-----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, BuVce39evd2JpRkfBkYZObsUOas/O11rw5Pc9GbnreS7wubooZwmNJbdmJD2xGaH U+Jksk8w+4dT2d+o7ELjYA== 0000950131-97-007222.txt : 19971212 0000950131-97-007222.hdr.sgml : 19971212 ACCESSION NUMBER: 0000950131-97-007222 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971211 SROS: NYSE 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: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12823 FILM NUMBER: 97736192 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 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1997 COMMISSION FILE NUMBER 1-12823 LASALLE RE HOLDINGS LIMITED (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) BERMUDA NOT APPLICABLE (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) CONTINENTAL BUILDING, 25 CHURCH STREET, HAMILTON HM 12, BERMUDA (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) TELEPHONE NUMBER: 441-292-3339 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED - ------------------- ----------------------------------------- Common Shares, par value $1.00 per share The New York Stock Exchange, Inc. Series A Preferred Shares, par value $1.00 per share The New York Stock Exchange, Inc.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [_] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((S) 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the shares of all classes of voting stock of the registrant held by non-affiliates of the registrant on December 1, 1997 was approximately $360,544,414, computed upon the basis of the closing sales price of the Common Shares on that date. For the purposes of this computation, shares held by directors (and shares held by any entities in which they serve as officers) and officers of the registrant have been excluded. Such exclusion is not intended, nor shall it be deemed, to be an admission that such persons are affiliates of the registrant. As of December 1, 1997, there were outstanding 15,084,396 Common Shares of $1.00 par value, of the registrant. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the registrant's annual report to shareholders for the fiscal year ended September 30, 1997 (the "1997 Annual Report"). 2. Portions of the registrant's definitive proxy statement (the "1998 Proxy Statement") to be filed with the Securities and Exchange Commission not later than 120 days after the end of the Registrant's fiscal year pursuant to Regulation 14A relating to the Annual General Meeting of Shareholders scheduled to be held on February 26, 1998. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- LASALLE RE HOLDINGS LIMITED TABLE OF CONTENTS
ITEM PAGE NUMBER ---- ----------- PART I 1. BUSINESS.................................................... 10K-2 2. PROPERTIES.................................................. 10K-17 3. LEGAL PROCEEDINGS........................................... 10K-17 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 10K-17 EXECUTIVE OFFICERS OF THE COMPANY........................... 10K-17 PART II 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS........................................ 10K-18 6. SELECTED FINANCIAL DATA..................................... 10K-19 7. MANAGEMENTS' DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION......................... 10K-19 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 10K-26 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................................... 10K-49 PART III 10. DIRECTORS AND EXECUTIVE OFFICERS............................ 10K-49 11. EXECUTIVE COMPENSATION...................................... 10K-49 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................. 10K-49 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 10K-49 PART IV 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K................................................... 10K-49
10K-1 PART I Unless the context otherwise requires, references herein to the "Company" include LaSalle Re Holdings Limited and its subsidiary, LaSalle Re Limited ("LaSalle Re"), and its subsidiaries LaSalle Re Corporate Capital Ltd. ("LaSalle Re Capital") and LaSalle Re (Services) Limited ("LaSalle Re Services"). NOTE ON FORWARD-LOOKING STATEMENTS This report contains certain forward-looking statements within the meaning of Section 27A of the United States Securities Act of 1933, as amended, and Section 21E of the United States Securities Exchange Act of 1934, as amended. Forward-looking statements are statements other than historical information or statements of current condition. Some forward-looking statements may be identified by use of terms such as "believes", "anticipates", "intends", or "expects". These statements relate to the plans of the Company for future operations, including the dividend policy pursuant to which the Company intends to distribute as dividends to holders of common shares of the Company ("Common Shares") and exchangeable non-voting shares of LaSalle Re ("Exchangeable Non-Voting Shares") in each fiscal year 50% to 60% of the amount by which its net income (before minority interest) from the prior fiscal year exceeds the amount of dividends payable on preferred shares of the Company in the current fiscal year. In light of the risks and uncertainties inherent in all future projections, these statements should not be regarded as a representation that the objectives will be achieved. Many factors could cause actual results to differ materially from those in the forward-looking statements, including, but not limited, to the following: catastrophic events of unanticipated frequency or severity; changes in the demand for or supply of property catastrophe reinsurance; actions of competitors; changes in the Company's financial ratings; changes in insurance or tax laws or regulations or governmental interpretations thereof; changes in foreign economic conditions including currency rate fluctuations; a major decrease in the cession of business from CNA Financial Corporation ("CNA"); or the termination of the Underwriting Services Agreement (as defined below) with an affiliate of CNA. The Company undertakes no obligation to release publicly the results of any future revisions it may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. ITEM 1. BUSINESS GENERAL DEVELOPMENT OF THE BUSINESS The Company is a property and casualty reinsurer writing worldwide specialist products with an emphasis on catastrophe cover. Catastrophe reinsurance contracts cover unpredictable events such as hurricanes, windstorms, hailstorms, earthquakes, fires, industrial explosions, freezes, riots, floods and other man-made or natural disasters. The Company also seeks to take advantage of pricing opportunities that may occur in other lines of reinsurance. These lines currently include property risk excess, property pro rata treaty, casualty clash, marine, crop hail, aviation and satellite. LaSalle Re was incorporated in Bermuda in October 1993 with an initial capitalization of $373.1 million from institutional and other investors (the "Founding Shareholders"). It commenced operations on November 22, 1993. LaSalle Re Holdings Limited was incorporated in Bermuda in September 1995 to act as an investment holding company for LaSalle Re. LaSalle Re has two wholly owned subsidiaries, LaSalle Re Services, which acts as a representative office for the Company in the United Kingdom, and LaSalle Re Capital, which was incorporated in Bermuda in November 1996 to provide capital support to selected syndicates at Lloyd's. LaSalle Re Capital was accepted as a corporate member ("Corporate Member") of Lloyd's in December 1996 and, with effect from January 1, 1997, has participated in three Lloyd's syndicates. In November 1995, the Company and LaSalle Re consummated an offer (the "Exchange Offer") pursuant to which, among other things, the Founding Shareholders exchanged their capital stock in LaSalle Re for 10K-2 Common Shares of the Company and, in certain circumstances, Exchangeable Non- Voting Shares of LaSalle Re. The Exchangeable Non-Voting Shares are held by certain Founding Shareholders who would otherwise hold, or cause another shareholder to hold, directly, indirectly or constructively, in excess of 9.9% of the voting power of the Company or LaSalle Re. The Exchangeable Non-Voting Shares are exchangeable, at the option of the holder, for Common Shares on a one-for-one basis, unless the board of directors of the Company (the "Board") determines such exchange may cause actual or potential adverse tax consequences to the Company or any shareholder. The Exchangeable Non-Voting Shares will at all times rank as to assets, dividends and in all other respects on a parity with the common shares of LaSalle Re, except that they do not have the right to vote on any matters except as required by Bermuda law and in connection with certain actions by the Company. In November 1995, the Company and certain Founding Shareholders also consummated an initial public offering of 4,312,500 Common Shares (the "Initial Public Offering"). Of these shares, 2,920,500 were sold by Founding Shareholders and 1,392,000 by the Company. The proceeds from the sale of the 1,392,000 shares sold by the Company were used to enable LaSalle Re to redeem shares of its capital stock (the "Redemption"). Upon the consummation of the Exchange Offer, the Initial Public Offering and the Redemption, the Company owned 100% of the outstanding voting stock, which constituted 63% of the outstanding capital stock of LaSalle Re. In December 1996, the Company completed a secondary offering of Common Shares (the "Secondary Offering"). In connection with the Secondary Offering, certain Founding Shareholders of LaSalle Re exchanged 2,119,110 of their Exchangeable Non-Voting Shares for Common Shares. As a result of this exchange, the Company increased its ownership of the outstanding capital stock of LaSalle Re from 63% to 73%. In March 1997, the Company issued 3,000,000 Series A Preferred Shares in a public offering (the "Preferred Offering"). The Series A Preferred Shares, par value $1.00 per share, carry a liquidation preference of $25.00 per share, plus accrued and unpaid dividends, if any, to the date of liquidation. Dividends on the Series A Preferred Shares are payable in an amount per share equal to 8.75% of the liquidation preference per annum (equivalent to $2.1875 per share). Net proceeds from the Preferred Offering after underwriting discounts and commissions were $72.6 million. In May 1997, the Company completed a $100 million tender offer (the "Tender Offer") whereby it purchased for cancellation 3,703,703 of its Common Shares at a price of $27.00 per share. The Tender Offer was made to all holders of Common Shares and Common Share equivalents, which included Exchangeable Non-Voting Shares and options to purchase Common Shares and Exchangeable Non-Voting Shares. Pursuant to the Tender Offer, 2,163,538 Exchangeable Non-Voting Shares were exchanged for Common Shares and 95,679 options for Exchangeable Non-Voting Shares were exercised and exchanged for Common Shares. As a result of these exchanges, the Company increased its ownership of the outstanding capital stock of LaSalle Re from 73% to 79%. The Company has continually owned 100% of the outstanding voting stock of LaSalle Re. In order to reduce its earnings volatility, protect its capital base and support its dividend policy, the Company purchased a multi-year excess of loss reinsurance program effective January 1, 1997. The program is event based, providing up to $100 million of coverage in excess of the first $100 million of losses for the first loss occurrence and $100 million of coverage in excess of the first $150 million of losses for the second loss occurrence, with a $200 million aggregate coverage limit over a three-year period. The attachment point is triggered by losses incurred directly by the Company. If and when the first loss is triggered, the Company is required to accrue a reinstatement premium and additional premiums will be payable in years 2 and 3 of the contract. The Company has accounted for the first loss portion of the coverage as a deposit in accordance with Statement of Financial Accounting Standard ("SFAS") 113. If and when a second loss occurs, the Company will be required to pay a one-time additional premium equal to 35% of any losses that are covered by the second loss event portion of the coverage. If no losses occur, the contract can be canceled after the first year with significant return premiums accruing to the Company. The reinsurance is provided by a company that currently holds a rating of "A+" (Superior) from A.M. Best Company, Inc. ("A.M. Best") and a claims- paying rating of "AA" (Excellent) from Standard & Poor's Rating Services ("S&P"). 10K-3 Effective July 1, 1997, the Company entered into a $100 million multi-year Catastrophe Equity Put ("CatEPut") option program. The CatEPut option will enable the Company to put up to $100 million of equity, through the issue of convertible preferred shares at pre-negotiated terms, in the event of a major catastrophe or series of large catastrophes that cause substantial losses to the Company or its subsidiaries. With effect from October 1, 1997, the administrative services agreement ("Administrative Services Agreement"), under which Aon Risk Consultants (Bermuda) Limited ("ARC") provided the Company with actuarial and financial reporting, accounting, office space and other administrative services, was terminated. All of the personnel assigned to the Company by ARC have become employees of the Company and services performed by ARC have been assumed by the Company. In connection with the termination of the agreement the Company agreed to purchase all of the fixed assets owned by ARC and utilized by the Company for a purchase price of $1.5 million. In addition, the Company agreed to assume the current leasing agreements. BUSINESS SEGMENTS The Company writes property and casualty reinsurance on a worldwide basis through its subsidiary, LaSalle Re. The Company also writes selected other lines of reinsurance when it believes that market conditions are favorable. These lines currently include property risk excess, property pro rata treaty, casualty clash, marine, crop hail, aviation, satellite and political risk. The following table sets forth the Company's net premiums written and number of contracts written by type of reinsurance for the years indicated (dollars in millions):
YEAR ENDED YEAR ENDED SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 ---------------------- ---------------------- NET PREMIUMS NUMBER OF NET PREMIUMS NUMBER OF TYPE OF REINSURANCE WRITTEN CONTRACTS WRITTEN CONTRACTS - ------------------- ------------ --------- ------------ --------- Property catastrophe reinsurance: Excess of loss................. $110.4 802 $122.4 832 Pro rata....................... 34.4 10 42.2 10 Other lines of business: LaSalle Re Capital............. 14.1 -- 0.0 -- Property--risk excess and pro rata.......................... 9.0 80 9.7 70 Casualty clash................. 4.0 36 3.0 30 Marine......................... 3.7 23 4.6 17 Miscellaneous.................. 6.1 49 4.8 36 Adjustments, reinstatement premiums and no claims bonuses.. (10.3) -- 3.5 -- ------ ----- ------ --- Total........................ $171.4 1,000 $190.2 995 ====== ===== ====== ===
Property Catastrophe The largest portion of the Company's business consists of property catastrophe excess of loss contracts. Property catastrophe excess of loss reinsurance provides coverage when total losses and loss expenses from a single occurrence of a covered peril under a portfolio of primary reinsurance contracts exceed the attachment point specified in the reinsurance contract with the primary insurer. Some of the Company's property catastrophe excess of loss policies limit coverage to one occurrence in a policy year, but most policies provide for coverage of a second occurrence after the payment of a reinstatement premium. The Company also writes a minimal amount of aggregate property catastrophe excess of loss contracts that cover more than one catastrophe with one attachment point. The Company writes pro rata of property catastrophe reinsurance treaties when it believes that rates and volume are attractive. In such programs, the Company assumes a specified proportion of the exposure under a portfolio of excess of loss property catastrophe reinsurance contracts written by the ceding reinsurer and receives 10K-4 an equal proportion of the premium received by the cedent. The cedent generally receives a ceding commission, based upon the premiums ceded to the reinsurer, and may also be entitled to receive a profit commission based on the ratio of losses, loss expenses and the reinsurer's expenses to premiums ceded. The Company generally requires that its pro rata of property catastrophe contracts have aggregate exposure limits per occurrence on a zonal basis. The Company generally obtains detailed information concerning each underlying contract and the exposures underlying the risks it assumes and, as appropriate, audits the premiums associated with the cessions. However, the Company is dependent upon the cedent's underwriting, pricing and claims administration to yield an underwriting profit. Other Lines of Business The Company formed LaSalle Re Capital to provide capital support to selected Lloyd's syndicates. Effective January 1, 1997, the Company provided an aggregate of approximately $25 million of capital support to three syndicates. These syndicates individually write the following lines of business: direct and facultative property insurance; marine insurance and reinsurance; and professional indemnity, directors and officers' insurance and bankers blanket bond business. LaSalle Re Capital provides capital support to the syndicates through letters of credit totaling (Pounds)9.8 million ($16.0 million). The Company's property risk excess of loss contracts cover a cedent's loss on a single "risk" in excess of the cedent's attachment point, rather than covering multiple risks as does property catastrophe reinsurance. A "risk" in this context might mean the insurance coverage on one building or a group of buildings or the insurance coverage under a single policy, which the reinsured treats as a single risk. In property pro rata reinsurance treaties, the Company assumes a proportional part of the original premiums and losses of the reinsured on non-catastrophe reinsurance contracts. In property pro rata reinsurance, the reinsurer generally pays the ceding company a ceding commission. The ceding commission generally is based on the ceding company's cost of acquiring the business being reinsured (including commissions, premium taxes, assessments and miscellaneous administrative expense) and also may include a profit factor. In addition to property risk excess of loss and pro rata, the Company also writes other lines of reinsurance, which currently include casualty clash, marine, crop hail, aviation, satellite and political risk. Casualty clash reinsurance protects cedents against an aggregation of casualty losses incurred by multiple insureds from a single event. In addition to aggregation of losses, casualty clash coverage protects a reinsured against a single extraordinary loss caused by a judgment in excess of the original policy limit issued (including punitive damages) or an action by an original insured against the insurer for "bad faith" handling of a claim (extra-contractual obligations). Marine and aviation risks involve property damage, although they may also involve casualty coverages arising from the same event causing the property claims. Crop hail reinsurance provides property coverage for hail damage to crops. Satellite reinsurance protects the reinsured primarily from losses relating to launches, improper orbits and other losses in the early stages of the satellite's life. Political risk includes coverage for losses arising from contract frustration, confiscation, repatriation and international trade credit business. Adjustment premiums, reinstatement premiums and no claims bonuses Due to the changing nature of a reinsurer's exposure under an excess of loss contract, certain contracts contain adjustable premium clauses. The reinsurer receives an initial deposit premium, with the final premium calculated at the end of the contract period using a pre-negotiated percentage of the ceding company's gross net annual premium income. The adjustment premium is the difference between the initial deposit and the revised premium and can be either an additional or return premium. In addition, the Company experiences adjustment premiums on its pro rata of property catastrophe reinsurance treaties. The Company estimates premiums written using reports received from ceding companies, which estimates are revised during the contract period as more information as to actual premiums written by the ceding companies is received. Any differences between the estimate and the revised information is booked as an adjustment during the period the revised information is received. Certain excess of loss contracts contain a no claims bonus clause. Where no claim is made under the contract, the ceding company is entitled to a pre- determined return premium, which is referred to as a "no claims bonus". 10K-5 Geographic Diversification The Company seeks to diversify its property catastrophe exposures across geographic zones in order to optimize its spread of risk. For the year ended September 30, 1997, excluding the premiums written by LaSalle Re Capital, adjustment premiums, reinstatement premiums and no claims bonuses, 45% of the Company's net premiums written represented U.S.-based risks. Within the United States, the Company's largest exposure on a zonal basis is the West Coast, including Hawaii and Alaska. The remaining 55% of net premiums written was spread in other territories around the world. This distribution of risk is subject to change and is dependent upon rates available in various zones. As a result of long-term relationships between the Company's management and certain clients and brokers, the Company has developed a strong base of regional business in the U.S. This business assists the Company in diversifying its U.S.-based risks and makes more efficient use of its capital by limiting multi-zone exposures. In the year ended September 30, 1997, this regional business represented a significant component of the Company's U.S.-based net premiums written. The following table sets forth the percentage of the Company's net premiums written allocated to the zone of exposure at the dates indicated (dollars in millions):
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 ------------------- ------------------- PERCENTAGE PERCENTAGE NET OF NET NET OF NET PREMIUMS PREMIUMS PREMIUMS PREMIUMS GEOGRAPHIC AREA WRITTEN WRITTEN WRITTEN WRITTEN - --------------- -------- ---------- -------- ---------- United States.......................... $ 75.3 44.9% $ 79.4 42.5% Europe (excluding the U.K.)............ 18.6 11.1 22.0 11.8 United Kingdom......................... 15.2 9.1 16.3 8.7 Japan.................................. 7.0 4.2 8.0 4.3 Australasia............................ 6.4 3.8 11.0 5.9 Worldwide(1)........................... 20.9 12.5 22.0 11.8 Worldwide (excluding the U.S.)(2)...... 12.6 7.5 11.5 6.2 Other.................................. 11.6 6.9 16.5 8.8 ------ ----- ------ ----- 167.6 100.0% 186.7 100.0% ===== ===== LaSalle Re Corporate Capital........... 14.1 Adjustments, reinstatement premiums and no claims bonuses..................... (10.3) 3.5 ------ ------ Total.............................. $171.4 $190.2 ====== ======
- -------- (1) The category "Worldwide" consists of contracts that cover more than one zone. The exposure in this category could include business written in the U.S. (2) The category "Worldwide (excluding the U.S.)" consists of contracts that cover more than one zone (none of which is in the U.S.). The exposure in this category for business written to date is predominantly from Europe and Japan. Program Limits The following table sets forth the number of the Company's property catastrophe excess of loss programs written in the year ended September 30, 1997 by aggregate excess of loss program limits:
NUMBER OF PROGRAMS --------- Greater than $15 million but less than $20 million.............. 2 $10-15 million.................................................. 19 $7.5-10 million................................................. 25 $5-7.5 million.................................................. 43 $2.5-5 million.................................................. 66 Less than $2.5 million.......................................... 212 --- Total....................................................... 367 ===
10K-6 UNDERWRITING The Company's principal underwriting strategy is to underwrite property catastrophe exposures within clearly defined parameters that permit thorough analysis and appropriate pricing of each of the Company's reinsurance contracts. Underwriting decisions are made following analysis of each reinsurance contract based on the expected incremental return on equity in relation to the Company's overall portfolio of reinsurance contracts. The Underwriting/Actuarial Committee of the Board has set limits on the Company's aggregate exposure. The Company uses various methods to evaluate and monitor its exposure to loss. The Company diversifies its property catastrophe exposures worldwide and within each geographic zone and also maintains exposure limits within each geographic zone. Aggregate exposures also are controlled and monitored on a real-time basis using computer-based rating and control systems. The Company imposes attachment points in its contracts at a level that is expected to exceed frequency of loss and limits aggregate risk exposure. In addition, the Company regularly reevaluates its pricing to ensure that general market conditions remain attractive. The Company obtains information from brokers, potential cedents and other sources, as appropriate, in order to make informed underwriting decisions. A potential cedent generally is not accepted without a thorough examination of its historical record, management, business strategy, underwriting policies and risk management systems. The Company also seeks to select clients with disciplined catastrophe management programs. The Company seeks to build long- term relationships with its clients because the Company believes that it can underwrite renewal business with greater precision. The Company uses computer-based modeling systems to estimate exposure to loss and evaluate pricing adequacy of its reinsurance programs. These models are also used in the analysis of projected return on equity and the monitoring of aggregate exposures within geographic zones. For U.S.-based risks, the Company has developed a proprietary model called L-CAM(TM) (LaSalle Catastrophe Analysis Model). L-CAM(TM) incorporates commercially available catastrophe simulation models and the Company's internally-generated models. The commercially available models include (i) CATMAP(TM), which uses market share data derived from zip code and/or country aggregate data to develop individual contract and portfolio loss statistics and (ii) IRAS(TM), which derives loss statistics based on hypothetical risk location determined from the most detailed information provided by the primary insurer. Models developed by the Company and used in L-CAM(TM) include (i) the Modified Historical Event Model, which fits a Pareto loss distribution to over 45 years of catastrophe loss data, adjusted for inflation and demographic shifts, (ii) the Market Loss Pricing Model, which uses underwriting-zone market share information to develop attachment and exhaustion probabilities from which pricing input is determined, and (iii) the Industry Peer Model, which is a portfolio management tool selecting treaties in force with similar characteristics for pricing considerations. For non-U.S. based property catastrophe risks, the Company uses modeling techniques which incorporate Pareto loss distributions with exposure rating based on aggregate liabilities per geographic zone. The Company also examines experience ratings of adjusted historical loss events and, for some non-U.S. territories, uses a commercially available software program produced by EQECAT International, which utilizes probabilistic and deterministic loss calculations. For the other lines of reinsurance, the Company uses internal rating techniques that incorporate, among other things, exposure and experience ratings and thorough analysis of loss ratios and underwriting expenses associated with the business to be reinsured. The Company carefully structures the terms and conditions of its contracts to restrict coverage to the specific perils intended. The results of these analyses are measured against the Company's current portfolio and other known treaties in the market and combined with management's knowledge of the client and the current reinsurance market environment. Pricing and participation decisions are then made based on the estimated exposure of losses and the potential impact of each contract on incremental return on equity. 10K-7 Underwriting services are provided to the Company by CNA (Bermuda) Services Ltd. ("CNA Bermuda") pursuant to an underwriting services agreement (the "Underwriting Services Agreement"). A staff of eight professionals with extensive experience in the reinsurance industry currently serve as the Company's underwriting team in Bermuda. The Company also has access to the reinsurance expertise of CNA in terms of underwriting databases and technology, a staff of specialized professionals and a worldwide network of contacts in the reinsurance market. In addition, the underwriting of all new exposures is reviewed by the Chief Executive Officer or Chief Operating Officer of the Company. REINSURANCE PROTECTIONS PURCHASED Reinsurance premiums ceded are primarily in respect of a multi-year excess of loss reinsurance program purchased by the Company, and various reinsurance protections purchased by LaSalle Re Capital. The excess of loss program provides coverage of $100 million per occurrence in excess of the first $100 million of losses for a first loss event and $100 million excess of $150 million per occurrence on the second loss event for the three-year period ended December 31, 1999, subject to a maximum aggregate recovery of $200 million. The Company may participate on a co-insurance basis for the second loss event. Coverage for the first loss is substantially funded by way of annual and reinstatement premium obligations. Accordingly, this portion of the coverage has been recorded as a financing arrangement whereby the consideration paid, net of associated financing charges, is recorded as a deposit and included as part of other assets in the consolidated balance sheet. The deposit asset is adjusted at the balance sheet date to reflect the net present value of expected future cash flows under that portion of the contract. The Company is required to pay an additional reinsurance premium equal to 35% of any losses that are covered by the second loss event portion of the coverage. The reinsurance is provided by a company that currently holds a rating of "A+" (Superior) from A.M. Best Company, Inc. and a claims-paying rating of "AA" (Excellent) from Standard & Poor's Rating Services. MARKETING The Company markets its reinsurance products worldwide primarily through reinsurance brokers. By marketing its products primarily through the broker network, the Company limits the expense of establishing and maintaining worldwide offices and marketing operations. The Company believes that its broker relationships permit it to obtain business and monitor developments in various lines of reinsurance in order to increase its writings when market conditions in those lines are favorable. The Company maintains an office in London, England through LaSalle Re Services. LaSalle Re Services introduces prospective customers to the Company and provides an important liaison with brokers in the London market, assisting in the distribution of marketing literature and collecting information for LaSalle Re on demand and developments in the London reinsurance market generally. In addition, LaSalle Re Services plays a key role in the Company's marketing efforts in Europe. The Company strives to develop strong relationships with its brokers and clients. Retention of clients permits the Company to use experience regarding a client's underwriting practices and risk management systems to underwrite its own business with greater precision. The Company also targets brokers and clients that it believes will enhance the risk/return composition of its portfolio, are capable of supplying detailed and accurate underwriting data and can potentially add diversification to the Company's book of business. Additionally, the Company believes that its level of capital and surplus offers financial security and demonstrates to brokers and clients a high level of commitment to property catastrophe reinsurance. The Company focuses on providing high quality service by promptly responding to underwriting submissions, designing customized programs and offering lead terms when circumstances warrant and paying valid claims within an average of five days. The Company believes that it has established a reputation with its brokers and clients for high quality service. 10K-8 The Company received 2,344 contract submissions in the year ended September 30, 1997 as compared to 3,423 in the year ended September 30, 1996. This difference reflects a better understanding and a greater focus by brokers on the lines of business actually written by the Company. The Company is highly selective in accepting risks, extending coverage on only 1,000 (1996: 995 contracts), or 42.7% (1996: 29.1%) of the program submissions received, in the year ended September 30, 1997. Subsidiaries and affiliates of Aon Corporation (together with its affiliates, "Aon") were brokers for approximately 16.6% and 12.4% of the Company's gross written premiums in the years ended September 30, 1997 and 1996, respectively. Guy Carpenter & Company, Inc., together with its affiliates, generated 15.5% and 16.6% of the Company's gross premiums written for the years ended September 30, 1997 and 1996, respectively. E.W. Blanch accounted for 11.3% of the Company's gross written premiums for the year ended September 30, 1997. This percentage did not exceed 10% for the year ended September 30, 1996. No other broker accounted for more than 10% of the Company's gross premiums written for the years ended September 30, 1997 and 1996. Consistent with its emphasis on disciplined underwriting practices, the Company is not obligated to accept any business from any intermediary, including Aon, CNA or LaSalle Re Services. No intermediary has the authority to bind the Company on any business. RESERVES The Company establishes loss reserves for the ultimate settlement costs of all losses and loss expenses incurred with respect to business written by it. Generally accepted accounting principles ("GAAP") do not permit the Company to establish reserves with respect to its property catastrophe reinsurance until an event occurs that may give rise to a claim. As a result, only loss reserves applicable to losses incurred up to the reporting date may be set aside, with no allowance for the provision of a contingency reserve to account for expected future losses. The derivation of loss reserves involves the actuarial and statistical projection at any given time of the Company's expectations of the ultimate settlement of loss and loss expenses. These loss projections become necessary, in large part, as a result of time lags associated with reinsurance loss reporting. These lags are principally attributable both to claimant delays in reporting to the primary carrier as well as primary and reinsurance company delays in gathering statistics and subsequently reporting cession details to the Company. As a result, in addition to the loss estimates reported by primary insurers on known claims, actuarially projected estimates of reserves applicable to both the development (growth) of known claims as well as the emergence of new claims reports related to losses events which have been incurred but not reported ("IBNR losses") prior to the evaluation date must be developed. In addition to the impact of reporting lags upon the accuracy of estimated loss liabilities, other factors have significant impact upon the ultimate settlement of insured losses, including loss cost inflation, trends in the amount of insurance purchased to the full value of insured properties and trends in the size and demographics of insured populations. Loss reserve estimates are not precise in that they necessarily involve an attempt to predict the ultimate outcome of future loss reporting and settlement activities. To establish appropriate loss reserves, the Company uses a combination of data sources and commercially available catastrophe models. These models are employed upon the occurrence of an event to arrive at estimates of losses to the Company. In addition, grouped and individual contract data illustrating the loss development history for prior similar events, as well as actual loss emergence experience of the underlying insurers, are analyzed to assist in the determination of suitable loss reserves. The data derived from the industry sources, and supplemented with the client specific information, are then used to arrive at estimates of loss emergence patterns and initial estimates of ultimate loss rates. These parameters are then applied, on a contract-by- contract basis, to arrive at estimates of ultimate losses. These loss estimates are then supplemented with the results derived from the catastrophe models, and final loss estimates are selected and reduced for losses reported to the Company to arrive at IBNR losses as of the date of evaluation. The reserves for LaSalle Re Capital are separately derived from an analysis using expected loss ratios. The reserves are prepared quarterly by the Company's actuaries and reviewed by the executive officers and the Board of Directors of LaSalle Re, and to the extent they develop upward or downward, the results are 10K-9 reflected in the net income in the period in which the reserve deficiency or redundancy is evaluated. There can be no assurance that the final loss settlements will not exceed the Company's loss reserve and have a material adverse effect upon the Company's financial condition and results of operations in a particular period. Prior to October 1, 1997, the Company determined its reserves with the assistance of actuarial staff provided by ARC pursuant to the Administrative Services Agreement. INVESTMENTS Composition of Portfolio The Board has implemented a set of investment guidelines designed to meet the Company's liquidity requirements and return objectives. The guidelines are intended to be conservative, stressing preservation of principal, yield enhancement through the identification of value and market inefficiencies, market liquidity and risk reduction. The primary objective of the investment portfolio, as set forth in the guidelines, is to maximize investment returns consistent with these policies. The Company's investment guidelines are reviewed periodically and are subject to change at the discretion of the Board. The following table summarizes the composition of the Company's investment portfolio as of September 30, 1997 and 1996 (dollars in millions):
SEPTEMBER 30, -------------------------- 1997 1996 ------------ ------------ FAIR % OF FAIR % OF TYPE OF INVESTMENT VALUE TOTAL VALUE TOTAL - ------------------ ------ ----- ------ ----- Fixed maturities: Non-U.S. government bonds and agencies............ $ 71.8 13.0% $ 75.3 14.0% U.S. government bonds and agencies................ 88.4 16.0 90.1 16.8 Corporate bonds................................... 337.1 60.9 325.1 60.5 Other debt........................................ 1.0 0.2 0.0 0.0 ------ ----- ------ ----- Subtotal........................................ 498.3 90.1 490.5 91.3 Cash and cash equivalents......................... 54.8 9.9 47.0 8.7 ------ ----- ------ ----- Total cash and investments...................... $553.1 100.0% $537.5 100.0% ====== ===== ====== =====
Quality of Portfolio The Company has investment guidelines which restrict investments in securities below an "AA" grade rating to 20% of the total portfolio, and only 10% of the total portfolio can be invested in "BBB" grade rating. As of September 30, 1997, the 20% guideline relating to investments in securities below "AA" grade had been exceeded by 5.7%. Given the quality of the securities involved, the investment committee of the Board permitted the holding of these securities in the short term. As of October 31, 1997, the percentage of securities held with a grade below "AA" had been reduced to 20%. During the year, the Company amended the guidelines to allow up to $5 million to be invested in catastrophe bonds. These bonds may carry a rating below "BBB". In addition, the guidelines restrict investments in a single issuer to no greater than 5% of the market value of the portfolio (except for U.S. and U.K. Government issues) and, with respect to country of issue, to no greater than 25% of the market value of the portfolio, except for U.S. and supernational borrowers. 10K-10 The following table summarizes the composition of the Company's fixed maturity portfolio by rating as assigned by S&P or Moody's Investors Services Inc. ("Moody's") as of September 30, 1997 and 1996 (dollars in millions):
SEPTEMBER 30, -------------------------- 1997 1996 ------------ ------------ FAIR % OF FAIR % OF RATING VALUE TOTAL VALUE TOTAL - ------ ------ ----- ------ ----- AAA................................................. $215.3 43.2% $310.5 63.3% AA.................................................. 155.0 31.1 126.1 25.7 A................................................... 127.0 25.5 53.9 11.0 BB.................................................. 1.0 0.2 0.0 0.0 ------ ----- ------ ----- $498.3 100.0% $490.5 100.0% ====== ===== ====== =====
Maturity and Duration of Portfolio The Company's investment guidelines specify a one to four year duration for the Company's investment portfolio, reflecting the need to maintain a liquid, short duration portfolio to assure the Company's ability to pay claims on a timely basis. The Company currently has a target duration for the portfolio of three years and at September 30, 1997, the modified average duration of the portfolio was 2.76 years. The Company expects to periodically reevaluate the target duration in light of market conditions, including the level of interest rates, and estimates of the duration of its liabilities. The following table summarizes the contractual maturities of the Company's fixed maturity portfolio as of September 30, 1997 and 1996 (dollars in millions):
SEPTEMBER 30, -------------------------- 1997 1996 ------------ ------------ FAIR % OF FAIR % OF VALUE TOTAL VALUE TOTAL ------ ----- ------ ----- Due in less than one year........................... $ 55.2 11.1% $ 99.8 20.4% Due in one to five years............................ 381.9 76.6 331.8 67.6 Due in five to ten years............................ 61.2 12.3 58.9 12.0 ------ ----- ------ ----- $498.3 100.0% $490.5 100.0% ====== ===== ====== =====
Equity Securities/Real Estate Pursuant to the Company's investment guidelines, the Company's investment portfolio may not contain any direct investments in real estate, mortgage loans or equity securities. Foreign Currency Exposures At present, the Company's fixed maturity portfolio is composed only of securities denominated in U.S. dollars. In the future, the Company's investment managers may be instructed to invest some of the fixed maturity portfolio in securities denominated in currencies other than U.S. dollars based upon the business the Company anticipates writing, the exposures and claims reserves on the Company's books and the local currency outlook compared to that of the U.S. dollar. The primary risk exposures and premiums receivable are denominated in U.S. dollars, European currencies, Japanese yen and Australian dollars. In an effort to manage its exposure to foreign currency exchange rate fluctuations, the Company from time to time enters into foreign exchange contracts. These contracts generally involve the exchange of one currency for U.S. dollars at some future date. At September 30, 1997, the Company had no outstanding foreign exchange contracts; as of September 30, 1996, the Company had a notional principal amount outstanding of $25.2 million. Realized and unrealized gains or losses on these contracts are recorded as an income or expense item in the Company's consolidated statement of operations. 10K-11 Investment Manager LaSalle Re has entered into an investment management agreement (the "Investment Management Agreement") with Aon Advisors (UK) Limited ("Aon Advisors"). Pursuant to the terms of the Investment Management Agreement, the Company pays Aon Advisors a fee equal to 0.16375% per annum of the assets under management. Prior to July 1, 1997, the Company paid Aon Advisors a fee equal to 0.35% per annum of the first $100 million of assets under management, 0.25% per annum of the next $100 million of assets under management in excess of $100 million and 0.15% per annum of any additional assets under management in excess of $200 million. The terms of the Investment Management Agreement were determined in arm's length commercial negotiations. The performance of, and the fees paid to, Aon Advisors under the Investment Management Agreement are reviewed periodically by the Investment Committee of the Board. COMPETITION The property catastrophe reinsurance industry is highly competitive. The Company competes, and will continue to compete, with major U.S. and non-U.S. insurers and property catastrophe reinsurers, including other Bermuda-based property catastrophe reinsurers and CNA, some of which have greater financial and organizational resources than the Company. A recent trend in the property catastrophe reinsurance industry has been the utilization of the capital markets in structuring reinsurance agreements using catastrophe bonds. There may be established companies or new companies of which the Company is not aware who may be planning to enter the property catastrophe reinsurance market or existing reinsurers who may be planning to raise additional capital. In addition, Lloyd's began to allow capital from corporate investors in 1994. Competition in the types of reinsurance business that the Company underwrites is based on many factors, including rates and other terms and conditions offered, services provided, ratings assigned by independent rating agencies, speed of claims payment and reputation, the perceived financial strength and experience of the reinsurer in the line of reinsurance to be written. In April 1996, LaSalle Re received an initial rating from A.M. Best of "A-" (Excellent). In August 1997, the rating was upgraded to "A" (Excellent). The current rating received by LaSalle Re represents the fourth highest in the rating scale used by A.M. Best. In October 1996, LaSalle Re received an initial rating of its claims paying ability from S&P of "A" (Good). The rating received by LaSalle Re represents the sixth highest in the rating scale used by S&P. Such ratings are based on factors of concern to cedents and brokers and are not directed toward the protection of investors. Such ratings are neither a rating of securities nor a recommendation to buy, hold or sell such securities. While the Company believes that its new ratings will not be a major competitive advantage or disadvantage, some of the Company's principal competitors have higher ratings than the Company. Insurance ratings are one factor used by brokers and cedents as a means of assessing the financial strength and quality of reinsurers. In addition, a cedent's own rating may be adversely affected by the lack of a rating of its reinsurer. Therefore, a cedent may elect to reinsure with a competitor of the Company that has a higher insurance rating. Similarly, the lowering or loss of a rating in the future could adversely affect the Company's ability to compete. Other than being a corporate member of selected Lloyd's syndicates, the Company is not licensed or admitted as an insurer in any jurisdiction other than Bermuda and has no plans to become so licensed or admitted. Because jurisdictions in the United States do not permit insurance companies to take credit for reinsurance obtained from unlicensed or non-admitted insurers on their statutory financial statements unless security is posted, the Company's reinsurance contracts generally require it to post a letter of credit or provide other security for outstanding claims and/or unearned premiums. In order to post these letters of credit, the Company generally is required to provide the issuing banks with collateral equal to such amounts. As a result of the size of the Company's capitalization, the Company does not believe that its non-admitted status in any jurisdiction has, or should have, a material adverse effect on its ability to compete or obtain business in the property catastrophe reinsurance market in which it operates, principally because many of the Company's competitors are not admitted or licensed in United States jurisdictions. However, there can be no assurance that increased competitive pressure from current reinsurers and future market entrants or the Company's non-admitted status will not adversely affect the Company. 10K-12 EMPLOYEES Prior to October 1, 1997, the Company had three employees: Mr. Blake, Chairman, Chief Executive Officer and President of the Company; Mr. Cook, Senior Vice-President and Chief Financial Officer and Treasurer of the Company; and the Company's Investor Relations Manager. On October 1, 1997, following the termination of the Administrative Services Agreement with ARC, the Company hired the 25 former ARC employees who had provided services to the Company under the Administrative Services Agreement, thereby increasing the number of the Company's employees to 28. Underwriting services are provided by CNA pursuant to the Underwriting Services Agreement. Under this agreement, eight employees of CNA are currently dedicated to the Company. The Company believes that its employee relations are satisfactory. None of the Company's employees are subject to collective bargaining agreements, and the Company knows of no current efforts to implement such agreements at the Company. REGULATION Bermuda The Insurance Act 1978, as amended, and related regulations (the "Insurance Act"). As a holding company, the Company is not subject to Bermuda insurance regulations. However, the Insurance Act, which regulates the insurance business of LaSalle Re and LaSalle Re Capital, provides that no person shall carry on an insurance business in or from within Bermuda unless registered as an insurer under the Insurance Act by the Minister of Finance (the "Minister"). The Minister, in deciding whether to grant registration, has broad discretion to act as he thinks fit in the public interest. The Minister is required by the Insurance Act to determine whether the applicant is a fit and proper body to be engaged in the insurance business and, in particular, whether it has, or has available to it, adequate knowledge and expertise. The registration of an applicant as an insurer is subject to its complying with the terms of its registration and such other conditions as the Minister may impose at any time. An Insurance Advisory Committee appointed by the Minister advises him on matters connected with the discharge of his functions, and sub-committees thereof supervise and review the law and practice of insurance in Bermuda, including reviews of accounting and administrative procedures. The Insurance Act imposes on Bermuda insurance companies solvency and liquidity standards and auditing and reporting requirements and grants to the Minister powers to supervise, investigate and intervene in the affairs of insurance companies. Although LaSalle Re Capital is governed by the Insurance Act, it is exempted from complying with most of the Act filings required by insurance companies by section 57 of the Insurance Act. The solvency and liquidity standards and auditing and reporting requirements of the Insurance Act are summarized below. Significant aspects of the Bermuda insurance regulatory framework are set forth below. Cancellation of Insurer's Registration. An insurer's registration may be canceled by the Minister on certain grounds specified in the Insurance Act, including failure of the insurer to comply with its obligations under the Insurance Act or, if in the opinion of the Minister after consultation with the Insurance Advisory Committee, the insurer has not been carrying on business in accordance with sound insurance principles. Independent Approved Auditor. Every registered insurer must appoint an independent auditor who will annually audit and report on the Statutory Financial Statements and the Statutory Financial Return of the insurer, both of which, in the case of LaSalle Re, are required to be filed annually with the Registrar of Companies (the "Registrar"), who is the chief administrative officer under the Insurance Act. The independent auditor of the insurer must be approved by the Minister and may be the same person or firm that audits the insurer's financial statements and reports for presentation to its shareholders. Loss Reserve Specialist. LaSalle Re is registered as a Class 4 insurer. Every Class 4 insurer is required to submit an annual loss reserve opinion when filing the annual Statutory Financial Return. This opinion must be 10K-13 issued by a Loss Reserve Specialist. The Loss Reserve Specialist, who will normally be a qualified casualty actuary, must be approved by the Minister. Statutory Financial Statements. An insurer must prepare Statutory Financial Statements annually. The Insurance Act prescribes rules for the preparation and substance of such Statutory Financial Statements (which include, in statutory form, a balance sheet, income statement, statement of capital and surplus and detailed notes thereto). The insurer is required to give detailed information and analyses regarding premiums, claims, reinsurance and investments. The Statutory Financial Statements are not prepared in accordance with GAAP and are distinct from the financial statements prepared for presentation to the insurer's shareholders under the Companies Act 1981 of Bermuda (the "Companies Act"), which financial statements may be prepared in accordance with GAAP. LaSalle Re is required to submit the Statutory Financial Statements as part of the annual Statutory Financial Return. Minimum Solvency Margin. The Insurance Act provides that the statutory assets of an insurer must exceed its statutory liabilities by an amount greater than the prescribed minimum solvency margin which varies with the type of business and class of registration of the insurer and the insurer's net premiums written and loss reserve level. As a registered Class 4 insurer, LaSalle Re is required to maintain a minimum solvency margin equal to the greater of $100 million, 50% of its net premiums written (but may not deduct more than 25% of gross premiums written when computing net premiums written) or 15% of its loss and other certain insurance reserves. At September 30, 1997, LaSalle Re's actual statutory capital and surplus was $490.1 million, compared to its minimum solvency margin requirement of $100 million. Minimum Liquidity Ratio. The Insurance Act provides a minimum liquidity ratio for general business. An insurer engaged in general business is required to maintain the value of its relevant assets at not less than 75% of the amount of its relevant liabilities. Relevant assets include cash and time deposits, quoted investments, unquoted bonds and debentures, first liens on real estate, investment income due and accrued, accounts and premiums receivable and reinsurance balances receivable. There are certain categories of assets which, unless specifically permitted by the Minister, do not automatically qualify as relevant assets, such as unquoted equity securities, investments in and advances to affiliates, real estate and collateral loans. The relevant liabilities are total general business insurance reserves and total other liabilities less deferred income tax and sundry liabilities (by interpretation, those not specifically defined). Annual Statutory Financial Return. LaSalle Re is required to file annually with the Registrar a Statutory Financial Return no later than four months after its financial year end (unless specifically extended). The Statutory Financial Return includes, among other matters, a report of the approved independent auditor on the Statutory Financial Statements of the insurer; a declaration of the statutory ratios; a solvency certificate; the Statutory Financial Statements themselves; the opinion of the approved Loss Reserve Specialist and certain details concerning ceded reinsurance. The solvency certificate and the declaration of the statutory ratios must be signed by the principal representative and at least two directors of the insurer who are required to state (among other matters) whether the Minimum Solvency Margin and, in the case of the solvency certificate, the Minimum Liquidity Ratio have been met, and the independent approved auditor is required to state whether in its opinion it was reasonable for them to so state and whether the declaration of the statutory ratios complies with the requirements of the Insurance Act. The Statutory Financial Return must include the opinion of the Loss Reserve Specialist in respect of the loss and loss expense provisions of LaSalle Re. Where an insurer's accounts have been audited for any purpose other than compliance with the Insurance Act, a statement to that effect must be filed with the Statutory Financial Return. Supervision, Investigation and Intervention. The Minister may appoint an inspector with extensive powers to investigate the affairs of an insurer if the Minister believes that an investigation is required in the interest of the insurer's policyholders or persons who may become policyholders. In order to verify or supplement information otherwise provided to him, the Minister may direct an insurer to produce documents or information relating to matters connected with the insurer's business. 10K-14 If it appears to the Minister that there is a risk of the insurer becoming insolvent or that it is in breach of the Insurance Act or any conditions imposed upon its registration, the Minister may (among other matters) direct the insurer not to take on any new insurance business; not to vary any insurance contract if the effect would be to increase the insurer's liabilities; not to make certain investments; to realize certain investments; to maintain in or transfer to the custody of a specified bank, certain assets; not to declare or pay any dividends or other distributions or to restrict the making of such payments; and/or to limit its premium income. Principal Representative. An insurer is required to maintain a principal office in Bermuda and to appoint and maintain a principal representative in Bermuda. For the purpose of the Insurance Act, the principal office of LaSalle Re is at the Company's offices at 25 Church Street, Hamilton HM FX Bermuda, and Andrew Cook is the principal representative of LaSalle Re. Without a reason acceptable to the Minister, an insurer may not terminate the appointment of its principal representative, and the principal representative may not cease to act as such, unless 30 days' notice in writing to the Minister is given of the intention to do so. It is the duty of the principal representative, within 30 days of his reaching the view that there is a likelihood of the insurer for which he acts becoming insolvent or its coming to his knowledge, or his having reason to believe, that an "event" has occurred, to make a report in writing to the Minister setting out all the particulars of the case that are available to him. Examples of such an "event" include failure by the reinsurer to comply substantially with a condition imposed upon the reinsurer by the Minister relating to a solvency margin or a liquidity or other ratio. Class 4 Insurer. LaSalle Re is registered as a Class 4 insurer and, as such: (i) is required to maintain a minimum statutory capital and surplus equal to the greatest of $100 million, 50% of its net premiums written (but may not deduct more than 25% of gross premiums written when computing net premiums written) or 15% of its loss and other insurance reserves; (ii) is required to file annually within four months following the end of the relevant financial year with the Registrar, inter alia, a Statutory Financial Return together with a copy of its annual Statutory Financial Statements and an opinion of a Loss Reserve Specialist in respect of its loss and loss expense provisions; (iii) is prohibited from declaring or paying any dividends during any financial year if it is in breach of its minimum solvency margin or minimum liquidity ratio or if the declaration or payment of such dividends would cause it to fail to meet such margin or ratio (if it has failed to meet its minimum solvency margin or minimum liquidity ratio on the last day of any financial year, LaSalle Re will be prohibited, without the approval of the Minister, from declaring or paying any dividends during the next financial year); (iv) is prohibited from declaring or paying in any financial year dividends of more than 25% of its total statutory capital and surplus (as shown on its previous financial year's statutory balance sheet) unless it files (at least 7 days before payment of such dividends) with the Registrar an affidavit stating that it will continue to meet the required margins; (v) is prohibited, without the approval of the Minister, from reducing by 15% or more its total statutory capital, as set out in its previous year's financial statements; and (vi) is required, at any time it fails to meet its solvency margin, within 30 days (45 days where total statutory capital and surplus falls to $75 million or less) after becoming aware of that failure or having reason to believe that such failure has occurred to file with the Minister a written report containing certain information. Certain Other Considerations. As "exempted" companies, the Company, LaSalle Re and LaSalle Re Capital may not, without the express authorization of the Bermuda legislature or a license granted by a Minister, participate in certain business transactions, including: (i) the acquisition or holding of land in Bermuda (except that required for its business and held by way of lease or tenancy agreement for a term not exceeding 21 years); (ii) the taking of mortgages on land in Bermuda in excess of $50,000; or (iii) the carrying on of business of any kind in Bermuda, except in furtherance of the business carried on outside Bermuda or as permitted under the Companies Act. The Bermuda government actively encourages foreign investment in "exempted" entities like the Company that are based in Bermuda but do not operate in competition with local businesses. As well as having no restrictions on the degree of foreign ownership, the Company, LaSalle Re and LaSalle Re Capital are not currently subject to taxes on their income or dividends or to any foreign exchange controls in Bermuda. In addition, there currently is no capital gains tax in Bermuda, and profits can be accumulated by the Company, LaSalle Re and LaSalle Re Capital, as required, without limitation. 10K-15 The Companies Act prohibits a company from declaring or paying a dividend, or making a contribution out of contributed surplus, if there are reasonable grounds for believing that (i) the company is, or would after the payment be, unable to pay its liabilities as they come due; or (ii) the realizable value of the company's assets would thereby be less than the aggregate of its liabilities and shareholders' equity. The foregoing restriction applies to the Company, LaSalle Re and LaSalle Re Capital as Bermudian companies. LaSalle Re Capital LaSalle Re Capital became a Corporate Member of Lloyd's in December 1996 and commenced underwriting effective January 1, 1997. LaSalle Re Capital is only licensed to carry on business related to Lloyd's. As a Corporate Member, LaSalle Re Capital is subject to the regulatory jurisdiction of the Council of Lloyd's (the "Council"). Unlike other financial markets in the UK, Lloyd's is not subject to direct UK government regulation under The Financial Services Act of 1986. Instead, Lloyd's is self regulating by virtue of The Lloyd's Act of 1982, through by-laws, regulations and codes of conduct written by the Council, which governs the market. Under the Council, there are two boards, the Market Board and the Regulatory Board. The Market Board is led by working members of the Council and is responsible for strategy and policy signing. The Regulatory Board is responsible for the regulation of the market, compliance and the protection of policyholders. Under the terms of its license under the Insurance Act, LaSalle Re Capital is required to meet and maintain the solvency requirements of Lloyd's. As a Corporate Member of Lloyd's, LaSalle Re Capital is required to file audited financial statements and an annual return, which is part of the annual declaration of compliance process. The annual declaration of compliance sets out the financial position of the Corporate Member and confirms details of its directors and controllers. In addition, LaSalle Re Capital is required to file an audited solvency return either confirming the value of funds at Lloyd's ("FAL") held by the member as at the previous December 31, or that it held no FAL at that date. Lloyd's will compare the value of a Corporate Member's FAL derived from the solvency return with its underwriting assets and liabilities as reported by the syndicates on which it participates. Where a negative solvency position is disclosed, the Corporate Member is required to provide sufficient additional funds to cover the shortfall. As at September 30, 1997, LaSalle Re Capital had only filed a nil solvency return for the 1996 underwriting year. In addition to the above Lloyd's requirements, LaSalle Re Capital must send to the Bermuda Registrar of Companies within 30 days after submission of the annual solvency return and declaration of compliance to Lloyd's a copy of such documents together with a copy of the audited annual statements of each of the syndicates in which LaSalle Re Capital participates. As a Bermudian insurer, LaSalle Re Capital must also maintain a principal office in Bermuda and appoint and maintain a principal representative in Bermuda. United States, United Kingdom and Other LaSalle Re is registered as an insurer and is subject to regulation and supervision in Bermuda. LaSalle Re is not admitted or authorized to do business in any jurisdiction except Bermuda. The insurance laws of each state of the United States do not directly regulate the sale of reinsurance within their jurisdictions by alien insurers, such as LaSalle Re. Nevertheless, the sale of reinsurance by alien reinsurers, such as LaSalle Re, to insurance companies domiciled or licensed in United States jurisdictions is indirectly regulated by state "credit for reinsurance" laws that operate to deny financial statement credit to ceding insurers unless the non-admitted alien reinsurer posts acceptable security for ceded liabilities and agrees to certain contract provisions (e.g., insolvency and intermediary clauses). Although the insurance laws of United States jurisdictions generally exempt the business of reinsurance from "doing business" laws, the Company conducts its business at its principal offices in Bermuda and does not maintain an office in the United States, and its personnel do not solicit, advertise, settle claims or conduct other insurance activities in the United States. All policies are issued and delivered and premiums are received outside the United States. The Company does not believe that it is subject to the insurance laws of any state in the United States. 10K-16 From time to time, there have been congressional and other initiatives in the United States regarding the supervision and regulation of the insurance industry, including proposals to supervise and regulate alien reinsurers. While none of these proposals have been adopted to date on either the federal or state level, there can be no assurance that federal or state legislation will not be enacted subjecting the Company to supervision and regulation in the United States, which could have a material adverse effect on the Company. In addition, no assurance can be given that if the Company were to become subject to any laws of the United States or any state thereof or of any other country at any time in the future, it would be in compliance with such laws. LaSalle Re does not intend to maintain an office or to solicit, advertise, settle claims or conduct other insurance activities in any jurisdiction other than Bermuda where the conduct of such activities would require that LaSalle Re be so admitted. Consistent with this policy, LaSalle Re established LaSalle Re Services as a subsidiary in the United Kingdom to operate a London "contact office" at the London Underwriting Center. LaSalle Re Services is not registered as an insurer in England or in any other jurisdiction. The Company believes that LaSalle Re Services is not required to be registered as an insurance company in the United Kingdom, and that the activities of LaSalle Re Services do not cause the Company to be subject to regulation as an insurance company in the United Kingdom. ITEM 2. PROPERTIES Prior to October 1, 1997, ARC provided the Company with office space in Bermuda and London pursuant to the Administrative Services Agreement. With effect from October 1, 1997, the Administrative Services Agreement between the Company and ARC was terminated and the Company has agreed to assume the current leasing agreements. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of shareholders of the Company during the fourth fiscal quarter of the fiscal year ended September 30, 1997. EXECUTIVE OFFICERS OF THE COMPANY Set forth below are the names, ages, positions and certain other information concerning the current executive officers of the Company.
NAME AGE POSITION ---- --- -------- Victor H. Blake......... 62 Chairman, Chief Executive Officer and President Guy D. Hengesbaugh...... 38 Executive Vice President and Chief Operating Officer Andrew Cook............. 35 Senior Vice President and Chief Financial Officer
Victor H. Blake has been Chairman, Chief Executive Officer and President of the Company since its organization in September 1995 and Chairman and Chief Executive Officer of LaSalle Re since May 1994. Mr. Blake has 37 years experience in the insurance industry, concentrating primarily in reinsurance. Mr. Blake served as Chairman and Chief Executive Officer of CNA International Reinsurance Company Ltd. ("CNA Re"), a leading property and casualty insurer operating in the London market, from its formation in 1976 until October 1995. In addition, he acted as the chairman and chief executive officer of CNA Reinsurance Group from its formation in April 1994 until October 1995. CNA Reinsurance Group includes CNA Re and the United States reinsurance operations of CNA. Mr. Blake is the non-executive chairman of CNA Reinsurance Group. Mr. Blake 10K-17 is also founder Chairman of the LUC Holdings Ltd, the shareholder of the London Underwriting Centre, a marketplace housing many of the London market insurers and reinsurers. He also served as a member of the Council of the London Insurance and Reinsurance Market Association and its predecessor bodies from 1977 to 1996. Guy D. Hengesbaugh was promoted to Executive Vice President and Chief Operating Officer effective on October 1, 1997. Prior to that, Mr. Hengesbaugh had been Executive Vice President and Chief Underwriting Officer of the Company since its organization in September 1995 and Executive Vice President and Chief Underwriting Officer of LaSalle Re since its organization in October 1993. Mr. Hengesbaugh has ten years experience in underwriting management with CNA in Chicago and London. Mr. Hengesbaugh is a Vice President of Continental Casualty Company and an employee of CNA Bermuda and his services are made available to the Company pursuant to the Underwriting Services Agreement. Andrew Cook, a chartered accountant, was promoted to Senior Vice President and Chief Financial Officer effective on October 1, 1997. Mr. Cook continues to be Chief Financial Officer and Treasurer of the Company, a position he has held since its organization in September 1995, and Chief Financial Officer and Treasurer of LaSalle Re, a position he has held since its organization in October 1993. Mr. Cook was an employee of Aon from 1993 until October 1995. Mr. Cook was employed by Becher and Carlson Risk Management Limited, a subsidiary of American Re-Insurance Company, from November 1990 to October 1993, where he was a Vice President responsible for a portfolio of captive insurance companies. From December 1987 to October 1990, Mr. Cook was an audit manager with Ernst & Young in Bermuda specializing in the audit of insurance and reinsurance companies. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Common Shares were quoted on the NASDAQ National Market under the symbol "LSREF" until April 11, 1997, at which time the Common Shares were transferred to The New York Stock Exchange under the symbol "LSH". The following table sets forth, for the periods indicated, the high and low sale prices for the Common Shares as reported by the NASDAQ National Market until April 11, 1997 and The New York Stock Exchange thereafter. Such prices reflect inter-dealer prices, without retail mark-up, mark-down or commission, and do not necessarily represent actual transactions.
HIGH LOW ------ ------ Quarter ended December 31, 1996.................................. $29.25 $22.75 Quarter ended March 31, 1997..................................... 29.25 26.50 Quarter ended June 30, 1997...................................... 30.13 27.50 Quarter ended September 30, 1997................................. 35.50 29.75 Quarter ended December 31, 1995 (from November 20, 1995)......... $23.25 $19.50 Quarter ended March 31, 1996..................................... 23.63 21.00 Quarter ended June 30, 1996...................................... 22.75 19.75 Quarter ended September 30, 1996................................. 25.50 21.00
10K-18 As of December 1, 1997, there were 80 holders of record of the Common Shares. The following table sets forth for the fiscal quarters of the two most recent fiscal years all dividends declared during each such period.
FISCAL YEAR ENDED SEPTEMBER 30, FISCAL QUARTER DIVIDEND PER SHARE ------------------------------- -------------- ------------------ 1996 First quarter $0.00 Second quarter $0.25 Third quarter $0.25 Fourth quarter $0.25 1997 First quarter $0.71 Second quarter $0.71 Third quarter $0.71 Fourth quarter $0.71
In February 1997, in connection with the Preferred Offering, the Board confirmed the dividend policy pursuant to which the Company intends to distribute as dividends to holders of Common Shares and Exchangeable Non-Voting Shares in each fiscal year, 50% to 60% of the amount by which its net income (before minority interest) from the prior fiscal year exceeds the amount of dividends payable on preferred shares of the Company in the current fiscal year. The actual amount and timing of any future dividends is at the discretion of the Board and is dependent upon the profits and financial requirements of the Company as well as loss experience, business opportunities and any other factors that the Board deems relevant. In addition, if the Company has funds available for distribution, it may nevertheless determine that such funds should be retained for the purposes of replenishing capital, expanding premium writings or other purposes. The Company is a holding company whose principal source of income is cash dividends and other permitted payments from LaSalle Re. The payment of dividends by LaSalle Re to the Company is restricted under Bermuda law and regulation, including Bermuda insurance law. Under the Insurance Act, LaSalle Re is prohibited from paying dividends of more than 25% of its opening statutory capital and surplus unless it files an affidavit (at least 7 days before payment of such dividends) stating that it will continue to meet the required solvency margin and minimum liquidity ratio requirements and from declaring or paying any dividends without the approval of the Minister of Finance if it failed to meet its required margins on the last day of the previous fiscal year. The Insurance Act also requires LaSalle Re to maintain a minimum solvency margin and minimum liquidity ratio and prohibits dividends which would result in a breach of these requirements. In addition, LaSalle Re is prohibited under the Insurance Act from reducing its opening total statutory capital by more than 15% without the approval of the Minister of Finance. As a result of these factors, there can be no assurance that the Company's dividend policy will not change or that the Company will declare or pay any dividends. ITEM 6. SELECTED FINANCIAL DATA Information with respect to this item may be found in the section captioned "Selected Financial Data" contained in the 1997 Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following is a discussion and analysis of the Company's results of operations and financial condition. This discussion and analysis should be read in conjunction with the audited consolidated financial statements and related notes. RESULTS OF OPERATIONS Year Ended September 30, 1997 Compared with Year Ended September 30, 1996 Gross premiums written decreased 9.9% to $171.4 million for the year ended September 30, 1997 from $190.2 million for the year ended September 30, 1996. This decrease was due primarily to a reduction in 10K-19 international property catastrophe premiums to $73.1 million for the year ended September 30, 1997 from $88.9 million for the year ended September 30, 1996. This reduction, in turn, was a result of the competitive rate environment, which led to a reduction in the number of international property catastrophe contracts written. The Company experienced a 5.3% decrease in property catastrophe premiums written in the United States. The decline in gross premiums written by the Company was partially offset by an increase of $14.9 million in respect of other non-property catastrophe lines written. This increase primarily related to premiums written in the year ended September 30, 1997 by LaSalle Re Capital, which was accepted into Lloyd's with effect from January 1, 1997. Further, for the year ended September 30, 1997 compared to the year ended September 30, 1996, the Company experienced a reduction in reinstatement premiums of $6.2 million due to more favorable loss experience and an increase in overall negative premium adjustments of $7.6 million. Premiums ceded for the year ended September 30, 1997 were $7.7 million compared to nil in the year ended September 30, 1996. This was primarily attributable to reinsurance protection purchased by LaSalle Re with effect from January 1, 1997 and to reinsurance purchased by LaSalle Re Capital. Ceded premiums amortized were $1.9 million for the year ended September 30, 1997 compared to nil in the year ended September 30, 1996. Net premiums earned decreased 16.0% to $163.9 million for the year ended September 30, 1997 from $195.1 million for the year ended September 30, 1996. This decrease was principally due to the overall decrease in premiums written in the previous fiscal year and the year ended September 30, 1997. Net investment income increased 23.5% to $33.1 million for the year ended September 30, 1997 from $26.8 million for the year ended September 30, 1996. This increase was principally attributable to an increase in yields during the year ended September 30, 1997 together with a larger average investment base compared to the year ended September 30, 1996. Annualized investment income as a percentage of the average market value of invested assets was 6.07% for year ended September 30, 1997 compared to 5.44% for the year ended September 30, 1996. Net realized gains on investments were $0.6 million during the year ended September 30, 1997 compared to $0.4 net realized losses during the year ended September 30, 1996. Other income was derived from reinsurance related services providing an annual fee of $0.3 million. As the provision of these services began on January 1, 1997, there was no corresponding income in the year ended September 30, 1996. The following table sets forth the Company's combined ratios for the years ended September 30, 1997 and 1996:
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 ------------------ ------------------ Loss and loss expense ratio......... 19.0% 26.4% Expense ratio....................... 23.6% 19.6% Combined ratio...................... 42.6% 46.0%
Losses and loss expenses incurred decreased 39.4% to $31.2 million for the year ended September 30, 1997 from $51.5 million for the year ended September 30, 1996. This decrease was a result of the limited number of worldwide catastrophic events that affected the Company during the year. Losses and loss expenses incurred during the year ended September 30, 1997 primarily included $12.0 million for floods in Eastern Europe, $6.1 million in respect of various international windstorms and winter storm activity in the United States and $4.6 million adverse development on Hurricane Fran, which occurred in September 1996. Losses and loss expenses incurred during the year ended September 30, 1996 included additional reserves of $14.2 million for Hurricanes Marilyn and Luis and various other losses emanating from the 1996 hurricane season and end of the 1995 hurricane season and international storms. Underwriting expenses decreased 4.8% from $27.3 million for the year ended September 30, 1996 to $26.0 million for the year ended September 30, 1997. As a percentage of net premiums earned, underwriting expenses 10K-20 were 15.9% for the year ended September 30, 1997 compared to 14.0% for the year ended September 30, 1996. Of this increase, 0.6% was due to the settlement of significant profit commissions on one program underwritten in previous fiscal years, which had better than expected loss ratios, and the provision for profit commission on contracts underwritten in the current fiscal year. In addition, the business underwritten by LaSalle Re Capital has higher underwriting costs, which increases the Company's percentage of underwriting expenses to net premiums earned. The Company has experienced an increase in the fees and profit commission accrued under the Underwriting Services Agreement from 3.7% of net premiums earned for the year ended September 30, 1996 to 4.0% net premiums earned for the year ended September 30, 1997. Operational expenses increased 14.4% to $12.7 million for the year ended September 30, 1997 from $11.1 million for the year ended September 30, 1996. This increase was substantially due to additional executive compensation and expenses relating to the operation of LaSalle Re Capital. Corporate expenses were $1.8 million for the year ended September 30, 1997, compared with $0.9 million for the year ended September 30, 1996. Corporate expenses for the year ended September 30, 1997 included costs associated with the Secondary Offering, the Preferred Offering, the Tender Offer, the formation costs of LaSalle Re Capital, the Company's move to the New York Stock Exchange and fees incurred with respect to the CatEPut. In 1996, corporate expenses included costs associated with the initial public offering and all costs associated with the establishment of the Company's credit facility. Corporate expenses do not include the underwriting discounts associated with the various offerings. These costs were borne by the selling shareholders in the initial public offering and the Secondary Offering. In respect of the Preferred Offering, the underwriting discount was charged to additional paid in capital. Interest expense was $1.7 million during the year ended September 30, 1997 compared to $0.2 million in the year ended September 30, 1996. This increase was due to financing charges associated with the deposit portion of LaSalle Re's ceded reinsurance contract. Other interest expenses related to the annual administration fee and the ongoing commitment fees payable on the Company's credit facility. As at September 30, 1997, there were no borrowings under this facility. Foreign exchange losses in the year ended September 30, 1997 were $3.0 million compared to losses of $1.1 million in the year ended September 30, 1996. The losses in the year ended September 30, 1997 resulted from the unfavorable closing of a Sterling forward contract, and an overall strengthening of the United States Dollar since January 1, 1997 against the major foreign currencies in which the Company writes premiums. The losses for the year ended September 30, 1996 were the result of several factors, including the decrease in the value of Yen and Deutsche Marks relative to the United States Dollar. Additionally, the Company's Sterling foreign exchange contracts precluded participation in the appreciation of Sterling in the third fiscal quarter above the Company's average forward rate. The Company's net income per share was $5.14 for the year ended September 30, 1997 and $5.40 for the year ended September 30, 1996. Following the Tender Offer, the weighted average number of Common Shares and Common Share equivalents outstanding decreased from 23,967,870 for the year ended September 30, 1996 to 22,998,936 for the year ended September 30, 1997. This decrease generated a 6.6% accretive effect on the Company's 1997 net income per share. Year Ended September 30, 1996 Compared with Year Ended September 30, 1995 Net premiums written decreased 5.8% to $190.2 million for the year ended September 30, 1996 from $201.9 million for the year ended September 30, 1995, as a result of a reduction in United States property catastrophe excess of loss premiums and adjustments on current and prior years' premium estimates. The overall decrease was mitigated by a 26.4% increase in premiums written in other lines of business to $22.1 million for the year ended September 30, 1996 from $17.4 million for the year ended September 30, 1995. Of the net premiums written for the years ended September 30, 1996 and 1995, $164.6 million and $178.5 million, respectively, were attributable to property catastrophe excess of loss and pro rata of property catastrophe reinsurance. Reinstatement 10K-21 premiums for the year ended September 30, 1996 totaled $5.5 million and related to a variety of worldwide events. In the year ended September 30, 1995, reinstatement premiums were $5.9 million, of which approximately 50% related to Hurricanes Luis and Marilyn. Net premiums earned increased 14.5% to $195.1 million for the year ended September 30, 1996 from $170.4 million for the year ended September 30, 1995. The magnitude of this increase was primarily due to the overall increase in premiums written in the third and fourth quarters of fiscal 1995 compared with fiscal 1994, which had a subsequent impact on net premiums earned in fiscal 1996 and fiscal 1995, respectively. Net investment income increased 6.8% to $26.8 million for the year ended September 30, 1996 from $25.1 million for the year ended September 30, 1995. This increase was primarily attributable to a larger average investment base in the year ended September 30, 1996 compared to the year ended September 30, 1995. Investment income as a percentage of the average market value of invested assets was 5.44% for the year ended September 30, 1996 compared to 5.38% for the year ended September 30, 1995. Net realized losses on investments were $0.5 million during the year ended September 30, 1996 compared to net realized losses of $25,000 during the year ended September 30, 1995. The following table sets forth the Company's combined ratios for the years ended September 30, 1996 and 1995:
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995 ------------------ ------------------ Loss and loss expense ratio......... 26.4% 35.5% Expense ratio....................... 19.6% 17.1% Combined ratio...................... 46.0% 52.6%
Losses and loss expenses incurred decreased 14.8% to $51.5 million for the year ended September 30, 1996 from $60.4 million for the year ended September 30, 1995. The Company was not affected by any significant catastrophic events in the year ended September 30, 1996, however, additional reserves of $14.2 million were established for Hurricanes Luis and Marilyn, which occurred in September 1995. Other losses emanated from the 1996 hurricane season and end of the 1995 hurricane season and various international storms. Losses and loss expenses incurred in the year ended September 30, 1995 included $27.3 million in respect of Hurricanes Luis and Marilyn, with the balance of the losses and loss expenses relating to a variety of worldwide incidents. Underwriting expenses increased 18.6% to $27.3 million for the year ended September 30, 1996 from $23.0 million for the year ended September 30, 1995, primarily attributable to the growth in net premiums earned. As a percentage of net premiums earned, underwriting expenses increased from 13.5% for the year ended September 30, 1995 to 14.0% for the year ended September 30, 1996. This was attributable to an increase in the level of fees accrued pursuant to the Underwriting Services Agreement which, as a percentage of net premiums earned, were 3.7% for the year ended September 30, 1996 and 3.3% for the year ended September 30, 1995. Operational expenses increased 78.7% to $11.1 million for the year ended September 30, 1996 from $6.2 million for the year ended September 30, 1995. The increase was primarily due to increased staff at the executive level and increased fees pursuant to the Administrative Services Agreement. Interest expense was $0.2 million during the year ended September 30, 1996 compared to no expense in the year ended September 30, 1995. Interest expense in the year ended September 30, 1996 related to agency fees and ongoing commitment fees payable on the Company's credit facility. As at September 30, 1996, there were no borrowings under this credit facility. Foreign exchange losses in the year ended September 30, 1996 were $1.1 million compared to $0.2 million in the year ended September 30, 1995. The losses in the year ended September 30, 1996 were due to the weak performance of the United States dollar against the Yen in conjunction with a strengthening of Sterling in excess of the average foreign exchange contract rates. In the year ended September 30, 1995, the Company experienced foreign currency losses principally as a result of the weakening of Sterling against the United States Dollar. 10K-22 The Company's net income per share was $5.40 for the year ended September 30, 1996 compared to $4.51 for the year ended September 30, 1995. LIQUIDITY AND CAPITAL RESOURCES As a holding company, the Company's assets consist primarily of all of the outstanding voting stock of LaSalle Re. The Company's cash flows depend primarily on dividends and other permitted payments from LaSalle Re. LaSalle Re's sources of funds consist of premiums written, investment income and proceeds from sales and redemptions of investments. Cash is used primarily to pay losses and loss expenses, brokerage, commissions, excise taxes, administrative expenses and dividends. Under the Insurance Act, LaSalle Re is prohibited from paying dividends of more than 25% of its opening statutory capital and surplus unless it files an affidavit (at least 7 days before payment of such dividends) stating that it will continue to meet the required solvency margin and minimum liquidity ratio requirements and from declaring or paying any dividends without the approval of the Minister of Finance if it failed to meet its required margins in the previous fiscal year. The Insurance Act also requires LaSalle Re to maintain a minimum solvency margin and minimum liquidity ratio and prohibits dividends that would result in a breach of these requirements. In addition, LaSalle Re is prohibited under the Insurance Act from reducing its total opening statutory capital by more than 15% without the approval of the Minister of Finance. LaSalle Re currently meets its requirements under the Insurance Act. In addition, the payment of dividends by LaSalle Re is subject to the rights of holders of the Exchangeable Non-Voting Shares to receive a pro rata share of any dividend and to its need to maintain shareholders' equity adequate to support the level of LaSalle Re's reinsurance operations. Operating activities provided net cash of $98.6 million for the year ended September 30, 1997 and $131.4 million for the year ended September 30, 1996. Cash flows from operations in future years may differ substantially from net income. Cash flows are affected by loss payments, which, due to the nature of the reinsurance coverage provided by LaSalle Re, are generally expected to comprise large loss payments on a limited number of claims and can therefore fluctuate significantly from year to year. The irregular timing of these large loss payments can create significant variations in operating cash flows between periods. LaSalle Re funds such payments from cash flows from operations and sales of investments. As a result of the potential for large loss payments, LaSalle Re maintains a substantial portion of its assets in cash and marketable securities. As of September 30, 1997, 80.6% of its total assets were held in cash and marketable securities. To further mitigate the uncertainty surrounding the amount and timing of potential liabilities and to minimize interest rate risk, LaSalle Re maintains a short average duration for its investment portfolio. The modified average duration of the investment portfolio, including cash, was 2.76 years at September 30, 1997. At September 30, 1997, the fair value of the Company's total investment portfolio, including cash, was $553.0 million. Cash and cash equivalents increased from $47.0 million at September 30, 1996 to $54.8 million at September 30, 1997 in order to fund the Common Share dividend payable in October 1997. The Company has adopted the SFAS 115 to account for its marketable securities. In accordance with SFAS 115, all of the Company's investments are classified as "available for sale". Under this classification, investments are recorded at fair market value and any unrealized gains or losses are reported as a separate component of shareholders' equity. The unrealized gain on the investment portfolio, net of amounts attributable to minority interest, was $2.0 million at September 30, 1997 compared to an unrealized loss of $1.9 million at September 30, 1996. At September 30, 1997, 74.3% of the securities held in the Company's investment portfolio were fixed-income securities rated "AA" or better and 99.8% were fixed-income securities rated "A" or better by S&P or Moody's. No single investment comprised more than 5% of the overall portfolio. Reinsurance balances receivable were $80.0 million at September 30, 1997 compared to $70.6 million at September 30, 1996. This increase was due to the inclusion of $11.3 million relating to the business underwritten 10K-23 by LaSalle Re Capital. Unearned premiums and deferred acquisition costs increased from $82.9 million and $10.5 million, respectively, at September 30, 1996 to $88.5 million and $11.9 million, respectively, at September 30, 1997, also as a result of business underwritten by LaSalle Re Capital. Prepaid reinsurance premiums relate to the reinsurance coverage placed by the Company at January 1, 1997. There was no corresponding coverage at September 30, 1996. Other assets increased from $1.6 million at September 30, 1996 to $22.6 million as at September 30, 1997 primarily due to the deposit portion of the ceded reinsurance contract, accounted for in accordance with SFAS No 113. In accordance with the terms of certain reinsurance contracts written by the Company, the Company has posted letters of credit in the amount of $8.7 million as of September 30, 1997 as compared to $15.5 million as of September 30, 1996 to support outstanding loss reserves. In connection with LaSalle Re Capital's support of three Lloyd's syndicates, the Company has posted letters of credit in the amount of $16.0 million (equivalent to (Pounds)9.8 million). All letters of credit are secured by a lien on the Company's investment portfolio equal to 115% of the amount of the outstanding letters of credit. At September 30, 1997, the liability for unpaid losses and loss expenses was $45.5 million compared to $49.9 million at September 30, 1996. This reduction reflected the payment of losses outstanding as at September 30, 1996 and the lack of significant catastrophic events in the year ended September 30, 1997. Other liabilities increased from $11.1 million as at September 30, 1996 to $22.8 million as at September 30, 1997 as a result of the inclusion of $5.0 million relating to reinsurance balances payable, $2.0 million relating to the profit commission accrued pursuant to the Administrative Services Agreement with ARC and $2.4 million relating to provisions for profit commissions and no claims bonuses. Effective October 1, 1997, the Administrative Services Agreement between the Company and ARC was terminated. All of the personnel formerly assigned to the Company by ARC have become employees of the Company and services formerly performed by ARC have been assumed by the Company. In connection with the termination of the agreement the Company has agreed to purchase all of the fixed assets owned by ARC and utilized by the Company and to assume the current leasing agreements. In February 1997, in connection with the Preferred Offering, the Board confirmed the dividend policy pursuant to which the Company intends to distribute as dividends to holders of Common Shares and Exchangeable Non-Voting Shares in each fiscal year, 50% to 60% of the amount by which its net income, before minority interest, from the prior fiscal year exceeds the amount of dividends payable on preferred shares of the Company in the current fiscal year. The Company paid dividends on its Common Shares of $0.25 per share in October 1996 and $0.71 per share in January, April and July 1997. In June and September 1997, the Company paid a dividend of $0.3889 and $0.5469 per share to holders of its Series A Preferred Shares. As of September 30, 1997, dividends due but not yet declared on the Series A Preferred Shares amounted to $0.5 million. Based on the Company's net income for the year ended September 30, 1997, the Company currently expects to declare quarterly dividends in the range of $0.71 to $0.75 per Common Share during the 1998 fiscal year. The actual amount and timing of any future Common Share dividends is at the discretion of the Board. The declaration and payment of any dividends is dependent upon the profits and financial requirements of the Company and other factors, including certain legal, regulatory and other restrictions. There can be no assurance that the Company's dividend policy will not change or that the Company will declare or pay any dividends in future periods. LaSalle Re Capital is committed to provide capital support for the 1998 underwriting year to the same syndicates as it supported in 1997. The level of support is not expected to change materially from that provided in 1997. 10K-24 The Company has in place a $100 million committed line of credit from a syndicate of banks. The proceeds from the credit facility may only be used to buy preferred shares of LaSalle Re, which, in turn, may use the proceeds of such purchase to meet current cash requirements. The facility matures on December 1, 2000 and is secured by a pledge ("legal mortgage") of all the capital stock of LaSalle Re held by the Company, including any preferred shares that may be issued by LaSalle Re to the Company. The line of credit contains various covenants, including limitations on incurring additional indebtedness; prohibitions of dividends and other restricted payments that would cause the Company's tangible net worth (total shareholders' equity and minority interest) to fall below $375 million for calendar years 1997 and 1998, and $400 million thereafter; restriction of dividends per fiscal quarter to 12.5% of consolidated net income of the Company for the immediately preceding fiscal year; restrictions on the sale or lease of assets not in the ordinary course of business; maintenance of a ratio of consolidated total debt to consolidated tangible net worth of no more than 0.40 to 1.00; maintenance of tangible net worth at the end of each fiscal year of the greater of $300 million or 70% of net premiums written; maintenance of statutory capital of LaSalle Re at the end of each fiscal year of at least $300 million; and maintenance of a ratio of net premiums written to statutory capital at the end of any fiscal quarter for the four fiscal quarters then ended of no more than 1.00 to 1.00 in each case. In order for the Company to pay dividends in excess of 50% of net income, the Company would have to renegotiate certain terms of its credit facility. As of September 30, 1997, the credit facility had not been utilized. The Company's financial condition and results of operations are influenced by both internal and external forces. Loss payments, investment returns and premiums may be impacted by changing rates of inflation and other economic conditions. Cash flows from operations and the liquidity of its investment portfolio are, in the Company's opinion, adequate to meet the Company's expected cash requirements over the next 12 months. The Financial Accounting Standards Board has not issued any Financial Accounting Standards, not already adopted by the Company, which would have a material impact on the results of the Company. 10K-25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA LASALLE RE HOLDINGS LIMITED INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE NUMBER ----------- INDEPENDENT AUDITORS' REPORT........................................ 10K-27 CONSOLIDATED BALANCE SHEETS......................................... 10K-28 CONSOLIDATED STATEMENTS OF OPERATIONS............................... 10K-29 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY.......... 10K-30 CONSOLIDATED STATEMENTS OF CASH FLOWS............................... 10K-31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.......................... 10K-32
10K-26 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders LaSalle Re Holdings Limited We have audited the consolidated financial statements of LaSalle Re Holdings Limited and subsidiaries as listed in the accompanying index. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of LaSalle Re Holdings Limited and subsidiaries as of September 30, 1997 and 1996 and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 1997 in conformity with generally accepted accounting principles. KPMG PEAT MARWICK Chartered Accountants Hamilton, Bermuda October 30, 1997 10K-27 LASALLE RE HOLDINGS LIMITED CONSOLIDATED BALANCE SHEETS YEARS ENDED SEPTEMBER 30, 1997 AND 1996 (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
1997 1996 -------- -------- ASSETS Cash and cash equivalents................................... $ 54,761 $ 46,990 Investments held as available for sale at fair value........ 498,282 490,514 (amortized cost 1997: $495,705; 1996: $493,450) Accrued investment income................................... 12,684 14,211 Reinsurance balances receivable............................. 80,041 70,625 (related party 1997: $13,481; 1996: $11,700) Deferred acquisition costs.................................. 11,932 10,464 Prepaid reinsurance premiums................................ 5,837 0 Other assets................................................ 22,551 1,570 -------- -------- Total assets................................................ $686,088 $634,374 ======== ======== LIABILITIES Outstanding losses and loss expenses........................ $ 45,491 $ 49,875 Unearned premiums........................................... 88,490 82,894 Other liabilities........................................... 22,823 11,087 (related party 1997: $7,975; 1996: $6,080) Dividend payable............................................ 10,703 3,600 -------- -------- Total liabilities........................................... 167,507 147,456 -------- -------- Minority Interest........................................... 93,355 179,470 -------- -------- SHAREHOLDERS' EQUITY Share capital authorized in the aggregate 100,000,000 shares, par value $1 Preferred shares............................................ 3,000 0 (par value $1, liquidation preference $25 per share, issued & outstanding, 3,000,000, Series A Preferred Shares; 1996: Nil) Common shares............................................... 15,074 14,398 (par value $1 issued & outstanding, 15,073,914; 1996: 14,397,720) Additional paid in capital.................................. 299,964 221,968 Unrealized gains/(losses) on investments.................... 2,035 (1,861) Retained earnings........................................... 105,153 72,943 -------- -------- Total shareholders' equity.................................. 425,226 307,448 -------- -------- Total liabilities, minority interest and shareholders' equity..................................................... $686,088 $634,374 ======== ========
See accompanying notes to consolidated financial statements 10K-28 LASALLE RE HOLDINGS LIMITED CONSOLIDATED STATEMENT OF OPERATIONS YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995 (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
1997 1996 1995 ---------- ---------- ---------- REVENUES Premiums written.......................... $ 171,386 $ 190,151 $ 201,916 (related party 1997 : $21,408; 1996 : $24,045; 1995: $28,836 Premiums ceded............................ ( 7,693) 0 0 ---------- ---------- ---------- Net premiums written...................... 163,693 190,151 201,916 Change in unearned premiums and prepaid reinsurance premiums..................... 240 4,990 (31,546) ---------- ---------- ---------- Net premiums earned....................... 163,933 195,141 170,370 Net investment income..................... 33,109 26,846 25,091 Net realized gains (losses) on investments.............................. 555 (418) (25) Other income.............................. 188 0 0 (related party 1997 : $188; 1996 : $0; 1995 : $0) ---------- ---------- ---------- Total revenues............................ 197,785 221,569 195,436 ---------- ---------- ---------- EXPENSES Losses and loss expenses incurred......... 31,199 51,477 60,397 Underwriting expenses .................... 26,018 27,268 22,988 (related party 1997 : $9,857; 1996 : $10,419; 1995: $8,524) Operational expenses...................... 12,656 11,114 6,218 (related party 1997 : $6,212; 1996 : $6,500; 1995: $4,500) Corporate expenses........................ 1,770 911 1,145 Interest expense.......................... 1,678 222 0 Exchange loss............................. 2,996 1,126 240 ---------- ---------- ---------- Total expenses............................ 76,317 92,118 90,988 ---------- ---------- ---------- Income before minority interest........... 121,468 129,451 104,448 Minority interest......................... 24,391 47,966 38,774 ---------- ---------- ---------- NET INCOME................................ $ 97,077 $ 81,485 $ 65,674 ========== ========== ========== Net income per common share............... $ 5.14 $ 5.40 $ 4.51 ========== ========== ========== Weighted average number of common share and common share equivalents outstanding. 22,998,936 23,967,870 23,170,680 ========== ========== ==========
See accompanying notes to consolidated financial statements 10K-29 LASALLE RE HOLDINGS LIMITED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995 (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
1997 1996 1995 -------- -------- -------- PREFERRED SHARES PAR VALUE $1 Issuance of shares during the year............... $ 3,000 $ 0 $ 0 -------- -------- -------- Balance at end of year........................... $ 3,000 $ 0 $ 0 ======== ======== ======== COMMON SHARES PAR VALUE $1 Balance at beginning of year..................... $ 14,398 $ 14,398 $ 14,396 Issuance of shares............................... 1 0 2 Share repurchase................................. (3,704) 0 0 Exchange of exchangeable non-voting shares....... 4,379 0 0 -------- -------- -------- Balance at end of year........................... $ 15,074 $ 14,398 $ 14,398 ======== ======== ======== ADDITIONAL PAID IN CAPITAL Balance at beginning of year..................... $221,968 $221,968 $221,945 Issuance of shares............................... 70,177 0 23 Share repurchase................................. (44,990) 0 0 Exchange of exchangeable non-voting shares....... 54,664 0 0 Equity put option premium........................ (1,855) 0 0 -------- -------- -------- Balance at end of year........................... $299,964 $221,968 $221,968 ======== ======== ======== UNREALIZED GAINS / (LOSSES) ON INVESTMENTS Balance at beginning of year..................... $ (1,861) $ (1,039) $(11,836) Unrealized gain / (loss) in year................. 4,354 (822) 10,797 Exchange of exchangeable non-voting shares....... (458) 0 0 -------- -------- -------- Balance at end of year........................... $ 2,035 $ (1,861) $ (1,039) ======== ======== ======== RETAINED EARNINGS Balance at beginning of year..................... $ 72,943 $ 18,095 $ 18,941 Net income....................................... 97,077 81,485 65,674 Common share dividends........................... (44,860) (26,637) (66,520) (1997: $2.84 per share; 1996: $0.75; 1995: $5.72) Preferred share dividends........................ (2,807) 0 0 (1997: $0.94 per share; 1996: $Nil; 1995: $Nil) Share and option repurchase...................... (33,807) 0 0 Exchange of exchangeable non-voting shares....... 16,607 0 0 -------- -------- -------- Balance at end of year........................... $105,153 $ 72,943 $ 18,095 ======== ======== ======== Total shareholders' equity................... $425,226 $307,448 $253,422 ======== ======== ========
See accompanying notes to consolidated financial statements 10K-30 LASALLE RE HOLDINGS LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995 (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
1997 1996 1995 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income................................... $ 97,077 $ 81,485 $ 65,674 Adjustments to reconcile net income to cash provided by operating activities: Minority interest in net income............ 24,391 47,966 38,774 Amortization of investment premium......... 1,725 3,280 4,535 Net realized (gains) / losses on sale of investments............................... (555) 418 25 Unrealized losses / (gains) on foreign exchange.................................. 937 590 (153) Changes in: Reinsurance balances receivable............ (10,495) 15,412 (35,745) Deferred acquisition costs................. (1,468) 244 (3,898) Prepaid reinsurance premiums............... (5,837) 0 0 Accrued investment income.................. 1,527 1,592 (2,294) Other assets............................... (20,981) (105) (404) Outstanding losses and loss expenses....... (4,242) (16,748) 28,923 Unearned premiums.......................... 5,596 (4,991) 31,546 Other liabilities.......................... 10,968 2,294 3,187 --------- --------- --------- Cash provided by operating activities........ 98,643 131,437 130,170 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investments...................... (364,989) (270,287) (108,796) Net sales of short term investments.......... 116 47 2,654 Proceeds on the sale of investments.......... 282,449 170,296 50,198 Proceeds on the maturity of investments...... 79,000 44,500 25,000 --------- --------- --------- Cash applied to investing activities......... (3,424) (55,444) (30,944) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from subscriptions to share capital..................................... 72,682 0 39 Payment of dividends......................... (54,338) (111,363) (30,003) Share repurchase............................. (103,442) 0 0 Equity put option premium.................... (2,350) 0 0 --------- --------- --------- Cash applied to financing activities......... (87,448) (111,363) (29,964) --------- --------- --------- Net increase / (decrease) in cash and cash equivalents................................. 7,771 (35,370) 69,262 Cash and cash equivalents at beginning of year........................................ 46,990 82,360 13,098 --------- --------- --------- Cash and cash equivalents at end of year..... $ 54,761 $ 46,990 $ 82,360 ========= ========= =========
See accompanying notes to consolidated financial statements 10K-31 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995 (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AND PER SHARE DATA) 1. GENERAL The Company was incorporated on September 20, 1995 under the laws of Bermuda to act as an investment holding company. LaSalle Re Limited ("LaSalle Re") was incorporated on October 26, 1993 under the laws of Bermuda and commenced operations on November 22, 1993. LaSalle Re is licensed under the Insurance Act, 1978 as amended by the Insurance Amendment Act, 1995 of Bermuda to write insurance business and operates as a multi-line reinsurance company, with emphasis on property catastrophe business. Property catastrophe reinsurance covers unpredictable events such as hurricanes, windstorms, hailstorms, earthquakes, fires, industrial explosions, freezes, riots, floods and other man-made or natural disasters. Because the Company has large aggregate exposures to these risks, the Company expects that its claims experience will be characterized by relatively low frequency and high severity claims. The occurrence of claims from catastrophic events is likely to result in substantial volatility in the Company's financial results for any particular period. The Company endeavors to manage its exposures to catastrophic events by limiting the amount of its exposure in each geographic zone worldwide and requiring that its property catastrophe contracts provide for aggregate limits and attachment points. On August 26, 1994, LaSalle Re incorporated a subsidiary company in the United Kingdom, LaSalle Re (Services) Limited, to act as a representative office for the Company. In addition, on June 11, 1996, LaSalle Re incorporated a subsidiary company in Bermuda, LaSalle Re Corporate Capital Ltd., to provide capital support to selected Lloyd's syndicates. In November 1995, the Company and LaSalle Re consummated an offer (the "Exchange Offer") pursuant to which, among other things, the founding shareholders of LaSalle Re (the "Founding Shareholders") exchanged their capital stock of LaSalle Re for common shares of the Company (the "Common Shares") and, in certain circumstances, exchangeable non-voting shares of LaSalle Re (the "Exchangeable Non-Voting Shares"). The Exchange Offer was accounted for as if it were a pooling of interests of combining enterprises under common control. On November 27, 1995, the Company and certain Founding Shareholders also consummated an initial public offering of 4,312,500 Common Shares. Of these shares, 2,920,500 were sold by Founding Shareholders and 1,392,000 by the Company. The proceeds from the sale of 1,392,000 shares sold by the Company were used to enable LaSalle Re to redeem shares of its capital stock. The consolidated financial statements include the results of the Company and the Company's share of LaSalle Re and its subsidiaries for all periods presented. 2. SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements are prepared in accordance with United States generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported and disclosed amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. The estimates most susceptible to significant change are those used in determining the liability for unpaid losses and loss expenses and the amount of ultimate premiums written. 10K-32 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following are the significant accounting policies adopted by the Company: (a) Principles of consolidation The consolidated financial statements include the financial statements of LaSalle Re Holdings Limited, LaSalle Re Limited and its subsidiaries, LaSalle Re (Services) Limited and LaSalle Re Corporate Capital Ltd. All significant inter-company balances and transactions have been eliminated in consolidation. (b) Minority interest Minority interest represents the Founding Shareholders' ownership of the Exchangeable Non-Voting Shares. These shares are held by certain Founding Shareholders who would otherwise hold, or cause another shareholder to hold, directly, indirectly or constructively, in excess of 9.9% of the voting power of the Company or LaSalle Re. The Exchangeable Non-Voting Shares are exchangeable, at the option of the holder, for Common Shares of the Company, on a one-for-one basis, unless the board of directors of the Company determines such exchange may cause actual or potential adverse tax consequences to the Company or any shareholder. The Exchangeable Non-Voting Shares will at all times rank as to assets, dividends and in all other respects on a parity with the Common Shares of LaSalle Re, except that they do not have the right to vote on any matters except as required by Bermuda law and in connection with certain actions by the Company. Decreases in the minority interest of LaSalle Re as a result of the exchange of such shares are therefore recorded at historic cost by transferring an appropriate portion of the minority interest to the various components of shareholders' equity. The minority's share of income as recorded in the income statement is calculated using the minority's ownership percentage as at the balance sheet date. Minority interest as reported in the balance sheet represents the minority's current proportionate share of LaSalle Re's net assets. (c) Premiums earned and deferred acquisition costs Premiums written are estimated by management based upon reports received from ceding companies. These estimates are subject to review with adjustments recorded in the period in which the actual amounts are determined. Premiums on property catastrophe excess of loss contracts are earned on a pro rata basis over the period the coverage is provided, which is generally 12 months. Under pro rata property catastrophe contracts, the risks underlying the contracts incept throughout the policy period and premiums generally are earned over an 18 month period. Premiums written by LaSalle Re Corporate Capital Ltd. are derived from reports submitted to the Company by the syndicates. These premiums are earned in accordance with the related underlying risk attachment periods, which average between 18-24 months. Unearned premiums represent the portion of premiums written which are applicable to the unexpired terms of the policies in force. Acquisition costs, mainly brokerage, commissions, underwriting fees and excise taxes related to unearned premiums, are deferred and amortized to income over the period in which the premiums are earned. Future earned premiums and anticipated losses and loss adjustment expenses related to those premiums are considered in determining the recoverability of deferred acquisition costs. The Company does not consider anticipated future investment income in determining if a premium deficiency exists. (d) Reinsurance In the normal course of business, the Company seeks to reduce its exposure to losses that may arise from catastrophes and cause unfavorable underwriting results by reinsuring certain levels of risks with other reinsurers. 10K-33 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In accordance with Statement of Financial Accounting Standard ("SFAS") No. 113 "Accounting and Reporting for Reinsurance of Short-Duration and Long- Duration Contracts", contracts providing indemnification against loss or liability relating to insurance risk have been accounted for as reinsurance. Reinsurance premiums are reported as prepaid reinsurance premiums and amortized over the contract period in proportion to the amount of reinsurance protection provided. Where the contract provides for return premiums, these are accrued based on loss experience through to the balance sheet date. Reinsurance contracts which do not satisfy the conditions for reinsurance accounting under SFAS No. 113 are accounted for as deposits. (e) Losses and loss expenses The liability for outstanding losses and loss expenses is based on reports and individual case estimates received from ceding companies. An amount is included for losses and loss expenses incurred but not reported on the basis of reports received from ceding companies and an internally produced actuarial analysis. The amount included as losses incurred in respect of business written by LaSalle Re Corporate Capital Ltd. is derived from an analysis of expected loss ratios. Given the inherent nature of major catastrophic events, considerable uncertainty underlies the assumptions and associated estimated reserves for losses and loss expenses. These estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments, if any, are reflected in results of operations in the period in which they are determined and are accounted for as changes in estimates. Due to the inherent uncertainty in estimating the liability for losses and loss expenses, there can be no assurance that the ultimate liability will not exceed recorded amounts, with a resulting material effect on the Company. Based on the current assumptions used in calculating the liability, management believes that the Company's recorded amount is adequate to meet its future obligations. Amounts recoverable from reinsurers are estimated in a manner consistent with the underlying liabilities. Liabilities are recorded without consideration of potential salvage or subrogation recoveries which are estimated to be immaterial. Such recoveries, when realized, are reflected as a reduction of losses incurred. (f) Investments The Company's investments comprise fixed interest securities and short term investments, such as certificates of deposit or commercial paper. All investments are considered to be available for sale under the definition included in SFAS No. 115. As such, they are reported at fair value with unrealized gains and losses reported as a separate component of shareholders' equity, net of amounts attributable to minority interests. Purchases and sales of investments are accounted for on the trade date of the transaction. (g) Investment income Investment income, net of investment expenses, is accrued to the balance sheet date and includes amortization of premiums and discounts relative to fixed interest securities purchased at prices different to par value. Realized gains or losses on sales of investments are determined on the basis of specific identification and are included as part of net investment income in the statements of operations. 10K-34 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (h) Translation of foreign currencies The U.S. dollar is the Company's functional currency. Foreign currency monetary assets and liabilities are translated at exchange rates in effect at the balance sheet date. Unearned premiums and deferred acquisition costs are translated at historic exchange rates. Foreign currency revenues and expenses are translated at the exchange rates in effect at the date of the transaction. Exchange gains and losses are included in the determination of net income. The Company has entered into foreign exchange contracts to manage the currency risks associated with the receipt of non-U.S. dollar insurance premiums. Realized and unrealized gains and losses on these contracts are included in the determination of net income. (i) Fair value of financial instruments Fair value disclosures with respect to certain financial instruments are separately included herein, where appropriate. The carrying values of other financial instruments, including cash and cash equivalents, reinsurance balances receivable, accrued investment income, promissory note receivable and other liabilities, approximate their fair value due to the short term nature of the balances. (j) Other Income Other income relates to fees earned in respect of reinsurance services provided. (k) Corporate expenses Corporate expenses are expensed as they are incurred on an accruals basis. (l) Cash and cash equivalents For the purposes of the statements of cash flows, the Company considers all time deposits and certificates of deposit with an original maturity of 90 days or less as equivalent to cash. (m) Stock incentive compensation plans The Company has adopted SFAS No. 123 "Accounting for Stock-Based Compensation". As allowed under this standard, the Company accounts for stock option grants in accordance with APB opinion No. 25, "Accounting for Stock Issued to Employees". Compensation expense for stock option grants is recognized to the extent that the fair value of the stock exceeds the exercise price of the option at the measurement date. Any resulting compensation expense is recorded over the shorter of the vesting or service period. Pro forma disclosure of net income and earnings per share as if the fair value based method of SFAS No. 123 had been adopted is provided in Note 10 to the consolidated financial statements. (n) Net Income per Common Share Net income per Common Share is calculated by dividing net income available to common shareholders, by the weighted average number of Common Shares and Common Share equivalents outstanding during the period. The Exchangeable Non-Voting Shares of LaSalle Re are considered Common Share equivalents, as are stock options and stock appreciation rights, which are included in the computation of weighted average number of 10K-35 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Common Shares outstanding using the treasury stock method. Net income available to common shareholders is therefore before minority interest and after preferred dividends declared and in arrears. There is no material difference between primary and fully diluted net income per Common Share. (o) Accounting pronouncements In February 1997, the Financial Accounting Standards Board issued SFAS No. 128 "Earnings per Share" ("EPS"), effective for financial statements issued for periods ending after December 15, 1997. Pro forma EPS amounts computed using this Statement are disclosed in Note 5 to the consolidated financial statements. In June 1997, the Financial Accounting Standards Board issued SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." These statements are effective for financial statements issued for periods beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components within a set of financial statements. This standard will be adopted in respect of the quarter ended March 31, 1998. Adoption of the standard will have no material effect on the earnings of the Company. SFAS No. 131 requires the Company to report financial and descriptive information about its reportable operating segments. The Company is currently reviewing the impact of this standard on its financial reporting. 3. INVESTMENTS AND INVESTMENT INCOME (a) Investments All fixed interest securities and short term investments are considered available for sale. The fair values are based on quoted market prices at the reporting date for those, or similar, investments. As at September 30, 1997 and 1996, the fair values and amortized costs of investments are as follows:
AMORTIZED UNREALIZED UNREALIZED FAIR 1997 COST GAINS LOSSES VALUE - ---- --------- ---------- ---------- -------- U.S. government and agencies........... $ 88,088 $ 506 $ (195) $ 88,399 Non U.S. government and agencies....... 71,541 456 (207) 71,790 Corporate.............................. 335,076 2,819 (831) 337,064 Other debt............................. 1,000 29 0 1,029 -------- ------ ------- -------- $495,705 $3,810 $(1,233) $498,282 ======== ====== ======= ======== AMORTIZED UNREALIZED UNREALIZED FAIR 1996 COST GAINS LOSSES VALUE - ---- --------- ---------- ---------- -------- U.S. government and agencies........... $ 90,596 $ 221 $ (693) $ 90,124 Non U.S. government and agencies....... 75,863 258 (828) 75,293 Corporate.............................. 326,991 1,077 (2,971) 325,097 -------- ------ ------- -------- $493,450 $1,556 $(4,492) $490,514 ======== ====== ======= ========
The unrealized gain on investments as shown on the consolidated balance sheet of $2,035 (1996 unrealized loss: $1,861) is net of the minority's interest of $542 (1996: $1,075). Investments held at September 30, 1997 mature as follows:
FAIR AMORTIZED COST VALUE -------------- -------- Less than 1 year.................................. $ 55,126 $ 55,230 1-5 years......................................... 380,161 381,856 5-10 years........................................ 60,418 61,196 -------- -------- $495,705 $498,282 ======== ========
10K-36 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following table summarizes the composition of the fair value of available for sale securities by ratings assigned or, with respect to non-rated issues, as estimated by the Company's investment managers.
1997 1996 ------ ------ AAA......................................................... 43.2% 63.3% AA.......................................................... 31.1% 25.7% A........................................................... 25.5% 11.0% BB.......................................................... 0.2% 0.0% ------ ------ 100.0% 100.0% ====== ======
In the normal course of reinsurance operations, the Company's bankers have issued letters of credit totalling $8,673 (1996: $15,511) in favor of ceding insurance companies to secure the Company's obligations under various reinsurance contracts. In addition, in connection with LaSalle Re Corporate Capital Ltd.'s support of three Lloyd's syndicates, the Company has posted letters of credit in the amount of $15,974. At September 30, 1997, $28,344 (1996: $17,837) of fixed interest securities have been pledged as collateral for these letters of credit. (b) Net investment income Net investment income for the years ended September 30, 1997, 1996 and 1995 was derived from the following sources:
1997 1996 1995 ------- -------- -------- Cash and short term investments............. $ 4,342 $ 1,443 $ 2,558 U.S. government and agencies fixed interest securities................................. 5,933 1,631 107 Non U.S. government and agencies fixed interest securities........................ 3,531 4,702 3,224 Corporate fixed interest securities......... 20,456 20,197 20,288 ------- -------- -------- Gross investment income..................... 34,262 27,973 26,177 Investment expenses (Note 11)............... (1,153) (1,127) (1,086) ------- -------- -------- $33,109 $ 26,846 $ 25,091 ======= ======== ========
Included in gross investment income for the year ended September 30, 1997 was a charge of $1,725 (1996: $3,280; 1995: $4,535) relating to the amortization of investment premium. Net realized gains (losses) comprise $1,881 realized gains and $1,326 realized losses (1996: $1,242 and $1,660; 1995: $186 and $211, respectively). The change in net unrealized losses, net of the minority's interest, that has been included as a separate component of shareholders' equity for the year ended September 30, 1997 was a decrease of $3,896 (1996 increase: $822; 1995 decrease: $10,797). Proceeds received from the sale of available for sale securities during the year ended September 30, 1997 were $282,449 (1996: $170,296; 1995: $50,198). 4. REINSURANCE Reinsurance premiums ceded are primarily in respect of a multi-year excess of loss reinsurance program purchased by the Company, and various reinsurance protections purchased by LaSalle Re Corporate Capital Ltd. The excess of loss program provides coverage of $100,000 in excess of the first $100,000 of losses per 10K-37 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) occurrence for a first loss event and $100,000 excess of $150,000 per occurrence on the second loss event for the three-year period ended December 31, 1999, subject to a maximum aggregate recovery of $200,000. The Company may participate on a co-insurance basis for the second loss event. Coverage for the first loss is substantially funded by way of annual and reinstatement premium obligations. Accordingly, this portion of the coverage has been recorded as a financing arrangement whereby the consideration paid, net of associated financing charges, is recorded as a deposit and included as part of other assets in the consolidated balance sheet. The deposit asset is adjusted at the balance sheet date to reflect the net present value of expected future cash flows under that portion of the contract. Interest expense includes finance charges of $1,470 which are being amortized over the period of the contract using the interest method. The Company is required to pay an additional reinsurance premium equal to 35% of any losses that are covered by the second loss event portion of the coverage. The reinsurance is provided by a company which currently holds a rating of "A+" (Superior) from A.M. Best Company, Inc. and a claims-paying rating of "AA" (Excellent) from Standard & Poor's Rating Services. The ceding of the reinsurance does not legally discharge the Company from its liability, since the Company is required to pay losses and bear collection risk if the reinsurers fail to meet their obligations under the reinsurance agreements. The effect of reinsurance on premiums written and earned is as follows:
1997 ------------------ WRITTEN EARNED -------- -------- Assumed............................................... $171,386 $165,789 Ceded................................................. (7,693) (1,856) -------- -------- Net Premiums.......................................... $163,693 $163,933 ======== ========
There were no premiums ceded for the years ended September 30, 1996 and 1995. 10K-38 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 5. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued SFAS No. 128 "Earnings per Share." Under this statement, early adoption is not allowed, however, a company is permitted to disclose pro forma earnings per share amounts computed using the Statement in the notes to the financial statements. The following EPS amounts would have been disclosed had EPS been computed using SFAS No. 128:
1997 1996 1995 ------------ ------------ ------------ Net income........................... $ 97,077 $ 81,485 $ 65,674 Add back: minority interest.......... 24,391 47,966 38,774 Less: Series A preferred share dividends........................... (3,354) (0) (0) ------------ ------------ ------------ Income available to common shareholders........................ $ 118,114 $ 129,451 $ 104,448 ------------ ------------ ------------ Weighted average number of shares outstanding: Common Shares........................ 15,567,521 14,397,720 14,396,760 Exchangeable Non-Voting Shares....... 5,703,212 8,329,290 8,329,290 ------------ ------------ ------------ 21,270,733 22,727,010 22,726,050 ------------ ------------ ------------ Basic EPS............................ $ 5.55 $ 5.70 $ 4.60 ============ ============ ============ Income available to common shareholders........................ $ 118,114 $ 129,451 $ 104,448 Weighted average number of common shares outstanding:................. 21,270,733 22,727,010 22,726,050 Plus: incremental shares from assumed: exercise of options.............. 1,661,391 1,210,317 441,792 exercise of stock appreciation rights.......................... 66,812 30,543 2,838 ------------ ------------ ------------ Adjusted weighted average number of common shares outstanding........... 22,998,936 23,967,870 23,170,680 ------------ ------------ ------------ Diluted EPS.......................... $ 5.14 $ 5.40 $ 4.51 ============ ============ ============
For the purposes of the computation of basic EPS, the Exchangeable Non-Voting Shares are considered outstanding Common Shares due to the exchangeable nature of the shares. 6. OTHER ASSETS Included in other assets is a promissory note receivable. In connection with the terms of the Chief Executive Officer's five-year employment contract, LaSalle Re advanced $695 to him for the purpose of purchasing a property in Bermuda. The advance is evidenced by a promissory note, which bears interest at the rate of 8% per annum and is repayable in full at the earlier of the termination date of the Chief Executive Officer's employment contract or the date of sale of the property. Under the employment contract, LaSalle Re will assume any gain or loss on the disposition of the property. As discussed in Note 4, other assets also includes a deposit relating to funded reinsurance. 7. MINORITY INTEREST During the year LaSalle Re repurchased 3,703,703 of its common shares held by LaSalle Re Holdings Limited and 28,496 Exchangeable Non-Voting Shares. In addition, 4,378,327 Exchangeable Non-Voting Shares were exchanged for Common Shares of LaSalle Re Holdings Limited. These transactions had the effect of reducing the minority interest percentage in LaSalle Re from 36.6% to 21.1%. 10K-39 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following table summarizes the movement in minority interest during the year ended September 30, 1997. Minority Interest as at October 1, 1996........................ $179,470 Share of: income....................................................... 24,391 dividends declared........................................... (12,503) equity put option premium.................................... (495) preferred offering issue costs............................... (497) change in unrealized position of investments................. 1,161 share repurchase adjustments................................. (20,941) Adjustment relating to the exchange of Exchangeable Non-Voting Shares for Common Shares...................................... (77,231) -------- Minority Interest as at September 30, 1997..................... $ 93,355 ========
8. SHARE CAPITAL AND ADDITIONAL PAID-IN CAPITAL The authorized share capital of the Company is 100,000,000 shares of par value $1 each. This aggregate figure includes both common and preferred shares. As of September 30, 1997 and 1996, the following shares have been issued and fully paid. COMMON SHARES
1997 1996 ---------- ---------- Number issued and fully paid....................... 15,073,914 14,397,720 ========== ========== Share capital...................................... $ 15,074 $ 14,398 Additional paid in capital......................... $ 229,681 $ 221,968
The Company completed a secondary offering of Common Shares in December 1996. In connection with the offering, certain Founding Shareholders of LaSalle Re exchanged 2,119,110 of their Exchangeable Non-Voting Shares for Common Shares of the Company. Pursuant to a tender offer ("Tender Offer") made by the Company in May 1997, 2,163,538 Exchangeable Non-Voting Shares were exchanged for Common Shares of the Company and 95,679 options for Exchangeable Non-Voting Shares were exercised and exchanged for Common Shares of the Company. Following these exchanges, the Company purchased 3,703,703 Common Shares, for cancellation, at the tender price of $27.00. The par value of the shares canceled has been deducted from share capital. The additional paid in capital arising from the original subscription to the shares, subject to the Tender Offer, has been eliminated from additional paid in capital and the difference between the subscription price received for the shares and the price paid in the Tender Offer has been deducted from retained earnings. These exchanges of Exchangeable Non-Voting Shares for Common Shares are non- cash financing transactions for the purposes of the Statement of Cash Flows. In addition, pursuant to the Employee Stock Purchase Plan (the "Plan") the Company issued 1,571 Common Shares. Under the Plan, the Company is authorized to sell up to 150,000 Common Shares at a discount equivalent to 15% of the market price, to eligible employees of the Company and its subsidiaries, and other persons providing services to those companies. The maximum investment by an employee is $25 per calendar year. The Company has recorded the shares issued under the Plan at fair value. No compensation cost has been 10K-40 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) recorded as this was reimbursed pursuant to the service agreements with CNA (Bermuda) Services Limited ("CNA Bermuda") and Aon Risk Consultants (Bermuda) Limited ("ARC Bermuda"). PREFERRED SHARES
1997 1996 --------- ---- Number issued and fully paid............................... 3,000,000 Nil --------- --- Share capital.............................................. $ 3,000 $ 0 Additional paid in capital................................. $ 70,283 $ 0
In March 1997, the Company issued 3,000,000 Series A Preferred Shares, par value $1.00 per share. These shares are entitled to a liquidation preference of $25.00 per share. Dividends are cumulative at 8.75% of the liquidation preference per annum (equivalent to an annual rate of $2.1875 per share). On or after March 27, 2007, these shares will be redeemable, in whole or in part, at the option of the Company at a redemption price of $25.00 per share. 9. CATASTROPHE EQUITY PUT Effective July 1, 1997, the Company entered into a $100 million multi-year Catastrophe Equity Put ("CatEPut") option program. The CatEPut option enables the Company to sell up to $100 million of equity, through the issue of convertible Series B Preferred Shares to the option writers. The preferred shares can be redeemed by the Company at any time over the three years following their issue. In addition, the option writers can convert their preferred shares into Common Shares of the Company at any time after they have been outstanding for three years. Conversion is at the greater of the book value of the Company at the date of conversion or the market value of the Common Shares based on the 30-day trading average prior to conversion. The Company is obligated to pay an option premium of $2,350 per annum. The option premium is charged to additional paid in capital, net of the minority's interest of $495. Of the option premium, $422 is payable to affiliates of shareholders of the Company. 10. SHARE PURCHASE OPTIONS AND STOCK APPRECIATION RIGHTS (a) Non-compensatory The Company has issued options to purchase 136,350 Common Shares to certain shareholders and their affiliates and LaSalle Re has issued options to purchase 2,199,780 Exchangeable Non-Voting Shares. These options became exercisable on October 1, 1996 and may be exercised until November 22, 2003. During the year ended September 30, 1997, 95,679 options were exercised at a price of $9.74. In addition, 136,350 options to purchase Exchangeable Non- Voting Shares were bought by the Company at a price of $24.97 and subsequently cancelled. As at September 30, 1997, the Company and LaSalle Re had outstanding 136,350 options to purchase Common Shares and 1,967,751 options to purchase Exchangeable Non-Voting Shares, respectively. The original exercise price of the options was $16.67 per share, which was equal to the fair value of the Company's shares at the grant date, minus dividend adjustments. The current exercise price is $9.03. As the options were granted to certain of the Founding Shareholders and their affiliates as an inducement to purchase stock in LaSalle Re, no compensation expense has been recorded in connection with the options. (b)(i) Compensatory--Stock Appreciation Rights In consideration for entering into an employment agreement with LaSalle Re, the Company's Chief Executive Officer (the "Executive") was granted a total of 340,872 Stock Appreciation Rights (SARs) during 1994. Upon exercise, the SARs entitle the Executive to a cash payment equal to the value of the SARs as of the 10K-41 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) exercise date. Alternatively, at the Company's sole discretion, the SARs will entitle the Executive to either (i) the number of Special Non-Voting Shares of LaSalle Re equal to the aggregate value of the SARs divided by the fair value of a Common Share at the exercise date, or (ii) upon payment of the base value for each SAR, the number of Special Non-Voting Shares of LaSalle Re equal to the number of SARs exercised. The value of each SAR equals the fair market value of a Common Share less the base value on the exercise date, subject to anti-dilution adjustments. The fair market value shall be determined by the board of directors of the Company, but shall be based on the market price of the Common Shares. The base value of each SAR at the time of issuance was $16.67, minus dividend adjustments. The current base value is $9.03. The number of SARs which can be exercised is dependent upon the internal rate of return achieved during the period from November 22, 1993 through to the date of exercise and ending on March 30, 2004 or, if earlier, two years after the Chief Executive Officer's termination of employment. SARs will not be exercisable unless a targeted internal rate of return of at least 18% per annum is achieved during the entire measurement period. The internal rate of return is based upon the financial performance of LaSalle Re from inception to November 27, 1995 and LaSalle Re Holdings Limited's consolidated performance from that date forward. As at September 30, 1997, the number of SARs vested is 68,174, which became exercisable on January 1, 1997. The remaining balance of SARs become exercisable on January 1 of each of 1998 or 1999. At September 30, 1997, the Company's internal rate of return has exceeded 18% and therefore the Company has charged an expense of $1,611 (1996 : $909; 1995 : $240). (b)(ii) Compensatory--Options In November 1995, the Company adopted a Long Term Incentive Plan (the "Incentive Plan") which permits the award of various incentives to employees of the Company, its subsidiaries and other persons providing services to those companies. Under the Incentive Plan, the options granted vest ratably in five annual installments over 5 years from the grant date, except for 85,218 options granted in 1997 which vest ratably in three annual installments over 3 years from the date of grant. The options can be exercised over a 10-year period, commencing on the vesting date. The exercise price of the options is subject to anti-dilution adjustments, which make the options granted under the plan variable. The Company has charged an expense of $716 (1996 : $81; 1995 : $Nil) relating to the compensation on these options. The following table is a summary of the options granted and outstanding during 1997 and 1996. No options were granted or outstanding in the year ended September 30, 1995.
1997 1996 --------------------------- --------------------------- WEIGHTED AVERAGE WEIGHTED AVERAGE EXERCISE PRICE AS EXERCISE PRICE AS NUMBER ADJUSTED FOR NUMBER ADJUSTED FOR OF SHARES DIVIDENDS OF SHARES DIVIDENDS --------- ----------------- --------- ----------------- Outstanding --beginning of year... 163,218 $18.75 0 $ 0.00 Granted................. 283,218 $28.75 163,218 $19.25 ------- ------- Outstanding --end of year......... 446,436 $23.67 163,218 $18.75 ======= =======
Of the 446,436 options granted, 32,644 options are presently exercisable at an exercise price of $17.33, as adjusted for dividends. The remaining options are not presently exercisable and have a weighted average vesting period of 3.75 years. 10K-42 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The weighted average fair value of options granted during 1997 is $8.18 (1996 : $5.85) per share. The fair value of each option grant in 1997 is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions : dividend yield of 0% per annum; expected volatility of 10%; expected life of 10 years; and a risk free interest rate of 5.6%. The Company applies APB Opinion 25 and Related Interpretations in accounting for the Incentive Plan. Accordingly, a compensation cost has been recognized based on the intrinsic value of the options at the measurement date. The net income and earnings per share would have been reduced to the pro forma amounts indicated below had compensation cost been determined based on the fair value of the options at the grant date consistent with the method of SFAS No 123:
1997 1996 ------- ------- Net income................................... As reported $97,077 $81,485 Pro forma $97,098 $81,202 Primary earnings per share................... As reported $ 5.14 $ 5.40 Pro forma $ 5.14 $ 5.39
There are no comparatives for the year ended September 30, 1995 as no options had been granted. 11. RELATED PARTY TRANSACTIONS In addition to the share purchase options discussed in Note 10 and the CatEPut transaction discussed in Note 9, LaSalle Re has entered into the following transactions and agreements with companies related to the Founding Shareholders. (a) Premiums written During the year ended September 30, 1997, LaSalle Re assumed premiums written of approximately $21,408 (1996 : $24,045; 1995 : $28,836) from a ceding company related to a shareholder of LaSalle Re. In addition, LaSalle Re assumed premiums totalling $28,450 (1996 : $23,577; 1995 : $22,057) through brokers related to a shareholder of LaSalle Re. Brokerage fees incurred in respect of this business were approximately $2,845 (1996 : $2,357; 1995 : $2,206). All such transactions were undertaken on normal commercial terms. Reinsurance balances receivable at the balance sheet date include $13,481 (1996 : $11,700) due from such related parties. (b) Underwriting services LaSalle Re is party to an underwriting services agreement with CNA Bermuda. Under this agreement, LaSalle Re has granted CNA Bermuda the authority to provide underwriting services and to underwrite all classes of insurance and reinsurance as agents for LaSalle Re. LaSalle Re has agreed to pay fees to CNA Bermuda as follows: With effect from January 1, 1996: (i) 1.5% of the gross written and collected premium per fiscal year; and (ii) An underwriting profit commission equal to 4.0% of the aggregate net underwriting profits of LaSalle Re, where certain conditions are met. Prior to January 1, 1996: (i) 2.0% of the gross written and collected premium per fiscal year, up to premium of $150,000 plus 1.5% of the gross written and collected premium in excess of $150,000; and 10K-43 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (ii) An underwriting profit commission equal to 2.5% of the aggregate net underwriting profits of LaSalle Re, where certain conditions are met. The Company has incurred $2,526 (1996 : $3,081; 1995 : $3,411) for underwriting services provided for the year ended September 30, 1997, of which $2,903 (1996 : $2,482) was payable at September 30, 1997. The Company has incurred $4,061 (1996 : $4,140; 1995 : $2,186) for underwriting profit commission for the year ended September 30, 1997, of which $2,890 was payable at September 30, 1997 (1996 : $3,350). (c) Administrative services During the period from the incorporation of LaSalle Re until September 30, 1997, LaSalle Re was party to an agreement with ARC Bermuda. Under this agreement, ARC Bermuda performed certain actuarial and administrative services on behalf of the Company. The management fees payable to ARC Bermuda during this period were as follows:
CALENDAR YEAR ------------- 1994 $3,000 1995 $5,000 1996 $7,000 1997 $3,300 and an underwriting profit commission equal to 2.75% of the aggregate net underwriting profit of LaSalle Re, where certain conditions were met.
The Company has incurred $6,212 (1996 : $6,500; 1995 : $4,500) for administrative services for the year ended September 30, 1997, of which $1,987 was payable at September 30, 1997 (1996 : $Nil). Following the termination of the agreement, all personnel assigned to the Company by ARC Bermuda became employees of the Company and all services performed by ARC Bermuda are now performed in- house. (d) Investment management services LaSalle Re is party to an agreement with Aon Advisors (UK) Limited ("Aon UK") to provide investment management services. Fees are based on the average daily balance of the investment portfolio of the preceding quarter. The average daily balance is split into various bands, with fees calculated by applying a sliding scale of basis points to each band. In July 1997, the company re-negotiated a flat fee with Aon UK. The Company has incurred $1,057 (1996 : $1,028; 1995 : $987) for services provided for the year ended September 30, 1997, of which $215 (1996 : $272) was payable at September 30, 1997. (e) Claims handling services LaSalle Re was party to an agreement with Integrated Runoff Insurance Services Corporation ("IRISC") whereby IRISC performed certain claims handling services for LaSalle Re. The contract expired December 31, 1996. The Company has incurred $16 (1996 : $92; 1995 : $78) for services provided for the year ended September 30, 1997, of which $Nil (1996 : $Nil) was payable at September 30, 1997. 10K-44 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (f) Reinsurance Services Effective January 1, 1997, LaSalle Re is party to a fronting agreement with Hedge Financial Products, an affiliate of CNA. CNA reinsures LaSalle Re 100% for the liabilities fronted. LaSalle Re received an administration fee of $250 for the services provided in the 1997 calendar year. As at September 30, 1997, fees due to the Company were $188, of which $60 was receivable. 12. CONCENTRATION OF CREDIT RISK The Company has investment guidelines which restrict investments in securities below an "AA" grade rating to 20% of the total portfolio and only 10% of the total portfolio can be invested in "BBB" grade rating. During the year the Company amended the guidelines to allow up to $5,000 to be invested in catastrophe bonds. These bonds may carry a rating below "BBB". In addition, the guidelines restrict investments in a single issuer to no greater than 5% of the market value of the portfolio (except for U.S. and U.K. Government issues) and, with respect to country of issue, to no greater than 25% of the market value of the portfolio, except for U.S. and supernational borrowers. A broker, who is unrelated to the Company, arranged more than 15% of the Company's premiums written for the year ended September 30, 1997 (1996 : 16%; 1995 : 21%). Another broker, who is unrelated to the Company, arranged more than 10% of the Company's premiums written for the year ended September 30, 1997 (1996 and 1995: less than 10%). A broker, who is related to the Company, arranged more than 16% of the Company's premiums written for the year ended September 30, 1997 (1996 : 12%; 1995 : 10%). Approximately 13% (1996 : 13%; 1995 : 15%) of the gross premiums written for the year ended September 30, 1997 were ceded by related companies. 13. OUTSTANDING LOSSES AND LOSS EXPENSES Activity in liability for losses and loss expenses during the years ended September 30, 1997, 1996 and 1995 is summarized as follows:
1997 1996 1995 -------- -------- -------- Balance as of October 1........................... $ 49,875 $ 66,654 $ 37,789 -------- -------- -------- Incurred related to: Current year.................................... 22,095 31,910 52,587 Prior year events............................... 9,104 19,567 7,810 -------- -------- -------- 31,199 51,477 60,397 -------- -------- -------- Paid related to: Current year.................................... (3,216) (10,222) ( 7,572) Prior year...................................... (32,367) (58,034) (23,960) -------- -------- -------- (35,583) (68,256) (31,532) -------- -------- -------- Balance as of September 30........................ $ 45,491 $ 49,875 $ 66,654 ======== ======== ========
The prior year development in 1997 relates primarily to an additional liability on Hurricane Fran, which occurred in September 1996. In addition, the Company has experienced late reporting on certain aggregate cover policies, with loss notifications being received in 1997 for contracts underwritten in prior years. The amounts incurred in respect of prior year losses in 1996 relate primarily to Hurricanes Luis and Marilyn, which occurred 10K-45 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) in September 1995. Additional information reported by ceding companies in the months following the losses necessitated the provision of additional liabilities. This impact has been mitigated by the collection of additional reinstatement premiums. In respect of 1995, additional losses of $5,700 (gross of reinstatements of approximately $1,100) related to development on the Northridge earthquake, reflecting an increase in the market estimates of anticipated total insured loss. 14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company's functional currency is the U.S. dollar, however, as the Company operates internationally, it has exposure to changes in foreign currency exchange rates. These exposures include net cash inflows on non-U.S. dollar denominated insurance premiums. To manage the Company's exposure to these risks, the Company may enter into foreign exchange contracts in the major currencies to which the Company is exposed. These contracts generally involve the exchange of one currency for another at some future date. At September 30, 1997, the Company had no foreign exchange contracts in place. At September 30, 1996, the Company had a notional principal amount outstanding of approximately $25,192 in contracts to sell foreign currencies in the future. The fair value of these contracts, based on quoted forward rates available for the maturity of the contracts, as at September 30, 1996 was $(571). Losses of $1,906 (1996: $294 and 1995: $756) are included in the Statements of Operations with respect to foreign exchange contracts. The Company may also enter into foreign exchange contracts to manage the exposures relating to known reinsurance losses denominated in foreign currencies. However, no such contracts had been entered into at September 30, 1997. 15. CREDIT FACILITY The Company has in place a $100 million committed line of credit from a syndicate of banks. The proceeds from the credit facility may only be used to buy preferred shares of LaSalle Re, which in turn may use the proceeds of such purchase to meet current cash requirements. The facility matures December 1, 2000, and is secured by a pledge ("legal mortgage") of all the capital stock of LaSalle Re held by the Company, including any preferred shares that may be issued by LaSalle Re to the Company. As at September 30, 1997, the facility had not been utilized. The line of credit contains various covenants, including: limitations on incurring additional indebtedness; prohibitions of dividends and other restricted payments that would cause the Company's tangible net worth (total shareholders' equity and minority interest) to fall below $375 million for calendar years 1997 and 1998, and $400 million thereafter; restriction of dividends per fiscal quarter to 12.5% of consolidated net income of the Company for the immediately preceding fiscal year; restrictions on the sale or lease of assets not in the ordinary course of business; maintenance of a ratio of consolidated total debt to consolidated tangible net worth of no more than 0.40 to 1.00; maintenance of tangible net worth at the end of each fiscal year of the greater of $300 million or 70% of net premiums written; maintenance of statutory capital of LaSalle Re at the end of each fiscal year of at least $300 million; and maintenance of a ratio of net premiums written to statutory capital at the end of any fiscal quarter for the four fiscal quarters then ended of no more than 1.00 to 1.00 in each case. In order for the Company to pay dividends in excess of 50% of net income, the Company would have to renegotiate certain terms of its credit facility. As of September 30, 1997, the credit facility had not been utilized and the Company was in compliance with all covenants under the facility. 10K-46 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 16. STATUTORY DATA The Company's ability to pay dividends is subject to certain regulatory restrictions on the payment of dividends by LaSalle Re. Under the Insurance Act 1978, amendments thereto and related regulations of Bermuda, LaSalle Re is required to prepare statutory financial statements and to file in Bermuda a statutory financial return. LaSalle Re is required to maintain certain measures of solvency and liquidity. The statutory capital and surplus of LaSalle Re at September 30, 1997 was approximately $490,000 (1996: $477,000) and the minimum required statutory capital and surplus required by its license as a Class 4 insurer was $100,000 (1996: $100,000). In this regard, the declaration of dividends from retained earnings and distributions from additional paid in capital is limited to the extent that the above requirements are met. At September 30, 1997, there were no restrictions on the distribution of retained earnings. 17. SEGMENTAL INFORMATION The following table sets forth the Company's gross premiums written and the percentage thereof allocated to the zone of exposure for the years ended September 30, 1997, 1996 and 1995:
1997 1996 1995 --------------- -------------- -------------- PREMIUMS PREMIUMS PREMIUMS WRITTEN % WRITTEN % WRITTEN % -------- ----- -------- ----- -------- ----- United States................. $ 75,338 44.0% $ 79,357 41.7% $ 91,561 45.4% Europe (excluding the U.K.)... 18,553 10.8 21,959 11.6 21,041 10.4 United Kingdom................ 15,165 8.8 16,310 8.6 14,089 7.0 Japan......................... 6,949 4.1 7,998 4.2 7,642 3.8 Australasia................... 6,472 3.8 11,038 5.8 9,756 4.8 Worldwide..................... 20,872 12.2 22,049 11.6 26,893 13.3 Worldwide (excluding U.S.).... 12,579 7.3 11,451 6.0 8,789 4.4 Other......................... 11,628 6.8 16,433 8.6 16,128 8.0 Lloyds syndicates............. 14,125 8.2 0 0.0 0 0.0 Reinstatements, adjustment premiums and no claim bonuses...................... (10,295) (6.0) 3,556 1.9 6,017 2.9 -------- ----- -------- ----- -------- ----- $171,386 100.0% $190,151 100.0% $201,916 100.0% ======== ===== ======== ===== ======== =====
18. TAXATION Under current Bermuda law, the Company is not required to pay any taxes in Bermuda on either income or capital gains. The Company has received an undertaking from the Minister of Finance in Bermuda that will exempt the Company from taxation until the year 2016 in the event of any such taxes being imposed. The Company does not consider itself to be engaged in a trade or business in the United States and accordingly does not expect to be subject to United States income taxes. 10K-47 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 19. UNAUDITED QUARTERLY FINANCIAL DATA Year ended September 30, 1997
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- Net premiums earned............................ $43,123 $41,400 $45,903 $33,507 Net investment income (net of realized gains (losses))..................................... 8,179 8,535 7,904 9,046 Losses and loss expenses incurred.............. 10,837 6,886 4,475 9,001 Net income (before minority interest).......... 28,047 32,698 37,685 23,038 Net income per share........................... $ 1.16 $ 1.34 $ 1.63 $ 1.02 Year ended September 30, 1996 FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- Net premiums earned............................ $49,445 $53,647 $55,294 $36,755 Net investment income (net of realized gains (losses))..................................... 6,204 6,399 6,789 7,036 Losses and loss expenses incurred.............. 15,882 18,354 9,954 7,287 Net income (before minority interest).......... 29,400 31,332 40,818 27,901 Net income per share........................... $ 1.23 $ 1.31 $ 1.70 $ 1.16
10K-48 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS For information regarding the Company's executive officers, see "Executive Officers of the Company" in Part I. The other information required by this Item 10 is incorporated by reference to the information contained under the captions "Election of Directors", "Nominees", "Meetings and Committees of the Board of Directors" and "Section 16 Reporting" in the 1998 Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information required for this item is incorporated by reference to the information contained under the caption "Management" in the 1998 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required for this item is incorporated by reference to the information contained under the caption "Beneficial Ownership of Common Shares--Directors, Officers and Other Beneficial Owners" in the 1998 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required for this item is incorporated by reference to the information contained under the caption "Certain Transactions" in the 1998 Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K The following documents are filed as a part of this report: (a) Financial Statements and Schedules: 1. Financial Statements See Index to Financial Statements on page 26 of this report, which is incorporated herein by reference. 2. Financial Statement Schedules: Schedules have been omitted since the required information is presented elsewhere in this report or is not applicable. 3. Exhibits See Index to Exhibits on pages 52 to 55 of this report, which is incorporated herein by reference. (b) Reports on Form 8-K: The following reports on Form 8-K were filed during the last quarter of the period covered by this report.
ITEMS FINANCIAL DATE REPORTED STATEMENTS ---- -------- ---------- July 7, 1997 9 No
(c) Exhibits: The Exhibits required by Item 601 of Regulation S-K are listed in the Index to Exhibits on pages 52 to 55 of this report, which is incorporated herein by reference. These Exhibits have been omitted from the copies of this Form 10-K that are being distributed to shareholders. The Company will furnish a copy of any Exhibit to any shareholder upon written request and upon payment of a fee to cover the Company's reasonable expenses in furnishing such Exhibit. Such requests may be made to: Investor Relations Department, LaSalle Re Holdings Limited, Continental Building, Church Street, Hamilton HM 12, Bermuda. 10K-49 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN BERMUDA, ON THE 11TH DAY OF DECEMBER, 1997. LaSalle Re Holdings Limited /s/ Andrew Cook By: _________________________________ Name: Andrew Cook Title: Senior Vice President and Chief Financial Officer POWER OF ATTORNEY EACH PERSON WHOSE SIGNATURE APPEARS BELOW CONSTITUTES AND APPOINTS VICTOR H. BLAKE, ANDREW COOK, CLARE MORAN AND IVAN BERK, OR ANY OF THEM, AS SUCH PERSON'S TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH FULL POWER OF SUBSTITUTION AND RESUBSTITUTION, TO SIGN ANY AND ALL AMENDMENTS TO THIS REPORT, AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED AND ON THE 11TH DAY OF DECEMBER, 1997.
SIGNATURE TITLE --------- ----- /s/ Victor H. Blake Chairman, President and Chief Executive ___________________________________________ Officer (Principal Executive Officer) Victor H. Blake /s/ Andrew Cook Senior Vice President and Chief Financial ___________________________________________ Officer (Principal Financial Officer) Andrew Cook /s/ Clare Moran Assistant Vice President--Financial ___________________________________________ Reporting (Principal Accounting Officer) Clare Moran /s/ William J. Adamson, Jr. Director ___________________________________________ William J. Adamson, Jr. /s/ Ivan P. Berk Director ___________________________________________ Ivan P. Berk /s/ Jonathan H. Kagan Director ___________________________________________ Jonathan H. Kagan /s/ Donald P. Koziol, Jr. Director ___________________________________________ Donald P. Koziol, Jr.
10K-50
SIGNATURE TITLE --------- ----- /s/ Tim I. Madden Director ___________________________________________ Tim I. Madden /s/ Lester Pollack Director ___________________________________________ Lester Pollack /s/ Peter J. Rackley Director ___________________________________________ Peter J. Rackley /s/ Paul J. Zepf Director ___________________________________________
Paul J. Zepf 10K-51 INDEX TO EXHIBITS Certain of the following documents are filed herewith. Certain other of the following documents have been previously filed with the Securities and Exchange Commission and, pursuant to Rule 12b-32, are incorporated herein by reference.
EXHIBIT NUMBER DESCRIPTION METHOD OF FILING ------- ----------- ---------------- 3.1 Memorandum of Association Incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-1 (No. 33- 97304) 3.2 Bye-Laws Incorporated by reference to Exhibit 3.1 to Form 10-Q for the quarterly period ended December 31, 1995 (File No. 0-27216) 10.1 Excess Ownership Agreement dated Incorporated by reference to November 27, 1995 among the Exhibit 10.3 to Form 10-Q for the Company, LaSalle Re and the quarterly period ended December 31, Founding Shareholders 1995 (File No. 0-27216) 10.2 Amended and Restated Shareholders Incorporated by reference to Agreement dated November 27, 1995 Exhibit 10.1 to Form 10-Q for the among the Company, LaSalle Re and quarterly period ended December 31, the Founding Shareholders 1995 (File No. 0-27216) 10.3 Amended and Restated Option Incorporated by reference to Agreement dated November 27, 1995 Exhibit 10.2 to Form 10-Q for the among the Company, LaSalle Re and quarterly period ended December 31, certain of the Founding 1995 (File No. 0-27216) Shareholders 10.4 Conversion Agreement dated Incorporated by reference to November 27, 1995 among the Exhibit 10.4 to Form 10-Q for the Company, LaSalle Re and holders quarterly period ended December 31, of Exchangeable Non-Voting Shares 1995 (File No. 0-27216) 10.5 Amended and Restated Employment Incorporated by reference to Agreement dated October 1, 1995 Exhibit 10.5 to Form 10-Q for the between Victor H. Blake and quarterly period ended December 31, LaSalle Re* 1995 (File No. 0-27216) 10.6 Amended and Restated Underwriting Incorporated by reference to Services Agreement dated Exhibit 10.6 to Form 10-Q for the September 21, 1995 among the quarterly period ended December 31, Company, LaSalle Re and CNA 1995 (File No. 0-27216) Bermuda** 10.7 Amended and Restated Incorporated by reference to Administrative Services Agreement Exhibit 10.7 to Form 10-Q for the dated September 21, 1995 among quarterly period ended December 31, the Company, LaSalle Re and ARC 1995 (File No. 0-27216) 10.8 Amended and Restated Investment Incorporated by reference to Management Agreement dated Exhibit 10.8 to Registration September 21, 1995 among the Statement on Form S-1 (No. 333- Company, LaSalle Re and Aon 14861) Advisors
- -------- * Management contract or compensatory plan. ** Pursuant to this service agreement, the services of Mr. Hengesbaugh are provided to the Company. 10K-52
EXHIBIT NUMBER DESCRIPTION METHOD OF FILING ------- ----------- ---------------- 10.9 Claims Agreement dated December Incorporated by reference to 16, 1993 between LaSalle Re and Exhibit 10.9 to Registration Integrated Runoff Insurance Statement on Form S-1 (No. 333- Services Corporation 14861) 10.10 Employment Agreement dated Incorporated by reference to October 1, 1995 between Andrew Exhibit 10.10 to Form Cook and LaSalle Re* 10-Q for the quarterly period ended December 31, 1995 (File No. 0-27216) 10.11 Credit Agreement dated as of Incorporated by reference to December 1, 1995 among the Exhibit 10.9 to Form 10-Q for the Company, several banks and quarterly period ended December 31, Chemical Bank, as administrative 1995 (File No. 0-27216) agent 10.12 First Amendment, dated September Incorporated by reference to 25, 1996, among the Company, Exhibit 10.12 to Registration several banks and Chase Manhattan Statement on Form S-1 (No. 333- Bank as administrative agent, to 14861) Credit Agreement dated as of December 1, 1995 among the Company, several banks and Chemical Bank, as administrative agent 10.13 LaSalle Re Holdings Limited 1996 Incorporated by reference to Long-Term Incentive Plan* Exhibit 10.13 to Registration Statement on Form S-1 (No. 333- 14861) 10.14 LaSalle Re Holdings Limited Incorporated by reference to Employee Stock Purchase Plan* Exhibit 10.14 to Registration Statement on Form S-1 (No. 333- 14861) 10.15 First Amendment dated July 1, Incorporated by reference to 1996 to Amended and Restated Exhibit 10.15 to Registration Underwriting Services Agreement Statement on Form S-1 (No. 333- dated as of September 21, 1995 14861) between CNA Bermuda and LaSalle Re 10.16 First Amendment dated July 1, Incorporated by reference to 1996 to Amended and Restated Exhibit 10.16 to Registration Administrative Services Agreement Statement on Form S-1 (No. 333- dated as of September 21, 1995 14861) between ARC and LaSalle Re 10.17 Quota Share Treaty between CNA Incorporated by reference to International Reinsurance Company Exhibit 10.17 to Registration Limited and LaSalle Re in respect Statement on Form S-1 (No. 333- of 1994 underwriting year of 14861) account (London office) 10.18 Quota Share Treaty between CNA Incorporated by reference to International Reinsurance Company Exhibit 10.18 to Registration Limited and LaSalle Re in respect Statement on Form S-1 (No. 333- of 1995 underwriting year of 14861) account (London office)
- -------- * Management contract or compensatory plan. 10K-53
EXHIBIT NUMBER DESCRIPTION METHOD OF FILING ------- ----------- ---------------- 10.19 Quota Share Treaty between CNA Incorporated by reference to International Reinsurance Company Exhibit 10.19 to Registration Limited and LaSalle Re in respect Statement on Form S-1 (No. of 1996 underwriting year of 333-14861) account (London office) 10.20 Quota Share Treaty between CNA Incorporated by reference to International Reinsurance Company Exhibit 10.20 to Registration Limited and LaSalle Re in respect Statement on Form S-1 (No. of 1994 underwriting year of 333-14861) account (Amsterdam office) 10.21 Quota Share Treaty between CNA Incorporated by reference to International Reinsurance Company Exhibit 10.21 to Registration Limited and LaSalle Re in respect Statement on Form S-1 (No. of 1995 underwriting year of 333-14861) account (Amsterdam office) 10.22 Quota Share Treaty between CNA Incorporated by reference to International Reinsurance Company Exhibit 10.22 to Registration Limited and LaSalle Re in respect Statement on Form S-1 (No. of 1996 underwriting year of 333-14861) account (Amsterdam office) 10.23 LMX Quota Share Retrocessional Incorporated by reference to Agreement between Continental Exhibit 10.23 to Registration Casualty Company and LaSalle Re Statement on Form S-1 (No. for the 1995 underwriting year of 333-14861) account 10.24 LMX Quota Share Retrocessional Incorporated by reference to Agreement between Continental Exhibit 10.24 to Registration Casualty Company and LaSalle Re Statement on Form S-1 (No. for the 1996 underwriting year of 333-14861) account 10.25 Amendment of Amended and Restated Incorporated by reference to Employment Agreement dated as of Exhibit 10.25 to Registration October 1, 1996 between Victor H. Statement on Form S-1 (No. Blake and LaSalle Re* 333-14861) 10.26 Amendment of Employment Agreement Incorporated by reference to dated as of October 1, 1996 Exhibit 10.26 to Registration between Andrew Cook and LaSalle Statement on Form S-1 (No. Re* 333-14861) 10.27 Quota Share Treaty between CNA Filed with this document International Reinsurance Company Limited and LaSalle Re in respect of 1997 underwriting year of account (London office) 10.28 Quota Share Treaty between CNA Filed with this document International Reinsurance Company Limited and LaSalle Re in respect of 1997 underwriting year of account (Amsterdam office)
- -------- * Management contract or compensatory plan. 10K-54
EXHIBIT NUMBER DESCRIPTION METHOD OF FILING ------- ----------- ---------------- 10.29 LMX Quota Share Retrocessional Filed with this document Agreement between Continental Casualty Company and LaSalle Re for the 1997 underwriting year of account 10.30 Second Amendment, dated March 13, Filed with this document 1997, among the Company, several banks and Chase Manhattan Bank as administrative agent, to Credit Agreement dated as of December 1, 1995 among the Company, several banks and Chemical Bank, as administrative agent 10.31 Catastrophe Equity Securities Filed with this document Issuance Option Agreement, dated as of July 1, 1997 between the Company on the one hand and European Reinsurance Company of Zurich, Allianz Aktiengesellschaft, Continental Casualty Company and CIC- Hilldale, Inc. on the other hand 10.32 First Amendment to LaSalle Re Incorporated by reference to Holdings Limited 1996 Long-Term Exhibit 4.4 to Registration Incentive Plan, dated September Statement on Form S-8 (No. 25, 1997* 333-38653) 10.33 First Amendment to LaSalle Re Incorporated by reference to Holdings Limited Employee Stock Exhibit 4.4 to Registration Purchase Plan, September 25, Statement on Form S-8 (No. 1997* 333-38655) 10.34 Agreement, dated September 9, Filed with this document 1997, terminating the Amended and Restated Administrative Services Agreement dated September 21, 1995 among the Company, LaSalle Re and ARC 11.1 Statement re computation of per Filed with this document share earnings 12.1 Statement re computation of ratio Filed with this document of earnings to combined fixed charges and preferred share dividends 13.1 Selected Financial Data from the Filed with this document Annual Report to Shareholders for the fiscal year ended September 30, 1997 21.1 Subsidiaries of the Registrant Incorporated by reference to Exhibit 21.1 to Registration Statement on Form S-1 (No. 333-14861) 24.1 Power of Attorney Included on signature page 27.1 Financial Data Schedule Filed with this document
- -------- * Management contract or compensatory plan. 10K-55 EX-10.27 2 QUOTA SHARE TREATY (LONDON OFFICE) EXHIBIT 10.27 CNA Ref: 44 FIR --------------- Reassured:- CNA International Reinsurance Company Limited Period:- Continuous contract in respect of all business written by the Reassured and signed into their 1994 and subsequent Underwriting Years of Account Subject to three months prior notice of cancellation to expire at 31st December any year. HEREON: SIGNING SLIP IN RESPECT OF 1997 UNDERWRITING YEAR OF ACCOUNT. Type:- Quota Share Treaty Class:- The Reassured's Account of PROPERTY CATASTROPHE EXCESS OF LOSS TREATIES (including specific peril aggregate excess of loss written for a single territory) underwritten in their London Office. Excluding the Reinsured's interest whether direct or by way of reinsurance in loss arising from claim or claims against an Insured by another party or parties. Notwithstanding the foregoing this reinsurance shall not exclude: (a) Workers' Compensation and/or Employers' Liability losses arising from the following perils:- Fire, Lightning, Explosion, Structural Collapse, Windstorm, Hail, Flood, Seismic Activity, Volcanic Eruption, Collision, Riots, Strikes, Civil Commotion, Malicious Damage. (b) Any Physical Damage and/or Consequential loss coverage contingent thereon effected by an Insured on behalf of another party. Territorial Scope:- Worldwide excluding USA & Canada, other than incidental. Treaty Detail:- To take 50% Quota Share of the Reassured's participation subject to a maximum cession hereon of GBP 2,000,000 ($3,000,000) any one programme. Cessions in currencies other than sterling at rates of exchange as used in the books of the Reassured. Rate:- Original Net Premium as Original. Administrative Processing Fee:- 4.0% on Original Net Rate. Taxes:- As may be applicable on the original business. CNA Ref:44 FIR - -------------- Premium Reserve:- Not applicable. Loss Reserve:- As may be applicable on the original business. Portfolio:- Agreed, if and when requested by the Reassured, to close each Underwriting Year of Account at any time after the end of the third year at an amount sufficient to cover all outstanding losses as may be mutually agreed. Cash Loss:- At Reassured's discretion, Minimum $5,000,000. Accounts:- Quarterly Accounts in GBP and US$ separately on each year of account. Presentation within 45 days of end of quarter with settlement due within 30 days thereafter. General Conditions:- Monthly bordereau of risks ceded each January, February and March, quarterly thereafter. Full Reinsurance Clause War Exclusion G51 Nuclear Energy Risks Exclusion Clause (Reinsurance) 1984, NMA 1975 (Japanese Amendment) Nuclear Incident Exclusion Clauses - Physical Damage Reinsurance - USA & Canada Excluding Financial Guarantee and Insolvency Maximum Net Premium ceded hereon $22m Normal Maximum aggregate cession per country or territorial zone hereon GBP 30,000,000 exception is United Kingdom where maximum aggregate ceded is agreed at GBP 50,000,000. Insolvency Clause G86. Special cessions to be agreed by Reinsurers prior to binding Multi Year policies accepted by annual re-signing. Wording:- As before as far as applicable, any amendments to be agreed. Information:- 1997 Est. Net Premium Income US$ 15.4m (net of brokerage). Underwriting Authority as follows:- Ray Livesey VP - Full Underwriting Authority Cliff Downing AVP - Full Underwriting Authority John Byrne U/W - New & Renewals Simon Whelton Dep. U/W - New & Renewals Jim Harris Asst. U/W - Renewals HEREON: 100% LaSalle Re Signed /s/ Graham Waite Dated 23\1\97 ......................... ........................... on behalf of LaSalle Re TITLE: NON-OBLIGATORY QUOTA SHARE REINSURANCE AGREEMENT BETWEEN: CNA INTERNATIONAL REINSURANCE COMPANY LIMITED AND LA SALLE RE LTD COMMENCING: 1ST JANUARY, 1994 NON-OBLIGATORY QUOTA SHARE REINSURANCE AGREEMENT ------------------------------------------------ made between CNA INTERNATIONAL REINSURANCE COMPANY LIMITED (hereinafter referred to as 'the Reassured') and LA SALLE RE LTD (hereinafter referred to as 'the Reinsurers') PREAMBLE - -------- This Agreement is made and entered into between CNA International Reinsurance Company Ltd (hereinafter referred to as "the Reassured") and La Salle Re Ltd (hereinafter referred to as "the Reinsurers"), on the following terms and conditions. ARTICLE 1 --------- BUSINESS REINSURED - ------------------ This Agreement applies to policies and/or contracts of insurance and/or reinsurance allocated by the Reassured to its account of Property Catastrophe Excess of Loss Treaties (including specific peril aggregate excess of loss written for a single territory) written or renewed by the Reassured in its London Office. ARTICLE 2 --------- COVER, LIMIT AND RETENTION - -------------------------- The Reassured may cede and the Reinsurers shall accept by way of reinsurance under this Agreement, 50% Quota Share of all cessions coming within the scope of this Agreement, subject to a maximum Quota Share of cessions hereto of (pounds)2,000,000 or US$3,000,000 for any one programme. The Reassured shall retain the remaining 50% Quota Share for its own account but, without prejudice to the above, shall be at liberty to protect that retention by way of reinsurance for its own account and benefit. The maximum aggregate cession hereto per country or territorial zone is (pounds)30,000,000. - 2 - ARTICLE 3 --------- TERRITORIAL SCOPE - ----------------- This Agreement shall cover wherever cessions hereto cover other than losses occurring in the United States of America and/or Canada except where such loss exposures are incidental to the main hazard. ARTICLE 4 --------- PERIOD - ------ This Agreement takes effect on 1st January 1994 and applies to all business written or renewed by the Reassured and signed into its 1994 and/or subsequent Underwriting Years of Account. This Agreement shall remain in full force and effect unless and until terminated on 31st December 1994 or on any subsequent 31st December by either party giving to the other not less than three months prior written notice. For the purposes of this Agreement, the term of and participations in this Agreement shall be divided into separate Underwriting Years, each for twelve months commencing on 1st January. Each cession made by the Reassured and all accounting transactions relating thereto, shall be allocated by the Reassured to One Underwriting Year. In the event of cancellation, all cessions in force at Midnight on the date of cancellation shall remain covered under this Agreement until their individual natural expiration or termination whichever occurs first. Notwithstanding anything to the contrary contained in this Article, either party shall have the right to terminate this Agreement by giving the other party notice:- (a) if the performance of the whole or any part of this Agreement be prohibited or rendered impossible de jure or de facto in particular and without prejudice to the generality of the preceding words in consquence of any law or regulation which is or shall be in force in any country or territory or if any law or regulation shall prevent directly or indirectly the remittance of any or all or any part of the balance of payments due to or from either party; (b) if the other party has become insolvent or unable to pay its debts or has lost the whole or any part of its paid up capital; - 3 - (c) if there is any material change in the ownership or control of the other party; (d) if the country or territory in which the other party resides or has its head office or is incorporated shall be involved in armed hostilities with any other country whether war be declared or not or is partly or wholly occupied by another power; (e) if the other party shall have failed to comply with any of the terms and conditions of this Agreement. All notices of termination in accordance with any of the provisions of this Article shall be by Telex or telegram and shall be deemed to be served upon despatch or, where communications between the parties are interrupted, upon attempted despatch. All notices of termination served in accordance with any of the provisions of this Article shall be addressed to the party concerned at its head office or at any other address previously designated by that party. In the event of this Agreement being terminated at any date other than its natural expiry then the premium due to the Reinsurers shall be calculated upon the Original Net Premium income of the Reassured up to the date of termination. ARTICLE 5 --------- FOLLOW THE FORTUNES - ------------------- The Reinsurers' liability to the Reassured in respect of all cessions under this Agreement shall follow the liability of the Reassured to its reinsureds. ARTICLE 6 --------- FULL REINSURANCE - ---------------- The Reinsurers agree to follow and abide by all agreements, actions and/or settlements made by the Reassured and to agree, with or without notice, all alterations and/or additions and/or extensions made under the original cessions subsequent to the effecting of this Agreement, subject to the conditions of this Agreement. The Reinsurers expressly agree to pay in all respects as may be paid on the original cessions liable or not liable, including in addition where applicable a pro rata share of legal and/or other special expenses when incurred by the Reassured. - 4 - ARTICLE 7 --------- EXCLUSIONS - ---------- This Agreement does not cover: A. any liability assumed by the Reassured for loss or damage directly or indirectly occasioned by, happening through or in consequence of war, invasion, acts of foreign enemies, hostilities or war-like operations (whether war be declared or not), civil war, mutiny, civil commotion assuming the proportions of or amounting to a popular rising, insurrection, rebellion, revolution, military or usurped power, martial law, confiscation or nationalisation or requisition or destruction of or damage to property by or under the order of any Government or public or local authority. However, the foregoing exclusion shall not apply to those classes of business which are written in accordance with the War and Civil War Exclusion Agreement and/or the War and Civil War Risk Exclusion Agreement nor to business outside the scope of such Agreements unless such classes of business are not covered by this Agreement. In respect of losses arising in the United Kingdom only (other than in respect of losses arising under those classes of business covered hereunder which contain a War Inclusion Clause and such other classes of business covered hereunder for which there is no Market requirement for such other classes of business to contain a War Exclusion Clause by virtue of the operation of the War and Civil War Exclusion Agreement and/or the War and Civil War Risk Exclusion Agreement), this Agreement shall not cover any liability assumed by the Reassured for loss or damage directly or indirectly occasioned by, happening through or in consequence of any act of any person or persons acting on behalf of or in connection with any organisation the objects of which are to include the overthrowing or influencing of any de jure or de facto government by terrorism or by any violent means; B. the Reassured's interest whether direct or by way of reinsurance in loss arising from claim or claims against an insured by another party or parties. - 5 - Notwithstanding the foregoing this Agreement shall not exclude: 1) Workers' Compensation and/or Employers' Liability losses arising from the following perils:- Fire, Lightning, Explosion, Structural Collapse, Windstorm, Hail, Flood, Seismic Activity, Volcanic Eruption, Collision, Riots, Strikes, Civil Commotion, Malicious Damage; 2) Any Physical Damage and/or Consequential loss coverage contingent thereon effected by an insured on behalf of another party. C. Financial Guarantee and Insolvency. D. Nuclear Risks for those applicable classes of business and territories as appropriate in accordance with the clause referred to below and which shall form an integral part hereof, copies of which are on file with the Reassured:- NUCLEAR ENERGY RISKS EXCLUSION CLAUSE (REINSURANCE) (1984) - WORLDWIDE EXCLUDING U.S.A. AND CANADA - NMA 1975 Notwithstanding the provisions this Clause, in respect of Japanese business certain liabilities, the type of which by market practice and custom have not been declared to the Japanese Nuclear Pool shall not fall within the scope of this exclusion. ARTICLE 8 --------- PREMIUM - ------- In consideration of the liabilities undertaken by the Reinsurers in accordance with the terms of this Agreement, the Reassured shall pay to the Reinsurers their 50% Quota Share proportion of the Reassured's Original Net Premium in respect of all cessions hereto. The term "Original Net Premium" shall, for all purposes of this Agreement, be understood to mean the full gross amount of the premiums paid to the Reassured under the original cessions by their original insureds or reinsureds, less all original commissions, brokerage and taxes. The maximum Original Net Premium to be ceded to this Agreement for any one Underwriting Year shall be $18,000,000. - 6 - ARTICLE 9 --------- ADMINISTRATIVE PROCESSING FEE - ----------------------------- The Reinsurers agree to allow the Reassured to deduct and retain for its own benefit as administrative processing fee 2.5% of the Original Net Premium payable to the Reinsurers in accordance with the terms of Article 8, "Premium". ARTICLE 10 ---------- LOSSES AND LOSS EXPENSES - ------------------------ All loss settlements made by the Reassured, whether under strict policy conditions or by compromise, shall be unconditionally binding upon the Reinsurers who shall be liable for their Quota Share proportion thereof and of all expenses (other than the salaries of employees and office expenses of the Reassured) incurred by the Reassured in connection therewith. The Reinsurers shall benefit in their Quota Share proportion from any salvage or recoveries effected by the Reassured for the benefit of itself and the Reinsurers. Losses which the Reassured has paid shall be debited to the Reinsurers in the quarterly accounts rendered in accordance with Article 11, "Accounts, Reports and Payments" but, in the event of the Reassured sustaining a loss in respect of which the 100% Quota Share proportion amounts to or exceeds $5,000,000 any one occurrence, the Reassured shall have the option of requiring the Reinsurers to effect payment as soon as practicable upon submission of proof of loss. ARTICLE 11 ---------- ACCOUNTS, REPORTS AND PAYMENTS - ------------------------------ The Reassured shall render a separate quarterly statement of account for each Underwriting Year of Account during which this Agreement is in force showing a total of all premiums ceded to this Agreement during such quarter. The Reassured shall also furnish a separate quarterly loss statement for each such Underwriting Year of Account, showing losses paid, loss expenses and salvages coming within the terms of this Agreement and entered into the Reassured's books during such quarter. - 7 - The quarterly accounts shall be rendered within forty-five days after the end of each quarter. All accounts shall be rendered and settled in Sterling. Balances due to the Reinsurers shall be paid on delivery of the accounts, balances due to the Reassured shall be paid together with the confirmation but not later than thirty days after the receipt of the accounts. In case of objections, however, the amount not in dispute shall be paid at once and the difference as soon as agreement has been reached. The Reassured shall furnish quarterly bordereaux of cessions hereto. ARTICLE 12 ---------- COMMUTATION - ----------- If mutually agreed by the Reassured and the Reinsurers, at thirty-six months following the commencement of any Underwriting Year of this Agreement, or at any time thereafter, the Reassured may discharge the Reinsurers from all and/or further liability in respect of such Underwriting Year. The Reassured will prepare a report evaluating loss reserves and liabilities to establish a basis for the discussion of commutation. The payment by the Reinsurers of an amount mutually agreed will constitute a complete and final release of the Reinsurers in respect of all liability relating to such Underwriting Year. ARTICLE 13 ---------- LOSS RESERVES - ------------- Where required by original ceding companies, outstanding loss reserves will be established by the Reassured and reference thereto shall be included in the quarterly bordereaux referred to in Article 11 "Accounts, Reports and Payments". ARTICLE 14 ---------- CURRENCY - -------- The currency to be used for all purposes of this Agreement shall be Pounds Sterling. Cessions in currencies other than Pounds Sterling shall be converted to Pounds Sterling at the rates of exchange used in the Reassured's books. - 8 - ARTICLE 15 ---------- INSOLVENCY OF THE REASSURED - --------------------------- Amounts due to the Reassured under this Agreement shall be payable by the Reinsurers on the basis of the liability of the Reassured under the cessions hereto without diminution because of the insolvency of the Reassured. In the event of the insolvency of the Reassured, the Liquidator or Receiver or Statutory Successor of the Reassured shall give written notice to the Reinsurers of the pendency of any claim against the insolvent Reassured on the cessions hereto within a reasonable time after such claim is filed in the insolvency proceedings. During the pendency of such claim the Reinsurers may investigate such claim and intervene, at their own expense, in the proceedings where such a claim is to be adjudicated and interpose any defence or defences which they may deem available to the Reassured or its Liquidator or Receiver or Statutory Successor. The expense thus incurred by the Reinsurers shall be chargeable, subject to court approval, against the insolvent Reassured as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Reassured solely as a result of the defence so undertaken by the Reinsurers. When two or more Reinsurers are involved in the same claim and a majority in interest elect to investigate the claim and/or interpose defence to such claim, the expense shall be apportioned in accordance with the terms of the above paragraph as though such expense had been incurred by the Reassured. Should the Reassured go into liquidation or should a receiver be appointed, the Reinsurers shall be entitled to deduct from any sums which may be or may become due to the Reassured under this Agreement any sums which are due to the Reinsurers from the Reassured under this Agreement and which are payable at a fixed or stated date, as well as any other sums due to the Reinsurers which are permitted to be offset under applicable law. In the event of the insolvency of the Reassured, the amounts due to the Reassured under this Agreement shall be payable by the Reinsurers directly to the Reassured or to its Liquidator, Receiver or Statutory Successor. - 9 - ARTICLE 16 ---------- DELAYS, ERRORS OR OMISSIONS - --------------------------- No inadvertent delay, error or omission shall be held to relieve either party hereto of any liability which would have attached to them under this Agreement if such delay, error or omission had not been made, provided that rectification is made immediately upon discovery. ARTICLE 17 ---------- AMENDMENTS AND ALTERATIONS - -------------------------- The terms herein contained comprise the whole Agreement between the Reassured and the Reinsurers and may only be changed in writing, signed by or on behalf of both parties. ARTICLE 18 ---------- ACCESS TO RECORDS - ----------------- All documents and records in the possession of the Reassured concerning this Agreement shall be made available upon reasonable notice at the request of the Reinsurers for inspection by the Reinsurers or their nominated representatives for the purposes of obtaining information concerning this Agreement or the subject matter hereof. For the avoidance of doubt, the rights given to the Reinsurers by this Article shall continue in effect notwithstanding the termination of this Agreement and shall be exercised at the Reinsurers' own expense. ARTICLE 19 ---------- OFFSET - ------ Each party hereto shall have and may exercise in the event of the insolvency of the other or the non-payment by the other of obligations where due hereunder, the right to offset any balance or balances whether on account or premiums, commissions, claims or losses, adjustment expenses, salvage or any other amount due from that party to the other party hereto under this Agreement against the balance or balances due or to become due to the offsetting party from the other party under this Agreement. - 10 - ARTICLE 20 ---------- ARBITRATION - ----------- 1. All matters in difference between the parties arising under, out of or in connection with this Agreement, including formation and validity, and whether arising during or after the period of this Agreement, shall be referred to an arbitration tribunal in the manner hereinafter set out. 2. Unless the parties appoint a sole arbitrator within 14 days of one receiving a written request from the other for arbitration, the claimant (the party requesting arbitration) shall appoint his arbitrator and give written notice thereof to the respondent. Within 30 days of receiving such notice the respondent shall appoint his arbitrator and give written notice thereof to the claimant, failing which the claimant may apply to the appointor hereafter named to nominate an arbitrator on behalf of the respondent. 3. Before they enter upon a reference the two arbitrators shall appoint a third arbitrator. Should they fail to appoint such a third arbitrator within 30 days of the appointment of the respondent's arbitrator then either of them or either of the parties may apply to the appointor for the appointment of the third arbitrator. The three arbitrators shall decide by majority. If no majority can be reached the verdict of the third arbitrator shall prevail. He shall also act as chairman of the tribunal. 4. Unless the parties otherwise agree the arbitration tribunal shall consist of persons (including those who have retired) with not less than ten years experience of insurance or reinsurance as persons engaged in the industry itself or as lawyers or other professional advisers. 5. The arbitration tribunal shall, so far as is permissible under the law and practice of the place of arbitration, have power to fix all procedural rules for the holding of the arbitration including discretionary power to make orders as to any matters which it may consider proper in the circumstances of the case with regard to pleadings, discovery, inspection of the documents, examination of witnesses and any other matter whatsoever relating to the conduct of the arbitration and may receive and act upon such evidence whether oral or written strictly admissible or not as it shall in its discretion think fit. -11- 6. The appointor shall be the Chairman for the time being of ARIAS (UK) or if he is unavailable or it is inappropriate for him to act for any reason, such person as may be nominated by the Committee of ARIAS (UK). If for any reason such persons decline or are unable to act, then the appointor shall be the Judge of the appropriate Courts having jurisdiction at the place of arbitration. 7. All costs of the arbitration shall be determined by the arbitration tribunal who may, taking into account the law and practice of the place of arbitration, direct to and by whom and in what manner they shall be paid. 8. The place of arbitration may be chosen by the parties, but in default of such choice, the place of arbitration shall be London, England. 9. The proper law of this Agreement shall be the law of England. 10. The award of the arbitration tribunal shall be in writing and binding upon the parties who consent to carry out the same. ARTICLE 21 ---------- PARTICIPATION - ------------- This Agreement obligates the Reinsurers for their proportion of the interests and liabilities set forth in this Agreement. - 12 - IN WITNESS WHEREOF the parties hereto have, by their duly authorised representative, executed this Agreement as follows: Signed in London, England, this 11th day of April 1994 For and on behalf of the Reassured: /s/ H. Simons CNA INTERNATIONAL REINSURANCE CO. LTD And Signed in Hamilton, Bermuda, this 26th day of September 1994. For and on behalf of the Reinsurers. /s/ Guy Hengesbaugh Guy Hengesbaugh Chief Underwriter LASALLE RE LIMITED EX-10.28 3 QUOTA SHARE TREATY (AMSTERDAM OFFICE) Exhibit 10.28 CNA Ref.: 45 FIR - ---------------- Reassured:- CNA International Reinsurance Company Limited Period:- Continuous contract in respect of all business written by the Reassured and signed into their 1994 and subsequent Underwriting Years of Account Subject to three months prior notice of cancellation to expire at 31st December any year. HEREON: SIGNING SLIP IN RESPECT OF 1997 UNDERWRITING YEAR OF ACCOUNT. Type:- Quota Share Treaty Class:- The Reassured's Account of PROPERTY CATASTROPHE EXCESS OF LOSS TREATIES (including specific peril aggregate excess of loss written for a single territory) underwritten in their Amsterdam, Zurich and Milan Branch Offices. Excluding the Reinsured's interest whether direct or by way of reinsurance in loss arising from claim or claims against an Insured by another party or parties. Notwithstanding the foregoing this Insurance shall not exclude: a) Workers Compensation and/or Employers' Liability losses arising from the following perils:- Fire, Lightning, Explosion, Structural Collapse, Windstorm, Hail, Flood, Seismic Activity, Volcanic Eruption, Collision, Riots, Strikes, Civil Commotion, Malicious Damage. b) Any Physical Damage and/or Consequential loss coverage contingent thereon effected by an Insured on behalf of another party. Territorial Scope:- Worldwide excluding USA & Canada other than incidental. Treaty Detail:- To take 70% Quota Share of the Reassured's participation subject to a maximum cession hereon of GBP 3,000,000 ($4,500,000) any one programme. Cessions in currencies other than sterling at rates of exchange as used in the books of the Reassured. Rate:- Original Net Premium as Original. Administrative Processing Fee:- 4.0% on Original Net Rate Taxes:- As may be applicable on the original business. CNA Ref: 45 FIR - --------------- Premium Reserve:- Not applicable. Loss Reserve:- As may be applicable on the original business. Portfolio:- Agreed, if and when requested by the Reassured, to close each Underwriting Year of Account at any time after the end of the third year at an amount sufficient to cover all outstanding losses as may be mutually agreed. Cash Loss:- At Reassured's discretion, Minimum $2,000,000. Accounts:- Quarterly Accounts in GBP and US$ separately on each year of account. Presentation within 45 days of end of quarter with settlement due with 30 days thereafter. General Conditions:- Monthly bordereaux of risks ceded January, February and March quarterly thereafter. Full Reinsurance Clause War Exclusion G51 Nuclear Energy Risks Exclusion Clause (Reinsurance) 1984, NMA 1975 (Japanese Amendment) Nuclear Incident Exclusion Clauses - Physical Damage Reinsurance - USA & Canada Excluding Financial Guarantee and Insolvency Maximum Net Premium ceded hereon US$ 10m Maximum aggregate cession per country or territorial zone hereon GBP 30,000,000 Insolvency Clause G86. Special cessions to be agreed by Reinsurers prior to binding. Multi year policies accepted by annual re-signing. Wording:- As before as far as applicable, any amendments to be agreed. Information:- 100% Estimated Net Premium Income US$ 8.0m (net of brokerage). HEREON: 100% LaSalle Re Signed /s/ M. C. Stockton Dated 20/2/97 -------------------------- ----------- on behalf of LaSalle Re TITLE: NON-OBLIGATORY QUOTA SHARE REINSURANCE AGREEMENT BETWEEN: CNA INTERNATIONAL REINSURANCE COMPANY LIMITED AND LA SALLE RE LTD COMMENCING: 1ST JANUARY, 1994 NON-OBLIGATORY QUOTA SHARE REINSURANCE AGREEMENT ------------------------------------------------ made between CNA INTERNATIONAL REINSURANCE COMPANY LIMITED (hereinafter referred to as "the Reassured") and LA SALLE RE LTD (hereinafter referred to as "the Reinsurers") PREAMBLE - -------- This Agreement is made and entered into between CNA International Reinsurance Company Ltd (hereinafter referred to as "the Reassured") and La Salle Re Ltd (hereinafter referred to as "the Reinsurers"), on the following terms and conditions. ARTICLE 1 --------- BUSINESS REINSURED - ------------------ This Agreement applies to policies and/or contracts of insurance and/or reinsurance allocated by the Reassured to its account of Property Catastrophe Excess of Loss Treaties (including specific catastrophe peril aggregate excess written for a single territory) written or renewed by the Reassured in its Amsterdam Branch Office. ARTICLE 2 --------- COVER, LIMIT AND RETENTION - -------------------------- The Reassured may cede and the Reinsurers shall accept by way of reinsurance under this Agreement, 75% Quota Share of all cessions coming within the scope of this Agreement, subject to a maximum Quota Share of cessions hereto of (pound-sterling)3,000,000 or US$4,500,000 for any one programme. The Reassured shall retain the remaining 25% Quota Share for its own account but, without prejudice to the above, shall be at liberty to protect that retention by way of reinsurance for its own account and benefit. The maximum aggregate cession hereto per country or territorial zone is (pound-sterling)30,000,000. - 2 - ARTICLE 3 --------- TERRITORIAL SCOPE - ----------------- This Agreement shall cover wherever cessions hereto cover other than losses occurring in the United States of America and/or Canada except where such loss exposures are incidental to the main hazard. ARTICLE 4 --------- PERIOD - ------ This Agreement takes effect on 1st January 1994 and applies to all business written or renewed by the Reassured and signed into its 1994 and/or subsequent Underwriting Years of Account. This Agreement shall remain in full force and effect unless and until terminated on 31st December 1994 or on any subsequent 31st December by either party giving to the other not less than three months prior written notice. For the purposes of this Agreement, the term of and participations in this Agreement shall be divided into separate Underwriting Years, each for twelve months commencing on 1st January. Each cession made by the Reassured and all accounting transactions relating thereto, shall be allocated by the Reassured to one Underwriting Year. In the event of cancellation, all cessions in force at Midnight on the date of cancellation shall remain covered under this Agreement until their individual natural expiration or termination whichever occurs first. Notwithstanding anything to the contrary contained in this Article, either party shall have the right to terminate this Agreement by giving the other party notice:- (a) if the performance of the whole or any part of this Agreement be prohibited or rendered impossible de jure or de facto in particular and without prejudice to the generality of the preceding words in consequence of any law or regulation which is or shall be in force in any country or territory or if any law or regulation shall prevent directly or indirectly the remittance of any or all or any part of the balance of payments due to or from either party; - 3 - (b) if the other party has become insolvent or unable to pay its debts or has lost the whole or any part of its paid up capital; (c) if there is any material change in the ownership or control of the other party; (d) if the country or territory in which the other party resides or has its head office or is incorporated shall be involved in armed hostilities with any other country whether war be declared or not or is partly or wholly occupied by another power; (e) if the other party shall have failed to comply with any of the terms and conditions of this Agreement. All notices of termination in accordance with any of the provisions of this Article shall be by Telex or telegram and shall be deemed to be served upon despatch or, where communications between the parties are interrupted, upon attempted despatch. All notices of termination served in accordance with any of the provisions of this Article shall be addressed to the party concerned at its head office or at any other address previously designated by that party. In the event of this Agreement being terminated at any date other than its natural expiry then the premium due to the Reinsurers shall be calculated upon the Original Net Premium income of the Reassured up to the date of termination. ARTICLE 5 --------- FOLLOW THE FORTUNES - ------------------- The Reinsurers' liability to the Reassured in respect of all cessions under this Agreement shall follow the liability of the Reassured to its reinsureds. ARTICLE 6 --------- FULL REINSURANCE - ---------------- The Reinsurers agree to follow and abide by all agreements, actions and/or settlements made by the Reassured and to agree, with or without notice, all alterations and/or additions and/or - 4 - extensions made under the original cessions subsequent to the effecting of this Agreement, subject to the conditions of this Agreement. The Reinsurers expressly agree to pay in all respects as may be paid on the original cessions liable or not liable, including in addition where applicable a pro rata share of legal and/or other special expenses when incurred by the Reassured. ARTICLE 7 --------- EXCLUSIONS - ---------- This Agreement does not cover: A. any liability assumed by the Reassured for loss or damage directly or indirectly occasioned by, happening through or in consequence of war, invasion, acts of foreign enemies, hostilities or war-like operations (whether war be declared or not), civil war, mutiny, civil commotion assuming the proportions of or amounting to a popular rising, insurrection, rebellion, revolution, military or usurped power, martial law, confiscation or nationalisation or requisition or destruction of or damage to property by or under the order of any Government or public or local authority. However, the foregoing exclusion shall not apply to those classes of business which are written in accordance with the War and Civil War Exclusion Agreement and/or the War and Civil War Risk Exclusion Agreement nor to business outside the scope of such Agreements unless such classes of business are not covered by this Agreement. In respect of losses arising in the United Kingdom only (other than in respect of losses arising under those classes of business covered hereunder which contain a War Inclusion Clause and such other classes of business covered hereunder for which there is no Market requirement for such other classes of business to contain a War Exclusion Clause by virtue of the operation of the War and Civil War Exclusion Agreement and/or the War and Civil War Risk Exclusion Agreement), this Agreement shall not cover any liability assumed by the Reassured for loss or damage directly or indirectly occasioned by, happening through or in consequence of any act of any person or persons acting on behalf of or in connection with any organisation the objects of which are to include the overthrowing or influencing of any de jure or de facto government by terrorism or by any violent means. - 5 - B. the Reassured's interest whether direct or by way of reinsurance in loss arising from claim or claims against an insured by another party or parties. Notwithstanding the foregoing this Agreement shall not exclude: 1) Workers' Compensation and/or Employers' Liability losses arising from the following perils:- Fire, Lightning, Explosion, Structural Collapse, Windstorms, Hail, Flood, Seismic Activity, Volcanic Eruption, Collision, Riots, Strikes, Civil Commotion, Malicious Damage; 2) Any Physical Damage and/or Consequential loss coverage contingent thereon effected by an insured on behalf of another party. C. Financial Guarantee and Insolvency. D. Nuclear Risks for those applicable classes of business and territories as appropriate in accordance with the clause referred to below and which shall form an integral part hereof, copies of which are on file with the Reassured:- NUCLEAR ENERGY RISKS EXCLUSION CLAUSE (REINSURANCE) (1984) - WORLDWIDE EXCLUDING U.S.A. AND CANADA - NMA 1975 Notwithstanding the provisions of this Clause, in respect of Japanese business certain liabilities, the type of which by market practice and custom have not been declared to the Japanese Nuclear Pool shall not fall within the scope of this exclusion. ARTICLE 8 --------- PREMIUM - ------- In consideration of the liabilities undertaken by the Reinsurers in accordance with the terms of this Agreement, the Reassured shall pay to the Reinsurers their 75% Quota Share proportion of the Reassured's Original Net Premium in respect of all cessions hereto. - 6 - The term "Original Net Premium" shall, for all purposes of this Agreement, be understood to mean the full gross amount of the premiums paid to the Reassured under the original cessions by their original insureds or reinsureds, less all original commissions, brokerage and taxes. The maximum Original Net Premium to be ceded to this Agreement for any one Underwriting Year shall be $7,000,000. ARTICLE 9 --------- ADMINISTRATIVE PROCESSING FEE - ----------------------------- The Reinsurers agree to allow the Reassured to deduct and retain, for its own benefit as administrative processing fee 2.5% of the Original Net Premium payable to the Reinsurers in accordance with the terms of Article 8, "Premium". ARTICLE 10 ---------- LOSSES AND LOSS EXPENSES - ------------------------ All loss settlements made by the Reassured, whether under strict policy conditions or by compromise, shall be unconditionally binding upon the Reinsurers who shall be liable for their Quota Share proportion thereof and of all expenses (other than the salaries of employees and office expenses of the Reassured) incurred by the Reassured in connection therewith. The Reinsurers shall benefit in their Quota Share proportion from any salvage or recoveries effected by the Reassured for the benefit of itself and the Reinsurers. Losses which the Reassured has paid shall be debited to the Reinsurers in the quarterly accounts rendered in accordance with Article 11, "Accounts, Reports and Payments" but, in the event of the Reassured sustaining a loss in respect of which the 100% Quota Share proportion amounts to or exceeds $2,000,000 any one occurrence, the Reassured shall have the option of requiring the Reinsurers to effect payment as soon as practicable upon submission of proof of loss. - 7 - ARTICLE 11 ---------- ACCOUNTS, REPORTS AND PAYMENTS The Reassured shall render a separate quarterly statement of account for each Underwriting Year of Account during which this Agreement is in force showing a total of all premiums ceded to this Agreement during such quarter. The Reassured shall also furnish a separate quarterly loss statement for each such Underwriting Year of Account, showing losses paid, loss expenses and salvages coming within the terms of this Agreement and entered into the Reassured's books during such quarter. The quarterly accounts shall be rendered within forty-five days after the end of each quarter. All accounts shall be rendered and settled in Sterling. Balances due to the Reinsurers shall be paid on delivery of the accounts, balances due to the Reassured shall be paid together with the confirmation but not later than thirty days after the receipt of the accounts. In case of objections, however, the amount not in dispute shall be paid at once and the difference as soon as agreement has been reached. The Reassured shall furnish quarterly bordereaux of cessions hereto. ARTICLE 12 ---------- COMMUTATION If mutually agreed by the Reassured and the Reinsurers, at thirty-six months following the commencement of any Underwriting Year of this Agreement, or at any time thereafter, the Reassured may discharge the Reinsurers from all and/or further liability in respect of such Underwriting Year. The Reassured will prepare a report evaluating loss reserves and liabilities to establish a basis for the discussion of commutation. The payment by the Reinsurers of an amount mutually agreed will constitute a complete and final release of the Reinsurers in respect of all liability relating to such Underwriting Year. ARTICLE 13 ---------- LOSS RESERVES Where required by original ceding companies, outstanding loss reserves will be established by the Reassured and reference thereto shall be included in the quarterly bordereaux referred to in Article 11 "Accounts, Reports and Payments". -8- ARTICLE 14 ---------- CURRENCY - -------- The currency to be used for all purposes of this Agreement shall be Pounds Sterling. Cessions in currencies other than Pounds Sterling shall be converted to Pounds Sterling at the rates of exchange used in the Reassured's books. ARTICLE 15 ---------- INSOLVENCY OF THE REASSURED - --------------------------- Amounts due to the Reassured under this Agreement shall be payable by the Reinsurers on the basis of the liability of the Reassured under the cessions hereto without diminution because of the insolvency of the Reassured. In the event of the insolvency of the Reassured, the Liquidator or Receiver or Statutory Successor of the Reassured shall give written notice to the Reinsurers of the pendency of any claim against the insolvent Reassured on the cessions hereto within a reasonable time after such claim is filed in the insolvency proceedings. During the pendency of such claim the Reinsurers may investigate such claim and intervene, at their own expense, in the proceedings where such a claim is to be adjudicated and interpose any defence or defences which they may deem available to the Reassured or its Liquidator or Receiver or Statutory Successor. The expense thus incurred by the Reinsurers shall be chargeable, subject to court approval, against the insolvent Reassured as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Reassured solely as a result of the defence so undertaken by the Reinsurers. When two or more Reinsurers are involved in the same claim and a majority in interest elect to investigate the claim and/or interpose defence to such claim, the expense shall be apportioned in accordance with the terms of the above paragraph as though such expense had been incurred by the Reassured. Should the Reassured go into liquidation or should a receiver be appointed, the Reinsurers shall be entitled to deduct from any sums which may be or may become due to the Reassured under this Agreement any sums which are due to the Reinsurers from the Reassured under this Agreement and which are payable at a fixed or stated date, as well as any other sums due to the Reinsurers which are permitted to be offset under applicable law. - 9 - In the event of the insolvency of the Reassured, the amounts due to the Reassured under this Agreement shall be payable by the Reinsurers directly to the Reassured or to its Liquidator, Receiver or Statutory Successor. ARTICLE 16 ---------- DELAYS, ERRORS OR OMISSIONS No inadvertent delay, error or omission shall be held to relieve either party hereto of any liability which would have attached to them under this Agreement if such delay, error or omission had not been made, provided that rectification is made immediately upon discovery. ARTICLE 17 ---------- AMENDMENTS AND ALTERATIONS The terms herein contained comprise the whole Agreement between the Reassured and the Reinsurers and may only be changed in writing, signed by or on behalf of both parties. ARTICLE 18 ---------- ACCESS TO RECORDS All documents and records in the possession of the Reassured concerning this Agreement shall be made available upon reasonable notice at the request of the Reinsurers for inspection by the Reinsurers or their nominated representatives for the purposes of obtaining information concerning this Agreement or the subject matter hereof. For the avoidance of doubt, the rights given to the Reinsurers by this Article shall continue in effect notwithstanding the termination of this Agreement and shall be exercised at the Reinsurers' own expense. ARTICLE 19 ---------- OFFSET Each party hereto shall have and may exercise in the event of the insolvency of the other or the non-payment by the other of obligations where due hereunder, the right to offset any balance or balances whether on account or premiums, commissions, claims or losses, adjustment expenses, salvage or any other amount due from that party to the other party hereto under this Agreement against the balance or balances due or to become due to the offsetting party from the other party under this Agreement. - 10 - ARTICLE 20 ---------- ARBITRATION 1. All matters in difference between the parties arising under, out of or in connection with this Agreement, including formation and validity, and whether arising during or after the period of this Agreement, shall be referred to an arbitration tribunal in the manner hereinafter set out. 2. Unless the parties appoint a sole arbitrator within 14 days of one receiving a written request from the other for arbitration, the claimant (the party requesting arbitration) shall appoint his arbitrator and give written notice thereof to the respondent. Within 30 days of receiving such notice the respondent shall appoint his arbitrator and give written notice thereof to the claimant, failing which the claimant may apply to the appointor hereafter named to nominate an arbitrator on behalf of the respondent. 3. Before they enter upon a reference the two arbitrators shall appoint a third arbitrator. Should they fail to appoint such a third arbitrator within 30 days of the appointment of the respondent's arbitrator then either of them or either of the parties may apply to the appointor for the appointment of the third arbitrator. The three arbitrators shall decide by majority. If no majority can be reached the verdict of the third arbitrator shall prevail. He shall also act as chairman of the tribunal. 4. Unless the parties otherwise agree the arbitration tribunal shall consist of persons (including those who have retired) with not less than ten years' experience of insurance or reinsurance as persons engaged in the industry itself or as lawyers or other professional advisers. 5. The arbitration tribunal shall, so far as is permissible under the law and practice of the place of arbitration, have power to fix all procedural rules for the holding of the arbitration including discretionary power to make orders as to any matters which it may consider proper in the circumstances of the case with regard to pleadings, - 11 - discovery, inspection of the documents, examination of witnesses and any other matter whatsoever relating to the conduct of the arbitration and may receive and act upon such evidence whether oral or written strictly admissible or not as it shall in its discretion think fit. 6. The appointer shall be the Chairman for the time being of ARIAS (UK) or if he is unavailable or it is inappropriate for him to act for any reason, such person as may be nominated by the Committee of ARIAS (UK). If for any reason such persons decline or are unable to act, then the appointor shall be the Judge of the appropriate Courts having jurisdiction at the place of arbitration. 7. All costs of the arbitration shall be determined by the arbitration tribunal who may, taking into account the law and practice of the place of arbitration, direct to and by whom and in what manner they shall be paid. 8. The place of arbitration may be chosen by the parties, but in default of such choice, the place of arbitration shall be Amsterdam. 9. The proper law of this Agreement shall be the law of the Netherlands. 10. The award of the arbitration tribunal shall be in writing and binding upon the parties who consent to carry out the same. ARTICLE 21 ---------- PARTICIPATION This Agreement obligates the Reinsurers for their proportion of the interests and liabilities set forth in this Agreement. -12- IN WITNESS WHEREOF the parties hereto have, by their duly authorised representative, executed this Agreement as follows: Signed in Amsterdam, the Netherlands this 7th day of April 1994 For and on behalf of the Reassured: /s/ P. Van Nek CNA INTERNATIONAL REINSURANCE CO. LTD. And Signed in Hamilton, Bermuda, this 26th day of September 1994. For and on behalf of the Reinsurers. /s/ Guy Hengesbaugh Guy Hengesbaugh Chief Underwriter LASALLE RE LIMITED EX-10.29 4 LMX QUOTA SHARE Exhibit 10.29 INTERESTS AND LIABILITIES AGREEMENT attaching to and forming a part of LMX CATASTROPHE QUOTA SHARE RETROCESSIONAL AGREEMENT between CONTINENTAL CASUALTY COMPANY an ILLINOIS corporation (hereinafter called the "Retrocedent") and LASALLE RE LIMITED a BERMUDA corporation (hereinafter called the "Subscribing Retrocessionaire") It is hereby mutually understood and agreed by and between the Retrocedent and the Subscribing Retrocessionaire that effective 12:01 a.m., Standard Time, January 1, 1997 to 12:01 a.m., Standard Time, January 1, 1998 the Subscribing Retrocessionaire's share in the interests and liabilities of the Retrocessionaires on the attached Agreement will be 47.50%. The share of the Subscribing Retrocessionaire will be separate and apart from the shares of the other Retrocessionaires and will not be joint with those of the other Retrocessionaires, and the Subscribing Retrocessionaire will in no event participate in the interests and liabilities of the other Retrocessionaires. If the Subscribing Retrocessionaire wishes to designate an alternate party to that named in the Service of Suit Article contained in the attached Agreement, then service of process will be made upon the party hereinafter named: - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- IN WITNESS WHEREOF, the parties hereto have caused this Interests and Liabilities Agreement to be executed in duplicate by their duly authorized representatives. Signed at CHICAGO, ILLINOIS CONTINENTAL CASUALTY COMPANY Signature: /s/ Tim I. Madden Title: Executive Vice President ----------------------- ---------------------------- Attest: /s/ Albert Moz Date: April 8, 1997 ----------------------- ---------------------------- 1 Signed at HAMILTON, BERMUDA LASALLE RE LIMITED Signature: /s/ Guy Hengesbaugh Title: Chief Underwriting Officer & EVP --------------------------- --------------------------------- Attest: /s/ Jeanine M. Tribley Date: May 27th, 1997 --------------------------- --------------------------------- 2 LMX CATASTROPHE QUOTA SHARE RETROCESSIONAL AGREEMENT ----------------------------------------------------
ARTICLE PAGE ------- ---- COVERAGE I 2 TERM II 3 TERRITORY III 4 EXCLUSIONS IV 4 DEFINITIONS V 4 REINSURANCE PREMIUM AND CEDING COMMISSION VI 5 EXTRA CONTRACTUAL OBLIGATIONS VII 6 REPORTS AND REMITTANCES VIII 6 RESERVES AND LETTERS OF CREDIT IX 7 INTEREST PENALTY X 10 SETTLEMENTS XI 11 OFFSET XII 11 SALVAGE AND SUBROGATION XIII 12 WARRANTY XIV 12 DELAYS, ERRORS, OR OMISSIONS XV 12 AMENDMENTS XVI 13 ACCESS TO RECORDS XVII 13 CONFIDENTIALITY XVIII 14 INSOLVENCY XIX 14 ARBITRATION XX 16 TAXES XXI 18 FEDERAL EXCISE TAX XXII 18 CURRENCY XXIII 18 SERVICE OF SUIT XXIV 19 INTER-COMPANY POOLING ARRANGEMENT XXV 20 INTERMEDIARY XXVI 21
LMX CATASTROPHE QUOTA SHARE RETROCESSIONAL AGREEMENT ---------------------------------------------------- THIS AGREEMENT is made and entered into by and between CONTINENTAL CASUALTY COMPANY, an Illinois corporation, (hereinafter called the "Retrocedent") of the one part, and the various Retrocessionaires as identified by the attached Interests and Liabilities Agreements (hereinafter called the "Retrocessionaires") of the other part. WITNESSETH: That in consideration of the mutual covenants hereinafter contained and upon the terms and conditions hereinbelow set forth, the parties hereto agree as follows: ARTICLE I --------- COVERAGE The Retrocedent shall cede to the Retrocessionaires, and the Retrocessionaires shall accept, a 33.33% of $5,000,000 (i.e., $1,666,500) quota share participation in respect to all original contracts written or renewed by the Retrocedent with an effective date during the term of this Agreement and classified by the Retrocedent as "London Market Catastrophe Excess of Loss Reinsurance," where 100% of the layer is written by the Retrocedent and coded Product Type 6308. The limit of liability to the Retrocessionaires shall not exceed 33.33% of $5,000,000 (i.e., $1,666,500) any one occurrence, any one original reinsured, subject to an aggregate limitation of no more than 33.33% of $20,000,000 (i.e., $6,666,000) any one occurrence. Should any loss involve this reinsurance, the obligation of the Retrocessionaires shall be automatically reinstated as to any subsequent loss for the full 2 amount of reinsurance as set forth above. The Retrocedent shall retain a minimum of 66.67% of $5,000,000 (i.e., $3,333,500) of all cessions to this Agreement net. All reinsurance for which the Retrocessionaires shall be obligated by virtue of this Agreement shall be subject to the same terms, rates, conditions, interpretations, waivers, modifications, and alterations as to the respective original contracts of the Retrocedent to which this reinsurance applies. Nothing herein shall in any manner create any obligations or establish any rights against the Retrocessionaires in favor of any third parties or any persons not parties to this Agreement except as provided in the Insolvency Article. The Retrocedent shall be the sole judge of what constitutes any one occurrence, any one original reinsured. ARTICLE II ---------- TERM This Agreement shall apply to all losses occurring on original contracts written or renewed with an effective date during the 12-month period commencing January 1, 1997, 12:01 a.m. Standard Time. The Retrocessionaires shall remain liable for all losses under original contracts in force until their expiration or renewal dates, whichever come first, plus an additional 12 month period should an original contract be renewed at an original reinsured's option. In addition, the Retrocessionaires shall remain liable as respects any run-off obligations under the original contracts covered hereunder. In the event a Retrocessionaire opts not to continue its participation on the agreement replacing this Agreement, the Retrocessionaire shall remit to the Retrocedent 90% of the Retrocessionaire's share of the positive balance of premium received, less 3 losses paid, and less ceding and other commissions within 30 days after the termination of the Agreement. This provision shall not apply in the event this Agreement is not renewed. Notwithstanding the cancellation of this Agreement as hereinabove provided, its provisions shall continue to apply to all unfinished business hereunder to the end that all obligations and liabilities incurred by each party hereunder prior to such termination shall be fully performed and discharged. ARTICLE III ----------- TERRITORY This Agreement shall apply to losses wheresoever rising. ARTICLE IV ---------- EXCLUSIONS No indemnity shall be provided hereunder for any liability excluded under the Retrocedent's original contracts. ARTICLE V --------- DEFINITIONS "Original contracts" as used in this Agreement shall mean reinsurance treaties, binders, cover notes, slips, policies, contracts, or agreements, whether written or oral. "Occurrence" as used in this Agreement is defined as on the original contracts covered hereunder. 4 "Loss" as used in this Agreement shall mean the amount of any settlement, award, or judgment paid by the Retrocedent or for which the Retrocedent has become liable to pay after deduction of all recoveries, salvages, subrogations, and other reinsurances whether recovered or not. Loss shall not include loss expense, unless the original contracts reinsured hereunder define loss as including loss expense. "Loss expense" as used in this Agreement shall mean all expenses incurred by the Retrocedent in the investigation, appraisal, adjustment, litigation and/or defense of claims under original contracts reinsured hereunder, including court costs and interest accrued before and after final judgment, but excluding internal office expenses, salaries, and other remuneration of regular employees (other than staff field adjusters) of the original reinsureds or the Retrocedent. The Retrocessionaires shall bear their pro rata shares of all such loss expense (unless defined as part of loss in reinsured original contracts) and shall benefit pro rata in all salvages, subrogations, discounts, and other recoveries. ARTICLE VI ---------- REINSURANCE PREMIUM AND CEDING COMMISSION The Retrocedent shall cede to the Retrocessionaires their proportionate share of the original premium on all original contracts written or renewed with an effective date on or after the inception of this Agreement for the business described in the Coverage Article, less the ceding commission set forth below. The Retrocessionaires shall allow the Retrocedent a 3% flat ceding commission in addition to any commissions being paid under the original contracts reinsured hereunder. 5 ARTICLE VII ----------- EXTRA CONTRACTUAL OBLIGATIONS This Agreement shall protect the Retrocedent, within the limits hereof, for liability incurred in accordance with the provisions of the extra contractual obligations clauses contained in the original contracts covered hereunder. ARTICLE VIII ------------ REPORTS AND REMITTANCES Within 30 days after the close of each quarter, the Retrocedent shall furnish the Retrocessionaires with a report summarizing the gross premium, commission allowed on the gross premium, premium ceded less return premium and commission, losses paid, loss expenses paid, salvage recovered, and net balance due either party. The quarterly report also shall contain a statement showing the total reserves for outstanding losses including loss expenses and a list of all catastrophe code numbers assigned by the Property Claim Services division of American Insurance Services Group, Inc. for paid and outstanding catastrophe losses and loss expense incurred during the quarter. All amendments or adjustments, including reinstatement premium, shall be accounted for on a year- of-account basis. Amounts due the Retrocessionaires shall be remitted with said report. Amounts due the Retrocedent shall be remitted within 30 days following receipt of the report. Within 60 days following the expiration of this Agreement, the Retrocedent shall furnish the Retrocessionaires with a report detailing the unearned premium, calculated on a monthly pro rata basis, as well as the December 31st state of losses. The Retrocedent 6 shall also furnish the Retrocessionaires with any additional information they may require to prepare their financial statements. Should payment due from the Retrocessionaires exceed their share of $250,000, the Retrocedent may give the Retrocessionaires notice of payment made or its intention to make payment on a certain date. If the Retrocedent has paid the loss, payment shall be made by the Retrocessionaires immediately. If the Retrocedent intends to pay the loss by a certain date and has submitted a proof of loss or similar document, payment shall be due from the Retrocessionaires 24 hours prior to that date, provided the Retrocessionaires have a period of five working days after receipt of said notice to dispatch the payment. Cash loss amounts specifically remitted by the Retrocessionaires as set forth herein shall be credited to their next quarterly account. ARTICLE IX ---------- RESERVES AND LETTERS OF CREDIT (This Article is only applicable to those Retrocessionaires who cannot qualify for credit by each governmental authority having jurisdiction over the Retrocedent's reserves.) As regards original contracts issued by the Retrocedent coming within the scope of this Agreement, the Retrocedent agrees that, when it files with the Insurance Department or sets up on its books reserves for known losses that have been reported to the Retrocessionaires (including loss and loss expense paid by the Retrocedent and loss and loss expense reported and outstanding) and/or reserves for unearned premium, which it is required by law to set up, it shall forward to the Retrocessionaires a statement showing the proportion of such loss reserves applicable to them. The Retrocessionaires hereby 7 agree that they shall apply for and secure delivery to the Retrocedent of a clean, irrevocable, and unconditional Letter of Credit, dated on or before December 31 of the year in which the request is made, and issued by Citibank, N.A., and containing provisions acceptable to the insurance regulatory authorities having jurisdiction over the Retrocedent's reserves, in an amount equal to the Retrocessionaire's proportion of such reserves applicable to them as shown in the statement prepared by the Retrocedent. Under no circumstances shall any amount relating to reserves in respect of Incurred But Not Reported losses be included in the amount of the Letter of Credit. The Letter of Credit shall be issued for a period of not less than one year, and shall be automatically extended for one year from its date of expiration or any future expiration date unless 30 days prior to any expiration date Citibank N.A. notifies the Retrocedent by registered mail that it elects not to consider the Letter of Credit extended for any additional period. Notwithstanding any other provisions of this Agreement, the Retrocedent or its court-appointed successor in interest may draw upon such credit at any time without diminution because of the insolvency of the Retrocedent or of any Retrocessionaire for one or more of the following purposes only: A. To reimburse the Retrocedent for the Retrocessionaire's share of unearned premium on original contracts reinsured hereunder or account of cancellations of such original contracts. B. To pay the Retrocessionaire's share or to reimburse the Retrocedent for the Retrocessionaire's share of any loss reinsured by this Agreement, which has not been otherwise paid. C. To make refund of any sum in excess of the actual amount required to pay the Retrocessionaire's share of any liability reinsured by the Agreement. 8 D. In the event of non-extension of the Letter of Credit as provided for above, to establish deposit of the Retrocessionaire's share for unearned premium and/or losses, including reserves for incurred but not reported losses under this Agreement. Such cash deposit shall be held in an interest bearing account separate from the Retrocedent's other assets, and interest thereon shall accrue to the benefit of the Retrocessionaires. Citibank, N.A. shall have no responsibility whatsoever in connection with the propriety of withdrawals made by the Retrocedent or the disposition of funds withdrawn, except to ensure that withdrawals are made only upon the order of properly authorized representatives of the Retrocedent. At annual intervals, or more frequently as agreed but never more frequently than semi-annually, the Retrocedent shall prepare, for the sole purpose of amending the Letter of Credit, a specific statement of the Retrocessionaires' share of reserves for losses and/or unearned premium. If the statement shows that the Retrocessionaires' share of such reserves exceeds the balance of credit as of the statement date, the Retrocessionaires shall, within 30 days after receipt of notice of such excess, secure delivery to the Retrocedent of an amendment of the Letter of Credit, increasing the amount of credit by the amount of such difference. If, however, the statement shows that the Retrocessionaires' share of such reserves is less than the balance of credit as of the statement date, the Retrocedent shall, within 30 days after receipt of written request from the Retrocessionaires, release such excess credit by agreeing to secure an amendment to the Letter of Credit, reducing the amount of credit available by the amount of such excess credit. 9 ARTICLE X --------- INTEREST PENALTY The interest amounts provided for in this Article will apply to the Retrocessionaires or to the Retrocedent in the following circumstances: A. Loss payments owned by the Retrocessionaires to the Retrocedent shall have a due date to the Retrocedent of 90 calendar days following the date of the billing/proof of loss. B. Payment of any premium shall be due the Retrocessionaires within 90 calendar days of the date specified in this Agreement. Any premium adjustments will be due by the debtor party within 150 calendar days of the expiry of this Agreement. C. Payment on return of premiums, commissions, profit sharing, or any amounts not provided in paragraphs A. or B. above, shall have the due date as specified in this Agreement. If no due date is specified, the due date shall be 90 days following the date of billing. D. Failure by a Retrocessionaire or the Retrocedent to comply with their respective payment obligations within the time periods as herein provided will result in a compound interest penalty payable at a rate equal to the 90-day Treasury Bill rate as published in the Money Rate Section or any successor section of The Wall Street Journal on the first business day following the date a remittance becomes due, plus 1% per annum, to be compounded and adjusted quarterly. Any interest which occurs pursuant to this Article shall be calculated by the party to which it is owed. The accumulation of the number of days that any payment is past due will stop on the date that the Intermediary, where applicable, receives payment. E. The validity of any claim or payment may be contested under the provisions of this Agreement. If the debtor party prevails in an arbitration or any other proceeding, there shall be no interest penalty due. Otherwise, any interest will be calculated and due as outlined above. F. If a Retrocessionaire advances payment of any claim it is contesting, and prevails in the contest, the Retrocedent shall return such payment plus pay interest on same, calculated as per the provisions of this Article. 10 G. Any interest that occurs pursuant to this Article may be waived by the party to which it is owed. Further, any interest which is calculated pursuant to this Article that is $100 or less shall be waived. Waiver of such interest, however, shall not affect the waiving party's rights to similar interest for any other failure by the other party to make payment when due under this Article. H. Nothing in this Article shall diminish any legal remedies that either party may have against the other. ARTICLE XI ---------- SETTLEMENTS The Retrocedent shall have the right to settle all claims under its original contracts. All settlements, provided they are within the terms of this Agreement, shall be unconditionally binding on the Retrocessionaires in proportion to their participation in the Agreement, upon provision by the Retrocedent of the following: identification of loss including date and documented settlement/loss amounts and expenses received by the Retrocedent subject to this Agreement. Inadvertent omission in dispatching the aforementioned documentation will in no way affect the obligation of the Retrocessionaires under this Agreement, provided the Retrocedent informs the Retrocessionaires of such omission promptly upon discovery. ARTICLE XII ----------- OFFSET The Retrocedent or any Retrocessionaire hereunder shall be entitled to deduct from amounts due the other party under this Agreement any amounts due itself from the other party under this Agreement; however, in the event of the insolvency of any party hereto, offset shall be in accordance with applicable law. 11 ARTICLE XIII ------------ SALVAGE AND SUBROGATION The Retrocessionaires shall be credited with their share of salvage and/or subrogation in respect of claims and settlements under this Agreement, less their share of recovery expense. Unless the Retrocedent and the Retrocessionaires agree to the contrary, the Retrocedent shall enforce its right to salvage and/or subrogation and shall prosecute all claims arising out of such right. ARTICLE XIV ----------- WARRANTY It is hereby warranted that the Retrocedent and the Retrocessionaires hereon shall retain all business subject to this Agreement net and unreinsured in any way, subject to the limits expressed in the Coverage Article. ARTICLE XV ---------- DELAYS, ERRORS, OR OMISSIONS Inadvertent delays, errors, or omissions made in connection with this Agreement shall not relieve either party from any liability which should have attached to either party had such delay, error, or omission not occurred, provided always that such error or omission is rectified immediately upon discovery. 12 ARTICLE XVI ----------- AMENDMENTS - ---------- This Agreement may be altered or amended in any of its terms and conditions by mutual consent of the Retrocedent and the Retrocessionaires by addenda hereto which will then constitute a part of this Agreement. ARTICLE XVII ------------ ACCESS TO RECORDS - ----------------- The Retrocessionaires, or their duly accredited representatives, shall have access to the books and records of the Retrocedent on matters reasonably relating to this reinsurance at all reasonable times for the purpose of obtaining information concerning this Agreement or the subject matter hereof. Except as provided in the following sentence, access to premium records is restricted to within four years of the expiration of this Agreement. A Retrocessionaire shall be permitted access to premium records subsequent to the aforementioned period only on the condition that either: a) there are no balances payable hereunder by the Retrocessionaire which are overdue as provided in the Interest Penalty Article of this Agreement, or b) the Retrocessionaire has funded all balances due hereunder in an interest-bearing trust fund or with a Letter of Credit as hereinafter provided. Should a Retrocessionaire choose option b) of the foregoing paragraph, the Retrocessionaire agrees to provide the Retrocedent a Trust Agreement established at Morgan Guaranty Trust Company of New York, New York, or at a mutually agreed successor Trustee, or a clean, irrevocable, and evergreen Letter of Credit, issued by 13 Morgan Guaranty Trust Company of New York, New York, or by a mutually agreed bank, of which the Retrocedent shall be the beneficiary, which shall secure in full all balances due from the Retrocessionaire to the Retrocedent with respect to this Agreement. Such Trust Agreement and/or Letter of Credit shall be established under the laws of the state of New York and shall meet all requirements of the state regulatory authorities applicable to the Retrocedent. The Retrocessionaire is responsible for all costs associated with providing such Trust Agreement and/or Letters of Credit as required under this Article. ARTICLE XVIII ------------- CONFIDENTIALITY It is a condition precedent to any indemnification under this Agreement that the Retrocedent shall not disclose any details of this Agreement at any time to any third party without the approval of the Retrocessionaires. Notwithstanding the foregoing, the Retrocedent may disclose details of this Agreement to Names and their agents, auditors, accountants, and other third parties as may be required in order to comply with law or with the bylaws of Lloyd's, provided that they themselves respect the confidentiality of this undertaking. ARTICLE XIX ----------- INSOLVENCY In the event of the Retrocedent's insolvency, the reinsurance afforded by this Agreement shall be payable by the Retrocessionaires on the basis of Retrocedent's liability under the original contracts reinsured without diminution because of the Retrocedent's insolvency or because its liquidator, receiver, conservator, or statutory 14 successor has failed to pay all or a portion of any claims, subject however to the right of the Retrocessionaires to offset against such funds due hereunder, any sums that may be payable to them by said insolvent Retrocedent in accordance with the Offset Article. The reinsurance shall be payable by the Retrocessionaires directly to the Retrocedent, its liquidator, receiver, conservator, or statutory successor except (a) where this Agreement specifically provides another payee of such reinsurance in the event of the Retrocedent's insolvency or (b) where the Retrocessionaires, with the consent of the direct insured or insureds, have assumed such policy obligations of the Retrocedent as direct obligations of themselves to the payees under such policies in substitution for the Retrocedent's obligation to such payees. The Retrocedent's liquidator, receiver, conservator, or statutory successor shall give written notice of the pendency of a claim against the Retrocedent under the original contracts within a reasonable time after such claim is filed in the insolvency proceeding. During the pendency of such claim, the Retrocessionaires may investigate said claim and interpose in the proceeding where the claim is to be adjudicated, at their own expense, any defense that they may deem available to the Retrocedent, its liquidator, receiver, conservator, or statutory successor. The expense thus incurred by the Retrocessionaires shall be chargeable against the Retrocedent, subject to court approval, as part of the expense of conservation or liquidation to the extent that such proportionate share of the benefit shall accrue to the Retrocedent solely as a result of the defense undertaken by the Retrocessionaires. Where two or more Retrocessionaires are involved in the same claim, and a majority in interest elect to interpose defense to such claim, the expense shall be 15 apportioned in accordance with the terms of this Agreement as though such expense had been incurred by the Retrocedent. In the event of insolvency of the Retrocedent, the Retrocessionaires under this Agreement shall have all rights, as more fully set forth in Section 173 of Illinois Insurance Code, as amended. ARTICLE XX ---------- ARBITRATION In the event of any arbitration between the Retrocedent and its reinsureds under the terms of any original contract, the Retrocessionaires agree unreservedly to abide by the result of such arbitration. As a condition precedent to any right of action hereunder, any dispute arising out of this Agreement, whether arising before or after termination, shall be submitted to the decision of a board of arbitration composed of two arbitrators and an umpire, meeting in Chicago, Illinois unless otherwise agreed. The members of the board of arbitration shall be active or retired, disinterested officials of insurance or reinsurance companies or Underwriters at Lloyd's, London. Each party shall appoint its arbitrator, and the two arbitrators shall choose an umpire before instituting the hearing. If the respondent fails to appoint its arbitrator within four weeks after being requested to do so by the claimant, the claimant shall also appoint the second arbitrator. If the two arbitrators fail to agree upon the appointment of an umpire within four weeks after their nominations, they shall request the American Arbitration Association to appoint an umpire. Both parties shall be promptly notified, in writing, of the appointment of the umpire. 16 The claimant shall submit its initial brief within 20 days from the appointment of the umpire. The respondent shall submit its brief within 20 days thereafter, and the claimant may submit a reply brief within 10 days after filing of the respondent's brief. The board shall make its decision with due regard to the custom and usage of the insurance and reinsurance business. The board shall issue its decision in writing based upon a hearing in which evidence may be introduced without following strict rules of evidence but in which cross-examination and rebuttal shall be allowed. The board shall make its decision within 60 days following the termination of the hearings unless the parties consent to an extension. The majority decision of the board shall be final and binding upon all parties to the proceeding. Judgment may be entered upon the award of the board in any court having jurisdiction thereof. If more than one Retrocessionaire is involved in the same dispute, all such Retrocessionaires shall constitute and act as one party for purposes of this Article, and communications shall be made by the Retrocedent to each of the Retrocessionaires constituting the one party, provided that nothing therein shall impair the rights of the Retrocessionaires to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the Retrocessionaires under the terms of this Agreement from several to joint. Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the expense of the umpire. The remaining costs of the arbitration proceedings shall be allocated by the board. 17 ARTICLE XXI ----------- TAXES The Retrocedent shall pay all taxes (except for Federal Excise Tax) on premiums reported to the Retrocessionaires on this Agreement. ARTICLE XXII ------------ FEDERAL EXCISE TAX (This Article applies to Retrocessionaires domiciled outside the United States of America, excepting Lloyd's London Underwriters and other Retrocessionaires exempt from Federal Excise Tax). The Retrocessionaires shall allow for the purpose of paying the Federal Excise Tax the applicable percentage of the premium payable hereon (as imposed under Section 4371 of the Internal Revenue Service Code) to the extent such premium is subject to such tax. In the event of any return of premium, the Retrocessionaires shall deduct the applicable percentage of the return premium payable hereon and the Retrocedent or its agent shall recover such tax from the United States government. ARTICLE XXIII ------------- CURRENCY The sign "$" in this Agreement refers to United States of America Dollars and all payments hereunder shall be made in that currency. All amounts paid or received by the Retrocedent in any other currency shall be converted into United States of America Dollars at the rate of exchange on the Retrocedent's books when such payment is made or received. 18 ARTICLE XXIV ------------ SERVICE OF SUIT - --------------- (This Article applies to Retrocessionaires domiciled outside the United States of America and/or unauthorized in any state, territory, or district of the United States of America that has jurisdiction over the Retrocedent and in which a subject suit has been instituted. This Article is not intended to conflict with or override the parties' obligation to arbitrate their disputes in accordance with the Arbitration Article.) In the event any Retrocessionaire hereon fails to pay any amount or perform any obligation claimed due hereunder, such Retrocessionaire, at the request of the Retrocedent, shall submit to the jurisdiction of any court of competent jurisdiction within the United States and shall comply with all requirements necessary to give that court jurisdiction. Nothing in this Article constitutes or should be understood to constitute a waiver of the Retrocessionaire's right to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. Service of process in such suit may be made upon Mendes and Mount, 750 Seventh Avenue, New York, New York 10019- 6829, or another party specifically designated in the applicable Interests and Liabilities Agreement attached hereto. In any suit instituted against it upon this Agreement, the Retrocessionaire shall abide by the final decision of such court or of any appellate court in the event of an appeal. The above named are authorized and directed to accept service of process on behalf of the Retrocessionaire in any such suit and/or upon request of the Retrocedent to give a written undertaking to the Retrocedent that they shall enter a general appearance on the Retrocessionaire's behalf in the event such a suit is instituted 19 Further, pursuant to any statute of any state, territory, or district of the United States that makes provisions therefor, the Retrocessionaire hereby designates the Superintendent, Commissioner, or Director of Insurance or other officer specified for that purpose in the statute (or his successor or successors in office) as its true and lawful attorney upon whom may be served any lawful process in any action, suit, or proceeding instituted by or on behalf of the Retrocedent or any beneficiary hereunder arising out of this Agreement, and hereby designates above named as the person to whom said officer is authorized to mail such process or a true copy thereof. ARTICLE XXV ----------- INTER-COMPANY POOLING ARRANGEMENT It is understood and agreed that the Retrocedent has entered into the CNA Reinsurance Pooling Agreement whereby it assumes 100% of the liability of the other participants in the CNA Reinsurance Pooling Agreement. This present Agreement protects such assumed liability and attaches prior to redistribution, if any, within the participating companies. Such redistribution shall be disregarded for all purposes of this present Agreement. For all purposes of this Agreement, other member companies of the CNA Reinsurance Pooling Agreement are: National Fire Insurance Company of Hartford, American Casualty Company of Reading Pennsylvania, Transportation Insurance Company, Transcontinental Insurance Company, Valley Forge Insurance Company, CNA Casualty of California, CNA Lloyd's of Texas and Columbia Casualty Company. It is also understood and agreed that the Retrocedent shall include the insurance companies of the Continental Corporation which are affiliated with, controlled by or under the common management of CNA. 20 It is further agreed that notice shall be given to the Retrocessionaries within 45 days of the acquisition of a company, not previously a participant in either of the above-referenced, having in-force business that the Retrocedent wishes to have covered by this Agreement. In the event either party hereto maintains that the inclusion hereunder of some portion of the in force business of any such new acquisition calls for alteration in the existing terms of this Agreement, and the parties are unable to negotiate terms that are mutually acceptable, then that portion of the newly acquired in force business not considered mutually acceptable shall be covered for an additional period of 45 days from the date the dissenting party gives to the other written notice that said portion of the newly acquired in force business is unacceptable. ARTICLE XXVI ------------ INTERMEDIARY Aon Re Inc. is hereby recognized as the Intermediary negotiating this Agreement for all business hereunder. All communications (including but not limited to notices, statements, premiums, return premiums, commissions, taxes, losses, loss adjustment expense, salvages, and loss settlements) relating thereto shall be transmitted to the Retrocedent or the Retrocessionaries through Aon Re Inc., 123 N. Wacker Drive, Chicago, Illinois 60606. Payments by the Retrocedent to the Intermediary shall be deemed payment to the Retrocessionaries. Payments by the Retrocessionaries to the Intermediary shall be deemed payment to the Retrocedent only to the extent that such payments are actually received by the Retrocedent. 21 EX-10.30 5 SECOND AMENDMENT DATED 3/13/97 EXHIBIT 10.30 SECOND AMENDMENT ---------------- SECOND AMENDMENT AND WAIVER, dated as of March 13, 1997 (this "Amendment"), to the Credit Agreement, dated as of December 1, 1995, among LASALLE RE HOLDINGS LIMITED, a Bermuda company (the "Borrower"), the several banks and other financial institutions from time to time parties to this Agreement (collectively, the "Lenders"; individually, a "Lender") and THE CHASE MANHATTAN BANK (formerly known as CHEMICAL BANK), a New York banking corporation, as administrative agent for the Lenders hereunder. W I T N E S S E T H: -------------------- WHEREAS, pursuant to the Credit Agreement, the Lenders have agreed to make, and have made, certain loans and other extensions of credit to the Borrower; and WHEREAS, the Borrower has requested, and, upon this Amendment becoming effective, the Required Lenders have agreed, that certain provisions of the Credit Agreement be amended in the manner provided for in this Amendment. NOW, THEREFORE, the parties hereto hereby agree as follows: I. Defined Terms. Terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. II. Amendments to Credit Agreement. 1. Amendment to Subsection 1.1. (a) The definition of "Statutory Capital" set forth in subsection 1.1 of Credit Agreement is hereby amended by deleting that definition in its entirety and substituting therefor the following: "Statutory Capital": at any date of determination, (i)(1) the amount set forth on line 3 of the Statutory Statement of Capital and Surplus in the Annual Return of LaSalle Re (or, if such statement shall be modified, the equivalent item on any applicable successor form) or (2) the amount identified as "Statutory Capital" on the Quarterly Certificate of LaSalle Re, whichever was most recently delivered to the Administrative Agent and the Lenders pursuant to subsection 5. 1, (ii) plus, to the extent it is excluded or deducted in the 2 determination of the amount in clause (i) hereof, the amount of any preferred stock of LaSalle Re (including the Preferred Stock and the LaSalle Re Series A Preferred Shares) and (iii) less an amount equal to the outstanding Loans. (b) The definition of "Tangible Net Worth" set forth in subsection 1.1 of Credit Agreement is hereby amended by adding the following phrase immediately before the period at the end of such definition: ; provided that with respect to the Borrower, Tangible Net Worth shall include all items which in accordance with GAAP would be included under minority interest on a balance sheet of the Borrower at the date of determination and (c) inserting the following new definitions in their appropriate alphabetical order: "Holdings Series A Preferred Shares": the perpetual preferred shares issued prior to June 1, 1997 by the Borrower in an aggregate amount not exceeding $75,000,000 on substantially the terms and conditions set forth in Annex I-C hereto. "LaSalle Re Series A Preferred Shares": the perpetual preferred shares issued prior to June 1, 1997 by LaSalle Re in an aggregate amount not exceeding $75,000,000 on substantially the terms and conditions set forth in Annex I-D hereto. 2. Amendment to Subsection 6.1. Subsection 6.1 of the Credit Agreement is hereby amended by (a) deleting the amount "$250,000,000" in clause (b) thereof and substituting therefor the amount "$300,000,000" and (b) deleting the amount "$250,000,000" in clause (c) thereof and substituting therefor the amount "$300,000,000". 3. Amendment to Subsection 6.2. Subsection 6.2 of the Credit Agreement is hereby amended by (a) deleting the "and" at the end of clause (iii) and (b) inserting immediately before the period at the end of such subsection the following new clause: , (v) the issue of the Holdings Series A Preferred Shares in an aggregate amount not exceeding $75,000,000, and (vi) the issue of the LaSalle Re Series A Preferred Shares in an aggregate amount not exceeding $75,000,000 4. Amendment to Subsection 6.7. Subsection 6.7 of the Credit Agreement is hereby amended by (a) deleting in its entirety clause (ii) thereof and substituting in lieu thereof the following: 3 (ii) (A) LaSalle Re may pay a cash dividend on its common shares immediately prior to December 31, 1995 in an aggregate amount not to exceed $25,000,000, (B) the Borrower may make a share repurchase of the common shares of the Borrower immediately prior to December 31, 1996 in an aggregate amount not to exceed $50,000,000, and (C) the Borrower may make a share repurchase of common shares of the Borrower prior to January 1, 1998 in an aggregate amount equal to the sum of (1) the proceeds of the Holdings Series A Preferred Shares and (2) to the extent not utilized, the Restricted Payments previously permitted pursuant to subclause (ii)(B) of this subsection 6.7; provided that in no case shall Restricted Payments made pursuant to this subclause (ii)(C) exceed an aggregate amount of $125,000,000, and and (b) deleting in its entirety clause (iii) thereof and substituting in lieu thereof the following: (iii) each of the Borrower and LaSalle Re may make a Restricted Payment on its common shares and the Borrower may make Restricted Payments in the form of cash dividends on the Holdings Series A Preferred Shares when (A) the Consolidated Tangible Net Worth resulting after such Restricted Payment would be at least (1) during calendar year 1996, $350,000,000, (2) during calendar years 1997 and 1998, $375,000,000, and (3) thereafter, $400,000,000 and (B) the aggregate Restricted Payments, resulting after such Restricted Payment, pursuant to this clause (iii) during any fiscal quarter of the Borrower would not exceed 12.5% of the Consolidated Net Income of the Borrower for the immediately preceding fiscal year; provided that the aggregate amount of Restricted Payments made pursuant to this clause (iii) in the third quarter of the Borrower's 1997 fiscal year shall not exceed 13.75% of the Consolidated Net Income of the Borrower for the immediately preceding fiscal year 5. Amendment to Subsection 6.9. Subsection 6.9 of the Credit Agreement is hereby amended by (a) deleting the "and" at the end of clause (v) thereof and (b) inserting the following new clause immediately preceding the period at the end of such subsection: and (vii) Investments by the Borrower in the LaSalle Re Series A Preferred Shares made prior to June 1, 1997 6. Amendment to Subsection 6.13. Subsection 6.13 of the Credit Agreement is hereby amended by deleting that subsection in its entirety and substituting in lieu thereof the following: 6.13 Limitation on Issuances of Capital Stock. Issue or sell any shares of LaSalle Re's Capital Stock (other than the Eligible Stock) unless such 4 Capital Stock is subordinate to the Eligible Stock in terms of dividends and liquidation preference and is otherwise on terms and conditions satisfactory in all respects to the Required Lenders; except that LaSalle Re may issue and sell to the Borrower the LaSalle Re Series A Preferred Shares. 7. Amendment of Annexes: Annexes I-C and I-D are hereby added to the Credit Agreement in the forms thereof set forth on Exhibits A and B, respectively, hereto. III. Conditions to Effectiveness. This Amendment shall become effective on the date (the "Amendment Effective Date") on which the following condition precedent has been satisfied or waived: 1. The Borrower, the Agent and the Required Lenders shall have executed and delivered this Amendment to the Agent. IV. General. 1. Representations and Warranties. To induce the Agent and the Lenders parties hereto to enter into this Amendment, the Borrower hereby represents and warrants to the Agent and all of the Lenders as of the Amendment Effective Date that: (a) Financial Condition. (1) The audited consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at September 30, 1996 and the related audited consolidated statements of income and of cash flows for the fiscal year ended on such date, copies of which have heretofore been furnished to each Lender, are complete and correct and present fairly the consolidated financial condition of the Borrower and its consolidated Subsidiaries as at such date, and the consolidated results of their operations and their consolidated cash flows for the fiscal year then ended. (2) The unaudited consolidated balance sheets of the Borrower and its consolidated Subsidiaries as at December 31, 1996 and the related unaudited consolidated statement of income and of cash flows for the three-month period ended on each such date, certified by a Responsible Officer, copies of which have heretofore been furnished to each Lender, are complete and correct and present fairly the consolidated financial condition of the Borrower and its consolidated Subsidiaries as at such date, and the consolidated results of their operations and their consolidated cash flows for the three-period then ended (subject to normal year-end audit adjustments). (3) All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by such accountants or Responsible Officer, as the case may be, and as disclosed therein). 5 (b) Corporate Power; Authorization; Enforceable Obligations. (1) The Borrower has the corporate power and authority, and the legal right, to make, deliver this Amendment and to perform the Loan Documents to which it is a party, as amended by this Amendment, and has taken all necessary corporate action to authorize the execution, delivery and performance of this Amendment and the performance of such Loan Documents, as so amended. (2) No consent or authorization of, approval by, notice to, filing with or other act by or in respect of, any Governmental Authority or any other Person is required in connection with the execution and delivery of this Amendment or with the performance, validity or enforceability of the Loan Documents to which it is a party, as amended by this Amendment. (3) This Amendment has been duly executed and delivered on behalf of the Borrower. (4) This Amendment and each Loan Document to which it is a party, as amended by this Amendment, constitutes a legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms, except as affected by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting the enforcement of creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. (c) No Legal Bar. The execution, delivery and performance of this Amendment and the performance of the Loan Documents, as amended by this Amendment, will not violate any Requirement of Law or Contractual Obligation of the Borrower or of any of its Subsidiaries and will not result in, or require, the creation or imposition of any Lien on any of its or their respective properties or revenues pursuant to any such Requirement of Law or Contractual Obligation. (d) Representations and Warranties. The representations and warranties made by the Borrower in the Loan Documents are true and correct in all material respects on and as of the Amendment Effective Date, before and after giving effect to the effectiveness of this Amendment, as if made on and as of the Amendment Effective Date, except to the extent such representations and warranties expressly relate to an earlier date in which case such representations and warranties shall be true and correct in all material respects as of such earlier date. 2. Payment of Expenses. The Borrower agrees to pay or reimburse the Agent for all of its out-of-pocket costs and reasonable expenses incurred in connection with this Amendment, any other documents prepared in connection herewith and the transactions 6 contemplated hereby, including, without limitation, the reasonable fees and disbursements of counsel to the Agent. 3. No Other Amendments; Confirmation. Except as expressly amended, modified and supplemented hereby, the provisions of the Credit Agreement are and shall remain in full force and effect. 4. Governing Law; Counterparts. (a) This Amendment and the rights and obligations of the parties hereto shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York. (b) This Amendment may be executed by one or more of the parties to this Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the copies of this Amendment signed by all the parties shall be lodged with the Borrower and the Agent. This Amendment may be delivered by facsimile transmission of the relevant signature pages hereof. 7 IN, WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective proper and duly authorized officers as of the day and year first above written. LASALLE RE HOLDINGS LIMITED By: /s/ Andrew Cook ---------------------------------- Title: Chief Financial Officer THE CHASE MANHATTAN BANK, as Administrative Agent and as a Lender By: /s/ Deborah Van Zijl ---------------------------------- Title: Vice President THE FIRST NATIONAL BANK OF CHICAGO By: /s/ Samuel W. Bridges ---------------------------------- Title: First Vice President MELLON BANK, N.A. By: /s/ Susan M. Whitewood ---------------------------------- Title: Assistant Vice President FLEET NATIONAL BANK By: /s/ Carla Balesano ---------------------------------- Title: Vice President CITIBANK, N.A. By: /s/ Andrew G. Fowler ---------------------------------- Title: Vice President EX-10.31 6 CATASTROPHE EQUITY SECURITIES EXHIBIT 10.31 CATASTROPHE EQUITY SECURITIES ISSUANCE OPTION AGREEMENT This Catastrophe Equity Securities Issuance Option Agreement (this "Agreement") is entered into as of July 1, 1997 between LaSalle Re Holdings Limited, a Bermuda company ("Company"), on the one hand, and European Reinsurance Company of Zurich, a corporation organized under the laws of Switzerland; Allianz Aktiengesellschaft, a corporation organized under the laws of Germany; Continental Casualty Company, a stock insurance company organized under the laws of Illinois, U.S.; and CIC-Hilldale, Inc., a corporation organized under the laws of Illinois, U.S. (each an "Option Writer" and collectively, "Option Writers"), on the other hand. RECITALS WHEREAS, Company is a holding company with direct and indirect subsidiaries which insure and/or reinsure, directly or through syndicates, property and casualty insurance risks; WHEREAS, Option Writers are companies in the business of insuring and/or reinsuring certain property/casualty insurance risks; WHEREAS, Company and Option Writers wish to enter into an arrangement under which, during a specified time period, Company shall have the option (the "Securities Issuance Option", as defined in Article 1) to require Option Writers to purchase up to 4,000,000 of the Series B Preferred Shares of Company (the "Preferred Shares", as defined in Article 1) in the event that Company Subsidiaries experience a Qualifying Catastrophic Event (as defined in Article 1); and WHEREAS, Company and Option Writers desire to memorialize their agreement with respect to the Securities Issuance Option on the terms and conditions set forth below; NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged, Company and Option Writers agree as follows: AGREEMENT 1. Definitions. Terms used in this Agreement shall have the respective meanings ascribed to them below. "A.M. Best Rating" means a rating of financial condition and performance, as published from time to time, by A.M. Best Company. 1 "Affiliate" of, or Person "affiliated" with, a specified Person means a Person that directly, or indirectly through one or more intermediaries, controls or is controlled, by, or is under common control with, such specified Person. "Agreement Year" means a one (1) year period, during the Exposure Period, beginning at 12:00 a.m. midnight Bermuda Time on July 1 and ending at 12:00 a.m. midnight Bermuda Time on the next following July 1. "Business Day" means any day other than a Saturday, Sunday or a day on which banking institutions in any of Hamilton, Bermuda; Zurich, Switzerland; Munich, Germany; Chicago, U.S.; or London, England, are not required to be open. "Certificate of Designation" means the Certificate of Designation, Preferences and Rights of Series B Preferred Shares of LaSalle Re Holdings Limited, in the form attached as Exhibit 1.1. "Change of Control" means the earlier to occur of (a) the date of a public announcement that a Person or group of affiliated Persons (an "Acquiring Person") has acquired, or has obtained the right to acquire, legal or beneficial ownership of fifty percent (50%) or more of the voting power of the issued and outstanding shares of Company or any Company Subsidiary, (b) the date an Acquiring Person acquires fifty percent (50%) or more of the assets of Company, or (c) the date of any amalgamation, consolidation or merger of Company with any Acquiring Person. For purposes hereof, the term "Acquiring Person" shall not include (i) Company, any of its Subsidiaries or any employee benefit plan (or related trust) sponsored or maintained by Company or any of its Subsidiaries, or (ii) any other person where sixty percent (60%) or more of the combined voting power of such Person's issued and outstanding shares or capital stock is beneficially owned, directly or indirectly, by the Persons who were the holders of the voting shares of Company immediately prior to such acquisition, amalgamation, consolidation or merger (as the case may be). "Company" means LaSalle Re Holdings Limited, a Bermuda company. "Company Common Stock" means the common shares of Company, par value US$1.00 per share. "Company Financial Statements" means the financial statements of Company specified in Section 3.7. "Company Subsidiaries" means any or all of LaSalle Re Limited, an insurance company formed under the laws of Bermuda, LaSalle Re Corporate Capital Ltd., a company formed under the laws of Bermuda, and such other direct or indirect Subsidiaries of Company as may be agreed in writing between Company and Option Writers. 2 "Credit Agreement" means that certain credit agreement, as amended, dated as of December 1, 1995, among Company, several banks and The Chase Manhattan Bank (formerly known as Chemical Bank), as administrative agent. "Effective Date" means July 1, 1997. "Event" means a "loss occurrence" as defined in any excess of loss property catastrophe reinsurance agreement under which any Company Subsidiary incurs an Ultimate Loss. "Exchange Act" means the U.S. Securities Exchange Act of 1934, as amended, and all rules and regulations promulgated thereunder. "Exercise Date" means the date of purchase and sale of Preferred Shares pursuant to an exercise of the Securities Issuance Option which date shall be specified in the Notice of Exercise and shall be the later of thirty (30) days following the delivery of the Notice of Exercise or ten (10) days following receipt of all regulatory approvals applicable to Company in connection with such purchase and sale of Preferred Shares (including without limitation any necessary approvals by the Bermuda Monetary Authority or Registrar of Companies), provided that the Exercise Date shall not be later than the one hundred eightieth (180th) day after delivery of the Notice of Exercise, or such later date, if any, as may be determined by alternative dispute resolution under Article 8 of this Agreement, which date shall be ten (10) days after the rendering of a final decision under Article 8. "Exercise Term" means (a) with respect to a single Event which (i) is a windstorm, the one (1) year period commencing upon the occurrence of a Qualifying Catastrophic Event and ending at 12:00 a.m. midnight Bermuda Time on the first anniversary of such occurrence (as the same may be extended under Section 2.4) during which Company has the right to exercise the Securities Issuance Option, or (ii) is other than a windstorm, the eighteen (18) month period commencing upon the occurrence of a Qualifying Catastrophic Event and ending at 12:00 a.m. midnight Bermuda Time on the date which is eighteen (18) months following such occurrence (as the same may be extended under Section 2.4) during which Company has the right to exercise the Securities Issuance Option, or (b) with respect to a series of Events, the period commencing upon the occurrence of a Qualifying Catastrophic Event and ending one (1) year following the end of the Agreement Year during which such series of Events occurs, which one (1) year period ends at 12:00 a.m. midnight Bermuda Time on the July 1 next following the end of such Agreement Year (as the same may be extended under Section 2.4), during which Company has the right to exercise the Securities Issuance Option. "Exposure Period" means the three (3) year period beginning at 12:00 a.m. midnight Bermuda Time on July 1, 1997 and ending at 12:00 a.m. midnight Bermuda Time on July 1, 2000. 3 "GAAP" means U.S. generally accepted accounting principles, consistently applied. "GAAP Net Worth" means the amount equal to Company's consolidated shareholders' equity plus minority interest, as determined in accordance with GAAP. "Majority Option Interest" means more than fifty percent (50%) of the total percentage interest in the Securities Issuance Option as set forth in Schedule 1.1, as the same may be amended. "Mean Risk of Ruin" means Company's mean probability of incurring aggregate Ultimate Losses in excess of one hundred percent (100%) of Company's GAAP Net Worth during any one (1) year period, calculated using the probability analysis and risk modeling techniques used by Company at the Effective Date. "Non-assessable" means, with respect to shares of the Company, that no further sums are required to be paid by the registered holders thereof in connection with the issue of such shares. "Non-Property Catastrophe Business" means Company's insurance and reinsurance business other than: property-risk excess and prorata business; property catastrophe prorata business; and property catastrophe excess of loss business. "Notice of Exercise" means the written notice of Company's intent to exercise the Securities Issuance Option as described in Section 2.3. "Notice of Objection" means Option Writers' written notice of objection to a Notice of Exercise, as described in Section 2.3. "Option Fee" means the amounts paid by Company to Option Writers as consideration for the Securities Issuance Option, as set forth in Section 2.1. "Option Writers" means, collectively, European Reinsurance Company of Zurich, a corporation organized under the laws of Switzerland; Allianz Aktiengesellschaft, a corporation organized under the laws of Germany; Continental Casualty Company, a stock insurance company organized under the laws of Illinois, U.S.; and CIC-Hilldale, Inc., a corporation organized under the laws of Illinois, U.S.; each of which individually shall be (a) entitled to the financial benefits and privileges, and subject to the financial burdens and obligations, of Option Writers under this Agreement in accordance with its respective percentage interest as set forth in the attached Schedule 1.1, (b) obligated to fully comply with all representations, warranties, conditions, covenants and agreements applicable to Option Writers under this Agreement (despite the fact that it may hold only a percentage interest in the financial benefits, privileges, burdens and obligations of Option Writers under this Agreement), and (c) referred to in this Agreement as an "Option Writer". 4 "Person" means an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, limited liability company, government (or an agency or political subdivision thereof) or other entity of any kind. "Preferred Share Purchase Price" means the higher of US$25 or par value per Preferred Share payable by Option Writers to Company as set forth in Section 2.3. "Preferred Shares" means the Series B Preferred Shares of LaSalle Re Holdings Limited, current par value US$1.00 per share. "Qualifying Catastrophic Event" means (a) with respect to any single Event, an Event occurring during the Exposure Period pursuant to which the Company Subsidiaries incur an Ultimate Loss in excess of US$200,000,000, or (b) with respect to any series of Events during any Agreement Year within the Exposure Period, a series of Events that, when considered in the aggregate, cause the Company Subsidiaries to incur an Ultimate Loss in excess of US$250,000,000. No loss shall be included in the calculation of Ultimate Loss for more than one Qualifying Catastrophic Event. Any Qualifying Catastrophic Event that commences during the Exposure Period, whether or not it terminates within the Exposure Period, shall be deemed to have occurred within the Exposure Period. A single Event that has occurred during the Exposure Period but which has not developed into a Qualifying Catastrophic Event prior to the first anniversary of the Event (or eighteen (18) months following the date of the Event if the Event is other than a windstorm) shall not constitute a Qualifying Catastrophic Event for purposes of this Agreement. A single Event that has occurred during the Exposure Period and which develops into a Qualifying Catastrophic Event prior to the first anniversary of the Event (or eighteen (18) months following the date of the Event if the Event is other than a windstorm), but after expiration of the Exposure Period, shall constitute a Qualifying Catastrophic Event for purposes of this Agreement. With respect to a single Event which develops into a Qualifying Catastrophic Event, such Qualifying Catastrophic Event shall be deemed to have occurred as of the date such single Event occurred. A series of Events that has occurred during any Agreement Year within the Exposure Period but which has not developed into a Qualifying Catastrophic Event prior to the end of one (1) year following the end of such Agreement Year shall not constitute a Qualifying Catastrophic Event for purposes of this Agreement. A series of Events that has occurred during any Agreement Year within the Exposure Period and which develops into a Qualifying Catastrophic Event prior to the end of one (1) year following the end of such Agreement Year, but after expiration of the Exposure Period, shall constitute a Qualifying Catastrophic Event for purposes of this Agreement. With respect to a series of Events which develops into a Qualifying Catastrophic Event, such Qualifying Catastrophic Event shall be deemed to have occurred during the Agreement Year in which such series of Events occurred. "Registration Rights Agreement" means the Registration Rights Agreement described in Section 6.2. "Rule 144A" means Rule 144A of the General Regulations of the Securities Act. 5 "S&P Rating" means a claims payment ability rating or credit rating, as applicable, as published from time to time, by the Standard & Poor's Division of The McGraw-Hill Companies. "SEC" means the U.S. Securities and Exchange Commission. "SEC Filings" means all documents and reports filed by Company with the SEC from November of 1995 through the date of this Agreement. "Securities Act" means the U.S. Securities Act of 1933, as amended, and all rules and regulations promulgated thereunder. "Securities Issuance Option" means Company's option to obligate Option Writers to purchase up to 4,000,000 Preferred Shares, subject to the terms and conditions set forth in this Agreement. "Subsidiary" means, with respect to any Person, any corporation or other entity (including, without limitation, partnerships, joint ventures, and associations) regardless of its jurisdiction of organization or formation, at least a majority of the total combined voting power of all classes of voting stock or other ownership interests of which shall, at the time of which any determination is being made, be owned by such Person, either directly or indirectly through one or more other Subsidiaries. "Transaction Agreements" means this Agreement, its schedules and exhibits, the Registration Rights Agreement and the Certificate of Designation. "Ultimate Loss" means the actual direct losses (including all paid losses, all reserves for unpaid losses (including without limitation outstanding loss reserves and incurred but not reported loss reserves), loss adjustment expense and coinsurance paid by the Company Subsidiaries) incurred by the Company Subsidiaries prior to accounting for any retrocessional reinsurance. "U.S." or "US" means the United States of America. "US$" means United States Dollars. To the extent any losses, liabilities or other amounts described or referred to in this Agreement are stated or denominated in currencies other than United States Dollars, such losses, liabilities or amounts shall be stated, for purposes of this Agreement, in their respective United States Dollar equivalents as shown on the books of Company. 2. Securities Issuance Option. 6 2.1 Option Fee. To acquire the right to exercise the Securities Issuance Option during the Exercise Term with respect to a Qualifying Catastrophic Event, Company shall pay to Option Writers an annual fee (the "Option Fee") as set forth on the attached Schedule 2.1. The first Option Fee payment shall be delivered upon the later of the Effective Date or the date of execution of this Agreement, and the second and third Option Fee payments shall be delivered on July 1, 1998 and July 1, 1999, respectively (or if either such date is not a Business Day, on the Business Day immediately following such date). In consideration of the payment of the Option Fee as may be required under this Agreement, Option Writers hereby grant to Company the right to exercise the Securities Issuance Option on the terms set forth in this Agreement. 2.2 Exercise Rights. Company shall have the right to exercise the Securities Issuance Option subject to the following limitations: a. The Securities Issuance Option must be exercised with respect to Preferred Shares having a minimum aggregate Preferred Share Purchase Price of US$15,000,000 or an integral multiple of US$1,000,000 above such amount. b. In no case shall the Preferred Shares issued pursuant to any one exercise of the Securities Issuance Option have an aggregate Preferred Share Purchase Price in excess of US$100,000,000. c. In no case shall the Preferred Shares issued pursuant to all exercises of the Securities Issuance Option have an aggregate Preferred Share Purchase Price of greater than US$100,000,000. d. In no case shall the Securities Issuance Option be exercised more than one time (i) per Qualifying Catastrophic Event resulting from any single Event, (ii) per Qualifying Catastrophic Event resulting from any series of Events occurring during any one Agreement Year, or (iii) with respect to any one Agreement Year (regardless of the number of Qualifying Catastrophic Events occurring during such Agreement Year). 2.3 Method of Exercise. In the event that Company desires to exercise the Securities Issuance Option with respect to a Qualifying Catastrophic Event, Company shall provide written notice to each Option Writer during the Exercise Term of its intent to exercise the Securities Issuance Option (a "Notice of Exercise"). The Notice of Exercise shall specify (a) the aggregate Preferred Share Purchase Price for the Preferred Shares to be issued pursuant to the exercise of the Securities Issuance Option and the proposed Exercise Date, and (b) with respect to the applicable Qualifying Catastrophic Event, the amount of the Ultimate Loss relating to such Qualifying Catastrophic Event, including the amount of (i) paid losses, (ii) losses reported but not yet then paid, and (iii) losses incurred but not yet then reported, including assumptions underlying the calculation of item (iii). Following delivery of a Notice of Exercise in accordance with Section 10.2, Option Writers shall have until the end of the thirty (30) day period following delivery of the Notice of Exercise to investigate whether the conditions to exercise of the Securities Issuance Option set forth in Section 5.2 have been 7 satisfied and shall, by the end of such thirty (30) day period, if any Option Writer determines that such conditions have not been satisfied, issue a Notice of Objection (as defined below); provided, however, that if the Exercise Date is extended for more than an additional thirty (30) days (beyond the initial thirty (30) day notice period) as described in the definition of Exercise Date in Article 1 above, such Option Writer shall have a period of ten (10) business days to update its investigation, which ten (10) business day period shall commence on the date which is the later of (a) the date that Company certifies to such Option Writer that all conditions to exercise of the Securities Issuance Option set forth in Section 5.2 have been satisfied, or (b) the thirtieth (30th) day preceding the actual Exercise Date. In connection with such investigation, Company shall provide or procure for such Option Writer, or its designated agent, reasonable access to loss records of the applicable Company Subsidiaries relating to the Qualifying Catastrophic Event in question (including, without limitation, policy files, claim files, and loss and loss reserve files or information), during normal business hours of the applicable Company Subsidiaries, in order to allow such Option Writer to undertake such investigation. In the event that such Option Writer determines that the conditions for exercise of Securities Issuance Option have not been met, such Option Writer shall deliver a written notice of objection to exercise of the Securities Issuance Option (the "Notice of Objection") to Company within such thirty (30) day period or the ten (10) business day update period described above, as applicable. Such Notice of Objection shall specify in reasonable detail the reason(s) for such Option Writer's objection to the exercise of the Securities Issuance Option. If, within twenty (20) days following delivery of the Notice of Objection to Company, Company and such Option Writer cannot reach an agreement regarding the exercise of the Securities Issuance Option, their dispute shall be submitted to dispute resolution in accordance with Article 8 below. With respect to each Option Writer, in the event that such Option Writer has not issued a Notice of Objection in accordance with this Section 2.3, such Option Writer shall deliver, on the Exercise Date (or the next following Business Day if the Exercise Date is not a Business Day), by wire transfer of immediately available funds, in U.S. dollars, its percentage interest (as stated in Schedule 1.1) of the aggregate Preferred Share Purchase Price specified in the Notice of Exercise, against the delivery by Company of the corresponding number of Preferred Shares. 2.4 Extension of Exercise Term. Notwithstanding anything in this Agreement to the contrary, in the event that Company files, prior to the end of any Exercise Term, preliminary proxy materials with the SEC relating to a submission to registered holders of Company Common Stock for approval of the issuance of the Preferred Shares (or the issuance of shares of Company Common Stock upon conversion of the Preferred Shares), as required by any exchange listing or other regulatory requirements, the Exercise Term shall be extended by a period of ninety (90) days plus, if any such materials are not reviewed by the staff at the SEC within thirty (30) days, an additional number of days (not to exceed fifteen (15) days in any event) equal to the number of days in excess of thirty (30) between the filing of such preliminary materials with the SEC and the initial receipt by Company of written comments from the SEC staff. 8 3. Representations and Warranties of Company. Company represents and warrants to Option Writers as follows (it being understood that, subject to the terms of Section 10.11, the representations and warranties contained in Sections 3.1, 3.2, 3.3, 3.4, 3.5(a), 3.6 and 3.7 shall be deemed to be repeated by Company on each Exercise Date): 3.1 Existence and Qualifications. Company is a company duly organized, validly existing and in compliance with filing requirements and payment of government fees required under the laws of Bermuda, and each of the Company Subsidiaries is a company duly organized, validly existing and in compliance with filing requirements and payment of government fees required under the laws of its respective place of domicile specified in Article 1 above. Subject to obtaining Bermuda governmental approvals for issuance of the Preferred Shares, Company has the full corporate power and authority to execute and deliver the Transaction Agreements, and to perform its obligations under, and to consummate the transactions contemplated by, the Transaction Agreements, including, without limitation, the delivery of the Preferred Shares pursuant to the exercise of the Securities Issuance Option as described in this Agreement. 3.2 No Violation or Conflict. The execution and delivery by Company of the Transaction Agreements, and the performance of Company under the Transaction Agreements, do not violate or conflict with any applicable law, any provision of Company's memorandum of association or Bye-laws or any order or judgment of any court or other government agency applicable to Company or any of its assets or any of the Company Subsidiaries, or any contractual restriction binding upon or affecting Company or any of the Company Subsidiaries or their respective assets (other than as set forth in the Credit Agreement). 3.3 Consents. All Bermuda governmental and other consents that are required to have been obtained by Company with respect to the execution and delivery of this Agreement have been obtained and are in full force and effect and all conditions of any such consents have been complied with or, will have been obtained or complied with (as the case may be) as of the applicable Exercise Date or prior to any conversion of Preferred Shares into Company Common Stock, provided always that any information requested from the Option Writers necessary in connection with such consent or obtaining the same shall have been supplied in a timely manner (as the circumstances may warrant). 3.4 Licenses and Permits. The Company Subsidiaries have all requisite material licenses, permits and authority (collectively, "Licenses") that are necessary for the conduct of their respective insurance businesses, such Licenses are in full force and effect, and no proceeding is pending or, to Company's knowledge, threatened to suspend, revoke or limit any License which is material to the operations of any such Company Subsidiaries. 3.5 Absence of Litigation. a. There is not pending or to its knowledge threatened, against Company or the Company Subsidiaries, any action, suit or proceeding before any court, 9 tribunal, governmental body, agency or official or any arbitrator or mediator that would reasonably be expected to materially and adversely affect the legality, validity and enforceability against Company of any Transaction Agreement. b. There is not pending or to its knowledge threatened, against the Company or the Company Subsidiaries, any action, suit or proceeding before any court, tribunal, governmental body, agency or official or any arbitrator or mediator that, if adversely determined, could reasonably be expected to materially and adversely affect the financial condition of the Company or any Company Subsidiary. 3.6 Options or Other Rights. Except for this Agreement, there is no outstanding right, subscription, warrant, call, unsatisfied preemptive right, option or other agreement of any kind to purchase or otherwise to receive from Company any Preferred Shares, except as set forth in the Credit Agreement with respect to the preferred shares of LaSalle Re Limited. 3.7 Financial Statements. Company has furnished Option Writers with true and complete copies of its audited consolidated balance sheets as of September 30, 1994, 1995 and 1996 and audited consolidated statements of operations for the periods ended September 30, 1994, 1995 and 1996 (collectively the "Company Financial Statements"). The Company Financial Statements have been prepared in accordance with GAAP and present fairly in all material respects the financial position of Company and the results of its operations as of the dates indicated and for the periods then ended. 3.8 Binding Obligations. The execution of the Transaction Agreements has been duly authorized by all necessary corporate action of Company, and such Transaction Agreements (a) have been duly executed and delivered by Company, (b) constitute legal, valid and binding obligations of Company, and (c) are enforceable against Company in accordance with their terms (subject to applicable bankruptcy, reorganization, insolvency, moratorium or similar laws affecting creditors' rights generally and subject, as to enforceability, to equitable principles of general application). 3.9 Preferred Shares. Company has, or will have as of the applicable Exercise Date, authority to issue Preferred Shares with an aggregate Preferred Share Purchase Price of US$100,000,000, and such Preferred Shares, when issued pursuant to the exercise of the Securities Issuance Option, shall, upon delivery of payment therefor, be validly issued, fully paid and Non-assessable. Upon issuance pursuant to this Agreement, the Preferred Shares shall be free and clear of any lien, encumbrance or other restriction (except as otherwise set forth in the Transaction Agreements and in any consent issued by the Bermuda Monetary Authority, provided always that Company shall use reasonable efforts to have removed any restriction contained in such consent affecting the transferability of the Preferred Shares), and upon delivery of and payment for the Preferred Shares as provided in this Agreement, Option Writers will acquire good title to the Preferred Shares purchased under this Agreement, free and clear of any lien, encumbrance or other restriction (except as otherwise set forth in the Transaction Agreements and in any consent issued by the Bermuda Monetary 10 Authority, provided always that Company shall use reasonable efforts to have removed any restriction contained in such consent affecting the transferability of the Preferred Shares to persons not designated as being resident in Bermuda for foreign exchange control purposes). 3.10 Company Common Stock. The shares of Company Common Stock into which the Preferred Shares may be converted, as set forth in the Certificate of Designation, shall, upon conversion, be validly issued, fully paid and Non- assessable. Such shares of Company Common Stock shall be free and clear of any lien, encumbrance or other restriction (except as otherwise set forth in the Transaction Agreements and in any consent issued by the Bermuda Monetary Authority, provided always that Company shall use reasonable efforts to have removed any restriction contained in such consent affecting the transferability of the Preferred Shares), and upon conversion as provided in the Certificate of Designation, Option Writers will acquire good title to the number of shares of Company Common Stock into which such Preferred Shares are converted, free and clear of any lien, encumbrance or other restriction (except as otherwise set forth in the Transaction Agreements and in any consent issued by the Bermuda Monetary Authority, provided always that Company shall use reasonable efforts to have removed any restriction contained in such consent affecting the transferability of the Preferred Shares to persons not designated as being resident in Bermuda for foreign exchange control purposes). Such shares of Company Common Stock shall be subject to the Registration Rights Agreement described in Section 6.2. 3.11 No Insolvency or Bankruptcy. Neither Company nor LaSalle Re Limited (a) is the subject of any voluntary or involuntary petition under any bankruptcy, insolvency or similar law affecting creditors generally, (b) is the subject of any liquidation, transformation or rehabilitation proceeding, or (c) has had a receiver or similar person or entity appointed for any of its property. Notwithstanding the foregoing, (a) a breach of the representations and warranties contained in Section 3.1, 3.2, 3.3 or 3.4 at any Exercise Date shall prevent exercise of the Securities Issuance Option unless and until such breach is cured in accordance with Section 10.11, and (b) a breach of the representations and warranties contained in Sections 3.5(a), 3.6 or 3.7 at any Exercise Date shall not in any way prevent or delay exercise of the Securities Issuance Option. Notwithstanding the preceding sentence, each party shall have the right to recover damages that may be available at law from any other party for any loss or injury that is caused by any inaccuracy or breach of any representation or warranty made by such other party. 4. Representations and Warranties of Option Writers. Each Option Writer represents and warrants to Company as follows (it being understood that, subject to the terms of Section 10.11, the representations contained in Sections 4.1, 4.2, 4.3, 4.4 and 4.5 shall be deemed to be repeated by each Option Writer on each Exercise Date: 11 4.1 Existence and Qualifications of Option Writers. Each Option Writer is a corporation duly organized, validly existing and in compliance with filing requirements and payment of government fees required under the laws of its respective domicile as set forth on Schedule 1.1, and each Option Writer has the full corporate power and authority to execute and deliver the Transaction Agreements, and to perform its obligations under, and consummate the transactions contemplated by, the Transaction Agreements, including, without limitation, the purchase of the Preferred Shares pursuant to the exercise of the Securities Issuance Option by Company as described in this Agreement. 4.2 No Violation or Conflict. The execution and delivery of the Transaction Agreements by each Option Writer, and the performance of each Option Writer under the Transaction Agreements, do not violate or conflict with any applicable law, any provision of such Option Writer's organizational documents or any order or judgment of any court or other government agency applicable to such Option Writer (or any of its assets or subsidiary or affiliated companies to the extent any such order or judgment would have a material adverse effect on the rights or privileges of Company under this Agreement), or any contractual restriction binding upon or affecting such Option Writer (or any of its subsidiary or affiliated companies or its assets to the extent any such restriction would have a material adverse effect on the rights or privileges of Company under this Agreement). 4.3 Consents. All governmental and other consents that are required to have been obtained by each Option Writer with respect to the execution and delivery of this Agreement have been obtained by such Option Writer and are in full force and effect and all conditions of any such consents have been complied with. 4.4 Absence of Litigation. There is not pending or to its knowledge, threatened against any Option Writer or any of its Subsidiaries or Affiliates, any action, suit or proceeding before any court, tribunal, governmental body, agency or official or any arbitrator or mediator that would reasonably be expected to materially and adversely affect the legality, validity and enforceability against such Option Writer of any Transaction Agreement. 4.5 Investment Representation. Each Option Writer understands that the issuance of Preferred Shares under this Agreement and the issuance of Company Common Stock upon conversion of Preferred Shares have not been and will not (except as set forth in the Registration Rights Agreement) be registered under the Securities Act and such Preferred Shares and Company Common Stock will be issued in reliance upon the exemption afforded by Section 4(2) of the Securities Act for transactions by an issuer not involving any public offering. Each Option Writer represents that (a) it is acquiring the Preferred Shares and such Company Common Stock solely for its own account, for investment purposes only, and not with a view to distribution, fractionalization or resale thereof, (b) it will not sell or otherwise dispose of the Preferred Shares or such Company Common Stock except in compliance with the registration requirements or exemption provisions of applicable securities laws including the Securities Act, (c) it has not relied on Company for any explanation of the application of the various U.S. state and federal securities laws with regard to the acquisition of the Preferred Shares and such Company Common Stock, (d) it has access to complete information 12 regarding the business and finances of Company, and has received, read and understood the contents of the SEC Filings, (e) it has such knowledge and experience in business and financial matters that it has been able to fully understand and completely evaluate the risks and merits of holding the Preferred Shares and such Company Common Stock as provided in this Agreement, and (f) it is able to bear the economic risk and limitation in liquidity of an investment in the Preferred Shares and such Company Common Stock. 4.6 Binding Obligations. The execution of the Transaction Agreements has been duly authorized by all necessary corporate action of each Option Writer, and such Transaction Agreements (a) have been duly executed and delivered by each Option Writer, (b) constitute legal, valid and binding obligations of each Option Writer, and (c) are enforceable against each Option Writer in accordance with their terms (subject to applicable bankruptcy, reorganization, insolvency, moratorium or similar laws affecting creditors' rights generally and subject, as to enforceability, to equitable principles of general application). Notwithstanding the foregoing, each party shall have the right to recover damages that may be available at law from any other party for any loss or injury that is caused by any inaccuracy or breach of any representation or warranty made by such other party. 5. Conditions. 5.1 Conditions to Effectiveness of Agreement. The effectiveness of this Agreement shall be subject to the satisfaction by Company at, or waiver by Option Writers at or prior to its execution and delivery, of the following conditions (it being understood that unless Option Writers make an objection at or prior to such execution and delivery, this Agreement shall be deemed effective for all purposes upon such execution and delivery): a. Registration Rights Agreement. Company and Option Writers shall have entered into the Registration Rights Agreement as described in Section 6.2. b. Compliance with Laws and Consents. Company shall have complied with all laws and regulations applicable to the authorization and issuance of the Preferred Shares and, subject to the following sentence, the conversion of Preferred Shares into Company Common Stock, including the adoption or authorization by the Board of Directors of Company of the Certificate of Designation. Company and Option Writers shall have obtained all consents and approvals (whether shareholder, regulatory, contractual or otherwise) necessary for the authorization and issuance of the Preferred Shares (other than as set forth in the Credit Agreement), the conversion of the Preferred Shares into Company Common Stock, and the authorization and issuance of such Company Common Stock, including without limitation the approval of any applicable insurance regulatory body or agency, and the approval of any filing or application required under applicable securities laws (whether of Bermuda, the U.S., any state of the U.S., or any other applicable jurisdiction), provided, however, that if any insurance regulator shall for any reason decline to approve the 13 conversion of the Preferred Shares and/or the issuance of Company Common Stock pursuant to such conversion, but shall approve the authorization and issuance of the Preferred Shares, then such approval of the conversion of the Preferred Shares and/or the issuance of Company Common Stock pursuant to such conversion, as applicable, shall not be a condition to exercise of the Securities Issuance Option, provided further, however, that Company has reasonably cooperated with Option Writers to obtain such approvals. Notwithstanding the foregoing, if any consent, approval or other matter necessary for conversion of the Preferred Shares into Company Common Stock is of such a nature that it cannot be obtained or achieved until at or about the time of such conversion (including without limitation the approvals of any members of the Board of Directors of Company required under the Bermuda Companies Act of 1981, as amended, or other applicable law), then such consent, approval or other matter shall not be a condition to exercise of the Securities Issuance Option. c. No Insolvency or Bankruptcy. Neither Company nor LaSalle Re Limited (a) is the subject of any voluntary or involuntary petition under bankruptcy, insolvency or similar law affecting creditors generally (provided, however, that Company or LaSalle Re Limited, as applicable, shall not be in breach of this condition with respect to an involuntary petition unless such involuntary petition is not dismissed within sixty (60) days following Company's or LaSalle Re Limited's receipt of notice of the filing of such petition), (b) is the subject of any liquidation, transformation or rehabilitation proceeding, or (c) has had a receiver or similar person or entity appointed for any of its property. 5.2 Conditions to Exercise of Securities Issuance Option. The right of Company to exercise the Securities Issuance Option (or any increment of the Securities Issuance Option) shall be subject to the satisfaction by Company at, or waiver by Option Writers at or prior to, the Exercise Date, of the following conditions: a. Occurrence of Event. A Qualifying Catastrophic Event shall have occurred with respect to the Company Subsidiaries. b. Company Net Worth. With respect to the first exercise of the Securities Issuance Option, after accounting for the Qualifying Catastrophic Event, but prior to payment for any Preferred Shares to be purchased upon such first exercise of the Securities Issuance Option, Company's GAAP Net Worth shall not be less than US$175,000,000. With respect to any subsequent exercise of the Securities Issuance Option, after accounting for the Qualifying Catastrophic Event and any payment for any Preferred Shares previously issued pursuant to any prior exercise of the Securities Issuance Option, Company's GAAP Net Worth shall not be less than US$175,000,000. c. Review of Financial Statements by Auditor. Company's regular outside auditor or accounting firm shall have reviewed Company's consolidated balance sheet and statement of operations for the most recent quarter ending prior to the date of the applicable Notice of Exercise, and shall have issued a review report solely to the Option Writers on such quarterly financial statements. In addition, Company shall have provided an adjusted consolidated balance sheet for Company as at the applicable Exercise Date, and 14 Company shall have represented and warranted, as of such Exercise Date, that such adjusted consolidated balance sheet presents fairly, in all material respects, the financial position of Company as of the date indicated. d. No Insolvency or Bankruptcy. Neither Company nor LaSalle Re Limited shall (a) be the subject of any voluntary or involuntary petition under bankruptcy, insolvency or similar law affecting creditors generally (provided, however, that Company or LaSalle Re Limited, as applicable, shall not be in breach of this condition with respect to an involuntary petition unless such involuntary petition is not dismissed within sixty (60) days following Company's or LaSalle Re Limited's receipt of notice of the filing of such petition), (b) be the subject of any liquidation, transformation or rehabilitation proceeding, or (c) has had a receiver or similar person or entity appointed for any of its property. e. Payment of Fees. All Option Fee payments then due shall have been paid in full. f. Certification. With respect to any exercise of the Securities Issuance Option, Company shall deliver to Option Writers, at or prior to the applicable Exercise Date, a certificate, in the form attached as Exhibit 5.2(f), executed by a duly authorized officer of Company and dated as of such Exercise Date, provided, however, that in accordance with Article 3, the failure to include, in such certificate, references to truth and accuracy of the representations and warranties in any or all of Sections 3.5, 3.6 or 3.7 shall not in any way prevent or delay such exercise of the Securities Issuance Option. g. Legal Opinion. With respect to the first exercise of the Securities Issuance Option only, Option Writers shall have received, from special counsel for Company, an opinion of counsel, dated on or about the Exercise Date, which is substantially in the form attached as Exhibit 5.2(g). h. Credit Agreement. Company shall have satisfied its obligation under Section 6.15 below. 6. Covenants and Agreements. 6.1 Preferred Shares. In the event of the issuance of Preferred Shares pursuant to an exercise of the Securities Issuance Option, such Preferred Shares shall be subject to, and governed by, the provisions of the Certificate of Designation and the Bye-laws of Company. 6.2 Registration Rights. Concurrently with this Agreement, Company and Option Writers shall enter into the Registration Rights Agreement, substantially in the form attached as Exhibit 6.2. 6.3 Preferred Share Resale Rights. 15 a. The Preferred Shares will be freely transferable subject only to restrictions imposed by U.S. federal and state securities laws, Bermuda regulatory authorities and the Bye-laws of Company, except that any transfer of Preferred Shares shall require the prior consent of Company, which consent shall not be unreasonably withheld, subject, however, to the provisions of Section 6.14 below. The certificates evidencing the Preferred Shares shall bear legends on the front and back which evidences restrictions upon transferability of the Preferred Shares. The legend on the front of each certificate shall read as follows: THIS CERTIFICATE IS RESTRICTED FROM TRANSFER AS INDICATED ON THE REVERSE SIDE. The legend on the reverse side of each certificate shall read as follows: ANY SALE, ASSIGNMENT, TRANSFER, PLEDGE, OR OTHER DISPOSITION OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO ALL OF THE PROVISIONS OF THE BYE-LAWS OF THE COMPANY AS THEY MAY BE AMENDED FROM TIME TO TIME, AND THE CATASTROPHE EQUITY SECURITIES ISSUANCE OPTION AGREEMENT DATED AS OF JULY 1, 1997 BETWEEN THE COMPANY AND EUROPEAN REINSURANCE COMPANY OF ZURICH, A CORPORATION ORGANIZED UNDER THE LAWS OF SWITZERLAND; ALLIANZ AKTIENGESELLSCHAFT, A CORPORATION ORGANIZED UNDER THE LAWS OF GERMANY; CONTINENTAL CASUALTY COMPANY, A STOCK INSURANCE COMPANY ORGANIZED UNDER THE LAWS OF ILLINOIS, USA; AND CIC- HILLDALE, INC., A CORPORATION ORGANIZED UNDER THE LAWS OF ILLINOIS, USA; WHICH ARE AVAILABLE FOR EXAMINATION BY HOLDERS OF SHARES AT THE REGISTERED OFFICE OF THE COMPANY. IN ADDITION TO THE FOREGOING RESTRICTIONS, THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "SECURITIES ACT") OR ANY UNITED STATES SECURITIES LAWS AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF UNLESS (I) A REGISTRATION STATEMENT IS IN EFFECT UNDER THE SECURITIES ACT WITH RESPECT TO SUCH SHARES OR A WRITTEN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY IS OBTAINED TO THE EFFECT THAT NO SUCH REGISTRATION IS REQUIRED AND (II) EXCEPT IN THE CASE OF PUBLICLY TRADED SHARES, THE TRANSFEREE IS OTHERWISE APPROVED BY APPLICABLE BERMUDA REGULATORY AUTHORITIES. 16 The legends shall be removed from any Preferred Share Certificates as to which, in an opinion of counsel reasonably satisfactory to Company (which opinion shall be paid for solely by the registered holder of such Preferred Shares), such registration described in the legends is not necessary or required, and that the transfer will not otherwise violate this Agreement, the Securities Act, the Exchange Act, or applicable securities laws, and does not require the approval of any Bermuda regulatory authorities; and any stop transfer instructions previously given to Company's transfer agent shall be revoked as to such Preferred Shares upon the delivery of the opinion of counsel described above. b. The shares of Company Common Stock into which the Preferred Shares may be convertible may be subject to registration as contemplated by the Registration Rights Agreement. Prior to the registration of any shares of Company Common Stock into which the Preferred Shares are converted, pursuant to the Registration Rights Agreement or otherwise, the certificates representing such shares of Company Common Stock shall bear legends on both the front and back which evidence restrictions upon transferability of such shares of Company Common Stock. The legend on the front of each certificate shall read as follows: THIS CERTIFICATE IS RESTRICTED FROM TRANSFER AS INDICATED ON THE REVERSE SIDE. The legend on the reverse side of each certificate shall read as follows: ANY SALE, ASSIGNMENT, TRANSFER, PLEDGE, OR OTHER DISPOSITION OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO ALL OF THE PROVISIONS OF THE BYE-LAWS OF THE COMPANY AS THEY MAY BE AMENDED FROM TIME TO TIME, WHICH ARE AVAILABLE FOR EXAMINATION BY HOLDERS OF SHARES AT THE REGISTERED OFFICE OF THE COMPANY. IN ADDITION TO THE FOREGOING RESTRICTIONS, THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "SECURITIES ACT") OR ANY UNITED STATES SECURITIES LAWS AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF UNLESS (I) A REGISTRATION STATEMENT IS IN EFFECT UNDER THE SECURITIES ACT WITH RESPECT TO SUCH SHARES OR A WRITTEN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY IS OBTAINED TO THE EFFECT THAT NO SUCH REGISTRATION IS REQUIRED AND (II) EXCEPT IN THE CASE OF PUBLICLY TRADED SHARES, THE TRANSFEREE IS OTHERWISE APPROVED BY APPLICABLE BERMUDA REGULATORY AUTHORITIES. 17 The legends shall be removed from any certificate representing either (a) shares of Company Common Stock sold under an effective registration statement under the Securities Act in a sale approved by applicable Bermuda regulatory authorities, or (b) shares of Company Common Stock as to which, in an opinion of counsel reasonably satisfactory to Company (which opinion shall be paid for solely by the registered holder of such shares of Company Common Stock), such registration is not necessary or required, and that the transfer will not otherwise violate the Securities Act, the Exchange Act, or applicable securities laws, and does not require the approval of any Bermuda regulatory authorities; and stop transfer instructions previously given to Company's transfer agent shall be revoked as to such shares of Company Common Stock upon the occurrence of (a) or (b) above. 6.4 Preferred Share Liquidation Preference. The liquidation preference of the Preferred Shares shall be at least equal to the highest liquidation preference of any other class of shares of Company issued and outstanding at the time of liquidation. During the period that the Securities Issuance Option remains exercisable under this Agreement, and during any period when Preferred Shares remain issued and outstanding following issuance under this Agreement, Company shall not issue any debt securities convertible into equity securities of Company or any preferred shares or other class of shares of Company which ranks senior to the Preferred Shares with respect to dividend or distribution rights or rights to distributions on liquidation without the prior written approval, which approval shall not be unreasonably withheld, of (a) the holders of the Majority Option Interest if no Preferred Shares are issued or outstanding, or (b) if Preferred Shares are then issued and outstanding, the registered holders of more than fifty percent (50%) of such Preferred Shares. 6.5 Restrictions on Company. During the period when any Preferred Shares remain issued and outstanding, without the prior written consent of the registered holders of more than fifty percent (50%) of such Preferred Shares, which consent shall not be unreasonably withheld, (a) Company shall not dispose of any of its interest in any of its Subsidiaries, and (b) Company and the Company Subsidiaries shall not (i) except in the ordinary course of business, make any loan or advance to, or investment in, any person or entity, or (ii) enter into related party transactions at other than arm's length. 6.6 Option Writers' Securities Filings. Notwithstanding anything in the Agreement to the contrary, each Option Writer shall be responsible for making any regulatory filing required of it under Section 13(d) or Section 16 of the Exchange Act, but the making of any such filings shall not be a condition to the exercise of the Securities Issuance Option. 6.7 Regulatory Filings for Conversion. Company, Option Writers and their respective Affiliates shall make all regulatory filings which are necessary or desirable to permit Option Writers to convert any Preferred Shares into shares of Company Common Stock in accordance with the terms of the Certificate of Designation as promptly as possible following any request by Option Writers. Option Writers and Company shall cooperate and use reasonable efforts to obtain any insurance and other regulatory approvals for such conversion which have not previously been obtained. 18 6.8 Change of Control. In the event of a Change of Control: a. If all or any portion of the Securities Issuance Option remains unexercised, this Agreement shall automatically be terminated in accordance with Section 7.2 unless such Change of Control shall have received the prior approval of the holders of the Majority Option Interest. In the event such Change of Control is so approved, this Agreement shall remain in full force and effect. b. If any Preferred Shares are then issued and outstanding, unless such Change of Control is approved by the registered holders of such Preferred Shares as set forth in the Certificate of Designation, or unless such Change of Control involves a sale of all or substantially all Company's assets (in which case holders of the Preferred Shares shall have no voting or approval rights as stated in the Certificate of Designation), the respective rights, privileges and obligations of Company and such registered holders shall, subject to the provisions of Section 42 of the Bermuda Companies Act of 1981 being satisfied (if applicable), be as set forth in the Certificate of Designation. Notwithstanding the foregoing, the termination of this Agreement shall not affect any rights or obligations arising out of or relating to events occurring or circumstances existing prior to such termination. 6.9 Information Supplied by Company. Company shall provide Option Writers with such information as Option Writers may reasonably request in order to determine whether Company has satisfied the conditions to exercise set forth in Section 5.2 of this Agreement. 6.10 [Untitled.] [This Section Intentionally Left Blank.] 6.11 Operational Covenant. Company shall comply with the operational covenant set forth in the attached Exhibit 6.11. 6.12 Option Writer Credit Support. An Option Writer shall, promptly upon request by Company, in the event that the S&P Rating of such Option Writer falls below AA- or the A.M. Best Rating of such Option Writer falls below A- during any period in which Company has the ability to exercise the Securities Issuance Option, (a) purchase at such Option 19 Writer's sole expense an irrevocable standby letter of credit, from a financial institution reasonably acceptable to Company, which letter of credit secures the performance of such Option Writer under this Agreement and is issued by a bank which maintains an S&P Rating of AA-, or (b) otherwise obtain credit support reasonably approved by and acceptable to Company with respect to the obligations of such Option Writer under this Agreement, which credit support may include a guaranty, in form and substance reasonably acceptable to Company, from an affiliate of Option Writer which maintains, throughout the period such guaranty is effective, an S&P Rating of at least AA- or an A.M. Best Rating of at least A-. Such letter of credit shall remain in effect until the earlier of (a) five (5) days following the end of the period during which Company has the ability to exercise the Securities Issuance Option, or (b) the date that the rating(s) whose fall triggered the credit support obligation in the first sentence of this Section 6.12 returns to the requisite minimum level so that the S&P Rating of such Option Writer shall again be at least AA-, and/or the A.M. Best Rating of such Option Writer shall again be at least A-. Such letter of credit shall initially be in a principal amount equal to such Option Writer's percentage interest in the aggregate Preferred Share Purchase Price of the Preferred Shares covered by any then unexercised portion of the Securities Issuance Option, if any, and shall subsequently be adjusted from time to time based on the aggregate Preferred Share Purchase Price of the Preferred Shares subject to exercise under the Securities Issuance Option. 6.13 Indebtedness. Company shall comply with the covenants regarding indebtedness set forth on the attached Schedule 6.13. 6.14 Additional Covenants. Company shall comply with the additional covenants set forth on the attached Exhibit 6.14. 6.15 Credit Agreement. To the extent the Credit Agreement contains provisions which would materially and adversely affect Company's ability to perform under this Agreement (including without limitation its ability to issue, and pay dividends on, any Preferred Shares), or any Option Writer's ability to purchase, transfer or convert Preferred Shares as described in this Agreement, Company shall, prior to any Exercise Date, either (a) obtain an amendment to the Credit Agreement which modifies or deletes any such Credit Agreement provisions (provided that any such amendment does not create any new provisions which would materially and adversely affect Company's ability to perform under this Agreement, or any Option Writer's ability to purchase, transfer or convert Preferred Shares as described in this Agreement), or (b) otherwise take action reasonably acceptable to such Option Writer to ensure that such Credit Agreement provisions are then no longer applicable. If Company provides Option Writers with a copy of an amended Credit Agreement or any substitute or replacement credit agreement pursuant to this Section 6.15, and an Option Writer shall not have objected in writing to any provision of such amended Credit Agreement or substitute or replacement credit agreement as being inconsistent with Company's obligation under this Section 6.15 within thirty (30) days after delivery by Company, Company shall be deemed to have satisfied its obligation under this Section 6.15 with respect to such Option Writer. 20 6.16 Notices. Company shall promptly give notice to the Option Writers of (a) any material breach of the representations and warranties contained in Article 3 above of which the Chairman, President, Chief Financial Officer or the Chief Underwriting Officer of Company become aware, and (b) any action, suit or proceeding before any court, tribunal, governmental body, agency or official or any arbitrator or mediator that is not covered by insurance or in which injunctive or similar relief is sought which, if adversely determined, could reasonably be expected to materially and adversely affect the financial condition of the Company or any Company Subsidiary. 6.17 Amendment of Certain Documents. Prior to the issuance of any Preferred Shares, Company shall not, without the prior approval of the holders of at least seventy-five percent (75%) of the total percentage interest in the Securities Issuance Option as set forth in Schedule 1.1, as amended, amend the Bye-Laws or the Credit Agreement in any manner which would materially and adversely affect the ability of any Option Writer to purchase, transfer or convert Preferred Shares as described in this Agreement. 7. Termination. This Agreement and the transactions contemplated by this Agreement shall be terminated: 7.1 By mutual written consent signed by Company and Option Writers at any time prior to the end of the Exposure Period, in which case Option Writers shall refund to Company a prorata portion of the annual Option Fee previously paid for the then current year; 7.2 Upon a Change of Control occurring while all or any portion of the Securities Issuance Option remains unexercised, which Change of Control has not received the prior approval of the Option Writers as set forth in Section 6.8(a), in which case Option Writers shall refund to Company a prorata portion of the percentage of the annual Option Fee previously paid for the then current year which is allocable to any then unexercised portion of the Securities Issuance Option (provided, however, that the provision in the last paragraph of Section 6.8 shall apply with respect to any Preferred Shares then outstanding); or 7.3 Upon the latest of: a. Expiration of the Exposure Period; b. Expiration of the Exercise Term for the latest Qualifying Catastrophic Event (including an Event that develops into a Qualified Catastrophic Event outside the Exposure Period); c. The Exercise Date for which a Notice of Exercise was properly delivered during the Exercise Term, as such date may be extended pursuant to the submission of any matter to alternative dispute resolution under Article 8; or 21 d. The first day on which no Preferred Shares issued pursuant to this Agreement (including without limitation Preferred Shares issued on the Exercise Date specified in paragraph (c) of Section 7.3) remain issued and outstanding. 8. Alternative Dispute Resolution. Any dispute arising out of or in connection with this Agreement, including any question regarding its existence, validity or termination shall be referred to and finally resolved by arbitration under the UNCITRAL model law. There shall be a panel of three arbitrators. Company shall appoint one arbitrator and the applicable Option Writer shall appoint one arbitrator and the two arbitrators thus appointed shall appoint the third. If a party fails to appoint the arbitrator within thirty (30) days of receipt of a request to do so from the other party, or if the two arbitrators fail to agree on the third arbitrator within thirty (30) days of their appointment, the appointment shall be made, upon request of a party, by the Supreme Court of Bermuda. The place of arbitration shall be Bermuda at the Bermuda International Commercial Arbitration Centre and the language of the arbitration shall be English. Judgment upon the award entered by the arbitrators may be entered in any court having jurisdiction thereof. The costs and expenses of the arbitration shall be borne equally by the parties involved, and any interest and fees and expenses of counsel shall be borne as the arbitrators consider just under the circumstances, as directed in the award. In the event that a Notice of Objection specifies failure to satisfy the condition in Section 5.2(a) as a reason for such Notice of Objection, then any dispute over satisfaction of such Section 5.2(a) condition shall be subject to separate arbitration pursuant to this paragraph, provided, however, that all three arbitrators shall be independent Fellows of the Casualty Actuarial Society, and such arbitrators shall review applicable loss data solely for the purpose of determining whether the condition in Section 5.2(a) has been satisfied. 9. Intermediary. Company and Option Writers represent and acknowledge that Aon Re (Bermuda) Ltd. (with respect to Option Writers domiciled outside the U.S.) and Aon Securities Corporation (with respect to Option Writers domiciled within the U.S.) have acted as the sole intermediaries for all purposes with respect to the negotiation of this Agreement, and that none of Company or Option Writers has engaged any other broker or finder in connection with the transactions contemplated by this Agreement. Company and Option Writers agree that all fees or commissions payable to Aon Re (Bermuda) Ltd. (with respect to Option Writers domiciled outside the U.S.) and/or Aon Securities Corporation (with respect to Option Writers domiciled within the U.S.) in connection with this transaction shall be the sole responsibility of Option Writers. 10. Miscellaneous. 10.1 Amendments. The provisions of this Agreement may not be waived, altered, amended or repealed, in whole or in part, except by the written consent of all parties to this Agreement. 22 10.2 Notices. Any notice or other communication required or permitted under this Agreement shall be in writing and shall be deemed to have been given (a) on the date of delivery if delivered personally or by facsimile transmission, receipt confirmed, (b) twenty-four (24) hours after sending if sent by reputable overnight delivery service, or (c) seventy-two (72) hours after mailing if sent by certified, registered or express mail, postage prepaid, if properly addressed or directed to such party at the appropriate address or facsimile number set forth below, or such address or facsimile number as such party may designate by written notice to the other parties: (i) if to Company to: LaSalle Re Holdings Limited Continental Building 25 Church Street Hamilton HM 12 Bermuda Attention: Andrew Cook Fax No.: (441) 292-2656 with a copy to: Mayer, Brown & Platt 190 South LaSalle Street Chicago, Illinois 60603-3441 Attention: Richard Shepro Fax No.: (312) 701-7711 and a copy to: Aon Re (Bermuda) Ltd. Craig Appin House 8 Wesley Street P.O. Box HM 2450 Hamilton HM JX Bermuda Attention: Paul Markey Fax No.: (441) 296-5130 and a copy to: Aon Securities Corporation 123 N. Wacker Drive Chicago, Illinois 60606 Attention: Kevin Diamond Patricia Ruth Fax No.: (312) 701-2174 23 (ii) if to Option Writers to the respective addresses set forth on the attached Schedule 1.1. 10.3 Entire Agreement. This Agreement (including the Exhibits and the Schedules) contains the entire agreement between the parties, and supersedes all prior agreements, written or oral, with respect to the Securities Issuance Option. 10.4 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of Bermuda (without regard to any choice of law or conflict of law rules that would cause the application of any laws or rules of any jurisdiction other than Bermuda). 10.5 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns and legal representatives, and any references to a specific party in this Agreement shall include such party's permitted successors or assigns. Neither party shall have the right to assign or otherwise transfer its rights or obligations under this Agreement without the prior written consent of the other party. The covenant of Company contained in Section 6.14 is personal to the Option Writers, and, except as otherwise specifically stated in Section 6.14, in no case shall the rights and privileges of Option Writers under Section 6.14 be assignable or transferrable. 10.6 Severability. Each term, covenant, condition or provision of this Agreement shall be viewed as separate and distinct, and in the event that any such term, covenant, condition or provision shall be deemed by a court of competent jurisdiction to be invalid, the remaining provisions shall continue in full force and effect. 10.7 Necessary Acts. Each party to this Agreement shall perform any further acts and execute and deliver any additional agreements, assignments, documents or instruments that may be reasonably necessary or desirable to carry out the provisions or effectuate the purposes of this Agreement. 10.8 Legal Expenses. Subject to the provisions of Article 8, if any legal action or any arbitration or other proceeding is brought to enforce the provisions of this Agreement, or because of an alleged dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement, the successful or prevailing party or parties, whether such party or parties have instituted the action, shall be entitled to recover all attorneys' fees and other costs incurred in such action or proceeding, in addition to any other relief to which it or they may be entitled. 10.9 Counterparts. This Agreement may be executed in separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. 24 10.10 Headings. The headings in this Agreement are for reference only, and shall not affect the interpretation of this Agreement. 10.11 Right to Cure. In the event of a breach (a) by Company of any of the representations and warranties set forth in Article 3, (b) by any Option Writer of any of the representations and warranties set forth in Article 4, or (c) by either Company or any Option Writer of its respective covenants and agreements under Article 6, the entity committing such breach shall have sixty (60) days following its receipt of notice of such breach in which to cure such breach, unless such sooner cure is necessary in order to effect the terms of this Agreement. Except as specifically set forth in Article 3 above, the inability or failure of Company or any Option Writer to cure such breach shall neither (i) give Company or any Option Writer the right to terminate this Agreement nor (ii) excuse Company or any Option Writer from the performance of their respective obligations hereunder. Notwithstanding the preceding sentence, Company or any Option Writer shall have the right to recover any damages that may result from any breach of this Agreement. 10.12 Specific Performance. Each of the parties to this Agreement acknowledges and agrees that in the event of any breach of this Agreement, the non-breaching parties would be irreparably harmed and could not be made whole by monetary damages. Accordingly, each of the parties to this Agreement agrees that the other parties, in addition to any other remedies to which they may be entitled at law or in equity, shall be entitled to compel specific performance of this Agreement. 25 IN WITNESS WHEREOF, the parties to this Agreement have caused it to be duly executed as of the date first written above. LaSalle Re Holdings Limited By: /s/ Andrew Cook By: /s/ Guy Hengesbaugh ------------------------------- ------------------------------- Title: Chief Financial Officer Title: Exec. Vice President and ------------------------------ ------------------------------ Chief Underwriting Officer ------------------------------ European Reinsurance Company of Zurich By: /s/ Scott Bradley By: /s/ D. Whiting -------------------------------- ------------------------------- Title: Member of Senior Management Title: Member of Senior Management ------------------------------ ------------------------------ Allianz Aktiengesellschaft By: /s/ Martin Markoff By: /s/ Jurgen Rathmann --------------------------------- ------------------------------- Title: Vice President Title: ------------------------------- ------------------------------ Continental Casualty Company By: /s/ William J. Adamson, Jr. By: /s/ William B. Heberton, Jr. -------------------------------- ------------------------------- Title: Senior Vice President Title: Vice President ------------------------------ ------------------------------ CIC-Hilldale, Inc. By: /s/ Michael A. Conway By: -------------------------------- ------------------------------- Title: President Title: ------------------------------ ------------------------------ 26 EX-10.34 7 AGREEMENT DATED 9/9/97 EXHIBIT 10.34 [Letterhead of LaSalle Re Holdings Limited] 9 September 1997 Donald P. Koziol, Jr. President, Aon Specialty Group Inc., 123 North Wacker Drive, Chicago, Illinois, 60606. Dear Don, RE: AON CONTRACT - ---------------- In a spirit of goodwill we have agreed to move toward the compromise of the middle ground. We both are mindful of the need to find a balanced solution which is fair to all the shareholders of LaSalle and to the Service Provider. The understanding would be: 1. Aon will fulfill its obligations and commitments through September 30, including all costs incurred to date but not yet invoiced and reimbursed by Aon. 2. LaSalle will not authorize any further expenditure of a material nature (without Aon's approval) between now and September 30. 3. Aon will provide the services of Drew Caldwell exclusively dedicated to LaSalle until April 1, 1998, if needed at no cost to LaSalle. Aon anticipates that Phase I and II implementation will be within the $1.5m budget. 4. Subject to the foregoing, LaSalle will pay Aon a total of $1.5m (payable in quarterly installments) commencing October 1, 1997, to reflect the value of all real and intellectual assets (including 75% of the book value of the Senator system) which will then become the absolute property of LaSalle. Assets purchased after April 1, 1997, will be reimbursed 100% to Aon and is in addition to the above negotiated amount. 5. The above payment will be in addition to fees paid under the contract of $2.5m (pro rata of $3.3m) to September 30. LaSalle Re Holdings Limited Page 2 December 2, 1997 6. Additionally Aon has the opportunity to make a pro rata profit commission to September 30 contingent upon our maintaining a favorable loss experience through December 31 as more fully described in the contract. I sincerely hope that when all aspects of the Aon/LaSalle relationship is factored in, as well as the four year result of the Service Agreement, that this offer will be acceptable. Yours sincerely, /s/ Victor Signed: /s/ Victor H. Blake Signed: /s/ Don Koziol ---------------------- ----------------------------- V. H. Blake Don Koziol Chairman, President & CEO President LaSalle Re Aon Speciality Group 2 EX-11.1 8 STATEMENT RE COMPUTATION Exhibit 11.1 LaSalle Re Holdings Limited STATEMENTS RE COMPUTATION OF PER COMMON SHARE EARNINGS (Expressed in thousands of United States Dollars except for number of shares and earnings per share)
Year ended Year ended Year ended September 30, 1997 September 30, 1996 September 30, 1995 ------------------------ ------------------------ ------------------------ Fully Fully Fully Primary Diluted Primary Diluted Primary Diluted ---------- ---------- ---------- ---------- ---------- ---------- Net income before minority interest: (1) 121,468 121,468 129,451 129,451 104,448 104,448 Preferred dividend 3,354 3,354 0 0 0 0 ---------- ---------- ---------- ---------- ---------- ---------- Net income available to common shareholders 118,114 118,114 129,451 129,451 104,448 104,448 ========== ========== ========== ========== ========== ========== Number of shares: Weighted average shares outstanding 15,567,521 15,567,521 14,397,720 14,397,720 14,396,760 14,396,715 Exchangeable non-voting shares (1) 5,703,212 5,703,212 8,329,290 8,329,290 8,329,290 8,329,290 Incremental shares of outstanding stock options (2) 1,661,391 1,812,396 1,210,317 1,324,055 441,792 473,714 Incremental shares of outstanding stock appreciation rights (3) 66,812 78,568 30,543 49,147 2,838 5,383 ---------- ---------- ---------- ---------- ---------- ---------- 22,998,936 23,161,697 23,967,870 24,100,212 23,170,680 23,205,102 ========== ========== ========== ========== ========== ========== Earnings per share: $5.14 $5.10 $5.40 $5.37 $4.51 $4.50
(1) The holders of exchangeable non-voting shares in LaSalle Re Limited, which represents the minority interest, generally can exchange these shares at any time, on a one for one basis, for common shares in LaSalle Re Holdings Limited. For purposes of the computation of net income per common share, these shares have been treated as common share equivalents. (2) As of September 30, 1997, 1996 and 1995 the Company had options outstanding of 2,550,537, 2,499,348 and 2,439,348 respectively. The dilution would be the equivalent of approximately 1,661,391, 1,210,317 and 441,792 shares for the years ended September 30, 1997, 1996 and 1995 using the treasury stock method, based on average market price. The dilution under the fully diluted computation is calculated using the treasury stock method based on closing market price. (3) As of September 30, 1997, 1996 and 1995 the Company had granted 340,872 stock appreciation rights. The dilution would be the equivalent of approximately 66,812, 30,543 and 2,838 shares for the years ended September 30, 1997, 1996 and 1995 using the treasury stock method, based on average market price. The dilution under the fully diluted computation is calculated using the treasury stock method based on closing market price. EX-12.1 9 STATEMENT RE COMPUTATION RATIO Exhibit 12.1 LaSalle Re Holdings Limited STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED SHARE DIVIDENDS (Expressed in thousands of United States Dollars except for number of shares and earnings per share)
Year ended Year ended Year ended September 30, 1997 September 30, 1996 September 30, 1995 ------------------ ------------------ ------------------ Earnings available for fixed charges and preferred share dividends Net income before minority interest 121,468 129,451 104,448 Interest expense 1,678 222 0 Preferred share dividends (1) 0 0 0 ------- ------- ------- Total earnings available for fixed charges and preferred dividends 123,146 129,673 104,448 ======= ======= ======= Fixed charges and preferred share dividends Interest expense 1,678 222 0 ------- ------- ------- Total fixed charges 1,678 222 0 ------- ------- ------- Preferred share dividends 3,354 0 0 ------- ------- ------- Combined fixed charges and preferred dividends 5,032 222 0 ======= ======= ======= Ratio of earnings to combined fixed charges and preferred share dividends 24.5 584.1 - ======= ======= =======
(1) Not deducted from net income before minority interest. EX-13.1 10 SELECTED FINANCIAL DATA FROM ANNUAL REPORT EXHIBIT 13.1 Selected Financial Data (expressed in dollars in thousands, except per share and other data)
- ------------------------------------------------------------------------------------------------------------------------- Year ended Year ended Year ended Period October 26, 1993 September 30, September 30, September 30, to September 30, 1994 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- Statement of Income Data - ------------------------ Premiums written......................... $ 171,386 $ 190,151 $ 201,916 $ 133,327 Net premiums earned...................... 163,933 195,141 170,370 76,989 Net investment income (net of realized gains and losses)....... 33,664 26,428 25,066 15,739 Loss and loss expenses incurred.......... 31,199 51,477 60,397 49,801 Underwriting expenses.................... 26,018 27,268 22,988 8,686 Operational expenses..................... 12,656 11,114 6,218 4,066 Income before minority interest.......... 121,468 129,451 104,448 29,899 Minority interest /(1)/ (1997 : 21%; All other periods : 37%).. 24,391 47,966 38,774 10,958 Net income............................... 97,077 81,485 65,674 18,941 Net income per share /(2)/............... $ 5.14 $ 5.40 $ 4.51 $ 1.31 Weighted average shares outstanding /(3)/ 22,998,936 23,967,870 23,170,680 22,852,910 Dividends declared per Common Share...... $ 2.84 $ 0.75 5.72 $ 0.00 Other Data - ---------- Loss ratio............................... 19.0% 26.4% 35.5% 64.7% Expense ratio............................ 23.6% 19.6% 17.1% 16.6% Combined ratio........................... 42.6% 46.0% 52.6% 81.3% Return on average equity /(4)/........... 25.4% 29.2% 26.6% 9.3% Balance Sheet Data (at end of period) - ------------------------------------- Total investments and cash............... $ 553,043 $ 537,504 $ 522,425 $ 409,738 Total assets............................. 686,088 634,374 636,547 481,424 Reserve for losses and loss expenses..... 45,491 49,875 66,654 37,789 Minority interest /(1)/.................. 93,355 179,470 147,389 140,838 Total shareholders' equity............... 425,226 307,448 253,422 243,446 Book value per share /(5)/............... $ 23.23 $ 21.42 $ 17.64 $ 16.91 - ----------------------------------------------------------------------------------------------------------------------
(1) Minority interest represents those shares in LaSalle Re that are held as Exchangeable Non-Voting Shares. These shares are exchangeable, at the option of the holder, for Common Shares of the Company on a one-for-one basis. (2) Net income per share equals income before minority interest and after preferred dividends declared and in arrears divided by the weighted average shares outstanding. (3) 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. (4) Return on average equity is calculated by dividing net income before minority interest and after preferred dividends declared and in arrears by the average of the opening and closing sum of common shareholders' equity and minority interest. The adjustment in respect of minority interest reflects the exchangeable nature of the Exchangeable Non-Voting Shares. (5) Book value per share is based on the sum of closing common shareholders' equity and minority interest divided by Common Shares and Exchangeable Non- Voting Shares. EX-27.1 11 FINANCIAL DATA SCHEDULE
7 1,000 12-MOS SEP-30-1997 OCT-01-1996 SEP-30-1997 498,282 0 0 0 0 0 498,282 54,761 0 11,932 686,088 45,491 88,490 0 0 0 15,074 0 3,000 407,152 686,088 163,933 33,109 555 188 31,199 26,018 19,100 121,468 0 121,468 0 0 0 121,468 5.14 5.10 0 0 0 0 0 0 0 Amounts for Securities Act Industry Guide 6 and Exchange Act Industry Guide 4 disclosures are not provided because the Company's loss reserves do not exceed one-half of consolidated common shareholders' equity. Includes minority interest.
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