We conduct our operations from leased office space located at Cumberland House, 1 Victoria Street, Hamilton, HM 11, Bermuda. Annuity and Life Re America conducts its operations from leased space located at 406 Farmington Avenue, Farmington, Connecticut, USA. We believe our space is adequate to meet our current and expected needs.
The following table presents 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 with our consolidated financial statements and accompanying notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report.
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 our 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.
With the exception of historical information, the matters contained in this report are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act. 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
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 us; our ability to successfully implement our operating strategies; material changes in the level of our 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 the 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.
The profitability of the life reinsurance product line depends in large part on the volume and amount of death claims incurred. While death claims are reasonably predictable over many years, claims become less predictable over shorter periods and are subject to fluctuation from quarter to quarter and year to year. Significant fluctuations from period to period could adversely affect the results of operations.
We began our insurance operations on April 17, 1998 following the completion of our initial public offering and direct sales of our common shares. A loss of $449,000 was incurred during the three month period ended March 31, 1998 relating to expenses and costs incurred in our formation and organization. For purposes of this discussion, we compare our results for the year ended December 31, 1999 to our results for the eight and one half month period ended December 31, 1998. Part of the difference in our operating results for these
two periods is attributable to the difference in length of the two operating periods. Information regarding the full year ended December 31, 1998 is included in the financial statements filed as a part of this report.
Net Income. For the year ended December 31, 1999, we had consolidated net income of $35,703,000, or $1.40 per common share ($1.31 per common share on a fully diluted basis), compared with $0.81 per common share ($0.76 per common share on a fully diluted basis) for the initial operating period of approximately eight and one-half months ended December 31, 1998. Earnings per share for the year ended December 31, 1998 has been calculated using earnings and the number of shares outstanding since the beginning of the second fiscal quarter.
Net Premiums. Net premium revenue for the year ended December 31, 1999 was $100,835,000, an increase of 261% over the initial operating period of approximately eight and one-half months ended December 31, 1998. All premium revenue was derived from traditional ordinary life reinsurance we developed directly and through the use of intermediaries. The growth reflects the level of new business written and the increase in the face amount of insurance in force. At December 31, 1999 the total face amount of life insurance in force was $45.4 billion compared with $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.
Claims and Policy Benefits. Claims and Policy Benefits for the year ended December 31, 1999 were $79,953,000 or 79% of net premium as compared with $23,297,000 or 83% of net premium for the initial operating period of eight and one-half months ended December 31, 1998. Mortality experience has been
Interest Credited to Interest Sensitive Contract Liabilities. Interest credited to interest sensitive contract liabilities, which are the liabilities we assume under reinsurance agreements we enter into, was $22,313,000 for the year ended December 31, 1999, as compared with $1,989,000 for the initial operating period of eight and one-half months ended December 31, 1998. This increase reflects the growth in 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 $64,606,000 for the year ended December 31, 1999, as compared with $8,927,000 for the initial operating period of eight and one-half months ended December 31, 1998.
Investments. Invested assets, including cash and cash equivalents, amounted to $304,060,000 at December 31, 1999 as compared with $342,614,000 at December 31, 1998. The change in invested assets during 1999 is due primarily to the unrealized losses incurred in the year, the funds used in our operating activities and payment of shareholder dividends. At December 31, 1999 unrealized losses total $11,269,000 as compared with total unrealized gains of $3,723,000 at December 31, 1998. The change in unrealized gains and losses is principally related to the increase in the general level of interest rates during 1999.
Our results of operations and our financial condition are significantly affected by the performance of our investments and by changes in interest rates. During a period of declining interest rates, if our investments are sold, called, prepaid or redeemed, we may be unable to reinvest the proceeds in securities of equivalent risk with comparable rates of return. During a period of rising interest rates, the fair value of our invested assets could decline. In addition, rising interest rates could also cause disintermediation, which in turn could cause us to sell investments at prices and times when the fair values of these investments are less than their amortized cost. We believe that our traditional life insurance liabilities are not highly interest rate sensitive and, therefore, the effects of fluctuating interest rates on these liability cash flows are not significant. For interest sensitive liabilities, the cedent utilizes asset/liability matching to minimize the impact of changes in interest rates. We have not engaged in hedging activities to mitigate the effects of interest rate changes on our invested assets and related liabilities, although we may do so in the future.
Our invested assets consist primarily of fixed maturity securities. These fixed maturity securities are invested primarily in U.S. government obligations, foreign government obligations excluding emerging markets, public utilities obligations, corporate fixed maturities and mortgage backed securities.
At December 31, 1999, mortgage backed securities represented 37% of invested assets, as compared with 33% at December 31, 1998. Investors in these securities are compensated primarily for reinvestment risk rather than credit quality risk. Investments in mortgage backed securities include collateralized mortgage obligations 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 and the Federal Home Loan Mortgage Corporation, 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, 1999 and 1998.
Funds Withheld at Interest -- Interest Sensitive Contract Liabilities. At December 31, 1999 and 1998 the liability related to our annuity reinsurance agreements in the amount of $1,603,383,000 and $1,283,676,000 was included on the balance sheet as Interest Sensitive Contract Liabilities. The products reinsured under these agreements are general account deferred annuity policies containing minimum interest guarantees and market value adjustment features. At December 31, 1999 and 1998, assets related to these annuity reinsurance agreements with a carrying value of $1,532,653,000 and $1,200,101,000, respectively, were included on our balance sheet as Funds Withheld at Interest. Funds Withheld at Interest is equivalent to the statutory reserve held by the ceding company. This reserve is calculated in accordance with the actuarial valuation method known as the Commissioners Annuity Reserve Valuation Method. Under the reinsurance agreements the ceding company is obligated to credit interest on the outstanding amounts of these funds based on the return of the underlying assets held by the ceding companies in segmented portfolios. The underlying assets, which include fixed income and convertible fixed income securities, are managed by investment managers appointed by the original cedant in accordance with investment guidelines and policies that are included in the reinsurance agreements. Accordingly, the carrying value of the Funds Withheld at Interest is not directly exposed to market risk with respect to the assets held by the ceding company.
The profitability of these agreements is dependent on earning a targeted spread between the interest earned on the Funds Withheld at Interest, and the interest credited to the policyholder liabilities.
The product line is interest rate sensitive, as fluctuations in the general level of interest rates from period to period may cause fluctuations in the interest spread earned. The product type reinsured and the structure of the reinsurance agreement tend to mitigate the interest rate sensitivity of this business. Further, due to the structure of the reinsurance agreement, we are not directly exposed to market risk with respect to the assets underlying the reinsurance agreements.
Our liquidity and capital resources are a measure of our overall financial strength and our ability to generate cash flows from our operations to meet our operating and growth needs. Our principal sources of funds are premiums received, net investment income, proceeds from investments called, redeemed or sold, cash and short term investments. The principal obligations and uses of the funds are the payment of policy benefits, acquisition and operating expenses and the purchase of investments.
Net cash used by operating activities was $18,920,000 for the year ended December 31, 1999, as compared with $16,388,000 for the initial operating period of eight and one-half months ended December 31, 1998. In addition to the difference in length of the operating periods compared, the increase in the cash used by operating activities is primarily related to the growth and development of our insurance operations and the initial costs associated with writing new life reinsurance and annuity reinsurance business. The net cash used by operating activities was funded from available cash balances and proceeds from our sales of fixed maturity securities. During the next twelve months, we believe our obligations will be adequately provided for by our principal sources of funds.
Our capital structure currently consists entirely of equity. At December 31, 1999, our total capitalization after deducting certain loans to management and including retained earnings and accumulated other comprehensive income (loss) amounted to $392,055,000, as compared with $375,340,000 at December 31, 1998. We believe this level of capital is sufficient to support our insurance writings and growth for the near future.
On April 17, 1998 we completed an initial public offering of 19,640,579 common shares. Total proceeds received net of underwriting discounts and commissions were $276,932,164. Simultaneous with the initial closing of the public offering, we sold 5,859,420 common shares and 397,500 Class B warrants to certain investors, members of our Board of Directors and management. Total net proceeds were $82,617,806. Substantially all of the net proceeds from these offerings were used to provide working capital and to capitalize our operating subsidiary, Annuity & Life Reassurance, Ltd.
We have no material commitments other than as outlined in "Acquisition" below.
Capitol Bankers is domiciled in the United States and is authorized to conduct its life insurance business in 43 states of the United States. After we complete our pending acquisitions, we expect Capitol Bankers to focus its operations on the United States life and annuity reinsurance markets.
We experienced no significant disruptions to our business as a result of the conversion to the Year 2000. We incurred no material Year 2000 expenses during 1999, and all expenses incurred were funded from operations. We do not expect to incur significant Year 2000 expenses during 2000 and we expect to fund any such expenses from operations.
The Company's 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.
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 KPMG regarding audit scope, timing, results and to discus other auditing and financial reporting matters. Our auditors have direct access to and meet privately with the Audit Committee.
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 which was incorporated on May 28, 1999. Holdings, Annuity and Life Reassurance and Annuity and Life Re 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 and Annuity & Life Re America. All significant inter-company accounts and transactions have been eliminated upon consolidation.
The Company calculates basic earnings per common share and earnings per common share-assuming dilution.
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 this new Statement and has concluded that it is not likely to significantly affect its current financial reporting.
(a) The amortized cost and fair values of investments in fixed interest securities classified as available for sale at December 31, 1999 and 1998 are as follows:
During the year ended December 31, 1999 there were sales of fixed interest securities amounting to $226,566,212, as compared with $309,328,762 during the year ended December 31, 1998.
(b) The following table sets forth certain information regarding the investment ratings of the Company's fixed interest securities portfolio at December 31, 1999 and 1998.
(c) At December 31, 1999 and 1998 letters of credit totaling $121,475,000 and $46,425,000, 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, 1999 and 1998 investments of a similar amount were pledged as collateral for these letters of credit.
The Company is authorized to issue 100,000,000 common shares of par value $1.00 each.
In the event of a liquidation, dissolution or winding up of the Company, the holders of the common shares are able to share equally in the assets of the Company, if any remain after payment of all liabilities and the liquidation preference of any outstanding preference shares. Certain restrictions exist with respect to the
The exercise price of the Warrants is $15.00, which was equal to the initial public offering price per share of the Company's common shares. The Class A Warrants become exercisable over three years commencing on the first anniversary of the consummation of the Company's initial public offering. The Class A Warrants will expire on January 15, 2008.
Certain directors of the Company are also owners, directors, or officers of Inter-Atlantic Capital Partners, Inc. ("Inter-Atlantic"). In 1998 the Company entered into an agreement with Inter-Atlantic, whereby Inter-Atlantic agreed to provide financial advisory services to the Company in connection with its organization and initial public offering. The Company reimbursed Inter-Atlantic for expenses incurred in connection with the organization of the Company and the initial public offering of $683,000 and paid a fee of $2.0 million as compensation for financial advisory services.
One of the strategic investors is affiliated with Prudential Securities Incorporated, one of the underwriters of the Company's initial public offering, and with The Prudential Investment Corporation, which serves as one of the Company's investment managers. The Company paid a fee of $1.0 million to Prudential Securities Incorporated for investment banking and financial advisory services in connection with the Company's initial public offering. The Company has agreed to pay a fee for investment management services to The Prudential Investment Corporation based upon the amount of funds managed. The fee is based upon a sliding scale and has been determined on an arms-length basis. The Company has entered into a life reinsurance agreement with the Prudential Insurance Company of America to reinsure certain mortality risks. The contract has been negotiated under normal commercial terms.
At December 31, 1999 and 1998 there were loans outstanding from management for stock purchases of $1,150,000 and $1,325,000, respectively, with accrued interest thereon of $136,691 and $66,068, respectively. Interest income of $70,623 and $66,068 has been recognized for the years December 31, 1999 and 1998, respectively, on these loans.
The minimum exercise price of the options will be 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 shall be 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, shall be granted an option to purchase 15,000 common shares on the date he or she becomes an eligible non-employee Director. The options shall have an exercise price equal to the fair market value of the optioned Common Shares on the date the options are granted and shall be exercisable in three equal installments commencing with the first anniversary of the grant date. In addition, subject to certain conditions, each non-employee Director shall be granted an option to purchase 2,000 Common Shares at each successive annual general meeting. These options shall have an exercise price equal to the fair market value of the optioned Common Shares on the date the options are granted and shall be immediately exercisable if granted after April 8, 1999.
It should be noted that such retrocession 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.
At December 31, 1999 and 1998, the Company did not have a material concentration of investments in fixed income securities in a single investee, industry or geographic location.
The carrying value of assets classified as cash and cash equivalents is approximately their fair value.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." This Standard requires public companies to report financial and descriptive information about their reportable operating segments. Operating segments, as defined, are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance.
To date the Company has written of a number of ordinary life reinsurance and annuity reinsurance contracts. The Company views life and annuity reinsurance as one business segment and accumulates financial data for this segment when assessing performance and allocating resources. As the Company only has one business segment at the current time, management feels that the information presented in the balance sheet and statement of operations is sufficient to understand the business segment of the Company.
On September 7, 1999 the Company, through Annuity and Life Re America, signed an agreement to acquire Capitol Bankers Life Insurance Company ("Capitol Bankers") for approximately $2,000,000 plus the capital and surplus of Capitol Bankers. Upon completion of the acquisition, the Company intends to contribute additional capital of approximately $18 million. Completion of the acquisition, however, is subject to regulatory approval. The acquisition price and subsequent capital contribution will be funded from available cash balances and proceeds from the sale of fixed maturity securities held by the Company. Prior to closing, the in force insurance business of Capitol Bankers will be 100% reinsured by Capitol Bankers to a third party. This transaction will be accounted for as a purchase.
Under current Bermuda law neither Holdings nor Annuity and Life Reassurance is required to pay any taxes in Bermuda on either income or capital gains. Holdings and Annuity and Life Reassurance have each 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 ANNUITY AND LIFE RE (HOLDINGS), LTD.
Annuity and Life Re America is subject to all applicable Federal and State taxes of the United States.
The Company's ability to pay dividends depends on the ability of its operating subsidiaries to pay dividends to the Company. While the Company itself is not subject to any significant legal prohibitions on the payment of dividends, Annuity and Life Reassurance is subject to Bermuda regulatory constraints which affect its ability to pay dividends to the Company. Annuity and Life Reassurance is prohibited from declaring or paying a dividend if such a payment would reduce its statutory surplus below the required minimum of $250,000. No such restriction currently exists.
The unaudited quarterly financial data for the years ended December 31, 1999 and 1998 are as follows: