e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2005
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-16561
ANNUITY AND LIFE RE (HOLDINGS), LTD.
(Exact Name of Registrant as Specified in Its Charter)
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Bermuda
(State or Other Jurisdiction of
Incorporation or Organization)
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66-0619270
(IRS Employer
Identification No.) |
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Cumberland House, 1 Victoria Street, Hamilton, Bermuda
(Address of Principal Executive Offices)
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HM11
(Zip Code) |
441-296-7667
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes þ No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of the registrants Common Shares (par value $1.00 per share) outstanding as of
November 4, 2005 was 24,543,811.
INDEX TO FORM 10-Q
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PAGE |
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PART I |
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FINANCIAL INFORMATION |
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Condensed Consolidated Financial Statements |
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Condensed Consolidated Balance Sheets
September 30, 2005 and December 31, 2004
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1 |
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Condensed Consolidated Statements of Operations for the
Three Months and Nine Months ended September 30, 2005 and
September 30, 2004
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2 |
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Condensed Consolidated Statements of Comprehensive Loss for the
Three Months and Nine Months ended September 30, 2005 and
September 30, 2004
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3 |
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Condensed Consolidated Statements of Changes in Stockholders
Equity for the Nine Months ended September 30, 2005 and
September 30, 2004
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4 |
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Condensed Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 2005 and September 30, 2004
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5 |
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Notes to Unaudited Condensed Consolidated Financial Statements
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6 |
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Managements Discussion and Analysis of
Financial Condition and Results of Operations
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24 |
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Quantitative and Qualitative Disclosures About Market Risk
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47 |
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Controls and Procedures
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47 |
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PART II |
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OTHER INFORMATION |
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Legal Proceedings
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48 |
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Unregistered Sales of Equity Securities and Use of Proceeds
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49 |
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Exhibits
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50 |
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51 |
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Master Agreement dated as of August 10, 2005 |
Rule 13a-14(a)/15d-14(a) Certification of the Company's Chief Executive Officer |
Rule 13a-14(a)/15d-14(a) Certification of the Company's Chief Financial Officer |
Section 1350 Certification of the Company's Chief Executive Officer |
Section 1350 Certification of the Company's Chief Financial Officer |
PART I
FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ANNUITY AND LIFE RE (HOLDINGS), LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. dollars)
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September 30, 2005 |
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December 31, 2004 |
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(unaudited) |
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Assets |
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Cash and cash equivalents |
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$ |
21,749,463 |
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$ |
56,394,484 |
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Fixed maturity investments at fair value (amortized cost of
$71,455,17 and $80,767,893 at September 30, 2005 and December
31, 2004, respectively) |
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71,150,222 |
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82,034,410 |
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Funds withheld at interest |
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50,962,885 |
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56,415,386 |
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Accrued investment income |
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677,662 |
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1,155,762 |
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Receivable for reinsurance ceded |
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77,016,411 |
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82,433,270 |
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Other reinsurance receivables |
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3,021,878 |
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4,306,931 |
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Deferred policy acquisition costs |
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5,592,316 |
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6,084,488 |
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Other assets |
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401,850 |
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580,625 |
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Total Assets |
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$ |
230,572,687 |
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$ |
289,405,356 |
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Liabilities |
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Reserves for future policy benefits |
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$ |
103,758,582 |
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$ |
109,860,843 |
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Interest sensitive contracts liability |
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50,691,337 |
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57,754,009 |
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Other reinsurance liabilities |
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13,202,482 |
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49,186,297 |
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Accounts payable and accrued expenses |
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2,867,363 |
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6,186,995 |
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Total Liabilities |
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170,519,764 |
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222,988,144 |
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Stockholders Equity |
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Preferred shares (par value $1.00; 50,000,000 shares authorized;
no shares outstanding) |
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Common shares (par value $1.00; 100,000,000 shares authorized;
24,543,811 and 26,338,528 shares issued and outstanding at
September 30, 2005 and December 31, 2004, respectively) |
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24,543,811 |
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26,338,528 |
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Additional paid-in capital |
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334,116,857 |
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333,810,766 |
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Stock warrants |
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1,350,000 |
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1,350,000 |
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Unamortized stock based compensation |
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(107,050 |
) |
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(490,415 |
) |
Accumulated other comprehensive (loss) income |
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(305,655 |
) |
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1,016,260 |
|
Accumulated deficit |
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(299,545,040 |
) |
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(295,607,927 |
) |
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Total Stockholders Equity |
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60,052,923 |
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66,417,212 |
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Total Liabilities and Stockholders Equity |
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$ |
230,572,687 |
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$ |
289,405,356 |
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See accompanying notes to unaudited condensed consolidated financial statements.
-1-
ANNUITY AND LIFE RE (HOLDINGS), LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in U.S. dollars)
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For the Three Months Ended |
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For the Nine Months Ended |
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September 30, |
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September 30, |
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2005 |
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2004 |
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2005 |
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2004 |
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Revenues |
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Net premiums |
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$ |
3,584,825 |
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$ |
9,906,337 |
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$ |
12,001,008 |
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$ |
34,565,859 |
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Investment income, net of related expenses |
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1,531,065 |
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4,780,211 |
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4,806,689 |
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17,875,012 |
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Net realized investment gains (losses) |
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99,507 |
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(84,868 |
) |
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500,650 |
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456,172 |
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Net change in fair value of embedded derivatives |
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654,444 |
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565,939 |
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1,105,853 |
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1,692,113 |
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Surrender fees and other revenues |
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33,574 |
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1,024,405 |
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94,887 |
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3,609,905 |
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Total Revenues |
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5,903,415 |
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16,192,024 |
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18,509,087 |
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58,199,061 |
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Benefits and Expenses |
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Claim and policy benefits |
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4,591,875 |
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5,669,394 |
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10,781,404 |
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24,683,101 |
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Interest credited to interest sensitive products |
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359,361 |
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5,513,653 |
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985,614 |
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10,865,545 |
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Policy acquisition costs and other insurance
expenses |
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|
715,013 |
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5,693,745 |
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3,079,459 |
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18,529,269 |
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Operating expenses |
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2,865,648 |
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2,410,937 |
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7,599,723 |
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12,446,874 |
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Total Benefits and Expenses |
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8,531,897 |
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19,287,729 |
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22,446,200 |
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66,524,789 |
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Loss before cumulative effect of a change in
accounting principle (Note 5) |
|
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(2,628,482 |
) |
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(3,095,705 |
) |
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(3,937,113 |
) |
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(8,325,728 |
) |
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Cumulative effect of a change in accounting
principle |
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(365,960 |
) |
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|
Net Loss |
|
$ |
(2,628,482 |
) |
|
$ |
(3,095,705 |
) |
|
$ |
(3,937,113 |
) |
|
$ |
(8,691,688 |
) |
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Loss per common share before cumulative effect
of a change in accounting principle per common
share |
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|
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Basic |
|
$ |
(0.10 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.32 |
) |
Diluted |
|
$ |
(0.10 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.32 |
) |
|
Cumulative effect of a change in accounting
principle per common share |
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Basic |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(0.01 |
) |
Diluted |
|
$ |
|
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|
$ |
|
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|
$ |
|
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|
$ |
(0.01 |
) |
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Net loss per common share |
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|
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Basic |
|
$ |
(0.10 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.33 |
) |
Diluted |
|
$ |
(0.10 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.33 |
) |
See accompanying notes to unaudited condensed consolidated financial statements.
-2-
ANNUITY AND LIFE RE (HOLDINGS), LTD.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited and in U.S. dollars)
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For the Three Months Ended |
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For the Nine Months Ended |
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September 30, |
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September 30, |
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2005 |
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2004 |
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|
2005 |
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|
2004 |
|
Net loss for the period |
|
$ |
(2,628,482 |
) |
|
$ |
(3,095,705 |
) |
|
$ |
(3,937,113 |
) |
|
$ |
(8,691,688 |
) |
|
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|
Other comprehensive (loss) income: |
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Unrealized holding (losses) gains
on securities arising during the
period |
|
|
(879,823 |
) |
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|
1,722,029 |
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|
(821,265 |
) |
|
|
(346,583 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Less reclassification
adjustment for net realized
gains (losses) in net loss |
|
|
99,507 |
|
|
|
(84,868 |
) |
|
|
500,650 |
|
|
|
456,172 |
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Other comprehensive (loss) income |
|
$ |
(979,330 |
) |
|
$ |
1,806,897 |
|
|
$ |
(1,321,915 |
) |
|
$ |
(802,755 |
) |
|
|
|
|
|
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
Total comprehensive loss |
|
$ |
(3,607,812 |
) |
|
$ |
(1,288,808 |
) |
|
$ |
(5,259,028 |
) |
|
$ |
(9,494,443 |
) |
|
|
|
|
|
|
|
|
|
|
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|
See accompanying notes to unaudited condensed consolidated financial statements.
-3-
ANNUITY AND LIFE RE (HOLDINGS), LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(Unaudited and in U.S. dollars)
|
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|
For the Nine Months Ended |
|
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|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
Preferred shares par value $1.00 |
|
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|
Balance at beginning and end of period |
|
$ |
|
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|
$ |
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
Common shares par value $1.00 |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
26,338,528 |
|
|
$ |
26,454,195 |
|
Issuance of shares |
|
|
|
|
|
|
|
|
Cancellation of shares |
|
|
(1,794,717 |
) |
|
|
(58,267 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
24,543,811 |
|
|
$ |
26,395,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
333,810,766 |
|
|
$ |
334,418,029 |
|
Issuance of shares |
|
|
|
|
|
|
15,000 |
|
Cancellation of shares |
|
|
306,091 |
|
|
|
(391,085 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
334,116,857 |
|
|
$ |
334,041,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock warrants |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
1,350,000 |
|
|
$ |
1,250,000 |
|
Issuance of warrants |
|
|
|
|
|
|
100,000 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
1,350,000 |
|
|
$ |
1,350,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized stock based compensation |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
(490,415 |
) |
|
$ |
(1,509,022 |
) |
Issuance of stock based compensation |
|
|
|
|
|
|
|
|
Cancellation of stock based compensation |
|
|
34,725 |
|
|
|
449,352 |
|
Amortization of stock based
compensation |
|
|
348,640 |
|
|
|
278,294 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
(107,050 |
) |
|
$ |
(781,376 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive (loss) income |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
1,016,260 |
|
|
$ |
1,840,849 |
|
Net unrealized losses on fixed maturity investments |
|
|
(1,321,915 |
) |
|
|
(802,755 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
(305,655 |
) |
|
$ |
1,038,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
(295,607,927 |
) |
|
$ |
(227,281,472 |
) |
Net loss |
|
|
(3,937,113 |
) |
|
|
(8,691,688 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
(299,545,040 |
) |
|
$ |
(235,973,160 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity |
|
$ |
60,052,923 |
|
|
$ |
126,071,430 |
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
-4-
ANNUITY AND LIFE RE (HOLDINGS), LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended |
|
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(3,937,113 |
) |
|
$ |
(8,691,688 |
) |
Adjustments to reconcile net loss to cash used by operating activities: |
|
|
|
|
|
|
|
|
Net realized investment gains |
|
|
(500,650 |
) |
|
|
(456,172 |
) |
Net change in fair value of embedded derivatives |
|
|
(1,105,853 |
) |
|
|
(1,692,113 |
) |
Amortization of premiums on fixed maturity investments |
|
|
775,412 |
|
|
|
816,630 |
|
Amortization of stock based compensation |
|
|
348,640 |
|
|
|
278,294 |
|
Stock warrants expense |
|
|
|
|
|
|
100,000 |
|
Cumulative effect of a change in accounting principle |
|
|
|
|
|
|
365,960 |
|
Changes in: |
|
|
|
|
|
|
|
|
Accrued investment income |
|
|
478,100 |
|
|
|
457,700 |
|
Other reinsurance receivables |
|
|
6,701,912 |
|
|
|
6,776,590 |
|
Deferred policy acquisition costs |
|
|
492,172 |
|
|
|
9,309,181 |
|
Other assets |
|
|
178,775 |
|
|
|
(70,940 |
) |
Reserves for future policy benefits |
|
|
(6,102,261 |
) |
|
|
(7,553,564 |
) |
Interest sensitive contracts liability, net of funds withheld at interest |
|
|
(504,318 |
) |
|
|
(14,164,633 |
) |
Other reinsurance liabilities |
|
|
(35,983,815 |
) |
|
|
(40,445,842 |
) |
Accounts payable and accrued expenses |
|
|
(3,319,632 |
) |
|
|
(1,540,624 |
) |
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(42,478,631 |
) |
|
|
(56,511,221 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Proceeds from sales and maturity of fixed maturity investments |
|
|
43,514,786 |
|
|
|
52,924,881 |
|
Purchase of fixed maturity investments |
|
|
(34,227,275 |
) |
|
|
(19,548,197 |
) |
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
9,287,511 |
|
|
|
33,376,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Purchase and cancellation of company stock |
|
|
(1,453,901 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(1,453,901 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
|
(34,645,021 |
) |
|
|
(23,134,537 |
) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period |
|
|
56,394,484 |
|
|
|
80,068,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
21,749,463 |
|
|
$ |
56,933,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash disclosures: amounts recorded in connection with the
cumulative effect of a change in accounting principle |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred policy acquisition costs |
|
$ |
|
|
|
$ |
(36,154,010 |
) |
|
|
|
|
|
|
|
|
|
Reserves for future policy benefits |
|
|
|
|
|
|
(1,878,760 |
) |
|
|
|
|
|
|
|
|
|
Interest sensitive contracts, net of funds withheld at interest |
|
|
|
|
|
|
38,398,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of a change in accounting principle |
|
$ |
|
|
|
$ |
365,960 |
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
-5-
ANNUITY AND LIFE RE (HOLDINGS), LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
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., which is licensed under
the laws of Bermuda as a long term insurer, Annuity and Life Re America, Inc., an insurance holding
company based in the United States of America, and Annuity and Life Reassurance America, Inc., a
life insurance company domiciled in the United States of America. Holdings, Annuity and Life
Reassurance, Ltd., Annuity and Life Re America, Inc. and Annuity and Life Reassurance America, Inc.
are collectively referred to herein as the Company.
As a result of significant operating losses over the past four years, the Company has reduced
its operations significantly through the novation, termination and recapture of many of its life
and annuity reinsurance agreements. The Company continues to receive premiums and pay claims under
its remaining reinsurance treaties; however, as more fully described in Note 2, the Company has
entered into an agreement to novate, or 100% coinsure, its remaining reinsurance treaties effective
on June 30, 2005. If the transactions contemplated by this agreement are consummated, the Company
will either be released from or indemnified for its obligations under each of its remaining
reinsurance treaties.
The accompanying unaudited condensed consolidated financial statements of the Company have
been prepared in accordance with accounting principles generally accepted in the United States of
America (U.S. GAAP) for interim financial information and in accordance with Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for
complete financial statements. These unaudited condensed consolidated financial statements should
be read in conjunction with the audited consolidated financial statements and notes thereto
contained in the Companys Form 10-K as of and for the year ended December 31, 2004. The accounting
policies used in preparing these unaudited condensed consolidated financial statements are
consistent with those described in Note 4 to the Companys audited consolidated financial
statements as of and for the year ended December 31, 2004. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included in these financial
statements. The results of operations for the three and nine months ended September 30, 2005 are
not necessarily indicative of results that may be expected for any other interim period or for the
full year.
2. Significant Events
Wilton Re Transaction
On August 10, 2005, the Company entered into a Master Agreement (the Master Agreement) with
Prudential Select Life Insurance Company of America and Wilton Reinsurance Bermuda Limited
(collectively, the Wilton Subsidiaries), each a direct or indirect wholly-owned operating
subsidiary of Wilton Re Holdings, Ltd. The Master Agreement provides for the novation to or 100%
coinsurance by the Wilton Subsidiaries effective as of June 30, 2005 (the Effective Date) of the
Companys life and annuity reinsurance treaties (the Treaties) identified in the Master
Agreement. The Master Agreement contemplates that the Company and the Wilton Subsidiaries will use
commercially reasonable efforts to obtain the consent of each counterparty to the Treaties to the
novation of such Treaties to the Wilton
-6-
Subsidiaries. If any of these consents cannot be obtained, then the Company and the
appropriate Wilton Subsidiary will enter into a 100% indemnity coinsurance agreement with respect
to such Treaties, effective as of the Effective Date.
Upon the closing of the transactions contemplated by the Master Agreement, the Company will
pay the Wilton Subsidiaries an aggregate settlement amount equal to $91.6 million, less any expense
reimbursement payments previously made by the Company to the Wilton Subsidiaries in connection with
the transactions, plus the amount of interest that will have accrued since June 30, 2005 at fixed
rates specified in the Agreement on certain assets being transferred to the Wilton Subsidiaries.
The $91.6 million settlement amount will consist of the funds withheld held by the cedents under
certain of the Treaties on the Effective Date, which assets totaled approximately $58.4 million on
that date, and cash and invested assets of approximately $33.2 million. If the cash flows arising
from the Treaties and the earnings on the invested assets to be transferred to the Wilton
Subsidiaries are positive between the Effective Date and the closing date of the Master Agreement
(the Closing Date), such positive amount will be paid to the Wilton Subsidiaries. If such cash
flows and earnings are negative, the negative of that amount will be paid to the Company.
Between the date of the Master Agreement and the first day of the first calendar month
beginning at least 28 days after the Closing Date or such other date as the parties shall mutually
agree (such date, the Transition Date), the Company will continue to administer the Treaties in a
manner consistent with current practices. The Wilton Subsidiaries will pay the Company a fee of
$30,000 per month for these administration services and will reimburse the Company to the extent
that the cost of any approved third party engaged to provide such services exceeds the $30,000 fee.
The Master Agreement includes mutual indemnification provisions covering, among other things,
all costs and expenses arising or resulting from any breach of any representation or warranty, any
breach of any covenant and certain excluded liabilities. Neither the Company nor the Wilton
Subsidiaries will have any liability for indemnification with respect to losses relating to
breaches of representations or warranties under the Master Agreement, unless and until the total of
all such losses exceeds $25,000, and then only for the amount by which such losses exceed $25,000.
The total liability for losses relating to breaches of representations or warranties under the
Master Agreement shall not exceed $2,000,000 in the aggregate for the Company, on the one hand, or
the Wilton Subsidiaries, on the other hand. In order to secure their indemnification obligations
under the Master Agreement, each of the Companys subsidiaries is required to maintain statutory
capital and surplus of at least $2,000,000 for 18 months following the Closing Date, and the
Company has agreed not to take any action that would reduce the statutory capital and surplus of
the Companys subsidiaries below such levels.
The consummation of the transactions contemplated by the Master Agreement is subject to
certain closing conditions, including the receipt of requisite regulatory and other approvals,
including the approval of the Companys shareholders and retrocessionaires. In connection with the
execution of the Master Agreement, the Companys directors and officers, as well as certain
significant shareholders, executed voting agreements obligating them to vote in favor of the
transactions contemplated by the Agreement (the Voting Agreements). Directors, officers and
shareholders holding collectively approximately 29.3% of the Companys outstanding common shares as
of the date of the Master Agreement (or 26.4% of the outstanding common shares entitled to vote as
of such date after giving effect to certain voting cutback provisions in the Companys Bye-laws)
signed voting agreements. As of September 30, 2005, the number of common shares held by directors,
officers and shareholders who signed voting agreements totaled approximately 31.5% of the Companys
outstanding common shares, or 28.1% of the outstanding common shares entitled to vote as of such
date after giving effect to the voting cutback provisions in the Companys Bye-laws.
-7-
The Master Agreement is terminable by any party if the closing of the transactions has not
occurred on or before January 2, 2006 and may also be terminated, in limited circumstances, by the
Company if the Companys Board of Directors determines it has a fiduciary obligation to pursue a
superior proposal. In such case, the Voting Agreements would terminate and the Company would be
obligated to pay the Wilton Subsidiaries a $500,000 break-up fee and any out of pocket expenses
they incurred in connection with the transactions. If the Master Agreement is terminated by any
party due to the failure of the Companys shareholders to approve the transaction, the Company
would be obligated to reimburse the Wilton Subsidiaries for the out of pocket expenses they
incurred in connection with the transactions. UBS Investment Bank acted as the Companys financial
advisor in connection with the transactions contemplated by the Master Agreement.
Upon consummation of the transactions, the Company anticipates that it will recognize a loss
of approximately $13.0 to $15.0 million, primarily reflecting the excess of the sum of the
aggregate carrying value of the cash and assets transferred to Wilton, plus transaction costs and a
write-off of deferred acquisition costs, over the aggregate carrying value of the liabilities
assumed by Wilton. Following the consummation of the transactions contemplated by the Master
Agreement, the financial condition and results of operations of the Company will remain subject to
certain contingencies, including obligations for amounts that may be due under previously
terminated or recaptured reinsurance agreements relating to deaths occurring prior to such
terminations or recaptures and obligations that have been 100% reinsured with third parties, but
for which the Company remains liable in the event the reinsurer is unable or unwilling to pay its
obligations. The Company also remains subject to certain third party claims, including an
outstanding claim by Transamerica for rescission or damages related to two life reinsurance
agreements novated to Transamerica effective as of December 31, 2004. The Company also has
continuing obligations under employment agreements with certain of its employees, including
obligations to make severance payments under certain circumstances. The amount of funds that may be
available for distribution from its subsidiaries to the Company and its shareholders will also
likely be limited by continuing regulatory requirements, policyholder obligations that will remain
following the Closing Date and normal working capital requirements.
Because the Company will continue to have residual commitments and contingencies following the
consummation of the transactions contemplated by the Master Agreement, it does not expect to be
able immediately to wind-down or dissolve the Company or its subsidiaries. The Company intends to
continue to explore strategic alternatives to attempt to maximize its economic value for
shareholders, including a merger of Holdings into another entity, the sale of one or both of its
operating subsidiaries or other comparable transactions. In addition, the Company may consider cash
distributions to shareholders, stock buybacks or similar transactions, to the extent its financial
condition allows it to do so and it is not constrained by insurance regulatory or other laws or by
its obligations under the Master Agreement.
The following unaudited pro forma consolidated financial statements are presented for
informational purposes to show the effect of the proposed transactions with Wilton. The pro forma
information presented is based on assumptions and includes adjustments as explained in the notes to
the unaudited pro forma consolidated financial statements. The unaudited pro forma information
presented does not include any adjustments to reflect transaction costs or the cost of severance
payments to the Companys former Chief Executive Officer of approximately $1.16 million.
The unaudited pro forma condensed consolidated balance sheet as of September 30, 2005 is
intended to demonstrate how the Companys unaudited condensed consolidated balance sheet would have
looked had the Wilton transactions been consummated on September 30, 2005. The pro forma condensed
consolidated balance sheet is presented as of September 30, 2005 assuming that all of the
reinsurance
-8-
treaties covered by the Master Agreement are novated to Wilton, as well as assuming that all
of those reinsurance treaties are coinsured by Wilton. The Company can offer no estimate as to how
many of the ceding companies under these reinsurance treaties will ultimately consent to the
novation of the treaties to Wilton.
Annuity and Life Re (Holdings), Ltd.
Pro Forma Condensed Consolidated Balance Sheet as of September 30, 2005
(Unaudited and in U.S. Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100% Novation |
|
|
100% Coinsurance |
|
|
|
Reported |
|
|
Adjustments |
|
|
Pro Forma |
|
|
Adjustments |
|
|
Pro Forma |
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash & invested assets |
|
$ |
92,899,685 |
|
|
$ |
(32,490,788 |
)(A) |
|
$ |
60,408,897 |
|
|
$ |
(32,490,788 |
)(K) |
|
$ |
60,408,897 |
|
Funds withheld at interest |
|
|
50,962,885 |
|
|
|
(50,962,885 |
)(B) |
|
|
|
|
|
|
(50,962,885 |
)(L) |
|
|
|
|
Accrued investment income |
|
|
677,662 |
|
|
|
|
|
|
|
677,662 |
|
|
|
|
|
|
|
677,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable for reinsurance ceded |
|
|
77,016,411 |
|
|
|
(211,956 |
)(C) |
|
|
76,804,455 |
|
|
|
25,863,490 |
(M) |
|
|
102,879,901 |
|
Other reinsurance receivables |
|
|
3,021,878 |
|
|
|
(2,586,522 |
)(D) |
|
|
435,356 |
|
|
|
(2,586,522 |
)(N) |
|
|
435,356 |
|
Deferred policy acquisition costs |
|
|
5,592,316 |
|
|
|
(5,592,316 |
)(E) |
|
|
|
|
|
|
(5,592,316 |
)(O) |
|
|
|
|
Other assets |
|
|
401,850 |
|
|
|
|
|
|
|
401,850 |
|
|
|
|
|
|
|
401,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
230,572,687 |
|
|
$ |
(91,844,467 |
) |
|
$ |
138,728,220 |
|
|
$ |
(65,769,021 |
) |
|
$ |
164,803,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for future policy benefits |
|
$ |
103,758,582 |
|
|
$ |
(26,075,446 |
)(F) |
|
$ |
77,683,136 |
|
|
$ |
|
|
|
$ |
103,758,582 |
|
Interest sensitive contracts liability |
|
|
50,691,337 |
|
|
|
(50,691,337 |
)(G) |
|
|
|
|
|
|
(50,691,337 |
)(P) |
|
|
|
|
Other reinsurance liabilities |
|
|
13,202,482 |
|
|
|
(5,767,747 |
)(H) |
|
|
7,434,735 |
|
|
|
(5,767,747 |
)(Q) |
|
|
7,434,735 |
|
Accounts payable and accrued expenses |
|
|
2,867,363 |
|
|
|
(49,145 |
)(I) |
|
|
2,818,218 |
|
|
|
(49,145 |
)(R) |
|
|
2,818,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
170,519,764 |
|
|
$ |
(82,583,675 |
) |
|
$ |
87,936,089 |
|
|
$ |
(56,508,229 |
) |
|
$ |
114,011,535 |
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity |
|
$ |
60,052,923 |
|
|
$ |
(9,260,792 |
)(J) |
|
$ |
50,792,131 |
|
|
$ |
(9,260,792 |
)(S) |
|
$ |
50,792,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
230,572,687 |
|
|
$ |
(91,844,467 |
) |
|
$ |
138,728,220 |
|
|
$ |
(65,769,021 |
) |
|
$ |
164,803,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
To record the transfer of cash and invested assets to Wilton. |
|
(B) |
|
To record the transfer of Funds withheld at interest to Wilton. |
|
(C) |
|
To record the transfer of ceded benefit reserves to Wilton. |
|
(D) |
|
To record the transfer of premiums receivable related to the life reinsurance agreements novated to Wilton. |
|
(E) |
|
To write-off the Deferred policy acquisition costs associated with the life and annuity reinsurance agreements novated to Wilton. |
|
(F) |
|
To record the transfer of benefit reserves associated with the life reinsurance agreements novated to Wilton. |
|
(G) |
|
To record the transfer of Interest sensitive contracts liabilities associated with the annuity reinsurance agreement novated to Wilton. |
|
(H) |
|
To record the transfer of Other reinsurance liabilities associated with the life reinsurance agreements novated to Wilton. |
|
(I) |
|
To record the transfer of excise tax payable associated with the life reinsurance agreements novated to Wilton. |
|
(J) |
|
To record to net effect of the Wilton novation transaction in Stockholders equity. |
|
(K) |
|
To record the transfer of cash and invested assets to Wilton. |
|
(L) |
|
To record the transfer of Funds withheld at interest to Wilton. |
|
(M) |
|
To record the ceded life reserves recoverable for the life reinsurance agreements coinsured by Wilton. |
|
(N) |
|
To record the ceded premiums payable related to the life reinsurance agreements coinsured by Wilton. |
|
(O) |
|
To record ceded Deferred policy acquisition costs associated with the life and annuity reinsurance agreements coinsured by Wilton. |
|
(P) |
|
To record the ceded Interest sensitive contracts liabilities associated with the annuity reinsurance agreement coinsured by Wilton. |
|
(Q) |
|
To record the ceded amount of Other reinsurance liabilities associated with the life reinsurance agreements coinsured by Wilton. |
|
(R) |
|
To record the ceded excise tax receivable associated with the life reinsurance agreements
coinsured by Wilton. |
|
(S) |
|
To record the net effect of the coinsurance transaction in Stockholders equity. |
The unaudited pro forma condensed consolidated statement of operations for the nine
months ended
-9-
September 30, 2005 adjusts the reported GAAP statement of operations by assuming that
(1) the effective date of the proposed transactions with Wilton was January 1, 2005, and (2) there
was no gain or loss from the Wilton transactions. No attempt has been made to estimate the impact
of the aforementioned adjustments on cash flow for the periods presented, on net investment income
earned on assets transferred to third parties in connection with the novated life reinsurance
agreements or on operating expenses. The pro forma information presented below is not necessarily
indicative of the financial results that would have been attained had the transactions occurred on
the dates referenced above and should not be viewed as indicative of operations in future periods.
Annuity & Life Re (Holdings) Ltd.
Pro Forma Consolidated Statement of Operations for the Nine Months Ended September 30, 2005
(Unaudited and in U.S. Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wilton |
|
|
|
|
|
|
|
|
|
|
Transaction |
|
|
|
|
|
|
Reported |
|
|
Adjustments |
|
|
Pro Forma |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums |
|
$ |
12,001,008 |
|
|
$ |
(11,325,272 |
)(A) |
|
$ |
675,736 |
|
Investment income, net of related expenses |
|
|
4,806,689 |
|
|
|
(1,938,486 |
)(B) |
|
|
2,868,203 |
|
Net realized investment gains |
|
|
500,650 |
|
|
|
|
|
|
|
500,650 |
|
Net change in fair value of embedded derivatives |
|
|
1,105,853 |
|
|
|
(1,105,853 |
)(C) |
|
|
|
|
Surrender fees and other revenues |
|
|
94,887 |
|
|
|
(94,887 |
)(D) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
18,509,087 |
|
|
$ |
(14,464,498 |
) |
|
$ |
4,044,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Claims and policy benefits |
|
$ |
10,781,404 |
|
|
$ |
(12,675,325 |
)(E) |
|
$ |
(1,893,921 |
) |
Interest credited to interest sensitive products |
|
|
985,614 |
|
|
|
(985,614 |
)(F) |
|
|
|
|
Policy acquisition costs and other insurance expenses |
|
|
3,079,459 |
|
|
|
(2,370,965 |
)(G) |
|
|
708,494 |
|
Operating expenses |
|
|
7,599,723 |
|
|
|
|
|
|
|
7,599,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Benefits and Expenses |
|
$ |
22,446,200 |
|
|
$ |
(16,031,904 |
) |
|
$ |
6,414,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of a change in accounting principal |
|
$ |
(3,937,113 |
) |
|
$ |
1,567,406 |
|
|
$ |
(2,369,707 |
) |
Cumulative effect of a change in accounting principal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
$ |
(3,937,113 |
) |
|
$ |
1,567,406 |
|
|
$ |
(2,369,707 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share before cumulative effect of change in accounting
principal per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.16 |
) |
|
$ |
0.06 |
|
|
$ |
(0.09 |
) |
Diluted |
|
$ |
(0.16 |
) |
|
$ |
0.06 |
|
|
$ |
(0.09 |
) |
Cumulative effect of a change in accounting principal per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
Diluted |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
Net loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.16 |
) |
|
$ |
0.06 |
|
|
$ |
(0.09 |
) |
Diluted |
|
$ |
(0.16 |
) |
|
$ |
0.06 |
|
|
$ |
(0.09 |
) |
|
|
|
(A) |
|
To reflect reduced Premiums as if the life reinsurance treaties novated to or coinsured by Wilton did
not exist during the first nine months of 2005. |
|
(B) |
|
To reflect reduced Net investment income as if the annuity reinsurance treaty novated to or coinsured by Wilton did not exist
during the first nine months of 2005. |
|
(C) |
|
To reflect no embedded derivative as if the annuity reinsurance treaty novated or coinsured by Wilton did not exist during the
first nine months of 2005. |
|
(D) |
|
To reflect reduced Surrender fees as if the annuity reinsurance treaty novated to or coinsured by Wilton did not exist during the
first nine months of 2005. |
|
(E) |
|
To reflect reduced Claim and Policy Benefits as if the life reinsurance treaties novated to or coinsured by Wilton did not exist
during the first nine months of 2005. |
|
(F) |
|
To reflect reduced Interest credited to interest sensitive products as if the annuity reinsurance treaty novated to or coinsured
by Wilton did not exist during the first nine months of 2005. |
|
(G) |
|
To reflect reduced Policy acquisition costs and other insurance expenses as if the life and annuity reinsurance treaties novated
to or |
-10-
|
|
|
|
|
coinsured by Wilton did not exist during the first nine months of 2005. |
The unaudited pro forma condensed consolidated statement of operations for the year ended
December 31, 2004 adjusts the reported GAAP statement of operations by assuming that (1) all of the novation, recapture
and termination transactions that had effective dates in 2004 occurred on January 1, 2004 (which removes from reported net (loss)
the actual performance for each agreement through its novation, recapture or termination date), (2) the
effective date of the proposed transactions with Wilton was January 1, 2004, and (3) there was no
gain or loss from the novation, recapture or termination transactions
that had effective dates in 2004 or from the Wilton transactions. No attempt has been made to estimate the impact of the
aforementioned adjustments on cash flow for the periods presented, on net investment income earned
on assets transferred to third parties in connection with the novated life reinsurance agreements
or on operating expenses. The pro forma information presented below is not necessarily indicative
of the financial results that would have been attained had the transactions occurred on the dates
referenced above and should not be viewed as indicative of operations in future periods.
Annuity and Life Re (Holdings), Ltd.
Pro Forma Consolidated Statement of Operations for the Year Ended December 31, 2004
(Unaudited and in U.S. Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(as adjusted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for the 2004 |
|
|
|
|
|
|
|
|
|
|
|
Pro Forma |
|
|
Adjustments |
|
|
transactions |
|
|
|
|
|
|
|
Adjustments |
|
|
(as adjusted |
|
|
(for the |
|
|
and the |
|
|
|
|
|
|
|
(for the 2004 |
|
|
for the 2004 |
|
|
Wilton |
|
|
Wilton |
|
|
|
Reported |
|
|
transactions) |
|
|
transactions) |
|
|
transaction) |
|
|
transaction) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums |
|
$ |
48,297,706 |
|
|
$ |
(30,325,348 |
)(A) |
|
$ |
17,972,358 |
|
|
$ |
(15,898,984 |
)(H) |
|
$ |
2,073,374 |
|
Investment income, net of related expenses |
|
|
21,697,563 |
|
|
|
(13,439,098 |
)(B) |
|
|
8,258,465 |
|
|
|
(2,923,139 |
)(I) |
|
|
5,335,326 |
|
Net realized investment gains |
|
|
439,536 |
|
|
|
|
|
|
|
439,536 |
|
|
|
|
|
|
|
439,536 |
|
Net change in fair value of embedded derivatives |
|
|
2,181,070 |
|
|
|
|
|
|
|
2,181,070 |
|
|
|
(2,181,070 |
)(J) |
|
|
|
|
Surrender fees and other revenues |
|
|
4,475,691 |
|
|
|
(4,257,721 |
)(C) |
|
|
217,970 |
|
|
|
(217,970 |
)(K) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
77,091,566 |
|
|
$ |
(48,022,167 |
) |
|
$ |
29,069,399 |
|
|
$ |
(21,221,163 |
) |
|
$ |
7,848,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and policy benefits |
|
$ |
14,101,129 |
|
|
|
(306,552 |
)(D) |
|
$ |
13,794,577 |
|
|
|
(13,990,062 |
)(L) |
|
|
(195,485 |
) |
Interest credited to interest sensitive products |
|
|
5,399,460 |
|
|
|
(3,530,883 |
)(E) |
|
|
1,868,577 |
|
|
|
(1,868,577 |
)(M) |
|
|
|
|
Policy acquisition costs and other insurance expenses |
|
|
110,922,948 |
|
|
|
(105,602,277 |
)(F) |
|
|
5,320,671 |
|
|
|
(3,987,088 |
(N) |
|
|
1,333,583 |
|
Operating expenses |
|
|
14,628,524 |
|
|
|
|
|
|
|
14,628,524 |
|
|
|
|
|
|
|
14,628,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Benefits and Expenses |
|
$ |
145,052,061 |
|
|
|
(109,439,712 |
) |
|
$ |
35,612,349 |
|
|
$ |
(19,845,727 |
) |
|
$ |
15,766,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of a change in
accounting principal |
|
$ |
(67,960,495 |
) |
|
|
61,417,545 |
|
|
$ |
(6,542,950 |
) |
|
$ |
(1,375,436 |
) |
|
$ |
(7,918,386 |
) |
Cumulative effect of a change in accounting principal |
|
|
(365,960 |
) |
|
|
365,960 |
(G) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
$ |
(68,326,455 |
) |
|
$ |
61,783,505 |
|
|
$ |
(6,542,950 |
) |
|
$ |
(1,375,436 |
) |
|
$ |
(7,918,386 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share before cumulative effect of
change in accounting principal per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(2.63 |
) |
|
$ |
2.38 |
|
|
$ |
(0.25 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.31 |
) |
Diluted |
|
$ |
(2.63 |
) |
|
$ |
2.38 |
|
|
$ |
(0.25 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.31 |
) |
Cumulative effect of a change in accounting principal
per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.01 |
) |
|
$ |
0.01 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
Diluted |
|
$ |
(0.01 |
) |
|
$ |
0.01 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
Net loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(2.64 |
) |
|
$ |
2.39 |
|
|
$ |
(0.25 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.31 |
) |
Diluted |
|
$ |
(2.64 |
) |
|
$ |
2.39 |
|
|
$ |
(0.25 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.31 |
) |
|
|
|
(A) |
|
To reflect reduced Premiums as if the Scottish Re and F&G life reinsurance agreements novated to Transamerica and as if the GMDB/ GMIB agreement recaptured by CIGNA did not exist in 2004 |
|
(B) |
|
To reflect reduced Net investment income as if the Transamerica annuity agreement did not exist in 2004. |
|
(C) |
|
To reflect reduced Surrender fees and other revenues as if the Transamerica annuity agreement did not exist in 2004. |
|
(D) |
|
To reflect reduced Claim and Policy Benefits as if the Scottish Re and F&G life reinsurance agreements novated to Transamerica and as if the GMDB/ GMIB agreement recaptured by CIGNA did not exist in 2004. |
|
(E) |
|
To reflect reduced Interest credited to interest sensitive products as if the Transamerica annuity agreement did not exist in 2004. Includes the release of interest sensitive contracts liability net of
funds withheld at interest and the termination premium of $14,000,000 paid to Transamerica in consideration of the termination of this agreement as of December 1, 2004. |
-11-
|
|
|
(F) |
|
To reflect reduced Policy acquisition costs and other insurance expenses as if the Transamerica annuity agreement, the Scottish Re and F&G life reinsurance agreements novated to Transamerica and the GMDB/
GMIB agreement recaptured by CIGNA did not exist in 2004. Includes the write down of deferred acquisition costs of approximately $63,100,000 associated with the termination of the Transamerica annuity
agreement and approximately $24,900,000 associated with the novation of Scottish Re and F&G life agreements as of December 31, 2004. |
|
(G) |
|
To reflect the reversal of the application of SOP 03-1 to the GMDB/ GMIB agreement recaptured by CIGNA and the Transamerica annuity agreement as if those agreements did not exist in 2004. |
|
(H) |
|
To reflect reduced Premiums as if the life reinsurance agreements novated to or coinsured by Wilton did not exist in 2004. |
|
(I) |
|
To reflect reduced Net investment income as if the annuity reinsurance agreement novated to or coinsured by Wilton did not exist in 2004. |
|
(J) |
|
To reflect no embedded derivative as if the annuity reinsurance treaty novated to or coinsured by Wilton did not exist in 2004. |
|
(K) |
|
To reflect reduced Surrender fees as if the annuity reinsurance agreement novated to or coinsured by Wilton did not exist in 2004. |
|
(L) |
|
To reflect reduced Claim and Policy Benefits as if the life reinsurance agreement novated to or coinsured by Wilton did not exist in 2004. |
|
(M) |
|
To reflect reduced Interest credited to interest sensitive products as if the annuity reinsurance agreement novated to or coinsured by Wilton did not exist during the first six months of 2005. |
|
(N) |
|
To reflect reduced Policy acquisition costs and other insurance expenses as if the life and annuity reinsurance agreement novated to or coinsured by Wilton did not exist in 2004. |
The unaudited pro forma condensed consolidated statement of operations for the nine
months ended September 30, 2004 adjusts the reported GAAP statement of operations by assuming that (1) all of the
novation, recapture and termination transactions that had effective dates in 2004 occurred on January 1, 2004 (which removes from
reported net (loss) the actual performance for each agreement through its novation, recapture or termination date),
(2) the effective date of the proposed transactions with Wilton was January 1, 2004, and (3) there
was no gain or loss from the novation, recapture or termination
transactions that had effective dates in 2004 or from the Wilton transactions. No attempt has been made to estimate the impact
of the aforementioned adjustments on cash flow for the periods presented, on net investment income
earned on assets transferred to third parties in connection with the novated life reinsurance
agreements or on operating expenses. The pro forma information presented below is not necessarily
indicative of the financial results that would have been attained had the transactions occurred on
the dates referenced above and should not be viewed as indicative of operations in future periods.
Annuity and Life Re (Holdings), Ltd.
Pro Forma Consolidated Statement of Operations for the Nine Months Ended September 30, 2004
(Unaudited and in U.S. Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(as adjusted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for the 2004 |
|
|
|
|
|
|
|
|
|
|
|
Pro Forma |
|
|
Adjustments |
|
|
transactions |
|
|
|
|
|
|
|
Adjustments |
|
|
(as adjusted |
|
|
(for the |
|
|
and the |
|
|
|
|
|
|
|
(for the 2004 |
|
|
for the 2004 |
|
|
Wilton |
|
|
Wilton |
|
|
|
Reported |
|
|
transactions) |
|
|
transactions) |
|
|
transaction) |
|
|
Transaction) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums |
|
$ |
34,565,859 |
|
|
$ |
(21,253,833 |
)(A) |
|
$ |
13,312,026 |
|
|
$ |
(11,804,417 |
)(H) |
|
$ |
1,507,609 |
|
Investment income, net of related expenses |
|
|
17,875,012 |
|
|
|
(11,476,353 |
)(B) |
|
|
6,398,659 |
|
|
|
(2,253,938 |
)(I) |
|
|
4,144,721 |
|
Net realized investment gains |
|
|
456,172 |
|
|
|
|
|
|
|
456,172 |
|
|
|
|
|
|
|
456,172 |
|
Net change in fair value of embedded derivatives |
|
|
1,692,113 |
|
|
|
|
|
|
|
1,692,113 |
|
|
|
(1,692,113 |
)(J) |
|
|
|
|
Surrender fees and other revenues |
|
|
3,609,905 |
|
|
|
(3,467,072 |
)(C) |
|
|
142,833 |
|
|
|
(142,833 |
)(K) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
58,199,061 |
|
|
$ |
(36,197,258 |
) |
|
$ |
22,001,803 |
|
|
$ |
(15,893,301 |
) |
|
$ |
6,108,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and policy benefits |
|
$ |
24,683,101 |
|
|
|
(14,068,562 |
)(D) |
|
$ |
10,614,539 |
|
|
|
(9,197,418 |
)(L) |
|
|
1,417,121 |
|
Interest credited to interest sensitive products |
|
|
10,865,545 |
|
|
|
(9,584,687 |
)(E) |
|
|
1,280,858 |
|
|
|
(1,280,858 |
)(M) |
|
|
|
|
Policy acquisition costs and other insurance expenses |
|
|
18,529,269 |
|
|
|
(14,795,810 |
)(F) |
|
|
3,733,459 |
|
|
|
(3,112,693 |
)(N) |
|
|
620,766 |
|
Operating expenses |
|
|
12,446,874 |
|
|
|
|
|
|
|
12,446,874 |
|
|
|
|
|
|
|
12,446,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Benefits and Expenses |
|
$ |
66,524,789 |
|
|
|
(38,449,059 |
) |
|
$ |
28,075,730 |
|
|
$ |
(13,590,969 |
) |
|
$ |
14,484,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of a change in
accounting principal |
|
$ |
(8,325,728 |
) |
|
|
2,251,801 |
|
|
$ |
(6,073,927 |
) |
|
$ |
(2,302,332 |
) |
|
$ |
(8,376,259 |
) |
Cumulative effect of a change in accounting principal |
|
|
(365,960 |
) |
|
|
365,960 |
(G) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
$ |
(8,691,688 |
) |
|
$ |
2,617,761 |
|
|
$ |
(6,073,927 |
) |
|
$ |
(2,302,332 |
) |
|
$ |
(8,376,259 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share before cumulative effect of
change in accounting principal per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.32 |
) |
|
$ |
0.09 |
|
|
$ |
(0.23 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.32 |
) |
Diluted |
|
$ |
(0.32 |
) |
|
$ |
0.09 |
|
|
$ |
(0.23 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.32 |
) |
-12-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(as adjusted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for the 2004 |
|
|
|
|
|
|
|
|
|
|
|
Pro Forma |
|
|
Adjustments |
|
|
transactions |
|
|
|
|
|
|
|
Adjustments |
|
|
(as adjusted |
|
|
(for the |
|
|
and the |
|
|
|
|
|
|
|
(for the 2004 |
|
|
for the 2004 |
|
|
Wilton |
|
|
Wilton |
|
|
|
Reported |
|
|
transactions) |
|
|
transactions) |
|
|
transaction) |
|
|
Transaction) |
|
Cumulative effect of a change in accounting principal
per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.01 |
) |
|
$ |
0.01 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
Diluted |
|
$ |
(0.01 |
) |
|
$ |
0.01 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
Net loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.33 |
) |
|
$ |
0.10 |
|
|
$ |
(0.23 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.32 |
) |
Diluted |
|
$ |
(0.33 |
) |
|
$ |
0.10 |
|
|
$ |
(0.23 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.32 |
) |
|
|
|
(A) |
|
To reflect reduced Premiums as if the Scottish Re and F&G life reinsurance agreements novated to Transamerica and as if the GMDB/ GMIB agreement recaptured by CIGNA did not exist in 2004 |
|
(B) |
|
To reflect reduced Net investment income as if the Transamerica annuity agreement did not exist in 2004. |
|
(C) |
|
To reflect reduced Surrender fees and other revenues as if the Transamerica annuity agreement did not exist in 2004. |
|
(D) |
|
To reflect reduced Claim and Policy Benefits as if the Scottish Re and F&G life reinsurance agreements novated to Transamerica and as if the GMDB/ GMIB agreement recaptured by CIGNA did not exist in 2004. |
|
(E) |
|
To reflect reduced Interest credited to interest sensitive products as if the Transamerica annuity agreement did not exist in 2004. |
|
(F) |
|
To reflect reduced Policy acquisition costs and other insurance expenses as if the Transamerica annuity agreement, the Scottish Re and F&G life reinsurance agreements novated to Transamerica and the GMDB/ GMIB
agreement recaptured by CIGNA did not exist in 2004. |
|
(G) |
|
To reflect the reversal of the application of SOP 03-1 to the GMDB/ GMIB agreement recaptured by CIGNA and the Transamerica annuity agreement as if those agreements did not exist in 2004. |
|
(H) |
|
To reflect reduced Premiums as if the life reinsurance agreements novated to or coinsured by Wilton did not exist in 2004. |
|
(I) |
|
To reflect reduced Net investment income as if the annuity reinsurance agreement novated to or coinsured by Wilton did not exist in 2004. |
|
(J) |
|
To reflect no embedded derivative as if the annuity reinsurance treaty novated to or coinsured by Wilton did not exist in 2004. |
|
(K) |
|
To reflect reduced Surrender fees as if the annuity reinsurance agreement novated to or coinsured by Wilton did not exist in 2004. |
|
(L) |
|
To reflect reduced Claim and Policy Benefits as if the life reinsurance agreement novated to or coinsured by Wilton did not exist in 2004. |
|
(M) |
|
To reflect reduced Interest credited to interest sensitive products as if the annuity reinsurance agreement novated to or coinsured by Wilton did not exist during the first nine months of 2005. |
|
(N) |
|
To reflect reduced Policy acquisition costs and other insurance expenses as if the life and annuity reinsurance agreement novated to or coinsured by Wilton did not exist in 2004. |
Repurchase of Common Shares
On September 14, 2005, the Company entered into a Purchase Agreement (the Purchase
Agreement) with Overseas Partners, Ltd. (Overseas Partners). The Purchase Agreement provided for
the purchase by the Company from Overseas Partners of 1,773,050
common shares of the Company (the Shares) and Class B warrants to purchase an additional 133,396 common shares of the Company
(the Warrants) for a total cash purchase price of $1,453,901. The Company completed the
acquisition of the Shares and Warrants pursuant to the terms of the Purchase Agreement on September
14, 2005. The Shares represented approximately 6.74% of the Companys outstanding common shares,
and the Warrants had an exercise price of $14.06 per share. Following the acquisition, the Shares
and the Warrants were cancelled by the Company. As a consequence of the repurchase of the Shares
and Warrants, Overseas Partners no longer has the right to nominate one person for election to the
Companys Board of Directors.
Separation of Chief Executive Officer
On September 23, 2005, the Company entered into a Separation of Employment Agreement and
General Release (the Separation Agreement) with John F. Burke, the Companys President and Chief
Executive Officer. Pursuant to the Separation Agreement, the Amended and Restated Employment
Agreement, dated July 28, 2003, by and among Mr. Burke, Holdings and Annuity and Life Reassurance,
Ltd. (the Employment Agreement) was terminated, and Mr. Burke resigned from all positions he held
as a director or officer of the Company and its subsidiaries.
Pursuant to the Separation Agreement, on October 3, 2005, the Company made a one-time payment
to Mr. Burke of $740,000 in cash. In addition, within five business days of the closing of the
transactions contemplated by the Master Agreement with the Wilton Subsidiaries, the Company will
pay Mr. Burke a one-time cash amount of $1,160,000 (the Closing Payment). The Separation
Agreement provides that Mr. Burke will also be paid the Closing Payment if (i) a Competing
Acquisition Proposal (as such term is defined in the Master Agreement) is formally proposed to the
Companys Board of Directors, on or
-13-
before February 28, 2006, (ii) the Board elects to pursue that
Competing Acquisition Proposal in lieu of the transactions contemplated by the Master Agreement and
(iii) the final closing of such Competing Acquisition Proposal occurs. Effective with the execution
of the Separation Agreement, all of Mr. Burkes restricted common shares became immediately vested
and his stock options became immediately exercisable. Mr. Burke was also permitted to keep certain
computer equipment that was provided to him during the course of his employment with the Company.
The Separation Agreement also provides that Mr. Burke will cooperate fully with the Company
and its counsel with respect to any matter (including any litigation, arbitration, investigation,
or governmental proceeding) relating to matters with which Mr. Burke was involved during the term
of his employment with the Company. Mr. Burke is entitled to receive a fee of $2,500 for each day
he provides services pursuant to this provision. The Separation Agreement also contains a mutual
release by the Company and Mr. Burke of any and all claims relating to Mr. Burkes service as a
director of the Company, his employment relationship with the Company, the Employment Agreement or
Mr. Burkes separation from the Company.
Transamerica Transaction
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.
Pursuant to the letter of intent with Transamerica, on January 31, 2005, the Company executed
definitive documents (the Novation Agreement) and novated its life reinsurance agreements
with Scottish Re and F&G to Transamerica as of December 31, 2004. In consideration of the life
reinsurance agreement novations, the Company paid Transamerica $18.5 million. Also, on January 31,
2005, the Company executed an amendment to its annuity reinsurance agreement with Transamerica
which terminated the agreement and resulted in Transamerica recapturing all business ceded under
the agreement effective as of December 1, 2004. In consideration of the annuity recapture, the
Company paid a $14.0 million premium to terminate and recapture the agreement and approximately
$7.1 million for monthly settlement amounts owed under the annuity reinsurance agreement through
November 30, 2004.
The termination, recapture and novation transactions consummated by the Company effective in
2004 had a material impact on the Companys results of operations. The following unaudited table
shows summarized results of operations for the three and nine months ended September 30, 2004
assuming that all of the termination, recapture and novation transactions occurred on January
1, 2004.
-14-
Annuity and Life Re (Holdings), Ltd.
Pro Forma Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 2004
(Unaudited and in U.S. Dollars)
|
|
|
|
|
|
|
|
|
|
|
For the Period Ended September 30, 2004 |
|
|
|
Three Months |
|
|
Nine Months |
|
Pro Forma |
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
7,453,090 |
|
|
$ |
22,001,800 |
|
Total Benefits and Expenses |
|
|
7,551,700 |
|
|
|
28,075,800 |
|
|
|
|
|
|
|
|
Income before cumulative effect of a change in
accounting principle |
|
|
(98,610 |
) |
|
|
(6,074,000 |
) |
Cumulative effect of a change in accounting principle |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(98,610 |
) |
|
$ |
(6,074,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share before cumulative effect of a change
in accounting principle per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.00 |
) |
|
$ |
(0.23 |
) |
Diluted |
|
$ |
(0.00 |
) |
|
$ |
(0.23 |
) |
|
|
|
|
|
|
|
|
|
Cumulative effect of a change in accounting principle per
common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.00 |
|
|
$ |
0.00 |
|
Diluted |
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
|
Net loss per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.00 |
) |
|
$ |
(0.23 |
) |
Diluted |
|
$ |
(0.00 |
) |
|
$ |
(0.23 |
) |
Settlement of Shareholder Lawsuit
On and since December 4, 2002, certain of the Companys shareholders, seeking to act as class
representatives, filed lawsuits against the Company and certain of its present and former officers
and directors in the United States District Court for the District of Connecticut seeking
unspecified monetary damages. On July 20, 2004, the Company announced that it had reached an
agreement in principle with the plaintiffs, subject to full documentation by the parties to the
settlement, notice to the class, court approval and other steps required to consummate a class
action settlement, to settle the lawsuit. The Companys share of the settlement was $5.0 million in
cash, of which it paid $2.5 million into escrow in August 2004, and the remaining $2.5 million on
January 10, 2005. Following a Settlement Fairness Hearing, the District Court entered an order and
final judgment approving the settlement in January 2005. The Company recorded its $5.0 million
portion of the settlement as an operating expense in the second
quarter of 2004.
3. Loss per Common Share
The following table sets forth the computation of basic and diluted loss per common share for
the three and nine months ended September 30, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Loss before cumulative
effect of a change in
accounting
principle |
|
$ |
(2,628,482 |
) |
|
$ |
(3,095,705 |
) |
|
$ |
(3,937,113 |
) |
|
$ |
(8,325,728 |
) |
Cumulative effect of a
change in accounting
principle (Note 5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(365,960 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,628,482 |
) |
|
$ |
(3,095,705 |
) |
|
$ |
(3,937,113 |
) |
|
$ |
(8,691,688 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number
of common shares
outstanding |
|
|
25,306,170 |
|
|
|
25,945,328 |
|
|
|
25,213,320 |
|
|
|
25,856,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative
effect of a change in
accounting principle per common share |
|
$ |
(0.10 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.32 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of a
change in accounting
principle per common
share |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
-15-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net loss per common share |
|
$ |
(0.10 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.33 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number
of common shares
outstanding |
|
|
25,306,170 |
|
|
|
25,945,328 |
|
|
|
25,213,320 |
|
|
|
25,856,995 |
|
Loss before cumulative
effect of a change in
accounting principle per
common share |
|
$ |
(0.10 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.32 |
) |
Cumulative effect of a
change in accounting
principle per common
share |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share |
|
$ |
(0.10 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.33 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2005, 5,556,318 warrants, 647,702 options, and 78,334 shares of unvested
restricted stock were outstanding. The calculation of the diluted loss per common share
for the three and nine months ended September 30, 2005 does not include the incremental number
of shares from the assumed exercise of options and warrants, or the vesting of unvested
restricted stock grants because the inclusion of these potential common shares would be considered
anti-dilutive.
At September 30, 2004, 5,690,032 warrants, 745,702 options, and 434,767 shares of unvested
restricted stock were outstanding. The calculation of the diluted loss per common share
for the three and nine months ended September 30, 2004 does not include the incremental number
of shares from the assumed exercise of options and warrants, or the vesting of unvested
restricted stock grants because the inclusion of these potential common shares would be considered
anti-dilutive.
The following table sets forth the pro forma computation of basic and diluted loss per common
share after accounting for stock option grants made prior to the Companys January 1, 2003 adoption
of the prospective method described in Statement of Financial Accounting Standards (SFAS) No. 148
for the three and nine months ended September 30, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net loss as reported |
|
$ |
(2,628,482 |
) |
|
$ |
(3,095,705 |
) |
|
$ |
(3,937,113 |
) |
|
$ |
(8,691,688 |
) |
Stock option expense recognized |
|
|
41,667 |
|
|
|
20,833 |
|
|
|
130,258 |
|
|
|
62,500 |
|
Pro forma effect on net loss
of applying fair value
accounting to all stock option
grants (a) |
|
|
(41,667 |
) |
|
|
(165,128 |
) |
|
|
(130,258 |
) |
|
|
(571,273 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss pro forma |
|
$ |
(2,628,482 |
) |
|
$ |
(3,240,000 |
) |
|
$ |
(3,937,113 |
) |
|
$ |
(9,200,461 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share as
reported: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.10 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.33 |
) |
Diluted |
|
$ |
(0.10 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.33 |
) |
Net loss
per common share
pro forma: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.10 |
) |
|
$ |
(0.13 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.35 |
) |
Diluted |
|
$ |
(0.10 |
) |
|
$ |
(0.13 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.35 |
) |
|
|
|
(a) |
|
The pro forma effect of applying fair value accounting to all stock option grants is
equal to the stock option expense recognized in the determination of net loss for the three
and nine months ended September 30, 2005 because the Company no longer has any unvested
stock options that were granted prior to the adoption of SFAS No. 123 and No. 148. |
-16-
Stock-based compensation expense, including restricted common stock issued to employees,
for the three months ended September 30, 2005 and 2004 was $98,500 and $180,732, respectively.
Stock-based compensation expense, including restricted common stock issued to employees, for the
nine months ended September 30, 2005 and 2004 was $348,640 and $278,294, respectively.
4. Business Segments
The Company separately tracks financial results of its life and annuity operations in
segments. Each segment is defined by a dominant risk characteristic inherent in all products in
that segment. The life segment consists of all products where the dominant risk characteristic is
mortality risk. The annuity segment comprises all products where the dominant risk characteristic
is investment risk, including those products that provide minimum guarantees on variable annuity
products. In addition, certain of the Companys modified coinsurance annuity reinsurance agreements
have features that constitute embedded derivatives that require bifurcation and separate accounting
under SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities. The change in
fair value of these embedded derivatives is included in the annuity segment.
Both the life and annuity segments have specific assets, liabilities, stockholders equity,
revenue, benefits and expenses that apply only to them. The corporate segment contains all
stockholders equity not otherwise deployed to the life or annuity segment. In addition, the
corporate segment includes all capital gains and losses from sales of securities in the Companys
portfolio and investment income on undeployed invested assets. Operating expenses are generally
allocated to the segments proportionately based upon the amount of stockholders equity deployed to
each segment. Costs associated with the Companys efforts to raise capital and pursue other
strategic alternatives and the costs of settling the shareholder class action lawsuit have been
allocated to the corporate segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Life |
|
|
Annuity |
|
|
|
|
|
|
|
September 30, 2005 |
|
Reinsurance |
|
|
Reinsurance |
|
|
Corporate |
|
|
Consolidated |
|
Revenues |
|
$ |
3,957,221 |
|
|
$ |
1,283,347 |
|
|
$ |
662,847 |
|
|
$ |
5,903,415 |
|
Benefits and Expenses |
|
|
5,180,216 |
|
|
|
646,343 |
|
|
|
2,705,338 |
|
|
|
8,531,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment (Loss) Income |
|
$ |
(1,222,995 |
) |
|
$ |
637,004 |
|
|
$ |
(2,042,491 |
) |
|
$ |
(2,628,482 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
121,261,064 |
|
|
$ |
52,291,337 |
|
|
$ |
57,020,286 |
|
|
$ |
230,572,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Life |
|
|
Annuity |
|
|
|
|
|
|
|
September 30, 2005 |
|
Reinsurance |
|
|
Reinsurance |
|
|
Corporate |
|
|
Consolidated |
|
Revenues |
|
$ |
10,620,367 |
|
|
$ |
5,026,576 |
|
|
$ |
545,081 |
|
|
$ |
16,192,024 |
|
Benefits and Expenses |
|
|
8,016,909 |
|
|
|
9,781,795 |
|
|
|
1,489,025 |
|
|
|
19,287,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Income (Loss) |
|
$ |
2,603,458 |
|
|
$ |
(4,755,219 |
) |
|
$ |
(943,944 |
) |
|
$ |
(3,095,705 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
197,754,315 |
|
|
$ |
642,979,101 |
|
|
$ |
79,890,539 |
|
|
$ |
920,623,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
Life |
|
|
Annuity |
|
|
|
|
|
|
|
September 30, 2005 |
|
Reinsurance |
|
|
Reinsurance |
|
|
Corporate |
|
|
Consolidated |
|
Revenues |
|
$ |
13,239,655 |
|
|
$ |
3,121,282 |
|
|
$ |
2,148,150 |
|
|
$ |
18,509,087 |
|
Benefits and Expenses |
|
|
13,332,089 |
|
|
|
2,089,331 |
|
|
|
7,024,780 |
|
|
|
22,446,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment (Loss) Income |
|
$ |
(92,434 |
) |
|
$ |
1,031,951 |
|
|
$ |
(4,876,630 |
) |
|
$ |
(3,937,113 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
121,261,064 |
|
|
$ |
52,291,337 |
|
|
$ |
57,020,286 |
|
|
$ |
230,572,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-17-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
Life |
|
|
Annuity |
|
|
|
|
|
|
|
September 30, 2005 |
|
Reinsurance |
|
|
Reinsurance |
|
|
Corporate |
|
|
Consolidated |
|
Revenues |
|
$ |
35,750,909 |
|
|
$ |
19,948,919 |
|
|
$ |
2,499,233 |
|
|
$ |
58,199,061 |
|
Benefits and Expenses |
|
|
32,238,504 |
|
|
|
24,584,137 |
|
|
|
9,702,148 |
|
|
|
66,524,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Income
(Loss) before
cumulative effect of
a change in
accounting principle |
|
$ |
3,512,405 |
|
|
$ |
(4,635,218 |
) |
|
$ |
(7,202,915 |
) |
|
$ |
(8,325,728 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of
a change in
accounting principle |
|
$ |
|
|
|
$ |
(365,960 |
) |
|
$ |
|
|
|
$ |
(365,960 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Income (Loss) |
|
$ |
3,512,405 |
|
|
$ |
(5,001,178 |
) |
|
$ |
(7,202,915 |
) |
|
$ |
(8,691,688 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
197,754,315 |
|
|
$ |
642,979,101 |
|
|
$ |
79,890,539 |
|
|
$ |
920,623,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. Accounting Standards
Emerging Issues Task Force
The Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (FASB)
issued EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments in late 2003. It contains two aspects that impact the Company. First, it
provides details regarding disclosures about unrealized losses on available-for-sale debt and
equity securities accounted for under SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities.
These disclosures were effective in annual financial statements for fiscal years ended after
December 15, 2003. Second, it provides additional guidance for evaluating whether an investment is
other-than-temporarily impaired. This guidance was scheduled to be effective for reporting periods
beginning after June 30, 2004. However, the FASB determined that a delay in the effective date of
these provisions was necessary until it could issue additional guidance on the application of EITF
Issue No. 03-1. At the June 29, 2005 meeting, the FASB decided not to provide additional guidance
on the meaning of other-than-temporary impairment and decided that (1) transition would be applied
prospectively and (2) the effective date would be reporting periods beginning after December 15,
2005. The Company has adopted the provisions of EITF Issue No. 03-1 and has determined that such
adoption had no material impact on the Companys results of operations or financial condition.
AICPA Statement of Position (SOP) 03-1
In July 2003, the Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants (AICPA) issued Statement of Position (SOP) 03-1, Accounting and
Reporting by Insurance Enterprises for Certain Non-Traditional Long-Duration Contracts and for
Separate Accounts. The SOP is effective for financial statements for fiscal years beginning after
December 15, 2003 and provides guidance on accounting and reporting by insurance enterprises for
certain nontraditional long-duration contracts and for separate accounts. The SOP changed the
manner in which life insurance companies account for certain types of insurance and reinsurance
contracts. On January 1, 2004, the Company adopted this new accounting standard. At that time, the
Company had a combined GMDB/GMIB agreement with Connecticut General Life Insurance Company
(CIGNA) and an annuity reinsurance agreement with Transamerica that were both affected by the
adoption of the new SOP. The cumulative effect of the change in accounting principle was a net loss
of $365,960 for the three months
-18-
ended March 31, 2004. The Company no longer has any reinsurance
agreements that are affected by the SOP.
Share-Based Payments
On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment
(SFAS No. 123R). SFAS No. 123R replaces SFAS No. 123 Accounting for Stock-Based Compensation
and supersedes APB opinion No. 25 Accounting for Stock Issued to Employees. SFAS No. 123R
requires all entities to recognize compensation expense in an amount equal to the fair value of
share-based payments granted to employees and is effective as of the beginning of the first quarter
of the first fiscal year that begins after June 15, 2005. Because the Company applies fair value
accounting to all employee stock options granted or modified subsequent to December 31, 2002, the
impact of this statement will be to record compensation expense utilizing fair value accounting for
awards vesting on or after July 1, 2005 that were granted on or before December 31, 2002. The pro
forma table in Note 3 illustrates the impact of SFAS No. 123 on the Companys unaudited condensed
consolidated statements of operations; SFAS No. 123R will have no impact on the Companys financial
position and results of operations.
6. Related Party Transactions
Michael P. Esposito, Jr., a director of the Company, currently serves as the non-executive
Chairman of the Board of XL Capital Ltd (XL Capital). Robert M. Lichten, a director of the
Company, serves as a director of a United States-based subsidiary of XL Capital. XL Capital is a
major stockholder of the Company.
7. Restricted Stock
In 2002, the Board of Directors adopted a Restricted Stock Plan (the Plan) under which it
may grant common shares to key employees. The aggregate number of common shares that may be granted
under the Plan is 1,200,000, and the Compensation Committee of the Board of Directors administers
the Plan. Since the inception of the Plan, the Company has issued 976,000 shares of restricted
stock. As a result of certain employees terminating their employment with the Company, 227,133
shares of restricted stock were cancelled in 2003, 115,667 shares of restricted stock were
cancelled in 2004 and 21,667 shares of restricted stock were cancelled in 2005. Also, 60,833 shares
of restricted stock vested in 2003 and 2004 prior to certain employees terminating their employment
with the Company. Effective with the execution of the Separation Agreement with John F. Burke, the
Companys former CEO, there were 66,667 restricted common shares that became immediately vested on
September 23, 2005 which would have otherwise vested in 2006.
As of September 30, 2005, there remain outstanding 78,334 unvested restricted common shares
that will vest on June 25, 2006. The Company believes that the transactions contemplated by the
Master Agreement fall within the scope of the definition of Change of Control under the equity
incentive plan pursuant to which these restricted shares were granted. As a consequence, all
unvested restricted shares will vest immediately upon the consummation of the transactions
contemplated by the Master Agreement.
The fair value as determined at the date of grant of the restricted stock awards that were
outstanding on September 30, 2005 was approximately $1,460,000 and is reflected in the Companys
balance sheet as common shares and additional paid-in-capital. The fair value of the outstanding
restricted stock is being amortized on a straight-line basis over the three-year vesting period.
Based on the vesting of the restricted stock, and offset partially by cancellations of restricted
stock, approximately $218,000 and $216,000 was
-19-
expensed during the nine months ended September 30,
2005 and 2004, respectively. The unamortized balance of outstanding restricted stock is
reflected in the balance sheet as a component of unamortized stock based compensation and was
$84,250 at September 30, 2005 and approximately $600,000 at September 30, 2004.
8. Vulnerability Due to Concentrations
As a result of the life reinsurance agreements that were novated to Transamerica as of
December 31, 2004, certain of the Companys remaining agreements, which previously did not
represent a significant percentage of the Companys business, have become more prominent. The
Companys three largest life reinsurance agreements, as measured by gross premiums, are now with
National States Insurance Company (National States), John Hancock Life Insurance Company (John
Hancock) and Omega Reinsurance Corporation (Omega). For the three and nine months ended
September 30, 2005, the Company recorded a loss of approximately $0.5 million and $2.8 million,
respectively, related to its life reinsurance agreement with National States. Premiums associated
with this agreement for the three and nine months ended September 30, 2005 were approximately $2.7
million and $7.6 million, respectively. For the three and nine months ended September 30, 2005, the
Company recorded gross profits of approximately $0.4 million and $1.3 million, respectively,
related to its life reinsurance agreement with John Hancock. Premiums associated with this
agreement for the three and nine months ended September 30, 2005 were approximately $0.5 million
and $1.5 million, respectively. For the three and nine months ended September 30, 2005, the Company
recorded gross losses of approximately $0.7 million and $0.3 million related to its life
reinsurance agreement with Omega. Premiums associated with this agreement for the three and nine
months ended September 30, 2005 were approximately $0.3 million and $0.9 million, respectively.
The Company has a significant deferred annuity reinsurance agreement with Lafayette Life
Insurance
Company (Lafayette). Due to the size of this agreement, there is a material concentration of
net investment income, interest credited to interest sensitive products, funds withheld at
interest, deferred policy acquisition costs and interest sensitive contract liabilities.
Approximately $45.7 million, or 90%, of the Companys funds withheld at interest, approximately
$50.7 million, or 100%, of the Companys interest sensitive contracts liability, and approximately
$2.6 million, or 46%, of the deferred acquisition costs on the Companys unaudited condensed
consolidated balance sheet as of September 30, 2005 were related to its reinsurance agreement with
Lafayette.
Since June 1, 2000, 100% of Annuity and Life Reassurance Americas life and annuity policies
that were in force prior to the Companys acquisition of that entity were reinsured with Reassure
America Life Insurance Company (Reassure). Following the acquisition, the policies continue to be
100% reinsured with Reassure; however, Annuity and Life Reassurance America remains the primary
carrier. Reassure is required to indemnify Annuity and Life Reassurance America for any losses
associated with these policies. However, Annuity and Life Reassurance America is not discharged
from its primary liability as the direct insurer of the risks reinsured should Reassure default on
its obligations. Reserves ceded under this reinsurance agreement amounted to approximately $76.8
million and $82.2 million at September 30, 2005 and December 31, 2004, respectively. As of
September 30, 2005, Reassure is rated A+ (g) (superior) by A.M. Best.
9. Contingencies
As described in Note 2, the Company and Transamerica entered into a Novation Agreement to
novate the Companys reinsurance contracts with F&G and Scottish Re to Transamerica effective
December 31, 2004. In accordance with the terms of the Novation Agreement, the Company and
Transamerica have been in discussions regarding possible adjustments to the policy benefit reserves
transferred to
-20-
Transamerica as part of the F&G novation. On March 30, 2005, the Company received a
demand letter from Transamerica stating that $7,000,000 was owed to Transamerica as an adjustment
to the F&G policy benefit reserves. On June 14, 2005, the Company received an additional letter
from Transamerica revising its original demand to $6,000,000. Because the Company had been unable
to resolve this issue through continued discussions with Transamerica, the Company sought
resolution of the dispute by a neutral actuary pursuant to a provision of the Novation Agreement. The
Company and Transamerica had agreed upon a neutral actuary and were in discussions regarding the
scope of the issue to be submitted to the neutral actuary when, on October 3, 2005, Transamerica delivered a demand for arbitration
in connection with this dispute. In that demand, Transamerica alleged that the Company materially misrepresented the true
economic nature of the reinsurance agreements that the Company novated to it, or, in the
alternative, that there was a mutual mistake as to the true economic nature of those reinsurance
agreements. Transamerica is now seeking to rescind the Novation Agreement or recover such interest
and damages as the arbitration panel deems appropriate for the alleged misrepresentations and
breaches of representations and warranties. The Company believes Transamericas position is without
merit and intends to defend itself vigorously in arbitration.
The United States Internal Revenue Service (IRS) has conducted an audit of the Companys
United States operating subsidiaries. Those companies currently have a significant tax based net
operating loss carryforward. In addition, the IRS has requested certain information and documents
related to the Companys Bermuda operations. While the Companys United States operating
subsidiaries have complied with the IRS requests for information, both the Company and its Bermuda
operating subsidiary have declined to supply the IRS with certain information in response to its
initial requests for information on May 7, 2002 and July 1, 2002. The Company did provide the IRS
with certain publicly available information in addition to minutes of the Board of Directors
meetings and committee meetings held from 1999 through to 2001. The Company has not received any
additional requests for information since July 1, 2002. If the IRS were to determine that the
Company or its Bermuda operating subsidiary were
engaged in business in the United States, those entities could be subject to United States tax
at regular corporate rates on their taxable income that is attributable to a permanent
establishment, if any, in the United States plus an additional 30% branch profits tax on such
income remaining after the regular tax. Such taxes would have a material effect on the Companys
results of operations and financial condition.
Pursuant to an engagement letter dated January 19, 2004, as amended (the Engagement Letter),
the Company engaged UBS Securities LLC (UBS) to serve as its financial advisor and capital
markets advisor in connection with identifying strategic alternatives available to the Company. The
Engagement Letter provides that if, during the term of the Engagement Letter, the Company closes an
equity investment, the Company is obligated to pay UBS a minimum transaction fee of $1,000,000. If
the Company closes a sale transaction during the term of the Engagement Letter, the Company is
obligated to pay UBS a minimum transaction fee of either $1,500,000 or $2,000,000, depending on
whether the other party to that transaction is one identified in the Engagement Letter. In any
case, the transaction fee payable to UBS may increase as the transaction value increases. Any
transaction fee payable to UBS under the Engagement Letter will be offset by certain fees paid by
the Company to UBS prior to the closing of the equity investment or sale transaction. At September
30, 2005, the offset due to such fees totaled $270,000. The Company anticipates that it will be
required to pay UBS a fee of $1,750,000 upon the consummation of the novation and coinsurance
transaction with the Wilton Subsidiaries, subject to the $270,000 offset for fees already paid.
Pursuant to the Separation Agreement with John F. Burke, the Companys former Chief Executive
Officer, the Company is liable for a one-time payment of $1,160,000 should certain contingencies
described in Note 2 be satisfied.
-21-
10. Subsequent Events
On October 8, 2003, the Company was served with a statutory demand for $640,000 from Imagine
Group Holdings Limited (Imagine), a Bermuda based reinsurance company, which was subsequently
withdrawn. Imagine has since instituted a civil proceeding in the Bermuda Supreme Court against the
Company, alleging that the Company is obligated to reimburse it for $640,000 of expenses incurred
by Imagine in connection with a proposed December 2002 capital raising transaction that was not
consummated. On March 11, 2004, the Company filed an amended defense with the court to which
Imagine responded on April 26, 2004. On October 26, 2005, the Company reached an agreement in
principle with Imagine to settle this dispute for a payment of $425,000 which the Company paid into
escrow on November 7, 2005.
On April 15, 2005, the Company and its wholly-owned subsidiary Annuity and Life Reassurance,
Ltd. were served with a Writ of Summons from the Bermuda Supreme Court, whereby Rodney Cordle, a
former employee of the Company, alleged that the Company and its subsidiary failed to pay a monthly
housing allowance to him in accordance with the terms of his employment agreement. Mr. Cordle was
seeking $287,403 plus damages, interest and costs. On October 25, 2005, the dispute was settled and
the Company paid Mr. Cordle a settlement amount of $181,866 plus $18,134 for legal costs.
On October 19, 2005, the Company entered into letter agreements with William H. Mawdsley and
John W. Lockwood setting forth the terms of their continued employment by the Company. The Company
had previously given Messrs. Mawdsley and Lockwood notice that their current employment agreements
would not be renewed upon their expiration. Pursuant to the letter agreement with Mr. Mawdsley, he
is entitled to an annual salary of $250,000 and an additional $10,000 per month as a housing and
travel allowance. Effective with the execution of the letter agreement, Mr. Mawdsley was
named the Companys Chief Executive Officer, subject to the approval of the Bermuda Department
of Immigration, and he was appointed to fill a vacancy on the Companys Board of Directors created
by the recent resignation of John F. Burke, the Companys former President and Chief Executive
Officer. Mr. Mawdsley had previously been a Vice President of the Company and the Chief Actuary of
its Bermuda based operating subsidiary. Pursuant to the letter agreement with Mr. Lockwood, he is
entitled to an annual salary of $200,000 and an additional $7,500 per month as a housing and travel
allowance. Mr. Lockwood will continue to serve as the Companys Chief Financial Officer and
President of the Companys United States based subsidiaries.
The Company has also agreed to continue to provide Messrs. Mawdsley and Lockwood with the same
benefits they are currently receiving, and they will be eligible for bonus compensation at the
discretion of the Companys Board of Directors. Mr. Mawdsley and Mr. Lockwood may be terminated at
any time for any reason, but if such termination is without cause (as defined in the letter
agreements), Mr. Mawdsley would be entitled to receive a severance payment of $620,000 plus
reasonable relocation expenses from Bermuda to the United States, and Mr. Lockwood would be
entitled to receive a severance payment of $490,000. Both men would also receive the foregoing
severance payments if they resign because of a reduction in their base salary or housing allowance
to which they did not agree or if they resign for any other reason within the period commencing 90
days and ending 180 days following the effective time of (i) the acquisition of all of the
outstanding equity securities of Holdings or (ii) the merger of Holdings with another entity, other
than one of Holdings direct or indirect wholly owned subsidiaries.
On October 12, 2005, Messrs. Lee M. Gammill, Jr., Frederick S. Hammer and Jon W. Yoskin, II, who
are members of the Companys Board of Directors currently serving terms that will expire at the
Companys upcoming annual general meeting (the AGM) of shareholders, informed the Company that
they will not stand for re-election as directors. Accordingly, each of these Board members will
cease to be
-22-
a director of the Company following the AGM. Also on October 12, 2005, Messrs. Robert
M. Lichten and Robert P. Johnson, whose terms would otherwise expire in 2006 and 2007,
respectively, informed the Company that they will resign as directors of the Company effective as
of the date of the AGM.
-23-
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
General
Annuity and Life Re (Holdings), Ltd. was incorporated on December 2, 1997 under the laws of
Bermuda. We provide annuity and life reinsurance to select insurers and reinsurers through our
wholly-owned subsidiaries: Annuity and Life Reassurance, Ltd., which is licensed under the
insurance laws of Bermuda as a long term insurer; and Annuity and Life Re America, Inc., an
insurance holding company based in the United States, and its subsidiary, Annuity and Life
Reassurance America, Inc., a life insurance company authorized to conduct business in over 40
states of the United States and the District of Columbia. We acquired Annuity and Life Reassurance
America on June 1, 2000. For more information regarding the business and operations of our company
and its subsidiaries, please see our Annual Report on Form 10-K for the year ended December 31,
2004.
Our company has encountered significant difficulties during the last four years. In addition
to reporting significant operating losses for those years, we have reduced our operations
significantly through the novation, termination and recapture of many of our life and annuity
reinsurance agreements. We continue to receive premiums and pay claims under our remaining
reinsurance treaties; however, we are not currently underwriting any new treaties or accepting any
new business from our existing treaties. If the transactions contemplated by the Master Agreement
described below under Wilton Re Transaction are consummated, we will be either released from or
indemnified for each of our remaining reinsurance treaties.
Our remaining life reinsurance agreements are the reinsurance of ordinary life insurance,
primarily for mortality risk. Profitability of our life reinsurance line depends in large part on
the volume and amount of death claims incurred. While death claims are reasonably predictable over
a long time horizon, they are less predictable over shorter periods and are subject to fluctuation
from quarter to quarter and year to year, particularly given the relatively small size of our in
force business as a result of recaptures and terminations in previous periods. Significant
fluctuations from period to period could adversely affect the results of our operations. Similarly,
claims experience that exceeds what we anticipated at the time we enter into reinsurance agreements
can also adversely affect the results of our operations, as occurred in 2003 and 2002. At September
30, 2005 and December 31, 2004, the total face amount of our life insurance in force was
approximately $2.2 billion and $2.3 billion, respectively.
Our remaining annuity reinsurance agreement reinsures general account fixed deferred
annuities. Profitability of this agreement is primarily dependent on earning a spread between the
interest rate earned on the assets under management and the interest rate credited to the
policyholder. This agreement is market and interest rate sensitive. Fluctuations in the general
level of interest rates and fixed income markets from period to period may cause fluctuations in
the profitability of this agreement. At September 30, 2005 and December 31, 2004, our liability for
annuity reinsurance agreements amounted to approximately $50.7 million and $57.8 million,
respectively.
Because our financial results are heavily dependent on three life reinsurance agreements and
one remaining annuity reinsurance agreement, large fluctuations in actual experience under any one
of these agreements could cause volatility in our overall financial results.
Wilton Re Transaction
On August 10, 2005, we entered into a Master Agreement (the Master Agreement) with
Prudential Select Life Insurance Company of America and Wilton Reinsurance Bermuda Limited
(collectively,
-24-
Wilton), each a direct or indirect wholly owned operating subsidiary of Wilton Re Holdings,
Ltd. The Agreement provides for the novation to or 100% coinsurance by Wilton effective as of June
30, 2005 (the Effective Date) of our life and annuity reinsurance treaties (the Treaties)
identified in the Master Agreement. The Master Agreement contemplates that we and Wilton will
use commercially reasonable efforts to obtain the consent of each counterparty to the Treaties to
the novation of such Treaties to the Wilton Subsidiaries. If any of these consents cannot be
obtained, then we and Wilton will enter into a 100% indemnity coinsurance agreement with respect to
such Treaties, effective as of the Effective Date.
Upon the closing of the transactions contemplated by the Master Agreement, we will pay Wilton
an aggregate settlement amount equal to $91.6 million, less any expense reimbursement payments
previously made by us to Wilton in connection with the transactions. The $91.6 million settlement
amount will consist of the funds withheld held by the cedents under certain of the Treaties on the
Effective Date, which assets totaled approximately $58.4 million on that date, and cash and
invested assets of approximately $33.2 million. If the cash flows arising from the Treaties and the
earnings on the invested assets to be transferred to Wilton are positive between the Effective Date
and the closing date of the Agreement (the Closing Date), such positive amount will be paid to
Wilton. If such cash flows and earnings are negative, the negative of that amount will be paid to us.
The consummation of the transactions contemplated by the Master Agreement is subject to
certain closing conditions, including the receipt of requisite regulatory and other approvals,
including the approval of our shareholders and retrocessionaires. In connection with the execution
of the Master Agreement, our directors and officers, as well as certain significant shareholders,
executed voting agreements obligating them to vote in favor of the transactions contemplated by the
Master Agreement. Directors, officers and shareholders holding collectively approximately 29.3% of
our outstanding common shares as of the date of the Master Agreement (or 26.4% of the outstanding
common shares entitled to vote as of such date after giving effect to certain voting cutback
provisions in our Bye-laws) signed voting agreements. As of September 30, 2005, the number of
common shares held by directors, officers and shareholders who signed voting agreements totaled
approximately 31.5% of our outstanding common shares, or 28.1% of the outstanding common shares
entitled to vote as of such date after giving effect to the voting cutback provisions in our
Bye-laws.
Because we will continue to have residual commitments and contingencies following the
consummation of the transactions contemplated by the Master Agreement, we do not expect to be able
immediately to wind-down or dissolve our company or its subsidiaries. We intend to continue to
explore strategic alternatives to attempt to maximize our economic value for shareholders,
including a merger of our company into another entity, the sale of one or both of our operating
subsidiaries or other comparable transactions. In addition, we may consider cash distributions to
shareholders, stock buybacks or similar transactions, to the extent our financial condition allows
us to do so and we are not constrained by insurance regulatory or other laws or by our obligations
under the Master Agreement.
The following unaudited pro forma consolidated financial statements are presented for
informational purposes to show the effect of the proposed transactions with Wilton. The pro forma
information presented is based on assumptions and includes adjustments as explained in the notes to
the unaudited pro forma consolidated financial statements. The unaudited pro forma information
presented does not include any adjustments to reflect transaction costs or the cost of severance
payments to the Companys former Chief Executive Officer of approximately $1.16 million.
The unaudited pro forma condensed consolidated balance sheet as of September 30, 2005 is
intended to demonstrate how the Companys unaudited condensed consolidated balance sheet would have
looked had the Wilton transactions been consummated on September 30, 2005. The unaudited pro forma
-25-
condensed consolidated balance sheet is presented as of September 30, 2005 assuming that all
of the reinsurance treaties covered by the Master Agreement are novated to Wilton, as well as
assuming that all of those reinsurance treaties are coinsured by Wilton. The Company can offer no
estimate as to how many of the ceding companies under these reinsurance treaties will ultimately
consent to the novation of the treaties to Wilton.
Annuity and Life Re (Holdings), Ltd.
Pro Forma Condensed Consolidated Balance Sheet as of September 30, 2005
(Unaudited and in U.S. Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100% Novation |
|
|
100% Coinsurance |
|
|
|
Reported |
|
|
Adjustments |
|
|
Pro Forma |
|
|
Adjustments |
|
|
Pro Forma |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash & invested assets |
|
$ |
92,899,685 |
|
|
$ |
(32,490,788 |
)(A) |
|
$ |
60,408,897 |
|
|
$ |
(32,490,788 |
)(K) |
|
$ |
60,408,897 |
|
Funds withheld at interest |
|
|
50,962,885 |
|
|
|
(50,962,885 |
)(B) |
|
|
|
|
|
|
(50,962,885 |
)(L) |
|
|
|
|
Accrued investment income |
|
|
677,662 |
|
|
|
|
|
|
|
677,662 |
|
|
|
|
|
|
|
677,662 |
|
|
Receivable for reinsurance ceded |
|
|
77,016,411 |
|
|
|
(211,956 |
)(C) |
|
|
76,804,455 |
|
|
|
25,863,490 |
(M) |
|
|
102,879,901 |
|
Other reinsurance receivables |
|
|
3,021,878 |
|
|
|
(2,586,522 |
)(D) |
|
|
435,356 |
|
|
|
(2,586,522 |
)(N) |
|
|
435,356 |
|
Deferred policy acquisition costs |
|
|
5,592,316 |
|
|
|
(5,592,316 |
)(E) |
|
|
|
|
|
|
(5,592,316 |
)(O) |
|
|
|
|
Other assets |
|
|
401,850 |
|
|
|
|
|
|
|
401,850 |
|
|
|
|
|
|
|
401,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
230,572,687 |
|
|
$ |
(91,844,467 |
) |
|
$ |
138,728,220 |
|
|
$ |
(65,769,021 |
) |
|
$ |
164,803,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for future policy benefits |
|
$ |
103,758,582 |
|
|
$ |
(26,075,446 |
)(F) |
|
$ |
77,683,136 |
|
|
$ |
|
|
|
$ |
103,758,582 |
|
Interest sensitive contracts liability |
|
|
50,691,337 |
|
|
|
(50,691,337 |
)(G) |
|
|
|
|
|
|
(50,691,337 |
)(P) |
|
|
|
|
Other reinsurance liabilities |
|
|
13,202,482 |
|
|
|
(5,767,747 |
)(H) |
|
|
7,434,735 |
|
|
|
(5,767,747 |
)(Q) |
|
|
7,434,735 |
|
Accounts payable and accrued expenses |
|
|
2,867,363 |
|
|
|
(49,145 |
)(I) |
|
|
2,818,218 |
|
|
|
(49,145 |
)(R) |
|
|
2,818,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
170,519,764 |
|
|
$ |
(82,583,675 |
) |
|
$ |
87,936,089 |
|
|
$ |
(56,508,229 |
) |
|
$ |
114,011,535 |
|
Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity |
|
$ |
60,052923 |
|
|
$ |
(9,260,792 |
)(J) |
|
$ |
50,792,131 |
|
|
$ |
(9,260,792 |
)(S) |
|
$ |
50,792,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
230,572,687 |
|
|
$ |
(91,844,467 |
) |
|
$ |
138,728,220 |
|
|
$ |
(65,769,021 |
) |
|
$ |
164,803,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
To record the transfer of cash and invested assets to Wilton. |
|
(B) |
|
To record the transfer of Funds withheld at interest to Wilton. |
|
(C) |
|
To record the transfer of ceded benefit reserves to Wilton. |
|
(D) |
|
To record the transfer of premiums receivable related to the life reinsurance agreements novated to Wilton. |
|
(E) |
|
To write-off the Deferred policy acquisition costs associated with the life and annuity reinsurance agreements novated to Wilton. |
|
(F) |
|
To record the transfer of benefit reserves associated with the life reinsurance agreements novated to Wilton. |
|
(G) |
|
To record the transfer of Interest sensitive contracts liabilities associated with the annuity reinsurance agreement novated to Wilton. |
|
(H) |
|
To record the transfer of Other reinsurance liabilities associated with the life reinsurance agreements novated to Wilton. |
|
(I) |
|
To record the transfer of excise tax payable associated with the life reinsurance agreements novated to Wilton. |
|
(J) |
|
To record to net effect of the Wilton novation transaction in Stockholders equity. |
|
(K) |
|
To record the transfer of cash and invested assets to Wilton. |
|
(L) |
|
To record the transfer of Funds withheld at interest to Wilton. |
|
(M) |
|
To record the ceded life reserves recoverable for the life reinsurance agreements coinsured by Wilton. |
|
(N) |
|
To record the ceded premiums payable related to the life reinsurance agreements coinsured by Wilton. |
|
(O) |
|
To record ceded Deferred policy acquisition costs associated with the life and annuity reinsurance agreements coinsured by Wilton. |
|
(P) |
|
To record the ceded Interest sensitive contracts liabilities associated with the annuity reinsurance agreement coinsured by Wilton. |
|
(Q) |
|
To record the ceded amount of Other reinsurance liabilities associated with the life reinsurance agreements coinsured by Wilton. |
|
(R) |
|
To record the ceded excise tax receivable associated with the life reinsurance agreements coinsured by Wilton. |
|
(S) |
|
To record the net effect of the coinsurance transaction in Stockholders equity. |
-26-
The unaudited pro forma condensed consolidated statement of operations for the nine
months ended September 30, 2005 adjusts the reported GAAP statement of operations by assuming that
(1) the effective date of the proposed transactions with Wilton was January 1, 2005, and (2) there
was no gain or loss from the Wilton transactions. No attempt has been made to estimate the impact
of the aforementioned adjustments on cash flow for the periods presented, on net investment income
earned on assets transferred to third parties in connection with the novated life reinsurance
agreements or on operating expenses. The unaudited pro forma information presented below is not
necessarily indicative of the financial results that would have been attained had the transactions
occurred on the dates referenced above and should not be viewed as indicative of operations in
future periods.
Annuity & Life Re (Holdings) Ltd.
Pro Forma Consolidated Statement of Operations for the Nine Months Ended September 30, 2005
(Unaudited and in U.S. Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wilton |
|
|
|
|
|
|
|
|
|
|
Transaction |
|
|
|
|
|
|
Reported |
|
|
Adjustments |
|
|
Pro Forma |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums |
|
$ |
12,001,008 |
|
|
$ |
(11,325,272 |
)(A) |
|
$ |
675,736 |
|
Investment income, net of related expenses |
|
|
4,806,689 |
|
|
|
(1,938,486 |
)(B) |
|
|
2,868,203 |
|
Net realized investment gains |
|
|
500,650 |
|
|
|
|
|
|
|
500,650 |
|
Net change in fair value of embedded derivatives |
|
|
1,105,853 |
|
|
|
(1,105,853 |
)(C) |
|
|
|
|
Surrender fees and other revenues |
|
|
94,887 |
|
|
|
(94,887 |
)(D) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
18,509,087 |
|
|
$ |
(14,464,498 |
) |
|
$ |
4,044,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Claims and policy benefits |
|
$ |
10,781,404 |
|
|
$ |
(12,675,325 |
)(E) |
|
$ |
(1,893,921 |
) |
Interest credited to interest sensitive products |
|
|
985,614 |
|
|
|
(985,614 |
)(F) |
|
|
|
|
Policy acquisition costs and other insurance expenses |
|
|
3,079,459 |
|
|
|
(2,370,965 |
)(G) |
|
|
708,494 |
|
Operating expenses |
|
|
7,599,723 |
|
|
|
|
|
|
|
7,599,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Benefits and Expenses |
|
$ |
22,446,200 |
|
|
$ |
(16,031,904 |
) |
|
$ |
6,414,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of a change in accounting principal |
|
$ |
(3,937,113 |
) |
|
$ |
1,567,406 |
|
|
$ |
(2,369,707 |
) |
Cumulative effect of a change in accounting principal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
$ |
(3,937,113 |
) |
|
$ |
1,567,406 |
|
|
$ |
((2,369,707 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share before cumulative effect of change in accounting
principal per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.16 |
) |
|
$ |
0.06 |
|
|
$ |
(0.09 |
) |
Diluted |
|
$ |
(0.16 |
) |
|
$ |
0.06 |
|
|
$ |
(0.09 |
) |
Cumulative effect of a change in accounting principal per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
Diluted |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
Net loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.16 |
) |
|
$ |
0.06 |
|
|
$ |
(0.09 |
) |
Diluted |
|
$ |
(0.16 |
) |
|
$ |
0.06 |
|
|
$ |
(0.09 |
) |
|
|
|
(A) |
|
To reflect reduced Premiums as if the life reinsurance treaties novated to or coinsured by Wilton did
not exist during the first nine months of 2005. |
|
(B) |
|
To reflect reduced Net investment income as if the annuity reinsurance treaty novated to or coinsured by Wilton did not exist
during the first nine months of 2005. |
|
(C) |
|
To reflect no embedded derivative as if the annuity reinsurance treaty novated or coinsured by Wilton did not exist during the
first nine months of 2005. |
|
(D) |
|
To reflect reduced Surrender fees as if the annuity reinsurance treaty novated to or coinsured by Wilton did not exist during the
first nine months of 2005. |
|
(E) |
|
To reflect reduced Claim and Policy Benefits as if the life reinsurance treaties novated to or coinsured by Wilton did not exist
during the first nine months of 2005. |
|
(F) |
|
To reflect reduced Interest credited to interest sensitive products as if the annuity reinsurance treaty novated to or coinsured by
Wilton did not exist during the first nine months of 2005. |
-27-
|
|
|
(G) |
|
To reflect reduced Policy acquisition costs and other insurance expenses as if the life and annuity reinsurance treaties novated to
or coinsured by Wilton did not exist during the first nine months of 2005. |
The unaudited pro forma condensed consolidated statement of operations for the year ended
December 31, 2004 adjusts the reported GAAP statement of operations by assuming that (1) all of the novation, recapture
and termination transactions that had effective dates in 2004 occurred on January 1, 2004 (which removes from reported net (loss)
the actual performance for each agreement through its novation, racapture or termination date), (2) the
effective date of the proposed transactions with Wilton was January 1, 2004, and (3) there was no
gain or loss from the novation, recapture or termination transactions
that had effective dates in 2004 or from the Wilton transactions. No attempt has been made to estimate the impact of the
aforementioned adjustments on cash flow for the periods presented, on net investment income earned
on assets transferred to third parties in connection with the novated life reinsurance agreements
or on operating expenses. The pro forma information presented below is not necessarily indicative
of the financial results that would have been attained had the transactions occurred on the dates
referenced above and should not be viewed as indicative of operations in future periods.
Annuity and Life Re (Holdings), Ltd.
Pro Forma Consolidated Statement of Operations for the Year Ended December 31, 2004
(Unaudited and in U.S. Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(as adjusted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for the 2004 |
|
|
|
|
|
|
|
|
|
|
|
Pro Forma |
|
|
Adjustments |
|
|
transactions |
|
|
|
|
|
|
|
Adjustments |
|
|
(as adjusted |
|
|
(for the |
|
|
and the |
|
|
|
|
|
|
|
(for the 2004 |
|
|
for the 2004 |
|
|
Wilton |
|
|
Wilton |
|
|
|
Reported |
|
|
transactions) |
|
|
transactions) |
|
|
transaction) |
|
|
transaction) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums |
|
$ |
48,297,706 |
|
|
$ |
(30,325,348 |
)(A) |
|
$ |
17,972,358 |
|
|
$ |
(15,898,984 |
)(H) |
|
$ |
2,073,374 |
|
Investment income, net of related expenses |
|
|
21,697,563 |
|
|
|
(13,439,098 |
)(B) |
|
|
8,258,465 |
|
|
|
(2,923,139 |
)(I) |
|
|
5,335,326 |
|
Net realized investment gains |
|
|
|
|
|
|
439,536 |
|
|
|
439,536 |
|
|
|
|
|
|
|
439,536 |
|
Net change in fair value of embedded derivatives |
|
|
2,181,070 |
|
|
|
|
|
|
|
2,181,070 |
|
|
|
(2,181,070 |
)(J) |
|
|
|
|
Surrender fees and other revenues |
|
|
4,475,691 |
|
|
|
(4,257,721 |
)(C) |
|
|
217,970 |
|
|
|
(217,970 |
)(K) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
77,091,566 |
|
|
$ |
(48,022,167 |
) |
|
$ |
29,069,399 |
|
|
$ |
(21,221,163 |
) |
|
$ |
7,848,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and policy benefits |
|
$ |
14,101,129 |
|
|
|
(306,552 |
)(D) |
|
$ |
13,794,577 |
|
|
|
(13,990,062 |
)(L) |
|
|
(195,485 |
) |
Interest credited to interest sensitive products |
|
|
5,399,460 |
|
|
|
(3,530,883 |
)(E) |
|
|
1,868,577 |
|
|
|
(1,868,577 |
)(M) |
|
|
|
|
Policy acquisition costs and other insurance expenses |
|
|
110,922,948 |
|
|
|
(105,602,277 |
)(F) |
|
|
5,320,671 |
|
|
|
(3,987,088 |
)(N) |
|
|
1,333,583 |
|
Operating expenses |
|
|
14,628,524 |
|
|
|
|
|
|
|
14,628,524 |
|
|
|
|
|
|
|
14,628,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Benefits and Expenses |
|
$ |
145,052,061 |
|
|
|
(109,439,712 |
) |
|
$ |
35,612,349 |
|
|
$ |
(19,845,727 |
) |
|
$ |
15,766,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of a change in
accounting principal |
|
$ |
(67,960,495 |
) |
|
|
61,417,545 |
|
|
$ |
(6,542,950 |
) |
|
$ |
(1,375,436 |
) |
|
$ |
(7,918,386 |
) |
Cumulative effect of a change in accounting principal |
|
|
(365,960 |
) |
|
|
365,960 |
(G) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
$ |
(68,326,455 |
) |
|
$ |
61,783,505 |
|
|
$ |
(6,542,950 |
) |
|
$ |
(1,375,436 |
) |
|
$ |
(7,918,386 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share before cumulative effect of
change in accounting principal per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(2.63 |
) |
|
$ |
2.38 |
|
|
$ |
(0.25 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.31 |
) |
Diluted |
|
$ |
(2.63 |
) |
|
$ |
2.38 |
|
|
$ |
(0.25 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.31 |
) |
Cumulative effect of a change in accounting principal
per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.01 |
) |
|
$ |
0.01 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
Diluted |
|
$ |
(0.01 |
) |
|
$ |
0.01 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
Net loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(2.64 |
) |
|
$ |
2.39 |
|
|
$ |
(0.25 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.31 |
) |
Diluted |
|
$ |
(2.64 |
) |
|
$ |
2.39 |
|
|
$ |
(0.25 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.31 |
) |
|
|
|
(A) |
|
To reflect reduced Premiums as if the Scottish Re and F&G life reinsurance agreements novated to Transamerica and as if the GMDB/ GMIB agreement recaptured by CIGNA did not exist in 2004 |
|
(B) |
|
To reflect reduced Net investment income as if the Transamerica annuity agreement did not exist in 2004. |
|
(C) |
|
To reflect reduced Surrender fees and other revenues as if the Transamerica annuity agreement did not exist in 2004. |
|
(D) |
|
To reflect reduced Claim and Policy Benefits as if the Scottish Re and F&G life reinsurance agreements novated to Transamerica and as if the GMDB/ GMIB agreement recaptured by CIGNA did not exist in 2004. |
|
(E) |
|
To reflect reduced Interest credited to interest sensitive products as if the Transamerica annuity agreement did not exist in 2004. Includes the release of interest sensitive contracts liability net of
funds withheld at interest and the termination premium of $14,000,000 paid to Transamerica in consideration of the termination of this agreement as of December 1, 2004. |
- 28 -
|
|
|
(F) |
|
To reflect reduced Policy acquisition costs and other insurance expenses as if the Transamerica annuity agreement, the Scottish Re and F&G life reinsurance agreements novated to Transamerica and the GMDB/
GMIB agreement recaptured by CIGNA did not exist in 2004. Includes the write down of deferred acquisition costs of approximately $63,100,000 associated with the termination of the Transamerica annuity
agreement and approximately $24,900,000 associated with the novation of Scottish Re and F&G life agreements as of December 31, 2004. |
|
(G) |
|
To reflect the reversal of the application of SOP 03-1 to the GMDB/ GMIB agreement recaptured by CIGNA and the Transamerica annuity agreement as if those agreements did not exist in 2004. |
|
(H) |
|
To reflect reduced Premiums as if the life reinsurance agreements novated to or coinsured by Wilton did not exist in 2004. |
|
(I) |
|
To reflect reduced Net investment income as if the annuity reinsurance agreement novated to or coinsured by Wilton did not exist in 2004. |
|
(J) |
|
To reflect no embedded derivative as if the annuity reinsurance treaty novated to or coinsured by Wilton did not exist in 2004. |
|
(K) |
|
To reflect reduced Surrender fees as if the annuity reinsurance agreement novated to or coinsured by Wilton did not exist in 2004. |
|
(L) |
|
To reflect reduced Claim and Policy Benefits as if the life reinsurance agreement novated to or coinsured by Wilton did not exist in 2004. |
|
(M) |
|
To reflect reduced Interest credited to interest sensitive products as if the annuity reinsurance agreement novated to or coinsured by Wilton did not exist during the first six months of 2005. |
|
(N) |
|
To reflect reduced Policy acquisition costs and other insurance expenses as if the life and annuity reinsurance agreement novated to or coinsured by Wilton did not exist in 2004. |
The unaudited pro forma condensed consolidated statement of operations for the nine
months ended September 30, 2004 adjusts the reported GAAP statement of operations by assuming that
(1) all of the novation, recapture and termination transactions that had effective dates in 2004 occurred on January 1, 2004
(which removes from reported net (loss) the actual performance for each agreement through its novation, recapture or termination
date), (2) the effective date of the proposed transactions with Wilton was January 1, 2004, and (3) there
was no gain or loss from the novation, recapture or termination
transactions that had effective dates in 2004 or from the Wilton transactions. No attempt has been made to estimate the impact
of the aforementioned adjustments on cash flow for the periods presented, on net investment income
earned on assets transferred to third parties in connection with the novated life reinsurance
agreements or on operating expenses. The pro forma information presented below is not necessarily
indicative of the financial results that would have been attained had the transactions occurred on
the dates referenced above and should not be viewed as indicative of operations in future periods.
Annuity and Life Re (Holdings), Ltd.
Pro Forma Consolidated Statement of Operations for the Nine Months Ended September 30, 2004
(Unaudited and in U.S. Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(as adjusted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for the 2004 |
|
|
|
|
|
|
|
|
|
|
|
Pro Forma |
|
|
Adjustments |
|
|
transactions |
|
|
|
|
|
|
|
Adjustments |
|
|
(as adjusted |
|
|
(for the |
|
|
and the |
|
|
|
|
|
|
|
(for the 2004 |
|
|
for the 2004 |
|
|
Wilton |
|
|
Wilton |
|
|
|
Reported |
|
|
transactions) |
|
|
transactions) |
|
|
transaction) |
|
|
Transaction) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums |
|
$ |
34,565,859 |
|
|
$ |
(21,253,833 |
)(A) |
|
$ |
13,312,026 |
|
|
$ |
(11,804,417 |
)(H) |
|
$ |
1,507,609 |
|
Investment income, net of related expenses |
|
|
17,875,012 |
|
|
|
(11,476,353 |
)(B) |
|
|
6,398,659 |
|
|
|
(2,253,938 |
)(I) |
|
|
4,144,721 |
|
Net realized investment gains |
|
|
456,172 |
|
|
|
|
|
|
|
456,172 |
|
|
|
|
|
|
|
456,172 |
|
Net change in fair value of embedded derivatives |
|
|
1,692,113 |
|
|
|
|
|
|
|
1,692,113 |
|
|
|
(1,692,113 |
)(J) |
|
|
|
|
Surrender fees and other revenues |
|
|
3,609,905 |
|
|
|
(3,467,072 |
)(C) |
|
|
142,833 |
|
|
|
(142,833 |
)(K) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
58,199,061 |
|
|
$ |
(36,197,258 |
) |
|
$ |
22,001,803 |
|
|
$ |
(15,893,301 |
) |
|
$ |
6,108,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and policy benefits |
|
$ |
24,683,101 |
|
|
|
(14,068,562 |
)(D) |
|
$ |
10,614,539 |
|
|
|
(9,197,418 |
)(L) |
|
|
1,417,121 |
|
Interest credited to interest sensitive products |
|
|
10,865,545 |
|
|
|
(9,584,687 |
)(E) |
|
|
1,280,858 |
|
|
|
(1,280,858 |
)(M) |
|
|
|
|
Policy acquisition costs and other insurance expenses |
|
|
18,529,269 |
|
|
|
(14,795,810 |
)(F) |
|
|
3,733,459 |
|
|
|
(3,112,693 |
)(N) |
|
|
620,766 |
|
Operating expenses |
|
|
12,446,874 |
|
|
|
|
|
|
|
12,446,874 |
|
|
|
|
|
|
|
12,446,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Benefits and Expenses |
|
$ |
66,524,789 |
|
|
|
(38,449,059 |
) |
|
$ |
28,075,730 |
|
|
$ |
(13,590,969 |
) |
|
$ |
14,484,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of a change in
accounting principal |
|
$ |
(8,325,728 |
) |
|
|
2,251,801 |
|
|
$ |
(6,073,927 |
) |
|
$ |
(2,302,332 |
) |
|
$ |
(8,376,259 |
) |
Cumulative effect of a change in accounting principal |
|
|
(365,960 |
) |
|
|
365,960 |
(G) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
$ |
(8,691,688 |
) |
|
$ |
2,617,761 |
|
|
$ |
(6,073,927 |
) |
|
$ |
(2,302,332 |
) |
|
$ |
(8,376,259 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share before cumulative effect of
change in accounting principal per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.32 |
) |
|
$ |
0.09 |
|
|
$ |
(0.23 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.32 |
) |
-29-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(as adjusted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for the 2004 |
|
|
|
|
|
|
|
|
|
|
|
Pro Forma |
|
|
Adjustments |
|
|
transactions |
|
|
|
|
|
|
|
Adjustments |
|
|
(as adjusted |
|
|
(for the |
|
|
and the |
|
|
|
|
|
|
|
(for the 2004 |
|
|
for the 2004 |
|
|
Wilton |
|
|
Wilton |
|
|
|
Reported |
|
|
transactions) |
|
|
transactions) |
|
|
transaction) |
|
|
Transaction) |
|
Diluted |
|
$ |
(0.32 |
) |
|
$ |
0.09 |
|
|
$ |
(0.23 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.32 |
) |
Cumulative effect of a change in accounting principal
per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.01 |
) |
|
$ |
0.01 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
Diluted |
|
$ |
(0.01 |
) |
|
$ |
0.01 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
Net loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.33 |
) |
|
$ |
0.10 |
|
|
$ |
(0.23 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.32 |
) |
Diluted |
|
$ |
(0.33 |
) |
|
$ |
0.10 |
|
|
$ |
(0.23 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.32 |
) |
|
|
|
(A) |
|
To reflect reduced Premiums as if the Scottish Re and F&G life reinsurance agreements novated to Transamerica and as if the GMDB/ GMIB agreement recaptured by CIGNA did not exist in 2004 |
|
(B) |
|
To reflect reduced Net investment income as if the Transamerica annuity agreement did not exist in 2004. |
|
(C) |
|
To reflect reduced Surrender fees and other revenues as if the Transamerica annuity agreement did not exist in 2004. |
|
(D) |
|
To reflect reduced Claim and Policy Benefits as if the Scottish Re and F&G life reinsurance agreements novated to Transamerica and as if the GMDB/ GMIB agreement recaptured by CIGNA did not exist in 2004. |
|
(E) |
|
To reflect reduced Interest credited to interest sensitive products as if the Transamerica annuity agreement did not exist in 2004. |
|
(F) |
|
To reflect reduced Policy acquisition costs and other insurance expenses as if the Transamerica annuity agreement, the Scottish Re and F&G life reinsurance agreements novated to Transamerica and the GMDB/ GMIB
agreement recaptured by CIGNA did not exist in 2004. |
|
(G) |
|
To reflect the reversal of the application of SOP 03-1 to the GMDB/ GMIB agreement recaptured by CIGNA and the Transamerica annuity agreement as if those agreements did not exist in 2004. |
|
(H) |
|
To reflect reduced Premiums as if the life reinsurance agreements novated to or coinsured by Wilton did not exist in 2004. |
|
(I) |
|
To reflect reduced Net investment income as if the annuity reinsurance agreement novated to or coinsured by Wilton did not exist in 2004. |
|
(J) |
|
To reflect no embedded derivative as if the annuity reinsurance treaty novated to or coinsured by Wilton did not exist in 2004. |
|
(K) |
|
To reflect reduced Surrender fees as if the annuity reinsurance agreement novated to or coinsured by Wilton did not exist in 2004. |
|
(L) |
|
To reflect reduced Claim and Policy Benefits as if the life reinsurance agreement novated to or coinsured by Wilton did not exist in 2004. |
|
(M) |
|
To reflect reduced Interest credited to interest sensitive products as if the annuity reinsurance agreement novated to or coinsured by Wilton did not exist during the first nine months of 2005. |
|
(N) |
|
To reflect reduced Policy acquisition costs and other insurance expenses as if the life and annuity reinsurance agreement novated to or coinsured by Wilton did not exist in 2004. |
Transamerica Transaction
On December 31, 2004, we entered into a binding letter of intent with Transamerica Occidental
Life Insurance Company (Transamerica) that provided for the novation of our life reinsurance
agreements with Scottish Re Limited (Scottish Re) and with 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 us and recapture all business ceded under the agreement
effective as of December 1, 2004. Our annuity reinsurance agreement with Transamerica has generated
substantial losses since 2001 and has required us to make significant cash payments to
Transamerica.
Pursuant to our letter of intent with Transamerica, on January 31, 2005, we executed
definitive documents (the Novation Agreement) and novated our life reinsurance agreements with
Scottish Re and F&G to Transamerica as of December 31, 2004. In consideration of these novations,
we paid Transamerica $18.5 million, representing a transfer of reserves related to the life
reinsurance agreements that were novated. Also on January 31, 2005, we executed an amendment to our
annuity reinsurance agreement with Transamerica pursuant to which our agreement with Transamerica
was terminated, and Transamerica recaptured all business ceded under the agreement effective as of
December 1, 2004. In consideration of the recapture, we paid Transamerica all amounts owed under
the annuity reinsurance agreement through November 30, 2004, which was approximately $7.1 million,
along with a termination premium of $14.0 million.
In connection with the novations of the life reinsurance agreements, approximately $28.9
million of collateral held in a trust established with respect to our life reinsurance agreement
with Scottish Re was transferred to Transamerica. In addition, $23.8 million of the letters of
credit we posted in connection
-30-
with our life reinsurance agreement with F&G were cancelled and the
collateral securing those letters of credit was released to us. Approximately $39.6 million was
paid to Transamerica in connection
with the novation and recapture transactions from this
collateral, including $18.5 million as consideration for the novations, a $14.0 million termination
premium and approximately $7.1 million for amounts due to Transamerica on December 1, 2004.
Following those payments, approximately $13.1 million of cash and securities previously posted as
collateral was released to us.
On March 30, 2005, we received a demand letter from Transamerica stating that $7.0 million was
owed to Transamerica as an adjustment to the F&G policy benefit reserves. On June 14, 2005, we
received an additional letter from Transamerica revising its original demand to $6.0 million.
Because we had been unable to resolve this issue through continued discussions with Transamerica,
we sought resolution of the dispute by a neutral actuary pursuant to a provision of the Novation Agreement.
The Company and Transamerica had agreed upon a neutral actuary and were in discussions regarding
the scope of the issue to be submitted to the neutral actuary when, on October 3, 2005, Transamerica delivered a demand for
arbitration in connection with this dispute. In that demand,
Transamerica alleged that we materially misrepresented the true
economic nature of the reinsurance agreements that we novated to it, or, in the alternative, that
there was a mutual mistake as to the true economic nature of those reinsurance agreements.
Transamerica is now seeking to rescind the Novation Agreement or recover such interest and damages
as the arbitration panel deems appropriate for the alleged misrepresentations and breaches of
representations and warranties. We believe Transamericas position is without merit and intend to
defend ourselves vigorously in arbritration.
Critical Accounting Policies
Our unaudited condensed consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America, which require our
management to make estimates and assumptions that affect the amounts of our assets, liabilities,
stockholders equity and results of operations. We believe that the following critical accounting
policies, as well as those set forth in our Form 10-K for the year ended December 31, 2004, detail
the more significant estimates and assumptions used in the preparation of our unaudited condensed
consolidated financial statements.
Deferred Policy Acquisition Costs. The costs of acquiring new business, principally
allowances, which vary with and are primarily related to the production of new business, are
deferred. For traditional life and annuity policies with life contingencies, deferred policy
acquisition costs are charged to expense using assumptions consistent with those used in computing
policy reserves. Assumptions as to anticipated premiums are estimated at the date of the policy
issuance, or the effective date of the most recent premium rate increase, and are consistently
applied during the life of the contracts. Deviations from estimated experience are reflected in
earnings in the period such deviations occur. For these contracts, the amortization periods are
generally the estimated life of the policies. We terminated or recaptured several of our
reinsurance agreements during 2003 and 2004, which caused us to incur significant deferred
acquisition cost write-downs. For example, we completed the termination and recapture of our
annuity reinsurance agreement with Transamerica effective as of December 1, 2004, which resulted in
a write off of deferred policy acquisition costs of approximately $63,100,000 in 2004. Also, the
transactions contemplated under the Master Agreement with the Wilton Subsidiaries will require
write downs of all remaining deferred policy acquisition costs.
In preparing our financial statements, we make assumptions about our proportionate share of
future investment income that will be earned from the investment of premiums received from
underlying policyholders by our ceding companies and about future rates of lapse of policies
underlying our annuity reinsurance agreements. These assumptions have a direct impact on our
estimated expected gross profits on our annuity reinsurance agreements and, therefore, on the
recoverability of the deferred acquisition
- 31 -
costs carried on our balance sheet for these agreements.
While these estimates are based upon historical results and information provided to us by our
ceding companies, actual results could differ (and, in the past, have differed) materially from our
estimates for a variety of reasons, including the failure of our ceding companies to report timely
information regarding material developments under our reinsurance agreements. Such differences
could be material to our future results. If our assumptions for investment returns prove to be
inaccurate, or if lapse rates exceed our assumptions, we may be required to record additional
charges, which would adversely impact our results of operations.
Consistent with our accounting policies, we review the key assumptions used in determining the
carrying value of our deferred acquisition cost associated with our annuity reinsurance agreement
each quarter. A change in these assumptions could result in additional charges that would adversely
impact future results of operations. If our assumptions for total returns prove to be inaccurate,
or if lapse rates exceed our assumptions, we may be required to record additional write downs of
deferred acquisition costs, which would adversely impact future results of operations. For example,
assuming no change in lapse assumptions, the net impact of a 100 basis point decrease in our total
return assumptions in all future years would have required an additional write down of deferred
acquisition costs of approximately $1,300,000 as of September 30, 2005.
Embedded Derivatives. We have concluded that there is an embedded derivative within the Funds
withheld at interest related to our annuity reinsurance agreement with Lafayette Life Insurance
Company (Lafayette) that requires bifurcation and separate accounting under Statement of
Financial Accounting
Standards No. 133 Accounting for Derivative Instruments and Hedging Activities. This embedded
derivative is similar to a total return swap arrangement on the underlying assets held by
Lafayette. The fair value of the embedded derivative is classified as part of our Funds withheld
asset on our balance sheet. We have developed a cash flow model with the assistance of outside
advisors to arrive at an estimate of the fair value of this total return swap that uses various
assumptions regarding future cash flows under the agreement. The fair value of the embedded
derivative is influenced by changes in credit risk, changes in expected future cash flows under the
agreement and interest rates. The change in fair value of the embedded derivative is recorded in
our statement of operations as the net change in fair value of embedded derivatives.
The change in fair value of the embedded derivative also impacts the emergence of expected
gross profits for purposes of amortizing deferred acquisition costs associated with our annuity
reinsurance agreement with Lafayette. The application of this accounting policy has increased the
volatility of our reported results of operations. While we have made an estimate of the fair value
of the embedded derivative using a model that we believe to be appropriate and based upon
reasonable assumptions, the assumptions used are subjective and may require adjustment in the
future. Changes in our assumptions could have a significant impact on the fair value of the
embedded derivative and our reported results of operations.
Recognition of Revenues and Expenses. Reinsurance premium revenues from life products with
mortality risk are recognized when due from the policyholders. Premiums from universal life and
investment-type contracts are recorded on our balance sheet as interest sensitive contracts
liability. Revenues from these investment-type contracts consist of income earned on the assets and
amounts assessed during the period against policyholders account balances for mortality charges,
policy administration charges and surrender charges. Items that are charged to expense represent
interest credited to policyholder accounts and other benefits in excess of related policyholders
account balances, including lifetime minimum interest guarantee payments. We make estimates at the
end of each reporting period regarding premiums and benefits for ceding companies who do not report
such information in a timely
- 32 -
manner. These estimates can have a significant effect on the amounts
we report in our financial statements.
Reserves for Policy Benefits, Including Claims Incurred but not Reported (IBNR) and Interest
Sensitive Contracts Liability. The development of reserves for policy benefits and for claims
incurred but not reported for our life reinsurance contracts requires us to make estimates and
assumptions regarding mortality, lapse, persistency, expense and investment experience. Such
estimates are primarily based on historical experience and information provided by ceding
companies. Actual results could differ, and in the past have differed, materially from those
estimates. We monitor actual experience, and where circumstances warrant, will revise our
assumptions and the related reserve estimates.
Our obligations arising from our fixed annuity reinsurance agreements came from our agreement
with Lafayette and, in 2004, our agreement with Transamerica. Our obligations for these fixed
annuity agreements were reflected on our balance sheet as interest sensitive contracts liability.
On December 31, 2004, we entered into a binding letter of intent with Transamerica which provided
that it would terminate its annuity reinsurance agreement with us and recapture all business ceded
under the agreement effective as of December 1, 2004. Pursuant to this letter of intent, on January
31, 2005, we executed definitive documents and completed the termination and recapture of our
annuity reinsurance agreement with Transamerica.
AICPA Statement of Position (SOP) 03-1. In July 2003, the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants (AICPA) issued Statement of
Position 03-1 (SOP), Accounting and Reporting by Insurance Enterprises for Certain
Non-Traditional Long-Duration Contracts and for Separate Accounts, which provides guidance on
accounting and reporting by insurance enterprises for certain nontraditional long-duration
contracts and for separate accounts. The SOP is effective for financial statements for fiscal years
beginning after December 15, 2003. We adopted the SOP as of January 1, 2004. We no longer have any
reinsurance agreements that are affected by the SOP.
Stock-Based Compensation. On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004),
Share-Based Payment (SFAS No. 123R). SFAS No. 123R replaces SFAS No. 123 Accounting for
Stock-Based Compensation and supersedes APB opinion No. 25 Accounting for Stock Issued to
Employees. SFAS No. 123R requires all entities to recognize within compensation expense an amount
equal to the fair value of share-based payments granted to employees and is effective as of the
beginning of the first quarter of the first fiscal year that begins after June 15, 2005. We already
record compensation expense for awards of stock options and restricted stock to employees based on
the fair value of the awards. Consequently this statement will not impact our results of operations
or financial condition.
If actual events differ significantly from the underlying estimates and assumptions used by us
in the application of any of the aforementioned accounting policies, there could be a material
adverse effect on our results of operations and financial condition.
Operating Results
Net Loss. For the three months ended September 30, 2005, we had a net loss of $(2,628,482),
or $(0.10) per basic and fully diluted common share, as compared with a net loss of $(3,095,705),
or $(0.12) per basic and fully diluted common share, for the three months ended September 30, 2004.
For the nine months ended September 30, 2005, we had a net loss of $(3,937,113), or $(0.16) per
basic and fully diluted common share, as compared to a net loss, after the cumulative effect of a
change in accounting
- 33 -
principle, of $(8,691,688), or $(0.33) per basic and fully diluted common
share, for the nine months ended September 30, 2004.
Our loss for the three and nine months ended September 30, 2005 was the result of our
operating expenses exceeding our net investment income due to the significantly reduced size of our
remaining book of business. In addition, during the first nine months of 2005 we encountered
unfavorable experience on the National States life reinsurance agreement, partially offset by
favorable experience relative to our assumptions at December 31, 2004 on the Scottish Re and F&G
life reinsurance agreements that were novated to Transamerica at December 31, 2004. Our net loss
during the three months ended September 30, 2004 was primarily due to a $2,421,000 charge for the
settlement of the recapture agreement with CIGNA, while our net loss during the nine months ended
September 30, 2004 was primarily due to that charge and a $5,000,000 accrual for our portion of the
settlement payment under a class action shareholder lawsuit that had been brought against us and
certain of our present and former officers and directors.
Net Premiums. Net premium revenue for the three and nine months ended September 30, 2005 was
$3,584,825 and $12,001,008, a decrease of 64% and 65%, respectively, from net premium revenue of
$9,906,337 and $34,565,859, respectively, for the three and nine months ended September 30, 2004.
Substantially all premium revenue was derived from traditional ordinary life reinsurance
agreements. The decline in premium revenue reflects the significant reduction of business in force
resulting from the novations of our life reinsurance agreements with Scottish Re and F&G as of
December 31, 2004. At September 30, 2005, the total face amount of life insurance in force
decreased to approximately $2.2 billion, as compared with approximately $15.3 billion at September
30, 2004. Our largest life reinsurance
agreement represented approximately $0.2 billion of life insurance in force at September 30,
2005 and approximately $7.6 million of premium revenue for the nine months ended September 30,
2005.
Net Investment Income. Total net investment income for the three and nine months ended
September 30, 2005 was $1,531,065 and $4,806,689, respectively, as compared with $4,780,211 and
$17,875,012, respectively, for the three and nine months ended September 30, 2004. Net investment
income is comprised of income earned on our general account assets and income earned on assets held
and managed by our reinsurance ceding companies under modified coinsurance contracts, which we
refer to as Funds withheld.
Net investment income earned on our general account assets for the three and nine months ended
September 30, 2005 was approximately $927,000 and $2,868,000, respectively, as compared to
$1,194,000 and $4,145,000, respectively, for the three and nine months ended September 30, 2004.
The average annualized yield rate earned on our general account assets for the three and nine
months ended September 30, 2005 was approximately 3.92% and 3.57%, respectively, as compared with
approximately 3.53% and 3.11%, respectively, for the three and nine months ended September 30,
2004. Because the amount of our cash and invested assets has decreased significantly due to
payments associated with the novation of certain life reinsurance agreements to Transamerica as of
December 31, 2004 and will decrease further following the consummation of the transactions
contemplated by the Master Agreement, we expect our net investment income earned on our general
account assets for the remainder of 2005 to be substantially less than 2004.
Net investment income earned on Funds withheld for the three and nine months ended September
30, 2005 was approximately $604,000 and $1,938,000, respectively, as compared to approximately
$3,586,000 and $13,730,000, respectively, for the three and nine months ended September 30, 2004.
The decrease in investment income on our Funds withheld was the result of our annuity reinsurance
agreement with Transamerica being recaptured as of December 1, 2004. Approximately $2.8 million and
$11.5
- 34 -
million, respectively, of net investment income earned on Funds withheld for the three and
nine months ended September 30, 2004 related to our annuity reinsurance agreement with
Transamerica. The average annualized yield rates earned on Funds withheld for our annuity
reinsurance agreement with Lafayette Life Insurance Company were approximately 4.67% and 4.87%,
respectively, for the three and nine months ended September 30, 2005, as compared with 4.94% and
4.98%, respectively, for the three and nine months ended September 30, 2004. For purposes of
calculating the average yield rates earned on our Funds withheld at
interest, we include
our share of the investment income and net realized capital gains and losses as reported to us
through our settlements with our ceding companies.
Net Realized Investment Gains. Net realized investment gains for the three and nine months
ended September 30, 2005 were $99,507 and $500,650, respectively, as compared with net realized
investment (losses) gains of $(84,868) and $456,172, respectively, for the three and nine months
ended September 30, 2004. The level of net realized investment gains for both periods reflected the
transfer and sale of securities in our investment portfolio to ceding companies in connection with
the termination and recapture of certain of our reinsurance agreements in the first nine months of
2005 and 2004. Although we have moved a greater portion of our invested assets into longer duration
investments, we continue to hold a relatively large portion of our assets in short duration
investments. We will adjust our investment strategy based on developments in the markets and our
business and those adjustments may result in realized gains or losses being recognized. We make
decisions concerning the sales of invested assets based on a variety of market, business and other
factors.
Net Change in the Fair Value of Embedded Derivatives. Under SFAS No. 133, we have been
required to bifurcate and separately account for the embedded derivatives contained in our annuity
reinsurance agreement with Lafayette. Unrealized changes in the fair value of the embedded
derivative are reflected in our results of operations. For the three and nine months ended
September 30, 2005, the net change in fair value of our embedded derivatives was an unrealized gain
of $654,444 and $1,105,853, respectively. For the three and nine months ended September 30, 2004,
the net change in fair value of our embedded derivatives was an unrealized gain of $565,939 and
$1,692,113, respectively.
Surrender Fees and Other Revenue. Surrender fees and other revenue for the three and nine
months ended September 30, 2005 were $33,574 and $94,887, respectively, as compared with $1,024,405
and $3,609,905, respectively, for the three and nine months ended September 30, 2004. For the
three and nine months ended September 30, 2005, this income was solely derived from surrender fees
related to our fixed annuity agreement with Lafayette. Approximately $1.0 million and $3.5 million,
respectively, of surrender fee revenue was generated on account of our annuity reinsurance
agreement with Transamerica for the three and nine months ended September 30, 2004. In light of
the termination and recapture of our annuity reinsurance agreement with Transamerica, effective as
of December 1, 2004, we do not expect to report significant surrender fee revenue in future
periods.
Claims and Policy Benefits. Claims and policy benefits include both life and variable annuity
benefits, which, during the first half of 2004, included guaranteed minimum death benefits (GMDB)
and guaranteed minimum income benefits (GMIB). Claims and policy benefits for the three months
ended September 30, 2005 and 2004 were $4,591,875 and $5,669,394, or 128% and 57% of net premiums,
respectively. For the nine months ended September 30, 2005 and 2004, claims and policy benefits
were $10,781,404 and $24,683,101, or 90% and 71% of net premiums, respectively. The absolute
decline in claims and policy benefits for the three and nine months ended September 30, 2005 as
compared to the same periods in 2004 was the result of the significant reduction of life insurance
in force from approximately $15.3 billion at September 30, 2004 to approximately $2.2 billion at
September 30, 2005. This included the termination of our GMDB/GMIB agreement with CIGNA, which was
effective July 1, 2004, as well as the novation of our life reinsurance agreements with Scottish Re
and F&G to
- 35 -
Transamerica as of December 31, 2004. While the novations of these life reinsurance
agreements will reduce claims and policy benefits throughout 2005, they may increase volatility in
the level of claims and policy benefits as a percentage of premiums.
Interest Credited to Interest Sensitive Products. Interest credited to interest sensitive
products, which are liabilities we assume under certain annuity reinsurance agreements, was
$359,361 and $985,614, respectively, for the three and nine month periods ended September 30, 2005,
as compared with $5,513,653 and $10,865,545, respectively, for the three and nine month periods
ended September 30, 2004. The reduction in interest credited to interest sensitive products for
the three and nine months ended September 30, 2005 as compared to the same periods in 2004 was due
to the recapture and termination of our annuity reinsurance agreement with Transamerica which was
effective December 1, 2004. For the three and nine months ended September 30, 2005, interest
credited to interest sensitive products related entirely to our fixed annuity agreement with
Lafayette. Interest credited to interest sensitive products for the three and nine months ended
September 30, 2004 included lifetime minimum interest guarantee payments of approximately
$2,652,000 and $8,063,000, respectively, related to our Transamerica agreement.
Policy Acquisition Costs and Other Insurance Expenses. Policy acquisition costs and other
insurance expenses, consisting primarily of allowances and amortization and write downs of deferred
policy acquisition costs, for the three and nine months ended September 30, 2005 were $715,013 and
$3,079,459, respectively, as compared with $5,693,745 and $18,529,269, respectively, for the three
and nine months ended September 30, 2004. The decrease for the three and nine months ended
September 30, 2005 reflects the reduction in the size of our book of business as a result of the
termination and recapture
of our annuity reinsurance agreement with Transamerica and the novation of our life
reinsurance agreements with Scottish Re and F&G to Transamerica.
Operating Expenses. Operating expenses for the three months ended September 30, 2005 were
$2,865,648 or 55% of total revenue (excluding the net change in fair value of embedded
derivatives), as compared with $2,410,937 or 15% of total revenue (excluding the net change in fair
value of embedded derivatives) for the three months ended September 30, 2004. Operating expenses
for the nine months ended September 30, 2005 were $7,599,723 or 44% of total revenue (excluding the
net change in fair value of embedded derivatives), as compared to $12,446,874 or 22% of total
revenue (excluding the net change in fair value of embedded derivatives) for the nine months ended
September 30, 2004. Operating expenses for the three and nine months ended September 30,
2005 included a $740,000 severance accrual for John F. Burke, our former President and Chief
Executive Officer, as well as a $200,000 settlement accrual for our dispute with Rodney Cordle, a
former employee of the Company. The decrease in expenses for the nine months ended
September 30, 2005 reflects the accrual of $5,000,000 for the settlement of the purported
shareholder class action lawsuit in June 2004.
Segment Results
We separately track financial results of our life and annuity operations in segments. Each
segment is defined by a dominant risk characteristic inherent in products in that segment. The life
segment consists of all products where the dominant risk characteristic is mortality risk. The
annuity segment comprises all products where the dominant risk characteristic is investment risk.
In addition, our remaining modified coinsurance annuity reinsurance agreement has features that
constitute embedded derivatives that require bifurcation and separate accounting under SFAS No. 133
Accounting for Derivative Instruments and Hedging Activities. The change in the fair value of
these embedded derivatives is included in the annuity segment. Both the life and annuity segments
have specific assets, liabilities, stockholders equity, revenue, benefits and expenses that apply
only to them. The corporate segment contains all stockholders
- 36 -
equity not otherwise deployed to the
life or annuity segment. In addition, the corporate segment includes all capital gains and losses
from sales of securities in our portfolio and investment income on undeployed invested assets.
Operating expenses are generally allocated to the segments proportionately based upon the amount of
stockholders equity deployed to the segment. Costs associated with our efforts to raise capital
and pursue other strategic alternatives and the costs of settling the shareholder class action
lawsuit have been completely allocated to the corporate segment. Segment results are reported in
Note 4 to our unaudited condensed consolidated financial statements.
Life Segment. Our life reinsurance segment is the reinsurance of ordinary life insurance,
primarily for mortality risks. Ordinary life reinsurance generally is the reinsurance of
individual term life insurance policies, whole life insurance policies and joint and survivor
insurance policies on a yearly renewable term basis. In addition, we reinsured the mortality risk
inherent in universal life insurance policies, variable universal life insurance policies and
variable life insurance policies.
Our life segment is our largest segment as measured by revenues. Life segment loss for the
three months ended September 30, 2005 was $(1,222,995), as compared with segment income of
$2,603,458 for the three months ended September 30, 2004. Segment loss for the nine months ended
September 30, 2005 was $(92,434), as compared to segment income of $3,512,405 for the nine months
ended September 30, 2004.
Segment revenues for the three months ended September 30, 2005 declined 63% to $3,957,221 from
$10,620,367 for the three months ended September 30, 2004. Segment revenues for the nine months
ended September 30, 2005 declined 63% to $13,239,655 from $35,750,909 for the nine months ended
September 30, 2004. This decline reflects our reduced levels of life insurance in force as a
result of novations of life reinsurance agreements at the end of 2004. In addition, net investment
income attributable to the life segment for the first nine months of 2005 decreased by
approximately $1,250,000, as compared with the first nine months of 2004, reflecting reduced
invested assets in the life segment as a result of the novations to Transamerica at the end of
2004.
Segment policy benefits and expenses decreased 35% to $5,180,216 for the three months ended
September 30, 2005, as compared with $8,016,909 for the three months ended September 30, 2004.
Segment policy benefits and expenses for the nine months ended September 30, 2005 decreased 59% to
$13,332,089, as compared to $32,238,504 for the nine months ended September 30, 2004. The decline
is attributable to the significant reduction in life insurance in force at the end of 2004 when our
agreements with F&G and Scottish Re were novated to Transamerica. While novations of life
reinsurance agreements in 2004 have reduced claims and policy benefits in the first nine months of
2005, they may increase volatility in the level of claims and policy benefits as a percentage of
premiums in the future.
Annuity Segment. Our annuity reinsurance segment has historically consisted of the
reinsurance of general account fixed deferred annuities and certain minimum guarantees arising from
variable annuities. We currently have only one remaining annuity reinsurance agreement, which
covers individual general account single premium deferred annuity policies, which involve the
tax-deferred accumulation of interest on a single premium paid by the policyholder (accumulation
phase policies). Accumulation phase policies are subject primarily to investment risk and
persistency (lapse) risk. Historically, we have also reinsured certain guarantees associated with
variable annuity agreements, including GMDB and GMIB. At September 30, 2005, we no longer reinsured
any GMDB or GMIB due to the recapture of our reinsurance agreement with CIGNA in 2004.
Our annuity segment has historically contained the majority of our assets and exposes us to
significant volatility in our results from operations due to the
application of SFAS No. 133
Accounting
- 37 -
for Derivative Instruments and Hedging Activities. We must currently bifurcate and
separately account for the embedded derivative associated with our annuity reinsurance agreement
with Lafayette, and we have had to do so for other annuity reinsurance agreements in the past. This
unrealized change in the value of the derivative is reported in our statement of operations each
quarter. The change in the value of the derivative can be large, and is driven by financial market
conditions, most notably credit risk related changes.
Annuity segment income was $637,004 for the three months ended September 30, 2005, as compared
with a loss of $(4,755,219) for the three months ended September 30, 2004. The segment income for
the three months ended September 30, 2005 was largely the result of the net unrealized gain on our
embedded derivatives of $654,444 on our agreement with Lafayette. During the three months ended
September 30, 2004, the Transamerica annuity reinsurance agreement, which was terminated and
recaptured at the end of 2004, incurred a loss of approximately $(2,059,000). For the nine months
ended September 30, 2005, segment income was $1,031,951 as compared to a segment loss of
$(5,001,178) for the nine months ended September 30, 2004. The segment income for the nine months
ended September 30, 2005 was largely the result of the net unrealized gain on our embedded
derivatives of $1,105,853 on our agreement with Lafayette. The loss for the nine months ended
September 30, 2004 reflected a loss of approximately $(2,965,000) incurred on our annuity
reinsurance agreement with Transamerica.
Total revenue for our annuity segment declined 75% to $1,283,347 for the three months ended
September 30, 2005, as compared with $5,026,576 for the three months ended September 30, 2004.
Total revenue for our annuity segment declined 84% to $3,121,282 for the nine months ended
September 30, 2005, as compared with $19,948,919 for the nine months ended September 30, 2004. This
decline is due
to the termination and recapture of our annuity reinsurance agreement with Transamerica in
2004 and was primarily caused by decreased investment income on our Funds withheld assets as a
result of smaller asset base. Approximately $2.8 million and $11.5 million, respectively, of net
investment income earned on our annuity segment for the three and nine months ended September 30,
2004 was related to our annuity reinsurance agreement with Transamerica. Approximately $1.0 million
and $3.5 million, respectively, of surrender fee revenue was generated on account of our annuity
reinsurance agreement with Transamerica for the three and nine months ended September 30, 2004.
Policy benefits and expenses for the annuity segment declined 93% to $646,343 for the three
months ended September 30, 2005, as compared with $9,781,795 for the three months ended September
30, 2004. These expenses declined 92% to $2,089,331 for the nine months ended September 30, 2005,
as compared with $24,584,137 for the nine months ended September 30, 2004. The primary components
of these expenses are interest credited to policyholders, payments for minimum interest guarantees,
payments and reserve changes for minimum guarantees associated with variable annuity contracts and
write downs and amortization of deferred acquisition costs. The decline in policy benefits and
expenses is primarily due to the termination and recapture of our annuity reinsurance agreement
with Transamerica as of December 1, 2004. Policy benefits and expenses included minimum interest
guarantee payments on the Transamerica annuity reinsurance agreement of approximately $2,652,000
and $8,063,000, respectively, for the three and nine months ended September 30, 2004.
Corporate Segment. The corporate segment includes all of our capital gains and losses,
investment income on undeployed invested assets, costs associated with our efforts to raise capital
and pursue other strategic alternatives, costs relating to the settlement of the shareholder class
action lawsuit and a proportionate share of operating expenses based upon how stockholders equity
is deployed to the life and annuity segments. As a result, the corporate segment, while small
relative to our total company, will likely have volatile results.
- 38 -
Segment losses of $(2,042,491) and $(4,876,630), respectively, were incurred for the three and
nine months ended September 30, 2005, as compared with losses of $(943,944) and $(7,202,915),
respectively, for the three and nine months ended September 30, 2004. The decrease in segment loss
for the nine months ended September 30, 2005 reflects the accrual of $5,000,000 for the settlement
of the purported shareholder class action lawsuit in June 2004. Revenues increased by 22% to
$662,847 for the three months ended September 30, 2005, as compared with $545,081 for the three
month period ended September 30, 2004, and declined by 14% to $ $2,148,150 for the nine months
ended September 30, 2005, as compared with $2,499,233 for the nine months ended September 30, 2004.
This decrease in segment revenues for the nine months ended September 30, 2005 was primarily the
result of lower investment income earned on general account assets as a result of the reduced level
of invested assets.
Segment benefits and expenses increased to $2,705,338 for the three months ended September 30,
2005, as compared with $1,489,025 for the three months ended September 30, 2004. This increase was
primarily due to a $740,000 severance accrual for the Companys former CEO as well as a $200,000
settlement accrual for the dispute with a former employee of the Company in the third quarter of
2005. Segment benefits and expenses decreased to $7,024,780 for the nine months ended September
30, 2005, as compared with $9,702,148 for the nine months ended September 30, 2004. This decrease
partially reflects the $5,000,000 accrual for the anticipated settlement of the purported
shareholder class action lawsuit in June 2004.
Financial Condition
Investments
At September 30, 2005 and December 31, 2004, a large portion of our invested assets, including
cash and cash equivalents, were posted as collateral to secure our obligations under reinsurance
agreements and letter of credit facilities or were required to maintain the statutory capital and
surplus requirements of our U.S. operating subsidiary. At September 30, 2005, our invested assets,
including cash and cash equivalents, had an aggregate fair value of $92,899,685, as compared with
an aggregate fair value of $138,428,894 at December 31, 2004. The decline in our invested assets
during the first nine months of 2005 was primarily due to the payment to Transamerica of
$18,500,000 as consideration for the novations of our agreements with Scottish Life and F&G to
Transamerica, $14,000,000 for the termination and recapture of our annuity reinsurance agreement
with Transamerica and approximately $7,100,000 for amounts due to Transamerica through November 30,
2004. On January 10, 2005, we paid $2,500,000 in connection with the settlement of a class action
shareholder lawsuit that had been brought against us and certain of our present and former officers
and directors. At September 30, 2005, gross unrealized losses totaled $(305,655), as compared to
gross unrealized gains of $1,266,517 at December 31, 2004. At September 30, 2005 and December 31,
2004, the weighted average duration of the fixed income securities included in our invested assets
was 2.8 and 2.9 years, respectively, and the weighted average investment quality rating was AA at
the end of each period.
Our investments are governed by investment guidelines established and approved by our Board of
Directors. Our investment objectives are to achieve above average risk-adjusted total returns,
maintain a high quality portfolio, maximize current income, maintain an adequate level of liquidity
in our portfolio and match the cash flows of our investments to our related insurance liabilities.
Our investment guidelines require our overall fixed income portfolio to maintain a minimum weighted
average credit quality of A and limit investment in fixed income securities that are non-rated or
below investment grade at the time of purchase to an aggregate of $3,000,000. In 2004, we invested
approximately $900,000 in securities that were non-rated at the time of their purchase. While any
investment carries some risk, the risks associated with non-rated or lower-rated securities
generally are greater than the risks associated with investment
- 39 -
grade securities. A fixed income
security rated A by Standard & Poors is considered to be somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than higher rated issuers;
however, the issuers capacity to meet its financial commitment on the security is still considered
to be strong. We currently do not invest in any fixed income securities in emerging markets.
Prudential Investment Corporation (Prudential) serves as our advisor for our general account
investment portfolio. Our management agreement with Prudential may be terminated by either party
with 45 days notice. On September 14, 2005, Prudential provided us with the requisite written
notice that it would be terminating our investment management agreement as of November 15, 2005.
Our Board of Directors is currently reviewing the options available to replace Prudential.
We do not engage in trading activities to generate realized investment gains and, thus, do not
have a trading portfolio. However, we evaluate 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, as was the case in 2003 and 2004. As a result, our securities are classified as
available for sale and are carried at fair value on our balance sheet.
At both September 30, 2005 and at December 31, 2004, there was one below investment-grade
security held in the portfolio. The market value of non-rated securities held at September 30,
2005 was approximately $812,000. The fair value of such investments varies depending on economic
and market conditions, the level of interest rates and the perceived creditworthiness of the
issuer. As noted above, our investment guidelines require our overall fixed income portfolio to
maintain a minimum weighted average credit quality of A and limit the amount of our investments
in fixed income securities that are non-rated or below investment grade at the time of purchase. We
monitor the creditworthiness of the portfolio as a whole, and when the fair market value of a
security declines for reasons other than changes in interest rates or other perceived temporary
conditions, the security is written down to its fair value. At September 30, 2005 and December 31,
2004, there were no impaired securities in our portfolio.
At September 30, 2005, mortgage-backed securities represented approximately 3% of our invested
assets, including cash and cash equivalents, as compared with approximately 7% at December 31,
2004. Investors in these securities are compensated primarily for reinvestment risk rather than
credit quality risk. Investments in mortgage-backed securities include collateralized mortgage
obligations (CMOs) 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.
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 both September 30, 2005 and December 31, 2004.
At September 30, 2005, approximately 65% of our mortgage-backed investment portfolio consisted
of securities with planned repayment schedules, as compared with 17% at December 31, 2004. These
investments are designed to amortize in a more predictable manner by shifting the primary risk of
prepayment of the underlying collateral to investors in other tranches of the CMO.
- 40 -
The following table summarizes our investment results (excluding investment income on assets
held and managed by our ceding companies or others on their behalf) for the periods indicated:
Investment Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months Ended September 30, |
|
Twelve Months Ended December 31, |
|
|
2005 |
|
2004 |
|
2004 |
|
2003 |
|
2002 |
|
|
(Dollars in thousands) |
|
Total invested assets,
including cash and
equivalents (1) |
|
$ |
92,900 |
|
|
$ |
140,221 |
|
|
$ |
138,429 |
|
|
$ |
197,881 |
|
|
$ |
306,346 |
|
Investment income, net
of related expenses |
|
$ |
2,868 |
|
|
$ |
4,145 |
|
|
$ |
5,335 |
|
|
$ |
5,924 |
|
|
$ |
25,931 |
|
Effective annualized
yield rate (2) |
|
|
3.57 |
% |
|
|
3.53 |
% |
|
|
3.51 |
% |
|
|
2.53 |
% |
|
|
5.28 |
% |
Realized investment gains |
|
$ |
501 |
|
|
$ |
456 |
|
|
$ |
440 |
|
|
$ |
6,407 |
|
|
$ |
19,749 |
|
|
|
|
(1) |
|
Fair value at end of the indicated period. |
|
(2) |
|
The effective yield rate equals (i) net investment income divided by (ii) the average of
total adjusted invested assets (fixed maturities at amortized cost, including assets on
deposit with reinsurers) at the end of each calendar quarter included in the indicated
period. |
Funds Withheld at Interest
As of September 30, 2005, our ceding companies had approximately $51.0 million in assets that
were held and managed by them under our modified coinsurance and coinsurance funds withheld
arrangements. Approximately $45.7 million of the funds withheld at interest relates to our modified
coinsurance annuity reinsurance agreement with Lafayette, with the remaining $5.2 million related
to a coinsurance funds withheld life reinsurance agreement.
Our remaining annuity reinsurance agreement covers general account fixed deferred annuity
policies and is structured as a modified coinsurance arrangement. In this type of arrangement, the
ceding company invests the premiums received from policyholders or engages an investment manager to
do so, credits interest to policyholders accounts, processes surrenders and engages in other
administrative activities. The ceding company is also required to carry reserves for these annuity
policies based upon certain statutory rules in the state in which the ceding company is domiciled.
The underlying investments purchased with the premiums received from policyholders support these
statutory reserves.
Historically, when a ceding company enters into an annuity reinsurance agreement structured as
a modified coinsurance arrangement with us, a portion of the ceding companys liability to the
policyholders is ceded to us. Our remaining modified coinsurance arrangement is on a quota share
basis, so the portion that is ceded to us is a fixed percentage of the liabilities arising from the
underlying policies. Our share of the ceding companys liability is included on our balance sheet
as interest sensitive contracts liabilities. However, unlike other reinsurance arrangements in
which we receive cash or investments as consideration for assuming a portion of the ceding
companys liability, under these types of arrangements, we have established a receivable called
funds withheld at interest that is equal to our fixed portion of the statutory reserves carried
by the ceding company. We are allocated our share of the investment income and realized capital
gains and losses that arise from the securities in the investment portfolio underlying the
statutory reserve.
The average yield rate earned on the invested premiums funding our annuity obligations to
Lafayette was approximately 4.67% and 4.87%, respectively, for the three and nine months ended
September 30, 2005 and approximately 4.94% and 4.98%, respectively, for the three and nine months
ended September 30, 2004. For purposes of calculating the average yield rate earned on assets held
and managed by our
- 41 -
ceding companies, we include our share of the investment income and net realized
capital gains and losses as reported to us through our settlements with our ceding companies.
The performance of the assets held and managed by our ceding companies depends to a great
extent on the ability of the ceding company and its investment managers to make appropriate
investments consistent with their investment guidelines. If these assets do not achieve investment
returns sufficient to meet our obligations on the underlying policies, we could experience
unexpected losses.
Lafayette Annuity Reinsurance Agreement
Approximately $45.7 million, or 90%, of our funds withheld at interest receivable,
approximately $50.7 million, or 100%, of our interest sensitive contracts liability, and
approximately $2.6 million, or 46%, of the deferred acquisition costs on our balance sheet as of
September 30, 2005 related to our annuity reinsurance agreement with Lafayette. As a result of the
termination and recapture of our annuity reinsurance agreement with Transamerica effective as of
December 1, 2004, we expect that the assets and liabilities associated with the Lafayette agreement
will represent a significant portion of our total assets and liabilities in future periods. The
amount of deferred acquisition costs we record as an asset on our balance sheet related to our
agreement with Lafayette is based on a series of assumptions related to the investment performance
of the assets supporting our liabilities under the agreement, as well as future lapse rates for the
underlying policies. These assumed lapse rates include assumptions regarding future full
surrenders, partial withdrawals, annuitizations and policyholder deaths. While we believe our
investment and lapse estimates to be reasonable, they are estimates of future events and we cannot
assure you that they will prove to be accurate. If such assumptions turn out to be inaccurate, we
could be
required to write off additional deferred acquisition costs, which would have a significant
adverse impact on our results of operations in future periods.
The assets funding the policyholder obligations under our annuity reinsurance agreement with
Lafayette have an average credit quality of A- and an average duration of 3.7 years. The average
yield rates on the assets held and managed by Lafayette was approximately 5.1% as of September 30,
2005. At September 30, 2005, none of the assets were invested in below investment grade or
non-rated securities. The premiums paid in connection with the underlying policies have been
invested in investment grade bonds and mortgage backed securities.
According to information provided by Lafayette, at September 30, 2005, the assets funding the
policyholder obligations under our annuity reinsurance agreement were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total |
|
Type of Security |
|
Book Value(1) |
|
|
Market Value |
|
|
Market Value |
|
Investment grade US corporate bonds |
|
$ |
39,605,135 |
|
|
$ |
40,603,096 |
|
|
|
78.6 |
% |
Mortgage-backed securities |
|
|
5,527,012 |
|
|
|
5,978,893 |
|
|
|
11.6 |
% |
Government bonds |
|
|
5,114,039 |
|
|
|
5,084,687 |
|
|
|
9.8 |
% |
|
|
|
|
|
|
|
|
|
|
Total invested assets |
|
$ |
50,246,186 |
|
|
$ |
51,666,676 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
Accrued investment income |
|
|
|
|
|
|
762,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total market value, including
accrued investment income |
|
|
|
|
|
$ |
52,428,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 42 -
|
|
|
(1) |
|
Book values are statutory book values reported to us by Lafayette for the underlying
investments and represent the value of our Funds withheld at interest receivable. We
present statutory book values in the above table because that is the basis upon which we
settle with Lafayette. We believe this presents a better understanding of potential future
returns and cash flows under the agreement. |
According to information provided by Lafayette, at September 30, 2005, the credit ratings
of the assets (excluding accrued investment income) funding the policyholder obligations under our
annuity reinsurance agreement were approximately as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total |
|
Ratings(1) |
|
Book Value(2) |
|
|
Market Value |
|
|
Market Value |
|
AAA |
|
$ |
5,822,578 |
|
|
$ |
5,771,383 |
|
|
|
11.2 |
% |
AA |
|
|
3,265,558 |
|
|
|
3,342,010 |
|
|
|
6.5 |
% |
A |
|
|
14,259,514 |
|
|
|
14,695,695 |
|
|
|
28.4 |
% |
BBB |
|
|
26,898,536 |
|
|
|
27,857,588 |
|
|
|
53.9 |
% |
|
|
|
|
|
|
|
|
|
|
Total invested assets |
|
$ |
50,246,186 |
|
|
$ |
51,666,676 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
Accrued investment income |
|
|
|
|
|
|
762,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total market value,
including accrued
investment income |
|
|
|
|
|
$ |
52,428,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As assigned by Standard & Poors, or, if unrated by Standard & Poors, based on an
equivalent rating assigned by the National Association of Insurance Commissioners. |
|
(2) |
|
Book values are statutory book values reported to us by Lafayette for the underlying
investments and represent the value of our Funds withheld at interest receivable. We
present statutory book values in the above table because that is the basis upon which we
settle with Lafayette. We believe this presents a better understanding of potential future
returns and cash flows under the agreement. |
According to information provided by Lafayette, at September 30, 2005, the maturity
distribution of the assets funding the policyholder obligations under our annuity reinsurance
agreement was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total |
|
Maturity |
|
Book Value(1) |
|
|
Market Value |
|
|
Book Value |
|
Within one year |
|
$ |
5,284,689 |
|
|
$ |
5,309,945 |
|
|
|
10.3 |
% |
From one to five years |
|
|
22,356,515 |
|
|
|
23,173,587 |
|
|
|
44.9 |
% |
From six to ten years |
|
|
19,389,936 |
|
|
|
19,693,693 |
|
|
|
38.1 |
% |
More than ten years |
|
|
3,215,046 |
|
|
|
3,489,451 |
|
|
|
6.7 |
% |
|
|
|
|
|
|
|
|
|
|
Total all years |
|
$ |
50,246,186 |
|
|
$ |
51,666,676 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Book values are those statutory book values reported to us by Lafayette for the
underlying investments and represent the value of our Funds withheld at interest
receivable. We present statutory book values in the above table because that is the basis
upon which we settle with Lafayette. We believe this presents a better understanding of
potential future returns and cash flows under the agreement. |
Liquidity and Capital Resources
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 needs. Our principal
sources of funds are
- 43 -
premiums received, net investment income, proceeds from investments called,
redeemed or sold and cash and short-term investments. Our principal obligations and uses of the
funds are to post collateral for the statutory reserves ceded to us by U.S. based insurers and
reinsurers, the payment of policy benefits, acquisition and operating expenses and the purchase of
investments.
Under the terms of our reinsurance agreements, we are required to provide letters of credit or
fund trust accounts with liquid assets to satisfy the collateral requirements of our ceding
companies. At September 30, 2005 and December 31, 2004, letters of credit totaling $9,800,000 and
$35,100,000, respectively, had been issued in the ordinary course of our business by our bankers in
favor of certain ceding insurance companies (including our U.S. operating subsidiary) to provide
security and meet regulatory requirements. At September 30, 2005 and December 31, 2004, cash and
investments of approximately $14,000,000 and $41,300,000, respectively, were pledged as collateral
for letters of credit. At September 30, 2005 and December 31, 2004, cash and investments of nil and
approximately $28,900,000, respectively, were held in trust for the benefit of certain of our
ceding insurance companies to provide security and to meet regulatory requirements. At September
30, 2005, we had satisfied the collateral requirements of all of our ceding companies.
We have two reinsurance operating subsidiaries, one of which is based in and operates out of
Bermuda, and the other of which is based in and operates out of the United States. Our Bermuda
operating subsidiary reinsures a large portion of the reinsurance business written by our U.S.
operating
subsidiary. The primary purpose of this reinsurance is to provide reinsurance capacity to our
U.S. operating subsidiary so that it can compete in its market place. Our Bermuda operating
subsidiary also has made capital infusions into the U.S. operating subsidiary to allow the U.S.
Company to maintain targeted statutory surplus levels and to provide cash and securities as
collateral for the reinsurance cessions the U.S. operating subsidiary makes to the Bermuda
operating company. At September 30, 2005, approximately $50,000,000 of our cash and cash
equivalents and fixed income securities were held by the U.S. operating subsidiary and were not
available to us or our Bermuda operating subsidiary to fund our liquidity or collateral needs.
In connection with the novations of the life reinsurance agreements, approximately $28,900,000
of collateral held in a trust established with respect to our life reinsurance agreement with
Scottish Re was transferred to Transamerica. In addition, $23,800,000 of letters of credit we
posted on behalf of our life reinsurance agreement with F&G was cancelled and the collateral
securing those letters of credit was released to us. Approximately $39,600,000 was paid to
Transamerica in connection with the novation and recapture transactions from this collateral,
including $18,500,000 as consideration for the novations, a $14,000,000 termination premium and
approximately $7,100,000 for amounts due to Transamerica as of December 1, 2004. Following those
payments, approximately $13,100,000 of cash and securities previously posted as collateral was
released to us. On March 30, 2005, we received a demand letter from Transamerica stating that
$7,000,000 was owed to Transamerica as an adjustment to the F&G
policy benefit reserves. On June 14, 2005, we received an additional letter from Transamerica revising its original demand to
$6,000,000. Because we had been unable to resolve this issue through continued discussions with
Transamerica, we sought resolution of the dispute by a neutral actuary pursuant
to a provision of the
Novation Agreement. We had agreed with Transamerica upon a neutral
actuary and were in
discussions regarding the scope of the issue to be submitted to the
neutral actuary when, on October 3, 2005, Transamerica delivered
a demand for arbitration in connection with this dispute. In that
demand, Transamerica alleged that we materially
misrepresented the true economic nature of the reinsurance agreements that we novated to it, or, in
the alternative, that there was a mutual mistake as to the true economic nature of those
reinsurance agreements. Transamerica is now seeking to rescind the Novation Agreement or recover
such interest and damages as the arbitration panel deems appropriate for the alleged
misrepresentations and breaches of representations and warranties. We believe Transamericas
position is without merit and intend to defend ourselves vigorously in arbitration.
- 44 -
Although our liquidity position has improved following the novation and recapture transactions
we completed with Transamerica, a large portion of our cash and investments is held by our U.S.
operating subsidiary or is posted as collateral under our remaining life reinsurance agreements and
is unavailable to fund our operations or those of our Bermuda operating subsidiary.
At September 30, 2005, our total capitalization, which consisted entirely of equity, was
$60,052,923. During 2001, our Board of Directors approved a share repurchase program of up to an
aggregate of $25,000,000 of our common shares from time to time in the future if market conditions
so dictate. As of September 30, 2005, no shares had been repurchased under this program.
On September 14, 2005, we entered into and completed a purchase agreement with Overseas
Partners, Ltd. This agreement provided for our purchase from Overseas Partners, Ltd. of 1,773,050
of our common shares and Class B warrants to acquire an additional 133,396 common shares
for a total cash purchase price of $1,453,901. Following the acquisition, we cancelled
these shares and warrants.
For the nine months ended September 30, 2005, we utilized $42,478,631 of our cash and
equivalents to fund operating activities, as compared with using cash and equivalents of
$56,511,221 from our operating activities for the nine months ended September 30, 2004. The
utilization of our cash and
equivalents during the first nine months of 2005 primarily reflects the $18,500,000 payment as
consideration for the novations of our agreements with Scottish Life and F&G to Transamerica, the
$14,000,000 premium paid to Transamerica for the termination and recapture of our annuity
reinsurance agreement and approximately $7,100,000 for amounts due to Transamerica for monthly
settlements under our annuity reinsurance agreement through November 30, 2004. Also, on January 10,
2005, we paid $2,500,000 in connection with the settlement of a class action shareholder lawsuit
that had been brought against us and certain of our present and former officers and directors.
We have no material commitments for capital expenditures as of September 30, 2005. We continue
to receive premiums and pay claims under our remaining reinsurance treaties; however, we are not
currently underwriting any new treaties or accepting any new business from our existing treaties.
Because we will continue to have residual commitments and contingencies following the consummation
of the transactions contemplated by the Master Agreement, we do not expect to be able immediately
to wind-down or dissolve our company or its subsidiaries. We intend to continue to explore
strategic alternatives to attempt to maximize our economic value for shareholders, including a
merger of our company into another entity, the sale of one or both of our operating subsidiaries or
other comparable transactions. In addition, we may consider cash distributions to shareholders,
stock buybacks or similar transactions, to the extent our financial condition allows us to do so
and we are not constrained by insurance regulatory or other laws or by our obligations under the
Master Agreement.
Both we and our Bermuda operating subsidiary, Annuity and Life Reassurance, are required to
comply with the provisions of the Bermuda Companies Act that regulate the payment of dividends and
the making of distributions from contributed surplus. Under the Act, neither we nor Annuity and
Life Reassurance may declare or pay a dividend, or make a distribution out of contributed surplus,
if there are reasonable grounds for believing that: (i) the relevant company is, or would be after
the payment, unable to pay its liabilities as they become due; or (ii) the realizable value of the
relevant companys assets would thereby be less than the aggregate of its liabilities and its
issued share capital and share premium accounts. As of and since December 31, 2002, we have not
declared a dividend to shareholders. The declaration and payment of future dividends to holders of
our common shares will be at the discretion of our Board of Directors and will depend upon our
earnings and financial condition, capital requirements of
- 45 -
our subsidiaries, the ability of our
operating subsidiaries to pay dividends to us, regulatory considerations and other factors the
Board of Directors deems relevant.
Forward-Looking and Cautionary Statements
This report, together with other statements and information we may provide, contains
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements may include, but are not
limited to, projections of 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, believe and similar expressions
are intended to identify forward-looking statements, although not all forward-looking statements
include these expressions. 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. Factors that could materially and adversely affect our
operations and financial condition and/or cause our actual results of operations or financial
condition to differ from those expressed or implied in our forward-looking statements include, but
are not necessarily limited to, our ability to consummate the pending transactions with Wilton
described in this report, our ability to meet the obligations associated with our current business
and to fund our continuing operations; the loss of a key executive; our ability to pursue strategic
alternatives on
favorable terms; the outcome of pending legal proceedings involving us; the ability of our
ceding companies to manage successfully assets they hold on our behalf; our success in managing our
investments; changes in mortality, morbidity and claims experience; our ability to make accurate
estimates and assumptions regarding future mortality, persistency, lapses, expenses and investment
performance based upon historical results and information provided to us by our ceding companies;
changes in market conditions, including changes in interest rate levels; the competitive
environment; the impact of recent and possible future terrorist attacks and the U.S. governments
response thereto; regulatory changes (such as changes in U.S. tax law and insurance regulation that
directly affect the competitive environment for our products); and a prolonged economic downturn.
Investors are also directed to consider the risks and uncertainties discussed in other documents we
have filed with the Securities and Exchange Commission, and in particular, our Annual Report on
Form 10-K for the year ended December 31, 2004. We do not undertake to update any forward-looking
statement that may be made from time to time by or on our behalf.
- 46 -
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes since December 31, 2004 with respect to our market risk
exposure described in our Annual Report on Form 10-K for the year ended December 31, 2004. Please
refer to Item 7A: Quantitative and Qualitative Disclosures about Market Risk in our Annual Report
on Form 10-K for the year ended December 31, 2004.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
The Companys principal executive officer and its principal financial officer, based on their
evaluation of the Companys disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934, as amended (the Exchange Act)), have concluded that the
Companys disclosure controls and procedures were effective for the purposes set forth in the
definition thereof in Exchange Act Rule 13a-15(e) as of September 30, 2005.
Changes in internal control over financial reporting
There were no changes to the Companys system of internal control during the three months
ended September 30, 2005 that have materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting. Please refer to Item 9a. Controls
and Procedures in our Annual Report on Form 10-K for the year ended December 31, 2004.
- 47 -
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On October 8, 2003, we were served with a statutory demand for $640,000 from Imagine Group
Holdings Limited (Imagine), a Bermuda based reinsurance company, which was subsequently
withdrawn. Imagine has since instituted a civil proceeding in the Bermuda Supreme Court against us,
alleging that we are obligated to reimburse it for $640,000 of expenses incurred by Imagine in
connection with a proposed December 2002 capital raising transaction that was not consummated. On
March 11, 2004, we filed an amended defense with the court to which Imagine responded on April 26,
2004. On October 26, 2005, we reached an agreement in principle with Imagine to settle this dispute
for a payment of $425,000 which we paid into escrow on November 7, 2005.
On April 15, 2005, we were served with a Writ of Summons from the Bermuda Supreme Court,
whereby Rodney Cordle, a former employee of the Company, alleged that we failed to pay a monthly
housing allowance to him in accordance with the terms of his employment agreement. Mr. Cordle was
seeking $287,403 plus damages, interest and costs. On October 25, 2005, the dispute was settled and
we paid Mr. Cordle a settlement amount of $181,866 plus $18,134 for legal costs.
On March 30, 2005, we received a demand letter from Transamerica stating that $7.0 million was
owed to Transamerica as an adjustment to the F&G policy benefit reserves. On June 14, 2005, we
received an additional letter from Transamerica revising its original demand to $6.0 million.
Because we had been unable to resolve this issue through continued discussions with Transamerica,
we sought resolution of the dispute by a neutral actuary pursuant to
a provision of the Novation Agreement.
We had agreed with Transamerica upon a neutral actuary and were in discussions regarding the
scope of the issue to be submitted to the neutral actuary when, on October 3, 2005, Transamerica delivered a demand for arbitration
in connection with this dispute. In that demand, Transamerica alleged that we materially misrepresented the true economic
nature of the reinsurance agreements that we novated to it, or, in the alternative, that there was
a mutual mistake as to the true economic nature of those reinsurance agreements. Transamerica is
now seeking to rescind the agreement providing for the novation of the reinsurance agreements, or,
in the alternative, such interest and damages as the arbitration panel deems appropriate for the
alleged misrepresentations and breaches of representations and warranties. We believe
Transamericas position is without merit and intend to defend
ourselves vigorously in arbitration.
There are no other material arbitration or other legal proceedings currently in process in
which we are involved.
- 48 -
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes our equity security repurchases during the three months ended
September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Approximate Dollar |
|
|
Total |
|
|
|
|
|
Share Purchased |
|
Value of Shares that |
|
|
Number of |
|
Average |
|
as part of Publicly |
|
May Yet Be Purchased |
|
|
Shares |
|
Price Paid |
|
Announced Plans |
|
Under the |
Period |
|
Purchased |
|
per Share |
|
or Programs |
|
Plans or Programs (1) |
July 1 July 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25,000,000 |
|
August 1 August 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25,000,000 |
|
September 1 September
30, 2005 |
|
|
1,773,050 |
(2) |
|
$ |
0.82 |
|
|
|
|
|
|
$ |
25,000,000 |
|
|
|
|
Total |
|
|
1,773,050 |
(2) |
|
$ |
0.82 |
|
|
|
|
|
|
$ |
25,000,000 |
|
|
|
|
(1) |
|
During 2001, the Companys Board of Directors approved a share repurchase program to allow
the Company to repurchase up to an aggregate $25,000,000 of its common shares in the future if
market conditions so dictate. As of September 30, 2005, no shares had been repurchased under
the program. |
|
(2) |
|
On September 14, 2005, the Company entered into a Purchase Agreement (the Agreement) with
Overseas Partners, Ltd. (Overseas Partners). The Agreement provided for the purchase by the
Company from Overseas Partners of 1,773,050 common shares of the Company (the Shares) and
Class B warrants to purchase an additional 133,396 common shares of the Company (the
Warrants) for a total cash purchase price of $1,453,901. The Company completed the
acquisition of the Shares and Warrants pursuant to the terms of the Agreement on September 14,
2005. The Shares represented approximately 6.74% of the Companys outstanding common shares,
and the Warrants had an exercise price of $14.06 per share. Following the acquisition, the
Shares and the Warrants were cancelled by the Company. |
- 49 -
Item 6. Exhibits
|
|
|
10.1
|
|
Master Agreement dated as of August 10, 2005 by and between Prudential Select
Life Insurance Company of America, Wilton Reinsurance Bermuda Limited, Annuity and Life
Reassurance America, Inc. and Annuity and Life Reassurance, Ltd. |
|
|
|
10.2
|
|
Purchase Agreement dated as of September 14, 2005 by and between Annuity and
Life Re (Holdings), Ltd. and Overseas Partners, Ltd. (incorporated by reference to the
issuers Current Report on Form 8-K dated September 14, 2005, as filed with the
Commission on September 15, 2005). |
|
|
|
10.3
|
|
Separation of Employment Agreement and General Release, dated September 23,
2005, by and among Annuity and Life Re (Holdings), Ltd., Annuity and Life Reassurance,
Ltd., and John F. Burke (incorporated by reference to the issuers Current Report on
Form 8-K dated September 23, 2005, as filed with the Commission on September 26, 2005). |
|
|
|
10.4
|
|
Employment Letter, dated October 19, 2005, by and among Annuity and Life Re
(Holdings), Ltd. and William H. Mawdsley (incorporated by reference to the issuers
Current Report on Form 8-K dated October 19, 2005, as filed with the Commission on
October 20, 2005). |
|
|
|
10.5
|
|
Employment Letter, dated October 19, 2005, by and among Annuity and Life Re
(Holdings), Ltd. and John W. Lockwood. (incorporated by reference to the issuers
Current Report on Form 8-K dated October 19, 2005, as filed with the Commission on
October 20, 2005). |
|
|
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification of the Companys Chief Executive Officer. |
|
|
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification of the Companys Chief Financial Officer. |
|
|
|
32.1
|
|
Section 1350 Certification of the Companys Chief Executive Officer. |
|
|
|
32.2
|
|
Section 1350 Certification of the Companys Chief Financial Officer. |
- 50 -
ANNUITY AND LIFE RE (HOLDINGS), LTD.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
ANNUITY AND LIFE RE (HOLDINGS), LTD.
|
|
|
/s/ William H. Mawdsley
|
|
|
Name: |
William H. Mawdsley |
|
Date: November 9, 2005 |
Title: |
Chief Executive Officer |
|
|
|
|
|
|
/s/ John W. Lockwood
|
|
|
Name: |
John W. Lockwood |
|
Date: November 9, 2005 |
Title: |
Chief Financial Officer |
|
- 51 -
Exhibit Index
|
|
|
10.1
|
|
Master Agreement dated as of August 10, 2005 by and between Prudential Select
Life Insurance Company of America, Wilton Reinsurance Bermuda Limited, Annuity and Life
Reassurance America, Inc. and Annuity and Life Reassurance, Ltd. |
|
|
|
10.2
|
|
Purchase Agreement dated as of September 14, 2005 by and between Annuity and
Life Re (Holdings), Ltd. and Overseas Partners, Ltd. (incorporated by reference to the
issuers Current Report on Form 8-K dated September 14, 2005, as filed with the
Commission on September 15, 2005). |
|
|
|
10.3
|
|
Separation of Employment Agreement and General Release, dated September 23,
2005, by and among Annuity and Life Re (Holdings), Ltd., Annuity and Life Reassurance,
Ltd., and John F. Burke (incorporated by reference to the issuers Current Report on
Form 8-K dated September 23, 2005, as filed with the Commission on September 26, 2005). |
|
|
|
10.4
|
|
Employment Letter, dated October 19, 2005, by and among Annuity and Life Re
(Holdings), Ltd. and William H. Mawdsley (incorporated by reference to the issuers
Current Report on Form 8-K dated October 19, 2005, as filed with the Commission on
October 20, 2005). |
|
|
|
10.5
|
|
Employment Letter, dated October 19, 2005, by and among Annuity and Life Re
(Holdings), Ltd. and John W. Lockwood. (incorporated by reference to the issuers
Current Report on Form 8-K dated October 19, 2005, as filed with the Commission on
October 20, 2005). |
|
|
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification of the Companys Chief Executive Officer. |
|
|
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification of the Companys Chief Financial Officer. |
|
|
|
32.1
|
|
Section 1350 Certification of the Companys Chief Executive Officer. |
|
|
|
32.2
|
|
Section 1350 Certification of the Companys Chief Financial Officer. |
- 52 -