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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, 2002.
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.)
LOM Building, 27 Reid Street, Hamilton HM 11, 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 Over The Counter Bulletin Board
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|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |_| No |X|
There was no voting stock held by non-affiliates on June 30, 2002.
The number of shares outstanding of each of the issuer's classes of common
stock as of March 31, 2003:
Class Outstanding at March 31, 2003
Common Stock, $1.00 par value 20,432,043
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LASALLE RE HOLDINGS LIMITED
TABLE OF CONTENTS
Item Page Number
- ---- -----------
PART I
1. BUSINESS .................................................................. 2
2. PROPERTIES ................................................................ 24
3. LEGAL PROCEEDINGS ......................................................... 24
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ....................... 25
PART II
5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS... 25
6. SELECTED FINANCIAL DATA ................................................... 25
7. MANAGEMENTS' DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION ................................................................. 26
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK ................. 48
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ............................... 56
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE ................................................................ 56
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS .......................................... 56
11. EXECUTIVE COMPENSATION .................................................... 57
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ............ 60
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............................ 61
14. CONTROLS AND PROCEDURES ................................................... 61
PART IV
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K .......... 62
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"), Oak Dedicated Limited, Oak Dedicated
Two Limited and Oak Dedicated Three Limited, (collectively called the "Oak
Entities").
FORWARD-LOOKING STATEMENTS
Some of the statements under "Business," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
elsewhere in this Report may include forward-looking statements which reflect
our current views with respect to future events and financial performance. These
statements include forward-looking statements both with respect to us
specifically and the insurance and reinsurance sectors in general. Statements
which include the words "expect," "intend," "plan," "believe," "project,"
"anticipate," "will" and similar statements of a future or forward-looking
nature identify forward-looking statements for purposes of the federal
securities laws or otherwise.
All forward-looking statements address matters that involve risks and
uncertainties. Accordingly, there are or will be important factors that could
cause our actual results to differ materially from those indicated in these
statements. We believe that these factors include, but are not limited to, those
described under "Risk Factors" below and the following:
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:
- actions by insurance regulators seizing or otherwise taking control
of our insurance company subsidiaries or their assets or those of
other affiliated entities;
- actions by our creditors or securities holders, or those of our
parent company, Trenwick Group Ltd. ("Trenwick"), commencing
liquidation or similar proceedings against us, our subsidiaries,
Trenwick or their assets or those of other affiliated activities;
- actions by the Financial Services Authority or Lloyd's in the United
Kingdom, which could result in our affiliate Trenwick Managing
Agents being required to cease underwriting at Lloyd's;
- greater frequency or severity of claims and loss activity, including
as a result of natural or man-made catastrophic events, than our
underwriting, reserving or investment practices anticipate based on
historical experience or industry data;
- failure of our business strategy due to changes in current or future
market conditions;
- increased competition on the basis of financial strength, pricing,
capacity, coverage terms or other factors;
- our lack of experience in operating insurance or reinsurance
entities that are in runoff and are not writing new business;
- the effects of acts of terrorism or war;
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- developments in the world's financial and capital markets that
adversely affect the performance of our investments;
- changes in regulation or tax laws applicable to us, our
subsidiaries, brokers or customers;
- changes in the availability, cost or quality of reinsurance;
- changes in the distribution or placement of risks due to increased
consolidation of insurance and reinsurance brokers;
- decreased demand for our insurance and reinsurance products at
Lloyd's;
- loss of additional key personnel or consultants, or failure of
management companies to provide services;
- inability of affiliated entities to provide administrative and other
management services under the terms of administrative services
agreements;
- the effects of mergers, acquisitions and divestitures;
- changes in rating agency policies or practices;
- changes in legal theories, including trends that impact verdicts in
insurance claims litigation;
- changes in accounting policies or practices;
- changes in general economic conditions, including inflation, foreign
currency exchange rates, interest rates, and other factors.
The foregoing review of important factors should not be construed as exhaustive
and should be read in conjunction with the other cautionary statements that are
included in this Report. We undertake no obligation to publicly update or review
any forward-looking statement, whether as a result of new information, future
developments or otherwise.
If one or more of these or other risks or uncertainties materialize, or if our
underlying assumptions prove to be incorrect, actual results may vary materially
from what we projected. Any forward-looking statements you read in this Report
reflect our current views with respect to future events and are subject to these
and other risks, uncertainties and assumptions relating to our operations,
results of operations, growth strategy and liquidity. All subsequent written and
oral forward-looking statements attributable to us or individuals acting on our
behalf are expressly qualified in their entirety by this paragraph. You should
specifically consider the factors identified in this Report which could cause
actual results to differ before making an investment decision.
ITEM 1. BUSINESS
General
The Company was incorporated in Bermuda in September 1995 to act as a holding
company for LaSalle Re, which was incorporated in Bermuda in October 1993 and
commenced operations on November 22, 1993. It primarily acted as a multi-line
reinsurance company with emphasis on property catastrophe business.
On September 27, 2000, the Company, LaSalle Re, Trenwick Group Ltd. ("Trenwick")
and Trenwick Group Inc. completed a business combination (the "Trenwick/LaSalle
business combination"). Under the terms of the Trenwick/LaSalle business
combination, the common shareholders of the Company, LaSalle Re and
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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 and a guarantor of certain indebtedness owed by Trenwick
and certain of its direct and indirect subsidiaries.
Trenwick is a Bermuda-based specialty insurance and reinsurance holding company
with subsidiaries located in the United States and the United Kingdom, including
four runoff operations. Trenwick's operations at Lloyd's of London ("Lloyd's")
underwrite specialty property and casualty insurance as well as treaty and
facultative property and casualty reinsurance on a worldwide basis.
In 2002, Trenwick conducted several strategic reviews of its operations in light
of its capital constraints and determined that it was necessary for Trenwick to
reduce its operating leverage by reducing premium volumes to a level more
commensurate with its capital base and to concentrate its limited financial
resources on its core franchises and businesses, its United States treaty
reinsurance business and its Lloyd's operations, where it would be able to write
insurance and reinsurance based on direct or indirect financial support. As a
result, Trenwick voluntarily placed into runoff its United States specialty
program business formerly operated through its subsidiary, Canterbury Financial
Group, Inc., and its London-based specialty insurance and reinsurance company,
Trenwick International Limited. Additionally, in light of the increasing capital
requirements imposed by the market on catastrophe insurance providers, the
Company sold its in-force property catastrophe reinsurance business. Little or
no new insurance or reinsurance is presently being offered in these runoff
operations, including the Company, with the exception of business written at
Lloyd's through the Oak Entities, which are owned by the Company and are
described below under "Business Segments - Lloyd's - Corporate Members."
Trenwick's United States reinsurance company subsidiary, Trenwick America
Reinsurance Corporation ("Trenwick America Re") has been limited since November
2002 to providing, through an underwriting facility with Chubb Re, Inc. and its
affiliate Federal Insurance Company (together, "Chubb"), treaty reinsurance to
insurers of property and casualty risks. Trenwick announced on April 15, 2003
that it would cease underwriting reinsurance business under the Chubb facility.
Since inception in November 2002, Trenwick underwrote approximately $128 million
of reinsurance under the facility. Trenwick will continue to be entitled to the
economic benefits of existing business under the facility, subject to the terms
and conditions of the facility. Trenwick's ability to write reinsurance business
under the facility was severely constrained by its financial condition and
concerns arising with respect to its ongoing stability. As a result, Trenwick
ceased underwriting activities under the facility in order to reduce Trenwick's
costs. The effect of this cessation is that Trenwick America Re is now primarily
in runoff. Trenwick will continue to service and pay claims for all business
previously written through Trenwick America Re outside of the Chubb facility and
will jointly adjust and settle with Chubb any claim arising under the business
written under the Chubb facility, subject to Chubb's final authority.
From LaSalle Re's incorporation in 1993 until April 1, 2002, its primary
business activity was as a property and casualty reinsurer underwriting
worldwide specialty products with an emphasis on catastrophe reinsurance.
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. Following losses
sustained in the September 11, 2001 terrorist attacks, Trenwick determined that
without additional capital LaSalle Re could no longer compete effectively in
this business nor could Trenwick remain in a business that was inherently
unpredictable and which could result in additional significant losses. Effective
April 1, 2002, LaSalle Re was placed into runoff following the sale of its
in-force catastrophe reinsurance business to Endurance Specialty Insurance Ltd.
("Endurance") (See "Significant Developments," below).
LaSalle Re's other business consisted primarily of participations in certain
Lloyd's syndicates through LaSalle Re Capital, which provided capital support to
those syndicates. Effective for the 2001 underwriting year at Lloyd's, LaSalle
Re Capital withdrew its capital support from all Lloyd's syndicates. LaSalle Re
Capital, which was incorporated in Bermuda in November 1996, is currently
inactive. On December 10, 2002, LaSalle Re, with the permission of the Bermuda
Monetary Authority ("BMA"), again became a
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corporate capital provider at Lloyd's pursuant to an agreement between Trenwick,
LaSalle Re and the Company whereby the Oak Entities were contributed by Trenwick
to LaSalle Re. The Oak Entities (three separate subsidiaries), which are
incorporated in the United Kingdom, participate in Lloyd's syndicates managed by
Trenwick Managing Agents ("TMA"), a wholly owned subsidiary of Trenwick. The
contribution of the Oak Entities by Trenwick to LaSalle Re together with an
additional investment by LaSalle Re of $81.6 million was completed as part of
Trenwick's underwriting capital at Lloyd's for the 2003 year of account. In
return for its investment, LaSalle Re will receive 43% of the economic interest
(prior to the deduction of the Banks' letter of credit fees and profit
participation, discussed below in "- Significant Developments - Pledge by
Trenwick of the Company's Stock and Assets, Including the Stock of LaSalle Re")
in the 2003 year of account of syndicates managed by TMA at Lloyd's and will
also participate in the economic interest in the results of such syndicates for
the 2002 and prior years of account. For further discussion regarding the
Company's activities in the Lloyd's market, see "- Business Segments - Lloyd's -
Corporate Members," below.
LaSalle Re's other wholly owned subsidiaries include 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 in September 2000 and LaSalle Re Barbados, which was incorporated in
Barbados in 2001 and acts as an investment holding company.
Significant Developments
During 2002 and the first quarter of 2003, a number of developments have
occurred that have significantly and negatively affected Trenwick's operations,
capital structure and the financial resources required to conduct its
businesses, including those of the Company. Set forth below are brief
descriptions of a number of these developments as well as certain material
transactions entered into by Trenwick and the Company to enable them to continue
to conduct business operations despite the adverse developments. Investors and
shareholders are cautioned that Trenwick and the Company have had a number of
significant adverse events which could make it extremely difficult to continue
in their current businesses, if at all, and they should carefully review this
annual report on Form 10-K, as well as Trenwick's annual report on Form 10-K for
the year ended December 31, 2002 filed with the Securities and Exchange
Commission, including the "Significant Developments," "Risk Factors" and
"Forward-Looking Statements" sections thereof, as well as other sections of this
Report and Trenwick's Report.
Going Concern Qualification
The Company's independent accountants, PricewaterhouseCoopers LLP, have stated,
in their audit report with respect to the Company's financial statements as at
and for the twelve months ended December 31, 2002, dated March 31, 2003, that
substantial doubt exists as to the Company's ability to continue as a going
concern. Trenwick's and the Company's ability to operate continue to be
adversely impacted by the deterioration in Trenwick's financial condition and
its lack of available financial resources to meet its obligations.
Sale of In-Force Business of the Company to Endurance
Trenwick and the Company's wholly owned subsidiary, LaSalle Re, entered into a
Transfer and Purchase Agreement, a Quota Share Retrocession Agreement, a Bill of
Sale, an Assignment Agreement, an Administrative Services Agreement and an
Assignment of Reinsurance Recoverables and Other Receivables, each dated as of
May 16, 2002, pursuant to which LaSalle Re sold to Endurance the in-force
property catastrophe business of LaSalle Re as of April 1, 2002. Concurrent with
the sale, substantially all of LaSalle Re's employees became employees of
Endurance. The Quota Share Retrocession Agreement was a 100% quota share
reinsurance agreement, with Endurance paying LaSalle Re a ceding commission of
25% of premiums ceded and additional profit sharing of 50% if the losses do not
exceed a loss ratio of 45%. In addition, Endurance will have the right to renew
LaSalle Re's in-force business as it expires in exchange for a 12.5% commission
on the business renewed. Included in the Company's results for the year ended
4
December 31, 2002 are $11.6 million in ceding commissions earned on the quota
share agreement with Endurance as well as $6.0 million in amortization of
acquisition costs on the related assumed business. The loss on sale of in-force
business recorded during 2002 of $20.1 million is net of the non-recurring
revenue and expense items incurred as a result of the sale, as detailed in the
table below (in millions).
Minimum proceeds related to sale of renewal rights $ 8.0
Accelerated amortization of reinsurance contracts not transferred in sale (20.9)
Legal expenses and investment banking fees (4.4)
Severance and related expenses (2.8)
------
Net loss on sale of LaSalle Re's in-force reinsurance business $(20.1)
======
Realization of any additional revenue from the renewal commission in excess of
the $8.0 million previously received, or future revenue from profit sharing
related to the loss ratio, is not known at this time; however, the Company and
LaSalle Re do not expect to receive significant revenues in 2003 from this
transaction.
Special dividend
Subsequent to LaSalle Re being placed into runoff, Trenwick borrowed $258
million from LaSalle Re in June 2002. Of the funds borrowed, Trenwick used
approximately $195 million to repay the outstanding term indebtedness under
Trenwick's bank credit facility, which had been guaranteed by the Company, and
utilized the remaining portion primarily for capital support of Trenwick's
Lloyd's operations (including the Oak Entities, which became wholly owned
subsidiaries of LaSalle Re effective December 10, 2002).
As the Company had agreed to cease future competitive activities in connection
with the Endurance transaction and did not have any plans to underwrite new
insurance or reinsurance through LaSalle Re, Trenwick applied to the BMA in
November 2002 for permission to recharacterize the $258 million loan as a
special dividend since it would more appropriately reflect the status of the
distribution. The Company has determined that the reduction in capital and
surplus resulting from the special dividend would not cause LaSalle Re to fall
below the minimum statutory capital and surplus of $100 million which is
required of a Class 4 insurer in Bermuda. In connection with this request, the
BMA and LaSalle Re agreed that LaSalle's Certificate of Registration be endorsed
to restrict LaSalle Re's license so that it can no longer write any insurance or
reinsurance without the prior written consent of the BMA.
The Company has accounted for this distribution as a dividend in the
accompanying Consolidated Financial Statements.
Dividend suspension
On November 29, 2002, the Company suspended the payment of dividends on its
Series A Preferred Shares as a result of restrictions on the Company under
Trenwick's credit agreement with various lending institutions, under which the
Company is a guarantor. The Company intends to accrue the dividends until
payment is reinstated, if ever. The date of dividend payment reinstatement has
not been determined by the Company. The Company does not expect to be able to
pay dividends to the holders of the Series A Preferred Shares in the foreseeable
future, if ever.
Transactions with Affiliates
In 2000, Trenwick borrowed $75 million from LaSalle Re. The proceeds of the loan
were used primarily for capital support of Trenwick's Lloyd's operations and for
general corporate purposes. The BMA recently confirmed to the Company that it
will allow LaSalle Re's existing $75 million loan to Trenwick, plus accrued
interest, to continue to be recorded as an admitted asset on LaSalle Re's
balance sheet. LaSalle Re's statutory capital and surplus is estimated to be
$133 million, which is above the $100 million minimum required as a Class 4
insurer in Bermuda. In light of Trenwick's current financial condition, there is
5
significant uncertainty as to whether Trenwick will be able, financially, to pay
principal or interest on this loan. Should the loan and related interest and
other related intercompany receivables be determined to not be realizable
because of the currentfuture uncertainties of Trenwick's financial condition,
LaSalle Re could fall below the minimum required statutory capital and surplus
amount of $100 million. The Company is required by Trenwick's credit agreement
(discussed below in "-- Pledge by Trenwick of the Company's Stock and Assets,
Including the Stock of LaSalle Re") to use its best efforts to obtain a
reduction in LaSalle Re's insurance license classification from the BMA. LaSalle
Re has notified the BMA that it intends to file with the BMA an application
during 2003 for a reduction in class from a Class 4 insurer to a Class 3
insurer, which could reduce its statutory capital and surplus requirement to
$29.4 million if applied to its December 31, 2002 statutory balance sheet. There
can be no assurance that such an application would be approved by the BMA or, if
approved, that the BMA would not impose more restrictive capital and surplus and
other financial requirements on LaSalle Re than those generally established for
Class 3 insurers.
During the years ended December 31, 2001 and 2000, the Company purchased $10.7
million and $13.0 million par value, respectively, of Trenwick Capital Trust I
Preferred Stock for $8.5 million and $9.9 million, respectively, which are
included in the Company's debt securities held for investment. The Trenwick
Capital Trust I Preferred Stock matures in 2037 and provides preferential
cumulative semi-annual cash distributions at an annual rate of 8.82% which are
guaranteed by Trenwick America Corporation, within certain limits, as to
distribution payments and liquidation or redemption payments. In November 2002,
Trenwick suspended the dividend payment on these securities. The market value of
these investments was $2.4 million at December 31, 2002. In accordance with the
Company's investment accounting policy, the Company determined that this
investment suffered an impairment of value that is considered to be other than
temporary and therefore the difference between amortized cost and market value
is included in the accompanying Consolidated Statement of Operations and
Comprehensive Income Statement as a realized loss of $16.0 million. No interest
has been accrued on these securities since August 1, 2002, the date of the last
dividend payment.
Acquisition of Oak Entities
On December 10, 2002, the capital stock of the Oak Entities was contributed by
Trenwick to LaSalle Re, prior to which certain indebtedness owed to Trenwick by
the Oak Entities was forgiven. The transaction was approved by the BMA. The Oak
Entities, as corporate capital providers, participate in several Lloyd's
syndicates managed by TMA. The Company, through its subsidiary LaSalle Re
Capital, also participated in one of these syndicates through the 2000 Lloyd's
year of account. The Company's financial statements have been restated to
include the accounts of the Oak Entities as a transfer of operations under
common control is accounted for in a manner similar to a pooling of interest.
Reserve Adjustments
Trenwick announced on October 25, 2002 that it had engaged independent actuaries
to conduct a review of the reserves for unpaid claims and claims expenses at
each of Trenwick's operating subsidiaries, including those of the Company. Based
upon the study conducted by independent actuarial consultants and additional
work performed during the quarter by Trenwick's internal actuaries, Trenwick
increased its reserves for unpaid claims and claims expenses in the fourth
quarter of 2002 by $107 million, which was net of a favorable adjustment of $6
million applicable to LaSalle Re. The fourth quarter 2002 increases in reserves
impact Trenwick's United States insurance subsidiaries and Trenwick
International. Trenwick's reserves at its Lloyd's operation, which includes the
Oak Entities, while also analyzed, were not adversely affected by this reserve
increase. The fourth quarter 2002 reserve increases followed reserve increases
made by Trenwick earlier in 2002, for an aggregate reserve increase for 2002 of
$303.4 million, of which $33.1 million applied to the Company. The reserve
increases recorded during the first nine months of 2002 include $21.5 million
related to LaSalle's Re exposure to the terrorist attacks of September 11, 2001
offset in part by reductions in LaSalle Re's other reserves of $19.0 million.
The remainder of the reserve increase relates primarily to the Oak Entities and
reflects a reassessment of reserves for unpaid claims and claims expenses in
6
light of recent reported loss activity trends across its major business groups
and principally impacts the 1998 to 2001 accident years.
Pledge by Trenwick of the Company's Stock and Assets, Including the Stock of
LaSalle Re
Concurrently with the Trenwick/LaSalle business combination in September of
2000, Trenwick America Corporation ("Trenwick America") and Trenwick Holdings
Limited ("Trenwick Holdings"), Trenwick's U.S. and U.K. holding companies,
entered into an amended and restated $490 million credit agreement with various
lending institutions (the "Banks"), which was guaranteed by the Company. The
credit agreement consisted of both a $260 million revolving credit facility and
a $230 million letter of credit facility. The revolving credit facility was
subsequently converted into a four-year term loan and repaid in full on June 17,
2002. Additionally, on December 24, 2002, the credit agreement was amended to
reduce the letter of credit facility, which is utilized by Trenwick to support
its underwriting operations at Lloyd's, to the currently outstanding $182.5
million. The letter of credit facility is scheduled to terminate on December 31,
2003, although the letters of credit issued pursuant to the facility are not
scheduled to expire until December 31, 2006.
Pursuant to a guaranty agreement entered into concurrently with the credit
agreement, the Company has guaranteed the obligations of Trenwick America and
Trenwick Holdings under the credit agreement. In April of 2002, Trenwick pledged
the capital stock of the Company, and the Company and Trenwick pledged the
capital stock of LaSalle Re as collateral to the Banks. In December of 2002,
Trenwick agreed to provide the Banks additional security interests as described
below.
On October 18, 2002, A.M. Best Company lowered the financial strength ratings of
the Company and Trenwick's other operating subsidiaries below "A-". The lowered
A.M. Best Company ratings constituted an event of default under the credit
agreement. In addition, increases in reserves for unpaid claims and claims
expenses at Trenwick's subsidiaries and the establishment of a deferred tax
asset reserve at Trenwick's United States subsidiaries in the third quarter of
2002 resulted in violations of the financial covenants in the credit agreement
requiring Trenwick to maintain a minimum tangible net worth and minimum
risk-based capital. On November 13, 2002, Trenwick, its subsidiaries (including
the Company) and the Banks executed a forbearance agreement with respect to the
events of default arising from the lowered A.M. Best Company ratings and
financial covenant violations.
Subsequently, an amendment and waiver of default under the credit agreement and
amendment to the guaranty agreement were entered into on December 24, 2002 (the
"December Amendments"). The December Amendments extended the letter of credit
facility through December 31, 2003 to support Trenwick's underwriting operation
at Lloyd's for the 2003 year of account. To those Banks extending their letters
of credit, Trenwick agreed to pay a 5% per annum cash letter of credit fee,
issue pay-in-kind notes bearing interest at LIBOR plus 2.5% per annum to
evidence an additional 3.16% per annum letter of credit fee, issue warrants
equal to 10% of Trenwick's fully diluted equity capital, and pay 15% of the
profits earned by Trenwick's Lloyd's operations, including those of the Oak
Entities owned by LaSalle Re, for the 2002 and 2003 Lloyd's years of account.
Trenwick, Trenwick America and Trenwick Holdings agreed to provide the Banks a
security interest in, and the assets and property of, their direct and indirect
subsidiaries, including the Company, as additional collateral for the Banks, and
to cause its subsidiaries, including the Company, to provide a guaranty to the
Banks, subject to applicable laws and regulations and existing contractual
rights.
The December Amendments also prohibit Trenwick and its subsidiaries from
declaring or paying any dividends (including on Trenwick's common shares, the
Series A Preferred Shares of the Company and the capital securities of Trenwick
Capital Trust I). The December Amendments and the other amendments and waivers
entered into in the first quarter of 2003 waive certain other defaults, add
covenants further restricting the operation of Trenwick's business (including
that of the Company), prohibit Trenwick from making certain payments without the
Banks' approval, prohibit Trenwick and its subsidiaries (including the Company)
from selling or otherwise disposing of any assets or property, require Trenwick
to regularly report certain financial information to the Banks, and adjust
downward certain of the financial covenants.
7
Pursuant to the December Amendments, Trenwick is required to collateralize with
cash, cash equivalents and marketable securities 60% of the outstanding letters
of credit by August 1, 2003. If it is unable to do so, Trenwick's insurance
company subsidiaries will be prohibited from underwriting any insurance or
reinsurance business without the Banks' prior approval. In addition, Trenwick is
required to use its best efforts to terminate the letters of credit by December
31, 2003. In order to do so, the letters of credit would need to be replaced
with other letters of credit or collateral acceptable to Lloyd's. In the event
Trenwick has not terminated the letters of credit by December 31, 2003, it is
required on such date to collateralize with cash, cash equivalents and
marketable securities the full amount of the outstanding letters of credit. At
this time, Trenwick does not have sufficient available liquidity to
collateralize the letters of credit as required by the December Amendments.
Additionally, Trenwick does not believe that it will be able to replace the
letters of credit with other letters of credit or collateral acceptable to
Lloyd's.
Since December 2002, Trenwick has entered into additional amendments and
numerous waivers with the Banks providing for, among other things, waivers of
potential covenant defaults, further reductions in certain financial covenants,
additional financial reporting, approval of certain employee and other payments,
approval of the extension of the maturity of Trenwick America's senior notes
from April 1, 2003 to August 1, 2003, the payment of interest accrued through
April 1, 2003 to the holders of the senior notes and extension of numerous
deadlines imposed under the December Amendments.
If there is an event of default under the credit agreement, including as a
result of Trenwick failing to collateralize the letters of credit as described
above, or if there is an event of default under other outstanding indebtedness
of Trenwick or its subsidiaries (including the Company), including under
Trenwick America's senior notes, resulting in a cross default under the credit
agreement, Trenwick may be required to fully and immediately collateralize the
outstanding letters of credit under the terms of the credit agreement and the
guaranty agreement. No liability for any such amounts has been reflected in
Trenwick's financial statements. If events of default occur and are not waived,
there is substantial doubt as to Trenwick's ability to continue as a going
concern and Trenwick and/or one or more of its subsidiaries (including the
Company) may be forced to seek protection from creditors through proceedings
commenced in Bermuda and other jurisdictions including the United States. In
addition, at any time one or more of the insurance regulatory authorities having
jurisdiction over Trenwick's insurance company subsidiaries (including the
Bermuda Monetary Authority with respect to the Company and LaSalle Re, or the
Financial Services Authority or Lloyd's in the United Kingdom with respect to
Trenwick's Lloyd's operations) may commence voluntary or involuntary proceedings
for the formal supervision, rehabilitation or liquidation of such subsidiaries,
or one or more of the creditors of Trenwick or its subsidiaries (including the
Company) may commence proceedings against Trenwick or its subsidiaries,
including the Company, seeking their liquidation.
Pursuant to the December Amendments, the Company is also required among other
things to (1) use its best efforts to convert LaSalle Re to Class 3 insurer
status in Bermuda, (2) use its best efforts to secure loss portfolio transfers
at LaSalle Re and its subsidiaries in form and substance satisfactory to the
Banks, (3) use its best efforts to secure stop-loss reinsurance treaties
satisfactory to the Banks for the 2001, 2002 and 2003 years of account at
Lloyd's and (4) promptly pay, upon receipt of notice from Lloyd's, any solvency
deficit or cash call for the 2002 and prior years of account at Lloyd's.
Recent Ratings Actions
Moody's Investor Services announced on April 10, 2003 that it had withdrawn all
debt and preferred stock ratings of Trenwick and its subsidiaries. The action
reflects the failure of Trenwick America to pay the $75 million principal
payment on its Senior Notes due April 1, 2003 and the ongoing effort to
restructure Trenwick's debt obligations. The senior debt rating of Trenwick and
the rating of Trenwick America's trust preferred securities had previously been
lowered to "Ca" and "C," respectively, on January 31, 2003.
Standard and Poor's Ratings Services announced on April 2, 2003 that it had
lowered the counter-party credit ratings on Trenwick, Trenwick America and the
Company to "D" following the announced non-payment of
8
principal and interest on the Senior Notes. Standard & Poor's also stated that
despite the agreement in principal to extend the maturity of the Senior Notes,
it believes that the prospect for significant recoveries to the senior note
holders is very low. Standard & Poor's also announced on March 4, 2003 that it
placed its "CCC" counterparty credit and financial strength ratings on Trenwick
America's subsidiaries, Trenwick America Reinsurance Corporation ("Trenwick
America Re"), Dakota Specialty Insurance Company and The Insurance Corporation
of New York on CreditWatch negative. In addition, Standard and Poor's withdrew
its "CCC" counterparty credit and financial strength ratings on Chartwell
Insurance Company due to its merger with Trenwick America Re.
On April 2, 2003, A.M. Best Company announced that it had withdrawn the
financial strength rating of "C" (Weak) and assigned a "NR-4" rating (Rating
Withdrawn at Company's Request) to Trenwick America Re. Concurrently, A.M. Best
downgraded the debt rating of Trenwick America to "D" from "C" relating to its
Senior Notes. These rating actions followed the announced non-payment of
principal and interest on the Senior Notes. The financial strength rating of
Trenwick America Re had previously been downgraded to "C" (Weak) from "B-"
(Fair) on February 3, 2003.
On April 3, 2003, Fitch Ratings announced that it had lowered its long term and
senior debt rating on Trenwick America to "D" from "C". In addition, Fitch
lowered its long term ratings on Trenwick and the Company to "D" from "C".
Fitch's "C" ratings on the Company's Series A Preferred Shares and the capital
securities of Trenwick Capital Trust I were unchanged. Fitch's rating action
also followed the announced non-payment of principal and interest on the Senior
Notes. Fitch's "D" rating indicates that Fitch believes that Trenwick America's
senior note holders' recovery value is unlikely to exceed fifty percent.
Suspension of Trading From New York Stock Exchange
On March 25, 2003, the Series A Preferred Shares of the Company and the common
shares of Trenwick and were suspended from trading, pending application to the
Securities and Exchange Commission for delisting, by the New York Stock Exchange
("NYSE") as a result of failure to meet the NYSE's minimum continued listing
criteria. On the same day, Trenwick was notified that its common shares and the
Series A Perpetual Preferred Shares of the Company would be quoted on the Over
The Counter Bulletin Board ("OTC").
By letter dated March 24, 2003, the BMA issued permission for the free
transferability on an interim basis of the shares of Trenwick and the Company
while they are traded on the OTC Bulletin Board, on the condition that the BMA
is notified promptly of all instances in which Trenwick or the Company becomes
aware that a new shareholder has obtained 5% or more of either company's shares,
including background information on any such new 5% shareholder.
Business segments
The Company has two reportable business segments: reinsurance operations and
Lloyd's. The reinsurance segment provided reinsurance for property catastrophe
and for other lines of business that have similar characteristics, namely high
severity and low frequency. These lines included property risk excess, property,
pro rata treaty, casualty, marine, aviation, satellite, terrorism, multi-peril,
crop, and political risk coverages. Prior to December 10, 2002, the Lloyd's
syndicates segment in runoff 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, facultative
property reinsurance, marine insurance and reinsurance, professional indemnity,
directors and officers insurance and bankers blanket bond business. Effective
for the 2001 underwriting year at Lloyd's, LaSalle Re Capital withdrew its
capital support from all Lloyd's syndicates. As described below, LaSalle Re's
continuing underwriting activities arise as a result of the Oak Entities which
are corporate members at Lloyd's.
9
Reinsurance operations (in runoff)
The Company wrote property and casualty reinsurance on a worldwide basis through
its operating subsidiary LaSalle Re until April 1, 2002, when it sold LaSalle
Re's in-force business to Endurance and placed LaSalle Re into runoff. The
Company also wrote selected other lines of reinsurance at times when it believed
that market conditions were favorable.
The Company's objective is to maximize the economic value of the runoff through
effective claims settlement, commutation of assumed obligations where
appropriate, collection of reinsurance recoverables and effective cash
management. The overall financial condition of the runoff operation will
determine the Company's ability to successfully accomplish this goal. The
Company expects that it will manage outstanding liabilities until their natural
expiration, although it may explore other strategic alternatives to assure that
the interests of policyholders and ceding companies are protected, while
maximizing the potential for return. LaSalle Re has entered into an
administrative services agreement with Trenwick for Trenwick to provide LaSalle
Re with executive management, actuarial, accounting, treasury, claims and other
administrative services. From time to time the Company may also seek the advice
of outside experts and retain consultants to assist in these efforts.
Lloyd's - Corporate Members
As described above, on December 10, 2002, Trenwick, LaSalle Re and the Company
entered into an agreement pursuant to which the Oak Entities were contributed by
Trenwick to LaSalle Re, following the forgiveness of certain indebtedness owed
to Trenwick by the Oak Entities. LaSalle Re agreed to invest $81.6 million in
the Oak Entities which, together with the renewal of Trenwick's letter of credit
facility, provide funds at Lloyd's as part of Trenwick's underwriting capital at
Lloyd's for the 2003 year of account. The Oak Entities will receive 43% of the
economic interest (prior to the deduction of the Banks' letter of credit fees
and profit participation) in the 2003 year of account for syndicates managed by
TMA at Lloyd's.
Information Regarding Lloyd's Syndicates
Lloyd's is an internationally recognized insurance market place that has been
operating in England for over 300 years pursuant to legislation and custom. The
following is a general description of certain fundamental principles upon which
business is conducted at Lloyd's by Trenwick's subsidiaries, including the Oak
Entities, and other participants in the Lloyd's market.
Capital Support. The capital required to support a corporate member's
underwriting on a syndicate is determined by Lloyd's and is based on the
application of a risk based capital (RBC) model. The variables within the RBC
model are dependent on various criteria as applied to each Lloyd's syndicate and
corporate member. There are four main elements to the current RBC framework
which, when considered together, determine the level of capital required to
support underwriting. These are:
o the performance of each category of business assessed by risk code;
o a credit which is given for the diversity of the business contained
within the syndicate;
o Lloyd's assessment of management performance; and
o the underwriting history of the corporate member.
Relationship between members and managing agents. Members conduct their business
as sole traders or corporate entities, grouped into annual ventures known as
syndicates, each of which is managed by a managing agent which may manage one or
more syndicates. All of Trenwick's Lloyd's operations, including that of the Oak
Entities are conducted through syndicates which are managed by TMA. See
"Business Management Services," below. At the end of each year the syndicate is
dissolved and a new syndicate is formed for the following year, although members
in existing syndicates have a priority for participating as members in the next
following year. Accordingly, the members participating on a syndicate may change
from year to year. In the conduct of the syndicate's business, the managing
agent acts for each member
10
under a separate agency agreement. The syndicate itself is not a legal entity.
Members of a syndicate are not in partnership, and no member has joint liability
with any other member of a syndicate for the risks underwritten through that
syndicate. Each member of the syndicate is responsible only for the proportion
of each risk written on his behalf and if an individual, such member may have
unlimited liability for that business to the full extent of his assets, although
no new members with unlimited liability are permitted. Each corporate member has
limited liability for that business.
Actual acceptance of risk is undertaken either by the active underwriter of each
syndicate or his underwriting deputies. The managing agent determines the
underwriting policy of, and appoints and supervises the active underwriter of,
each of its managed syndicates and supplies administrative and accounting
services for the managed syndicate. The members themselves generally take no
active part in the conduct of the business. That conduct is, by requirement of
Lloyd's, delegated exclusively to the managing agent.
The managing agent will agree and/or settle claims made against the syndicates
and establish systems to monitor and control the premium income earned by the
syndicate to see that members' premium limits are not exceeded. The managing
agent will also determine and carry into effect the syndicate's reinsurance
program and determine the premium for and effect the reinsurance required for
the syndicate to close each year of account (see below).
Year of Account. Lloyd's has its origin in marine insurance which, because of
the length of voyages, led to the development of the current three-year
accounting system whereby premiums, losses and expenses are accumulated over
three years before the result of a particular underwriting year's trading is
calculated. Under the three-year system, members' underwriting results are
stated by "year of account". Each year of account is a one-year venture that, as
a general rule, is fully accounted for and settled at the end of a 36-month
period. As a result, syndicates writing insurance in Lloyd's 2003 year of
account will not be "closed" for purposes of determining profit or loss
participation until reinsurance to close has been effected after December 31,
2005. Since December 31, 1994, the year of account to which a policy is
allocated has been determined by the inception date of the policy.
Reinsurance to close. At the close of a year of account, members' underwriting
liabilities with regard to the year are usually reinsured under a contract known
as reinsurance to close, or "RITC". Until the RITC is effected (currently at the
earliest, at the end of the third year of the account, i.e. two years after the
end of the relevant underwriting year) no profits in respect of the relevant
year of account can be distributed to members.
Through the payment of a premium for the RITC, a syndicate member's liabilities
in respect of risks allocated to the relevant year of account and not discharged
in full (including liabilities in respect of RITC of the preceding years of
account) are reinsured without limit in time or amount into a succeeding,
usually the next, underwriting year of account of the same syndicate; they may
also, on occasion, be reinsured by another syndicate.
Runoff account. A runoff account is a year of account that has not been closed
by RITC in the usual way. This may happen for a number of reasons, but primarily
from uncertainty as to future levels of liability and a consequent inability to
fix a fair premium for the RITC. In these circumstances, closure of the year of
account may take a number of years, during which, without Lloyd's consent, there
can be no release of the members' funds at Lloyd's nor of profits arising from
the underwriting or investments of that syndicate.
Premium Trust Fund. Each member's premiums are held in Premium Trust Funds
("PTF") and invested in assets until the close of the year of account. All
investment income from funds held in the PTF is similarly retained in the PTF
and may be reinvested during the course of the year of account. As stated above,
a year of account normally closes after the end of the third year. Funds
representing a members' underwriting profits arising in respect of a particular
year's underwriting on a syndicate will not normally be released from the PTF to
the member until the relevant year has been closed by RITC and Lloyd's has
confirmed the members' overall underwriting position as solvent. If a corporate
member becomes insolvent, underwriting
11
claims can still be met to the extent of the assets held in the members' PTF, as
these funds are not available to its general creditors.
Funds at Lloyd's. Under its Byelaws, Lloyd's has power to prescribe the amount
of security to be provided by a member in respect of its underwriting business
at Lloyd's. This security (which is additional to the amounts held under the
control of managing agents in a member's PTF) comprises a member's funds at
Lloyd's. These funds are held in accordance with the terms of prescribed form
Lloyd's Deposit Trust Deeds. The minimum required level of funds at Lloyd's is
reviewed by Lloyd's prior to the commencement of each year of account.
Lloyd's determines the investment criteria applicable to funds held within a
member's funds at Lloyd's, but a member is able to select the investment for
those funds within the established criteria. In addition to or in substitution
for depositing cash and/or securities as funds at Lloyd's, members are able to
provide Lloyd's, among other things, with letters of credit, bank guarantees or
a covenant and charge. The level of funds at Lloyd's fixes the member's maximum
overall premium limit ("OPL") and it may be necessary during any account year to
arrange additional funds at Lloyd's to increase OPL, or to maintain OPL when
such funds have been depleted by losses. All such funds at Lloyd's are subject
to trust arrangements designed to ensure that they are available to meet the
relevant member's Lloyd's losses and expenses.
The FSA requires Lloyd's to maintain net central assets which are adequate to
cover the aggregate of certain variable solvency margins, which relate to the
value of each member's PTF and each member's funds at Lloyd's. If at any time a
corporate member's funds at Lloyd's have fallen by more than 10 percent the
member will be obliged to notify Lloyd's, and Lloyd's may then give such
directions as it sees fit, including directing the member to reduce the overall
level of its underwriting business.
For solvency purposes, if a member's closed year losses, runoff account
deficiencies and cash calls on open years of account are not paid in full, they
must be provided for in addition to the member's funds at Lloyd's required to
support underwriting for succeeding years of account. To the extent that a
member's funds at Lloyd's are used to cover these provisions with the effect
that the member's funds at Lloyd's ratio is no longer satisfied, the member's
OPL will be correspondingly reduced for the next year of account.
Geographic diversification
Prior to April 1, 2002 when LaSalle Re was placed into runoff, the Company
diversified its property, casualty and other insurance and reinsurance exposures
across geographic zones in order to optimize its spread of risk. The Oak
Entities through their participation in a Lloyd's syndicate are the only
subsidiaries of the Company actively writing business as of December 31, 2002.
The geograghic diversification for the Oak Entities is determined by the
syndicate in which they participate.
Reinsurance protections purchased
As a result of the sale of LaSalle's in-force reinsurance business as of April
1, 2002, substantially all of the underlying contracts were ceded to Endurance.
All losses incurred on those contracts after April 1, 2002 are 100% reinsured by
Endurance. LaSalle Re establishes reserves for all unpaid claims and claim
expenses on any losses applicable to those ceded contracts and records a
corresponding reinsurance recoverable.
In 2002, LaSalle Re purchased two excess of loss programs that provided coverage
of $20 million in excess of the first $30 million of losses per occurrence and
$5 million in excess of the first $50 million of losses per occurrence, both of
which, as of April 1, 2002, were retroceded to Endurance as part of the sale of
LaSalle Re's in-force reinsurance business. A third excess of loss program,
which provided coverage of $25 million in excess of the first $100 million of
losses per occurrence for a four year period with a yearly aggregate limit of
$50 million and a contract aggregate limit of $150 million, was commuted by
LaSalle Re in December 2002.
12
In 2001, the Company purchased three excess of loss programs which provided
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.
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, $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, 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 participated in the reinsurance coverage purchased by
the Lloyd's syndicates it supported.
In addition, as part of the Company's capital protection strategy, the Company
has 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, Trenwick assumed the benefits and obligations of the Company under
the CatEPut option, and is the issuer of the convertible preferred shares
thereunder.
The Oak Entities purchase reinsurance generally to protect against extraordinary
losses or losses involving one or more underwriting classes. The amount
purchased is determined by TMA, subject to availability, with reference to the
syndicates' aggregate exposure and potential loss scenarios.
Marketing
There are no marketing activities for LaSalle Re and LaSalle Re Capital as they
are in runoff.
Marketing activities for the Oak Entities are managed by TMA through the Lloyd's
syndicates in which they participate.
Reserves
The Company establishes reserves for the estimated ultimate settlement costs of
all claims and claims expenses incurred with respect to business written by it.
Accounting principles generally accepted in the United States of America,
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 reserves for unpaid
claims and claims expenses 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 reserves for unpaid claims and claims expenses 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
13
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 in proportion to the full
value of insured properties, and trends in the size and demographics of insured
populations. Reserves for unpaid claims and claims expenses are not precise in
that they necessarily involve an attempt to predict the ultimate outcome of
future loss reporting and settlement activities.
Actuarial Methods
The Company uses a combination of data sources and commercially available
catastrophe models to establish appropriate loss reserves for a catastrophic
event. These models are employed upon the occurrence of an event to arrive at
initial estimates of losses to the Company for significant catastrophe events.
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
initial loss estimates are selected and reduced for losses reported to the
Company to arrive at IBNR losses as of the date of evaluation. Loss estimates
for a catastrophe event are subsequently re-estimated based on the actual
reported and paid loss experience of the Company as of the evaluation date, and
utilizing and applying the historical reporting patterns for similar events and
contracts. The reserves for the Oak Entities and 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.
The reserves are prepared quarterly by the Chief Actuary of Trenwick and
reviewed by the Company's management. 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 reserves for
unpaid claims and claims expenses and have a material adverse effect upon the
Company's financial condition and results of operations in a particular period.
With the acquisition of the Oak Entities on December 10, 2002, LaSalle Re now
provides significant underwriting capacity to Lloyd's, principally to Syndicate
839 which is managed by TMA. Claims and claims expense reserves arising from
this participation have been recorded on the balance sheet of LaSalle Re
Holdings based on the review and analysis performed by TMA.
In connection with its review and analysis, TMA has engaged an independent
actuarial consulting firm to review the claim liabilities and prepare an
actuarial opinion for each of its non-life syndicates, including the actuarial
opinion required by Lloyd's solvency regulations. These opinions, which are
prepared solely for the use of Lloyd's regulators and TMA, assist syndicates in
establishing appropriate liability estimates for both establishing the
reinsurance to close and determining the open years of account.
Loss Development Analysis
Central estimates of loss reserves are derived separately for LaSalle Re's
reinsurance runoff operations and for its Lloyd's participation through the Oak
Entities. A range of plus or minus 5% is judgmentally defined about the central
estimate reserve estimate as representing a "reasonable" range for lower or
higher outcomes. Management, after reviewing the results of the actuarial
reserve reviews, then determines its best
14
estimate within the range. For year-end 2002, the range of net reserves
(indications in $ millions) was as follows:
Low Range Indication $536
Central Indication $565
High Range Indication $593
Actual Net Reserve $563
Difference Central less Actual $2
The $2 million difference between Central Indicated and Actual net reserves at
year end 2002 arises from judgments made by management to reduce estimates of
September 11, 2001 losses by $2 million because of the low level of reported
September 11, 2001 loss activity during the last three quarters of 2002.
Management believes that claim and claim expense liabilities are adequate.
However, the process of estimating claims and claim expense liabilities is
inherently imprecise and involves an evaluation of many variables, including
potentially unpredictable social and economic conditions. Accordingly, there can
be no assurance that LaSalle's ultimate liability will not vary significantly
from amounts reserved. In addition, with respect to the reinsurance portion of
LaSalle's business, the inherent uncertainties of estimating such liabilities
are greater than for the primary insurance portion, primarily due to the longer
term reporting nature of the reinsurance business, the diversity of development
patterns among different types of reinsurance, the necessary reliance on ceding
companies for information regarding reported claims and differing reserving
practices utilized by various ceding companies. Other items that have been
considered in determining year-end reserves but which may develop differently
than currently estimated include:
o September 11, 2001 related claims;
o Claims against insured financial services companies for certain
types of practices including alleged misallocations of shares in
initial public offerings;
o Directors and Officers liability insurance in the United States;
o Ultimate losses on business underwritten in the last four years, as
reserve estimates are inherently more uncertain on recent business,
where reported loss activity is still low relative to ultimate
losses;
o Reinsurance collectibility - LaSalle Re and TMA review and monitor
their reinsurance recoverables from reinsurers and make provision
for uncollectible reinsurance as appropriate. However, given the
magnitude of reinsurance recoverables, $913.0 million at year-end
2002, the Company has a significant exposure to collectibility
issues particularly for business underwritten at Lloyds.
The uncertainties in and the risk factors associated with the reserves for
unpaid claims and claims expenses at year-end 2002 are significantly different
than prior years at the Company, arising from exposure to Lloyd's business
through the Oak Entities. Given the deterioration in the Company's financial
condition and significant reduction in the net worth of LaSalle Re, the Company
is now less financially equipped to handle these uncertainties should there be
adverse development in its loss reserves. Consequently, there can be no
assurance as to the adequacy of reserves, and the risk of future developments,
both favorable and unfavorable, exists.
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.
15
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 ensure the Company's ability to pay claims on a timely
basis. At December 31, 2002, the average maturity of the Company's portfolio was
1.1 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.
The table below sets forth the distribution of the Company's debt securities
available for sale at December 31, 2002 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 0.9 $341,529 $339,619
Other foreign government securities 0.2 58,681 58,468
Mortgage and other asset-backed securities 0.7 93,516 93,179
Corporate and other debt securities 4.0 62,111 61,782
-------- -------- --------
Total debt securities 1.1 $555,837 $553,048
======== ========
Maturity
Due in one year or less $359,387 $359,354
Due in one year through five years 170,365 168,211
Due in five years through ten years 14,510 14,066
Due after ten years 11,575 11,417
-------- --------
Total debt securities $555,837 $553,048
======== ========
Investment Grade Non-investment Grade
------------------------ ------------------------
Quality Fair Value Cost Fair Value Cost
---------- ---------- ---------- ----------
U.S. and U.K. federal government
securities, including agencies $ 341,529 $ 339,619 $ -- $ --
Other foreign government securities 58,681 58,468 -- --
Mortgage and other asset-backed securities 93,516 93,179 -- --
Corporate and other debt securities 59,746 59,417 2,365 2,365
---------- ---------- ---------- ----------
Total investment grade and
non-investment grade debt securities $ 553,472 $ 550,683 $ 2,365 $ 2,365
========== ========== ========== ==========
Percentage of total debt securities 99.6% 99.6% 0.4% 0.4%
Investment Grade Quality (fair value) Aaa Aaa A Baa
---------- ---------- ---------- ----------
U.S. and U.K. federal government
16
securities, including agencies $ 341,529 $ -- $ -- $ --
Other foreign government securities 58,681 -- -- --
Mortgage and other asset-backed securities 93,516 -- -- --
Corporate and other debt securities 22,140 29,419 8,187 --
---------- ---------- ---------- ----------
Total investment grade and
non-investment grade debt securities $ 515,866 $ 29,419 $ 8,187 $ --
========== ========== ========== ==========
Percentage of total debt securities 92.8% 5.3% 1.5% 0.0%
Non-investment Grade Quality (fair value) Ba/B Caa/Ca P1 Not rated
---------- ---------- ---------- ----------
Mortgage and other asset-backed securities $ -- $ -- $ -- $ --
Corporate and other debt securities -- -- -- 2,365
---------- ---------- ---------- ----------
Total non-investment grade debt securities $ -- $ -- $ -- $ 2,365
========== ========== ========== ==========
Percentage of total debt securities 0.0% 0.0% 0.0% 0.4%
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
In an effort to manage 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, 2002 and 2001, the Company had no principal
amounts outstanding under foreign exchange contracts.
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.
Management Services
LaSalle Re currently manages its runoff operations with a staff of three
employees and two consultants. LaSalle Re has also contracted with a third party
administrator in Bermuda, IAS, to provide accounting services on an as needed
basis and has entered into an administrative services agreement with Trenwick
for Trenwick to provide LaSalle Re with executive management, actuarial,
accounting, treasury, claims and other administrative services. From time to
time, LaSalle Re may utilize other consultants or managers to provide services.
The Oak Entities and the Lloyd's syndicates in which they participate are
managed by TMA pursuant to a standard agreement, set down by Lloyd's byelaws,
entitled Managing Agent's Agreement (Corporate Member) (the "Agreement"). TMA is
authorized by Lloyd's to manage syndicates including Syndicates 44 and 839, and
by the Financial Services Authority (the "FSA"), to carry out the regulated
activity of managing the underwriting capacity of a Lloyd's syndicate as a
managing agent at Lloyd's. Under the terms of the Agreement, TMA is appointed to
employ and manage the underwriter and his associates, who in turn accept risks,
pay claims, arrange reinsurance, close the account and strike a profit or loss
on the year's trading on behalf of the Oak Entities as a member of the relevant
syndicate. Under the terms of the Agreement, the Oak Entities have agreed to pay
TMA, as remuneration for its services in relation to each year of account, a fee
and a profit commission. For the 2003 year of account, the fee charged by TMA is
0.5% of the capacity allocated by each of the Oak Entities to Syndicates 44 and
839. At the close of the 2003 year of account, subject to certain adjustments
for prior year syndicate losses, TMA will be entitled to
17
deduct and retain 15% of any profit so determined, prior to the balance being
distributed to the Oak Entities. In the event of a loss being determined in
respect of the 2003 year of account, TMA will not receive any remuneration other
than the 0.5% fee.
Employees
As of December 31, 2002, the Company had five employees. 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
Trenwick and its insurance and reinsurance company subsidiaries, including
LaSalle Re, are subject to regulatory oversight under the insurance statutes and
regulations of the jurisdictions in which they are domiciled and in which they
conduct business. These regulations vary from jurisdiction to jurisdiction and
are generally designed to protect ceding insurance companies and policyholders
by regulating such companies' financial integrity and solvency in their business
transactions and operations. Many of the insurance statutes and regulations
relate to financial reporting and enable regulators to closely monitor the
performance of the insurers. Typical required reports include information
concerning Trenwick's capital structure, ownership, financial condition, and
general business operations.
Because the Company, as well as Trenwick, Trenwick America and Trenwick
Holdings, are holding companies, their principal sources of funds consist of
permissible dividends, tax allocation payments and other statutorily permissible
payments from their respective regulated operating insurance company
subsidiaries, each of which is subject to oversight and regulatory supervision
by insurance regulators in its jurisdiction of domicile. As a result of recent
losses incurred by these operating inasurance company subsidiaries, their cash
distribution capacities have been significantly reduced. Each insurance
regulatory body, including those of Bermuda, New York, Connecticut, North
Dakota, the United Kingdom and Lloyd's, may act independently with respect to
the company or companies domiciled in its jurisdiction. To the extent that any
such regulator takes action with respect to an insurance company domiciled in
its jurisdiction, such as the commencement of voluntary or involuntary
proceedings for the formal supervision, conservation, rehabilitation or
liquidation of such company, such action could adversely impact the ability of
the Company or Trenwick to continue to function, or could precipitate other
actions by other insurance regulators with respect to the particular insurer or
insurers under their primary jurisdiction.
LaSalle Re, as a runoff company, will continue to be subject to regulation and
supervision in Bermuda. LaSalle Re was 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 conducted
its business at its principal offices in Bermuda and did not maintain an office
in the United States, and its personnel did not solicit, advertise, settle
claims or conduct other insurance activities in the United States. All policies
were issued and delivered and premiums were and continue to be 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
18
States or any state thereof or of any other country at any time in the future,
it would be in compliance with such laws.
Bermuda Regulation
LaSalle Re and LaSalle Re Corporate Capital Ltd. are regulated by the Insurance
Act 1978 of Bermuda, as amended, and related regulations (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
Supervisor of Insurance (the "Supervisor"), acting on the recommendation of the
Bermuda Monetary Authority (the "BMA"). Under the Insurance Act, insurance
business includes reinsurance business. The BMA, in deciding whether to
recommend registration, has broad discretion to act as it thinks fit in the
public interest. The Supervisor and the BMA are 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 continued 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 of Finance may impose from time to time.
The day to day supervision of insurers is the responsibility of the BMA.
The Insurance Act also imposes on Bermuda insurance companies solvency and
liquidity standards and auditing and reporting requirements and grants to the
Supervisor powers to supervise, investigate, require information and the
production of documents and intervene in the affairs of insurance companies.
Although LaSalle Re Corporate Capital Ltd. 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.
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.
LaSalle Re is in runoff and the BMA has placed restrictions on its continued
operations including that it may not enter into any new contracts of insurance
or reinsurance without the BMA's prior written approval, effective as of January
1, 2003, and that it must at all times meet and maintain relevant solvency
margins, liquidity and other ratios applicable under Bermuda law at all times
that it carries on insurance business.
Cancellation of Insurer's Registration
An insurer's registration may be canceled by the Supervisor 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 Supervisor
and the BMA, after consultation with the Insurance Advisory Committee (the
"IAC"), the insurer has not been carrying on business in accordance with sound
insurance principles.
The IAC, along with related sub-committees, which are appointed by the Minster
of Finance, advises the Supervisor and the BMA on matters connected with the
discharge of their functions and supervises and reviews the law and practice of
insurance in Bermuda, including reviews of accounting and administrative
procedures. In addition, the IAC may advise the Supervisor and the BMA on any
matter relating to the development of the insurance industry in Bermuda.
Principal Representative
An insurer is required to maintain a principal office in Bermuda and to appoint
and maintain a principal representative in Bermuda to oversee the insurer's
business and to report to the BMA and the Supervisor in connection with specific
events. For the purpose of the Insurance Act, LaSalle Re's principal office is
its executive offices in Hamilton, Bermuda, and LaSalle Re's principal
representative is Peter Woolf. Without a reason acceptable to the BMA, 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 BMA is
19
given of the intention to do so. It is the duty of the principal representative,
within 30 days of reaching the view that there is a likelihood that the insurer
will become insolvent or that a reportable "event" has, to the principal
representative's knowledge, occurred or is believed to have occurred, to make a
report in writing to the BMA setting forth all the particulars of the case that
are available to the principal representative. For example, the failure by the
insurer to comply substantially with a condition imposed upon the insurer by the
Supervisor relating to a solvency margin or a liquidity or other ratio would be
a reportable "event."
Independent Approved Auditor
Every registered insurer must appoint an independent auditor who will audit and
report annually on the statutory financial statements and the statutory
financial return of the insurer, both of which, in the case of LaSalle Re, are
required to be filed annually with the BMA. LaSalle Re's independent auditor
must be approved by the BMA and may be the same person or firm that audits
Trenwick's consolidated financial statements and reports for presentation to its
shareholders. LaSalle Re's independent auditor is PricewaterhouseCoopers LLP.
Loss Reserve Specialist
As a registered Class 4 insurer, LaSalle Re is required to submit an opinion of
its approved loss reserve specialist with its statutory financial return in
respect of its losses and loss expenses provisions. The loss reserve specialist,
who will normally be a qualified casualty actuary, must be approved by the BMA.
Robert Giambo, who is no longer an employee of Trenwick, had been approved to
act as LaSalle Re's loss reserve specialist. Mr. Giambo has submitted an opinion
which will be filed with LaSalle Re's statutory financial return for the year
ended December 31, 2002.
Statutory Financial Statements
LaSalle Re must prepare annual statutory financial statements. The Insurance Act
prescribes rules for the preparation and substance of these statutory financial
statements, which include, in statutory form, a balance sheet, an income
statement, a statement of capital and surplus and 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 U.S. GAAP and are distinct from the financial statements
prepared for presentation to the insurer's shareholders under the Companies Act,
which financial statements will be prepared in accordance with U.S. GAAP. As a
general business insurer, LaSalle Re is required to submit the annual statutory
financial statements as part of the annual statutory financial return. The
statutory financial statements and the statutory financial return do not form
part of the public records maintained by the BMA.
Annual Statutory Financial Return
LaSalle Re is required to file with the BMA a statutory financial return no
later than four months after its financial year end unless specifically extended
upon application to the BMA. The statutory financial return for a Class 4
insurer includes, among other matters, a report of the approved independent
auditor on the statutory financial statements of the insurer, solvency
certificates, the statutory financial statements, the opinion of the loss
reserve specialist and a schedule of reinsurance ceded. The solvency
certificates must be signed by the principal representative and at least two
directors of the insurer certifying that the minimum solvency margin has been
met and whether the insurer complied with the conditions attached to its
certificate of registration. The independent approved auditor is required to
state whether, in its opinion, it was reasonable for the directors to make these
certifications. If an insurer's accounts have been audited for any purpose other
than compliance with the Insurance Act, a statement to that effect must be filed
with the statutory financial return.
20
Minimum Solvency Margin and Restrictions on Dividends and Distributions
Under the Insurance Act, the value of the general business assets of a Class 4
insurer, such as LaSalle Re, must exceed the amount of its general business
liabilities by an amount greater than the prescribed minimum solvency margin.
LaSalle Re:
1. is required, with respect to its general business, to maintain a
minimum solvency margin equal to the greatest of:
a. $100,000,000;
b. 50% of net premiums written (being gross premiums written less
any premiums ceded by LaSalle Re, but LaSalle Re may not deduct more than
25% of gross premiums when computing net premiums written); and
c. 15% of net losses and loss expense reserves;
2. 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 (and 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 BMA, from declaring or paying any dividends during the
next financial year);
3. 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 if
files with the BMA, (at least seven days before payment of such dividends)
an affidavit stating that it will continue to meet the required margins;
4. is prohibited, without the approval of the Supervisor, from
reducing by 15% or more its total statutory capital as set out in its
previous year's financial statements, and any application for such
approval must include an affidavit stating that it will continue to meet
the required margins; and
5. 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 BMA a written
report containing certain information.
Additionally, under the Companies Act, LaSalle Re may only declare or pay a
dividend if it has no reasonable grounds for believing that it is, or would
after the payment be, unable to pay its liabilities as they become due, or if
the realizable value of its assets would not be less than the aggregate of its
liabilities and its issued share capital and share premium accounts.
Minimum Liquidity Ratio
The Insurance Act provides a minimum liquidity ratio for general business
insurers, like LaSalle Re. 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, but are not limited to, 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 BMA, do not qualify as
relevant assets, such
21
as unquoted equity securities, investments in and advances to affiliates, and
real estate and collateral loans. The relevant liabilities are total general
business insurance reserves and total other liabilities less deferred income tax
and sundry liabilities (by interpretation, those not specifically defined).
Supervision, Investigation and Intervention
The BMA may appoint an inspector with extensive powers to investigate the
affairs of LaSalle Re if the BMA believes that such an investigation is in the
best interests of its policyholders or persons who may become policyholders. In
order to verify or supplement information otherwise provided to the BMA, the BMA
may direct LaSalle Re to produce documents or information relating to matters
connected with its business. If it appears to the BMA that there is a risk of
LaSalle Re becoming insolvent, or that LaSalle Re is in breach of the Insurance
Act or any conditions imposed upon its registration, the BMA may, among other
things, direct LaSalle Re (i) not to take on any new insurance business; (ii)
not to vary any insurance contract if the effect would be to increase its
liabilities; (iii) not to make certain investments; (iv) to liquidate certain
investments; (v) to maintain in, or transfer to the custody of, a specified
bank, certain assets; (vi) not to declare or pay any dividends or other
distributions or to restrict the making of such payments and/or (vii) to limit
LaSalle Re's premium income. In connection with the recent application of
LaSalle Re to the BMA to recharacterize a June 2002 loan of $258 million by
LaSalle Re to Trenwick as a special dividend, the BMA and LaSalle Re agreed that
LaSalle Re's Certificate of Registration be endorsed to restrict LaSalle Re's
license so that it can no longer write any insurance without the prior written
consent of the BMA.
Disclosure of Information
In addition to powers under the Insurance Act to investigate the affairs of an
insurer, the BMA may require certain information from an insurer (or certain
other persons) to be produced to them. Further, the BMA has been given powers to
assist other regulatory authorities, including foreign insurance regulatory
authorities, with their investigations involving insurance and reinsurance
companies in Bermuda but subject to restrictions. For example, the BMA must be
satisfied that the assistance being requested is in connection with the
discharge of regulatory responsibilities of the foreign regulatory authority.
Further, the BMA must consider whether cooperation is in the public interest.
The grounds for disclosure are limited and the Insurance Act provides sanctions
for breach of the statutory duty of confidentiality.
Transfer of Securities of Trenwick and LaSalle Re Holdings
The BMA must give specific permission for all issues and transfers of securities
of Bermuda companies involving persons who are not resident of Bermuda, unless
the company's securities are listed on an Appointed Stock Exchange as defined in
the Companies Act 1981.
On March 25, 2003, the common shares of Trenwick and the Series A Preferred
Shares of LaSalle Re Holdings were suspended from trading, pending application
to the Securities and Exchange Commission for delisting, by the NYSE as a result
of failure to meet the NYSE's minimum continued listing criteria. On the same
day, Trenwick was notified that its common shares and the Series A Preferred
Shares of LaSalle Re Holdings will be quoted on the OTC Bulletin Board.
By letter dated March 24, 2003, the BMA issued permission for the free
transferability on an interim basis of Trenwick's and LaSalle Re Holdings'
shares while they are quoted on the OTC Bulletin Board. This permission is
contingent on the condition that the BMA is notified promptly of any instances
in which Trenwick or LaSalle Re Holdings become aware that a new shareholder has
obtained 5% or more of either company's shares, including background information
on any such new 5% shareholder.
In the absence of the permission granted by the BMA discussed in the previous
paragraph, as a consequence of the suspension of trading, all transfers of
shares involving holders of Trenwick's or LaSalle Re Holdings' securities would
be required to be approved by the BMA before they could be entered into
Trenwick's or LaSalle Re Holdings' share register. This procedure would only
apply to share transfers involving
22
shareholders who hold shares in their own name on Trenwick's or LaSalle Re
Holdings' share register (a "record holder"). Shareholders who hold through
nominees, brokers, or banks, which in turn have accounts through other nominees,
would not be affected by this approval procedure unless one of the parties to
the transfer becomes a record holder on Trenwick's or LaSalle Re Holdings' share
register or the number of shares held by an existing record holder is increased
or decreased by the transfer. If the BMA's free transferability permission is
rescinded, this pre-approval process will cause a delay in share transfers.
United Kingdom Regulation - Oak Entities and LaSalle Re Capital
On December 1, 2001, the Financial Services and Markets Act (the "FSMA")
established the Financial Services Authority (the "FSA") as the primary
regulator responsible for regulating the financial services industry with
respect to the carrying on of "regulated activities" including insurance and
reinsurance in the U.K. It is a criminal offense for any person to engage in a
regulated activity in the U.K. unless that person is authorized by the FSA to
carry on that regulated activity. Trenwick's Lloyd's operations are directly or
indirectly regulated by the FSA.
The FSA has been granted broad authorization and intervention powers as it
relates to the operations of all insurers operating in the U.K., including (i)
periodic financial reporting requirements, (ii) supervision of management
through an "approved persons" regime which requires that certain "controlled
functions" within a regulated entity must be performed by individuals approved
by the FSA, (iii) various margin of solvency and related requirements for the
regulated entity and its parent company, (iv) reporting requirements relating to
all material related party transactions including certain intra group
transactions, (v) indirect restriction on dividend payments, (vi) formal
inspections and monitoring of regulated entities and regular formal interviews
of management, (vii) prior notification and approval by the FSA of the
acquisition of "control" including the direct or indirect acquisition of 10% or
more of the voting shares of the regulated entity or its parent companies and
(viii) enforcement of disciplinary measures including criminal prosecution where
it deems appropriate. In addition, the FSA is currently seeking to strengthen
its requirements for senior management arrangements and systems and controls of
insurance and reinsurance companies under its jurisdiction and intends to place
an increased emphasis on risk identification and management in relation to the
prudential regulation of insurance and reinsurance business in the U.K. For
example, the FSA is currently in consultation on a number of proposals,
including the regulation of the sale of general insurance, insurance mediation
and proposals aimed at ensuring adequate diversification of an insurer's or
reinsurer's exposures to any credit risk of its reinsurers.
Lloyd's Operations
Under the FSMA, Lloyd's is subject to the full range of supervisory and
disciplinary sanctions of the FSA. The Council of Lloyd's is permitted, subject
to the ultimate authority of the FSA, to continue its day to day supervisory
functions at Lloyd's, although the FSA may intervene directly or through Lloyd's
and either body may initiate investigative and disciplinary proceedings. In
addition, Lloyd's is required to notify the FSA of any matter that is likely to
be of material concern to the FSA concerning Lloyd's operations as well as those
of its constituent parties.
The Company's dedicated Lloyd's underwriting entities, the Oak Entities, as
Lloyd's corporate members are subject to regulation and/or supervision by the
Council of Lloyd's. Lloyd's operates under a self-regulatory regime arising
under the Lloyd's Act 1982 and the FSMA 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.
Trenwick Managing Agents, which manage the Oak Entities, has been granted a
Scope of Permission Notice by the FSA to carry out a regulated activity -
'Managing the capacity of a Lloyd's syndicate as a managing
23
agent of Lloyd's'. As a regulated firm, Trenwick Managing Agents is required to
comply with the Rules made by the FSA, the Lloyd's Acts passed by UK Parliament,
and Lloyd's Byelaws. These regulations confer powers on the regulators to revoke
the Scope of Permission Notice, which could result in Trenwick Managing Agents
being required to cease underwriting at Lloyd's.
The FSA has begun to more closely monitor the activities of Lloyd's managing
agents. In February 2003, the FSA began to carry out risk assessments of
managing agents, looking at the potential exposure to the Lloyd's Central Fund.
In addition, the FSA has indicated its intention to become more directly
involved in monitoring both the performance of specific Lloyd's syndicates and
the financial strength of the Lloyd's market as a whole and, in that connection,
it is anticipated that there will be changes to Lloyd's regulatory reporting
among other things. Moreover, internal reforms proposed at Lloyd's are likely to
be adopted including moving to a franchise structure whereby the syndicates will
act as franchisees of Lloyd's, establishment of a new Franchise Board to govern
Lloyd's adoption of a one year accounting system in lieu of the three year
accounting system and elimination of new unlimited liability members. These and
other amendments are expected to be proposed in the amendments to the Lloyd's
Acts to modernize its governance structure and to remove unnecessary business
restrictions.
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.
As corporate members of Lloyd's, the Oak Entities and LaSalle Re Capital are
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, the Oak Entities and
LaSalle Re Capital are required to file audited solvency returns 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 recognized 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.
ITEM 2. PROPERTIES
The Company's executive offices are located in approximately 3,870 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 pending 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.
24
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, 2002.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Following the business combintaion 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.
No dividends on common stock were paid by the Company during the year ended
December 31, 2000 while its common stock was publicly held (through September
27, 2000). The Company paid a quarterly dividend of $.547 on its Series A
preferred shares in each of the first three quarters of 2002 and each of the
four quarters of 2001 and 2000. The Company suspended payment of dividends on
its Series A Preferred Shares on November 29, 2002. See - "Business -
Significant Developments - Dividend Suspension," above.
ITEM 6. SELECTED FINANCIAL DATA
On December 10, 2002, the capital stock of the Oak Entities was contributed by
Trenwick to the Company. The Company and the Oak Entities are under the common
control of Trenwick, which was effective beginning on September 27, 2000, as a
result of the Trenwick/LaSalle business combination, therefore, this transaction
was accounted for at historical cost, in a manner similar to a pooling of
interests business combination. Accordingly, the selected financial data
presented herein for the 2002, 2001 and 2000 years have been restated to reflect
the combined operating results, cash flows and financial position of the Company
and the Oak Entities. The 1999 and 1998 selected financial data presented herein
includes only the results of the Company.
The 2002, 2001 and 2000 years presented below relate to a December 31 year end,
and the 1999 and 1998 years relate to a September 30 year end.
2002 Year 2001 Year 2000 Year 1999 Period 1999 Year 1998 Year
----------- ----------- ----------- ----------- ----------- -----------
(Monetary amounts expressed in thousands of United States dollars)
Income Statement Data
Gross premiums written $ 536,898 $ 522,292 $ 412,292 $ 10,307 $ 139,010 $ 155,316
Net premiums earned 291,289 302,989 271,696 30,391 126,615 154,620
Net investment income 29,439 50,446 46,681 8,588 34,462 39,863
Claims and claims expenses incurred 178,220 305,560 219,005 46,642 131,147 95,539
Policy acquisition costs 72,173 97,376 76,058 5,878 19,844 22,661
Underwriting expenses 50,696 33,640 37,429 4,533 13,733 8,932
Income (loss) before income taxes,
minority interest and cumulative
effect of change in accounting
principle 118,236 (76,423) (20,067) (19,831) (5,679) 65,232
Minority interest(1) -- -- 839 (4,990) (2,845) 13,426
Net income (loss) 85,509 (56,870) (10,203) (14,841) (2,834) 51,806
Common dividends declared 264,000 7,500 1,500 -- 17,543 44,641
Other Data
Loss ratio 61.2 100.8 80.6 153.5% 103.6% 61.8%
Expense ratio 42.2 43.2 41.8 34.3% 26.5% 20.4%
Combined ratio 103.4 144.0 122.4 187.8% 130.1% 82.2%
- ----------------
25
Balance Sheet Data (at end of
period)
Total investments and cash $ 731,286 $ 786,356 $ 642,677 $ 559,591 $ 556,976 $ 606,757
Total assets 2,154,927 1,983,330 1,167,391 726,168 736,107 757,290
Unpaid claims and claims expenses 1,475,821 1,178,467 668,734 190,352 146,552 97,942
Minority interest(1) -- -- -- 86,906 93,055 105,569
Total shareholders' equity 134,937 309,500 379,916 361,960 382,197 430,053
(1) Minority interest represents those shares in LaSalle Re 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion highlights material factors affecting the results of
operations of LaSalle Re Holdings Limited (the "Company") for each of the three
years ended December 31, 2002, 2001 and 2000. This discussion and analysis
should be read in conjunction with the consolidated financial statements and
notes thereto of the Company for the years ended December 31, 2002, 2001 and
2000 contained in this annual report.
Overview
The Company was incorporated in Bermuda in September 1995 to act as a holding
company for LaSalle Re Limited ("LaSalle Re"), which was incorporated in Bermuda
in October 1993 and commenced operations on November 22, 1993. It primarily
acted as a multi-line reinsurance company with emphasis on property catastrophe
business.
On September 27, 2000, the Company, LaSalle Re, Trenwick Group Ltd. ("Trenwick")
and Trenwick Group Inc. completed a business combination (the "Trenwick/LaSalle
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, and a
guarantor of certain indebtedness owed by Trenwick and certain of its direct and
indirect subsidiaries.
Trenwick is a Bermuda-based specialty insurance and reinsurance holding company
with subsidiaries located in the United States and the United Kingdom, including
four runoff operations. Trenwick's operations at Lloyd's of London ("Lloyd's")
underwrite specialty property and casualty insurance as well as treaty and
facultative property and casualty reinsurance on a worldwide basis.
Trenwick's United States reinsurance company subsidiary, Trenwick America Re has
been limited since November 2002 to providing, through an underwriting facility
with Chubb Re, Inc. and its affiliate Federal Insurance Company, treaty
reinsurance to insurers of property and casualty risks. Trenwick announced on
April 15, 2003 that it would cease underwriting reinsurance business under the
Chubb facility. Since inception in November 2002, Trenwick underwrote
approximately $128 million of reinsurance under the facility. Trenwick will
continue to be entitled to the economic benefits of existing business under the
facility, subject to the terms and conditions of the facility. Trenwick's
ability to write reinsurance business under the facility was severely
constrained by its financial condition and concerns arising with respect to its
ongoing stability. As a result, Trenwick ceased underwriting activities under
the facility in order to reduce Trenwick's costs. The effect of this cessation
is that Trenwick America Re is now primarily in runoff. Trenwick will continue
to service and pay claims for all business previously written through Trenwick
America Re outside of the Chubb facility and will jointly adjust and settle with
Chubb any claim arising under the business written under the Chubb facility,
subject to Chubb's final authority.
26
In 2002, Trenwick conducted several strategic reviews of its operations in light
of its capital constraints and determined that it was necessary for Trenwick to
reduce its operating leverage by reducing premium volumes to a level more
commensurate with its capital base and to concentrate its limited financial
resources on its core franchises and businesses, its United States treaty
reinsurance business and its Lloyd's operations, where it would be able to write
insurance and reinsurance based on direct or indirect financial support. As a
result, Trenwick voluntarily placed into runoff its United States specialty
program business formerly operated through its subsidiary, Canterbury Financial
Group, Inc. and its London-based specialty insurance and reinsurance company,
Trenwick International Limited. Additionally, in light of the increasing capital
requirements imposed by the market on catastrophe insurance providers, Trenwick
sold the in-force property catastrophe reinsurance business of the Company.
Little or no new insurance or reinsurance is presently being offered in these
runoff operations, including the Company, with the exception of business written
through the Oak Entities owned by the Company, described below.
From LaSalle Re's incorporation in 1993 until April 1, 2002, its primary
business activity was as a property and casualty reinsurer underwriting
worldwide specialty products with an emphasis on catastrophe reinsurance.
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. Following losses
sustained in the September 11, 2001 terrorist attacks, Trenwick determined that
without additional capital LaSalle Re could no longer compete effectively in
this business nor could Trenwick remain in a business that was inherently
unpredictable and which could result in additional significant losses. Effective
April 1, 2002, LaSalle Re was placed into runoff following the sale of its
in-force catastrophe reinsurance business to Endurance Specialty Insurance Ltd.
("Endurance") (See "Significant Developments," below).
LaSalle Re's other business consisted primarily of participations in certain
Lloyd's syndicates through LaSalle Re Capital, which provided capital support to
those syndicates. Effective for the 2001 underwriting year at Lloyd's, LaSalle
Re Capital withdrew its capital support from all Lloyd's syndicates. LaSalle Re
Capital, which was incorporated in Bermuda in November 1996, is currently
inactive. On December 10, 2002, LaSalle Re, with the permission of the Bermuda
Monetary Authority ("BMA"), again became a corporate capital provider at Lloyd's
pursuant to an agreement between Trenwick, LaSalle Re and the Company whereby
the Oak Entities were contributed by Trenwick to LaSalle Re. The Oak Entities
(three separate subsidiaries), which are incorporated in the United Kingdom,
participate in Lloyd's syndicates managed by Trenwick Managing Agents ("TMA"), a
w