<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1996
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-27216
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LASALLE RE HOLDINGS LIMITED
(Exact name of registrant as specified in its charter)
Bermuda Not applicable
- ------------------------------- -----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
Continental Building, 25 Church Street, Hamilton HM12, Bermuda
--------------------------------------------------------------
(Address of principal executive offices)
441-292-3339
------------
(Registrant's Telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] Not applicable [_]
The number of the Registrant's Common Shares (par value $1.00 per share)
outstanding as of January 21, 1997 was 16,517,469
<PAGE>
LASALLE RE HOLDINGS LIMITED
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
PAGE
----
ITEM 1. Unaudited Consolidated Financial Statements.
Consolidated Balance Sheets
December 31, 1996 and September 30, 1996 ........................ 3
Consolidated Statements of Operations
Three Months ended December 31, 1996 and 1995 ................... 4
Consolidated Statements of Changes in Shareholders' Equity
Three Months ended December 31, 1996 and 1995 ................... 5
Consolidated Statements of Cash Flows
Three Months ended December 31, 1996 and 1995.................... 6
Notes to Unaudited Consolidated Financial Statements............. 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 8
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings................................................ 16
ITEM 2. Changes in Securities............................................ 16
ITEM 3. Defaults upon Senior Securities.................................. 16
ITEM 4. Submission of Matters to a Vote of Security Holders.............. 16
ITEM 5. Other information................................................ 16
ITEM 6. Exhibits and Reports on Form 8-K................................. 16
Signatures .............................................................. 17
Exhibit 11.1 ............................................................. 18
<PAGE>
LaSalle Re Holdings Limited
Consolidated Balance Sheets
(Expressed in thousands of United States Dollars, except share and per share
data)
Unaudited
<TABLE>
<CAPTION>
December 31, 1996 September 30, 1996
<S> <C> <C> (note 1)
Assets
Cash and cash equivalents $ 48,819 $ 46,990
Investments held as available for
sale at fair value (amortized cost
$501,940: $493,450) 503,230 490,514
Accrued investment income 15,150 14,211
Reinsurance balances receivable 45,845 70,625
Deferred acquisition costs 6,084 10,464
Other assets 1,713 1,570
-------- --------
Total assets $620,841 $634,374
======== ========
Liabilities
Reserve for losses and loss expenses $ 45,981 $ 49,875
Unearned premium reserve 45,008 82,894
Other liabilities 15,064 11,087
Dividend payable 11,727 3,600
-------- --------
Total liabilities 117,780 147,456
-------- --------
Minority Interest 137,462 133,810
-------- --------
Shareholders' equity
Share capital (authorized, 16,517 16,517
100,000,000, par value $1,
issued & outstanding, 16,517,111
par value $1)
Additional paid in capital 254,645 254,638
Unrealized gain/(loss) on
investments 935 (2,136)
Retained earnings 93,502 84,089
-------- --------
Total shareholders' equity 365,599 353,108
-------- --------
Total liabilities, minority interest
and shareholders' equity $620,841 $634,374
======== ========
See accompanying notes to unaudited consolidated financial statements.
3
</TABLE>
<PAGE>
LaSalle Re Holdings Limited
Consolidated Statements of Operations
(Expressed in thousands of United States Dollars, except share and per share
data)
Unaudited
================================================================================
Three Months Ended
Dec 31, 1996 Dec 31, 1995
Revenues (note 1)
Premiums written $5,237 $12,619
Change in unearned premiums 37,886 36,825
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Net premiums earned 43,123 49,444
Net investment income 8,148 6,172
Net realized gains on investments 31 31
---------- ----------
Total revenues 51,302 55,647
---------- ----------
Expenses
Losses and loss expenses incurred 10,837 15,881
Underwriting expenses 7,115 6,498
Operational expenses 3,304 2,441
Corporate expenses 839 853
Interest expense 67 52
Exchange loss 1,093 522
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Total expenses 23,255 26,247
---------- ----------
Income before minority interest 28,047 29,400
Minority interest 6,907 8,283
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Net income 21,140 21,117
========== ==========
Net income per common share $1.16 $1.23
========== ==========
Weighted average number of common shares
and common share equivalents outstanding 24,263,620 23,900,115
========== ==========
See accompanying notes to unaudited consolidated financial statements.
================================================================================
4
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LaSalle Re Holdings Limited
Consolidated Statements of Changes in Shareholders' Equity
(Expressed in thousands of United States Dollars, except share and per share
data)
Unaudited
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<TABLE>
<CAPTION>
Three Months Ended
Dec. 31, 1996 Dec. 31, 1995
(note 1)
<S> <C> <C>
Common shares par value $1
Balance at beginning of period $16,517 $16,517
Issue of shares 0 0
-------- --------
Balance at end of period $16,517 $16,517
======== ========
Additional paid in capital
Balance at beginning of period $254,638 $254,638
Issue of Shares-Employee Stock Purchase Plan 7 0
-------- --------
Balance at end of period $254,645 $254,638
======== ========
Unrealized loss on investments
Balance at beginning of period $(2,136) $(1,192)
Unrealized gain/(loss) in period 3,071 5,280
-------- --------
Balance at end of period $935 $4,088
======== ========
Retained earnings
Balance at beginning of period $84,089 $20,957
Net Income 21,140 21,117
Dividends (11,727) (18,169)
-------- --------
Balance at end of period $93,502 $23,905
======== ========
Total shareholders' equity $365,599 $299,148
======== ========
</TABLE>
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5
<PAGE>
LaSalle Re Holdings Limited
Consolidated Statements of Cash Flows
(Expressed in thousands of United States Dollars)
Unaudited
================================================================================
Three Months Ended
Dec 31, 1996 Dec 31, 1995
Cash flows from operating activities (note 1)
Net income $21,140 $21,117
Adjustments to reconcile net income to
cash provided by operating activities:
Minority interest in net income 6,907 8,283
Amortization of investment premium 517 1,149
Net gain on sale of investments (31) (31)
Unrealized loss/(gain) on foreign exchange 466 127
Changes in:
Reinsurance balances receivable 26,004 25,616
Deferred acquisition costs 4,380 4,386
Accrued investment income (939) (1,126)
Other assets (143) (569)
Reserve for losses and loss expenses (4,506) (5,572)
Unearned premium (37,886) (36,825)
Other liabilities 574 508
---------- ----------
Cash provided by operating activities 16,483 17,063
---------- ----------
Cash flows from investing activities
Purchase of investments (85,650) (23,259)
Net purchases of short term investments 0 0
Proceeds on the sale of marketable securities 53,671 34,433
Proceeds on the maturity of marketable securities 23,000 0
---------- ----------
Cash (applied to) provided by investing activities (8,979) 11,174
---------- ----------
Cash flows from financing activities
Issue of Shares 7 0
Dividends paid (5,682) (100,000)
---------- ----------
Cash applied to financing activities (5,675) (100,000)
---------- ----------
Net increase (decrease) in cash and cash equivalents 1,829 (71,763)
Cash and cash equivalents at beginning of period 46,990 82,360
---------- ----------
Cash and cash equivalents at end of period $48,819 $10,597
========== ==========
See accompanying notes to unaudited consolidated financial statements.
================================================================================
6
<PAGE>
LaSalle Re Holdings Limited
Notes to Unaudited Consolidated Financial Statements
1 General
The accompanying unaudited interim consolidated financial statements have been
prepared pursuant to the rules and regulations for reporting on Form 10-Q.
Accordingly, certain information and footnotes required by generally accepted
accounting principles for complete financial statements are not included herein.
The interim financial statements should be read in conjunction with LaSalle Re
Holdings Limited Annual Report dated September 30, 1996.
Unless the context otherwise requires, references herein to the "Company"
include LaSalle Re Holdings Limited and its subsidiary, LaSalle Re Limited
("LaSalle Re") and its subsidiaries LaSalle Re Corporate Capital Ltd. ("LaSalle
Re Corporate Capital") and LaSalle Re (Services) Limited.
Interim statements are subject to possible adjustments in connection with the
annual audit of the Company's accounts for the full year; in the Company's
opinion, all adjustments necessary for a fair presentation of these interim
statements have been included and are of a normal and recurring nature.
During the quarter ended December 31, 1996 the Company completed a Secondary
Offering of shares (the "Secondary"). In connection with the Secondary certain
founding shareholders of LaSalle Re (the "Founding Shareholders") exchanged some
of their exchangeable non-voting shares ("Exchangeable Non-Voting Shares") for
Common Shares of the Company (the "Exchange"). As a result of the Exchange the
Company increased its ownership of the outstanding capital stock of LaSalle Re
from 63% to 73%. The Company has continually owned 100% of the outstanding
voting stock of LaSalle Re. This transaction has been accounted for as if it
were a pooling of interests at historic cost, as the minority interest in
LaSalle Re is related to the controlling interest in the Company. All
comparatives have been restated to reflect the revised minority interest of 27%
in LaSalle Re as if the Exchange had occurred on the first day of the periods
presented.
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.
7
<PAGE>
LaSalle Re Holdings Limited
Management's Discussion and Analysis of Operations
and Financial Condition
The following is a discussion and analysis of the Company's financial condition
as of December 31, 1996 and the results of operations for the three months ended
December 31, 1996 and 1995. This discussion and analysis should be read in
conjunction with the attached unaudited consolidated financial statements and
notes thereto of the Company and the audited consolidated financial statements
and notes thereto contained in the Company's Annual Report dated September 30,
1996.
GENERAL
LaSalle Re was incorporated in Bermuda in October 1993 and initially capitalized
by several institutional and other investors with $373.1 million. It commenced
operations on November 22, 1993. LaSalle Re Holdings Limited was incorporated in
Bermuda in September 1995. During the quarter ended December 31, 1995, the
Company and LaSalle Re consummated an offer (the "Exchange Offer") pursuant to
which, among other things, the Founding Shareholders exchanged their capital
stock of LaSalle Re for common shares of the Company (the "Common Shares") and,
in certain circumstances, Exchangeable Non-Voting Shares of LaSalle Re. The
Exchangeable Non-Voting 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 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. Immediately following
the completion of the Offerings, LaSalle Re consummated the Redemption, pursuant
to which it redeemed from certain selling shareholders capital stock of LaSalle
Re at a price per share that was equivalent to the initial public offering price
per Common Share (less the underwriting discount and commissions).
In December 1996, the Company completed a Secondary Offering. In connection
with the Secondary certain Founding Shareholders of LaSalle Re exchanged some of
their Exchangeable Non-Voting Shares for Common Shares of the Company. As a
result of the Exchange, the Company increased its ownership of the outstanding
capital stock of LaSalle Re from 63% to 73%. The Company has continually owned
100% of the outstanding voting stock of LaSalle Re.
LaSalle Re Corporate Capital was incorporated in Bermuda to provide capital
support to selected Lloyd's of London syndicates. During the quarter ended
December 31, 1996 LaSalle Re Corporate Capital was accepted as a corporate
member of Lloyd's of London. Effective January 1, 1997 it is participating in
three syndicates which individually write the following: marine insurance and
reinsurance; professional indemnity, directors and officers insurance, bankers
blanket bond business; and direct and facultative business. LaSalle Re Corporate
Capital provides support to the syndicates through letters of credit.
The Company primarily writes property catastrophe reinsurance on a worldwide
basis through its subsidiary, LaSalle Re. Property catastrophe reinsurance
contracts cover unpredictable events such as hurricanes, windstorms, hailstorms,
earthquakes, fires, industrial explosions, freezes, riots, floods and other man-
made or natural disasters. Therefore, there can be significant volatility in the
Company's results from fiscal quarter to quarter and fiscal year to year. In
addition, as a result of the Company's limited operating and claims history, the
financial data included herein are
8
<PAGE>
LaSalle Re Holdings Limited
Management's Discussion and Analysis of Operations
and Financial Condition
- -------------------------------------------------------------------------------
not necessarily indicative of the financial condition or results of operations
of the Company in the future.
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
Net premiums written for the quarter ended December 31, 1996 were $5.2 million
compared to $12.6 million for the quarter ended December 31, 1995, a decrease of
58.7%. This decrease is primarily due to a reduction in new and renewal premiums
written in the quarter ended December 31, 1996 compared to the quarter ended
December 31, 1995. This reduction is due, in part, to the change in the renewal
date of a significant contract from December 1 to January 1. In addition, the
quarter ended December 31, 1995 included $3.0 million in respect of adjustments
to quota share contracts that were not recurring. Reinstatement premiums for the
quarter totaled $0.9 million and related primarily to Hurricane Fran. For the
quarter ended December 31, 1995 reinstatement premiums totaled $1.8 million and
related primarily to Hurricanes Luis, Marilyn and Opal. As the Company does not
purchase retrocessional protection there is no difference between gross and net
premiums written.
Net premiums earned for the quarter ended December 31, 1996 were $43.1 million
compared to $49.4 million for the same quarter in 1995. The 12.7% decrease is
the result of a reduction in premiums written from calendar year 1995 to
calendar year 1996. Premiums on property catastrophe excess of loss contracts
are earned on a pro rata basis over the period coverage is provided, which is
generally 12 months. Under proportional property catastrophe contracts, the
risks underlying the contracts incept throughout the policy period and premiums
generally are earned over 18 months.
Net investment income increased 30.6% to $8.1 million for the quarter ended
December 31, 1996 from $6.2 million for the quarter ended December 31, 1995.
Annualized investment income as a percentage of the average market value of
invested assets was 5.9% for the quarter ended December 31, 1996 compared to
5.5% for the quarter ended December 31, 1995. The increase in net investment
income was attributable to a larger average investment base and an increase in
investment yields compared to the quarter ended December 31, 1995.
Net realized gains on investments were $0.03 million during the quarter ended
December 31, 1996 compared to $0.03 million during the quarter ended December
31, 1995. In accordance with generally accepted accounting principles,
unrealized gains and losses on the Company's investment portfolio are not
recognized in the Company's consolidated results of operations but are reflected
as a separate component of shareholders' equity.
The following table sets forth the Company's combined ratios for the quarters
ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------------------------
<S> <C> <C>
Loss and loss expense ratio 25.1% 32.1%
Expense ratio 24.3% 18.1%
Combined ratio 49.4% 50.2%
</TABLE>
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9
<PAGE>
LaSalle Re Holdings Limited
Management's Discussion and Analysis of Operations
and Financial Condition
- -------------------------------------------------------------------------------
Losses and loss expenses incurred represents losses paid and reserves
established in respect of specific losses and loss expenses reported by cedents
and expected loss development and additions to incurred-but-not-reported loss
reserves.
The Company incurred losses and loss expenses of $10.8 million during the
quarter ended December 31, 1996 compared with $15.9 million during the quarter
ended December 31, 1995. The main components of losses and loss expenses
incurred during the quarter ended December 31, 1996 relate to development for
Hurricane Fran, winter storm activity in the United States, the United Kingdom
and Northern Europe and the triggering of annual aggregate loss covers. Losses
and loss expenses incurred in the quarter ended December 31, 1995 included
losses and loss expenses related to German hailstorms and Hurricane Opal. In
addition, there was a reserve strengthening for Hurricanes Luis and Marilyn.
The expense ratio includes underwriting expenses and operational expenses.
Underwriting expenses include brokerage, commissions, excise taxes and other
costs related to underwriting reinsurance contracts. Underwriting expenses as a
percentage of net earned premiums were 16.5% for the quarter ended December 31,
1996 compared to 13.1% for the quarter ended December 31, 1995. The increase is
primarily attributable to an increase in the level of fees accrued pursuant to
the Underwriting Services Agreement which as a percentage of net premiums earned
were 4.6% for the quarter ended December 31, 1996 and 3.3% for the quarter ended
December 31, 1995. In addition, the Company incurred significant profit
commissions on one program due to better than expected loss ratios, which
increased the underwriting expenses as a percentage of net earned premiums by
1.1%. Excluding this factor, the Companys brokerage, ceding and profit
commissions are comparable for the quarters ended December 31, 1996 and 1995 at
10.4% and 9.8% respectively.
Operational expenses as a percentage of earned premiums were 7.7% during the
quarter ended December 31, 1996 compared with 4.9% for the quarter ended
December 31, 1995. Of the increase, 1.5% is due to increased fees under the
Administrative Services Agreement between the Company and Aon Risk Consultants
(Bermuda) Ltd.
The Company incurred corporate expenses of $0.8 million during the quarter ended
December 31, 1996 compared to $0.9 million in the quarter ended December 31,
1995. Corporate expenses for the quarter ended December 31, 1996 include all
costs associated with the secondary public offering, except the underwriting
discount and the formation costs of LaSalle Re Corporate Capital. In the quarter
ended December 31, 1995 the corporate expenses related to the initial public
offering and the establishment of the credit facility. All corporate expenses
are charged to income in the period they are incurred.
Interest expense was $0.07 million during the quarter ended December 31, 1996
compared with $0.06 million in the quarter ended December 31, 1995. Interest
expense relates to the annual administration fee and the ongoing commitment fees
payable on the Company's credit facility. As at December 31, 1996, there were no
borrowings under this facility.
Foreign exchange losses in the quarter ended December 31, 1996 were $1.1 million
compared to $0.5 million in the quarter ended December 31, 1995. The losses in
the quarter ended December 31, 1996 resulted from an appreciation of sterling
against the United States dollar which significantly affected the closing of a
sterling contract, resulting in a loss to the Company. This, in connection with
the appreciation of sterling outstanding loss reserves, eliminated the
unrealized gains on the Companys sterling receivable balances. In 1995, the
losses were due to the strong performance of the United States dollar against
sterling which created unrealized losses on the Companys sterling receivable
balances.
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10
<PAGE>
LaSalle Re Holdings Limited
Management's Discussion and Analysis of Operations
and Financial Condition
- -------------------------------------------------------------------------------
The Company's net income per share was $1.16 for the quarter ended December 31,
1996 and $1.23 for the quarter ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
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.
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, 1978,
amendments thereto and related regulations of Bermuda, LaSalle Re is prohibited
from paying dividends of more than 25% of its opening statutory capital and
surplus unless it files an affidavit 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 which 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 more than 15%
without the approval of the Minister of Finance. LaSalle Re currently meets
these requirements. In addition, the payment of dividends by LaSalle Re is
subject to the rights of holders of the Exchangeable Non-Voting Shares to
receive a pro rata share of any dividend and to its need to maintain
shareholders equity adequate to support the level of LaSalle Re's insurance
operations.
Operating activities provided net cash of $16.5 million for the quarter ended
December 31, 1996 and $17.1 million for the quarter ended December 31, 1995.
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
December 31, 1996, 88.9% 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 portfolio was 2.41 years at December 31, 1996. At
December 31, 1996, the fair value of the Company's total investment portfolio,
including cash, was $552.0 million.
The Company has adopted the Statement of Financial Accounting Standard 115
("SFAS 115") to account for its marketable securities. In accordance with SFAS
115, all of the Company's investments are classified as "available for sale".
Under this classification, investments are recorded at fair market value and any
unrealized gains or losses are reported as a separate component of shareholders'
equity. The unrealized gain on the investment portfolio net of amounts
attributable to minority interest was $0.9 million at December 31, 1996 compared
to an unrealized loss of $1.9 million at September 30, 1996.
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11
<PAGE>
LaSalle Re Holdings Limited
Management's Discussion and Analysis of Operations
and Financial Condition
- -------------------------------------------------------------------------------
As of December 31, 1996, all of the securities held in the Company's investment
portfolio were fixed-income securities rated "A" or better by S&P or Moody's
Investors Services Inc. ("Moody's"). No single investment comprised more than 5%
of the overall portfolio.
Reinsurance balances receivable were $45.6 million at December 31, 1996 compared
to $70.6 million at September 30, 1995. The reduction is reflective of the
seasonality of premiums written with the Company traditionally writing a low
level of premiums in the quarter ended December 31 compared to other calendar
quarters. In addition, the Company collected cash on the reinsurance balances
receivable at September 30, 1996.
In November 1996, both the Company and LaSalle Re paid cash dividends of $0.25
per share to holders of their capital stock. In October 1996, the Company
adopted a dividend policy pursuant to which it intends to distribute in each
fiscal year 50% to 60% of the Companys net income from the prior fiscal year, if
any, on a quarterly basis. On December 20, 1996 the Company declared a dividend
of $0.71 per share payable on January 16, 1997. The actual amount and timing of
any future dividends is at the discretion of the Board and 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.
As part of its capital management strategy, the Company currently intends to
repurchase up to $50 million of Common Shares in open market or privately
negotiated transactions from time to time depending on market conditions and the
Companys capital and liquidity requirements. The Company expects that any share
repurchases will be funded by available cash.
In accordance with the terms of certain reinsurance contracts, the Company has
posted letters of credit in the amount of $18.9 million as of December 31, 1996
as compared to $15.5 million as of September 30, 1996. These letters of credit
support outstanding loss reserves and are secured by a lien on the Companys
investment portfolio equal to 115% of the amount of the outstanding letters of
credit.
At December 31, 1996, reserves for unpaid losses and loss expenses were $46.0
million. The Company has no material commitments for capital expenditures.
The Company has in place a $100 million committed line of credit from a
syndicate of banks. The proceeds from the credit facility may only be used to
buy preferred shares of LaSalle Re, which in turn may use the proceeds of such
purchase to meet current cash requirements. The facility matures December 1,
2000, and is secured by a pledge ("legal mortgage") of all the capital stock of
LaSalle Re held by the Company, including any preferred shares that may be
issued by LaSalle Re to the Company. The line of credit contains various
covenants, including: limitations on incurring additional indebtedness;
prohibitions of dividend and other restricted payments that would cause the
Company's tangible net worth (total shareholders' equity and minority interest)
to fall below $350 million for calendar year 1996, $375 million for calendar
years 1997 and 1998, and $400 million thereafter; restriction of dividends per
fiscal quarter to 12.5% of consolidated net income of the Company for the
immediately preceding fiscal year; 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 $250 million or 70% of net premiums written; maintenance of statutory capital
of LaSalle Re at the end of each fiscal year of at least $250 million; 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. In
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12
<PAGE>
LaSalle Re Holdings Limited
Management's Discussion and Analysis of Operations
and Financial Condition
- -------------------------------------------------------------------------------
order for the Company to pay dividends in excess of 50% of net
income, the Company would have to renegotiate certain terms of its credit
facility. As of December 31, 1996, the credit facility had not been utilized.
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.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
Section 27A of the United States Securities Act of 1933 as amended and Section
21E of the United States Securities Exchange Act of 1934 as amended. Forward-
looking statements are statements other than historical information or
statements of current condition. Some forward-looking statements may be
identified by use of terms such as "believes", "anticipates", "intends", or
"expects". These statements relate to the plans of the Company for future
operations, including the Company's policy to distribute as dividends in each
fiscal year 50% to 60% of the Company's net income from the prior fiscal year,
if any, on a quarterly basis. In light of the risks and uncertainties inherent
in all future projections, these statements should not be regarded as a
representation that the objectives will be achieved. Many factors could cause
actual results to differ materially from those in the forward-looking
statements, including, but not limited, to the following:
LIMITED OPERATING HISTORY
The Company commenced operations in November 1993 and accordingly has a limited
operating and loss history. The Company's limited operating and loss history may
make it more difficult for the Company to assess the risks it underwrites based
on its own historical loss experience and to project future results based on
past results.
VOLATILITY OF FINANCIAL RESULTS
Because the property catastrophe reinsurance business involves large aggregate
exposures to man-made and natural disasters, the Company expects that its claim
experience will be characterized by relatively low frequency and high severity.
The occurrence of losses from catastrophic events is likely to result in
substantial volatility in the Company's financial results for any fiscal quarter
or year and could have a material adverse effect on the Company's financial
condition and results of operations and its ability to write new business.
The Company's property catastrophe reinsurance contracts cover unpredictable
events such as hurricanes, windstorms, hailstorms, earthquakes, fires,
industrial explosions, freezes, riots, floods and other man-made or natural
disasters. The Company endeavors to manage its exposure to catastrophic events
by, among other things, limiting the amount of its exposure in each geographic
zone worldwide and implementing exposure limits and attachment points on each
property catastrophe reinsurance contract. Nonetheless, a single catastrophic
event could affect multiple geographic zones or the frequency or severity of
catastrophic events could exceed the Company's estimates, either of which could
have a material adverse effect on the Company's financial condition and results
of operations.
- -------------------------------------------------------------------------------
13
<PAGE>
LaSalle Re Holdings Limited
Management's Discussion and Analysis of Operations
and Financial Condition
- -------------------------------------------------------------------------------
While the property catastrophe reinsurance contracts represent the most volatile
aspect of the Company's portfolio, other lines of insurance and reinsurance may
be assumed by the Company. These lines have their own characteristics, which may
include, but not be limited to, a longer reporting period between the event and
the discovery of the event giving rise to a loss. For these lines of insurance
and reinsurance, the Company will post incurred but not reported loss reserves
using actuarial techniques. Actual losses and loss expenses, if any, may
deviate, perhaps substantially, from the incurred but not reported loss reserve.
There can be no assurance that the final loss settlements, if any, will not
exceed the Company's incurred but not reported loss reserve and have a material
adverse effect on the Company's financial condition and results of operations in
a particular period.
PREMIUM NEGOTIATIONS
The Company engages in negotiations with its clients and their brokers during
the underwriting process with respect to rates, attachment points, limits and
line size. Since all of these and other factors are subject to negotiation, any
estimated premiums provided by the Company could change materially as
negotiations are finalized and contracts are signed.
Premiums for proportional contracts are based on estimates provided to the
Company by the ceding company. These contracts are adjusted during the course of
the contract life as actual figures become available. There can be material
differences between estimated and actual results and these differences can have
a material impact on the Company's results of operations.
BUSINESS CONSIDERATIONS
The Company believes that an imbalance between the supply and demand for
property catastrophe reinsurance existed in 1993 and resulted in an increase in
premiums from pre-1993 levels. The Company believes that the numerous and severe
catastrophic events experienced worldwide from 1987 to 1992 resulted in large
losses for reinsurers and led to the withdrawal, in whole or in part, of certain
reinsurers from the property catastrophe market. At the same time, increased
scrutiny of catastrophe exposures and a general increase in insured property
values in catastrophe-exposed areas contributed to increased demand for property
catastrophe insurance and reinsurance. There can be no assurance that the
present level of demand will continue or that the present level of supply of
reinsurance will not increase as a result of increased capital provided by
future market entrants or by existing property catastrophe reinsurers, either of
which factors could materially impact the amount of premiums written by the
Company and have a material adverse effect on the Company's financial condition
and results of operations.
INVESTMENT INCOME
Investment income is a function of the composition of the investment portfolio
and the external interest rate environment. The composition of the investment
portfolio may change in response to the Company's operations, in particular loss
payments. The external interest rate environment, which is beyond the control of
the Company, can change at any time. Either of these factors alone or in
combination could materially impact the amount of investment income earned by
the Company.
RELIANCE ON Aon AND CNA; TRANSACTIONS WITH AFFILIATES; CONFLICTS OF INTEREST
The majority of the Company's day-to-day operations are performed by affiliates
of Aon Corporation ("Aon") and CNA Financial Corporation ("CNA") pursuant to
service agreements. The
- -------------------------------------------------------------------------------
14
<PAGE>
LaSalle Re Holdings Limited
Management's Discussion and Analysis of Operations
and Financial Condition
- -------------------------------------------------------------------------------
service agreements generally provide for underwriting, actuarial, information
technology, financial reporting and investment management. The service
agreements terminate on December 31, 1998 with a two year extension at the
option of the Company. While a number of other organizations offer the services
provided to the Company by affiliates of Aon and CNA, there can be no assurance
that if any of the service agreements were to terminate, the Company would be
able to successfully perform such services for itself or obtain such services
from persons which are not affiliated to CNA and Aon on substantially similar
terms. In particular, the termination of the Company's underwriting services
agreement or administrative services agreement could have a material adverse
effect on the Company.
Since inception, CNA has ceded to the Company a portion of its existing book of
property catastrophe reinsurance business. Such cessions assisted the Company in
establishing a geographic diversification of exposures. If CNA were to suddenly
cease ceding business to the Company, the geographical diversity of the
Company's portfolio of property catastrophe risks and the Company's results of
operations could be materially adversely affected.
LOSS RESERVES
It is the Company's policy to establish loss reserves for the settlement costs
of all loss and loss expenses incurred with respect to business written by it.
Loss reserves represent loss estimates derived from actuarial and statistical
projections of the Company's expectations of ultimate loss and loss expenses for
incurred losses at a given time. Under GAAP, the Company is not permitted to
establish loss reserves with respect to its property catastrophe reinsurance
until an event occurs that may give rise to a loss. As a result, only loss
reserves applicable to losses incurred up to the reporting date may be set
aside, with no allowance for the provision of a contingency reserve to account
for expected future losses. Reserve estimates by the Company may be inherently
less reliable than the reserve estimates of reinsurers with stable volumes of
business and an established loss history. Actual losses and loss expenses paid
may deviate, perhaps substantially, from the reserve estimates. There can be no
assurance that actual losses and loss expenses will not deviate substantially
from the reserves reflected in the Company's financial statements or that the
final loss settlements will not exceed the Company's loss reserve and have a
material adverse effect in the Company's financial condition and results of
operations in a particular period.
FOREIGN CURRENCY FLUCTUATIONS
The Company's financial statements are reported in US dollars. The Company
writes a significant amount of business in currencies other than US dollars and
is exposed to risks relating to fluctuations in foreign currency exchange rates.
These risks include exposure to changes in net cash inflows on non-US dollar
denominated insurance premiums and exposure to reinsurance losses denominated in
non-US currencies. The Company may from time to time experience significant
exchange gains or losses in currencies other than US dollars, which will affect
the Company's results of operations.
RATINGS
LaSalle Re is currently rated by A. M. Best Company, Inc. ("A. M. Best") and
Standard & Poor's Corporation ("S&P"). In April 1996, LaSalle Re received an
initial rating from A. M. Best of "A-" (Excellent). Prior to that time, LaSalle
Re was not rated by any rating agency. The rating received by LaSalle Re
represents the fourth highest in the rating scale used by A. M. Best. In
October 1996, LaSalle Re received an initial rating of its claims paying ability
from S&P of "A"
- -------------------------------------------------------------------------------
15
<PAGE>
LaSalle Re Holdings Limited
Management's Discussion and Analysis of Operations
and Financial Condition
- -------------------------------------------------------------------------------
(Good). The rating received by LaSalle Re represents the sixth highest in the
rating scale used by S&P. Such ratings are based on factors of concern to
cedents and brokers and are not directed toward the protection of investors.
Such ratings are neither a rating of securities nor a recommendation to buy,
hold or sell such securities. While the Company believes that its new ratings
will not be a major competitive advantage or disadvantage, some of the Company's
principal competitors have higher ratings than the Company. Insurance ratings
are one factor used by brokers and cedants as a means of assessing the financial
strength and quality of reinsurers. In addition, a cedant's own rating may be
adversely affected by the lack of a rating of its reinsurer. Therefore, a cedant
may elect to reinsure with a competitor of the Company that has a higher
insurance rating. Similarly, the lowering or loss of a rating in the future
could adversely affect the Company's ability to compete.
The Company undertakes no obligation to release publicly the results of any
future revisions it may make to forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
- -------------------------------------------------------------------------------
16
<PAGE>
LASALLE RE HOLDINGS LIMITED
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) Exhibits - The following exhibits are filed as part of this report on
Form 10-Q:
11.1 Statement Regarding Computation of Net Income Per Common Share.
27 Financial Data Schedule
(B) Reports on Form 8-K: The Registrant did not file any reports on Form
8-K during the three months ended December 31, 1996.
- -------------------------------------------------------------------------------
17
<PAGE>
- --------------------------------------------------------------------------------
LASALLE RE HOLDINGS LIMITED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 7, 1997 LASALLE RE HOLDINGS LIMITED
----------------
/s/ Andrew Cook
---------------
Name: Andrew Cook
Title: Chief Financial Officer &
Treasurer
Date: February 7, 1997 /s/ Victor H. Blake
---------------- -------------------
Name: Victor H. Blake
Title: Chairman, President & Chief
Executive Officer
Date: February 7, 1997 /s/ Andrew Cook
---------------- ---------------
Name: Andrew Cook
Title: Chief Financial Officer &
Treasurer
- --------------------------------------------------------------------------------
18
<PAGE>
- --------------------------------------------------------------------------------
Exhibit 11.1
LASALLE RE HOLDINGS LIMITED
STATEMENT OF COMPUTATION OF NET INCOME PER COMMON SHARE
(Expressed in thousands of United States Dollars
except for number of shares and earnings per share)
<TABLE>
<CAPTION>
Quarter
-------
Primary Fully Diluted
------- -------------
<S> <C> <C>
Net income before minority interest: (1) 28,047 28,047
========== ==========
Number of shares:
Weighted average shares outstanding 16,517,104 16,517,104
Exchangeable non-voting Shares (1) 6,210,180 6,210,180
Incremental shares of outstanding stock options (2) 1,479,092 1,581,471
Incremental shares of outstanding stock
appreciation rights (3) 57,244 63,715
------ -------
24,263,620 24,372,470
========== ==========
Earnings per Share: 1.16 1.15
</TABLE>
(1) The holders of Exchangeable Non-voting Shares in LaSalle Re Limited, which
represents the minority interest, generally can exchange these shares at
any time, on a one for one basis, for common shares in LaSalle Re Holdings
Limited. For purposes of the computation of net income per common share,
these shares have been treated as common share equivalents.
(2) As of December 31, 1996, the Company has 2,499,348 options outstanding. The
dilution would be the equivalent of approximately 1,479,092 shares for the
quarter using the treasury stock method, based on market price.
(3) As of December 31, 1996, the Company had granted 340,872 stock appreciation
rights. The dilution would be the equivalent of approximately 57,244 shares
for the quarter ended December 31, 1996, using the treasury stock method,
based on market price.
- --------------------------------------------------------------------------------
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 503,230
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 503,230
<CASH> 48,819
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 6,084
<TOTAL-ASSETS> 620,841
<POLICY-LOSSES> 45,981
<UNEARNED-PREMIUMS> 45,008
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 16,517
0
0
<OTHER-SE> 349,082
<TOTAL-LIABILITY-AND-EQUITY> 620,841
5,237
<INVESTMENT-INCOME> 8,148
<INVESTMENT-GAINS> 31
<OTHER-INCOME> 0
<BENEFITS> 10,837
<UNDERWRITING-AMORTIZATION> 7,115
<UNDERWRITING-OTHER> 4,210
<INCOME-PRETAX> 21,140
<INCOME-TAX> 0
<INCOME-CONTINUING> 21,140
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,140
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.15
<RESERVE-OPEN> 49,875
<PROVISION-CURRENT> 4,393
<PROVISION-PRIOR> 6,444
<PAYMENTS-CURRENT> 431
<PAYMENTS-PRIOR> 14,300
<RESERVE-CLOSE> 45,981
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
