-----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, NwUAg891HXqUj8KhufPwYAifNo5KLUyMS4vWAuIeQlq1Ap8nVvhXsVgNERkS5MfS ZyyouBB8YiRoQXKfNT5F1g== 0000950131-99-006789.txt : 19991223 0000950131-99-006789.hdr.sgml : 19991223 ACCESSION NUMBER: 0000950131-99-006789 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991222 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-K405 SEC ACT: SEC FILE NUMBER: 001-12823 FILM NUMBER: 99779402 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-K405 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-K --------------- (Mark One) [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, 1999 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 Incorporation or Organization) Identification No.) Continental Building, 25 Church Street, Hamilton HM 12, Bermuda (Address of Principal Executive Offices) Telephone Number: 441-292-3339 (Registrant's telephone number, including area code) --------------- Securities registered pursuant to Section 12(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. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] 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, 1999 was approximately $131,980,541, 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, 1999, there were outstanding 15,603,570 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, 1999 (the "1999 Annual Report") are incorporated by reference in Part II of this Form 10-K. 2. Portions of the registrant's definitive proxy statement relating to the Annual General Meeting of Shareholders to be held on February 17, 2000 (the "2000 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, are incorporated by reference in Part III of this Form 10-K. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- LASALLE RE HOLDINGS LIMITED TABLE OF CONTENTS
Page Item Number ---- ------ PART I 1. BUSINESS......................................................... 10K- 2 2. PROPERTIES....................................................... 10K-19 3. LEGAL PROCEEDINGS................................................ 10K-19 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 10K-19 EXECUTIVE OFFICERS OF THE COMPANY................................ 10K-19 PART II 5. MARKET FOR THE COMMON SHARES AND RELATED STOCKHOLDER MATTERS..... 10K-20 6. SELECTED FINANCIAL DATA.......................................... 10K-21 7. MANAGEMENTS' DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION.............................................. 10K-21 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK........ 10K-31 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 10K-32 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............................................. 10K-58 PART III 10. DIRECTORS AND EXECUTIVE OFFICERS................................. 10K-58 11. EXECUTIVE COMPENSATION........................................... 10K-58 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT... 10K-58 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 10K-58 PART IV 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. 10K-59
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 Forward-looking statements are statements other than historical information or statements of current condition. These forward-looking statements are based on the Company's current plans and objectives for future operations. Some forward-looking statements may be identified by the use of words or phrases such as "believes," "anticipates," "intends," "may," "estimates," "expects," "plans" and similar expressions. Forward-looking statements are subject to risks and uncertainties and actual results may vary materially from those included within the forward-looking statements. Many factors could cause actual results to differ materially from those in the forward-looking statements, including the following: catastrophic events of unanticipated frequency or severity; changes in the demand for or supply of property catastrophe reinsurance; actions of competitors; consolidation in the reinsurance industry; decisions or actions of rating agencies; changes in insurance or tax laws or regulations or governmental interpretations thereof; fluctuations in interest rates; fluctuations in foreign currency exchange rates; a major decrease in the cession of business to the Company from CNA Financial Corporation and its affiliates (collectively, "CNA") or termination of the existing quota share reinsurance arrangement with CNA; and any failure of the Company's computer systems or the computer systems of third parties that are material to the Company's operations (such as the computer systems of service providers, suppliers and brokers) to process correctly information relating to dates in and after the year 2000. 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, marine, aviation, satellite, terrorism, and political risk coverages. 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 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- 10K-2 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. The holders of the Exchangeable Non-Voting Shares constitute the minority holding in LaSalle Re. In November 1995, the Company and certain Founding Shareholders 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 beneficially 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 beneficial 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 beneficial ownership of the outstanding capital stock of LaSalle Re from 73% to 79%. The Company has continually beneficially owned 100% of the outstanding voting stock of LaSalle Re. With effect from October 1, 1997, the administrative services agreement ("Administrative Services Agreement"), under which Aon Risk Consultants (Bermuda) Ltd. ("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 became employees of the Company and services performed by ARC were 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. Effective on October 1, 1998, the underwriting services agreement (the "Underwriting Services Agreement") under which CNA (Bermuda) Services Limited ("CNA Bermuda") had provided the Company with underwriting services, was terminated. On that date, all of the personnel assigned to the Company by CNA Bermuda became employees of the Company and the underwriting function formerly performed by CNA Bermuda was assumed by the Company directly. In connection with the termination of the Underwriting Services Agreement, the Company entered into an underwriting support services agreement (the "Underwriting Support Services Agreement") with CNA Re Services Company ("CRSC") and CNA Bermuda. Under the Underwriting 10K-3 Support Services Agreement, CRSC and CNA Bermuda provide the Company with various support services upon request, including (1) underwriting personnel to assist the Company's underwriting staff on a temporary basis, (2) assistance with actuarial, financial and statistical analysis and reporting, (3) support on data processing and other technical matters, (4) access to the CNA reinsurance underwriting database and technology as pertinent to the Company's business, (5) advice on insurance industry customs and practices and (6) advice to the Company's human resources department. Business segments The Company writes property and casualty reinsurance on a worldwide basis through its operating subsidiary, LaSalle Re. The Company also writes selected other lines of reinsurance when it believes that market conditions are favorable. The Company has two reportable segments: reinsurance operations and Lloyd's. The reinsurance segment provides reinsurance for property catastrophe and for other lines of business that have similar characteristics, namely high severity and low frequency. These lines currently include property risk excess, property pro rata treaty, casualty, marine, aviation, satellite, terrorism and political risk coverages. The Lloyd's segment is written through LaSalle Re Capital, which provides capital support to selected Lloyd's syndicates. The lines of business written by the selected syndicates include direct and facultative property insurance, marine insurance and reinsurance, professional indemnity, directors and officers insurance and bankers blanket bond business. Complete financial information about segments is presented in Note 14 to the Company's consolidated financial statements. The following table sets forth the Company's gross premiums written and number of contracts written by business segment and type of reinsurance for the years indicated (dollars in millions):
Year Ended Year Ended Year Ended September 30, 1999 September 30, 1998 September 30, 1997 ------------------ ------------------ ------------------ Gross Gross Gross Premiums Number of Premiums Number of Premiums Number of Written Contracts Written Contracts Written Contracts -------- --------- -------- --------- -------- --------- Reinsurance segment: Property catastrophe reinsurance: Excess of loss........ $ 81.4 717 $ 82.7 719 $110.4 802 Pro rata.............. 11.1 8 21.6 10 34.4 10 Other lines of business: Property--risk excess and pro rata......... 4.9 62 10.5 76 9.0 80 Casualty.............. 6.1 26 5.7 28 4.0 36 Space, marine and aviation............. 5.4 31 7.4 47 7.7 35 Miscellaneous......... 4.4 43 6.3 57 2.1 37 Fronted premiums, adjustments, reinstatement premiums and no claims bonuses.. 3.3 -- 0.1 -- (10.3) -- ------ --- ------ --- ------ ----- 116.6 887 134.3 937 157.3 1,000 Lloyd's segment: LaSalle Re Capital.... 22.4 -- 21.0 -- 14.1 -- ------ --- ------ --- ------ ----- Total............... $139.0 887 $155.3 937 $171.4 1,000 ====== === ====== === ====== =====
Reinsurance Segment 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 insurance contracts exceed the attachment point specified in the reinsurance contract with the primary insurer. Some of the Company's property catastrophe 10K-4 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 during any one contract year. The Company writes property catastrophe pro rata reinsurance treaties when it believes that rates and volume are attractive. In these programs, the Company assumes a specified proportion of the exposure under a portfolio of excess of loss property catastrophe reinsurance contracts written by the ceding reinsurer and receives an equal proportion of the premium received by the cedent. The cedent generally receives a ceding commission, based upon the premiums ceded to the reinsurer, and may also be entitled to receive a profit commission based on the ratio of losses, loss expenses and the reinsurer's expenses to premiums ceded. The Company generally requires that its property catastrophe pro rata contracts have aggregate exposure limits per occurrence on a zonal basis. The Company usually 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'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 expenses) and also may include a profit factor. In addition to property risk excess of loss and pro rata treaties, the Company also writes other lines of reinsurance, which currently include casualty, marine, aviation, satellite, terrorism and political risk. The Company's underwriting strategy with respect to these lines of business is to target those lines which demonstrate relatively low historical levels of attritional loss. Excess of loss contracts are written above a significant attachment point and therefore could be impacted only by large market losses such as the destruction of an oil drilling platform (marine coverage) or an airline disaster (aviation coverage). Pro rata contracts, where the Company has proportional responsibility for the first dollar of its cedents' losses, could be impacted by the cedents' expected loss ratios as well as by large market losses. Claims on those contracts could arise from physical damage, casualty and major political and trade crises. Casualty excess of loss reinsurance protects cedents from losses that arise from multiple insureds or from one large severe event. The Company does not write casualty excess of loss business at a level where frequency of loss is anticipated. Marine and aviation coverages can be triggered by physical damage perils and may also entail casualty coverages arising from the same loss event. Satellite reinsurance protects the reinsured primarily for losses arising from launch failure and in-orbit breakdown. Terrorism reinsurance provides coverage against major terrorist incidents involving damage to property. Political risk includes coverages for losses arising from contract frustration, confiscation, repatriation and international trade credit transactions. Fronting arrangements, adjustment premiums, reinstatement premiums and no claims bonuses Fronting is an arrangement whereby the Company issues a contract on a risk for, and at the request of, the insured with the intent of reinsuring the entire risk with another reinsurer. The risk assumed by the Company is primarily credit risk. During the year ended September 30, 1999, the Company provided fronting arrangements for three companies, of which two had claims paying ratings of "A-" from Standard & Poor's Ratings Services ("S&P") and the other had a rating of "A" from A. M. Best Company ("A.M. Best"). 10K-5 Due to the changing nature of the Company's exposure under an excess of loss contract, certain contracts contain adjustable premium clauses. The Company 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 receives adjustment premiums on its property catastrophe pro rata reinsurance treaties. The Company estimates premiums written using reports received from ceding companies adjusted for previous years' experiences of actual premiums against estimated premiums. These 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 are recorded as adjustments during the period the revised information is received. Some 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". A liability for the "no claims bonus" is established at the same time the gross written premium is recorded. If a loss occurs, the no claims bonus is reversed in the period in which the loss is reported to the Company. Lloyd's segment The Company formed LaSalle Re Capital to provide capital support on an underwriting year basis to selected Lloyd's syndicates. The Company has provided capital support to three syndicates for the 1999, 1998 and 1997 underwriting years of approximately $31.9 million ((Pounds)19.4 million), $27.4 million ((Pounds)16.8 million) and $28.2 million ((Pounds)16.8 million), respectively. Through this support, for the year ended September 30, 1999, the Company has written gross premiums of approximately $3.4 million for the 1998 underwriting year and approximately $19.0 million for the 1999 underwriting year. Capital support does not necessarily equate to premium income, due to different levels of capital utilization by the 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 ($16.1 million). 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, 1999, excluding the premiums written by LaSalle Re Capital, fronted premiums, adjustment premiums, reinstatement premiums and no claims bonuses, 53% of the Company's gross 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 47% of gross premiums written were 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, 1999, this regional business represented a significant component of the Company's U.S.-based gross premiums written. 10K-6 The following table sets forth the percentage of the Company's gross premiums written allocated to the zone of exposure at the dates indicated (dollars in millions):
September 30, 1999 September 30, 1998 September 30, 1997 ------------------- ------------------- ------------------- Percentage Percentage Percentage Gross of Gross Gross of Gross Gross of Gross Premiums Premiums Premiums Premiums Premiums Premiums Geographic Area Written Written Written Written Written Written - --------------- -------- ---------- -------- ---------- -------- ---------- United States........... $ 60.1 53.0% $ 64.4 48.0% $ 75.3 44.9% Europe (excluding the U.K.).................. 9.5 8.4 14.4 10.7 18.6 11.1 United Kingdom.......... 9.8 8.6 11.7 8.7 15.2 9.1 Japan................... 2.9 2.6 3.2 2.4 7.0 4.2 Australasia............. 4.5 4.0 3.3 2.5 6.4 3.8 Worldwide(1)............ 14.1 12.4 21.8 16.2 20.9 12.5 Worldwide (excluding the U.S.)(2)............... 5.4 4.8 7.5 5.6 12.6 7.5 Other................... 7.0 6.2 7.9 5.9 11.6 6.9 ------ ----- ------ ----- ------ ----- 113.3 100.0% 134.2 100.0% 167.6 100.0% ===== ===== ===== LaSalle Re Corporate Capital................ 22.4 21.0 14.1 Fronted premiums, adjustments, reinstatement premiums and no claims bonuses.. 3.3 0.1 (10.3) ------ ------ ------ Total................. $139.0 $155.3 $171.4 ====== ====== ======
- -------- (1) The category "Worldwide" consists of contracts that cover more than one zone, at least one of which is 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 Property catastrophe reinsurance is usually arranged in a series of layers, which form an individual program. The Company may write one or more of these layers with each layer constituting a separate contract. The following table sets forth the number of the Company's property catastrophe excess of loss programs written in the year ended September 30, 1999 by aggregation of program limits:
Number of Programs --------- Greater than $30 million but less than $35 million.............. 2 $25-30 million.................................................. 3 $20-25 million.................................................. 4 $15-20 million.................................................. 7 $10-15 million.................................................. 16 $7.5-10 million................................................. 18 $5-7.5 million.................................................. 39 $2.5-5 million.................................................. 70 Less than $2.5 million.......................................... 127 --- Total......................................................... 286 ===
10K-7 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. In many cases, this includes analysis of a 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 loss 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 participates at attachment levels that are expected to exceed normal loss frequency. In addition, the Company regularly reevaluates its pricing to ensure that the terms and conditions of its business are the best available in the market. 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, overall financial condition, 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 the output of commercially available catastrophe simulation models and the Company's internally-generated models. The commercially available models include (1) AIR--CATRADER(TM), which uses market share data derived from zip code and/or county aggregate data to develop individual contract and portfolio loss scenarios and (2) RMS--RiskLink(TM), which derives portfolio loss scenarios based on detailed risk location data provided by the primary insurer. Models developed by the Company and used in L-CAM(TM) include (1) 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, (2) 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 (3) 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 has developed a proprietary model called LASER (LaSalle Excess of Loss Rating). LASER incorporates the output of commercially available catastrophe simulation models and the Company's internally-generated models and mathematical techniques. The commercially available models include (1) AIR--CATRADER(TM), which uses market share data derived from zip code and/or county aggregate data to develop individual contract and portfolio loss scenarios and (2) RMS-- RiskLink(TM), which derives portfolio loss scenarios based on detailed risk location data provided by the primary insurer. Models developed by the Company and used in LASER include (1) Pareto base layer loss distributions extrapolated through the primary insurer's excess of loss program structure, (2) the Historical Claims Index method, which recalibrates portfolio historical losses, adjusting for growth in premium, inflation and changes in underlying aggregate sums insured, and (3) Exposure Rating, where probable maximum losses and return periods are assigned for each catastrophe peril, by geographic zone, to determine exposure pricing for each vertical layer within an excess of loss program. 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. 10K-8 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. In addition, the underwriting of all new exposures is reviewed by the Chief Underwriting Officer of the Company. Prior to October 1, 1998, underwriting services were provided to the Company by CNA Bermuda pursuant to the Underwriting Services Agreement. A staff of seven professionals with extensive experience in the reinsurance industry served as the Company's underwriting team in Bermuda. This agreement was terminated on October 1, 1998. On that date, all of the personnel assigned to the Company by CNA Bermuda became employees of the Company and the underwriting function formerly performed by CNA Bermuda was assumed by the Company directly. In connection with the termination of the Underwriting Services Agreement, the Company entered into an Underwriting Support Services Agreement with CRSC and CNA Bermuda. Under the Underwriting Support Services Agreement, which expires on September 30, 2001, CRSC provides underwriting support services to the Company on a daily or hourly fee basis when and as requested by the Company. The Company pays CNA Bermuda a $0.3 million annual retainer, which is credited against CRSC's daily or hourly fees and associated travel expenses. In recognition of the contribution made by CNA Bermuda to the development of the Company's business, the Company has agreed, subject to certain conditions, to pay CNA Bermuda, during the term of the Underwriting Support Services Agreement, an underwriting profit commission of 1.67% of the aggregate net underwriting profits of LaSalle Re for each fiscal year for which LaSalle Re's loss ratio was 70% or less. Reinsurance Protections Purchased The Company utilizes various reinsurance protections to reduce its exposure to large losses. The Company has purchased an excess of loss program which provides coverage of $75.0 million in excess of the first $75.0 million of losses per occurrence for a first loss event and $60.0 million excess of $75.0 million per occurrence on the second loss event and $52.5 million excess of $125.0 million per occurrence on the third loss event over a three-year period ended December 31, 2001 subject to a maximum aggregate recovery of $187.5 million. Coverage for the first loss is substantially funded by way of annual and reinstatement premium obligations. Accordingly, this part of the coverage has been recorded as a financing arrangement. The coverage is provided by a company that currently holds a claims paying ability rating of AA from S&P. In addition, the Company has a three year quota share arrangement with CNA, which incepted April 1, 1999. The Company cedes an adjustable proportion of U.S. property catastrophe premium, net of acquisition costs, to the arrangement, which was negotiated on normal commercial terms and includes an override commission and profit commission payable to the Company. CNA has a claims paying ability rating of A+ from S&P. The Company has also purchased other non-proportional excess of loss protections, which provide for the recovery of losses from reinsurers in excess of certain retentions that are related to the magnitude of market losses. The Company reviews the claims paying ability of each reinsurer for adequacy before each cover is placed. LaSalle Re Capital also participates in the reinsurance coverages purchased by the syndicates it supports. In addition, as part of the Company's capital protection strategy, the Company entered into a $100 million multi-year Catastrophe Equity Put ("CatEPut") option program effective July 1, 1997. The CatEPut option is a capital replacement tool that will enable the Company to put up to $100 million of equity, through the issue of convertible preferred shares to the option writers 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. 10K-9 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. LaSalle Re Services assists in the distribution of marketing literature and collects information for LaSalle Re on demand and developments in the London reinsurance market. 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 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. In addition, the Company meets frequently in Bermuda and elsewhere outside of the United States with brokers and senior representatives of clients and prospective clients. 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. 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 received 1,941 contract submissions in the year ended September 30, 1999 as compared to 2,022 in the year ended September 30, 1998. The Company is highly selective in accepting risks, extending coverage on only 887, or 45.7%, of the contract submissions received in the year ended September 30, 1999. The Company extended coverage on 937 contracts, or 46.3%, of the contract submissions received in the year ended September 30, 1998. Subsidiaries and affiliates of Aon Corporation (collectively, "Aon") were brokers for 18.1% and 17.4% of the Company's gross written premiums in the years ended September 30, 1999 and 1998, respectively. Guy Carpenter & Company, Inc., together with its affiliates, generated 20.6% and 17.1% of the Company's gross premiums written for the years ended September 30, 1999 and 1998, respectively. No other broker accounted for more than 10% of the Company's gross premiums written for the years ended September 30, 1999 and 1998. Consistent with its emphasis on disciplined underwriting practices, the Company is not obligated to accept any business from Aon or CNA, or any business recommended by 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. United States 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. 10K-10 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, primarily, 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 loss 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 ratios. 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 primarily from an analysis using expected loss ratios which is supplemented, when available, by actuarial evaluations produced for the individual syndicates. To establish appropriate loss reserves, the Company uses both proprietary and commercially available catastrophe models. These models are employed upon the occurrence of an event to arrive at an estimate of losses to the Company as a result of the event. Where loss reports have been received from ceding companies, these reports are used in conjunction with the results produced from the catastrophe models to determine the appropriate loss reserves for an event. In addition, loss emergence patterns and initial estimates of ultimate loss ratios which are derived from a combination of data sources, including industry sources and the Company's own loss experience and exposure, are applied to homogenously grouped data to determine estimates of ultimate losses and hence suitable loss reserves for these groups. The reserves are prepared quarterly by the Company's actuary and reviewed by the Company's executive officers and the Board. To the extent that reserves develop upward or downward, the results are reflected in the net income in the period in which the reserve deficiency or redundancy is evaluated. There can be no assurance that the final loss settlements will not exceed the Company's loss reserve and have a material adverse effect upon the Company's financial condition and results of operations in a particular period. 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. 10K-11 The following table summarizes the composition of the Company's investment portfolio as of September 30, 1999 and 1998 (dollars in millions):
September 30, -------------------------- 1999 1998 ------------ ------------ Fair % of Fair % of Type of Investment Value Total Value Total ------------------ ------ ----- ------ ----- Fixed maturities: Non-U.S. government bonds and agencies...... $ 30.6 5.5% $ 38.4 6.3% U.S. government bonds and agencies.......... 94.1 16.9 141.2 23.3 Corporate bonds............................. 234.1 42.0 309.0 50.9 Mortgage-backed securities.................. 0.0 0.0 30.2 5.0 Other debt.................................. 5.0 0.9 2.7 0.4 ------ ----- ------ ----- Subtotal.................................. 363.8 65.3 521.5 85.9 Cash and cash equivalents................... 193.2 34.7 85.3 14.1 ------ ----- ------ ----- Total cash and investments................ $557.0 100.0% $606.8 100.0% ====== ===== ====== =====
Quality of Portfolio The Company's investment guidelines restrict investments in securities below an "AA" grade rating to 20% of the total portfolio, including managed cash and cash equivalents, and permit only 10% of the total portfolio to be invested in securities having a "BBB" grade rating. The guidelines also allow up to $10 million to be invested in risk based investments such as 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. 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, 1999 and 1998 (dollars in millions):
September 30, -------------------------- 1999 1998 ------------ ------------ Fair % of Fair % of Rating Value Total Value Total ------ ------ ----- ------ ----- AAA............. $157.8 43.3% $363.0 69.6% AA.............. 119.6 32.9 88.1 16.9 A............... 69.0 19.0 59.5 11.4 BBB............. 12.4 3.4 2.6 0.0 BB.............. 5.0 1.4 8.3 2.1 ------ ----- ------ ----- $363.8 100.0% $521.5 100.0% ====== ===== ====== =====
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, 1999, the modified average duration of the portfolio was 1.8 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. 10K-12 The following table summarizes the contractual maturities of the Company's fixed maturity portfolio as of September 30, 1999 and 1998 (dollars in millions):
September 30, -------------------------- 1999 1998 ------------ ------------ Fair % of Fair % of Rating Value Total Value Total ------ ------ ----- ------ ----- Due in less than one year................... $ 12.0 3.3% $ 24.8 4.8% Due in one to five years.................. 309.5 85.1 348.9 66.9 Due in five to ten years.................. 42.3 11.6 117.6 22.6 ------ ----- ------ ----- 363.8 100.0 491.3 94.3 Mortgage-backed securities............. 0.0 0.0 30.2 5.7 ------ ----- ------ ----- $363.8 100.0% $521.5 100.0% ====== ===== ====== =====
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 As at September 30, 1999, all of the Company's fixed maturity portfolio was denominated in U.S. dollars. The investment guidelines allow up to 5% of the market value of the portfolio at the time of purchase to be invested in hedged international bonds. Under this type of investment, the currency risk is negated through the use of forward contracts with the Company only being exposed to the interest rate risk on the bond purchased. In an effort to manage other areas of 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, 1999 and 1998, the Company had no principal amounts outstanding under foreign exchange contracts. See "Quantitative and Qualitative Disclosure About Market Risk." 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 flat 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 10K-13 Bermuda-based property catastrophe reinsurers and CNA. Some of these competitors 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, swaps and other types of derivative instruments. There may be established 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. LaSalle Re currently has a rating of "A" (Excellent) from A.M. Best, which represents the fourth highest in the rating scale used by A.M. Best. LaSalle Re currently has a claims paying ability rating from S&P of "A-", which represents the seventh highest in the rating scale used by S&P. These ratings are based on factors of concern to cedents and brokers and are not directed toward the protection of investors. These ratings are neither a rating of securities nor a recommendation to buy, hold or sell such securities. 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. Employees As of December 1, 1999, the Company employed 32 people. 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, LaSalle Re and LaSalle Re Capital are regulated by the Insurance Act, which 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. Under the Insurance Act, insurance business includes reinsurance business. 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 10K-14 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. The Insurance Act distinguishes between insurers carrying on long-term business and insurers carrying on general business. There are four classifications of insurers carrying on general business, with Class 4 insurers subject to the strictest regulation. LaSalle Re is registered as a Class 4 insurer in Bermuda and is regulated as such under the Insurance Act. 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 filings required to be made by insurance companies by section 57 of the Insurance Act. 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 appointed by the Minister, 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. In the case of LaSalle Re, both the statutory financial statements and the statutory financial return are required to be filed annually with the Registrar of Companies, 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. As a Class 4 insurer, LaSalle Re is required to submit an annual loss reserve opinion when filing the annual statutory financial return. This opinion must be issued by a loss reserve specialist. The loss reserve specialist, who will normally be a qualified casualty actuary, must be approved by the Minister. Statutory Financial Statements. An insurer must prepare 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. However, the statutory financial statements and the statutory financial return do not form part of the public records maintained by the Registrar. 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 LaSalle Re who are required to state 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 10K-15 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 LaSalle Re'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. Minimum Solvency Margin. The Insurance Act provides that the statutory assets of an insurer must exceed its statutory liabilities by an amount greater than the prescribed minimum solvency margin, which varies with the type of business and class of registration of the insurer and the insurer's net premiums written and loss reserve level. As a registered Class 4 insurer, LaSalle Re is required to maintain a minimum solvency margin equal to the greatest of (1) $100 million, (2) 50% of its net premiums written (without deducting more than 25% of gross premiums written when computing net premiums written) and (3) 15% of its loss and other certain insurance reserves. At September 30, 1999, LaSalle Re's actual statutory capital and surplus was $446.9 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). Supervision, Investigation and Intervention. The Minister may appoint an inspector with extensive powers to investigate the affairs of an insurer if the Minister believes that an investigation is required in the interest of the insurer's policyholders or persons who may become policyholders. In order to verify or supplement information otherwise provided to him, the Minister may direct an insurer to produce documents or information relating to matters connected with the insurer's business. If it appears to the Minister that there is a risk of the insurer becoming insolvent or that it is in breach of the Insurance Act or any conditions imposed upon its registration, the Minister may 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 12 Bermuda, and Clare E. Moran 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 a reportable "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 a reportable "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: (1) is required to maintain a minimum statutory capital and surplus equal to the greatest of $100 million, 50% of its net premiums written (without deducting more than 25% of gross premiums written when computing net premiums written) and 15% 10K-16 of its loss and other insurance reserves; (2) 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; (3) 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); (4) 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; (5) is prohibited, without the prior 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 (6) 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: (1) 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 50 years or that used to provide accommodation or recreational facilities for its officers and employees and held with the consent of the Minister for a term not exceeding 21 years); (2) the taking of mortgages on land in Bermuda in excess of $50,000; or (3) the carrying on of business of any kind in Bermuda, except in certain limited circumstances such as doing business with another exempted undertaking in furtherance of business carried on outside Bermuda. The Bermuda government encourages foreign "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 non-Bermudian 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 under general Bermuda law. The Companies Act prohibits a company from declaring or paying a dividend, or making a distribution out of contributed surplus, if there are reasonable grounds for believing that (1) the company is, or would after the payment be, unable to pay its liabilities as they come due; or (2) the realizable value of the company's assets would thereby be less than the aggregate of its liabilities and shareholders' equity. This restriction applies to the Company, LaSalle Re and LaSalle Re Capital as Bermuda exempted 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 U.K., Lloyd's is not currently subject to direct U.K. government regulation under The Financial Services Act of 1986 (although this position is due to change during the year 2000 as explained below). Instead, Lloyd's is self regulating by virtue of The Lloyd's Act of 1982, through bye-laws, regulations and codes of conduct prescribed 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. 10K-17 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 December 1, 1999, LaSalle Re Capital had filed a solvency return for the 1997 and 1998 underwriting years. Regulation of the Lloyd's market is due to change during the year 2000, once the Financial Services and Markets Bill (the "Bill") has been enacted. The Bill will implement substantial reform of the regulation of the entire financial services industry in the United Kingdom and includes provision for the regulation by the new Financial Services Authority (the "FSA") of the Society of Lloyd's itself and the Lloyd's market. When the Bill becomes law, the regulatory functions currently carried out by the Council will be split into two categories: those that will in future be carried out directly by the FSA and those in respect of which the FSA will require Lloyd's to continue to exercise its powers under FSA direction. Within the latter category will be the prudential supervision of Lloyd's insurance business by the fixing and monitoring of compliance with solvency requirements. In relation to this and other areas of delegated authority, the FSA will require Lloyd's to exercise its powers under the supervision of, and in accordance with standards and guidance to be prescribed by, the FSA and will monitor Lloyd's to ensure that it does so. Under the terms of its license as a "member of a recognised association of underwriters" under the Bermuda Insurance Act, LaSalle Re Capital is required to meet and maintain the solvency requirements of Lloyd's. LaSalle Re Capital is also required to 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 those documents together with a copy of the audited annual statements of each of the syndicates in which LaSalle Re Capital participates. Further, LaSalle Re Capital must also 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 prescribed contract provisions, such as insolvency and intermediary clauses. The Company conducts its business at its principal offices in Bermuda and does not maintain an office in the United States, and its personnel do not solicit, advertise, settle claims or conduct other insurance activities in the United States. All policies are issued and delivered and premiums are received outside the United States. The Company does not believe that it is subject to the insurance laws of any state in the United States. From time to time, there have been congressional and other initiatives in the United States regarding the supervision and regulation of the insurance industry, including proposals to supervise and regulate alien reinsurers. While none of these proposals 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. 10K-18 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 The Company's executive offices, which are leased, are located in Hamilton, Bermuda. In addition, the Company leases office space in London, England. 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, 1999. 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 ---- --- -------- Guy D. Hengesbaugh. 41 President and Chief Executive Officer Senior Vice President and Chief Underwriting Mark C. Stockton... 40 Officer Clare E. Moran..... 31 Senior Vice President, Treasurer and Interim Chief Financial Officer
Guy D. Hengesbaugh was promoted to President and Chief Executive Officer of the Company and LaSalle Re in July 1999. He previously served as Executive Vice President and Chief Underwriting Officer of the Company since its organization in September 1995, President and Chief Operating Officer of LaSalle Re since September 1998, and Executive Vice President and Chief Underwriting Officer of LaSalle Re from its organization in October 1993 to September 1998. Mr. Hengesbaugh is a director of LaSalle Re and of R.V.I. Guaranty Co. Ltd., a Bermuda-based residential insurer. He has 14 years of experience in underwriting management in Chicago, London and Bermuda. Mark C. Stockton was promoted to Senior Vice President and Chief Underwriting Officer in July 1999. He previously served as a Vice President of the Company since January 1996. He joined the Company as an Assistant Vice President and Underwriter in November 1994. Mr. Stockton has 21 years of experience in the reinsurance industry, working in the London market until his arrival in Bermuda in 1994. He holds the title of Chartered Insurer and qualified as an Associate of the Chartered Insurance Institute in 1985. Clare E. Moran was promoted to the position of Senior Vice President, Treasurer and Interim Chief Financial Officer in October 1999. She previously served as Vice President, Finance, since September 1998. Ms. Moran joined the Company in July 1995 as Assistant Controller. Prior to joining the Company, she was employed by KPMG Peat Marwick in Bermuda, where she specialized in reinsurance and insurance. Miss Moran qualified as a Chartered Accountant in the U.K. in 1991. 10K-19 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Common Shares are quoted on 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 New York Stock Exchange.
High Low ------ ------ Quarter ended December 31, 1998............................ $25.88 $19.50 Quarter ended March 31, 1999............................... 22.25 14.75 Quarter ended June 30, 1999................................ 18.25 12.12 Quarter ended September 30, 1999........................... 18.38 13.63 Quarter ended December 31, 1997............................ $35.63 $32.00 Quarter ended March 31, 1998............................... 42.00 31.13 Quarter ended June 30, 1998................................ 42.25 34.88 Quarter ended September 30, 1998........................... 39.06 26.63
As of December 1, 1999, there were 158 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 Dividend September 30, Fiscal quarter per share ----------------- ---------------- --------- 1999 First quarter... $0.375 Second quarter.. $0.375 Third quarter... $0.375 Fourth quarter.. $0.000 1998 First quarter $0.750 Second quarter.. $0.750 Third quarter... $0.750 Fourth quarter.. $0.750
On April 21, 1999, the Company announced its intention to discontinue its formula-based policy of paying 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 as dividends to holders of Common Shares and Exchangeable Non Voting shares. 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. There can be no assurance that the Company will declare or pay any dividends. 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 with the Bermuda Registrar of Companies 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 10K-20 any dividends without the prior 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 15% or more without the prior approval of the Minister of Finance. ITEM 6. SELECTED FINANCIAL DATA Information with respect to this item may be found in the section captioned "Selected Financial Data" contained in the 1999 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 Company's audited consolidated financial statements and related notes. Results of Operations Year Ended September 30, 1999 Compared with Year Ended September 30, 1998 Gross premiums written for the year ended September 30, 1999 were $139.0 million compared to $155.3 million for the year ended September 30, 1998, a decrease of 10.5%. The table below summarizes the Company's gross premiums written by line of business (expressed in millions of dollars).
Year ended Year ended September 30, September 30, 1999 1998 Change ------------- ------------- ------ Reinsurance segment: U.S. property catastrophe.................. $ 52.1 $ 55.2 $ (3.1) International property catastrophe......... 40.4 49.0 ( 8.6) ------ ------ ------ Total property catastrophe................. 92.5 104.2 (11.7) Other lines................................ 20.8 30.0 (9.2) Fronted premiums, reinstatements, adjustments and no claims bonuses......... 3.3 0.1 3.2 ------ ------ ------ 116.6 134.3 (17.7) Lloyd's segment: LaSalle Re Capital......................... 22.4 21.0 1.4 ------ ------ ------ Total gross premiums written............... $139.0 $155.3 $(16.3) ====== ====== ======
The Company's property catastrophe book experienced a reduction in gross premiums written of $11.7 million for the year ended September 30, 1999 compared to the year ended September 30, 1998. Of this reduction, 73.5% or $8.6 million related to a decline in the level of gross premiums written on the international book of business. In turn, $6.9 million of this reduction resulted from the Company's reduction of its line sizes on two international quota share contracts. During the year ended September 30, 1999, the Company experienced a change in the mix of international property catastrophe business assumed, with the Company reducing its line sizes on pro rata contracts and increasing gross premiums written from direct business. The Company has placed an emphasis on accessing clients directly because pro rata contracts have a less efficient cost structure. The remaining reduction on the property catastrophe book of business was due to continuing competitive rates. Based on the Company's experience, rates for U.S. and international property catastrophe business written in the year ended September 30, 1999 were approximately 7.5% to 10% and 12.5% to 15%, respectively, below those experienced in the year ended September 30, 1998. Because of these reduced rates, premiums were lower in comparison to those written in the year ended September 30, 1998, and the Company chose not to renew contracts in some cases where it considered business to be underpriced. 10K-21 For the year ended September 30, 1999, gross premiums written in other lines of business, including LaSalle Re Capital, totaled $43.2 million, or 31.1% of gross premiums written, compared to $51.0 million, or 32.8% of gross premiums written, for the year ended September 30, 1998. The decrease was primarily due to reduced gross premiums written in property pro-rata due to cancelled contracts and a reduction in the line sizes written on satellite business. The reduction in gross premiums written was partly offset by an increase of $3.3 million in the aggregate level of fronted premiums, reinstatements, adjustments and no claims bonuses written in the year ended September 30, 1999 compared to the year ended September 30, 1998. This increase was principally due to fronting arrangements, entered into in the fiscal year ended September 30, 1999, which produced $3.1 million of gross premiums written. These fronting arrangements were primarily provided for three companies: two of these companies have claims paying ratings from S&P of "A-"; the other company is rated "A" by A.M. Best. Premiums ceded for the year ended September 30, 1999 were $28.2 million compared to $7.8 million in the year ended September 30, 1998. Of the $20.4 million increase, $8.1 million was ceded to a property catastrophe quota share arrangement with CNA Re, $3.0 million related to fronting arrangements and $5.2 million related to increased premiums ceded through LaSalle Re Capital. In addition, the Company continued to purchase various reinsurance protections because of the current pricing environment. As a result of the above, net premiums written for the year ended September 30, 1999 were $110.8 million compared to $147.5 million for the year ended September 30, 1998. Net premiums earned for the year ended September 30, 1999 were $126.6 million compared to $154.6 million for the same period in 1998. The decline in premiums earned of $28.0 million was due to two factors: an increase in ceded premiums amortized from $6.1 million for the year ended September 30, 1998 to $18.5 million for the year ended September 30, 1999 and a continued decrease in the level of gross premiums written on the Company's core property catastrophe business. Premiums on property catastrophe excess of loss contracts are earned over the period coverage is provided, which is generally 12 months. Under proportional property catastrophe contracts, with the risks underlying the contracts incepting throughout the contract period, premiums are generally earned over 18 months. Premiums on other lines of business are earned over the period for which coverage is provided, which generally ranges between 12 months and 60 months. Premiums written by LaSalle Re Capital are earned over a period of 18-24 months from the inception date of the underlying contracts. Net investment income remained reasonably constant for the years ended September 30, 1999 and September 30, 1998 at $33.8 million and $34.3 million, respectively. Annualized investment income as a percentage of the average market value of invested assets was 5.6% for the year ended September 30, 1999 compared to 6.0% for the year ended September 30, 1998. The decrease in the investment income generated from the investment portfolio of $2.2 million was primarily attributable to lower market yields. This decrease was partly offset by income generated on an equity account maintained in accordance with the terms of the Company's multi-year excess of loss reinsurance program and investment income from LaSalle Re Capital. Net realized gains on investments were $0.6 million for the year ended September 30, 1999 compared to $5.6 million for the year ended September 30, 1998. During the year ended September 30, 1999, the Company sold longer maturity bonds and reinvested the proceeds in shorter maturity bonds and money market instruments. This measure was designed to protect the total returns on the portfolio in an increasing yield environment. In this environment, the unrealized gain on the investment portfolio declined from $13.8 million at September 30, 1998 to a loss of $4.1 million at September 30, 1999. The Company anticipates that the measure taken to shorten interest rate sensitive assets will reduce the potential for significant capital gains while generating future income returns at money market rates or better. The gains in the year ended September 30, 1999 resulted primarily from a credit spread enhancement exercise undertaken during the period. In addition, the Company realized small gains on the sale of bonds with Far East and Asian exposure. 10K-22 The following table sets forth the Company's combined ratios for the years ended September 30, 1999 and 1998:
September 30, September 30, 1999 1998 ------------- ------------- Loss and loss expense ratio................... 103.6% 61.8% Expense ratio................................. 26.5% 20.4% Combined ratio................................ 130.1% 82.2%
Losses and loss expenses incurred represent losses paid and reserves established in respect of specific losses and loss expenses reported by cedents and expected loss development and additions to incurred-but-not- reported loss reserves. The Company incurred losses and loss expenses, net of recoveries, of $131.1 million during the year ended September 30, 1999 compared with $95.5 million during the year ended September 30, 1998. Of the losses incurred for the year ended September 30, 1999, a significant portion related to the strengthening of prior year reserves. Approximately $14.5 million was incurred in respect of Hurricane Georges, which occurred in September 1998. In addition, the Company recorded approximately $14 million of additional case reserves for large reported losses. These losses arose from causes that could not have been reasonably anticipated when the Company established its incurred-but-not- reported loss reserves. Included in the additional case reserves was a loss of $6.5 million on a property stop loss contract. This contract had an incidental auto warranty coverage component that produced a full limit loss to the contract. Also included were losses of $4.5 million on auto property damage stop loss contracts. Given the Company's recent loss experience, the Company reviewed the assumptions used in setting incurred-but-not-reported loss reserves. These assumptions have been revised to reflect both new information and a more prudent reserving philosophy. As a result, the Company recorded an additional $16 million of incurred-but-not-reported losses during the year ended September 30, 1999. These reserves relate to all lines of business written by the Company. Losses and loss expenses, net of recoveries, incurred on events that occurred during the year ended September 30, 1999 include $6.0 million related to an Australian hailstorm, $6.0 million related to Oklahoma tornadoes, $6.9 million related to Hurricane Floyd, $2.6 million related to the Turkish earthquake and $4.1 million related to Typhoon Olga. The main components of losses and loss expenses incurred during the year ended September 30, 1998 related to Hurricane Georges and claims derived from adverse weather conditions, aggregate stop loss protection losses, satellite failures and various risk losses. Effective on October 1, 1998, the Underwriting Services Agreement, under which CNA Bermuda had provided the Company with underwriting services, was terminated. On that date, all of the personnel assigned to the Company by CNA Bermuda became employees of the Company and the underwriting function formerly performed by CNA Bermuda was assumed by the Company directly. In connection with the termination of the Underwriting Services Agreement, the Company entered into an Underwriting Support Services Agreement with CNA Re Services Company and CNA Bermuda. With effect from October 1, 1998, LaSalle Re has agreed to pay an annual retainer of $0.3 million and an underwriting profit commission equal to 1.67% of the aggregate net underwriting profits of LaSalle Re, where specified conditions are met. For the 1998 fiscal year, LaSalle Re paid fees under the Underwriting Services Agreement at a rate of 1.5% of the gross written and collected premium per fiscal year; and an underwriting profit commission equal to 4.0% of the aggregate net underwriting profits of LaSalle Re, where specified conditions were met. Underwriting expenses as a percentage of net premiums earned were 17.5% for the year ended Septermber 30, 1999 compared to 14.6% for the year ended September 30, 1998. The increase in the ratio of 2.9% was primarily due to the increased amount of amortized ceded reinsurance that reduced net premiums earned. Underwriting expenses as a percentage of gross premiums earned were 15.5% for the year ended September 30, 1999 compared to 14.1% for the year ended September 30, 1998. 10K-23 As a percentage of gross earned premiums, fees accrued pursuant to the Underwriting Support Services Agreement decreased from 2.2% for the year ended September 30, 1998 to 1.0% for the year ended September 30, 1999. This decrease was offset by the inclusion of the underwriters' compensation cost in underwriting expenses following their transfer to the Company. This has increased the ratio of underwriting expenses to gross premiums earned by 1.6%. For the year ended September 30, 1999, the Company's brokerage, ceding and profit commissions increased to 12.8% of gross premiums earned from 11.8% for the corresponding period in 1998. The increase was partly due to the effect of increased earned premiums on the business underwritten by LaSalle Re Capital, whose expense ratio was approximately 20%, and an increase in the average cost of property catastrophe proportional business. Operational expenses were $11.4 million for the year ended September 30, 1999 compared to $8.9 million for the year ended September 30, 1998. As a percentage of net premiums earned, operational expenses were 9.0% during the year ended September 30, 1999 compared to 5.8% for the year ended September 30, 1998. The increase in operational expenses of $2.5 million was principally due to an increase in the level of executive compensation booked. During the year ended September 30, 1999, the Company recorded a credit of $1.5 million in respect of stock appreciation rights compared to a credit of $0.6 million during the year ended September 30, 1998. This reduction was offset by increased compensation costs of approximately $2.1 million, due in part to additional compensation costs following the change in the CNA Underwriting Services Agreement, a change in the method of compensating employees and the payment of severance costs. The remaining increase in expenses of $1.3 million was due to additional costs relating to travel, staff recruitment, software modeling and LaSalle Re Capital. The Company incurred corporate expenses of $0.8 million during the year ended September 30, 1999 compared to $0.5 million for the year ended September 30, 1998. The costs incurred in the year ended September 30, 1999 related to costs associated with the Company's investigation of potential transactions and the preparation and filing of a registration statement for an offering of preferred shares. The registration statement was subsequently withdrawn prior to becoming effective. The costs incurred in the year ended September 30, 1998 related to costs associated with the Company's investigation of potential transactions. Interest expense was $1.7 million for the year ended September 30, 1999 compared to $1.9 million for the year ended September 30, 1998. Interest expense primarily included financing charges associated with the deposit portion of LaSalle Re's ceded reinsurance contract and other interest expenses related to the ongoing commitment fees payable on the Company's credit facility. As at September 30, 1999, there were no borrowings outstanding under this facility. The Company's losses per Common Share were $(0.61) for the year ended September 30, 1999 compared to earnings per Common Share of $3.06 for the year ended September 30, 1998. Losses per Common Share assuming dilution were $(0.61) for the year ended September 30, 1999 compared to earnings per Common Share of $2.80 for the year ended September 30, 1998. 10K-24 Year Ended September 30, 1998 Compared with Year Ended September 30, 1997 Gross premiums written decreased 9.4% to $155.3 million for the year ended September 30, 1998 from $171.4 million for the year ended September 30, 1997. The table below summarizes the Company's gross premiums written by line of business (expressed in millions of dollars).
Year ended Year ended September 30, September 30, 1998 1997 Change ------------- ------------- ------ Reinsurance segment: U.S. property catastrophe............ $ 55.2 $ 71.6 $(16.4) International property catastrophe... 49.0 73.1 (24.1) ------ ------ ------ Total property catastrophe........... 104.2 144.7 (40.5) Other lines.......................... 30.0 22.9 7.1 Reinstatements, adjustments and no claims bonuses...................... 0.1 (10.3) 10.4 ------ ------ ------ 134.3 157.3 (23.0) Lloyd's segment: LaSalle Re Capital................... 21.00 14.1 6.9 ------ ------ ------ Total gross premiums written......... $155.3 $171.4 $(16.1) ====== ====== ======
The overall decrease in gross premiums written was primarily due to a 28.0% reduction in gross premiums written in the Company's core property catastrophe business from $144.7 million for the year ended September 30, 1997 to $104.2 million for the year ended September 30, 1998. Of this reduction, approximately 60.0% related to the international property catastrophe book and 40.0% related to the U.S. property catastrophe book. The reduction was greater in the international property catastrophe book because the Company reduced its line sizes on some proportional treaties pursuant to its policy of reducing aggregate exposures in a declining rate environment. This accounted for approximately $7.7 million of the decrease in the international property catastrophe book. Approximately 25% of the decrease in the U.S. property catastrophe book related to a multi-year contract that was written in the year ended September 30, 1997 for which no written premium was recorded in the year ended September 30, 1998. The remaining decrease in the total property catastrophe book was due to continuing competitive rates. Based on the Company's experience, rates for property catastrophe business written in the year ended September 30, 1998 were approximately 15% and 10% below those experienced in the year ended September 30, 1997 for international and U.S. property catastrophe business, respectively. Because of these reduced rates, premiums were lower in comparison to those written in the year ended September 30, 1997, and the Company chose not to renew contracts in some cases where it considered business to be underpriced. For the year ended September 30, 1998, the Company experienced a 6.3% reduction in the number of property catastrophe contracts written from 1,000 in the year ended September 30, 1997 to 937 contracts for the year ended September 30, 1998. The decline in gross premiums written by the Company was partially offset by an increase of $14.0 million in respect of gross premiums written in other non-property catastrophe lines. The increase was primarily due to increased gross premiums written by LaSalle Re Capital, which commenced underwriting as a corporate member of Lloyd's in January 1997, the second quarter of the 1997 fiscal year. For the year ended September 30, 1998, LaSalle Re Capital wrote gross premiums of $21.0 million compared to $14.1 million for the year ended September 30, 1997. Also, the Company increased the size of its terrorism and political risks book, which accounted for approximately $1.0 million of gross premiums written for the year ended September 30, 1997 compared with approximately $4.4 million for the year ended September 30, 1998. In addition, for the year ended September 30, 1997, $10.3 million relating to adjustment premiums, reinstatement premiums and no claims bonuses produced a reduction in gross premiums written. In the year 10K-25 ended September 30, 1998, there was a positive adjustment to gross premiums written of $0.1 million. This was principally due to insignificant premium adjustments and, as a result of increased loss activity, to increased reinstatement premiums and lower no claims bonuses. Premiums ceded for the year ended September 30, 1998 were $7.8 million compared to $7.7 million for the year ended September 30, 1997. These ceded premiums related to reinsurance protection purchased by LaSalle Re with effect from January 1, 1997 and to various reinsurance protections purchased by LaSalle Re Capital. Ceded premiums amortized increased from $1.9 million in the year ended September 30, 1997 to $6.1 million for the year ended September 30, 1998. This increase was due primarily to the reinsurance protections purchased by LaSalle Re Capital, which were amortized in line with the premiums earned by LaSalle Re Capital. Net premiums earned decreased 5.7% to $154.6 million for the year ended September 30, 1998 from $163.9 million for the year ended September 30, 1997. This decrease was the result of reduced premiums earned on the Company's core property catastrophe business that were partially offset by increased earned premiums on the business written by LaSalle Re Capital. Net investment income increased 3.6% to $34.3 million for the year ended September 30, 1998 from $33.1 million for the year ended September 30, 1997. This increase was attributable to a larger average investment base compared to the year ended September 30, 1997. Annualized investment income as a percentage of the average market value of invested assets was 6.0% for the year ended September 30, 1998 compared to 6.1% for the year ended September 30, 1997. Net realized gains on investments were $5.6 million for the year ended September 30, 1998 compared to $0.6 million for the year ended September 30, 1997. During the year ended September 30, 1998, the Company realized gains on investments as part of an exercise undertaken to increase the credit quality of the portfolio. In addition, during the last quarter of the year ended September 30, 1998, the Company took advantage of market conditions by realizing some of the large unrealized gains in the portfolio. The proceeds from this exercise were reinvested in securities with marginally lower yields. Other income was derived from a contract under which the Company provided certain reinsurance related services. This contract was not renewed on January 1, 1998. The following table sets forth the Company's combined ratios for the years ended September 30, 1998 and 1997:
September 30, September 30, 1998 1997 ------------- ------------- Loss and loss expense ratio.................... 61.8% 19.0% Expense ratio............. 20.4% 23.6% Combined ratio............ 82.2% 42.6%
Losses and loss expenses incurred increased 206.2% from $31.2 million for the year ended September 30, 1997 to $95.5 million for the year ended September 30, 1998. This increase was due to an increase in the number of worldwide catastrophic events that affected the Company during the year ended September 30, 1998. The largest loss event to affect the Company was Hurricane Georges, which occurred in September 1998. The Company established a $25 million loss provision for this event that represented 26% of the losses incurred for the year ended September 30, 1998. In addition, throughout the year ended September 30, 1998, the Company incurred losses in respect of various weather-related events, notably U.K. Midland floods ($7.0 million), Canadian winter freeze ($4.3 million) and various U.S. storms ($2.4 million). The Company sustained a number of claims relating to aggregate stop loss and excess of loss contracts, which accounted for approximately $16.8 million, or 18%, of losses incurred. A large percentage of these aggregate losses incurred in the year ended September 30, 1998 related to losses that had occurred in prior years. This was due to the extended loss reporting 10K-26 periods on these contracts, a number of which had a period of 24 months after the expiry of the contract within which to report losses. Also, as a result of increasing other lines of business, the Company incurred losses relating to LaSalle Re Capital ($5.0 million), satellite coverages ($3.0 million), various risk excess coverages ($3.0 million) and political risks coverages ($1.7 million). As a result of the current year loss activity, the Company increased the level of incurred-but-not-reported reserves. 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). Underwriting expenses decreased 12.9% from $26.0 million for the year ended September 30, 1997 to $22.7 million for the year ended September 30, 1998. As a percentage of net premiums earned, underwriting expenses were 14.6% for the year ended September 30, 1998 compared to 15.9% for the year ended September 30, 1997. Fees accrued pursuant to the Underwriting Services Agreement as a percentage of net premiums earned decreased to 2.3% for the year ended September 30, 1998 from 4.0% for the year ended September 30, 1997. This decrease was due to the higher loss activity and lower premium earnings in the year ended September 30, 1998 compared with the year ended September 30, 1997. The Company's level of brokerage fees and ceding commissions increased to 12.3% of net premiums earned for the year ended September 30, 1998 from 11.8% of net premiums earned for the year ended September 30, 1997. The increase was partly due to an increase in earned premiums written by LaSalle Re Capital, whose expense ratio was approximately 20%, and partly due to an increase in the average cost of writing proportional business. Operational expenses decreased 29.4% from $12.7 million for the year ended September 30, 1997 to $8.9 million for the year ended September 30, 1998. As a percentage of net premiums earned, operational expenses were 5.7% during the year ended September 30, 1998 compared to 7.7% for the year ended September 30, 1997. Effective October 1, 1997, the Administrative Services Agreement with ARC was terminated and all of the personnel assigned to the Company by ARC became employees of the Company, with the Company assuming the functions previously performed by ARC. This generated a reduction in operational expenses of approximately $2.3 million, as the fees paid to ARC were in excess of the additional costs assumed by the Company. In addition, the Company experienced a reduction in executive compensation of approximately $2.4 million, due partly to a decline in the fair value of stock appreciation rights and partly to reduced bonus provisions. These decreases were offset by increased costs of $1.0 million relating to LaSalle Re Capital and fees paid to directors. Corporate expenses decreased 72.2% from $1.8 million for the year ended September 30, 1997 to $0.5 million for the year ended September 30, 1998. The costs incurred in the year ended September 30, 1998 related to costs associated with the Company's investigation of potential merger and acquisition transactions. 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. Corporate expenses do not include the underwriting discounts associated with the various offerings. These costs were borne by the selling shareholders in the Secondary Offering. In respect of the Preferred Offering, the underwriting discount was charged to additional paid-in capital. Interest expense increased 11.8% from $1.7 million in the year ended September 30, 1997 to $1.9 million for the year ended September 30, 1998. The increase was due to additional financing charges associated with the deposit portion of LaSalle Re's ceded reinsurance contract in the year ended September 30, 1998. As the contract incepted January 1, 1997, only three quarters of the annual charge was included in the year ended September 30, 1997. 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, 1998, there were no borrowings under this facility. Foreign exchange gains in the year ended September 30, 1998 were negligible at $0.2 million compared to losses of $3.0 million in the year ended September 30, 1997. 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 U.S. dollar against the major foreign currencies in which the Company wrote premiums. 10K-27 Earnings per Common Share were $3.06 for the year ended September 30, 1998 and $5.55 for the year ended September 30, 1997. Earnings per Common Share assuming dilution were $2.80 for the year ended September 30, 1998 and $5.14 for the year ended September 30, 1997. The weighted average number of shares outstanding used in the calculation of earnings assuming dilution decreased from 22,998,936 for the year ended September 30, 1997 to 20,919,405 for the year ended September 30, 1998. The decrease in the weighted average number of shares outstanding resulted primarily from the repurchase of shares in the Tender Offer in April 1997. 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 and its subsidiaries. LaSalle Re's sources of funds consist of net premiums written, investment income and proceeds from sales and redemptions of investments. Cash is used primarily to pay losses and loss expenses, brokerage, commissions, excise taxes, administrative expenses and dividends. Under the Insurance Act, LaSalle Re is prohibited from paying dividends of more than 25% of its opening statutory capital and surplus unless it files with the Bermuda Registrar of Companies an affidavit (at least 7 days before payment of such dividends) stating that it will continue to meet the required minimum solvency margin and minimum liquidity ratio requirements and from declaring or paying any dividends without the prior approval of the Bermuda 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 that 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 15% or more without the approval of the Minister of Finance. LaSalle Re currently meets these requirements. In addition, the payment of dividends by LaSalle Re is subject to the rights of holders of the Exchangeable Non-Voting Shares 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 $19.6 million for the year ended September 30, 1999 and $96.0 million for the year ended September 30, 1998. 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 these 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 investments. As of September 30, 1999, 75.7% of its total assets were held in cash and investments, which totaled $557.0 million. Cash and cash equivalents were $193.2 million at September 30, 1999 compared to $85.3 million at September 30, 1998. The increase was a result of the Company's current investment strategy of selling longer maturity bonds and reinvesting the proceeds in shorter maturity bonds and money market instruments, a move designed to protect the total returns on the portfolio in an increasing yield environment. This has reduced the modified average duration of the portfolio from 3.1 years at September 30, 1998 to 1.8 years at September 30, 1999. As of September 30, 1999, 76.2% of the securities held in the Company's investment portfolio were fixed-income securities rated "AA" or better and 95.2% 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. As at September 30, 1999, issuers from the Far East and Asia represented 5.1% of the investment portfolio. These bonds had an insignificant aggregate unrealized loss and were all rated AAA. Reinsurance balances receivable were $93.2 million at September 30, 1999 compared to $86.8 million at September 30, 1998. The increase was due the inclusion of reinsurance balances receivable related to the 10K-28 business written by LaSalle Re Capital. At September 30, 1999, these receivable balances were $46.0 million compared to $28.1 million as at September 30, 1998. Given the three-year accounting methodology utilized by Lloyd's, these balances will not be received until after the year 2000. Prepaid reinsurance premiums increased from $7.6 million as at September 30, 1998 to $17.3 million as at September 30, 1999. The increase of $9.7 million was primarily due to the new property catastrophe quota share arrangement with CNA Re, the increased reinsurance protections purchased through LaSalle Re Capital and an increase in the number of the reinsurance protections bought by LaSalle Re. At September 30, 1999, the Company had $9.1 million of losses recoverable from reinsurers compared to $nil in 1998. Other assets increased from $31.7 million as at September 30, 1998 to $37.6 million as at September 30, 1999. This was primarily due to the associated profit commission due on the multi-year excess of loss reinsurance contract. At September 30, 1999, reserves for unpaid losses and loss expenses were $146.5 million compared to $97.9 million at September 30, 1998. During the year ended September 30, 1999, the Company increased its reserves for unpaid losses and loss expenses following a revision of the assumptions used in setting incurred-but-not-reported loss reserves. In addition, included in the reserve for unpaid losses and loss expenses at September 30, 1999 was $18.7 million in respect of the business underwritten by LaSalle Re Capital, compared to $6.7 million at September 30, 1998. Given the three-year accounting methodology, these losses will not be settled until after the year 2000. The Company has no material commitments for capital expenditures. Other liabilities increased from $29.2 million as at September 30, 1998 to $37.3 million as at September 30, 1999. The increase of $8.1 million was primarily due to liabilities established for the purchased reinsurance protections. In accordance with the terms of certain reinsurance contracts, the Company has posted letters of credit in the amount of $21.6 million as of September 30, 1999, as compared to $8.3 million as of September 30, 1998, to support outstanding loss reserves. In connection with LaSalle Re Capital's support of three Lloyd's syndicates, with effect from January 1, 1997, the Company posted letters of credit in the amount of $16.1 million (equivalent to (Pounds)9.8 million). In addition, in connection with the Japanese earthquake swap, the Company has posted a letter of credit of $3.0 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. The Company paid dividends on its Common Shares of $0.75 per share in October 1998 and $0.375 per share in each of January, April and July 1999. The Company paid a quarterly dividend of $0.5469 per share to holders of record of Series A preferred shares in December 1998 and March, June and September 1999. As of September 30, 1999, dividends due but not yet declared on the Series A preferred shares amounted to $0.5 million. LaSalle Re Capital is committed to provide capital support for the 2000 underwriting year to the same syndicates it supported in prior years. The total level of support is not expected to change materially from that provided in 1999. 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 that, 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 voting common stock of LaSalle Re held by the Company, plus any preferred shares that the Company may purchase from LaSalle Re with proceeds from the facility. The line of credit contains various covenants, including limitations on incurring additional indebtedness; restrictions on the sale or lease of assets not in the ordinary course of business; maintenance of a ratio of consolidated total debt to 10K-29 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 of at least $400 million at the end of calendar year 1999 and thereafter; 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. The Company may pay dividends and make other restricted payments so long as, after giving effect to such restricted payments, no event of default has occurred. However, dividends and restricted payments are limited to 50% of consolidated net income for the Company's immediately preceding fiscal year less amounts paid on the Series A preferred shares. As of September 30, 1999, there were no borrowings under the credit facility. 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 opinion of the Company, adequate to meet the expected cash requirements of the Company over the next 12 months. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Given the limited number of transactions currently entered into by the Company that are covered by the statement, the Company does not anticipate any significant changes to its current financial reporting. The AICPA issued Statement of Position 98-7, "Deposit Accounting," which is effective for financial statements with fiscal years beginning after June 15, 1999. The Company does not expect that this standard will have a significant impact on the current financial reporting. Year 2000 Issue The Company has given priority to making its computer systems ready to process dates in and after the year 2000 ("Year 2000 ready"). The Company does not believe that it faces any material Year 2000 issues with respect to its non-information technology systems. The Company has completed its testing of the Year 2000 version of the Senator underwriting management system and found it to be Year 2000 ready. In addition, the Company has upgraded the RSG reinsurance system to the Year 2000 version, completed its testing to ensure Year 2000 readiness and has made corrections of a remedial nature to other software and hardware components and infrastructure. Furthermore, the Company has reviewed enterprise-wide spreadsheet and database files for potential Year 2000 problems and has made corrections where applicable. The Company has budgeted $0.3 million for the overall Year 2000 effort and has expensed $0.2 million to date. The Company distributed a Year 2000 readiness questionnaire to its external suppliers and brokers. As of December 1, 1999, approximately 98% of suppliers and brokers, including all of the Company's major suppliers and brokers, had provided adequate response to this questionnaire. The Company has decided not to continue its business relationship with those few brokers and suppliers who have not responded to the Year 2000 readiness questionnaire. The Company also assesses the effect of the Year 2000 issue on the business it underwrites, considering the exposure to Year 2000 related losses on a contract by contract basis at the time of underwriting. The Company's most reasonably likely worst case scenario would be the failure of the Company's computerized reinsurance systems to process transactions. As a contingency plan, the Company intends, prior to January 1, 2000, to extract from its computerized reinsurance systems a hard copy of all information required to initiate a manual system for processing transactions in the event of a system failure. The Company believes that it would have the necessary resources to function on a manual basis, if so required. 10K-30 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company's major market risk exposure is to changes in interest rates, primarily in the United States, since the Company has a portfolio of fixed maturity investments, all of which are denominated in U.S. dollars. A change in interest rates would affect the fair value of the Company's investments and would lead to fluctuations in "Accumulated Other Comprehensive Income" on the balance sheet. The Company limits this risk by setting a maximum portfolio duration of four years, which is stipulated in the Company's investment guidelines. It does not use derivative financial instruments to manage market risk in its U.S. dollar denominated portfolio. The aggregate hypothetical loss generated from an immediate adverse parallel shift in the treasury yield curve of 100 basis points would cause a decrease in the total return of 1.8% (1998: 3.1%), which equates to a decrease in the market value of approximately $9.8 million (1998: $18.7 million) on a portfolio valued at $541.1 million at September 30, 1999 (1998: $594.4 million). This calculation is based on an immediate time horizon in order to reflect the worst-case scenario. The change in the aggregate hypothetical loss calculation from 1998 to 1999 is due to the Company having sold longer maturity bonds and reinvested the proceeds in shorter maturity bonds and money market instruments during the year ended September 30, 1999. This measure was designed to protect the total returns on the portfolio in an increasing yield environment. It is anticipated that the measure taken to shorten interest rate sensitive assets will reduce the potential for significant capital gains while generating future income returns at money market rates or better. In addition, the Company has foreign currency risk on both reinsurance balances receivable and reinsurance balances payable (including payables relating to losses). The Company does not currently utilize derivative instruments to manage the Company's exposure to foreign currency movements. In the past, the Company has used forward contracts to eliminate the risk; however, given the uncertainty in cash flows, this was not deemed to be an efficient management technique. As of September 30, 1999, the majority of the Company's net receivable/payable position was denominated in U.S. dollars. As at September 30, 1999, the largest foreign currency exposure was sterling, as the Company had a net payable balance of (Pounds)13.3 million (1998: receivable $14.1 million). A 5% increase or decrease in the year-end sterling/U.S. dollar exchange rate would produce a gain or loss, respectively, of $0.7 million (1998: $1.2 million). The Company has only a limited amount of net receivable balances in other currencies and, therefore, no other currency movement has been considered. 10K-31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA LASALLE RE HOLDINGS LIMITED INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Number ------ INDEPENDENT AUDITORS' REPORTS............................................ 10K-33 CONSOLIDATED BALANCE SHEETS.............................................. 10K-35 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME........... 10K-36 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY............... 10K-37 CONSOLIDATED STATEMENTS OF CASH FLOWS.................................... 10K-38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................... 10K-39
10K-32 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders LaSalle Re Holdings Limited We have audited the accompanying consolidated balance sheet of LaSalle Re Holdings Limited and subsidiaries as of September 30, 1999, and the related consolidated statements of operations and comprehensive income, changes in shareholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of LaSalle Re Holdings Limited and subsidiaries as of September 30, 1999 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE November 5, 1999 10K-33 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders LaSalle Re Holdings Limited We have audited the accompanying consolidated balance sheet of LaSalle Re Holdings Limited and subsidiaries as of September 30, 1998, and the related consolidated statements of operations and comprehensive income, changes in shareholders' equity, and cash flows for the years in the two-year period then ended. 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 auditing standards generally accepted in the United States of America. 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, 1998, and the results of their operations and their cash flows for each of the years in the two-year period ended September 30, 1998, in conformity with accounting principles generally accepted in the United States of America. KPMG Chartered Accountants Hamilton, Bermuda October 26, 1998 10K-34 LASALLE RE HOLDINGS LIMITED CONSOLIDATED BALANCE SHEETS Years ended September 30, 1999 and 1998 (Expressed in thousands of United States Dollars, except share and per share data)
1999 1998 -------- -------- Assets Cash and cash equivalents................................... $193,151 $ 85,281 Investments held as available for sale at fair value........ 363,825 521,476 -------- -------- (amortized cost 1999: $369,179; 1998: $503,531) Total investments and cash.................................. 556,976 606,757 Accrued investment income................................... 10,075 11,056 Reinsurance balances receivable............................. 93,163 86,779 (related party 1999: $(72); 1998: $8,729) Deferred acquisition costs.................................. 11,911 13,444 Prepaid reinsurance premiums................................ 17,310 7,584 Outstanding losses recoverable from reinsurers.............. 9,100 0 (related party 1999: $4,100; 1998: $0) Other assets................................................ 37,572 31,670 -------- -------- Total assets................................................ $736,107 $757,290 ======== ======== Liabilities Outstanding losses and loss expenses........................ $146,552 $ 97,942 Unearned premiums........................................... 77,049 83,119 Other liabilities........................................... 37,254 29,241 (related party 1999: $8,202; 1998: $3,831) Dividend payable............................................ 0 11,366 -------- -------- Total liabilities........................................... 260,855 221,668 -------- -------- Minority interest........................................... 93,055 105,569 -------- -------- Shareholders' equity Share capital authorized in the aggregate 100,000,000 shares, par value $1 Preferred shares...................... 3,000 3,000 (par value $1, liquidation preference $25 per share, issued & outstanding, 3,000,000 Series A Preferred Shares) Common shares............................................... 15,600 15,179 (par value $1 issued & outstanding, 1999: 15,600,262; 1998: 15,178,791) Additional paid in capital.................................. 293,709 295,578 Accumulated other comprehensive income...................... (4,113) 13,838 Deferred compensation....................................... (516) 0 Retained earnings........................................... 74,517 102,458 -------- -------- Total shareholders' equity.................................. 382,197 430,053 -------- -------- Total liabilities, minority interest and shareholders' equity..................................................... $736,107 $757,290 ======== ========
See accompanying notes to consolidated financial statements 10K-35 LASALLE RE HOLDINGS LIMITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME Years ended September 30, 1999, 1998 and 1997 (Expressed in thousands of United States Dollars, except share and per share data)
1999 1998 1997 -------- -------- -------- Revenues Premiums written................................. $139,010 $155,316 $171,386 (related party 1999: $8,369; 1998: $16,917; 1997: $21,408) Premiums ceded................................... (28,191) (7,815) (7,693) -------- -------- -------- (related party 1999: $8,091; 1998: $0; 1997: $0) Net premiums written............................. 110,819 147,501 163,693 Change in unearned premiums and prepaid reinsurance premiums............................ 15,796 7,119 240 -------- -------- -------- Net premiums earned.............................. 126,615 154,620 163,933 Net investment income............................ 33,847 34,288 33,109 Net realized gains on investments................ 615 5,575 555 Other income..................................... 0 63 188 -------- -------- -------- (related party 1999: $0; 1998: $63; 1997: $188) Total revenues................................... 161,077 194,546 197,785 -------- -------- -------- Expenses Losses and loss expenses incurred................ 131,147 95,539 31,199 (net of recoveries of $11,085; 1998 & 1997: $0) Underwriting expenses............................ 22,219 22,661 26,018 (related party 1999: $3,769; 1998: $6,318; 1997: $9,857) Operational expenses............................. 11,358 8,932 12,656 (related party 1999: $0; 1998: $44; 1997: $6,212) Corporate expenses............................... 788 517 1,770 Interest expense................................. 1,714 1,881 1,678 Exchange (gains) losses.......................... (470) (216) 2,996 -------- -------- -------- Total expenses................................... 166,756 129,314 76,317 -------- -------- -------- (Loss)/income before minority interest........... (5,679) 65,232 121,468 Minority interest................................ (2,845) 13,426 24,391 -------- -------- -------- Net (loss)/income................................ $ (2,834) $ 51,806 $ 97,077 Other comprehensive income Unrealized (losses) gains on securities.......... (9,638) $ 12,715 $ 3,592 Less: reclassification adjustments for (gains) losses included in net (loss)/income............ (8,313) $ (912) $ 304 -------- -------- -------- Total other comprehensive (loss)/income.......... (17,951) 11,803 3,896 -------- -------- -------- Comprehensive (loss)/income...................... $(20,785) $ 63,609 $100,973 ======== ======== ======== (Loss)/earnings per common share................. $ (0.61) $ 3.06 $ 5.55 ======== ======== ======== (Loss)/earnings per common share--assuming dilution........................................ $ (0.61) $ 2.80 $ 5.14 ======== ======== ========
See accompanying notes to consolidated financial statements 10K-36 LASALLE RE HOLDINGS LIMITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years ended September 30, 1999, 1998 and 1997 (Expressed in thousands of United States Dollars, except share and per share data)
1999 1998 1997 -------- -------- -------- Preferred shares par value $1 Balance at beginning and end of year............. $ 3,000 $ 3,000 $ 3,000 ======== ======== ======== Common shares par value $1 Balance at beginning of year..................... $ 15,179 $ 15,074 $ 14,398 Issuance of shares............................... 732 155 1 Share repurchase................................. (317) (50) (3,704) Exercise of share options........................ 6 0 0 Change in minority interest...................... 0 0 4,379 -------- -------- -------- Balance at end of year........................... $ 15,600 $ 15,179 $ 15,074 ======== ======== ======== Additional paid in capital Balance at beginning of year..................... $295,578 $299,964 $221,968 Issuance of shares............................... 1,398 1,490 70,177 Share repurchase................................. (779) (790) (44,990) Change in minority interest...................... (1,068) (3,274) 54,664 Equity put option premium........................ (1,420) (1,812) (1,855) -------- -------- -------- Balance at end of year........................... $293,709 $295,578 $299,964 ======== ======== ======== Accumulated other comprehensive income Balance at beginning of year..................... $ 13,838 $ 2,035 $ (1,861) Unrealized (loss)/gain in year................... (17,886) 11,851 4,354 Change in minority interest...................... (65) (48) (458) -------- -------- -------- Balance at end of year........................... $ (4,113) $ 13,838 $ 2,035 ======== ======== ======== Deferred compensation Issuance of shares............................... $ (1,092) $ 0 $ 0 Amortization..................................... 576 0 0 -------- -------- -------- Balance at end of year........................... $ (516) $ 0 $ 0 ======== ======== ======== Retained earnings Balance at beginning of year..................... $102,458 $105,153 $ 72,943 Net (loss)/income................................ (2,834) 51,806 97,077 Common share dividends........................... (17,543) (44,641) (44,860) (1999: $1.125; 1998: $3.00; 1997: $2.84 per share) Preferred share dividends........................ (6,563) (6,563) (2,807) (1999: $2.19; 1998: $2.19; 1997: $0.94 per share) Share repurchase................................. (204) (719) (33,807) Exercise of share options........................ (508) (133) 0 Change in minority interest...................... (289) (2,445) 16,607 -------- -------- -------- Balance at end of year........................... $ 74,517 $102,458 $105,153 ======== ======== ======== Total shareholders' equity................... $382,197 $430,053 $425,226 ======== ======== ========
See accompanying notes to consolidated financial statements 10K-37 LASALLE RE HOLDINGS LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended September 30, 1999, 1998 and 1997 (Expressed in thousands of United States Dollars, except share and per share data)
1999 1998 1997 --------- --------- --------- Cash flows from operating activities Net (loss)/income............................ $ (2,834) $ 51,806 $ 97,077 Adjustments to reconcile net income to cash provided by operating activities: Minority interest in net (loss)/income..... (2,845) 13,426 24,391 Amortization of investment premium......... 516 863 1,725 Net realized gains on sale of investments.. (615) (5,575) (555) Unrealized losses/(gains) on foreign exchange.................................. 193 (594) 937 Changes in: Accrued investment income.................. 981 1,628 1,527 Reinsurance balances receivable............ (6,354) (6,590) (10,495) Deferred acquisition costs................. 1,533 (1,512) (1,468) Prepaid reinsurance premiums............... (9,726) (1,747) (5,837) Outstanding losses recoverable from reinsurers................................ (9,100) 0 0 Other assets............................... (5,916) (9,156) (20,981) Outstanding losses and loss expenses....... 48,403 52,218 (4,242) Unearned premiums.......................... (6,070) (5,372) 5,596 Other liabilities.......................... 11,387 6,613 10,968 --------- --------- --------- Cash provided by operating activities........ 19,553 96,008 98,643 --------- --------- --------- Cash flows from investing activities Purchase of investments...................... (195,935) (427,283) (364,989) Net sales of short term investments.......... 0 0 116 Proceeds on the sale of investments.......... 305,671 389,170 282,449 Proceeds on the maturity of investments...... 24,710 35,000 79,000 --------- --------- --------- Cash provided by (applied to) investing activities.................................. 134,446 (3,113) (3,424) --------- --------- --------- Cash flows from financing activities Net proceeds from subscriptions to share capital..................................... 1,163 4,802 72,682 Payment of dividends......................... (44,096) (63,267) (54,338) Share repurchase............................. (1,346) (1,560) (103,442) Equity put option premium.................... (1,850) (2,350) (2,350) --------- --------- --------- Cash applied to financing activities......... (46,129) (62,375) (87,448) --------- --------- --------- Net increase in cash and cash equivalents.... 107,870 30,520 7,771 Cash and cash equivalents at beginning of year........................................ 85,281 54,761 46,990 --------- --------- --------- Cash and cash equivalents at end of year..... $ 193,151 $ 85,281 $ 54,761 ========= ========= =========
See accompanying notes to consolidated financial statements 10K-38 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended September 30, 1999, 1998 and 1997 (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 (the "Act") 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-39 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 in LaSalle Re. 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 in LaSalle Re 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. Changes in the minority interest of LaSalle Re as a result of the exchange of such shares for shares in the Company are 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 consolidated balance sheets represents the minority's current proportionate share of LaSalle Re and its subsidiaries' 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 adjusted where a contract contains a no claims bonus with a provision for the potential liability recorded simultaneously with the written premium. In addition, 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, anticipated losses and loss adjustment expenses and anticipated investment income related to those premiums are considered in determining the recoverability of deferred acquisition costs. (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-40 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. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies. (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 actuarial analysis, performed by the Company and reviewed by an independent firm of actuaries. 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. Liabilities are recorded without consideration of potential salvage or subrogation recoveries that 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 "Accounting and Reporting for Certain Investments in Debt and Equity Securities". As such, they are reported at fair value with unrealized gains and losses, net of amounts attributable to the minority interest, reported as other comprehensive income. 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 accretion of 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 in the consolidated statements of operations and comprehensive income. 10K-41 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, as they arise. In prior years, 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 were included in the determination of net income as they arose. (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 recorded on an accruals basis. (l) Cash and cash equivalents For the purposes of the consolidated statements of cash flows, the Company considers all time deposits, certificates of deposit and commercial paper 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) Earnings per common share Earnings per Common Share have been calculated in accordance with SFAS 128 "Earnings per Share". Earnings per Common Share are calculated by dividing net income available to common shareholders by the 10K-42 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) weighted average number of Common Shares outstanding. For the purposes of this calculation, the exchangeable non-voting shares of LaSalle Re ("Exchangeable Non-Voting Shares") are considered outstanding Common Shares of the Company due to the exchangeable nature of the shares. Earnings per Common Share assuming dilution is computed by dividing net income available to common shareholders by the sum of the weighted average number of Common Shares outstanding and the dilutive potential Common Shares outstanding during the period of calculation. 1997 calculations have been restated to give effect to SFAS 128. (o) Accounting pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Given the limited number of transactions currently entered into by the Company that are covered by the Statement, the Company does not anticipate any significant changes to its current financial reporting. The AICPA issued Statement of Position, 98-7 "Deposit Accounting" which is effective for financial statements with fiscal years beginning after June 15, 1999. The Company does not expect that this standard will have a significant impact on the current financial reporting. 3. Investments and Investment Income (a) Investments All fixed interest securities and short term investments are considered as 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, 1999 and 1998, the estimated fair values and amortized cost of investments are as follows:
Gross Gross Amortized Unrealized Unrealized Fair 1999 Cost Gains Losses Value ---- --------- ---------- ---------- -------- U.S. government and agencies.... $ 95,584 $ 36 $(1,530) $ 94,090 Non U.S. government and agencies....................... 31,041 21 (395) 30,667 Corporate....................... 237,527 297 (3,761) 234,063 Other debt...................... 5,027 5 (27) 5,005 -------- ------- ------- -------- $369,179 $ 359 $(5,713) $363,825 ======== ======= ======= ======== Gross Gross Amortized Unrealized Unrealized Fair 1998 Cost Gains Losses Value ---- --------- ---------- ---------- -------- U.S. government and agencies.... $134,832 $ 6,349 $ 0 $141,181 Non U.S. government and agencies....................... 37,239 1,233 (90) 38,382 Corporate....................... 299,101 9,869 (3) 308,967 Mortgage-backed securities...... 29,649 581 0 30,230 Other debt...................... 2,710 10 (4) 2,716 -------- ------- ------- -------- $503,531 $18,042 $ (97) $521,476 ======== ======= ======= ========
The unrealized loss on investments of $4,113 (1998: gain of $13,838) which includes an unrealized loss of $5 on cash and cash equivalents is included in accumulated other comprehensive income in the consolidated balance sheet. This amount is disclosed net of the minority's interest of $1,246 (1998: $4,107). 10K-43 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Investments held at September 30, 1999 mature as follows:
Amortized Fair Cost Value --------- ------- Less than one year.... 12,024 12,005 1-5 years............. 312,265 309,490 5-10 years............ 44,890 42,330 ------- ------- 369,179 363,825 ======= =======
The following table summarizes the composition of the fair value of available for sale securities by ratings assigned by Standard & Poor's Ratings Services or Moody's Investors Services Inc.
1999 1998 ----- ----- AAA....................... 43.3% 69.6% AA........................ 32.9% 16.9% A......................... 19.0% 11.4% BBB....................... 3.4% 0.0% BB........................ 1.4% 2.1% ----- ----- 100.0% 100.0% ===== =====
In the normal course of reinsurance operations, the Company's bankers have issued letters of credit totaling $21,577 (1998: $8,303) in favor of ceding insurance companies to secure the Company's obligations under various reinsurance contracts. 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 $16,137 (1998: $16,616). In addition, in connection with a swap agreement, the Company has posted a letter of credit of $3,000 (1998: $3,000). At September 30, 1999, $46,821 (1998: $32,107) 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, 1999, 1998 and 1997 was derived from the following sources:
1999 1998 1997 ------- ------- ------- Cash and short term investments............... $ 6,477 $ 3,649 $ 4,342 U.S. government and agencies fixed interest securities................................... 2,046 3,627 5,933 Non U.S. government and agencies fixed interest securities.......................... 6,598 7,548 3,531 Corporate fixed interest securities........... 15,836 19,784 20,456 Mortgage-backed securities.................... 1,092 477 0 Other......................................... 2,664 154 0 ------- ------- ------- Gross investment income....................... 34,713 35,239 34,262 Investment expenses (Note 12)................. (866) (951) (1,153) ------- ------- ------- $33,847 $34,288 $33,109 ======= ======= =======
Net realized gains (losses) comprise $4,082 realized gains and $3,467 realized losses (1998: $6,085 and $510; 1997: $1,881 and $1,326 respectively). Proceeds received from the sale of available for sale securities during the year ended September 30, 1999 were $305,671 (1998: $389,170; 1997: $282,449). 10K-44 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 4. Reinsurance The Company utilizes various reinsurance protections to reduce its exposure to large losses. The Company has purchased an excess of loss program which provides coverage of $75,000 in excess of the first $75,000 (1998: $100,000 in excess of the first $100,000) of losses per occurrence for a first loss event and $60,000 excess of $75,000 (1998: $100,000 in excess of $100,000) per occurrence on the second loss event and $52,500 excess of $125,000 (1998: $100,000 in excess of $150,000) per occurrence on the third loss event over a three-year period ended December 31, 2001, subject to a maximum aggregate recovery of $187,500 (1998: $300,000). Coverage for the first loss is substantially funded by way of annual and reinstatement premium obligations. Accordingly, this part of the coverage has been recorded as a financing arrangement. The consideration paid, net of associated financing charges, is recorded as a deposit (as part of other assets in the consolidated balance sheet) and 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 $1,331 (1998: $1,666; 1997: $1,470), which are being amortized over the period of the contract using the interest method. In addition, in 1999, the Company entered into a quota share arrangement which cedes a proportion of the Company's property catastrophe business to a founding shareholder. The Company has also purchased other non-proportional excess of loss protections, which provide for the recovery of losses from reinsurers in excess of certain retentions and loss warranties. The ceding of the reinsurance does not legally discharge the Company from its liability to its reinsureds, 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:
1999 1998 1997 ------------------ ------------------ ------------------ Written Earned Written Earned Written Earned -------- -------- -------- -------- -------- -------- Assumed................. $139,010 $145,080 $155,316 $160,688 $171,386 $165,789 Ceded................... (28,191) (18,465) (7,815) (6,068) (7,693) (1,856) -------- -------- -------- -------- -------- -------- Net Premiums............ $110,819 $126,615 $147,501 $154,620 $163,693 $163,933 ======== ======== ======== ======== ======== ========
5. Outstanding losses and loss expenses Activity in the liability for losses and loss expenses during the years ended September 30, 1999, 1998 and 1997 is summarized as follows:
1999 1998 1997 -------- -------- -------- Balance as of October 1..................... $ 97,942 $ 45,491 $ 49,875 -------- -------- -------- Incurred related to: Current year.............................. 82,537 79,014 22,095 Prior year events......................... 48,610 16,525 9,104 -------- -------- -------- 131,147 95,539 31,199 -------- -------- -------- Paid related to: Current year.............................. (12,821) (12,934) (3,216) Prior year................................ (78,816) (30,154) (32,367) -------- -------- -------- (91,637) (43,088) (35,583) -------- -------- -------- Losses recoverable as of September 30....... 9,100 0 0 -------- -------- -------- Balance as of September 30.................. $146,552 $ 97,942 $ 45,491 ======== ======== ========
10K-45 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The prior year development in 1999 was due to several factors. Firstly, the Company increased reserves by $14,500 in respect of Hurricane Georges, which occurred in September 1998. This followed an increase in the size of the market loss. Secondly, in March 1999 the Company recorded outstanding loss reserves totaling approximately $11,000 on three stop loss contracts. These losses arose from causes which could not have been reasonably anticipated when incurred but not reported losses were previously established. Thirdly, as a result of higher than previously anticipated losses on international catastrophe business, the Company strengthened its incurred but not reported losses by approximately $16,000 to reflect this trend. In 1998 the prior year development related to a loss reported during the year on a 1996 aggregate stop loss contract. This contract had a period of 24 months after the expiry of the contract within which to report losses. Following this notification the Company also established reserves for the 1997 renewal of this contract. The prior year development in 1997 relates primarily to an additional liability on Hurricane Fran, which occurred in September 1996. As at September 30, 1999, the Company's gross reserve for incurred but not reported losses was $68,665 compared to $52,200 at September 30, 1998. 6. Earnings per common share The following earnings per Common Share amounts have been disclosed in accordance with the requirements of SFAS No. 128:
1999 1998 1997 ---------- ---------- ---------- Net (loss)/income.......................... $ (2,834) $ 51,806 $ 97,077 Add back: minority interest................ (2,845) 13,426 24,391 Less: Series A preferred share dividends... (6,563) (6,563) (3,354) ---------- ---------- ---------- (Loss) income available to common shareholders.............................. $ (12,242) $ 58,669 $ 118,114 ---------- ---------- ---------- Weighted average number of Common Shares outstanding: Common Shares............................ 15,628,650 15,145,112 15,567,521 Exchangeable Non-Voting Shares........... 4,584,505 4,018,146 5,703,212 ---------- ---------- ---------- Weighted average number of Common Shares outstanding............................... 20,213,155 19,163,258 21,270,733 ---------- ---------- ---------- (Loss) earnings per Common Share........... $ (0.61) $ 3.06 $ 5.55 ========== ========== ========== (Loss) income available to common shareholders.............................. (12,242) $ 58,669 $ 118,114 Weighted average number of Common Shares outstanding............................... 20,213,155 19,163,258 21,270,733 Plus: incremental shares from assumed: exercise of options.................... Note 1,653,233 1,661,391 exercise of stock appreciation rights.. Note 80,516 66,812 contingently issuable shares........... Note 22,398 0 ---------- ---------- ---------- Adjusted weighted average number of Common Shares outstanding........................ 20,213,155 20,919,405 22,998,936 ---------- ---------- ---------- (Loss) earnings per Common Share assuming dilution.................................. $ (0.61) $ 2.80 $ 5.14 ========== ========== ==========
Note: The incremental shares from assumed exercises of options, stock appreciation rights and contingently issuable shares have not been included in the above computation as they have an antidilutive effect on losses per Common Share. As of September 30, 1999, the Company had 1,029,514 options outstanding (1998: 1,873,782; 1997: 2,550,537) and had granted 340,872 (1998 and 1997: 340,872) stock appreciation rights. 10K-46 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 7. Other assets Included in other assets is a promissory note receivable. In connection with the terms of an employment contract, LaSalle Re advanced $695 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 individual'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 include a deposit relating to funded reinsurance. 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, 1999 and 1998, the following Common Shares have been issued and fully paid. (a) Common shares
1999 1998 ----------- ----------- Number issued and fully paid. 15,600,262 15,178,791 Share capital...... $ 15,600 $ 15,179 Additional paid in capital. $ 223,426 $ 225,295
A holder of a common share is entitled to one vote for each share held. There are various restrictions on the ability of certain shareholders to dispose of their shares. (b) Preferred Shares
1999 1998 ---------- ---------- Number issued and fully paid........... 3,000,000 3,000,000 Share capital......... $ 3,000 $ 3,000 Additional paid in capital.............. $ 70,283 $ 70,283
Series A Preferred Shares, have a par value of $1.00 per share and are entitled to a liquidation preference of $25.00 per share ($75,000 in total). 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. (c) Catastrophe equity put The Company has entered into a $100 million multi-year Catastrophe Equity Put ("CatEPut") option program which enables the Company to raise 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 five 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 five 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 a net option 10K-47 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) premium of $1,850 (1998: $1,850) per annum. The net option premium is charged to additional paid in capital, net of the minority's interest of $430 (1998: $424). In 1998, $422 of the option premium was payable to affiliates of shareholders of the Company. 9. Shareholder share options The Company has issued options to purchase Common Shares to certain shareholders and their affiliates and LaSalle Re has issued options to purchase 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, 1999, a total number of 909,000 options were exercised in cashless transactions resulting in the issuance of 653,274 Common Shares. In addition, 268 options were repurchased at a value of $7.97 per option. As at September 30, 1999, 563,078 options to purchase Exchangeable Non-Voting Shares of LaSalle Re were outstanding. During the year ended September 30, 1998, a total number of 177,255 options were exercised in cashless transactions resulting in the issuance of 132,588 Common Shares. In addition, 454,500 options were exercised at an exercise price of $6.78, which resulted in the issuance of 454,500 Exchangeable Non- Voting Shares. As at September 30, 1998, LaSalle Re had 1,472,346 options to purchase Exchangeable Non-Voting Shares outstanding. 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 $6.03. 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. 10. Stock Incentive Compensation and Employee benefit plans (a) Stock appreciation rights In consideration for entering into an employment agreement with LaSalle Re, the Company's former Chief Executive Officer and current Chairman of the Board (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 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 $6.03. The number of SARs which can be exercised is dependent upon the internal rate of return achieved during a predefined period and 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, 1999, the number of SARs exercisable is 92,035. During the fiscal year ended September 30, 1999, the fair value of the SARs has decreased and therefore the Company has recorded a reduction in the total liability relating to the SARs of $1,490 (1998: reduction $548; 1997: charge $1,611). 10K-48 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (b) Long term incentive plan 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, related companies and directors of the Company. The maximum number of shares that may be issued under the Incentive Plan is 1,000,000. (i) Share options 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. For certain option grants, the Plan has an anti-dilution provision, which awards the option holder a number of shares of restricted stock in the event that a dividend, when added to the value of all cash dividends previously paid within the same fiscal year, exceeds 5% of the average book value per share for the prior four quarters. As at September 30, 1999, 46,459 shares of restricted stock (1998: 26,995) were awarded. The restricted stock vests when the underlying options are exercised and is forfeited if the options expire unexercised. The Company has recorded an expense of $565 (1998: $374; 1997: $264) relating to compensation on these options. The following table is a summary of the options granted and outstanding during 1999, 1998 and 1997.
1999 1998 1997 ------------------ ----------------- ---------------- Weighted Weighted Weighted Number average Number average Number average of Exercise of Exercise of Exercise shares price shares price shares price -------- -------- ------- -------- ------- -------- Outstanding--beginning of year................ 401,436 $24.96 446,436 $ 25.28 163,218 $19.25 Granted................. 233,000 $25.11 10,000 $ 31.63 283,218 $28.75 Exercised............... (19,800) $19.25 0 $ 0.00 0 $ 0.00 Forfeited............... (148,200) $27.10 (55,000) $(28.75) 0 $ 0.00 -------- ------ ------- ------- ------- ------ Outstanding--end of year................... 466,436 $24.90 401,436 $ 24.96 446,436 $25.28 ======== ====== ======= ======= ======= ======
Of the 466,436 options outstanding, 78,131 options are presently exercisable at $19.25, 88,812 are presently exercisable at $28.75 and 2,000 are presently exercisable at $31.63. The remaining options are not presently exercisable and have a weighted average vesting period of 3.74 years. The weighted average fair value of options granted during 1999 is $10.38 (1998: $12.21; 1997:$8.18) per share. The fair value of the option grant in 1999 is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: dividend yield of 4% per annum; expected volatility of 27%; expected life of 7 years; and a risk free interest rate of 6.2%. 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 Common 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 SFAS No 123:
1999 1998 1997 ------- ------- ------- Net income................................ As reported $(2,834) $51,806 $97,077 Pro forma $(3,458) $51,350 $96,647 Earnings per Common Share, assuming dilution................................. As reported $ (0.61) $ 2.80 $ 5.14 Pro forma $ (0.64) $ 2.78 $ 5.12
10K-49 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (ii) Share awards Pursuant to the provisions of the Incentive Plan awards of restricted stock vest over 5 years from the date of award with 33 1/3% vested on the third anniversary date of the award date, 66 2/3% vested on the fourth anniversary date of the award and 100% vested on the fifth anniversary date of the award. However, there are 30,000 shares of restricted stock which vest ratably in two annual installments over 2 years from the date of award. During the restricted period the employee receives dividends in the form of additional shares of restricted stock. During 1999 the Company awarded 55,000 shares of restricted stock (1998:Nil) with a value of $1,423 (1998:$Nil) to certain executive officers. At the time of the award the market value of the shares is recorded as deferred compensation and is presented as a separate component of shareholders' equity. The deferred compensation is charged to the income statement over the vesting period. For the year ended September 30, 1999 the Company charged $751 (1998 and 1997: $Nil) in respect of compensation on restricted stock awards. In addition, during the year ended September 30, 1999 pursuant to the Incentive Plan 1,379 (1998:Nil) Common Shares were awarded to individuals as of the fifth anniversary date of their hire. At the time of the award the market value of the shares is recorded as a compensation expense. During the year ended September 30, 1999 the Company booked a compensation expense of $28 (1998 and 1997: $Nil) on these share awards to employees (c) Employee stock purchase plan Pursuant to the Employee Stock Purchase Plan (the "Plan"), during the year ended September 30, 1999 the Company issued 19,459 (1998: 12,687) 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 employees of the Company, related companies, directors of the Company and other persons providing services to those companies. The maximum investment by an employee under the payroll deduction component of the Plan is $50 per calendar year. In addition, certain employees are eligible to use up to 100% of their annual bonus to purchase Common Shares under the Plan. The Company has recorded the shares issued under the Plan at fair value. No compensation cost has been recorded on those shares issued to employees of CNA (Bermuda) Services Limited ("CNA Bermuda") as the cost was reimbursed pursuant to the service agreement with CNA Bermuda. Compensation cost of $59 (1998: $5; 1997: $Nil) has been recorded on those shares issued to employees and directors of the Company. 11. Minority interest At October 1, 1998, the Minority interest of $105,569 represented the founding shareholders ownership of 4,472,646 outstanding Exchangeable Non- Voting Shares in LaSalle Re Limited. During the year ended September 30, 1999, the number of Exchangeable Non-Voting Shares increased due to the exercise of shareholder stock options and the issuance of further Exchangeable Non-Voting Shares. These transactions had the effect of increasing the minority interest percentage in LaSalle Re from 22.8% to 23.3%. At September 30, 1999 there were 4,725,546 outstanding Exchangeable Non-Voting Shares in LaSalle Re Limited, which represented the minority interest of $93,055. 12. Related party transactions In addition to the reinsurance arrangement (note 4), CatEPut transaction (note 8) and share purchase options (note 9), LaSalle Re has entered into the following transactions and agreements with companies related to the Founding Shareholders. 10K-50 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (a) Premiums written During the year ended September 30, 1999, LaSalle Re assumed premiums written of approximately $8,369 (1998: $16,917; 1997: $21,408) from a ceding company related to a shareholder of LaSalle Re. In addition, LaSalle Re assumed premiums totaling $25,266 (1998: $27,190; 1997: $28,450) through brokers related to a shareholder of LaSalle Re. Brokerage fees incurred in respect of this business were approximately $2,526 (1998: $2,719; 1997: $2,845). Reinsurance balances receivable at the balance sheet date include $(72) (1998: $8,729; 1997: $13,481) due (to) from such related parties. (b) Premiums ceded During the year ended September 30, 1999 LaSalle Re ceded premiums of $8,091 (1998: $0; 1997: $0) to a founding shareholder pursuant to a quota share contract. The Company recorded $647 (1998: $0; 1997: $0) of override commission with respect to this contract. Outstanding losses recoverable at the balance sheet date were $4,100 (1998: $0; 1997: $0). Reinsurance balances payable at the balance sheet date were $5,314 (1998: $0; 1997: $0). (c) Underwriting services LaSalle Re was party to an underwriting services agreement with CNA Bermuda during the period from the incorporation of LaSalle Re until September 30, 1998 at which date the agreement was terminated. Under this agreement, LaSalle Re 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 agreed to pay fees, during this period, to CNA Bermuda as follows: Prior to October 1, 1998 but on or after 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. Following the termination of the agreement, all personnel assigned to the Company by CNA Bermuda became employees of the Company and all underwriting functions performed by CNA Bermuda are now performed in-house. On October 1, 1998, LaSalle Re entered into an underwriting support services agreement with CNA Re Services Company ("CNA Services"). Under this Agreement, CNA Services provides certain underwriting support functions to LaSalle Re but no longer underwrites insurance or reinsurance as agents for LaSalle Re. With effect from October 1, 1998 LaSalle Re has agreed to pay fees to CNA Services as follows: (i) An annual retainer of $333; and (ii) An underwriting profit commission equal to 1.67% of the aggregate net underwriting profits of LaSalle Re, where certain conditions are met. The agreement provides for additional fees to be payable if services provided exceed the retainer. Fees in excess of the retainer are calculated at daily or hourly rates to be agreed between the parties. Fees incurred with respect to the agreements with CNA Bermuda and CNA Services for the year ended September 30, 1999, were $1,461 (1998: $3,594; 1997: $6,587). At September 30, 1999, $2,693 (1998: $3,658) was payable in respect of these fees. 10K-51 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (d) Administrative services LaSalle Re was party to an agreement with Aon Risk Consultants (Bermuda) Ltd. ("ARC Bermuda") during the period from the incorporation of LaSalle Re until September 30, 1997 at which date the agreement was terminated. Under this agreement, ARC Bermuda performed certain actuarial and administrative services on behalf of the Company. The management fees payable to ARC Bermuda were as follows: Calendar Year 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 incurred $44 and $6,212 for administrative services for the year ended September 30, 1998 and 1997 respectively. (e) 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 a flat fee structure. Prior to July 1997, fees were based on the average daily balance of the investment portfolio of the preceding quarter. The average daily balance was split into various bands, with fees calculated by applying a sliding scale of basis points to each band. The Company has incurred $801 (1998: $850; 1997: $1,057) for services provided for the year ended September 30, 1999, of which $195 (1998: $215) was payable at September 30, 1999. (f) 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 incurred $16 for services provided for the year ended September 30, 1997. (g) Reinsurance services Effective January 1, 1997, LaSalle Re was party to a fronting agreement with Hedge Financial Products, an affiliate of CNA. CNA reinsured LaSalle Re 100% for the business fronted. For the year ended September 30, 1998 LaSalle Re received an administration fee of $63 (1997: $250) for the services provided. The agreement was not renewed on January 1, 1998. 10K-52 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 13. Geographic 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, 1999, 1998 and 1997:
1999 1998 1997 -------------- -------------- --------------- Premiums Premiums Premiums Written % Written % Written % -------- ----- -------- ----- -------- ----- United States.................... 60,074 53.0% 64,352 48.0% $ 75,338 44.9% Europe (excluding the U.K.)...... 9,555 8.4% 14,477 10.7% 18,553 11.1% United Kingdom................... 9,772 8.6% 11,726 8.7% 15,165 9.1% Japan............................ 2,926 2.6% 3,166 2.4% 6,949 4.2% Australasia...................... 4,457 4.0% 3,263 2.5% 6,472 3.8% Worldwide........................ 14,068 12.4% 21,784 16.2% 20,872 12.5% Worldwide (excluding U.S.)....... 5,399 4.8% 7,499 5.6% 12,579 7.5% Other............................ 7,041 6.2% 7,935 5.9% 11,628 6.9% -------- ----- -------- ----- -------- ----- 113,292 100% 134,202 100% 167,556 100% ===== ===== ===== Lloyd's.......................... 22,389 21,039 14,125 Fronted premiums, reinstatements, adjustment premiums and no claim bonuses......................... 3,329 75 (10,295) -------- -------- -------- $139,010 $155,316 $171,386 ======== ======== ========
10K-53 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 14. Segmental Reporting The Company has two reportable segments: reinsurance operations and Lloyds. The reinsurance segment provides reinsurance for property catastrophe and for other lines of business which have similar characteristics, namely high severity and low frequency. The Lloyd's segment is written through LaSalle Re Corporate Capital Ltd., which provides capital support to selected Lloyd's syndicates. The lines of business written by the selected syndicates include direct and facultative property insurance, marine insurance and reinsurance, professional indemnity, directors and officers insurance and bankers blanket bond business. Data for the three years ended September 30, 1999, 1998 and 1997 was as follows:
Reinsurance Lloyd's Total ----------- ------- -------- 1999 Gross premiums written........................... $116,621 $22,389 $139,010 Total revenues................................... 147,804 13,273 161,077 Loss before minority interest.................... (2,090) (3,589) (5,679) Assets........................................... 677,573 58,534 736,107 Losses & loss expense ratio...................... 105.5% 86.4% 103.6% Expense ratio.................................... 24.1% 48.5% 26.5% -------- ------- -------- Combined ratio................................... 129.6% 134.9% 130.1% -------- ------- -------- 1998 Gross premiums written........................... $134,276 $21,039 $155,316 Total revenues................................... 185,026 9,520 194,546 Income before minority interest.................. 64,757 475 65,232 Assets........................................... 720,624 36,666 757,290 Losses & loss expense ratio...................... 62.3% 54.4% 61.8% Expense ratio.................................... 19.0% 43.8% 20.4% -------- ------- -------- Combined ratio................................... 81.3% 98.2% 82.2% -------- ------- -------- 1997 Gross premiums written........................... $157,261 $14,125 $171,386 Total revenues................................... 195,066 2,719 197,785 Income (loss) before minority interest........... 121,683 (215) 121,468 Assets........................................... 669,004 17,084 686,088 Losses & loss expense ratio...................... 18.3% 62.1% 19.0% Expense ratio.................................... 23.2% 44.7% 23.6% -------- ------- -------- Combined ratio................................... 41.5% 106.8% 42.6% -------- ------- --------
15. Commitments and contingencies (a) Leasing commitments The Company has rented space for its principal executive offices under lease agreements, which expire in 2001. Total rental expense for the year ended September 30, 1999 was approximately $328 (1998: $269; 1997: $Nil). Future minimum rental payments under the leases are expected to be as follows: Year ending September 30, 2000...... $299 Year ending September 30, 2001...... 105 ---- Total minimum future rentals........ $404 ====
10K-54 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (b) Financial instruments with off-balance sheet risk LaSalle Re has entered into a swap agreement to provide cash flow to a counterparty in the event of defined earthquake activity in Japan. Receipts to LaSalle Re which are accounted for as investment income are based on the notional amount of the swap. As at September 30, 1999, the Company had recorded $114 (1998: $58) of investment income. The contract exposes LaSalle Re to a maximum cash outflow of the same notional amount should the defined seismic event occur. The Company is also exposed to credit loss in the event of nonperformance by the counterparty to the remittance of interest payments as required by the swap. The Company does not anticipate nonperformance by the counterparty. At September 30, 1999, the total notional principal amount of the swap was $3,000 (1998: $3,000) which is supported by a letter of credit. 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. The Company had a notional principal amount outstanding of approximately $5,518 as at September 30, 1998 (fair value $Nil) in a contract to sell foreign currencies. No such contracts were outstanding in 1999 or 1997. The Company may also enter into foreign exchange contracts to manage the exposures relating to known reinsurance losses denominated in foreign currencies. As at September 30, 1999 the Company had no outstanding foreign exchange contracts. (c) 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 including managed cash and cash equivalents, can be invested in "BBB" grade rating. The Company is allowed to invest up to $10,000 in risk based investments and 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 20% of the Company's premiums written for the year ended September 30, 1999 (1998: more than 17%; 1997: 15%). A broker, who is related to the Company, arranged 18% of the Company's premiums written for the year ended September 30, 1999 (1998: 17%; 1997: 16%). Approximately 16% (1998: 14%; 1997: 8%) of the Company's gross premiums written are derived from its participation as a corporate member of Lloyd's. 16. 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 that, 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. 10K-55 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The line of credit contains various covenants, including limitations on incurring additional indebtedness; 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 of at least $400 million at the end of calendar year 1999 and thereafter; 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. The Company may pay dividends and make other restricted payments so long as, after giving effect to such restricted payments, no event of default has occurred. Dividends and restricted payments are limited to 50% of consolidated net income for its immediately preceding fiscal year less amounts paid on the Series A preferred shares. As of September 30, 1999, there were no borrowings under the credit facility and the Company was in compliance with all covenants under the facility. 17. 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 Act, LaSalle Re is required to prepare statutory financial statements and to file in Bermuda a statutory financial return together with the statutory financial statements. LaSalle Re is required to maintain certain measures of solvency and liquidity. The statutory capital and surplus of LaSalle Re at September 30, 1999 was approximately $446,909 (1998: $506,000) and the minimum required statutory capital and surplus required by its license as a Class 4 insurer was $100,000 (1998: $100,000). 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 (as well as following certain procedures required under Bermuda law). At September 30, 1999, there were no restrictions on the distribution of retained earnings. 18. Taxation Under current Bermuda law, the Company is not required to pay 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, subject to the terms expressed in the said undertaking, from taxation until the year 2016 in the event of any such taxes being imposed. Other than with respect to its Lloyd's business, 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. LaSalle Re Corporate Capital Ltd. is a corporate member of Lloyd's. Pursuant to a Closing Agreement between Lloyd's and the IRS, LaSalle Re Corporate Capital Ltd. will be treated as engaged in business in the U.S. and is subject to U.S. corporate income tax on its net income from U.S. sources. The Company believes that currently there is no income tax liability. LaSalle Re Corporate Capital Ltd. is also subject to U.K. corporation tax, with the assessment made at the end of thirty six months. Deferred tax assets and liabilities resulting from the Company's support of syndicates through LaSalle Re Corporate Capital are currently estimated to be insignificant, but are subject to change as the results of the syndicates are uncertain. 10K-56 LASALLE RE HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded) 19. Unaudited quarterly financial data Year ended September 30, 1999
First Second Third Fourth Quarter Quarter Quarter Quarter ------- -------- ------- ------- Net premiums earned...................... $35,130 $ 38,055 $32,068 $21,362 Net investment income and realized gains (losses)................................ 10,146 8,222 8,691 7,403 Losses and loss expenses incurred (net of recoveries)............................. 30,586 50,204 24,789 25,568 Net income (loss) (before minority interest)............................... 6,859 (13,727) 5,458 (4,269) Earnings (loss) per common share-- assuming dilution....................... $ 0.25 $ (0.76) $ 0.19 $ (0.29)
Year ended September 30, 1998
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Net premiums earned........................ $37,919 $41,906 $42,053 $32,742 Net investment income and realized gains (losses).................................. 8,856 10,196 9,247 11,564 Losses and loss expenses incurred (net of recoveries)............................... 8,698 19,938 23,607 43,296 Net income (loss) (before minority interest)................................. 29,679 22,023 18,173 (4,643) Earnings (loss) per common share--assuming dilution................................... $ 1.34 $ 0.97 $ 0.78 $ (0.33)
10K-57 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Effective October 25, 1999, the Company's previous independent auditors, KPMG, tendered their resignation citing a potential independence issue that could have arisen in connection with the upcoming audit of the Company's September 30, 1999 financial statements. The audit reports of KPMG on the financial statements of the Company for the past two years contain no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. During the Company's two most recent fiscal years and the interim period to date, there have been no disagreements between KPMG and the Company with respect to any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure. None of the reportable events described in Item 304(a)(1)(v) of Regulation S-K occurred with respect to the Company within the two most recent fiscal years and through the interim period. On October 28, 1999, the Company announced that it had engaged Deloitte & Touche as its independent auditors, effective October 25, 1999. The engagement of Deloitte & Touche was recommended by the Company's audit committee, authorized by its board of directors, and will be presented for shareholder approval at the Company's next annual general meeting of shareholders. 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 for Election," "--Directors Whose Terms of Office Will Continue After This Meeting" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the 2000 Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information required for this item is incorporated by reference to the information contained under the caption "Management" and "Election of Directors--Director Compensation" in the 2000 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" in the 2000 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 "Election of Directors--Certain Transactions" in the 2000 Proxy Statement. 10K-58 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 10K-32 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 10K-62 to 10K-66 of this report, which is incorporated herein by reference. (b) Reports on Form 8-K: The following report on Form 8-K was filed during the quarter ended September 30, 1999: Item ReportedDate of Report Changes in Registrant's Certifying AccountantOctober 25, 1999 (c) Exhibits: The Exhibits required by Item 601 of Regulation S-K are listed in the Index to Exhibits on pages 10K-62 to 10K-66 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, 25 Church Street, Hamilton HM 12, Bermuda. 10K-59 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 15th day of December, 1999. LaSalle Re Holdings Limited /s/ Guy D. Hengesbaugh By __________________________________ Name: Guy D. Hengesbaugh Title: President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Guy D. Hengesbaugh, Clare E. Moran and Michael A. Conway, 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 15th day of December, 1999.
Signature Title --------- ----- /s/ Victor H. Blake Chairman and Director ___________________________________________ Victor H. Blake /s/ Guy D. Hengesbaugh President and Chief Executive Officer ___________________________________________ (Principal executive officer) Guy D. Hengesbaugh /s/ Clare E. Moran Senior Vice President, Treasurer and ___________________________________________ Interim Chief Financial Officer Clare E. Moran (Principal financial and accounting officer) /s/ William J. Adamson, Jr. Director ___________________________________________ William J. Adamson, Jr. /s/ Michael A. Conway Director ___________________________________________ Michael A. Conway /s/ Robert V. Deutsch Director ___________________________________________ Robert V. Deutsch /s/ Clement S. Dwyer, Jr. Director ___________________________________________ Clement S. Dwyer, Jr.
10K-60
Signature Title --------- ----- /s/ Donald P. Koziol, Jr. Director ___________________________________________ Donald P. Koziol, Jr. /s/ Lester Pollack Director ___________________________________________ Lester Pollack /s/ Peter J. Rackley Director ___________________________________________ Peter J. Rackley /s/ Paul J. Zepf Director ___________________________________________ Paul J. Zepf
10K-61 INDEX TO EXHIBITS
Exhibit Number Description Method of Filing ------- ----------- ---------------- 3.1 Memorandum of Association Incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-1 (No. 33-97304) 3.2 Bye-Laws Incorporated by reference to Exhibit 3.2 to Form 10-Q for the quarterly period ended March 31, 1998 (File No. 1-12823) 10.1 Excess Ownership Incorporated by reference to Exhibit Agreement dated November 10.3 to Form 10-Q for the quarterly 27, 1995 among the period ended December 31, 1995 (File Company, LaSalle Re and No. 0-27216) the Founding Shareholders 10.2 Amended and Restated Incorporated by reference to Exhibit Shareholders Agreement 10.1 to Form 10-Q for the quarterly dated November 27, 1995 period ended December 31, 1995 (File among the Company, No. 0-27216) LaSalle Re and the Founding Shareholders 10.3 Amended and Restated Incorporated by reference to Exhibit Option Agreement Dated 10.2 to Form 10-Q for the quarterly November 27, 1995 among period ended December 31, 1995 (File the Company, LaSalle Re No. 0-27216) and certain of the Founding Shareholders 10.4 Conversion Agreement Incorporated by reference to Exhibit dated November 27, 1995 10.4 to Form 10-Q for the quarterly among the Company, period ended December 31, 1995 (File No. LaSalle Re and holders of 0-27216) Exchangeable Non-Voting Shares 10.5 Underwriting Support Incorporated by reference to Exhibit Services Agreement Dated 10.7 to Form 10-K for the fiscal year October 1, 1998 among ended September 30, 1998 (File LaSalle Re, CRSC and CNA No. 1-12823) Bermuda 10.6 Amended and Restated Incorporated by reference to Exhibit Investment Management 10.8 to Registration Statement on Form Agreement dated September S-1 (No. 333-14861) 21, 1995 among the Company, LaSalle Re and Aon Advisors 10.7 Second Amended and Filed with this document Restated Employment Agreement dated as of July 1, 1999 between Victor H. Blake and LaSalle Re 10.8 Employment Agreement Incorporated by reference to Exhibit dated October 1, 1998 10.12 to Form 10-K for the fiscal year between Guy D. ended September 30, 1998 (File Hengesbaugh and LaSalle No. 1-12823) Re 10.9 Employment Agreement Incorporated by reference to Exhibit dated October 1, 1998 10.13 to Form 10-K for the fiscal year between Andrew Cook and ended September 30, 1998 (File LaSalle Re No. 1-12823) 10.10 Employment Agreement Filed with this document dated March 1, 1999 between Robert P. Cuthbert and LaSalle Re 10.11 Separation Agreement Filed with this document dated May 1, 1999 between Robert P. Cuthbert and LaSalle Re 10.12 Employment Agreement Filed with this document dated October 1, 1998 between Mark C. Stockton and LaSalle Re
10K-62 10.13 LaSalle Re Holdings Incorporated by reference to Exhibit Limited 1996 Long-Term 10.13 to Registration Statement on Form Incentive Plan S-1 (No. 333-14861) 10.14 First Amendment to Incorporated by reference to Exhibit 4.4 LaSalle Re Holdings to Registration Statement on Form S-8 Limited 1996 Long-Term (No. 333-38653) Incentive Plan, dated September 25, 1997 10.15 Second Amendment to Incorporated by reference to Exhibit LaSalle Re Holdings 10.16 to Form 10-K for the fiscal year Limited 1996 Long-Term ended September 30, 1998 (File Incentive Plan, dated No. 1-12823) September 25, 1998 10.16 LaSalle Re Holdings Incorporated by reference to Exhibit Limited Employee Stock 10.14 to Registration Statement on Form Purchase Plan S-1 (No. 333-14861) 10.17 First Amendment to Incorporated by reference to Exhibit 4.4 LaSalle Re Holdings to Registration Statement on Form S-8 Limited Employee Stock (No. 333-38655) Purchase Plan, dated September 25, 1997 10.18 Second Amendment to Incorporated by reference to Exhibit LaSalle Re Holdings 10.19 to Form 10-K for the fiscal year Limited Employee Stock ended September 30, 1998 (File No. 1- Purchase Plan, dated 12823) September 25, 1998 10.19 Third Amendment to Incorporated by reference to Exhibit LaSalle Re Holdings 10.4 to Form 10-Q for the quarterly Limited Employee Stock period ended March 31, 1999 (File Purchase Plan, dated No. 1-12823) February 26, 1999 10.20 Credit Agreement dated as Incorporated by reference to Exhibit of December 1, 1995 among 10.9 to Form 10-Q for the quarterly the Company, several period ended December 31, 1995 (File banks and Chemical Bank, No. 0-27216) as administrative agent 10.21 First Amendment, dated Incorporated by reference to Exhibit September 25, 1996, among 10.12 to Registration Statement on Form the Company, several S-1 (No. 333-14861) 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 10.22 Second Amendment, dated Incorporated by reference to Exhibit March 13, 1997, 10.30 to among the Company, Form 10-K for the fiscal year ended several banks and Chase September 30, 1997 (File No. 1-12823) 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 10.23 Third Amendment, dated Incorporated by reference to Exhibit March 16, 1998, among the 10.1 to Form 10-Q for the quarterly Company, several banks period ended March 31, 1998 (File and Chase Manhattan Bank No. 1-12823) as administrative agent, to Credit Agreement dated as of December 1, 1995 among the Company, several banks and Chemical Bank, as administrative agent 10.24 Waiver dated as of April Incorporated by reference to Exhibit 1, 1999, among the 10.1 to Form 10-Q for the quarterly Company, several banks period ended March 31, 1999 (File and Chase Manhattan Bank No. 1-12823) as administrative agent, to Credit Agreement dated as of December 1, 1995 among the Company, several banks and Chemical Bank, as administrative agent.
10K-63 10.25 Catastrophe Equity Incorporated by reference to Exhibit Securities Issuance Option 10.31 to Form 10-K for the fiscal year Agreement, dated as of ended September 30, 1997 (File No. July 1, 1997 between the 1-12823) Company on the one hand and European Reinsurance Company of Zurich, Allianz Aktiengesellschaft, Continental Casualty Company and CIC-Hilldale, Inc. on the other hand 10.26 Quota Share Arrangement, Incorporated by reference to Exhibit dated as of April 1, 1999, 10.2 to Form 10-Q for the quarterly between LaSalle Re and period ended March 31, 1999 (File Continental Casualty No. 1-12823) Company 10.27 Quota Share Treaty between Incorporated by reference to Exhibit CNA International 10.17 to Registration Statement on Form Reinsurance Company S-1 (No. 333-14861) Limited and LaSalle Re in respect of 1994 underwriting year of account (London office) 10.28 Quota Share Treaty between Incorporated by reference to Exhibit CNA International 10.18 to Registration Statement on Form Reinsurance Company S-1 (No. 333-14861) Limited and LaSalle Re in respect of 1995 underwriting year of account (London office) 10.29 Quota Share Treaty between Incorporated by reference to Exhibit CNA International 10.19 to Registration Statement on Form Reinsurance Company S-1 (No. 333-14861) Limited and LaSalle Re in respect of 1996 underwriting year of account (London office) 10.30 Quota Share Treaty between Incorporated by reference to Exhibit CNA International 10.27 to Form 10-K for the fiscal year Reinsurance Company ended September 30, 1997 (File Limited and LaSalle Re in No. 1-12823) respect of 1997 underwriting year of account (London office) 10.31 Quota Share Treaty between Incorporated by reference to Exhibit CNA International 10.27 to Form 10-K for the fiscal year Reinsurance Company ended September 30, 1998 (File Limited and LaSalle Re in No. 1-12823) respect of 1998 underwriting year of account (London office) 10.32 Quota Share Treaty between Filed with this document CNA International Reinsurance Company Limited and LaSalle Re in respect of 1999 underwriting year of account (London office) 10.33 Quota Share Treaty between Incorporated by reference to Exhibit CNA International 10.20 to Registration Statement on Form Reinsurance Company S-1 (No. 333-14861) Limited and LaSalle Re in respect of 1994 underwriting year of account (Amsterdam office) 10.34 Quota Share Treaty between Incorporated by reference to Exhibit CNA International 10.21 to Registration Statement on Form Reinsurance Company S-1 (No. 333-14861) Limited and LaSalle Re in respect of 1995 underwriting year of account (Amsterdam office) 10.35 Quota Share Treaty between Incorporated by reference to Exhibit CNA International 10.22 to Registration Statement on Form Reinsurance Company S-1 (No. 333-14861) Limited and LaSalle Re in respect of 1996 underwriting year of account (Amsterdam office)
10K-64 10.36 Quota Share Treaty between Incorporated by reference to Exhibit CNA International 10.28 to Form 10-K for the fiscal year Reinsurance Company ended September 30, 1997 (File Limited and LaSalle Re in No. 1-12823) respect of 1997 underwriting year of account (Amsterdam office) 10.37 Quota Share Treaty between Incorporated by reference to Exhibit CNA International 10.28 to Form 10-K for the fiscal year Reinsurance Company ended September 30, 1998 (File No. 1- Limited and LaSalle Re in 12823) respect of 1998 underwriting year of account (Amsterdam office) 10.38 Quota Share Treaty between Filed with this document CNA International Reinsurance Company Limited and LaSalle Re in respect of 1999 underwriting year of account (Amsterdam office) 10.39 LMX Quota Share Incorporated by reference to Exhibit Retrocessional Agreement 10.23 to Registration Statement on Form between Continental S-1 (No. 333-14861) Casualty Company and LaSalle Re for the 1995 underwriting year of Account 10.40 LMX Quota Share Incorporated by reference to Exhibit Retrocessional Agreement 10.24 to Registration Statement on Form between Continental S-1 (No. 333-14861) Casualty Company and LaSalle Re for the 1996 underwriting year of Account 10.41 LMX Quota Share Incorporated by reference to Exhibit Retrocessional Agreement 10.29 to Form 10-K for the fiscal year between Continental ended September 30, 1997 (File Casualty Company and No. 1-12823) LaSalle Re for the 1997 underwriting year of Account 10.42 LMX Quota Share Incorporated by reference to Exhibit Retrocessional Agreement 10.38 to Form 10-K for the fiscal year between Continental ended September 30, 1998 (File Casualty Company and No. 1-12823) LaSalle Re for the 1998 underwriting year of Account 10.43 LMX Quota Share Filed with this document Retrocessional Agreement between Continental Casualty Company and LaSalle Re for the 1999 underwriting year of Account 12.1 Statement re computation Filed with this document of ratio of earnings to combined fixed charges and preferred share dividends 13.1 Portions of the Annual Filed with this document Report to Shareholders for the fiscal year ended September 30, 1999 16.1 Letter re change in Incorporated by reference to Exhibit 16 certifying accountant to Form 8-K filed on October 28, 1999 (File No. 1-12823) 21.1 Subsidiaries of the Incorporated by reference to Exhibit Registrant 21.1 to Registration Statement on Form S-1 (No. 333-14861) 23.1 Consent of KPMG Filed with this document 23.2 Consent of Deloitte & Filed with this document Touche 24.1 Power of Attorney Included on signature page 27.1 Financial Data Schedule Filed with this document
10K-65 EX-10.7 2 EMPLOYMENT AGREEMENT 07/01/99 BLAKE & LASALLE EXHIBIT 10.7 SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT ------------------------------------------------ THIS AGREEMENT, made and entered into as of July 1, 1999 (the "Restatement Date") further amends and restates the amended and restated employment agreement entered into as of October 1, 1995, as subsequently amended, which amended and restated employment agreement amended and restated the agreement entered into as of April 1, 1994 (the "Effective Date"), by and between Victor H. Blake (the "Executive") and LaSalle Re Limited (the "Company"); WITNESSETH THAT: --------------- WHEREAS, the parties desire to enter into this Agreement pertaining to the continued employment of the Executive by the Company; NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth below, it is hereby covenanted and agreed by the Executive and the Company as follows: 1. Performance of Services. The Executive's employment with the Company shall be subject to the following: (a) Subject to the provisions of this Agreement, the Company hereby agrees to employ the Executive as Chairman and Internal Consultant of the Company and of LaSalle Re Holdings Limited (the "Holding Company") during the Agreement Term (as defined below), and the Executive hereby agrees to remain in the employ of the Company during the Agreement Term. (b) During the Agreement Term, while the Executive is employed by the Company, the Executive shall devote his time, energies and talents to performing his duties under this Agreement. (c) The Executive agrees that he shall perform his duties faithfully and efficiently subject to the directions of the Board. The Executive's duties may include providing services for both the Company, the Holding Company and the Subsidiaries (as defined below), as determined by the Board.; provided, that the Executive shall not, without his consent, be assigned tasks that would be inconsistent with his position at the Company. The Executive will have such authority and power as are inherent to the undertakings applicable to his positions and necessary to carry out his responsibilities and the duties required of him hereunder. (d) While the Executive is employed by the Company, he shall be subject to the duties that generally apply to the Company's directors, officers, and employees (including, without limitation, the duty of loyalty to the Company). (e) The Executive shall represent the Company in all places where it does business, but shall have no authority to act for the Company outside Bermuda, to make decisions on behalf of the Company outside Bermuda, or to bind the Company with respect to actions outside Bermuda. (f) Notwithstanding the foregoing provisions of this paragraph 1, during the Agreement Term, the Executive may devote reasonable time to activities other than those required under this Agreement, including chairmanship or membership of the London Underwriting Centre Board, membership of International Underwriters Association, memberships of the boards of directors of or consultancies with CNA and its affiliates, acting as a managing director of CNA Underwriting Agencies Limited, the supervision of his personal investments, and activities involving professional, charitable, educational, religious and similar types of organizations, speaking engagements, membership of the boards of directors of or consultancies with other organizations, and similar type of activities, to the extent that such other activities do not inhibit or prohibit the performance of the Executive's duties under this Agreement, or conflict in any material way with the business transacted by the Company or any Subsidiary; provided, however, that except as otherwise expressly provided in this Agreement, the Executive shall not serve on the board of any entity engaged in the business of transacting reinsurance, or hold any position with any entity engaged in the transaction of such business, without the consent of the Board. (g) Subject to the provisions of this Agreement, the Executive shall not be required to perform services under this Agreement during any period that he is Disabled. The Executive shall be considered "Disabled" during any period in which he has a physical or mental disability which renders him incapable, after reasonable accommodation, of performing his duties under this Agreement. In the event of a dispute as to whether the Executive is Disabled, the Company may refer the same to a licensed practicing physician of the Company's choice, and the Executive agrees to submit to such tests and examinations as such physician shall deem appropriate. (h) the "Agreement Term" shall be the period beginning on the Effective Date and ending on September 30, 2003. (i) For purposes of this Agreement, the term "Subsidiary" shall mean any company (regardless of whether incorporated) during any period in which 50% or more of the total combined voting power of all classes of stock (or other ownership interest) entitled to vote is owned, directly or indirectly, by the Company. 2 2. Compensation. Subject to the provisions of this Agreement, during the Agreement Term, while he is employed by the Company, the Company shall compensate the Executive for the Executive's services as follows: (a) Salary. The Executive shall receive an annual base salary of $575,000, payable in substantially equal monthly or more frequent installments, during the period beginning on the Restatement Date and ending on October 31, 2000. During the period beginning on November 1, 2000 and ending September 30, 2003, the Executive shall receive an annual base salary of $300,000, payable in substantially equal monthly or more frequent installments. Amounts payable under this paragraph 2(a) shall be referred to in this Agreement as "Salary." (b) Bonus. The Executive shall be entitled to receive bonuses from the Company in accordance with the provisions of Exhibit A, which is attached to and forms a part of this Agreement. (c) Stock Appreciation Rights. The Executive shall continue to be entitled to receive a stock appreciation rights award from the Company under an agreement that is substantially in the form of the Stock Appreciation Rights Agreement set forth in Exhibit B, which is attached to and forms a part of this Agreement. All other stock options and stock awards previously granted to Executive continue to be subject to the terms of the separate agreements governing such awards, the terms of which are unaffected by the terms of this Agreement. (d) Pension. Other than $30,286 payable to the Executive on March 31, 2000 if the Executive's Date of Termination has not occurred on or prior to such date, the Executive will accrue no additional retirement benefits under any retirement scheme or arrangement sponsored by or contributed to by the Company. (e) Life Assurance and Other Benefits. During that part of the Agreement Term ending on September 30, 2000, the Executive will be provided with life assurance benefits providing a death benefit of (i) $2,000,000.00. The Executive will be provided with medical benefits, workers compensation benefits, and long term disability benefits by the Company. The Executive will also be provided with other benefits to the same extent as other senior executives of the Company. (f) Automobile. During that part of the Agreement Term ending on September 30, 2000, the Company will provide the Executive with use of an automobile in Bermuda. The Company will assume responsibility for the cost of insurance, maintenance and similar items. The Executive's personal use of the automobile will be permitted at no additional 3 cost to the Executive, and the Executive will be provided with a gross-up for any income taxes incurred by the Executive in connection with his personal use of the automobile. (g) Club. During that part of the Agreement Term ending on September 30, 2000, the Company will reimburse the Executive for periodic dues in one country club and one business club in Bermuda. If any initiation fees previously paid on behalf of the Executive are returned to the Executive upon termination of his membership or any other reason, such fees shall be repaid to the Company to the extent such return is attributable to amounts paid by the Company. (h) Housing. It is understood and agreed by the parties that with respect to the condominium previously purchased by the Executive (the "Condominium") for which the Company previously arranged a loan to the Executive for the amount of the Condominium purchase price ($695,000), which loan is reflected by the terms of a loan agreement (the "Loan Agreement"): (i) Subject to the provisions of paragraph (v), sale of the Condominium shall be required within a reasonable time following the Executive's Date of Termination (as defined in this Agreement). Payment of the principal amount under the Loan Agreement shall be due at the time the Condominium is sold or otherwise transferred by the Executive. (ii) Subject to the provisions of paragraph (v), the Company shall reimburse the Executive for any interest payments made by Executive under the Loan Agreement. (iii) The Company (not the Executive) shall be responsible for any losses incurred on the sale of the Condominium, and shall be entitled to any gain on the sale, if such sale occurs under paragraph (i). (iv) The Company shall reimburse the Executive for any tax liability incurred by him or his estate in any jurisdiction as a result of the sale of the Condominium, if such sale occurs under paragraph (i). (v) The Executive, by irrevocable written election filed with the Company not later than the 45th day after the Date of Termination, may elect to retain the Condominium. As a result of such election, the Executive shall be entitled to permanently retain title to the Condominium, and no sale of the Condominium shall be required under paragraph (i), subject to the following: 4 (A) Subject to paragraph (B), the Executive shall remain liable for repayment of the full amount of principal under the Loan Agreement, which repayment shall be fully due on the 50th day after the Date of Termination. (B) If, as of the Date of Termination, the fair market value of the Condominium has increased over the purchase price, the Executive shall also be required pay the amount of the increase to the Company. If the fair market value of the Condominium has decreased to below the purchase price, the amount due from the Executive shall be reduced by the amount of the decrease, which reduction shall be deemed to occur as of the date of repayment. (C) The adjustment made in accordance with paragraph (B) shall be in lieu of the adjustment required under paragraph (iii). (D) The fair market value of the Condominium shall be determined by an appraiser selected by the Company and reasonably acceptable to the Executive. The Executive shall be entitled to review the completed appraisal prior to being required to make the election to retain the Condominium as described in the first sentence of this paragraph (v). (vi) The Executive and the Company agree that they shall cooperate with each other, and shall execute such other documents, to the extent reasonable or appropriate to carry out this paragraph 2(h). (vii) Effective on or about December 1, 1999, following shipment by the Company at the Company's expense of the Executive's personal affects and belongings to the United Kingdom, and through the remainder of the Agreement Term, the Executive shall make the Condominium fully available to the Company's designee for such use as a full-time residence by such designee. (viii) After the date the Executive makes the Condominium available for use by the Company's designee in accordance with paragraph (vii), above, and prior to the date that either the Condominium is sold in accordance with paragraph (i) or that the Executive elects to retain the Condominium in accordance with paragraph (v), the Company shall reimburse Executive for any costs or liabilities relating to the Condominium. 5 (i) Holiday/vacation. During that part of the Agreement Term ending on September 30, 2000, the Executive shall be subject to the holiday and vacation policy that applies to other senior executives of the Company. (j) Financial planning. During that part of the Agreement Term ending on September 30, 2000, the Executive will be provided with financial and tax planning advice at the Company's expense. (k) Expenses. The Company will reimburse the Executive for travel, entertainment, and other expenses incurred on a basis appropriate to an individual holding the position of chairman of a company of the status of the Company, provided that such expenses are incurred in furtherance of the Executive's duties for the Company, and subject to such policies and procedures in effect from time to time for the Company's senior executives. To the extent provided in this Agreement, the Executive will also be reimbursed for other expenses (e.g., travel by spouse) even though such reimbursement may not be covered pursuant to the Company's generally applicable reimbursement policy. (l) Indemnification. The Company shall maintain directors and officers liability insurance in commercially reasonable amounts (as reasonably determined by the Board), and the Executive shall be covered under such insurance to the same extent as other senior management employees of the Company. The Executive shall be eligible for indemnification by the Company under the Company bye-laws as currently in effect. The Company agrees that it shall not take any action that would impair the Executive's rights to indemnification under the Company bye-laws, as currently in effect. (m) Dollar Amounts. As used in this Agreement, "dollars" or numbers preceded by the symbol "$" shall mean amounts in United States Dollars. 3. Termination. The Executive's employment during the Agreement Term may be terminated by the Company or the Executive without any breach of this Agreement only under the circumstances described in paragraphs 3(a) through 3(f): (a) Death. The Executive's employment will terminate upon his death. (b) Permanently Disabled. The Company may terminate the Executive's employment if he is Permanently Disabled. "Permanently Disabled" means that the Executive is eligible for benefits under the Company's long-term disability plan. (c) Cause. The Company may terminate the Executive's employment at any time for Cause. "Cause" shall mean: 6 (i) the wilful and continued failure by the Executive to substantially perform his duties with the Company (other than any such failure resulting from the Executive's being Disabled), within a reasonable period of time after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed his duties; (ii) the wilful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise; or (iii) the engaging by the Executive in egregious misconduct involving serious moral turpitude to the extent that, in the reasonable judgment of the Company's Board, the Executive's credibility and reputation no longer conform to the standard of the Company's executives. For purposes of this Agreement, no act, or failure to act, on the Executive's part shall be deemed "wilful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interest of the Company. (d) Constructive Discharge. If the Executive (i) provides written notice to the Company of the occurrence of a material breach of this Agreement by the Company, which specifically identifies the manner in which the Executive believes that the breach has occurred; (ii) the Company fails to correct such breach within a reasonable time after such notice; and (iii) the Executive resigns within the 60-day period following the occurrence of such breach, then the Executive shall be considered to have been constructively discharged. (e) Resignation by Executive. The Executive may resign for any reason by giving the Company 180 days prior written notice, except the Executive will be treated as having resigned under this paragraph 3(e) only if he has not been constructively discharged under paragraph 3(d). (f) Termination by Company. The Company may terminate the Executive's employment at any time for any reason by giving the Executive prior written notice, except the Executive's employment will not be treated as having been terminated under this paragraph 3(f) if the termination is for reasons of being Permanently Disabled or for Cause. 7 (g) Date of Termination. "Date of Termination" means the last day the Executive is employed by the Company, provided that the Executive's employment is terminated in accordance with the foregoing provisions of this paragraph 3. 4. Rights Upon Termination. This paragraph 4 describes the payments and benefits to be provided to the Executive after his Date of Termination: (a) Payment of Previously Earned Amounts. The Executive shall receive payment of accrued but unpaid Salary, vacation pay, and a pro rata portion of his bonus (if any) for the period ending with the Date of Termination. (b) No Severance Payments. If the Executive's Date of Termination occurs because of his termination for Cause (paragraph 3(c)) or his resignation (paragraph 3(e)), then, except as otherwise expressly provided in this Agreement, no payments shall be due to the Executive under this Agreement for periods after the Date of Termination. (c) Salary Continuation. If the Executive's Date of Termination occurs during the Agreement Term because of his death (described in paragraph 3(a)), his Permanent Disability (described in paragraph 3(b)), or his constructive discharge (described in paragraph 3(d)), or because of discharge by the Company for reasons other than Cause (described in paragraph 3(f)), then the Executive (or his beneficiary, if applicable, in accordance with paragraph 4(f)) shall continue to receive Salary payments (at the rate in effect on the Date of Termination) in monthly or more frequent instalments through the earliest of: (i) the last day of the Agreement Term or (ii) the date, if any, of the breach by the Executive of the non-competition requirements of paragraph 8, the confidentiality requirements of paragraph 9 or the non-disparagement requirements of paragraph 10. (d) Other Programs. No benefits shall be payable to the Executive under any other severance pay arrangement or similar arrangement maintained by the Company or any Subsidiary. Except as otherwise expressly provided in this Agreement, no other payments or benefits shall be due to the Executive following the Date of Termination (except as otherwise specifically provided under the terms of an employee benefit plan or arrangement). (e) Accelerate Payment. At the discretion of the Board, with the consent of the Executive, the present value of any amount payable to or on behalf of the Executive (or his beneficiary) in accordance with this paragraph 4 may be paid to or on behalf of the Executive in a lump sum. The interest rate used in determining the present value shall be the interest rate on one- year United States Treasury Bills at the auction of such instruments nearest in time to the date of the Executive's Date of Termination. Notwithstanding the foregoing, if any amount is payable to the beneficiary of the Executive because the Executive's Date of Termination has occurred as a result of the 8 Executive's death, and at the discretion of the Board, such amount is to be paid as a lump sum, then the full amount payable on behalf of the Executive shall be paid to such beneficiary, unreduced to reflect the present value of the amount payable on behalf of the Executive. (f) Payment to Beneficiary. Any amounts payable to the Executive in accordance with this paragraph 4 that are not paid at the time of the Participant's death shall be paid at the time and in the form determined in accordance with the provisions of this Agreement, to the beneficiary designated by the Executive in writing filed with the Company in such form and at such time as the Board shall require. If the Executive failed to designate a beneficiary, or if the designated beneficiary of the deceased Executive dies before the Executive or before complete payment of the amounts payable under this Agreement, the Board shall direct that amounts to be paid under this Agreement be paid to the legal representative or representatives of the estate of the last to die of the Executive and his beneficiary. 5. Duties on Termination. Subject to the provisions of this Agreement, during the period beginning on the date of delivery of a notice of termination, and ending on the Date of Termination, the Executive shall continue to perform his duties as set forth in this Agreement, and shall also perform such services for the Company as are necessary and appropriate for a smooth transition to the Executive's successor, if any. Notwithstanding the foregoing provisions of this paragraph 5, the Company may suspend the Executive from performing his duties under this Agreement following the delivery of a notice of termination providing for the Executive's resignation, or delivery by the Company of a notice of termination providing for the Executive's termination of employment for any reason; provided, however, that during the period of suspension (which shall end on the Date of Termination), the Executive shall continue to be treated as employed by the Company for other purposes, and his rights to compensation or benefits shall not be reduced by reason of the suspension. 6. Change in Control. Upon a Change in Control, the Executive shall be treated for purposes of this Agreement as having had his employment terminated by the Company in accordance with paragraph 3(f), and the date of such Change in Control shall be the Executive's Date of Termination; provided, however, that in lieu of being paid salary continuation payments in accordance with paragraph 4(c) with respect to all amounts of Salary payable to the Executive, any Salary attributable to the period ending October 31, 2000 which has not yet been paid to the Executive shall be paid to the Executive in a lump sum, unreduced to reflect the present value of such amount, and the Salary otherwise payable to the Executive which is attributable to the period after October 31, 2000 shall be paid as salary continuation payments in accordance with paragraph 4(c); provided further, however, that the Executive may elect to receive the present value of those Salary amounts attributable to the period after October 31, 2000 in a lump sum. The interest rate used in determining the present value shall be the interest rate on one-year 9 United States Treasury Bills at the auction of such instruments nearest in time to the date of the Executive's Date of Termination (a) Change in Control. For purposes of this paragraph 6, "Change in Control" means a change in the beneficial ownership of the voting stock of the Holding Company or a change in the composition of the Board of the Holding Company which occurs as follows: (i) Any "person" (as such term is used in Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) is or becomes a beneficial owner, directly or indirectly, of stock of the Holding Company representing 50 percent or more of the total voting power of the Holding Company's then outstanding stock; or (ii) Individuals who were the nominees of the Board of Directors of the Holding Company for election as directors of the Holding Company immediately prior to a meeting of the shareholders of the Holding Company involving a contest for the election of directors shall not constitute a majority of the Board following the election. 7. Mitigation and Set-Off. The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise. The Company shall not be entitled to set off against the amounts payable to the Executive under this Agreement any amounts owed to the Company by the Executive, any amounts earned by the Executive in other employment after termination of his employment with the Company, or any amounts which might have been earned by the Executive in other employment had he sought such other employment. 8. Non-competition. While the Executive is employed by the Company, and during the Non-Competition Period (as defined below), the Executive agrees that he will not directly or indirectly: (a) provide Goods or perform Services (both as defined below) for the benefit of any Client (as defined below) except with respect to Goods provided or Services performed for the benefit of the Company or any Subsidiary, and except for Goods provided and Services otherwise performed at the written direction or with the written consent of the Board; (b) solicit, attempt to solicit, or endeavor to procure engagement, for himself or for any business (other than the Company and the Subsidiaries and, to the extent expressly 10 permitted or directed by the Board in writing, any other business), the opportunity to provide Goods or perform Services for any Client; or (c) divert or attempt to divert any business from the Company or any Subsidiary. For purposes of this paragraph 8: (i) "Goods" shall mean goods of the type provided in the ordinary course of business by the Company or any of the Subsidiaries during the period in which the Executive is employed by the Company. (ii) "Services" shall mean services of the type provided in the ordinary course of business by the Company or any of the Subsidiaries during the period in which the Executive is employed by the Company. (iii) "Client" shall mean any person to whom the Company or any Subsidiary has provided Goods or Services; provided, however, that for periods after the Executive's Date of Termination, the term "Client" shall be limited to those persons, (regardless of where located, and including, without limitation, businesses) to whom the Company or any Subsidiary has provided Goods or Services in the twelve-month period prior to the Date of Termination, and any person to whom (during the six-month period prior to the Date of Termination) the Company or any Subsidiary has devoted material efforts to obtaining as a purchaser of its Goods or Services. (iv) "Non-Competition Period" shall be determined as follows: (A) If the Executive's Date of Termination occurs under circumstances other than those described in paragraph 3(d) (relating to constructive discharge) or paragraph 3(f) (relating to certain terminations by the Company), the Non- Competition Period shall be the period beginning on the Date of Termination, and ending on the twenty-four-month anniversary of the Date of Termination. (B) If the Executive's Date of Termination occurs under circumstances described in paragraph 3(d) (relating to constructive discharge) or paragraph 3(f) (relating to certain terminations by the Company), the Non-Competition Period shall be the period beginning on the Date of Termination, and ending on the earlier to occur of the last day of the Agreement Term or the twenty-four-month anniversary of the Date of Termination. However, under this paragraph (B), the Company, in its 11 discretion, by notice provided to the Executive not later than 15 days after the Date of Termination, may extend the Non- Competition Period beyond the end of the Agreement Term, to a date specified in such notice (but not later than the twenty- four-month anniversary of the Date of Termination), but only if the Company agrees to provide the Salary Continuation Payments during such Non-Competition Period. Nothing in this paragraph 8, paragraph 9 or paragraph 10 shall be construed as limiting the Executive's duty of loyalty to the Company while he is employed by the Company or any other duty he may otherwise have to the Company while he is employed by the Company. 9. Confidential Information. Except as may be required by the lawful order of a court or agency of competent jurisdiction, or except to the extent that the Executive has express authorization from the Company, the Executive agrees to keep secret and confidential indefinitely all non-public information (including, without limitation, information regarding litigation and pending litigation) concerning the Company and the Subsidiaries which was acquired by or disclosed to the Executive during the course of his employment with the Company, or during the course of his consultation with the Company following his termination of employment (regardless of whether consultation is pursuant to paragraph 11), and not to disclose the same, either directly or indirectly, to any other person, firm, or business entity, or to use it in any way. To the extent that the Executive obtains information on behalf of the Company or any of the Subsidiaries that may be subject to attorney-client privilege as to the Company's attorneys, the Executive shall take reasonable steps to maintain the confidentiality of such information and to preserve such privilege. Nothing in the foregoing provisions of this paragraph 9 shall be construed so as to prevent the Executive from using, in connection with his employment for himself or an employer other than the Company or any of the Subsidiaries, knowledge which was acquired by him during the course of his employment with the Company and the Subsidiaries, and which is generally known to persons of his experience in other companies in the same industry. 10. Non-Disparagement. The Executive agrees that, while he is employed by the Company, and after his Date of Termination, he shall not make any false, defamatory or disparaging statements about the Company, the Subsidiaries, or the officers or directors of the Company or the Subsidiaries that are reasonably likely to cause material damage to the Company, the Subsidiaries or the officers or directors of the Company or the Subsidiaries. While the Executive is employed by the Company, and after his Date of Termination, the Company agrees, on behalf of itself and the Subsidiaries, that neither the officers nor the directors of the Company or the Subsidiaries shall make any false, defamatory or disparaging statements about the Executive that are reasonably likely to cause material damage to Executive. 12 11. Defense of Claims. The Executive agrees that, for the period beginning on the Effective Date, and continuing for a reasonable period after the Executive's termination of employment with the Company, the Executive will cooperate with the Company in defense of any claims that may be made against the Company, and will cooperate with the Company in the prosecution of any claims that may be made by the Company, to the extent that such claims may relate to services performed by the Executive for the Company. The Executive agrees to promptly inform the Company if he becomes aware of any lawsuits involving such claims that may be filed against the Company. The Company agrees to reimburse the Executive for all of the Executive's reasonable out-of-pocket expenses associated with such cooperation, including travel expenses. For periods after the Executive's employment with the Company terminates, the Company agrees to provide reasonable compensation to the Executive for such cooperation. 12. Remedies. The Executive acknowledges that the Company would be irreparably injured by a violation of paragraph 8, paragraph 9, or paragraph 10, and he agrees that the Company, in addition to any other remedies available to it for such breach or threatened breach, shall be entitled to a preliminary injunction, temporary restraining order, or other equivalent relief, restraining the Executive from any actual or threatened breach of either paragraph 8, paragraph 9 or paragraph 10. The Company acknowledges that the Executive would be irreparably injured by a violation of paragraph 10, and the Company agrees that the Executive, in addition to any other remedies available to him for such breach or threatened breach, shall be entitled to a preliminary injunction, temporary restraining order, or other equivalent relief, restraining the Company from any actual or threatened breach of paragraph 10. If a bond is required to be posted in order for the Company or the Executive to secure an injunction or other equitable remedy, the parties agree that said bond need not be more than a nominal sum. 13. Nonalienation. The interests of the Executive under this Agreement are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors of the Executive or the Executive's beneficiary. 14. Amendment. This Agreement may be amended or canceled only by mutual agreement of the parties in writing without the consent of any other person. So long as the Executive lives, no person, other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof. 15. Applicable Law. The provisions of this Agreement shall be construed in accordance with the laws of Bermuda, without regard to the conflict of law provisions of any jurisdiction. All disputes shall be arbitrated or litigated (whichever is applicable) in Bermuda. 16. Severability. The invalidity or unenforceability of any provision of this Agreement will not affect the validity or enforceability of any other provision of this Agreement, and this 13 Agreement will be construed as if such invalid or unenforceable provision were omitted (but only to the extent that such provision cannot be appropriately reformed or modified). 17. Waiver of Breach. No waiver by any party hereto of a breach of any provision of this Agreement by any other party, or of compliance with any condition or provision of this Agreement to be performed by such other party, will operate or be construed as a waiver of any subsequent breach by such other party or any similar or dissimilar provisions and conditions at the same or any prior or subsequent time. The failure of any party hereto to take any action by reason of such breach will not deprive such party of the right to take action at any time while such breach continues. 18. Successors. This Agreement shall be binding upon, and inure to the benefit of, the Company and its successors and assigns and upon any person acquiring, whether by merger, consolidation, purchase of assets or otherwise, all or substantially all of the Company's assets and business. 19. Notices. Notices and all other communications provided for in this Agreement shall be in writing and shall be delivered personally or sent by registered or certified mail, return receipt requested, postage prepaid, or sent by facsimile or prepaid overnight courier to the parties at the addresses set forth below (or such other addresses as shall be specified by the parties by like notice). Such notices, demands, claims and other communications shall be deemed given: (a) in the case of delivery by overnight service with guaranteed next day delivery, the next day or the day designated for delivery; (b) in the case of certified, registered or similar mail delivery, five days after deposit in the local mail; or (c) in the case of facsimile, the date upon which the transmitting party received confirmation of receipt by facsimile, telephone or otherwise; provided, however, that in no event shall any such communications be deemed to be given later than the date they are actually received. Communications that are to be delivered by the mail or by overnight service are to be delivered to the addresses set forth below: to the Company: LaSalle Re Limited P.O. Box HM 1502 Hamilton HMFX - Bermuda 14 or to the Executive: Victor H. Blake 802 St. James Court Flatts Village Hamilton Parish FL04 Bermuda with copy to: Victor H. Blake Knights Mead Broad Highway Cobham, Surrey KT11 2RR England All notices to the Company shall be directed to the attention of the chief financial officer of the Company, with a copy to the Secretary of the Company. Each party, by written notice furnished to the other party, may modify the applicable delivery address, except that notice of change of address shall be effective only upon receipt. 21. Arbitration of All Disputes. In the event of any dispute, controversy or claim arising out of or in relation to this Agreement, or the breach, termination or invalidity thereof, the parties hereto agree to proceed to arbitration. The number of arbitrators shall be three (3), to be appointed in the absence of the parties agreement by the Appointment Committee of the Chartered Institute of Arbitrators Bermuda Branch. The procedure to be followed shall be that as laid down in the Arbitration Act of 1986. The place of arbitration shall be Bermuda and the language of the arbitration shall be English. The decision and award of the arbitral tribunal is final and binding on the parties. For the avoidance of doubt, the parties agree that judgment may be entered and any award made by the Tribunal in any Federal Court in the United States (or any other jurisdiction where a party to this agreement is located). 22. Survival of Agreement. Except as otherwise expressly provided in this Agreement, the rights and obligations of the parties to this Agreement shall survive the termination of the Executive's employment with the Company. 23. Entire Agreement. Except as otherwise noted herein, this Agreement, including any Exhibit(s) attached hereto, constitutes the entire agreement between the parties concerning the subject matter hereof and supersedes all prior and contemporaneous agreements, if any, between the parties relating to the subject matter hereof. The enforceability of this Agreement shall not 15 cease or otherwise be adversely affected by the termination of the Executive's employment with the Company. 24. Acknowledgment by Executive. The Executive represents to the Company that he is knowledgeable and sophisticated as to business matters, including the subject matter of this Agreement, that he has read this Agreement and that he understands its terms. The Executive acknowledges that, prior to assenting to the terms of this Agreement, he has been given a reasonable time to review it, to consult with counsel of his choice, and to negotiate at arm's-length with the Company as to the contents. The Executive and the Company agree that the language used in this Agreement is the language chosen by the parties to express their mutual intent, and that no rule of strict construction is to be applied against any party hereto. IN WITNESS THEREOF, the Executive has hereunto set his hand, and the Company has caused these presents to be executed in its name and on its behalf, and its corporate seal to be hereunto affixed, all as of the day and year first above written. /s/ Victor H. Blake --------------------------------------- Victor H. Blake LASALLE RE LIMITED By /s/ Clement S. Dwyer, Jr. ------------------------------------ Chairman, Compensation Committee ATTEST: 16 EXHIBIT A --------- BONUS COMPUTATION ----------------- A-1. Purpose. This Exhibit A is attached to and forms a part of the employment agreement (the "Agreement") between Victor H. Blake (the "Executive") and LaSalle Re Holdings Limited (the "Company"). The purpose of this Exhibit A is to set forth the terms of the bonus program described in paragraph 2(b) of the Agreement. A-2. Guidelines. The bonus shall be determined in accordance with the following guidelines: . A discretionary bonus may be awarded annually in the discretion of the Board of the Company, after considering the recommendation of the Compensation Committee of the Board. . A non-discretionary bonus shall be earned and paid annually based upon the Company's Return on Equity (defined below) achieved for each fiscal year of the Company while the Executive is employed by the Company; provided however, that no bonus shall be payable for fiscal years ending after September 30, 1999. . The non-discretionary annual bonus calculation will be based on the Company's Return on Equity earned each year. If the Company's Return on Equity for any year exceeds 10%, the bonus will be paid according to the following formula: . For each 1% improvement in Return on Equity above 10%, an amount equal to 10.0 % of The Executive's Salary will be paid. . For each 1% improvement in Return on Equity above 22.5%, an amount equal to 15.0 % of The Executive's Salary will be paid. . For Return on Equity results between whole percentages (but above 10%), the percentage of Salary awarded will be increased by interpolation. . The " Return on Equity" for any fiscal year shall be equal to the net income of the Company for the fiscal year, divided by shareholders' equity at the beginning of the period (as determined on the basis of U.S. generally accepted accounting principles). For purposes of this calculation any 17 unrealized appreciation or depreciation of the Company's investments shall be disregarded (both as to the numerator and the denominator). In addition, payments made to CNA Financial Corporation or its affiliates under the Underwriting Support Services Agreement will not reduce net income in determining the Return on Equity. 18 EXHIBIT B --------- STOCK APPRECIATION RIGHTS ------------------------- B-1. Purpose. This Exhibit B is attached to and forms a part of the employment agreement (the "Agreement") between Victor H. Blake (the "Executive") and LaSalle Re Holdings Limited (the "Company"). The purpose of this Exhibit B is to set forth the terms of the stock appreciation rights award described in paragraph 2(c) of the Agreement. B-2. Agreement. The Executive shall be entitled to receive a stock appreciation rights award from the Company under an agreement that is substantially in the form of the Stock Appreciation Rights Agreement set forth below. 19 STOCK APPRECIATION RIGHTS AGREEMENT This AGREEMENT made as of this 1st day of April, 1994 (this "Agreement") is among LaSalle Re Limited, a company incorporated and organized under the laws of Bermuda (the "Company"), and Victor H. Blake (the "Executive"). W I T N E S E T H: ----------------- WHEREAS, pursuant to the Employment Agreement dated April 1, 1994 between the Company and the Executive, the Company wishes to grant stock appreciation rights ("SARs") to the Executive upon the terms and conditions set forth herein. NOW, THEREFORE, the Executive and the Company agree as follows: 1. Definitions. As used in this Agreement, the following terms shall have the meanings set forth below: (A) "Affiliate" shall mean, with respect to any specified Person, a Person that directly or indirectly controls, is controlled by or is under common control with such Person. (B) "Base Value" shall mean U.S. $100, except as may be adjusted pursuant to Section 5. (C) "Common Shares" shall mean the common shares of the Company, par value U.S. $1.00 per share. (D) "Extraordinary Transaction" shall mean each of the following transactions: (i) any amalgamation of the Company with any Person if the Company shall not be the continuing or surviving corporation of such amalgamation excluding an amalgamation in which the Holders of the outstanding Shares immediately before the amalgamation own more than 50% of the outstanding shares and voting power of the surviving corporation in substantially the same proportions; (ii) any amalgamation of the Company with any Person if the Company shall be the continuing or surviving corporation but, in connection with such amalgamation, the Shares shall be changed into or exchanged for shares or other securities of any other Person or cash or any other property excluding an amalgamation in which the holders of the outstanding Shares immediately before the amalgamation own more than 50% of the outstanding shares and voting power of the surviving corporation in substantially the same proportions; (iii) any transfer by the Company of all or substantially all of its properties or assets to any other Person; (iv) any transaction whereby any Person other than Combined Insurance Company of America, Virginia Surety Company, Inc. Union Fidelity Life Insurance Company, Aon Risk Consultants (Bermuda) Ltd., Continental Casualty Company, CNA Services (Bermuda) Ltd., Corporate Partners L.P., Corporate Offshore Partners L.P., State Board Administration of Florida, Blackstone LR Capital Partners II L.P., Blackstone Offshore Partners L.P., Blackstone Family Investment Partnership (Cayman) L.P., Apollo LS Holdings LDC, FIMA Finance Management Inc., SDI Inc., Thomas H. Lee Equity Partners, L.P., THL-CCI Investors Limited Partnership, Strome Offshore Limited, Strome Partners L.P., Perry Partners L.P., Perry Partners International Inc. or Engineers Joint Pension Fund becomes the Owner (as defined below) of at least 50% of the aggregate number of Shares issued and outstanding on the date of such transaction on a Fully Diluted Basis. For the purpose of this Section 1(C)(iv), "Owner" shall mean any Person that individually or with or through any of its Affiliates beneficially owns Shares, directly or indirectly; or has the right to acquire Shares (whether such right is exercisable immediately or only after the passage of time); or has the right to vote Common Shares except if this Person's right to vote Common Shares arises solely from a revocable proxy; or has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting (except voting pursuant to a revocable proxy) or disposing of Shares with any other Person that beneficially owns, or whose Affiliates beneficially own, directly or indirectly, Shares; provided, however, that no transaction shall be considered an Extraordinary Transaction if it is intended by the Board of Directors to create a holding company in connection with an initial public offering. (E) "Fair Market Value" of Special Non-Voting Shares, for the purpose of any computation of SAR Value on a specified date, shall be the value determined for such a date in good faith by the Board of Directors of the Company, but shall be based on the market price of the Special Non-Voting Shares or Common Shares if they are publicly traded. The determination of the Fair Market Value of such Special Non-Voting Shares made by the Board of Directors shall be final. The calculation of the Fair Market Value of the Special Non-Voting Shares made by the Board of Directors shall not include any discount relating to the absence of a public trading market for, or any transfer restrictions on, the Special Non-Voting Shares. (F) "Fully Diluted Basis" shall mean as of any date the aggregate number of Shares that would be issued and outstanding on such date assuming that all options, including the Options, warrants and other rights to purchase Shares and all securities convertible into or exchangeable 2 for Shares issued and outstanding on such date of exercise shall have been exercised, converted or exchanged, as the case may be, on such date. (G) "Holding Company" shall have the meaning given such term in Section 5(C) hereof. (H) "Members" shall have the meaning given such term in the Bye-laws. (I) "Options" shall mean the Options to purchase Special Non-Voting Shares granted to the Optionholders pursuant to the Option Agreement between the Company and the Optionholders dated November 22, 1993. (J) "Person" shall mean an individual, trust, estate, partnership, association, company or corporation. (K) "SAR Value" shall mean, subject to adjustments in Section 5, as of any date an amount equal to (i) the Fair Market Value of a Special Non-Voting Share as of that date minus (ii) the Base Value. (L) "Shareholders Agreement" shall mean the Shareholders Agreement dated as of November 22, 1993 among the Company and the Persons named therein, as amended, supplemented, restated or otherwise modified from time to time. (M) "Shares" shall mean any share in the share capital of the Company. (N) "Subsidiary" of a Person shall mean (i) a corporation in which more than 50% of the issued and outstanding shares in the share capital entitled to vote for the election of directors is at the time owned, directly or indirectly, by such Person, or (ii) a partnership or other entity in which more than 50% of the voting power is at the time held, directly or indirectly, by such Person. (O) "Target Rate of Return" shall be considered to have been met, with respect to any date, if the Company's financial performance from November 22, 1993 through the date for which the calculation is being made, based on book value per share on that date (as determined on the basis of U.S. generally accepted accounting principles) plus all dividends paid since November 22, 1993, when compared to the initial amount invested, reflects a cumulative internal rate of return equal to or in excess of the internal rate of return set forth in the table under Section 2(B). For purposes of this calculation all per share amounts will be adjusted to reflect any stock splits, stock dividends or similar reclassifications. If the Company adopts a holding company structure the Company and the holding company shall be considered on a consolidated basis for purposes of determining whether the Target Rate of Return has been met. 2. Terms of the SARs. 3 (A) In consideration of the entering into of the Employment Agreement and for other value received, receipt of which is hereby acknowledged, the Company, subject to the terms and conditions of this Agreement, hereby grants to the Executive 56,812 SARs. (B) Subject to Section 2(F), the Executive may exercise that percentage of Executive's SARs indicated in the table below, in whole or in part, from time to time during the period commencing on the day following the last day of the first, if any, of fiscal years 1996 through 1999 in which as of the last day of such fiscal year the Target Rate of Return indicated on the table below has been met and ending at March 30, 2004 or, if earlier, two years after the Executive's termination of employment (the "SAR Period"); however, once a given percentage of SARs shall become exercisable by reason of the achievement of a particular rate of return, a subsequent reduction in cumulative rate of return for a period ending on December 31 of a later year will not serve to reduce the percentage of SARs that are exercisable. Upon the expiration of the SAR Period, the Executive shall cease to have any rights in respect of his SARs, except that the SARs will be exercisable after the termination of the Executive's employment to the extent that they are exercisable immediately prior to the date of termination. To the extent that the right to exercise the SARs is not earned by reason of termination of employment, the right to exercise shall be forfeited regardless of the reason for the termination.
==================================================================================================== SARs SARs SARs If the Earned Earned Earned Internal Rate After After After of Return is: 12/31/96 12/31/97 12/31/98 - ---------------------------------------------------------------------------------------------------- Less than 18% 0% 0% 0% - ---------------------------------------------------------------------------------------------------- Greater than 18% and 20% 27% 33% less than 25% - ---------------------------------------------------------------------------------------------------- Greater than 25% and 40% 53% 57% less than 27% - ---------------------------------------------------------------------------------------------------- Greater than 27% 60% 80% 100% ====================================================================================================
(C) If the Target Rate of Return has not been met as of the last day of fiscal year 1999 or as of the last day of at least one of the previous three fiscal years, the Executive shall cease to have any rights under this Agreement. (D) The Executive shall not, solely by virtue of this Agreement, be entitled to any rights of a Member of the Company either at law or in equity. (E) At its option, the Executive may return to the Company for cancellation all or a portion of its SARs. 4 (F) Notwithstanding the provisions of Section 2(B), in the event of any Extraordinary Transaction and provided that on the date of such Extraordinary Transaction the Target Rate of Return has been met, the Executive shall have the right to exercise its SARs, in whole or in part, at any time and from time to time during the period commencing concurrently with and subject to the closing of such Extraordinary Transaction and ending on November 22, 2003 (also the "SAR Period"). At any time during the SAR Period and on or after the date of the Extraordinary Transaction, if the Executive exercises its SARs, the Executive shall be entitled to receive the kind and amount of shares, other securities, cash or other property that the Executive would have owned or have been entitled to receive after the occurrence of such Extraordinary Transaction had the Executive owned an amount of Special Non-Voting Shares equal to his number of SARs prior to such Extraordinary Transaction, including the exercise by the Executive of any rights of election provided to holders of Special Non-Voting Shares as to the kind or amount of shares, securities, cash or other property receivable in connection with such Extraordinary Transaction, as the case may be. (G) Any determination by the Board of Directors, acting in good faith, as to whether the Target Rate of Return has been met shall be final. Following any such determination that the Target Rate of Return has been met, the Company shall provide prompt written notice to the Executive of the commencement of the SAR Period. 3. Notices of Extraordinary Transactions and Exercise Notice. The Company shall provide the Executive with written notice of the occurrence of an Extraordinary Transaction no later than five (5) business days after such Extraordinary Transaction has occurred or, in the event of an Extraordinary Transaction described in Section 1(D)(iv), not later than five (5) business days after the Company first becomes aware of such Extraordinary Transaction. 4. Payment on Exercise of SAR. (A) In order to exercise any of the SARs, the Executive shall provide written notice (the "Exercise Notice") to the Company specifying the number of SARs being exercised and the date that the SARs will be exercised (the "Exercise Date"). (B) Upon receipt of the Exercise Notice by the Company, for each SAR exercised by the Executive, subject to Section 4(C) the Executive shall be entitled to a cash payment equal to the SAR Value as of the Exercise Date, without regard to changes in the Fair Market Value of a share of the Company occurring after the Exercise Date. The cash amount payable with respect to the exercise of a SAR under this Section 4 shall be made, without interest, as soon as practicable after the later of the date the SAR is exercised or the date on which the SAR Value has been determined. The Company shall take all reasonable steps to pay amounts due with respect to the exercise of a SAR not later than 10 days after the Exercise Date; provided, however, that when funds are not legally available to pay amounts due under this 5 Section 4 (or if the amount of the cash payment would not have been legally available to be paid as a dividend), the Executive shall be entitled to payment only as described in Section 4(C). (C) Notwithstanding the foregoing, upon the exercise of any or all SARs, instead of making a cash payment equal to the SAR Value the Company in its sole discretion may elect to: (i) issue to the Executive a number of Special Non-Voting Shares equal to the aggregate SAR Value divided by the Fair Market Value of a Special Non-Voting Share or (ii) require payment by the Executive of the Base Value for each SAR exercised and issue to the Executive a number of Special Non- Voting Shares equal to the number of SARs exercised. 5. Adjustment of the Number of SARs and of the SAR Value. (A) In the event that the Company shall at any time after the date hereof (i) declare or pay a dividend in Shares or make any other distribution in Shares such that the number of Shares issued and outstanding is increased, (ii) subdivide or split its issued and outstanding Shares, such that the number of Shares issued and outstanding is increased, (iii) combine its issued and outstanding Shares into a smaller number of Shares, (whether by reverse share split or otherwise) or (iv) issue any Shares in a reclassification of the Shares (including any such reclassification in connection with a merger, consolidation or amalgamation in which the Company is the surviving corporation), the number of SARs shall be proportionately adjusted on a pro rata basis so that the ratio of aggregate number of outstanding SARs to outstanding Shares shall not change. Adjustments made pursuant to this Section 5(A) shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. (B) In the event that the Company shall issue rights, options, warrants or convertible securities to all holders of its issued and outstanding Shares, entitling them to subscribe for or purchase or convert such convertible securities into Shares at a price per Share that is lower on the record date mentioned below than the then Fair Market Value of the Special Non-Voting Shares, the number of SARs owned by the Executive shall be adjusted by multiplying his number of SARs by a fraction, (i) of which the numerator shall be the sum of (A) the number of Shares issued and outstanding on the record date for determining Members entitled to receive such rights, options, warrants or convertible securities plus (B) the number of additional Shares offered for subscription or purchase or upon conversion, and (ii) of which the denominator shall be the sum of (A) the number of Shares issued and outstanding on the record date for determining Members entitled to receive such rights, options, warrants or convertible securities plus (B) the number of shares that the aggregate offering price of the total number of Shares so offered would purchase at the Fair Market Value per Share at such record date. Such adjustment shall be made whenever such rights, options, warrants or convertible securities are 6 issued, and shall become effective immediately after the record date for the determination of Members entitled to receive such rights, options, warrants or convertible securities. (C) In the event that the Company shall form or cause to be formed a holding company or a parent company for the Company (a "Holding Company") and all or substantially all of the shares in the share capital of the Holding Company shall be distributed to all holders of Shares in exchange for their Shares or otherwise, the SAR Value shall be equal to (i) the Fair Market Value of the number of shares in the share capital of the Holding Company that a holder of a Special Non-Voting Share was entitled to receive after such distribution minus (ii) the Base Value. (D) Whenever the number of SARs is adjusted as provided in this Section 5, the Base Value shall be adjusted by multiplying the Base Value immediately prior to such adjustment by a fraction, (i) of which the numerator shall be the number of SARs outstanding prior to such adjustment and (ii) of which the denominator shall be the number of SARs outstanding immediately thereafter. (E) Except in the case of a distribution to the holders of Shares payable (i) in Shares, in accordance with Section 5(A) hereof, (ii) in shares of the share capital of a Holding Company pursuant to Section 5(C) or (iii) in dividends declared by the Board to be "regular dividends" and which are paid in cash in an amount per share which, when added to the value of all cash dividends previously paid within the same fiscal year, does not exceed 5% of the average book value per share for the prior four quarters (as determined on the basis of U.S. generally accepted accounting principles), the Base Value of each outstanding SAR shall be reduced by the per share amount of all dividends or distributions paid or declared by the Company prior to the exercise of the SARs; provided, however, that in no event shall the Base Value be reduced below the par value of the Common Shares. (F) No adjustment in the number of SARs need be made under Section 5(B) if ------------ the Company issues or distributes, pursuant to this Agreement, to the Executive the shares, rights, options, warrants, securities or assets that the Executive would have been entitled to receive had the Executive owned Special Non-Voting Shares in an amount equal to its number of SARs prior to the event or the record date with respect thereto. No adjustment need be made for a change in the par value of any of the Shares. (G) For the purpose of this Section 5 and the definition of SAR Value in Section 1(J), the term "Shares" shall mean (i) the Shares at the date of this Agreement or (ii) any other class of shares in the share capital of the Company resulting from successive changes or reclassification of such shares consisting solely of changes in par value. (H) In the case of Section 5(B) hereof, upon the expiration of any rights, options, warrants or convertible securities or if any rights, options, warrants or convertible securities shall not have been exercised or converted, the number of SARs held by the Executive shall, upon such expiration, be readjusted and shall thereafter be such as they would have been had they 7 been originally adjusted (or had the original adjustment not been required, as the case may be) as if (A) the only Shares so issued were the Shares, if any, actually issued or sold upon the exercise of such rights, options or warrants or the conversion of such convertible securities and (B) such Shares, if any, were issued or sold for the consideration actually received by the Company upon such exercise or conversion plus the aggregate consideration, if any, actually received by the Company for the issuance, sale or grant of all such rights, options, warrants or convertible securities whether or not exercised; provided, further, that no such readjustment shall have the effect of decreasing the number of SARs held by the Executive by an amount in excess of the amount of the adjustment initially made in respect to the issuance, sale or grant or such rights, options, warrants or convertible securities. (I) In the case of Section 5(B) hereof, on any change in the number of Shares deliverable upon exercise of any such rights, options, warrants or convertible securities, other than a change resulting from the antidilution provisions hereof, the number of SARs held by the Executive shall forthwith be readjusted to such number as would have been obtained had the adjustment made upon the issuance of such rights, options, warrants or convertible securities not converted prior to such change (or rights, options, warrants or convertible securities related to such securities not converted prior to such change) been made upon the basis of such change. 6. No Fractional Shares In the event that the Company decides to pay the SAR Value as provided in Section 4(C), the Company shall not be required to issue a fractional Share. If any fractional interest in a Share would be deliverable upon the exercise of any of the SARs, in whole or in part, but for the provisions of this Section, the Company, in lieu of delivering any such fractional Share therefor, shall pay a cash adjustment therefor in an amount equal to the book value per Share at the end of the most recent fiscal quarter multiplied by the fraction of the Share that would otherwise have been issued hereunder. 7. Issuance of Certificates In the event that the Company decides to pay the SAR Value as provided in Section 4(C), the issuance of certificates upon the exercise of the SARs, in whole or in part, shall be without additional charge to the Executive. The Company shall pay and indemnify the Executive from and against any issuance, stamp, documentary or other similar taxes (other than transfer taxes) or charges imposed by any governmental body, agency or official by reason of the exercise of the SARs, in whole or in part, or the resulting issuance of Special Non- Voting Shares. Each certificate representing the Special Non-Voting Shares so issued shall (unless its transfer is not restricted under the Bye-laws of the Company), be stamped or otherwise imprinted with a legend in substantially the form set forth in the Shareholders Agreement. 8. Issuance of Certificates 8 In the event that the Company decides to issue Special Non-Voting Shares upon the exercise of any SAR as provided in Section 4(C), such Special Non- Voting Shares shall be subject, among others, to the provisions of Bye-law 50 (repurchase of Shares by Company or its Assignee(s)). 9. Restriction on Transfer of the SARs and Certain Special Non-Voting Shares. (A) In the event that the Company decides to issue Special Non-Voting Shares upon the exercise of any SAR as provided in Section 4(C), such Special Non-Voting Shares shall be subject, among others, to the provisions relating to restrictions on stock ownership set forth in the Bye-laws and in the Shareholders Agreement. The Executive agrees to execute the Shareholders Agreement in such event. (B) The transfer, in whole or in part, of the Special Non-Voting Shares issued upon the exercise of any SAR shall be subject to the terms and conditions applicable to any transfer of Shares provided by the Bye-laws (as amended), the Shareholders Agreement (as amended) and this Agreement. 10. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of Bermuda, without regard to principles regarding conflicts of laws. 11. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed, unless otherwise specified herein, to have been duly given if given in person or otherwise communicated or sent by mail, courier service, cable, telex, telecopier, facsimile or other mode of representing words in a legible and non-transitory form if to the Executive at: 802 St. James Court, Flatts Village, Hamilton Parish FLO4, Bermuda and if to the Company at P.O. Box HM 1502, Hamilton HM CX, Bermuda, Attention: Secretary, or such other address as the Company may have furnished to the Members and Executive in writing; provided, however, that if such notice is sent by next-day courier it shall be deemed to have been given the day following sending and, if by registered mail, five days following the sending. 12. Severability. Any provision of this Agreement that is prohibited, unenforceable or not authorized in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition, unenforceability or lack of authorization without invalidating the remaining provisions hereof or affecting the validity, unenforceability or legality of such provision in any other jurisdiction. 13. Binding Effect; Benefit. 9 This Agreement shall inure to the benefit of and be binding upon the parties hereto, and their respective successors, legal representatives and permitted assigns. Nothing in this Agreement, expressed or implied, is intended to confer on any Person other than the parties hereto, and their respective successors, legal representatives and permitted assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement. 14. Headings. The headings contained in this Agreement are for convenience only and shall not affect the meaning or interpretation of this Agreement. * * * * * IN WITNESS WHEREOF, the parties hereto have executed this Agreement under seal as of the date first above written. LASALLE RE LIMITED By: ------------------------------------------- Name: Title: - ---------------------------------------------- Victor H. Blake 10 EX-10.10 3 EMPLOYMENT AGREEMENT 03/01/99 CUTHBERT & LASALLE EXHIBIT 10.10 EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT, made and entered into as of March 1, 1999 (the "Effective Date"), by and between Robert P. Cuthbert (the "Executive") and LaSalle Re Limited (the "Company"); WITNESSETH THAT: --------------- WHEREAS, the parties desire to enter into this Agreement pertaining to the employment of the Executive by the Company; NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth below, it is hereby covenanted and agreed by the Executive and the Company as follows: 1. Performance of Services. The Executive's employment with the Company shall be subject to the following: (a) Subject to the provisions of this Agreement, the Company hereby agrees to employ the Executive as the Senior Vice President, Chief Financial Officer and Treasurer of the Company and LaSalle Re Holdings Limited (the "Holding Company") during the Agreement Term (as defined below), and the Executive hereby agrees to remain in the employ of the Company during the Agreement Term. (b) During the Agreement Term, while the Executive is employed by the Company, the Executive shall devote, subject to paragraph 1(f), his full time, energies and talents to performing his duties under this Agreement. (c) The Executive agrees that he shall perform his duties faithfully and efficiently subject to the directions of the Board of Directors (the "Board") and the Chief Executive Officer (the "CEO") of the Company. The Executive's duties may include providing services for the Company, the Holding Company, and the Subsidiaries (as defined below), as determined by the CEO; provided that the Executive shall not, without his consent, be assigned tasks that would be inconsistent with his position at the Company. The Executive will have such authority and power as are inherent to the undertakings applicable to his position and necessary to carry out his responsibilities and the duties required of him hereunder. (d) While the Executive is employed by the Company, he shall be subject to the duties that reasonably apply to the Company's officers and employees (including, without limitation, the duty of loyalty to the Company). (e) The Company may change the Executive's title and duties in the event of reorganization, restructuring, or similar circumstances, except that the Executive shall have a senior executive position at all times during the Agreement Term while he is employed by the Company. (f) Notwithstanding the foregoing provisions of this paragraph 1, during the Agreement Term, the Executive may devote reasonable time to activities other than those required under this Agreement, including the supervision of his personal investments, and activities involving professional, charitable, educational, religious and similar types of organizations, speaking engagements, membership of the boards of directors of other organizations, and similar type of activities, to the extent that such other activities do not inhibit or prohibit the performance of the Executive's duties under this Agreement, or conflict in any material way with the business of the Company, the Holding Company, or any Subsidiary; provided, however, that except as otherwise expressly provided in this Agreement, the Executive shall not serve on the board of any business, or hold any position with any business without the consent of the Board and the CEO of the Company. (g) The Executive will be required to maintain a residence in Bermuda while employed by the Company. (h) The Company will use its reasonable best efforts to maintain a Bermuda work permit for the Executive. The Executive shall cooperate with the Company and the appropriate authorities in maintaining such permit. The Executive's employment by the Company is conditioned upon the Company's ability to keep current all required work permits, and except as otherwise provided in this paragraph 1(h), the Company shall have no further obligation to the Executive if, after employing its reasonable best efforts, it is unable to maintain such permits. If despite the Company's best efforts to maintain the Bermuda work permit, the work permit is terminated or revoked by the Government of Bermuda through no fault of the Executive, then the Executive shall be deemed to have received written notice from the Company that his Date of Termination is the date on which the termination or revocation of his or her work permit is effective, and the Executive shall be entitled to the benefits provided for Termination by the Company under Section 3(g). In addition, the Company shall reimburse the Executive for reasonable costs actually incurred by the Executive and the members of his or her immediate family to relocate to the nation in which the Executive maintains citizenship; provided, however, that such reimbursement shall be made only if such relocation occurs within a reasonable time following such Date of Termination. The reasonableness of the cost and time of relocation shall be determined by the Board. (i) Subject to the provisions of this Agreement, the Executive shall not be required to perform services under this Agreement during any period that he is Disabled. The Executive shall be considered "Disabled" during any period in which he has a physical or mental disability which renders him incapable, after reasonable accommodation, of performing his duties under this Agreement. In the event of a dispute as to whether the Executive is Disabled, the Company may refer the same to a licensed practicing physician of the Company's choice, and the Executive agrees to submit to such tests and examination as such physician shall deem appropriate. (j) The "Agreement Term" shall be the period beginning on the Effective Date and ending on the third anniversary of the Effective Date; provided, however, that beginning on the 2 second anniversary of the Effective Date, such Agreement Term shall automatically be renewed daily, such that at any time on or after the second anniversary of the Effective Date, the remaining term shall equal one year. However, such additional day-to-day renewals may be terminated by either party be delivering written notice of such termination to the other party, in accordance with the requirements of paragraph 18. The cessation of the automatic renewals shall be effective on the date such written notice is deemed to be given to the other party in accordance with paragraph 18, such that the Agreement Term shall end on the one-year anniversary of the date such written notice is deemed given to the other party. For purposes of this Agreement, a Notice of Termination, as described in paragraph 3(i), shall be deemed to be a notice to terminate day-to-day renewals. (k) For purposes of this Agreement, the term "Subsidiary" shall mean any company (regardless of whether incorporated) during any period in which 50% or more of the total combined voting power of all classes of stock (or other ownership interest) entitled to vote is owned, directly or indirectly, by the Company. 2. Compensation. Subject to the provisions of this Agreement, during the Agreement Term, while he is employed by the Company, the Company shall compensate the Executive for the Executive's services as follows: (a) Salary. The Executive shall receive, for each 12-consecutive month period beginning on the Effective Date and each anniversary thereof, in substantially equal monthly or more frequent installments, an annual base salary of $300,000 (the "Salary"). In no event shall the Salary of the Executive be reduced to an amount that is less than the amount specified in this paragraph (a), except to the extent that reductions of the same percentage are being made at the same time to the salaries of all other Company officers in the corporate office at or above the vice-president level, and such Salary shall be restored to its prior level when, and to the same extent, as the restoration that applies to the other officers. (b) Bonus. The Executive shall be entitled to receive bonuses from the Company in accordance with the provisions of Exhibit A, which is attached to and forms a part of this Agreement. Notwithstanding the foregoing, but subject to this paragraph 2(b), for the fiscal year ended September 30, 1999, the Executive shall be entitled to a minimum bonus of $100,000, of which $50,000 shall be payable on the Effective Date or as soon as practicable thereafter, and the remaining $50,000 shall be payable on September 30, 1999 or as soon as practicable thereafter. The bonus, if any, otherwise payable in accordance with the provisions of Exhibit A which is attributable to the fiscal year ended September 30, 1999, will be reduced, but not below $0, to reflect the $100,000 payable in accordance with the immediately foregoing sentence. (c) Stock Options. On the later of the Effective Date or the date such award is approved by the Board of Directors of the Holding Company, the Executive shall receive an option to purchase 50,000 common shares of the Holding Company. The terms and conditions for such option shall be governed by the LaSalle Re Holdings Limited 1996 Long-Term Incentive Plan (the "LTIP"), including, as permitted by the LTIP, by such additional 3 terms imposed by the Committee under the LTIP, which terms shall be reflected in an option agreement between the Holding Company and the Executive. (d) Restricted Stock. On the later of the Effective Date or the date such award is approved by the Board of Directors of the Holding Company, the Executive shall receive 12,500 shares of restricted stock of the Holding Company. The terms and conditions for such restricted stock shall be governed by the LTIP, including, as permitted by the LTIP, by such additional terms imposed by the Committee under the LTIP, which terms shall be reflected in an restricted stock agreement between the Holding Company and the Executive. (e) Disability. The Executive shall receive from the Company disability income replacement coverage which will provide for replacement of income at a commercially reasonable rate during any period in which the Executive is Disabled if the disability arose during the Agreement Term and prior to the Executive's Date of Termination. During any period while the Executive is Disabled, and is otherwise entitled to receive Salary under this Agreement, any Salary payments to the Executive shall be reduced by the amount of any benefits paid for the same period of time under the Company's disability income replacement coverage. (f) Pension. The Company will provide the Executive with a defined contribution savings plan, into which the Company will make a contribution for each fiscal year equal to 10% of the Salary paid to the Executive for such fiscal year. The plan will also provide that the Executive may make annual contributions equal to or less than the Company's contribution. (g) Automobile. The Company will provide the Executive with an allowance toward the cost of an automobile in Bermuda, the amount of which will be approved by the CEO. The Company will assume responsibility for the cost of insurance, maintenance and similar items. The Executive's personal use of the automobile will be permitted. This perquisite shall be governed by the rules and limitations set down from time to time by the Company. (h) Club. The Company will reimburse the Executive for periodic dues for his membership in clubs located in Bermuda in an amount not to exceed $3,000 per fiscal year. The Company will provide a one-time reimbursement to the Executive for initiation fees for club membership in an amount not to exceed $10,000; provided, however, that if any such initiation fees are returned to the Executive upon termination of membership or for any other reason, such fees shall be paid to the Company to the extent such return is attributable to amounts paid by the Company. (i) Housing/Living Allowance. The Company shall provide the Executive with a housing and living expense allowance at the annual rate of $120,000, with such allowance to be payable to the Executive in monthly instalments. 4 (j) Professional Dues. The Company will reimburse the Executive for reasonable professional dues to maintain his professional standing as a Chartered Accountant. (k) Tax, Accounting and Financial Planning; Legal Counsel. The Company will reimburse the Executive for reasonable expenses, not to exceed $5,000 per fiscal year, for tax, accounting, and financial planning services. The Company will reimburse the Executive for reasonable expenses, not to exceed $5,000, for review of this Agreement by the Executive's legal counsel; provided, however, that such review must occur within a reasonable time of the Effective Date, as determined by the CEO. (l) Relocation. The Company will reimburse the Executive for the expenses he incurs in connection with his relocation to Bermuda, including travel expenses for the Executive, his wife, and his immediate family, provided that such reimbursement shall be subject to such policies and procedures as may be in effect from time to time for the Company's senior executives. (m) Other Benefits. Except as otherwise specifically provided to the contrary in this Agreement, the Executive shall be provided with the welfare benefits and other fringe benefits to the same extent and on the same terms as those benefits are provided by the Company from time to time to the Company's other senior management employees. However, the Company shall not be required to provide a benefit or perquisite under this paragraph 2(m) if such benefit or perquisite would duplicate (or otherwise be the same type as) a benefit or perquisite specifically required to be provided under another provision of this Agreement. (n) Expenses. Upon approval by the CEO, the Company will reimburse the Executive for reasonable expenses for entertainment, traveling, meals, lodging and similar items in promoting the Company's business which the Executive documents on a form used by the Company to report business expenses. (o) Indemnification. The Company shall maintain officers liability insurance in commercially reasonable amounts (as reasonably determined by the Board), and the Executive shall be covered under such insurance to the same extent as other senior management employees of the Company. The Executive shall be eligible for indemnification by the Company under the Company's bye-laws as currently in effect. The Company agrees that it shall not take any action that would impair the Executive's rights to indemnification under the Company's bye-laws, as currently in effect. (p) Holiday/Vacation. The Executive shall be subject to the holiday and vacation policy that applies to other senior executives of the Company. (q) Dollar Amounts. As used in this Agreement, "dollars" or numbers preceded by the symbol "$" shall mean amounts in United States Dollars. 5 3. Termination. The Executive's employment during the Agreement Term may be terminated by the Company or the Executive without any breach of this Agreement only under the circumstances described in paragraphs 3(a) through 3(h): (a) Death. The Executive's employment will terminate upon his death. (b) Permanently Disabled. The Company may terminate the Executive's employment if he is Permanently Disabled. "Permanently Disabled" means that the Executive is eligible for benefits under the Company's long-term disability plan. (c) Cause. The Company may terminate the Executive's employment at any time for Cause. "Cause" shall mean: (i) the wilful and continued failure by the Executive to substantially perform his duties with the Company (other than any such failure resulting from the Executive's being Disabled), within a reasonable period of time after a written demand for substantial performance is delivered to the Executive by the CEO, which demand specifically identifies the manner in which the CEO believes that the Executive has not substantially performed his duties; (ii) the wilful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company or the Holding Company, monetarily or otherwise; or (iii) the engaging by the Executive in egregious misconduct involving serious moral turpitude to the extent that, in the reasonable judgment of the CEO, the Executive's credibility and reputation no longer conform to the standard of the Company's executives. For purposes of this Agreement, no act, or failure to act, on the Executive's part shall be deemed "wilful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interest of the Company or the Holding Company. (d) Constructive Discharge. If the Executive (i) provides written notice to the Company of the occurrence of a material breach of this Agreement by the Company, which specifically identifies the manner in which the Executive believes that the breach has occurred; (ii) the Company fails to correct such breach within a reasonable time after such notice; and (iii) the Executive resigns within the 60-day period following the occurrence of such breach, then the Executive shall be considered to have been constructively discharged. (e) Resignation by Executive. The Executive may resign for any reason by giving the Company ninety (90) days prior written notice, except the Executive will be treated as having resigned under this paragraph 3(e) only if he has not been constructively discharged under paragraph 3(d) and he has not terminated employment for those 6 specified reasons occurring within one year following a Change in Control under paragraph 3(h). (f) Mutual Agreement. This Agreement may be terminated at any time by the mutual agreement of the parties. Any termination of the Executive's employment by mutual agreement of the parties will be memorialized by an agreement which is reduced in writing and signed by the Executive and the CEO or other duly appointed officer of the Company. (g) Termination by Company. The Company may terminate the Executive's employment at any time for any reason by giving the Executive prior written notice, except the Executive's employment will not be treated as having been terminated under this paragraph 3(g) if the termination is for reasons of being Permanently Disabled or for Cause or if the termination is for those specified reasons occurring within one year following a Change in Control under paragraph 3(h). (h) Change in Control. Within one year of a Change in Control, either the Company may terminate the Executive for any reason by giving the Executive prior written notice (except the Executive's employment will not be treated as having been terminated under this paragraph 3(h) if the termination is for reasons of being Permanently Disabled or for Cause); or the Executive may resign with Good Reason by giving prior written notice to the Company, and such termination for either reason shall be considered a termination by reason of Change in Control. For purposes of this paragraph (h): (i) "Change in Control" means a change in the beneficial ownership of the Holding Company's voting stock or a change in the composition of the Board of the Holding Company which occurs as follows: (a) Any "person" (as such term is used in Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) is or becomes a beneficial owner, directly or indirectly, of stock of the Holding Company representing 30 percent or more of the total voting power of the Holding Company's then outstanding stock. (b) A tender offer (for which a filing has been made with the SEC which purports to comply with the requirements of Section 14(d) of the Securities Exchange Act of 1934 and the corresponding SEC rules) is made for the stock of the Holding Company, which has not been negotiated and approved by the Board of the Holding Company. In case of a tender offer described in this paragraph (b), the Change in Control will be deemed to have occurred upon the first to occur of (i) any time during the offer when the person (using the definition in (a) above) making the offer owns or has accepted for payment stock of the Holding Company with 25 percent or more of the total voting power of the Holding Company's stock or (ii) three business days 7 before the offer is to terminate unless the offer is withdrawn first, if the person making the offer could own, by the terms of the offer plus any shares owned by this person, stock with 50 percent or more of the total voting power of the Holding Company's stock when the offer terminates. (c) Individuals who were the nominees of the Board of Directors of the Holding Company for election as directors of the Holding Company immediately prior to a meeting of the shareholders of the Holding Company involving a contest for the election of directors shall not constitute a majority of the Board following the election. (ii) "Good Reason" shall mean: (a) without the express written consent of the Executive, (i) the assignment to the Executive of any duties inconsistent in any substantial respect with the Executive's position, authority or responsibilities as held, exercised and assigned during the ninety (90) day period immediately preceding the Change in Control, or (ii) any other substantial adverse change in such position (including titles), authority or responsibilities; or (b) the Company's requiring the Executive to be based or to perform services at any office or location other than that at which the Executive is based immediately prior to the Change in Control, except for travel reasonably required in the performance of the Executive's responsibilities. (i) Date of Termination. "Date of Termination" means the last day the Executive is employed by the Company, provided that the Executive's employment is terminated in accordance with the foregoing provisions of this paragraph 3. (k) Notice of Termination. Any termination of the Executive's employment by the Company or the Executive (other than a termination pursuant to paragraph 3(a) or paragraph 3(f)) must be communicated by a written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" means a dated notice which indicates the specific termination provision in this Agreement relied on and which sets forth in reasonable detail the facts and circumstances, if any, claimed to provide a basis for termination of the Executive's employment under the provision so indicated. 4. Rights Upon Termination. This paragraph 4 describes the payments and benefits to be provided to the Executive after his Date of Termination: (a) Payment of Previously Earned Amounts. The Executive shall receive payment of accrued but unpaid Salary, vacation pay and, if expressly provided for in paragraph 4(d) or paragraph 4(f), a pro rata portion of his bonus (if any), in each case for the period ending with the Executive's Date of Termination; provided, however, that regardless of 8 when the Executive's Date of Termination occurs, the Executive shall receive the $100,000 bonus described in paragraph 2(b) for the fiscal year ending September 30, 1999. (b) No Severance Payments. If the Executive's Date of Termination occurs during or after the end of the Agreement Term because of (i) the Executive's death, (ii) his being Permanently Disabled (described in paragraph 3(b)), (iii) his termination for Cause (described in paragraph 3(c)), or (iv) his resignation (described in paragraph 3(e)), then, except as otherwise expressly provided for in this Agreement, no payments shall be due to the Executive under this Agreement for periods after the Date of Termination. (c) Salary Continuation. If the Executive's Date of Termination occurs during the Agreement Term because of (i) his discharge by the Company for reasons other than Cause (described in paragraph 3(c)) or because of (ii) his constructive discharge (described in paragraph 3(d)), the Executive shall continue to receive Salary payments (at the rate in effect on the Date of Termination) in monthly or more frequent instalments through the earliest of: (i) the last day of the Agreement Term; (ii) the date that is the twelve (12) month anniversary of the Executive's Date of Termination; (iii) the date of the Executive's death, or (iv) the date, if any, of the breach by the Executive of the non-competition requirements of paragraph 7, the confidentiality requirements of paragraph 8 or the non-disparagement requirements of paragraph 9. (d) Pro rata Bonus. Except as otherwise provided in this paragraph 4(d) or in paragraph 4(f), the Executive shall not receive a bonus for the fiscal year in which the Executive's Date of Termination occurs. If the Executive's Date of Termination occurs during the Agreement Term as a result of (i) the Executive's death, (ii) his being Permanently Disabled (described in paragraph 3(b)), (iii) his discharge by the Company for reasons other than Cause (described in paragraph 3(c)), or (iv) his constructive discharge (described in paragraph 3(d)), the Executive shall receive a pro rata portion of the bonus which would have been paid pursuant to Exhibit A for the fiscal year in which the Executive's Date of Termination occurs. Such portion, if any, shall be calculated for the period ending on the Date of Termination and shall be paid to the Executive (or his estate) within a reasonable period of time after the Company calculates the bonus amount, if any, for all employees for the fiscal year. As provided in paragraph 4(a) above, the $100,000 bonus payable for the fiscal year ending September 30, 1999 shall be paid to the Executive, and shall not be pro rated, regardless of when the Executive's Date of Termination occurs. (e) Housing/Living Expenses, Medical Benefits. If the Executive is entitled to Salary Continuation payments pursuant to paragraph 4(c), the Executive shall receive a housing and living expense allowance (described in paragraph 2(i)) and may continue to participate in the medical and dental plans in which he participated on the day before his Date of Termination through the earlier of: (i) the last day for which the Executive receives Salary Continuation payments pursuant to paragraph 4(c); or (ii) three (3) months after the Executive's Date of Termination. Participation in the medical and dental plans is subject to the Executive's payment of the applicable employee portion of the 9 monthly premium cost, if any. If the Company ceases offering the medical and dental plans in which the Executive participated on the day before his Date of Termination to Company employees during this time, the Executive may elect to participate in any other medical or dental plan offered by the Company to its employees, provided however, that the Executive shall be responsible for paying the applicable employee portion of the monthly premium cost. (f) Payments following Change in Control. If the Executive's Date of Termination occurs during the Agreement Term because of his involuntary termination or voluntary termination for Good Reason within one year after a Change in Control (described in paragraph 3(h)), the Company shall pay to the Executive the amounts described below. Amounts payable to the Executive under this paragraph 4(f) shall not be subject to the set-off described in paragraph 6. (i) Lump Sum Payment of Salary. The Executive shall receive a lump sum payment as soon as practicable following his Date of Termination equal to the Salary (at the rate in effect at the Date of Termination) that would have been payable to the Executive had his Salary continued to be paid through the period beginning on his Date of Termination and ending on the date that is the twenty-four (24) month anniversary of the Executive's Date of Termination. (ii) Pro rata Bonus. The Executive shall receive a pro rata portion of the bonus which would have been paid pursuant to Exhibit A for the fiscal year in which the Executive's Date of Termination occurs. Such portion, if any, shall be calculated for the period ending on the Date of Termination and shall be paid to the Executive (or his estate) within a reasonable period of time after the Company calculates the bonus amount, if any, for all employees for the fiscal year. As provided in paragraph 4(a) above, the $100,000 bonus payable for the fiscal year ending September 30, 1999 shall be paid to the Executive, and shall not be pro rated, regardless of when the Executive's Date of Termination occurs. (iii) Relocation Expenses. The Executive shall be reimbursed for reasonable costs actually incurred by the Executive and the members of his or her immediate family to relocate to the United States; provided, however, that such reimbursement shall be made only if such relocation occurs within a reasonable time following the Executive's Date of Termination. The reasonableness of the cost and time of relocation shall be determined by the Board. (iv) Tax Gross-Up for Certain Taxable Income. The Executive shall receive the following amounts: (x) the amount, if any, which is equal to the amount of taxes imposed by the tax laws of the United States on taxable income attributable to payment of relocation expenses to the Ex ecutive under subparagraph 4(f)(iii), on taxable income, if any, attributable to the accelerated vesting of options and restricted stock as a result of the Executive's termination of employment for reasons described in paragraph 3(h), and on taxable income, if any, attributable to payments to the Executive from any nonqualified retirement or deferred 10 compensation plan maintained by the Company payable to the Executive as a result of his termination of employment for reasons described in paragraph 3(h), and (y) such additional amount, if any, which is equal to the amount of taxes imposed by the tax laws of the United States on the amount, if any, payable to the Executive under clause (x) of this subparagraph 4(f)(iv). (v) Reimbursement for Excise Tax. With respect to any payment made to the Executive under this Agreement as a result of termination within one year after a Change in Control (described in paragraph 3(h)) (and with respect to any other payment made to the Executive upon a Change in Control, including without limitation, the vesting of an option or other cash or non-cash benefit or property, whether pursuant to the terms of this Agreement or any other plan, arrangement, or agreement with the Company) (the "Total Payments"), if such Total Payments are or become subject to the tax imposed by Section 4999 of the United States Internal Revenue Code of 1986, as amended (the "Code") (or any similar tax that may hereafter be imposed) (the "Excise Tax"), the Company shall pay to Executive an additional amount equal to the amount of such Excise Tax. (g) Other Programs. No benefits shall be payable to the Executive under any other severance pay arrangement or similar arrangement maintained by the Company or any Subsidiary. Except as otherwise expressly provided in this Agreement, no other payments or benefits shall be due to the Executive following the Date of Termination (except as otherwise specifically provided under the terms of an employee benefit plan or arrangement). 5. Duties on Termination. Subject to the provisions of this Agreement, during the period beginning on the date of delivery of a Notice of Termination, and ending on the Date of Termination, the Executive shall continue to perform his duties as set forth in this Agreement, and shall also perform such services for the Company and the Holding Company as are necessary and appropriate for a smooth transition to the Executive's successor, if any. Notwithstanding the foregoing provisions of this paragraph 5, the Company may suspend the Executive from performing his duties under this Agreement following the delivery of a Notice of Termination providing for the Executive's resignation, or delivery by the Company of a Notice of Termination providing for the Executive's termination of employment for any reason; provided, however, that during the period of suspension (which shall end on the Date of Termination), the Executive shall continue to be treated as employed by the Company for other purposes, and his rights to compensation or benefits shall not be reduced by reason of the suspension. 6. Set-Off. Except as otherwise provided in paragraph 4(f), if the Executive's employment with the Company is terminated for any reason and, under the terms of this Agreement, the Executive is otherwise entitled to receive Salary and bonus payments, such payments will be reduced by the amount of any salary and bonus payments the Executive receives in connection with other employment. 7. Non-competition. While the Executive is employed by the Company, and during the Non-Competition Period (as defined below), the Executive agrees that he will not directly or 11 indirectly perform services in a financial-related position in Bermuda for a direct competitor of the Company. A financial-related position shall include, but is not limited to, a financial officer or comptroller. For purposes of this paragraph 7: "Non-Competition Period" shall be determined as follows: (1) If the Executive's Date of Termination occurs under circumstances other than those described in paragraph 3(d) (relating to constructive discharge) or paragraph 3(g) (relating to certain terminations by the Company), the Non-Competition Period shall be the period beginning on the Date of Termination, and ending on the twenty-four-month (24) anniversary of the Date of Termination. (2) If the Executive's Date of Termination occurs under circumstances described in paragraph 3(d) (relating to constructive discharge) or paragraph 3(g) (relating to certain terminations by the Company), the Non-Competition Period shall be the period beginning on the Date of Termination, and ending on the earlier to occur of the last day of the Agreement Term or the twelve (12) month anniversary of the Date of Termination. However, under this paragraph (2), the Company, in its discretion, by notice provided to the Executive not later than fifteen (15) days after the Date of Termination, may extend the Non- Competition Period beyond the end of the Agreement Term, to a date specified in such notice (but not later than the twelve-month anniversary of the Date of Termination), but only if the Company agrees to provide the salary continuation payments described in paragraph 4(c) during such Non-Competition Period. Nothing in this paragraph 7, paragraph 8 or paragraph 9 shall be construed as limiting the Executive's duty of loyalty to the Company while he is employed by the Company or any other duty he may otherwise have to the Company while he is employed by the Company. 8. Confidential Information. Except as may be required by the lawful order of a court or agency of competent jurisdiction, or except to the extent that the Executive has express authorization from the Company, the Executive agrees to keep secret and confidential indefinitely all non-public information (including, without limitation, information regarding litigation and pending litigation) concerning the Company, the Holding Company, and the Subsidiaries which was acquired by or disclosed to the Executive during the course of his employment with the Company, or during the course of his consultation with the Company following his termination of employment (regardless of whether consultation is pursuant to paragraph 10), and not to disclose the same, either directly or indirectly, to any other person, firm, or business entity, or to use it in any way. To the extent that the Executive obtains information on behalf of the Company, the Holding Company, or any of the Subsidiaries that may be subject to attorney-client privilege as to the Company's attorneys, the Executive shall take reasonable steps to maintain the confidentiality of such information and to preserve such privilege. Nothing in the foregoing provisions of this paragraph 8 shall be construed so as to prevent the Executive from using, in connection with his employment for himself or an employer 12 other than the Company, the Holding Company, or any of the Subsidiaries, knowledge which was acquired by him during the course of his employment with the Company, the Holding Company, and the Subsidiaries, and which is generally known to persons of his experience in other companies in the same industry. 9. Non-Disparagement. The Executive agrees that, while he is employed by the Company, and after his Date of Termination, he shall not make any false, defamatory or disparaging statements about the Company, the Holding Company, the Subsidiaries, or the officers or directors of the Company, the Holding Company, or the Subsidiaries that are reasonably likely to cause material damage to the Company, the Holding Company, the Subsidiaries, or their officers or directors. While the Executive is employed by the Company, and after his Date of Termination, the Company agrees, on behalf of itself, the Holding Company, and the Subsidiaries, that neither the officers nor the directors of the Company, the Holding Company, or the Subsidiaries shall make any false, defamatory or disparaging statements about the Executive that are reasonably likely to cause material damage to Executive. 10. Defense of Claims. The Executive agrees that, for the period beginning the Effective Date, and continuing for a reasonable period after the Executive's termination of employment with the Company, the Executive will cooperate with the Company, the Holding Company and the Subsidiaries in defense of any claims that may be made against the Company, the Holding Company and the Subsidiaries, and will cooperate with the Company, the Holding Company or the Subsidiaries in the prosecution of any claims that may be made by the Company, the Holding Company or the Subsidiaries, to the extent that such claims may relate to services performed by the Executive for the Company. The Executive agrees to promptly inform the Company if he becomes aware of any lawsuits involving such claims that may be filed against the Company, the Holding Company or the Subsidiaries. The Company agrees to reimburse the Executive for all of the Executive's reasonable out-of-pocket expenses associated with such cooperation, including travel expenses. For periods after the Executive's employment with the Company terminates, the Company agrees to provide reasonable compensation to the Executive for such cooperation. The determination of the reasonableness of such compensation shall take into account information provided to the Company by the Executive or otherwise known to the Company, which may include, without limitation, (a) the Executive's rate of compensation at the time he ceased employment with the Company, and whether he is then receiving other compensation payments from the Company; (b) the Executive's rate of compensation at the time of such cooperation; (c) the amount of time required of the Executive for such cooperation; (d) difficulty of the issues as to which the cooperation is required; (e) the amount of inconvenience to the Executive resulting from such cooperation (including consideration of factors such as the amount of travel required of the Executive, the effect on other commitments of the Executive, and the amount of advance notice provided to the Executive); and (f) whether such cooperation would be legally required in the absence of the requirements of this paragraph 10. The Executive also agrees to promptly inform the Company if he is asked to assist in any investigation of the Company, the Holding Company or the Subsidiaries (or their actions) that may relate to services performed by the Executive for the Company, regardless of whether a lawsuit has then been filed against the Company, the Holding Company or the Subsidiaries with respect to such investigation. 13 11. Remedies. The Executive acknowledges that the Company or the Holding Company would be irreparably injured by a violation of paragraph 7, paragraph 8, or paragraph 9, and he agrees that the Company, in addition to any other remedies available to it for such breach or threatened breach, shall be entitled to a preliminary injunction, temporary restraining order, or other equivalent relief, restraining the Executive from any actual or threatened breach of either paragraph 7, paragraph 8 or paragraph 9. The Company acknowledges that the Executive would be irreparably injured by a violation of paragraph 9, and the Company agrees that the Executive, in addition to any other remedies available to him for such breach or threatened breach, shall be entitled to a preliminary injunction, temporary restraining order, or other equivalent relief, restraining the Company from any actual or threatened breach of paragraph 9. If a bond is required to be posted in order for the Company or the Executive to secure an injunction or other equitable remedy, the parties agree that said bond need not be more than a nominal sum. 12. Nonalienation. The interests of the Executive under this Agreement are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors of the Executive or the Executive's beneficiary. 13. Amendment. This Agreement may be amended or canceled only by mutual agreement of the parties in writing without the consent of any other person. So long as the Executive lives, no person, other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof. 14. Applicable Law. The provisions of this Agreement shall be construed in accordance with the laws of Bermuda, without regard to the conflict of law provisions of any jurisdiction. All disputes shall be arbitrated or litigated (whichever is applicable) in Bermuda. 15. Severability. The invalidity or unenforceability of any provision of this Agreement will not affect the validity or enforceability of any other provision of this Agreement, and this Agreement will be construed as if such invalid or unenforceable provision were omitted (but only to the extent that such provision cannot be appropriately reformed or modified). 16. Waiver of Breach. No waiver by any party hereto of a breach of any provision of this Agreement by any other party, or of compliance with any condition or provision of this Agreement to be performed by such other party, will operate or be construed as a waiver of any subsequent breach by such other party or any similar or dissimilar provisions and conditions at the same or any prior or subsequent time. The failure of any party hereto to take any action by reason of such breach will not deprive such party of the right to take action at any time while such breach continues. 17. Successors. This Agreement shall be binding upon, and inure to the benefit of, the Company and its successors and assigns and upon any person acquiring, whether by merger, consolidation, purchase of assets or otherwise, all or substantially all of the Company's assets and business. 14 18. Notices. Notices and all other communications provided for in this Agreement shall be in writing and shall be delivered personally or sent by registered or certified mail, return receipt requested, postage prepaid, or sent by facsimile or prepaid overnight courier to the parties at the addresses set forth below (or such other addresses as shall be specified by the parties by like notice). Such notices, demands, claims and other communications shall be deemed given: (a) in the case of delivery by overnight service with guaranteed next day delivery, the next day or the day designated for delivery; (b) in the case of certified, registered or similar mail delivery, five days after deposit in the local mail; or (c) in the case of facsimile, the date upon which the transmitting party received confirmation of receipt by facsimile, telephone or otherwise; provided, however, that in no event shall any such communications be deemed to be given later than the date they are actually received. Communications that are to be delivered by the mail or by overnight service are to be delivered to the addresses set forth below: to the Company: LaSalle Re Limited 25 Church Street Hamilton HMFX, Bermuda or to the Executive: Robert P. Cuthbert 25 Church Street Hamilton HMFX, Bermuda All notices to the Company shall be directed to the attention of the chief executive officer of the Company, with a copy to the Secretary of the Company. Each party, by written notice furnished to the other party, may modify the applicable delivery address, except that notice of change of address shall be effective only upon receipt. 19. Arbitration of All Disputes. Any controversy or claim arising out of or relating to this Agreement (or the breach thereof) shall be settled by final, binding and non-appealable arbitration in Bermuda by three arbitrators. Except as otherwise expressly provided in this paragraph 19, the arbitration shall be conducted in accordance with the Arbitration Act 1986 as then in effect. One of the arbitrators shall be appointed by the Company, one shall be appointed by the Executive, and the third shall be appointed by the first two arbitrators. If the first two arbitrators cannot agree on the third arbitrator within 30 days of the appointment of the second arbitrator, then the third arbitrator shall be appointed by the President of the Bermuda Bar Council. 15 20. Survival of Agreement. Except as otherwise expressly provided in this Agreement, the rights and obligations of the parties to this Agreement shall survive the termination of the Executive's employment with the Company. 21. Entire Agreement. Except as otherwise noted herein, this Agreement, including any Exhibit(s) attached hereto, constitutes the entire agreement between the parties concerning the subject matter hereof and supersedes all prior and contemporaneous agreements, if any, between the parties relating to the subject matter hereof. The enforceability of this Agreement shall not cease or otherwise be adversely affected by the termination of the Executive's employment with the Company. 22. Acknowledgment by Executive. The Executive represents to the Company that he is knowledgeable and sophisticated as to business matters, including the subject matter of this Agreement, that he has read this Agreement and that he understands its terms. The Executive acknowledges that, prior to assenting to the terms of this Agreement, he has been given a reasonable time to review it, to consult with counsel of his choice, and to negotiate at arm's-length with the Company as to the contents. The Executive and the Company agree that the language used in this Agreement is the language chosen by the parties to express their mutual intent, and that no rule of strict construction is to be applied against any party hereto. The Executive represents and warrants that he is not, and will not become a party to any agreement, contract, arrangement or understanding, whether of employment or otherwise, that would in any way restrict or prohibit him from undertaking or performing his duties in accordance with this Agreement. 23. Titles and Headings. Titles and headings in this Agreement are for ease of reference and convenience only, and shall not be construed to affect the meaning of any provision of this Agreement. IN WITNESS THEREOF, the Executive has hereunto set his hand, and the Company has caused these presents to be executed in its name and on its behalf, and its corporate seal to be hereunto affixed, all as of the day and year first above written. /s/ Robert P. Cuthbert -------------------------- Robert P. Cuthbert LASALLE RE LIMITED By: /s/ Victor H. Blake ---------------------- Victor H. Blake 16 EXHIBIT A --------- BONUS COMPUTATION ----------------- A-1. Purpose. This Exhibit A is attached to and forms a part of the employment agreement (the "Agreement") between Robert P. Cuthbert (the "Executive") and LaSalle Re Limited (the "Company"). The purpose of this Exhibit A is to set forth the terms of the bonus program described in paragraph 2(b) of the Agreement. A-2. Guidelines. The bonus shall be determined in accordance with the following guidelines: . A discretionary bonus may be awarded annually by the Board of the Company after considering the recommendation of the CEO of the Company. . A non-discretionary bonus shall be earned and paid annually based upon the Company's Return on Equity (defined below) achieved for each fiscal year of the Company, while the Executive is employed by the Company. . The non-discretionary annual bonus calculation will be based on the Company's Return on Equity earned each year. If the Company's Return on Equity for any year exceeds 15%, the bonus will be paid according to the following formula: . For each 1% improvement in Return on Equity above 10%, an amount equal to 10.0 % of The Executive's Salary will be paid. . For each 1% improvement in Return on Equity above 22.5%, an amount equal to 15.0 % of The Executive's Salary will be paid. . For Return on Equity results between whole percentages (but above 10%), the percentage of Salary awarded will be increased by interpolation. . The "Return on Equity" for any fiscal year shall be equal to the net income of the Company for the fiscal year, divided by shareholders' equity at the beginning of the period (as determined on the basis of U.S. generally accepted accounting principles). For purposes of this calculation any unrealized appreciation or depreciation of the Company's investments shall be disregarded (both as to the numerator and the denominator). Payments made to CNA Financial Corporation or its affiliates under the Underwriting Support Services Agreement will not reduce net income in determining Return on Equity. EX-10.11 4 SEPARATION AGREEMENT 05/01/99 CUTHBERT & LASALLE EXHIBIT 10.11 [LETTER HEAD OF LASALLE RE LIMITED] April 27, 1999 Robert P. Cuthbert 126 Lloyd Road Montclair, New Jersey 07042 Dear Bob: This letter agreement (the "Agreement") will confirm our understanding regarding your cessation of employment from LaSalle Re Limited (the "Company") by mutual agreement, as described in paragraph 3(f) of the Employment Contract, as defined in paragraph 17 of this Agreement, between you and the Company. 1. Termination Date. Except as otherwise provided in paragraph 4, the effective date of your cessation of employment with the Company and separation from all positions with the Company and its Affiliates (as defined in paragraph 12) is May 1, 1999, the "Termination Date" for purposes of this Agreement. 2. Payments and Benefits. You shall be entitled to compensation and other payments and benefits in accordance with Exhibit 1, which is attached to, and forms a part of this Agreement. 3. No Mitigation or Offset. Except as otherwise provided in this Agreement, you have no obligation to seek or accept employment (or otherwise seek or accept offers to provide your services to any person or entity), and any compensation earned by or provided to you from any person or entity other than the Company for the performance of such employment or other services (regardless of whether such compensation is provided to you in cash or in any other form) shall not reduce or otherwise affect the amount due to you from the Company in accordance with this Agreement. 4. Assistance with Claims. You agree that, for the period beginning on your Termination Date, and continuing for a reasonable time thereafter (but for a period of not less than 24 months after your Termination Date), you will assist the Company and its Affiliates in the defense of any claims that may be made against the Company and its Affiliates, and will assist the Company and its Affiliates in the prosecution of any claims that may be made by the Company or any Affiliate, to the extent that such claims may relate to services performed by you for the Company or its Affiliates. The Company will consult Robert P. Cuthbert April 27, 1999 Page 2 with you, and make reasonable efforts to schedule such assistance so as not to materially disrupt your business and personal affairs. You agree, unless precluded by law, to promptly inform the Company if you are asked to participate (or otherwise become involved) in any lawsuits involving such claims that may be filed against the Company or any Affiliate. You also agree, unless precluded by law, to promptly inform the Company if you are asked to assist in any investigation (whether governmental or private) of the Company or any Affiliate (or their actions) that may relate to services performed by you for the Company or any Affiliate, regardless of whether a lawsuit has then been filed against the Company or any Affiliate with respect to such investigation. The Company agrees to reimburse you for all of your reasonable out-of-pocket expenses associated with such assistance, including travel expenses. The determination of the reasonableness of such compensation shall take into account information provided to the Company by you or otherwise known to the Company, which may include, without limitation, (a) your rate of compensation at the time you ceased employment with the Company, and whether your are then receiving other compensation payments from the Company; (b) your rate of compensation at the time of such cooperation; (c) the amount of time required of you for such cooperation; (d) difficulty of the issues as to which the cooperation is required; (e) the amount of inconvenience to you resulting from such cooperation (including consideration of factors such as the amount of travel required of you, the effect on your other commitments, and the amount of advance notice provided to you); and (f) whether such cooperation would be legally required in the absence of the requirements of this paragraph 4. 5. Confidential Information. Except as may be required by the lawful order of a court or agency of competent jurisdiction, or except to the extent that you have express authorization from the Company, you agree to keep secret and confidential indefinitely all non-public information (including, without limitation, information regarding litigation and pending litigation) concerning the Company or any of its Affiliates which was acquired by or disclosed to you (a) during your negotiations regarding employment or during the course of your consultation with the Company or any Affiliate prior to your employment with the Company, (b) during the course of your employment with the Company or your holding a position as an officer of any Affiliate, or (c) during the course of your consultation with the Company or any Affiliate following your termination of employment (regardless of whether consultation is pursuant to paragraph 4), and not to disclose the same, either directly or indirectly, to any other person, firm, or business entity, or to use it in any way. To the extent that you obtain information on behalf of the Company or any of the Affiliates that may be subject to attorney-client privilege as to the Company's or any Affiliate's attorneys, you shall take reasonable steps to maintain the confidentiality of such information and to preserve such privilege. Robert P. Cuthbert April 27, 1999 Page 3 Nothing in the foregoing provisions of this paragraph 5 shall be construed so as to prevent you from using, in connection with your employment for yourself, whether or not in partnership with others, or for an employer other than the Company or any of the Affiliates, knowledge which was acquired by you during the course of your employment with the Company or your being an officer of any Affiliate, and which is generally known to persons of your experience in other companies in the same industry. 6. Non-Disclosure. a. You acknowledge that the benefits provided by the Company under this Agreement are not generally available to other employees of the Company, and you agree that, except as may be required by the lawful order of a court or agency of competent jurisdiction, you will keep the terms of this Agreement secret and confidential indefinitely. Notwithstanding the foregoing provisions of this paragraph 6, you may disclose the contents of this Agreement to your attorneys, accountants and financial advisors, your immediate family, any prospective employer in connection with its decision to hire you, and any prospective lender in connection with its decision to make a loan to you, provided that you take steps that are reasonably calculated to assure that such persons do not further disclose the terms of this Agreement. Nothing in this Agreement shall preclude you from fully discussing with any prospective employer, in connection with its decision to hire you, the conditions and reasons surrounding your separation from the Company. The provisions of this paragraph (a) shall be waived if the Company publicly discloses the contents of this Agreement in accordance with paragraph (b) next below. b. The Company agrees that it will keep the terms of this Agreement secret and confidential indefinitely, except to the extent that the Company determines that disclosure is required by reason of applicable securities laws or other legal requirements, and except as otherwise provided in this Agreement. c. You agree that, prior to the commencement of any new employment in the insurance industry, you will furnish the prospective new employer with a copy of the provisions of this Agreement relating to competition, confidentiality, and solicitation. You also agree that the Company may advise any new employer or prospective new employer of the provisions of this Agreement relating to competition, confidentiality, and solicitation Robert P. Cuthbert April 27, 1999 Page 4 and furnish the new employer or prospective new employer with a copy of such provisions. 7. Disparagement. a. You agree that for the period beginning on your Termination Date and ending on the twelve-month anniversary of your Termination Date, you will not make any statement or disclosure that disparages the Company or its Affiliates and is intended or reasonably likely to result in material harm to the Company or its Affiliates; provided that the provisions of this paragraph (a): (i) shall not apply to testimony as a witness, compliance with other legal obligations, your assertion of or defense against any claim of breach of this Agreement (including the Exhibits thereto and the referenced plans and arrangements), or your statements or disclosures to officers or directors of the Company or its Affiliates, and (ii) shall not require you to make false statements or disclosures. b. The Company agrees that for the period beginning on your Termination Date and ending on the twelve-month anniversary of your Termination Date, neither the Company nor any Affiliate will make any statement or disclosure that disparages you and is intended or reasonably likely to result in material harm to you; provided that the provisions of this paragraph (b): (i) shall not apply to testimony as a witness, compliance with other legal obligations, assertion of or defense against any claim of breach of this Agreement (including the Exhibits thereto and the referenced plans and arrangements), or statements or disclosures to you, and (ii) shall not require false statements or disclosures to be made. 8. Transition. a. Your cessation of employment from the Company and your cessation as an officer of LaSalle Re Holdings Limited shall be announced by a statement substantially in the form of Exhibit 2 of this Agreement. You and the Company will cooperate with each other in any statements about your cessation of employment with the Company and about your cessation as an officer of LaSalle Re Holdings Limited so as not to depart materially from the statement described in this paragraph (a); provided, however, that in addition to the information in the statement, both you and the Company Robert P. Cuthbert April 27, 1999 Page 5 or any Affiliate may refer generally to differences between you and the Company in management style and approach to business operations. b. You are required to execute the resignation letters set forth in Exhibits 3A and 3B of this Agreement. c. As soon as practicable after this Agreement has been fully executed, you agree to remove your personal effects from your office at the Company (or the Company will remove such personal effects and ship them to you in accordance with paragraph 1-4 of Exhibit 1 of this Agreement), to vacate such office, to return to the Company any keys, credit cards, passes, confidential documents or material, or other property belonging to the Company or any of the Affiliates, and to return all writings, files, records, correspondence, notebooks, notes and other documents and things (including any copies thereof) containing any trade secrets relating to the Company or any of the Affiliates. 9. Indemnification. a. If you incur liability by reason of actions taken by you on behalf of the Company while you were employed by the Company, or by reason of actions taken by you as required under paragraph 4 of this Agreement, you shall be eligible for indemnification from the Company to the same extent as other current or former directors or officers of the Company. b. You shall be entitled to coverage under the directors and officers liability insurance coverage maintained by the Company or its Affiliates (as in effect from time to time) to the same extent as other current or former officers and directors of the Company; provided, however, that nothing in this paragraph 9 shall be construed to require the Company or any Affiliate to continue to maintain any such directors and officers liability insurance coverage. c. To the extent that expenses (including attorneys' fees) incurred by you in defending any civil, criminal, administrative or investigative action, suit or proceeding may be subject to indemnification by the Company and such expenses are not paid currently by insurance, the Company shall pay all such expenses (including attorneys' fees) in advance of the final disposition of such action, suit or proceeding upon receipt of an Robert P. Cuthbert April 27, 1999 Page 6 undertaking by you to repay such amount if it shall ultimately be determined that you are not entitled to be indemnified by the Company and not entitled to insurance coverage for such expenses. 10. Non-Alienation. Your interests under this Agreement are not subject to the claims of your creditors, and may not otherwise be voluntarily or involuntarily assigned, alienated or encumbered. Your obligations under this Agreement may not be assigned. 11. Amendment. This Agreement may be amended or canceled only by mutual agreement of the parties in writing without the consent of any other person. So long as you live, no person, other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof. 12. Successors and Affiliates. This Agreement shall be binding on, and inure to the benefit of, the Company and its successors and assigns and any person acquiring, whether by merger, consolidation, purchase of assets or otherwise, all or substantially all of the Company's assets and business. For purposes of this Agreement, the term "Affiliate" means (a) any corporation, partnership, joint venture or other entity which, as of your Termination Date, owns, directly or indirectly, at least fifty percent of the voting power of all classes of stock of the Company (or any successor to the Company) entitled to vote; and (b) any corporation, partnership, joint venture or other entity in which, as of your Termination Date, at least a fifty percent voting or profits interest is owned, directly or indirectly, by the Company, by any entity that is a successor to the Company, or by any entity that is an Affiliate by reason of clause (a) next above. For purposes of paragraph 4 (relating to assistance with claims), paragraph 5 (relating to confidential information), paragraph 6 (relating to protective covenants), paragraph 7 (relating to disparagement), the Employee Release, and the Company Release, the term "Affiliate" shall also include any entity that would have been an "Affiliate" by reason of the preceding sentence (including any successor to the assets or business of any such Affiliate) at any time during the period of the your employment by the Company (and shall include any predecessor to any entity described in clause (a) or (b)). 13. Effect of Breach. You acknowledge that the Company would be irreparably injured by your violation of paragraph 5, 6, or 7, and you agree that the Company and its Affiliates, in addition to any other remedies available to it for such breach or threatened breach, shall be entitled to a preliminary injunction, temporary restraining order, or other equivalent relief, as may be permitted or applicable in the given circumstances, restraining you from any actual or threatened breach of paragraph 5, 6, or 7. The Company acknowledges that you would be irreparably injured by its violation of Robert P. Cuthbert April 27, 1999 Page 7 paragraph 6 or 7, and the Company agrees that you, in addition to any other remedies available to you for such breach or threatened breach, shall be entitled to a preliminary injunction, temporary restraining order, or other equivalent relief, as may be permitted or applicable in the given circumstances, restraining the Company and its Affiliates from any actual or threatened breach of paragraph 6 or 7. 14. Waiver of Breach. The waiver by either you or the Company (or the Affiliates) of a breach of any provision of this Agreement shall not operate as or be deemed a waiver of any subsequent breach by either you or the Company. Continuation of benefits hereunder by the Company following a breach by you of any provision of this Agreement shall not preclude the Company from thereafter exercising any right that it may otherwise independently have to terminate said benefits based upon the same violation. 15. Severability. The invalidity or unenforceability of any provision of this Agreement will not affect the validity or enforceability of any other provision of this Agreement, and this Agreement will be construed as if such invalid or unenforceable provision were omitted (but only to the extent that such provision cannot be appropriately reformed or modified). 16. General Release and Waiver. As part of this Agreement, and in consideration of the release provided to the Company as set forth in Exhibit 5 of this Agreement, the Company shall enter into the General Release and Waiver as set forth in Exhibit 4 of this Agreement, which is attached to and forms part of this Agreement (the "Company Release"). As part of this Agreement, and in consideration of the payments provided to you in accordance with this Agreement, and in consideration of the release provided to you as set forth in Exhibit 4 of this Agreement, you are required to execute the General Release and Waiver, in the form set forth as Exhibit 5 of this Agreement, which is attached to and forms a part of this Agreement (the "Employee Release"). 17. Other Agreements. Except as otherwise specifically provided in this Agreement, this instrument constitutes the entire agreement between you and the Company and supersedes all prior agreements and understandings, written or oral, including, without limitation, the employment contract between you and the Company which was effective April 1, 1999 (referred to in this Agreement as the "Employment Contract") and any other employment agreements that may have been made by and between you and the Company or its predecessors or Affiliates. As of your Termination Date, all rights, duties and obligations of both you and the Company pursuant to the Employment Contract shall terminate. Robert P. Cuthbert April 27, 1999 Page 8 18. Notices. Notices and all other communications provided for in this Agreement shall be in writing and shall be delivered personally or sent by registered or certified mail, return receipt requested, postage prepaid, or sent by facsimile or prepaid overnight courier to the parties at the addresses set forth below (or such other addresses as shall be specified by the parties by like notice). Such notices, demands, claims and other communications shall be deemed given: (a) in the case of delivery by overnight service with guaranteed next day delivery, the next day or the day designated for delivery; (b) in the case of certified, registered or similar mail delivery, five days after deposit in the local mail; or (c) in the case of facsimile, the date upon which the transmitting party received confirmation of receipt by facsimile, telephone or otherwise; provided, however, that in no event shall any such communications be deemed to be given later than the date they are actually received. Communications that are to be delivered by the mail or by overnight service are to be delivered to the addresses set forth below: to the Company: LaSalle Re Limited 25 Church Street Hamilton HMFX, Bermuda or to you: Robert P. Cuthbert 126 Lloyd Road Montclair, New Jersey 07042 All notices to the Company shall be directed to the attention of the chief executive officer of the Company, with a copy to the Secretary of the Company. Each party, by written notice furnished to the other party, may modify the applicable delivery address, except that notice of change of address shall be effective only upon receipt. Robert P. Cuthbert April 27, 1999 Page 9 19. Governing Law. The provisions of this Agreement shall be construed in accordance with the laws of Bermuda, without regard to the conflict of law provisions of any jurisdiction. 20. Arbitration of All Disputes. In the event of any dispute, controversy or claim arising out of or in relation to this Agreement, or the breach, termination or invalidity thereof, the parties hereto agree to proceed to arbitration. The number of arbitrators shall be three (3), to be appointed in the absence of the parties agreement by the Appointment Committee of the Chartered Institute of Arbitrators Bermuda Branch. The procedure to be followed shall be that as laid down in the Arbitration Act of 1986. The place of arbitration shall be Bermuda and the language of the arbitration shall be English. The decision and award of the arbitral tribunal is final and binding on the parties. For the avoidance of doubt, the parties agree that judgment may be entered and any award made by the Tribunal in any Federal Court in the United States (or any other jurisdiction where a party to this agreement is located). In accordance with section 13 of the Employment Contract, as defined in section 17 of this Agreement, the Employment Contract is hereby amended by mutual agreement of the parties, by deleting the language in section 19 of the Employment Contract and replacing it, effective as of the original effective date of the Employment Contract, with terms identical to the immediately foregoing provisions of this section 20 of this Agreement. 21. Exhibits, Other Documents. Except as otherwise expressly provided in this Agreement, or except where the context clearly requires otherwise, all references in this Agreement to "the Agreement" or "this Agreement" shall be deemed to include references to each of the Exhibits to this Agreement. To the extent that the terms of this Agreement (including the Exhibits to this Agreement) provide that your rights or obligations set forth in this Agreement (including the Exhibits to this Agreement) are to be determined under, or are to be subject to, the terms of any other plan or other document, this Agreement (including the Exhibits to this Agreement) shall be deemed to incorporate by reference such plan or other document. 22. Counterparts. This Agreement may be executed in more than one counterpart, but all of which together will constitute one and the same agreement. Robert P. Cuthbert April 27, 1999 Page 10 If you agree to the terms of this Agreement, please indicate your agreement by signing and returning a copy of this letter to the undersigned, along with a signed copies of Exhibits 3A and 3B (Letters of Resignation), and a signed and notarized copy of Exhibit 5 (Employee Release). Very truly yours, LASALLE RE LIMITED By: /s/ Victor H. Blake ------------------------------- Its: Chairman, President and CEO ------------------------------- Accepted and agreed to this 28th day of April, 1999. /s/ Robert P. Cuthbert - -------------------------------- Robert P. Cuthbert Exhibit 1 --------- COMPENSATION AND BENEFITS ------------------------- This Exhibit 1 describes your right to compensation, benefits and other payments and distributions from the Company under the Agreement. 1-1. Prior Amounts. The Company shall pay you the amount of all earned and previously unpaid salary for the period ending on your Termination Date. 1-2. Bonus Payment. You shall be entitled to receive $100,000, representing payment of the bonus described in and otherwise payable under paragraph 2(b) of your Employment Contract, of which $50,000 shall be paid as soon as practicable following the date of execution of this Agreement; and of which the remaining $50,000 shall be paid on September 30, 1999, or as soon as practicable thereafter; provided, however, that payment of such remaining $50,000 shall be made only if you have complied with all terms of this Agreement, as determined by the Company. 1-3. Salary Continuation. Subject to the provisions of this Agreement, for the period beginning on your Termination Date, you shall be entitled to "Salary Continuation Payments" in accordance with the following: (a) Subject to paragraph 1-3(b), for each calendar month (A) beginning with the month of May, 1999, and (B) ending with the earlier of the month of April, 2000 or the calendar month in which the Payment Termination Date (as defined in paragraph 1-10) occurs, you will receive a Salary Continuation Payment of $ 25,000. (b) You will not receive a Salary Continuation Payment for any period after the occurrence of a Payment Termination Date. The loss of your right to payments under this paragraph 1-3 shall be in addition to, and not in lieu of, any other remedies to which the Company may be entitled by reason of a breach of this Agreement. (c) Salary Continuation Payment due under this paragraph 1-3 for any month will be paid to you in arrears, provided that no Salary Continuation Payment shall be due under this paragraph 1-3 prior to the Initial Payment Date. 1-4. Expense Reimbursement. Upon written approval by the Chief Executive Officer of the Company, for the period beginning on January 25, 1999 and ending April 15, 1999, the Company will reimburse you for reasonable expenses in the amount of $7,406.95, and for additional reasonable expenses, if any, for shipping your personal effects from Bermuda to your home in New Jersey in the United States, which expenses you have documented or which you will document in such form as required by the Company to report business expenses. 1-5. Leasing Expense Payment. You will provide timely notice to the lessor of the house you leased in Bermuda of your intent to terminate the lease effective May 1, 1999, and the Company will cooperate with you in enabling you to provide the notice to the lessor in accordance with the terms of such lease. To the extent continued rental payment is required by the terms of the lease for the period following May 1, 1999, the Company shall pay the monthly rent of $14,000 for the months of May, June and July, 1999; but in no event shall the Company be obligated to pay more than $42,000 for such continued payment of rent. 1-6. Car Payment Reimbursement. Upon your transfer to the Company's designee of the title to the automobile that you have purchased in Bermuda, the Company will reimburse you for the $4,950.00 which you paid out of your own funds for such automobile. 1-7. Other Benefits. For the period beginning on your Termination Date, and ending on the earlier of the three-month anniversary of your Termination Date or the Payment Termination Date, you and your eligible dependents may continue to participate in the Company's medical and dental plans in which you participated on the date before your Termination Date; provided, however, that participation in the medical and dental plans is subject to your payment of the applicable employee portion of the monthly premium cost, if any. 1-8. Withholding. All amounts otherwise payable under the Agreement shall be subject to customary withholding and other employment taxes, if any, if required under United States tax law. 1-9. Initial Payment Date. For purposes of this Agreement, the "Initial Payment Date" shall be the first business day following the date of execution of this Agreement, including your execution of Exhibit 3A and Exhibit 3B (Letters of Resignation) and Exhibit 5 (Employee Release) of this Agreement. All payments to be made by the Company to the Employee shall be made by wire transfer to the account designated by the Employee, unless the Employee provided written direction to the Company to make payment directly to the Employee. 1-10. Payment Termination Date. The Payment Termination Date shall be the earliest to occur of: (a) the twelve-month anniversary of your Termination Date or (b) the date, if any, of any breach by you of the provisions of paragraph 5, 6, or 7. 1-11. Other Payments. Except as specified in this Exhibit 1, or otherwise expressly provided in or pursuant to the Agreement, you shall be entitled to no compensation, benefits or other payments or distributions, and references in the Employee Release to the release of claims against the Company shall be deemed to also include reference to the release of claims against all compensation and benefit plans and arrangements established or maintained by the Company and its Affiliates. 1-12. Dollar Amounts. As used in this Agreement, "dollars" or numbers preceded by the symbol "$" shall mean amounts in United States Dollars. Exhibit 2 --------- PRESS RELEASE ------------- LaSalle Re Holdings Limited announced today that it has reopened its search for a Chief Financial Officer. Robert P. Cuthbert will leave to pursue other interests, effective May 1, 1999. A committee of the Company's Board of Directors will serve as a search committee to identify a successor. LaSalle Re Holdings Limited, through its operating company LaSalle Re Limited, writes specialist classes of reinsurance on a worldwide basis, including property catastrophe reinsurance. Exhibit 3A ---------- LETTER OF RESIGNATION --------------------- Board of Directors LaSalle Re Limited Dear Sirs: Effective May 1, 1999, I hereby resign from employment with LaSalle Re Limited. Very truly yours, /s/ Robert P. Cuthbert Robert P. Cuthbert Exhibit 3B ---------- LETTER OF RESIGNATION --------------------- Board of Directors LaSalle Re Holdings Limited Dear Sirs: Effective May 1, 1999, I hereby resign from all positions held with LaSalle Re Holdings Limited. Very truly yours, /s/ Robert P. Cuthbert Robert P. Cuthbert Exhibit 4 --------- COMPANY RELEASE --------------- GENERAL RELEASE AND WAIVER -------------------------- 1. This document is attached to, is incorporated into, and forms a part of, an agreement (the "Agreement") by and between LaSalle Re Limited (the "Company") and Robert P. Cuthbert (the "Employee"). 2. Except for a claim based upon a breach of the Agreement, the Company, for and on behalf of itself and the other Company Releasors, releases and forever discharges to the fullest extent permitted under applicable law, and in particular to that extent permitted by Section 98 of the Companies Act of 1981, the Employee and the other Employee Releasees from any and all Claims, which the Company may now have or claim, or might hereafter have or claim, against the Employee (or against the other Employee Releasees, to the extent that it is derived from a Claim against the Employee) based upon or arising out of any matter or thing whatsoever, occurring or arising on or before the date of this General Release and Waiver, to the extent that the Claim arises out of or relates to the Employee's employment by the Company and its Affiliates, the Employee's position as an officer of the Company or any of its Affiliates, and/or the Employee's termination or resignation therefrom, and shall include, without limitation, Claims arising out of or related to the Employment Contract. For purposes of this General Release and Waiver, the terms set forth below shall have the following meanings: (a) The term "Agreement" shall include the Agreement and the Exhibits thereto, and including the plans and arrangements under which the Employee is entitled to benefits in accordance with the Agreement and the Exhibits. (b) The term "Claims" shall include any and all rights, claims, demands, debts, dues, sums of money, accounts, attorneys' fees, complaints, judgments, executions, actions and causes of action of any nature whatsoever, cognizable at law or equity. (c) The term "Company Releasors" shall include the Company and its Affiliates (as defined in the Agreement), and their officers, directors, trustees, members, representatives, agents, employees, shareholders, partners, attorneys, and insurers, and their predecessors and successors. (d) The term "Employee Releasees" shall include the Employee and his heirs, representatives, agents, and insurers. In witness whereof LaSalle Re Limited has executed this deed on the 30 April 1999 The Common Seal of ) LaSalle Re Limited ) [Common Seal affixed here] was hereunto affixed in the ) presence of: ) /s/ Victor H. Blake - --------------------------------- Director /s/ Lisa J. Marshall - --------------------------------- Secretary Exhibit 5 --------- EMPLOYEE RELEASE ---------------- GENERAL RELEASE AND WAIVER -------------------------- 1. This document is attached to, is incorporated into, and forms a part of, an agreement (the "Agreement") by and between LaSalle Re Limited (the "Company") and Robert P. Cuthbert (the "Employee"). Except for a claim based upon a breach of the Agreement, the Employee, on behalf of himself and the other Employee Releasors, releases and forever waives and discharges the Company and the other Company Releasees from any and all Claims which the Employee (or the other Employee Releasors may have, to the extent that it is derived from a Claim which the Employee may have) now has or claims, or might hereafter have or claim, against the Company Releasees based upon or arising out of any matter or thing whatsoever, occurring or arising on or before the date of this General Release and Waiver, to the extent that the Claim arises out of or relates to the Employee's employment by the Company and its Affiliates, the Employee's position as an officer of the Company or any of its Affiliates, and/or the Employee's termination or resignation therefrom, and shall include, without limitation, Claims arising out of or related to the Employment Contract, and Claims arising under any law dealing with employment discrimination. For purposes of this General Release and Waiver, the terms set forth below shall have the following meanings: (a) The term "Agreement" shall include the Agreement and the Exhibits thereto, and including the plans and arrangements under which the Employee is entitled to benefits in accordance with the Agreement and the Exhibits. (b) The term "Claims" shall include any and all rights, claims, demands, debts, dues, sums of money, accounts, attorneys' fees, complaints, judgments, executions, actions and causes of action of any nature whatsoever, cognizable at law or equity of any applicable jurisdictions. (c) The term "Company Releasees" shall include the Company and its Affiliates (as defined in the Agreement), and their officers, directors, trustees, members, representatives, agents, employees, shareholders, partners, attorneys, and insurers, and their predecessors and successors. (d) The term "Employee Releasors" shall include the Employee, and his heirs, representatives, agents, and insurers. 2. The following provisions are applicable to and made a part of the Agreement and this General Release and Waiver: (a) In exchange for this General Release and Waiver, the Employee hereby acknowledges that he has received separate consideration beyond that to which he is otherwise entitled under the Company's policy or applicable law. (b) The Company hereby expressly advises the Employee to consult with an attorney of his choosing prior to executing the Agreement or this General Release and Waiver. The Employee acknowledges that, prior to executing this Agreement and this General Release and Waiver, he has been given a reasonable time to review it, to consult with counsel of his choice, and to negotiate at arm's-length with the Company as to the contents. (c) The Employee hereby acknowledges that he has carefully read and understands the terms of the Agreement and this General Release and Waiver and each of his rights as set forth therein. Signed, sealed and delivered by Robert P. Cuthbert this 28th day of April, 1999. /s/ Robert P. Cuthbert ------------------------------- Robert P. Cuthbert State of New Jersey ------------------- County of Essex ----------------- Subscribed Before Me This 28th Day of April, 1999. /s/ Phillis Roberson --------------------------- Notary Public EX-10.12 5 EMPOLYMENT AGREEMENT 10/01/98 STOCKTON & LASALLE Exhibit 10.12 ------------- EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT, made and entered into as of October 1, 1998 (the "Effective Date"), by and between Mark Stockton (the "Executive") and LaSalle Re Limited (the "Company"); WITNESSETH THAT: --------------- WHEREAS, the parties desire to enter into this Agreement pertaining to the employment of the Executive by the Company; NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth below, it is hereby covenanted and agreed by the Executive and the Company as follows: 1. Performance of Services. The Executive's employment with the Company shall be subject to the following: (a) Subject to the provisions of this Agreement, the Company hereby agrees to employ the Executive as a Senior Vice President of the Company during the Agreement Term (as defined below), and the Executive hereby agrees to remain in the employ of the Company during the Agreement Term. (b) During the Agreement Term, while the Executive is employed by the Company, the Executive shall devote, subject to paragraph 1(f), his full time, energies and talents to performing his duties under this Agreement. (c) The Executive agrees that he shall perform his duties faithfully and efficiently subject to the directions of the Board of Directors (the "Board") and the Chief Executive Officer (the "CEO") of the Company. The Executive's duties may include providing services for the Company, LaSalle Re Holdings Limited (the "Holding Company"), and the Subsidiaries (as defined below), as determined by the CEO; provided that the Executive shall not, without his consent, be assigned tasks that would be inconsistent with his position at the Company. The Executive will have such authority and power as are inherent to the undertakings applicable to his position and necessary to carry out his responsibilities and the duties required of him hereunder. (d) While the Executive is employed by the Company, he shall be subject to the duties that reasonably apply to the Company's officers and employees (including, without limitation, the duty of loyalty to the Company). (e) The Company may change the Executive's title and duties in the event of reorganization, restructuring, or similar circumstances, except that the Executive shall have a senior executive position at all times during the Agreement Term while he is employed by the Company. (f) Notwithstanding the foregoing provisions of this paragraph 1, during the Agreement Term, the Executive may devote reasonable time to activities other than those required 1 under this Agreement, including the supervision of his personal investments, and activities involving professional, charitable, educational, religious and similar types of organizations, speaking engagements, membership of the boards of directors of other organizations, and similar type of activities, to the extent that such other activities do not inhibit or prohibit the performance of the Executive's duties under this Agreement, or conflict in any material way with the business of the Company, the Holding Company, or any Subsidiary; provided, however, that except as otherwise expressly provided in this Agreement, the Executive shall not serve on the board of any business, or hold any position with any business without the consent of the Board and the CEO of the Company. (g) The Executive will be required to maintain a residence in Bermuda while employed by the Company. (h) The Company will use its reasonable best efforts to maintain a Bermuda work permit for the Executive. The Executive shall cooperate with the Company and the appropriate authorities in maintaining such permit. The Executive's employment by the Company is conditioned upon the Company's ability to keep current all required work permits, and except as otherwise provided in this paragraph 1(h), the Company shall have no further obligation to the Executive if, after employing its reasonable best efforts, it is unable to maintain such permits. If despite the Company's best efforts to maintain the Bermuda work permit, the work permit is terminated or revoked by the Government of Bermuda through no fault of the Executive, then the Executive shall be deemed to have received written notice from the Company that his Date of Termination is the date on which the termination or revocation of his or her work permit is effective, and the Executive shall be entitled to the benefits provided for Termination by the Company under Section 3(g). In addition, the Company shall reimburse the Executive for reasonable costs actually incurred by the Executive and the members of his or her immediate family to relocate to the nation in which the Executive maintains citizenship; provided, however, that such reimbursement shall be made only if such relocation occurs within a reasonable time following such Date of Termination. The reasonableness of the cost and time of relocation shall be determined by the Board of Directors of the Company. (i) Subject to the provisions of this Agreement, the Executive shall not be required to perform services under this Agreement during any period that he is Disabled. The Executive shall be considered "Disabled" during any period in which he has a physical or mental disability which renders him incapable, after reasonable accommodation, of performing his duties under this Agreement. In the event of a dispute as to whether the Executive is Disabled, the Company may refer the same to a licensed practicing physician of the Company's choice, and the Executive agrees to submit to such tests and examination as such physician shall deem appropriate. (j) The "Agreement Term" shall be the period beginning on the Effective Date and ending on the first anniversary of the Effective Date; provided, however, that such Agreement Term shall automatically be renewed daily, such that at any time on or after the Effective Date, the remaining term shall equal one year. However, such additional day-to-day 2 renewals may be terminated by either party be delivering written notice of such termination to the other party, in accordance with the requirements of paragraph 18. The cessation of the automatic renewals shall be effective on the date such written notice is deemed to be given to the other party in accordance with paragraph 18, such that the Agreement term shall end on the one-year anniversary of the date such written notice is deemed given to the other party. For purposes of this Agreement, a Notice of Termination, as described in paragraph 3(i), shall be deemed to be a notice to terminate day-to-day renewals. (k) For purposes of this Agreement, the term "Subsidiary" shall mean any company (regardless of whether incorporated) during any period in which 50% or more of the total combined voting power of all classes of stock (or other ownership interest) entitled to vote is owned, directly or indirectly, by the Company. 2. Compensation. Subject to the provisions of this Agreement, during the Agreement Term, while he is employed by the Company, the Company shall compensate the Executive for the Executive's services as follows: (a) Salary. The Executive shall receive, for each 12-consecutive month period beginning on the Effective Date and each anniversary thereof, in substantially equal monthly or more frequent installments, an annual base salary of $230,000 (the "Salary"). In no event shall the Salary of the Executive be reduced to an amount that is less than the amount specified in this paragraph (a), or to an amount that is less than the amount that he was previously receiving, except to the extent that reductions of the same percentage are being made at the same time to the salaries of all other Company officers in the corporate office at or above the vice-president level, and such Salary shall be restored to its prior level when, and to the same extent, as the restoration that applies to the other officers. (b) Bonus. The Executive shall be entitled to receive bonuses from the Company in accordance with the provisions of Exhibit A, which is attached to and forms a part of this Agreement. (c) Disability. The Executive shall receive from the Company disability income replacement coverage which will provide for replacement of income at a commercially reasonable rate during any period in which the Executive is Disabled if the disability arose during the Agreement Term and prior to the Executive's Date of Termination. During any period while the Executive is Disabled, and is otherwise entitled to receive Salary under this Agreement, any Salary payments to the Executive shall be reduced by the amount of any benefits paid for the same period of time under the Company's disability income replacement coverage. (d) Pension. The Company will provide the Executive with a defined contribution savings plan, into which the Company will make a contribution for each fiscal year equal to 10% of the Salary paid to the Executive for such fiscal year. The plan will also provide that the Executive may make annual contributions equal to or less than the Company's contribution. 3 (e) Automobile. The Company will provide the Executive with an allowance toward the cost of an automobile in Bermuda, the amount of which will be approved by the CEO. The Company will assume responsibility for the amount of insurance, maintenance and similar items. The Executive's personal use of the automobile will be permitted. The perquisite shall be governed by the rules and limitations set down from time to time by the Company. (f) Housing/Living Allowance. The Company shall provide the Executive with a housing and living expense allowance at the annual rate of $72,000 for the Agreement Term, with such allowance to be payable to the Executive in monthly instalments. (g) Club. The Company will reimburse the Executive for periodic dues for his membership in clubs located in Bermuda in an amount not to exceed $2,200 per fiscal year. The Company will not reimburse initiation fees for club membership under this Agreement, in light of reimbursements made by the Company to the Executive's prior employer with respect to initiation fees for club membership for the period during which the Executive performed services for the Company but was employed by the prior employer. (h) Other Benefits. Except as otherwise specifically provided to the contrary in this Agreement, the Executive shall be provided with the welfare benefits and other fringe benefits to the same extent and on the same terms as those benefits are provided by the Company from time to time to the Company's other senior management employees. However, the Company shall not be required to provide a benefit or perquisite under this paragraph 2(h) if such benefit or perquisite would duplicate (or otherwise be the same type as) a benefit or perquisite specifically required to be provided under another provision of this Agreement. (i) Expenses. Upon approval by the CEO, the Company will reimburse the Executive for reasonable expenses for entertainment, traveling, meals, lodging and similar items in promoting the Company's business which the Executive documents on a form used by the Company to report business expenses. (j) Indemnification. The Company shall maintain officers liability insurance in commercially reasonable amounts (as reasonably determined by the Board), and the Executive shall be covered under such insurance to the same extent as other senior management employees of the Company. The Executive shall be eligible for indemnification by the Company under the Company's bye-laws as currently in effect. The Company agrees that it shall not take any action that would impair the Executive's rights to indemnification under the Company's bye-laws, as currently in effect. (k) Holiday/Vacation. The Executive shall be subject to the holiday and vacation policy that applies to other senior executives of the Company. (l) Dollar Amounts. As used in this Agreement, "dollars" or numbers preceded by the symbol "$" shall mean amounts in United States Dollars. 4 3. Termination. The Executive's employment during the Agreement Term may be terminated by the Company or the Executive without any breach of this Agreement only under the circumstances described in paragraphs 3(a) through 3(g): (a) Death. The Executive's employment will terminate upon his death. (b) Permanently Disabled. The Company may terminate the Executive's employment if he is Permanently Disabled. "Permanently Disabled" means that the Executive is eligible for benefits under the Company's long-term disability plan. (c) Cause. The Company may terminate the Executive's employment at any time for Cause. "Cause" shall mean: (i) the wilful and continued failure by the Executive to substantially perform his duties with the Company (other than any such failure resulting from the Executive's being Disabled), within a reasonable period of time after a written demand for substantial performance is delivered to the Executive by the CEO, which demand specifically identifies the manner in which the CEO believes that the Executive has not substantially performed his duties; (ii) the wilful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company or the Holding Company, monetarily or otherwise; or (iii) the engaging by the Executive in egregious misconduct involving serious moral turpitude to the extent that, in the reasonable judgment of the CEO, the Executive's credibility and reputation no longer conform to the standard of the Company's executives. For purposes of this Agreement, no act, or failure to act, on the Executive's part shall be deemed "wilful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interest of the Company or the Holding Company. (d) Constructive Discharge. If the Executive (i) provides written notice to the Company of the occurrence of a material breach of this Agreement by the Company, which specifically identifies the manner in which the Executive believes that the breach has occurred; (ii) the Company fails to correct such breach within a reasonable time after such notice; and (iii) the Executive resigns within the 60-day period following the occurrence of such breach, then the Executive shall be considered to have been constructively discharged. (e) Resignation by Executive. The Executive may resign for any reason by giving the Company ninety (90) days prior written notice, except the Executive will be treated as having resigned under this paragraph 3(e) only if he has not been constructively discharged under paragraph 3(d). 5 (f) Mutual Agreement. This Agreement may be terminated at any time by the mutual agreement of the parties. Any termination of the Executive's employment by mutual agreement of the parties will be memorialized by an agreement which is reduced in writing and signed by the Executive and the CEO or other duly appointed officer of the Company. (g) Termination by Company. The Company may terminate the Executive's employment at any time for any reason by giving the Executive prior written notice, except the Executive's employment will not be treated as having been terminated under this paragraph 3(g) if the termination is for reasons of being Permanently Disabled or for Cause. (h) Date of Termination. "Date of Termination" means the last day the Executive is employed by the Company, provided that the Executive's employment is terminated in accordance with the foregoing provisions of this paragraph 3. (i) Notice of Termination. Any termination of the Executive's employment by the Company or the Executive (other than a termination pursuant to paragraph 3(a) or paragraph 3(f)) must be communicated by a written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" means a dated notice which indicates the specific termination provision in this Agreement relied on and which sets forth in reasonable detail the facts and circumstances, if any, claimed to provide a basis for termination of the Executive's employment under the provision so indicated. 4. Rights Upon Termination. This paragraph 4 describes the payments and benefits to be provided to the Executive after his Date of Termination: (a) Payment of Previously Earned Amounts. The Executive shall receive payment of accrued but unpaid Salary, vacation pay and, if expressly provided for in paragraph 4(d), a pro rata portion of his bonus (if any), in each case for the period ending with the Executive's Date of Termination. (b) No Severance Payments. If the Executive's Date of Termination occurs during or after the end of the Agreement Term, or because of (i) the Executive's death, (ii) his being Permanently Disabled (paragraph 3(b)), (iii) his termination for Cause (paragraph 3(c)), or (iv) his resignation (paragraph 3(e)), then, except as otherwise expressly provided for in this Agreement, no payments shall be due to the Executive under this Agreement for periods after the Date of Termination. (c) Salary Continuation. If the Executive's Date of Termination occurs during the Agreement Term because of (i) his discharge by the Company for reasons other than Cause (described in paragraph 3(c)), or (ii) his constructive discharge (described in paragraph 3(d)), the Executive shall continue to receive Salary payments (at the rate in effect on the Date of Termination) in monthly or more frequent instalments through the earliest of: (i) the last day of the Agreement Term; (ii) the date of the Executive's death, 6 or (iii) the date, if any, of the breach by the Executive of the non- competition requirements of paragraph 7, the confidentiality requirements of paragraph 8 or the non-disparagement requirements of paragraph 9. (d) Pro rata Bonus. Except as otherwise provided in this paragraph 4(d), the Executive shall not receive a bonus for the fiscal year in which the Executive's Date of Termination occurs. If the Executive's Date of Termination occurs during the Agreement Term as a result of (i) the Executive's death (ii) his being Permanently Disabled (paragraph 3(b)), (iii) his discharge by the Company for reasons other than Cause (described in paragraph 3(c)), or (iv) his constructive discharge (described in paragraph 3(d)), the Executive shall receive a pro rata portion of the bonus, if any, which would have been paid pursuant to paragraph 2(b) for the fiscal year in which the Executive's Date of Termination occurs. Such portion, if any, shall be calculated for the period ending on the Date of Termination and shall be paid to the Executive (or his estate) within a reasonable period of time after the Company calculates the bonus amount, if any, for all employees for the fiscal year. (e) Housing/Living Expenses, Medical Benefits. If the Executive is entitled to Salary Continuation payments pursuant to paragraph 4(c), the Executive shall receive a housing and living expense allowance (described in paragraph 2(g)) and may continue to participate in the medical and dental plans in which he participated on the day before his Date of Termination through the earlier of: (i) the last day for which the Executive receives Salary Continuation payments pursuant to paragraph 4(c); or (ii) three (3) months after the Executive's Date of Termination. Participation in the medical and dental plans is subject to the Executive's payment of the applicable employee portion of the monthly premium cost, if any. If the Company ceases offering the medical and dental plans in which the Executive participated on the day before his Date of Termination to Company employees during this time, the Executive may elect to participate in any other medical or dental plan offered by the Company to its employees, provided however, that the Executive shall be responsible for paying the applicable employee portion of the monthly premium cost. (f) Other Programs. No benefits shall be payable to the Executive under any other severance pay arrangement or similar arrangement maintained by the Company or any Subsidiary. Except as otherwise expressly provided in this Agreement, no other payments or benefits shall be due to the Executive following the Date of Termination (except as otherwise specifically provided under the terms of an employee benefit plan or arrangement). 5. Duties on Termination. Subject to the provisions of this Agreement, during the period beginning on the date of delivery of a Notice of Termination, and ending on the Date of Termination, the Executive shall continue to perform his duties as set forth in this Agreement, and shall also perform such services for the Company and the Holding Company as are necessary and appropriate for a smooth transition to the Executive's successor, if any. Notwithstanding the foregoing provisions of this paragraph 5, the Company may suspend the Executive from performing his duties under this Agreement following the delivery of a Notice of Termination providing for the Executive's resignation, or delivery by the Company of a Notice of Termination providing for the Executive's termination of employment for any reason; 7 provided, however, that during the period of suspension (which shall end on the Date of Termination), the Executive shall continue to be treated as employed by the Company for other purposes, and his rights to compensation or benefits shall not be reduced by reason of the suspension. 6. Set-Off. If the Executive's employment with the Company is terminated for any reason and, under the terms of this Agreement, the Executive is otherwise entitled to receive Salary and bonus payments, such payments will be reduced by the amount of any salary and bonus payments the Executive receives in connection with other employment. 7. Non-competition. While the Executive is employed by the Company, and during the Non-Competition Period (as defined below), the Executive agrees that he will not directly or indirectly perform services in an underwriting-related position in Bermuda for a direct competitor of the Company. A related position shall include, but is not limited to, a senior vice president of underwriting. For purposes of this paragraph 7: "Non-Competition Period" shall be determined as follows: (A) If the Executive's Date of Termination occurs under circumstances other than those described in paragraph 3(d) (relating to constructive discharge) or paragraph 3(g) (relating to certain terminations by the Company), the Non-Competition Period shall be the period beginning on the Date of Termination, and ending on the twenty-four-month (24) anniversary of the Date of Termination. (B) If the Executive's Date of Termination occurs under circumstances described in paragraph 3(d) (relating to constructive discharge) or paragraph 3(g) (relating to certain terminations by the Company), the Non-Competition Period shall be the period beginning on the Date of Termination, and ending on the earlier to occur of the last day of the Agreement Term or the twenty-four-month (24) anniversary of the Date of Termination. However, under this paragraph (B), the Company, in its discretion, by notice provided to the Executive not later than fifteen (15) days after the Date of Termination, may extend the Non-Competition Period beyond the end of the Agreement Term, to a date specified in such notice (but not later than the twenty-four-month anniversary of the Date of Termination), but only if the Company agrees to provide the salary continuation payments described in paragraph 4(c) during such Non-Competition Period. Nothing in this paragraph 7, paragraph 8 or paragraph 9 shall be construed as limiting the Executive's duty of loyalty to the Company while he is employed by the Company or any other duty he may otherwise have to the Company while he is employed by the Company. 8 8. Confidential Information. Except as may be required by the lawful order of a court or agency of competent jurisdiction, or except to the extent that the Executive has express authorization from the Company, the Executive agrees to keep secret and confidential indefinitely all non-public information (including, without limitation, information regarding litigation and pending litigation) concerning the Company, the Holding Company, and the Subsidiaries which was acquired by or disclosed to the Executive during the course of his employment with the Company, or during the course of his consultation with the Company following his termination of employment (regardless of whether consultation is pursuant to paragraph 10), and not to disclose the same, either directly or indirectly, to any other person, firm, or business entity, or to use it in any way. To the extent that the Executive obtains information on behalf of the Company, the Holding Company, or any of the Subsidiaries that may be subject to attorney-client privilege as to the Company's attorneys, the Executive shall take reasonable steps to maintain the confidentiality of such information and to preserve such privilege. Nothing in the foregoing provisions of this paragraph 8 shall be construed so as to prevent the Executive from using, in connection with his employment for himself or an employer other than the Company, the Holding Company, or any of the Subsidiaries, knowledge which was acquired by him during the course of his employment with the Company, the Holding Company, and the Subsidiaries, and which is generally known to persons of his experience in other companies in the same industry. 9. Non-Disparagement. The Executive agrees that, while he is employed by the Company, and after his Date of Termination, he shall not make any false, defamatory or disparaging statements about the Company, the Holding Company, the Subsidiaries, or the officers or directors of the Company, the Holding Company, or the Subsidiaries that are reasonably likely to cause material damage to the Company, the Holding Company, the Subsidiaries, or their officers or directors. While the Executive is employed by the Company, and after his Date of Termination, the Company agrees, on behalf of itself, the Holding Company, and the Subsidiaries, that neither the officers nor the directors of the Company, the Holding Company, or the Subsidiaries shall make any false, defamatory or disparaging statements about the Executive that are reasonably likely to cause material damage to Executive. 10. Defense of Claims. The Executive agrees that, for the period beginning the Effective Date, and continuing for a reasonable period after the Executive's termination of employment with the Company, the Executive will cooperate with the Company, the Holding Company and the Subsidiaries in defense of any claims that may be made against the Company, the Holding Company and the Subsidiaries, and will cooperate with the Company, the Holding Company or the Subsidiaries in the prosecution of any claims that may be made by the Company, the Holding Company or the Subsidiaries, to the extent that such claims may relate to services performed by the Executive for the Company. The Executive agrees to promptly inform the Company if he becomes aware of any lawsuits involving such claims that may be filed against the Company, the Holding Company or the Subsidiaries. The Company agrees to reimburse the Executive for all of the Executive's reasonable out-of-pocket expenses associated with such cooperation, including travel expenses. For periods after the Executive's employment with the Company terminates, the Company agrees to provide reasonable compensation to the Executive for such cooperation. The determination of the reasonableness of such compensation shall take into account information provided to the Company by the Executive or otherwise known to the Company, which may 9 include, without limitation, (a) the Executive's rate of compensation at the time he ceased employment with the Company, and whether he is then receiving other compensation payments from the Company; (b) the Executive's rate of compensation at the time of such cooperation; (c) the amount of time required of the Executive for such cooperation; (d) difficulty of the issues as to which the cooperation is required; (e) the amount of inconvenience to the Executive resulting from such cooperation (including consideration of factors such as the amount of travel required of the Executive, the effect on other commitments of the Executive, and the amount of advance notice provided to the Executive); and (f) whether such cooperation would be legally required in the absence of the requirements of this paragraph 10. The Executive also agrees to promptly inform the Company if he is asked to assist in any investigation of the Company, the Holding Company or the Subsidiaries (or their actions) that may relate to services performed by the Executive for the Company, regardless of whether a lawsuit has then been filed against the Company, the Holding Company or the Subsidiaries with respect to such investigation. 11. Remedies. The Executive acknowledges that the Company or the Holding Company would be irreparably injured by a violation of paragraph 7, paragraph 8, or paragraph 9, and he agrees that the Company, in addition to any other remedies available to it for such breach or threatened breach, shall be entitled to a preliminary injunction, temporary restraining order, or other equivalent relief, restraining the Executive from any actual or threatened breach of either paragraph 7, paragraph 8 or paragraph 9. The Company acknowledges that the Executive would be irreparably injured by a violation of paragraph 9, and the Company agrees that the Executive, in addition to any other remedies available to him for such breach or threatened breach, shall be entitled to a preliminary injunction, temporary restraining order, or other equivalent relief, restraining the Company from any actual or threatened breach of paragraph 9. If a bond is required to be posted in order for the Company or the Executive to secure an injunction or other equitable remedy, the parties agree that said bond need not be more than a nominal sum. 12. Nonalienation. The interests of the Executive under this Agreement are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors of the Executive or the Executive's beneficiary. 13. Amendment. This Agreement may be amended or canceled only by mutual agreement of the parties in writing without the consent of any other person. So long as the Executive lives, no person, other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof. 14. Applicable Law. The provisions of this Agreement shall be construed in accordance with the laws of Bermuda, without regard to the conflict of law provisions of any jurisdiction. All disputes shall be arbitrated or litigated (whichever is applicable) in Bermuda. 15. Severability. The invalidity or unenforceability of any provision of this Agreement will not affect the validity or enforceability of any other provision of this Agreement, and this Agreement will be construed as if such invalid or unenforceable provision were omitted (but only to the extent that such provision cannot be appropriately reformed or modified). 10 16. Waiver of Breach. No waiver by any party hereto of a breach of any provision of this Agreement by any other party, or of compliance with any condition or provision of this Agreement to be performed by such other party, will operate or be construed as a waiver of any subsequent breach by such other party or any similar or dissimilar provisions and conditions at the same or any prior or subsequent time. The failure of any party hereto to take any action by reason of such breach will not deprive such party of the right to take action at any time while such breach continues. 17. Successors. This Agreement shall be binding upon, and inure to the benefit of, the Company and its successors and assigns and upon any person acquiring, whether by merger, consolidation, purchase of assets or otherwise, all or substantially all of the Company's assets and business. 18. Notices. Notices and all other communications provided for in this Agreement shall be in writing and shall be delivered personally or sent by registered or certified mail, return receipt requested, postage prepaid, or sent by facsimile or prepaid overnight courier to the parties at the addresses set forth below (or such other addresses as shall be specified by the parties by like notice). Such notices, demands, claims and other communications shall be deemed given: (a) in the case of delivery by overnight service with guaranteed next day delivery, the next day or the day designated for delivery; (b) in the case of certified, registered or similar mail delivery, five days after deposit in the local mail; or (c) in the case of facsimile, the date upon which the transmitting party received confirmation of receipt by facsimile, telephone or otherwise; provided, however, that in no event shall any such communications be deemed to be given later than the date they are actually received. Communications that are to be delivered by the mail or by overnight service are to be delivered to the addresses set forth below: to the Company: LaSalle Re Limited 25 Church Street Hamilton HMFX - Bermuda or to the Executive: Mark Stockton 25 Church Street Hamilton, HMFX, Bermuda All notices to the Company shall be directed to the attention of the chief executive officer of the Company, with a copy to the Secretary of the Company. Each party, by written notice furnished 11 to the other party, may modify the applicable delivery address, except that notice of change of address shall be effective only upon receipt. 19. Arbitration of All Disputes. Any controversy or claim arising out of or relating to this Agreement (or the breach thereof) shall be settled by final, binding and non-appealable arbitration in Bermuda by three arbitrators. Except as otherwise expressly provided in this paragraph 19, the arbitration shall be conducted in accordance with the Arbitration Act 1986 as then in effect. One of the arbitrators shall be appointed by the Company, one shall be appointed by the Executive, and the third shall be appointed by the first two arbitrators. If the first two arbitrators cannot agree on the third arbitrator within 30 days of the appointment of the second arbitrator, then the third arbitrator shall be appointed by the President of the Bermuda Bar Council. 20. Survival of Agreement. Except as otherwise expressly provided in this Agreement, the rights and obligations of the parties to this Agreement shall survive the termination of the Executive's employment with the Company. 21. Entire Agreement. Except as otherwise noted herein, this Agreement, including any Exhibit(s) attached hereto, constitutes the entire agreement between the parties concerning the subject matter hereof and supersedes all prior and contemporaneous agreements, if any, between the parties relating to the subject matter hereof. The enforceability of this Agreement shall not cease or otherwise be adversely affected by the termination of the Executive's employment with the Company. 22. Acknowledgment by Executive. The Executive represents to the Company that he is knowledgeable and sophisticated as to business matters, including the subject matter of this Agreement, that he has read this Agreement and that he understands its terms. The Executive acknowledges that, prior to assenting to the terms of this Agreement, he has been given a reasonable time to review it, to consult with counsel of his choice, and to negotiate at arm's-length with the Company as to the contents. The Executive and the Company agree that the language used in this Agreement is the language chosen by the parties to express their mutual intent, and that no rule of strict construction is to be applied against any party hereto. The Executive represents and warrants that he is not, and will not become a party to any agreement, contract, arrangement or understanding, whether of employment or otherwise, that would in any way restrict or prohibit him from undertaking or performing his duties in accordance with this Agreement. 23. Titles and Headings. Titles and headings in this Agreement are for ease of reference and convenience only, and shall not be construed to affect the meaning of any provision of this Agreement. IN WITNESS THEREOF, the Executive has hereunto set his hand, and the Company has caused these presents to be executed in its name and on its behalf, and its corporate seal to be hereunto affixed, all as of the day and year first above written. 12 ___________________________ Mark Stockton LASALLE RE LIMITED By:________________________ Victor H. Blake EXHIBIT A --------- BONUS COMPUTATION ----------------- A-1. Purpose. This Exhibit A is attached to and forms a part of the employment agreement (the "Agreement") between Mark Stockton (the "Executive") and LaSalle Re Limited (the "Company"). The purpose of this Exhibit A is to set forth the terms of the bonus program described in paragraph 2(b) of the Agreement. A-2. Guidelines. The bonus shall be determined in accordance with the following guidelines: . A discretionary bonus may be awarded annually by the Board of the Company after considering the recommendation of the CEO of the Company. . A non-discretionary bonus shall be earned and paid annually based upon the Company's Return on Equity (defined below) achieved for each fiscal year of the Company, while the Executive is employed by the Company. . The non-discretionary annual bonus calculation will be based on the Company's Return on Equity earned each year. If the Company's Return on Equity for any year exceeds 15%, the bonus will be paid according to the following formula: . For each 1% improvement in Return on Equity above 15%, an amount equal to 10.0 % of The Executive's Salary will be paid. . For each 1% improvement in Return on Equity above 22.5%, an amount equal to 15.0 % of The Executive's Salary will be paid. . For Return on Equity results between whole percentages (but above 15%), the percentage of Salary awarded will be increased by interpolation. . The "Return on Equity" for any fiscal year shall be equal to the net income of the Company for the fiscal year, divided by shareholders' equity at the beginning of the period (as determined on the basis of U.S. generally accepted accounting principles). For purposes of this calculation any unrealized appreciation or depreciation of the Company's investments shall be disregarded (both as to the numerator and the denominator). Payments made to CNA Financial Corporation or its affiliates under the Underwriting Support Services Agreement will not reduce net income in determining Return on Equity. 2 EX-10.32 6 QUOTA SHARE TREATY CNA & LASALLE 1999 LONDON Exhibit 10.32 CNA Reference: 44 FIR 1999 -------------------------- Reassured:- CNA Reinsurance Company Limited. International Treaty Department, London, England. 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 FOR 1999 UNDERWRITING YEAR OF ACCOUNT. Type:- 40% Quota Share Treaty Class:- The Reassured's Account of PROPERTY CATASTROPHE EXCESS OF LOSS TREATIES 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 40% Quota Share of the Reassureds participation subject to a maximum cession hereon of GBP 1,600,000 ($2,400,000) 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:- 7.00% on Original Net Rate. CNA Reference: 44 FIR 1999 -------------------------- Profit Commission:- 20% on an Underwriting Year Basis. Losses carried forward to extinction. To be calculated 12 months after the close of the Underwriting Year and annually thereafter subject to a Reinsurer expense allowance of 25%. Taxes:- As may be applicable on the original business. 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 GBP 2,666,666 ($4,000,000). Accounts:- Quarterly Accounts in GBP and US$ separately on each year of account. Presentation within 45 days of end of quarter with settlement due within 30 days thereafter. General Conditions:- Monthly bordereaux of risks ceded 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 GBP 14,600,000 Normal maximum aggregate cession per country or territorial zone hereon GBP 24,000,000 with exception of the United Kingdom where the maximum aggregate to be ceded is GBP 40,000,000 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:- 1999 E.N.P.I. GBP 5,000,000 for 40% Hereon. (Net of original brokerage) HEREON: 100% LaSalle Re Limited Signed /s/ M. C. Stockton Dated 28/1/1999 ------------------ --------- ATTACHING TO AND FORMING PART OF QUOTA SHARE AGREEMENT MADE BETWEEN Reassured:- CNA Reinsurance Company Limited - International Treaty Department, London, England. (Hereinafter called the "Reinsured") and Reinsurers:- LaSalle Re Limited (Hereinafter called the "Reinsurers") 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 FOR 1999 UNDERWRITING YEAR OF ACCOUNT. Type:- 40% Quota Share Treaty ________________________________________________________________________________ It is noted and agreed with effect 1st January, 1999 the following changes:- Administrative Processing Fee:- 7.00% on Original Net Rate Profit Commission:- The Reinsurers shall pay the Reinsured a Profit Commission of 20.00% calculated on the net profit, if any, under this Agreement in any one Underwriting Year of Account. Such profit commission being calculated as below and payable for each Underwriting Year of Account separately after the close of such Underwriting Year of Account. The first calculation of profit commission for each Underwriting Year of Account shall be made 24 months after the inception of such Underwriting Year of Account and annually thereafter. For the purposes of calculating the profit commission the profit will be deemed to be the difference between Income and Outgo as calculated below. INCOME Original Net Premiums, as defined in PREMIUM, for the current Underwriting Year of Account. OUTGO a) Losses paid in respect of the Underwriting Year of Account under consideration. b) Commission as defined in the treaty wording. c) 100% of the estimated liability for losses outstanding in respect of the Underwriting Year of Account under consideration. d) Reinsurers' expenses calculated at 20.00% of INCOME. e) Deficit, if any, from the profit commission statement for the previous Underwriting Years of Account. In the event of any premiums or salvages being received, or claims or returns being payable subsequent to the calculation of profit commission, then such profit commission shall be adjusted as if such additional items had been included in the original calculation and the Reassured credited or debited as the case may be, in the next profit commission calculation. In the event of a profit commission statement showing a deficit for any one Underwriting Year of Account, the total amount of such deficit shall be debited to the profit commission calculation for the ensuing Underwriting Year or Years of Account. All other terms and conditions remain unaltered. On behalf of CNA Reinsurance Company Limited, London, England. Signed /s/ Tim I. Madden Dated 22 June 1999 ----------------- ------------ On behalf of LaSalle Re Limited, [LOGO] Hamilton, Bermuda, Signed /s/ M. C. Stockton Dated 7th July, 1999. ------------------ -------------- ADDENDUM ATTACHING TO AND FORMING PART OF QUOTA SHARE AGREEMENT MADE BETWEEN Reassured:- CNA Reinsurance Company Limited - International Treaty Department, London, England. (Hereinafter called the "Reassured") and Reinsurers:- LaSalle Re Limited (Hereinafter called the "Reinsurers") 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 FOR 1999 UNDERWRITING YEAR OF ACCOUNT. Type:- 40% Quota Share Treaty ________________________________________________________________________________ It is noted and agreed with effect from 12.01 am 1st April, 1999 the percentage of the Quota Share is reduced to 15.00%. As a consequence of this change the following should be noted:- Loss Portfolio:- The Reinsurer shall be debited with a portfolio of loss withdrawal calculated at 25% of the Reassured's estimate of losses outstanding at the 1st April, 1999 and thereafter shall be free of further liability in respect of the percentage share reduction. The Reinsurer shall continue to be liable for all incurred losses for their 15.00% share at the date of commencement of this Agreement. Profit Commission:- The Reinsurers shall pay the Reassured a provisional Profit Commission of 20.00% calculated on the net profit expected, under this Agreement in respect of the reduction of 25.00% in the 1999 Underwriting Year of Account. Such profit commission being calculated in accordance with the formula previously agreed. Any further adjustment to the calculation of the provisional profit commission statement will be made 24 months after the inception of the 1999 Underwriting Year of Account and annually thereafter. All other terms and conditions remain unaltered. On behalf of CNA Reinsurance Company Limited, London, England. Signed /s/ Tim I. Madden Dated 22 June 1999 --------------------- ---------------- On behalf of LaSalle Re Limited, Hamilton, Bermuda. [LOGO] Signed /s/ M. C. Stockton Dated 7th July, 1999. --------------------- ---------------- EX-10.38 7 QUOTA SHARE TREATY CNA & LASALLE 1999 AMSTERDAM Exhibit 10.38 CNA Ref: 45 FIR 1999 -------------------- Reassured:- CNA Reinsurance Company Limited, London- i.r.o. its Amsterdam, Zurich and Milan Branches 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 1999 UNDERWRITING YEAR OF ACCOUNT. Type:- 50% Quota Share Treaty Class:- The Reassured's Account of PROPERTY CATASTROPHE EXCESS OF LOSS TREATIES 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:- 7.00% on Original Net Rate. CNA Ref: 45 FIR 1999 -------------------- Profit Commission:- 20% on an Underwriting Year Basis. Losses carried forward to extinction. To be calculated 12 months after the close of the Underwriting Year and annually thereafter subject to a Reinsurer expense allowance of 25% Taxes:- As may be applicable on the original business. 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 GBP 888,888 ($1,333,333). Accounts:- Quarterly Accounts in GBP and US$ separately on each year of account. Presentation within 45 days of end of quarter with settlement due within 30 days thereafter. General Conditions:- Monthly 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 20,000,000 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:- 1999 E.N.P.I. GBP 2,000,000 for 50% Hereon. (Net of Original Brokerage) HEREON: 100% LaSalle Re Limited. Signed /s/ M. C. Stockton Dated 28/1/1999 -------------------------------- --------------------------- ADDENDUM ATTACHING TO AND FORMING PART OF QUOTA SHARE AGREEMENT MADE BETWEEN Reassured:- CNA Reinsurance Company Limited, London, - On behalf of its Amsterdam, Zurich and Milan Branches. (Hereinafter called the "Reassured") and Reinsurers:- LaSalle Re Limited (Hereinafter called the "Reinsurers") 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 FOR 1999 UNDERWRITING YEAR OF ACCOUNT. Type:- 50% Quota Share Treaty _______________________________________________________________________________ It is noted and agreed with effect 1st January, 1999 the following changes:- Administrative Processing Fee:- 7.00% on Original Net Rate Profit Commission:- The Reinsurers shall pay the Reinsured a Profit Commission of 20.00% calculated on the net profit, if any, under this Agreement in any one Underwriting Year of Account. Such profit commission being calculated as below and payable for each Underwriting Year of Account separately after the close of such Underwriting Year of Account. The first calculation of profit commission for each Underwriting Year of Account shall be made 24 months after the inception of such Underwriting Year of Account and annually thereafter. For the purposes of calculating the profit commission the profit will be deemed to be the difference between Income and Outgo as calculated below. INCOME Original Net Premiums, as defined in PREMIUM, for the current Underwriting Year of Account. OUTGO a) Losses paid in respect of the Underwriting Year of Account under consideration. b) Commission as defined in the treaty wording. c) 100% of the estimated liability for losses outstanding in respect of the Underwriting Year of Account under consideration. d) Reinsurers' expenses calculated at 20.00% of INCOME. e) Deficit, if any, from the profit commission statement for the previous Underwriting Years of Account. In the event of any premiums or salvages being received, or claims or returns being payable subsequent to the calculation of profit commission, then such profit commission shall be adjusted as if such additional items had been included in the original calculation and the Reassured credited or debited as the case may be, in the next profit commission calculation. In the event of a profit commission statement showing a deficit for any one Underwriting Year of Account, the total amount of such deficit shall be debited to the profit commission calculation for the ensuing Underwriting Year or Years of Account. All other terms and conditions remain unaltered. On behalf of CNA Reinsurance Company Limited, London, England. Signed /s/ Tim I. Madden Dated 22 June 1999 --------------------------- ----------------------- On behalf of LaSalle Re Limited, Hamilton, Bermuda. [LOGO] Signed /s/ M. C. Stockton Dated 7th July, 1999. --------------------------- ---------------------- ADDENDUM ATTACHING TO AND FORMING PART OF QUOTA SHARE AGREEMENT MADE BETWEEN Reassured:- CNA Reinsurance Company Limited, London, On behalf of its Amsterdam, Zurich and Milan Branches. (Hereinafter called the "Reassured") and Reinsurers:- LaSalle Re Limited (Hereinafter called the "Reinsurers") 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 FOR 1999 UNDERWRITING YEAR OF ACCOUNT. Type:- 50% Quota Share Treaty ________________________________________________________________________________ It is noted and agreed with effect from 12.01 am 1st April, 1999 this Agreement is cancelled As a consequence of this change the following should be noted:- Loss Portfolio:- The Reinsurer shall be debited with a portfolio of loss withdrawal calculated at 50% of the Reassured's estimate of losses outstanding at the 1st April, 1999 and thereafter shall be free of further liability Profit Commission:- The Reinsurers shall pay the Reassured a provisional Profit Commission of 20.00% calculated on the net profit expected under this Agreement in respect of the reduction of 50% in the 1999 Underwriting Year of Account. Such profit commission being calculated in accordance with the formula previously agreed. Any further adjustment to the calculation of the provisional profit commission statement will be made 24 months after the inception of the 1999 Underwriting Year of Account and annually thereafter. All other terms and conditions remain unaltered On behalf of CNA Reinsurance Company Limited, London, England. Signed /s/ Tim I. Madden Dated 22 June 1999 ----------------- ---------------- On behalf of LaSalle Re Limited, Hamilton, Bermuda. [LOGO] Signed /s/ M. C. Stockton Dated 7th July, 1999. ------------------ ---------------- EX-10.43 8 LMX QUOTA SHARE AGREEMENT CONTINENTAL & LASALLE Exhibit 10.43 LMX CATASTROPHE QUOTA SHARE RETROCESSIONAL RENEWAL PLACEMENT SLIP ---------------------- COMPANY: Continental Casualty Company Illinois EFFECTIVE: Losses occurring on original contracts written or renewed with effective dates during the 12 month term beginning January 1, 1999 Cessions in force to run off until natural expiry, plus an additional 12 month period should an original contract be renewed at original reinsured's option. In addition, Retrocessionaires will remain liable as respects run-off obligations under each original cession in force at the time of expiration. In the event a Retrocessionaire opts not to continue its participation on the agreement replacing this Agreement, it will remit to the Retrocedent 90% of the Retrocessionaire's share of the positive balance of premium received, less losses paid, and less ceding commission and other commissions paid within 30 days after Agreement expiration. This provision will not apply in the event that this Agreement is not renewed. BUSINESS COVERED: London Market Catastrophe Excess of Loss business, where 100% of the layer is written by the Retrocedent and coded Product Type 6308. EXCLUSIONS: As per original contracts. TERRITORY: Losses wheresoever arising LIMIT: Layer A ------- 33.33% Quota Share of $20,000,000 (or $6,666,000) of aggregate cover any one occurrence. Subject to a maximum of up to 33.33% of $5,000,000 (or $1,666,500) any one occurrence, any one original reinsured. Minimum net retention of 66.67% of $5,000,000 (or $3,333,500) of all cessions to Agreement. Layer B ------- 33.33% Quota Share of $17,500,000 (or $5,832,750) of aggregate cover any one occurrence. Subject to a maximum of up to 33.33% of $5,000,000 (or $1,666,500) any one occurrence, any one original reinsured. Minimum net retention of 66.67% of $5,000,000 (or $3,333,500) of all cessions to Agreement. Page 1 of 6 CONTINENTAL CASUALTY COMPANY LMX QUOTA SHARE RETRO RATE: Original Gross Reinsurance Premium less any commissions paid under reinsured original contracts and ceding commission. CEDING COMMISSION: 3.0% (FLAT) WARRANTY: The Retrocedent and Retrocessionaires hereunder will retain all business subject to this Agreement net and unreinsured in any way, subject to limits in Limit Section. FUNDING OF RESERVES: Letters of Credit (Citibank Scheme) as required by Retrocedent, in respect of unearned premium and known outstanding losses reported to Retrocessionaires, excluding losses incurred but not reported to Retrocessionaires, in compliance with statutory/regulatory requirements from non- admitted Retrocessionaires only. CASH LOSSES: $250,000 (on a 100% basis). REPORTS & REMITTANCES: As attached. CURRENCY: All transactions hereunder to be in U.S. Dollars. Losses in other currencies to be converted to U.S. Dollars at the same rates of exchange used by the Retrocedent in its own books. WORDING: As expiring. GENERAL CONDITIONS: Retrocessionaires will be subject to the same terms, rates, and conditions as original and will follow original settlements made by the Retrocedent. Arbitration Clause Definition of Retrocedent Clause Confidentiality Clause (per attached) Salvage and Subrogation Clause Settlements Clause (per attached) Offset Clause (this Agreement only, except that in the event of insolvency, offset will be allowed per applicable regulation) ECO Clause Page 2 of 6 CONTINENTAL CASUALTY COMPANY LMX QUOTA SHARE RETRO GENERAL CONDITIONS: (cont'd) Delays, Errors, or Omissions Clause Amendments Clause Access to Records Clause (per attached) Interest Penalty Clause (per attached) Insolvency Clause Arbitration Clause Taxes Clause Federal Excise Tax Clause Service of Suit Clause Aon Re Inc. Intermediary Clause You have already provided written authorization based on the terms set forth hereon. Please formalize your acceptance and approval by signing and returning one copy of this Final Placement Slip to Aon Re Inc. REINSURER: LaSalle Re Limited [LOGO APPEARS HERE] --------------------------------------------------------------------- THRU: -------------------------------------------------------------------------- SIGNED REFERENCE LINE: 47.5% NUMBER: 1739/99 -------------------------------------- ------------------------- (Layer A) SIGNED REFERENCE LINE: 31.43% NUMBER: 2790/99 -------------------------------------- ------------------------- (Layer B) ACCEPTED & APPROVAL BY: /s/ Luke Roden DATE: 20th October, 1998 ------------------------------ -------------------------- Luke Roden - Assistant Underwriter Page 3 of 6 CONTINENTAL CASUALTY COMPANY LMX QUOTA SHARE RETRO 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 catastrophic code numbers assigned by the Property Claims Services division of the American Insurance Services Group, Inc. for paid and outstanding catastrophe losses and expenses 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 report. Within 60 days following the expiration of the 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 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 by 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. 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. Page 4 of 6 CONTINENTAL CASUALTY COMPANY LMX QUOTA SHARE RETRO 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 Retrocedent informs the Retrocessionaires of such omission promptly upon discovery. 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 the 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 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. Page 5 of 6 CONTINENTAL CASUALTY COMPANY LMX QUOTA SHARE RETRO 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 payment owed 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 to the Retrocessionaires within 90 calendar days of the date specified in this Agreement. Any premium adjustments shall 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 the 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. 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. Page 6 of 6 EX-12.1 9 STATEMENT RE COMPUTATION OF RATIO OF EARNINGS 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, 1999 September 30, 1998 September 30, 1997 ------------------ ------------------ ------------------ Earnings available for fixed charges and preferred share dividends Net (loss) income before minority interest (5,679) 6,859 65,232 Interest expense 1,714 465 1,881 Preferred share dividends (1) 0 0 0 ---------- ---------- ---------- Total earnings available for fixed charges and preferred dividends (7,392) 7,324 67,113 ========== ========== ========== Fixed charges and preferred share dividends Interest expense 1,714 465 1,881 ---------- ---------- ---------- Total fixed charges 1,714 465 1,881 ---------- ---------- ---------- Preferred share dividends 6,563 1,641 6,563 ---------- ---------- ---------- Combined fixed charges and preferred dividends 8,277 2,106 8,444 ========== ========== ========== Ratio of earnings to combined fixed charges and preferred share dividends (0.89) 3.5 7.9 ========== ========== ========== Deficiency (15,669) ==========
(1) Not deducted from net income before minority interest. EX-13.1 10 PORTIONS OF THE ANNUAL REPORT 09/30/99 EXHIBIT 13.1 - -------------------------------------------------------------------------------- LASALLE RE HOLDINGS LIMITED - -------------------------------------------------------------------------------- SELECTED FINANCIAL DATA - -------------------------------------------------------------------------------- Expressed in thousands of United States Dollars, except per share and operational data.
Year Ended Year Ended Year Ended Year Ended Year Ended September 30 September 30 September 30 September 30 September 30 1999 1998 1997 1996 1995 STATEMENT OF INCOME DATA Gross Premiums written $ 139,010 $ 155,316 $ 171,386 $ 190,151 $ 201,916 Net premiums earned 126,615 154,620 163,933 195,141 170,370 Net investment income (including realized gains and losses) 34,462 39,863 33,664 26,428 25,066 Loss and loss expenses incurred 131,147 95,539 31,199 51,477 60,397 Underwriting expenses 22,219 22,661 26,018 27,268 22,988 Operational expenses 11,358 8,932 12,656 11,114 6,218 Income before minority interest (5,679) 65,232 121,468 129,451 104,448 Minority interest/(1)/ (1999:23%, 1998: 23%, 1997: 21%, all other periods: 37%) (2,845) 13,426 24,391 47,966 38,774 Net income (2,834) 51,806 97,077 81,485 65,674 Earnings per Common Share - assuming dilution/(2)/ $ (0.61) $ 2.80 $ 5.14 $ 5.40 $ 4.51 Adjusted weighted average number of Common Shares outstanding/(3)/ 20,213,155 20,919,405 22,998,936 23,967,870 23,170,680 Dividends declared per Common Share $ 1.125 $ 3.00 $ 2.84 $ 0.75 $ 5.72 OTHER DATA Loss ratio 103.6% 61.8% 19.0% 26.4% 35.5% Expense ratio 26.5% 20.4% 23.6% 19.6% 17.1% Combined ratio 130.1% 82.2% 42.6% 46.0% 52.6% Return on average equity/(4)/ -2.84% 13.0% 25.4% 29.2% 26.6% BALANCE SHEET DATA (AT END OF PERIOD) Total investments and cash $ 556,976 $ 606,757 $ 553,043 $ 537,504 $ 522,425 Total assets 736,107 757,290 686,088 634,374 636,547 Reserve for losses and loss expenses 146,552 97,942 45,491 49,875 66,654 Minority interest 93,055 105,569 93,355 179,470 147,389 Total shareholders' equity 382,197 430,053 425,226 307,448 253,422 Book value per share/(5)/ $ 19.69 $ 23.39 $ 23.23 $ 21.42 $ 17.64
/(1)/ Minority interest represents those shares in LaSalle Re Limited 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)/ Earnings per Common Share equals income before minority interest and after preferred dividends declared and in arrears divided by the adjusted weighted average number of Common Shares outstanding. /(3)/ The adjusted weighted average number of Common Shares outstanding include Common Shares and the Exchangeable Non-Voting Shares 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. Page 9 EX-23.1 11 CONSENT OF KPMG PEAT MARWICK Exhibit 23.1 [Letterhead of KPMG] The Board of Directors LaSalle Re Holdings Limited We consent to incorporation by reference in the registration statement (No. 333-64543) on Form S-3 and registration statements (No. 333-38653) and (No. 333-38655) on Forms S-8 of LaSalle Re Holdings Limited of our report dated October 26, 1998, relating to the consolidated balance sheet of LaSalle Re Holdings Limited and subsidiaries as of September 30, 1998, and the related consolidated statements of operations and comprehensive income, changes in shareholders' equity and cash flows for each of the years in the two-year period ended September 30, 1998, and all related schedules, which report appears in the September 30, 1999, annual report on Form 10-K of LaSalle Re Holdings Limited, and to the reference to our firm under the heading "Experts". /s/ KPMG Hamilton, Bermuda Chartered Accountants December 22, 1999 EX-23.2 12 CONSENT OF DELOITTE & TOUCHE Exhibit 23.2 [Letterhead of Deloitte & Touche] To The Board of Directors LaSalle Re Holdings Limited We consent to incorporation by reference in the registration statement (No. 333-64543) on Form S-3 and registration statements (No. 333-38653) and (No. 333-38655) on Form S-8 of LaSalle Re Holdings Limited of our report dated November 5, 1999, relating to the consolidated balance sheet of LaSalle Re Holdings Limited and subsidiaries as of September 30, 1999, and the related consolidated statements of operations and comprehensive income, changes in shareholders' equity and cash flows for the year ended September 30, 1999, and all related schedules, which report appears in the September 30, 1999, annual report on Form 10-K of LaSalle Re Holdings Limited, and to the reference to our firm under the heading "Experts". /s/ DELOITTE & TOUCHE Chartered Accountants Hamilton, Bermuda December 22, 1999 EX-27.1 13 FINANCIAL DATA SCHEDULE
7 1,000 3-MOS 12-MOS SEP-30-1999 SEP-30-1999 JUL-01-1999 OCT-01-1998 SEP-30-1999 SEP-30-1999 363,825 363,825 0 0 0 0 0 0 0 0 0 0 363,825 363,825 193,151 193,151 9,100 9,100 11,911 11,911 736,107 736,107 146,552 146,552 77,049 77,049 0 0 0 0 0 0 0 0 3,000 3,000 15,600 15,600 363,597 363,597 736,107 736,107 21,362 126,615 8,530 33,847 (1,127) 615 0 0 25,568 131,147 4,101 22,219 3,365 13,390 (4,269) (5,679) 0 0 (4,269) (5,679) 0 0 0 0 0 0 (4,269) (5,679) (0.29) (0.61) (0.29) (0.61) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Represents 3,000,000 Series A preferred shares par value $1 liquidation preference $25 per share. Includes minority interest. 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 the consolidated common shareholders' equity.
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