This report, together with other statements and information we may provide, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements may include, but are not limited to, projections of revenues, income or loss, capital expenditures, plans for future operations and financing needs or plans, as well as assumptions relating to the foregoing. The words “expect,” “project,” “estimate,” “predict,” “anticipate,” “believe,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements include these expressions. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results, performance and achievements could differ materially from those set forth in, contemplated by or underlying the forward-looking statements. We assume no obligation to update any forward-looking statement to reflect actual results or changes in or additions to the factors affecting such forward-looking statements.
On April 8, 2003, we received notice from the New York Stock Exchange that we did not satisfy its continued listing standards as of that date because the average closing price of our common shares had been below $1.00 for a 30 consecutive trading day period. If we cannot achieve a $1.00 average share price for 30 consecutive trading days within six months of the receipt of this notification, the NYSE will commence suspension and delisting procedures with respect to our common shares. In addition, the NYSE informed us that it is considering whether we continue to meet certain of its qualitative continued listing standards due to concerns over our financial condition. We can provide no assurance that we will be able to maintain the listing of our common shares on the NYSE. If delisted, the liquidity of our common shares likely would decrease to a point where our shareholders may experience difficulties selling, and may be unable to sell, any of our common shares. We cannot assure you that, if delisted, our common shares will qualify for trading in an over-the-counter bulletin board system, the pink sheets or any similar trading system, or that if they do qualify, a trading market in our common shares will develop. In addition, if our common shares are no longer listed on an appointed stock exchange, we would need to apply for an amendment to the previously granted consent of the Bermuda Monetary Authority to permit for the trading of our common shares after they are delisted. While we believe that we would be able to obtain such permission so long as we are regulated by the SEC, we cannot assure you that we will be able to secure such permission or that we can predict what conditions the Authority may impose in granting such permission. If we cannot secure such permission, any transfers of our common shares between persons regarded as non-resident in Bermuda for exchange control purposes would require specific prior approval under Bermuda law. Please see Item 1. Business - Regulation for more information.
Currently, our financial strength ratings are at the level where certain of these agreements can be recaptured. Although we attempt to manage our investment portfolio so that we have sufficient liquidity to support anticipated withdrawals and recaptures, we cannot assure you that we will be able to dispose of assets on favorable terms in the future to support withdrawals and recaptures.
While we plan to continue to receive premiums and pay claims under our remaining reinsurance treaties, we have ceased to write new reinsurance agreements and have notified our existing clients that we will not be accepting any new business under existing treaties on their current terms. We do not anticipate resuming to write new reinsurance agreements in the foreseeable future. Our plans for the future involve attempting to meet or reduce the additional collateral requirements of our ceding companies by continuing to negotiate the recapture, retrocession, novation or sale of certain of our reinsurance agreements, but there can be no assurance that we will be able to negotiate favorable terms for such transaction. We have also instituted substantial premium rate increases on all of our non-guaranteed premium yearly renewable term contracts that remain in force. There can be no assurance that our plans will be sufficient to improve our operations or liquidity. If we are not successful in implementing our plans, or if those plans are insufficient, we will not be able to satisfy our obligations in 2003 and will likely be required to liquidate our business if we cannot successfully pursue any other strategic alternative.
The accompanying consolidated financial statements and financial statement schedule have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered a significant loss from operations and experienced liquidity demands that raise substantial doubt about its ability to continue as a going concern. Management’s plans with regard to these matters are also described in Note 2. The consolidated financial statements and financial statement schedule do not include any adjustments that might result from the outcome of this uncertainty.
reinsurance agreements in the foreseeable future. These aforementioned factors raise substantial doubt about the Company’s ability to continue as a going concern.
The American Institute of Certified Public Accountants has issued a proposed Statement of Position that could establish new standards for accounting for Certain Nontraditional Long-Duration Contracts and for Separate Accounts that, if adopted, could require the Company to establish additional reserves for certain guarantees associated with variable annuity contracts. Reserve adjustments under the proposed standard will likely be volatile because they are influenced by the performance of the financial markets. The Company anticipates that if the proposed standard is adopted as currently written, this volatility will affect the Company’s reported results of operations.
Prior year financial information is reclassified, when necessary, to be consistent with current year presentation.
On December 31, 2002, the Company entered into a transaction with XL Life Ltd (“XL Life”), a subsidiary of XL Capital, pursuant to which the Company transferred certain blocks of life reinsurance business to XL Life. Under the agreement with XL Life, the Company novated five blocks of life reinsurance business to XL Life, which in turn entered into a 50% quota share reinsurance contract with the Company with respect to four of those blocks of business. As a result of the transaction, the Company incurred a loss of approximately $26.5 million, primarily as a result of write down of deferred acquisition costs of $38.7 million (which was partially offset by a net ceding commission to the Company of $18.0 million), a write off of prepaid expenses of $2.4 million and transaction costs of approximately $3.2 million. The agreement also provides that XL Life will receive an additional payment of $5 million if, during the 18 months following the agreement, the Company receives new capital funding of at least $35 million and the Company’s stock trades at a price at or above $5.00 per share for a period of 20 out of any 30 consecutive trading days.
The Company also currently has $45,000,000 of outstanding letters of credit issued on its behalf by Citibank. In October 2002, Citibank agreed to extend the Company’s unsecured letter of credit facility into 2003 in exchange for the Company’s agreement to secure or eliminate the letter of credit facility by June 30, 2003. If the Company is unable to secure or eliminate the letter of credit facility by that date, Citibank will not renew the outstanding letters of credit at December 31, 2003.
In April 2002, the Company served written notice of arbitration on The Metropolitan Life Insurance Companies (“MetLife”), the cedent under its largest life reinsurance agreement, seeking equitable relief and monetary damages based on MetLife’s misrepresentation of and failure to disclose material facts relating to the agreement. In January 2003, the Company also provided written notice to MetLife of a premium rate increase, effective March 5, 2003, which also has become the subject of this arbitration. An arbitration panel is scheduled to hear these claims in December 2003.