-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JtUpRAIIve8txFTfIWkbRAtdjlMV4HSL6dlky/u8bfGGuVGDz5aof2Yl8RAUXzqs hlEXoDP0/Wd+rr45Y3wfZg== 0000950131-96-006395.txt : 19961223 0000950131-96-006395.hdr.sgml : 19961223 ACCESSION NUMBER: 0000950131-96-006395 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961220 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: LASALLE RE HOLDINGS LTD CENTRAL INDEX KEY: 0001001384 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-27216 FILM NUMBER: 96683585 BUSINESS ADDRESS: STREET 1: 25 CHURCH ST STREET 2: PO BOX HM 1502 CITY: HAMILTON HM FX BERMU STATE: D0 BUSINESS PHONE: 4412923339 MAIL ADDRESS: STREET 1: 25 CHURCH ST STREET 2: PO BOX HM 1502 CITY: HAMILTON HM FX STATE: D0 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 [FEE REQUIRED] OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended September 30, 1996. COMMISSION FILE NUMBER 0-27216 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 INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 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(G) OF THE ACT: COMMON SHARES, PAR VALUE $1.00 PER SHARE (TITLE OF CLASS) 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. [X] (Amended by Exch Act Rel No. 28869, eff. 5/1/91.) 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 12, 1996 was approximately $441,832,719, 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 12, 1996, there were outstanding 16,517,111 Common Shares of $1.00 par value, of the registrant. DOCUMENTS INCORPORATED BY REFERENCE 1. Excerpts from the Registrant's annual report to shareholders for the fiscal year ended September 30, 1996 (the "1996 Annual Report"). 2. The Registrant's definitive 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 28, 1997. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- LASALLE RE HOLDINGS LIMITED TABLE OF CONTENTS
PAGE ITEM NUMBER - ---- ------ PART I 1.Business................................................................. 2 2.Properties............................................................... 15 3.Legal Proceedings........................................................ 15 4.Submission of Matters to a Vote of Security Holders...................... 15 Executive Officers of the Registrant..................................... 15
PART II 5.Market for the Registrant's Common Stock and Related Stockholder Matters................................................................... 16 6.Selected Financial Data................................................. 17 7.Managements' Discussion and Analysis of Financial Condition and Results of Operations............................................................. 18 8.Financial Statements and Supplementary Data............................. 18 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................................................... 18 PART III 10.Directors and Executive Officers........................................ 18 11.Executive Compensation.................................................. 18 12.Security Ownership of Certain Beneficial Owners and Management.......... 18 13.Certain Relationships and Related Transactions.......................... 19 PART IV 14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K........ 19
1 PART 1 NOTE ON FORWARD-LOOKING STATEMENTS This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the 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 forward- looking statements relate to the plans and objectives of LaSalle Re Holdings Limited ("the Company") for future operations, including the Company's objective to seek annualized returns on shareholders' equity of 20%-25% and the Company's policy to distribute as dividends 50%-60% of the Company's net income from the prior fiscal year. In light of the risks and uncertainties inherent in all future projections, the inclusion of forward-looking statements in this report should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. Numerous factors could cause the Company's actual results to differ materially from those in the forward-looking statements, including the following: (i) the occurrence of catastrophic events with a frequency or severity exceeding the Company's estimates; (ii) a decrease in the level of demand for property catastrophe reinsurance; (iii) any lowering or loss of one of the financial ratings of the Company's subsidiary, LaSalle Re Limited ("LaSalle Re"), or the Company's non-admitted status in the United States jurisdictions; (iv) a decrease in the cession of business from CNA Financial Corporation (together with its affiliates, "CNA") to the Company; (v) loss of the services of any of the Company's executive officers; (vi) the termination of any of the Company's service agreements; (vii) the passage of federal or state legislation subjecting the Company to supervision or regulation in the United States; (viii) challenges by insurance regulators in the United States or the United Kingdom to the Company's claim of exemption from insurance regulation under current laws; or (ix) a contention by the United States Internal Revenue Service that the Company or LaSalle Re is engaged in the conduct of a trade or business within the U.S. The foregoing review of important factors should not be construed as exhaustive; 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 writes high severity, low frequency reinsurance on a worldwide basis through its subsidiary, LaSalle Re. The Company primarily underwrites property catastrophe reinsurance and 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. The Company was incorporated on September 20, 1995 under the laws of Bermuda to act as an investment holding company. LaSalle Re was incorporated on October 26, 1993 under the laws of Bermuda to capitalize on the opportunity created by an imbalance between the supply of and demand for property catastrophe reinsurance, which resulted in an increase in premiums from pre- 1993 levels. The Company believes that the decrease in supply of property catastrophe capacity was attributable to the withdrawal, in whole or in part, of certain reinsurers, including syndicates at Lloyd's of London ("Lloyd's"), from the property catastrophe market. Such withdrawals followed a succession of property catastrophe losses by those reinsurers that began in 1987 and culminated with hurricane Andrew. LaSalle Re has two wholly owned subsidiaries, LaSalle Re (Services) Limited ("LaSalle Re Services"), which acts as a representative office for the Company in the UK, and LaSalle Re Corporate Capital Ltd. ("LaSalle Re Capital"), which was formed to provide capital support to selected Lloyd's syndicates commencing in January 1997. 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, 2 in certain circumstances, exchangeable non-voting shares of LaSalle Re (the "Exchangeable Non-Voting Shares"). 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 that 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. On November 27, 1995, the Company and certain Founding Shareholders also consummated an initial public offering of 4,312,500 Common Shares (the "Offerings"). 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 "Redemption"). Since the consummation of the Exchange Offer, the Offerings and the Redemption, the Company owned 100% of the outstanding voting stock which constituted approximately 63% of the outstanding capital stock of LaSalle Re. The Exchange Offer was accounted for as if it were a pooling of interests of combining enterprises under common control. In December 1996, certain selling shareholders of the Company consummated a secondary public offering of 3,910,000 Common Shares. The Company did not receive any of the proceeds from the sale of the Common Shares. Upon completion of the secondary offering, the Company owned approximately 73% of the outstanding capital stock of LaSalle Re, or 100% of the outstanding voting stock of LaSalle Re. BUSINESS SEGMENTS The Company writes high severity, low frequency reinsurance on a worldwide basis through its subsidiary, LaSalle Re. The Company primarily writes property catastrophe reinsurance and 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 and satellite. The following table sets forth the Company's net premiums written and number of contracts written by type of reinsurance for the periods indicated (dollars in millions):
YEAR ENDED YEAR ENDED SEPTEMBER 30, 1996 SEPTEMBER 30, 1995 ---------------------- ---------------------- NET PREMIUMS NUMBER OF NET PREMIUMS NUMBER OF TYPE OF REINSURANCE WRITTEN CONTRACTS WRITTEN CONTRACTS - ------------------- ------------ --------- ------------ --------- Property catastrophe reinsurance: Excess of loss................. $122.4 832 $135.7 773 Pro rata....................... 42.2 10 42.8 10 Other lines of business: Property--risk excess and pro rata.......................... 9.7 70 5.3 59 Casualty clash................. 3.0 30 2.6 27 Marine......................... 4.6 17 3.1 4 Miscellaneous.................. 4.8 36 6.4 20 Adjustments and reinstatement premiums...................... 3.5 -- 6.0 -- ------ --- ------ --- Total........................ $190.2 995 $201.9 893 ====== === ====== ===
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 3 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, which 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 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 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'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 and satellite. 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. The Company has formed LaSalle Re Capital to provide capital support to selected Lloyd's syndicates commencing in January 1997. The Company expects that such support will be provided through letters of credit or a deposit of funds at Lloyd's. The Company is currently negotiating with three syndicates. One of such syndicates writes direct and facultative property insurance; one writes marine insurance and reinsurance; and one writes professional indemnity, directors and officers' insurance and bankers blanket bond business. There can be no assurance that any such negotiations will result in a definitive agreement. LaSalle Re Capital's provision of capital support to Lloyd's syndicates is subject to approval by the appropriate regulatory authorities. 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, 1996, 41.7% of the Company's net premiums 4 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 58.3% 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. The Company intends to continue its expansion in international writings to further diversify its exposures. 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, 1996, 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, 1996 SEPTEMBER 30, 1995 ---------------------- ---------------------- NET PERCENTAGE OF NET PERCENTAGE OF PREMIUMS NET PREMIUMS PREMIUMS NET PREMIUMS GEOGRAPHIC AREA WRITTEN WRITTEN WRITTEN WRITTEN - --------------- -------- ------------- -------- ------------- United States.................... $ 79.4 41.7% $ 91.6 45.4% Europe (excluding the U.K.)...... 22.0 11.6 21.0 10.4 United Kingdom................... 16.3 8.6 14.1 7.0 Japan............................ 8.0 4.2 7.6 3.8 Australasia...................... 11.0 5.8 9.8 4.8 Worldwide........................ 22.0 11.6 26.9 13.3 Worldwide (excluding the U.S.)(1)........................ 11.5 6.0 8.8 4.4 Other(2)......................... 16.5 8.6 16.1 8.0 Adjustments and reinstatements... 3.5 1.9 6.0 2.9 ------ ----- ------ ----- Total........................ $190.2 100.0% $201.9 100.0% ====== ===== ====== =====
- -------- (1) 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. (2) Other relates to other lines of reinsurance, including casualty clash, marine, crop hail, aviation and satellite. 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, 1996 by aggregate excess of loss program limits:
NUMBER OF PROGRAMS --------- Greater than $15 million but less than $20 million.............. 2 $10-15 million.................................................. 15 $7.5-10 million................................................. 18 $5-7.5 million.................................................. 36 $2.5-5 million.................................................. 70 Less than $2.5 million.......................................... 209 --- Total....................................................... 350 ===
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 5 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 Company's 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. Underwriting services are provided to the Company by CNA (Bermuda) Services Ltd. ("CNA Bermuda") pursuant to an underwriting services agreement. A staff of five professionals with extensive experience in the 6 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 Underwriting Officer of the Company. MARKETING The Company markets its reinsurance products worldwide primarily through reinsurance brokers. By marketing its products primarily through the broker network, the Company avoids 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. The Company received approximately 3,423 contract submissions in the year ended September 30, 1996 as compared to 3,667 in the year ended September 30, 1995. The Company is highly selective in accepting risks, extending coverage on only 995 contracts, or 29.1% of the program submissions received, in the year ended September 30, 1996. Subsidiaries and affiliates of Aon Corporation (together with its affiliates, "Aon") were brokers for approximately 12.4%, 10.6% and 11.9% of the Company's net written premiums in the years ended September 30, 1996, 1995 and the period ended September 30,1994 respectively. Guy Carpenter & Company, Inc., together with its affiliates, generated 16.6%, 21.1% and 20.3% of the Company's net premiums written for the years ended September 30, 1996, 1995 and the period ended September 30, 1994. No other broker accounted for more than 10% of the Company's net premiums written for the years ended September 30, 1996, 1995 or the period ended September 30, 1994. 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") does not 7 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 tremendous 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. The 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 are reviewed regularly by the Company's actuaries and executive officers and the Board of Directors of LaSalle Re, and to the extent they develop upward or downward, the results are 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. The Company determines its reserves with the assistance of actuarial staff provided by Aon Risk Consultants (Bermuda) Ltd. ("Aon Bermuda") pursuant to an administrative services agreement (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. 8 The following table summarizes the composition of the Company's investment portfolio as of September 30, 1996, 1995 and 1994 (dollars in millions):
SEPTEMBER 30 --------------------------- 1996 1995 ------------- ------------ FAIR % OF FAIR % OF TYPE OF INVESTMENT VALUE TOTAL VALUE TOTAL ------------------ ------- ----- ------ ----- Fixed maturities: Non-U.S. government bonds and agencies..... $ 75.3 14.0% $ 63.3 12.1% U.S. government bonds and agencies......... 90.1 16.8 4.9 0.9 Corporate bonds............................ 325.1 60.5 371.8 71.2 Short-term investments..................... 0.0 0.0 0.0 0.0 ------- ----- ------ ----- Subtotal................................. 490.5 91.3 440.0 84.2 Cash and cash equivalents.................. 47.0 8.7 82.4 15.8 ------- ----- ------ ----- Total investments........................ $ 537.5 100.0% $522.4 100.0% ======= ===== ====== =====
Quality of Portfolio The Company has investment guidelines which restrict investments in securities below an "AA" grade rating to 15% of the total portfolio, and only 10% of the total portfolio can be invested in "BBB" grade rating. 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. The following table summarizes the composition of the Company's fixed maturity portfolio by rating as assigned by S&P or Moody's as of September 30, 1996 and 1995 (dollars in millions):
SEPTEMBER 30, ---------------------------- 1996 1995 ------------- ------------- FAIR % OF FAIR % OF RATING VALUE TOTAL VALUE TOTAL ------ ------ ------ ------ ------ AAA......................................... $310.5 63.3% $305.4 69.4% AA.......................................... 126.1 25.7 134.6 30.6 A........................................... 53.9 11.0 -- -- ------ ------ ------ ------ $490.5 100.0% $440.0 100.0% ====== ====== ====== ======
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, 1996, the modified average duration of the portfolio was 2.57 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, 1996 and 1995 (dollars in millions):
SEPTEMBER 30, -------------------------- 1996 1995 ------------ ------------ Due in less than one year..................... $ 99.8 20.4% $ 45.1 10.3% Due in one to five years...................... 331.8 67.6 353.3 80.3 Due in five to ten years...................... 58.9 12.0 41.6 9.4 Greater than 10 years......................... -- -- -- -- ------ ----- ------ ----- $490.5 100.0% $440.0 100.0% ====== ===== ====== =====
9 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, 1996, the Company has a notional principal amount outstanding of approximately $25.2 million in foreign exchange contracts as compared to $6.1 million at September 30, 1995. The carrying value of these contracts at September 30, 1996 approximated their fair value. Realized and unrealized gains or losses on these contracts are recorded as an income item in the Company's consolidated statement of operations. Foreign exchange contracts at September 30, 1996 generally had maturities of six months or less and related to major Western currencies. Diversification and Liquidity Pursuant to the investment guidelines of the Company, no more than 25% of the fair market value of the Company's investment portfolio may be invested in the securities of any sovereign government or agency issuing in its own currency (except for the U.S. and supernational entities). Additionally, no more than 5% of the fair market value of the investment portfolio may be invested in securities issued by any single issuer. 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 0.35% 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 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. There may be established companies or new companies of which the Company is not aware which may be planning to enter the property catastrophe reinsurance market or existing reinsurers which 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. 10 In April 1996, LaSalle Re received an initial rating from A.M. Best Company, Inc. ("A.M. Best") of "A-" (Excellent). Prior to that time, LaSalle Re was not rated by any rating agency. The 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 Standard & Poor's Corporation ("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. 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; however, LaSalle Re Capital may become a corporate member of a Lloyd's syndicate. 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. EMPLOYEES The Company has three employees, which are Mr. Blake, Chairman, Chief Executive Officer and President of the Company, Mr. Cook, Chief Financial Officer and Treasurer of the Company and the Company's Investor Relations Manager. In addition to their activities, the Company's day-to-day operations are performed by affiliates of Aon and CNA pursuant to certain service agreements. Under these agreements, 31 employees of Aon and 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, 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. 11 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. Other 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 which 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 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 Annual Statutory Financial Statements. 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, which financial statements may be prepared in accordance with GAAP. LaSalle Re is required to submit the Annual 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 greatest of $100 million, 50% of its net premiums written and 15% of its loss and other certain insurance reserves. At September 30, 1996, LaSalle Re's actual statutory capital and surplus was $475.6 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). 12 Annual Statutory Financial Return. LaSalle Re is required to file with the Registrar an Annual Statutory Financial Return no later than four months after its financial year end (unless specifically extended). The Annual Statutory Financial Return includes, among other matters, a report of the approved independent auditor on the Annual Statutory Financial Statements of the insurer; a declaration of the statutory ratios; a solvency certificate; the Annual 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. 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 Bermuda, 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 and 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 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 with the Registrar an affidavit stating that it will continue to meet the required margins; (v) is prohibited, without the approval of 13 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 and LaSalle Re 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 of the Company carried on outside Bermuda. 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 and LaSalle Re are not currently subject to taxes on their incomeor 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 and LaSalle Re, as required, without limitation. 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. 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 has 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. The Company has formed LaSalle Re Capital to provide capital support to selected Lloyd's syndicates commencing in January 1997. LaSalle Re Capital may become a corporate member of Lloyd's in the course of 14 December 1996 and underwrite as a member of Lloyd's syndicates as from January 1 1997, at which point it will become subject to various Lloyd's regulations. ITEM 2. PROPERTIES The Company is provided office space in Bermuda and London by Aon Bermuda pursuant to the Administrative Services Agreement. 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, 1996. EXECUTIVE OFFICERS OF THE REGISTRANT 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 61 Chief Executive Officer and President Guy D. Hengesbaugh 37 Executive Vice President and Chief Underwriting Officer Andrew Cook 34 Chief Financial Officer and Treasurer Terry J. Alfuth 51 Senior Vice President
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 is also founder Chairman of the LUC Holdings Ltd, the shareholders 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 has 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 an underwriting services agreement. Andrew Cook, a chartered accountant, has been Chief Financial Officer and Treasurer of the Company since its organization in September 1995 and Chief Financial Officer and Treasurer of LaSalle Re 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 15 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. Terry J. Alfuth has been Senior Vice President, responsible for actuarial, claims, human resources, and information services, of the Company and LaSalle Re since September 1996. He joined LaSalle in September 1996 after eight years with one of the Winterthur US Regional companies as Vice President/Risk Management during which time he was instrumental in establishing a commercial lines division. Mr. Alfuth has 29 years of experience in the property and casualty insurance industry. He is a Fellow of the Casualty Actuarial Society, a member of the American Academy of Actuaries and a graduate of the PMD program at Harvard Graduate School of Business PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Common Shares were initially offered to the public on November 20, 1995 at a price of $19.25 per share. The Common Shares are quoted on the NASDAQ National Market under the symbol "LSREF." 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. 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, 1995 (from November 20, 1995). $23.250 $19.500 Quarter ended March 31, 1996............................. 23.625 21.000 Quarter ended June 30, 1996.............................. 22.750 19.750 Quarter ended September 30, 1995......................... 25.500 21.000 Quarter ended December 31, 1996 (through December 12, 1996)................................................... 29.500 22.375
As of December 12, 1996, there were 58 holders of record of the Common Shares. In April, July and October 1996, the Company paid dividends of $0.25, $0.25 and $0.25 per share to holders of its Common Shares. In October 1996, the Company adopted a dividend policy pursuant to which it intends to distribute in each fiscal year 50% to 60% of the Company's net income from the prior fiscal year, if any, on a quarterly basis. 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. In order for the Company to pay dividends in excess of 50% of net income, the Company will have to renegotiate certain terms of its credit facility. 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 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 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. 16 ITEM 6. SELECTED FINANCIAL DATA The historical consolidated financial data presented below as of and for each of the periods ended September 30, 1996, 1995 and 1994 were derived from the Company's consolidated financial statements incorporated from the Company's 1996 Annual Report. The selected consolidated financial data should be read in conjunction with the Company's consolidated financial statements and related notes thereto and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" also contained in the 1996 Annual Report.
PERIOD OCTOBER 26, YEAR ENDED YEAR ENDED 1993 TO SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1996 1995(1) 1994(1) ------------- ------------- ------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF INCOME DATA Net premiums written............... $ 190,151 $ 201,916 $ 133,327 Net premiums earned................ 195,141 170,370 76,989 Net investment income (net of realized losses).................. 26,428 25,066 15,739 Loss and loss expenses incurred.... 51,477 60,397 49,801 Underwriting expenses.............. 27,268 22,988 8,686 Operating expenses (2)............. 13,373 7,603 4,342 Income before minority interest.... 129,451 104,448 29,899 Minority interest (3).............. 47,966 38,774 10,958 Net income......................... 81,485 65,674 18,941 Net income per share (4)........... $ 5.40 $ 4.51 $ 1.31 Weighted average shares outstanding (5)............................... 23,967,870 23,170,680 22,852,910 Dividend per Common Share (6)...... $ 1.85 $ 4.62 -- OTHER DATA Loss and loss expense ratio (7).... 26.4% 35.5% 64.7% Expense ratio (7).................. 19.6% 17.1% 16.6% Combined ratio (7)................. 46.0% 52.6% 81.3% Return on average Combined Equity (8)............................... 29.2% 26.6% 9.3% Total statutory capital and surplus (9)............................... $ 475,580 $ 390,683 $ 376,414 BALANCE SHEET DATA (AT END OF PERIOD) Total investments and cash......... $ 537,504 $ 522,425 $ 409,738 Reinsurance balances receivable.... 70,625 86,146 50,307 Total assets....................... 634,374 636,547 481,424 Reserve for losses and loss expenses.......................... 49,875 66,654 37,789 Reserve for unearned premiums...... 82,894 87,885 56,338 Minority interest (3).............. 179,470 147,389 140,838 Total shareholders' equity......... 307,448 253,422 243,446 Book value per share (10).......... $ 21.42 $ 17.64 $ 16.91
- -------- (1) In October 1995, LaSalle Re changed its fiscal year end from December 31, to September 30, effective September 30, 1995. All prior periods have been adjusted to reflect a fiscal year end of September 30. (2) Includes operating expenses, corporate expenses, interest payable and foreign exchange gains and losses. For a discussion of foreign exchange gains and losses, see "Management's Discussion of Financial Condition and Results of Operations". (3) Minority interest represents those shares in LaSalle Re that are held as Exchangeable Non-Voting Shares and constitute approximately 37% of the capital stock of LaSalle Re. The Exchangeable Non-Voting Shares are held by certain Founding Shareholders and are exchangeable, at the option of the holder, for Common Shares on a one-for-one basis, unless the Board determines that such exchange may cause actual or potential adverse tax consequences to the Company or any shareholder. (4) Net income per share equals income before minority interest divided by weighted average shares outstanding. 17 (5) Weighted average shares outstanding include Common Shares and the Exchangeable Non-Voting Shares as common stock equivalents and the dilutive effect of stock options and stock appreciation rights using the treasury stock method. (6) Dividend per Common Share is based on the outstanding Common Shares as of September 30, 1996 of 14,397,720 (1995: 14,397,720; 1994: 14,395,710). (7) The loss and loss expense ratio is calculated by dividing the losses and loss expenses incurred by net premiums earned. The expense ratio is calculated by dividing underwriting expenses and certain operational expenses by net premiums earned. The combined ratio is the sum of the loss and loss expense ratio and the expense ratio. (8) Return on average Combined Equity is calculated by dividing net income before minority interest by the average of the opening and closing sum of shareholders' equity and minority interest. The adjustment in respect of minority interest reflects the exchangeable nature of the Exchangeable Non- Voting Shares. Closing shareholders' equity and minority interest reflects any dividends declared or paid during such periods, with the average not adjusted to reflect the timing of dividends declared or paid. (9) Total statutory capital and surplus is calculated in accordance with the provisions of the Insurance Act. See "Business--Regulation." (10) Book value per share is based on Combined Equity divided by Common Shares and Exchangeable Non-Voting Shares of 22,727,010 (as of September 30, 1996) (1995: 22,727,010; 1994: 22,725,000). ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required for this item is incorporated by reference to the narrative contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1996 Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required for this item is incorporated by reference to the consolidated financial statements of the Company contained in the Company's 1996 Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The information concerning directors required for this item 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 Company's Proxy Statement for the Annual Meeting of Stockholders. ITEM 11. EXECUTIVE COMPENSATION The information required for this item is incorporated by reference to the information contained under the caption "Management" in the Company's Proxy Statement for the Annual Meeting of Stockholders. 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 Company's Proxy Statement for the Annual Meeting of Stockholders. 18 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 Company's Proxy Statement for the Annual Meeting of Stockholders. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements The following Consolidated Financial Statements of LaSalle Re Holdings Limited and the Report of Independent Auditors are incorporated by reference to the Company's 1996 Annual Report: Consolidated balance sheets as at September 30, 1996 and 1995 Consolidated statements of operations for the years ended September 30, 1996, 1995 and the period from October 26, 1993 to September 30, 1994 Consolidated statements of changes in shareholders' equity for the years ended September 30, 1996, 1995 and the period from October 26, 1993 to September 30, 1994 Consolidated statements of cash flows for the years ended September 30, 1996, 1995 and the period from October 26, 1993 to September 30, 1994 Notes to the Consolidated Financial Statements (a) 2. Financial Statement Schedules Schedule III Supplementary Insurance Information (a) 3. Exhibits
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 Incorporated by reference to Exhibit dated November 27, 1995 among 10.3 to Form 10-Q for the quarterly the Company, LaSalle Re and period ended December 31, 1995 (File the Founding Shareholders No. 0-27216) 10.2 Amended and Restated Incorporated by reference to Exhibit Shareholders Agreement dated 10.1 to Form 10-Q for the quarterly November 27, 1995 among the period ended December 31, 1995 (File Company, LaSalle Re and the No. 0-27216). Founding Shareholders 10.3 Amended and Restated Option Incorporated by reference to Exhibit Agreement dated November 27, 10.2 to Form 10-Q for the quarterly 1995 among the Company, period ended December 31, 1995 (File LaSalle Re and certain of the No. 0-27216). Founding Shareholders 10.4 Conversion Agreement dated Incorporated by reference to Exhibit November 27, 1995 among the 10.4 to Form 10-Q for the quarterly Company, LaSalle Re and period ended December 31, 1995 (File holders of Exchangeable Non- No. 0-27216). Voting Shares 10.5 Amended and Restated Incorporated by reference to Exhibit Employment Agreement dated 10.5 to Form 10-Q for the quarterly October 1, 1995 between Victor period ended December 31, 1995 (File H. Blake and LaSalle Re* No. 0-27216).
19
EXHIBIT NUMBER DESCRIPTION METHOD OF FILING ------- ----------- ---------------- 10.6 Amended and Restated Incorporated by reference to Exhibit Underwriting Services Agreement 10.6 to Form 10-Q for the quarterly dated September 21, 1995 among period ended December 31, 1995 (File the Company, LaSalle Re and CNA No. 0-27216). Bermuda** 10.7 Amended and Restated Incorporated by reference to Exhibit Administrative Services 10.7 to Form 10-Q for the quarterly Agreement dated September 21, period ended December 31, 1995 (File 1995 among the Company, LaSalle No. 0-27216). Re and Aon Bermuda 10.8 Amended and Restated Investment Incorporated by reference to Management Agreement dated Registration Statement on Form S-1 September 21, 1995 among the (No. 333-14861) Company, LaSalle Re and Aon Advisors. 10.9 Claims Agreement dated December Incorporated by reference to 16, 1993 between LaSalle Re and Registration Statement on Form S-1 IRISC (No. 333-14861) 10.10 Employment Agreement dated Incorporated by reference to Exhibit October 1, 1995 between Andrew 10.10 to Form 10-Q for the quarterly Cook and LaSalle* period ended December 31, 1995 (File No. 0-27216). 10.11 Credit Agreement dated as of Incorporated by reference to Exhibit December 1, 1995 among the 10.9 to Form 10-Q for the quarterly Company, several banks and period ended December 31, 1995 (File Chemical Bank, as No. 0-27216). administrative agent 10.12 First Amendment, dated Incorporated by reference to September 25, 1996, among the Registration Statement on Form S-1 Company, several banks and (No. 333-14861) Chase Manhattan Bank as administrative agent, to Credit Agreement dated as of December 1, 1995 among Holdings, several banks and Chemical Bank, as administrative agent 10.13 Long-Term Incentive Plan.* Incorporated by reference to Registration Statement on Form S-1 (No. 333-14861) 10.14 Employee Stock Purchase Plan.* Incorporated by reference 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 Registration Statement on Form S-1 Underwriting Services Agreement (No. 333-14861) dated as of September 21, 1995 between CNA (Bermuda) Services Limited and LaSalle Re 10.16 First Amendment dated July 1, Incorporated by reference to 1996 to Amended and Restated Registration Statement on Form S-1 Administrative Services (No. 333-14861) Agreement dated as of September 21, 1995 between Aon Risk Consultants (Bermuda) Limited and LaSalle Re 10.17 Quota Share Treaty between CNA Incorporated by reference to International Reinsurance Registration Statement on Form S-1 Company Limited and LaSalle Re (No. 333-14861) in respect of 1994 underwriting year of account (London office). 10.18 Quota Share Treaty between CNA Incorporated by reference to International Reinsurance Registration Statement on Form S-1 Company Limited and LaSalle Re (No. 333-14861) in respect of 1995 underwriting year of account (London office).
20
EXHIBIT NUMBER DESCRIPTION METHOD OF FILING ------- ----------- ---------------- 10.19 Quota Share Treaty between CNA Incorporated by reference to International Reinsurance Registration Statement on Form S-1 Company Limited and LaSalle Re (No. 333-14861) in respect of 1996 underwriting year of account (London office). 10.20 Quota Share Treaty between CNA Incorporated by reference to International Reinsurance Registration Statement on Form S-1 Company Limited and LaSalle Re (No. 333-14861) in respect of 1994 underwriting year of account (Amsterdam office). 10.21 Quota Share Treaty between CNA Incorporated by reference to International Reinsurance Registration Statement on Form S-1 Company Limited and LaSalle Re (No. 333-14861) in respect of 1995 underwriting year of account (Amsterdam office). 10.22 Quota Share Treaty between CNA Incorporated by reference to International Reinsurance Registration Statement on Form S-1 Company Limited and LaSalle Re (No. 333-14861) in respect of 1996 underwriting year of account (Amsterdam office). 10.23 LMX Quota Share Retrocessional Incorporated by reference to Agreement between Continental Registration Statement on Form S-1 Casualty Company and LaSalle Re (No. 333-14861) for the 1995 underwriting year of account. 10.24 LMX Quota Share Retrocessional Incorporated by reference to Agreement between Continental Registration Statement on Form S-1 Casualty Company and LaSalle Re (No. 333-14861) for the 1996 underwriting year of account. 10.25 Amendment of Amended and Incorporated by reference to Restated Employment Agreement Registration Statement on Form S-1 dated as of October 1, 1996 (No. 333-14861) between Victor H. Blake and the Company* 10.26 Amendment of Amended and Incorporated by reference to Restated Employment Agreement Registration Statement on Form S-1 dated as of October 1, 1996 (No. 333-14861) between Andrew Cook and the Company* 11.1 Statement re computation of per Incorporated by reference to share earnings Registration Statement on Form S-1 (No. 333-14861) 13.1 Annual Report to shareholders Filed with this document for the fiscal year ended September 30, 1996 21.1 Subsidiaries of the Registrant Incorporated by reference to Registration Statement on Form S-1 (No. 333-14861) 27.1 Financial Data Schedule Incorporated by reference to Registration Statement on Form S-1 (No. 333-14861)
- -------- *Management contract or compensatory plan. **Pursuant to this services agreement, the services of Mr. Hengesbaugh are provided to the Company. (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth fiscal quarter of Fiscal 1996. 21 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 20TH DAY OF DECEMBER, 1996. LaSalle Re Holdings Limited /s/ Andrew Cook By: _________________________________ Andrew Cook Chief Financial Officer and Treasurer 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 20TH DAY OF DECEMBER, 1996.
SIGNATURE TITLE --------- ----- /s/ Victor H. Blake Chairman, President and Chief Executive ___________________________________________ Officer (Principal Executive Officer) Victor H. Blake /s/ Andrew Cook Chief Financial Officer and Treasurer ___________________________________________ (Principal Financial Officer) Andrew Cook /s/ Steven Given Controller (Principal Accounting Officer) ___________________________________________ Steven Given /s/ William J. Adamson, Jr. Director ___________________________________________ William J. Adamson, Jr. /s/ Andrew Africk Director ___________________________________________ Andrew Africk /s/ Ivan P. Berk Director ___________________________________________ Ivan P. Berk /s/ Joseph Haviv Director ___________________________________________ Joseph Haviv /s/ Jonathan H. Kagan Director ___________________________________________ Jonathan H. Kagan /s/ Donald P. Koziol, Jr. Director ___________________________________________ Donald P. Koziol, Jr. /s/ Lester Pollack Director ___________________________________________ Lester Pollack /s/ Peter J. Rackley Director ___________________________________________ Peter J. Rackley /s/ Scott A. Schoen Director ___________________________________________ Scott A. Schoen /s/ Harvey G. Simons Director ___________________________________________ Harvey G. Simons /s/ David A. Stockman Director ___________________________________________ David A. Stockman /s/ Paul J. Zepf Director ___________________________________________ Paul J. Zepf
22 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders LaSalle Re Holdings Limited Under date of October 19, 1996 we reported on the consolidated balance sheets of LaSalle Re Holdings Limited and subsidiaries as of September 30, 1996 and 1995 and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the years ended September 30, 1996 and 1995 and the period from October 26, 1993 (date of incorporation) to September 30, 1994, as contained in the 1996 annual report to the shareholders. These consolidated financial statements and our report thereon are incorporated by reference in this annual report on Form 10-K for the year 1996. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedules as listed in Item 14 (a) 2 of this Form 10-K. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG Peat Marwick Hamilton, Bermuda October 19, 1996 Chartered Accountants 23 SCHEDULE III LASALLE RE HOLDINGS LIMITED SUPPLEMENTARY INSURANCE INFORMATION (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
FUTURE POLICY BENEFITS, DEFERRED LOSSES, OTHER POLICY ACQUISITION CLAIMS AND LOSS UNEARNED CLAIMS AND PREMIUM SEGMENT COST EXPENSES PREMIUMS BENEFITS PAYABLE REVENUE - ------- ----------- --------------- --------------- ---------------- -------- 1996: Property & Similar................ 10,464 49,875 82,894 NIL 195,141 1995: Property & Similar................ 10,708 66,654 87,885 NIL 170,370 1994: Property & Similar................ 6,809 37,789 56,338 NIL 76,989 BENEFITS, CLAIMS AMORTIZATION OF NET LOSSES AND DEFERRED INVESTMENT SETTLEMENT ACQUISITION OTHER OPERATING PREMIUMS SEGMENT INCOME EXPENSES COSTS EXPENSES WRITTEN - ------- ----------- --------------- --------------- ---------------- -------- 1996: Property & Similar................ 26,846 51,477 27,268 13,373 190,151 1995: Property & Similar................ 25,091 60,397 22,988 7,603 201,916 1994: Property & Similar................ 15,758 49,801 8,686 4,342 133,327
24 INDEX TO EXHIBITS
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 pe- riod ended December 31, 1995 (File No. 0-27216) 10.1 Excess Ownership Agreement Incorporated by reference to Exhibit dated November 27, 1995 10.3 to Form 10-Q for the quarterly among the Company, LaSalle period ended December 31, 1995 (File Re and the Founding Share- No. 0-27216) holders 10.2 Amended and Restated Share- Incorporated by reference to Exhibit holders Agreement dated No- 10.1 to Form 10-Q for the quarterly vember 27, 1995 among the period ended December 31, 1995 (File Company, LaSalle Re and the No. 0-27216). Founding Shareholders 10.3 Amended and Restated Option Incorporated by reference to Exhibit Agreement dated November 10.2 to Form 10-Q for the quarterly 27, 1995 among the Company, period ended December 31, 1995 (File LaSalle Re and certain of No. 0-27216). the Founding Shareholders 10.4 Conversion Agreement dated Incorporated by reference to Exhibit November 27, 1995 among the 10.4 to Form 10-Q for the quarterly Company, LaSalle Re and period ended December 31, 1995 (File holders of Exchangeable No. 0-27216). Non-Voting Shares 10.5 Amended and Restated Em- Incorporated by reference to Exhibit ployment Agreement dated 10.5 to Form 10-Q for the quarterly October 1, 1995 between period ended December 31, 1995 (File Victor H. Blake and LaSalle No. 0-27216). Re* 10.6 Amended and Restated Under- Incorporated by reference to Exhibit writing Services Agreement 10.6 to Form 10-Q for the quarterly dated September 21, 1995 period ended December 31, 1995 (File among the Company, LaSalle No. 0-27216). Re and CNA Bermuda** 10.7 Amended and Restated Admin- Incorporated by reference to Exhibit istrative Services Agree- 10.7 to Form 10-Q for the quarterly ment dated September 21, period ended December 31, 1995 (File 1995 among the Company, No. 0-27216). LaSalle Re and Aon Bermuda 10.8 Amended and Restated In- Incorporated by reference to Registra- vestment Management Agree- tion Statement on Form S-1 (No. 333- ment dated September 21, 14861) 1995 among the Company, LaSalle Re and Aon Advi- sors. 10.9 Claims Agreement dated De- Incorporated by reference to Registra- cember 16, 1993 between tion Statement on Form S-1 (No. 333- LaSalle Re and IRISC 14861) 10.10 Employment Agreement dated Incorporated by reference to Exhibit October 1, 1995 between An- 10.10 to Form 10-Q for the quarterly drew Cook and LaSalle* period ended December 31, 1995 (File No. 0-27216). 10.11 Credit Agreement dated as Incorporated by reference to Exhibit of December 1, 1995 among 10.9 to Form 10-Q for the quarterly the Company, several banks period ended December 31, 1995 (File and Chemical Bank, as ad- No. 0-27216). ministrative agent 10.12 First Amendment, dated Sep- Incorporated by reference to Registra- tember 25, 1996, among the tion Statement on Form S-1 (No. 333- Company, several banks and 14861) Chase Manhattan Bank as ad- ministrative agent, to Credit Agreement dated as of December 1, 1995 among Holdings, several banks and Chemical Bank, as adminis- trative agent
EXHIBIT NUMBER DESCRIPTION METHOD OF FILING ------- ----------- ---------------- 10.13 Long-Term Incentive Plan* Incorporated by reference to Registra- tion Statement on Form S-1 (No. 333- 14861) 10.14 Employee Stock Purchase Incorporated by reference to Registra- Plan* tion Statement on Form S-1 (No. 333- 14861) 10.15 First Amendment dated July Incorporated by reference to Registra- 1, 1996 to Amended and Re- tion Statement on Form S-1 (No. 333- stated Underwriting Serv- 14861) ices Agreement dated as of September 21, 1995 between CNA (Bermuda) Services Lim- ited and LaSalle Re 10.16 First Amendment dated July Incorporated by reference to Registra- 1, 1996 to Amended and Re- tion Statement on Form S-1 (No. 333- stated Administrative Serv- 14861) ices Agreement dated as of September 21, 1995 between Aon Risk Consultants (Ber- muda) Limited and LaSalle Re 10.17 Quota Share Treaty between Incorporated by reference to Registra- CNA International Reinsur- tion Statement on Form S-1 (No. 333- ance Company Limited and 14861) LaSalle Re in respect of 1994 underwriting year of account (London office) 10.18 Quota Share Treaty between Incorporated by reference to Registra- CNA International Reinsur- tion Statement on Form S-1 (No. 333- ance Company Limited and 14861) LaSalle Re in respect of 1995 underwriting year of account (London office) 10.19 Quota Share Treaty between Incorporated by reference to Registra- CNA International Reinsur- tion Statement on Form S-1 (No. 333- ance Company Limited and 14861) LaSalle Re in respect of 1996 underwriting year of account (London office) 10.20 Quota Share Treaty between Incorporated by reference to Registra- CNA International Reinsur- tion Statement on Form S-1 (No. 333- ance Company Limited and 14861) LaSalle Re in respect of 1994 underwriting year of account (Amsterdam office) 10.21 Quota Share Treaty between Incorporated by reference to Registra- CNA International Reinsur- tion Statement on Form S-1 (No. 333- ance Company Limited and 14861) LaSalle Re in respect of 1995 underwriting year of account (Amsterdam office) 10.22 Quota Share Treaty between Incorporated by reference to Registra- CNA International Reinsur- tion Statement on Form S-1 (No. 333- ance Company Limited and 14861) LaSalle Re in respect of 1996 underwriting year of account (Amsterdam office) 10.23 LMX Quota Share Incorporated by reference to Registra- Retrocessional Agreement tion Statement on Form S-1 (No. 333- between Continental Casu- 14861) alty Company and LaSalle Re for the 1995 underwriting year of account 10.24 LMX Quota Share Incorporated by reference to Registra- Retrocessional Agreement tion Statement on Form S-1 (No. 333- between Continental Casu- 14861) alty Company and LaSalle Re for the 1996 underwriting year of account 10.25 Amendment of Amended and Incorporated by reference to Registra- Restated Employment Agree- tion Statement on Form S-1 (No. 333- ment dated as of October 1, 14861) 1996 between Victor H. Blake and the Company*
EXHIBIT NUMBER DESCRIPTION METHOD OF FILING ------- ----------- ---------------- 10.26 Amendment of Amended and Incorporated by reference to Registra- Restated Employment Agree- tion Statement on Form S-1 (No. 333- ment dated as of October 1, 14861) 1996 between Andrew Cook and the Company* 11.1 Statement re computation of Incorporated by reference to Registra- per share earnings tion Statement on Form S-1 (No. 333- 14861) 13.1 Annual Report to sharehold- Filed with this document ers for the fiscal year ended September 30, 1996 21.1 Subsidiaries of the Regis- Incorporated by reference to Registra- trant tion Statement on Form S-1 (No. 333- 14861) 27.1 Financial Data Schedule Incorporated by reference to Registra- tion Statement on Form S-1 (No. 333- 14861)
- -------- *Management contract or compensatory plan. **Pursuant to this services agreement, the services of Mr. Hengesbaugh are provided to the Company. EX-13.1 2 LASALLE RE HOLDINGS LTD 1996 ANNUAL REPORT LaSalle Re Holdings Limited Annual Report 1996 LaSalle Re Holdings Limited ("Holdings"), through its operating company, LaSalle Re Limited ("LaSalle Re") and together with Holdings ("The Company"), writes high severity, low frequency reinsurance, primarily property catastrophe reinsurance, on a worldwide basis. The Company is headquartered in Bermuda, and began operations in October, 1993. Common Shares of LaSalle Re Holdings Limited were listed on the Nasdaq Stock Market in November, 1995, and trade under the symbol "LSREF". LaSalle's mission is: . to protect insurance companies from losses caused by natural events such as climatic or seismographic conditions, or from the financial consequences of man-made disasters . by assuming such risks, to introduce an important element of stability into insurance company balance sheets . to provide this support on a financially secure basis, underpinned by a strong capital commitment.
CONTENTS Highlights 2 Financial summary 3 Chairman's statement 4 CEO interview 6 Management's discussion and analysis of financial condition and results of operations 10 Note on forward-looking statements 19 Consolidated balance sheets 20 Consolidated statements of operations 21 Consolidated statements of changes in shareholders' equity 22 Consolidated statements of cash flows 23 Notes to consolidated financial statements 24 Independent auditors' report 38 Financial and investor information 39 Directors and officers 40 Company information 41
1 HIGHLIGHTS LaSalle's first year as a public company was one of continued growth and profitability, in the face of downward pressure on rates paid for our key product, property catastrophe reinsurance. We credit this success to our conservative underwriting practices, our policy of further limiting risk by spreading our exposures internationally, and our participation in other lines of reinsurance. . LaSalle achieved record financial results for the fiscal year ended September 30, 1996. Net income rose 24% to $129.5 million. Earnings per share were $5.40 and fully-diluted book value per share reached $20.20. . Premiums written rose to $190.2 million and premiums earned to $195.1 million. . Shareholders' equity and minority interest was $487 million, an increase of 21.5%. Return on average shareholder's equity and minority interest was 29.2%, well above the company's goal of 20% to 25%. . Statutory capital and surplus for LaSalle Re Limited, our operating subsidiary, rose 22% to $475.6 million. . A new dividend policy, designed to return excess capital to our shareholders, was adopted. . We received an "A-" (Excellent) rating from A.M. Best Company, Inc. and, shortly after year-end, an "A" (Good) rating from Standard & Poor's Corporation. . We applied for corporate membership in Lloyd's of London, as a first step in direct participation in that market. . We further refined and trademark registered our L-CAM(TM) proprietary computer software model, which we use to assess insurance risks.
Worldwide ex-USA 6% Adjustments & reinstatement premiums 1.8% Adjustments & reinstatements 1.9% Casualty clash 1.6% Others 8.6% Property catastrophe reinsurance excess of loss 64.4% Japan 4.2% Miscellaneous 2.5% USA 41.7% Marine 2.4% Australasia 5.8% Property catastrophe reinsurance pro rata 22.2% Europe 11.6% Property-risk excess & pro rata 5.1% Worldwide 11.6% *LINES OF BUSINESS UK 8.6% *GEOGRAPHIC DISTRIBUTION OF BUSINESS *For premiums written in the year ended September 30, 1996
2 FINANCIAL SUMMARY LASALLE RE HOLDINGS LIMITED AND SUBSIDIARIES (Expressed in thousands of United States Dollars, except per share and operational data)
PERIOD YEAR ENDED YEAR ENDED OCTOBER 26, 1993 TO SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1996 1995 1994 OPERATIONAL DATA Premiums written $190,151 $201,916 $133,327 Total revenues 221,569 195,436 92,728 Net income before minority interest 129,451 104,448 29,899 Cash and investments 537,504 522,425 409,738 Total assets 634,734 636,547 481,424 Total shareholders' equity and minority interest 486,918 400,811 384,284 LaSalle Re statutory capital and surplus 475,580 390,683 376,414 Return on average shareholders' equity and minority interest 29.2% 26.6% 9.3% PER SHARE DATA Net income $ 5.40 $ 4.51 $ 1.31 Book value 21.42 17.64 16.91 Dividends declared 1.85 4.62 0.00 OPERATIONAL RATIOS Loss ratio 26.4% 35.5% 64.7% Expense ratio 19.6% 17.1% 16.6% Combined ratio 46.0% 52.6% 81.3%
SHARE PRICE -- QUARTERLY HIGH STATUTORY CAPITAL & SURPLUS December 1995 $23.25 1994 $376,414,000 March 1996 $23.63 1995 $390,683,000 June 1996 $22.75 1996 $475,580,000 September 1996 $25.50 3 CHAIRMAN'S STATEMENT [PHOTO] Victor H. Blake Chairman, President & CEO TO OUR SHAREHOLDERS We are pleased to present our third annual report. Over the last three years, we have generated a return on capital employed well above the industry average. We are a specialist reinsurer by choice, focusing mainly -- but not exclusively -- on property catastrophe reinsurance. SERVICE We serve our clients by assisting them in managing their exposures to major catastrophic events which could severely damage their balance sheets -- or even their ability to trade -- if not provided for. It was just such a series of world-wide events between 1987 and 1992, culminating in Hurricane Andrew, that originally led to the formation of your company on October 26, 1993. In the aftermath of the devastation wrought by these events came the realisation that premiums for catastrophe reinsurance were below technically acceptable levels. In the light of increasingly sophisticated measurements of exposure, a 200% price increase was mandated. THE PROMISE DELIVERED In our first year of operation, LaSalle Re was called upon to respond to the Northridge, California earthquake. In our second year, Hurricanes Luis and Marilyn laid waste to the Caribbean, and there were floods in Norway and storms in Germany to contend with. In the year under review, our third year of trading, a late hurricane season in the Gulf of Mexico saw Hurricane Opal cause an estimated $2 billion in insured damage in October 1995. The 1996 hurricane season produced an above average number of named storms, but did not match the intensity of the previous record- setting year. Hurricanes Bertha, Fran and Hortense, in particular, were clearly significant events for the people and companies directly affected. But none caused losses of sufficient magnitude to affect our business adversely. Severe winter weather in the United Kingdom, and spring storms in the mid- western United States produced minor losses in some lower-level catastrophe protections we provide. There was no significant earthquake activity this year. The first three years of our operations were therefore marked by several events which underline the importance of the role we play, and the vital need for the protection we offer. These events show that our business is about the willing assumption of risk. It is about having the knowledge and the ability to manage that risk, and in so doing to create a profitable and lasting business. 4 CHAIRMAN'S STATEMENT (CONTINUED) How successful have we been in this regard? I believe our combined ratios illustrate the profitability of our business: 81.3% in 1994, 52.6% in 1995, 46.0% in 1996. Our return on average shareholders' equity and minority interest rose to 29.2%, up from 26.6% in 1995, and 9.3% in our start-up year of 1994. This is exceptional. SPECIALTY The conventional wisdom is that reinsurers must be big and must provide coverage across all lines. Alternatively, they can afford to be slightly less large provided they have a streamlined operating structure and are highly specialized and service-orientated. LaSalle comes under this latter category. However, we are not a purely mono-line company. We operate in a number of different areas where there is an undisputed need for the specialized forms of high-severity, low-frequency protection we offer. CLIENTS We are very much aware of the need to be responsive, and not simply be satisfied with the role of provider. Our aim is to establish long-term partnerships that transcend fluctuations in price. Our core clients are aware that coverage bought from competitors willing to operate at prices below the technical level is dubious currency, and could impair their ability to keep their promises. CAPITAL MANAGEMENT Because of its greater volatility, the property catastrophe reinsurance business requires better than average returns on equity. Balance is the key word. We need sufficient capital and surplus to enable our clients to trade confidently with us. At the same time, we must keep this capital employed. Unless we make better than average returns in years when catastrophe losses are within attritional expectations, we will not achieve the stability we need to respond in years of high losses. The measure of our success in achieving this balance is best demonstrated by the assessment of the rating agencies: A.M. Best has awarded us an A- (Excellent) rating, while Standard & Poor's has rated us A (Good). OUR PEOPLE At LaSalle it's our people who make the difference. Even in this high-tech age, reputation, integrity and relationships remain the crucial ingredients. I am grateful to all our staff for their dedication to, and their belief in, the Company. /s/ Victor H. Blake Chairman, President & CEO 5 CEO INTERVIEW IN THE FOLLOWING INTERVIEW VICTOR H. BLAKE -- CHAIRMAN, PRESIDENT AND CEO OF LASALLE RE HOLDINGS -- OFFERS AN OVERVIEW OF THE CHANGES TO THE BUSINESS OF REINSURANCE, AND OUTLINES HIS VISION OF LASALLE'S FUTURE. WHAT IS THE CURRENT STATE OF THE REINSURANCE INDUSTRY, AND WHAT CHANGES DO YOU FORESEE? 1996 has been described as a 'year of consolidation' for the insurance and reinsurance industries. More and more business has been concentrated in the hands of the strongest companies. Companies are concentrating on core lines of business, and actively pursuing growth through acquisition. A study by A.M. Best showed that at least 45 insurance company acquisitions were made during 1995. The trend is towards larger and larger deals. This pattern has continued into 1996. There have been five mega-mergers so far. The biggest was the purchase of American Re by Munich Re for $4 billion. When it was announced in August, this sale confirmed Munich Re as the world's largest reinsurer. The result of all this activity has been a widening gap between the top-rank reinsurers and the weaker players. This gap is likely to get wider. The real issue, however, is not size but quality. The top-tier companies that emerge from this process of consolidation may have large capital bases, but in the long term the strongest performers will need more than that. If they are to meet the changing needs of primary insurers, they must also demonstrate global capabilities, superior underwriting, and the ability to work closely with clients -- offering value-added solutions to their insurance problems. To cope with the increasing risks they face, primary insurers are looking for a high degree of expertise. They demand both strength and quality. They need reinsurance partners who can add real value to their businesses, making them stronger, more effective competitors. As the flight to quality continues, specialist reinsurers who can provide not only good security but also in-depth knowledge and control of their business have a key role to play. Such companies tend to be more creative and more aware of their clients' needs. WHAT IS BEHIND THE TREND TO INTERNATIONAL EXPANSION AMONG REINSURERS? The reinsurance industry is rapidly becoming more globalized. Munich Re's purchase of American Re is an example of a European giant moving into the U.S. market. But equally, market opportunities in Europe have attracted many U.S. firms. Also the emerging markets of Latin America and Southeast Asia are seen as new sources of profitable growth. A key reason for the move toward global expansion is the international business activities of the clients themselves. Primary reinsurers are writing increasing volumes of business worldwide. So they need worldwide reinsurance. Companies like LaSalle, with an international book of business from inception, are in a strong position to offer the quality service this growing international market is looking for. 6 CEO INTERVIEW (CONTINUED) WHAT SETS LASALLE APART FROM ITS COMPETITORS? In a word: balance. We have achieved a good balance in our geographic spread of business, in the lines of business we write, and in our approach to managing risk and managing assets. From day one, our goal has been to ensure a roughly equal balance between the business we write in the United States and in other parts of the world. We are continuing to enhance the international portion of our book of business by reinsuring certain syndicates at Lloyd's of London. Our newness is an asset. We are free of any problems inherited from the past. But equally, with insurance industry giants Aon and CNA as our major sponsors, we do not have to struggle to make ourselves credible. Our close industry ties also allow us access to new and valuable business opportunities. From the outset, we have been able to operate as a multi-line company, offering coverage for other lines of business besides property catastrophe reinsurance. Writing other lines of business is a way of balancing our exposure to risk. In terms of risk management, we employ a conservative underwriting philosophy. We stress pricing discipline over premium volume, and only write business which we are confident will generate appropriate returns. We also make use of the latest information technology available. We have created a proprietary computer model, called L-CAM(TM) (LaSalle Catastrophe Analysis Model), which we use to assist in assessing insurance risks. Our goal is to use the latest technological tools to provide the best possible service to our clients and investors. We manage our business with a goal of achieving an average annualized return on equity of between 20% and 25% over time. It's what we call our 'ROE discipline'. WHAT IS YOUR LONG-TERM VISION FOR LASALLE? LaSalle was created three years ago, when optimum conditions for the growth of a company such as ours existed. Premium rates for property catastrophe reinsurance were at a historic high due to an unprecedented string of natural disasters, and disarray at Lloyd's of London made it pull back from insuring catastrophe business. This produced a market opportunity for LaSalle and other companies, most of whom chose Bermuda as the domicile for their reinsurance operations. Three years later, the Bermuda "cats" account for 30% of the world's catastrophe business. Over the past year, however, rates for our primary product have softened somewhat. This is a development we had anticipated right from the time we launched our business and hence we offer a full service capability. Pricing fluctuation will always occur depending on the presence or absence of major losses. But we believe prices will not now return to uneconomic levels, because both buyer and seller are only too well aware of the exposures at risk. Because of this, our aim has always been to offer strength and quality to a worldwide roster of clients -- but to focus more on our return on equity than on simply generating premium income. 7 CEO INTERVIEW (CONTINUED) What we are selling to our clients is a promise to pay. We recognize financial security as a key goal and our clients recognize it as one of our key strengths. Our commitment to financial security is perhaps best illustrated by the level and the quality of our assets. We have a pristine balance sheet and intend to keep it that way. Our long-term vision for LaSalle is to carry on with what we have achieved over our first three years of operations. We intent to continue to maintain a balanced geographical spread of business. We will focus on conservative underwriting practices, and on conservative management of our assets. And we will take advantage of opportunities to enhance our growth wherever we perceive them. The challenge is to manage our business through all the cycles. Writing other low-frequency, high-severity business enables us to balance our portfolio and maintain our commitment to profitable growth. All of the above gives me reason for optimism. But perhaps the most encouraging factor is the certain knowledge that we have the support of our marketing force - -- of the brokers, and of the core clients we have attracted. Our staff are professional, well travelled, well known and respected in the business. Reinsurance is still a people business after all, and these qualities are irreplaceable. We also enjoy the sponsorship of two of the biggest names in our industry: CNA and Aon. Taken together, all these attributes and allegiances give us ample cause for confidence in our future. YOU HAVE RECENTLY ANNOUNCED AN ENHANCED CAPITAL MANAGEMENT POLICY. PLEASE EXPLAIN We believe the efficient use of our capital is of paramount importance to both our clients and our investors. Beginning in the 1997 fiscal year, we intend to pay out 50% to 60% of the prior year's net income in dividends to our shareholders. This will represent a significant increase from our current dividend. It also means we will retain 40% to 50% of our net income to provide for growth. Importantly, this policy will be fair to both our existing and new shareholders while at the same time providing for the development of the company's long term strategy. The enhanced policy also allows us to conduct share repurchases from time to time. WILL THIS DIVIDEND POLICY APPLY IN ALL CIRCUMSTANCES? It will apply if we operate at or near our business plan. We have designed the policy to allow us to reconsider the payout following circumstances such as a loss or series of losses of such magnitude that the Company was presented with an opportunity, through hardening rate levels, to retain more capital and use it beneficially. This also provides us with the flexibility to manage our capital prudently for the protection of our clients. 8 CEO INTERVIEW (CONTINUED) ARE YOU ACTIVELY PARTICIPATING IN LLOYD'S OF LONDON? We have always selectively supported Lloyd's through quota-shares of certain syndicates. Beginning in 1997 it is our intention that this support will also take the form of becoming a member of Lloyd's through LaSalle Re Corporate Capital Limited, a subsidiary company. This will enable us to be a part of the Lloyd's franchise. It is part of our strategy to have representation in other major centres as well as Bermuda. Becoming a corporate member of Lloyd's accomplishes this, as does having our representative office in the London Underwriting Centre. Lloyd's membership will be accomplished without having to expend capital, so it also is effective leveraging of our capital. DO YOU FORESEE ANY DECLINE IN THE IMPORTANCE OF THE BERMUDA MARKET? On the contrary, we believe Bermuda is here to stay. It is home to a diverse group of specialist reinsurers, which have collectively obtained 30% of the market share and a lead role in worldwide business. Bermuda is ideal for specialist companies such as LaSalle, where large risk and premium income can be generated with a small, but highly-qualified workforce operating in a favorable regulatory climate. Perhaps the most telling aspect of Bermuda's economic health is the development of offices by the major insurance brokerage houses to access fully the reinsurers located here. Bermuda has gained acceptance and recognition throughout the world from buyers and intermediaries and, importantly, by the insurance ratings agencies. In our view, it has become one of the key insurance markets globally and with its many advantages as a location can only go from strength to strength. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of the Company's results of operations and financial position. This discussion should be read in conjunction with the Company's Consolidated Financial Statements and related notes. OVERVIEW LaSalle Re was incorporated under the laws of Bermuda in October 1993 and commenced operations on November 22, 1993. LaSalle Re was initially capitalized with $373.1 million provided through private sales of common shares and special non-voting shares. Holdings was incorporated in Bermuda in September 1995 as a holding company in connection with the Company's recapitalization and initial public offering. The Company owns 100% of the outstanding voting stock of LaSalle Re. Certain founding shareholders hold exchangeable non-voting shares of LaSalle Re, which are exchangeable, at the option of the holder, for Common Shares of the Company on a one-for-one basis, unless the Companies board of directors determines such exchange may cause actual or potential adverse tax consequences to the Company or any shareholder. If and while favorable loss experience continues and reinsurance capacity does not diminish, the Company expects further downward pressure on rates for property catastrophe reinsurance during 1997. If rates decline, the Company expects net premiums written from property catastrophe reinsurance to decline in 1997. However, based on its current perception of market opportunities, the Company expects that growth in its other lines of business would cause total net premiums written to remain relatively stable. Premiums written include new and renewal business, reinstatement premiums and premium adjustments on current and prior year contracts. Renewal dates for property catastrophe reinsurance contracts historically have been concentrated in the January 1 to July 1 period. As a result, the Company's net premiums written for the first six months of each calendar year generally represent a significant portion of its net premiums written for the entire calendar year. Premiums on property catastrophe excess of loss contracts are earned on a pro rata basis over the period coverage is provided, which is generally 12 months. Under pro rata of property catastrophe contracts, the risks underlying the contracts incept throughout the policy period and premiums generally are earned over an 18-month period. As a result, the Company's net premiums earned are not concentrated in any interim period. Net realized gains and losses on the Company's investment portfolio are disclosed separately from net investment income. In accordance with generally accepted accounting principles ("GAAP"), the Company has classified its investments as available for sale; therefore, unrealized gains and losses on the Company's investment portfolio are not recognized in the Company's consolidated results of operations but are reflected as a separate component of shareholders' equity, net of minority interest. Losses and loss expenses incurred represent losses and loss expenses reported by cedents and reserves established in respect of specific losses. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Underwriting expenses are composed primarily of brokerage, ceding commissions and excise taxes. Brokerage on property catastrophe excess of loss contracts is 10% of ceded premiums. Pro rata of property catastrophe contracts have varying rates of brokerage, ceding and profit commissions that are individually negotiated based on the underlying risks of each contract and generally are not dependent on geographic factors. These commissions range from 0% to 45% of ceded premiums and averaged 10.8% of net premiums written for the year ended September 30, 1996. United States federal excise tax on premiums paid by United States domiciled cedents is 1% of ceded premiums. In addition, underwriting expenses include underwriting services fees and, depending upon the Company's financial performance, underwriting profit commissions payable to CNA Services Limited ("CNA Bermuda") pursuant to the Company's Underwriting Services Agreement. Until December 31, 1995, LaSalle Re paid CNA Bermuda underwriting fees equal to 2% for the first $150 million of gross written and collected premiums per fiscal year and 1.5% thereafter and, for periods during which the Company's loss ratio since inception of LaSalle Re was 57% or less, subject to certain conditions, an underwriting profit commission of 2.5% of the aggregate net underwriting profits of LaSalle Re. Effective January 1, 1996, these fees equalled 1.5% of gross written and collected premiums per fiscal year and, subject to the same loss ratio test and conditions, an underwriting profit commission of 4.0% of the aggregate net underwriting profits of LaSalle Re. LaSalle Re accrued underwriting service fees to CNA Bermuda of $3.1 million, $3.5 million and $1.5 million for the years ended September 30, 1996, 1995 and the period from October 26, 1993 to September 30, 1994, respectively. In addition, the Company incurred $4.1 million, $2.2 million and $nil in respect of profit commissions to CNA Bermuda for the years ended September 30, 1996, 1995 and the period from October 26, 1993 to September 30, 1994, respectively. All underwriting expenses are charged to income on the same basis as the premiums to which they relate are earned. The primary component of operating expenses is fees paid to Aon Risk Consultants Bermuda ("Bermuda Ltd.") ("Aon Bermuda") pursuant to an Administrative Services Agreement with the Company. The Company's loss and loss expense ratio is calculated by dividing the losses and loss expenses incurred by net premiums earned. The expense ratio is calculated by dividing underwriting expenses and certain operational expenses by net premiums earned. The combined ratio is the sum of the loss and loss expense ratio and the expense ratio. The loss and loss expense ratios and the combined ratios fluctuate based on losses and loss expenses incurred, which are not within the control of the Company. The underwriting expense component of the expense ratio fluctuates in proportion to earned premiums and profitability of the Company, while the operational expenses component consists primarily of amounts payable to Aon Bermuda pursuant to the Administrative Services Agreement and executive compensation. The Company's financial statements are reported in U.S. dollars. The Company writes a significant amount of business in currencies other than U.S. dollars and therefore is exposed to risks relating to fluctuations in foreign currency exchange rates. These risks include exposure to changes in net cash inflows on non-U.S. dollar denominated insurance premiums and exposure to reinsurance losses denominated in non-U.S. currencies. The Company may from time to time experience significant exchange gains or losses as a result of fluctuations in foreign currency exchange rates, which will affect the Company's statement of operations. In an effort to manage its exposure to foreign currency exchange rate fluctuations, the Company from time to time enters into foreign exchange contracts. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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. The total number of contracts bound by the Company increased from 893 for the year ended September 30, 1995 to 995 for the year ended September 30, 1996. Reinstatement premiums for the year ended September 30, 1996 totalled $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. [PREMIUMS EARNED BAR GRAPH APPEARS HERE] 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. In accordance with GAAP, for investments classified as available for sale, unrealized gains and losses on the Company's investment portfolio are not recognized in the Company's consolidated results of operations but are reflected as a separate component of shareholders' equity, net of minority interest. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The following table sets forth the Company's combined ratios for the years ended September 30, 1996 and 1995:
YEAR ENDED SEPTEMBER 30, 1996 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 has not been 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 emanate from the 1996 hurricane season and the end of the 1995 hurricane season, winter/spring storms in the United States, the United Kingdom and Northern Europe and satellite losses from the in-orbit portion of coverages. 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. LOSS & LOSS EXPENSES [PERFORMANCE GRAPH APPEARS HERE] 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 increase 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. The Company's brokerage, ceding and profit commissions were comparable for the years ended September 30, 1996 and 1995 at 10.3% and 10.2%, respectively. 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. This increase was primarily due to increased staff at the executive level and increased fees under the Administrative Services Agreement. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Interest expense was $0.2 million during the year ended September 30, 1996 compared with no expense in the year ended September 30, 1995. Interest expense in the year 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. Income before minority interest increased 23.9% to $129.5 million for the year ended September 30, 1996 from $104.4 million for the year ended September 30, 1995. This increase was primarily due to an increase in net premiums earned and a decrease in losses and loss expenses incurred. 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. NET INCOME [GRAPH APPEAR HERE] Year Ended September 30, 1995 and Period from October 26, 1993 through September 30, 1994. LaSalle Re was incorporated in October 1993 and commenced operations on November 22, 1993. Net premiums written increased 51.4% to $201.9 million for the year ended September 30, 1995 from $133.3 million for the 1994 period, primarily due to increased writings of property catastrophe reinsurance. Of the net premiums written for the 1995 year, $178.5 million was attributable to property catastrophe excess of loss and pro rata property catastrophe reinsurance. The total number of contracts bound by the Company increased from 508 for the 1994 period to 893 for the year ended September 30, 1995. Reinstatement premiums were $5.9 million in the year ended September 30, 1995 and $8.2 million in the 1994 period. Approximately 50% of the reinstatement premiums recorded in 1995 related to Hurricanes Luis and Marilyn. Primarily all of the 1994 reinstatement premiums were attributable to the Northridge, California earthquake. *Before minority interest 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Net premiums earned increased 121.3% to $170.4 million for the year ended September 30, 1995 from $77.0 million for the 1994 period. This increase was primarily a result of the greater volume of premiums written in the year ended September 30, 1995 together with the earnings of premiums written in the 1994 period that were unearned at September 30, 1994. Net investment income increased 59.2% to $25.1 million for the year ended September 30, 1995 from $15.8 million for the 1994 period. This increase was primarily attributable to a larger investment base and an increase in yields, particularly in the second quarter of the year ended September 30, 1995. Investment income as a percentage of the average market value of investments and cash was 5.4% and 4.7% for the year ended September 30, 1995 and the 1994 period, respectively. The following table sets forth the Company's combined ratios for the year ended September 30, 1995 and the period from October 26, 1993 through September 30, 1994: YEAR ENDED PERIOD ENDED SEPTEMBER 30, 1995 SEPTEMBER 30, 1994 Loss and loss expense ratio 35.5% 64.7% Expense ratio 17.1% 16.6% Combined ratio 52.6% 81.3% Losses and loss expenses incurred increased 21.3% to $60.4 million for the year ended September 30, 1995 from $49.8 million for the 1994 period. The main component of losses and loss expenses incurred in the year ended September 30, 1995 were losses of $27.3 million related to Hurricanes Luis and Marilyn, which occurred in September 1995. The balance of the losses and loss expenses relate to a variety of worldwide incidents including property risk excess losses of $7.9 million, development of the Northridge, California earthquake of $5.8 million and summer flooding in Norway of $4.4 million. In 1994, the Northridge, California earthquake resulted in losses of $42.3 million, representing approximately 85% of total losses incurred in the 1994 period. Underwriting expenses increased 164.7% from $8.7 million for the 1994 period to $23.0 million for the year ended September 30, 1995, primarily due to the growth in net premiums earned. As a percentage of net premiums earned, underwriting expenses were 13.5% for the year ended September 30, 1995 and 11.3% for the 1994 period. This increase is primarily due to the accrual of a $2.1 million underwriting profit commission incurred pursuant to the Underwriting Services Agreement. No underwriting profit commission was accrued in respect of the 1994 period because the conditions for earning such commission were not satisfied. Operational expenses increased 52.9% to $6.2 million for the year ended September 30, 1995 from $4.1 million for the 1994 period. The increase is primarily due to increased fees of $1.7 million under the Administrative Services Agreement. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) As a result of a relatively stable U.S. dollar and the placement of foreign currency contracts, the Company experienced a foreign exchange loss of $0.2 million for the year end September 30, 1995 compared with a $1.6 million gain for the 1994 period. Due to the Kobe, Japan earthquake and the potential for loss payments in Yen, the Company did not place foreign currency contracts for Yen balances during the year ended September 30, 1995 and sustained a loss on this currency of $0.4 million. Income before minority interest increased 249.3% to $104.4 million for the year ended September 30, 1995 from the 1994 period. This increase was due primarily to increases in net premiums earned and net investment income. The Company's net income per share increased to $4.51 for the year ended September 30, 1995 from $1.31 for the 1994 period. LIQUIDITY AND CAPITAL RESOURCES As a holding company, Holdings' assets consist primarily of the outstanding voting stock of LaSalle Re and its cash flows depend primarily on dividends and other permitted payments from LaSalle Re. LaSalle Re's sources of funds consist of net 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 1978 of Bermuda (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 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 Bermuda 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 which 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 these requirements. In addition, the payment of dividends by LaSalle Re is subject to the rights of holders of the exchangeable non-voting shares of LaSalle Re 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 insurance operations. Operating activities provided net cash of $131.4 million for the year ended September 30, 1996 and $130.2 million for the year ended September 30, 1995. 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 cash flows from operations between periods. LaSalle Re funds such payments from cash flows from operations and sales of investments. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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, 1996, 84.7% 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 portfolio was 2.57 years at September 30, 1996. At September 30, 1996, the fair value of the Company's total investment portfolio, including cash, was $537.5 million. The Company has adopted the Statement of Financial Accounting Standard 115 ("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 loss on the investment portfolio net of amounts attributable to minority interest was $1.9 million at September 30, 1996 compared to $1.0 million at September 30, 1995. As of September 30, 1996, all of the securities held in the Company's investment portfolio were fixed-income securities rated "A" or better by Standard & Poor's or Moody's Investors Services Inc. No single investment comprised more than 5% of the overall portfolio. See Notes 3 and 8 to Consolidated Financial Statements for additional information regarding the Company's investment portfolio. FIXED INCOME SECURITIES [GRAPH APPEARS HERE] In March, October and November 1995, LaSalle Re paid cash dividends on its capital stock in the aggregate amounts of $30 million, $75 million and $25 million, respectively. In April, July and October, 1996, the Company paid dividends of $0.25, $0.25 and $0.25 per Common Share respectively to holders of its capital stock. In October 1996, the Company adopted a dividend policy pursuant to which it intends to distribute in each fiscal year 50% to 60% of the Company's net income from the prior fiscal year, if any, on a quarterly basis. In 1997, the Company expects to distribute 50% of its fiscal 1996 net income. Based on the Company's net income for the year ended September 30, 1996, the Company currently expects to declare a quarterly dividend of $0.71 per share payable in January 1997. The actual amount and timing of any future dividends, including the proposed quarterly dividend payable in January 1997, is at the discretion of the Board and 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. 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) As part of its capital management strategy, the Company currently intends to repurchase up to $50 million of Common Shares in open market or privately negotiated transactions from time to time depending on market conditions and the Company's capital and liquidity requirements. The Company expects that any share repurchases will be funded by available cash. In accordance with the terms of certain reinsurance contracts, the Company has posted letters of credit in the amount of $15.5 million as of September 30, 1996 as compared to $15.7 million as of September 30, 1995. These letters of credit support outstanding loss reserves and are secured by a lien on the Company's investment portfolio equal to 115% of the amount of the outstanding letters of credit. The Company made loss payments of $68.3 million during the year ended September 30, 1996 as compared to $31.5 million for the year ended September 30, 1995. The majority of the payments made in the year ended September 30, 1995 related to the Northridge, California earthquake, which increased as cedant paid losses exceeded Company attachment points and loss payments were required. As of September 30, 1996, the Company paid a total of $37.6 million, or 78.3%, of total incurred losses of $48.0 million relating to the Northridge, California earthquake (as compared to $29.0 million, or 60.4%, of such total incurred losses as of September 30, 1995). The majority of loss payments in 1996 relate to Hurricanes Luis and Marilyn, for which the Company paid a total of $33.8 million, or 81.4% of total incurred losses of $41.2 million (as compared to $0.6 million, or 1.5%, of such total incurred losses as of September 30, 1995). At September 30, 1996, reserves for unpaid losses and loss expenses were $49.9 million. The Company has no material commitments for capital expenditures. 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. The line of credit contains various covenants, including: limitations on incurring additional indebtedness; prohibitions of dividend and other restricted payments that would cause the Company's tangible net worth (total shareholders' equity and minority interest) to fall below $350 million for calendar year 1996, $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 $250 million or 70% of net premiums written; maintenance of statutory capital of LaSalle Re at the end of each fiscal year of at least $250 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 Holdings 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, 1996, the credit facility had not been utilized. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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. 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 Company's objective to seek average annualized returns on shareholders' equity of 20% to 25% over time and the Company's policy to distribute as dividends in each fiscal year 50% to 60% of the Company's net income from the prior fiscal year, if any, on a quarterly basis. 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 the following: (i) catastrophic events with a frequency or severity exceeding the Company's estimates; (ii) a decrease in the level of demand or increase in the supply of property catastrophe reinsurance; (iii) any lowering or loss of one of the Company's financial ratings or the Company's non-admitted status in the United States jurisdictions; (iv) a decrease in the cession of business from CNA Financial Corporation to the Company; (v) loss of the services of any of the Company's executive officers; (vi) the termination of any of the Company's service agreements; (vii) the passage of legislation subjecting the Company to supervision or regulation in the United States; (viii) challenges by insurance regulators in the United States or the United Kingdom to the Company's claim of exemption from insurance regulation under current laws; or (ix) a contention by the United States Internal Revenue Service that the Company or LaSalle Re is engaged in the conduct of a trade or business within the U.S. 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. 19 CONSOLIDATED BALANCE SHEETS Years ended September 30, 1996 and 1995 (Expressed in thousands of United States Dollars, except share and per share data)
1996 1995 ASSETS Cash and cash equivalents $ 46,990 $ 82,360 Investments held as available for sale at fair value (Note 3 (a)) (amortized cost 1996: $493,450; 1995: $441,705) 490,514 440,065 Accrued investment income 14,211 15,803 Reinsurance balances receivable (Note 7) (related party 1996: $11,700; 1995: $25,206) 70,625 86,146 Deferred acquisition costs 10,464 10,708 Other assets (Note 4) 1,570 1,465 - ---------------------------------------------------------------------------------------- Total assets $634,374 $636,547 ======================================================================================== LIABILITIES Reserve for losses and loss expenses (Note 9) $ 49,875 $ 66,654 Unearned premium reserve 82,894 87,885 Other liabilities (Notes 6 & 7) (related party 1996: $6,080; 1995: $6,076) 11,087 6,197 Dividend payable 3,600 75,000 - ---------------------------------------------------------------------------------------- Total liabilities 147,456 235,736 - ---------------------------------------------------------------------------------------- MINORITY INTEREST (Note 1) $179,470 $147,389 - ---------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Share capital (Note 5) $ 14,398 $ 14,398 Additional paid in capital (Note 5) 221,968 221,968 Unrealized loss on investments (Note 3 (a)) (1,861) (1,039) Retained earnings 72,943 18,095 - ---------------------------------------------------------------------------------------- Total shareholders' equity 307,448 253,422 - ---------------------------------------------------------------------------------------- Total liabilities, minority interest and shareholders' equity $634,374 $636,547 ========================================================================================
See accompanying notes to consolidated financial statements 20 CONSOLIDATED STATEMENTS OF OPERATIONS Years ended September 30, 1996, 1995 and the period from October 26, 1993 to September 30, 1994 (Expressed in thousands of United States Dollars, except share and per share data)
1996 1995 1994 REVENUES Premiums written (Notes 7, 8 & 13) (related party 1996: $24,045; 1995: $28,836; 1994: $24,186) $190,151 $201,916 $133,327 Change in unearned premiums 4,990 (31,546) (56,338) - --------------------------------------------------------------------------------------------- Net premiums earned 195,141 170,370 76,989 - --------------------------------------------------------------------------------------------- Net investment income (Note 3 (b)) 26,846 25,091 15,758 Net realized losses on investments (Note 3(b)) (418) (25) (19) - --------------------------------------------------------------------------------------------- Total revenues 221,569 195,436 92,728 ============================================================================================= EXPENSES Losses and loss expenses incurred (Note 9) 51,477 60,397 49,801 Underwriting expenses (Note 7) (related party 1996: $10,419; 1995: $8,524; 1994: $3,183) 27,268 22,988 8,686 Operational expenses (Note 7) (related party 1996: $6,500; 1995: $4,500; 1994: $2,798) 11,114 6,218 4,066 Corporate expenses 911 1,145 1,866 Interest expense 222 0 0 Exchange loss/(gain) 1,126 240 (1,590) - --------------------------------------------------------------------------------------------- Total expenses 92,118 90,988 62,829 - --------------------------------------------------------------------------------------------- Income before minority interest 129,451 104,448 29,899 Minority interest (Note 1) 47,966 38,774 10,958 ============================================================================================= Net income $ 81,485 $ 65,674 $ 18,941 ============================================================================================= Net income per common share $ 5.40 $ 4.51 $ 1.31 ============================================================================================= Weighted average number of common share and common share equivalents outstanding 23,967,870 23,170,680 22,852,910 =============================================================================================
See accompanying notes to consolidated financial statements 21 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years ended September 30, 1996, 1995 and the period from October 26, 1993 to September 30, 1994 (Expressed in thousands of United States Dollars, except share and per share data)
1996 1995 1994 COMMON SHARES PAR VALUE $1 Balance at beginning of period $ 14,398 $ 14,396 $ 0 Issuance of shares 0 2 14,396 - --------------------------------------------------------------------------------------- Balance at end of period $ 14,398 $ 14,398 $ 14,396 ======================================================================================= ADDITIONAL PAID IN CAPITAL Balance at beginning of period $221,968 $221,945 $ 0 Proceeds on issue of shares in excess of par value 0 23 221,945 - --------------------------------------------------------------------------------------- Balance at end of period $221,968 $221,968 $221,945 ======================================================================================= UNREALIZED LOSS ON INVESTMENTS Balance at beginning of period $ (1,039) $(11,836) $ 0 Unrealized gain/(loss) in period (822) 10,797 (11,836) - --------------------------------------------------------------------------------------- Balance at end of period $ (1,861) $ (1,039) $(11,836) ======================================================================================= RETAINED EARNINGS Balance at beginning of period $ 18,095 $ 18,941 $ 0 Net Income 81,485 65,674 18,941 Dividends (26,637) (66,520) 0 - --------------------------------------------------------------------------------------- Balance at end of period $ 72,943 $ 18,095 $ 18,941 ======================================================================================= Total shareholders' equity $307,448 $253,422 $243,446 =======================================================================================
See accompanying notes to consolidated financial statements 22 CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended September 30, 1996, 1995 and the period from October 26, 1993 to September 30, 1994 (Expressed in thousands of United States Dollars, except share and per share data)
1996 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 81,485 $ 65,674 $ 18,941 Adjustments to reconcile net income to cash provided by operating activities: Minority interest in net income 47,966 38,774 10,958 Amortization of investment premium 3,280 4,535 3,438 Net loss on sale of investments 418 25 19 Unrealized loss/(gain) on foreign exchange 590 (153) (1,319) Changes in: Accrued investment income 1,592 (2,294) (13,509) Reinsurance balances receivable 15,412 (35,745) (48,987) Deferred acquisition costs 244 (3,898) (6,809) Other assets (105) (404) (1,061) Reserve for losses and loss expenses (16,748) 28,923 37,789 Unearned premium reserve (4,991) 31,546 56,338 Other Liabilities 2,294 3,187 3,012 - ------------------------------------------------------------------------------------------ Cash provided by operating activities 131,437 130,170 58,810 - ------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investments (270,287) (108,796) (381,826) Net sales/(purchases) of short term investments 47 2,654 (42,247) Proceeds on the sale of marketable securities 170,296 50,198 5,293 Proceeds on the maturity of marketable securities 44,500 25,000 0 - ------------------------------------------------------------------------------------------ Cash applied to investing activities (55,444) (30,944) (418,780) - ------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Payment of dividends (111,363) (30,003) 0 Subscription to share capital 0 39 373,068 - ------------------------------------------------------------------------------------------ Cash (applied to)/provided by financing activities (111,363) (29,964) 373,068 - ------------------------------------------------------------------------------------------ Net (decrease)/increase in cash and cash equivalents (35,370) 69,262 13,098 Cash and cash equivalents at beginning of period 82,360 13,098 0 - ------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 46,990 $ 82,360 $ 13,098 ==========================================================================================
See accompanying notes to consolidated financial statements 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended September 30, 1996, 1995 and the period from October 26, 1993 to September 30, 1994 (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. The Company 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 endeavours 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., a member of a recognized association of underwriters, to act as a corporate member of Lloyd's of London. In November 1995, the Company and LaSalle Re Limited consummated an offer (the "Exchange Offer") pursuant to which, among other things, the founding shareholders of the Company (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 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 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. On November 27, 1995, the Company and certain Founding Shareholders also consummated an initial public offering of 4,312,500 Common Shares (the "Offerings"). 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 "Redemption"). 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years ended September 30, 1996, 1995 and the period from October 26, 1993 to September 30, 1994 (Expressed in thousands of United States Dollars, except share and per share data) 1. GENERAL (CONTINUED) Since the consummation of the Exchange Offer, the Offerings and the Redemption, the Company has owned 100% of the outstanding voting stock, which constitutes approximately 63% of the outstanding capital stock of LaSalle Re. The minority interest represents approximately the 37% interest in LaSalle Re not owned by the Company. The Exchange Offer was accounted for as if it were a pooling of interests of combining enterprises under common control. 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 reserve for unpaid losses and loss expenses and ultimate premiums written. 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 intercompany balances and transactions have been eliminated in consolidation. (b) PREMIUMS EARNED AND DEFERRED ACQUISITION EXPENSES 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. Unearned premiums represent the portion of premiums written which is 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. 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years ended September 30, 1996, 1995 and the period from October 26, 1993 to September 30, 1994 (Expressed in thousands of United States Dollars, except share and per share data) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (c) LOSSES AND LOSS EXPENSES The reserve for 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. 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 reserves 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 reserves, management believes that the Company's reserve levels are adequate to meet its future obligations. Reserves 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. (d) 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 Statement of Financial Accounting Standards 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. (e) 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. (f) 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. 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years ended September 30, 1996, 1995 and the period from October 26, 1993 to September 30, 1994 (Expressed in thousands of United States Dollars, except share and per share data) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (f) TRANSLATION OF FOREIGN CURRENCIES (CONTINUED) The Company enters 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. (g) FAIR VALUE OF FINANCIAL STATEMENTS 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. (h) CORPORATE EXPENSES Corporate expenses are expensed as they are incurred on an accruals basis. (i) 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. (j) STOCK INCENTIVE COMPENSATION PLANS The Company accounts for stock option grants in accordance with APB opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly, recognizes compensation expense for stock option grants 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. (k) INCOME PER COMMON SHARE Net income per common share is calculated by dividing net income by the weighted average number of common shares and common share equivalents outstanding during the period. The Exchangeable Non-Voting Shares in 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 common shares outstanding using the treasury stock method. There is no material difference between primary and fully diluted net income per common share. 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years ended September 30, 1996, 1995 and the period from October 26, 1993 to September 30, 1994 (Expressed in thousands of United States Dollars, except share and per share data) 3. INVESTMENTS (a) 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, 1996 and 1995, the fair values and amortized costs of investments are as follows:
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 ========= ====== ======== ======== AMORTIZED UNREALIZED UNREALIZED FAIR 1995 COST GAINS LOSSES VALUE U.S. government and agencies $ 4,988 $ 0 $ (57) $ 4,931 Non U.S. government and agencies 63,208 672 (589) 63,291 Corporate 373,509 2,950 (4,616) 371,843 -------- ------ -------- -------- $441,705 $3,622 $(5,262) $440,065 ======== ====== ======== ========
The unrealized loss on investments as shown on the consolidated balance sheet of $1,861 (1995: $1,039) is net of the minority's interest of $1,075 (1995: $601). Investments held at September 30, 1996 mature as follows:
AMORTIZED FAIR COST VALUE Less than 1 year $100,034 $ 99,819 1-5 years 334,252 331,808 5-10 years 59,164 58,887 -------- -------- $493,450 $490,514 ======== ========
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:
1996 1995 AAA 63.3% 69.4% AA 25.7% 30.6% A 11.0% 0.0% ------ ------ 100.0% 100.0% ====== ======
In the normal course of reinsurance operations, the Company's bankers have issued letters of credit totalling $15,511 (1995: $15,704) in favor of ceding insurance companies to secure the Company's obligations under various reinsurance contracts. At September 30, 1996, $17,837 (1995: $18,059) of fixed interest securities have been pledged as collateral for these letters of credit. 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years ended September 30, 1996, 1995 and the period from October 26, 1993 to September 30, 1994 (Expressed in thousands of United States Dollars, except share and per share data) 3. INVESTMENTS (CONTINUED) (B) NET INVESTMENT INCOME Net investment income for the years ended September 30, 1996, 1995 and the period ended September 30, 1994 is derived from the following sources:
1996 1995 1994 Cash and short term investments $ 1,443 $ 2,558 $ 2,379 U.S. government and agencies fixed interest securities 1,631 107 0 Non U.S. government and agencies fixed interest securities 4,702 3,224 1,877 Corporate fixed interest securities 20,197 20,288 12,315 Gross realized losses (418) (25) (19) ------- ------- ------- Gross investment income 27,555 26,152 16,552 Investment expenses (Note 7) (1,127) (1,086) (813) ------- ------- ------- Net investment income $26,428 $25,066 $15,739 ======= ======= =======
Included in gross investment income for the year ended September 30, 1996 was a charge of $3,280 (1995: $4,535; 1994: $3,438) relating to the accretion/amortization of investment premium. 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, 1996 was a increase of $822 (decrease 1995: $10,797; increase 1994: $11,836). Proceeds received from the sale of available for sale securities in the period ended September 30, 1996 were $170,296 (1995: $50,198; 1994: $5,293). 4. 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 is secured upon the title deeds of the property. The promissory note 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. 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years ended September 30, 1996, 1995 and the period from October 26, 1993 to September 30, 1994 (Expressed in thousands of United States Dollars, except share and per share data) 5. SHARE CAPITAL AND ADDITIONAL PAID-IN CAPITAL The authorized share capital of the Company is 100,000,000 Common Shares of par value $1 each. As of September 30, 1996 and 1995, the following shares have been issued and fully paid:
1996 & 1995 NUMBER OF SHARE ADDITIONAL SHARES CAPITAL PAID IN ISSUED CAPITAL Common shares 14,397,720 $14,398 $ 221,968 ========== ======= =========
During the year, the Company established an Employee Stock Purchase Plan (the "Plan"). 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. As at September 30, 1996, no shares had been issued in respect of the Plan. 6. 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. In addition, LaSalle Re has issued options to purchase 2,199,780 Exchangeable Non-Voting shares. The options became exerciseable on October 1, 1996 and may be exercised until November 22, 2003. 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 $10.45. 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 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 SARs value as of the exercise date. Alternatively, at the Company's sole discretion, the SARs will entitle the Executive to either (i) the number of common shares in LaSalle Re Holdings Limited 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 common shares equal to the number of SARs exercised. Any common shares taken up through the exercise of the SARs shall rank equally with the other common shares. The value of each SAR equals the fair market value of a common share of LaSalle Re Holdings 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 was $16.67, minus dividend adjustments. The current exercise price is $10.45. 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years ended September 30, 1996, 1995 and the period from October 26, 1993 to September 30, 1994 (Expressed in thousands of United States Dollars, except share and per share data) 6. SHARE PURCHASE OPTIONS AND STOCK APPRECIATION RIGHTS (CONTINUED) (B) [I] COMPENSATORY -- STOCK APPRECIATION RIGHTS (CONTINUED) A percentage of these SARs may become exerciseable on January 1 of each of 1997, 1998 or 1999. These percentages vary depending on 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 exerciseable unless a targeted internal rate of return of at least 18% per annum is achieved during the entire measurement period. This is based upon the financial performance of LaSalle Re from inception to November 27, 1995 and LaSalle Re Holdings' consolidated performance from that date forward. At September 30, 1996, the Company's internal rate of return has exceeded 18% and therefore the Company has charged an expense of $909 (1995: $240; 1994: $Nil). (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 Company granted options for 163,218 common shares during the year ended September 30, 1996. The options vest rateably in five annual instalments over 5 years from the grant date. The options can be exercised over a 10 year period, commencing on the vesting date. As of September 30, 1996, no options were exerciseable. The original exercise price was $19.25 per share. The current exercise price is $18.75, as adjusted for dividends. The options were granted at the fair value of the Company's shares at the grant date. The Company applies APB Opinion 25 and Related Interpretations in accounting for the Incentive Plan. Accordingly, no compensation cost has been recognized. Had compensation cost been determined based on the fair value at the grant date of the options consistent with the method of SFAS Statement 123, the net income and earnings per share would have been reduced to the pro forma amounts indicated below: 1996 Net income As reported $81,485 Pro forma $81,465 Primary earnings per share As reported $ 5.40 Pro forma $ 5.40 The fair value of the option grants are estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: dividend yield of 10% per annum; expected volatility of 9%; and a risk free interest rate of 5.2%. 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years ended September 30, 1996, 1995 and the period from October 26, 1993 to September 30, 1994 (Expressed in thousands of United States Dollars, except share and per share data) 7. RELATED PARTY TRANSACTIONS In addition to the share purchase options discussed in Note 6, 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, 1996, LaSalle Re assumed premiums written of approximately $24,045 (1995: $28,836; 1994: $24,186) from a ceding company related to a shareholder of LaSalle Re. In addition, LaSalle Re assumed premiums totalling $23,577 (1995: $22,057; 1994: $14,163) through brokers related to a shareholder of LaSalle Re. Brokerage fees incurred in respect of this business were approximately $2,357 (1995: $2,206; 1994: $1,416). All such transactions were undertaken on normal commercial terms. Reinsurance balances receivable at the balance sheet date include $11,700 (1995: $25,206) due from such related parties. (b) UNDERWRITING SERVICES LaSalle Re is party to an underwriting services agreement with CNA (Bermuda) Services Limited ("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 (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 $3,081 (1995: $3,411; 1994: $1,465) for underwriting services provided for the year ended September 30, 1996, of which $2,482 (1995: $3,629) was payable at September 30, 1996. The Company has incurred $4,140 (1995: $2,186; 1994: $Nil) for underwriting profit commission for the year ended September 30, 1996, of which $3,350 was payable at September 30, 1996 (1995: $2,186). 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years ended September 30, 1996, 1995 and the period from October 26, 1993 to September 30, 1994 (Expressed in thousands of United States Dollars, except share and per share data) 7. RELATED PARTY TRANSACTIONS (CONTINUED) (c) ADMINISTRATIVE SERVICES LaSalle Re is party to an agreement with Aon Risk Consultants (Bermuda) Limited ("ARC Bermuda"). Under this agreement ARC Bermuda performs certain actuarial and administrative services on behalf of the Company. LaSalle Re has agreed to pay management fees to ARC Bermuda as follows:
CALENDAR YEAR 1993 $548 (pro-rata basis) 1994 $3,000 1995 $5,000 1996 $7,000
Beginning on January 1, 1997, the management fees payable to ARC Bermuda will be: (i) $3,300 per annum; and (ii) An underwriting profit commission equal to 2.75% of the aggregate net underwriting profit of LaSalle Re, where certain conditions are met. (d) INVESTMENT MANAGEMENT SERVICES LaSalle Re is party to an agreement with Aon Advisors (UK) Limited ("Aon UK") to provide investment management services. LaSalle Re has agreed to pay fees to Aon UK based on the average daily balance of the investment portfolio of the preceding quarter, as follows:
PORTFOLIO BALANCE ANNUAL FEE IN BASIS POINTS $0 through $100,000 35 Excess of $100,000 through $200,000 25 Excess of $200,000 15
The Company has incurred $1,028 (1995: $987; 1994: $752) for services provided for the year ended September 30, 1996, of which $272 (1995: $261) was payable at September 30, 1996. 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years ended September 30, 1996, 1995 and the period from October 26, 1993 to September 30, 1994 (Expressed in thousands of United States Dollars, except share and per share data) 7. RELATED PARTY TRANSACTIONS (CONTINUED) (E) CLAIMS HANDLING SERVICES LaSalle Re is party to an agreement with Integrated Runoff Insurance Services Corporation ("IRISC") whereby IRISC performs certain claims handling services for LaSalle Re. LaSalle Re has agreed to pay the following minimum fees to IRISC: CALENDAR YEAR 1994 $50 1995 $53 1996 $56 The agreement provides for additional fees to be payable if services provided exceed a certain "base level". Fees in excess of this "base level" are calculated on an hourly rate. The Company has incurred $92 (1995: $78; 1994: $47) for services provided for the year ended September 30, 1996, of which $Nil (1995: $Nil) was payable at the balance sheet date. 8. CONCENTRATION OF CREDIT RISK The Company has investment guidelines which restrict investments in securities below an "AA" grade rating to 15% of the total portfolio and only 10% of the total portfolio can be invested in "BBB" grade rating. 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 16% of the Company's premiums written for the year ended September 30, 1996 (1995: 21%; 1994: 20%). Another broker who is related to the Company arranged more than 12% (1995: 10%; 1994: 11%). Approximately 13% (1995: 15%; 1994: 18%) of the gross premiums written for the year ended September 30, 1996 were ceded by related companies. 9. RESERVE FOR LOSSES AND LOSS EXPENSES Activity in the reserve for losses and loss expenses during the periods ended September 30, 1996, 1995 and 1994 is summarized as follows:
1996 1995 1994 Balance as of October 1 $ 66,654 $ 37,789 $ 0 -------- -------- -------- Incurred related to: Current year 31,910 52,587 49,801 Prior year 19,567 7,810 0 -------- -------- -------- 51,477 60,397 49,801 -------- -------- -------- Paid related to: Current year (10,222) (7,572) (12,012) Prior year (58,034) (23,960) $ 0 -------- -------- -------- (68,256) (31,532) (12,012) -------- -------- -------- Balance as of September 30 $ 49,875 $ 66,654 $ 37,789 ======== ======== ========
34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years ended September 30, 1996, 1995 and the period from October 26, 1993 to September 30, 1994 (Expressed in thousands of United States Dollars, except share and per share data) 9. RESERVE FOR LOSSES AND LOSS EXPENSES (CONTINUED) The amounts incurred in respect of prior year losses in 1996 relate primarily to Hurricanes Luis and Marilyn which occurred in September 1995. Additional information reported by ceding companies in the months following the losses necessitated additional reserving. This impact has been mitigated by the collection of additional reinstatement premiums. In respect of 1995, additional losses of $5.7 million (gross of reinstatements of approximately $1.1 million) related to development on the Northridge, California earthquake, reflecting an increase in the market estimates of anticipated total insured loss. 10. 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 enters 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, 1996, the Company had a notional principal amount outstanding of approximately $25,192 (1995: $6,129) 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) (1995: $(136)). A loss of $294 (1995: $756; 1994: $Nil) is included in the Statements of Operations in respect of these contracts. Foreign exchange contracts at September 30, 1996 generally have maturities of six months or less and relate to major Western currencies. Counterparties to the transactions are large financial institutions. Although the Company is exposed to credit loss in the event of non-performance by other parties in the contracts, such non-performance is not anticipated. 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 the balance sheet date. 11. CREDIT FACILITY On December 1, 1995, the Company obtained a five year, $100 million committed line of credit from a syndicate of banks, maturing on December 1, 2000. The proceeds from the 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 is secured by a pledge ("legal mortgage") of all of 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, 1996, the facility had not been utilized. The credit facility contains various covenants, including: limitations on incurring additional indebtedness; prohibition of dividend payments that would cause the Company's tangible net worth, defined as total shareholders' equity and minority interest, to fall below $350 million in calendar 1996, $375 million in calendar years 1997 and 1998 and thereafter $400 million; restriction of dividends to a maximum of 50% of the consolidated net income 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 $250 million or 70% of net premiums 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years ended September 30, 1996, 1995 and the period from October 26, 1993 to September 30, 1994 (Expressed in thousands of United States Dollars, except share and per share data) 11. CREDIT FACILITY (CONTINUED) written; maintenance of statutory capital at the end of each fiscal year of at least $250 million; and maintenance of a ratio of net premiums written to statutory capital at the end of any fiscal quarter of no more than 1.00 to 1.00 in each case. At September 30, 1996, the Company was in compliance with all covenants under the facility. 12. 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, 1996 was approximately $476,000 (1995: $391,000) and the minimum required statutory capital and surplus required by its license as a Class 4 insurer, was approximately $100,000 (1995: $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, 1996, there were no restrictions on distribution of retained earnings. 13. SEGMENTAL INFORMATION The following table sets forth the Company's net premiums written and the percentage thereof allocated to the zone of exposure for the years ended September 30, 1996 and 1995 and the period ended September 30, 1994:
1996 1995 1994 PREMIUMS PREMIUMS PREMIUMS WRITTEN % WRITTEN % WRITTEN % United States $ 79,357 41.7% $ 91,561 45.4% $ 67,176 50.4% Europe (excluding the U.K.) 21,959 11.6 21,041 10.4 18,147 13.6 United Kingdom 16,310 8.6 14,089 7.0 8,724 6.5 Japan 7,998 4.2 7,642 3.8 4,896 3.7 Australasia 11,038 5.8 9,756 4.8 4,510 3.4 Worldwide 22,049 11.6 26,893 13.3 7,920 5.9 Worldwide (excluding U.S.) 11,451 6.0 8,789 4.4 6,441 4.8 Other 16,433 8.6 16,128 8.0 7,241 5.5 Reinstatements and adjustment premiums 3,556 1.9 6,017 2.9 8,272 6.2 -------- -------- -------- -------- -------- -------- $190,151 100.0% $201,916 100.0% $133,327 100.0% ======== ======== ======== ======== ======== ========
36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years ended September 30, 1996, 1995 and the period from October 26, 1993 to September 30, 1994 (Expressed in thousands of United States Dollars, except share and per share data) 14. 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. 15. UNAUDITED QUARTERLY FINANCIAL DATA
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 losses) 6,204 6,399 6,789 7,036 Losses and loss expenses incurred 15,882 18,354 9,954 7,287 Net income 29,400 31,332 40,818 27,901 Net income per share $ 1.23 $ 1.31 $ 1.70 $ 1.16
YEAR ENDED SEPTEMBER 30, 1995 FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER Net premiums earned $28,683 $45,344 $48,758 $47,585 Net investment income (net of realized losses) 5,585 6,126 6,349 7,006 Losses and loss expenses incurred 591 13,462 10,488 35,856 Net income 28,264 31,154 35,320 9,710 Net income per share $ 1.22 $ 1.34 $ 1.49 $ 0.41
16. SUBSEQUENT EVENTS On November 25, 1996, the Company filed a registration statement with the Securities and Exchange Commission, with 3,400,000 common shares, par value $1.00 being offered for sale. The Company will not receive any proceeds from the sale, as the common shares are being sold by certain founding shareholders. In addition, 510,000 common shares may be sold if the over- allotment option granted by the selling shareholders to the Underwriters is exercised. 37 INDEPENDENT AUDITORS' REPORT [LETTERHEAD OF KPMG PEAT MARWICK] THE BOARD OF DIRECTORS AND SHAREHOLDERS OF LASALLE RE HOLDINGS LIMITED We have audited the accompanying consolidated balance sheets of LaSalle Re Holdings Limited as at September 30, 1996 and 1995 and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the years ended September 30, 1996 and 1995 and the period from October 26, 1993 (date of incorporation) to September 30, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with United States 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 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 its subsidiaries as at September 30, 1996 and 1995 and the results of their operations, and their cash flows for the years ended September 30, 1996 and 1995 and the period from October 26, 1993 (date of incorporation) to September 30, 1994 in conformity with United States generally accepted accounting principles. /s/ KPMG Peat Marwick KPMG PEAT MARWICK CHARTERED ACCOUNTANTS HAMILTON, BERMUDA OCTOBER 19, 1996 38 FINANCIAL AND INVESTOR INFORMATION THE COMPANY WILL PROVIDE, WITHOUT CHARGE, TO ANY PERSON UPON WRITTEN REQUEST A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K (OTHER THAN EXHIBITS, WHICH WILL BE FURNISHED UPON PAYMENT OF A FEE). For general information about the Company or copies of the Annual Report, quarterly earnings releases and forms 10-K and 10-Q, please contact: DIANE NEWMAN Investor Relations Manager LaSalle Re Holdings Limited P.O. Box HM 1502 Hamilton HM FX Bermuda Telephone: (441) 292 3339 Facsimile: (441) 292 1501 STOCK EXCHANGE LISTING The Company's common stock trades on the Nasdaq Stock Market under the symbol LSREF. SHARE PRICE INFORMATION The following table sets forth for the periods indicated, the high, low and closing sale prices of the Company's common shares: FISCAL YEAR ENDED SEPTEMBER 30, 1996 HIGH LOW CLOSE First Quarter* $23 1/4 $19 1/2 $22 7/8 Second Quarter $23 5/8 $21 $21 1/2 Third Quarter $22 3/4 $19 3/4 $22 1/2 Fourth Quarter $25 1/2 $21 $23 1/2 *Period from November 21 - December 31, 1995 TRANSFER AGENT AND REGISTRAR Shareholders seeking information regarding the registration of their shares, a change of address and other administrative share matters should contact the Transfer Agent and Registrar as follows: FIRST CHICAGO TRUST COMPANY OF NEW YORK Mail Suite 4690 P.O. Box 2532 Jersey City New Jersey 07303-2532 Telephone: (201) 222 4234 Facsimile: (201) 222 4248 39 DIRECTORS & OFFICERS BOARD OF DIRECTORS VICTOR H. BLAKE (1, 4) Chairman, President & Chief Executive Officer LaSalle Re Holdings Limited WILLIAM J. ADAMSON, JR. (1, 2, 4, 5) Chief Executive Officer CNA Reinsurance Group ANDREW AFRICK Apollo Advisors, L.P. IVAN BERK (4, 5) Executive Director Aon Advisors, Inc. JOSEPH HAVIV (3) Vice President EXOR America, Inc. JONATHAN H. KAGAN (1, 2) Managing Director Corporate Advisors, L.P. DONALD P. KOZIOL, JR. (1) Executive Vice President Aon Risk Services PETER J. RACKLEY (1, 2, 3) Chairman Western International Financial Group Ltd. SCOTT A. SCHOEN (2, 3, 4) Managing Director Thomas H. Lee Company HARVEY G. SIMONS Executive Vice President CNA International Reinsurance Company Limited DAVID A. STOCKMAN (1) Senior Managing Director Blackstone Group Holdings, L.L.C. PAUL J. ZEPF (1, 4) Principal Corporate Advisors, L.P. 1. Underwriting/Actuarial Committee 2. Audit Committee 3. Compensation Committee 4. Investment Committee 5. Nominating Committee OFFICERS VICTOR H. BLAKE Chairman, President & Chief Executive Officer WILLIAM J. ADAMSON, JR. Deputy Chairman GUY D. HENGESBAUGH Executive Vice President & Chief Underwriter ANDREW COOK Chief Financial Officer & Treasurer TERRY J. ALFUTH Senior Vice President, Actuarial/Claims & Information Systems STEVEN GIVEN Controller T. W. TUCKER HALL Secretary SENIOR STAFF ROB LEE WOMACK, JR. Vice President & Underwriter U.S. Business GRAHAM WAITE Vice President & Underwriter International Business MARK STOCKTON Vice President & Underwriter International Business GLENN CLINTON Manager Underwriting Support Services JONATHAN GOFF Manager LaSalle Re (Services) Ltd., London CLARE MORAN Manager Financial Reporting 40 COMPANY INFORMATION COMPANY OFFICES HEAD OFFICE LaSalle Re Holdings Limited Continental Building 25 Church Street Hamilton HM 12 P.O. Box HM 1502 Hamilton HM FX Bermuda Telephone: (441) 292 3339 Facsimile: (441) 292 2656 LONDON CONTACT OFFICE Jonathan Goff LaSalle Re (Services) Ltd. London Underwriting Centre Lower Ground Floor, Suite 2 3 Minster Court Mincing Lane London EC3R 7DD United Kingdom Telephone: (071) 617 6079 Facsimile: (071) 617 6074 AUDITORS KPMG Peat Marwick Vallis Building P.O. Box HM 906 Hamilton HM DX Bermuda LEGAL COUNSEL U.S. COUNSEL Mayer, Brown & Platt 190 South LaSalle Street Chicago Illinois 60603-3441 USA Telephone: 312 701 7007 Facsimile: 312 701 7711 BERMUDA COUNSEL Conyers, Dill & Pearman Clarendon House Church Street Hamilton HM DX Bermuda SECRETARY T. W. Tucker Hall Codan Services Limited P.O. Box HM 1022 Clarendon House Church Street Hamilton HM DX Bermuda Telephone: (441) 295 1422 Facsimile: (441) 292 4720 or 3799 41 -----END PRIVACY-ENHANCED MESSAGE-----