revisions it may make to forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF THE BUSINESS
The Company is a property and casualty reinsurer writing worldwide
specialist products with an emphasis on catastrophe cover. Catastrophe
reinsurance contracts cover unpredictable events such as hurricanes,
windstorms, hailstorms, earthquakes, fires, industrial explosions, freezes,
riots, floods and other man-made or natural disasters. The Company also seeks
to take advantage of pricing opportunities that may occur in other lines of
reinsurance. These lines currently include property risk excess, property pro
rata treaty, casualty clash, marine, crop hail, aviation and satellite.
LaSalle Re was incorporated in Bermuda in October 1993 with an initial
capitalization of $373.1 million from institutional and other investors (the
"Founding Shareholders"). It commenced operations on November 22, 1993.
LaSalle Re Holdings Limited was incorporated in Bermuda in September 1995 to
act as an investment holding company for LaSalle Re.
LaSalle Re has two wholly owned subsidiaries, LaSalle Re Services, which
acts as a representative office for the Company in the United Kingdom, and
LaSalle Re Capital, which was incorporated in Bermuda in November 1996 to
provide capital support to selected syndicates at Lloyd's. LaSalle Re Capital
was accepted as a corporate member ("Corporate Member") of Lloyd's in December
1996 and, with effect from January 1, 1997, has participated in three Lloyd's
syndicates.
In November 1995, the Company and LaSalle Re consummated an offer (the
"Exchange Offer") pursuant to which, among other things, the Founding
Shareholders exchanged their capital stock in LaSalle Re for
10K-2
Common Shares of the Company and, in certain circumstances, Exchangeable Non-
Voting Shares of LaSalle Re. The Exchangeable Non-Voting Shares are held by
certain Founding Shareholders who would otherwise hold, or cause another
shareholder to hold, directly, indirectly or constructively, in excess of 9.9%
of the voting power of the Company or LaSalle Re. The Exchangeable Non-Voting
Shares are exchangeable, at the option of the holder, for Common Shares on a
one-for-one basis, unless the board of directors of the Company (the "Board")
determines such exchange may cause actual or potential adverse tax consequences
to the Company or any shareholder. The Exchangeable Non-Voting Shares will at
all times rank as to assets, dividends and in all other respects on a parity
with the common shares of LaSalle Re, except that they do not have the right to
vote on any matters except as required by Bermuda law and in connection with
certain actions by the Company.
In November 1995, the Company and certain Founding Shareholders also
consummated an initial public offering of 4,312,500 Common Shares (the "Initial
Public Offering"). Of these shares, 2,920,500 were sold by Founding
Shareholders and 1,392,000 by the Company. The proceeds from the sale of the
1,392,000 shares sold by the Company were used to enable LaSalle Re to redeem
shares of its capital stock (the "Redemption"). Upon the consummation of the
Exchange Offer, the Initial Public Offering and the Redemption, the Company
owned 100% of the outstanding voting stock, which constituted 63% of the
outstanding capital stock of LaSalle Re.
In December 1996, the Company completed a secondary offering of Common Shares
(the "Secondary Offering"). In connection with the Secondary Offering, certain
Founding Shareholders of LaSalle Re exchanged 2,119,110 of their Exchangeable
Non-Voting Shares for Common Shares. As a result of this exchange, the Company
increased its ownership of the outstanding capital stock of LaSalle Re from 63%
to 73%.
In March 1997, the Company issued 3,000,000 Series A Preferred Shares in a
public offering (the "Preferred Offering"). The Series A Preferred Shares, par
value $1.00 per share, carry a liquidation preference of $25.00 per share, plus
accrued and unpaid dividends, if any, to the date of liquidation. Dividends on
the Series A Preferred Shares are payable in an amount per share equal to 8.75%
of the liquidation preference per annum (equivalent to $2.1875 per share). Net
proceeds from the Preferred Offering after underwriting discounts and
commissions were $72.6 million.
In May 1997, the Company completed a $100 million tender offer (the "Tender
Offer") whereby it purchased for cancellation 3,703,703 of its Common Shares at
a price of $27.00 per share. The Tender Offer was made to all holders of Common
Shares and Common Share equivalents, which included Exchangeable Non-Voting
Shares and options to purchase Common Shares and Exchangeable Non-Voting
Shares. Pursuant to the Tender Offer, 2,163,538 Exchangeable Non-Voting Shares
were exchanged for Common Shares and 95,679 options for Exchangeable Non-Voting
Shares were exercised and exchanged for Common Shares. As a result of these
exchanges, the Company increased its ownership of the outstanding capital stock
of LaSalle Re from 73% to 79%. The Company has continually owned 100% of the
outstanding voting stock of LaSalle Re.
In order to reduce its earnings volatility, protect its capital base and
support its dividend policy, the Company purchased a multi-year excess of loss
reinsurance program effective January 1, 1997. The program is event based,
providing up to $100 million of coverage in excess of the first $100 million of
losses for the first loss occurrence and $100 million of coverage in excess of
the first $150 million of losses for the second loss occurrence, with a $200
million aggregate coverage limit over a three-year period. The attachment point
is triggered by losses incurred directly by the Company. If and when the first
loss is triggered, the Company is required to accrue a reinstatement premium
and additional premiums will be payable in years 2 and 3 of the contract. The
Company has accounted for the first loss portion of the coverage as a deposit
in accordance with Statement of Financial Accounting Standard ("SFAS") 113. If
and when a second loss occurs, the Company will be required to pay a one-time
additional premium equal to 35% of any losses that are covered by the second
loss event portion of the coverage. If no losses occur, the contract can be
canceled after the first year with significant return premiums accruing to the
Company. The reinsurance is provided by a company that currently holds a rating
of "A+" (Superior) from A.M. Best Company, Inc. ("A.M. Best") and a claims-
paying rating of "AA" (Excellent) from Standard & Poor's Rating Services
("S&P").
10K-3
Effective July 1, 1997, the Company entered into a $100 million multi-year
Catastrophe Equity Put ("CatEPut") option program. The CatEPut option will
enable the Company to put up to $100 million of equity, through the issue of
convertible preferred shares at pre-negotiated terms, in the event of a major
catastrophe or series of large catastrophes that cause substantial losses to
the Company or its subsidiaries.
With effect from October 1, 1997, the administrative services agreement
("Administrative Services Agreement"), under which Aon Risk Consultants
(Bermuda) Limited ("ARC") provided the Company with actuarial and financial
reporting, accounting, office space and other administrative services, was
terminated. All of the personnel assigned to the Company by ARC have become
employees of the Company and services performed by ARC have been assumed by
the Company. In connection with the termination of the agreement the Company
agreed to purchase all of the fixed assets owned by ARC and utilized by the
Company for a purchase price of $1.5 million. In addition, the Company agreed
to assume the current leasing agreements.
BUSINESS SEGMENTS
The Company writes property and casualty reinsurance on a worldwide basis
through its subsidiary, LaSalle Re. The Company also writes selected other
lines of reinsurance when it believes that market conditions are favorable.
These lines currently include property risk excess, property pro rata treaty,
casualty clash, marine, crop hail, aviation, satellite and political risk.
The following table sets forth the Company's net premiums written and number
of contracts written by type of reinsurance for the years indicated (dollars
in millions):
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
---------------------- ----------------------
NET PREMIUMS NUMBER OF NET PREMIUMS NUMBER OF
TYPE OF REINSURANCE WRITTEN CONTRACTS WRITTEN CONTRACTS
- ------------------- ------------ --------- ------------ ---------
Property catastrophe reinsurance:
Excess of loss................. $110.4 802 $122.4 832
Pro rata....................... 34.4 10 42.2 10
Other lines of business:
LaSalle Re Capital............. 14.1 -- 0.0 --
Property--risk excess and pro
rata.......................... 9.0 80 9.7 70
Casualty clash................. 4.0 36 3.0 30
Marine......................... 3.7 23 4.6 17
Miscellaneous.................. 6.1 49 4.8 36
Adjustments, reinstatement
premiums and no claims bonuses.. (10.3) -- 3.5 --
------ ----- ------ ---
Total........................ $171.4 1,000 $190.2 995
====== ===== ====== ===
Property Catastrophe
The largest portion of the Company's business consists of property
catastrophe excess of loss contracts. Property catastrophe excess of loss
reinsurance provides coverage when total losses and loss expenses from a
single occurrence of a covered peril under a portfolio of primary reinsurance
contracts exceed the attachment point specified in the reinsurance contract
with the primary insurer. Some of the Company's property catastrophe excess of
loss policies limit coverage to one occurrence in a policy year, but most
policies provide for coverage of a second occurrence after the payment of a
reinstatement premium. The Company also writes a minimal amount of aggregate
property catastrophe excess of loss contracts that cover more than one
catastrophe with one attachment point.
The Company writes pro rata of property catastrophe reinsurance treaties
when it believes that rates and volume are attractive. In such programs, the
Company assumes a specified proportion of the exposure under a portfolio of
excess of loss property catastrophe reinsurance contracts written by the
ceding reinsurer and receives
10K-4
an equal proportion of the premium received by the cedent. The cedent
generally receives a ceding commission, based upon the premiums ceded to the
reinsurer, and may also be entitled to receive a profit commission based on
the ratio of losses, loss expenses and the reinsurer's expenses to premiums
ceded. The Company generally requires that its pro rata of property
catastrophe contracts have aggregate exposure limits per occurrence on a zonal
basis. The Company generally obtains detailed information concerning each
underlying contract and the exposures underlying the risks it assumes and, as
appropriate, audits the premiums associated with the cessions. However, the
Company is dependent upon the cedent's underwriting, pricing and claims
administration to yield an underwriting profit.
Other Lines of Business
The Company formed LaSalle Re Capital to provide capital support to selected
Lloyd's syndicates. Effective January 1, 1997, the Company provided an
aggregate of approximately $25 million of capital support to three syndicates.
These syndicates individually write the following lines of business: direct
and facultative property insurance; marine insurance and reinsurance; and
professional indemnity, directors and officers' insurance and bankers blanket
bond business. LaSalle Re Capital provides capital support to the syndicates
through letters of credit totaling (Pounds)9.8 million ($16.0 million).
The Company's property risk excess of loss contracts cover a cedent's loss
on a single "risk" in excess of the cedent's attachment point, rather than
covering multiple risks as does property catastrophe reinsurance. A "risk" in
this context might mean the insurance coverage on one building or a group of
buildings or the insurance coverage under a single policy, which the reinsured
treats as a single risk. In property pro rata reinsurance treaties, the
Company assumes a proportional part of the original premiums and losses of the
reinsured on non-catastrophe reinsurance contracts. In property pro rata
reinsurance, the reinsurer generally pays the ceding company a ceding
commission. The ceding commission generally is based on the ceding company's
cost of acquiring the business being reinsured (including commissions, premium
taxes, assessments and miscellaneous administrative expense) and also may
include a profit factor.
In addition to property risk excess of loss and pro rata, the Company also
writes other lines of reinsurance, which currently include casualty clash,
marine, crop hail, aviation, satellite and political risk. Casualty clash
reinsurance protects cedents against an aggregation of casualty losses
incurred by multiple insureds from a single event. In addition to aggregation
of losses, casualty clash coverage protects a reinsured against a single
extraordinary loss caused by a judgment in excess of the original policy limit
issued (including punitive damages) or an action by an original insured
against the insurer for "bad faith" handling of a claim (extra-contractual
obligations). Marine and aviation risks involve property damage, although they
may also involve casualty coverages arising from the same event causing the
property claims. Crop hail reinsurance provides property coverage for hail
damage to crops. Satellite reinsurance protects the reinsured primarily from
losses relating to launches, improper orbits and other losses in the early
stages of the satellite's life. Political risk includes coverage for losses
arising from contract frustration, confiscation, repatriation and
international trade credit business.
Adjustment premiums, reinstatement premiums and no claims bonuses
Due to the changing nature of a reinsurer's exposure under an excess of loss
contract, certain contracts contain adjustable premium clauses. The reinsurer
receives an initial deposit premium, with the final premium calculated at the
end of the contract period using a pre-negotiated percentage of the ceding
company's gross net annual premium income. The adjustment premium is the
difference between the initial deposit and the revised premium and can be
either an additional or return premium.
In addition, the Company experiences adjustment premiums on its pro rata of
property catastrophe reinsurance treaties. The Company estimates premiums
written using reports received from ceding companies, which estimates are
revised during the contract period as more information as to actual premiums
written by the ceding companies is received. Any differences between the
estimate and the revised information is booked as an adjustment during the
period the revised information is received.
Certain excess of loss contracts contain a no claims bonus clause. Where no
claim is made under the contract, the ceding company is entitled to a pre-
determined return premium, which is referred to as a "no claims bonus".
10K-5
Geographic Diversification
The Company seeks to diversify its property catastrophe exposures across
geographic zones in order to optimize its spread of risk. For the year ended
September 30, 1997, excluding the premiums written by LaSalle Re Capital,
adjustment premiums, reinstatement premiums and no claims bonuses, 45% of the
Company's net premiums written represented U.S.-based risks. Within the United
States, the Company's largest exposure on a zonal basis is the West Coast,
including Hawaii and Alaska. The remaining 55% of net premiums written was
spread in other territories around the world. This distribution of risk is
subject to change and is dependent upon rates available in various zones. As a
result of long-term relationships between the Company's management and certain
clients and brokers, the Company has developed a strong base of regional
business in the U.S. This business assists the Company in diversifying its
U.S.-based risks and makes more efficient use of its capital by limiting
multi-zone exposures. In the year ended September 30, 1997, this regional
business represented a significant component of the Company's U.S.-based net
premiums written.
The following table sets forth the percentage of the Company's net premiums
written allocated to the zone of exposure at the dates indicated (dollars in
millions):
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------- -------------------
PERCENTAGE PERCENTAGE
NET OF NET NET OF NET
PREMIUMS PREMIUMS PREMIUMS PREMIUMS
GEOGRAPHIC AREA WRITTEN WRITTEN WRITTEN WRITTEN
- --------------- -------- ---------- -------- ----------
United States.......................... $ 75.3 44.9% $ 79.4 42.5%
Europe (excluding the U.K.)............ 18.6 11.1 22.0 11.8
United Kingdom......................... 15.2 9.1 16.3 8.7
Japan.................................. 7.0 4.2 8.0 4.3
Australasia............................ 6.4 3.8 11.0 5.9
Worldwide(1)........................... 20.9 12.5 22.0 11.8
Worldwide (excluding the U.S.)(2)...... 12.6 7.5 11.5 6.2
Other.................................. 11.6 6.9 16.5 8.8
------ ----- ------ -----
167.6 100.0% 186.7 100.0%
===== =====
LaSalle Re Corporate Capital........... 14.1
Adjustments, reinstatement premiums and
no claims bonuses..................... (10.3) 3.5
------ ------
Total.............................. $171.4 $190.2
====== ======
- --------
(1) The category "Worldwide" consists of contracts that cover more than one
zone. The exposure in this category could include business written in the
U.S.
(2) The category "Worldwide (excluding the U.S.)" consists of contracts that
cover more than one zone (none of which is in the U.S.). The exposure in
this category for business written to date is predominantly from Europe
and Japan.
Program Limits
The following table sets forth the number of the Company's property
catastrophe excess of loss programs written in the year ended September 30,
1997 by aggregate excess of loss program limits:
NUMBER OF
PROGRAMS
---------
Greater than $15 million but less than $20 million.............. 2
$10-15 million.................................................. 19
$7.5-10 million................................................. 25
$5-7.5 million.................................................. 43
$2.5-5 million.................................................. 66
Less than $2.5 million.......................................... 212
---
Total....................................................... 367
===
10K-6
UNDERWRITING
The Company's principal underwriting strategy is to underwrite property
catastrophe exposures within clearly defined parameters that permit thorough
analysis and appropriate pricing of each of the Company's reinsurance
contracts. Underwriting decisions are made following analysis of each
reinsurance contract based on the expected incremental return on equity in
relation to the Company's overall portfolio of reinsurance contracts.
The Underwriting/Actuarial Committee of the Board has set limits on the
Company's aggregate exposure. The Company uses various methods to evaluate and
monitor its exposure to loss. The Company diversifies its property catastrophe
exposures worldwide and within each geographic zone and also maintains
exposure limits within each geographic zone. Aggregate exposures also are
controlled and monitored on a real-time basis using computer-based rating and
control systems. The Company imposes attachment points in its contracts at a
level that is expected to exceed frequency of loss and limits aggregate risk
exposure. In addition, the Company regularly reevaluates its pricing to ensure
that general market conditions remain attractive.
The Company obtains information from brokers, potential cedents and other
sources, as appropriate, in order to make informed underwriting decisions. A
potential cedent generally is not accepted without a thorough examination of
its historical record, management, business strategy, underwriting policies
and risk management systems. The Company also seeks to select clients with
disciplined catastrophe management programs. The Company seeks to build long-
term relationships with its clients because the Company believes that it can
underwrite renewal business with greater precision.
The Company uses computer-based modeling systems to estimate exposure to
loss and evaluate pricing adequacy of its reinsurance programs. These models
are also used in the analysis of projected return on equity and the monitoring
of aggregate exposures within geographic zones.
For U.S.-based risks, the Company has developed a proprietary model called
L-CAM(TM) (LaSalle Catastrophe Analysis Model). L-CAM(TM) incorporates
commercially available catastrophe simulation models and the Company's
internally-generated models. The commercially available models include (i)
CATMAP(TM), which uses market share data derived from zip code and/or country
aggregate data to develop individual contract and portfolio loss statistics
and (ii) IRAS(TM), which derives loss statistics based on hypothetical risk
location determined from the most detailed information provided by the primary
insurer. Models developed by the Company and used in L-CAM(TM) include (i) the
Modified Historical Event Model, which fits a Pareto loss distribution to over
45 years of catastrophe loss data, adjusted for inflation and demographic
shifts, (ii) the Market Loss Pricing Model, which uses underwriting-zone
market share information to develop attachment and exhaustion probabilities
from which pricing input is determined, and (iii) the Industry Peer Model,
which is a portfolio management tool selecting treaties in force with similar
characteristics for pricing considerations.
For non-U.S. based property catastrophe risks, the Company uses modeling
techniques which incorporate Pareto loss distributions with exposure rating
based on aggregate liabilities per geographic zone. The Company also examines
experience ratings of adjusted historical loss events and, for some non-U.S.
territories, uses a commercially available software program produced by EQECAT
International, which utilizes probabilistic and deterministic loss
calculations.
For the other lines of reinsurance, the Company uses internal rating
techniques that incorporate, among other things, exposure and experience
ratings and thorough analysis of loss ratios and underwriting expenses
associated with the business to be reinsured. The Company carefully structures
the terms and conditions of its contracts to restrict coverage to the specific
perils intended.
The results of these analyses are measured against the Company's current
portfolio and other known treaties in the market and combined with
management's knowledge of the client and the current reinsurance market
environment. Pricing and participation decisions are then made based on the
estimated exposure of losses and the potential impact of each contract on
incremental return on equity.
10K-7
Underwriting services are provided to the Company by CNA (Bermuda) Services
Ltd. ("CNA Bermuda") pursuant to an underwriting services agreement (the
"Underwriting Services Agreement"). A staff of eight professionals with
extensive experience in the reinsurance industry currently serve as the
Company's underwriting team in Bermuda. The Company also has access to the
reinsurance expertise of CNA in terms of underwriting databases and technology,
a staff of specialized professionals and a worldwide network of contacts in the
reinsurance market. In addition, the underwriting of all new exposures is
reviewed by the Chief Executive Officer or Chief Operating Officer of the
Company.
REINSURANCE PROTECTIONS PURCHASED
Reinsurance premiums ceded are primarily in respect of a multi-year excess of
loss reinsurance program purchased by the Company, and various reinsurance
protections purchased by LaSalle Re Capital. The excess of loss program
provides coverage of $100 million per occurrence in excess of the first $100
million of losses for a first loss event and $100 million excess of $150
million per occurrence on the second loss event for the three-year period ended
December 31, 1999, subject to a maximum aggregate recovery of $200 million. The
Company may participate on a co-insurance basis for the second loss event.
Coverage for the first loss is substantially funded by way of annual and
reinstatement premium obligations. Accordingly, this portion of the coverage
has been recorded as a financing arrangement whereby the consideration paid,
net of associated financing charges, is recorded as a deposit and included as
part of other assets in the consolidated balance sheet. The deposit asset is
adjusted at the balance sheet date to reflect the net present value of expected
future cash flows under that portion of the contract. The Company is required
to pay an additional reinsurance premium equal to 35% of any losses that are
covered by the second loss event portion of the coverage.
The reinsurance is provided by a company that currently holds a rating of
"A+" (Superior) from A.M. Best Company, Inc. and a claims-paying rating of "AA"
(Excellent) from Standard & Poor's Rating Services.
MARKETING
The Company markets its reinsurance products worldwide primarily through
reinsurance brokers. By marketing its products primarily through the broker
network, the Company limits the expense of establishing and maintaining
worldwide offices and marketing operations. The Company believes that its
broker relationships permit it to obtain business and monitor developments in
various lines of reinsurance in order to increase its writings when market
conditions in those lines are favorable.
The Company maintains an office in London, England through LaSalle Re
Services. LaSalle Re Services introduces prospective customers to the Company
and provides an important liaison with brokers in the London market, assisting
in the distribution of marketing literature and collecting information for
LaSalle Re on demand and developments in the London reinsurance market
generally. In addition, LaSalle Re Services plays a key role in the Company's
marketing efforts in Europe.
The Company strives to develop strong relationships with its brokers and
clients. Retention of clients permits the Company to use experience regarding a
client's underwriting practices and risk management systems to underwrite its
own business with greater precision. The Company also targets brokers and
clients that it believes will enhance the risk/return composition of its
portfolio, are capable of supplying detailed and accurate underwriting data and
can potentially add diversification to the Company's book of business.
Additionally, the Company believes that its level of capital and surplus offers
financial security and demonstrates to brokers and clients a high level of
commitment to property catastrophe reinsurance.
The Company focuses on providing high quality service by promptly responding
to underwriting submissions, designing customized programs and offering lead
terms when circumstances warrant and paying valid claims within an average of
five days. The Company believes that it has established a reputation with its
brokers and clients for high quality service.
10K-8
The Company received 2,344 contract submissions in the year ended September
30, 1997 as compared to 3,423 in the year ended September 30, 1996. This
difference reflects a better understanding and a greater focus by brokers on
the lines of business actually written by the Company. The Company is highly
selective in accepting risks, extending coverage on only 1,000 (1996: 995
contracts), or 42.7% (1996: 29.1%) of the program submissions received, in the
year ended September 30, 1997. Subsidiaries and affiliates of Aon Corporation
(together with its affiliates, "Aon") were brokers for approximately 16.6% and
12.4% of the Company's gross written premiums in the years ended September 30,
1997 and 1996, respectively. Guy Carpenter & Company, Inc., together with its
affiliates, generated 15.5% and 16.6% of the Company's gross premiums written
for the years ended September 30, 1997 and 1996, respectively. E.W. Blanch
accounted for 11.3% of the Company's gross written premiums for the year ended
September 30, 1997. This percentage did not exceed 10% for the year ended
September 30, 1996. No other broker accounted for more than 10% of the
Company's gross premiums written for the years ended September 30, 1997 and
1996.
Consistent with its emphasis on disciplined underwriting practices, the
Company is not obligated to accept any business from any intermediary,
including Aon, CNA or LaSalle Re Services. No intermediary has the authority to
bind the Company on any business.
RESERVES
The Company establishes loss reserves for the ultimate settlement costs of
all losses and loss expenses incurred with respect to business written by it.
Generally accepted accounting principles ("GAAP") do not permit the Company to
establish reserves with respect to its property catastrophe reinsurance until
an event occurs that may give rise to a claim. As a result, only loss reserves
applicable to losses incurred up to the reporting date may be set aside, with
no allowance for the provision of a contingency reserve to account for expected
future losses.
The derivation of loss reserves involves the actuarial and statistical
projection at any given time of the Company's expectations of the ultimate
settlement of loss and loss expenses. These loss projections become necessary,
in large part, as a result of time lags associated with reinsurance loss
reporting. These lags are principally attributable both to claimant delays in
reporting to the primary carrier as well as primary and reinsurance company
delays in gathering statistics and subsequently reporting cession details to
the Company. As a result, in addition to the loss estimates reported by primary
insurers on known claims, actuarially projected estimates of reserves
applicable to both the development (growth) of known claims as well as the
emergence of new claims reports related to losses events which have been
incurred but not reported ("IBNR losses") prior to the evaluation date must be
developed. In addition to the impact of reporting lags upon the accuracy of
estimated loss liabilities, other factors have significant impact upon the
ultimate settlement of insured losses, including loss cost inflation, trends in
the amount of insurance purchased to the full value of insured properties and
trends in the size and demographics of insured populations. Loss reserve
estimates are not precise in that they necessarily involve an attempt to
predict the ultimate outcome of future loss reporting and settlement
activities.
To establish appropriate loss reserves, the Company uses a combination of
data sources and commercially available catastrophe models. These models are
employed upon the occurrence of an event to arrive at estimates of losses to
the Company. In addition, grouped and individual contract data illustrating the
loss development history for prior similar events, as well as actual loss
emergence experience of the underlying insurers, are analyzed to assist in the
determination of suitable loss reserves. The data derived from the industry
sources, and supplemented with the client specific information, are then used
to arrive at estimates of loss emergence patterns and initial estimates of
ultimate loss rates. These parameters are then applied, on a contract-by-
contract basis, to arrive at estimates of ultimate losses. These loss estimates
are then supplemented with the results derived from the catastrophe models, and
final loss estimates are selected and reduced for losses reported to the
Company to arrive at IBNR losses as of the date of evaluation. The reserves for
LaSalle Re Capital are separately derived from an analysis using expected loss
ratios.
The reserves are prepared quarterly by the Company's actuaries and reviewed
by the executive officers and the Board of Directors of LaSalle Re, and to the
extent they develop upward or downward, the results are
10K-9
reflected in the net income in the period in which the reserve deficiency or
redundancy is evaluated. There can be no assurance that the final loss
settlements will not exceed the Company's loss reserve and have a material
adverse effect upon the Company's financial condition and results of operations
in a particular period.
Prior to October 1, 1997, the Company determined its reserves with the
assistance of actuarial staff provided by ARC pursuant to the Administrative
Services Agreement.
INVESTMENTS
Composition of Portfolio
The Board has implemented a set of investment guidelines designed to meet the
Company's liquidity requirements and return objectives. The guidelines are
intended to be conservative, stressing preservation of principal, yield
enhancement through the identification of value and market inefficiencies,
market liquidity and risk reduction. The primary objective of the investment
portfolio, as set forth in the guidelines, is to maximize investment returns
consistent with these policies. The Company's investment guidelines are
reviewed periodically and are subject to change at the discretion of the Board.
The following table summarizes the composition of the Company's investment
portfolio as of September 30, 1997 and 1996 (dollars in millions):
SEPTEMBER 30,
--------------------------
1997 1996
------------ ------------
FAIR % OF FAIR % OF
TYPE OF INVESTMENT VALUE TOTAL VALUE TOTAL
- ------------------ ------ ----- ------ -----
Fixed maturities:
Non-U.S. government bonds and agencies............ $ 71.8 13.0% $ 75.3 14.0%
U.S. government bonds and agencies................ 88.4 16.0 90.1 16.8
Corporate bonds................................... 337.1 60.9 325.1 60.5
Other debt........................................ 1.0 0.2 0.0 0.0
------ ----- ------ -----
Subtotal........................................ 498.3 90.1 490.5 91.3
Cash and cash equivalents......................... 54.8 9.9 47.0 8.7
------ ----- ------ -----
Total cash and investments...................... $553.1 100.0% $537.5 100.0%
====== ===== ====== =====
Quality of Portfolio
The Company has investment guidelines which restrict investments in
securities below an "AA" grade rating to 20% of the total portfolio, and only
10% of the total portfolio can be invested in "BBB" grade rating. As of
September 30, 1997, the 20% guideline relating to investments in securities
below "AA" grade had been exceeded by 5.7%. Given the quality of the securities
involved, the investment committee of the Board permitted the holding of these
securities in the short term. As of October 31, 1997, the percentage of
securities held with a grade below "AA" had been reduced to 20%. During the
year, the Company amended the guidelines to allow up to $5 million to be
invested in catastrophe bonds. These bonds may carry a rating below "BBB". In
addition, the guidelines restrict investments in a single issuer to no greater
than 5% of the market value of the portfolio (except for U.S. and U.K.
Government issues) and, with respect to country of issue, to no greater than
25% of the market value of the portfolio, except for U.S. and supernational
borrowers.
10K-10
The following table summarizes the composition of the Company's fixed
maturity portfolio by rating as assigned by S&P or Moody's Investors Services
Inc. ("Moody's") as of September 30, 1997 and 1996 (dollars in millions):
SEPTEMBER 30,
--------------------------
1997 1996
------------ ------------
FAIR % OF FAIR % OF
RATING VALUE TOTAL VALUE TOTAL
- ------ ------ ----- ------ -----
AAA................................................. $215.3 43.2% $310.5 63.3%
AA.................................................. 155.0 31.1 126.1 25.7
A................................................... 127.0 25.5 53.9 11.0
BB.................................................. 1.0 0.2 0.0 0.0
------ ----- ------ -----
$498.3 100.0% $490.5 100.0%
====== ===== ====== =====
Maturity and Duration of Portfolio
The Company's investment guidelines specify a one to four year duration for
the Company's investment portfolio, reflecting the need to maintain a liquid,
short duration portfolio to assure the Company's ability to pay claims on a
timely basis. The Company currently has a target duration for the portfolio of
three years and at September 30, 1997, the modified average duration of the
portfolio was 2.76 years. The Company expects to periodically reevaluate the
target duration in light of market conditions, including the level of interest
rates, and estimates of the duration of its liabilities.
The following table summarizes the contractual maturities of the Company's
fixed maturity portfolio as of September 30, 1997 and 1996 (dollars in
millions):
SEPTEMBER 30,
--------------------------
1997 1996
------------ ------------
FAIR % OF FAIR % OF
VALUE TOTAL VALUE TOTAL
------ ----- ------ -----
Due in less than one year........................... $ 55.2 11.1% $ 99.8 20.4%
Due in one to five years............................ 381.9 76.6 331.8 67.6
Due in five to ten years............................ 61.2 12.3 58.9 12.0
------ ----- ------ -----
$498.3 100.0% $490.5 100.0%
====== ===== ====== =====
Equity Securities/Real Estate
Pursuant to the Company's investment guidelines, the Company's investment
portfolio may not contain any direct investments in real estate, mortgage loans
or equity securities.
Foreign Currency Exposures
At present, the Company's fixed maturity portfolio is composed only of
securities denominated in U.S. dollars. In the future, the Company's investment
managers may be instructed to invest some of the fixed maturity portfolio in
securities denominated in currencies other than U.S. dollars based upon the
business the Company anticipates writing, the exposures and claims reserves on
the Company's books and the local currency outlook compared to that of the U.S.
dollar. The primary risk exposures and premiums receivable are denominated in
U.S. dollars, European currencies, Japanese yen and Australian dollars.
In an effort to manage its exposure to foreign currency exchange rate
fluctuations, the Company from time to time enters into foreign exchange
contracts. These contracts generally involve the exchange of one currency for
U.S. dollars at some future date. At September 30, 1997, the Company had no
outstanding foreign exchange contracts; as of September 30, 1996, the Company
had a notional principal amount outstanding of $25.2 million. Realized and
unrealized gains or losses on these contracts are recorded as an income or
expense item in the Company's consolidated statement of operations.
10K-11
Investment Manager
LaSalle Re has entered into an investment management agreement (the
"Investment Management Agreement") with Aon Advisors (UK) Limited ("Aon
Advisors"). Pursuant to the terms of the Investment Management Agreement, the
Company pays Aon Advisors a fee equal to 0.16375% per annum of the assets under
management. Prior to July 1, 1997, the Company paid Aon Advisors a fee equal to
0.35% per annum of the first $100 million of assets under management, 0.25% per
annum of the next $100 million of assets under management in excess of $100
million and 0.15% per annum of any additional assets under management in excess
of $200 million. The terms of the Investment Management Agreement were
determined in arm's length commercial negotiations. The performance of, and the
fees paid to, Aon Advisors under the Investment Management Agreement are
reviewed periodically by the Investment Committee of the Board.
COMPETITION
The property catastrophe reinsurance industry is highly competitive. The
Company competes, and will continue to compete, with major U.S. and non-U.S.
insurers and property catastrophe reinsurers, including other Bermuda-based
property catastrophe reinsurers and CNA, some of which have greater financial
and organizational resources than the Company. A recent trend in the property
catastrophe reinsurance industry has been the utilization of the capital
markets in structuring reinsurance agreements using catastrophe bonds. There
may be established companies or new companies of which the Company is not aware
who may be planning to enter the property catastrophe reinsurance market or
existing reinsurers who may be planning to raise additional capital. In
addition, Lloyd's began to allow capital from corporate investors in 1994.
Competition in the types of reinsurance business that the Company underwrites
is based on many factors, including rates and other terms and conditions
offered, services provided, ratings assigned by independent rating agencies,
speed of claims payment and reputation, the perceived financial strength and
experience of the reinsurer in the line of reinsurance to be written.
In April 1996, LaSalle Re received an initial rating from A.M. Best of "A-"
(Excellent). In August 1997, the rating was upgraded to "A" (Excellent). The
current rating received by LaSalle Re represents the fourth highest in the
rating scale used by A.M. Best. In October 1996, LaSalle Re received an initial
rating of its claims paying ability from S&P of "A" (Good). The rating received
by LaSalle Re represents the sixth highest in the rating scale used by S&P.
Such ratings are based on factors of concern to cedents and brokers and are not
directed toward the protection of investors. Such ratings are neither a rating
of securities nor a recommendation to buy, hold or sell such securities. While
the Company believes that its new ratings will not be a major competitive
advantage or disadvantage, some of the Company's principal competitors have
higher ratings than the Company. Insurance ratings are one factor used by
brokers and cedents as a means of assessing the financial strength and quality
of reinsurers. In addition, a cedent's own rating may be adversely affected by
the lack of a rating of its reinsurer. Therefore, a cedent may elect to
reinsure with a competitor of the Company that has a higher insurance rating.
Similarly, the lowering or loss of a rating in the future could adversely
affect the Company's ability to compete.
Other than being a corporate member of selected Lloyd's syndicates, the
Company is not licensed or admitted as an insurer in any jurisdiction other
than Bermuda and has no plans to become so licensed or admitted. Because
jurisdictions in the United States do not permit insurance companies to take
credit for reinsurance obtained from unlicensed or non-admitted insurers on
their statutory financial statements unless security is posted, the Company's
reinsurance contracts generally require it to post a letter of credit or
provide other security for outstanding claims and/or unearned premiums. In
order to post these letters of credit, the Company generally is required to
provide the issuing banks with collateral equal to such amounts. As a result of
the size of the Company's capitalization, the Company does not believe that its
non-admitted status in any jurisdiction has, or should have, a material adverse
effect on its ability to compete or obtain business in the property catastrophe
reinsurance market in which it operates, principally because many of the
Company's competitors are not admitted or licensed in United States
jurisdictions. However, there can be no assurance that increased competitive
pressure from current reinsurers and future market entrants or the Company's
non-admitted status will not adversely affect the Company.
10K-12
EMPLOYEES
Prior to October 1, 1997, the Company had three employees: Mr. Blake,
Chairman, Chief Executive Officer and President of the Company; Mr. Cook,
Senior Vice-President and Chief Financial Officer and Treasurer of the Company;
and the Company's Investor Relations Manager. On October 1, 1997, following the
termination of the Administrative Services Agreement with ARC, the Company
hired the 25 former ARC employees who had provided services to the Company
under the Administrative Services Agreement, thereby increasing the number of
the Company's employees to 28. Underwriting services are provided by CNA
pursuant to the Underwriting Services Agreement. Under this agreement, eight
employees of CNA are currently dedicated to the Company. The Company believes
that its employee relations are satisfactory. None of the Company's employees
are subject to collective bargaining agreements, and the Company knows of no
current efforts to implement such agreements at the Company.
REGULATION
Bermuda
The Insurance Act 1978, as amended, and related regulations (the "Insurance
Act"). As a holding company, the Company is not subject to Bermuda insurance
regulations. However, the Insurance Act, which regulates the insurance business
of LaSalle Re and LaSalle Re Capital, provides that no person shall carry on an
insurance business in or from within Bermuda unless registered as an insurer
under the Insurance Act by the Minister of Finance (the "Minister"). The
Minister, in deciding whether to grant registration, has broad discretion to
act as he thinks fit in the public interest. The Minister is required by the
Insurance Act to determine whether the applicant is a fit and proper body to be
engaged in the insurance business and, in particular, whether it has, or has
available to it, adequate knowledge and expertise. The registration of an
applicant as an insurer is subject to its complying with the terms of its
registration and such other conditions as the Minister may impose at any time.
An Insurance Advisory Committee appointed by the Minister advises him on
matters connected with the discharge of his functions, and sub-committees
thereof supervise and review the law and practice of insurance in Bermuda,
including reviews of accounting and administrative procedures.
The Insurance Act imposes on Bermuda insurance companies solvency and
liquidity standards and auditing and reporting requirements and grants to the
Minister powers to supervise, investigate and intervene in the affairs of
insurance companies. Although LaSalle Re Capital is governed by the Insurance
Act, it is exempted from complying with most of the Act filings required by
insurance companies by section 57 of the Insurance Act. The solvency and
liquidity standards and auditing and reporting requirements of the Insurance
Act are summarized below.
Significant aspects of the Bermuda insurance regulatory framework are set
forth below.
Cancellation of Insurer's Registration. An insurer's registration may be
canceled by the Minister on certain grounds specified in the Insurance Act,
including failure of the insurer to comply with its obligations under the
Insurance Act or, if in the opinion of the Minister after consultation with the
Insurance Advisory Committee, the insurer has not been carrying on business in
accordance with sound insurance principles.
Independent Approved Auditor. Every registered insurer must appoint an
independent auditor who will annually audit and report on the Statutory
Financial Statements and the Statutory Financial Return of the insurer, both of
which, in the case of LaSalle Re, are required to be filed annually with the
Registrar of Companies (the "Registrar"), who is the chief administrative
officer under the Insurance Act. The independent auditor of the insurer must be
approved by the Minister and may be the same person or firm that audits the
insurer's financial statements and reports for presentation to its
shareholders.
Loss Reserve Specialist. LaSalle Re is registered as a Class 4 insurer. Every
Class 4 insurer is required to submit an annual loss reserve opinion when
filing the annual Statutory Financial Return. This opinion must be
10K-13
issued by a Loss Reserve Specialist. The Loss Reserve Specialist, who will
normally be a qualified casualty actuary, must be approved by the Minister.
Statutory Financial Statements. An insurer must prepare Statutory Financial
Statements annually. The Insurance Act prescribes rules for the preparation and
substance of such Statutory Financial Statements (which include, in statutory
form, a balance sheet, income statement, statement of capital and surplus and
detailed notes thereto). The insurer is required to give detailed information
and analyses regarding premiums, claims, reinsurance and investments. The
Statutory Financial Statements are not prepared in accordance with GAAP and are
distinct from the financial statements prepared for presentation to the
insurer's shareholders under the Companies Act 1981 of Bermuda (the "Companies
Act"), which financial statements may be prepared in accordance with GAAP.
LaSalle Re is required to submit the Statutory Financial Statements as part of
the annual Statutory Financial Return.
Minimum Solvency Margin. The Insurance Act provides that the statutory assets
of an insurer must exceed its statutory liabilities by an amount greater than
the prescribed minimum solvency margin which varies with the type of business
and class of registration of the insurer and the insurer's net premiums written
and loss reserve level. As a registered Class 4 insurer, LaSalle Re is required
to maintain a minimum solvency margin equal to the greater of $100 million, 50%
of its net premiums written (but may not deduct more than 25% of gross premiums
written when computing net premiums written) or 15% of its loss and other
certain insurance reserves. At September 30, 1997, LaSalle Re's actual
statutory capital and surplus was $490.1 million, compared to its minimum
solvency margin requirement of $100 million.
Minimum Liquidity Ratio. The Insurance Act provides a minimum liquidity ratio
for general business. An insurer engaged in general business is required to
maintain the value of its relevant assets at not less than 75% of the amount of
its relevant liabilities. Relevant assets include cash and time deposits,
quoted investments, unquoted bonds and debentures, first liens on real estate,
investment income due and accrued, accounts and premiums receivable and
reinsurance balances receivable. There are certain categories of assets which,
unless specifically permitted by the Minister, do not automatically qualify as
relevant assets, such as unquoted equity securities, investments in and
advances to affiliates, real estate and collateral loans. The relevant
liabilities are total general business insurance reserves and total other
liabilities less deferred income tax and sundry liabilities (by interpretation,
those not specifically defined).
Annual Statutory Financial Return. LaSalle Re is required to file annually
with the Registrar a Statutory Financial Return no later than four months after
its financial year end (unless specifically extended). The Statutory Financial
Return includes, among other matters, a report of the approved independent
auditor on the Statutory Financial Statements of the insurer; a declaration of
the statutory ratios; a solvency certificate; the Statutory Financial
Statements themselves; the opinion of the approved Loss Reserve Specialist and
certain details concerning ceded reinsurance. The solvency certificate and the
declaration of the statutory ratios must be signed by the principal
representative and at least two directors of the insurer who are required to
state (among other matters) whether the Minimum Solvency Margin and, in the
case of the solvency certificate, the Minimum Liquidity Ratio have been met,
and the independent approved auditor is required to state whether in its
opinion it was reasonable for them to so state and whether the declaration of
the statutory ratios complies with the requirements of the Insurance Act. The
Statutory Financial Return must include the opinion of the Loss Reserve
Specialist in respect of the loss and loss expense provisions of LaSalle Re.
Where an insurer's accounts have been audited for any purpose other than
compliance with the Insurance Act, a statement to that effect must be filed
with the Statutory Financial Return.
Supervision, Investigation and Intervention. The Minister may appoint an
inspector with extensive powers to investigate the affairs of an insurer if the
Minister believes that an investigation is required in the interest of the
insurer's policyholders or persons who may become policyholders. In order to
verify or supplement information otherwise provided to him, the Minister may
direct an insurer to produce documents or information relating to matters
connected with the insurer's business.
10K-14
If it appears to the Minister that there is a risk of the insurer becoming
insolvent or that it is in breach of the Insurance Act or any conditions
imposed upon its registration, the Minister may (among other matters) direct
the insurer not to take on any new insurance business; not to vary any
insurance contract if the effect would be to increase the insurer's
liabilities; not to make certain investments; to realize certain investments;
to maintain in or transfer to the custody of a specified bank, certain assets;
not to declare or pay any dividends or other distributions or to restrict the
making of such payments; and/or to limit its premium income.
Principal Representative. An insurer is required to maintain a principal
office in Bermuda and to appoint and maintain a principal representative in
Bermuda. For the purpose of the Insurance Act, the principal office of LaSalle
Re is at the Company's offices at 25 Church Street, Hamilton HM FX Bermuda, and
Andrew Cook is the principal representative of LaSalle Re. Without a reason
acceptable to the Minister, an insurer may not terminate the appointment of its
principal representative, and the principal representative may not cease to act
as such, unless 30 days' notice in writing to the Minister is given of the
intention to do so. It is the duty of the principal representative, within 30
days of his reaching the view that there is a likelihood of the insurer for
which he acts becoming insolvent or its coming to his knowledge, or his having
reason to believe, that an "event" has occurred, to make a report in writing to
the Minister setting out all the particulars of the case that are available to
him. Examples of such an "event" include failure by the reinsurer to comply
substantially with a condition imposed upon the reinsurer by the Minister
relating to a solvency margin or a liquidity or other ratio.
Class 4 Insurer. LaSalle Re is registered as a Class 4 insurer and, as such:
(i) is required to maintain a minimum statutory capital and surplus equal to
the greatest of $100 million, 50% of its net premiums written (but may not
deduct more than 25% of gross premiums written when computing net premiums
written) or 15% of its loss and other insurance reserves; (ii) is required to
file annually within four months following the end of the relevant financial
year with the Registrar, inter alia, a Statutory Financial Return together with
a copy of its annual Statutory Financial Statements and an opinion of a Loss
Reserve Specialist in respect of its loss and loss expense provisions; (iii) is
prohibited from declaring or paying any dividends during any financial year if
it is in breach of its minimum solvency margin or minimum liquidity ratio or if
the declaration or payment of such dividends would cause it to fail to meet
such margin or ratio (if it has failed to meet its minimum solvency margin or
minimum liquidity ratio on the last day of any financial year, LaSalle Re will
be prohibited, without the approval of the Minister, from declaring or paying
any dividends during the next financial year); (iv) is prohibited from
declaring or paying in any financial year dividends of more than 25% of its
total statutory capital and surplus (as shown on its previous financial year's
statutory balance sheet) unless it files (at least 7 days before payment of
such dividends) with the Registrar an affidavit stating that it will continue
to meet the required margins; (v) is prohibited, without the approval of the
Minister, from reducing by 15% or more its total statutory capital, as set out
in its previous year's financial statements; and (vi) is required, at any time
it fails to meet its solvency margin, within 30 days (45 days where total
statutory capital and surplus falls to $75 million or less) after becoming
aware of that failure or having reason to believe that such failure has
occurred to file with the Minister a written report containing certain
information.
Certain Other Considerations. As "exempted" companies, the Company, LaSalle
Re and LaSalle Re Capital may not, without the express authorization of the
Bermuda legislature or a license granted by a Minister, participate in certain
business transactions, including: (i) the acquisition or holding of land in
Bermuda (except that required for its business and held by way of lease or
tenancy agreement for a term not exceeding 21 years); (ii) the taking of
mortgages on land in Bermuda in excess of $50,000; or (iii) the carrying on of
business of any kind in Bermuda, except in furtherance of the business carried
on outside Bermuda or as permitted under the Companies Act.
The Bermuda government actively encourages foreign investment in "exempted"
entities like the Company that are based in Bermuda but do not operate in
competition with local businesses. As well as having no restrictions on the
degree of foreign ownership, the Company, LaSalle Re and LaSalle Re Capital are
not currently subject to taxes on their income or dividends or to any foreign
exchange controls in Bermuda. In addition, there currently is no capital gains
tax in Bermuda, and profits can be accumulated by the Company, LaSalle Re and
LaSalle Re Capital, as required, without limitation.
10K-15
The Companies Act prohibits a company from declaring or paying a dividend, or
making a contribution out of contributed surplus, if there are reasonable
grounds for believing that (i) the company is, or would after the payment be,
unable to pay its liabilities as they come due; or (ii) the realizable value of
the company's assets would thereby be less than the aggregate of its
liabilities and shareholders' equity. The foregoing restriction applies to the
Company, LaSalle Re and LaSalle Re Capital as Bermudian companies.
LaSalle Re Capital
LaSalle Re Capital became a Corporate Member of Lloyd's in December 1996 and
commenced underwriting effective January 1, 1997. LaSalle Re Capital is only
licensed to carry on business related to Lloyd's. As a Corporate Member,
LaSalle Re Capital is subject to the regulatory jurisdiction of the Council of
Lloyd's (the "Council"). Unlike other financial markets in the UK, Lloyd's is
not subject to direct UK government regulation under The Financial Services Act
of 1986. Instead, Lloyd's is self regulating by virtue of The Lloyd's Act of
1982, through by-laws, regulations and codes of conduct written by the Council,
which governs the market. Under the Council, there are two boards, the Market
Board and the Regulatory Board. The Market Board is led by working members of
the Council and is responsible for strategy and policy signing. The Regulatory
Board is responsible for the regulation of the market, compliance and the
protection of policyholders. Under the terms of its license under the Insurance
Act, LaSalle Re Capital is required to meet and maintain the solvency
requirements of Lloyd's.
As a Corporate Member of Lloyd's, LaSalle Re Capital is required to file
audited financial statements and an annual return, which is part of the annual
declaration of compliance process. The annual declaration of compliance sets
out the financial position of the Corporate Member and confirms details of its
directors and controllers. In addition, LaSalle Re Capital is required to file
an audited solvency return either confirming the value of funds at Lloyd's
("FAL") held by the member as at the previous December 31, or that it held no
FAL at that date. Lloyd's will compare the value of a Corporate Member's FAL
derived from the solvency return with its underwriting assets and liabilities
as reported by the syndicates on which it participates. Where a negative
solvency position is disclosed, the Corporate Member is required to provide
sufficient additional funds to cover the shortfall. As at September 30, 1997,
LaSalle Re Capital had only filed a nil solvency return for the 1996
underwriting year.
In addition to the above Lloyd's requirements, LaSalle Re Capital must send
to the Bermuda Registrar of Companies within 30 days after submission of the
annual solvency return and declaration of compliance to Lloyd's a copy of such
documents together with a copy of the audited annual statements of each of the
syndicates in which LaSalle Re Capital participates. As a Bermudian insurer,
LaSalle Re Capital must also maintain a principal office in Bermuda and appoint
and maintain a principal representative in Bermuda.
United States, United Kingdom and Other
LaSalle Re is registered as an insurer and is subject to regulation and
supervision in Bermuda. LaSalle Re is not admitted or authorized to do business
in any jurisdiction except Bermuda. The insurance laws of each state of the
United States do not directly regulate the sale of reinsurance within their
jurisdictions by alien insurers, such as LaSalle Re. Nevertheless, the sale of
reinsurance by alien reinsurers, such as LaSalle Re, to insurance companies
domiciled or licensed in United States jurisdictions is indirectly regulated by
state "credit for reinsurance" laws that operate to deny financial statement
credit to ceding insurers unless the non-admitted alien reinsurer posts
acceptable security for ceded liabilities and agrees to certain contract
provisions (e.g., insolvency and intermediary clauses). Although the insurance
laws of United States jurisdictions generally exempt the business of
reinsurance from "doing business" laws, the Company conducts its business at
its principal offices in Bermuda and does not maintain an office in the United
States, and its personnel do not solicit, advertise, settle claims or conduct
other insurance activities in the United States. All policies are issued and
delivered and premiums are received outside the United States. The Company does
not believe that it is subject to the insurance laws of any state in the United
States.
10K-16
From time to time, there have been congressional and other initiatives in
the United States regarding the supervision and regulation of the insurance
industry, including proposals to supervise and regulate alien reinsurers.
While none of these proposals have been adopted to date on either the federal
or state level, there can be no assurance that federal or state legislation
will not be enacted subjecting the Company to supervision and regulation in
the United States, which could have a material adverse effect on the Company.
In addition, no assurance can be given that if the Company were to become
subject to any laws of the United States or any state thereof or of any other
country at any time in the future, it would be in compliance with such laws.
LaSalle Re does not intend to maintain an office or to solicit, advertise,
settle claims or conduct other insurance activities in any jurisdiction other
than Bermuda where the conduct of such activities would require that LaSalle
Re be so admitted. Consistent with this policy, LaSalle Re established LaSalle
Re Services as a subsidiary in the United Kingdom to operate a London "contact
office" at the London Underwriting Center. LaSalle Re Services is not
registered as an insurer in England or in any other jurisdiction. The Company
believes that LaSalle Re Services is not required to be registered as an
insurance company in the United Kingdom, and that the activities of LaSalle Re
Services do not cause the Company to be subject to regulation as an insurance
company in the United Kingdom.
ITEM 2. PROPERTIES
Prior to October 1, 1997, ARC provided the Company with office space in
Bermuda and London pursuant to the Administrative Services Agreement. With
effect from October 1, 1997, the Administrative Services Agreement between the
Company and ARC was terminated and the Company has agreed to assume the
current leasing agreements.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders of the Company during
the fourth fiscal quarter of the fiscal year ended September 30, 1997.
EXECUTIVE OFFICERS OF THE COMPANY
Set forth below are the names, ages, positions and certain other information
concerning the current executive officers of the Company.
NAME AGE POSITION
---- --- --------
Victor H. Blake......... 62 Chairman, Chief Executive Officer and President
Guy D. Hengesbaugh...... 38 Executive Vice President and Chief Operating Officer
Andrew Cook............. 35 Senior Vice President and Chief Financial Officer
Victor H. Blake has been Chairman, Chief Executive Officer and President of
the Company since its organization in September 1995 and Chairman and Chief
Executive Officer of LaSalle Re since May 1994. Mr. Blake has 37 years
experience in the insurance industry, concentrating primarily in reinsurance.
Mr. Blake served as Chairman and Chief Executive Officer of CNA International
Reinsurance Company Ltd. ("CNA Re"), a leading property and casualty insurer
operating in the London market, from its formation in 1976 until October 1995.
In addition, he acted as the chairman and chief executive officer of CNA
Reinsurance Group from its formation in April 1994 until October 1995. CNA
Reinsurance Group includes CNA Re and the United States reinsurance operations
of CNA. Mr. Blake is the non-executive chairman of CNA Reinsurance Group. Mr.
Blake
10K-17
is also founder Chairman of the LUC Holdings Ltd, the shareholder of the
London Underwriting Centre, a marketplace housing many of the London market
insurers and reinsurers. He also served as a member of the Council of the
London Insurance and Reinsurance Market Association and its predecessor bodies
from 1977 to 1996.
Guy D. Hengesbaugh was promoted to Executive Vice President and Chief
Operating Officer effective on October 1, 1997. Prior to that, Mr. Hengesbaugh
had been Executive Vice President and Chief Underwriting Officer of the
Company since its organization in September 1995 and Executive Vice President
and Chief Underwriting Officer of LaSalle Re since its organization in October
1993. Mr. Hengesbaugh has ten years experience in underwriting management with
CNA in Chicago and London. Mr. Hengesbaugh is a Vice President of Continental
Casualty Company and an employee of CNA Bermuda and his services are made
available to the Company pursuant to the Underwriting Services Agreement.
Andrew Cook, a chartered accountant, was promoted to Senior Vice President
and Chief Financial Officer effective on October 1, 1997. Mr. Cook continues
to be Chief Financial Officer and Treasurer of the Company, a position he has
held since its organization in September 1995, and Chief Financial Officer and
Treasurer of LaSalle Re, a position he has held since its organization in
October 1993. Mr. Cook was an employee of Aon from 1993 until October 1995.
Mr. Cook was employed by Becher and Carlson Risk Management Limited, a
subsidiary of American Re-Insurance Company, from November 1990 to October
1993, where he was a Vice President responsible for a portfolio of captive
insurance companies. From December 1987 to October 1990, Mr. Cook was an audit
manager with Ernst & Young in Bermuda specializing in the audit of insurance
and reinsurance companies.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Common Shares were quoted on the NASDAQ National Market under the symbol
"LSREF" until April 11, 1997, at which time the Common Shares were transferred
to The New York Stock Exchange under the symbol "LSH".
The following table sets forth, for the periods indicated, the high and low
sale prices for the Common Shares as reported by the NASDAQ National Market
until April 11, 1997 and The New York Stock Exchange thereafter. Such prices
reflect inter-dealer prices, without retail mark-up, mark-down or commission,
and do not necessarily represent actual transactions.
HIGH LOW
------ ------
Quarter ended December 31, 1996.................................. $29.25 $22.75
Quarter ended March 31, 1997..................................... 29.25 26.50
Quarter ended June 30, 1997...................................... 30.13 27.50
Quarter ended September 30, 1997................................. 35.50 29.75
Quarter ended December 31, 1995 (from November 20, 1995)......... $23.25 $19.50
Quarter ended March 31, 1996..................................... 23.63 21.00
Quarter ended June 30, 1996...................................... 22.75 19.75
Quarter ended September 30, 1996................................. 25.50 21.00
10K-18
As of December 1, 1997, there were 80 holders of record of the Common Shares.
The following table sets forth for the fiscal quarters of the two most recent
fiscal years all dividends declared during each such period.
FISCAL YEAR ENDED SEPTEMBER 30, FISCAL QUARTER DIVIDEND PER SHARE
------------------------------- -------------- ------------------
1996 First quarter $0.00
Second quarter $0.25
Third quarter $0.25
Fourth quarter $0.25
1997 First quarter $0.71
Second quarter $0.71
Third quarter $0.71
Fourth quarter $0.71
In February 1997, in connection with the Preferred Offering, the Board
confirmed the dividend policy pursuant to which the Company intends to
distribute as dividends to holders of Common Shares and Exchangeable Non-Voting
Shares in each fiscal year, 50% to 60% of the amount by which its net income
(before minority interest) from the prior fiscal year exceeds the amount of
dividends payable on preferred shares of the Company in the current fiscal
year. The actual amount and timing of any future dividends is at the discretion
of the Board and is dependent upon the profits and financial requirements of
the Company as well as loss experience, business opportunities and any other
factors that the Board deems relevant. In addition, if the Company has funds
available for distribution, it may nevertheless determine that such funds
should be retained for the purposes of replenishing capital, expanding premium
writings or other purposes. The Company is a holding company whose principal
source of income is cash dividends and other permitted payments from LaSalle
Re. The payment of dividends by LaSalle Re to the Company is restricted under
Bermuda law and regulation, including Bermuda insurance law. Under the
Insurance Act, LaSalle Re is prohibited from paying dividends of more than 25%
of its opening statutory capital and surplus unless it files an affidavit (at
least 7 days before payment of such dividends) stating that it will continue to
meet the required solvency margin and minimum liquidity ratio requirements and
from declaring or paying any dividends without the approval of the Minister of
Finance if it failed to meet its required margins on the last day of the
previous fiscal year. The Insurance Act also requires LaSalle Re to maintain a
minimum solvency margin and minimum liquidity ratio and prohibits dividends
which would result in a breach of these requirements. In addition, LaSalle Re
is prohibited under the Insurance Act from reducing its opening total statutory
capital by more than 15% without the approval of the Minister of Finance. As a
result of these factors, there can be no assurance that the Company's dividend
policy will not change or that the Company will declare or pay any dividends.
ITEM 6. SELECTED FINANCIAL DATA
Information with respect to this item may be found in the section captioned
"Selected Financial Data" contained in the 1997 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following is a discussion and analysis of the Company's results of
operations and financial condition. This discussion and analysis should be read
in conjunction with the audited consolidated financial statements and related
notes.
RESULTS OF OPERATIONS
Year Ended September 30, 1997 Compared with Year Ended September 30, 1996
Gross premiums written decreased 9.9% to $171.4 million for the year ended
September 30, 1997 from $190.2 million for the year ended September 30, 1996.
This decrease was due primarily to a reduction in
10K-19
international property catastrophe premiums to $73.1 million for the year ended
September 30, 1997 from $88.9 million for the year ended September 30, 1996.
This reduction, in turn, was a result of the competitive rate environment,
which led to a reduction in the number of international property catastrophe
contracts written. The Company experienced a 5.3% decrease in property
catastrophe premiums written in the United States. The decline in gross
premiums written by the Company was partially offset by an increase of $14.9
million in respect of other non-property catastrophe lines written. This
increase primarily related to premiums written in the year ended September 30,
1997 by LaSalle Re Capital, which was accepted into Lloyd's with effect from
January 1, 1997. Further, for the year ended September 30, 1997 compared to the
year ended September 30, 1996, the Company experienced a reduction in
reinstatement premiums of $6.2 million due to more favorable loss experience
and an increase in overall negative premium adjustments of $7.6 million.
Premiums ceded for the year ended September 30, 1997 were $7.7 million
compared to nil in the year ended September 30, 1996. This was primarily
attributable to reinsurance protection purchased by LaSalle Re with effect from
January 1, 1997 and to reinsurance purchased by LaSalle Re Capital. Ceded
premiums amortized were $1.9 million for the year ended September 30, 1997
compared to nil in the year ended September 30, 1996.
Net premiums earned decreased 16.0% to $163.9 million for the year ended
September 30, 1997 from $195.1 million for the year ended September 30, 1996.
This decrease was principally due to the overall decrease in premiums written
in the previous fiscal year and the year ended September 30, 1997.
Net investment income increased 23.5% to $33.1 million for the year ended
September 30, 1997 from $26.8 million for the year ended September 30, 1996.
This increase was principally attributable to an increase in yields during the
year ended September 30, 1997 together with a larger average investment base
compared to the year ended September 30, 1996. Annualized investment income as
a percentage of the average market value of invested assets was 6.07% for year
ended September 30, 1997 compared to 5.44% for the year ended September 30,
1996.
Net realized gains on investments were $0.6 million during the year ended
September 30, 1997 compared to $0.4 net realized losses during the year ended
September 30, 1996.
Other income was derived from reinsurance related services providing an
annual fee of $0.3 million. As the provision of these services began on January
1, 1997, there was no corresponding income in the year ended September 30,
1996.
The following table sets forth the Company's combined ratios for the years
ended September 30, 1997 and 1996:
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
Loss and loss expense ratio......... 19.0% 26.4%
Expense ratio....................... 23.6% 19.6%
Combined ratio...................... 42.6% 46.0%
Losses and loss expenses incurred decreased 39.4% to $31.2 million for the
year ended September 30, 1997 from $51.5 million for the year ended September
30, 1996. This decrease was a result of the limited number of worldwide
catastrophic events that affected the Company during the year. Losses and loss
expenses incurred during the year ended September 30, 1997 primarily included
$12.0 million for floods in Eastern Europe, $6.1 million in respect of various
international windstorms and winter storm activity in the United States and
$4.6 million adverse development on Hurricane Fran, which occurred in September
1996. Losses and loss expenses incurred during the year ended September 30,
1996 included additional reserves of $14.2 million for Hurricanes Marilyn and
Luis and various other losses emanating from the 1996 hurricane season and end
of the 1995 hurricane season and international storms.
Underwriting expenses decreased 4.8% from $27.3 million for the year ended
September 30, 1996 to $26.0 million for the year ended September 30, 1997. As a
percentage of net premiums earned, underwriting expenses
10K-20
were 15.9% for the year ended September 30, 1997 compared to 14.0% for the year
ended September 30, 1996. Of this increase, 0.6% was due to the settlement of
significant profit commissions on one program underwritten in previous fiscal
years, which had better than expected loss ratios, and the provision for profit
commission on contracts underwritten in the current fiscal year. In addition,
the business underwritten by LaSalle Re Capital has higher underwriting costs,
which increases the Company's percentage of underwriting expenses to net
premiums earned. The Company has experienced an increase in the fees and profit
commission accrued under the Underwriting Services Agreement from 3.7% of net
premiums earned for the year ended September 30, 1996 to 4.0% net premiums
earned for the year ended September 30, 1997.
Operational expenses increased 14.4% to $12.7 million for the year ended
September 30, 1997 from $11.1 million for the year ended September 30, 1996.
This increase was substantially due to additional executive compensation and
expenses relating to the operation of LaSalle Re Capital.
Corporate expenses were $1.8 million for the year ended September 30, 1997,
compared with $0.9 million for the year ended September 30, 1996. Corporate
expenses for the year ended September 30, 1997 included costs associated with
the Secondary Offering, the Preferred Offering, the Tender Offer, the formation
costs of LaSalle Re Capital, the Company's move to the New York Stock Exchange
and fees incurred with respect to the CatEPut. In 1996, corporate expenses
included costs associated with the initial public offering and all costs
associated with the establishment of the Company's credit facility. Corporate
expenses do not include the underwriting discounts associated with the various
offerings. These costs were borne by the selling shareholders in the initial
public offering and the Secondary Offering. In respect of the Preferred
Offering, the underwriting discount was charged to additional paid in capital.
Interest expense was $1.7 million during the year ended September 30, 1997
compared to $0.2 million in the year ended September 30, 1996. This increase
was due to financing charges associated with the deposit portion of LaSalle
Re's ceded reinsurance contract. Other interest expenses related to the annual
administration fee and the ongoing commitment fees payable on the Company's
credit facility. As at September 30, 1997, there were no borrowings under this
facility.
Foreign exchange losses in the year ended September 30, 1997 were $3.0
million compared to losses of $1.1 million in the year ended September 30,
1996. The losses in the year ended September 30, 1997 resulted from the
unfavorable closing of a Sterling forward contract, and an overall
strengthening of the United States Dollar since January 1, 1997 against the
major foreign currencies in which the Company writes premiums. The losses for
the year ended September 30, 1996 were the result of several factors, including
the decrease in the value of Yen and Deutsche Marks relative to the United
States Dollar. Additionally, the Company's Sterling foreign exchange contracts
precluded participation in the appreciation of Sterling in the third fiscal
quarter above the Company's average forward rate.
The Company's net income per share was $5.14 for the year ended September 30,
1997 and $5.40 for the year ended September 30, 1996. Following the Tender
Offer, the weighted average number of Common Shares and Common Share
equivalents outstanding decreased from 23,967,870 for the year ended September
30, 1996 to 22,998,936 for the year ended September 30, 1997. This decrease
generated a 6.6% accretive effect on the Company's 1997 net income per share.
Year Ended September 30, 1996 Compared with Year Ended September 30, 1995
Net premiums written decreased 5.8% to $190.2 million for the year ended
September 30, 1996 from $201.9 million for the year ended September 30, 1995,
as a result of a reduction in United States property catastrophe excess of loss
premiums and adjustments on current and prior years' premium estimates. The
overall decrease was mitigated by a 26.4% increase in premiums written in other
lines of business to $22.1 million for the year ended September 30, 1996 from
$17.4 million for the year ended September 30, 1995. Of the net premiums
written for the years ended September 30, 1996 and 1995, $164.6 million and
$178.5 million, respectively, were attributable to property catastrophe excess
of loss and pro rata of property catastrophe reinsurance. Reinstatement
10K-21
premiums for the year ended September 30, 1996 totaled $5.5 million and related
to a variety of worldwide events. In the year ended September 30, 1995,
reinstatement premiums were $5.9 million, of which approximately 50% related to
Hurricanes Luis and Marilyn.
Net premiums earned increased 14.5% to $195.1 million for the year ended
September 30, 1996 from $170.4 million for the year ended September 30, 1995.
The magnitude of this increase was primarily due to the overall increase in
premiums written in the third and fourth quarters of fiscal 1995 compared with
fiscal 1994, which had a subsequent impact on net premiums earned in fiscal
1996 and fiscal 1995, respectively.
Net investment income increased 6.8% to $26.8 million for the year ended
September 30, 1996 from $25.1 million for the year ended September 30, 1995.
This increase was primarily attributable to a larger average investment base in
the year ended September 30, 1996 compared to the year ended September 30,
1995. Investment income as a percentage of the average market value of invested
assets was 5.44% for the year ended September 30, 1996 compared to 5.38% for
the year ended September 30, 1995.
Net realized losses on investments were $0.5 million during the year ended
September 30, 1996 compared to net realized losses of $25,000 during the year
ended September 30, 1995.
The following table sets forth the Company's combined ratios for the years
ended September 30, 1996 and 1995:
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------ ------------------
Loss and loss expense ratio......... 26.4% 35.5%
Expense ratio....................... 19.6% 17.1%
Combined ratio...................... 46.0% 52.6%
Losses and loss expenses incurred decreased 14.8% to $51.5 million for the
year ended September 30, 1996 from $60.4 million for the year ended September
30, 1995. The Company was not affected by any significant catastrophic events
in the year ended September 30, 1996, however, additional reserves of $14.2
million were established for Hurricanes Luis and Marilyn, which occurred in
September 1995. Other losses emanated from the 1996 hurricane season and end of
the 1995 hurricane season and various international storms. Losses and loss
expenses incurred in the year ended September 30, 1995 included $27.3 million
in respect of Hurricanes Luis and Marilyn, with the balance of the losses and
loss expenses relating to a variety of worldwide incidents.
Underwriting expenses increased 18.6% to $27.3 million for the year ended
September 30, 1996 from $23.0 million for the year ended September 30, 1995,
primarily attributable to the growth in net premiums earned. As a percentage of
net premiums earned, underwriting expenses increased from 13.5% for the year
ended September 30, 1995 to 14.0% for the year ended September 30, 1996. This
was attributable to an increase in the level of fees accrued pursuant to the
Underwriting Services Agreement which, as a percentage of net premiums earned,
were 3.7% for the year ended September 30, 1996 and 3.3% for the year ended
September 30, 1995.
Operational expenses increased 78.7% to $11.1 million for the year ended
September 30, 1996 from $6.2 million for the year ended September 30, 1995. The
increase was primarily due to increased staff at the executive level and
increased fees pursuant to the Administrative Services Agreement.
Interest expense was $0.2 million during the year ended September 30, 1996
compared to no expense in the year ended September 30, 1995. Interest expense
in the year ended September 30, 1996 related to agency fees and ongoing
commitment fees payable on the Company's credit facility. As at September 30,
1996, there were no borrowings under this credit facility.
Foreign exchange losses in the year ended September 30, 1996 were $1.1
million compared to $0.2 million in the year ended September 30, 1995. The
losses in the year ended September 30, 1996 were due to the weak performance of
the United States dollar against the Yen in conjunction with a strengthening of
Sterling in excess of the average foreign exchange contract rates. In the year
ended September 30, 1995, the Company experienced foreign currency losses
principally as a result of the weakening of Sterling against the United States
Dollar.
10K-22
The Company's net income per share was $5.40 for the year ended September 30,
1996 compared to $4.51 for the year ended September 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
As a holding company, the Company's assets consist primarily of all of the
outstanding voting stock of LaSalle Re. The Company's cash flows depend
primarily on dividends and other permitted payments from LaSalle Re.
LaSalle Re's sources of funds consist of premiums written, investment income
and proceeds from sales and redemptions of investments. Cash is used primarily
to pay losses and loss expenses, brokerage, commissions, excise taxes,
administrative expenses and dividends. Under the Insurance Act, LaSalle Re is
prohibited from paying dividends of more than 25% of its opening statutory
capital and surplus unless it files an affidavit (at least 7 days before
payment of such dividends) stating that it will continue to meet the required
solvency margin and minimum liquidity ratio requirements and from declaring or
paying any dividends without the approval of the Minister of Finance if it
failed to meet its required margins in the previous fiscal year. The Insurance
Act also requires LaSalle Re to maintain a minimum solvency margin and minimum
liquidity ratio and prohibits dividends that would result in a breach of these
requirements. In addition, LaSalle Re is prohibited under the Insurance Act
from reducing its total opening statutory capital by more than 15% without the
approval of the Minister of Finance. LaSalle Re currently meets its
requirements under the Insurance Act. In addition, the payment of dividends by
LaSalle Re is subject to the rights of holders of the Exchangeable Non-Voting
Shares to receive a pro rata share of any dividend and to its need to maintain
shareholders' equity adequate to support the level of LaSalle Re's reinsurance
operations.
Operating activities provided net cash of $98.6 million for the year ended
September 30, 1997 and $131.4 million for the year ended September 30, 1996.
Cash flows from operations in future years may differ substantially from net
income. Cash flows are affected by loss payments, which, due to the nature of
the reinsurance coverage provided by LaSalle Re, are generally expected to
comprise large loss payments on a limited number of claims and can therefore
fluctuate significantly from year to year. The irregular timing of these large
loss payments can create significant variations in operating cash flows between
periods. LaSalle Re funds such payments from cash flows from operations and
sales of investments.
As a result of the potential for large loss payments, LaSalle Re maintains a
substantial portion of its assets in cash and marketable securities. As of
September 30, 1997, 80.6% of its total assets were held in cash and marketable
securities. To further mitigate the uncertainty surrounding the amount and
timing of potential liabilities and to minimize interest rate risk, LaSalle Re
maintains a short average duration for its investment portfolio. The modified
average duration of the investment portfolio, including cash, was 2.76 years at
September 30, 1997. At September 30, 1997, the fair value of the Company's
total investment portfolio, including cash, was $553.0 million. Cash and cash
equivalents increased from $47.0 million at September 30, 1996 to $54.8 million
at September 30, 1997 in order to fund the Common Share dividend payable in
October 1997.
The Company has adopted the SFAS 115 to account for its marketable
securities. In accordance with SFAS 115, all of the Company's investments are
classified as "available for sale". Under this classification, investments are
recorded at fair market value and any unrealized gains or losses are reported
as a separate component of shareholders' equity. The unrealized gain on the
investment portfolio, net of amounts attributable to minority interest, was
$2.0 million at September 30, 1997 compared to an unrealized loss of $1.9
million at September 30, 1996.
At September 30, 1997, 74.3% of the securities held in the Company's
investment portfolio were fixed-income securities rated "AA" or better and
99.8% were fixed-income securities rated "A" or better by S&P or Moody's. No
single investment comprised more than 5% of the overall portfolio.
Reinsurance balances receivable were $80.0 million at September 30, 1997
compared to $70.6 million at September 30, 1996. This increase was due to the
inclusion of $11.3 million relating to the business underwritten
10K-23
by LaSalle Re Capital. Unearned premiums and deferred acquisition costs
increased from $82.9 million and $10.5 million, respectively, at September 30,
1996 to $88.5 million and $11.9 million, respectively, at September 30, 1997,
also as a result of business underwritten by LaSalle Re Capital.
Prepaid reinsurance premiums relate to the reinsurance coverage placed by the
Company at January 1, 1997. There was no corresponding coverage at September
30, 1996.
Other assets increased from $1.6 million at September 30, 1996 to $22.6
million as at September 30, 1997 primarily due to the deposit portion of the
ceded reinsurance contract, accounted for in accordance with SFAS No 113.
In accordance with the terms of certain reinsurance contracts written by the
Company, the Company has posted letters of credit in the amount of $8.7 million
as of September 30, 1997 as compared to $15.5 million as of September 30, 1996
to support outstanding loss reserves. In connection with LaSalle Re Capital's
support of three Lloyd's syndicates, the Company has posted letters of credit
in the amount of $16.0 million (equivalent to (Pounds)9.8 million). All letters
of credit are secured by a lien on the Company's investment portfolio equal to
115% of the amount of the outstanding letters of credit.
At September 30, 1997, the liability for unpaid losses and loss expenses was
$45.5 million compared to $49.9 million at September 30, 1996. This reduction
reflected the payment of losses outstanding as at September 30, 1996 and the
lack of significant catastrophic events in the year ended September 30, 1997.
Other liabilities increased from $11.1 million as at September 30, 1996 to
$22.8 million as at September 30, 1997 as a result of the inclusion of $5.0
million relating to reinsurance balances payable, $2.0 million relating to the
profit commission accrued pursuant to the Administrative Services Agreement
with ARC and $2.4 million relating to provisions for profit commissions and no
claims bonuses.
Effective October 1, 1997, the Administrative Services Agreement between the
Company and ARC was terminated. All of the personnel formerly assigned to the
Company by ARC have become employees of the Company and services formerly
performed by ARC have been assumed by the Company. In connection with the
termination of the agreement the Company has agreed to purchase all of the
fixed assets owned by ARC and utilized by the Company and to assume the current
leasing agreements.
In February 1997, in connection with the Preferred Offering, the Board
confirmed the dividend policy pursuant to which the Company intends to
distribute as dividends to holders of Common Shares and Exchangeable Non-Voting
Shares in each fiscal year, 50% to 60% of the amount by which its net income,
before minority interest, from the prior fiscal year exceeds the amount of
dividends payable on preferred shares of the Company in the current fiscal
year.
The Company paid dividends on its Common Shares of $0.25 per share in October
1996 and $0.71 per share in January, April and July 1997. In June and September
1997, the Company paid a dividend of $0.3889 and $0.5469 per share to holders
of its Series A Preferred Shares. As of September 30, 1997, dividends due but
not yet declared on the Series A Preferred Shares amounted to $0.5 million.
Based on the Company's net income for the year ended September 30, 1997, the
Company currently expects to declare quarterly dividends in the range of $0.71
to $0.75 per Common Share during the 1998 fiscal year. The actual amount and
timing of any future Common Share dividends is at the discretion of the Board.
The declaration and payment of any dividends is dependent upon the profits and
financial requirements of the Company and other factors, including certain
legal, regulatory and other restrictions. There can be no assurance that the
Company's dividend policy will not change or that the Company will declare or
pay any dividends in future periods.
LaSalle Re Capital is committed to provide capital support for the 1998
underwriting year to the same syndicates as it supported in 1997. The level of
support is not expected to change materially from that provided in 1997.
10K-24
The Company has in place a $100 million committed line of credit from a
syndicate of banks. The proceeds from the credit facility may only be used to
buy preferred shares of LaSalle Re, which, in turn, may use the proceeds of
such purchase to meet current cash requirements. The facility matures on
December 1, 2000 and is secured by a pledge ("legal mortgage") of all the
capital stock of LaSalle Re held by the Company, including any preferred shares
that may be issued by LaSalle Re to the Company. The line of credit contains
various covenants, including limitations on incurring additional indebtedness;
prohibitions of dividends and other restricted payments that would cause the
Company's tangible net worth (total shareholders' equity and minority interest)
to fall below $375 million for calendar years 1997 and 1998, and $400 million
thereafter; restriction of dividends per fiscal quarter to 12.5% of
consolidated net income of the Company for the immediately preceding fiscal
year; restrictions on the sale or lease of assets not in the ordinary course of
business; maintenance of a ratio of consolidated total debt to consolidated
tangible net worth of no more than 0.40 to 1.00; maintenance of tangible net
worth at the end of each fiscal year of the greater of $300 million or 70% of
net premiums written; maintenance of statutory capital of LaSalle Re at the end
of each fiscal year of at least $300 million; and maintenance of a ratio of net
premiums written to statutory capital at the end of any fiscal quarter for the
four fiscal quarters then ended of no more than 1.00 to 1.00 in each case. In
order for the Company to pay dividends in excess of 50% of net income, the
Company would have to renegotiate certain terms of its credit facility. As of
September 30, 1997, the credit facility had not been utilized.
The Company's financial condition and results of operations are influenced by
both internal and external forces. Loss payments, investment returns and
premiums may be impacted by changing rates of inflation and other economic
conditions. Cash flows from operations and the liquidity of its investment
portfolio are, in the Company's opinion, adequate to meet the Company's
expected cash requirements over the next 12 months.
The Financial Accounting Standards Board has not issued any Financial
Accounting Standards, not already adopted by the Company, which would have a
material impact on the results of the Company.
10K-25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LASALLE RE HOLDINGS LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE NUMBER
-----------
INDEPENDENT AUDITORS' REPORT........................................ 10K-27
CONSOLIDATED BALANCE SHEETS......................................... 10K-28
CONSOLIDATED STATEMENTS OF OPERATIONS............................... 10K-29
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY.......... 10K-30
CONSOLIDATED STATEMENTS OF CASH FLOWS............................... 10K-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.......................... 10K-32
10K-26
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
LaSalle Re Holdings Limited
We have audited the consolidated financial statements of LaSalle Re Holdings
Limited and subsidiaries as listed in the accompanying index. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of LaSalle Re
Holdings Limited and subsidiaries as of September 30, 1997 and 1996 and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1997 in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK
Chartered Accountants
Hamilton, Bermuda
October 30, 1997
10K-27
LASALLE RE HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
YEARS ENDED SEPTEMBER 30, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AND PER SHARE
DATA)
1997 1996
-------- --------
ASSETS
Cash and cash equivalents................................... $ 54,761 $ 46,990
Investments held as available for sale at fair value........ 498,282 490,514
(amortized cost 1997: $495,705; 1996: $493,450)
Accrued investment income................................... 12,684 14,211
Reinsurance balances receivable............................. 80,041 70,625
(related party 1997: $13,481; 1996: $11,700)
Deferred acquisition costs.................................. 11,932 10,464
Prepaid reinsurance premiums................................ 5,837 0
Other assets................................................ 22,551 1,570
-------- --------
Total assets................................................ $686,088 $634,374
======== ========
LIABILITIES
Outstanding losses and loss expenses........................ $ 45,491 $ 49,875
Unearned premiums........................................... 88,490 82,894
Other liabilities........................................... 22,823 11,087
(related party 1997: $7,975; 1996: $6,080)
Dividend payable............................................ 10,703 3,600
-------- --------
Total liabilities........................................... 167,507 147,456
-------- --------
Minority Interest........................................... 93,355 179,470
-------- --------
SHAREHOLDERS' EQUITY
Share capital authorized in the aggregate 100,000,000
shares, par value $1
Preferred shares............................................ 3,000 0
(par value $1, liquidation preference $25 per share, issued
& outstanding,
3,000,000, Series A Preferred Shares; 1996: Nil)
Common shares............................................... 15,074 14,398
(par value $1 issued & outstanding, 15,073,914; 1996:
14,397,720)
Additional paid in capital.................................. 299,964 221,968
Unrealized gains/(losses) on investments.................... 2,035 (1,861)
Retained earnings........................................... 105,153 72,943
-------- --------
Total shareholders' equity.................................. 425,226 307,448
-------- --------
Total liabilities, minority interest and shareholders'
equity..................................................... $686,088 $634,374
======== ========
See accompanying notes to consolidated financial statements
10K-28
LASALLE RE HOLDINGS LIMITED
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AND PER SHARE
DATA)
1997 1996 1995
---------- ---------- ----------
REVENUES
Premiums written.......................... $ 171,386 $ 190,151 $ 201,916
(related party 1997 : $21,408; 1996 :
$24,045; 1995: $28,836
Premiums ceded............................ ( 7,693) 0 0
---------- ---------- ----------
Net premiums written...................... 163,693 190,151 201,916
Change in unearned premiums and prepaid
reinsurance premiums..................... 240 4,990 (31,546)
---------- ---------- ----------
Net premiums earned....................... 163,933 195,141 170,370
Net investment income..................... 33,109 26,846 25,091
Net realized gains (losses) on
investments.............................. 555 (418) (25)
Other income.............................. 188 0 0
(related party 1997 : $188; 1996 : $0;
1995 : $0)
---------- ---------- ----------
Total revenues............................ 197,785 221,569 195,436
---------- ---------- ----------
EXPENSES
Losses and loss expenses incurred......... 31,199 51,477 60,397
Underwriting expenses .................... 26,018 27,268 22,988
(related party 1997 : $9,857; 1996 :
$10,419; 1995: $8,524)
Operational expenses...................... 12,656 11,114 6,218
(related party 1997 : $6,212; 1996 :
$6,500; 1995: $4,500)
Corporate expenses........................ 1,770 911 1,145
Interest expense.......................... 1,678 222 0
Exchange loss............................. 2,996 1,126 240
---------- ---------- ----------
Total expenses............................ 76,317 92,118 90,988
---------- ---------- ----------
Income before minority interest........... 121,468 129,451 104,448
Minority interest......................... 24,391 47,966 38,774
---------- ---------- ----------
NET INCOME................................ $ 97,077 $ 81,485 $ 65,674
========== ========== ==========
Net income per common share............... $ 5.14 $ 5.40 $ 4.51
========== ========== ==========
Weighted average number of common share
and common share equivalents outstanding. 22,998,936 23,967,870 23,170,680
========== ========== ==========
See accompanying notes to consolidated financial statements
10K-29
LASALLE RE HOLDINGS LIMITED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AND PER SHARE
DATA)
1997 1996 1995
-------- -------- --------
PREFERRED SHARES PAR VALUE $1
Issuance of shares during the year............... $ 3,000 $ 0 $ 0
-------- -------- --------
Balance at end of year........................... $ 3,000 $ 0 $ 0
======== ======== ========
COMMON SHARES PAR VALUE $1
Balance at beginning of year..................... $ 14,398 $ 14,398 $ 14,396
Issuance of shares............................... 1 0 2
Share repurchase................................. (3,704) 0 0
Exchange of exchangeable non-voting shares....... 4,379 0 0
-------- -------- --------
Balance at end of year........................... $ 15,074 $ 14,398 $ 14,398
======== ======== ========
ADDITIONAL PAID IN CAPITAL
Balance at beginning of year..................... $221,968 $221,968 $221,945
Issuance of shares............................... 70,177 0 23
Share repurchase................................. (44,990) 0 0
Exchange of exchangeable non-voting shares....... 54,664 0 0
Equity put option premium........................ (1,855) 0 0
-------- -------- --------
Balance at end of year........................... $299,964 $221,968 $221,968
======== ======== ========
UNREALIZED GAINS / (LOSSES) ON INVESTMENTS
Balance at beginning of year..................... $ (1,861) $ (1,039) $(11,836)
Unrealized gain / (loss) in year................. 4,354 (822) 10,797
Exchange of exchangeable non-voting shares....... (458) 0 0
-------- -------- --------
Balance at end of year........................... $ 2,035 $ (1,861) $ (1,039)
======== ======== ========
RETAINED EARNINGS
Balance at beginning of year..................... $ 72,943 $ 18,095 $ 18,941
Net income....................................... 97,077 81,485 65,674
Common share dividends........................... (44,860) (26,637) (66,520)
(1997: $2.84 per share; 1996: $0.75; 1995:
$5.72)
Preferred share dividends........................ (2,807) 0 0
(1997: $0.94 per share; 1996: $Nil; 1995: $Nil)
Share and option repurchase...................... (33,807) 0 0
Exchange of exchangeable non-voting shares....... 16,607 0 0
-------- -------- --------
Balance at end of year........................... $105,153 $ 72,943 $ 18,095
======== ======== ========
Total shareholders' equity................... $425,226 $307,448 $253,422
======== ======== ========
See accompanying notes to consolidated financial statements
10K-30
LASALLE RE HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AND PER SHARE
DATA)
1997 1996 1995
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................... $ 97,077 $ 81,485 $ 65,674
Adjustments to reconcile net income to cash
provided by operating activities:
Minority interest in net income............ 24,391 47,966 38,774
Amortization of investment premium......... 1,725 3,280 4,535
Net realized (gains) / losses on sale of
investments............................... (555) 418 25
Unrealized losses / (gains) on foreign
exchange.................................. 937 590 (153)
Changes in:
Reinsurance balances receivable............ (10,495) 15,412 (35,745)
Deferred acquisition costs................. (1,468) 244 (3,898)
Prepaid reinsurance premiums............... (5,837) 0 0
Accrued investment income.................. 1,527 1,592 (2,294)
Other assets............................... (20,981) (105) (404)
Outstanding losses and loss expenses....... (4,242) (16,748) 28,923
Unearned premiums.......................... 5,596 (4,991) 31,546
Other liabilities.......................... 10,968 2,294 3,187
--------- --------- ---------
Cash provided by operating activities........ 98,643 131,437 130,170
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments...................... (364,989) (270,287) (108,796)
Net sales of short term investments.......... 116 47 2,654
Proceeds on the sale of investments.......... 282,449 170,296 50,198
Proceeds on the maturity of investments...... 79,000 44,500 25,000
--------- --------- ---------
Cash applied to investing activities......... (3,424) (55,444) (30,944)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from subscriptions to share
capital..................................... 72,682 0 39
Payment of dividends......................... (54,338) (111,363) (30,003)
Share repurchase............................. (103,442) 0 0
Equity put option premium.................... (2,350) 0 0
--------- --------- ---------
Cash applied to financing activities......... (87,448) (111,363) (29,964)
--------- --------- ---------
Net increase / (decrease) in cash and cash
equivalents................................. 7,771 (35,370) 69,262
Cash and cash equivalents at beginning of
year........................................ 46,990 82,360 13,098
--------- --------- ---------
Cash and cash equivalents at end of year..... $ 54,761 $ 46,990 $ 82,360
========= ========= =========
See accompanying notes to consolidated financial statements
10K-31
LASALLE RE HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AND PER SHARE
DATA)
1. GENERAL
The Company was incorporated on September 20, 1995 under the laws of Bermuda
to act as an investment holding company.
LaSalle Re Limited ("LaSalle Re") was incorporated on October 26, 1993 under
the laws of Bermuda and commenced operations on November 22, 1993. LaSalle Re
is licensed under the Insurance Act, 1978 as amended by the Insurance Amendment
Act, 1995 of Bermuda to write insurance business and operates as a multi-line
reinsurance company, with emphasis on property catastrophe business.
Property catastrophe reinsurance covers unpredictable events such as
hurricanes, windstorms, hailstorms, earthquakes, fires, industrial explosions,
freezes, riots, floods and other man-made or natural disasters. Because the
Company has large aggregate exposures to these risks, the Company expects that
its claims experience will be characterized by relatively low frequency and
high severity claims. The occurrence of claims from catastrophic events is
likely to result in substantial volatility in the Company's financial results
for any particular period. The Company endeavors to manage its exposures to
catastrophic events by limiting the amount of its exposure in each geographic
zone worldwide and requiring that its property catastrophe contracts provide
for aggregate limits and attachment points.
On August 26, 1994, LaSalle Re incorporated a subsidiary company in the
United Kingdom, LaSalle Re (Services) Limited, to act as a representative
office for the Company. In addition, on June 11, 1996, LaSalle Re incorporated
a subsidiary company in Bermuda, LaSalle Re Corporate Capital Ltd., to provide
capital support to selected Lloyd's syndicates.
In November 1995, the Company and LaSalle Re consummated an offer (the
"Exchange Offer") pursuant to which, among other things, the founding
shareholders of LaSalle Re (the "Founding Shareholders") exchanged their
capital stock of LaSalle Re for common shares of the Company (the "Common
Shares") and, in certain circumstances, exchangeable non-voting shares of
LaSalle Re (the "Exchangeable Non-Voting Shares"). The Exchange Offer was
accounted for as if it were a pooling of interests of combining enterprises
under common control.
On November 27, 1995, the Company and certain Founding Shareholders also
consummated an initial public offering of 4,312,500 Common Shares. Of these
shares, 2,920,500 were sold by Founding Shareholders and 1,392,000 by the
Company. The proceeds from the sale of 1,392,000 shares sold by the Company
were used to enable LaSalle Re to redeem shares of its capital stock.
The consolidated financial statements include the results of the Company and
the Company's share of LaSalle Re and its subsidiaries for all periods
presented.
2. SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements are prepared in accordance
with United States generally accepted accounting principles ("GAAP"). The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported and disclosed
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the period. Actual results could differ from those
estimates. The estimates most susceptible to significant change are those used
in determining the liability for unpaid losses and loss expenses and the amount
of ultimate premiums written.
10K-32
LASALLE RE HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following are the significant accounting policies adopted by the Company:
(a) Principles of consolidation
The consolidated financial statements include the financial statements of
LaSalle Re Holdings Limited, LaSalle Re Limited and its subsidiaries, LaSalle
Re (Services) Limited and LaSalle Re Corporate Capital Ltd. All significant
inter-company balances and transactions have been eliminated in consolidation.
(b) Minority interest
Minority interest represents the Founding Shareholders' ownership of the
Exchangeable Non-Voting Shares. These shares are held by certain Founding
Shareholders who would otherwise hold, or cause another shareholder to hold,
directly, indirectly or constructively, in excess of 9.9% of the voting power
of the Company or LaSalle Re. The Exchangeable Non-Voting Shares are
exchangeable, at the option of the holder, for Common Shares of the Company, on
a one-for-one basis, unless the board of directors of the Company determines
such exchange may cause actual or potential adverse tax consequences to the
Company or any shareholder. The Exchangeable Non-Voting Shares will at all
times rank as to assets, dividends and in all other respects on a parity with
the Common Shares of LaSalle Re, except that they do not have the right to vote
on any matters except as required by Bermuda law and in connection with certain
actions by the Company.
Decreases in the minority interest of LaSalle Re as a result of the exchange
of such shares are therefore recorded at historic cost by transferring an
appropriate portion of the minority interest to the various components of
shareholders' equity. The minority's share of income as recorded in the income
statement is calculated using the minority's ownership percentage as at the
balance sheet date. Minority interest as reported in the balance sheet
represents the minority's current proportionate share of LaSalle Re's net
assets.
(c) Premiums earned and deferred acquisition costs
Premiums written are estimated by management based upon reports received from
ceding companies. These estimates are subject to review with adjustments
recorded in the period in which the actual amounts are determined. Premiums on
property catastrophe excess of loss contracts are earned on a pro rata basis
over the period the coverage is provided, which is generally 12 months. Under
pro rata property catastrophe contracts, the risks underlying the contracts
incept throughout the policy period and premiums generally are earned over an
18 month period. Premiums written by LaSalle Re Corporate Capital Ltd. are
derived from reports submitted to the Company by the syndicates. These premiums
are earned in accordance with the related underlying risk attachment periods,
which average between 18-24 months. Unearned premiums represent the portion of
premiums written which are applicable to the unexpired terms of the policies in
force.
Acquisition costs, mainly brokerage, commissions, underwriting fees and
excise taxes related to unearned premiums, are deferred and amortized to income
over the period in which the premiums are earned. Future earned premiums and
anticipated losses and loss adjustment expenses related to those premiums are
considered in determining the recoverability of deferred acquisition costs. The
Company does not consider anticipated future investment income in determining
if a premium deficiency exists.
(d) Reinsurance
In the normal course of business, the Company seeks to reduce its exposure to
losses that may arise from catastrophes and cause unfavorable underwriting
results by reinsuring certain levels of risks with other reinsurers.
10K-33
LASALLE RE HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In accordance with Statement of Financial Accounting Standard ("SFAS") No.
113 "Accounting and Reporting for Reinsurance of Short-Duration and Long-
Duration Contracts", contracts providing indemnification against loss or
liability relating to insurance risk have been accounted for as reinsurance.
Reinsurance premiums are reported as prepaid reinsurance premiums and amortized
over the contract period in proportion to the amount of reinsurance protection
provided. Where the contract provides for return premiums, these are accrued
based on loss experience through to the balance sheet date. Reinsurance
contracts which do not satisfy the conditions for reinsurance accounting under
SFAS No. 113 are accounted for as deposits.
(e) Losses and loss expenses
The liability for outstanding losses and loss expenses is based on reports
and individual case estimates received from ceding companies. An amount is
included for losses and loss expenses incurred but not reported on the basis of
reports received from ceding companies and an internally produced actuarial
analysis. The amount included as losses incurred in respect of business written
by LaSalle Re Corporate Capital Ltd. is derived from an analysis of expected
loss ratios.
Given the inherent nature of major catastrophic events, considerable
uncertainty underlies the assumptions and associated estimated reserves for
losses and loss expenses. These estimates are reviewed regularly and, as
experience develops and new information becomes known, the reserves are
adjusted as necessary. Such adjustments, if any, are reflected in results of
operations in the period in which they are determined and are accounted for as
changes in estimates. Due to the inherent uncertainty in estimating the
liability for losses and loss expenses, there can be no assurance that the
ultimate liability will not exceed recorded amounts, with a resulting material
effect on the Company. Based on the current assumptions used in calculating the
liability, management believes that the Company's recorded amount is adequate
to meet its future obligations.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the underlying liabilities.
Liabilities are recorded without consideration of potential salvage or
subrogation recoveries which are estimated to be immaterial. Such recoveries,
when realized, are reflected as a reduction of losses incurred.
(f) Investments
The Company's investments comprise fixed interest securities and short term
investments, such as certificates of deposit or commercial paper. All
investments are considered to be available for sale under the definition
included in SFAS No. 115. As such, they are reported at fair value with
unrealized gains and losses reported as a separate component of shareholders'
equity, net of amounts attributable to minority interests.
Purchases and sales of investments are accounted for on the trade date of the
transaction.
(g) Investment income
Investment income, net of investment expenses, is accrued to the balance
sheet date and includes amortization of premiums and discounts relative to
fixed interest securities purchased at prices different to par value.
Realized gains or losses on sales of investments are determined on the basis
of specific identification and are included as part of net investment income in
the statements of operations.
10K-34
LASALLE RE HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(h) Translation of foreign currencies
The U.S. dollar is the Company's functional currency. Foreign currency
monetary assets and liabilities are translated at exchange rates in effect at
the balance sheet date. Unearned premiums and deferred acquisition costs are
translated at historic exchange rates. Foreign currency revenues and expenses
are translated at the exchange rates in effect at the date of the transaction.
Exchange gains and losses are included in the determination of net income.
The Company has entered into foreign exchange contracts to manage the
currency risks associated with the receipt of non-U.S. dollar insurance
premiums. Realized and unrealized gains and losses on these contracts are
included in the determination of net income.
(i) Fair value of financial instruments
Fair value disclosures with respect to certain financial instruments are
separately included herein, where appropriate.
The carrying values of other financial instruments, including cash and cash
equivalents, reinsurance balances receivable, accrued investment income,
promissory note receivable and other liabilities, approximate their fair value
due to the short term nature of the balances.
(j) Other Income
Other income relates to fees earned in respect of reinsurance services
provided.
(k) Corporate expenses
Corporate expenses are expensed as they are incurred on an accruals basis.
(l) Cash and cash equivalents
For the purposes of the statements of cash flows, the Company considers all
time deposits and certificates of deposit with an original maturity of 90 days
or less as equivalent to cash.
(m) Stock incentive compensation plans
The Company has adopted SFAS No. 123 "Accounting for Stock-Based
Compensation". As allowed under this standard, the Company accounts for stock
option grants in accordance with APB opinion No. 25, "Accounting for Stock
Issued to Employees". Compensation expense for stock option grants is
recognized to the extent that the fair value of the stock exceeds the exercise
price of the option at the measurement date. Any resulting compensation expense
is recorded over the shorter of the vesting or service period.
Pro forma disclosure of net income and earnings per share as if the fair
value based method of SFAS No. 123 had been adopted is provided in Note 10 to
the consolidated financial statements.
(n) Net Income per Common Share
Net income per Common Share is calculated by dividing net income available to
common shareholders, by the weighted average number of Common Shares and Common
Share equivalents outstanding during the period. The Exchangeable Non-Voting
Shares of LaSalle Re are considered Common Share equivalents, as are stock
options and stock appreciation rights, which are included in the computation of
weighted average number of
10K-35
LASALLE RE HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Common Shares outstanding using the treasury stock method. Net income available
to common shareholders is therefore before minority interest and after
preferred dividends declared and in arrears. There is no material difference
between primary and fully diluted net income per Common Share.
(o) Accounting pronouncements
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings per Share" ("EPS"), effective for financial statements issued for
periods ending after December 15, 1997. Pro forma EPS amounts computed using
this Statement are disclosed in Note 5 to the consolidated financial
statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information." These statements are effective for
financial statements issued for periods beginning after December 15, 1997. SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components within a set of financial statements. This standard will be
adopted in respect of the quarter ended March 31, 1998. Adoption of the
standard will have no material effect on the earnings of the Company. SFAS No.
131 requires the Company to report financial and descriptive information about
its reportable operating segments. The Company is currently reviewing the
impact of this standard on its financial reporting.
3. INVESTMENTS AND INVESTMENT INCOME
(a) Investments
All fixed interest securities and short term investments are considered
available for sale. The fair values are based on quoted market prices at the
reporting date for those, or similar, investments. As at September 30, 1997 and
1996, the fair values and amortized costs of investments are as follows:
AMORTIZED UNREALIZED UNREALIZED FAIR
1997 COST GAINS LOSSES VALUE
- ---- --------- ---------- ---------- --------
U.S. government and agencies........... $ 88,088 $ 506 $ (195) $ 88,399
Non U.S. government and agencies....... 71,541 456 (207) 71,790
Corporate.............................. 335,076 2,819 (831) 337,064
Other debt............................. 1,000 29 0 1,029
-------- ------ ------- --------
$495,705 $3,810 $(1,233) $498,282
======== ====== ======= ========
AMORTIZED UNREALIZED UNREALIZED FAIR
1996 COST GAINS LOSSES VALUE
- ---- --------- ---------- ---------- --------
U.S. government and agencies........... $ 90,596 $ 221 $ (693) $ 90,124
Non U.S. government and agencies....... 75,863 258 (828) 75,293
Corporate.............................. 326,991 1,077 (2,971) 325,097
-------- ------ ------- --------
$493,450 $1,556 $(4,492) $490,514
======== ====== ======= ========
The unrealized gain on investments as shown on the consolidated balance sheet
of $2,035 (1996 unrealized loss: $1,861) is net of the minority's interest of
$542 (1996: $1,075).
Investments held at September 30, 1997 mature as follows:
FAIR
AMORTIZED COST VALUE
-------------- --------
Less than 1 year.................................. $ 55,126 $ 55,230
1-5 years......................................... 380,161 381,856
5-10 years........................................ 60,418 61,196
-------- --------
$495,705 $498,282
======== ========
10K-36
LASALLE RE HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the composition of the fair value of available
for sale securities by ratings assigned or, with respect to non-rated issues,
as estimated by the Company's investment managers.
1997 1996
------ ------
AAA......................................................... 43.2% 63.3%
AA.......................................................... 31.1% 25.7%
A........................................................... 25.5% 11.0%
BB.......................................................... 0.2% 0.0%
------ ------
100.0% 100.0%
====== ======
In the normal course of reinsurance operations, the Company's bankers have
issued letters of credit totalling $8,673 (1996: $15,511) in favor of ceding
insurance companies to secure the Company's obligations under various
reinsurance contracts. In addition, in connection with LaSalle Re Corporate
Capital Ltd.'s support of three Lloyd's syndicates, the Company has posted
letters of credit in the amount of $15,974. At September 30, 1997, $28,344
(1996: $17,837) of fixed interest securities have been pledged as collateral
for these letters of credit.
(b) Net investment income
Net investment income for the years ended September 30, 1997, 1996 and 1995
was derived from the following sources:
1997 1996 1995
------- -------- --------
Cash and short term investments............. $ 4,342 $ 1,443 $ 2,558
U.S. government and agencies fixed interest
securities................................. 5,933 1,631 107
Non U.S. government and agencies fixed
interest securities........................ 3,531 4,702 3,224
Corporate fixed interest securities......... 20,456 20,197 20,288
------- -------- --------
Gross investment income..................... 34,262 27,973 26,177
Investment expenses (Note 11)............... (1,153) (1,127) (1,086)
------- -------- --------
$33,109 $ 26,846 $ 25,091
======= ======== ========
Included in gross investment income for the year ended September 30, 1997 was
a charge of $1,725 (1996: $3,280; 1995: $4,535) relating to the amortization of
investment premium.
Net realized gains (losses) comprise $1,881 realized gains and $1,326
realized losses (1996: $1,242 and $1,660; 1995: $186 and $211, respectively).
The change in net unrealized losses, net of the minority's interest, that has
been included as a separate component of shareholders' equity for the year
ended September 30, 1997 was a decrease of $3,896 (1996 increase: $822; 1995
decrease: $10,797).
Proceeds received from the sale of available for sale securities during the
year ended September 30, 1997 were $282,449 (1996: $170,296; 1995: $50,198).
4. REINSURANCE
Reinsurance premiums ceded are primarily in respect of a multi-year excess of
loss reinsurance program purchased by the Company, and various reinsurance
protections purchased by LaSalle Re Corporate Capital Ltd. The excess of loss
program provides coverage of $100,000 in excess of the first $100,000 of losses
per
10K-37
LASALLE RE HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
occurrence for a first loss event and $100,000 excess of $150,000 per
occurrence on the second loss event for the three-year period ended December
31, 1999, subject to a maximum aggregate recovery of $200,000. The Company may
participate on a co-insurance basis for the second loss event.
Coverage for the first loss is substantially funded by way of annual and
reinstatement premium obligations. Accordingly, this portion of the coverage
has been recorded as a financing arrangement whereby the consideration paid,
net of associated financing charges, is recorded as a deposit and included as
part of other assets in the consolidated balance sheet. The deposit asset is
adjusted at the balance sheet date to reflect the net present value of expected
future cash flows under that portion of the contract. Interest expense includes
finance charges of $1,470 which are being amortized over the period of the
contract using the interest method.
The Company is required to pay an additional reinsurance premium equal to 35%
of any losses that are covered by the second loss event portion of the
coverage.
The reinsurance is provided by a company which currently holds a rating of
"A+" (Superior) from A.M. Best Company, Inc. and a claims-paying rating of "AA"
(Excellent) from Standard & Poor's Rating Services.
The ceding of the reinsurance does not legally discharge the Company from its
liability, since the Company is required to pay losses and bear collection risk
if the reinsurers fail to meet their obligations under the reinsurance
agreements. The effect of reinsurance on premiums written and earned is as
follows:
1997
------------------
WRITTEN EARNED
-------- --------
Assumed............................................... $171,386 $165,789
Ceded................................................. (7,693) (1,856)
-------- --------
Net Premiums.......................................... $163,693 $163,933
======== ========
There were no premiums ceded for the years ended September 30, 1996 and 1995.
10K-38
LASALLE RE HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings per Share." Under this statement, early adoption is not allowed,
however, a company is permitted to disclose pro forma earnings per share
amounts computed using the Statement in the notes to the financial statements.
The following EPS amounts would have been disclosed had EPS been computed
using SFAS No. 128:
1997 1996 1995
------------ ------------ ------------
Net income........................... $ 97,077 $ 81,485 $ 65,674
Add back: minority interest.......... 24,391 47,966 38,774
Less: Series A preferred share
dividends........................... (3,354) (0) (0)
------------ ------------ ------------
Income available to common
shareholders........................ $ 118,114 $ 129,451 $ 104,448
------------ ------------ ------------
Weighted average number of shares
outstanding:
Common Shares........................ 15,567,521 14,397,720 14,396,760
Exchangeable Non-Voting Shares....... 5,703,212 8,329,290 8,329,290
------------ ------------ ------------
21,270,733 22,727,010 22,726,050
------------ ------------ ------------
Basic EPS............................ $ 5.55 $ 5.70 $ 4.60
============ ============ ============
Income available to common
shareholders........................ $ 118,114 $ 129,451 $ 104,448
Weighted average number of common
shares outstanding:................. 21,270,733 22,727,010 22,726,050
Plus: incremental shares from
assumed:
exercise of options.............. 1,661,391 1,210,317 441,792
exercise of stock appreciation
rights.......................... 66,812 30,543 2,838
------------ ------------ ------------
Adjusted weighted average number of
common shares outstanding........... 22,998,936 23,967,870 23,170,680
------------ ------------ ------------
Diluted EPS.......................... $ 5.14 $ 5.40 $ 4.51
============ ============ ============
For the purposes of the computation of basic EPS, the Exchangeable Non-Voting
Shares are considered outstanding Common Shares due to the exchangeable nature
of the shares.
6. OTHER ASSETS
Included in other assets is a promissory note receivable. In connection with
the terms of the Chief Executive Officer's five-year employment contract,
LaSalle Re advanced $695 to him for the purpose of purchasing a property in
Bermuda. The advance is evidenced by a promissory note, which bears interest at
the rate of 8% per annum and is repayable in full at the earlier of the
termination date of the Chief Executive Officer's employment contract or the
date of sale of the property. Under the employment contract, LaSalle Re will
assume any gain or loss on the disposition of the property.
As discussed in Note 4, other assets also includes a deposit relating to
funded reinsurance.
7. MINORITY INTEREST
During the year LaSalle Re repurchased 3,703,703 of its common shares held by
LaSalle Re Holdings Limited and 28,496 Exchangeable Non-Voting Shares. In
addition, 4,378,327 Exchangeable Non-Voting Shares were exchanged for Common
Shares of LaSalle Re Holdings Limited. These transactions had the effect of
reducing the minority interest percentage in LaSalle Re from 36.6% to 21.1%.
10K-39
LASALLE RE HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the movement in minority interest during the
year ended September 30, 1997.
Minority Interest as at October 1, 1996........................ $179,470
Share of:
income....................................................... 24,391
dividends declared........................................... (12,503)
equity put option premium.................................... (495)
preferred offering issue costs............................... (497)
change in unrealized position of investments................. 1,161
share repurchase adjustments................................. (20,941)
Adjustment relating to the exchange of Exchangeable Non-Voting
Shares for Common Shares...................................... (77,231)
--------
Minority Interest as at September 30, 1997..................... $ 93,355
========
8. SHARE CAPITAL AND ADDITIONAL PAID-IN CAPITAL
The authorized share capital of the Company is 100,000,000 shares of par
value $1 each. This aggregate figure includes both common and preferred shares.
As of September 30, 1997 and 1996, the following shares have been issued and
fully paid.
COMMON SHARES
1997 1996
---------- ----------
Number issued and fully paid....................... 15,073,914 14,397,720
========== ==========
Share capital...................................... $ 15,074 $ 14,398
Additional paid in capital......................... $ 229,681 $ 221,968
The Company completed a secondary offering of Common Shares in December 1996.
In connection with the offering, certain Founding Shareholders of LaSalle Re
exchanged 2,119,110 of their Exchangeable Non-Voting Shares for Common Shares
of the Company.
Pursuant to a tender offer ("Tender Offer") made by the Company in May 1997,
2,163,538 Exchangeable Non-Voting Shares were exchanged for Common Shares of
the Company and 95,679 options for Exchangeable Non-Voting Shares were
exercised and exchanged for Common Shares of the Company. Following these
exchanges, the Company purchased 3,703,703 Common Shares, for cancellation, at
the tender price of $27.00. The par value of the shares canceled has been
deducted from share capital. The additional paid in capital arising from the
original subscription to the shares, subject to the Tender Offer, has been
eliminated from additional paid in capital and the difference between the
subscription price received for the shares and the price paid in the Tender
Offer has been deducted from retained earnings.
These exchanges of Exchangeable Non-Voting Shares for Common Shares are non-
cash financing transactions for the purposes of the Statement of Cash Flows.
In addition, pursuant to the Employee Stock Purchase Plan (the "Plan") the
Company issued 1,571 Common Shares. Under the Plan, the Company is authorized
to sell up to 150,000 Common Shares at a discount equivalent to 15% of the
market price, to eligible employees of the Company and its subsidiaries, and
other persons providing services to those companies. The maximum investment by
an employee is $25 per calendar year. The Company has recorded the shares
issued under the Plan at fair value. No compensation cost has been
10K-40
LASALLE RE HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
recorded as this was reimbursed pursuant to the service agreements with CNA
(Bermuda) Services Limited ("CNA Bermuda") and Aon Risk Consultants (Bermuda)
Limited ("ARC Bermuda").
PREFERRED SHARES
1997 1996
--------- ----
Number issued and fully paid............................... 3,000,000 Nil
--------- ---
Share capital.............................................. $ 3,000 $ 0
Additional paid in capital................................. $ 70,283 $ 0
In March 1997, the Company issued 3,000,000 Series A Preferred Shares, par
value $1.00 per share. These shares are entitled to a liquidation preference of
$25.00 per share. Dividends are cumulative at 8.75% of the liquidation
preference per annum (equivalent to an annual rate of $2.1875 per share). On or
after March 27, 2007, these shares will be redeemable, in whole or in part, at
the option of the Company at a redemption price of $25.00 per share.
9. CATASTROPHE EQUITY PUT
Effective July 1, 1997, the Company entered into a $100 million multi-year
Catastrophe Equity Put ("CatEPut") option program. The CatEPut option enables
the Company to sell up to $100 million of equity, through the issue of
convertible Series B Preferred Shares to the option writers. The preferred
shares can be redeemed by the Company at any time over the three years
following their issue. In addition, the option writers can convert their
preferred shares into Common Shares of the Company at any time after they have
been outstanding for three years. Conversion is at the greater of the book
value of the Company at the date of conversion or the market value of the
Common Shares based on the 30-day trading average prior to conversion. The
Company is obligated to pay an option premium of $2,350 per annum. The option
premium is charged to additional paid in capital, net of the minority's
interest of $495. Of the option premium, $422 is payable to affiliates of
shareholders of the Company.
10. SHARE PURCHASE OPTIONS AND STOCK APPRECIATION RIGHTS
(a) Non-compensatory
The Company has issued options to purchase 136,350 Common Shares to certain
shareholders and their affiliates and LaSalle Re has issued options to purchase
2,199,780 Exchangeable Non-Voting Shares. These options became exercisable on
October 1, 1996 and may be exercised until November 22, 2003.
During the year ended September 30, 1997, 95,679 options were exercised at a
price of $9.74. In addition, 136,350 options to purchase Exchangeable Non-
Voting Shares were bought by the Company at a price of $24.97 and subsequently
cancelled. As at September 30, 1997, the Company and LaSalle Re had outstanding
136,350 options to purchase Common Shares and 1,967,751 options to purchase
Exchangeable Non-Voting Shares, respectively.
The original exercise price of the options was $16.67 per share, which was
equal to the fair value of the Company's shares at the grant date, minus
dividend adjustments. The current exercise price is $9.03. As the options were
granted to certain of the Founding Shareholders and their affiliates as an
inducement to purchase stock in LaSalle Re, no compensation expense has been
recorded in connection with the options.
(b)(i) Compensatory--Stock Appreciation Rights
In consideration for entering into an employment agreement with LaSalle Re,
the Company's Chief Executive Officer (the "Executive") was granted a total of
340,872 Stock Appreciation Rights (SARs) during 1994. Upon exercise, the SARs
entitle the Executive to a cash payment equal to the value of the SARs as of
the
10K-41
LASALLE RE HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
exercise date. Alternatively, at the Company's sole discretion, the SARs will
entitle the Executive to either (i) the number of Special Non-Voting Shares of
LaSalle Re equal to the aggregate value of the SARs divided by the fair value
of a Common Share at the exercise date, or (ii) upon payment of the base value
for each SAR, the number of Special Non-Voting Shares of LaSalle Re equal to
the number of SARs exercised.
The value of each SAR equals the fair market value of a Common Share less the
base value on the exercise date, subject to anti-dilution adjustments. The fair
market value shall be determined by the board of directors of the Company, but
shall be based on the market price of the Common Shares. The base value of each
SAR at the time of issuance was $16.67, minus dividend adjustments. The current
base value is $9.03.
The number of SARs which can be exercised is dependent upon the internal rate
of return achieved during the period from November 22, 1993 through to the date
of exercise and ending on March 30, 2004 or, if earlier, two years after the
Chief Executive Officer's termination of employment. SARs will not be
exercisable unless a targeted internal rate of return of at least 18% per annum
is achieved during the entire measurement period. The internal rate of return
is based upon the financial performance of LaSalle Re from inception to
November 27, 1995 and LaSalle Re Holdings Limited's consolidated performance
from that date forward. As at September 30, 1997, the number of SARs vested is
68,174, which became exercisable on January 1, 1997. The remaining balance of
SARs become exercisable on January 1 of each of 1998 or 1999. At September 30,
1997, the Company's internal rate of return has exceeded 18% and therefore the
Company has charged an expense of $1,611 (1996 : $909; 1995 : $240).
(b)(ii) Compensatory--Options
In November 1995, the Company adopted a Long Term Incentive Plan (the
"Incentive Plan") which permits the award of various incentives to employees of
the Company, its subsidiaries and other persons providing services to those
companies.
Under the Incentive Plan, the options granted vest ratably in five annual
installments over 5 years from the grant date, except for 85,218 options
granted in 1997 which vest ratably in three annual installments over 3 years
from the date of grant. The options can be exercised over a 10-year period,
commencing on the vesting date. The exercise price of the options is subject to
anti-dilution adjustments, which make the options granted under the plan
variable. The Company has charged an expense of $716 (1996 : $81; 1995 : $Nil)
relating to the compensation on these options. The following table is a summary
of the options granted and outstanding during 1997 and 1996. No options were
granted or outstanding in the year ended September 30, 1995.
1997 1996
--------------------------- ---------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICE AS EXERCISE PRICE AS
NUMBER ADJUSTED FOR NUMBER ADJUSTED FOR
OF SHARES DIVIDENDS OF SHARES DIVIDENDS
--------- ----------------- --------- -----------------
Outstanding
--beginning of year... 163,218 $18.75 0 $ 0.00
Granted................. 283,218 $28.75 163,218 $19.25
------- -------
Outstanding
--end of year......... 446,436 $23.67 163,218 $18.75
======= =======
Of the 446,436 options granted, 32,644 options are presently exercisable at
an exercise price of $17.33, as adjusted for dividends. The remaining options
are not presently exercisable and have a weighted average vesting period of
3.75 years.
10K-42
LASALLE RE HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The weighted average fair value of options granted during 1997 is $8.18 (1996
: $5.85) per share. The fair value of each option grant in 1997 is estimated on
the date of grant using the Black-Scholes option pricing model with the
following assumptions : dividend yield of 0% per annum; expected volatility of
10%; expected life of 10 years; and a risk free interest rate of 5.6%.
The Company applies APB Opinion 25 and Related Interpretations in accounting
for the Incentive Plan. Accordingly, a compensation cost has been recognized
based on the intrinsic value of the options at the measurement date. The net
income and earnings per share would have been reduced to the pro forma amounts
indicated below had compensation cost been determined based on the fair value
of the options at the grant date consistent with the method of SFAS No 123:
1997 1996
------- -------
Net income................................... As reported $97,077 $81,485
Pro forma $97,098 $81,202
Primary earnings per share................... As reported $ 5.14 $ 5.40
Pro forma $ 5.14 $ 5.39
There are no comparatives for the year ended September 30, 1995 as no options
had been granted.
11. RELATED PARTY TRANSACTIONS
In addition to the share purchase options discussed in Note 10 and the
CatEPut transaction discussed in Note 9, LaSalle Re has entered into the
following transactions and agreements with companies related to the Founding
Shareholders.
(a) Premiums written
During the year ended September 30, 1997, LaSalle Re assumed premiums written
of approximately $21,408 (1996 : $24,045; 1995 : $28,836) from a ceding company
related to a shareholder of LaSalle Re. In addition, LaSalle Re assumed
premiums totalling $28,450 (1996 : $23,577; 1995 : $22,057) through brokers
related to a shareholder of LaSalle Re. Brokerage fees incurred in respect of
this business were approximately $2,845 (1996 : $2,357; 1995 : $2,206). All
such transactions were undertaken on normal commercial terms. Reinsurance
balances receivable at the balance sheet date include $13,481 (1996 : $11,700)
due from such related parties.
(b) Underwriting services
LaSalle Re is party to an underwriting services agreement with CNA Bermuda.
Under this agreement, LaSalle Re has granted CNA Bermuda the authority to
provide underwriting services and to underwrite all classes of insurance and
reinsurance as agents for LaSalle Re. LaSalle Re has agreed to pay fees to CNA
Bermuda as follows:
With effect from January 1, 1996:
(i) 1.5% of the gross written and collected premium per fiscal year; and
(ii) An underwriting profit commission equal to 4.0% of the aggregate net
underwriting profits of LaSalle Re, where certain conditions are met.
Prior to January 1, 1996:
(i) 2.0% of the gross written and collected premium per fiscal year, up
to premium of $150,000 plus 1.5% of the gross written and collected premium
in excess of $150,000; and
10K-43
LASALLE RE HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ii) An underwriting profit commission equal to 2.5% of the aggregate net
underwriting profits of LaSalle Re, where certain conditions are met.
The Company has incurred $2,526 (1996 : $3,081; 1995 : $3,411) for
underwriting services provided for the year ended September 30, 1997, of which
$2,903 (1996 : $2,482) was payable at September 30, 1997.
The Company has incurred $4,061 (1996 : $4,140; 1995 : $2,186) for
underwriting profit commission for the year ended September 30, 1997, of which
$2,890 was payable at September 30, 1997 (1996 : $3,350).
(c) Administrative services
During the period from the incorporation of LaSalle Re until September 30,
1997, LaSalle Re was party to an agreement with ARC Bermuda. Under this
agreement, ARC Bermuda performed certain actuarial and administrative services
on behalf of the Company. The management fees payable to ARC Bermuda during
this period were as follows:
CALENDAR YEAR
-------------
1994 $3,000
1995 $5,000
1996 $7,000
1997 $3,300 and an underwriting profit commission equal to 2.75%
of the aggregate net underwriting profit of LaSalle
Re, where certain conditions were met.
The Company has incurred $6,212 (1996 : $6,500; 1995 : $4,500) for
administrative services for the year ended September 30, 1997, of which $1,987
was payable at September 30, 1997 (1996 : $Nil).
Following the termination of the agreement, all personnel assigned to the
Company by ARC Bermuda became employees of the Company and all services
performed by ARC Bermuda are now performed in- house.
(d) Investment management services
LaSalle Re is party to an agreement with Aon Advisors (UK) Limited ("Aon UK")
to provide investment management services. Fees are based on the average daily
balance of the investment portfolio of the preceding quarter. The average daily
balance is split into various bands, with fees calculated by applying a sliding
scale of basis points to each band. In July 1997, the company re-negotiated a
flat fee with Aon UK.
The Company has incurred $1,057 (1996 : $1,028; 1995 : $987) for services
provided for the year ended September 30, 1997, of which $215 (1996 : $272) was
payable at September 30, 1997.
(e) Claims handling services
LaSalle Re was party to an agreement with Integrated Runoff Insurance
Services Corporation ("IRISC") whereby IRISC performed certain claims handling
services for LaSalle Re. The contract expired December 31, 1996.
The Company has incurred $16 (1996 : $92; 1995 : $78) for services provided
for the year ended September 30, 1997, of which $Nil (1996 : $Nil) was payable
at September 30, 1997.
10K-44
LASALLE RE HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(f) Reinsurance Services
Effective January 1, 1997, LaSalle Re is party to a fronting agreement with
Hedge Financial Products, an affiliate of CNA. CNA reinsures LaSalle Re 100%
for the liabilities fronted. LaSalle Re received an administration fee of $250
for the services provided in the 1997 calendar year.
As at September 30, 1997, fees due to the Company were $188, of which $60 was
receivable.
12. CONCENTRATION OF CREDIT RISK
The Company has investment guidelines which restrict investments in
securities below an "AA" grade rating to 20% of the total portfolio and only
10% of the total portfolio can be invested in "BBB" grade rating. During the
year the Company amended the guidelines to allow up to $5,000 to be invested in
catastrophe bonds. These bonds may carry a rating below "BBB". In addition, the
guidelines restrict investments in a single issuer to no greater than 5% of the
market value of the portfolio (except for U.S. and U.K. Government issues) and,
with respect to country of issue, to no greater than 25% of the market value of
the portfolio, except for U.S. and supernational borrowers.
A broker, who is unrelated to the Company, arranged more than 15% of the
Company's premiums written for the year ended September 30, 1997 (1996 : 16%;
1995 : 21%). Another broker, who is unrelated to the Company, arranged more
than 10% of the Company's premiums written for the year ended September 30,
1997 (1996 and 1995: less than 10%). A broker, who is related to the Company,
arranged more than 16% of the Company's premiums written for the year ended
September 30, 1997 (1996 : 12%; 1995 : 10%). Approximately 13% (1996 : 13%;
1995 : 15%) of the gross premiums written for the year ended September 30, 1997
were ceded by related companies.
13. OUTSTANDING LOSSES AND LOSS EXPENSES
Activity in liability for losses and loss expenses during the years ended
September 30, 1997, 1996 and 1995 is summarized as follows:
1997 1996 1995
-------- -------- --------
Balance as of October 1........................... $ 49,875 $ 66,654 $ 37,789
-------- -------- --------
Incurred related to:
Current year.................................... 22,095 31,910 52,587
Prior year events............................... 9,104 19,567 7,810
-------- -------- --------
31,199 51,477 60,397
-------- -------- --------
Paid related to:
Current year.................................... (3,216) (10,222) ( 7,572)
Prior year...................................... (32,367) (58,034) (23,960)
-------- -------- --------
(35,583) (68,256) (31,532)
-------- -------- --------
Balance as of September 30........................ $ 45,491 $ 49,875 $ 66,654
======== ======== ========
The prior year development in 1997 relates primarily to an additional
liability on Hurricane Fran, which occurred in September 1996. In addition, the
Company has experienced late reporting on certain aggregate cover policies,
with loss notifications being received in 1997 for contracts underwritten in
prior years. The amounts incurred in respect of prior year losses in 1996
relate primarily to Hurricanes Luis and Marilyn, which occurred
10K-45
LASALLE RE HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
in September 1995. Additional information reported by ceding companies in the
months following the losses necessitated the provision of additional
liabilities. This impact has been mitigated by the collection of additional
reinstatement premiums. In respect of 1995, additional losses of $5,700 (gross
of reinstatements of approximately $1,100) related to development on the
Northridge earthquake, reflecting an increase in the market estimates of
anticipated total insured loss.
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company's functional currency is the U.S. dollar, however, as the Company
operates internationally, it has exposure to changes in foreign currency
exchange rates. These exposures include net cash inflows on non-U.S. dollar
denominated insurance premiums.
To manage the Company's exposure to these risks, the Company may enter into
foreign exchange contracts in the major currencies to which the Company is
exposed. These contracts generally involve the exchange of one currency for
another at some future date. At September 30, 1997, the Company had no foreign
exchange contracts in place. At September 30, 1996, the Company had a notional
principal amount outstanding of approximately $25,192 in contracts to sell
foreign currencies in the future. The fair value of these contracts, based on
quoted forward rates available for the maturity of the contracts, as at
September 30, 1996 was $(571). Losses of $1,906 (1996: $294 and 1995: $756) are
included in the Statements of Operations with respect to foreign exchange
contracts.
The Company may also enter into foreign exchange contracts to manage the
exposures relating to known reinsurance losses denominated in foreign
currencies. However, no such contracts had been entered into at September 30,
1997.
15. CREDIT FACILITY
The Company has in place a $100 million committed line of credit from a
syndicate of banks. The proceeds from the credit facility may only be used to
buy preferred shares of LaSalle Re, which in turn may use the proceeds of such
purchase to meet current cash requirements. The facility matures December 1,
2000, and is secured by a pledge ("legal mortgage") of all the capital stock of
LaSalle Re held by the Company, including any preferred shares that may be
issued by LaSalle Re to the Company. As at September 30, 1997, the facility had
not been utilized.
The line of credit contains various covenants, including: limitations on
incurring additional indebtedness; prohibitions of dividends and other
restricted payments that would cause the Company's tangible net worth (total
shareholders' equity and minority interest) to fall below $375 million for
calendar years 1997 and 1998, and $400 million thereafter; restriction of
dividends per fiscal quarter to 12.5% of consolidated net income of the Company
for the immediately preceding fiscal year; restrictions on the sale or lease of
assets not in the ordinary course of business; maintenance of a ratio of
consolidated total debt to consolidated tangible net worth of no more than 0.40
to 1.00; maintenance of tangible net worth at the end of each fiscal year of
the greater of $300 million or 70% of net premiums written; maintenance of
statutory capital of LaSalle Re at the end of each fiscal year of at least $300
million; and maintenance of a ratio of net premiums written to statutory
capital at the end of any fiscal quarter for the four fiscal quarters then
ended of no more than 1.00 to 1.00 in each case. In order for the Company to
pay dividends in excess of 50% of net income, the Company would have to
renegotiate certain terms of its credit facility. As of September 30, 1997, the
credit facility had not been utilized and the Company was in compliance with
all covenants under the facility.
10K-46
LASALLE RE HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. STATUTORY DATA
The Company's ability to pay dividends is subject to certain regulatory
restrictions on the payment of dividends by LaSalle Re. Under the Insurance Act
1978, amendments thereto and related regulations of Bermuda, LaSalle Re is
required to prepare statutory financial statements and to file in Bermuda a
statutory financial return. LaSalle Re is required to maintain certain measures
of solvency and liquidity.
The statutory capital and surplus of LaSalle Re at September 30, 1997 was
approximately $490,000 (1996: $477,000) and the minimum required statutory
capital and surplus required by its license as a Class 4 insurer was $100,000
(1996: $100,000).
In this regard, the declaration of dividends from retained earnings and
distributions from additional paid in capital is limited to the extent that the
above requirements are met. At September 30, 1997, there were no restrictions
on the distribution of retained earnings.
17. SEGMENTAL INFORMATION
The following table sets forth the Company's gross premiums written and the
percentage thereof allocated to the zone of exposure for the years ended
September 30, 1997, 1996 and 1995:
1997 1996 1995
--------------- -------------- --------------
PREMIUMS PREMIUMS PREMIUMS
WRITTEN % WRITTEN % WRITTEN %
-------- ----- -------- ----- -------- -----
United States................. $ 75,338 44.0% $ 79,357 41.7% $ 91,561 45.4%
Europe (excluding the U.K.)... 18,553 10.8 21,959 11.6 21,041 10.4
United Kingdom................ 15,165 8.8 16,310 8.6 14,089 7.0
Japan......................... 6,949 4.1 7,998 4.2 7,642 3.8
Australasia................... 6,472 3.8 11,038 5.8 9,756 4.8
Worldwide..................... 20,872 12.2 22,049 11.6 26,893 13.3
Worldwide (excluding U.S.).... 12,579 7.3 11,451 6.0 8,789 4.4
Other......................... 11,628 6.8 16,433 8.6 16,128 8.0
Lloyds syndicates............. 14,125 8.2 0 0.0 0 0.0
Reinstatements, adjustment
premiums and no claim
bonuses...................... (10,295) (6.0) 3,556 1.9 6,017 2.9
-------- ----- -------- ----- -------- -----
$171,386 100.0% $190,151 100.0% $201,916 100.0%
======== ===== ======== ===== ======== =====
18. TAXATION
Under current Bermuda law, the Company is not required to pay any taxes in
Bermuda on either income or capital gains. The Company has received an
undertaking from the Minister of Finance in Bermuda that will exempt the
Company from taxation until the year 2016 in the event of any such taxes being
imposed.
The Company does not consider itself to be engaged in a trade or business in
the United States and accordingly does not expect to be subject to United
States income taxes.
10K-47
LASALLE RE HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. UNAUDITED QUARTERLY FINANCIAL DATA
Year ended September 30, 1997
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Net premiums earned............................ $43,123 $41,400 $45,903 $33,507
Net investment income (net of realized gains
(losses))..................................... 8,179 8,535 7,904 9,046
Losses and loss expenses incurred.............. 10,837 6,886 4,475 9,001
Net income (before minority interest).......... 28,047 32,698 37,685 23,038
Net income per share........................... $ 1.16 $ 1.34 $ 1.63 $ 1.02
Year ended September 30, 1996
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Net premiums earned............................ $49,445 $53,647 $55,294 $36,755
Net investment income (net of realized gains
(losses))..................................... 6,204 6,399 6,789 7,036
Losses and loss expenses incurred.............. 15,882 18,354 9,954 7,287
Net income (before minority interest).......... 29,400 31,332 40,818 27,901
Net income per share........................... $ 1.23 $ 1.31 $ 1.70 $ 1.16
10K-48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
For information regarding the Company's executive officers, see "Executive
Officers of the Company" in Part I. The other information required by this Item
10 is incorporated by reference to the information contained under the captions
"Election of Directors", "Nominees", "Meetings and Committees of the Board of
Directors" and "Section 16 Reporting" in the 1998 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required for this item is incorporated by reference to the
information contained under the caption "Management" in the 1998 Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required for this item is incorporated by reference to the
information contained under the caption "Beneficial Ownership of Common
Shares--Directors, Officers and Other Beneficial Owners" in the 1998 Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required for this item is incorporated by reference to the
information contained under the caption "Certain Transactions" in the 1998
Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as a part of this report:
(a) Financial Statements and Schedules:
1. Financial Statements
See Index to Financial Statements on page 26 of this report, which is
incorporated herein by reference.
2. Financial Statement Schedules:
Schedules have been omitted since the required information is
presented elsewhere in this report or is not applicable.
3. Exhibits
See Index to Exhibits on pages 52 to 55 of this report, which is
incorporated herein by reference.
(b) Reports on Form 8-K: The following reports on Form 8-K were filed during
the last quarter of the period covered by this report.
ITEMS FINANCIAL
DATE REPORTED STATEMENTS
---- -------- ----------
July 7, 1997 9 No
(c) Exhibits:
The Exhibits required by Item 601 of Regulation S-K are listed in the Index
to Exhibits on pages 52 to 55 of this report, which is incorporated herein by
reference. These Exhibits have been omitted from the copies of this Form 10-K
that are being distributed to shareholders. The Company will furnish a copy of
any Exhibit to any shareholder upon written request and upon payment of a fee
to cover the Company's reasonable expenses in furnishing such Exhibit. Such
requests may be made to: Investor Relations Department, LaSalle Re Holdings
Limited, Continental Building, Church Street, Hamilton HM 12, Bermuda.
10K-49
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REPORT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN
BERMUDA, ON THE 11TH DAY OF DECEMBER, 1997.
LaSalle Re Holdings Limited
/s/ Andrew Cook
By: _________________________________
Name: Andrew Cook
Title: Senior Vice President and
Chief Financial Officer
POWER OF ATTORNEY
EACH PERSON WHOSE SIGNATURE APPEARS BELOW CONSTITUTES AND APPOINTS VICTOR H.
BLAKE, ANDREW COOK, CLARE MORAN AND IVAN BERK, OR ANY OF THEM, AS SUCH
PERSON'S TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH FULL POWER OF
SUBSTITUTION AND RESUBSTITUTION, TO SIGN ANY AND ALL AMENDMENTS TO THIS
REPORT, AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS
IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED AND ON THE 11TH DAY OF DECEMBER,
1997.
SIGNATURE TITLE
--------- -----
/s/ Victor H. Blake Chairman, President and Chief Executive
___________________________________________ Officer (Principal Executive Officer)
Victor H. Blake
/s/ Andrew Cook Senior Vice President and Chief Financial
___________________________________________ Officer (Principal Financial Officer)
Andrew Cook
/s/ Clare Moran Assistant Vice President--Financial
___________________________________________ Reporting (Principal Accounting Officer)
Clare Moran
/s/ William J. Adamson, Jr. Director
___________________________________________
William J. Adamson, Jr.
/s/ Ivan P. Berk Director
___________________________________________
Ivan P. Berk
/s/ Jonathan H. Kagan Director
___________________________________________
Jonathan H. Kagan
/s/ Donald P. Koziol, Jr. Director
___________________________________________
Donald P. Koziol, Jr.
10K-50
SIGNATURE TITLE
--------- -----
/s/ Tim I. Madden Director
___________________________________________
Tim I. Madden
/s/ Lester Pollack Director
___________________________________________
Lester Pollack
/s/ Peter J. Rackley Director
___________________________________________
Peter J. Rackley
/s/ Paul J. Zepf Director
___________________________________________
Paul J. Zepf
10K-51
INDEX TO EXHIBITS
Certain of the following documents are filed herewith. Certain other of the
following documents have been previously filed with the Securities and Exchange
Commission and, pursuant to Rule 12b-32, are incorporated herein by reference.
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
------- ----------- ----------------
3.1 Memorandum of Association Incorporated by reference to
Exhibit 3.1 to Registration
Statement on Form S-1 (No. 33-
97304)
3.2 Bye-Laws Incorporated by reference to
Exhibit 3.1 to Form 10-Q for the
quarterly period ended December 31,
1995 (File No. 0-27216)
10.1 Excess Ownership Agreement dated Incorporated by reference to
November 27, 1995 among the Exhibit 10.3 to Form 10-Q for the
Company, LaSalle Re and the quarterly period ended December 31,
Founding Shareholders 1995 (File No. 0-27216)
10.2 Amended and Restated Shareholders Incorporated by reference to
Agreement dated November 27, 1995 Exhibit 10.1 to Form 10-Q for the
among the Company, LaSalle Re and quarterly period ended December 31,
the Founding Shareholders 1995 (File No. 0-27216)
10.3 Amended and Restated Option Incorporated by reference to
Agreement dated November 27, 1995 Exhibit 10.2 to Form 10-Q for the
among the Company, LaSalle Re and quarterly period ended December 31,
certain of the Founding 1995 (File No. 0-27216)
Shareholders
10.4 Conversion Agreement dated Incorporated by reference to
November 27, 1995 among the Exhibit 10.4 to Form 10-Q for the
Company, LaSalle Re and holders quarterly period ended December 31,
of Exchangeable Non-Voting Shares 1995 (File No. 0-27216)
10.5 Amended and Restated Employment Incorporated by reference to
Agreement dated October 1, 1995 Exhibit 10.5 to Form 10-Q for the
between Victor H. Blake and quarterly period ended December 31,
LaSalle Re* 1995 (File No. 0-27216)
10.6 Amended and Restated Underwriting Incorporated by reference to
Services Agreement dated Exhibit 10.6 to Form 10-Q for the
September 21, 1995 among the quarterly period ended December 31,
Company, LaSalle Re and CNA 1995 (File No. 0-27216)
Bermuda**
10.7 Amended and Restated Incorporated by reference to
Administrative Services Agreement Exhibit 10.7 to Form 10-Q for the
dated September 21, 1995 among quarterly period ended December 31,
the Company, LaSalle Re and ARC 1995 (File No. 0-27216)
10.8 Amended and Restated Investment Incorporated by reference to
Management Agreement dated Exhibit 10.8 to Registration
September 21, 1995 among the Statement on Form S-1 (No. 333-
Company, LaSalle Re and Aon 14861)
Advisors
- --------
* Management contract or compensatory plan.
** Pursuant to this service agreement, the services of Mr. Hengesbaugh are
provided to the Company.
10K-52
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
------- ----------- ----------------
10.9 Claims Agreement dated December Incorporated by reference to
16, 1993 between LaSalle Re and Exhibit 10.9 to Registration
Integrated Runoff Insurance Statement on Form S-1 (No. 333-
Services Corporation 14861)
10.10 Employment Agreement dated Incorporated by reference to
October 1, 1995 between Andrew Exhibit 10.10 to Form
Cook and LaSalle Re* 10-Q for the quarterly period ended
December 31, 1995 (File No. 0-27216)
10.11 Credit Agreement dated as of Incorporated by reference to
December 1, 1995 among the Exhibit 10.9 to Form 10-Q for the
Company, several banks and quarterly period ended December 31,
Chemical Bank, as administrative 1995 (File No. 0-27216)
agent
10.12 First Amendment, dated September Incorporated by reference to
25, 1996, among the Company, Exhibit 10.12 to Registration
several banks and Chase Manhattan Statement on Form S-1 (No. 333-
Bank as administrative agent, to 14861)
Credit Agreement dated as of
December 1, 1995 among the
Company, several banks and
Chemical Bank, as administrative
agent
10.13 LaSalle Re Holdings Limited 1996 Incorporated by reference to
Long-Term Incentive Plan* Exhibit 10.13 to Registration
Statement on Form S-1 (No. 333-
14861)
10.14 LaSalle Re Holdings Limited Incorporated by reference to
Employee Stock Purchase Plan* Exhibit 10.14 to Registration
Statement on Form S-1 (No. 333-
14861)
10.15 First Amendment dated July 1, Incorporated by reference to
1996 to Amended and Restated Exhibit 10.15 to Registration
Underwriting Services Agreement Statement on Form S-1 (No. 333-
dated as of September 21, 1995 14861)
between CNA Bermuda and LaSalle
Re
10.16 First Amendment dated July 1, Incorporated by reference to
1996 to Amended and Restated Exhibit 10.16 to Registration
Administrative Services Agreement Statement on Form S-1 (No. 333-
dated as of September 21, 1995 14861)
between ARC and LaSalle Re
10.17 Quota Share Treaty between CNA Incorporated by reference to
International Reinsurance Company Exhibit 10.17 to Registration
Limited and LaSalle Re in respect Statement on Form S-1 (No. 333-
of 1994 underwriting year of 14861)
account (London office)
10.18 Quota Share Treaty between CNA Incorporated by reference to
International Reinsurance Company Exhibit 10.18 to Registration
Limited and LaSalle Re in respect Statement on Form S-1 (No. 333-
of 1995 underwriting year of 14861)
account (London office)
- --------
* Management contract or compensatory plan.
10K-53
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
------- ----------- ----------------
10.19 Quota Share Treaty between CNA Incorporated by reference to
International Reinsurance Company Exhibit 10.19 to Registration
Limited and LaSalle Re in respect Statement on Form S-1 (No.
of 1996 underwriting year of 333-14861)
account (London office)
10.20 Quota Share Treaty between CNA Incorporated by reference to
International Reinsurance Company Exhibit 10.20 to Registration
Limited and LaSalle Re in respect Statement on Form S-1 (No.
of 1994 underwriting year of 333-14861)
account (Amsterdam office)
10.21 Quota Share Treaty between CNA Incorporated by reference to
International Reinsurance Company Exhibit 10.21 to Registration
Limited and LaSalle Re in respect Statement on Form S-1 (No.
of 1995 underwriting year of 333-14861)
account (Amsterdam office)
10.22 Quota Share Treaty between CNA Incorporated by reference to
International Reinsurance Company Exhibit 10.22 to Registration
Limited and LaSalle Re in respect Statement on Form S-1 (No.
of 1996 underwriting year of 333-14861)
account (Amsterdam office)
10.23 LMX Quota Share Retrocessional Incorporated by reference to
Agreement between Continental Exhibit 10.23 to Registration
Casualty Company and LaSalle Re Statement on Form S-1 (No.
for the 1995 underwriting year of 333-14861)
account
10.24 LMX Quota Share Retrocessional Incorporated by reference to
Agreement between Continental Exhibit 10.24 to Registration
Casualty Company and LaSalle Re Statement on Form S-1 (No.
for the 1996 underwriting year of 333-14861)
account
10.25 Amendment of Amended and Restated Incorporated by reference to
Employment Agreement dated as of Exhibit 10.25 to Registration
October 1, 1996 between Victor H. Statement on Form S-1 (No.
Blake and LaSalle Re* 333-14861)
10.26 Amendment of Employment Agreement Incorporated by reference to
dated as of October 1, 1996 Exhibit 10.26 to Registration
between Andrew Cook and LaSalle Statement on Form S-1 (No.
Re* 333-14861)
10.27 Quota Share Treaty between CNA Filed with this document
International Reinsurance Company
Limited and LaSalle Re in respect
of 1997 underwriting year of
account (London office)
10.28 Quota Share Treaty between CNA Filed with this document
International Reinsurance Company
Limited and LaSalle Re in respect
of 1997 underwriting year of
account (Amsterdam office)
- --------
* Management contract or compensatory plan.
10K-54
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
------- ----------- ----------------
10.29 LMX Quota Share Retrocessional Filed with this document
Agreement between Continental
Casualty Company and LaSalle Re
for the 1997 underwriting year of
account
10.30 Second Amendment, dated March 13, Filed with this document
1997, among the Company, several
banks and Chase Manhattan Bank as
administrative agent, to Credit
Agreement dated as of December 1,
1995 among the Company, several
banks and Chemical Bank, as
administrative agent
10.31 Catastrophe Equity Securities Filed with this document
Issuance Option Agreement, dated
as of July 1, 1997 between the
Company on the one hand and
European Reinsurance Company of
Zurich, Allianz
Aktiengesellschaft, Continental
Casualty Company and CIC-
Hilldale, Inc. on the other hand
10.32 First Amendment to LaSalle Re Incorporated by reference to
Holdings Limited 1996 Long-Term Exhibit 4.4 to Registration
Incentive Plan, dated September Statement on Form S-8 (No.
25, 1997* 333-38653)
10.33 First Amendment to LaSalle Re Incorporated by reference to
Holdings Limited Employee Stock Exhibit 4.4 to Registration
Purchase Plan, September 25, Statement on Form S-8 (No.
1997* 333-38655)
10.34 Agreement, dated September 9, Filed with this document
1997, terminating the Amended and
Restated Administrative Services
Agreement dated September 21,
1995 among the Company, LaSalle
Re and ARC
11.1 Statement re computation of per Filed with this document
share earnings
12.1 Statement re computation of ratio Filed with this document
of earnings to combined fixed
charges and preferred share
dividends
13.1 Selected Financial Data from the Filed with this document
Annual Report to Shareholders for
the fiscal year ended September
30, 1997
21.1 Subsidiaries of the Registrant Incorporated by reference to
Exhibit 21.1 to Registration
Statement on Form S-1 (No.
333-14861)
24.1 Power of Attorney Included on signature page
27.1 Financial Data Schedule Filed with this document
- --------
* Management contract or compensatory plan.
10K-55