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 [FEE REQUIRED]
For the fiscal year ended December 31, 2001.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period _________to_________
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)
Registrant's Telephone Number, including area code: (441) 292-3339
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Series A Preferred Shares, par value $1.00 per share The New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
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]
There was no voting stock held by non-affiliates on March 15, 2002.
The number of shares outstanding of each of the issuer's classes of common
stock as of March 15, 2002:
Class Outstanding at March 15, 2002
Common Stock, $1.00 par value 20,432,043
LASALLE RE HOLDINGS LIMITED
TABLE OF CONTENTS
Item Page Number
- ---- -----------
PART I
1. BUSINESS................................................................................. 3
2. PROPERTIES............................................................................... 18
3. LEGAL PROCEEDINGS........................................................................ 18
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................... 18
PART II
5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS...................................................................... 18
6. SELECTED FINANCIAL DATA.................................................................. 19
7. MANAGEMENTS' DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION.................................................................. 20
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK................................ 31
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................................. 32
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..... 32
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS......................................................... 33
11. EXECUTIVE COMPENSATION................................................................... 33
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................................................... 37
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................... 38
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K...................................................................................... 38
i
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"), LaSalle Re (Services) Limited ("LaSalle Re Services") and LaSalle
Re (Barbados) Ltd. ("LaSalle Re Barbados").
Note On Forward-Looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company sets forth below cautionary
statements identifying important risks and uncertainties that could cause its
actual results to differ materially from those that might be projected,
forecasted or estimated in its "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, made by or on behalf of the Company in this Annual Report
on Form 10-K and in press releases, written statements or documents filed with
the Securities and Exchange Commission, or in its communications and discussions
with investors and analysts in the normal course of business through meetings,
telephone calls and conference calls. Such statements may include, but are not
limited to, projections of premium revenue, investment income, other revenue,
losses, expenses, earnings, cash flows, plans for future operations, common
shareholders' equity (including book value per share), investments, financing
needs, capital plans, dividends, plans relating to products or services of the
Company and estimates concerning the effects of litigation or other disputes, as
well as assumptions for any of the foregoing and generally expressed with words
such as "believes", "estimates", "expects", "anticipates", "plans", "projects",
"forecasts", "goals", "could have", "may have", and similar expressions.
Forward-looking statements involve known and unknown risks and uncertainties,
which may cause the Company's results to differ materially from such
forward-looking statements. These risks and uncertainties include, but are not
limited to, the following:
- - Changes in the level of competition in the United States and
international reinsurance or primary insurance markets that affect the
volume or profitability of the Company's property/casualty business.
These changes include, but are not limited to, changes in the intensity
of price competition, the entry of new competitors, existing
competitors exiting the market and the development of new products by
new and existing competitors;
- - Changes in the demand for reinsurance, including changes in ceding
companies' risk retentions and changes in the demand for excess and
surplus lines insurance coverages;
- - Changes in reinsurance purchasing and distribution patterns;
- - The ability of the Company to execute its strategies in its
property/casualty operations;
- - Catastrophe losses in the Company's United States and international
property/casualty businesses;
- - Adverse development on property/casualty claims and claims expense
liabilities related to business written in prior years, including, but
not limited to, evolving case law and its effect on environmental and
other latent injury claims, changing government regulations, newly
identified toxins, newly reported claims, new theories of liability or
new insurance and reinsurance contract interpretations;
- - Changes in inflation that affect the profitability of the Company's
current property/casualty business or the adequacy of its
property/casualty claims and claims expense liabilities related to
prior years' business;
1
- - Lower than estimated retrocessional or reinsurance recoveries on unpaid
losses, including, but not limited to, losses due to a decline in the
creditworthiness of the Company's retrocessionaires or reinsurers;
- - Changes in the Company's retrocessional arrangements;
- - Increases in interest rates, which may cause a reduction in the market
value of the Company's fixed income portfolio, and its common
shareholders' equity;
- - Decreases in interest rates which may cause a reduction of income
earned on cash flow from operations and the reinvestment of the
proceeds from sales or maturities of existing investments;
- - Changes in the composition of the Company's investment portfolio;
- - Credit losses on the Company's investment portfolio;
- - Adverse results in litigation matters;
- - The passage of federal or state legislation subjecting the Company to
United States taxation or regulation;
- - A contention by the United States Internal Revenue Service that the
Company is subject to United States taxation;
- - The impact of mergers and acquisitions;
- - Gains or losses related to changes in foreign currency exchange rates;
- - Changes in the Company's capital needs;
- - The ability of Trenwick Group Ltd. to refinance or repay its
outstanding indebtedness; and
- - Changes in the financial strength ratings.
In addition to the factors outlined above that are directly related to the
Company's businesses, the Company is also subject to general business risks,
including, but not limited to, adverse legislation and regulation, adverse
publicity or news coverage, changes in general economic factors and the loss of
key employees.
The facts set forth above should be considered in connection with any
forward-looking statement contained in this Annual Report on Form 10-K. The
important factors that could affect such forward-looking statements are subject
to change, and the Company does not intend to update any forward-looking
statement or the foregoing list of important factors. By this cautionary note
the Company intends to avail itself of the safe harbor from liability with
respect of forward-looking statements provided by Section 27A and Section 21E
referred to above.
2
ITEM 1. BUSINESS
General development of the business
The Company was incorporated in Bermuda in September 1995 to act as an
investment holding company for LaSalle Re, which was incorporated in Bermuda in
October 1993 and commenced operations on November 22, 1993.
On September 27, 2000, the Company, LaSalle Re, Trenwick Group Ltd. ("Trenwick")
and Trenwick Group Inc. completed a business combination. Under the terms of the
business combination, the common shareholders of the Company, LaSalle Re and
Trenwick Group Inc. exchanged their shares on a one-for-one basis for shares in
Trenwick. Following this transaction, the Company became a wholly owned
subsidiary of Trenwick.
In connection with the Trenwick/LaSalle business combination, the Company
changed its year end from September 30 to December 31 to be consistent with
Trenwick. Consequently, the data presented in the Form 10-K is for the twelve
months ended December 31, 2001, the twelve months ended December 31, 2000, the
three months ended December 31, 1999 and the twelve months ended September 30,
1999.
Trenwick is the Bermuda holding company which, including the Company, has five
principal operating units. Trenwick America Reinsurance Corporation provides
reinsurance to U.S. insurance companies for property and casualty risks.
Trenwick International Limited underwrites facultative reinsurance and specialty
insurance on a worldwide basis. Canterbury Financial Group Inc. underwrites
specialty property and casualty primary insurance programs through managing
general agents. Chartwell Managing Agents Limited manages underwriting
syndicates at Lloyds.
LaSalle Re 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. It 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 has three wholly owned subsidiaries: LaSalle Re Services (currently
inactive), which acted as a representative office for the Company in the United
Kingdom up until the completion of the Trenwick/LaSalle business combination,
LaSalle Re Capital, which was incorporated in Bermuda in November 1996 to
provide capital support to selected syndicates at Lloyd's; and LaSalle Re
Barbados, which was incorporated in Barbados in 2001 and acts as an investment
holding company.
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 syndicates. 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 multi-peril crop and political risk coverages. The Lloyd's syndicates'
segment, currently in run-off was written through LaSalle Re Capital, which
provided capital support to selected Lloyd's syndicates. The lines of business
written by the selected syndicates included direct insurance and facultative
property reinsurance, marine insurance and reinsurance, professional indemnity,
directors and officers insurance and bankers blanket bond
3
business. Effective for the 2001 underwriting year at Lloyd's, LaSalle Re
Capital withdrew its capital support from all Lloyd's syndicates.
Complete financial information about segments is presented in Note 3 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 ended December 31, 2001 and 2000,
the three month period ended December 31, 1999 and the fiscal year ended
September 30, 1999 (dollars in millions):
2001 Year 2000 Year 1999 Period 1999 Year
Gross Number Gross Number Gross Number Gross Number
Premiums of Premiums of Premiums of Premiums of
Written Contracts Written Contracts Written Contracts Written Contracts
------- --------- ------- --------- ------- --------- ------- ---------
Reinsurance segment:
Property catastrophe reinsurance:
Excess of loss................. $101.5 646 $78.1 661 $1.0 18 $ 81.4 717
Pro rata....................... 3.2 2 2.5 3 -- -- 11.1 8
Other lines of business:
Property--risk excess and pro
Rata........................... 8.9 43 6.4 53 0.5 2 4.9 62
Casualty....................... 2.0 20 2.2 17 0.2 1 6.1 26
Space, marine and aviation..... 3.6 8 3.8 24 5.4 31
Miscellaneous.................. 6.3 28 3.9 24 1.2 4 4.4 43
Fronted premiums, adjustments,
reinstatement premiums and no
claims bonuses................... 14.8 -- 4.7 -- 4.1 -- 3.3 --
----- --- ----- --- --- --- ----- ---
140.3 747 101.6 782 7.0 25 116.6 887
====== === ===== === === === ===== ===
Lloyd's segment:
LaSalle Re Capital (in run-off) 5.2 28.6 3.3 22.4
------ ------ ----- ------
Total..................... $145.5 $130.2 $10.3 $139.0
====== ====== ===== ======
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 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 an accumulation of catastrophes in a year
rather than one occurrence.
The Company writes a limited number of property catastrophe pro rata reinsurance
treaties. 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, on occasions may audit 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.
4
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 its insurance and 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 property pro rata treaties, the
Company also writes other lines of reinsurance, which currently include casualty
clash, marine, aviation, satellite, terrorism, multi-peril crop 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 should 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 clash 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. Multi-peril crop
includes coverage for agricultural losses associated with severe drought and
floods.
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 December 31, 2000, the Company provided fronting
arrangements for three reinsurers. During 2001, this business was insignificant.
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 or minimum deposit, 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 equal to the difference between the initial deposit or minumum deposit and
the revised 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.
5
The Company typically receives and pays reinstatement premiums on its assumed
and ceded contracts when a catastrophic event occurs that results in a loss.
Coverage is reinstated over the remaining life of the contracts. As a result of
the September 11th terrorist attacks, the Company received gross reinstatement
premiums of $14.4 million and paid ceded reinstatement premiums of $19.3 million
in 2001. The net decrease on net premiums earned due to reinstatement premiums
for 2001 was $10.2 million.
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 syndicates segment
The Company formed LaSalle Re Capital to provide capital support on an
underwriting year basis to selected Lloyd's syndicates. These syndicates
individually write the following lines of business: direct insurance and
facultative property reinsurance; marine insurance and reinsurance; and
professional indemnity, directors and officers' insurance and bankers blanket
bond business. Following the Trenwick/LaSalle business combination, the Company
withdrew its capital support for the 2001 underwriting year. This decision is in
line with the Company's strategy of returning to its core business of property
catastrophe reinsurance.
The Company has provided capital support to three syndicates for the 2000 and
1999 underwriting years of approximately $21.3 million ((pound)14.6 million) and
$28.3 million ((pound)19.4 million), respectively. Through this support and as
at December 31, 2001, the Company has written gross premiums of approximately
$18.6 million for the 2000 underwriting year and approximately $32.9 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. LaSalle Re Capital provides capital support to the syndicates
through letters of credit totaling $16.1 million ((pound)9.8 million). During
the year ended December 31, 2001, the 1998 underwriting year on which LaSalle Re
Capital participated was closed and settled. The net result from the 1998
underwriting year was a loss of $5.8 million to the Company.
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
December 31, 2001, excluding the premiums written by LaSalle Re Capital, fronted
premiums, adjustment premiums, reinstatement premiums and no claims bonuses, 50%
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 50% of gross premiums written
was spread in other territories around the world. This distribution of risk is
subject to change and is dependent upon rates available in various zones. As a
result of long-term relationships between the Company's management and certain
clients and brokers, the Company has developed a strong base of regional
business in the U.S. This business assists the Company in diversifying its
U.S.-based risks and makes more efficient use of its capital by limiting
multi-zone exposures.
6
The following table sets forth the percentage of the Company's gross premiums
written for the years ended December 31, 2001 and 2000, the three month period
ended December 31, 1999 and the fiscal year ended September 30, 1999 allocated
to the geographic region in which the risks originate: (dollars in millions):
Geographic Area 2001 Year 2000 Year 1999 Period 1999 Year
Percentage Percentage Percentage Percentage
Gross of Gross Gross of Gross Gross of Gross Gross of Gross
Premiums Premiums Premiums Premiums Premiums Premiums Premiums Premiums
Written Written Written Written Written Written Written Written
------- ------- ------- ------- ------- ------- ------- -------
United States................... $62.4 49.7% $ 51.4 53.0% $ 0.7 24.1% $ 60.1 53.0%
Europe (excluding
the U.K.)..................... 10.8 8.6 4.8 5.0 -- -- 9.5 8.4
United Kingdom.................. 9.1 7.3 7.0 7.2 0.1 3.5 9.8 8.6
Japan........................... 10.7 8.5 4.9 5.1 0.4 13.8 2.9 2.6
Australasia..................... 5.9 4.7 3.0 3.1 0.2 6.9 4.5 4.0
Worldwide(1).................... 17.0 13.6 16.8 17.3 1.2 41.4 14.1 12.4
Worldwide (excluding
the U.S.)(2).................. 2.9 2.3 2.9 3.0 -- -- 5.4 4.8
Other........................... 6.7 5.3 6.1 6.3 0.3 10.3 7.0 6.2
----- ----- ------ ----- --- ----- ----- -----
125.5 100.0% 96.9 100.0% 2.9 100.0% 113.3 100.0%
===== ===== ===== =====
LaSalle Re Capital.............. 5.2 28.6 3.3 22.4
Fronted premiums, adjustments,
reinstatement premiums and
no claims bonuses............. 14.8 4.7 4.1 3.3
------ ------ ----- ------
Total...................... $145.5 $130.2 $10.3 $139.0
====== ====== ===== ======
(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 December 31, 2001 by aggregation of program
limits:
2001 Year
-----------
Greater than $25 million........................ 2
$20-25 million.................................. 1
$15-20 million.................................. 13
$10-15 million.................................. 20
$7.5-10 million................................. 23
$5-7.5 million.................................. 40
$2.5-5 million.................................. 76
Less than $2.5 million.......................... 84
---
Total...................................... 259
===
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 Company sets limits on its aggregate loss exposure and 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
re-evaluates its pricing to ensure that the terms and conditions of its business
are competitive within the market.
The Company obtains information from brokers, cedents and potential cedents as
well as 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 proprietary modeling systems as well as commercially available
catastrophe simulation models to estimate exposure to loss and evaluate the
pricing adequacy of its reinsurance programs. These models also assist in the
monitoring of aggregate exposures within geographic zones.
The commercially available models include: (1) AIR-CATRADER 3.8, 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 4.1, which
derives portfolio loss scenarios based on detailed risk location data provided
by the primary insurer.
The results of all analyses are measured against the Company's current portfolio
and other available external market information; and it is 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
marginal return on equity. In addition, the underwriting of all new exposures is
reviewed by the Chief Underwriting Officer and/or the President of the Company.
On October 1, 1998 the Company entered into an Underwriting Support Services
Agreement with CNA Re Services Company ("CRSC") and CNA Bermuda. Under the
Underwriting Support Services Agreement, which expired on September 30, 2001,
CRSC provided underwriting support services to the Company on a daily or hourly
fee basis when and as requested by the Company. Between the closing of the
Trenwick/LaSalle business combination and September 30, 2001, the Company did
not use the support services provided under the Underwriting Support Services
Agreement.
Reinsurance protections purchased
The Company utilizes various reinsurance protections to reduce its exposure to
large losses. The Company reviews the claims paying ability of each reinsurer
for adequacy before each cover is placed.
In 2001, the Company has purchased three excess of loss programs which provide
coverage of $20.0 million in excess of the first $30.0 million of losses per
occurrence, $5.0 million in excess of the first $50.0 million of losses per
occurrence and $25.0 million in excess of the first $75.0 million of losses per
occurrence.
8
During 1999, the Company purchased an excess of loss program which provided
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. This
contract was canceled effective December 31, 2000.
In addition, in 1999 and 2000, the Company had a quota share arrangement with
CNA. This arrangement was canceled effective December 31, 2000. Under this
arrangement, the Company ceded an adjustable proportion of U.S. property
catastrophe premium, net of acquisition costs, which was negotiated on normal
commercial terms and included an override commission and profit commission
payable to the Company.
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.
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
utilized a Catastrophe Equity Put ("CatEPut") option program since July 1, 1997.
The CatEPut option was a capital replacement tool that enabled the Company to
put a pre-arranged amount 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. After the Trenwick/LaSalle business combination,
although the CatEPut remained in effect with the same triggers, the issuer of
the convertible preferred shares changed from LaSalle to the publicly traded
Trenwick. Accordingly, although the CatEPut will be triggered by loss experience
at the Company, the capital will be received by Trenwick.
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 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.
9
Subsidiaries and affiliates of Aon Corporation (collectively, "Aon") were
brokers for 26.7% and 23.3% of the Company's gross written premiums in the years
ended December 31, 2001 and December 31, 2000 respectively. Guy Carpenter &
Company, Inc., together with its affiliates, generated 26.1% and 19.8% of the
Company's gross premiums written for the years ended December 31, 2001 and
December 31, 2000 respectively. Willis Faber North America, Inc., together with
its affiliates, generated 10.7% and 5.4% of the Company's gross premiums written
for the years ended December 31, 2001 and December 31, 2000, respectively. No
other broker accounted for more than 10% of the Company's gross premiums written
for the years ended December 31, 2001 and December 31, 2000.
Consistent with its emphasis on disciplined underwriting practices, the Company
was not obligated to accept any business from any broker. No intermediary has
the authority to bind the Company on any business.
Reserves
The Company establishes loss reserves for the estimated ultimate settlement
costs of all losses and loss expenses incurred with respect to business written
by it. United States generally accepted accounting principles, sometimes
referred to as U.S. GAAP do not permit the Company to establish reserves with
respect to its property catastrophe reinsurance until an event occurs that may
give rise to a claim. As a result, only loss reserves applicable to losses
incurred up to the reporting date may be set aside, with no allowance for the
provision of a contingency reserve to account for expected future losses.
The derivation of loss reserves involves the actuarial and statistical
projection at any given time of the Company's expectations of the ultimate
settlement of loss and loss expenses. These loss projections become necessary,
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.
10
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 Chief Actuary of Trenwick and
reviewed by the Company's executive officers. 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 Company has implemented a set of investment guidelines designed to meet its
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 portfolio includes two sections: a shareholder portfolio
and a reserve portfolio. The shareholder portfolio has a longer time horizon
than the reserve portfolio.
Quality of portfolio
The Company's investment guidelines requires the securities held in the
shareholder portfolio and the reserve portfolio to maintain an average quality
of A+ and AA, respectively. In addition, the shareholder portfolio and the
reserve portfolio will not invest in securities below A- and BB+, respectively.
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 two and
one half to three years and, at December 31, 2001, the modified average duration
of the portfolio was 2.7 years. The Company expects to periodically re-evaluate
the target duration in light of market conditions, including the level of
interest rates, and estimates of the duration of its liabilities.
11
The table below sets forth the distribution of the Company's debt securities
available for sale at year end 2001 by type, maturity and quality rating.
Debt Security Investments
(Amounts expressed in thousands of United States dollars)
Average
Maturity Fair Amortized
in Years Value Cost
----------------- --------------- -------------
Type
U.S. and U.K. federal government
securities, including agencies 2.2 54,869 52,803
Other foreign government securities 1.0 25,186 24,448
Mortgage and other asset-backed securities 2.8 119,411 117,991
Corporate and other debt securities 6.0 307,812 307,232
----------------- --------------- -------------
Total debt securities 4.4 507,278 502,474
Maturity
Due in one year or less 74,539 73,125
Due in one year through five years 301,211 292,821
Due in five years through ten years 74,569 74,416
Due after ten years 56,959 62,112
--------------- -------------
Total debt securities 507,278 502,474
Investment Grade Non-investment Grade
-------------------------- --------------------------
Quality Fair Value Cost Fair Value Cost
------------ ---------- ------------ -----------
U.S. and U.K. federal government
securities, including agencies $ 54,869 $ 52,803 $ -- $ --
Other foreign government securities 25,186 24,448 -- --
Mortgage and other asset-backed securities 119,411 117,991 -- --
Corporate and other debt securities 274,914 268,841 32,898 38,391
--------- --------- --------- ---------
Total investment grade and
non-investment grade debt securities $474,380 $464,083 $32,898 $38,391
========= ========= ========= =========
Percentage of total debt securities 93.5% 92.4% 6.5% 7.6%
Investment Grade Quality (fair value) Aaa Aaa A Baa
--------- --------- --------- ---------
U.S. and U.K. federal government
securities, including agencies $ 54,869 $ -- $ -- $ --
Other foreign government securities -- $25,186 -- --
Mortgage and other asset-backed securities 119,411 -- -- --
Corporate and other debt securities 95,888 63,000 83,048 32,978
--------- --------- --------- ---------
Total investment grade and
non-investment grade debt securities $270,168 $88,186 $83,048 $32,978
========= ========= ========= =========
Percentage of total debt securities 53.2% 17.4% 16.4% 6.5%
Non-investment Grade Quality (fair value) Ba/B Caa/Ca P1 Not rated
--------- --------- --------- ---------
Mortgage and other asset-backed securities $ -- $ -- $ -- $ --
Corporate and other debt securities 32,898 -- -- --
--------- --------- --------- ---------
Total non-investment grade debt securities $32,898 $ -- $ -- $ --
========= ========= ========= =========
Percentage of total debt securities 6.5% 0.0% 0.0% 0.0%
12
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 December 31, 2001, all of the Company's debt securities were denominated
in U.S. dollars.
In an effort to manage other areas of exposure to foreign currency exchange rate
fluctuations, the Company may from time to time enter into foreign exchange
contracts. These contracts generally involve the exchange of one currency for
U.S. dollars at some future date. At December 31, 2001 and 2000, the Company had
no principal amounts outstanding under foreign exchange contracts. See
"Quantitative and Qualitative Disclosure About Market Risk."
Investment manager
Effective January 1, 2001, the Company appointed Wellington Management Company
LLP to act as its investment manager. Prior to this, LaSalle Re had an
investment management agreement with Aon Advisors (UK) Limited which terminated
December 31, 2000.
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 existing and newly formed
Bermuda-based property catastrophe reinsurers. 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. 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 Company and
is assigned "A-" financial strength rating by Standard & Poor's. These ratings
are based on factors of interest 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
13
generally is required to provide the issuing banks with collateral to cover 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 March 1, 2001, the Company employed 25 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 and tax matters
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 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 Supervisor of
Insurance, who is the chief administrative officer under the Insurance
14
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 Supervisor.
Annual statutory financial return. LaSalle Re is required to file annually with
the Supervisor 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 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 December 31, 2001, LaSalle Re's actual
statutory capital and surplus was $430.5 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).
15
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 Guy
Hengesbaugh 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% 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
Supervisor, 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 Supervisor 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
16
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.
Lloyd's operates under a self-regulatory regime under the Lloyd's Act 1982 and
has the power to set, interpret and change the rules which govern the operation
of the Lloyd's market, Lloyd's prescribes, in respect of its managing agents and
corporate members, certain minimum standards relating to their management and
control, solvency and various other requirements. In addition, Lloyd's imposes
restrictions against persons becoming controllers and major shareholders of
managing agents and corporate members without the consent of Lloyd's first
having been obtained.
In 2000, the Financial Services and Markets Bill established the Financial
Services Authority as a single regulator to supervise securities, banking and
insurance business, including Lloyd's. In 2001, the Financial Services Authority
gained wider authorization and intervention powers in relation to Lloyd's as
part of the implementation of the Financial Services and Markets Act.
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.
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 Supervisor 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.
17
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.
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.
ITEM 2. PROPERTIES
The Company's executive offices are located in approximately 10,000 square feet
of leased office space in Hamilton, Bermuda. Management believes the Company's
current office space is adequate for its needs.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are at times party to various legal proceedings
generally arising in the normal course of its business. The Company does not
believe that the eventual outcome of any such proceeding will have a material
effect on its financial condition or business. Pursuant to the Company's
reinsurance arrangements, disputes are generally required to be finally settled
by arbitration.
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 calendar year ended December 31, 2001.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Following the business combination with Trenwick, the Company's Common Shares,
which were quoted on The New York Stock Exchange under the symbol "LSH", were
delisted. There is no established public trading market for the Company's Common
Shares, all of which are owned by Trenwick.
18
In the year ended September 30, 1999, the Company paid a quarterly dividend of
$0.375 on its common stock for the first three quarters of the year. No further
dividends on common stock were paid by the Company while its common stock was
publicly held. The Company paid a quarterly dividend of $.547 on its Series A
preferred shares in each of the four quarters of 2001, 2000 and 1999.
ITEM 6. SELECTED FINANCIAL DATA
Expressed in thousands of United States Dollars, except other data. The
2001 and 2000 years relates to a December 31 year end and the 1999, 1998, 1997
and 1996 years relates to September 30 year end.
2001 Year 2000 Year 1999 Period 1999 Year 1998 Year 1997 Year
--------- --------- ----------- --------- --------- ---------
Statement of Income Data
Gross premiums written $145,532 $130,163 $10,307 $139,010 $155,316 $171,386
Net premiums earned 97,542 108,096 30,391 126,615 154,620 163,933
Net investment income (including
realized gains and losses) 46,495 35,756 8,588 34,462 39,863 33,664
Claims and claims expenses incurred 122,981 80,586 46,642 131,147 95,539 31,199
Policy acquisition costs 20,887 21,270 5,878 19,844 22,661 26,018
Underwriting expenses 11,771 13,342 4,533 13,733 8,932 12,656
Income (loss) before minority
interest (11,245) 24,104 (19,831) (5,679) 65,232 121,468
Minority interest(1) 839 (4,990) (2,845) 13,426 24,391
Net income (loss) (11,245) 23,265 (14,841) (2,834) 51,806 97,077
Common dividends declared 7,500 1,500 -- 17,543 44,641 44,860
Other Data
Loss ratio 126.1% 74.6% 153.5% 103.6% 61.8% 19.0%
Expense ratio 33.5% 32.0% 34.3% 26.5% 20.4% 23.6%
Combined ratio 159.6% 106.6% 187.8% 130.1% 82.2% 42.6%
Balance Sheet Data (at end of
period)
Total investments and cash 507,278 $499,666 $559,591 $556,976 $606,757 $553,043
Total assets 802,320 725,495 726,168 736,107 757,290 686,088
Reserve for losses and loss expenses 280,487 174,763 190,352 146,552 97,942 45,491
Minority interest -- -- 86,906 93,055 105,569 93,355
Total shareholders' equity 437,596 464,091 361,960 382,197 430,053 425,226
- --------
(1) Minority interest represents those shares in LaSalle Re Limited that were
held as Exchangeable Non-Voting Shares. These shares were exchangeable, at
the option of the holder, for Common Shares of the Company on a one-for-one
basis. These shares were exchanged for Trenwick Common Shares on a
one-for-one basis following the Trenwick/LaSalle business combination.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion highlights material factors affecting the Company's
results of operations for the three years ended December 31, 2001, December 31,
2000 and September 30, 1999. This discussion and analysis should be read in
conjunction with the audited consolidated financial statements and notes thereto
of the Company contained in Item 8 of this Form 10-K.
Results of Operations - Years Ended December 31, 2001 and 2000
2001 Year 2000 Year Change
--------- --------- ------
(in thousands)
Underwriting loss $(58,115) $ (7,102) $(51,013)
Net investment income 38,928 37,444 1,484
Interest expense -- (1,173) 1,173
Corporate expenses -- (3,255) 3,255
-------- -------- --------
Operating income (loss) (19,187) 25,914 (45,101)
Net realized investment (losses) gains 7,567 (1,688) 9,255
Goodwill accretion 488 122 366
Foreign currency losses (113) (244) 131
-------- -------- --------
Income (loss) before minority interest (11,245) 24,104 (35,349)
Minority interest in net (income) loss of
subsidiary -- (839) 839
-------- -------- --------
Net income (loss) (11,245) 23,265 (34,510)
Dividends on preferred stock (6,563) (6,563) --
-------- -------- --------
Net income (loss) available to common
shareholders $(17,808) $ 16,702 $(34,510)
======== ======== ========
The operating loss of $19.2 million in 2001 represented a $45.1 million decrease
over the operating income of $25.9 million recorded in 2000. This decrease was
primarily due to the deterioration of underwriting results caused by losses
incurred related to Tropical Storm Alison ($8.0 million) and the September 11th
terrorist attacks ($141.8 million gross and $86.8 million net of reinsurance
recoverable). The adverse effect of the underwriting performance primarily
generated the decrease in net income of $34.5 million.
Underwriting income (loss)
2001 Year 2000 Year Change
--------- --------- ------
(in thousands)
Net premiums earned $ 97,542 $108,096 $(10,554)
-------- -------- --------
Claims and claims expenses incurred (122,981) (80,586) (42,395)
Acquisition costs and underwriting expenses (32,676) (34,612) 1,936
-------- -------- --------
Total underwriting costs and expenses (155,657) (115,198) (40,459)
-------- -------- --------
Net underwriting loss $(58,115) $ (7,102) $(51,013)
======== ======== ========
Loss ratio 126.1% 74.6% 51.5%
Underwriting expense ratio 33.5% 31.9% 1.6%
-------- -------- --------
Combined ratio 159.6% 106.5% 53.1%
20
The underwriting loss of $58.1 million in 2001 represented a $51.0 million
increase compared to the underwriting loss of $7.1 million in the 2000 year. The
underwriting loss in 2001 included losses of $122.0 million on current year loss
events and net additions to prior years' reserves of $1.0 million. Of this
$123.0 million total loss incurred, $22.1 million relates to Lloyd's syndicates
which are now in run-off. The underwriting loss in 2000 included both losses of
$60.2 million on current year loss events and additions to prior years' reserves
of $20.4 million.
The effect of losses from the September 11th terrorist attacks is an increase in
the underwriting loss of $97.8 million resulting from increase in claims and
claims expenses incurred of $86.8 million and a decrease in net premiums earned
of $10.2 million due to net reinstatement premiums on assumed and ceded
contracts. This effect on the combined ratio was 96.4 percentage points
principally from increases in the loss ratio.
Premiums written
Gross premiums written for 2001 were $145.5 million compared to $130.2 million
for 2000, an increase of $15.3 million or 11.8%. Details of gross premiums
written are provided below.
2001 Year 2000 Year Change
--------- --------- ------
(in thousands)
Worldwide property catastrophe reinsurance $140,331 $101,570 $38,761
Lloyd's syndicates 5,201 28,593 (23,392)
-------- -------- -------
Total $145,532 $130,163 $15,369
======== ======== =======
The increase in worldwide property catastrophe reinsurance gross premium
writings for 2001 compared to 2000 resulted primarily from reinstatement
premiums of $14.4 million generated by reinstated coverages on assumed contracts
impacted by losses from the September 11th terrorist attacks.
The decrease in Lloyd's sydicates gross written premiums for 2001 compared to
2000 is expected as all of the Lloyd's sydicates business underwritten by the
Company prior to the combination with Trenwick has not been renewed in 2001 and
has been classified as runoff.
Premiums earned
2001 Year 2000 Year Change
--------- --------- ------
(in thousands)
Gross premiums written $ 145,532 $ 130,163 $ 15,369
Change in gross unearned premiums 4,992 9,966 (4,974)
--------- --------- --------
Gross premiums earned 150,524 140,129 10,395
--------- --------- --------
Premiums ceded (50,453) (31,631) (18,822)
Change in premiums ceded (2,529) (402) (2,127)
--------- --------- --------
Amortized ceded premiums (52,982) (32,033) (20,949)
--------- --------- --------
Net premiums earned $ 97,542 $ 108,096 $(10,554)
========= ========= ========
Gross premiums ceded for 2001 were $50.5 million compared to $31.6 million for
2000. This increase was primarily due to reinstated covers of $19.3 million on
ceded contracts following the September 11th terrorist attacks.
Net premiums earned in 2001 were $97.5 million compared to $108.1 million for
2000. The decrease in net premiums earned is primarily due to the increase in
ceded premiums.
21
Claims and claims expenses
Claims and claims expenses for 2001 were $123.0 million, a increase of $42.4
million compared to claims and claims expenses of $80.6 million for 2000. The
increase is due to losses associated with the September 11th terrorist attacks.
The Company's incurred losses related to the September 11th terrorist attacks
are based upon estimates of its ultimate exposure derived from a manual
assessment of its outstanding policies. The assessment included market share
analysis, probable maximum loss analysis, independent risk modeling analysis and
cedent loss estimates. The Company's primary exposure for this event relates to
commercial property damage, which includes business interruption and incidental
workers' compensation coverage, and catastrophe aviation coverage. The Company's
estimated loss from the September 11th terrorist attacks is $141.8 million gross
and $86.8 million net of reinsurance recoverable. The reinsurance recoverable of
$55.0 million related to the terrorist attacks is from companies which have
financial strength ratings from A.M. Best of "A" or better. In addition to
losses incurred related to the September 11th terrorist attack, the Company
incurred losses of $8.0 million associated with Tropical Storm Alison. Claims
and claims expenses incurred in 2000 included $6.5 million of catastrophe losses
relating to U.K. floods and an increase of $20.4 million in prior period
occurrences, principally losses relating to two storms, Martin and Anatol, which
hit Europe in late December 1999.
Underwriting expenses
2001 Year 2000 Year Change
--------- --------- ------
(in thousands)
Policy acquisition costs $20,886 $21,270 $ (384)
Underwriting expenses 11,790 13,342 (1,552)
------- ------- -------
Total underwriting expenses $32,676 $34,612 $(1,936)
======= ======= =======
Underwriting expense ratio 33.5% 31.9% 1.6%
======= ======= =======
Total underwriting expenses, comprising policy acquisition costs and
underwriting expenses, for 2001 decreased by $1.9 million compared to total
underwriting expenses for 2000. Policy acquisition costs as a percentage of net
premiums earned were 21.4% for 2001 compared to 19.7% for 2000. The increase in
the ratio occurred principally because of an increase in the amount of amortized
ceded premiums. As a percentage of gross premiums earned, policy acquisition
costs were 13.9% in 2001 compared to 15.2% in 2000. The decrease of 1.3% was
primarily due to the Company deriving less premiums from LaSalle Re Capital
which has a higher expense ratio than the rest of the business.
Underwriting expenses for 2001 were $11.8 million compared to $13.3 million for
2000, a decrease of $1.5 million. The decrease is primarily due to a reduction
in overall salary costs.
Net investment income
2001 Year 2000 Year Change
--------- --------- ------
(in thousands)
Average invested assets $ 491,861 $ 508,081 $(16,220)
Average annualized yields 7.5% 7.0% 0.5%
Investment income - portfolio 37,016 35,691 1,325
Investment income - non-portfolio 2,548 2,667 (119)
Investment expenses (636) (914) 278
--------- --------- --------
Net investment income $ 38,928 $ 37,444 $ 1,484
========= ========= ========
Net investment income for 2001 was $38.9 million compared to $37.4 million for
2000. The increase in net investment income in 2001 was primarily due to changes
in the allocation of investments to higher yielding debt securities following a
change in investment managers.
22
Interest expense
Interest expense was $1.1 million in 2000. There were no interest expense
charges in 2001. Interest expense in 2000 included financing charges associated
with a ceded reinsurance contract and other interest expenses related to the
commitment fees payable on the Company's credit facility which was canceled
effective the end of September, 2000.
Corporate expenses
The Company did not record any corporate expenses for 2001. The expenses of $3.3
million for 2000 relate primarily to the Company's decision to cancel the
implementation of new reinsurance software and costs related to the
Trenwick/LaSalle business combination.
Non-operating income and expenses
Net realized gains on investments were $7.6 million during 2001, compared to net
realized losses of $1.7 million for 2000. The gains in 2001 resulted from a
change in investment managers and a consequential re-positioning of the
portfolio to reflect a new investment philosophy.
The Company recorded minimal foreign currency losses in 2001 and 2000.
Results of Operations - Year Ended December 31, 2000 and Fiscal Year Ended
September 30, 1999
2000 Year 1999 Year Change
--------- --------- ------
(in thousands)
Underwriting loss $ (7,102) $(38,109) $ 31,007
Net investment income 37,444 33,847 3,597
Interest expense (1,173) (1,714) 541
Corporate expenses (3,255) (788) (2,467)
-------- -------- --------
Operating income (loss) 25,914 (6,764) 32,678
Net realized investment (losses) gains (1,688) 615 (2,303)
Goodwill accretion 122 0 122
Foreign currency (losses) gains (244) 470 (714)
-------- -------- --------
Income (loss) before minority interest 24,104 (5,679) 29,783
Minority interest in net (income) loss of
subsidiary (839) 2,845 (3,684)
-------- -------- --------
Net income (loss) 23,265
Dividends on preferred stock (6,563) (6,563) --
-------- -------- --------
Net income (loss) available to common
shareholders $ 16,702 $ (9,397) $ 26,099
======== ======== ========
Operating income of $25.9 million in 2000 represented a $32.7 million increase
over the operating loss of $6.8 million recorded in fiscal year 1999. This
improvement was principally due to better underwriting results in 2000, which
was due to a decrease in prior year reserve strengthening to both catastrophe
and non-catastrophe business. The effect of the improved underwriting
performance primarily generated the increase in net income of $26.1 million.
23
Underwriting income (loss)
2000 Year 1999 Year Change
--------- --------- ------
(in thousands)
Net premiums earned $ 108,096 $ 126,615 $(18,519)
--------- --------- --------
Claims and claims expenses incurred (80,586) (131,147) 50,561
Acquisition costs and underwriting expenses (34,612) (33,577) (1,035)
--------- --------- --------
Total underwriting costs and expenses (115,198) (164,724) 49,526
--------- --------- --------
Net underwriting loss $ (7,102) $ (38,109) $ 31,007
========= ========= ========
Loss ratio 74.6% 103.6% (29.0%)
Underwriting expense ratio 31.9% 26.5% 5.4%
--------- --------- --------
Combined ratio 106.5% 130.1% (23.6%)
The underwriting loss of $7.1 million in 2000 represented a $31.0 million
decrease compared to the underwriting loss of $38.1 million in the 1999 fiscal
year. The underwriting loss in 2000 included both losses of $60.2 million on
current year loss events and additions to prior years' reserves of $20.4
million. The underwriting results for the 1999 fiscal year included both losses
of $82.5 million relating to current year events and additions to prior year
loss reserves of $48.6 million.
The decrease in the combined ratio in 2000 compared to fiscal year 1999 resulted
primarily from an improvement in the loss ratio due to lower catastrophe losses
in the 2000 year and reduced additions to prior year loss reserves.
Premiums written
Gross premiums written for 2000 were $130.2 million compared to $139.0 million
for the 1999 fiscal year, a decrease of $8.8 million or 6%. Details of gross
premiums written are provided below.
2000 Year 1999 Year Change
--------- --------- ------
(in thousands)
Worldwide property catastrophe reinsurance $101,570 $116,621 $(15,051)
Lloyd's syndicates
runoff 28,593 22,389 6,204
-------- -------- --------
Total $130,163 $139,010 $ (8,847)
======== ======== ========
The decrease in worldwide property catastrophe reinsurance gross premium
writings for 2000 compared to the 1999 fiscal year resulted primarily from the
non-renewal of certain accounts following a re-evaluation of LaSalle Re
Limited's worldwide aggregate exposures. The most significant reduction in
aggregate exposures came from a reduction in accounts covering European risks.
The increase in Lloyd's gross written premiums for 2000 compared to the 1999
fiscal year primarily arose from new information concerning premium estimates
for the 1999 and 1998 underwriting years of account. All of the Lloyd's business
underwritten by the Company prior to the combination with Trenwick has not been
renewed as of December 31, 2000 and has been classified as runoff.
24
Premiums earned
2000 Year 1999 Year Change
--------- --------- ------
(in thousands)
Gross premiums written $ 130,163 $ 139,010 $ (8,847)
Change in gross unearned premiums 9,966 6,070 3,896
--------- --------- --------
Gross premiums earned 140,129 145,080 (4,951)
--------- --------- --------
Premiums ceded (31,631) (28,191) (3,440)
Change in premiums ceded (402) 9,726 (10,128)
--------- --------- --------
Amortized ceded premiums (32,033) (18,465) (13,568)
--------- --------- --------
Net premiums earned $ 108,096 $ 126,615 $(18,519)
========= ========= ========
Gross premiums ceded for 2000 were $31.6 million compared to $28.2 million for
the 1999 fiscal year. The increase in amortized ceded premiums of $13.6 million
was primarily attributable to a full year's cessions to the CNA property
catastrophe quota share arrangement in 2000. The facility originally incepted
April 1, 1999. In addition the Company also purchased several new protections in
2000.
Net premiums earned in 2000 were $108.1 million compared to $126.6 million for
the 1999 fiscal year. The decrease in net premiums earned is due to the increase
in amortized ceded premiums.
Claims and claims expenses
Claims and claims expenses for 2000 were $80.6 million, a decrease of $50.6
million compared to claims and claims expenses of $131.1 million for the 1999
fiscal year. The reduction in claims and claims expenses incurred was due to a
reduced number of catastrophe losses in 2000 and a reduction in prior year
reserve strengthening. Claims and claims expenses incurred in 2000 included $6.5
million of catastrophe losses relating to U.K. floods and an increase of $20.4
million in prior period occurrences, principally losses relating to two storms,
Martin and Anatol, which hit Europe in late December 1999.
During the 1999 fiscal year, claims and claims expenses incurred included $25.6
million in losses from various catastrophes including Hurricane Floyd, the
Australian hailstorm and Oklahoma tornadoes. During the same year, the Company
recorded additions to prior year reserves of $14.0 million in respect of
Hurricane Georges, which occurred in September 1998, due to an increase in
market estimates of the damage caused by the hurricane. The Company also
incurred $16.0 million of additional reserves in the 1999 fiscal year following
the completion of an evaluation of its catastrophe reserving methodology. In
addition, the Company recorded approximately $14.0 million of additional
reserves in the 1999 fiscal year relating to contracts written in prior years,
including contracts which had incidental extended warranty coverages.
Underwriting expenses
2000 Year 1999 Year Change
--------- --------- ------
(in thousands)
Policy acquisition costs $21,270 $19,844 $ 1,426
Underwriting expenses 13,342 13,733 (391)
------- ------- -------
Total underwriting expenses $34,612 $33,577 $ 1,035
======= ======= =======
Underwriting expense ratio 31.9% 26.5% 5.4%
======= ======= =======
Total underwriting expenses, comprising policy acquisition costs and
underwriting expenses, for 2000 increased by $1.0 million compared to total
underwriting expenses for the 1999 fiscal year. Policy acquisition costs as a
percentage of net premiums earned were 19.7% for 2000 compared to 15.7% for the
1999 fiscal
25
year. The increase in the ratio occurred principally because of an increase in
the amount of amortized ceded premiums. As a percentage of gross premiums earned
policy acquisition costs were 15.2% compared to 13.7%. The remaining increase of
1.5% was primarily due to the Company deriving more premiums from LaSalle Re
Capital which has a higher expense ratio than the rest of the business at 20%.
Underwriting expenses for the year 2000 and the 1999 fiscal year remained
comparable at 9.5%.
Net investment income
2000 Year 1999 Year Change
--------- --------- ------
(in thousands)
Average invested assets $ 508,081 $ 575,571 $(67,490)
Average annualized yields 7.0% 5.7% 1.3%
Investment income - portfolio 35,691 32,778 2,913
Investment income - non-portfolio 2,667 1,935 732
Investment expenses (914) (866) (48)
--------- --------- --------
Net investment income $ 37,444 $ 33,847 $ 3,597
========= ========= ========
Net investment income for 2000 was $37.4 million compared to $33.8 million for
the 1999 fiscal year. The principal reason for the increase in net investment
income in 2000 was the increase in market yields.
Interest expense
Interest expense was $1.2 million for 2000 a decrease of $0.5 million from the
1999 fiscal year. Interest expense included financing charges associated with a
ceded reinsurance contract and other interest expenses related to the commitment
fees payable on the Company's credit facility which was canceled effective the
end of September, 2000.
Corporate expenses
Corporate expenses were $3.3 million for 2000 compared to $0.8 million for 1999.
The increase in the expense was due to the write off of a new reinsurance system
following the cancellation of the implementation. The Company had originally
capitalized the system and intended to depreciate the asset once the system was
in operation.
Non-operating income and expenses
Net realized losses on investments were $1.7 million during 2000, compared to
net realized gains of $0.6 million for the 1999 fiscal year. Both the losses and
gains were made as a result of security sales executed pursuant to an investment
policy designed to protect the total returns on the portfolio.
The Company recorded foreign currency losses of $0.2 million for 2000, compared
to foreign currency gains of $0.4 million for the 1999 fiscal year due to the
decline in the value of European currencies against the US dollar.
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.
26
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 Supervisor 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.
Operating activities produced a net cash inflow of $51.9 million for the year
ended December 31, 2001 compared to $10.7 million for the year ended December
31, 2000. The increase was partially from the collection of a deposit of
approximately $27.4 million on the Company's multi year reinsurance contract
which was cancelled effective December 31, 2000. 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. Loss payments
following the September 11th terrorist attack have not been significant in 2001.
Loss payments from this event are expected to be significant in 2002 and 2003.
As a result of the potential for large loss payments, LaSalle Re maintains a
substantial portion of its assets in cash and debt securities. As of December
31, 2001, 68% of its total assets were held in cash and investments, which
totaled $543.7 million compared to 69% at December 31, 2000 or $499.7 million.
The increase in cash and investments of $44.0 million was primarily due to the
reinvestment of surplus cash flows. To further mitigate the uncertainty
surrounding the amount and timing of potential liabilities and to minimize
interest rate risk, LaSalle Re maintains a short average duration for its
investment portfolio. The Company has decreased the modified average duration of
the portfolio from 2.9 years at December 31, 2000 to 2.7 years at December 31,
2001.
As of December 31, 2001, 73% of the debt securities held in the Company's
investment portfolio were rated "AA" or better and 87% were rated "A" or better
by Standard and Poor's or Moody's. No single investment comprised more than 5%
of the overall portfolio.
Premiums receivable were $86.2 million at December 31, 2001 compared to $77.2
million at December 31, 2000. The increase was due to reinstatement premiums
generated by reinstated coverages on assumed contracts impacted by losses from
the September 11th terrorist attacks.
Other assets decreased from $30.3 million as at December 31, 2000 to $3.2
million at December 31, 2001. The decrease is related to collection of the
deposit on the Company's multi-year reinsurance contract.
At December 31, 2001, reserves for unpaid claims and claims expenses were $280.5
million compared to $174.8 million at December 31, 2000. Included in the reserve
for unpaid claims and claims expenses at December 31, 2001, was an amount of
$42.1 million compared to $37.2 million at December 31, 2000 in respect of the
business underwritten by LaSalle Re Capital. At December 31, 2001, reinsurance
recoverable balances were $57.2 million compared to $6.4 million as at December
31, 2000. The increase in unpaid claims and claims expenses and reinsurance
recoverable balances of $105.7 million and $50.8 million, respectively was due
to the impact on net losses incurred following the September 11th terrorist
attacks.
27
The reduction in unearned premium by $5.0 million from December 31, 2000 to
December 31, 2001 was primarily caused by the change in the mix of business in
the