In October 2005, we terminated our lease agreement for office space in Duluth, Georgia. We do not currently own or lease any properties and do not anticipate acquiring or leasing any properties.
On May 25, 2005, Global Preferred completed its sale of Global Preferred Re, which comprised substantially all of its assets, to AEGON for 4,503,274 shares of AEGON common stock. As a result, our operations and substantially all operating cash flows, except for investment income and wind-up expenses have ceased. Effective May 26, 2005, Global Preferred adopted the liquidation basis of accounting. The asset sale resulted in no further premium or reinsured policy revenues after May 25, 2005. Additionally, no benefits, claims and expenses, change in future policy benefits, reinsurance expense allowances, net, or amortization of deferred acquisition costs were incurred after May 25, 2005. The selected financial data for the 145 day period ended May 25, 2005 are not comparable to the prior years ended December 31 due to the shortened reporting period.
The following analysis of our financial condition and results of operations should be read in conjunction with “Selected Financial Data” and the financial statements and accompanying notes included elsewhere in this report.
Global Preferred was incorporated in Delaware in 1995 as a holding company and, until May 2005, owned all of the outstanding capital stock of Global Preferred Re, and until July 2005, owned all of the outstanding capital stock of Global Preferred Solutions, Global Preferred Resources and Preferred Advantage. Global Preferred Re was formed during 1995 as a Bermuda company registered as a long-term insurer under the Bermuda Insurance Act 1978. Global Preferred Solutions, Global Preferred Resources and Preferred Advantage were formed during 2003.
Upon changing to the liquidation basis of accounting on May 26, 2005, we recorded an $8.4 million increase to net assets, which included a charge of $6.7 million of estimated future operating costs and settlement reserves during liquidation.
The following represents the estimated future operating costs and settlement reserves during liquidation:
Settlement reserves and other estimated costs of liquidation represent management’s best estimate of the anticipated costs to settle expected claims against Global Preferred that result from the plan of reorganization and ultimate dissolution. Periodically, the board of directors reviews management’s estimates and makes adjustments to the estimated future operating costs and settlement reserves as deemed necessary.
On July 6, 2005, our board of directors approved the distribution of all of the AEGON common shares received by us pursuant to the Reorganization Agreement, to our stockholders of record as of June 1, 2005. The distribution consisted of approximately 1.07 AEGON common shares for each share of Global Preferred common stock. On July 8, 2005, we initiated the distribution of the AEGON common shares in whole shares. Fractional AEGON common shares remaining from the distribution of the whole shares were liquidated and the cash totaling approximately $8,000 was distributed to our stockholders on December 28, 2005. Together, these distributions represent the distribution of all of the consideration received by Global Preferred from AEGON for the sale of Global Preferred Re in May 2005 and represent substantially all of the assets to be distributed to stockholders under the Dissolution Plan.
On July 6, 2005, we entered into transition agreements with certain of our former executive officers. Pursuant to the terms of these agreements, each of these officers resigned as an officer of Global Preferred, but continued as an employee until August 19, 2005 to assist with the wind-up and dissolution of Global Preferred. In addition, the transition agreements amended the employment agreement of each of the respective executive officers to modify the restrictive covenants of the employment agreement to permit such employee to own and participate in the operations of a non-affiliated company formed by those executive officers. As disclosed in their respective transition agreements, the severance amounts shall be paid in accordance with our regular payroll practices, provided that (i) Global Preferred may, in its sole discretion, at any time elect to pay any remaining installments in a lump sum and (ii) Global Preferred agrees that any installments remaining unpaid at the time of the transfer of the remaining assets of Global Preferred to a liquidating trust will be paid to those officers prior to such transfer. The severance amounts remaining to be paid to those certain executive officers as of December 31, 2005 total $757,000.
Additionally, on July 6, 2005, Global Preferred completed the sale of its remaining subsidiaries, Global Preferred Solutions, Global Preferred Resources, and Preferred Advantage, to a company that is owned and managed by certain of our former officers. These subsidiaries were substantially inactive. We received $300 in consideration for these subsidiaries which was recorded as an increase in net assets in liquidation as part of the adjustment for changes in fair value of invested assets.
Our principal business objective was to align the long-term interests between independent marketing organizations and life insurance companies. Both the IMOs and insurers benefited from mutually rewarding relationships based on aligned interests, a dedication to improving the quality of business written, and a focus on managing insurance and distribution risk for long-term economic rewards.
Our core business consisted of providing reinsurance on business that resulted from a relationship with the independent agents of an IMO affiliate of AEGON USA, Inc. Although our reinsurance business was directed to us through these independent agent relationships, the life insurance and annuity policies that we reinsured were underwritten and issued by various ceding life companies. We wrote three types of reinsurance on a quota share basis: renewable term, coinsurance and modified coinsurance.
Reinsurance Revenues. For renewable term reinsurance, we recorded as “premiums” the amount of reinsurance premiums we received over the payment periods of the reinsured policies. For policies reinsured on a coinsurance or modified coinsurance basis, we recorded as “reinsured policy revenues” our proportionate share of the gross revenues received by the ceding life company over the payment periods of the reinsured policies. These revenues represented the policy mortality and expense charges, asset-based fees and deferred sales charges that had been assessed against the reinsured policy account balances.
Reinsurance Expenses. Regardless of the type of reinsurance, our related expenses may have included: (1) benefits, claims and settlement expenses, which represented our share of the payments made under the reinsured policies during the period, the change in claims in the course of settlement and the change in claims incurred but not reported; (2) expense allowances paid to the ceding life company for expenses associated with the reinsured policies,
including commissions and costs associated with underwriting, marketing, policy issue and maintenance; and (3) amortization of deferred acquisition costs, which are discussed in more detail below.
Deferred acquisition costs were amortized over the lives of the underlying policies, in conformity with the terms of the reinsurance agreement. Under the renewable term agreements, deferred acquisition costs were amortized in proportion to the premium revenue related to the mortality risk reinsured. Such premium revenue was estimated using the same assumptions used for computing liabilities for future policy benefits.
Under the coinsurance and modified coinsurance agreements, the amortization of the deferred acquisition costs was in proportion to the ratio of gross profits recognized during the then current period to total actual and future expected gross profits. During each accounting period, assumptions used in calculating the amortization of deferred acquisition costs reflected actual experience for the then current accounting period. We also reviewed, on a periodic basis, our evolving experience concerning our assumptions with regard to mortality, persistency, investment yields and expenses in determining our estimate of anticipated future gross profits.
Liabilities for future policy benefits under coinsurance and modified coinsurance agreements were equal to reinsured policy account balances on the underlying life insurance and annuity policies. With regard to the separate account benefits reinsured on a modified coinsurance basis, we recorded the liabilities as an offset to related assets as our intentions and rights under the agreements with the ceding life companies met the appropriate conditions governing rights of setoff.
Liabilities for future policy benefits under our reinsurance agreements may have included provisions for claims that had been incurred but had not yet been paid. A portion of these claims represented claims reported to us that were in the course of settlement. The remainder of this liability represented claims that may have been incurred but not yet reported to us.
Investments. Prior to the sale of Global Preferred Re, we classified all fixed maturity securities and equity securities that were not classified as trading securities as “available for sale.” Such securities were reported at fair value. Fixed maturity securities available for sale were so classified based upon the possibility that such securities could have been sold prior to maturity if that action enabled us to execute our investment philosophy and appropriately match investment results to operating and liquidity needs. Equity securities available for sale were so classified because we did not intend to actively trade such securities nor hold them to maturity. Unrealized gains and losses on marketable equity securities and fixed maturity securities available for sale, less applicable deferred income taxes, were reported as a separate component of “accumulated other comprehensive income” within stockholders’ equity. Investment income was recognized as it accrued or became legally due. Other equity investments, classified as trading securities, were bought and held principally for the purpose of selling them in the near term. Unrealized gains and losses on trading securities were reported as a separate revenue component on the income statement.
The following table indicates, by ceding life company: (1) the names and types of insurance products reinsured by Global Preferred Re prior to the sale; (2) the type of reinsurance agreement applicable to each; (3) policy issue dates reinsured under each agreement; and (4) the commencement date of the reinsurance.
“VUL” means variable universal life product. “VA” means variable annuity product.
Under our reinsurance agreements with the ceding life companies, we reinsured variable life insurance and variable annuity policies on either a renewable term basis or a coinsurance and modified coinsurance basis. The policies we reinsured on a renewable term basis represented 59% of our reinsurance revenues for the 145 day period ended May 25, 2005. The policies we reinsured on a coinsurance and modified coinsurance basis represented 41% of our reinsurance revenues for the same period. Of the 41%, 57% related to variable life insurance policies and 43% related to variable annuity policies.
Premiums. Premiums decreased $292,000, or 2%, from $17.4 million for the year ended December 31, 2003 to $17.1 million for the same period in 2004. The majority of the premium decrease was due to the decreasing business in force under our renewable term agreements, which is partially offset by an increase in the average premium per policy. Policies in force are decreased because the number of policy surrenders and lapses exceeded the number of new policies reinsured. Average premiums per policy increase as policyholders age.
Additionally, for the year ended December 31, 2004, reinsured policy revenues reflected an increase of $130,000 of reinsurance fees resulting from payments to us from Western Reserve to resolve certain settlement differences in the administration of our variable universal life coinsurance and modified coinsurance reinsurance agreements. These settlement adjustments also resulted in a decrease in benefits, claims and settlement expenses, a decrease in reinsurance expense allowances, net and an increase in amortization of deferred acquisition costs of $63,000, $73,000 and $178,000, respectively, for a total increase in income before income tax of $88,000.
Net Investment Income. Net investment income increased $442,000, or 109%, from $407,000 for the year ended December 31, 2003 to $849,000 for the same period in 2004, primarily due to the increased average size of our fixed maturity and equity securities portfolio during 2004 as compared to the average size of our fixed maturity and equity securities portfolio in 2003. The increase in our fixed maturity and equity securities portfolio resulted from
Change in Future Policy Benefits. Change in future policy benefits decreased $409,000, or 38%, from $1.1 million for the year ended December 31, 2003 to $645,000 for the same period in 2004. The decrease resulted from the aging of the policies and the decrease in business in force reinsured on a renewable term basis.
Interest Expense. Interest expense decreased $158,000, or 42%, from $375,000, for the year ended December 31, 2003 to $217,000 for the comparable period in 2004. The decrease was due to the repayment on July 29, 2004 of the $5 million promissory note, plus outstanding interest, due to Money Services, Inc., a subsidiary of AEGON USA, Inc.
Income Taxes. Due to higher levels of income before income taxes, income taxes increased $572,000, or 57%, from $1.0 million for the year ended December 31, 2003 to $1.6 million for the same period in 2004. The “small life insurance company deduction” available under Section 806 of the Internal Revenue Code for qualifying life insurance companies can reduce the effective federal income tax rate from 34% to less than 20% depending upon
The following tables present certain unaudited quarterly consolidated statements of income data on a going concern basis through the sale of Global Preferred Re on May 25, 2005, as well as the percentage of total revenue represented by each item. The information had been derived from the unaudited consolidated financial statements. The unaudited consolidated financial statements on a going concern basis had been prepared on substantially the same basis as the audited consolidated financial statements on a going concern basis contained herein and all adjustments, consisting only of normal recurring adjustments, which we considered to be necessary to present fairly this information when read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere herein.
As of December 31, 2005, we had invested assets totaling $4.3 million, at net realizable value. Due to the sale of Global Preferred Re, the amounts are not comparable from 2005 to prior years. The table below shows the aggregate amounts of fixed maturity securities, equity securities, cash and cash equivalents, and reinsured policy loans comprising our portfolio of invested assets:
Since May 26, 2005, our operations have been limited to winding-up our business and affairs, selling our remaining assets and discharging our known liabilities. The Reorganization Agreement provides that, within twelve months after closing of the asset transfer, we must dissolve and distribute all of our remaining assets to our stockholders, after making adequate provision for our liabilities in accordance with Delaware law.
On July 6, 2005, our board of directors approved the distribution of all of the AEGON common shares to our stockholders of record as of June 1, 2005. As of June 1, 2005, Global Preferred had 4,199,149 shares of common stock outstanding. The distribution consisted of approximately 1.07 AEGON common shares for each share of Global Preferred common stock. On July 8, 2005, we initiated the distribution of the AEGON common shares in whole shares. Fractional AEGON common shares remaining after the distribution of the whole shares were liquidated and the cash totaling approximately $8,000 was distributed to our stockholders on December 28, 2005. Together, these distributions represent the distribution of all the consideration received by Global Preferred from AEGON for the sale of Global Preferred Re in May 2005 and represent substantially all of the assets to be distributed to stockholders under the Dissolution Plan.
As of December 31, 2005, Global Preferred had 911 AEGON common shares, which were being held on behalf of stockholders who had not claimed their ownership. On January 5, 2005, the remaining 911 AEGON common shares were distributed. Our board of directors plans to distribute any remaining cash to our stockholders, after making adequate provision for its liabilities in accordance with Delaware law. We expect that it will be necessary to retain a portion of our liquid assets to pay liabilities that may arise after completion of the dissolution; therefore, our board of directors intends to transfer a portion of our assets to a liquidating trust. The liquidating trust will permit Global Preferred to dissolve and, as required under Delaware law, have assets still available to be applied to liabilities after the dissolution. In accordance with the Reorganization Agreement, if the board of directors determines to transfer assets to a liquidating trust, then the transfer must occur on or before May 25, 2006.
Due to the sale of Global Preferred Re, the dissolution of Global Preferred and the adoption of liquidation basis of accounting effective May 26, 2005, the cash flows for the 145 day period ended May 25, 2005 are compared below to the years ended December 31, 2003 and 2004. The statements of cash flows do not reflect adjustments recorded upon the change to the liquidation basis of accounting adopted on May 26, 2005.
Operating Cash Flows. Net cash flows provided by operating activities were $10.8 million and $9.1 million for the years ended December 31, 2003 and 2004, respectively and $3.1 million for the 145 day period ended May 25, 2005. Cash flows provided by operations in the shortened period in 2005 related primarily to policies previously in force because we utilized less cash to acquire new reinsurance business than was provided by in force business.
Cash flows provided by operations in 2004 related to new policies reinsured under coinsurance and modified coinsurance reflected net payments of $69,000 to Western Reserve to reinsure policies issued in 2004, and cash flows provided by operations for policies previously in force under coinsurance and modified coinsurance and by all policies reinsured under renewable term reinsurance of $14.2 million. Other cash flows used in operating activities of $5.0 million in 2004 were the result of cash payments for operating expenses, income taxes and interest expenses.
The following table shows our contractual obligations and commitments as of December 31, 2005, which are reported in the statement of net assets in liquidation as accrued expenses and accounts payable or estimated future operating costs. None of these commitments were assumed by AEGON in connection with the sale of Global Preferred Re. We paid the last payments for the office lease and operating leases in September 2005. No further amounts are due under the office and operating leases. The severance payments and benefits are due to those employees that have been terminated or that will be terminated in the near future as a result of the sale of Global Preferred Re and subsequent dissolution of Global Preferred.
Further information is included elsewhere herein and in Note 11 to the Financial Statements.
Certain statements made in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to the “safe-harbor” provisions of that Act. Additionally, any written or oral statements made by us or on our behalf may include forward-looking statements that reflect our current views with respect to future events and financial performance. These statements may include, but are not limited to statements relating to reinsurance revenues, gross profits, cash flows, and net income in future periods. Such statements often include the words “believes,” “expects,” “assumes,” “predicts,” “continue,” “potential,” “should,” “could,” “can,” “may,” “will,” “proposes,” “anticipates,” “intends,” “plans,” “estimates,” “projects,” and variations or negations of such expressions or similar expressions. When we make forward-looking statements, we are basing them on our management’s beliefs and assumptions, using information currently available to us. Because such forward-looking statements involve risks, both known and unknown, and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements, including but not limited to:
The timing of any distributions of remaining assets and the impact of distributions on the adequacy of reserves available to pay costs and expenses arising during liquidation;
These forward-looking statements are subject to change and uncertainty that are beyond our control and have been made based upon our expectations and beliefs concerning future developments and their potential effect on our business. We cannot assure you that future developments will be in accordance with our expectations or that the effect of future developments will be those we anticipate. Actual results could differ materially from those we expect, depending upon the outcome of certain factors, including those described in the forward-looking statements. We caution readers not to place undue reliance on these forward-looking statements, which speak only as of their dates. We have described some important factors that could cause our actual results to differ materially from our expectations in ”Risk Factors” included elsewhere herein. You should carefully review these risks and additional risks described in other documents we file from time to time with the Securities and Exchange Commission, including quarterly reports on the Form 10-Q. Except as otherwise required by federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Notes to Financial Statements for the Years Ended December 31, 2003, 2004 and 2005