<PAGE>
 
                                                                   EXHIBIT 10.12
                                                                   -------------
                             EMPLOYMENT AGREEMENT
                             --------------------

     THIS AGREEMENT, made and entered into as of October 1, 1998 (the "Effective
Date"), by and between Guy Hengesbaugh (the "Executive") and LaSalle Re Limited
(the "Company");

                               WITNESSETH THAT:
                               --------------- 

     WHEREAS, the parties desire to enter into this Agreement pertaining to the
employment of the Executive by the Company;

     NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth below, it is hereby covenanted and agreed by the Executive and the Company
as follows:

 
     1.  Performance of Services.  The Executive's employment with the Company
         -----------------------                                              
shall be subject to the following:

(a)  Subject to the provisions of this Agreement, the Company hereby agrees to
     employ the Executive as the President and Chief Operating Officer of the
     Company and the Executive Vice President and Chief Operating Officer of
     LaSalle Re Holdings Limited (the "Holding Company") during the Agreement
     Term (as defined below), and the Executive hereby agrees to remain in the
     employ of the Company during the Agreement Term.

(b)  During the Agreement Term, while the Executive is employed by the Company,
     the Executive shall devote, subject to paragraph 1(f), his full time,
     energies and talents to performing his duties under this Agreement.

(c)  The Executive agrees that he shall perform his duties faithfully and
     efficiently subject to the directions of the Board of Directors (the
     "Board") and the Chief Executive Officer (the "CEO") of the Company.  The
     Executive's duties may include providing services for the Company, the
     Holding Company, and the Subsidiaries (as defined below), as determined by
     the CEO; provided that the Executive shall not, without his consent, be
     assigned tasks that would be inconsistent with his position at the Company.
     The Executive will have such authority and power as are inherent to the
     undertakings applicable to his position and necessary to carry out his
     responsibilities and the duties required of him hereunder.

(d)  While the Executive is employed by the Company, he shall be subject to the
     duties that reasonably apply to the Company's officers and employees
     (including, without limitation, the duty of loyalty to the Company).

(e)  The Company may change the Executive's title and duties in the event of
     reorganization, restructuring, or similar circumstances, except that the
     Executive shall have a senior

                                       1
<PAGE>
 
     executive position at all times during the Agreement Term while he is
     employed by the Company.

(f)  Notwithstanding the foregoing provisions of this paragraph 1, during the
     Agreement Term, the Executive may devote reasonable time to activities
     other than those required under this Agreement, including the supervision
     of his personal investments, and activities involving professional,
     charitable, educational, religious and similar types of organizations,
     speaking engagements, membership of the boards of directors of other
     organizations, and similar type of activities, to the extent that such
     other activities do not inhibit or prohibit the performance of the
     Executive's duties under this Agreement, or conflict in any material way
     with the business of the Company, the Holding Company, or any Subsidiary;
     provided, however, that except as otherwise expressly provided in this
     Agreement, the Executive shall not serve on the board of any business, or
     hold any position with any business without the consent of the Board and
     the CEO of the Company.

(g)  The Executive will be required to maintain a residence in Bermuda while
     employed by the Company.

(h)  The Company will use its reasonable best efforts to maintain a Bermuda work
     permit for the Executive.  The Executive shall cooperate with the Company
     and the appropriate authorities in maintaining such permit.  The
     Executive's employment by the Company is conditioned upon the Company's
     ability to keep current all required work permits, and except as provided
     in this paragraph 1(h), the Company shall have no further obligation to the
     Executive if, after employing its reasonable best efforts, it is unable to
     maintain such permits.  If despite the Company's best efforts to maintain
     the Bermuda work permit, the work permit is terminated or revoked by the
     Government of Bermuda through no fault of the Executive, then the Executive
     shall be deemed to have received written notice from the Company that his
     Date of Termination is the date on which the termination or revocation of
     his or her work permit is effective, and the Executive shall be entitled to
     the benefits provided for Termination by the Company under Section 3(g). In
     addition, the Company shall reimburse the Executive for reasonable costs
     actually incurred by the Executive and the members of his or her immediate
     family to relocate to the nation in which the Executive maintains
     citizenship; provided, however, that such reimbursement shall be made only
     if such relocation occurs within a reasonable time following such Date of
     Termination.  The reasonableness of the cost and time of relocation shall
     be determined by the Board of Directors of the Company.

(i)  Subject to the provisions of this Agreement, the Executive shall not be
     required to perform services under this Agreement during any period that he
     is Disabled.  The Executive shall be considered "Disabled" during any
     period in which he has a physical or mental disability which renders him
     incapable, after reasonable accommodation, of performing his duties under
     this Agreement.  In the event of a dispute as to whether the Executive is
     Disabled, the Company may refer the same to a licensed practicing

                                       2
<PAGE>
 
     physician of the Company's choice, and the Executive agrees to submit to
     such tests and examination as such physician shall deem appropriate.

(j)  The "Agreement Term" shall be the period beginning on the Effective Date
     and ending on the second anniversary of the Effective Date; provided,
     however, that beginning on the first anniversary of the Effective Date,
     such Agreement Term shall automatically be renewed daily, such that at any
     time on or after the first anniversary of the Effective Date, the remaining
     term shall equal one year.  However, such additional day-to-day renewals
     may be terminated by either party be delivering written notice of such
     termination to the other party, in accordance with the requirements of
     paragraph 18.  The cessation of the automatic renewals shall be effective
     on the date such written notice is deemed to be given to the other party in
     accordance with paragraph 18, such that the Agreement term shall end on the
     one-year anniversary of the date such written notice is deemed given to the
     other party.  For purposes of this Agreement, a Notice of Termination, as
     described in paragraph 3(i), shall be deemed to be a notice to terminate
     day-to-day renewals.

(k)  For purposes of this Agreement, the term "Subsidiary" shall mean any
     company (regardless of whether incorporated) during any period in which 50%
     or more of the total combined voting power of all classes of stock (or
     other ownership interest) entitled to vote is owned, directly or
     indirectly, by the Company.

      2.  Compensation.  Subject to the provisions of this Agreement, during the
          ------------                                                          
Agreement Term, while he is employed by the Company, the Company shall
compensate the Executive for the Executive's services as follows:

(a)  Salary.   The Executive shall receive, for each 12-consecutive month period
     ------                                                                     
     beginning on the Effective Date and each anniversary thereof, in
     substantially equal monthly or more frequent installments, an annual base
     salary of $400,000 (the "Salary").  In no event shall the Salary of the
     Executive be reduced to an amount that is less than the amount specified in
     this paragraph (a), or to an amount that is less than the amount that he
     was previously receiving, except to the extent that reductions of the same
     percentage are being made at the same time to the salaries of all other
     Company officers in the corporate office at or above the vice-president
     level, and such Salary shall be restored to its prior level when, and to
     the same extent, as the restoration that applies to the other officers.

(b)  Bonus.  The Executive shall be entitled to receive bonuses from the Company
     -----                                                                      
     in accordance with the provisions of Exhibit A, which is attached to and
     forms a part of this Agreement.

(c)  Disability.  The Executive shall receive from the Company disability income
     ----------                                                                 
     replacement coverage which will provide for replacement of income at a
     commercially reasonable rate during any period in which the Executive is
     Disabled if the disability arose during the Agreement Term and prior to the
     Executive's Date of Termination.  During any period while the Executive is
     Disabled, and is otherwise entitled to receive Salary under this Agreement,
     any Salary payments to the Executive shall be reduced by the amount of any

                                       3
<PAGE>
 
     benefits paid for the same period of time under the Company's disability
     income replacement coverage.

(d)  Pension.  The Company will provide the Executive with a defined
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     contribution savings plan, into which the Company will make a contribution
     for each fiscal year equal to 10% of the Salary paid to the Executive for
     such fiscal year.  The plan will also provide that the Executive may make
     annual contributions equal to or less than the Company's contribution.

(e)  Automobile. The Company will provide the Executive with an allowance toward
     ----------                                                                 
     the cost of an automobile in Bermuda, the amount of which will be approved
     by the CEO.  The Company will assume responsibility for the cost of
     insurance, maintenance and similar items.  The Executive's personal use of
     the automobile will be permitted.  This perquisite shall be governed by the
     rules and limitations set down from time to time by the Company.

(f)  Club.  The Company will reimburse the Executive for periodic dues for his
     ----                                                                     
     membership in clubs located in Bermuda in an amount not to exceed $2,400
     per fiscal year.  The Company will not reimburse initiation fees for club
     membership under this Agreement, in light of reimbursements made by the
     Company to the Executive's prior employer with respect to initiation fees
     for club membership for the period during which the Executive performed
     services for the Company but was employed by the prior employer.

(g)  Housing/Living Allowance.  The Company shall provide the Executive with a
     ------------------------                                                 
     housing and living expense allowance at the annual rate of $120,000 for the
     Agreement Term, with such allowance to be payable to the Executive in
     monthly instalments.

(h)  Tax, Accounting and Financial Planning.  The Company will reimburse the
     --------------------------------------                                 
     Executive for reasonable expenses, not to exceed $5,000 per fiscal year,
     for tax, accounting, and financial planning services.

(i)  Other Benefits.  Except as otherwise specifically provided to the contrary
     --------------                                                            
     in this Agreement, the Executive shall be provided with the welfare
     benefits and other fringe benefits to the same extent and on the same terms
     as those benefits are provided by the Company from time to time to the
     Company's other senior management employees. However, the Company shall not
     be required to provide a benefit or perquisite under this paragraph 2(i) if
     such benefit or perquisite would duplicate (or otherwise be the same type
     as) a benefit or perquisite specifically required to be provided under
     another provision of this Agreement.

(j)  Expenses.  Upon approval by the CEO, the Company will reimburse the
     --------                                                           
     Executive for reasonable expenses for entertainment, traveling, meals,
     lodging and similar items in promoting the Company's business which the
     Executive documents on a form used by the Company to report business
     expenses.

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<PAGE>
 
(k)  Indemnification.  The Company shall maintain officers liability insurance
     ---------------                                                          
     in commercially reasonable amounts (as reasonably determined by the Board),
     and the Executive shall be covered under such insurance to the same extent
     as other senior management employees of the Company.  The Executive shall
     be eligible for indemnification by the Company under the Company's bye-laws
     as currently in effect. The Company agrees that it shall not take any
     action that would impair the Executive's rights to indemnification under
     the Company's bye-laws, as currently in effect.

(l)  Holiday/Vacation.  The Executive shall be subject to the holiday and
     ----------------                                                    
     vacation policy that applies to other senior executives of the Company.

(m)  Dollar Amounts.  As used in this Agreement, "dollars" or numbers preceded
     --------------                                                           
     by the symbol "$" shall mean amounts in United States Dollars.

     3.  Termination.  The Executive's employment during the Agreement Term may
         -----------       
be terminated by the Company or the Executive without any breach of this
Agreement only under the circumstances described in paragraphs 3(a) through
3(g):

(a)  Death.  The Executive's employment will terminate upon his death.
     -----                                                            

(b)  Permanently Disabled.  The Company may terminate the Executive's employment
     --------------------                                                       
     if he is Permanently Disabled.  "Permanently Disabled" means that the
     Executive is eligible for benefits under the Company's long-term disability
     plan.

(c)  Cause.  The Company may terminate the Executive's employment at any time
     -----                                                                   
     for Cause. "Cause" shall mean:

     (i)    the wilful and continued failure by the Executive to substantially
            perform his duties with the Company (other than any such failure
            resulting from the Executive's being Disabled), within a reasonable
            period of time after a written demand for substantial performance is
            delivered to the Executive by the CEO, which demand specifically
            identifies the manner in which the CEO believes that the Executive
            has not substantially performed his duties;

     (ii)   the wilful engaging by the Executive in conduct which is
            demonstrably and materially injurious to the Company or the Holding
            Company, monetarily or otherwise; or

     (iii)  the engaging by the Executive in egregious misconduct involving
            serious moral turpitude to the extent that, in the reasonable
            judgment of the CEO, the Executive's credibility and reputation no
            longer conform to the standard of the Company's executives.

     For purposes of this Agreement, no act, or failure to act, on the
     Executive's part shall be deemed "wilful" unless done, or omitted to be
     done, by the Executive not in good faith

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<PAGE>
 
     and without reasonable belief that the Executive's action or omission was
     in the best interest of the Company or the Holding Company.

(d)  Constructive Discharge.  If the Executive (i) provides written notice to
     ----------------------                                                  
     the Company of the occurrence of a material breach of this Agreement by the
     Company, which specifically identifies the manner in which the Executive
     believes that the breach has occurred; (ii) the Company fails to correct
     such breach within a reasonable time after such notice; and (iii) the
     Executive resigns within the 60-day period following the occurrence of such
     breach, then the Executive shall be considered to have been constructively
     discharged.

(e)  Resignation by Executive.  The Executive may resign for any reason by
     ------------------------                                             
     giving the Company ninety (90) days prior written notice, except the
     Executive will be treated as having resigned under this paragraph 3(e) only
     if he has not been constructively discharged under paragraph 3(d).

(f)  Mutual Agreement. This Agreement may be terminated at any time by the
     ----------------                                                     
     mutual agreement of the parties.  Any termination of the Executive's
     employment by mutual agreement of the parties will be memorialized by an
     agreement which is reduced in writing and signed by the Executive and the
     CEO or other duly appointed officer of the Company.

(g)  Termination by Company.  The Company may terminate the Executive's
     ----------------------                                            
     employment at any time for any reason by giving the Executive prior written
     notice, except the Executive's employment will not be treated as having
     been terminated under this paragraph 3(g) if the termination is for reasons
     of being Permanently Disabled or for Cause.

(h)  Date of Termination.  "Date of Termination" means the last day the
     -------------------                                               
     Executive is employed by the Company, provided that the Executive's
     employment is terminated in accordance with the foregoing provisions of
     this paragraph 3.

(i)  Notice of Termination. Any termination of the Executive's employment by the
     ---------------------                                           
     Company or the Executive (other than a termination pursuant to paragraph
     3(a) or paragraph 3(f)) must be communicated by a written Notice of
     Termination to the other party hereto. For purposes of this Agreement, a
     "Notice of Termination" means a dated notice which indicates the specific
     termination provision in this Agreement relied on and which sets forth in
     reasonable detail the facts and circumstances, if any, claimed to provide a
     basis for termination of the Executive's employment under the provision so
     indicated.

     4.   Rights Upon Termination.  This paragraph 4 describes the payments and
          -----------------------                                              
benefits to be provided to the Executive after his Date of Termination:

(a)  Payment of Previously Earned Amounts.  The Executive shall receive payment
     ------------------------------------                                      
     of accrued but unpaid Salary, vacation pay and, if expressly provided for
     in paragraph 4(d),

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<PAGE>
 
     a pro rata portion of his bonus (if any), in each case for the period
     ending with the Executive's Date of Termination.

(b)  No Severance Payments.  If the Executive's Date of Termination occurs
     ---------------------                                                
     during or after the end of the Agreement Term, or because of (i) the
     Executive's death, (ii) his being Permanently Disabled (paragraph 3(b)),
     (iii) his termination for Cause (paragraph 3(c)), or (iv) his resignation
     (paragraph 3(e)), then, except as otherwise expressly provided for in this
     Agreement, no payments shall be due to the Executive under this Agreement
     for periods after the Date of Termination.

(c)  Salary Continuation.  If the Executive's Date of Termination occurs during
     -------------------                                                       
     the Agreement Term because of (i) his discharge by the Company for reasons
     other than Cause (described in paragraph 3(c)), or (ii) his constructive
     discharge (described in paragraph 3(d)), the Executive shall continue to
     receive Salary payments (at the rate in effect on the Date of Termination)
     in monthly or more frequent instalments through the earliest of: (i) the
     last day of the Agreement Term; (ii) the date of the Executive's death, or
     (iii) the date, if any, of the breach by the Executive of the non-
     competition requirements of paragraph 7, the confidentiality requirements
     of paragraph 8 or the non-disparagement requirements of paragraph 9.

(d)  Pro rata Bonus.  Except as otherwise provided in this paragraph 4(d), the
     --------------                                                           
     Executive shall not receive a bonus for the fiscal year in which the
     Executive's Date of Termination occurs.  If the Executive's Date of
     Termination occurs during the Agreement Term as a result of (i) the
     Executive's death (ii) his being Permanently Disabled (paragraph 3(b)),
     (iii) his discharge by the Company for reasons other than Cause (described
     in paragraph 3(c)), or (iv) his constructive discharge (described in
     paragraph 3(d)), the Executive shall receive a pro rata portion of the
     bonus which would have been paid pursuant to Exhibit A for the fiscal year
     in which the Executive's Date of Termination occurs.  Such portion, if any,
     shall be calculated for the period ending on the Date of Termination and
     shall be paid to the Executive (or his estate) within a reasonable period
     of time after the Company calculates the bonus amount, if any, for all
     employees for the fiscal year.

(e)  Housing/Living Expenses, Medical Benefits.  If the Executive is entitled to
     -----------------------------------------                                  
     Salary Continuation payments pursuant to paragraph 4(c), the Executive
     shall receive a housing and living expense allowance (described in
     paragraph 2(g)) and may continue to participate in the medical and dental
     plans in which he participated on the day before his Date of Termination
     through the earlier of: (i) the last day for which the Executive receives
     Salary Continuation payments pursuant to paragraph 4(c); or (ii) three (3)
     months after the Executive's Date of Termination.  Participation in the
     medical and dental plans is subject to the Executive's payment of the
     applicable employee portion of the monthly premium cost, if any.  If the
     Company ceases offering the medical and dental plans in which the Executive
     participated on the day before his Date of Termination to Company employees
     during this time, the Executive may elect to participate in any other
     medical or dental plan offered by the Company to its employees, provided
     however, that the Executive shall be responsible for paying the applicable
     employee portion of the monthly premium cost.

                                       7
<PAGE>
 
(f)  Other Programs.  No benefits shall be payable to the Executive under any
     --------------                                                          
     other severance pay arrangement or similar arrangement maintained by the
     Company or any Subsidiary. Except as otherwise expressly provided in this
     Agreement, no other payments or benefits shall be due to the Executive
     following the Date of Termination (except as otherwise specifically
     provided under the terms of an employee benefit plan or arrangement).

     5.   Duties on Termination.  Subject to the provisions of this Agreement,
          ---------------------                                               
during the period beginning on the date of delivery of a Notice of Termination,
and ending on the Date of Termination, the Executive shall continue to perform
his duties as set forth in this Agreement, and shall also perform such services
for the Company and the Holding Company as are necessary and appropriate for a
smooth transition to the Executive's successor, if any. Notwithstanding the
foregoing provisions of this paragraph 5, the Company may suspend the Executive
from performing his duties under this Agreement following the delivery of a
Notice of Termination providing for the Executive's resignation, or delivery by
the Company of a Notice of Termination providing for the Executive's termination
of employment for any reason; provided, however, that during the period of
suspension (which shall end on the Date of Termination), the Executive shall
continue to be treated as employed by the Company for other purposes, and his
rights to compensation or benefits shall not be reduced by reason of the
suspension.

     6.   Set-Off.  If the Executive's employment with the Company is terminated
          -------                                                               
for any reason and, under the terms of this Agreement, the Executive is
otherwise entitled to receive Salary and bonus payments, such payments will be
reduced by the amount of any salary and bonus payments the Executive receives in
connection with other employment.

     7.   Non-competition.  While the Executive is employed by the Company, and
          ---------------                                                      
during the Non-Competition Period (as defined below), the Executive agrees that
he will not directly or indirectly perform services in an underwriting-related
or consulting-related position in Bermuda for a direct competitor of the
Company.  A related position shall include, but is not limited to, a chief
operating officer or executive vice president.

For purposes of this paragraph 7:

     "Non-Competition Period" shall be determined as follows:

     (1)  If the Executive's Date of Termination occurs under circumstances
          other than those described in paragraph 3(d) (relating to constructive
          discharge) or paragraph 3(g) (relating to certain terminations by the
          Company), the Non-Competition Period shall be the period beginning on
          the Date of Termination, and ending on the twenty-four-month (24)
          anniversary of the Date of Termination.

     (2)  If the Executive's Date of Termination occurs under circumstances
          described in paragraph 3(d) (relating to constructive discharge) or
          paragraph 3(g) (relating to certain terminations by the Company), the
          Non-Competition Period shall be the period beginning on the Date of
          Termination, and ending

                                       8
<PAGE>
 
          on the earlier to occur of the last day of the Agreement Term or the
          twenty-four-month (24) anniversary of the Date of Termination.
          However, under this paragraph (B), the Company, in its discretion, by
          notice provided to the Executive not later than fifteen (15) days
          after the Date of Termination, may extend the Non-Competition Period
          beyond the end of the Agreement Term, to a date specified in such
          notice (but not later than the twenty-four-month anniversary of the
          Date of Termination), but only if the Company agrees to provide the
          salary continuation payments described in paragraph 4(c) during such
          Non-Competition Period.

Nothing in this paragraph 7, paragraph 8 or paragraph 9 shall be construed as
limiting the Executive's duty of loyalty to the Company while he is employed by
the Company or any other duty he may otherwise have to the Company while he is
employed by the Company.

     8.   Confidential Information.  Except as may be required by the lawful 
          ------------------------       
order of a court or agency of competent jurisdiction, or except to the extent
that the Executive has express authorization from the Company, the Executive
agrees to keep secret and confidential indefinitely all non-public information
(including, without limitation, information regarding litigation and pending
litigation) concerning the Company, the Holding Company, and the Subsidiaries
which was acquired by or disclosed to the Executive during the course of his
employment with the Company, or during the course of his consultation with the
Company following his termination of employment (regardless of whether
consultation is pursuant to paragraph 10), and not to disclose the same, either
directly or indirectly, to any other person, firm, or business entity, or to use
it in any way. To the extent that the Executive obtains information on behalf of
the Company, the Holding Company, or any of the Subsidiaries that may be subject
to attorney-client privilege as to the Company's attorneys, the Executive shall
take reasonable steps to maintain the confidentiality of such information and to
preserve such privilege. Nothing in the foregoing provisions of this paragraph 8
shall be construed so as to prevent the Executive from using, in connection with
his employment for himself or an employer other than the Company, the Holding
Company, or any of the Subsidiaries, knowledge which was acquired by him during
the course of his employment with the Company, the Holding Company, and the
Subsidiaries, and which is generally known to persons of his experience in other
companies in the same industry.

     9.   Non-Disparagement.  The Executive agrees that, while he is employed by
          -----------------                                                     
the Company, and after his Date of Termination, he shall not make any false,
defamatory or disparaging statements about the Company, the Holding Company, the
Subsidiaries, or the officers or directors of the Company, the Holding Company,
or the Subsidiaries that are reasonably likely to cause material damage to the
Company, the Holding Company, the Subsidiaries, or their officers or directors.
While the Executive is employed by the Company, and after his Date of
Termination, the Company agrees, on behalf of itself, the Holding Company, and
the Subsidiaries, that neither the officers nor the directors of the Company,
the Holding Company, or the Subsidiaries shall make any false, defamatory or
disparaging statements about the Executive that are reasonably likely to cause
material damage to Executive.

                                       9
<PAGE>
 
     10.  Defense of Claims.  The Executive agrees that, for the period 
          -----------------        
beginning the Effective Date, and continuing for a reasonable period after the
Executive's termination of employment with the Company, the Executive will
cooperate with the Company, the Holding Company and the Subsidiaries in defense
of any claims that may be made against the Company, the Holding Company and the
Subsidiaries, and will cooperate with the Company, the Holding Company or the
Subsidiaries in the prosecution of any claims that may be made by the Company,
the Holding Company or the Subsidiaries, to the extent that such claims may
relate to services performed by the Executive for the Company. The Executive
agrees to promptly inform the Company if he becomes aware of any lawsuits
involving such claims that may be filed against the Company, the Holding Company
or the Subsidiaries. The Company agrees to reimburse the Executive for all of
the Executive's reasonable out-of-pocket expenses associated with such
cooperation, including travel expenses. For periods after the Executive's
employment with the Company terminates, the Company agrees to provide reasonable
compensation to the Executive for such cooperation. The determination of the
reasonableness of such compensation shall take into account information provided
to the Company by the Executive or otherwise known to the Company, which may
include, without limitation, (a) the Executive's rate of compensation at the
time he ceased employment with the Company, and whether he is then receiving
other compensation payments from the Company; (b) the Executive's rate of
compensation at the time of such cooperation; (c) the amount of time required of
the Executive for such cooperation; (d) difficulty of the issues as to which the
cooperation is required; (e) the amount of inconvenience to the Executive
resulting from such cooperation (including consideration of factors such as the
amount of travel required of the Executive, the effect on other commitments of
the Executive, and the amount of advance notice provided to the Executive); and
(f) whether such cooperation would be legally required in the absence of the
requirements of this paragraph 10. The Executive also agrees to promptly inform
the Company if he is asked to assist in any investigation of the Company, the
Holding Company or the Subsidiaries (or their actions) that may relate to
services performed by the Executive for the Company, regardless of whether a
lawsuit has then been filed against the Company, the Holding Company or the
Subsidiaries with respect to such investigation.

     11.  Remedies.  The Executive acknowledges that the Company or the Holding
          --------                                                             
Company would be irreparably injured by a violation of paragraph 7, paragraph 8,
or paragraph 9, and he agrees that the Company, in addition to any other
remedies available to it for such breach or threatened breach, shall be entitled
to a preliminary injunction, temporary restraining order, or other equivalent
relief, restraining the Executive from any actual or threatened breach of either
paragraph 7, paragraph 8 or paragraph 9.  The Company acknowledges that the
Executive would be irreparably injured by a violation of paragraph 9, and the
Company agrees that the Executive, in addition to any other remedies available
to him for such breach or threatened breach, shall be entitled to a preliminary
injunction, temporary restraining order, or other equivalent relief, restraining
the Company from any actual or threatened breach of paragraph 9.  If a bond is
required to be posted in order for the Company or the Executive to secure an
injunction or other equitable remedy, the parties agree that said bond need not
be more than a nominal sum.

     12.  Nonalienation.  The interests of the Executive under this Agreement 
          -------------  
are not subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, attachment, or garnishment by creditors of the
Executive or the Executive's beneficiary.

                                       10
<PAGE>
 
     13.  Amendment.  This Agreement may be amended or canceled only by mutual
          ---------                                                           
agreement of the parties in writing without the consent of any other person. So
long as the Executive lives, no person, other than the parties hereto, shall
have any rights under or interest in this Agreement or the subject matter
hereof.

     14.  Applicable Law.  The provisions of this Agreement shall be construed 
          --------------          
in accordance with the laws of Bermuda, without regard to the conflict of law
provisions of any jurisdiction. All disputes shall be arbitrated or litigated
(whichever is applicable) in Bermuda.

     15.  Severability.  The invalidity or unenforceability of any provision of
          ------------                                                         
this Agreement will not affect the validity or enforceability of any other
provision of this Agreement, and this Agreement will be construed as if such
invalid or unenforceable provision were omitted (but only to the extent that
such provision cannot be appropriately reformed or modified).

     16.  Waiver of Breach.  No waiver by any party hereto of a breach of any
          ----------------                                                   
provision of this Agreement by any other party, or of compliance with any
condition or provision of this Agreement to be performed by such other party,
will operate or be construed as a waiver of any subsequent breach by such other
party or any similar or dissimilar provisions and conditions at the same or any
prior or subsequent time.  The failure of any party hereto to take any action by
reason of such breach will not deprive such party of the right to take action at
any time while such breach continues.

     17.  Successors.  This Agreement shall be binding upon, and inure to the
          ----------                                                         
benefit of, the Company and its successors and assigns and upon any person
acquiring, whether by merger, consolidation, purchase of assets or otherwise,
all or substantially all of the Company's assets and business.

     18.  Notices.  Notices and all other communications provided for in this
          -------                                                            
Agreement shall be in writing and shall be delivered personally or sent by
registered or certified mail, return receipt requested, postage prepaid, or sent
by facsimile or prepaid overnight courier to the parties at the addresses set
forth below (or such other addresses as shall be specified by the parties by
like notice).  Such notices, demands, claims and other communications shall be
deemed given:

(a)  in the case of delivery by overnight service with guaranteed next day
     delivery, the next day or the day designated for delivery;

(b)  in the case of certified, registered or similar mail delivery, five days
     after deposit in the local mail; or

(c)  in the case of facsimile, the date upon which the transmitting party
     received confirmation of receipt by facsimile, telephone or otherwise;

provided, however, that in no event shall any such communications be deemed to
be given later than the date they are actually received.  Communications that
are to be delivered by the mail or by overnight service are to be delivered to
the addresses set forth below:

                                       11
<PAGE>
 
to the Company:

     LaSalle Re Limited
     25 Church Street
     Hamilton HMFX, Bermuda

or to the Executive:

     Guy Hengesbaugh
     25 Church Street
     Hamilton, HMFX, Bermuda

All notices to the Company shall be directed to the attention of the chief
executive officer of the Company, with a copy to the Secretary of the Company.
Each party, by written notice furnished to the other party, may modify the
applicable delivery address, except that notice of change of address shall be
effective only upon receipt.

     19.  Arbitration of All Disputes.  Any controversy or claim arising out of
          ---------------------------    
or relating to this Agreement (or the breach thereof) shall be settled by final,
binding and non-appealable arbitration in Bermuda by three arbitrators.  Except
as otherwise expressly provided in this paragraph 19, the arbitration shall be
conducted in accordance with the Arbitration Act 1986 as then in effect.  One of
the arbitrators shall be appointed by the Company, one shall be appointed by the
Executive, and the third shall be appointed by the first two arbitrators.  If
the first two arbitrators cannot agree on the third arbitrator within 30 days of
the appointment of the second arbitrator, then the third arbitrator shall be
appointed by the President of the Bermuda Bar Council.

     20.  Survival of Agreement.  Except as otherwise expressly provided in this
          ---------------------                                                 
Agreement, the rights and obligations of the parties to this Agreement shall
survive the termination of the Executive's employment with the Company.

     21.  Entire Agreement.  Except as otherwise noted herein, this Agreement,
          ----------------                                                    
including any Exhibit(s) attached hereto, constitutes the entire agreement
between the parties concerning the subject matter hereof and supersedes all
prior and contemporaneous agreements, if any, between the parties relating to
the subject matter hereof.  The enforceability of this Agreement shall not cease
or otherwise be adversely affected by the termination of the Executive's
employment with the Company.

     22.  Acknowledgment by Executive.  The Executive represents to the Company
          ---------------------------                                          
that he is knowledgeable and sophisticated as to business matters, including the
subject matter of this Agreement, that he has read this Agreement and that he
understands its terms.  The Executive acknowledges that, prior to assenting to
the terms of this Agreement, he has been given a reasonable time to review it,
to consult with counsel of his choice, and to negotiate at arm's-length with the
Company as to the contents.  The Executive and the Company agree that the
language used in this Agreement is the language chosen by the parties to express
their mutual intent, and that no rule of strict construction is to be applied
against any party hereto.  The

                                       12
<PAGE>
 
Executive represents and warrants that he is not, and will not become a party to
any agreement, contract, arrangement or understanding, whether of employment or
otherwise, that would in any way restrict or prohibit him from undertaking or
performing his duties in accordance with this Agreement.

     23.  Titles and Headings.   Titles and headings in this Agreement are for
          -------------------    
ease of reference and convenience only, and shall not be construed to affect the
meaning of any provision of this Agreement.

     IN WITNESS THEREOF, the Executive has hereunto set his hand, and the
Company has caused these presents to be executed in its name and on its behalf,
and its corporate seal to be hereunto affixed, all as of the day and year first
above written.



                                        /s/ Guy Hengesbaugh
                                        ------------------------
                                             Guy Hengesbaugh


                                        LASALLE RE LIMITED


                                        By: /s/ Victor H. Blake
                                           ---------------------
                                             Victor H. Blake

                                       13
<PAGE>
 
                                   EXHIBIT A
                                   ---------


                               BONUS COMPUTATION
                               -----------------

     A-1.  Purpose.  This Exhibit A is attached to and forms a part of the
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employment agreement (the "Agreement") between Guy Hengesbaugh (the "Executive")
and LaSalle Re Limited (the "Company").  The purpose of this Exhibit A is to set
forth the terms of the bonus program described in paragraph 2(b) of the
Agreement.

     A-2.  Guidelines.  The bonus shall be determined in accordance with the
           ----------                                                       
following guidelines:

 .    A discretionary bonus may be awarded annually by the Board of the Company
     after considering the recommendation of the CEO of the Company.

 .    A non-discretionary bonus shall be earned and paid annually based upon the
     Company's Return on Equity (defined below) achieved for each fiscal year of
     the Company, while the Executive is employed by the Company.

 .    The non-discretionary annual bonus calculation will be based on the
     Company's Return on Equity earned each year. If the Company's Return on
     Equity for any year exceeds 15%, the bonus will be paid according to the
     following formula: 

     .    For each 1% improvement in Return on Equity above 15%, an amount equal
          to 10.0 % of The Executive's Salary will be paid.

     .    For each 1% improvement in Return on Equity above 22.5%, an amount
          equal to 15.0 % of The Executive's Salary will be paid.

     .    For Return on Equity results between whole percentages (but above
          15%), the percentage of Salary awarded will be increased by
          interpolation.

     .    The "Return on Equity" for any fiscal year shall be equal to the net
          income of the Company for the fiscal year, divided by shareholders'
          equity at the beginning of the period (as determined on the basis of
          U.S. generally accepted accounting principles). For purposes of this
          calculation any unrealized appreciation or depreciation of the
          Company's investments shall be disregarded (both as to the numerator
          and the denominator). Payments made to CNA Financial Corporation or
          its affiliates under the Underwriting Support Services Agreement will
          not reduce net income in determining the Return on Equity.

                                       14