The Company's current liquidity needs at the holding company level include funding operating expenses, the repayment of incorporation expenses paid by DFG and interest payments on the Subordinated Notes. At the Company's option, the Company may pay interest on the Subordinated Notes in additional Subordinated Notes in lieu of cash payments during any five-year period. In 1999, the Company elected to pay $2.8 million of interest due on the Subordinated Notes by the issuance of additional Subordinated Notes with an aggregate principal amount of $2.8 million. As of December 31, 1999, the Company had $14.2 million in financial assets at the holding company level. The Company's other source of liquidity at the holding company level consists of dividends from Oracle Re. Dividend payments by the Company's insurance subsidiary to the Company are subject to certain Bermuda regulatory restrictions as well as contractual restrictions. Under the LOC Agreement, dividends by Oracle Re in any fiscal year may generally not exceed the greater of (a) 50% of Oracle Re's statutory net income for the preceding fiscal year and (b) the lesser of (i) $3,000,000 and (ii) Oracle Re's statutory net income for the preceding fiscal year. See "Business - Regulation - Bermuda."
In addition to Oracle Re's current liquidity requirements, Oracle Re is required to provide collateral security with respect to letters of credit outstanding under the LOC Agreement and otherwise. Under the LOC Agreement, depending on the type of collateral pledged, the collateral maintenance requirement is equal to up to 145% of the amount of the outstanding letters of credit. See "Other Transactions - Letter of Credit Agreement." In the event that sufficient collateral cannot be maintained relative to these requirements, Oracle Re may be required to negotiate with its reinsureds to reduce the size of the reinsurance transactions, thereby decreasing the amounts of letters of credit and related collateral requirements under the LOC Agreement. Moreover, if Oracle Re were unable to furnish sufficient collateral or otherwise were to fail to satisfy any covenant or requirement under the LOC Agreement, it may be required to liquidate all or a substantial portion of its investment portfolio or otherwise secure its obligations under its reinsurance agreements, which would likely have a material adverse effect on the business and operations of the Company.
Investments and Market Risk. At December 31, 1999, the Company has allocated $102.5 million, or 86.1% of the Company's investment portfolio, among a number of investment managers that utilize diverse investment strategies and to investments in the LLC, the assets of which are invested among similar investment managers. Ninety percent of the Company's investment in the LLC consists of redeemable preferred securities carrying a cumulative fixed dividend of 15.5%. The ability of the LLC
The Company's fixed maturity investments subject it to risks resulting from changes in interest rates. If interest rates were to increase by 10% from their December 31, 1999 levels, the fair value of the Company's fixed maturity investments, other than the preferred securities of the LLC, would decline by approximately $1.0 million as compared to a decline of approximately $0.6 million at December 31, 1998. This analysis incorporates numerous assumptions and estimates and assumes no changes in the Company's investment portfolio in reaction to such interest rate changes. Consequently, the results of this analysis will likely be different from the actual changes experienced under given interest rate scenarios and those differences may be material.
The information required by Item 8 is included in this Form 10-K beginning on page 16 of this Form 10-K.