December 31, 2003, our liability for annuity reinsurance agreements amounted to approximately $58 million and $671 million, respectively.
to us through our settlements with our ceding companies. Because the amount of invested assets underlying our Funds withheld at interest receivable has decreased significantly due to the recapture and termination of our reinsurance agreement with Transamerica, we expect our net investment income earned on Funds withheld for 2005 to be substantially less than 2004. Approximately $13.4 million of net investment income earned on Funds withheld was generated on account of our annuity reinsurance agreement with Transamerica in 2004.
products by $7,400,000, bringing our total carried reserve for these products to $11,000,000 at December 31, 2003. The decrease was a direct result of the recapture by Hartford Life in the second quarter of 2003 of its agreement with us, which was previously our largest variable annuity reinsurance agreement. The reduction in the reserves caused by the recapture of the Hartford Life agreement was partially offset by a $3,180,000 increase in reserves associated with our guaranteed minimum death benefit and guaranteed minimum income benefit agreement with CIGNA.
On December 31, 2004, the Company entered into a binding letter of intent with Transamerica Occidental Life Insurance Company (“Transamerica”) that provided for the novation of its life reinsurance agreements with Scottish Re Limited (“Scottish Re”) and Fidelity and Guaranty Life Insurance Company (“F&G”) to Transamerica as of December 31, 2004. The letter of intent also provided that, upon consummation of the novation of the life reinsurance agreements, Transamerica would terminate its annuity reinsurance agreement with the Company and recapture all business ceded under the agreement effective as of December 1, 2004.
The termination, recapture and novation transactions consummated by the Company in 2004 had a material impact on the Company’s results of operations. The following unaudited table shows summarized results of operations assuming that all of the termination, recapture and novation transactions occurred on January 1, 2004.
business. However, the Company has incurred significant operating losses. Further, the financial strength ratings of the Company’s operating subsidiaries were downgraded in 2002 and 2003 by A.M. Best, Standard & Poor’s, and Fitch Ratings to C+, BB-, and C, respectively. At the Company’s request, all three financial ratings have been withdrawn.
In addition, the Company has been attempting to engage Transamerica, and ultimately IL Annuity and Insurance Company, the primary insurance company under the Transamerica agreement, in discussions aimed at improving investment returns from the convertible bond portfolio and potentially redesigning the VisionMark product to reduce the minimum guarantee exposures from the Transamerica agreement. If the Company is not successful in convincing Transamerica and IL Annuity to restructure the portfolio and/or to redesign the product, it may incur additional losses on the agreement in the future.
may have been incurred and reported to the ceding company, but not yet reported to the Company due to timing delays. The average discount rate used to compute the Company’s reserves for future policy benefits, net of any receivable for reinsurance ceded, was approximately 5.1% for 2004.
(f) During the year ended December 31, 2002, the Company recognized a charge of $900,000 for securities that were impaired on other than a temporary basis.
The effective tax rate provided for in the financial statements is computed at a rate of zero. A substantial portion of the Company’s operations is based in Bermuda and as a result income is exempt from taxation.