The following table sets forth selected financial data and other operating information. The selected financial data have been derived from our consolidated financial statements and should be read in conjunction
The following analysis of our consolidated financial condition and results of operations should be read in conjunction with "Selected Financial Data" and the consolidated financial statements and accompanying notes included elsewhere in this report. The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions developed by our management. Any adjustments to reported bases of assets or liabilities resulting from changes in estimates are reflected in earnings in the period the estimates are revised. Certain management estimates are based, in part, on information provided by ceding companies. As is usual in the reinsurance business, our ceding companies periodically update, refine and revise the reinsurance information they provide to us. The financial effects resulting from the incorporation of revised data are reflected in earnings as changes in estimates.
The factors that could affect forward-looking statements include, but are not limited to: uncertainties relating to general economic and business conditions that may impact the reinsurance marketplace, including, among other things, changes in interest rate levels and the liquidity of certain securities; changes in laws and government regulations applicable to the company; the ability of the company to successfully implement its operating strategies; material changes in the level of the company's operating expenses; material changes in mortality and morbidity experience; and material changes in persistency. In addition, as part of our business strategy we evaluate from time to time opportunities to acquire, make investments in, or enter into joint ventures or other strategic alliances with companies whose businesses compliment our business, some of which could be material. If an acquisition is consummated, we may need to incur indebtedness in connection with such acquisition. In addition, we could have difficulty assimilating the personnel and operations of the acquired company, which would prevent us from realizing, expected synergies and could disrupt our ongoing business and distract management and resources. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated.
Our primary annuity products are reinsurance of general account fixed deferred annuity and general account payout annuity structures. The profitability of the annuity reinsurance product line is primarily dependent on earning a targeted spread between the interest rate earned on the supporting asset base, the interest rate credited to or priced in to the liabilities and persistency of the underlying business. This product line can be interest rate sensitive, as fluctuations in the general level of interest rates from period to period may cause fluctuations in the results of operations. At December 31, 2000 and 1999, our liability for annuity contracts amounted to $1.6 billion.
During the year ended December 31, 2000 we had unrealized gains of approximately $13,334,000, as compared with unrealized losses of $14,992,000 during the year ended December 31,1999 which were included in Other Comprehensive Income (Loss). The change in unrealized gains and losses is principally related to movements in the general level of interest rates.
Claims and Policy Benefits. Life Insurance Claims and Policy Benefits for the year ended December 31, 2000 were $115,953,000 or 77% of net premium as compared with $79,953,000 or 79% of net premium for the year ended December 31, 1999. Aggregate mortality experience has been favorable, falling within pricing parameters. Although we expect mortality to be fairly constant over long periods of time, it will fluctuate from
Interest Credited to Interest Sensitive Contract Liabilities. Interest credited to interest sensitive contract liabilities was approximately $63,042,000 for the year ended December 31, 2000, as compared with approximately $22,312,000 for the year ended December 31, 1999. This increase reflects the level of our Interest Sensitive Contracts Liabilities and is directly related to income earned on the related Funds Withheld at Interest. The income earned on Funds Withheld was approximately $116,522,000 for the year ended December 31, 2000, as compared with $64,606,000 for the year ended December 31, 1999.
face amount of life insurance in force was approximately $45.4 billion compared with approximately $22.5 billion at December 31, 1998. New business writings and premium revenue levels are significantly influenced by the seasonal nature of the life reinsurance marketplace and by large transactions and therefore can fluctuate from period to period.
Realized Investment Gains (Losses). Realized investment losses were approximately $1,285,000 for the year ended December 31, 1999 compared with realized gains of approximately $2,673,000 for the initial operating period of eight and one-half months ended December 31, 1998. Such gains and losses result from normal activity in the management of our investment portfolio.
Invested assets, including cash and cash equivalents, amounted to approximately $321,819,000 at December 31, 2000 as compared with approximately $304,060,000 at December 31, 1999. The change in invested assets during 2000 is due to the unrealized gains incurred in the year, the funds provided in the Company's operating activities less the payment of shareholder dividends and the assets included with the purchase of Annuity and Life Reassurance America. At December 31, 2000 unrealized gains total approximately $2,065,000 as compared with total unrealized losses of approximately $11,269,000 at December 31, 1999. The change in unrealized gains and losses is principally related to the movement in the general level of interest rates during 2000.
At December 31, 2000, fixed maturity securities, which constituted all of the total fair value of our invested assets, were 97 % investment grade, liquid securities with varying maturity dates, as compared with 88% at December 31, 1999. The fair value of such investments may vary depending on economic and market conditions, the level of interest rates and the perceived creditworthiness of the issuer. At December 31, 2000 and 1999, the weighted average duration of invested assets was 3.2 and 3.7, respectively, and the weighted average investment quality rating was "AA" and "AA-", respectively.
At December 31, 2000, $7,800,000 at fair value, 2.9% of the invested assets, consisted of below investment grade securities, as compared with approximately $34,500,000 or 12% of invested assets at December 31, 1999. We limit our investments in fixed maturities that are rated below investment grade to 25% of capital, as these investments are subject to a higher degree of credit risk than investment grade securities. We monitor these securities as well as the creditworthiness of the portfolio as a whole. When fair market values decline for reasons other than changes in interest rates or other perceived temporary conditions, the security is written down to its net realizable value. At December 31, 2000 there was one security in default with a fair value of $499,000. This security was written down by $1,000,000 during 2000. At December 31, 1999 there were no securities in default and no securities were written down during 1999.
At December 31, 2000, mortgage backed securities represented approximately 36% of invested assets, as compared with 37% at December 31, 1999. Investors in these securities are compensated primarily for reinvestment risk rather than credit quality risk. Investments in mortgage backed securities include collateralized mortgage obligations ("CMO's") and mortgage backed pass-through securities. Mortgage backed securities generally are collateralized by mortgages issued by the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"), all of which are agencies of the U.S. government. Of these, only GNMA mortgages are backed by the full faith and credit of the U.S. government. Credit risk generally is not a consideration when investing in agency mortgage backed securities. Our mortgage backed securities portfolio had a weighted average investment quality rating of "AAA" at December 31, 2000 and 1999.
The Company has no material commitments for capital expenditures as of December 31, 2000.
The amounts related to the reinsured business referred to above are included on the Company's Balance Sheet in the assets as Receivable for Reinsurance Ceded and in the liabilities as Reserves for Future Policy Benefits; at December 31, 2000 both amounts were $104,500,000.
The purchase price exceeded the fair value of the net assets acquired (the capital and surplus of Annuity and Life Reassurance America) by $2,301,000 which has been allocated to the value of the 43 insurance licenses of Annuity and Life Reassurance America. This is being amortized over 20 years.
The proforma balance sheet of Annuity and Life Reassurance America as of the date of acquisition after giving effect to the reinsurance transaction is as follows:
We experienced no disruptions to our business as a result of the conversion to the year 2000. We incurred no material Year 2000 expenses during the years ended December 31, 2000 and 1999 and all expenses incurred were funded from operations.
Management of the Company has primary responsibility for preparing the accompanying consolidated financial statements and for their integrity and objectivity. The consolidated financial statements included in this report were prepared in accordance with accounting principles generally accepted in the United States of America applied on a consistent basis. The consolidated 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 consolidated financial statements.
Management of the Company has established and maintains a system of internal controls designed to provide reasonable assurance as to the integrity and reliability of the consolidated financial statements, the protection of assets from unauthorized use or disposition and the prevention and detection of fraudulent financial reporting.
The Company's consolidated financial statements have been audited by our independent auditors, KPMG. Our independent auditors had unrestricted access to each member of management in conducting their audit. Management has made available to our auditors all of the Company's financial records and related data, as well as the minutes of shareholders' and directors' meetings. Management believes that all representations made to our auditors during their audits were valid and appropriate.
We conducted our audits in accordance auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and its subsidiaries as at December 31, 2000 and 1999 and the results of their operations and cash flows for the years ended December 31, 2000, 1999 and 1998 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (EXPRESSED IN UNITED STATES DOLLARS)
Annuity and Life Re (Holdings), Ltd. ("Holdings") was incorporated on December 2, 1997 under the laws of Bermuda. Holdings provides annuity and life reinsurance to insurers and reinsurers through its wholly-owned subsidiaries: Annuity and Life Reassurance, Ltd. ("Annuity and Life Reassurance"), licensed under the laws of Bermuda as a long term insurer; and Annuity and Life Re America, Inc. (Annuity and Life Re America), an insurance holding company based in the United States and Annuity and Life Reassurance America, Inc., formerly Capitol Bankers Life Insurance Company ("Annuity and Life Reassurance America"), a life insurance company domiciled in the United States. Holdings, Annuity and Life Reassurance, Annuity and Life Re America and Annuity and Life Reassurance America are collectively referred to herein as the "Company". The Company completed an initial public offering of its equity securities and commenced operations on April 17, 1998.
The consolidated financial statements include the accounts of Holdings and its subsidiaries, Annuity and Life Reassurance, Annuity & Life Re America and Annuity and Life Reassurance America. All significant inter-company accounts and transactions have been eliminated upon consolidation.
For traditional life and annuity policies with life contingencies, deferred policy acquisition costs are charged to expense using assumptions consistent with those used in computing policy reserves. Assumptions as to anticipated premiums are estimated at the date of the policy issuance and are consistently applied during the life of the contracts. Deviations from estimated experience are reflected in earnings in the period such deviations occur. For these contracts, the amortization periods generally are for the estimated life of the policies.
The Company has classified as insurance licenses the cost in excess of fair value of net assets acquired in a purchase transaction. This cost is being amortized on a straight-line basis over 20 years.
Premiums for universal life and investment-type contracts are reported as deposits to policyholders' account balances. Revenues from these contracts will consist of amounts assessed during the period against clients' account balances for mortality charges, policy administration and surrender charges. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related clients' account balances and interest credited to clients' account balances.
In June 1998, the FASB issued Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. In June 2000 the
FASB issued Statement No 138, which amended Statement No. 133. Statements No. 133 and 138 are effective for all fiscal periods beginning after June 15, 2000. The Company currently does not hold any derivatives and does not engage in any derivative hedging activities, although it may do so in the future. Management has reviewed these Statements and has concluded that they are not likely to significantly affect the Company's current financial reporting.
(a) The amortized cost and fair values of investments in fixed interest securities classified as available for sale at December 31, 2000 and 1999 are as follows:
(c) At December 31, 2000 and 1999 letters of credit totaling $183,687,000 and $121,475,000, respectively, issued in the ordinary course of the Company's business had been issued by the Company's bankers in favor of certain ceding insurance companies. At December 31, 2000 and 1999 investments of $161,392,000 and $147,898,000, respectively, were pledged as collateral for these letters of credit.
(d) For fixed interest securities held on December 31, 2000 and 1999 the maturity distribution is shown below. Actual maturity dates may differ from contractual maturity dates because certain borrowers have the ability to prepay their obligations without penalty.
Net realized investment gains (losses) comprise $1,376,373 gross realized gains and $6,193,494 gross realized losses for the year ended December 31, 2000 (1999: $1,104,026 and $2,388,795, respectively; 1998: $3,492,358 and $819,077, respectively).
The Company is authorized to issue 50,000,000 preferred shares of par value $1.00 each. At the balance sheet date there were no preferred shares issued or outstanding.
The common shareholders have no pre-emptive, redemption, conversion or sinking fund rights. Subject to certain voting restrictions, which limit the voting power of United States persons to less than 10% of the combined voting power of the issued voting shares of the Company, each holder is entitled to one vote per share.
As of December 31, 2000, 1999 and 1998 the Company had 1,903,365, 1,497,865 and 1,415,865 options outstanding, respectively, and 3,457,490 warrants outstanding.
Certain directors of the Company are also owners, directors, or officers of Inter-Atlantic Capital Partners, Inc. (Inter-Atlantic). In 1998 Inter-Atlantic agreed to provide financial advisory and other services to the Company for a term of five years in exchange for four annual payments of $600,000. Such services include, among other things, assistance in the development of products, financial planning, management of assets and liabilities, international marketing efforts and such other services as the Company may request. In 1999 the Company prepaid this fee at a discount of 10%. The prepayment is being amortized over the period the services are provided. At December 31, 2000 and 1999 the unamortized prepayment was $1,235,642 and $1,702,225, respectively. This is included in other assets.
During 1998 certain of the Company's officers purchased 163,121 shares in the Company and the Company made loans to the officers to partially finance such purchases. The loans bear interest at 7% per annum and must be repaid within five years. At December 31, 2000 and 1999 loans outstanding from management for such stock purchases were $1,150,000, with accrued interest thereon of $217,241 and $136,741, respectively. Interest income of $80,500, $70,673 and $66,068 has been recognized for the years December 31, 2000, 1999 and 1998, respectively, on these loans.
In 1998 the Board of Directors adopted a Stock Option Plan (the "Plan") under which it may grant, subject to certain restrictions, Incentive Stock Options ("ISO's") and Non-Qualified Stock Options ("NQSO's"). The aggregate number of common shares for which options may be granted under the initial plan is limited to 1,552,500 Common Shares. In 1999 the plan was amended such that options may be granted in any fiscal year equal to not more than 2% of the adjusted average of the outstanding common shares of the Company, as that number is determined by the Company to calculate fully diluted earnings per share. Only eligible employees of the Company are entitled to ISO's, while NQSO's may be granted to eligible employees, non-employee Directors and consultants.
The minimum exercise price of the options is equal to the fair market value, as defined in the Plan, of the Company's optioned Common Shares at the date of grant. The term of the options is not more than ten years from the date of grant. Unless otherwise provided in the option agreement, they are exercisable in three equal annual installments, commencing on the first anniversary of the grant date.
Each person who becomes an eligible non-employee Director, as defined in the plan, is granted an option to purchase 15,000 common shares on the date he or she becomes an eligible non-employee Director. These
options have an exercise price equal to the fair market value of the optioned Common Shares on the date the options are granted and are exercisable in three equal installments commencing with the first anniversary of the grant date. In addition, subject to certain conditions, each non-employee Director is granted an option to purchase 2,500 Common Shares at each successive annual general meeting. These options have an exercise price equal to the fair market value of the optioned Common Shares on the date the options are granted and are immediately exercisable if granted after April 8, 1999.
The Company applies APB Opinion No. 25 and FASB Interpretation No. 44 in accounting for the Stock Option Plan. Accordingly, no compensation cost has been recognized as the intrinsic value of the options was $nil at the measurement date. The net income and earnings per Common Share would have been reduced to the pro forma amounts indicated below, had compensation cost been determined based on the fair value of the options at the grant date, consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation."
The Company has entered into a retrocession agreement, which enables it to limit the amount of life reinsurance it retains to $2,000,000 per single life. The contract is on an automatic basis and is effective for risks assumed and in force from January 1, 1997. The limit of cover is $50 million and covers all single and joint life reinsurance assumed by the Company on an automatic basis. At December 31, 2000 and 1999 the Company ceded approximately $192.6 and $34.9 million of in force insurance coverage for a premium of $1,146,000 and $396,000, respectively. No claims are recoverable at December 31, 2000 or 1999.
It should be noted that such agreements do not relieve the Company from its obligations to its reinsureds and failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors any concentrations of credit risk that may develop to minimize its exposure. The other party to this retrocession agreement has a current credit rating of AA+, as assigned by A.M. Best.
Fair value disclosures are not required for reinsurance recoverables deferred policy acquisition costs and liabilities arising from insurance contracts and, therefore, they have not been determined by the Company.
The amounts related to the reinsured business referred to above are included on the Company's Balance Sheet in assets as Receivable for Reinsurance Ceded and in liabilities as Reserves for Future Policy Benefits; at December 31, 2000 the amounts were $104,500,000.
The purchase price of $13,200,000 exceeded the fair value of the net assets acquired (the capital and surplus of Annuity and Life Reassurance America) by $2,301,000 which has been allocated to the value of the 43 insurance licenses of Annuity and Life Reassurance America. This is being amortized over 20 years.
The effective tax rate provided for in the financial statements is computed at a rate of zero. Substantially all income is not subject to taxation.
received an assurance from the Minister of Finance in Bermuda that in the event of any such taxes being imposed the Company will be exempted from taxation until the year 2016. Annuity and Life Reassurance intends to operate in a manner such that it will not be liable to United States tax other than premium excise taxes and withholding taxes on certain investments.