The Company's executive offices, which are leased, are located in approximately 10,000 square feet of office space in Hamilton, Bermuda. Management believes the Company's current office space is adequate for its needs.
Expressed in thousands of United States Dollars, except per share and operational data. The 2000 year relates to December 31 year end and the 1999, 1998, 1997 and 1996 years relates to September 30 year end. The 1999 period relates to the quarter ended December 31, 1999.
For a discussion of the results of the Company's business segments see note (3) to the consolidated financial statements.
Operating income of $25.9 million in 2000 represented a $32.7 million increase over the operating loss of $6.8 million recorded in fiscal year 1999. This improvement was principally due to better underwriting results in 2000, which was due to a decrease in losses incurred. The effect of the improved underwriting performance primarily generated the increase in net income of $26.1 million.
$60.2 million on current year loss events and additions to prior years' reserves of $20.4 million. The underwriting results for the 1999 fiscal year included both losses of $82.5 million relating to current year events and additions to prior year loss reserves of $48.6 million.
The decrease in the combined ratio in 2000 compared to fiscal year 1999 resulted primarily from an improvement in the loss ratio due to lower catastrophe losses in the 2000 year and reduced additions to prior year loss reserves.
Net premiums earned in 2000 were $108.1 million compared to $126.6 million for the 1999 fiscal year. The decrease in net premiums earned is commensurate with the increase in amortized ceded premiums.
Claims and claims expenses for 2000 were $80.6 million, a decrease of $50.6 million compared to claims and claims expenses of $131.1 million for the 1999 fiscal year. The reduction in claims and claims expenses incurred was due to a reduced number of catastrophe losses in 2000 and a reduction in prior year reserve strengthening. Claims and claims expenses incurred in 2000 included $6.5 million of catastrophe losses relating to U.K. floods and an increase of $20.4 million in prior period occurrences, principally losses relating to two storms, Martin and Anatol, which hit Europe in late December 1999.
During the 1999 fiscal year, claims and claims expenses incurred included $25.6 million in losses from various catastrophes including Hurricane Floyd, the Australian hailstorm and Oklahoma tornadoes. During the same year, the Company recorded additions to prior year reserves of $14.0 million in respect of Hurricane Georges, which occurred in September 1998, due to an increase in market estimates of the damage caused by the hurricane. The Company also incurred $16.0 million of additional reserves in the 1999 fiscal year following the completion of an evaluation of its catastrophe reserving methodology. In addition, the Company recorded approximately $14.0 million of additional reserves in the 1999 fiscal year relating to contracts written in prior years, including contracts which had incidental extended warranty coverages.
Total underwriting expenses, comprising policy acquisition costs and underwriting expenses, for 2000 increased by $1.0 million compared to total underwriting expenses for the 1999 fiscal year. Policy acquisition costs as a percentage of net premiums earned were 19.7% for 2000 compared to 15.7% for the 1999 fiscal year. The increase in the ratio occurred principally because of an increase in the amount of amortized ceded premiums. As a percentage of gross premiums earned policy acquisition costs were 15.2% compared to 13.7%. The remaining increase of 1.5% was primarily due to the Company deriving more premiums from LaSalle Re Corporate Capital Ltd. which has a higher expense ratio than the rest of the business at 20%.
Net investment income for 2000 was $37.4 million compared to $33.8 million for the 1999 fiscal year. The principal reason for the increase in net investment income in 2000 was the increase in market yields.
The Company recorded foreign currency losses of $0.2 million for 2000, compared to foreign currency gains of $0.4 million for the 1999 fiscal year due to the decline in the value of European currencies against the US dollar.
Results of Operations--Years Ended September 30, 1999 and September 30, 1998
In fiscal year 1999, the Company reported a net loss of $9.4 million, a $54.6 million decrease from the net income of $45.2 million reported in the fiscal year 1998. In addition to the increase in claims activity affecting operating income, other factors affecting net income in the 1999 fiscal year were a reduction in net realized investment gains of $5.0 million offset by a reduction in minority interest of $16.3 million.
The underwriting loss of $38.1 million in the 1999 fiscal year represented a $65.6 million deterioration in underwriting results compared to underwriting income of $27.5 million in the 1998 fiscal year. The underwriting loss in the 1999 fiscal year resulted from both a decrease in premium writings and an increase in major catastrophic events compared to the 1998 fiscal year. The increase in the combined ratio was directly attributable to these two factors.
Gross premiums written for the 1999 fiscal year were $139.0 million compared to $155.3 million for the 1998 fiscal year, a decrease of $16.3 million or 10.5%. Details of gross premiums written are provided below.
Net premiums earned for the 1999 fiscal year were $126.6 million compared to $154.6 million for the 1998 fiscal year. The decline in net premiums earned of $28.0 million was commensurate with the decline in net premiums written.
Total underwriting expenses were $13.7 million for the 1999 fiscal year compared to underwriting expenses of $8.9 million for the 1998 fiscal year. The increase occurred principally because of the full inclusion of underwriters' compensation costs following the termination of the Company's underwriting services agreement with CNA on September 30, 1998.
As a holding company, the Company's assets consist primarily of all of the outstanding voting stock of LaSalle Re. The Company's cash flows depend primarily on dividends and other permitted payments from LaSalle Re and its subsidiaries.
Operating activities produced a net cash inflow of $10.7 million for the year ended December 31, 2000 and a net cash inflow of $19.2 million for the year ended September 30, 1999. Cash flows from operations in future years may differ substantially from net income. Cash flows are affected by loss payments, which, due to the nature of the reinsurance coverage provided by LaSalle Re, are generally expected to comprise large loss payments on a limited number of claims and can therefore fluctuate significantly from year to year. The irregular timing of these large loss payments can create significant variations in operating cash flows between periods. LaSalle Re funds these payments from cash flows from operations and sales of investments.
As a result of the potential for large loss payments, LaSalle Re maintains a substantial portion of its assets in cash and investments. As of December 31, 2000, 68.9% of its total assets were held in cash and investments, which totaled $499.7 million compared to 77.1% at December 31, 1999 or $559.6 million. The decrease in cash and investments of $59.9 million was primarily due to cash loan of $75.0 million made to Trenwick in calendar 2000.
The reduction in unearned premium by $10.0 million from December 31, 1999 to December 31, 2000 was caused by a reduction in the amount of gross premiums written in 2000 compared with fiscal 1999.
In accordance with the terms of certain reinsurance contracts, the Company has posted letters of credit in the amount of $20.5 million as of December 31, 2000 as compared to $22.6 million as of December 31, 1999 to support outstanding loss reserves. In connection with LaSalle Re Capital's support of three Lloyd's syndicates, the Company posted letters of credit in the amount of $14.6 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 (see note 12 to the consolidated financial statements). 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.
In connection with the Company's Business Combination with Trenwick, the Company cancelled its stand alone committed line of credit for $100 million effective September 27, 2000.
The Board of Directors and Shareholders of LaSalle Re Holdings Limited
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 December 31, 1999 and the results of their operations and their cash flows for the period from October 1, 1999 to December 31, 1999 in conformity with accounting principles generally accepted in the United States of America.
KPMG Chartered Accountants Hamilton, Bermuda October 26, 1998 Except as to Note 9, which is as of July 13, 2000
Years ended December 31, 2000 and 1999 (Expressed in thousands of United States Dollars, except share and per share data)
In connection with the Business Combination, the Company changed its year end from September 30 to December 31 to be consistent with Trenwick. Consequently, the data presented in these financial statements is for the twelve months ended December 31, 2000, the three months ended December 31, 1999 and the twelve months ended September 30, 1999 and 1998.
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. Following the Business Combination, the Company closed its UK representative office and ceased to actively participate as a corporate member in Lloyd's.
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 as they arise.
2. Business Combinations - LaSalle Re Holdings / Trenwick Group Inc. Combination
The following table summarizes the determination of the purchase price and its allocation:
The Lloyd's business segment was written in London, through LaSalle Re Corporate Capital Ltd., which provided capital support to selected Lloyd's syndicates. No further support will be provided beyond the 2000 underwriting year. The lines of business written by the selected syndicates included direct and facultative property insurance, marine insurance and reinsurance, professional indemnity, directors and officers insurance and bankers blanket bond business.
Policy acquisition costs primarily consist of commissions and brokerage expenses incurred at policy or contract issue date. These costs vary with, and are primarily related to, the acquisition of business and are deferred and amortized over the period in which the related premiums are earned. Deferred policy acquisition costs are reviewed periodically to determine that they do not exceed recoverable amounts after allowing for anticipated investment income.
The Company enters into reinsurance and retrocessional agreements to reduce its exposure to large, catastrophic losses. Reinsurance contracts which do not meet insurance accounting risk transfer requirements are classified as deposits. These deposits are treated as financing transactions and are credited or charged with interest income or expense according to contract terms. Cash flows from these deposit transactions are included as financing activities in the statement of cash flows. Reinsurance premiums are reported as prepaid reinsurance premiums and amortized over the contract period.
The Company purchased an excess of loss program to provide high level reinsurance coverage in excess of $75,000 for the first loss and, subject to a maximum aggregate recovery of $187,500 over a period of three years. Although the contract is a multi year contract, in the event of no loss it can be canceled at the end of each year.
The Company has classified all of its debt securities as "available for sale" and reported them at estimated fair value using quoted market prices or broker dealer quotes.
Investment income, consisting principally of interest, is recognized in income when earned, net of investment expenses. The amortization of premiums and accretion of discount for debt securities is computed utilizing the interest method.
The sources of net realized gains (losses) on sales of investments and their effect on net income were as follows:
The Company generally limits its investments in debt securities that are rated below investment grade, as these investments are subject to a higher degree of credit risk than investment grade securities. The Company closely monitors its below investment grade securities as well as the creditworthiness of the portfolio as a whole. The Company did not write down the value of any securities during the 2000 year, the 1999 period, the 1999 year or the 1998 year.
In the normal course of reinsurance operations, the Company's bankers have issued letters of credit totaling $20,472 at year end 2000 and $22,610 at period end 1999, in favor of ceding insurance companies to secure the Company's obligations under various reinsurance contracts. In connection with LaSalle Re Corporate Capital Ltd.'s support of three Lloyd's syndicates, the Company has posted letters of credit in the amount of $14,624 at year end 2000 and $15,820 at period end 1999. In addition, in connection with a swap agreement, the Company has posted a letter of credit of $3,000 at both year end 2000 and period end 1999. At year end 2000 and period end 1999, $43,810 and $47,645 respectively of fixed interest securities were pledged as collateral for these letters of credit.
Prior to the date of the Business Combination, the minority interest disclosed in the financial statements represented founding shareholders' ownership of exchangeable non-voting shares in LaSalle Re. These shares were held by certain founding shareholders who would otherwise have held, or caused 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 in LaSalle Re were 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 determined such exchange would cause actual or potential adverse tax consequences to the Company or any shareholder. The exchangeable non-voting shares at all times ranked as to assets, dividends and in all other respects on a parity with the common shares of LaSalle Re, except that they did not have the right to vote on any matters except as required by Bermuda law and in connection with certain actions by the Company.
Changes in the minority interest of LaSalle Re were 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 was calculated using the minority's ownership percentage as at the balance sheet date.
During the 2000 year, a total number of 27,270 options to purchase exchangeable non-voting shares were exercised for cash and 81,308 in cashless transactions resulting in the issuance of 80,678 common shares. In addition 454,500 exchangeable non-voting shares were repurchased at a value of $6.89. There were no outstanding options at year end 2000.
As at period end 1999, 563,078 options to purchase exchangeable non-voting shares of LaSalle Re were outstanding. During the 1999 year, a total number of 909,000 options were exercised in cashless transactions resulting in the issuance of 653,274 Common Shares. In addition, 268 options were repurchased at an exercise price of $7.97.
The Company entered into a multi-year Catastrophe Equity Put ("CatEPut") in 1997 which was subsequently renewed in July 1999. The CatEPut enabled the Company to exercise an option to raise up to $100 million of equity through the issuance of convertible preferred shares. Subsequent to the Business Combination, the publicly traded entity Trenwick assumed the benefits and obligations attaching to the CatEPut.
Other than with respect to its Lloyd's business, 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. LaSalle Re Corporate Capital Ltd. is a corporate member of Lloyd's. Pursuant to a Closing Agreement between Lloyd's and the IRS, LaSalle Re Corporate Capital Ltd. will be treated as engaged in business in the U.S. and is subject to U.S. corporate income tax on its net income from U.S. sources. The Company believes that currently there is no income tax liability.
The Company has a defined contribution plan for its Bermuda full-time employees; the plan is administered by a life insurance company. The Company contributes 10% of an eligible employee's total compensation to the plan; employee contributions can be made to the plan subject to a maximum of 10% of the employee's total compensation.
On September 27, 2000 following the Business Combination the Company's Employee Stock Purchase Plan (the ``Plan'') was cancelled. Under the Plan, the Company was authorized to sell up to 150,000 common shares at a discount equivalent to 15% of the market price, to employees of the Company, related companies, directors of the Company and other persons providing services to those companies. The maximum investment by an employee under the payroll deduction component of the Plan was $50 per calendar year. In addition, certain employees were eligible to use up to 100% of their annual bonus to purchase common shares under the Plan. 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. The number of shares issued under the Plan and the associated compensation expense are as follows:
In addition, common shares were awarded to individuals as of the fifth anniversary date of their hire. At the time of the award, the market value of the shares was recorded as a compensation expense. The number of shares awarded and the compensation expense are as follows:
(Amounts expressed in thousands of United States Dollars, except share and per share data)
All of the outstanding stock options granted were issued at fair market value on the date of grant; therefore no compensation expense has been recognized for these grants. Had the Company applied the fair value based method described above, net income and net income per share would have been the pro forma amounts indicated below:
As of period end 1999, year end 1999 and year end 1998, 5,172,400, 5,213,098 and 4,018,146 aggregate exchangeable non-voting shares, share options, stock appreciation rights and contingently issuable shares were excluded from the computation of diluted earnings per share because their effect would have been antidilutive on the calculation for the respective period.
Subsequent to the issuance of the Company's 1999 consolidated financial statements, the Company's management determined that, for purposes of the calculation of earnings per common share, the Exchangeable Non-Voting Shares of LaSalle Re were not considered to be outstanding Common Shares of the Company but, for purposes of calculating consolidated diluted EPS, were considered among the potential common shares of the Company. As a result, earnings per Common Share and earnings per Common Share -- assuming dilution -- were restated from the amounts previously reported.
The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties. Fair values have been estimated based upon quoted market prices or broker dealer quotes and may vary in the near term. Fair value disclosures with respect to debt securities are detailed in Note 5 to the financial statements.
The Company leases office space under a non-cancelable operating lease which expires in 2004. The Company's future minimum lease commitments at year end 2000 total $1,038 and are payable as follows: 2001, $317; 2002, $345; 2003, $347; 2004, $29.
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. For the 2000 year, the 1999 period, the 1999 year and the 1998 year, the Company had recorded investment income of $114, $29, $114 and $58 respectively. The contract exposes LaSalle Re to a maximum cash outflow of the same notional amount should the defined seismic event occur. The Company is also exposed to credit loss in the event of nonperformance by the counterparty to the remittance of interest payments as required by the swap. The Company does not anticipate nonperformance by the counterparty. At year end 2000 and period end 1999, the total notional principal amount of the swap is $3,000 (1999: $3,000) which is supported by a letter of credit (see Note 6).
At year end 2000 and period end 1999, the amounts receivable from CNA and Aon relating to these business relationships were $608 and $0, respectively. Amounts payable to CNA and Aon under these agreements at year end 2000 and period end 1999 were $1,416 and $5,935, respectively.
While the current underwriting support services agreement between the Company and CNA will not terminate until September 30, 2001, the Company has not utilized CNA's underwriting support services since the Business Combination and does not expect to utilize them in 2001. Consequently, all fees payable between September 30, 2000 and September 30, 2001 were accrued and expensed at the date of the Business Combination.
The investment management services agreement between LaSalle Re and Aon terminated at year end 2000.
In addition to the above, the Company had various transactions with its parent company, Trenwick.
At year end 2000, $75,000 was receivable from Trenwick with respect to a loan advanced during the year. Interest is paid on this loan at a rate equal to that generated by the Company's investment portfolio.
Also at year end 2000, $3,891 was receivable from Trenwick with respect to an intercompany account balance. This is repayable on demand and is interest free.