(2) Amounts have been derived from the Annual Statements of Life Reassurance, REALIC, Mission Life, Capitol Bankers Life, AML and TexasRe, as filed with insurance regulatory authorities and prepared in accordance with statutory accounting practices. For purposes of this presentation, capital and surplus are defined as statutory capital and surplus of Life Reassurance only, as its capital and surplus materially reflect that of Life Reassurance, REALIC and TexasRe, plus the Asset Valuation Reserve ("AVR") and the Interest Maintenance Reserve ("IMR") of Life Reassurance and REALIC.
Approximately 8% of Life Re's policy revenues were generated from group accident and health and special risk reinsurance in 1998. This business generally is written on an annual basis through reinsurance facilities which are managed by managing general underwriters. Generally the risks are shared by several reinsurers on a quota share basis. During 1997, Life Re withdrew from the group accident and health and special risk marketplace. Life Re previously had reduced or canceled certain pool participations, and effective January 1, 1997, retroceded 50% of its 1997 group accident and health and special risk reinsurance risks. For the year ended December 31, 1998, Life Re had $58.9 million of policy revenues related to group accident and health and special risk reinsurance, a reduction of 51% from the prior year. Life Re anticipates further declines of 80% in 1999 and policy revenues are expected to be minimal beyond 2000. Life Re expects no adverse financial impact from its withdrawal from this business.
The Management of Life Re Corporation has primary responsibility for preparing the accompanying financial statements and for their integrity and objectivity. The statements were prepared in accordance with generally accepted accounting principles applied on a consistent basis and are fairly stated in all material respects. The financial statements include amounts that are based on management's best estimates and judgements. Management also prepared the other information presented in the annual report and is responsible for its accuracy and consistency with the financial statements.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Life Re Corporation and subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
The accompanying notes are an integral component of the consolidated financial statements.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"), requires disclosure of pro forma information regarding net income and as if the Company had accounted for its employee stock options under the fair value method of SFAS 123. This method provides for employee stock options to be measured at fair value on the date of grant which is then amortized to expense over the options' vesting period. The fair value of the options for the pro forma disclosures which follow was estimated using a Black-Scholes option pricing model with the following assumptions for 1998, 1997 and 1996, respectively: risk-free interest rates ranging from 5.4% to 5.7%, 6.3% to 6.4% and 5.4% to 6.8%, respectively; dividend yields of 1.0% in each year; volatility factors of the expected market price of the Company's common stock of 20% in 1998 and 1997 and 25% in 1996; and weighted-average expected life of the options of 5 years.