The Company's executive offices, which are leased, are located in Hamilton, Bermuda. In addition, the Company leases office space in London, England.
Information with respect to this item may be found in the section captioned "Selected Financial Data" contained in the 1998 Annual Report.
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 reduction in gross premiums written in the Company's core product, property catastrophe reinsurance, from $144.7 million for the year ended September 30, 1997 to $104.2 million, a decrease of 28.0%. Of this reduction approximately 60.0% related to the international property catastrophe book and 40.0% related to the United States property catastrophe book. The reduction was greater in the international property catastrophe book as the Company reduced its line sizes on certain 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 United States property catastrophe book related to a multi-year contract which was written in the year ended September 30, 1997 and hence 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 United States property catastrophe business respectively. This led to lower priced premiums in comparison to those written in the year ended September 30, 1997 and the non-renewal of contracts in certain cases where the Company considered the business to be under-priced. 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.
In addition, for the year ended September 30, 1997, an amount of $10.3 million relating to adjustment premiums, reinstatement premiums and no claims bonuses produced a reduction in gross premiums written. In the year 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, due to increased loss activity, to increased reinstatement premiums and lower no claims bonuses.
Other income was derived from a contract under which the Company provided certain reinsurance related services. This contract was not renewed January 1, 1998.
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 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.
Gross premiums written decreased 9.9% to $171.4 million for the year ended September 30, 1997 from $190.2 million for the year ended September 30, 1996. This decrease was due primarily to a reduction in international property catastrophe premiums to $73.1 million for the year ended September 30, 1997 from $88.9 million for the year ended September 30, 1996. This reduction, in turn, was a result of the competitive rate environment, which led to a reduction in the number of international property catastrophe contracts written. The Company experienced a 5.3% decrease in property catastrophe premiums written in the United States. The decline in gross premiums written by the Company was partially offset by an increase of $14.9 million in respect of other non-property catastrophe lines written. This increase primarily related to premiums written in the year ended September 30, 1997 by LaSalle Re Capital, which was accepted into Lloyd's with effect from January 1, 1997. Further, for the year ended September 30, 1997 compared to the year ended September 30, 1996, the Company experienced a reduction in reinstatement premiums of $6.2 million due to more favorable loss experience and an increase in overall negative premium adjustments of $7.6 million.
Premiums ceded for the year ended September 30, 1997 were $7.7 million compared to nil in the year ended September 30, 1996. This was primarily attributable to reinsurance protection purchased by LaSalle Re with effect from January 1, 1997 and to reinsurance purchased by LaSalle Re Capital. Ceded premiums amortized were $1.9 million for the year ended September 30, 1997 compared to nil in the year ended September 30, 1996.
Net premiums earned decreased 16.0% to $163.9 million for the year ended September 30, 1997 from $195.1 million for the year ended September 30, 1996. This decrease was principally due to the overall decrease in premiums written in the previous fiscal year and the year ended September 30, 1997.
Underwriting expenses decreased 4.8% from $27.3 million for the year ended September 30, 1996 to $26.0 million for the year ended September 30, 1997. As a percentage of net premiums earned, underwriting expenses were 15.9% for the year ended September 30, 1997 compared to 14.0% for the year ended September 30, 1996. Of this increase, 0.6% was due to the settlement of significant profit commissions on one program underwritten in previous fiscal years, which had better than expected loss ratios, and the provision for profit commission on contracts underwritten in the current fiscal year. In addition, the business underwritten by LaSalle Re Capital has higher underwriting costs, which increases the Company's percentage of underwriting expenses to net premiums earned. The Company experienced an increase in the fees and profit commission accrued under the Underwriting Services Agreement from 3.7% of net premiums earned for the year ended September 30, 1996 to 4.0% net premiums earned for the year ended September 30, 1997.
Corporate expenses were $1.8 million for the year ended September 30, 1997, compared with $0.9 million for the year ended September 30, 1996. Corporate expenses for the year ended September 30, 1997 included costs associated with the Secondary Offering, the Preferred Offering, the Tender Offer, the formation costs of LaSalle Re Capital, the Company's move to the New York Stock Exchange and fees incurred with respect to the CatEPut. In 1996, corporate expenses included costs associated with the initial public offering and all costs associated with the establishment of the Company's credit facility. Corporate expenses do not include the underwriting discounts associated with the various offerings. These costs were borne by the selling shareholders in the initial public offering and the Secondary Offering. In respect of the Preferred Offering, the underwriting discount was charged to additional paid in capital.
Foreign exchange losses in the year ended September 30, 1997 were $3.0 million compared to losses of $1.1 million in the year ended September 30, 1996. 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 since January 1, 1997 against the major foreign currencies in which the Company writes premiums. The losses for the year ended September 30, 1996 were the result of several factors, including the decrease in the value of yen and deutschmarks relative to the U.S. dollar. Additionally, the Company's sterling foreign exchange contracts precluded participation in the appreciation of sterling in the third fiscal quarter above the Company's average forward rate.
LaSalle Re's sources of funds consist of 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 an affidavit (at least 7 days before payment of such dividends) stating that it will continue to meet the required solvency margin and minimum liquidity ratio requirements and from declaring or paying any dividends without the approval of the Minister of Finance if it failed to meet its required margins in 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 total opening statutory capital by 15% or more without the approval of the Minister of Finance. LaSalle Re currently meets its requirements under the Insurance Act. 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 $96.0 million for the year ended September 30, 1998 and $98.6 million for the year ended September 30, 1997. 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 such 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 marketable securities. As of September 30, 1998, 80.1% of its total assets were held in cash and marketable securities. To further mitigate the uncertainty surrounding the amount and timing of potential liabilities and to minimize interest rate risk, LaSalle Re maintains a short average duration for its investment portfolio. The modified average duration of the investment portfolio, including cash, was 3.1 years at September 30, 1998. At September 30, 1998, the fair value of the Company's total investment portfolio, including cash, was $606.8 million.
Cash and cash equivalents increased from $54.8 million at September 30, 1997 to $85.3 million at September 30, 1998. The increase was due to proceeds received on the sale of bonds in late September, which
were not re-invested until post year-end. In addition the Company required funds for the payment of losses, primarily as a result of Hurricane Georges.
The Company has adopted the Statement of Financial Accounting Standard No. 115 ("SFAS 115") to account for its marketable securities with all of the Company's investments classified as "available for sale". Under this classification, investments are recorded at fair market value and any unrealized gains or losses are reported as "Accumulated other comprehensive income", a separate component of shareholders' equity. In accordance with SFAS No. 130 "Reporting of Comprehensive Income", the movement in unrealized gains or losses on these investments are disclosed as part of other comprehensive income. The unrealized gain on the investment portfolio net of amounts attributable to minority interest was $13.8 million at September 30, 1998 compared to an unrealized gain of $2.0 million at September 30, 1997.
Deferred acquisition costs increased from $11.9 million at September 30, 1997 to $13.4 million at September 30, 1998 whereas unearned premiums decreased from $88.5 million at September 30, 1997 to $83.1 million at September 30, 1998. Although the volume of gross premiums written has declined, there has been an increase in the average cost of the business written due to increased costs associated with proportional business and an increased level of LaSalle Re Capital business.
Prepaid reinsurance premiums have increased from $5.8 million at September 30, 1997 to $7.6 million at September 30, 1998. The increase primarily related to an increase in the level of the risk transfer portion of the Company's reinsurance program and to the level of reinsurance ceded by LaSalle Re Capital.
At September 30, 1998, the liability for unpaid losses and loss expenses was $97.9 million compared to $45.5 million at September 30, 1997. The increase of $52.4 million from September 30, 1997 was primarily due to the losses which occurred in the fourth quarter on which the Company made an estimate of its total liability, notably Hurricane Georges. In addition, the Company increased its reserves for unpaid losses on other lines of business and the business written by LaSalle Re Capital which, given the three-year accounting methodology, will not be paid until after the year 2000.
In accordance with the terms of certain reinsurance contracts written by the Company, the Company has posted letters of credit in the amount of $8.3 million as of September 30, 1998 as compared to $8.7 million as of September 30, 1997 to support outstanding loss reserves. In connection with LaSalle Re Capital's support of three Lloyd's syndicates, the Company has posted letters of credit in the amount of $16.6 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.
Based on the Company's net income for the year ended September 30, 1998, the Company currently expects to declare dividends of $0.375 per Common Share each quarter during the 1999 fiscal year. The actual amount and timing of any future Common Share dividends is at the discretion of the Board. The declaration and payment of any dividends is dependent upon the profits and financial requirements of the Company and other factors, including certain legal, regulatory and other restrictions. There can be no assurance that the Company's dividend policy will not change or that the Company will declare or pay any dividends in future periods.
LaSalle Re Capital is committed to provide capital support for the 1999 underwriting year to the same Lloyd's syndicates as it supported in 1998. The level of support is not expected to change materially from that provided in 1998. The Company has no material commitments for capital expenditures.
In February 1998, the Financial Accounting Standards Board issued SFAS No. 132 "Employers' Disclosures about Pensions and other Postretirement Benefits". This statement is effective for fiscal years beginning after December 15, 1997. As the provisions of the statement need not be applied to immaterial items, the Company considers it unlikely the statement will change its disclosures significantly.
The Company's goal is to ensure that its computer systems and the computer systems of third parties that are material to the Company's operations (such as the computer systems of service providers, suppliers and brokers) will be capable of correctly processing information relating to dates in and after the year 2000 ("Year 2000 compliant"). The Company does not believe that it faces any material Year 2000 compliance problems with respect to its non-information technology systems.
. The target date of March 31, 1999 for Year 2000 compliance is based on the December 1998 commencement and timely progress of the actual software conversions. Any delays in starting or implementing the conversion process will present a significant hindrance to completing the project by the target date.
. Information technology ("IT") resources to implement Year 2000 conversions are in short supply and the supply of external contractor resources is likely to decrease further as the Year 2000 approaches. This shortage of resources could escalate the cost of performing the conversion work beyond the current estimates. The Company intends to maximize internal IT resources by freezing all discretionary changes to applications during the Year 2000 conversion and does not anticipate that this will delay other significant IT projects.
. The Company has no control over the timing of Year 2000 compliance by external brokers and suppliers who interface with the Company. However, the Company has distributed a Year 2000 compliance questionnaire to its suppliers and brokers and, as of November 12, 1998, 63.5% of suppliers and 61.5% of brokers, including the Company's major suppliers and brokers, had adequately responded to the Company's questionnaire.
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996 (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
The Company was incorporated on September 20, 1995 under the laws of Bermuda to act as an investment holding company. LaSalle Re Limited ("LaSalle Re") was incorporated on October 26, 1993 under the laws of Bermuda and commenced operations on November 22, 1993. LaSalle Re is licensed under the Insurance Act, 1978 as amended by the Insurance Amendment Act, 1995 of Bermuda (the "Act") to write insurance business and operates as a multi-line reinsurance company, with emphasis on property catastrophe business.
On August 26, 1994, LaSalle Re incorporated a subsidiary company in the United Kingdom, LaSalle Re (Services) Limited, to act as a representative office for the Company. In addition, on June 11, 1996, LaSalle Re incorporated a subsidiary company in Bermuda, LaSalle Re Corporate Capital Ltd., to provide capital support to selected Lloyd's syndicates.
On November 27, 1995, the Company and certain Founding Shareholders also consummated an initial public offering of 4,312,500 Common Shares. Of these shares, 2,920,500 were sold by Founding Shareholders and 1,392,000 by the Company. The proceeds from the sale of 1,392,000 shares sold by the Company were used to enable LaSalle Re to redeem shares of its capital stock.
Premiums written are estimated by management based upon reports received from ceding companies. These estimates are adjusted where a contract contains a no claims bonus with a provision for the potential liability recorded simultaneously with the written premium. In addition, estimates are subject to review with adjustments recorded in the period in which the actual amounts are determined. Premiums on property catastrophe excess of loss contracts are earned on a pro rata basis over the period the coverage is provided, which is generally 12 months. Under pro rata property catastrophe contracts, the risks underlying the contracts incept throughout the policy period and premiums generally are earned over an 18 month period. Premiums written by LaSalle Re Corporate Capital Ltd. are derived from reports submitted to the Company by the syndicates. These premiums are earned in accordance with the related underlying risk attachment periods, which average between 18-24 months. Unearned premiums represent the portion of premiums written which are applicable to the unexpired terms of the policies in force.
In the normal course of business, the Company seeks to reduce its exposure to losses that may arise from catastrophes and cause unfavorable underwriting results by reinsuring certain levels of risks with other reinsurers.
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. The amount included as losses incurred in respect of business written by LaSalle Re Corporate Capital Ltd. is derived from an analysis of expected loss ratios.
Given the inherent nature of major catastrophic events, considerable uncertainty underlies the assumptions and associated estimated reserves for losses and loss expenses. These estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments, if any, are reflected in results of operations in the period in which they are determined and are accounted for as changes in estimates. Due to the inherent uncertainty in estimating the liability for losses and loss expenses, there can be no assurance that the ultimate liability will not exceed recorded amounts, with a resulting material effect on the Company. Based on the current assumptions used in calculating the liability, management believes that the Company's recorded amount is adequate to meet its future obligations.
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 are included in the determination of net income as they arise.
Other income relates to fees earned in respect of reinsurance services provided.
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 weighted average number of Common Shares outstanding. For the purposes of this calculation, the exchangeable non-voting shares of LaSalle Re ("Exchangeable Non-Voting Shares") are considered outstanding Common Shares of the Company due to the exchangeable nature of the shares. Earnings per Common Share assuming dilution is computed by dividing net income available to common shareholders by the sum of the weighted average number of Common Shares outstanding and the dilutive potential Common Shares outstanding during the period of calculation. Prior period calculations have been restated to give effect to SFAS 128.
In February 1998, the Financial Standards Board issued SFAS No. 132 "Employers' Disclosures about Pensions and other Postretirement Benefits". This statement is effective for fiscal years beginning after December 15, 1997. As the provisions of the statement need not be applied to immaterial items, the Company considers it unlikely the statement will change its disclosures significantly.
The change in net unrealized gains on investments, net of the minority's interest, that has been included as part of other comprehensive income for the year ended September 30, 1998 was an increase of $11,803 (1997 increase: $3,896; 1996 decrease: $822).
Reinsurance premiums ceded are primarily in respect of a multi-year excess of loss reinsurance program purchased by the Company, and various reinsurance protections purchased by LaSalle Re Corporate Capital Ltd. The excess of loss program provides coverage of $100,000 in excess of the first $100,000 of losses per occurrence for a first loss event and $100,000 excess of $100,000 per occurrence on the second loss event and $100,000 excess of $150,000 per occurrence on the third loss event over a three-year period ended December 31, 2000, subject to a maximum aggregate recovery of $300,000. The Company is required to pay reinstatement premiums to reinstate the second and third loss event coverages. The Company may participate on a co-insurance basis for the third loss event.
As of September 30, 1998, the Company had 1,873,782 options outstanding (1997: 2,550,537; 1996: 2,499,348) and had granted 340,872 (1997 and 1996: 340,872) stock appreciation rights.
As of September 30, 1998, 10,000 options granted with an exercise price of $31.63 have not been included in the above computation, as the options have an antidilutive effect on earnings per Common Share.
The following table summarizes the movement in minority interest during the years ended September 30, 1998 and 1997.
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, 1998 and 1997, the following Common Shares have been issued and fully paid.
Pursuant to the Employee Stock Purchase Plan (the "Plan") the Company issued 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 eligible employees of the Company and its subsidiaries, and other persons providing services to those companies. The maximum investment by an employee under the payroll deduction component of the Plan is $25 per calendar year. In addition, since September 25, 1997, certain employees have been eligible to use up to 25% of their annual bonus to purchase Common Shares under the bonus component of 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 $5 (1997: $Nil; 1996: $Nil) has been recorded on those shares issued to employees of LaSalle Re.
In addition, during the year ended September 30, 1998, the Company issued 10,000 shares in a private placement for a cash consideration of $360. The Company also repurchased 50,400 shares through open market purchases for a total purchase price of $1,560.
During the year ended September 30, 1997, the Company completed a secondary offering of Common Shares. In connection with the offering, certain Founding Shareholders of LaSalle Re exchanged 2,199,110 of their Exchangeable Non- Voting Shares for Common Shares of the Company.
Pursuant to a tender offer ("Tender Offer") made by the Company in May 1997, 2,163,538 Exchangeable Non-Voting Shares were exchanged for Common Shares of the Company and 95,679 options for Exchangeable Non-Voting Shares were exercised and exchanged for Common Shares of the Company. Following these exchanges, the Company purchased 3,703,703 Common Shares, for cancellation, at the tender price of $27.00. The par value of the shares canceled has been deducted from share capital. The additional paid in capital arising from the original subscription to shares, subject to the Tender Offer, has been eliminated from additional paid in capital and the difference between the subscription price received for the shares and the price paid in the Tender Offer has been deducted from retained earnings.
Series A Preferred Shares, have a par value $1.00 per share and are entitled to a liquidation preference of $25.00 per share. 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.
Effective July 1, 1997, the Company entered into a $100 million multi-year Catastrophe Equity Put ("CatEPut") option program. The CatEPut option enables the Company to sell up to $100 million of equity, through the issue of convertible Series B Preferred Shares to the option writers. The preferred shares can be redeemed by the Company at any time over the three years following their issue. In addition, the option writers can convert their preferred shares into Common Shares of the Company at any time after they have been outstanding for three years. Conversion is at the greater of the book value of the Company at the date of conversion or the market value of the Common Shares based on the 30-day trading average prior to conversion. The Company is obligated to pay an option premium of $2,350 per annum. The option premium is charged to additional paid in capital, net of the minority's interest of $538. Of the option premium, $422 is payable to affiliates of shareholders of the Company.
During the year ended September 30, 1998, a total number of 177,255 options were exercised in cashless transactions resulting in the issuance of 132,588 Common Shares. In addition, 454,500 options were exercised at an exercise price of $6.78, which resulted in the issuance of 454,500 Exchangeable Non- Voting Shares. As at September 30, 1998, LaSalle Re had 1,472,346 options to purchase Exchangeable Non-Voting Shares outstanding.
The value of each SAR equals the fair market value of a Common Share less the base value on the exercise date, subject to anti-dilution adjustments. The fair market value shall be determined by the board of directors of the Company, but shall be based on the market price of the Common Shares. The base value of each SAR at the time of issuance was $16.67, minus dividend adjustments. The current base value is $6.78.
Of the 401,436 options outstanding, 65,287 options are presently exercisable at an exercise price of $19.25 and 81,006 are presently exercisable at an exercise price of $28.75. The remaining options are not presently exercisable and have a weighted average vesting period of 2.64 years.
The weighted average fair value of options granted during 1998 is $12.21 (1997: $8.18; 1996: $5.85) per share. The fair value of the option grant in 1998 is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0% per annum; expected volatility of 20%; expected life of 7 1/2 years; and a risk free interest rate of 5.4%.
In addition to the CatEPut transaction discussed in Note 9 and share purchase options discussed in Note 10, LaSalle Re has entered into the following transactions and agreements with companies related to the Founding Shareholders.
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
Prior to October 1, 1998 but on or after January 1, 1996:
(i) 2.0% of the gross written and collected premium per fiscal year, up to premium of $150,000 plus 1.5% of the gross written and collected premium in excess of $150,000; and
The Company has incurred $2,535 (1997: $2,526; 1996: $3,081) for underwriting services provided for the year ended September 30, 1998, of which $3,658 (1997: $2,903) was payable at September 30, 1998.
The Company has incurred $1,059 (1997: $4,061; 1996: $4,140) for underwriting profit commission for the year ended September 30, 1998, of which $Nil (1997: $2,890) was payable at September 30, 1998.
Commencing October 1, 1998, LaSalle Re entered into an underwriting support services agreement with CNA Re Services Company ("CNA Services"). Under this Agreement, CNA Services will provide certain underwriting support functions to LaSalle Re but no longer underwrite insurance or reinsurance as agents for LaSalle Re.
LaSalle Re has agreed to pay fees to CNA Services as follows:
LaSalle Re was party to an agreement with Aon Risk Consultants (Bermuda) Ltd. ("ARC Bermuda") during the period from the incorporation of LaSalle Re until September 30, 1997 at which date the agreement was terminated. Under this agreement, ARC Bermuda performed certain actuarial and administrative services on behalf of the Company. The management fees payable to ARC Bermuda were as follows:
During the year ended September 30, 1998, the Company incurred $44 in respect of an adjustment to the profit commission accrued for the year ended September 30, 1997. The Company incurred $6,212 and $6,500 for administrative services for the years ended September 30, 1997 and 1996 respectively. As of September 30, 1998, $Nil was payable (1997: $1,987) in respect of services performed under the agreement.
LaSalle Re is party to an agreement with Aon Advisors (UK) Limited ("Aon UK") to provide investment management services. Fees are based on a flat fee structure. Prior to July 1997, fees were based on the average daily balance of the investment portfolio of the preceding quarter. The average daily balance was split into various bands, with fees calculated by applying a sliding scale of basis points to each band.
A broker, who is unrelated to the Company, arranged more than 17% of the Company's premiums written for the year ended September 30, 1998 (1997: 15%; 1996: 16%). Another broker, who is unrelated to the Company, arranged more than 9% of the Company's premiums written for the year ended September 30, 1998 (1997: 10%; 1996: 10%). A broker, who is related to the Company, arranged 17% of the Company's premiums written for the year ended September 30, 1998 (1997: 16%; 1996: 12%). Approximately 14% (1997: 8%; 1996: Nil) of the Company's gross premiums written are derived from its participation as a corporate member of Lloyd's.
Activity in liability for losses and loss expenses during the years ended September 30, 1998, 1997 and 1996 is summarized as follows:
The reserves for outstanding losses and loss expenses at September 30, 1998 include an amount of $25,000 in respect of claims arising from Hurricane Georges. Hurricane Georges occurred in late September and significantly impacted certain parts of the Caribbean and southern United States. Management believes that the amount of reserves established will be sufficient to provide for claims arising from this event. However, the event occurred close to the Company's fiscal year end and few loss notifications have been received to date. Given the nature of the event and its proximity to the year end, there is considerable uncertainty underlying this estimate.
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 at 375 basis points. As at September 30, 1998, the Company had recorded $58 (1997: $Nil) 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 counterparty. At September 30, 1998, the total notional principal amount of the swap was $3,000 which is supported by a letter of credit.
The Year 2000 issue faced by the Company revolves around the extent to which the Company's computer systems and third parties' computer systems (that are material to the Company's operations such as the computer systems of service providers, suppliers and brokers) are capable of correctly processing information relating to dates in and after the Year 2000. The Company has utilized the services of IBM to perform an assessment and strategy phase for its Year 2000 issue. This assessment has indicated that the Company's systems, applications and business interfaces have some degree of Year 2000 date problems. In addition, the assessment has developed a strategy and series of plans to implement solutions to the Company's Year 2000 problems. It is anticipated that 359 effort days will be required and estimated costs are currently budgeted at approximately $300 but are subject to change due to the cost of external resources. A target date of March 31, 1999 has been set for full Year 2000 compliance, however, this may not be achieved as there are a number of external factors which are beyond the Company's control. The Company intends to retain the services of IBM who will take responsibility for the co- ordination of the project, however, overall responsibility for Year 2000 compliance remains with the Company.
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 $300 million, increasing to $350 million at the end of calendar year 1998 and $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 are limited to 50% of consolidated net income for its immediately preceding fiscal year less amounts paid on the Series A preferred shares. In order for the Company to pay dividends in excess of 50% of consolidated net income, the Company would have to renegotiate certain terms of its credit facility. As of September 30, 1998, the credit facility had not been utilized 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. LaSalle Re is required to maintain certain measures of solvency and liquidity.
The statutory capital and surplus of LaSalle Re at September 30, 1998 was approximately $506,000 (1997: $490,000) and the minimum required statutory capital and surplus required by its license as a Class 4 insurer was $100,000 (1997: $100,000).
In this regard, the declaration of dividends from retained earnings and distributions from additional paid in capital is limited to the extent that the above requirements are met. At September 30, 1998, there were no restrictions on the distribution of retained earnings.
Under current Bermuda law, the Company is not required to pay any taxes in Bermuda on either income or capital gains. The Company has received an undertaking from the Minister of Finance in Bermuda that will exempt the Company from taxation until the year 2016 in the event of any such taxes being imposed.