<PAGE>
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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, 1998
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number 1-12823
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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
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(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 February 5, 1999 was 15,782,987.
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<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, 1998 and September 30,1998........................... 3
Consolidated Statements of Operations and Comprehensive Income
Three Months ended December 31, 1998 and 1997..................... 4
Consolidated Statements of Changes in Shareholders' Equity
Three Months ended December 31, 1998 and 1997..................... 5
Consolidated Statements of Cash Flows
Three Months ended December 31, 1998 and 1997..................... 6
Notes to Unaudited Consolidated Financial Statements.............. 7
ITEM 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition..................... 9
ITEM 2A. Quantitative and Qualitative Disclosure about Market Risk......... 16
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings................................................. 17
ITEM 2. Changes in Securities and Use of Proceeds......................... 17
ITEM 3. Defaults upon Senior Securities................................... 17
ITEM 4. Submission of Matters to a Vote of Security Holders............... 17
ITEM 5. Other information................................................. 17
ITEM 6. Exhibits and Reports on Form 8-K.................................. 17
Signatures................................................................. 18
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2
<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, 1998 September 30, 1998
<S> <C> <C>
Assets
Cash and cash equivalents $98,299 $85,281
Investments held as available for sale at fair value 481,827 521,476
(amortized cost $466,494 : $503,531)
Accrued investment income 11,985 11,056
Reinsurance balances receivable 66,977 86,779
Deferred acquisition costs 10,131 13,444
Prepaid reinsurance premiums 5,901 7,584
Other assets 35,637 31,670
--------- --------
Total assets $710,757 $757,290
======== ========
Liabilities
Reserve for losses and loss expenses $100,534 $97,942
Unearned premium reserve 57,134 83,119
Other liabilities 22,654 29,241
Dividend payable 5,913 11,366
--------- --------
Total liabilities 186,235 221,668
--------- --------
Minority interest 99,955 105,569
--------- --------
Shareholders' equity
Share capital authorised in the aggregate 100,000,000
shares, par value $1
Preferred shares
(issued & outstanding, 3,000,000 Series A
preferred shares par value $1,
liquidation preference $25 per share) 3,000 3,000
Common shares
(issued & outstanding, 15,780,483 : 15,178,791 par value $1) 15,780 15,179
Additional paid in capital 297,135 295,578
Accumulated other comprehensive income
Unrealized gain on investments 7,836 13,838
Retained earnings 100,816 102,458
--------- --------
Total shareholders' equity 424,567 430,053
--------- --------
Total liabilities, minority interest and
shareholders' equity $710,757 $757,290
======== ========
See accompanying notes to unaudited consolidated financial statements
</TABLE>
3
<PAGE>
LaSalle Re Holdings Limited
Consolidated Statements of Operations and Comprehensive Income
(Expressed in thousands of United States Dollars,
except share and per share data)
Unaudited
<TABLE>
<CAPTION>
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Three Months Ended
December 31, December 31,
1998 1997
<S> <C> <C>
Revenues
Gross premiums written $11,811 $9,624
Premiums ceded (983) 1,460
----------- -----------
Net premiums written 10,828 11,084
Change in unearned premiums 24,302 26,835
----------- -----------
Net premiums earned 35,130 37,919
Net investment income 7,954 8,452
Net realized gains on investments 2,192 404
Other income 0 63
----------- -----------
Total revenues 45,276 46,838
----------- -----------
Expenses
Losses and loss expenses incurred 30,586 8,698
Underwriting expenses 5,664 6,174
Operational expenses 2,436 2,090
Corporate expenses 71 0
Interest expense 465 563
Exchange gain (805) (366)
----------- -----------
Total expenses 38,417 17,159
----------- -----------
Income before minority interest 6,859 29,679
Minority interest 1,155 5,901
----------- -----------
Net income 5,704 23,778
Other comprehensive income
Unrealized gains (losses) on securities (3,945) 1,341
Less: reclassification adjustments
for gains (losses) included in
net income (2,057) (125)
----------- -----------
Total other comprehensive (loss) income (6,002) 1,216
----------- -----------
Comprehensive (loss) income ($298) $24,994
========== ==========
Earnings per common share $0.26 $1.47
========== ==========
Earnings per common share - assuming dilution $0.25 $1.34
========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
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4
<PAGE>
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
December 31, 1998 December 31, 1997
<S> <C> <C>
Preferred shares par value $1
Balance at beginning and end of period $3,000 $3,000
========== ===========
Common shares par value $1
Balance at beginning of period $15,179 $15,074
Exercise of share options 6 50
Issue of shares 660 10
Share repurchase (65) 0
---------- -----------
Balance at end of period $15,780 $15,134
========== ===========
Additional paid in capital
Balance at beginning of period $295,578 $299,964
Issue of shares 173 358
Compensation awards 254 0
Share repurchase (1,015) 0
Change in minority interest 2,145 0
---------- -----------
Balance at end of period $297,135 $300,322
========== ===========
Accumulated Other Comprehensive Income
Balance at beginning of period $13,838 $2,035
Unrealized loss in period (6,135) 1,216
Change in minority interest 133 0
---------- -----------
Balance at end of period $7,836 $3,251
========== ===========
Retained earnings
Balance at beginning of period $102,458 $105,153
Net Income 5,704 23,778
Common share dividends (5,916) (11,341)
Preferred share dividends (1,641) (1,641)
Exercise of share options (509) (50)
Share repurchase (272) 0
Change in minority interest 992 0
---------- -----------
Balance at end of period $100,816 $115,899
========== ===========
Total shareholders' equity $424,567 $437,606
========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
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5
<PAGE>
LaSalle Re Holdings Limited
Consolidated Statements of Cash Flows
(Expressed in thousands of United States Dollars)
Unaudited
<TABLE>
<CAPTION>
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Three Months Ended
December 31, 1998 December 31, 1997
<S> <C> <C>
Cash flows from operating activities
Net income $5,704 $ 23,778
Adjustments to reconcile net income to
cash provided by operating activities:
Minority interest in net income 1,155 5,901
Amortization of investment premium 190 245
Net (gain) loss on sale of investments (2,192) (404)
Unrealized (gain) loss on foreign exchange 10 (651)
Changes in
Reinsurance balances receivable 19,702 26,422
Deferred acquisition costs 3,313 3,053
Prepaid reinsurance premiums 1,682 2,163
Accrued investment income (929) (1,283)
Other assets (3,960) (3,268)
Reserve for losses and loss expenses 2,676 (527)
Unearned premium reserve (25,985) (29,329)
Other liabilities (4,894) 2,508
-------- ---------
Cash (applied to) provided by operating activities (3,528) 28,608
-------- ---------
Cash flows from investing activities
Purchase of investments (69,707) (162,706)
Proceeds on the sale of investments 103,478 133,114
Proceeds on the maturity of investments 0 10,000
-------- ---------
Cash (applied to) provided by investing activities 33,771 (19,592)
-------- ---------
Cash flows from financing activities
Issue of shares 1,165 368
Dividends paid (16,384) (15,197)
Share repurchases (1,346) 0
Option exercises (660) 0
-------- ---------
Cash applied to financing activities (17,225) (14,829)
-------- ---------
Net increase in cash and cash equivalents 13,018 (5,813)
Cash and cash equivalents at beginning of period 85,281 54,761
-------- ---------
Cash and cash equivalents at end of period $ 98,299 $ 48,948
======== =========
See accompanying notes to unaudited consolidated financial statements
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</TABLE>
6
<PAGE>
LaSalle Re Holdings Limited
Notes to Unaudited Consolidated Financial Statements
(Expressed in thousands of United States Dollars,
except share and per share data)
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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 the LaSalle
Re Holdings Limited Annual Report on Form 10-K for the fiscal year ended
September 30, 1998.
Interim statements are subject to possible adjustments in connection with the
annual audit of the Company's financial statements 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.
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 Capital") and LaSalle Re (Services) Limited. 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.
2. Earnings per Share
Earnings per share have been calculated in accordance with SFAS No. 128:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net income $ 5,704 $ 23,778
Add back: minority interest 1,155 5,901
Less: Series A preferred share dividends (1,641) (1,641)
----------- -----------
Income available to common shareholders $ 5,218 $ 28,038
----------- -----------
Weighted average number of shares outstanding:
Common shares 15,346,215 15,090,139
Exchangeable Non-Voting Shares 4,472,646 4,018,146
----------- -----------
19,818,861 19,108,285
Earnings per share $ 0.26 $ 1.47
=========== ===========
Income available to common shareholders $ 5,218 $ 28,038
----------- -----------
Weighted average number of common shares
outstanding: 19,818,861 19,108,285
Plus: incremental shares from assumed:
exercise of options 874,603 1,674,419
exercise of stock appreciation rights 65,818 79,653
contingently issuable shares 100,623 0
----------- -----------
Adjusted weighted average number of
common shares Outstanding 20,859,905 20,862,357
Earnings per share assuming dilution $ 0.25 $ 1.34
=========== ===========
</TABLE>
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7
<PAGE>
LaSalle Re Holdings Limited
Notes to Unaudited Consolidated Financial Statements
(Expressed in thousands of United States Dollars,
except share and per share data)
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As of December 31, 1998, the Company had 1,072,982 options outstanding and had
granted 340,872 stock appreciation rights. As of December 31, 1997, the Company
had 2,447,362 options outstanding and had granted 340,872 stock appreciation
rights.
5. Reinsurance
The effect of reinsurance on premiums written and earned is as follows:
<TABLE>
<CAPTION>
Three months ended Three months ended
December 31, 1998 December 31, 1997
------------------ ------------------
Written Earned Written Earned
------- ------ ------- ------
<S> <C> <C> <C> <C>
Assumed $ 11,811 $ 37,796 $ 9,624 $ 38,953
Ceded (983) (2,666) 1,460 (1,034)
---------- ---------- ---------- ----------
Net premiums $ 10,828 $ 35,130 $ 11,084 $ 37,919
========== ========== ========== ==========
</TABLE>
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8
<PAGE>
LaSalle Re Holdings Limited
Management's Discussion and Analysis of Results of Operations
And Financial Condition
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The following is a discussion and analysis of the Company's results of
operations for the three months ended December 31, 1998 and 1997 and financial
condition as of December 31, 1998. 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 on Form 10-K for the
fiscal year ended September 30, 1998.
General
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.
Through LaSalle Re Capital, the Company also provides capital support to
selected Lloyd's syndicates which individually write the following lines of
business: direct and facultative property insurance; marine reinsurance; and
professional indemnity, directors and officers insurance and bankers blanket
bond business. Due to the nature of the business written by the Company, the
financial data included herein is not necessarily indicative of the results of
operations or financial condition of the Company in the future.
Results of Operation--for the three months ended December 31, 1998 and 1997
Traditionally, premiums written in the quarter ended December 31 are
significantly lower than premiums written in other quarters in the fiscal year,
as no major renewal date occurs during the quarter. Gross premiums written for
the quarter ended December 31, 1998 were $11.8 million compared to $9.6 million
for the quarter ended December 31, 1997, an increase of 22.9%. The level of
gross premiums written on the Company's property catastrophe book for the
quarter ended December 31, 1998 was consistent with that written in the quarter
ended December 31, 1997. The increase of $2.2 million in gross premiums written
was due to a combination of factors. The Company experienced an increase of $1.0
million in premiums written in other lines of business. This was primarily due
to one contract, which provides casualty coverage. In respect of gross premiums
written by LaSalle Re Capital the Company experienced a reduction of $3.0
million which was caused by a change in underlying writing patterns. In addition
for the quarter ended December 31, 1998 the Company experienced an increase of
$4.2 million in positive premium adjustments and reinstatement premiums. The
increase in reinstatement premiums was due to the increase in the loss reserves
for Hurricane Georges.
Premiums ceded for the quarter ended December 31, 1998 were 1.0 million compared
to $(1.5) million in the quarter ended December 31, 1997. Given the current
pricing environment, the Company believes that purchasing reinsurance coverage
is an effective and efficient method of managing its exposure to potential loss
in certain areas of its book of business. The major policies purchased during
the quarter ended December 31, 1998 provided coverage against European
catastrophe losses and aviation losses. In addition, the level of reinsurance
recorded in respect of business written by LaSalle Re Capital has increased.
These factors were offset to an extent by the recognition of a $2.4 million
return premium provision on the multi-year excess of loss reinsurance program
compared to $1.7 million for the quarter ended December 31, 1997.
As a result of the above, net premiums written for the quarter ended December
31, 1998 were $10.8 million compared to $11.1 million for the quarter ended
December 31, 1997.
Net premiums earned decreased from $37.9 million for the quarter ended December
31, 1997 to $35.1 million for the same quarter in 1998. The decrease of 7.4% is
caused by two factors: a
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9
<PAGE>
LaSalle Re Holdings Limited
Management's Discussion and Analysis of Results of Operations
And Financial Condition
- --------------------------------------------------------------------------------
reduction in premiums written from calendar year 1997 to calendar year 1998 and
an increase in the level of ceded premiums amortized. For the quarter ended
December 31, 1998 ceded premiums amortized were $2.7 million compared to $1.0
million for the quarter ended December 31, 1997.
Net investment income decreased 5.9% to $8.0 million for the quarter ended
December 31, 1998 from $8.5 million for the quarter ended December 31, 1997.
Annualized investment income as a percentage of the average market value of
invested assets was 5.4% for the quarter ended December 31, 1998 compared to
6.0% for the quarter ended December 31, 1997. The decrease in net investment
income was attributable to a fall in market yields.
Net realized gains on investments were $2.2 million during the quarter ended
December 31, 1998 compared to $0.4 million during the quarter ended December 31,
1997. Due to the continued interest rate uncertainties, the Company reduced the
duration of the portfolio by selling longer dated bonds that produced realized
gains and moved the proceeds into short-term holdings.
The following table sets forth the Company's combined ratios for the quarters
ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Loss and loss expense ratio 87.1% 22.9%
Expense ratio 23.1% 21.8%
Combined ratio 110.2% 44.7%
</TABLE>
Losses and loss expenses incurred represents losses paid and reserves
established in respect of specific losses and loss expenses reported by cedants
and expected loss development and additions to incurred-but-not-reported loss
reserves.
The Company incurred losses and loss expenses of $30.6 million during the
quarter ended December 31, 1998 compared with $8.7 million during the quarter
ended December 31, 1997. In addition to the increase in loss and loss expenses
caused by additional earned premium, the Company experienced a deterioration in
claims experience. A significant component of losses and loss expenses incurred
during the quarter ended December 31, 1998 related to the strengthening of
reserves by $10 million in respect of Hurricane Georges. The market estimate of
the loss for the Hurricane, which occurred in late September 1998, has increased
since the Company set its initial reserves. In addition, the Company incurred
losses relating to events covered under its political risk contracts, a
satellite failure, various international and US storms and a loss on a risk
excess surplus treaty. The main components of losses and loss expenses incurred
during the quarter ended December 31, 1997 related primarily to losses incurred
by LaSalle Re Capital and various risk losses.
The expense ratio includes underwriting expenses and operational expenses.
Underwriting expenses include brokerage, commissions, excise taxes and other
costs related to underwriting reinsurance contracts.
Effective on October 1, 1998, the Underwriting Services Agreement, under which
CNA Bermuda had provided the Company with underwriting services, was terminated.
On that date, all of the personnel assigned to the Company by CNA Bermuda became
employees of the Company and the underwriting function formerly performed by CNA
Bermuda was assumed by the Company directly. In connection with the termination
of the Underwriting Services Agreement, the Company entered into an Underwriting
Support Services Agreement with CNA Re Services Company and CNA Bermuda. With
effect from October 1, 1998 LaSalle Re has agreed to pay an annual retainer of
$333 and an underwriting profit commission equal to 1.67% of the aggregate net
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10
<PAGE>
LaSalle Re Holdings Limited
Management's Discussion and Analysis of Results of Operations
And Financial Condition
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underwriting profits of LaSalle Re, where certain conditions are met. For the
1997 fiscal year LaSalle Re paid fees under the Underwriting Services Agreement
at a rate of 1.5% of the gross written and collected premium per fiscal year;
and an underwriting profit commission equal to 4.0% of the aggregate net
underwriting profits of LaSalle Re, where certain conditions were met.
Underwriting expenses as a percentage of net earned premiums were 16.1% for the
quarter ended December 31, 1998 compared to 16.3% for the quarter ended December
31, 1997. As a percentage of net premiums earned, fees accrued pursuant to the
Underwriting Support Services Agreement were 1.7% for the quarter ended December
31, 1998 compared to 4.4% in respect of the Underwriting Services Agreement for
the quarter ended December 31, 1997. This decrease, however, has been offset by
two factors. Following the transfer of the underwriters, the Company has
included their compensation cost in underwriting expenses, which has increased
the percentage of underwriting expenses to net premiums earned by 0.9%.
Separately, the Company's level of brokerage fees and ceding commissions
increased to 13.5% of net premiums earned for the quarter ended December 31,
1998 compared to 11.9% of net premiums earned for the quarter ended December 31,
1997. The increase was partly due to an increase in the level of amortized
reinsurance, which reduces net premiums earned and the effect of increased
earned premiums on the business underwritten by LaSalle Re Capital, whose
expense ratio was approximately 20%.
Operational expenses were $2.4 million or, as a percentage of net earned
premiums, 7.0% during the quarter ended December 31, 1998 compared with $2.1
million or, as a percentage of net earned premiums, 5.5% for the quarter ended
December 31, 1997. The Company experienced an overall increase of $0.1 million
with respect to compensation. The increase was due to the change in the
Underwriting Services Agreement, with the salaries of the underwriting support
staff and the chief operating officer for the quarter ended December 31, 1998
borne by the Company. In addition, during the quarter ended December 31, 1998,
the Company recorded $0.3 million related to the settlement of bonuses on the
1998 fiscal year. These items, however, were offset by a $0.8 million reduction
in the fair value of granted stock appreciation rights. This was due to a
reduction in the value of the share price during the quarter and a reduction in
the vesting percentage entitlement due to the non-achievement of the targeted
rate of return. In addition, during the quarter ended December 31, 1998, the
Company incurred additional charges of $0.3 million relating to LaSalle Re
Capital and costs associated with the hiring of new employees.
Corporate expenses for the quarter ended December 31, 1998 were $0.01 million
compared with $Nil in the quarter ended December 31, 1997.
Interest expense was $0.5 million during the quarter ended December 31, 1998
compared with $0.4 million in the quarter ended December 31, 1997. The interest
expense was primarily due to financing charges associated with the deposit
portion of LaSalle Re's ceded reinsurance contract. Other interest expenses
related to the ongoing commitment fees payable on the Company's credit facility.
As at December 31, 1998, there were no borrowings under this facility.
Foreign exchange gains in the quarter ended December 31, 1998 were $0.8 million
compared to gains of $0.4 million in the quarter ended December 31, 1997. The
Company experienced realized gains on transactions during the quarter and
unrealized gains on balances existing at the quarter end. The gains in the
quarter ended December 31, 1998 were principally due to the movement in the
value of the US dollar against sterling, with the value of sterling falling. In
the quarter ended December 31, 1997, the gains were principally due to an
increase in the value of the US dollar against sterling.
The Company's basic earnings per share were $0.26 for the quarter ended December
31, 1998 compared to $1.47 for the quarter ended December 31, 1997. Earnings per
share assuming
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11
<PAGE>
LaSalle Re Holdings Limited
Management's Discussion and Analysis of Results of Operations
And Financial Condition
- --------------------------------------------------------------------------------
dilution were $0.25 for the quarter ended December 31, 1998 compared to $1.34
for the quarter ended December 31, 1997.
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 and its
subsidiaries.
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 Bermuda 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 produced a net cash outflow of $3.5 million for the quarter
ended December 31, 1998 compared to a net cash inflow of $28.6 million for the
quarter ended December 31, 1997. The change was principally caused by the
reduced net income for the quarter ended December 31, 1998. 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.
Cash and cash equivalents increased from $85.3 million at September 30, 1997 to
$98.3 million at September 30, 1998. The increase was due to proceeds received
on the sale of bonds, which were re-invested in short-term holdings. In
addition, the Company required funds for the payment of losses, primarily as a
result of Hurricane Georges.
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,
1998, 81.6% of its total assets were held in cash and investments. 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 2.84 years at December 31, 1998. At December 31, 1998, the
fair value of the Company's total investment portfolio, including cash, was
$580.1 million.
At December 31, 1998, 86.2% of the securities held in the Company's investment
portfolio were fixed-income securities rated "AA" or better and 97.3% 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.
- --------------------------------------------------------------------------------
12
<PAGE>
LaSalle Re Holdings Limited
Management's Discussion and Analysis of Results of Operations
And Financial Condition
- --------------------------------------------------------------------------------
As at December 31, 1998, issuers from the Far East and Asia represented 4.2% of
the investment portfolio. These securities had a market value of $20.4 million
and an aggregate unrealized gain of $0.2 million. All of these securities had an
average credit rating of AAA as assigned by S&P or Moody's, as at December 31,
1998.
The Company has adopted the Statement of Financial Accounting Standard No. 115
("SFAS 115") to account for its marketable securities with all of the Company's
investments classified as "available for sale". Under this classification,
investments are recorded at fair market value and any unrealized gains or losses
are reported as "Accumulated other comprehensive income", a separate component
of shareholders' equity. In accordance with SFAS No. 130 "Reporting of
Comprehensive Income", the movement in unrealized gains or losses on these
investments are disclosed as part of other comprehensive income. The unrealized
gain on the investment portfolio net of amounts attributable to minority
interest was $7.8 million at December 31, 1998 compared to a gain of $13.8
million at September 30, 1998.
Reinsurance balances receivable were $67.0 million at December 31, 1998 compared
to $86.8 million at September 30, 1998. This reduction reflected 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.
This also explains the decrease in unearned premiums and deferred acquisition
costs from $83.1 million and $13.4 million, respectively, as at September 30,
1998 to $57.1 million and $10.1 million, respectively, at December 31, 1998.
Included within reinsurance balances receivable at December 31, 1998 was $30.9
million, which related to the business written by LaSalle Re Capital, compared
to $28.1 million as at September 30, 1998. Given the three-year accounting
methodology utilized by Lloyd's, these balances will not be received until after
the year 2000.
Prepaid reinsurance premiums relate to the reinsurance coverage placed by the
Company and LaSalle Re Capital.
Other assets increased from $31.7 million as at September 30, 1998 to $35.6
million as at December 31, 1998. This was primarily due to an increased level in
prepaid expenses following the payment of two three year contracts for
catastrophe modeling services and directors and officers insurance. In addition,
other assets at December 31, 1998 included the recognition of a further
quarterly return premium on the multi-year excess of loss reinsurance program.
At December 31, 1998, the liability for unpaid losses and loss expenses was
$100.5 million compared to $97.9 million at September 30, 1998. During the
quarter ended December 31, 1998 the Company paid out $12.9 million in respect of
Hurricane Georges and increased its reserves for unpaid losses and loss
expenses. Included in the reserve for unpaid losses and loss expenses is an
amount of $9.0 million in respect of the business underwritten by LaSalle Re
Capital which, given the three-year accounting methodology, will not be paid
until after the year 2000.
Other liabilities decreased from $29.2 million as at September 30, 1998 to $22.6
million as at December 31, 1998. The decrease of $6.5 million was primarily due
to the settlement of a quarterly deposit premium relating to the multi-year
excess of loss reinsurance program.
On October 1, 1998, the Company paid a dividend of $.5469 per share to holders
of record of Series A preferred shares on October 30, 1998. As of December 31,
1998, dividends due but not yet declared on the Series A preferred shares
amounted to $0.5 million. On December 18, 1998, the Company declared a common
share dividend of $0.375 per share to shareholders of record on December 31,
1998 payable on January 15, 1999. The actual amount and timing of any future
Common Share dividends is at the discretion of the Board. The declaration and
payment of any dividends is dependent upon the profits and financial
requirements of the Company and other factors, including certain legal,
regulatory and other restrictions. There can be no assurance that
- --------------------------------------------------------------------------------
13
<PAGE>
LaSalle Re Holdings Limited
Management's Discussion and Analysis of Results of Operations
And Financial Condition
- --------------------------------------------------------------------------------
the Company's dividend policy will not change or that the Company will declare
or pay any dividends in future periods.
In accordance with the terms of certain reinsurance contracts, the Company has
posted letters of credit in the amount of $17.6 million as compared to $8.3
million as of September 30, 1998 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 $16.2 million (equivalent to
(Pounds)9.8 million). In addition, in connection with a swap agreement, the
Company has posted a letter of credit of $3.0 million. All letters of credit are
secured by a lien on the Company's investment portfolio equal to 115% of the
amount of the outstanding letters of credit.
LaSalle Re Capital is committed to provide capital support for the 1999
underwriting year to the same syndicates as it supported in 1998. The level of
support is not expected to change materially from that provided in 1998. The
Company has no material commitments for capital expenditures.
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 that, 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;
restrictions on the sale or lease of assets not in the ordinary course of
business; maintenance of a ratio of consolidated total debt to consolidated
tangible net worth of no more than 0.40 to 1.00; maintenance of tangible net
worth at the end of each fiscal year of the greater of $300 million or 70% of
net premiums written; maintenance of statutory capital of LaSalle Re of at least
$350 million at the end of calendar year 1998 and $400 million at the end of
calendar year 1999 and thereafter; and maintenance of a ratio of net premiums
written to statutory capital at the end of any fiscal quarter for the four
fiscal quarters then ended of no more than 1.00 to 1.00 in each case. The
Company may pay dividends and make other restricted payments so long as, after
giving effect to such restricted payments, no event of default has occurred.
Dividends and restricted payments are limited to 50% of consolidated net income
for its immediately preceding fiscal year less amounts paid on the Series A
preferred shares. In order for the Company to pay dividends in excess of 50% of
consolidated net income, the Company would have to renegotiate certain terms of
its credit facility. As of September 30, 1998, the credit facility had not been
utilized.
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 3 months.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information." This
statement is effective for financial statements issued for periods beginning
after December 15, 1997 and requires the Company to report financial and
descriptive information about its reportable operating segments. This standard
will require additional disclosure and will be adopted by the Company for the
year ended September 30, 1999. This statement is not applicable to interim
periods in the first year of adoption.
In February 1998, the Financial Standards Board issued SFAS No. 132 "Employers'
Disclosures about Pensions and other Postretirement Benefits". This statement is
effective for fiscal years beginning after December 15, 1997. As the provisions
of the statement need not be applied to
- --------------------------------------------------------------------------------
14
<PAGE>
LaSalle Re Holdings Limited
Management's Discussion and Analysis of Results of Operations
And Financial Condition
- --------------------------------------------------------------------------------
immaterial items, the Company considers it unlikely the statement will change
its disclosures significantly.
In June 1998, the Financial Standards Board issued SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities". This statement is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. Given the
limited number of transactions currently entered into by the Company that are
covered by the Statement, the Company does not anticipate any significant
changes to its current financial reporting.
Year 2000 Issue
The Company's goal is to ensure that its computer systems and the computer
systems of third parties that are material to the Company's operations (such as
the computer systems of service providers, suppliers and brokers) will be ready
to process dates in and after the year 2000 ("Year 2000 ready"). The Company
does not believe that it faces any material Year 2000 issues with respect to its
non-information technology systems.
The Company engaged International Business Machines Corporation ("IBM") to
prepare an assessment and strategy report outlining the steps needed to make the
Company's computer systems Year 2000 ready. IBM's report indicated that certain
of the Company's systems, applications and business interfaces have Year 2000
date problems which will require an estimated 359 person-days to correct. The
Company has set a target date of March 31, 1999 for the completion of the
necessary corrections to the following systems: (i) the Senator underwriting
management system, (ii) the RSG reinsurance system, (iii) other software and
hardware components and infrastructure, (iv) enterprise-wide spreadsheet and
database files, (v) broker compliance and (vi) supplier compliance. The Company
has budgeted $0.3 million for the overall Year 2000 effort and has expensed
$0.06 million to date for the IBM assessment and strategy report. Given the
current level of estimated costs, it is not anticipated that the costs of
achieving Year 2000 readiness will have a material impact on the Company's
future results.
A number of risk factors, including, but not limited to, the following, could
affect the Company's plans to achieve Year 2000 readiness by March 31, 1999
within the current budget:
. The Company is currently completing its installation of the Senator
underwriting management system. The testing of the Year 2000 version of this
system is currently scheduled to be completed by the end of February 1999. To
provide for the contingency of the Year 2000 version of the Senator
underwriting management system not being in use by the end of the year, the
Company contracted with outside service providers to make the Company's
current RSG reinsurance system Year 2000 ready. The Company has tested the
RSG reinsurance system and has concluded that it is Year 2000 ready.
. Information technology ("IT") resources to implement Year 2000 conversions
are in short supply and the supply of external contractor resources is likely
to decrease further as the Year 2000 approaches. Currently, the Company
anticipates that it has sufficient resources to complete its Year 2000
project. The Company intends to maximize internal IT resources by freezing
all discretionary changes to applications during the Year 2000 conversion and
does not anticipate that this will delay other significant IT projects.
. The Company has no control over the timing of Year 2000 readiness by external
brokers and suppliers who interface with the Company. The Company has
distributed a Year 2000 questionnaire to its suppliers and brokers. As of
February 4, 1999, 63.5% of suppliers and 61.5% of brokers, including the
Company's major suppliers and brokers, had provided adequate response to this
questionnaire. The Company is following up with suppliers and
- --------------------------------------------------------------------------------
15
<PAGE>
LaSalle Re Holdings Limited
Management's Discussion and Analysis of Results of Operations
And Financial Condition
- --------------------------------------------------------------------------------
brokers who have not given adequate responses and intends in March 1999 to
make a decision as to whether or not to continue the business relationship
with those brokers and suppliers who have not responded to the Year 2000
readiness questionnaire.
The Company also assesses the effect of the Year 2000 issue on the business it
underwrites, considering the exposure to Year 2000 related losses on a contract
by contract basis at the time of underwriting.
The Company's worst case scenario would be the failure of the Company's
computerized reinsurance systems to process transactions. As a contingency plan,
the Company intends, prior to January 1, 2000, to extract a hard copy from its
computerized reinsurance systems of all information required to initiate a
manual system for processing transactions in the event of a system failure. The
Company believes that it would have the necessary resources to function on a
manual basis, if so required.
Quantitative and Qualitative Disclosure about Market Risk
The Company made disclosure relating to its market risks in the Form 10-K for
the year ended September 30, 1998. The Company believes there have been no
material changes with respect to its market risks during the quarter ended
December 31, 1998.
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 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 Series A preferred shares in the current fiscal year. 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: catastrophic events of unanticipated frequency or severity; changes
in the demand for, or supply of, property catastrophe reinsurance; actions of
competitors; changes in the Company's financial ratings; changes in insurance or
tax laws or regulations or governmental interpretations thereof; changes in
foreign economic conditions including fluctuations in currency rate or global
markets; a major decrease in the cession of business from CNA Financial
Corporation ("CNA"); any failure of the Company's computer systems or the
computer systems of third parties that are material to the Company's operations
(such as the computer systems of service providers, suppliers and brokers) to
process correctly information relating to dates in and after the year 2000. 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
<TABLE>
<CAPTION>
<S> <C>
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
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:
3.1 Memorandum of Association (Incorporated by reference to Exhibit
3.1 to Registration Statement on Form S-1 (File No. 33-97304)).
3.2 Bye-Laws (Incorporated by reference to Exhibit 3.2 to Form 10-Q
for the quarterly period ended March 31, 1998 (File No.
1-12823)).
27 Financial Data Schedule
(b) Reports on Form 8-K - No reports were filed during the quarter
December 31, 1998.
</TABLE>
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 5, 1999 LASALLE RE HOLDINGS LIMITED
---------------- /s/ Victor H. Blake
-------------------
Name: Victor H. Blake
Title: Chairman, President & Chief Executive
Officer
Date: February 5, 1999 /s/ Clare Moran
---------------- ---------------
Name: Clare Moran
Title: Principal Accounting Officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 481,827
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 481,827
<CASH> 98,299
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 10,131
<TOTAL-ASSETS> 710,757
<POLICY-LOSSES> 100,534
<UNEARNED-PREMIUMS> 57,134
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
3,000<F3>
<COMMON> 15,780
<OTHER-SE> 405,786
<TOTAL-LIABILITY-AND-EQUITY> 710,757<F1>
35,130
<INVESTMENT-INCOME> 7,954
<INVESTMENT-GAINS> 2,192
<OTHER-INCOME> 0
<BENEFITS> 30,586
<UNDERWRITING-AMORTIZATION> 5,664
<UNDERWRITING-OTHER> 2,167
<INCOME-PRETAX> 6,859
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,859
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,859
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.25
<RESERVE-OPEN> 0<F2>
<PROVISION-CURRENT> 0<F2>
<PROVISION-PRIOR> 0<F2>
<PAYMENTS-CURRENT> 0<F2>
<PAYMENTS-PRIOR> 0<F2>
<RESERVE-CLOSE> 0<F2>
<CUMULATIVE-DEFICIENCY> 0<F2>
<FN>
<F1> Includes minority interest.
<F2> Amounts for Securities Act Industry Guide 6 and Exchange Act Industry Guide
4 disclosures are not provided because the Company's loss reserves do not
exceed one-half of the consolidated common shareholders' equity.
<F3> Represents 3,000,000 Series A preferred shares, par value $1 liquidation
preference $25 per share.
</FN>
</TABLE>
