Prior to October 1, 1997, ARC provided the Company with office space in Bermuda and London pursuant to the Administrative Services Agreement. With effect from October 1, 1997, the Administrative Services Agreement between the Company and ARC was terminated and the Company has agreed to assume the current leasing agreements.
Information with respect to this item may be found in the section captioned "Selected Financial Data" contained in the 1997 Annual Report.
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
Net investment income increased 23.5% to $33.1 million for the year ended September 30, 1997 from $26.8 million for the year ended September 30, 1996. This increase was principally attributable to an increase in yields during the year ended September 30, 1997 together with a larger average investment base compared to the year ended September 30, 1996. Annualized investment income as a percentage of the average market value of invested assets was 6.07% for year ended September 30, 1997 compared to 5.44% for the year ended September 30, 1996.
Net realized gains on investments were $0.6 million during the year ended September 30, 1997 compared to $0.4 net realized losses during the year ended September 30, 1996.
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 has 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.
Operational expenses increased 14.4% to $12.7 million for the year ended September 30, 1997 from $11.1 million for the year ended September 30, 1996. This increase was substantially due to additional executive compensation and expenses relating to the operation of LaSalle Re Capital.
Net premiums written decreased 5.8% to $190.2 million for the year ended September 30, 1996 from $201.9 million for the year ended September 30, 1995, as a result of a reduction in United States property catastrophe excess of loss premiums and adjustments on current and prior years' premium estimates. The overall decrease was mitigated by a 26.4% increase in premiums written in other lines of business to $22.1 million for the year ended September 30, 1996 from $17.4 million for the year ended September 30, 1995. Of the net premiums written for the years ended September 30, 1996 and 1995, $164.6 million and $178.5 million, respectively, were attributable to property catastrophe excess of loss and pro rata of property catastrophe reinsurance. Reinstatement
Losses and loss expenses incurred decreased 14.8% to $51.5 million for the year ended September 30, 1996 from $60.4 million for the year ended September 30, 1995. The Company was not affected by any significant catastrophic events in the year ended September 30, 1996, however, additional reserves of $14.2 million were established for Hurricanes Luis and Marilyn, which occurred in September 1995. Other losses emanated from the 1996 hurricane season and end of the 1995 hurricane season and various international storms. Losses and loss expenses incurred in the year ended September 30, 1995 included $27.3 million in respect of Hurricanes Luis and Marilyn, with the balance of the losses and loss expenses relating to a variety of worldwide incidents.
Interest expense was $0.2 million during the year ended September 30, 1996 compared to no expense in the year ended September 30, 1995. Interest expense in the year ended September 30, 1996 related to agency fees and ongoing commitment fees payable on the Company's credit facility. As at September 30, 1996, there were no borrowings under this credit facility.
At September 30, 1997, 74.3% of the securities held in the Company's investment portfolio were fixed-income securities rated "AA" or better and 99.8% 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 $80.0 million at September 30, 1997 compared to $70.6 million at September 30, 1996. This increase was due to the inclusion of $11.3 million relating to the business underwritten
by LaSalle Re Capital. Unearned premiums and deferred acquisition costs increased from $82.9 million and $10.5 million, respectively, at September 30, 1996 to $88.5 million and $11.9 million, respectively, at September 30, 1997, also as a result of business underwritten by LaSalle Re Capital.
Prepaid reinsurance premiums relate to the reinsurance coverage placed by the Company at January 1, 1997. There was no corresponding coverage at September 30, 1996.
Other liabilities increased from $11.1 million as at September 30, 1996 to $22.8 million as at September 30, 1997 as a result of the inclusion of $5.0 million relating to reinsurance balances payable, $2.0 million relating to the profit commission accrued pursuant to the Administrative Services Agreement with ARC and $2.4 million relating to provisions for profit commissions and no claims bonuses.
Effective October 1, 1997, the Administrative Services Agreement between the Company and ARC was terminated. All of the personnel formerly assigned to the Company by ARC have become employees of the Company and services formerly performed by ARC have been assumed by the Company. In connection with the termination of the agreement the Company has agreed to purchase all of the fixed assets owned by ARC and utilized by the Company and to assume the current leasing agreements.
In February 1997, in connection with the Preferred Offering, the Board confirmed the dividend policy pursuant to which the Company intends to distribute as dividends to holders of Common Shares and Exchangeable Non-Voting Shares in each fiscal year, 50% to 60% of the amount by which its net income, before minority interest, from the prior fiscal year exceeds the amount of dividends payable on preferred shares of the Company in the current fiscal year.
LaSalle Re Capital is committed to provide capital support for the 1998 underwriting year to the same syndicates as it supported in 1997. The level of support is not expected to change materially from that provided in 1997.
The Company's financial condition and results of operations are influenced by both internal and external forces. Loss payments, investment returns and premiums may be impacted by changing rates of inflation and other economic conditions. Cash flows from operations and the liquidity of its investment portfolio are, in the Company's opinion, adequate to meet the Company's expected cash requirements over the next 12 months.
YEARS ENDED SEPTEMBER 30, 1997 AND 1996 (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
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 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 the Company's share of LaSalle Re and its subsidiaries for all periods presented.
The consolidated financial statements include the financial statements of LaSalle Re Holdings Limited, LaSalle Re Limited and its subsidiaries, LaSalle Re (Services) Limited and LaSalle Re Corporate Capital Ltd. All significant inter-company balances and transactions have been eliminated in consolidation.
Minority interest represents the Founding Shareholders' ownership of the Exchangeable Non-Voting Shares. These shares are held by certain Founding Shareholders who would otherwise hold, or cause another shareholder to hold, directly, indirectly or constructively, in excess of 9.9% of the voting power of the Company or LaSalle Re. The Exchangeable Non-Voting Shares are exchangeable, at the option of the holder, for Common Shares of the Company, on a one-for-one basis, unless the board of directors of the Company determines such exchange may cause actual or potential adverse tax consequences to the Company or any shareholder. The Exchangeable Non-Voting Shares will at all times rank as to assets, dividends and in all other respects on a parity with the Common Shares of LaSalle Re, except that they do not have the right to vote on any matters except as required by Bermuda law and in connection with certain actions by the Company.
Decreases in the minority interest of LaSalle Re as a result of the exchange of such shares are therefore 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 balance sheet represents the minority's current proportionate share of LaSalle Re's net assets.
Acquisition costs, mainly brokerage, commissions, underwriting fees and excise taxes related to unearned premiums, are deferred and amortized to income over the period in which the premiums are earned. Future earned premiums and anticipated losses and loss adjustment expenses related to those premiums are considered in determining the recoverability of deferred acquisition costs. The Company does not consider anticipated future investment income in determining if a premium deficiency exists.
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 internally produced 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.
Amounts recoverable from reinsurers are estimated in a manner consistent with the underlying liabilities.
Liabilities are recorded without consideration of potential salvage or subrogation recoveries which are estimated to be immaterial. Such recoveries, when realized, are reflected as a reduction of losses incurred.
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. As such, they are reported at fair value with unrealized gains and losses reported as a separate component of shareholders' equity, net of amounts attributable to minority interests.
Realized gains or losses on sales of investments are determined on the basis of specific identification and are included as part of net investment income in the statements of operations.
The U.S. dollar is the Company's functional currency. Foreign currency monetary assets and liabilities are translated at exchange rates in effect at the balance sheet date. Unearned premiums and deferred acquisition costs are translated at historic exchange rates. Foreign currency revenues and expenses are translated at the exchange rates in effect at the date of the transaction. Exchange gains and losses are included in the determination of net income.
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.
Common Shares outstanding using the treasury stock method. Net income available to common shareholders is therefore before minority interest and after preferred dividends declared and in arrears. There is no material difference between primary and fully diluted net income per Common Share.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." These statements are effective for financial statements issued for periods beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components within a set of financial statements. This standard will be adopted in respect of the quarter ended March 31, 1998. Adoption of the standard will have no material effect on the earnings of the Company. SFAS No. 131 requires the Company to report financial and descriptive information about its reportable operating segments. The Company is currently reviewing the impact of this standard on its financial reporting.
Included in gross investment income for the year ended September 30, 1997 was a charge of $1,725 (1996: $3,280; 1995: $4,535) relating to the amortization of investment premium.
Net realized gains (losses) comprise $1,881 realized gains and $1,326 realized losses (1996: $1,242 and $1,660; 1995: $186 and $211, respectively).
Coverage for the first loss is substantially funded by way of annual and reinstatement premium obligations. Accordingly, this portion of the coverage has been recorded as a financing arrangement whereby the consideration paid, net of associated financing charges, is recorded as a deposit and included as part of other assets in the consolidated balance sheet. The deposit asset 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 $1,470 which are being amortized over the period of the contract using the interest method.
The Company is required to pay an additional reinsurance premium equal to 35% of any losses that are covered by the second loss event portion of the coverage.
The ceding of the reinsurance does not legally discharge the Company from its liability, 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 effect of reinsurance on premiums written and earned is as follows:
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, 1997 and 1996, the following shares have been issued and fully paid.
In March 1997, the Company issued 3,000,000 Series A Preferred Shares, par value $1.00 per share. These shares 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.
The number of SARs which can be exercised is dependent upon the internal rate of return achieved during the period from November 22, 1993 through to the date of exercise and ending on March 30, 2004 or, if earlier, two years after the Chief Executive Officer's termination of employment. SARs will not be exercisable unless a targeted internal rate of return of at least 18% per annum is achieved during the entire measurement period. The internal rate of return is based upon the financial performance of LaSalle Re from inception to November 27, 1995 and LaSalle Re Holdings Limited's consolidated performance from that date forward. As at September 30, 1997, the number of SARs vested is 68,174, which became exercisable on January 1, 1997. The remaining balance of SARs become exercisable on January 1 of each of 1998 or 1999. At September 30, 1997, the Company's internal rate of return has exceeded 18% and therefore the Company has charged an expense of $1,611 (1996 : $909; 1995 : $240).
Under the Incentive Plan, the options granted vest ratably in five annual installments over 5 years from the grant date, except for 85,218 options granted in 1997 which vest ratably in three annual installments over 3 years from the date of grant. The options can be exercised over a 10-year period, commencing on the vesting date. The exercise price of the options is subject to anti-dilution adjustments, which make the options granted under the plan variable. The Company has charged an expense of $716 (1996 : $81; 1995 : $Nil) relating to the compensation on these options. The following table is a summary of the options granted and outstanding during 1997 and 1996. No options were granted or outstanding in the year ended September 30, 1995.
Of the 446,436 options granted, 32,644 options are presently exercisable at an exercise price of $17.33, as adjusted for dividends. The remaining options are not presently exercisable and have a weighted average vesting period of 3.75 years.
In addition to the share purchase options discussed in Note 10 and the CatEPut transaction discussed in Note 9, LaSalle Re has entered into the following transactions and agreements with companies related to the Founding Shareholders.
During the year ended September 30, 1997, LaSalle Re assumed premiums written of approximately $21,408 (1996 : $24,045; 1995 : $28,836) from a ceding company related to a shareholder of LaSalle Re. In addition, LaSalle Re assumed premiums totalling $28,450 (1996 : $23,577; 1995 : $22,057) through brokers related to a shareholder of LaSalle Re. Brokerage fees incurred in respect of this business were approximately $2,845 (1996 : $2,357; 1995 : $2,206). All such transactions were undertaken on normal commercial terms. Reinsurance balances receivable at the balance sheet date include $13,481 (1996 : $11,700) due from such related parties.
LaSalle Re is party to an underwriting services agreement with CNA Bermuda. Under this agreement, LaSalle Re has 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 has agreed to pay fees to CNA Bermuda as follows:
(i) 1.5% of the gross written and collected premium per fiscal year; and
(ii) An underwriting profit commission equal to 4.0% of the aggregate net underwriting profits of LaSalle Re, where certain conditions are met.
The Company has incurred $2,526 (1996 : $3,081; 1995 : $3,411) for underwriting services provided for the year ended September 30, 1997, of which $2,903 (1996 : $2,482) was payable at September 30, 1997.
During the period from the incorporation of LaSalle Re until September 30, 1997, LaSalle Re was party to an agreement with ARC Bermuda. Under this agreement, ARC Bermuda performed certain actuarial and administrative services on behalf of the Company. The management fees payable to ARC Bermuda during this period were as follows:
The Company has incurred $1,057 (1996 : $1,028; 1995 : $987) for services provided for the year ended September 30, 1997, of which $215 (1996 : $272) was payable at September 30, 1997.
The Company has incurred $16 (1996 : $92; 1995 : $78) for services provided for the year ended September 30, 1997, of which $Nil (1996 : $Nil) was payable at September 30, 1997.
As at September 30, 1997, fees due to the Company were $188, of which $60 was receivable.
The Company has investment guidelines which restrict investments in securities below an "AA" grade rating to 20% of the total portfolio and only 10% of the total portfolio can be invested in "BBB" grade rating. During the year the Company amended the guidelines to allow up to $5,000 to be invested in catastrophe bonds. These bonds may carry a rating below "BBB". In addition, the guidelines restrict investments in a single issuer to no greater than 5% of the market value of the portfolio (except for U.S. and U.K. Government issues) and, with respect to country of issue, to no greater than 25% of the market value of the portfolio, except for U.S. and supernational borrowers.
Activity in liability for losses and loss expenses during the years ended September 30, 1997, 1996 and 1995 is summarized as follows:
The prior year development in 1997 relates primarily to an additional liability on Hurricane Fran, which occurred in September 1996. In addition, the Company has experienced late reporting on certain aggregate cover policies, with loss notifications being received in 1997 for contracts underwritten in prior years. The amounts incurred in respect of prior year losses in 1996 relate primarily to Hurricanes Luis and Marilyn, which occurred
The Company's ability to pay dividends is subject to certain regulatory restrictions on the payment of dividends by LaSalle Re. Under the Insurance Act 1978, amendments thereto and related regulations of Bermuda, 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 following table sets forth the Company's gross premiums written and the percentage thereof allocated to the zone of exposure for the years ended September 30, 1997, 1996 and 1995:
The Company does not consider itself to be engaged in a trade or business in the United States and accordingly does not expect to be subject to United States income taxes.