The following table sets forth selected financial data and other operating information. The selected financial data have been derived from the consolidated financial statements of Life Re Corporation and Subsidiaries("Life Re") and should be read in conjunction with the consolidated financial statements and accompanying notes of Life Re and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein.
Life Re is party to several reinsurance agreements for which transactions are denominated in Canadian currency. The assets and liabilities related to such reinsurance agreements are remeasured in U.S. dollars, the functional currency, at current exchange rates as of the end of each reporting period. Deterioration in the exchange rate of Canadian currency could have an adverse effect on results of operations. At December 31, 1997, Life Re had $23.7 million of net assets denominated in Canadian currency. Life Re has not engaged in hedging or any other activities to mitigate the effect on earnings of a deterioration in the exchange rate of Canadian currency.
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, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, 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, present fairly in all material respects the information set forth therein.
In addition, under the terms of the Contract (Note 9), on March 15, 2001, the holder will purchase from the Company between 0.81967 of a share and one share of common stock, depending on the then current market price, for a purchase price of $66.00.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"), requires disclosure of pro forma information regarding net income and earnings per share 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 1997, 1996 and 1995, respectively: risk-free interest rates ranging from 6.3% to 6.4%, 5.4% to 6.8% and 6.8% to 7.7%, 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 1997 and 25% in 1996 and 1995; and weighted-average expected life of the options of 5 years.
The Company's policy generally is to require collateral from those retrocessionaires not authorized to conduct reinsurance business in Connecticut, LRCA's domiciliary state, in an amount at least equal to the statutory reserves reinsured. Collateral is provided in the form of letters of credit and trust agreements.