MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Gross premiums written for the year ended September 30, 1999 were $139.0 million compared to $155.3 million for the year ended September 30, 1998, a decrease of 10.5%. The table below summarizes the Company's gross premiums written by line of business (expressed in millions of dollars).
For the year ended September 30, 1999, gross premiums written in other lines of business, including LaSalle Re Capital, totaled $43.2 million, or 31.1% of gross premiums written, compared to $51.0 million, or 32.8% of gross premiums written, for the year ended September 30, 1998. The decrease was primarily due to reduced gross premiums written in property pro-rata due to cancelled contracts and a reduction in the line sizes written on satellite business.
Premiums ceded for the year ended September 30, 1999 were $28.2 million compared to $7.8 million in the year ended September 30, 1998. Of the $20.4 million increase, $8.1 million was ceded to a property catastrophe quota share arrangement with CNA Re, $3.0 million related to fronting arrangements and $5.2 million related to increased premiums ceded through LaSalle Re Capital. In addition, the Company continued to purchase various reinsurance protections because of the current pricing environment.
Net investment income remained reasonably constant for the years ended September 30, 1999 and September 30, 1998 at $33.8 million and $34.3 million, respectively. Annualized investment income as a percentage of the average market value of invested assets was 5.6% for the year ended September 30, 1999 compared to 6.0% for the year ended September 30, 1998. The decrease in the investment income generated from the investment portfolio of $2.2 million was primarily attributable to lower market yields. This decrease was partly offset by income generated on an equity account maintained in accordance with the terms of the Company's multi-year excess of loss reinsurance program and investment income from LaSalle Re Capital.
Net realized gains on investments were $0.6 million for the year ended September 30, 1999 compared to $5.6 million for the year ended September 30, 1998. During the year ended September 30, 1999, the Company sold longer maturity bonds and reinvested the proceeds in shorter maturity bonds and money market instruments. This measure was designed to protect the total returns on the portfolio in an increasing yield environment. In this environment, the unrealized gain on the investment portfolio declined from $13.8 million at September 30, 1998 to a loss of $4.1 million at September 30, 1999. The Company anticipates that the measure taken to shorten interest rate sensitive assets will reduce the potential for significant capital gains while generating future income returns at money market rates or better. The gains in the year ended September 30, 1999 resulted primarily from a credit spread enhancement exercise undertaken during the period. In addition, the Company realized small gains on the sale of bonds with Far East and Asian exposure.
Losses and loss expenses incurred represent losses paid and reserves established in respect of specific losses and loss expenses reported by cedents and expected loss development and additions to incurred-but-not- reported loss reserves.
Effective on October 1, 1998, the Underwriting Services Agreement, under which CNA Bermuda had provided the Company with underwriting services, was terminated. On that date, all of the personnel assigned to the Company by CNA Bermuda became employees of the Company and the underwriting function formerly performed by CNA Bermuda was assumed by the Company directly. In connection with the termination of the Underwriting Services Agreement, the Company entered into an Underwriting Support Services Agreement with CNA Re Services Company and CNA Bermuda. With effect from October 1, 1998, LaSalle Re has agreed to pay an annual retainer of $0.3 million and an underwriting profit commission equal to 1.67% of the aggregate net underwriting profits of LaSalle Re, where specified conditions are met. For the 1998 fiscal year, LaSalle Re paid fees under the Underwriting Services Agreement at a rate of 1.5% of the gross written and collected premium per fiscal year; and an underwriting profit commission equal to 4.0% of the aggregate net underwriting profits of LaSalle Re, where specified conditions were met.
As a percentage of gross earned premiums, fees accrued pursuant to the Underwriting Support Services Agreement decreased from 2.2% for the year ended September 30, 1998 to 1.0% for the year ended September 30, 1999. This decrease was offset by the inclusion of the underwriters' compensation cost in underwriting expenses following their transfer to the Company. This has increased the ratio of underwriting expenses to gross premiums earned by 1.6%. For the year ended September 30, 1999, the Company's brokerage, ceding and profit commissions increased to 12.8% of gross premiums earned from 11.8% for the corresponding period in 1998. The increase was partly due to the effect of increased earned premiums on the business underwritten by LaSalle Re Capital, whose expense ratio was approximately 20%, and an increase in the average cost of property catastrophe proportional business.
Operational expenses were $11.4 million for the year ended September 30, 1999 compared to $8.9 million for the year ended September 30, 1998. As a percentage of net premiums earned, operational expenses were 9.0% during the year ended September 30, 1999 compared to 5.8% for the year ended September 30, 1998. The increase in operational expenses of $2.5 million was principally due to an increase in the level of executive compensation booked. During the year ended September 30, 1999, the Company recorded a credit of $1.5 million in respect of stock appreciation rights compared to a credit of $0.6 million during the year ended September 30, 1998. This reduction was offset by increased compensation costs of approximately $2.1 million, due in part to additional compensation costs following the change in the CNA Underwriting Services Agreement, a change in the method of compensating employees and the payment of severance costs. The remaining increase in expenses of $1.3 million was due to additional costs relating to travel, staff recruitment, software modeling and LaSalle Re Capital.
The Company incurred corporate expenses of $0.8 million during the year ended September 30, 1999 compared to $0.5 million for the year ended September 30, 1998. The costs incurred in the year ended September 30, 1999 related to costs associated with the Company's investigation of potential transactions and the preparation and filing of a registration statement for an offering of preferred shares. The registration statement was subsequently withdrawn prior to becoming effective. The costs incurred in the year ended September 30, 1998 related to costs associated with the Company's investigation of potential transactions.
The Company's losses per Common Share were $(0.61) for the year ended September 30, 1999 compared to earnings per Common Share of $3.06 for the year ended September 30, 1998. Losses per Common Share assuming dilution were $(0.61) for the year ended September 30, 1999 compared to earnings per Common Share of $2.80 for the year ended September 30, 1998.
Gross premiums written decreased 9.4% to $155.3 million for the year ended September 30, 1998 from $171.4 million for the year ended September 30, 1997. The table below summarizes the Company's gross premiums written by line of business (expressed in millions of dollars).
The overall decrease in gross premiums written was primarily due to a 28.0% reduction in gross premiums written in the Company's core property catastrophe business from $144.7 million for the year ended September 30, 1997 to $104.2 million for the year ended September 30, 1998. Of this reduction, approximately 60.0% related to the international property catastrophe book and 40.0% related to the U.S. property catastrophe book. The reduction was greater in the international property catastrophe book because the Company reduced its line sizes on some proportional treaties pursuant to its policy of reducing aggregate exposures in a declining rate environment. This accounted for approximately $7.7 million of the decrease in the international property catastrophe book. Approximately 25% of the decrease in the U.S. property catastrophe book related to a multi-year contract that was written in the year ended September 30, 1997 for which no written premium was recorded in the year ended September 30, 1998. The remaining decrease in the total property catastrophe book was due to continuing competitive rates. Based on the Company's experience, rates for property catastrophe business written in the year ended September 30, 1998 were approximately 15% and 10% below those experienced in the year ended September 30, 1997 for international and U.S. property catastrophe business, respectively. Because of these reduced rates, premiums were lower in comparison to those written in the year ended September 30, 1997, and the Company chose not to renew contracts in some cases where it considered business to be underpriced. For the year ended September 30, 1998, the Company experienced a 6.3% reduction in the number of property catastrophe contracts written from 1,000 in the year ended September 30, 1997 to 937 contracts for the year ended September 30, 1998.
ended September 30, 1998, there was a positive adjustment to gross premiums written of $0.1 million. This was principally due to insignificant premium adjustments and, as a result of increased loss activity, to increased reinstatement premiums and lower no claims bonuses.
Net realized gains on investments were $5.6 million for the year ended September 30, 1998 compared to $0.6 million for the year ended September 30, 1997. During the year ended September 30, 1998, the Company realized gains on investments as part of an exercise undertaken to increase the credit quality of the portfolio. In addition, during the last quarter of the year ended September 30, 1998, the Company took advantage of market conditions by realizing some of the large unrealized gains in the portfolio. The proceeds from this exercise were reinvested in securities with marginally lower yields.
The following table sets forth the Company's combined ratios for the years ended September 30, 1998 and 1997:
Underwriting expenses decreased 12.9% from $26.0 million for the year ended September 30, 1997 to $22.7 million for the year ended September 30, 1998. As a percentage of net premiums earned, underwriting expenses were 14.6% for the year ended September 30, 1998 compared to 15.9% for the year ended September 30, 1997. Fees accrued pursuant to the Underwriting Services Agreement as a percentage of net premiums earned decreased to 2.3% for the year ended September 30, 1998 from 4.0% for the year ended September 30, 1997. This decrease was due to the higher loss activity and lower premium earnings in the year ended September 30, 1998 compared with the year ended September 30, 1997. The Company's level of brokerage fees and ceding commissions increased to 12.3% of net premiums earned for the year ended September 30, 1998 from 11.8% of net premiums earned for the year ended September 30, 1997. The increase was partly due to an increase in earned premiums written by LaSalle Re Capital, whose expense ratio was approximately 20%, and partly due to an increase in the average cost of writing proportional business.
Foreign exchange gains in the year ended September 30, 1998 were negligible at $0.2 million compared to losses of $3.0 million in the year ended September 30, 1997. The losses in the year ended September 30, 1997 resulted from the unfavorable closing of a sterling forward contract, and an overall strengthening of the U.S. dollar against the major foreign currencies in which the Company wrote premiums.
LaSalle Re's sources of funds consist of net premiums written, investment income and proceeds from sales and redemptions of investments. Cash is used primarily to pay losses and loss expenses, brokerage, commissions, excise taxes, administrative expenses and dividends. Under the Insurance Act, LaSalle Re is prohibited from paying dividends of more than 25% of its opening statutory capital and surplus unless it files with the Bermuda Registrar of Companies an affidavit (at least 7 days before payment of such dividends) stating that it will continue to meet the required minimum solvency margin and minimum liquidity ratio requirements and from declaring or paying any dividends without the prior approval of the Bermuda Minister of Finance if it failed to meet its required margins on the last day of the previous fiscal year. The Insurance Act also requires LaSalle Re to maintain a minimum solvency margin and minimum liquidity ratio and prohibits dividends that would result in a breach of these requirements. In addition, LaSalle Re is prohibited under the Insurance Act from reducing its opening total statutory capital by 15% or more without the approval of the Minister of Finance. LaSalle Re currently meets these requirements. In addition, the payment of dividends by LaSalle Re is subject to the rights of holders of the Exchangeable Non-Voting Shares to receive a pro rata share of any dividend and to its need to maintain shareholders' equity adequate to support the level of LaSalle Re's reinsurance operations.
Operating activities provided net cash of $19.6 million for the year ended September 30, 1999 and $96.0 million for the year ended September 30, 1998. Cash flows from operations in future years may differ substantially from net income. Cash flows are affected by loss payments, which, due to the nature of the reinsurance coverage provided by LaSalle Re, are generally expected to comprise large loss payments on a limited number of claims and can therefore fluctuate significantly from year to year. The irregular timing of these large loss payments can create significant variations in operating cash flows between periods. LaSalle Re funds these payments from cash flows from operations and sales of investments.
As a result of the potential for large loss payments, LaSalle Re maintains a substantial portion of its assets in cash and investments. As of September 30, 1999, 75.7% of its total assets were held in cash and investments, which totaled $557.0 million. Cash and cash equivalents were $193.2 million at September 30, 1999 compared to $85.3 million at September 30, 1998. The increase was a result of the Company's current investment strategy of selling longer maturity bonds and reinvesting the proceeds in shorter maturity bonds and money market instruments, a move designed to protect the total returns on the portfolio in an increasing yield environment. This has reduced the modified average duration of the portfolio from 3.1 years at September 30, 1998 to 1.8 years at September 30, 1999.
Prepaid reinsurance premiums increased from $7.6 million as at September 30, 1998 to $17.3 million as at September 30, 1999. The increase of $9.7 million was primarily due to the new property catastrophe quota share arrangement with CNA Re, the increased reinsurance protections purchased through LaSalle Re Capital and an increase in the number of the reinsurance protections bought by LaSalle Re. At September 30, 1999, the Company had $9.1 million of losses recoverable from reinsurers compared to $nil in 1998.
At September 30, 1999, reserves for unpaid losses and loss expenses were $146.5 million compared to $97.9 million at September 30, 1998. During the year ended September 30, 1999, the Company increased its reserves for unpaid losses and loss expenses following a revision of the assumptions used in setting incurred-but-not-reported loss reserves. In addition, included in the reserve for unpaid losses and loss expenses at September 30, 1999 was $18.7 million in respect of the business underwritten by LaSalle Re Capital, compared to $6.7 million at September 30, 1998. Given the three-year accounting methodology, these losses will not be settled until after the year 2000.
Other liabilities increased from $29.2 million as at September 30, 1998 to $37.3 million as at September 30, 1999. The increase of $8.1 million was primarily due to liabilities established for the purchased reinsurance protections.
In accordance with the terms of certain reinsurance contracts, the Company has posted letters of credit in the amount of $21.6 million as of September 30, 1999, as compared to $8.3 million as of September 30, 1998, to support outstanding loss reserves. In connection with LaSalle Re Capital's support of three Lloyd's syndicates, with effect from January 1, 1997, the Company posted letters of credit in the amount of $16.1 million (equivalent to (Pounds)9.8 million). In addition, in connection with the Japanese earthquake swap, the Company has posted a letter of credit of $3.0 million. All letters of credit are secured by a lien on the Company's investment portfolio equal to 115% of the amount of the outstanding letters of credit.
The Company has given priority to making its computer systems ready to process dates in and after the year 2000 ("Year 2000 ready"). The Company does not believe that it faces any material Year 2000 issues with respect to its non-information technology systems.
The Company distributed a Year 2000 readiness questionnaire to its external suppliers and brokers. As of December 1, 1999, approximately 98% of suppliers and brokers, including all of the Company's major suppliers and brokers, had provided adequate response to this questionnaire. The Company has decided not to continue its business relationship with those few brokers and suppliers who have not responded to the Year 2000 readiness questionnaire.
The Company's most reasonably likely worst case scenario would be the failure of the Company's computerized reinsurance systems to process transactions. As a contingency plan, the Company intends, prior to January 1, 2000, to extract from its computerized reinsurance systems a hard copy of all information required to initiate a manual system for processing transactions in the event of a system failure. The Company believes that it would have the necessary resources to function on a manual basis, if so required.
We have audited the accompanying consolidated balance sheet of LaSalle Re Holdings Limited and subsidiaries as of September 30, 1999, and the related consolidated statements of operations and comprehensive income, changes in shareholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of LaSalle Re Holdings Limited and subsidiaries as of September 30, 1999 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of LaSalle Re Holdings Limited and subsidiaries as of September 30, 1998, and the results of their operations and their cash flows for each of the years in the two-year period ended September 30, 1998, in conformity with accounting principles generally accepted in the United States of America.
Years ended September 30, 1999 and 1998 (Expressed in thousands of United States Dollars, except share and per share data)
The accompanying consolidated financial statements are prepared in accordance with United States generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported and disclosed amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. The estimates most susceptible to significant change are those used in determining the liability for unpaid losses and loss expenses and the amount of ultimate premiums written.
The following are the significant accounting policies adopted by the Company:
Changes in the minority interest of LaSalle Re as a result of the exchange of such shares for shares in the Company are recorded at historic cost by transferring an appropriate portion of the minority interest to the various components of shareholders' equity. The minority's share of income as recorded in the income statement is calculated using the minority's ownership percentage as at the balance sheet date. Minority interest as reported in the consolidated balance sheets represents the minority's current proportionate share of LaSalle Re and its subsidiaries' net assets.
The liability for outstanding losses and loss expenses is based on reports and individual case estimates received from ceding companies. An amount is included for losses and loss expenses incurred but not reported on the basis of reports received from ceding companies and an actuarial analysis, performed by the Company and reviewed by an independent firm of actuaries. The amount included as losses incurred in respect of business written by LaSalle Re Corporate Capital Ltd. is derived from an analysis of expected loss ratios.
The Company's investments comprise fixed interest securities and short term investments, such as certificates of deposit or commercial paper. All investments are considered to be available for sale under the definition included in SFAS No. 115 "Accounting and Reporting for Certain Investments in Debt and Equity Securities". As such, they are reported at fair value with unrealized gains and losses, net of amounts attributable to the minority interest, reported as other comprehensive income.
Purchases and sales of investments are accounted for on the trade date of the transaction.
Realized gains or losses on sales of investments are determined on the basis of specific identification and are included in the consolidated statements of operations and comprehensive income.
In prior years, the Company has entered into foreign exchange contracts to manage the currency risks associated with the receipt of non-U.S. dollar insurance premiums. Realized and unrealized gains and losses on these contracts were included in the determination of net income as they arose.
Fair value disclosures with respect to certain financial instruments are separately included herein, where appropriate.
The Company has adopted SFAS No. 123 "Accounting for Stock-Based Compensation". As allowed under this standard, the Company accounts for stock option grants in accordance with APB opinion No. 25, "Accounting for Stock Issued to Employees". Compensation expense for stock option grants is recognized to the extent that the fair value of the stock exceeds the exercise price of the option at the measurement date. Any resulting compensation expense is recorded over the shorter of the vesting or service period.
Earnings per Common Share have been calculated in accordance with SFAS 128 "Earnings per Share". Earnings per Common Share are calculated by dividing net income available to common shareholders by the
The AICPA issued Statement of Position, 98-7 "Deposit Accounting" which is effective for financial statements with fiscal years beginning after June 15, 1999. The Company does not expect that this standard will have a significant impact on the current financial reporting.
The Company utilizes various reinsurance protections to reduce its exposure to large losses.
Coverage for the first loss is substantially funded by way of annual and reinstatement premium obligations. Accordingly, this part of the coverage has been recorded as a financing arrangement. The consideration paid, net of associated financing charges, is recorded as a deposit (as part of other assets in the consolidated balance sheet) and is adjusted at the balance sheet date to reflect the net present value of expected future cash flows under that portion of the contract. Interest expense includes finance charges of $1,331 (1998: $1,666; 1997: $1,470), which are being amortized over the period of the contract using the interest method.
In addition, in 1999, the Company entered into a quota share arrangement which cedes a proportion of the Company's property catastrophe business to a founding shareholder. The Company has also purchased other non-proportional excess of loss protections, which provide for the recovery of losses from reinsurers in excess of certain retentions and loss warranties.
The prior year development in 1999 was due to several factors. Firstly, the Company increased reserves by $14,500 in respect of Hurricane Georges, which occurred in September 1998. This followed an increase in the size of the market loss. Secondly, in March 1999 the Company recorded outstanding loss reserves totaling approximately $11,000 on three stop loss contracts. These losses arose from causes which could not have been reasonably anticipated when incurred but not reported losses were previously established. Thirdly, as a result of higher than previously anticipated losses on international catastrophe business, the Company strengthened its incurred but not reported losses by approximately $16,000 to reflect this trend.
In 1998 the prior year development related to a loss reported during the year on a 1996 aggregate stop loss contract. This contract had a period of 24 months after the expiry of the contract within which to report losses. Following this notification the Company also established reserves for the 1997 renewal of this contract. The prior year development in 1997 relates primarily to an additional liability on Hurricane Fran, which occurred in September 1996.
As at September 30, 1999, the Company's gross reserve for incurred but not reported losses was $68,665 compared to $52,200 at September 30, 1998.
As discussed in Note 4, other assets also include a deposit relating to funded reinsurance.
The authorized share capital of the Company is 100,000,000 shares of par value $1 each. This aggregate figure includes both common and preferred shares. As of September 30, 1999 and 1998, the following Common Shares have been issued and fully paid.
A holder of a common share is entitled to one vote for each share held. There are various restrictions on the ability of certain shareholders to dispose of their shares.
Series A Preferred Shares, have a par value of $1.00 per share and are entitled to a liquidation preference of $25.00 per share ($75,000 in total). Dividends are cumulative at 8.75% of the liquidation preference per annum (equivalent to an annual rate of $2.1875 per share). On or after March 27, 2007, these shares will be redeemable, in whole or in part, at the option of the Company at a redemption price of $25.00 per share.
premium of $1,850 (1998: $1,850) per annum. The net option premium is charged to additional paid in capital, net of the minority's interest of $430 (1998: $424). In 1998, $422 of the option premium was payable to affiliates of shareholders of the Company.
The Company has issued options to purchase Common Shares to certain shareholders and their affiliates and LaSalle Re has issued options to purchase Exchangeable Non-Voting Shares. These options became exercisable on October 1, 1996 and may be exercised until November 22, 2003.
During the year ended September 30, 1999, a total number of 909,000 options were exercised in cashless transactions resulting in the issuance of 653,274 Common Shares. In addition, 268 options were repurchased at a value of $7.97 per option. As at September 30, 1999, 563,078 options to purchase Exchangeable Non-Voting Shares of LaSalle Re were outstanding.
In consideration for entering into an employment agreement with LaSalle Re, the Company's former Chief Executive Officer and current Chairman of the Board (the "Executive") was granted a total of 340,872 Stock Appreciation Rights (SARs) during 1994. Upon exercise, the SARs entitle the Executive to a cash payment equal to the value of the SARs as of the exercise date. Alternatively, at the Company's sole discretion, the SARs will entitle the Executive to either (i) the number of Special Non-Voting Shares of LaSalle Re equal to the aggregate value of the SARs divided by the fair value of a Common Share at the exercise date, or (ii) upon payment of the base value for each SAR, the number of Special Non-Voting Shares of LaSalle Re equal to the number of SARs exercised.
Of the 466,436 options outstanding, 78,131 options are presently exercisable at $19.25, 88,812 are presently exercisable at $28.75 and 2,000 are presently exercisable at $31.63. The remaining options are not presently exercisable and have a weighted average vesting period of 3.74 years.
The Company applies APB Opinion 25 and Related Interpretations in accounting for the Incentive Plan. Accordingly, a compensation cost has been recognized based on the intrinsic value of the options at the measurement date. The net income and earnings per Common Share would have been reduced to the pro forma amounts indicated below had compensation cost been determined based on the fair value of the options at the grant date consistent with SFAS No 123:
Pursuant to the Employee Stock Purchase Plan (the "Plan"), during the year ended September 30, 1999 the Company issued 19,459 (1998: 12,687) Common Shares. Under the Plan, the Company is authorized to sell up to 150,000 Common Shares at a discount equivalent to 15% of the market price, to employees of the Company, related companies, directors of the Company and other persons providing services to those companies. The maximum investment by an employee under the payroll deduction component of the Plan is $50 per calendar year. In addition, certain employees are eligible to use up to 100% of their annual bonus to purchase Common Shares under the Plan. The Company has recorded the shares issued under the Plan at fair value. No compensation cost has been recorded on those shares issued to employees of CNA (Bermuda) Services Limited ("CNA Bermuda") as the cost was reimbursed pursuant to the service agreement with CNA Bermuda. Compensation cost of $59 (1998: $5; 1997: $Nil) has been recorded on those shares issued to employees and directors of the Company.
During the year ended September 30, 1999, LaSalle Re assumed premiums written of approximately $8,369 (1998: $16,917; 1997: $21,408) from a ceding company related to a shareholder of LaSalle Re. In addition, LaSalle Re assumed premiums totaling $25,266 (1998: $27,190; 1997: $28,450) through brokers related to a shareholder of LaSalle Re. Brokerage fees incurred in respect of this business were approximately $2,526 (1998: $2,719; 1997: $2,845). Reinsurance balances receivable at the balance sheet date include $(72) (1998: $8,729; 1997: $13,481) due (to) from such related parties.
LaSalle Re was party to an underwriting services agreement with CNA Bermuda during the period from the incorporation of LaSalle Re until September 30, 1998 at which date the agreement was terminated. Under this agreement, LaSalle Re granted CNA Bermuda the authority to provide underwriting services and to underwrite all classes of insurance and reinsurance as agents for LaSalle Re. LaSalle Re agreed to pay fees, during this period, to CNA Bermuda as follows:
Following the termination of the agreement, all personnel assigned to the Company by CNA Bermuda became employees of the Company and all underwriting functions performed by CNA Bermuda are now performed in-house.
1997 $3,300 and an underwriting profit commission equal to 2.75% of the aggregate net underwriting profit of LaSalle Re, where certain conditions were met.
The Company incurred $44 and $6,212 for administrative services for the year ended September 30, 1998 and 1997 respectively.
LaSalle Re was party to an agreement with Integrated Runoff Insurance Services Corporation ("IRISC") whereby IRISC performed certain claims handling services for LaSalle Re. The contract expired December 31, 1996. The Company incurred $16 for services provided for the year ended September 30, 1997.
The Company has two reportable segments: reinsurance operations and Lloyds. The reinsurance segment provides reinsurance for property catastrophe and for other lines of business which have similar characteristics, namely high severity and low frequency. The Lloyd's segment is written through LaSalle Re Corporate Capital Ltd., which provides capital support to selected Lloyd's syndicates. The lines of business written by the selected syndicates include direct and facultative property insurance, marine insurance and reinsurance, professional indemnity, directors and officers insurance and bankers blanket bond business. Data for the three years ended September 30, 1999, 1998 and 1997 was as follows:
The Company has rented space for its principal executive offices under lease agreements, which expire in 2001. Total rental expense for the year ended September 30, 1999 was approximately $328 (1998: $269; 1997: $Nil). Future minimum rental payments under the leases are expected to be as follows:
LaSalle Re has entered into a swap agreement to provide cash flow to a counterparty in the event of defined earthquake activity in Japan. Receipts to LaSalle Re which are accounted for as investment income are based on the notional amount of the swap. As at September 30, 1999, the Company had recorded $114 (1998: $58) of investment income. The contract exposes LaSalle Re to a maximum cash outflow of the same notional amount should the defined seismic event occur. The Company is also exposed to credit loss in the event of nonperformance by the counterparty to the remittance of interest payments as required by the swap. The Company does not anticipate nonperformance by the counterparty. At September 30, 1999, the total notional principal amount of the swap was $3,000 (1998: $3,000) which is supported by a letter of credit.
The Company may also enter into foreign exchange contracts to manage the exposures relating to known reinsurance losses denominated in foreign currencies. As at September 30, 1999 the Company had no outstanding foreign exchange contracts.
The line of credit contains various covenants, including limitations on incurring additional indebtedness; restrictions on the sale or lease of assets not in the ordinary course of business; maintenance of a ratio of consolidated total debt to consolidated tangible net worth of no more than 0.40 to 1.00; maintenance of tangible net worth at the end of each fiscal year of the greater of $300 million or 70% of net premiums written; maintenance of statutory capital of LaSalle Re of at least $400 million at the end of calendar year 1999 and thereafter; and maintenance of a ratio of net premiums written to statutory capital at the end of any fiscal quarter for the four fiscal quarters then ended of no more than 1.00 to 1.00 in each case. The Company may pay dividends and make other restricted payments so long as, after giving effect to such restricted payments, no event of default has occurred. Dividends and restricted payments are limited to 50% of consolidated net income for its immediately preceding fiscal year less amounts paid on the Series A preferred shares. As of September 30, 1999, there were no borrowings under the credit facility and the Company was in compliance with all covenants under the facility.
The Company's ability to pay dividends is subject to certain regulatory restrictions on the payment of dividends by LaSalle Re. Under the Act, LaSalle Re is required to prepare statutory financial statements and to file in Bermuda a statutory financial return together with the statutory financial statements. LaSalle Re is required to maintain certain measures of solvency and liquidity.
The statutory capital and surplus of LaSalle Re at September 30, 1999 was approximately $446,909 (1998: $506,000) and the minimum required statutory capital and surplus required by its license as a Class 4 insurer was $100,000 (1998: $100,000).