- ---------------------------------------- (1) Minority interest represents those shares in LaSalle Re Limited that were held as Exchangeable Non-Voting Shares. These shares were exchangeable, at the option of the holder, for Common Shares of the Company on a one-for-one basis. These shares were exchanged for Trenwick Common Shares on a one-for-one basis following the Business Combination. (2) Earnings per Common Share equals income before minority interest and after preferred dividends declared and in arrears divided by the adjusted weighted average number of Common Shares outstanding. (3) The adjusted weighted average number of Common Shares outstanding include Common Shares and the Exchangeable Non-Voting Shares and the dilutive effect of stock options and stock appreciation rights using the treasury stock method. (4) Return on average equity is calculated by dividing net income before minority interest and after preferred dividends declared and in arrears by the average of the opening and closing sum of common shareholders' equity and minority interest. The adjustment in respect of minority interest reflected the exchangeable nature of the Exchangeable Non-Voting Shares. (5) Book value per share is based on the sum of closing common shareholders' equity and minority interest divided by Common Shares and Exchangeable Non- Voting Shares.
The following discussion highlights material factors affecting the Company's results of operations for the three years ended December 31, 2000, September 30, 1999 and September 30, 1998. This discussion and analysis should be read in conjunction with the audited consolidated financial statements and notes thereto of the Company contained in Item 8 of this Form 10-K.
Year Ended December 31, 2000 and Year Ended September 30, 1999
The underwriting loss of $7.1 million in 2000 represented a $31.0 million decrease compared to the underwriting loss of $38.1 million in the 1999 fiscal year. The underwriting loss in 2000 included both losses of
The decrease in worldwide property catastrophe reinsurance gross premium writings for 2000 compared to the 1999 fiscal year resulted primarily from the non-renewal of certain accounts following a re-evaluation of LaSalle Re Limited's worldwide aggregate exposures. The most significant reduction in aggregate exposures came from a reduction in accounts covering European risks.
Interest expense was $1.2 million for 2000 a decrease of $0.5 million from the 1999 fiscal year. Interest expense included financing charges associated with the deposit portion of LaSalle Re's ceded reinsurance contract and other interest expenses related to the commitment fees payable on the Company's credit facility which was canceled effective the end of September, 2000.
Corporate expenses were $3.3 million for 2000 compared to $0.8 million for 1999. The increase in the expense was due to the write off of a new reinsurance system following the cancellation of the implementation. The Company had originally capitalized the system and intended to depreciate the asset once the system was in operation.
Worldwide property catastrophe reinsurance gross premiums written decreased $17.7 million for the 1999 fiscal year compared with the 1998 fiscal year. The decrease was primarily due to the non-renewal of underpriced business, a reduction in the line sizes written on both the Company's satellite business and on certain pro rata contracts.
Gross premiums written on Lloyd's syndicates increased by $1.3 million for the 1999 fiscal year compared to the 1998 fiscal year. The increase in gross premiums arose primarily from adjustments in premium estimates associated with the Company's Lloyd's business.
Premiums ceded for the 1999 fiscal year were $28.2 million compared to $7.8 million for the 1998 fiscal year. The increase in premiums ceded was primarily due to the purchase of a property catastrophe quota share arrangement with CNA Re, fronting arrangements and increased premiums ceded through its Lloyd's capital provider, LaSalle Re Corporate Capital Ltd. As a result of the above, net premiums written for the 1999 fiscal year were $110.8 million compared to $147.5 million for the 1998 fiscal year.
Policy acquisition costs as a percentage of net earned premiums were 15.6% for the 1999 fiscal year compared to 14.7% for the 1998 fiscal year. The increase in the policy acquisition expenses ratio in the 1999 fiscal year was due to an increase in non-catastrophe business which has a higher expense ratio and an increase in the amount of amortized ceded premiums which reduced net earned premiums.
Net investment income for the 1999 fiscal year was $33.8 million compared to $34.3 million for the same period in 1998.
Interest expense was $1.7 million for the 1999 fiscal year compared with $1.9 million for the 1998 fiscal year.
Net realized gains on investments were $0.6 million during the 1999 fiscal year compared to $5.6 million for the 1998 fiscal year. In each fiscal year, the gains were made as a result of security sales executed pursuant to a policy designed to protect the total returns on the portfolio.
The Company recorded foreign currency gains of $0.4 million for the fiscal year 1999 compared to $0.2 million for the fiscal year 1998. The foreign currency gains were principally due to unrealized gains primarily on British pound sterling reserves.
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.
Short term investments were $15.0 million at December 31, 2000 compared to $128.0 million at December 31, 1999. The decrease related to a change in the Company's investment strategy of reinvesting the proceeds of money market instruments, into longer maturity bonds following a change in the interest rate environment. The Company has
increased the modified average duration of the portfolio from 1.8 years at December 31, 1999 to 2.9 years at December 31, 2000.
As of December 31, 2000, 74.7% of the securities held in the Company's investment portfolio were fixed-income securities rated ``AA'' or better and 93.6% were fixed-income securities rated ``A'' or better by S&P or Moody's. No single investment comprised more than 5% of the overall portfolio.
Reinsurance balances receivable were $77.2 million at December 31, 2000 compared to $78.4 million at December 31, 1999. The decrease was due to the reduction in gross premiums written year on year. The decrease was partially offset by the inclusion of receivable balances of $57.3 million as at December 31, 2000 and $48.7 million as at December 31, 1999 relating to LaSalle Re Capital. Given the settlement methodology utilized by Lloyd's, these balances are not recieved until after three years following the start of the underwriting year.
Other assets decreased from $5.8 million as at December 31, 1999 to $2.6 million at December 31, 2000. The reduction was due to the elimination of the asset relating to the Company's cancelled reinsurance software.
The negative goodwill of $12.1 million relates to the Business Combination with Trenwick. The Company has adopted the push-down basis of accounting for the purchase of the minority interest in LaSalle Re in its financial statements.
The minority interest of $86.9 million at December 31, 1999 related to the exchangeable non-voting shares held in LaSalle Re Limited. Following the Company's Business Combination the exchangeable non-voting shares were exchanged for shares in Trenwick. Consequently, Trenwick now owns all shares in LaSalle Re Limited and LaSalle Re Holdings.
The Company paid a quarterly dividend of $0.5469 per share to holders of record of Series A preferred shares in December 1999 and March, June, September and December of 2000. As of December 31, 2000 dividends due but not yet declared on the Series A preferred shares amounted to $0.5 million.
Effective January 1, 2001, the Company implemented SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The adoption of SFAS No. 133 had no significant impact on the Company's consolidated financial statements.
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations and comprehensive income, of changes in shareholders' equity and of cash flows present fairly, in all material respects, the financial position of LaSalle Re Holdings Limited (a wholly owned subsidiary of Trenwick Group Ltd) and its subsidiaries at December 31, 2000 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. 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. We conducted our audit of these financial statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
We have audited the accompanying consolidated balance sheet of LaSalle Re Holdings Limited and subsidiaries as of December 31, 1999, and the related consolidated statements of operations and comprehensive loss, changes in shareholders' equity, and cash flows for the period from October 1, 1999 to December 31, 1999. 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.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for opinion.
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 ended in a conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 9, the accompanying 1999 financial statements were restated.
Hamilton, Bermuda DELOITTE & TOUCHE November 5, 1999 (July 13, 2000 as to Note 9)
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and the cash flows of LaSalle Re Holdings Limited and subsidiaries for the year ended September 30, 1998, in conformity with accounting principles generally accepted in the United States of America.
As disclosed in Note 9, the accompanying 1998 consolidated financial statements have been restated.
Year ended December 31, 2000, three months ended December 31, 1999 and years ended September 30, 1999 and 1998 (Expressed in thousands of United States Dollars, except share and per share data)
On September 27, 2000, the Company completed a business combination (the "Business Combination") with Trenwick Group Ltd. ("Trenwick") and Trenwick Group Inc. Under the terms of the Business Combination, the common shareholders of the Company, Trenwick Group, Trenwick Group Inc., and the minority shareholders of LaSalle Re Limited exchanged their shares on a one-for-one basis for shares in Trenwick. Following this transaction, the Company became a wholly owned subsidiary of Trenwick.
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.
The consolidated financial statements include the results of the Company and its subsidiaries for all periods presented. All significant inter-company balances and transactions have been eliminated on consolidation. These consolidated financial statements have been prepared in conformity with accounting principles that are generally accepted in the United States of America, sometimes referred to as U.S. GAAP. To prepare these financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Actual amounts will differ from these estimates.
As described above, following shareholder and regulatory approval, Trenwick issued 36,668,599 shares of its common stock on a one-for-one, tax-free basis to the former shareholders of the Company (15,634,394 shares), the minority shareholders of LaSalle Re, then a 77.5% owned subsidiary of the Company (4,797,649 shares), and the former shareholders of Trenwick Group Inc. (16,236,551 shares).
In its financial statements, the Company has adopted the push down basis of accounting for the purchase of the minority shareholding of LaSalle Re. The acquisition was accounted for using the purchase basis of accounting. Under the purchase basis of accounting, the purchase price was allocated to the identifiable assets acquired and liabilities assumed, based on their estimated fair values at the date of acquisition. The excess of the estimated fair value of those assets acquired over the purchase price was recorded as negative goodwill. The Company releases negative goodwill on a straight line basis over twenty five years.
The purchase was recorded in these financial statements by increasing common shareholders' equity by $75,611 through an addition to common shares and additional paid in capital.
The Company has two reportable segments: reinsurance operations and Lloyds. The reinsurance segment, which is written in Bermuda, provides reinsurance for property catastrophe and for other lines of business which have similar characteristics, namely high severity and low frequency. Gross Premiums written by product type are as follows:
Except as disclosed in note 12 to the consolidated financial statements, the Company has no customers who provide 10% or more of segmental revenues.
The following table sets forth the Company's gross premiums written and the percentage thereof allocated to the zone of exposure. It is not practicable to produce a geographic analysis by product revenues.
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 return premium 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.
Claims are recorded as incurred so as to match such costs with premiums over the contract periods. The amount provided for unpaid claims consists of any unpaid reported claims and estimates for incurred but not reported claims, net of salvage and subrogation. The estimates for claims incurred but not reported were developed based on historical claims experience and an actuarial evaluation of expected claims experience. Any adjustments to these estimates are reflected in income when known. The amount included as claims 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 claims and claims 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 claims and claims 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 estimating the liability, management believes that the Company's recorded amount is adequate to meet its future obligations.
The following table presents a reconciliation of the beginning and ending balances of net reserves for unpaid claims and claims expenses. The gross reserves for unpaid claims and claims expenses at period ends are as reflected in the balance sheet. The net reserves for unpaid claims and claims expenses are after deductions for reinsurance recoverable on unpaid claims and claims expenses, also as reflected in the balance sheet.
The prior year development for the 2000 year was due primarily to additional incurred claims from Storm Martin and Storm Anatol. Both of these storms occurred in December 1999. The increase in the Company's incurred claims followed an increase in the market estimate of the size of the insured claims. This was due to new information emerging following the elapse of time from the date of loss.
The favourable development on prior period claims reserves for the 1999 period related primarily to a reduction in the claims emanating from the Turkish earthquake. This was due to a reduction in the size of industry estimates relating to the loss which were used to originally estimate the Company's potential incurred loss.
The prior year development for the 1999 year 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 claim reserves totaling approximately $11,000 on three stop loss contracts. These claims arose out of two industry issues relating to extended warranty business and the deterioration of the Lloyds motor insurance market. This business produced loss emergence significantly higher than both the Company and the industry would have expected. These causes could not have been reasonably anticipated when incurred but not reported claims were previously established. Thirdly, as a result of higher than previously anticipated claims on international catastrophe business, the Company strengthened its incurred but not reported claims by approximately $16,000 to reflect this trend.
In the 1998 year, the prior year development related to a claim 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 claims. Following this notification the Company also established reserves for the 1997 renewal of this contract.
As at December 31, 2000, the Company's gross reserve for incurred but not reported claims was $83,911 compared to $112,541 at December 31, 1999.
In addition, the Company had a quota share arrangement which ceded a proportion of the Company's property catastrophe business to a founding shareholder (see Note 12). 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 ceding of the reinsurance does not legally discharge the Company from its liability to its reinsureds, since the Company is required to pay losses and bear collection risk if the reinsurers fail to meet their obligations under the reinsurance agreements.
The components of reinsurance recoverable balances, net at year end 2000 and period end 1999 are as follows:
There was no allowance for doubtful accounts on reinsurance recoverable balances at year end 2000 or period end 1999.
More information on concentration of brokers and assuming companies is included in Note 12.
Fair value and amortized cost of debt securities are as follows:
Gross and net unrealized gains and unrealized losses on debt securities are as follows:
The fair value and amortized cost on debt securities at year end 2000 mature as follows.
LASALLE RE HOLDINGS LIMITED Notes to Consolidated Financial Statements (Amounts expressed in thousands of United States Dollars, except share and per share data) Year ended December 31, 2000, Three Month Period ended December 31, 1999 And Years ended September 30, 1999 and 1998
Realized gains or losses on disposition of investments are determined on the basis of the specific identification method. When fair values decline for reasons other than changes in interest rates or other perceived temporary conditions, the security is written down to its net realizable value.
The components of the net unrealized investment gains (losses) included in accumulated other comprehensive income (loss) are as follows:
The Company had in place a $100 million committed line of credit from a syndicate of banks. The proceeds from the credit facility could only be used to buy preferred shares of LaSalle Re that, in turn, could use the proceeds of such purchase to meet current cash requirements. On September 27, 2000, following the Business Combination the facility was canceled.
The Company had 3,000,000 Series A preferred shares outstanding and fully paid at year end 2000 and period end 1999. The 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 aggregate). Dividends on the preferred shares, are cumulative at 8.75% of the liquidation preference per annum ($2.1875 per share). On or after March 27, 2007, the preferred shares may be redeemed, in whole or in part, at a redemption price of $25.00 per share, if before this date, the Company will have to pay a premium, which is dependent upon the date of redemption.
The authorized share capital of the Company is 100,000,000 shares of par value $1.00 each, which includes both common and preferred shares. At year end 2000 and period end 1999, the Company had outstanding issued and fully paid common shares of 20,432,043 and 15,603,652 respectively.
The Company is incorporated under the laws of Bermuda and is subject to Bermuda taxation. Under current Bermuda law, it is not required to pay any income or capital gains taxes in Bermuda. Furthermore, it has received an undertaking from the Bermuda Minister of Finance that, in the event of any income or capital gains taxes being imposed, they will be exempt from those taxes until 2016.
The Company's provisions for its employee retirement plans were as follows:
Shares of the Company issued in connection with employee stock purchase plans were recorded at fair value; the difference between fair value on the date of purchase and the discounted price offered under the plan was recorded as compensation expense.
Following the completion of the Business Combination on September 27, 2000 all outstanding restricted common stock in the Company was exchanged for common stock in Trenwick and the associated deferred compensation at that time was offset against additional paid in capital. The compensation expense associated with the restricted stock is as follows:
Stock appreciation rights (SAR's) granted by the Company entitled the holder to a cash payment equal to the value of the SAR's as of the exercise date. The value of each SAR equaled the fair market value of a common share of the Company less a base value. A liability was established for the exercise of the SAR's based upon the difference between the market value of the stock and the base value. This liability was adjusted each period based upon the market value of the Company's common shares.
The Company granted share options for a fixed number of common shares to employees with an exercise price equal to the market value of the shares at the date of grant. The current accounting standard establishes a fair value based method of accounting for stock-based compensation plans; however, it permits an entity to continue to apply the accounting provisions of a previous standard and make pro forma disclosures of net income and earnings per share, as if the fair market value based method had been applied. The Company continued to account for the share option grants in accordance with the previous standard and has included the pro forma disclosures required by the fair value based method below.
All options granted vested ratably in five annual installments over 5 years from the grant date and could be exercised over a 10-year period, commencing on the vesting date except for 85,218 options granted in 1997 which vested ratably in three annual installments from the date of grant. All outstanding options originally granted in 1995 and 1997, which totaled 295,436, automatically vested upon the completion of the Business Combination. For certain option grants, there was an anti-dilution provision, which awarded the option holder a number of shares of restricted stock in the event that a dividend, when added to the value of all cash dividends previously paid within the same fiscal year, exceeded 5% of the average book value per share for the prior four quarters. For the 2000 year and 1999 period, no shares of restricted stock were awarded. For the 1999 year, 46,459 shares of restricted stock were awarded.
For the 2000 year, the 1999 period and the 1999 and 1998 years, the Company has recorded compensation expense on these options of $317, $27, $565 and $374 respectively.
As of September 27, 2000, the Company became a wholly owned subsidiary of Trenwick. As the Company no longer has publicly held common stock, there is no requirement under SFAS No. 128 to prepare earnings per common share disclosures for the fiscal year ended December 31, 2000.
Year ended December 31, 2000, Three Month Period ended December 31, 1999 And Years ended September 30, 1999 and 1998
The carrying values of other financial instruments, including cash and cash equivalents, reinsurance balances receivable, accrued investment income, promissory note receivable and other liabilities, approximate their fair value due to the short term nature of the balances.
Total office rent expense for the 2000 year, the 1999 period, the 1999 year, and the 1998 year was $441, $227, $328 and $269, respectively.
During the 2000 year, the Company received 42% of its gross written premiums through two brokers of which Aon Reinsurance Agency accounted for 23% and Guy Carpenter accounted for 19%. During the 1999 period, the 1999 year and 1998 year, Aon Reinsurance Agency provided 4%, 18% and 17% and Guy Carpenter provided 40%, 20% and 17% of the Company's gross written premiums.
Loss of all or a substantial portion of the business provided by these brokers could have a material adverse effect on the business and operations of the Company. The Company does not believe, however, that the loss of such business would have a long-term adverse effect because of the Company's competitive position within the reinsurance market and the availability of business from other brokers. During the 2000 year, the Company derived 22% of its gross written premiums from its participation as a corporate member of Lloyds. The percentages for the 1999 period, the 1999 year and 1998 year were 32%, 16% and 14% respectively.
At year end 2000, 65% of the Company's net reinsurance recoverables on unpaid claims and claims expenses was recoverable from two principal retrocessionaires. These retrocessionaires are various Lloyd's syndicates, and Continental Casualty Company which had reinsurance recoverable balances liabilities of $2,605, and $1,578, respectively at year end 2000. These retrocessionaires are rated A or better by A.M. Best Company.
Included in reinsurance deposits in the balance sheet at year end 2000 is $27,422 and period end 1999 $32,742 which was deposited with Allianz.
Two of the Company's founding shareholders were CNA Financial and Aon. The Company had numerous business relationships with both companies, which are summarized below:
During the 2000 year, LaSalle Re purchased $13,000,000 Trenwick Capital Trust I Preferred stock. This Trust is a subsidiary of LaSalle Re's ultimate holding company. Income derived from the purchase of this investment amounted to $166 for the 2000 year. The market value of the investment at year end 2000 was $9,848 and the amortized cost was $9,905.
The 2000 year presented above is a calendar year: the 1999 and 1998 years are fiscal years ended September 30. The above information does not include results for the three month period ended December 31, 1999 as such information is presented separately in the statement of operations.