Life Re's principal operations are conducted from approximately 51,000 square feet of leased office space located at 969 High Ridge Road, Stamford, Connecticut 06905. The lease with respect to such space expires on September 30, 2004. The rental expense paid by Life Re under the lease during 1997 was $1.0 million.
- --------------- (1) Diluted earnings per share have been calculated in accordance with Financial Accounting Standards Board Statement No. 128, Earnings Per Share ("SFAS 128"). Basic earnings per share in accordance with SFAS 128 for the years ended 1997, 1996, 1995, 1994 and 1993 were $3.64, $3.97, $2.32, $2.21 and $2.53, respectively. The adoption of SFAS 128 did not result in the restatement of previously reported earnings per share, as diluted earnings per share calculated in accordance with SFAS 128 results in the same per share amounts as previously reported by Life Re.
(3) Book value per share is calculated by dividing end of period shareholders' equity (excluding unrealized investment gains and losses) by end of period common shares outstanding.
(4) For purposes of determining this ratio, earnings consist of income before federal income taxes and extraordinary charge (1995), plus fixed charges. Fixed charges consist of interest expense on debt, distributions on capital securities and the portion of operating leases that are representative of the interest factor.
With the exception of historical information, the matters contained in the following analysis are "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements may include, but are not limited to, projections of earnings, 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", "believes" and similar expressions are also intended to identify forward-looking statements. 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. Such factors include, but are not limited to, the uncertainties relating to general economic and business conditions which may impact the reinsurance marketplace; changes in laws and government regulations applicable to Life Re, the ability of Life Re to implement its operating strategies successfully, the ability of Life Re to execute Administrative Reinsurance transactions and the amount, timing and returns therefrom; material fluctuations in interest rate levels; material changes in mortality and morbidity experience; material changes in persistency; material changes in the level of operating expenses; and the success or failure of certain of Life Re's clients in premium writing, and other risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated.
In 1997, Life Re derived approximately 65% of its policy revenues from traditional life reinsurance, which includes ordinary and group life reinsurance. Ordinary life reinsurance policy revenues were derived under agreements with approximately 460 ceding companies and accounted for approximately 62% of total policy
revenues. The agreements cover primarily new business to be written by the client and/or existing blocks of in force business. This business is predominately marketed directly by Life Re without the use of intermediaries. In 1997, 51 ceding companies each accounted for at least $1.0 million of ordinary life reinsurance policy revenues and in the aggregate represented approximately 91% of Life Re's ordinary life reinsurance policy revenues.
Group life reinsurance accounted for approximately 3% of policy revenues in 1997. Group life reinsurance is written on a direct basis and generally is excess of loss and often includes experience rating provisions.
In 1995, Life Re, through its acquisition of REALIC, put into place a platform for acquiring and administering blocks of primary insurance in force. This platform, known as Administrative Reinsurance, provides a mechanism for an insurer to transfer to Life Re administrative responsibilities to facilitate the insurer's exit from a line of business by means of reinsurance or sale. Life Re outsources policy administration to third party administrators while maintaining management responsibilities.
During 1997 and 1996, Life Re completed several transactions through which it acquired blocks of insurance in force (collectively, the "Transactions"). The 1997 transactions, which were the 79% stock purchase of AML Acquisition Company, parent of American Merchants Life Insurance Company, a coinsurance agreement with UNUM Life Insurance Company of America and a coinsurance agreement with Employers Reassurance Corporation, covering in force business of Allianz Life Insurance Company of North America ("Allianz"), together represented assets acquired of approximately $930 million (collectively, the "1997 Transactions"). The 1996 transactions represented assets acquired of approximately $390 million (collectively, the "1996 Transactions"). The assets received as a result of the Transactions consisted primarily of cash and high quality investments. The Transactions were accounted for under the purchase method of accounting, and therefore, results of operations include the effect of the Transactions only from their respective dates of acquisition. For 1997 and 1996, the Transactions contributed policy revenues totaling $26.0 million and $10.9 million, respectively, and approximately $32.7 million and $10.8 million, respectively, of investment income. Policy revenues and investment income related to the Transactions exclude the effects of the acquisition of REALIC and the reinsurance of automobile credit life and disability.
NET INCOME decreased by $4.6 million in 1997 to $49.5 million, or $3.48 per share, compared with $54.2 million, or $3.89 per share, in 1996 and increased from $34.6 million, or $2.32 per share, in 1995. Included in these results were after-tax realized investment gains of $2.9 million and $15.9 million in 1997 and 1996, respectively. In March 1996, Life Re realized a gain of $13.5 million from the sale of its equity investment in Nacolah Holding Corporation ("Nacolah"), parent of North American Company for Life and Health
POLICY REVENUES by major source for the three year period are as follows:
The growth in Administrative Reinsurance policy revenues has been due to the Transactions and an increase in automobile credit reinsurance premiums.
POLICY BENEFITS increased by 3% in 1997 and 18% in 1996. The increase in 1997 was due to the Transactions and higher volumes of ordinary life reinsurance business. The increase in 1996 was due to an increase in accident and health and special risk pool participations, the 1996 Transactions and the purchase of REALIC in July 1995. As a percentage of policy revenues, policy benefits were 70% in 1997 and 74% in each of 1996 and 1995. Contributing to the lower percentage in 1997 was a shift in the mix of ordinary life reinsurance business from excess to first dollar quota share reinsurance; under first dollar quota share reinsurance, typically a higher portion of the reinsurance premium funds acquisition costs and a lesser portion funds mortality costs. Partially offsetting the shift in the mix of ordinary reinsurance business in 1997 was a deterioration in group accident and health and special risk morbidity experience. The higher percentages in 1996 and 1995 were primarily due to an increase in revenues generated under reinsurance treaties with no
acquisition costs, coinsurance involving paid-up insurance and Administrative Reinsurance, which produces no new business and, therefore, generally has a higher ratio of benefits to policy revenues.
ACQUISITION COSTS increased by 27% in 1997 and 17% in 1996. These increases reflect the higher volumes of ordinary life and group accident and health reinsurance business and the Transactions and, in addition, the aforementioned shift in the mix of ordinary reinsurance business from excess reinsurance to first dollar quota share reinsurance. As a percentage of policy revenues, policy acquisition costs were 29% in 1997 and 25% in each of 1996 and 1995.
INTEREST CREDITED TO POLICYHOLDER ACCOUNTS increased by 17% in 1997 and by 63% in 1996. These increases are attributable to the acquisition of REALIC and the Transactions as the majority of the policy benefit liabilities acquired in these transactions are interest sensitive.
INTEREST EXPENSE decreased to $8.0 million in 1997 from $8.4 million in 1996 and $10.7 million in 1995. This decrease was due to (i) a decrease in the weighted average variable rate charged on outstanding debt, which decreased to 6.0% in 1997 from 6.2% in 1996 and 7.1% in 1995, and (ii) a decrease in the outstanding principal balance to $125.0 million resulting from a first quarter 1996 repayment of $15.0 million. The effective interest rate as of December 31, 1997 was 6.3%.
OTHER OPERATING EXPENSES increased in 1997 and 1996 mainly due to i) administrative fees of third party administrators ("TPAs") incurred within Administrative Reinsurance due to the Transactions and ii) higher compensation costs. Administrative Reinsurance utilizes the services of TPAs to administer all of its business; accordingly, to the extent Life Re is successful in expanding Administrative Reinsurance, its operating expenses will continue to increase.
Life Re does not engage in trading activities to generate realized investment gains and, thus, does not have a trading portfolio. However, Life Re evaluates the desirability of continuing to hold a security when market conditions, creditworthiness or other measurement factors change. These changes may relate to a change in the credit risk of an issuer and a decision to sell may be made to avoid further declines in realizable value. Securities also may be sold prior to maturity to provide liquidity should the need arise.
Life Re's fixed maturity securities, which constituted 88%, or $2,442.9 million, of the total fair value of its invested assets as of December 31, 1997, are predominantly investment grade, liquid securities with varying maturity dates. 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.
The results of operations and the financial condition of Life Re are significantly affected by the performance of its investments and by changes in interest rates. During a period of declining interest rates, if Life Re's investments are prematurely sold, called, prepaid or redeemed, Life Re would be unable to reinvest the proceeds in securities with comparable rates of return. During a period of rising interest rates, the fair value of Life Re's invested assets could decline. In addition, rising interest rates could also cause disintermediation which in turn could cause Life Re to be required to sell investments at prices and times when the fair values of such investments are less than their amortized cost. Life Re believes that its traditional life insurance liabilities are not highly interest sensitive and, therefore, the effects of fluctuating interest rates on these liability cash flows are not significant. For interest sensitive liabilities, Life Re utilizes asset/liability matching to minimize the impact of changes in interest rates. Life Re has not engaged in hedging activities to mitigate the effects of interest rate changes on its invested assets and related liabilities.
At December 31, 1997, collateralized mortgage obligations and mortgage-backed pass-through securities represented approximately 17% of Life Re's invested assets. Certain of such investments may be subject to prepayment risk and, therefore, are susceptible to fluctuations in the level of interest rates. Prepayments of these investments did not have a material impact on Life Re's 1997 results of operations.
During 1997, 1996 and 1995, proceeds from sales of fixed maturities amounted to $301.0 million, $253.4 million and $370.8 million, respectively. The net gains realized from such sales were $7.3 million, $1.8 million and $4.5 million for the respective periods. The majority of the 1997 and 1996 sales was attributable to the restructuring of portfolios acquired in connection with the Transactions.
Real estate and mortgages (at cost) totaled $12 million at December 31, 1997 and were acquired as part of the Transactions. Mortgage loans comprise the majority of this amount.
Shareholders' equity increased by $83.7 million to $373.8 million at December 31, 1997 from $290.1 million at December 31, 1996 primarily as a result of net income of $49.5 million, net unrealized investment gains of $36.6 million, proceeds of $2.9 million from stock option exercises and tax benefits of approximately $2.3 million related to stock option and stock grants, partially offset by treasury stock purchases of $1.5 million and common shareholder dividends of $7.1 million.
Dividends paid to common shareholders reflect an annual rate of $.52 per share in 1997, $.40 per share in 1996 and $.28 per share in 1995. Effective in the first quarter of 1998, Life Re increased its dividend rate to an effective annual rate of $.60 per share.
Sources of liquidity are available to Life Re in the form of cash and short-term investments and, if necessary, the sale of invested assets. Life Re also may borrow an additional $35.0 million under the 1995 credit agreement and may enter into reverse repurchase agreements to fund short-term cash needs. In addition to its debt servicing and dividend and capital securities distribution obligations, Life Re's financial obligations consist of policy benefit and acquisition costs, taxes and general operating expenses. During the next twelve months, management believes these obligations will be adequately provided for by policy revenues and investment income.
In order to provide additional liquidity and capital needed to support its core businesses, Life Re raised capital in the first quarter of 1998 (see "Debt, Capital Securities and Shareholders' Equity" and Notes 9 and 10 "Notes to Consolidated Financial Statements") through the Offerings.
The primary sources of funds for Life Re Corporation (the "Parent") consist of dividends and surplus debenture principal and interest payments from TexasRe, which are further funded by dividends from LRCA to TexasRe. The ability of the Parent to make payments of principal and interest, distributions on capital securities, as well as to continue to pay common stock dividends, is ultimately dependent on the statutory earnings and surplus of its subsidiaries. The following table shows surplus debenture principal and interest payments received, dividends received by the Parent for the last three years as well as dividends available for payment in that year without prior approval of state regulatory authorities, and dividends paid to TexasRe for the last three years as well as dividends available for payment to TexasRe in that year without prior approval of state regulatory authorities:
The unpaid principal amount of the surplus debentures at December 31, 1997 was $160.5 million. The interest rate payable under the terms of the surplus debentures is the same as the interest rate under the 1995 credit agreement. In 1995, the principal amortization terms of the surplus debentures were changed to conform to the terms of the 1995 credit agreement.
Currently, no prior approval of the Texas Insurance Commissioner is required to prepay or pay scheduled interest or principal on the surplus debentures provided that, after giving effect to any such payment, the statutory surplus of TexasRe is $125.0 million.
Purchases and sales of fixed maturities increased substantially in 1997 and 1996 due primarily to restructuring of portfolios related to the Transactions. The completion of these types of transactions generally produces a cash outlay for acquisitions and a net cash inflow upon reinsurance of insurance in force. During 1997, net cash of $213.0 million was generated by the receipt of cash as consideration for the assumption of insurance liabilities partially offset by the purchase price paid in acquiring companies. Financing cash flows include debt prepayments of $15.0 million in 1996. Withdrawals from annuity and interest sensitive life insurance contracts totaled $108.6 million in 1997 compared to $74.7 million in 1996 due to increased volumes of business resulting from the Transactions and an increase in the related rate of lapsation.
Life Re intends to continue its strategy of growth through i) increased reinsurance of ordinary life new business and ii) the expansion of Administrative Reinsurance through purchases of in force blocks of insurance business and insurance companies.
In December 1997, Life Re entered into a coinsurance transaction whereby Life Re and Employers Reassurance Corporation ("ERAC") coinsured a block of life insurance and annuity business from Allianz. Under the transaction, Life Re, in conjunction with ERAC, coinsured certain universal life and traditional life insurance policies and annuity contracts. Life Re's agreement with ERAC provides that Life Re initially will reinsure 20% of the total block of business. Based on the terms of its agreement, Life Re expects that its share of the total block of business being reinsured will increase to 60% over a period of several years. The total block of business coinsured aggregates $1.1 billion of life insurance and annuity reserves, $90 million of annualized premiums and approximately 225,000 policies. Under its agreement with ERAC, Life Re will have the primary responsibility for management oversight and administration of the block of business.
In February 1998, Life Re acquired 100% of the outstanding stock of Mission Life Insurance Company ("Mission Life") for a purchase price of approximately $60 million. Mission Life's business is concentrated in life insurance policies designed to meet final expenses. As of December 31, 1997, Mission Life had statutory assets of $230 million and statutory capital and surplus including AVR of $28 million. Mission Life's 1997 premium income was $39 million. In a related transaction, Life Re and Mission Life's selling shareholders agreed to purchase a new company that will continue to market final expense life insurance policies. Life Re expects to own 20% of this entity and to reinsure the majority of new writings.
In February 1998, Life Re entered into an agreement to acquire Lincoln Liberty Life Insurance Company ("Lincoln Liberty") and First Delaware Life Insurance Company ("First Delaware")for an estimated purchase price of $50 million, including adjusted capital and surplus and AVR of approximately $29 million. Lincoln Liberty's and First Delaware's businesses primarily consist of traditional and universal life insurance policies. For the year ended December 31, 1997, on a combined basis, Lincoln Liberty and First Delaware had annual premiums of $7 million and total statutory assets of $230 million.
existing software and by converting to new software, the year 2000 issue will not pose significant operations problems for its computer systems.
Life Re believes that the systems of its third party administrators are or will be year 2000 compliant. Life Re plans to conduct a review of its third party administrator's systems to ensure such compliance.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE LIFE RE CORPORATION AND SUBSIDIARIES
The Audit Committee of the Board of Directors is comprised of certain directors who are neither employees nor officers of the Company. The Audit Committee meets periodically with management and the independent auditors regarding independent audit scope, timing, results and to discuss other auditing and financial reporting matters. The independent auditors have direct access to and meet privately with the Audit Committee.
/s/ Chris C. Stroup - ----------------------------------- Chris C. Stroup Executive Vice President and Chief Financial Officer
Stamford, Connecticut February 12, 1998, except for Notes 9 and 10, as to which the date is March 17, 1998
The consolidated financial statements of Life Re Corporation and Subsidiaries (the "Company") include the accounts of TexasRe Life Insurance Company ("TexasRe"), Life Reassurance Corporation of America ("LRCA"), Reassure America Life Insurance Company ("REALIC"), AML Acquisition Company and Life Re International, Ltd. (Note 3). All significant intercompany balances and transactions have been eliminated. The accompanying financial statements have been prepared in accordance with generally accepted accounting principles. Certain reclassifications have been made to the prior years' financial statements to conform to the current year's presentation. All dollar amounts are reported in thousands unless otherwise indicated.
Certain management estimates are based, in part, on information provided by ceding companies. As is usual in the reinsurance business, ceding companies periodically update, refine and revise reinsurance information provided to the Company. The financial effects resulting from the incorporation of revised data are reflected in earnings as changes in estimates.
Fixed maturities, consisting of bonds and redeemable preferred stocks, and equity securities, consisting of common and nonredeemable preferred stocks, are classified as available for sale and are reported at fair value. Unrealized gains and losses on available for sale securities are recorded directly in common shareholders' equity with no effect on income. These amounts are net of deferred income taxes and a valuation adjustment which represents the change in amortization of deferred acquisition costs that would have been recorded as a charge or credit to operations had the relating unrealized gains or losses been realized.
Realized investment gains and losses are reported net of related expenses and include the amount of amortization of deferred acquisition costs resulting from the inclusion of such realized gains or losses in the gross profits used for the calculation of such amortization.
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. All financial instruments of the Company are carried at amounts which approximate fair value except amounts related to insurance contracts, which are exempt from fair value reporting and disclosure requirements.
Premiums are recognized as revenues over the premium paying periods of the policies. Benefits and expenses are provided against such revenues to recognize profits over the estimated lives of the policies through the provision for future policy benefits and the deferral and amortization of acquisition costs.
The Company accounts for its stock options under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations. Under APB 25, the Company does not incur any expense from the issuance of stock options because the exercise price of the option equals the market price of the underlying stock on the date of grant.
Earnings Per Common Share and Earnings Per Common Share Assuming Dilution
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), effective for years beginning after December 15, 1997. SFAS 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. SFAS 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements and requires that the accumulated balance of other comprehensive income be displayed separately from retained earnings and paid in capital in the equity section of the balance sheet. The implementation of SFAS 130 will not affect results of operations or financial position but will affect their presentation and disclosure.
Effective December 30, 1997, the Company entered into an indemnity reinsurance agreement to coinsure 60% of a block of life insurance policies and annuity contracts coinsured by Employers Reassurance Corporation ("ERAC") from Allianz Life Insurance Company of North America. The Company simultaneously retroceded to ERC Life Insurance Company ("ERC Life"), a subsidiary of ERAC, on a modified coinsurance basis, 67% of the business assumed. The Company recorded a liability for policy benefits aggregating $683,345 and received assets, primarily fixed maturities, with a fair value of $652,019. The Company is required to maintain assets in a trust at least equal to the statutory reserves reinsured. The trust assets are managed by the Company's primary investment manager and are included in total investments in the accompanying balance sheet. The Company will administer the entire block using a third party administrator. Under the terms of the agreement, the Company can recapture the business retroceded to ERC Life over a ten year period beginning in 1998. This agreement had no effect on results of operations in 1997.
On September 30, 1997, the Company acquired a 79% interest in American Merchants Life Insurance Company ("AML") through the purchase of 79% of the common stock of AML's parent company, AML Acquisition Company, for a purchase price of $13,034. In conjunction with the purchase, the Company repaid $9,800 of long-term debt of AML Acquisition Company. The assets acquired, consisting primarily of invested assets, had a fair value of $145,268 and the liabilities assumed, principally future policy benefits under life insurance and annuity contracts, aggregated $132,234.
Effective July 1, 1997, the Company entered into an indemnity reinsurance agreement with life insurance subsidiaries of UNUM Corporation to coinsure and administer a block of insurance in force with liabilities for policy benefits under life insurance and annuity contracts totaling $117,622. Assets, principally cash, totaling $108,122 were transferred to the Company.
On July 31, 1995, the Company acquired 100% of the common stock of REALIC, formerly John Deere Life Insurance Company, from two wholly owned subsidiaries of Deere & Company for an adjusted purchase price of $33,335, including direct costs of the acquisition. The fair value of the assets acquired was $368,779 and liabilities assumed aggregated $335,444.
Effective May 31, 1996, REALIC acquired a block of insurance in force under an assumption reinsurance agreement with United Insurance Company of America, a subsidiary of Unitrin, Inc., whereby it assumed liabilities for future policy benefits totaling $124,245. Assets totaling $107,334, principally cash, were transferred to REALIC by the ceding company.
Deferred acquisition costs are amortized with interest at rates ranging from 5.3% to 8.7% except for the amount attributable to the acquisition of LRCA which is amortized with interest at 15%. The percentage of deferred acquisition costs which is expected to be amortized in each of the next five years is 15.6%, 14.2%, 13.0%, 11.8% and 10.8%, and the percentage expected to be amortized in each of the next five years, net of interest accretion, is 8.6%, 7.9%, 7.2%, 6.5% and 6.0%.
Net unrealized appreciation of available for sale securities is as follows:
The amortized cost, unrealized gains and losses and estimated fair values of available for sale securities are as follows (see Note 2 for a discussion of the fair value of financial instruments):
Major sources and related amounts of investment income are as follows:
The changes in unrealized gains (losses) on securities are as follows:
On March 18, 1996, Life Re Corporation sold its equity investment in Nacolah Holding Corporation ("Nacolah"), the parent of North American Company for Life and Health Insurance, in connection with the
TexasRe and LRCA file a consolidated federal income tax return with Life Re Corporation. REALIC and AML file separate federal income tax returns.
The Company has a senior secured revolving and term loan facility with a total commitment of $160,000 (the "Amended and Restated Credit Agreement"). Under the Amended and Restated Credit Agreement, at the conclusion of the revolving loan period, the loan converts to a five year amortizing term loan in a principal amount equal to the balance of the revolving loan at conversion. During 1997, the maturity date of the revolving loan period was extended to January 2000 and may, with bank consent, be extended for an additional one year period. As of December 31, 1997, borrowings were $125,000. Unamortized deferred loan costs associated with a prior credit agreement of $1,545, before federal tax benefit of $541, were charged to income in 1995 as an extraordinary charge.
Interest is payable at a rate or rates equal to a margin plus a eurodollar interbank offered rate ("IBOR"). Such margin over IBOR is adjustable based on the Company's indebtedness to capitalization ratio as defined at the end of each quarter.
Principal payments are due on January 5 of each year as follows (assuming no additional extension of the revolving loan):
On March 17, 1998, the Company, through Life Re Capital Trust II ("Trust II"), completed a public offering of 2,070,000 6% Adjustable Conversion-rate Equity Security Units ("Units") (the "Units Offering"). The Units consist of Quarterly Income Preferred Securities ("QUIPS") and a forward purchase contract (the "Contract") for the Company's common stock. The QUIPS have a maturity of March 15, 2003 and are subject to a put option by the QUIPS holder on either March 15, 2001 or June 15, 2001.
Concurrently with the Units Offering (Note 9), on March 17, 1998, the Company completed a public offering in which it sold 3,500,000 shares of common stock (the "Common Stock Offering"). The Company intends to use the net proceeds of the Common Stock Offering and the Units Offering totaling approximately $352,000 to provide additional capital to the insurance subsidiaries to support business growth, as well as for general corporate purposes.
Life Re Corporation owns $160,500 of surplus debentures issued by TexasRe which provide funds to Life Re Corporation in the form of principal and interest payments. Under the terms of an amendment to TexasRe's surplus debentures, no prior approval of the Texas Department of Insurance is required to pay or prepay scheduled principal or interest on the surplus debentures provided that, after giving effect to any such payment, the statutory surplus of TexasRe exceeds $125,000. The amendment to TexasRe's surplus debentures was approved under the consideration that statutory surplus, as defined, in excess of $125,000 be reflected in liabilities to the extent of outstanding surplus debenture interest and principal. Payments of surplus debenture principal and interest to Life Re Corporation by TexasRe totaled $9,799, $10,008 and $29,400 in 1997, 1996 and 1995, respectively.
The combined statutory basis financial position of TexasRe and subsidiaries as of December 31, 1997 and 1996 is as follows:
At December 31, 1997, 2,740,525 shares of authorized common stock are reserved for issuance under two stock options plans, the 1992 Life Re Corporation Stock Option Plan and the 1993 Non-Employee Directors Stock Option Plan. The Board of Directors has approved an amendment to the 1992 Life Re Corporation Stock Option Plan to allocate an additional 1,500,000 common shares to the Plan to be effective when it is approved by stockholders. The plans provide for the granting of nonqualified stock options or incentive stock options to certain officers, employees and directors. Options are granted at no less than fair value on the date of grant for a period not in excess of ten years. They vest over periods of four to five years or in full upon the occurrence of certain events including a change in control of the Company.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
Pro forma net income and earnings per common share including the effects of amortization of the estimated fair values of employee stock options granted after December 15, 1994 are as follows:
insurance business is to retain not more than $250 of liability on any one life insurance risk, $300 on any one accident or health insurance risk or, for special risk insurance, $1,000 on any one risk. The Company has agreements with group retrocessionaires primarily on an excess basis. Contracts for reinsurance ceded do not relieve the Company from its obligations under contracts for reinsurance assumed. Failure of retrocessionaires to honor their obligations could result in losses to the Company; however, no amounts are deemed uncollectible at December 31, 1997.
Policy benefits recovered on reinsurance ceded for the years ended December 31, 1997, 1996 and 1995 were $107,309, $75,971 and $90,435, respectively.
Due to changes in the number of average shares outstanding, quarterly earnings per share do not add to the total.