<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 24, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ANNUITY AND LIFE RE (HOLDINGS), LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
BERMUDA 6311 NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OF ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
VICTORIA HALL, VICTORIA STREET CT CORPORATION SYSTEM
P.O. BOX HM1262 1633 BROADWAY
HAMILTON, HM FX, BERMUDA NEW YORK, NEW YORK 10019
(441) 295-3278 (212) 664-1666
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, (NAME, ADDRESS, INCLUDING ZIP CODE, AND
INCLUDING AREA CODE, OF REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE,
PRINCIPAL EXECUTIVE OFFICES) OF AGENT FOR SERVICE)
</TABLE>
COPIES TO:
<TABLE>
<S> <C> <C>
F. DOUGLAS RAYMOND, III, ESQ. CHARLES G. COLLIS, JR., ESQ. CRAIG B. BROD, ESQ.
DRINKER BIDDLE & REATH LLP CONYERS DILL & PEARMAN CLEARY, GOTTLIEB, STEEN & HAMILTON
1100 PHILADELPHIA NATIONAL BANK BUILDING CLARENDON HOUSE ONE LIBERTY PLAZA
1345 CHESTNUT STREET 2 CHURCH STREET, P.O. BOX HM666 NEW YORK, NEW YORK 10006
PHILADELPHIA, PENNSYLVANIA 19107-3496 HAMILTON, HM CX, BERMUDA (212) 225-2000
(215) 988-2700 (441) 295-1422
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==========================================================================================================
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares................. 19,262,500 $16.00 $308,200,000 $90,919
==========================================================================================================
</TABLE>
(1) Includes 2,512,500 Common Shares that may be sold pursuant to the
Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION -- DATED DECEMBER 24, 1997
PROSPECTUS
- --------------------------------------------------------------------------------
16,750,000 Shares
ANNUITY AND LIFE RE (HOLDINGS), LTD.
Common Shares
- --------------------------------------------------------------------------------
All of the 16,750,000 common shares, par value $1.00 per share (the "Common
Shares"), offered hereby (the "Offering") are being sold by Annuity and Life Re
(Holdings), Ltd. (the "Company"). Prior to the Offering, the Company has not
conducted any business and there has been no public market for the Common
Shares. It is currently anticipated that the initial public offering price will
be between $14.00 and $16.00 per Common Share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price.
An application has been made to have the Common Shares approved for quotation in
The Nasdaq Stock Market's National Market (the "Nasdaq National Market") under
the symbol "ALREF."
The Common Shares offered hereby are subject to limitations on ownership,
transfers and voting rights which, among other things, generally prevent
transfers to holders beneficially owning 10% or more of the Common Shares (other
than as described herein) and reduce the voting power of any holder beneficially
owning 10% or more of the Common Shares to less than 10% of the total voting
power of the Company's capital stock. See "Description of Capital Stock."
SEE "RISK FACTORS" ON PAGES 8 TO 15 FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON SHARES
OFFERED HEREBY.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=================================================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Common Share............... $ $ $
- -------------------------------------------------------------------------------------------------
Total(3)....................... $ $ $
=================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting certain advisory fees and offering expenses payable by the
Company estimated to be $ . See "Use of Proceeds."
(3) The Company has granted the several Underwriters a 30-day over-allotment
option to purchase up to 2,512,500 additional Common Shares on the same
terms and conditions as set forth above. If all such additional shares are
purchased by the Underwriters, the total Price to Public will be
$ , the total Underwriting Discounts and Commissions will be
$ and the total Proceeds to Company will be $ . See
"Underwriting."
- --------------------------------------------------------------------------------
The Common Shares are offered by the several Underwriters subject to delivery by
the Company and acceptance by the Underwriters, to prior sale and to withdrawal,
cancellation or modification of the offer without notice. Delivery of the shares
to the Underwriters is expected to be made through the facilities of The
Depository Trust Company, New York, New York, on or about , 1998.
PRUDENTIAL SECURITIES INCORPORATED MERRILL LYNCH & CO.
, 1998
<PAGE> 3
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES,
INCLUDING PURCHASES OF THE COMMON SHARES TO STABILIZE ITS MARKET PRICE,
PURCHASES OF THE COMMON SHARES TO COVER SOME OR ALL OF A SHORT POSITION IN THE
COMMON SHARES MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
------------------------
CONSENT UNDER THE EXCHANGE CONTROL ACT 1972 (AND REGULATIONS THEREUNDER)
HAS BEEN OBTAINED FROM THE BERMUDA MONETARY AUTHORITY FOR THE ISSUE AND TRANSFER
OF THE COMMON SHARES BEING OFFERED PURSUANT TO THIS OFFERING. IN ADDITION, A
COPY OF THIS DOCUMENT HAS BEEN DELIVERED TO THE REGISTRAR OF COMPANIES IN
BERMUDA FOR FILING PURSUANT TO THE COMPANIES ACT 1981 OF BERMUDA. IN GIVING SUCH
CONSENT AND IN ACCEPTING THIS PROSPEC-
TUS FOR FILING, THE BERMUDA MONETARY AUTHORITY AND THE REGISTRAR OF COMPANIES IN
BERMUDA ACCEPT NO RESPONSIBILITY FOR THE FINANCIAL SOUNDNESS OF ANY PROPOSAL OR
FOR THE CORRECTNESS OF ANY OF THE STATEMENTS MADE OR OPINIONS EXPRESSED HEREIN.
------------------------
In this Prospectus, amounts are expressed in United States dollars and the
financial statements contained herein have been prepared in accordance with
United States generally accepted accounting principles ("GAAP").
2
<PAGE> 4
ENFORCEABILITY OF CIVIL LIABILITIES
UNDER UNITED STATES FEDERAL SECURITIES LAWS
The Company is organized pursuant to the laws of Bermuda. In addition,
certain of the directors and officers of the Company, as well as certain of the
experts named herein, reside outside the United States, and all or a substantial
portion of their assets and the assets of the Company are or may be located in
jurisdictions outside the United States. In particular, Annuity and Life
Reassurance, Ltd., the Company's sole subsidiary, through which the Company
expects to conduct all its operations, is also a Bermuda corporation. Therefore,
it may be difficult for investors to effect service of process within the United
States upon such persons or to recover against the Company or such persons on
judgments of courts in the United States, including judgments predicated upon
the civil liability provisions of the United States federal securities laws.
However, the Company may be served with process in the United States with
respect to actions against it arising out of or in connection with violations of
United States federal securities laws relating to offers and sales of Common
Shares made hereby by serving CT Corporation System, 1633 Broadway, New York,
New York 10019, its United States agent irrevocably appointed for that purpose.
The Company has been advised by Conyers Dill & Pearman, its Bermuda
counsel, that there is doubt as to whether the courts of Bermuda would enforce
(i) judgments of United States courts obtained in actions against the Company or
its directors and officers, as well as the experts named herein, who reside
outside the United States predicated upon the civil liability provisions of the
United States federal securities laws, or (ii) original actions brought in
Bermuda against the Company or such persons predicated solely upon United States
federal securities laws. The Company has also been advised by Conyers Dill &
Pearman that there is no treaty in effect between the United States and Bermuda
providing for such enforcement, and there are grounds upon which Bermuda courts
may not enforce judgments of United States courts. Certain remedies available
under the laws of United States jurisdictions, including certain remedies
available under the United States federal securities laws, may not be allowed in
Bermuda courts as contrary to that nation's public policy.
3
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, included elsewhere in this Prospectus. Unless the
context otherwise requires, references herein to the "Company" mean Annuity and
Life Re (Holdings), Ltd., together with its wholly-owned subsidiary, Annuity and
Life Reassurance, Ltd. ("Annuity Reassurance"), through which the Company
expects to conduct all its operations. The Company and Annuity Reassurance were
incorporated on December 2, 1997 in Bermuda and neither has any operating
history. See "Glossary of Selected Annuity and Life Insurance Terms" for
definitions of certain terms used in this Prospectus. Unless otherwise noted,
this Prospectus assumes that the Underwriters' over-allotment option will not be
exercised.
THE COMPANY
The Company was recently organized in Bermuda with the objective of being
an efficient, low cost provider of annuity and life reinsurance with expertise
in the underwriting of reinsurance focused on mortality and investment risks.
The Company's business strategy has been designed to respond to a number of
trends in the annuity and life insurance industry that in management's view will
increase the demand for annuity and life reinsurance. These trends include:
- Expanding growth in the sales of annuities in recent years;
- Increasing regulatory and certain capital and reserve requirements
applicable to annuity issuers and life insurers;
- Continuing consolidation in the annuity and life insurance industry,
including strategic decisions to reinsure large blocks of insurance;
- Leveraging of capital by annuity issuers and life insurers to increase
financial performance through the use of reinsurance; and
- Increasing use of multiple reinsurers by annuity issuers and life
insurers to diversify their reinsurance risk.
Through controls on overhead costs and the absence of a corporate level tax
in Bermuda on the Company's revenues and earnings, the Company expects to be
able to offer its products at prices that will be attractive to potential
clients. The Company intends to market its reinsurance products to select
insurers and reinsurers on a worldwide basis, with its primary target markets
initially being the United States, Canada, Europe, Australia and Bermuda. The
Company's principal executive office is located at Victoria Hall, Victoria
Street, P.O. Box HM1262, Hamilton, HM FX, Bermuda, and its telephone number is
(441) 295-3278.
BUSINESS STRATEGY
The Company's objective is to develop an efficient, low cost annuity and
life reinsurance business that will enable it to achieve attractive total rates
of return through prudent underwriting of insurance risks and careful management
of its investment portfolio. The Company will seek to achieve this objective
through the implementation of its business strategy, the principal components of
which are:
- - Maintain Low Cost Structure
The Company believes that the advantages of writing primarily treaty
reinsurance and reinsuring specific blocks of business, as well as its Bermuda
domicile, will enable it to maintain a low cost structure. By focusing on
treaty reinsurance and the reinsurance of specific blocks of business where
the underlying policies meet the underwriting criteria of the primary insurer,
the Company will be able to make fewer underwriting assessments than would
typically be required with respect to the underwriting of a large number of
small individual policies. As a consequence, the Company expects to limit its
number of employees initially to approximately ten and to use third-party
service providers to perform certain functions. As a part of this strategy,
the Company has contracted with J&H Marsh & McLennan
4
<PAGE> 6
Management (Bermuda) Limited ("Marsh & McLennan") to provide claims processing
and other administrative services. By minimizing its personnel and overhead
costs, the Company expects to be better able to control expense levels as
market conditions for writing reinsurance fluctuate, and intends to have one
of the lowest ratios of operating costs to total revenues in the annuity and
life reinsurance industry. In addition, the Company also expects to benefit
from the absence of a corporate level tax in Bermuda on the Company's revenues
and earnings. As a result of this low cost structure, the Company expects to
be able to offer attractive prices to its reinsurance clients.
- - Utilize a Disciplined Underwriting Approach
The Company's reinsurance underwriting strategy is to select opportunities
with acceptable risk/return profiles based on sophisticated actuarial and
investment modeling techniques. The principal risks associated with the
reinsurance of annuity and life insurance products are mortality risk and
investment risk. Mortality risk is actuarially quantifiable when spread across
large numbers of insureds. The Company will be exposed to investment risk to
the extent the products it reinsures guarantee an investment return or fixed
benefit. The Company intends to manage these risks by using modeling
techniques to structure its investments to match its anticipated liabilities
under reinsurance agreements. Initially, the Company intends to supplement its
underwriting analyses with commercially available actuarial models and may
retain consultants to analyze the risks that it reinsures, while it develops
its own proprietary models. The Company believes that its focus on annuity and
life reinsurance will enable it to structure its reinsurance products to meet
the specific requirements of its clients while managing its exposure to the
risks being assumed. Furthermore, the reinsurance of annuity and life
insurance products will not expose the Company to the catastrophic risks
normally associated with property/casualty reinsurance.
- - Employ Professional Investment Management
The Company will seek to generate attractive levels of investment income
through a professionally managed fixed income investment portfolio. The
Company has entered into an investment advisory agreement with Pacific
Investment Management Company ("PIMCO"), which is anticipated to manage at
least 50% of the Company's investment portfolio in accordance with guidelines
established by the Company. The Company is in the process of selecting
additional investment managers to manage the remainder of its portfolio. The
Company's investment policies focus on diversification of risk and maintenance
of liquidity, and include limits on investments in any one business sector or
issuer other than securities issued by the United States Government, its
agencies and instrumentalities. In addition, the Company's investment policies
prohibit any investment in equity securities or equity-based futures and
options other than pursuant to strategies intended to hedge the investment
risk associated with annuity and life insurance products which the Company
reinsures. The Company's investment guidelines provide that at least 75% of
its fixed income investment portfolio will be invested in a diversified
portfolio of fixed income securities that are rated investment grade by at
least one major rating agency, with the balance permitted to be invested in
below investment grade fixed income securities. The Company's investment
policies require its fixed income investment portfolio to maintain a weighted
average rating of "A".
- - Build on Strong Capital Base
The Company's capitalization after the Offering, including its lack of
indebtedness, will demonstrate a strong financial position to potential
clients and a high level of commitment to the annuity and life reinsurance
marketplace. Management believes that this will enable the Company to compete
with other reinsurers for desirable business and establish long-term
relationships with a select group of primary insurers and other reinsurers.
The Company does not anticipate that it will incur any material indebtedness
in the ordinary course of its business other than obtaining letters of credit
in connection with its reinsurance agreements. The Company should also benefit
from the fact that, as a recently formed entity, its capital is presently
unencumbered by issues such as loss reserve adequacy, unrealized losses in its
investment portfolio and uncollectible reinsurance. The Company's capital
structure will also assist in the process of obtaining a claims paying rating
from a major rating agency, which the Company expects to receive upon
consummation of the Offering (although no assurance can be given that such
rating will be received).
5
<PAGE> 7
- - Capitalize on Skill and Experience of Management and Board of Directors
The Company has begun assembling a senior management team of experienced
insurance and reinsurance professionals to implement its strategy. The
Company's President and Chief Executive Officer, Lawrence S. Doyle, has over
32 years of experience in the insurance and reinsurance industries and was
formerly the President and Chief Executive Officer of GCR Holdings Limited and
its subsidiary Global Capital Reinsurance Limited (together, "GCR") from its
formation as a Bermuda reinsurer specializing in catastrophe risk in 1993
until its acquisition by EXEL Limited in 1997, when Mr. Doyle became an
Executive Vice President of EXEL. Before founding GCR, Mr. Doyle was Senior
Vice President of Hartford Insurance Group in charge of international
operations, where he was employed for 27 years, the last six of which he was
also the President of Hartford Fire International. In addition to Mr. Doyle,
the Company's Board of Directors includes Frederick S. Hammer, Michael P.
Esposito, Jr. and Robert M. Lichten. Messrs. Hammer, Esposito and Lichten are
currently executives of Inter-Atlantic Capital Partners, Inc.
("Inter-Atlantic"), a firm which provides investment banking services to
insurance companies and other financial services firms, and they each have
over 30 years of experience in the financial services industry. Management
believes that the extensive insurance and financial services expertise
possessed by the Company's directors and President and Chief Executive Officer
should provide the Company with a competitive marketing advantage.
6
<PAGE> 8
THE OFFERING
<TABLE>
<S> <C>
Common Shares Offered Hereby............................. 16,750,000 shares
Common Shares to be Outstanding after the Offering(1).... 16,750,000 shares
Use of Proceeds.......................................... The net proceeds of the Offering
are estimated to be approximately
$232.7 million (at an assumed
initial public offering price of
$15.00 per share). Substantially
all of the net proceeds will be
contributed to the capital of
Annuity Reassurance to support its
reinsurance underwriting capacity.
See "Use of Proceeds."
Proposed Nasdaq National Market Symbol................... "ALREF"
</TABLE>
- ---------------
(1) The Annuity Re Purpose Trust, a Bermuda trust (the "Purpose Trust"),
currently owns 12,000 Common Shares, which constitute all of the currently
outstanding Common Shares. Upon consummation of the Offering, the Purpose
Trust has agreed to sell such Common Shares to the Company for an aggregate
price of $12,000 and such Common Shares will be cancelled. Common Shares to
be outstanding after the Offering excludes the 12,000 Common Shares
currently held by the Purpose Trust, 2,010,000 Common Shares issuable upon
exercise of outstanding Class A Warrants, 502,500 Common Shares issuable
upon exercise of outstanding options and 485,000 Common Shares reserved for
future issuance pursuant to the Company's Initial Stock Option Plan (the
"Stock Option Plan"). If the Underwriters' over-allotment option is
exercised in full, the number of Common Shares issuable upon exercise of
outstanding Class A Warrants will increase to 2,311,500 Common Shares, the
number of Common Shares issuable upon exercise of outstanding options will
increase to 577,875 Common Shares, and the number of Common Shares reserved
for future issuance pursuant to the Stock Option Plan will increase to
535,250 Common Shares. None of the outstanding Class A Warrants or options
are currently exercisable. See "Management -- Stock Option Plan" and
"Description of Capital Stock -- Warrants."
RISK FACTORS
Investors should consider the material risk factors involved in connection
with an investment in the Common Shares and the impact to investors from various
circumstances which could adversely affect the Company's business. See "Risk
Factors."
7
<PAGE> 9
RISK FACTORS
An investment in the Common Shares involves a high degree of risk.
Prospective investors should carefully consider the following risk factors, in
addition to the other information set forth in this Prospectus, in connection
with the investment in the Common Shares.
When used in this Prospectus, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "plan," "intend" and similar
expressions are intended to identify forward-looking statements regarding among
other things: (i) the Company's business and growth strategies; (ii) the
Company's relationship with third-party service providers and clients; (iii) the
use of the net proceeds of the Offering; (iv) trends in the insurance and
reinsurance industries; (v) government regulations; (vi) the Company's financing
plans; (vii) trends affecting the Company's financial condition or results of
operations; and (viii) the declaration and payment of dividends. Prospective
investors are cautioned that any forward-looking statements are not guarantees
of future performance and are subject to risks and uncertainties and that actual
results may differ materially from those included within the forward-looking
statements as a result of various factors. Factors that could cause or
contribute to such differences include, but are not limited to, those described
below, and under the heading "Management's Discussion and Analysis of Financial
Condition and Plan of Operations" and elsewhere in this Prospectus.
START UP OPERATIONS; RELIANCE ON SERVICE PROVIDERS. The Company and
Annuity Reassurance were formed on December 2, 1997, and neither has any
operating history. Businesses which are starting up or in their initial stages
of development present substantial business and financial risks and may suffer
significant losses. They must successfully develop business relationships,
establish operating procedures, hire staff and complete other tasks appropriate
for the conduct of their intended business activities. Furthermore, the Company
intends to have only a limited staff and at least initially to outsource many
functions, including claims processing, certain actuarial services and
investment management. The Company currently has retained Marsh & McLennan,
Abbott Associates Limited (the Bermuda-based member of the Woodrow Milliman
organization) and PIMCO to perform such functions. The Company also expects that
it will retain other investment managers in addition to PIMCO. The Company will
be dependent upon the quality of the services provided by such firms. The
inability of the Company to retain qualified service providers or the failure of
outside service providers to perform adequately their functions could delay or
prevent the Company from fully implementing its business strategy or could
otherwise adversely affect the Company. The Company has also not yet hired a
permanent Chief Financial Officer, a Chief Underwriting Officer or any members
of its underwriting team. Such individuals will be critical components of the
Company's operations. There can be no assurance that the Company will be
successful in attracting or employing the personnel that it is seeking, and if
it is unable to do so, such failure could delay or prevent the Company from
fully implementing its business strategy. See "Business."
COMPETITION AND ABSENCE OF FINANCIAL RATING. The reinsurance industry is
highly competitive. The Company will compete with major reinsurers, many of
which have substantially greater financial, marketing and management resources
than the Company. Competition in the types of reinsurance business that the
Company intends to underwrite is based on many factors, including the general
reputation and perceived financial strength of the reinsurers, premium charges,
other terms and conditions of products offered, ratings assigned by independent
rating agencies, speed of claims payment and reputation and experience in the
particular line of reinsurance to be written. The Company has no experience in
competing against such other companies, and there can be no assurance that it
will be successful. Furthermore, because the Company expects to rely at least
initially on a small number of clients, its business may be more susceptible to
the adverse effects of competition from other reinsurers.
Although the Company is in the process of applying to a major rating agency
for an insurance claims paying rating, the Company is not currently rated by any
such agency. Insurance ratings are used by insurers and reinsurance
intermediaries as an important means of assessing the financial strength and
quality of reinsurers. In addition, because the rating of a company purchasing
reinsurance may be adversely affected by the lack of a rating of its reinsurer,
if the Company is unable to obtain a rating, it could be adversely affected in
its ability to obtain clients. No assurances can be given that a rating will be
issued to the Company upon
8
<PAGE> 10
completion of the Offering or that such rating, if issued, will be at a level
that will allow the Company to implement successfully its business strategy. The
lack of such a rating or an unsatisfactory rating may dissuade a client from
reinsuring with the Company. Certain rating agencies, including A.M. Best
Company, Inc. ("A.M. Best") generally do not assign a rating to a company until
it has accumulated two to five consecutive years of representative operating
performance. See "Business -- Competition."
Annuity Reassurance is not licensed or admitted as an insurer in any
jurisdiction other than Bermuda. Because many jurisdictions do not permit
insurance companies to take credit for reinsurance obtained from unlicensed or
non-admitted insurers on their statutory financial statements unless appropriate
security measures are in place, it is anticipated that the Company's reinsurance
clients will require it to post a letter of credit or other collateral. Although
the Company has been negotiating with a commercial bank to obtain a standby
letter of credit facility, if it is unable to obtain such a facility, or is
unable to do so on commercially acceptable terms, its ability to operate its
business will be severely limited.
DEPENDENCE ON KEY EMPLOYEES. The Company will be substantially dependent
in the implementation of its business strategy on Lawrence S. Doyle, the
President and Chief Executive Officer of the Company, and on the to-be-hired
Chief Underwriting Officer and permanent Chief Financial Officer. Mr. Doyle has
recently joined the Company and has entered into an employment contract with the
Company for a term expiring three years after the consummation of the Offering.
See "Management -- Employment Agreements." The Company currently has only two
officers and is in the process of recruiting a senior management team of
experienced professionals, including a Chief Underwriting Officer and a
permanent Chief Financial Officer, to implement its business strategy. The loss
of the services of Mr. Doyle or the inability of the Company to hire and retain
other talented personnel could delay or prevent the Company from fully
implementing its business strategy or could otherwise adversely affect the
Company.
Under Bermuda law, non-Bermudians (other than spouses of Bermudians) may
not engage in any gainful occupation in Bermuda without an appropriate
Governmental work permit. Such a work permit may be granted or extended upon
showing that, after proper public advertisement, no Bermudian (or spouse of a
Bermudian) is available who meets the minimum standards for the advertised
position. Mr. Doyle, the Company's President and Chief Executive Officer, is
working in Bermuda under a work permit which expires in July 1998. Andrew S.
Lerner, the Company's Interim Chief Financial Officer, has not yet been issued a
work permit. While the Company is not currently aware of any reason why the work
permits for these officers would not be issued or extended, there can be no
assurance to that effect. The failure of these work permits to be issued or
extended could adversely affect the Company.
MARKETS FOR ANNUITY AND LIFE REINSURANCE. The market for annuities and
many life insurance products in the United States is based in large part on the
favorable tax treatment such products receive relative to other investment
alternatives. Any material change in such tax treatment, including the
imposition of a "flat tax" or a national sales tax in lieu of the current
federal income tax structure in the United States, would have an adverse effect
on the market for such products. Furthermore, a general economic downturn or a
downturn in the equity and other capital markets could adversely affect the
market for such products. If the market for annuities or life insurance were
adversely affected, it would likely depress the demand for reinsurance of
annuities or life insurance, which would have an adverse effect on the Company.
In addition, the market for annuity reinsurance products is currently not well
developed and there can be no assurance that such a market will develop in the
future. As the Company is not aware of any other publicly-traded reinsurance
company that focuses on the annuity reinsurance market to the extent the Company
intends, the Company will be more sensitive to adverse conditions in such market
than such other reinsurance companies.
INVESTMENT RISKS. Risk management and the success of the Company's
investment strategy are expected to be crucial to the success of the Company's
business. In particular, the Company's ability to structure its investments to
match its anticipated liabilities under reinsurance agreements has not been
tested. The Company's investment guidelines provide that at least 75% of its
fixed income investment portfolio will be invested in a diversified portfolio of
fixed income securities that are rated investment grade by at least one major
rating agency, with the balance permitted to be invested in below investment
grade fixed income securities. The Company's investment policies require its
fixed income investment portfolio to maintain a
9
<PAGE> 11
weighted average rating of "A". The Company will not invest in any fixed income
securities in emerging markets or which are not rated by a major rating agency.
While any investment carries some risk, some of the risks associated with
lower-rated securities are greater than the risks associated with investment
grade securities. The risk of loss of principal or interest through default is
greater because lower-rated securities are usually unsecured and are often
subordinated to an issuer's other obligations. Additionally, the issuers of
these securities frequently have high debt levels and are thus more sensitive to
difficult economic conditions, individual corporate developments and rising
interest rates which could impair an issuer's capacity or willingness to meet
its financial commitment on such lower-rated securities. Consequently, the
market price of these securities may be quite volatile, and the risk of loss is
greater.
The Company will also from time to time purchase or sell equity securities
or equity-based futures and options solely pursuant to strategies intended to
hedge the investment risk associated with annuity and life insurance products
which the Company reinsures. The failure of the Company to match its equity
investments accurately with the Company's equity-based liabilities could expose
the Company to the volatility of the equity markets and potential losses on such
equity securities and equity-based futures and options. In addition, the
possible lack of liquidity for certain futures and options could adversely
affect the Company.
The Company has entered into an investment advisory agreement with PIMCO,
which is anticipated to manage at least 50% of the Company's investment
portfolio in accordance with the guidelines established by the Company. The
Company is in the process of selecting additional investment managers (together
with PIMCO, the "Investment Managers") to manage the remainder of its portfolio.
Each of these additional Investment Managers will have discretionary authority
with respect to a portion of the Company's investments. The performance of the
Company's investment portfolio, therefore, will depend to a great extent on the
ability of the Investment Managers to select and manage appropriate investments.
There can be no assurance that the Investment Managers will be successful in
investing the Company's investment portfolio to meet the Company's investment
objectives.
The success of any investment activity is affected by general economic
conditions, which may adversely affect the markets for interest-rate-sensitive
securities and equity securities, including the level and volatility of interest
rates and the extent and timing of investor participation in such markets.
Unexpected volatility or illiquidity in the markets in which the Company
directly or indirectly holds positions could adversely affect the Company.
REGULATION. Annuity Reassurance is a registered Bermuda insurance company
and is subject to regulation and supervision in Bermuda. Generally the Bermudian
statutes and regulations applicable to Annuity Reassurance are less restrictive
than those that would be applicable to Annuity Reassurance were it subject to
the insurance laws of any state in the United States. Among other things, the
Bermuda statutes and regulations require Annuity Reassurance to maintain minimum
levels of capital and surplus; prescribe solvency standards that it must meet;
limit transfers of ownership of its capital shares; and provide for the
performance of certain periodic examinations of Annuity Reassurance and its
financial condition. These statutes and regulations may, in effect, restrict the
ability of Annuity Reassurance to write reinsurance policies and distribute
funds to the Company.
Annuity Reassurance is not licensed or admitted as an insurer in any
jurisdiction except Bermuda. The insurance laws of each state in the United
States and of many other jurisdictions regulate the sale of insurance and
reinsurance within their jurisdiction by insurers, such as Annuity Reassurance,
which are not admitted to do business within such jurisdiction. With some
exceptions, the sale of insurance within a jurisdiction where the insurer is not
admitted to do business is prohibited. The Company expects to conduct its
business through its Bermuda office either directly or through intermediaries,
such as brokers and consultants. The Company does not intend to maintain an
office, and it does not expect its personnel to solicit, advertise, settle
claims or conduct other activities which may constitute the transaction of the
business of insurance, in any jurisdiction in which the Company is not licensed
or otherwise authorized to engage in such activities. However, there can be no
assurance that inquiries or challenges to the Company's insurance activities
will not be raised in the future or that the Company's location, regulatory
status or restrictions on its activities resulting therefrom will not adversely
affect the Company.
10
<PAGE> 12
Recently, the insurance and reinsurance regulatory framework has become
subject to increased scrutiny in many jurisdictions, including the United
States, various states within the United States and elsewhere. In the past,
there have been Congressional and other initiatives in the United States
regarding increased supervision and regulation of the insurance industry,
including proposals to supervise and regulate reinsurers domiciled outside the
United States ("alien reinsurers"). If the Company were to become subject to any
insurance laws of the United States or any state thereof or of any other
jurisdiction at any time in the future, there can be no assurance that it would
be in compliance with such laws or that coming into compliance with such laws
would not have an adverse effect on the Company.
It is not possible to predict the future impact of changing law or
regulation on the operations of the Company. Such changes, if any, could have an
adverse effect on the Company. See "Business -- Regulation."
HOLDING COMPANY STRUCTURE. The Company is a holding company and will not
conduct reinsurance operations of its own. The Company, at least initially, will
have no significant operations or assets other than its ownership of the capital
stock of Annuity Reassurance. Dividends and other permitted payments from
Annuity Reassurance are expected to be the Company's sole source of funds to pay
expenses and dividends, if any. The payment of dividends by Annuity Reassurance
to the Company is limited under Bermuda law and regulations, including Bermuda
insurance law. Under the Insurance Act 1978 of Bermuda, as amended, and related
regulations (the "Insurance Act"), Annuity Reassurance must satisfy minimum
solvency requirements and is prohibited from declaring or paying dividends that
would result in non-compliance with such requirements. See "Management's
Discussion and Analysis of Financial Condition and Plan of Operations --
Liquidity and Capital Resources" and "Business -- Regulation -- Bermuda."
FOREIGN CORPORATION, SERVICE OF PROCESS AND ENFORCEMENT OF JUDGMENTS. The
Company is organized pursuant to the laws of Bermuda. In addition, certain of
the directors and officers of the Company, as well as certain of the experts
named herein, reside outside the United States, and all or a substantial portion
of their assets and the assets of the Company are or may be located in
jurisdictions outside the United States. Although the Company has irrevocably
appointed an agent in the City of New York to receive service of process with
respect to actions against it arising out of or in connection with violations of
United States federal securities laws relating to offers and sales of Common
Shares in the Offering, it may be difficult for investors to effect service of
process within the United States upon such persons or to recover against them or
the Company on judgments of United States courts, including judgments predicated
upon civil liability provisions of the United States federal securities laws.
See "Enforceability of Civil Liabilities Under United States Federal Securities
Laws."
INCOME TAX RISKS
Taxation of the Company and Annuity Reassurance. The Company and Annuity
Reassurance are Bermuda corporations and neither intends to file United States
tax returns. The Company plans to operate in such a manner that it will not be
subject to United States tax (other than United States excise tax on reinsurance
premiums and withholding tax on certain investment income from United States
sources) because it does not intend to engage in business in the United States.
However, because definitive identification of activities which constitute being
engaged in trade or business in the United States is not provided by the
Internal Revenue Code of 1986, as amended (the "Code"), or regulations or court
decisions, there can be no assurance that the Internal Revenue Service ("IRS")
will not contend that the Company and/or Annuity Reassurance is engaged in trade
or business in the United States. If the Company were considered to be engaged
in business in the United States (and, if the Company were to qualify for
benefits under the income tax treaty between the United States and Bermuda, such
business were attributable to a "permanent establishment" in the United States),
it would be subject to United States tax at regular corporate rates on its
taxable income that is effectively connected with its United States business
plus an additional 30% "branch profits" tax on such income remaining after the
regular tax, in which case there could be an adverse affect on the Company. See
"Certain Tax Considerations."
The United States currently imposes an excise tax on insurance and
reinsurance premiums paid to foreign insurers or reinsurers with respect to
risks located in the United States. In addition, the Company may be
11
<PAGE> 13
subject to withholding tax on certain investments from United States sources.
There can be no assurance that such tax rates will not be increased or that
other taxes will not be imposed on the Company's business.
Controlled Foreign Corporation Rules. United States persons who may,
directly or through certain attribution rules, acquire 10% or more of the Common
Shares of the Company, should consider the possible application of the
"controlled foreign corporation" ("CFC") rules. Each "United States shareholder"
of a CFC who owns shares in the CFC on the last day of the CFC's taxable year
generally must include in his gross income for United States federal income tax
purposes his pro-rata share of the CFC's "subpart F income," even if the subpart
F income has not been distributed. For these purposes, any United States person
who owns directly or indirectly 10% or more of the voting stock of a foreign
corporation will be considered to be a "United States shareholder." In general,
a foreign insurance company such as Annuity Reassurance is treated as a CFC only
if such "United States shareholders" collectively own more than 25% of the total
combined voting power or total value of the Company's stock for an uninterrupted
period of 30 days or more during any year. The Company believes that, because of
the anticipated dispersion of the Company's share ownership among holders and
because of the restrictions in the Company's Bye-Laws on transfer, issuance or
repurchase of the Common Shares, shareholders who acquire Common Shares in the
Offering will not be subject to treatment as "United States shareholders" of a
CFC. In addition, because under the Bye-Laws no single shareholder will be
permitted to exercise 10% or more of the total combined voting power of the
Company, shareholders of the Company should not be viewed as "United States
shareholders" of a CFC for purposes of these rules. There can be no assurance,
however, that these rules will not apply to shareholders of the Company. See
"Certain Tax Considerations."
Related Person Insurance Income Risks. If Annuity Reassurance's related
person insurance income ("RPII") determined on a gross basis were to equal or
exceed 20% of its gross insurance income in any taxable year, a United States
person who owns Common Shares in the Company directly or indirectly on the last
day of the taxable year may be required to include in income for United States
federal income tax purposes the shareholder's pro-rata share of Annuity
Reassurance's RPII for the taxable year, determined as if such RPII were
distributed proportionately to such United States persons at that date. RPII is
generally underwriting premium and related investment income attributable to
insurance or reinsurance policies where the direct or indirect insureds are
United States shareholders or are related to United States shareholders of the
insurance or reinsurance company issuing such policies. Although Annuity
Reassurance does not currently believe that the 20% threshold will be met in
1998 and subsequent years, the amount of RPII earned by Annuity Reassurance will
depend on a number of factors that may be beyond its control. Consequently,
there can be no assurance that Annuity Reassurance's RPII will not equal or
exceed 20% of its gross insurance income in any taxable year. See "Certain Tax
Considerations."
If a shareholder who is a United States person disposes of shares in a
foreign insurance corporation that has RPII (even if the amount of RPII is less
than 20% of the corporation's gross insurance income) and in which United States
persons own 25% or more of the shares, any gain from the disposition will
generally be treated as ordinary income to the extent of the shareholder's
portion of the corporation's undistributed earnings and profits that were
accumulated during the period that the shareholder owned the shares (potentially
whether or not such earnings and profits are attributable to RPII). In addition,
such a shareholder will be required to comply with certain reporting
requirements, regardless of the amount of shares owned by the shareholder. These
rules should not apply to dispositions of Common Shares because the Company is
not itself directly engaged in the insurance business and because proposed
United States Treasury regulations applicable to this situation appear to apply
only in the case of shares of corporations that are directly engaged in the
insurance business. There can be no assurance, however, that the IRS will
interpret the proposed regulations in this manner or that the proposed
regulations will not be promulgated in final form in a manner that would cause
these rules to apply to dispositions of Common Shares. See "Certain Tax
Considerations."
Passive Foreign Investment Company Risks. To avoid significant potential
adverse United States federal income tax consequences for any United States
person who owns Common Shares of the Company, it is important that the Company
not constitute a "passive foreign investment company" (a "PFIC") in any year in
which such person is a shareholder. In general, a foreign corporation is a PFIC
for a taxable year if 75% or more of its income constitutes "passive income" or
50% or more of its assets produce passive income. "Passive
12
<PAGE> 14
income" generally includes interest, dividends and other investment income.
However, "passive income" does not include income "derived in the active conduct
of an insurance business by a corporation which is predominantly engaged in an
insurance business." This exception is intended to ensure that income derived by
a bona fide insurance company is not treated as passive income, except to the
extent such income is attributable to financial reserves in excess of the
reasonable needs of the insurance business. Because the Company, through Annuity
Reassurance, expects to be predominantly engaged in an insurance business and
does not expect to have financial reserves in excess of the reasonable needs of
its insurance business, the Company does not expect to be a PFIC. There can be
no assurance, however, that the IRS or a court will concur in this view. See
"Certain Tax Considerations."
Bermuda Taxes. The Company and Annuity Reassurance have applied to the
Bermuda Minister of Finance for an undertaking under The Exempted Undertakings
Tax Protection Act 1966 of Bermuda to the effect that in the event of there
being enacted in Bermuda any legislation imposing tax computed on profits or
income, or computed on any capital asset, gain or appreciation, or any tax in
the nature of estate duty or inheritance tax, then the imposition of any such
tax shall not be applicable to the Company, Annuity Reassurance or to any of
their operations or the shares, debentures or other obligations of the Company
or Annuity Reassurance until March 2016. There can be no assurance that after
such date the Company or Annuity Reassurance would not be subject to any such
tax.
LIMITATIONS ON OWNERSHIP, TRANSFERS AND VOTING RIGHTS. Under the Company's
Bye-Laws, the Company's directors (or their designee) are required to decline to
register any transfer of Common Shares if they have any reason to believe that
such transfer would result in a person (or any group of which such person is a
member) beneficially owning, directly or indirectly, 10% or more of the Common
Shares. Similar restrictions apply to issuances and repurchases of Common Shares
by the Company. The directors (or their designee) also may, in their absolute
discretion, decline to register the transfer of any Common Shares if they have
reason to believe that such transfer may expose the Company, any subsidiary
thereof, any shareholder or any person purchasing reinsurance from the Company
to adverse tax or regulatory treatment in any jurisdiction. These restrictions
would apply to the registration of a transfer of Common Shares even if the
transfer had been executed on the Nasdaq National Market. A transferor of Common
Shares will be deemed to own such shares for dividend, voting and reporting
purposes until a transfer of such Common Shares has been registered on the
Register of Members of the Company. The Company is authorized to request
information from any holder or prospective acquiror of Common Shares as
necessary to effect registration of any such transaction, and may decline to
register any such transaction if complete and accurate information is not
received as requested.
In addition, the Bye-Laws generally provide that any person (or any group
of which such person is a member) holding directly, or by attribution, or
otherwise beneficially owning Common Shares carrying 10% or more of the total
voting rights attached to all of the Company's outstanding capital shares, will
have the voting rights attached to its Common Shares reduced so that it may not
exercise more than approximately 9.9% of such total voting rights. Because of
the attribution provisions of the Code and the rules of the Securities and
Exchange Commission (the "Commission") regarding determination of beneficial
ownership, this requirement may have the effect of reducing the voting rights of
a shareholder whether or not such shareholder directly holds of record 10% or
more of the Common Shares. Further, the directors (or their designee) have the
authority to request from any shareholder certain information for the purpose of
determining whether such shareholder's voting rights are to be reduced. Failure
to respond to such a notice, or submitting incomplete or inaccurate information,
gives the directors (or their designee) discretion to disregard all votes
attached to such shareholder's Common Shares. See "Description of Capital
Stock -- Common Shares."
NO PRIOR PUBLIC MARKET. Before the Offering there has been no public
market for the Common Shares. There can be no assurance that an active trading
market for the Common Shares will develop or be sustained following the
completion of the Offering or that the market price of the Common Shares will
not decline from the initial public offering price. The initial public offering
price for the Common Shares offered hereby will be determined through
negotiations between the Company and the representatives of the Underwriters and
may not be indicative of the market price of the Common Shares after the
Offering. See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price.
13
<PAGE> 15
SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of the Offering, the
Company will have outstanding 16,750,000 Common Shares, Class A Warrants to
purchase an aggregate of 2,010,000 additional Common Shares and options to
purchase an aggregate of 502,500 Common Shares. If the Underwriters'
over-allotment option is exercised in full, an additional 2,512,500 Common
Shares will be outstanding and the number of additional Common Shares issuable
upon exercise of outstanding Class A Warrants will increase to an aggregate of
2,311,500 Common Shares and the number of Common Shares issuable upon exercise
of outstanding options will increase to an aggregate of 535,250 Common Shares.
None of such outstanding Class A Warrants or options are currently exercisable.
See "Management -- Stock Option Plan" and "Description of Capital
Stock -- Warrants." Except as disclosed in "Description of Capital Stock --
Restrictions on Transfer," the Common Shares sold in the Offering will be freely
transferable without restriction or further registration under the Securities
Act of 1933, as amended (the "Securities Act"), except for any of those Common
Shares owned by an "affiliate" of the Company within the meaning of Rule 144
under the Securities Act (which sales will be subject to volume limitations and
certain other restrictions). The holders of the Class A Warrants have been
granted rights to require the Company to register the Common Shares underlying
the Class A Warrants, which rights become exercisable on the first anniversary
of the consummation of the Offering. The Company also intends to register the
resale of the Common Shares underlying the outstanding options promptly
following the first anniversary of the consummation of the Offering. The
Company, its directors and officers and the holders of the outstanding options
and Class A Warrants have executed agreements under which they have agreed that
they will not, for one year after the date of this Prospectus, directly or
indirectly offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase, or otherwise sell or dispose (or announce any offer, sale,
offer of sale, contract of sale, pledge, grant of any option to purchase or
other sale or disposition) of any Common Shares or other capital stock of the
Company or any other securities convertible into, or exercisable or exchangeable
for, any Common Shares or other capital stock of the Company without the prior
written consent of Prudential Securities Incorporated on behalf of the
Underwriters, except that such agreements do not prevent the Company from
granting options under the Stock Option Plan so long as such options are not
exercisable until one year from the date of this Prospectus. Prudential
Securities Incorporated may, in its sole discretion at any time and without
notice, release all or any portion of the securities subject to such lock-up
agreements. No prediction can be made as to the effect, if any, that future
sales of Common Shares, or the availability of Common Shares for future sale,
will have on the market price of the Common Shares prevailing from time to time.
Sales of substantial amounts of Common Shares in the public market following the
Offering, or the perception that such sales could occur, could adversely affect
the market price of the Common Shares and may make it more difficult for the
Company to sell its equity securities in the future at a time and at a price
which it deems appropriate. If the persons holding the outstanding options and
Class A Warrants cause a large number of the Common Shares underlying such
securities to be sold in the market, such sales could have an adverse effect on
the market price for the Common Shares. See "Shares Eligible for Future Sale."
IMPACT OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 115. The
Company's investment portfolio is expected to consist primarily of securities
considered available for sale within the meaning of Financial Accounting
Standards No. 115. Securities available for sale may be disposed of to meet
liquidity requirements, or for any other reason, and are carried in the balance
sheet at fair (or market) value. Changes in the market value of these securities
are accounted for through adjustments to shareholders' equity. Although not
currently planned, the Company's investment portfolio may in the future consist
of securities to be held to maturity within the meaning of Financial Accounting
Standards No. 115. Securities held to maturity may be disposed of only under
certain specific circumstances and are carried in the balance sheet at amortized
cost. If the Company's portfolio contained one or more securities classified as
held to maturity and the Company had to sell any of those securities, then all
such securities remaining in the held to maturity portfolio would have to be
transferred to the available for sale portfolio. This would result in those
securities immediately being valued on the balance sheet at market value, and
any difference between the market value and amortized cost at the date of
transfer would then be recognized as an adjustment to shareholders' equity at
that date. Depending on the market conditions for such securities at the date of
transfer, this could decrease the Company's reported shareholders' equity and
adversely affect the market price for the Common Shares.
14
<PAGE> 16
FOREIGN CURRENCY FLUCTUATIONS. The Company's functional currency is the
United States dollar. However, because the Company expects that it may write a
portion of its business and receive premiums in currencies other than United
States dollars and may maintain a small portion of its investment portfolio in
investments denominated in currencies other than United States dollars, the
Company may experience exchange losses to the extent its foreign currency
exposure is not properly managed or otherwise hedged, which in turn would
adversely affect the Company's statement of operations and financial condition.
15
<PAGE> 17
USE OF PROCEEDS
The net proceeds from the sale of the 16,750,000 Common Shares offered
hereby are estimated to be $232.7 million, assuming an initial public offering
price of $15.00 per share (after deducting underwriting discounts and
commissions, certain advisory fees and other estimated expenses, including
payments to Inter-Atlantic Securities Corp. for its services and reimbursement
for certain expenses related to the formation and initial operations of the
Company and the Offering). See "Certain Relationships and Related Party
Transactions." Substantially all of the net proceeds will be contributed to the
capital of Annuity Reassurance to support its reinsurance underwriting capacity
and will be invested in accordance with the Company's investment guidelines.
Until so invested, the net proceeds will be invested in short-term, investment
grade, interest-bearing securities. See "Business -- Investment Strategy."
16
<PAGE> 18
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of December 22, 1997 and as adjusted to give effect to the Offering
(assuming an initial public offering price of $15.00 per share) and the receipt
of the net proceeds therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED(2)
------ --------------
($ IN THOUSANDS)
<S> <C> <C>
Preferred Shares, par value $1.00 per share (50,000,000 shares
authorized; no shares outstanding; no shares outstanding as
adjusted)............................................................ $ -- $ --
Common Shares, par value $1.00 per share (100,000,000 shares
authorized; 12,000 shares outstanding; 16,750,000 shares outstanding
as adjusted)(1)...................................................... 12
Additional paid-in capital............................................. 238
Retained earnings...................................................... -- --
---- --------
Total shareholders' equity........................................... 250
---- --------
Total capitalization................................................... $250 $
==== ========
</TABLE>
- ---------------
(1) The Purpose Trust currently owns 12,000 Common Shares, which constitute all
of the currently outstanding Common Shares. Upon consummation of the
Offering, the Purpose Trust has agreed to sell such Common Shares to the
Company for an aggregate price of $12,000 and such Common Shares will be
cancelled. Common Shares outstanding excludes 2,010,000 Common Shares
issuable upon exercise of outstanding Class A Warrants, 502,500 Common
Shares issuable upon exercise of options to be granted upon consummation of
the Offering and 485,000 Common Shares reserved for future issuance pursuant
to the Stock Option Plan. If the Underwriters' over-allotment option is
exercised in full, the number of Common Shares issuable upon exercise of
outstanding Class A Warrants will increase to 2,311,500 Common Shares, the
number of Common Shares issuable upon exercise of options to be granted upon
consummation of the Offering will increase to 577,875 Common Shares, and the
number of Common Shares reserved for future issuance pursuant to the Stock
Option Plan will increase to 535,250 Common Shares. None of the outstanding
Class A Warrants or options are currently exercisable. See
"Management -- Stock Option Plan" and "Description of Capital
Stock -- Warrants."
(2) As adjusted does not give effect to any exercise of the Underwriters'
over-allotment option and excludes the 12,000 Common Shares currently held
by the Purpose Trust.
DIVIDEND POLICY
The Company is a newly formed corporation and has not declared or paid any
cash dividends on its Common Shares. The Board of Directors of the Company
intends to declare and pay out of earnings a quarterly dividend of $ per
Common Share beginning at the end of the first full fiscal quarter following the
consummation of the Offering. The declaration and payment of dividends by the
Company will be at the discretion of its Board of Directors and will depend upon
the Company's results of operations and cash flows, the financial position and
capital requirements of Annuity Reassurance, general business conditions, legal,
tax, regulatory and any contractual restrictions on the payment of dividends and
other factors the Board of Directors of the Company deems relevant. The
Company's ability to pay dividends depends on the ability of Annuity Reassurance
to pay dividends to the Company. While the Company is not itself subject to any
significant legal prohibitions on the payment of dividends, Annuity Reassurance
is subject to Bermuda regulatory constraints which affect its ability to pay
dividends to the Company. Accordingly, there is no assurance that dividends will
be declared or paid in the future. See "Management's Discussion and Analysis of
Financial Condition and Plan of Operations -- Liquidity and Capital Resources"
and "Business -- Regulation."
17
<PAGE> 19
DILUTION
Purchasers of the Common Shares offered hereby will experience an immediate
dilution in net tangible book value of their Common Shares from the initial
public offering price. After giving effect to the sale of 16,750,000 Common
Shares in the Offering, the pro forma net tangible book value of the Common
Shares (assuming an initial public offering price of $15.00 per share and after
deducting underwriting discounts and commissions, certain advisory fees and
other estimated expenses of the Offering, including fees payable to affiliates
of the Company) will be approximately $ million, or approximately $ per
outstanding share (assuming the Underwriters' over-allotment option will not be
exercised). This represents an immediate dilution in net tangible book value to
investors purchasing shares in the Offering of approximately $ per share,
without taking into account any Common Shares issuable upon exercise of
outstanding options and Class A Warrants. Pro forma "net tangible book value"
per outstanding share represents shareholders' equity divided by the number of
outstanding Common Shares, including the Common Shares issued in the Offering.
The following table illustrates this per share dilution:
<TABLE>
<S> <C>
Assumed initial public offering price per share............................. $15.00
Pro forma net tangible book value per outstanding share upon completion of
the Offering(1)...........................................................
------
Dilution per share to new investors in the Offering......................... $
======
</TABLE>
- ---------------
(1) Does not include 2,010,000 Common Shares issuable upon exercise of
outstanding Class A Warrants (2,311,500 Common Shares if the Underwriters'
over-allotment option is exercised in full) 502,500 Common Shares issuable
upon exercise of options to be granted upon consummation of the Offering
(577,875 Common Shares if the Underwriters' over-allotment option is
exercised in full) and 485,000 Common Shares reserved for future issuance
under the Stock Option Plan (535,250 Common Shares if the Underwriters'
over-allotment option is exercised in full). None of the outstanding Class A
Warrants or options are currently exercisable. The exercise of these
warrants and options are not expected to be dilutive to purchasers of the
Common Shares in the Offering because the exercise price per share of such
warrants and options is equal to the initial public offering price per
share. See "Description of Capital Stock -- Warrants."
18
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND PLAN OF OPERATIONS
GENERAL
The Company and Annuity Reassurance were formed on December 2, 1997 under
the laws of Bermuda, and neither has any operating history. Their fiscal years
end on December 31. The Company's financial statements will be prepared in
accordance with GAAP.
LIQUIDITY AND CAPITAL RESOURCES
The Company will rely primarily on cash dividends from Annuity Reassurance
to pay its operating expenses and dividends, if any. The Board of Directors of
the Company intends to declare and pay out of earnings a quarterly dividend of
$ per Common Share beginning at the end of the first full fiscal quarter
following the consummation of the Offering. The declaration and payment of
dividends by the Company will be at the discretion of its Board of Directors and
will depend upon the Company's results of operations and cash flows, the
financial position and capital requirements of Annuity Reassurance, general
business conditions, legal, tax, regulatory and any contractual restrictions on
the payment of dividends and other factors the Board of Directors of the Company
deems relevant. The Company's ability to pay dividends depends on the ability of
Annuity Reassurance to pay dividends to the Company. While the Company is not
itself subject to any significant legal prohibitions on the payment of
dividends, Annuity Reassurance is subject to Bermuda regulatory constraints
which affect its ability to pay dividends to the Company. Accordingly, there is
no assurance that dividends will be declared or paid in the future. See
"Dividend Policy" and "Business -- Regulation -- Bermuda."
The principal sources of funds for Annuity Reassurance's operations are
expected to be substantially all of the net proceeds of the Offering, premiums,
fees and net investment income, as well as maturities and sales of invested
assets. These funds are expected to be used primarily to pay policy benefits,
claims, operating expenses and commissions, as well as to purchase new
investments and, subject to Bermuda law, to make dividend payments to the
Company.
The principal risks associated with the reinsurance of annuity and life
insurance products are mortality risk and investment risk. Mortality risk is
actuarially quantifiable when spread across large numbers of insureds. The
Company will be exposed to investment risk to the extent the products it
reinsures guarantee an investment return or fixed benefit. The Company intends
to manage these risks by using modeling techniques to structure its investments
to match its anticipated liabilities under reinsurance agreements. No assurance
can be given, however, that the Company will successfully match the structure of
its investments with its liabilities under reinsurance agreements. If the
Company's calculations with respect to these reinsurance liabilities are
incorrect, or it improperly structures its investments to match such
liabilities, it could experience significant liquidity shortages or be forced to
liquidate investments prior to maturity at a significant loss. The Company will
also from time to time purchase or sell equity securities or equity-based
futures and options solely pursuant to strategies intended to hedge the
investment risk associated with the annuity and life insurance products which it
reinsures. The failure of the Company to match its equity investments accurately
with the Company's equity-based liabilities could expose the Company to the
volatility of the equity markets and potential losses on such equity securities
and equity-based futures and options. The Company has entered into an investment
advisory agreement with PIMCO which is anticipated to manage at least 50% of the
Company's investment portfolio in accordance with guidelines established by the
Company. The Company is in the process of selecting additional investment
managers to manage the remainder of its portfolio.
Annuity Reassurance is not licensed or admitted as an insurer in any
jurisdiction other than Bermuda. Because many jurisdictions do not permit
insurance companies to take credit for reinsurance obtained from unlicensed or
non-admitted insurers on their statutory financial statements unless appropriate
security
19
<PAGE> 21
mechanisms are in place, it is anticipated that the Company's reinsurance
clients will require it to post a letter of credit or other collateral. In the
event that the Company should default under the letter of credit facility, it
may be required to liquidate prematurely all or a substantial portion of its
investment portfolio and/or its other assets which have been pledged as security
for the facility or otherwise secure its obligations to its reinsureds, which
would likely have a material adverse effect on the Company.
The Company does not currently have any material commitments for any
capital expenditures over the next twelve months.
The Company expects that the net proceeds of the Offering will permit it to
begin implementation of its business strategy. Over time, internally generated
funds plus the capital base established by the Offering are expected to be
sufficient to operate its business. Consequently, the Company does not presently
anticipate that it will incur any material indebtedness in the ordinary course
of its business other than obtaining letters of credit. However, no assurance
can be given that the Company will not be required to incur indebtedness in
order to implement its business strategy. See "Risk Factors -- No Operating
History."
CURRENCY
The Company's functional currency is the United States dollar. However,
because the Company expects that it may write a portion of its business and
receive premiums in currencies other than United States dollars and may maintain
a small portion of its investment portfolio in investments denominated in
currencies other than United States dollars, the Company may experience exchange
losses to the extent its foreign currency exposure is not properly managed or
otherwise hedged, which in turn would adversely affect the Company's statement
of operations and financial condition.
TAXATION
Bermuda does not currently impose a corporate level tax on the revenues or
earnings of the Company, although it may do so in the future. The Company and
Annuity Reassurance have applied to the Bermuda Minister of Finance for an
undertaking under The Exempted Undertakings Tax Protection Act 1966 of Bermuda
to the effect that in the event of there being enacted in Bermuda any
legislation imposing tax computed on profits or income, or computed on any
capital asset, gain or appreciation, or any tax in the nature of estate duty or
inheritance tax, then the imposition of any such tax shall not be applicable to
the Company, Annuity Reassurance or to any of their operations or shares,
debentures or other obligations of the Company or Annuity Reassurance until
March 2016. There can be no assurance that after such date the Company or
Annuity Reassurance would not be subject to any such tax. See "Certain Tax
Considerations -- Taxation of the Company and Annuity Reassurance." Because the
Company is not expected to conduct business in the United States, and Annuity
Reassurance will not be licensed to do business in the United States or any
other jurisdiction except Bermuda, it is not expected that the Company will be
subject to United States federal income taxes or any other corporate level tax.
The United States does impose an excise tax on insurance and reinsurance
premiums paid to foreign insurers or reinsurers with respect to risks located in
the United States. The rate of tax applicable to reinsurance premiums to be paid
to Annuity Reassurance is currently 1%. In addition, the Company may be subject
to withholding tax on certain investments from United States sources.
EFFECTS OF INFLATION
The effects of inflation on the Company will be implicitly considered in
pricing and estimating reserves for unpaid losses. The actual effects of
inflation on the results of the Company cannot be accurately known until claims
are ultimately settled.
20
<PAGE> 22
BUSINESS
The Company was recently organized in Bermuda with the objective of being
an efficient, low cost provider of annuity and life reinsurance with expertise
in the underwriting of reinsurance focused on mortality and investment risks.
The Company's business strategy has been designed to respond to a number of
trends in the annuity and life insurance industry that in management's view will
increase the demand for annuity and life reinsurance. These trends include:
- Expanding growth in the sales of annuities in recent years;
- Increasing regulatory and certain capital and reserve requirements
applicable to annuity issuers and life insurers;
- Continuing consolidation in the annuity and life insurance industry,
including strategic decisions to reinsure large blocks of insurance;
- Leveraging of capital by annuity issuers and life insurers to increase
financial performance through the use of reinsurance; and
- Increasing use of multiple reinsurers by annuity issuers and life
insurers to diversify their reinsurance risk.
Through controls on overhead costs and the absence of a corporate level tax
in Bermuda on the Company's revenues and earnings, the Company expects to be
able to offer its products at prices that will be attractive to potential
clients. The Company intends to market its reinsurance products to select
insurers and reinsurers on a worldwide basis, with its primary target markets
initially being the United States, Canada, Europe, Australia and Bermuda. The
Company's principal executive office is located at Victoria Hall, Victoria
Street, P.O. Box HM1262, Hamilton, HM FX, Bermuda, and its telephone number is
(441) 295-3278.
BUSINESS STRATEGY
The Company's objective is to develop an efficient, low cost annuity and
life reinsurance business that will enable it to achieve attractive total rates
of return through prudent underwriting of insurance risks and careful management
of its investment portfolio. The Company will seek to achieve this objective
through the implementation of its business strategy, the principal components of
which are:
- - Maintain Low Cost Structure
The Company believes that the advantages of writing primarily treaty
reinsurance and reinsuring specific blocks of business, as well as its Bermuda
domicile, will enable it to maintain a low cost structure. By focusing on
treaty reinsurance and the reinsurance of specific blocks of business where
the underlying policies meet the underwriting criteria of the primary insurer,
the Company will be able to make fewer underwriting assessments than would
typically be required with respect to the underwriting of a large number of
small individual policies. As a consequence, the Company expects to limit its
number of employees initially to approximately ten and to use third-party
service providers to perform certain functions. As a part of this strategy,
the Company has contracted with Marsh & McLennan to provide claims processing
and other administrative services. By minimizing its personnel and overhead
costs, the Company expects to be better able to control expense levels as
market conditions for writing reinsurance fluctuate, and intends to have one
of the lowest ratios of operating costs to total revenues in the annuity and
life reinsurance industry. In addition, the Company also expects to benefit
from the absence of a corporate level tax in Bermuda on the Company's revenues
and earnings. As a result of this low cost structure, the Company expects to
be able to offer attractive prices to its reinsurance clients.
- - Utilize a Disciplined Underwriting Approach
The Company's reinsurance underwriting strategy is to select opportunities
with acceptable risk/return profiles based on sophisticated actuarial and
investment modeling techniques. The principal risks associated with the
reinsurance of annuity and life insurance products are mortality risk and
investment risk. Mortality risk is actuarially quantifiable when spread across
large numbers of insureds. The Company will be exposed
21
<PAGE> 23
to investment risk to the extent the products it reinsures guarantee an
investment return or fixed benefit. The Company intends to manage these risks
by using modeling techniques to structure its investments to match its
anticipated liabilities under reinsurance agreements. Initially, the Company
intends to supplement its underwriting analyses with commercially available
actuarial models and may retain consultants to analyze the risks that it
reinsures, while it develops its own proprietary models. The Company believes
that its focus on annuity and life reinsurance will enable it to structure its
reinsurance products to meet the specific requirements of its clients while
managing its exposure to the risks being assumed. Furthermore, the reinsurance
of annuity and life insurance products will not expose the Company to the
catastrophic risks normally associated with property/casualty reinsurance.
- - Employ Professional Investment Management
The Company will seek to generate attractive levels of investment income
through a professionally managed fixed income investment portfolio. The
Company has entered into an investment advisory agreement with PIMCO, which is
anticipated to manage at least 50% of the Company's investment portfolio in
accordance with guidelines established by the Company. The Company is in the
process of selecting additional investment managers to manage the remainder of
its portfolio. The Company's investment policies focus on diversification of
risk and maintenance of liquidity, and include limits on investments in any
one business sector or issuer other than securities issued by the United
States Government, its agencies and instrumentalities. In addition, the
Company's investment policies prohibit any investment in equity securities or
equity-based futures and options other than pursuant to strategies intended to
hedge the investment risk associated with annuity and life insurance products
which the Company reinsures. The Company's investment guidelines provide that
at least 75% of its fixed income investment portfolio will be invested in a
diversified portfolio of fixed income securities that are rated investment
grade by at least one major rating agency, with the balance permitted to be
invested in below investment grade fixed income securities. The Company's
investment policies require its fixed income investment portfolio to maintain
a weighted average rating of "A".
- - Build on Strong Capital Base
The Company's capitalization after the Offering, including its lack of
indebtedness, will demonstrate a strong financial position to potential
clients and a high level of commitment to the annuity and life reinsurance
marketplace. Management believes that this will enable the Company to compete
with other reinsurers for desirable business and establish long-term
relationships with a select group of primary insurers and other reinsurers.
The Company does not anticipate that it will incur any material indebtedness
in the ordinary course of its business other than obtaining letters of credit
in connection with its reinsurance agreements. The Company should also benefit
from the fact that, as a recently formed entity, its capital is presently
unencumbered by issues such as loss reserve adequacy, unrealized losses in its
investment portfolio and uncollectible reinsurance. The Company's capital
structure will also assist in the process of obtaining a claims paying rating
from a major rating agency, which the Company expects to receive upon
consummation of the Offering (although no assurance can be given that such
rating will be received).
- - Capitalize on Skill and Experience of Management and Board of Directors
The Company has begun assembling a senior management team of experienced
insurance and reinsurance professionals to implement its strategy. The
Company's President and Chief Executive Officer, Lawrence S. Doyle, has over
32 years of experience in the insurance and reinsurance industries and was
formerly the President and Chief Executive Officer of GCR from its formation
as a Bermuda reinsurer specializing in catastrophe risk in 1993 until its
acquisition by EXEL Limited in 1997, when Mr. Doyle became an Executive Vice
President of EXEL. Before founding GCR, Mr. Doyle was Senior Vice President of
Hartford Insurance Group in charge of international operations, where he was
employed for 27 years, the last six of which he was also the President of
Hartford Fire International. In addition to Mr. Doyle, the Company's Board of
Directors includes Frederick S. Hammer, Michael P. Esposito, Jr. and Robert M.
Lichten. Messrs. Hammer, Esposito and Lichten are currently executives of
Inter-Atlantic, a firm which provides investment banking services to insurance
companies and other financial services firms, and they each have over 30 years
of experience in the financial services industry. Management believes that the
22
<PAGE> 24
extensive insurance and financial services expertise possessed by the
Company's directors and President and Chief Executive Officer should provide
the Company with a competitive marketing advantage.
INDUSTRY TRENDS
The Company's business strategy has been designed to respond to a number of
trends in the annuity and life insurance industry that in management's view will
increase the demand for annuity and life reinsurance.
First, there has been recent strong growth in a variety of savings-oriented
insurance products that have tax-advantaged status, as evidenced by recent
increases in sales of annuity products, which can be used as retirement planning
vehicles. A.M. Best reports that annuity premiums sold (both individual and
group) in the United States and Canada in 1996 totaled $184 billion, an increase
of 13% from $164 billion in 1995; variable annuity premiums sold accounted for
49% of the 1996 total, while fixed annuity premiums accounted for 51%. Continued
growth in sales of annuities may induce primary insurers to seek increasing
amounts of reinsurance in an effort to manage capital and reserve requirements,
as well as commissions and other selling costs.
In recent years, state insurance regulators in the United States have
established increasingly stringent reserve and capital requirements applicable
to outstanding insurance policies, thus creating an additional demand for
reinsurance. For example, certain regulations have recently been approved by
individual states that are expected to increase reserve requirements for many
annuity and life insurance products, the most prominent being the adoption by
New York of Regulation 147, which sets higher capital standards for certain
products including guaranteed renewable term life insurance. Other states have
adopted a version of the National Association of Insurance Commissioners'
Valuation of Life Insurance Policies Model Regulation, which is similar to
Regulation 147. Management believes that this trend towards higher capital and
reserve requirements will continue in the future and that the Company will
benefit from an associated increased demand for reinsurance.
Management expects that there will be continuing consolidation in the
annuity and life insurance industry. This trend is likely to increase the need
for reinsurance of these products as acquirers seek to restructure the resulting
entities, focus on core markets and achieve better leveraging of existing
capital to improve financial performance. In addition, primary insurers are
expected to continue to reinsure large blocks of business as part of an effort
towards greater strategic focus on well-defined product markets. Furthermore,
many mutual life insurers have announced plans to "demutualize" during the next
few years. Demutualization is a process by which a mutual life insurer, which is
a non-stock corporation owned by its policyholders, becomes a shareholder-owned
insurance company. As part of the demutualization process, mutual life insurers
will be subject to close examination by regulatory authorities and the investing
public, and once demutualized, will generally be required to report public
financial results on a quarterly basis. Management believes that these factors
will cause such companies to seek to improve the quality of their reinsurance as
well as to generate higher levels of earnings by accelerating the reporting of
the results of profitable blocks of business through reinsurance.
Management expects annuity and life reinsurance products to be increasingly
utilized by annuity issuers and life insurers in these types of circumstances to
satisfy their strategic objectives.
Finally, primary insurers often prefer to expand and diversify their
reinsurance risk among multiple reinsurers so as to reduce their dependence upon
any one reinsurer as well as the risk of nonperformance. The Company believes
its entrance into the market will benefit from a preference for multiple sources
of reinsurance.
OVERVIEW OF REINSURANCE
Reinsurance is an arrangement under which an insurance company (the
"reinsurer") agrees to indemnify another insurance company (the "ceding company"
or "cedent") for all or a portion of the insurance risks
23
<PAGE> 25
underwritten by the ceding company. It is standard industry practice for primary
insurers to reinsure portions of their insurance risks with other insurance
companies under indemnity reinsurance agreements. Such practice permits primary
insurers to write policies in amounts larger than the risks they are willing to
retain. Reinsurance is generally designed to (i) reduce the net liability of the
ceding company on individual risks, thereby assisting the ceding company in
increasing the volume of business it can underwrite, as well as increasing the
maximum risk it can underwrite on a single life or risk; (ii) assist in
stabilizing operating results by leveling fluctuations in the ceding company's
loss experience; (iii) assist the ceding company in meeting applicable
regulatory capital requirements; (iv) assist in reducing the short-term
financial impact of sales and other acquisition costs; and (v) enhance the
ceding company's financial strength and statutory capital. Ceding companies
typically contract with more than one reinsurer to reinsure their business.
Reinsurance may be written on an indemnity or an assumption basis. However,
the Company presently expects to write only indemnity reinsurance. Indemnity
reinsurance does not discharge a ceding company from liability to the
policyholder; a ceding company is required to pay the full amount of its
insurance obligations regardless of whether it is entitled or able to receive
payments from its reinsurers. By contrast, reinsurance written on an assumption
basis effectively transfers the ceding company's obligations to the reinsurer,
and in some cases eliminates the cedent's further liability. Reinsurers also may
themselves purchase reinsurance, known as retrocession reinsurance, to limit
their own risk exposure. Reinsurance companies enter into retrocession
agreements with other reinsurers ("retrocessionaires") for reasons similar to
those that cause primary insurers to purchase reinsurance.
ANNUITY AND LIFE INSURANCE PRODUCTS TO BE REINSURED
The Company's primary business will be the reinsurance of the obligations
of insurers under annuity and life insurance contracts. The Company expects to
enter into reinsurance agreements with respect to cedents' obligations on one or
more of its individual and group annuity products, including fixed annuities,
variable annuities, equity-linked annuities, guaranteed investment contracts and
structured settlements, and individual and group life insurance products,
including term life insurance, universal life insurance, variable life insurance
and whole life insurance. The Company expects to write reinsurance both on a
direct and brokered basis with both primary annuity issuers and life insurers as
well as reinsurers.
When the Company enters into a reinsurance contract it will generally
receive periodic premium payments from the ceding company and will assume
certain reinsurance risks. Generally, the Company expects to assume a stated
percentage of the cedent's risks associated with the reinsured business (often
called "quota share" or "proportional reinsurance"). The risks reinsured by the
Company may include mortality and investment risks and, to a lesser extent,
early surrender and lapse risks. However, the Company will only enter into
contracts where the cedent continues to retain at least 10% of the exposure to
the risks assumed by the Company.
Generally, most life reinsurance is written on a yearly renewable term
basis, where the predominant risk is the mortality of the insured. However, most
other types of annuity and life reinsurance typically contain a certain level of
investment risk, with the reinsurer often reinsuring a stated percentage of the
cedent's investment risk. In addition to investment risk, a "quota share"
coinsurer reinsurer of annuity and life insurance products reinsures a stated
percentage of all of the other risks of the underlying annuity contracts,
including mortality, surrender and lapse risks.
Annuity Products to be Reinsured
The Company expects to reinsure both "fixed" annuities and "variable"
annuities. Fixed annuities are a type of "general account" product because the
assets backing fixed annuities are recorded as part of the insurer's general
funds and are subject to the claims of its general creditors. In contrast,
variable annuities are a type of "separate account" product because the assets
backing the variable annuities are placed in segregated accounts and are
generally not subject to the claims of the insurer's general creditors.
Annuities are long-term savings vehicles that generally are marketed to
customers over the age of 45 who are planning for retirement and seeking secure,
tax-deferred savings products. United States annuity products generally enjoy an
24
<PAGE> 26
advantage over certain other retirement savings products because the payment of
United States federal income taxes on interest credited on annuity policies is
deferred during the investment accumulation period.
General account annuities, which include fixed annuities and equity-indexed
annuities, generally have specified or minimum guaranteed performance levels and
consequently, involve a greater commitment of statutory surplus than separate
account annuities, as a reserve against the investment risk associated with such
policies, and therefore are more frequently reinsured. Separate account
annuities are investment vehicles that are held in segregated accounts for the
benefit of the policyholder and are not commingled with the other assets of the
insurance company. Holders of such annuities themselves generally bear the risks
of the underlying investments. The return on separate account annuities depends
solely on the performance of the assets underlying the particular separate
account and, therefore, require less capital reserves than fixed annuities.
Insurance companies offer a variety of annuity products including (i)
single premium deferred annuities ("SPDAs"), which, in general, are savings
vehicles in which the policyholder, or annuitant, makes a single premium payment
to an insurance company, and the insurance company credits the account of the
annuitant with earnings at a specified interest rate (the "crediting rate"),
which is declared by the insurance company from time to time and may exceed but
may not be lower than any contractually guaranteed minimum crediting rate, and
(ii) flexible premium deferred annuities ("FPDAs"), which are deferred annuities
in which the policyholder may elect to make more than one premium payment. In
addition, certain insurance companies in the United States market a variety of
tax-qualified retirement annuities to individuals participating in tax-qualified
plans, including employees of public schools and certain other tax-exempt
organizations. Tax-qualified retirement annuities tend to be purchased by
customers who are younger than purchasers of other annuity products.
Insurance companies that issue annuities generally incorporate a number of
features in their annuity products designed to reduce the early withdrawal or
surrender of the policies and to partially compensate the company for lost
investment opportunities and costs if policies are withdrawn early. Typically,
the policyholder is permitted to withdraw all or part of the premium paid plus
the amount credited to his or her account, less a penalty or surrender charge
for withdrawals. Often, an insurer's deferred annuity contract provides for
penalty-free partial withdrawals, typically up to 10% of the accumulation value
annually. Annuity policies typically impose some surrender charge during the
period ranging from the first five years to the term of the policy. The initial
surrender charge on annuity policies generally ranges from 5% to 10% of the
premium and decreases over the surrender charge period. Surrender charges are
set at levels intended to protect from loss on early terminations and to reduce
the likelihood of policyholders terminating their policies during periods of
increasing interest rates, thereby lengthening the effective duration of policy
liabilities and improving the ability to maintain profitability on such
policies.
The Company also may reinsure certain structured settlement contracts.
These contracts typically provide for periodic payments arising from the
settlement of personal injury and other legal claims and from lottery payouts.
Structured settlement contracts, as well as guaranteed investment contracts
issued by insurance companies, are often classified as annuities in that they
require periodic payments over a specified period of time.
Life Insurance Products to be Reinsured
The Company expects to reinsure traditional life insurance products, such
as term life and whole life, and also non-traditional products, including
variable life and universal life.
Traditional life insurance products include term life and whole life. A
term life insurance policy is a pure mortality risk insurance product with no
investment component. A term life insurance policy is generally renewable for a
fixed number of years, but the policy expires without value at the end of the
stated period. A traditional whole life insurance policy is permanent life
insurance combining an investment component along with a death benefit. The
insurance company credits the investment component of the whole life policy with
interest, generally guaranteed, at regular intervals. Term life and whole life
policies are typically obligations of an insurance company's general account.
25
<PAGE> 27
Variable life insurance provides a return linked to an underlying portfolio
in which policyholders are typically able to allocate their desired asset mix
among a variety of investment funds. As the total return on the investment
portfolio increases or decreases, as the case may be, the death benefit or
surrender value of the variable life policy may increase or decrease. The single
premium variable life product provides a death benefit to the policy beneficiary
based on a single premium deposit. Universal life and interest-sensitive whole
life insurance policies (which can either be single or flexible premium
policies) provide life insurance with adjustable rates of return based on
current interest rates. These policies provide policyholders flexibility in the
available coverage, timing and amount of premium payments and the amount of the
death benefit, provided there are sufficient policy funds to cover all
applicable policy charges.
Like annuities, life insurance policies also are subject to surrender.
However, they are generally less susceptible to surrender than are annuity
contracts because policyholders must generally undergo a new underwriting
process and incur new policy acquisition costs in order to obtain new life
insurance policies.
The Company may reinsure corporate owned life insurance ("COLI"). COLI is
life insurance purchased by a company on the life of its employees, with the
company named as the beneficiary under the policy. Through the purchase of COLI,
corporations have been able to use the favorable tax treatment of life insurance
to fund a variety of employee benefit liabilities such as post-retirement health
care and non-qualified benefit programs.
The Company may also reinsure group life insurance risks. Group life
reinsurance includes the reinsurance of various types of group life policies,
including employer-employee group term life, which form the majority of group
policies, as well as voluntary and supplemental term life, association term
life, mortgage and credit life and group universal life. The Company may
reinsure group life clients on an experience rated basis, whereby the ceding
company receives a refund of a portion of the profits resulting from favorable
claims experience with respect to the underlying policies through the reduction
of premiums on a going forward basis. The Company's group life insurance
business may be written on a quota share or excess basis, with ceding companies
generally required to retain at least 10% of the risk being reinsured by the
Company.
MARKETING
The Company has devised a marketing plan which calls for the development of
relationships with potential clients which management believes have a perceived
need for reinsurance, based on regulatory filings, management's industry
knowledge and market trends. Given the nature of the Company's business, it
expects to target a limited number of potential clients which the Company
expects will be likely purchasers of its reinsurance products. Management
believes that these clients focus principally on price and, to a lesser extent,
service when making a decision between two or more reinsurance companies
offering similar products. The Company anticipates that it will be able to
capitalize on the relationships its President and Chief Executive Officer, its
directors and future staff have established in the insurance industry in the
marketing of its products. The Company also expects that its low cost structure
will enable it to price its proposals competitively. The Company will also seek
to compete on the basis of service by evaluating each client's specific
reinsurance needs and tailoring its reinsurance programs to meet those needs,
and being responsive in processing claims, all with the objective of competing
on the basis of service. Initially, it is anticipated that insurers and
reinsurers located in the United States, Canada, Europe, Australia and Bermuda
will comprise the majority of the Company's customers.
The Company may, from time to time, use intermediaries (reinsurance brokers
and consultants functioning as brokers) to enter into treaties and facultative
arrangements with ceding companies. These intermediaries would be expected to
solicit, negotiate, and/or place reinsurance cessions or retrocessions on behalf
of the Company or a ceding insurer or reinsurer. Intermediaries would generally
not have the authority to bind the Company to any reinsurance agreement, nor
would the Company commit in advance to accept any business generated by an
intermediary. Any efforts of the intermediaries engaged by the Company will be
overseen and monitored by the Company's management and Board of Directors. The
Company has held discussions with several of such intermediaries and has
notified them of the Company's intention to write annuity and life reinsurance
upon completion of the Offering.
26
<PAGE> 28
During its first year of operation, the Company expects to reinsure annuity
and life-insurance-related business with a small number of ceding companies, and
three to five ceding companies may represent a majority of the Company's
reinsurance activities.
RETROCESSIONAL ARRANGEMENTS
The Company may reinsure, or retrocede, portions of certain risks for which
it has accepted liability. Retrocessional arrangements will allow the Company
greater underwriting capacity while limiting its risk profile. The Company's
current policy is not to retain a net liability on any one life in excess of
$1.0 million. Liability in excess of the established limit, if not approved by
the Board of Directors, will generally be retroceded to retrocessionaires.
Pursuant to the Company's current underwriting policies, each of its
retrocessionaires will have a claims paying rating of "A-" or better by a major
rating agency.
UNDERWRITING
The Company's reinsurance underwriting strategy is to select opportunities
with acceptable risk/return profiles based on sophisticated actuarial and
investment modeling techniques. The principal risk associated with the
reinsurance of annuity life insurance products are mortality risk and investment
risk. Mortality risk is actuarially quantifiable when spread across large
numbers of insureds. The Company will be exposed to investment risk to the
extent the products it reinsures guarantee an investment return or fixed
benefit. The Company intends to manage these risks by using modeling techniques
to structure its investments to match its anticipated liabilities under
reinsurance agreements. Initially, the Company intends to supplement its
underwriting analyses with commercially available actuarial models and may
retain consultants to analyze the risks that it reinsures, while it develops its
own proprietary models. The Company believes that its focus on annuity and life
reinsurance will enable it to structure its reinsurance products to meet the
specific requirements of its clients while managing its exposure to the risks
being assumed. The underwriting process will be designed to specify an adequate
premium for a given exposure that is intended to be commensurate with the amount
of capital the Company estimates it is placing at risk. The Company's Chief
Executive Officer and Chief Underwriting Officer will jointly approve all
underwriting decisions made under the Company's underwriting guidelines.
The Company has developed and its Board of Directors has approved
underwriting guidelines, with the objective of controlling the risks of the
reinsurance policies written as well as to determine appropriate pricing levels.
The Company's current underwriting guidelines include the following policies:
(i) the Company will not assume more than 90% of a risk and will require the
ceding company to retain at least 10% of every reinsured risk; (ii) the Company
will limit its net liability on any one life to no more than $1.0 million; and
(iii) the cedent must be domiciled in the United States, Canada, Europe,
Australia or Bermuda. Any deviation from the Company's underwriting guidelines,
as they may be amended from time to time, will require the approval of the Board
of Directors, as will the approval of contracts in excess of a certain size or
involving a certain level of risk and contracts involving equity investment
risks. In approving contracts in excess of a certain size, the Board may also
waive or relax the requirement that cedents retain 10% of the reinsured risk.
The Company reserves the right at all times to amend, modify or supplement its
underwriting guidelines in response to changes in its business, market
conditions or for other reasons, including changing the approved domiciles for
reinsurance clients.
The Company will determine whether to assume any particular reinsurance
business by considering many factors, including the type of risks to be covered,
actuarial evaluations, historical performance data for the cedent and the
industry as a whole, ceding company retention, products to be reinsured, pricing
assumptions, underwriting standards, reputation and financial strength of the
cedent, the likelihood of establishing a long-term relationship with the cedent
and the market share of the cedent. Pricing of the Company's reinsurance
products will be based on the Company's actuarial models which incorporate a
number of factors, including assumptions for mortality, expenses, persistency
and investment returns, as well as certain macroeconomic factors such as
inflation.
27
<PAGE> 29
The Company expects regularly to update its underwriting guidelines to take
into account changing industry conditions, market developments and changes in
technology. The Company will endeavor to ensure that the underwriting guidelines
of its ceding clients are compatible with those of the Company. Toward this end,
the Company anticipates that it would periodically retain unaffiliated service
providers to conduct reviews of the Company's ceding clients' underwriting and
claims personnel and procedures.
The Company is actively interviewing candidates for its underwriting and
actuarial positions, including the position of Chief Underwriting Officer. The
Company has also entered into a contract with Abbott Associates Limited, the
Bermuda-based member of the Woodrow Milliman organization, to provide actuarial
services and may use other actuarial consultants. Such consultants will
supplement the Company's own actuarial functions, including the evaluation of
mortality and other risks. John Rayner of Abbott Associates is the Company's
approved actuary for purposes of Bermuda law.
REINSURANCE AGREEMENTS
Automatic and Facultative Treaties
Although the Company's reinsurance policies may be written on an automatic
treaty basis or a facultative basis, the Company expects to write policies
primarily on an automatic treaty basis. An automatic reinsurance treaty provides
that the ceding company will cede risks to a reinsurer on specified policies
where the underlying policies meet the ceding company's underwriting criteria,
but the reinsurer does not approve each individual risk. Automatic reinsurance
treaties generally provide that the reinsurer will be liable for a stated
portion of the risk associated with the specified policies written by the ceding
company. Automatic reinsurance treaties also specify the ceding company's
mortality limit on an individual life, which is the maximum amount of risk on a
given life that can be ceded automatically and that the reinsurer must accept.
The mortality limit may be stated either as a multiple of the ceding company's
retention or as a stated dollar amount.
Automatic treaty business is generated under agreements referred to as
treaties, which generally require that the underlying policies meet the ceding
company's underwriting criteria. Automatic business tends to be very
price-competitive. The Company will generally require ceding companies to retain
at least 10% of every risk, whether the business is written on an excess or
quota share basis thereby increasing the ceding companies' incentives to
underwrite risks with care and, when appropriate, to contest claims diligently.
The Company's reinsurance agreements may provide for rights of recapture, which
will permit the ceding company to increase the amount of liability it retains on
the reinsured policies after the policies have remained in force for a
designated period of time. Accordingly, an increase in the amount of liability
retained by the ceding company will decrease both the Company's insurance in
force and premiums to be received from the reinsured policies.
Because the Company expects to write primarily treaty reinsurance and to
reinsure specific blocks of business where the underlying policies meet the
underwriting criteria of the primary insurer, the Company will be able to make
fewer underwriting assessments than would typically be required with respect to
the underwriting of a large number of small individual policies. As a
consequence, the Company expects to limit its number of employees initially to
approximately ten and to use third-party service providers to perform certain
functions. To a lesser extent, the Company may also enter into facultative
reinsurance arrangements. Facultative reinsurance is individually underwritten
by the reinsurer for each policy to be reinsured, with the pricing and other
terms established at the time the policy is underwritten based upon rates
negotiated in advance. Facultative reinsurance normally is purchased by
insurance companies for medically impaired lives, unusual risks or liabilities
in excess of binding limits on their automatic treaties. Facultative reinsurance
requires significantly more underwriting staff and other corporate
infrastructure than automatic treaty reinsurance.
Forms of Reinsurance
Annuity and life reinsurance may be written as coinsurance, modified
coinsurance or yearly renewable term insurance, which vary with the type of risk
assumed and the manner of pricing the reinsurance. Once a contract is reinsured,
it typically cannot be unilaterally removed from the reinsurance agreement,
except
28
<PAGE> 30
pursuant to a ceding company's recapture rights. Recapture rights permit the
ceding company to reassume all or a portion of the risk formerly ceded to the
reinsurer after an agreed-upon period of time (generally 10 years) and subject
to certain other conditions, including that the ceding company kept its full
retention.
Under a coinsurance or modified coinsurance arrangement, the reinsurer
will, depending upon the terms of the contract, share in all material risks
inherent in the underlying policies, including the risk of loss due to
mortality, surrender and lapse, as well as investment performance. Under
modified coinsurance arrangements the ceding company retains ownership of the
assets supporting the reserves, whereas in coinsurance the ceding company
transfers ownership of the assets supporting the reserves to the reinsurer.
Annuity reinsurance is traditionally written on a coinsurance or modified
coinsurance basis. Under coinsurance or modified coinsurance arrangements, the
Company's reinsurance agreements may remain in force for the life of the
underlying policies reinsured. In such cases, it is expected that the Company
would be entitled to renewal premiums absent the death of the insured, voluntary
surrender or lapse of the policy due to nonpayment of premium or the recapture
by the ceding company of the risks reinsured. Both the cedent and the reinsurer
generally have the right to terminate the agreement, with respect to new
policies only, upon reasonable notice. While annuity contracts underlying
coinsurance or modified coinsurance reinsurance are long-term policies, they may
or may not involve long-term investment risk. Management estimates that a
significant amount of annuity contracts currently underlying reinsurance
treaties call for an annual (or more frequent) reset of credited interest rates
to market rates.
Life reinsurance is primarily written on a yearly renewable term basis.
Under a yearly renewable term treaty, the reinsurer assumes only the mortality
risk. At the end of the year, premiums readjust based on the age of the policy
and the age of the insured.
Generally, the amount of life reinsurance ceded under reinsurance
agreements is stated on either an excess or a quota share basis. Reinsurance on
an excess basis covers amounts in excess of an agreed-upon retention limit.
Retention limits vary by ceding company and also vary by age and underwriting
classification of the insured, product, and other factors. Under quota share
reinsurance, the ceding company states its retention in terms of a fixed
percentage of the risk that will be retained, with the remainder up to the
maximum binding limit to be ceded to one or more reinsurers. The Company plans
to write reinsurance on both quota share and excess basis.
The Company may occasionally reinsure insurance policies on an experience
rated basis, under which the ceding company receives a refund of a portion of
the profits (through the retention of future premiums) resulting from favorable
claims experience with respect to the underlying policies.
ADMINISTRATION
The Company has entered into a contract with Marsh & McLennan to administer
on behalf of the Company treaty and contract compliance, the allocation of
receipts and disbursements, the estimation of accruals, assistance in the
generation of internal management reports, assistance with client services and
maintenance of the general ledger, as needed. Pursuant to the contract, Marsh &
McLennan is entitled to receive fees based on hourly rates with a $15,000 per
year minimum.
The Company's contract with Marsh & McLennan provides for the following
claims processing and other administrative services; (i) review and verification
of reinsurance claims, (ii) the procurement of information necessary to evaluate
claims, (iii) determination of the Company's liability with respect to claims,
and (iv) arrangement for timely claim payments. Claims will be subjected to a
thorough review process by the Company to ensure that the risk was properly
ceded, the claim complies with the contract provisions, and the ceding company
is current in the payment of reinsurance policy premiums to the Company. The
Company will also employ third-party contractors to conduct periodic audits of
the underlying business.
RESERVES
In accordance with Bermuda insurance regulations, the Company will
establish and carry as liabilities actuarially determined reserves which will be
calculated to meet the Company's future obligations. Future
29
<PAGE> 31
policy benefits and policy claims are expected to comprise the majority of the
Company's financial obligations and reserves therefor will be maintained on both
a Bermuda regulatory and GAAP basis. Future policy benefits will be based upon
the Company's best estimates of mortality, persistency and investment income,
with appropriate provision for adverse deviation and other factors. The
liabilities for future policy benefits established by the Company with respect
to individual risks or classes of business may be greater or less than those
established by ceding companies due to the use of different investment,
mortality and other assumptions. The Company's reserves will be computed at
amounts that, with additions from premiums to be received and with interest on
such reserves compounded annually at certain assumed rates, are expected to be
sufficient to meet the Company's policy obligations at their maturities or in
the event of an insured's death. Reserves may include unearned premiums, premium
deposits, claims reported but not yet paid, claims incurred but not reported and
claims in the process of settlement.
Coinsurance agreements regarding variable products will ordinarily require
the Company to establish separate accounts to hold policyholder-controlled
assets and liabilities. Such assets and liabilities will be segregated from the
Company's other assets and liabilities on both the Company's Bermuda regulatory
and GAAP statements. While the Company has legal responsibility for the proper
maintenance of such segregated accounts, the books and records of such accounts
initially will be maintained by Marsh & McLennan as part of its insurance
services contract with the Company.
The stability of the Company's annuity and interest-sensitive life
reinsurance reserves is expected to be enhanced by policy restrictions on
withdrawal of funds on policyholders. Withdrawals in excess of allowable
penalty-free amounts are assessed a surrender charge during a penalty period,
ranging from the first five years to the term of the policy.
INVESTMENT STRATEGY
Investments made by the Company will be governed by the general
requirements and guidelines established and approved by the Board of Directors
and by accounting regulations prescribed by Bermuda insurance laws and
regulations. The Company's investment policies focus on diversification of risk
and maintenance of liquidity, and include limits on investments in any one
business sector or issuer other than securities issued by the United States
Government, its agencies and instrumentalities. In addition, the Company's
investment policies prohibit any investment in equity securities or equity-based
futures and options other than pursuant to strategies intended to hedge the
investment risk associated with annuity and life insurance products which the
Company reinsures. The Company's investment guidelines provide that at least 75%
of its fixed income investment portfolio will be invested in a diversified
portfolio of fixed income securities that are rated investment grade by at least
one major rating agency, with the balance permitted to be invested in below
investment grade fixed income securities. The Company's investment policies
require its fixed income investment portfolio to maintain a weighted average
rating of "A". A fixed income security rated "A" by Standard & Poor's is
somewhat susceptible to the adverse effects of changes in circumstances and
economic conditions, however, the issuer's capacity to meet its financial
commitment on the security is still strong. The Company will not invest in any
fixed income securities in emerging markets or which are not rated by a major
rating agency. While any investment carries some risk, some of the risks
associated with lower-rated securities are greater than the risks associated
with investment grade securities. The risk of loss of principal or interest
through default is greater because lower-rated securities are usually unsecured
and are often subordinated to an issuer's other obligations. Additionally, the
issuers of these securities frequently have high debt levels and are thus more
sensitive to difficult economic conditions, individual corporate developments
and rising interest rates, which could impair an issuer's capacity or
willingness to meet its financial commitment on such lower-rated securities.
Consequently, the market price of these securities may be quite volatile, and
the risk of loss is greater.
The Company will be exposed to two primary sources of investment risk on
its fixed income investments: credit risk, relating to the uncertainty
associated with the continued ability of a given obligor to make timely payments
of principal and interest, and interest rate risk, relating to the market price
and/or cash flow variability associated with changes in market interest rates.
The Company will seek to manage credit risk through industry and issuer
diversification and asset allocation. The Company will seek to manage interest
rate
30
<PAGE> 32
risk by structuring its investments to match its anticipated liabilities under
reinsurance agreements, and through the use of hedging techniques. The
reinsurance of certain products may obligate the Company to credit a return with
respect to a reinsured policy which is derived from a market or other benchmark
rate. In order to manage the investment risks associated with these products,
the Company may enter into interest rate hedges or other similar transactions.
The Company may also enter into hedges to reduce potential mismatch between
durations of assets and liabilities and offset the potential cash flow impact
caused by interest rate changes. The Finance and Investment Committee of the
Company's Board of Directors will periodically review its investment portfolio,
which will include (i) a review of market conditions, (ii) an assessment of
default risk of its debt instruments, (iii) cash flow testing of its interest
sensitive assets and liabilities and (iv) a review of the performance of the
Investment Managers. The failure of the Investment Managers to manage the
Company's investments in a manner that is consistent with the Company's
anticipated need for liquidity, or which does not adequately match the Company's
anticipated liabilities under reinsurance agreements, could adversely affect the
Company.
The Company will also from time to time purchase or sell equity securities
or equity-based futures and options pursuant to strategies intended to hedge the
investment risk associated with annuity and life insurance products which the
Company reinsures. The failure of the Company to match its equity investments
accurately with the Company's equity-based liabilities could expose the Company
to the volatility of the equity markets and potential losses on such equity
securities and equity-based futures and options. In addition, the possible lack
of liquidity for certain futures and options could adversely affect the Company.
INVESTMENT MANAGERS
The Company expects to retain the services of a small number of investment
managers, including PIMCO, to provide professional management for the Company's
investment portfolio. It is anticipated that PIMCO will manage at least 50% of
the Company's total portfolio. PIMCO is one of the largest fixed income money
managers in the United States. PIMCO is a subsidiary of PIMCO Advisors L.P.
According to information supplied by PIMCO, as of September 30, 1997, PIMCO had
aggregate assets under management of approximately $108.5 billion, of which
approximately 90% consisted of fixed-income assets and approximately 10%
consisted of equity-related assets.
COMPETITION
The reinsurance industry is highly competitive. The Company expects to
compete with the major reinsurers. The Company's initial target markets will be
the United States, Canada, Europe, Australia and Bermuda. According to
management's estimates, there are approximately 25 reinsurers of annuity or life
insurance located in the United States. There are also numerous foreign
reinsurers which compete for reinsurance business in the United States and
abroad. These competitors primarily reinsure life insurance and health insurance
risks and, to a lesser degree, annuity risks. The Company is not aware of any
publicly traded reinsurance company that specializes in reinsuring annuity
risks. Most, if not all, of these competitors are expected to compete for
annuity reinsurance business in the future. Most of these competitors are well
established, have significant operating histories and strong claims paying
ratings, and have developed long-standing client relationships through existing
treaties with cedents.
Reinsurers compete on the basis of many factors, including financial
strength, pricing and other terms and conditions of reinsurance agreements,
reputation, service, and experience in the types of business underwritten. The
Company believes that the reinsurers with the largest market share in the United
States annuity and life reinsurance market include Lincoln National Corporation,
Transamerica Occidental Life Insurance Company, Reinsurance Group of America
Inc., General Re Corp., Life Re Corp. and Employers Reassurance Corporation, and
on a global basis also include Swiss Reinsurance and Munich Reinsurance. The
Company has no experience in competing with such other companies and there can
be no assurance that it will be successful.
Although the Company is in the process of applying to a major rating agency
for an insurance claims paying rating, the Company is not currently rated by any
such agency. Insurance ratings are used by insurers
31
<PAGE> 33
and reinsurance intermediaries as an important means of assessing the financial
strength and quality of reinsurers. In addition, because a ceding company's own
rating may be adversely affected by the lack of a rating of its reinsurer, if
the Company is unable to obtain a rating, it could be adversely affected in its
ability to obtain clients. No assurances can be given that a rating will be
issued to the Company upon completion of the Offering or that such rating, if
issued, will be at a level that will allow the Company to implement successfully
its business strategy. The lack of such a rating or an unsatisfactory rating may
dissuade a client from reinsuring with the Company. Certain rating agencies,
including A.M. Best, generally do not assign a rating to a company until it has
accumulated two to five consecutive years of representative operating
performance.
Annuity Reassurance is not licensed or admitted as an insurer in any
jurisdiction other than Bermuda. Because many jurisdictions do not permit
insurance companies to take credit for reinsurance obtained from unlicensed or
non-admitted insurers on their statutory financial statements unless appropriate
security measures are in place, it is anticipated that the Company's reinsurance
clients will require it to post a letter of credit or other collateral. Although
the Company has been negotiating with a commercial bank to obtain a standby
letter of credit facility, if the Company is unable to obtain such a facility,
or is unable to do so on commercially acceptable terms, its ability to operate
its business will be severely limited.
PROPERTY
The Company has leased office space in Hamilton, Bermuda from Marsh &
McLennan at which the principal offices of the Company and Annuity Reassurance
are located.
LEGAL PROCEEDINGS
The Company is not currently involved in any litigation or arbitration. The
Company anticipates that it will be subject to litigation and arbitration in the
ordinary course of business.
REGULATION
Bermuda
The Insurance Act of 1978, as amended, and Related Regulations. As a
holding company, the Company is not subject to Bermuda insurance regulations.
The Insurance Act, which regulates the insurance business of Annuity
Reassurance, provides that no person shall carry on an insurance business in or
from within Bermuda unless registered as an insurer under the Insurance Act by
the Minister of Finance (the "Minister"). The Minister, in deciding whether to
grant registration, has broad discretion to act as the Minister thinks fit in
the public interest. The Minister is required by the Insurance Act to determine
whether the applicant is a fit and proper body to be engaged in the insurance
business and, in particular, whether it has, or has available to it, adequate
knowledge and expertise. The registration of an applicant as an insurer is
subject to its complying with the terms of its registration and such other
conditions as the Minister may impose at any time.
An Insurance Advisory Committee appointed by the Minister advises the
Minister on matters connected with the discharge of the Minister's functions and
sub-committees thereof supervise and review the law and practice of insurance in
Bermuda, including reviews of accounting and administrative procedures.
The Insurance Act imposes on Bermuda insurance companies solvency and
liquidity standards and auditing and reporting requirements and grants to the
Minister powers to supervise, investigate and intervene in the affairs of
insurance companies. Certain significant aspects of the Bermuda insurance
regulatory framework are set forth below.
Classification of Insurers. The Insurance Act distinguishes between
insurers carrying on long-term business and insurers carrying on general
business. As Annuity Reassurance has been incorporated to provide reinsurance of
annuity and life insurance-related risks, it has been registered as a long-term
insurer in Bermuda and expects to be regulated as such under the Insurance Act.
An insurer carrying on long-term business is required to keep its accounts
in respect of its long-term business separate from any accounts kept in respect
of any other business and all receipts of its long-term
32
<PAGE> 34
business form part of its long-term business fund. No payment may be made from
an insurer's long-term business fund for any purpose other than a purpose
related to the insurer's long-term business, except insofar as such payment can
be made out of any surplus certified by the insurer's approved actuary to be
available for distribution otherwise than to policyholders. No insurer carrying
on long-term business may declare or pay a dividend to any person other than a
policyholder unless the value of the assets in its long-term business fund as
certified by the insurer's approved actuary exceeds the liabilities of the
insurer's long-term business by the margin prescribed by the Insurance Act, and
the amount of any such dividend may not exceed the aggregate of (i) that excess,
and (ii) any other funds properly available for payment of dividends, such as
funds arising out of business of the insurer other than long-term business.
Annuity Reassurance may not carry on general business (e.g., property
casualty, aviation and marine) without first being registered as a general
business insurer by the Minister under the Insurance Act. The Company has no
current intention to do so.
Cancellation of Insurer's Registration. An insurer's registration may be
cancelled by the Minister on certain grounds specified in the Insurance Act,
including failure of the insurer to comply with its obligations under the
Insurance Act or, if in the opinion of the Minister after consultation with the
Insurance Advisory Committee, the insurer has not been carrying on business in
accordance with sound insurance principles.
Independent Approved Auditor. Every registered insurer must appoint an
independent auditor who will annually audit and report on the Statutory
Financial Statements and the Statutory Financial Return of the insurer, which
are required to be filed annually with the Registrar of Companies in Bermuda.
The independent auditor of the insurer must be approved by the Minister and may
be the same person or firm which audits the insurer's financial statements and
reports for presentation to its shareholders. Annuity Reassurance's independent
auditor is KPMG Peat Marwick.
Approved Actuary. Annuity Reassurance, as a registered long-term insurer,
is required to submit an annual actuary's certificate when filing its Statutory
Financial Return. The actuary's certificate shall state whether or not, in the
opinion of the insurer's approved actuary, the aggregate amount of the
liabilities of the insurer in relation to long-term business as at the end of
the relevant year exceeded the aggregate amount of those liabilities as shown in
the insurer's statutory balance sheet. The approved actuary, who will normally
be a qualified life actuary, must be approved by the Minister. Annuity
Reassurance's approved actuary is John Rayner of Abbott Associates Limited.
Statutory Financial Statements. An insurer must prepare annual Statutory
Financial Statements. The Insurance Act prescribes rules for the preparation and
substance of such Statutory Financial Statements (which include, in statutory
form, a balance sheet, income statement, a statement of capital and surplus and
notes thereto). The insurer is required to give detailed information and
analyses regarding premiums, claims, reinsurance and investments. The Statutory
Financial Statements are not prepared in accordance with United States GAAP and
are distinct from the financial statements prepared for presentation to the
insurer's shareholders under the Companies Act 1981 of Bermuda, which financial
statements may be prepared in accordance with United States GAAP. An insurer is
required to submit the annual Statutory Financial Statements as part of the
annual Statutory Financial Return.
Minimum Solvency Margin. The Insurance Act provides that the value of the
long-term business assets of an insurer carrying on long-term business must
exceed the amount of its long-term business liabilities by at least $250,000.
Annual Statutory Financial Return. Annuity Reassurance is required to file
with the Registrar of Companies in Bermuda a Statutory Financial Return no later
than four months after its financial year end (unless specifically extended).
The Statutory Financial Return includes, among other matters, a report of the
approved independent auditor on the Statutory Financial Statements of the
insurer, a solvency certificate, the Statutory Financial Statements themselves
and a certificate of the approved actuary. The solvency certificate must be
signed by the principal representative and at least two directors of the insurer
who are required to certify whether the Minimum Solvency Margin has been met,
and the independent approved auditor is required to state whether in its opinion
it was reasonable for the directors to so certify. Where an insurer's
33
<PAGE> 35
accounts have been audited for any purpose other than compliance with the
Insurance Act, a statement to that effect must be filed with the Statutory
Financial Return.
Supervision, Investigation and Intervention. The Minister may appoint an
inspector with extensive powers to investigate the affairs of an insurer if the
Minister believes that an investigation is required in the interest of the
insurer's policyholders or persons who may become policyholders. In order to
verify or supplement information otherwise provided to the Minister, the
Minister may direct an insurer to produce documents or information relating to
matters connected with the insurer's business.
If it appears to the Minister that there is a risk of the insurer becoming
insolvent, or that it is in breach of the Insurance Act or any conditions
imposed upon its registration, the Minister may, among other things, direct the
insurer (i) not to take on any new insurance business, (ii) not to vary any
insurance contract if the effect would be to increase the insurer's liabilities,
(iii) not to make certain investments, (iv) to realize certain investments, (v)
to maintain in Bermuda, or transfer to the custody of a Bermuda bank, certain
assets, (vi) not to declare or pay any dividends or other distributions or to
restrict the making of such payments, and/or (vii) to limit its premium income.
An insurer is required to maintain a principal office in Bermuda and to
appoint and maintain a principal representative in Bermuda. For the purpose of
the Insurance Act, the principal office of Annuity Reassurance is at the
Company's offices in Hamilton, Bermuda, and Lawrence S. Doyle, the Company's
President and Chief Executive Officer, is the principal representative of
Annuity Reassurance. Without a reason acceptable to the Minister, an insurer may
not terminate the appointment of its principal representative, and the principal
representative may not cease to act as such, unless 30 days' notice in writing
to the Minister is given of the intention to do so. It is the duty of the
principal representative, within 30 days of reaching the view that there is a
likelihood of the insurer for which the principal representative acts becoming
insolvent or that a reportable "event" has, to the principal representative's
knowledge, occurred or is believed to have occurred, to make a report in writing
to the Minister setting out all the particulars of the case that are available
to the principal representative. Examples of such a reportable "event" include
failure by the insurer to comply substantially with a condition imposed upon the
insurer by the Minister relating to a solvency margin or a liquidity or other
ratio.
Certain Bermuda Law Considerations. The Company and Annuity Reassurance
have been designated as non-resident for exchange control purposes by the
Bermuda Monetary Authority whose permission for the issue and transfer of the
Common Shares has been obtained. This designation allows the Company and Annuity
Reassurance to engage in transactions, or to pay dividends to non-residents of
Bermuda who are holders of the Common Shares, in currencies other than the
Bermuda Dollar.
The transfer of the Common Shares between persons regarded as non-resident
in Bermuda for exchange control purposes and the issue of the Common Shares
after the completion of the Offering to such persons may be effected without
specific consent under the Exchange Control Act 1972 and regulations thereunder.
Issues and transfers of the Common Shares to any person regarded as resident in
Bermuda for exchange control purposes requires specific prior approval under the
Exchange Control Act 1972.
In accordance with Bermuda law, share certificates are issued only in the
names of corporations or individuals. In the case of an applicant acting in a
special capacity (for example, as an executor or trustee), certificates may, at
the request of the applicant, record the capacity in which the applicant is
acting. Notwithstanding the recording of any such special capacity, the Company
is not bound to investigate or incur any responsibility in respect of the proper
administration of any such estate or trust. The Company will take no notice of
any trust applicable to any of its Common Shares whether or not it had notice of
such trust.
As "exempted companies," the Company and Annuity Reassurance are exempt
from Bermuda laws restricting the percentage of share capital that may be held
by non-Bermudians, but as exempted companies they may not participate in certain
business transactions, including (i) the acquisition or holding of land in
Bermuda (except that required for their business and held by way of lease or
tenancy for terms of not more than 21 years) without the express authorization
of the Bermuda legislature, (ii) the taking of mortgages on land in Bermuda to
secure an amount in excess of $50,000 without the consent of the Minister, (iii)
the acquisition of any bonds or debentures secured by any land in Bermuda, other
than certain types of Bermuda
34
<PAGE> 36
government securities, or (iv) the carrying on of business of any kind in
Bermuda, including insuring domestic risks, except in furtherance of their
business carried on outside Bermuda, and, in the case of Annuity Reassurance,
reinsuring any long-term business risks undertaken by any company incorporated
in Bermuda and permitted to engage in the insurance and reinsurance business, or
under a license granted by the Minister.
United States and Other
Annuity Reassurance is not registered or licensed as an insurance company
in any jurisdiction except Bermuda. The insurance laws of each state in the
United States and of many other jurisdictions regulate the sale of insurance and
reinsurance within their jurisdiction by insurers, such as Annuity Reassurance,
which are not admitted to do business within such jurisdiction. With some
exceptions, such sale of insurance and reinsurance within a jurisdiction where
the insurer is not admitted to do business is prohibited. Annuity Reassurance
expects to conduct its business through its Bermuda office either directly or
through intermediaries, and does not intend to maintain an office, and does not
expect its personnel to solicit, advertise, settle claims or conduct other
activities which may constitute the transaction of the business of insurance, in
any jurisdiction in which it is not licensed or otherwise authorized to engage
in such activities.
In addition to the regulatory requirements imposed by the jurisdictions in
which a reinsurer is licensed, a reinsurer's business operations are affected by
regulatory requirements in other jurisdictions in which its ceding companies are
located governing "credit for reinsurance" which are imposed on its ceding
companies. In general, a ceding company which obtains reinsurance from a
reinsurer that is licensed, accredited or approved by the jurisdiction in which
the ceding company files statutory financial statements is permitted to reflect
in its statutory financial statements a credit in an aggregate amount equal to
the liability for unearned premiums and loss reserves and loss expense reserves
ceded to the reinsurers. Many jurisdictions also permit ceding companies to take
credit on their statutory financial statements for reinsurance obtained from
unlicensed or non-admitted reinsurers if adequate security is posted. Because
Annuity Reassurance is not licensed, accredited or approved in any jurisdiction
except Bermuda, Annuity Reassurance expects that its reinsurance contracts will
require it to post a letter of credit or other security.
35
<PAGE> 37
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The table below sets forth the names, ages and titles of the directors and
executive officers of the Company and Annuity Reassurance. Prior to the
effective date of the Registration Statement of which this Prospectus is a part,
the Company expects to elect up to ten additional directors, none of whom will
be officers, directors, employees or beneficial owners of Inter-Atlantic or
officers or employees of the Company or Annuity Reassurance.
<TABLE>
<CAPTION>
POSITION WITH
THE COMPANY AND
NAME AGE ANNUITY REASSURANCE
- ---------------------------- --- -------------------------------------------------
<S> <C> <C>
Lawrence S. Doyle........... 54 President, Chief Executive Officer and Director
Andrew S. Lerner............ 32 Interim Chief Financial Officer and Interim
Treasurer
Frederick S. Hammer......... 61 Chairman and Director
Robert M. Lichten........... 57 Deputy Chairman and Director
Michael P. Esposito, Jr. ... 58 Director
Charles G. Collis, Jr.* .... 35 Director
</TABLE>
- ---------------
* Mr. Collis is an attorney in the law firm of Conyers Dill & Pearman, the
Company's Bermuda counsel. He has indicated his intention to resign as a
director of the Company upon completion of the Offering prior to the
expiration of his term as a director. Mr. Collis has been an attorney at
Conyers Dill & Pearman since 1990.
Lawrence S. Doyle, age 54, was elected President, Chief Executive Officer
and a director of the Company upon its formation. Mr. Doyle was the President
and Chief Executive Officer of GCR Holdings Limited and its subsidiary Global
Capital Reinsurance Limited from 1993 until their acquisition by EXEL Limited in
1997, whereupon Mr. Doyle became an Executive Vice President of EXEL. Prior
thereto, Mr. Doyle was Senior Vice President of the Hartford Insurance Group in
charge of international operations, where he was employed for 27 years, the last
six of which he was also the President of Hartford Fire International.
Andrew S. Lerner, age 32, was elected Interim Chief Financial Officer and
Interim Treasurer of the Company upon its formation. Mr. Lerner has been Vice
President of Inter-Atlantic since 1995. Prior thereto, Mr. Lerner served as an
investment banker in the Financial Institutions Group of Smith Barney Inc. from
1991 to 1995 and in its Mortgage and Asset Finance Group from 1987 to 1989. The
Company is presently seeking to hire a permanent Chief Financial Officer.
Frederick S. Hammer, age 61, was elected Chairman of the Board and a
director of the Company upon its formation. Mr. Hammer has been Vice Chairman of
Inter-Atlantic since 1994. He is non-executive Chairman of the Board of National
Media Corporation and serves as a director of IKON Office Solutions, Inc.,
Search Financial Services, Inc., Provident American Corporation and Medallion
Financial Corporation. Mr. Hammer served as Chairman and Chief Executive Officer
of Mutual of America Capital Management Corporation from 1993 to 1994 and as
President of SEI Asset Management Group from 1989 to 1993. From 1985 to 1989,
Mr. Hammer was Chairman and Chief Executive Officer of Meritor Savings Bank, and
prior thereto he was an Executive Vice President of The Chase Manhattan
Corporation, where he was responsible for its global consumer activities.
Robert M. Lichten, age 57, was elected Deputy Chairman of the Board and a
director of the Company upon its formation. Mr. Lichten has been Vice Chairman
of Inter-Atlantic since 1994. Mr. Lichten served as a Managing Director of Smith
Barney Inc. from 1990 to 1994 and as a Managing Director of Lehman Brothers Inc.
from 1988 to 1990. Prior thereto, he served as an Executive Vice President of
The Chase Manhattan Corporation.
Michael P. Esposito, Jr., age 58, was elected a director of the Company
upon its formation. Mr. Esposito has been Vice Chairman of Inter-Atlantic since
1995. He has been non-executive Chairman of the Board of
36
<PAGE> 38
EXEL Limited since 1995 and a director since 1986 and serves as a director of
Mid Ocean Limited, Risk Capital Holdings, Inc. and Forest City Enterprises, Inc.
Mr. Esposito served as Executive Vice President and Chief Corporate Compliance,
Control and Administration Officer of The Chase Manhattan Corporation from 1992
to 1995, having previously served as Executive Vice President and Chief
Financial Officer from 1987 to 1992.
PROVISIONS GOVERNING THE COMPANY'S BOARD OF DIRECTORS
Number and Terms of Directors
The Company's Bye-Laws provide that the Board of Directors shall be divided
into three classes. The first class, whose initial term expires at the first
annual meeting of the Company's shareholders following completion of the
Offering, is comprised of Mr. Collis; the second class, whose initial term
expires at the second annual meeting of the Company's shareholders following
completion of the Offering, is comprised of Messrs. Lichten and Esposito; and
the third class, whose initial term expires at the third annual meeting of the
Company's shareholders following completion of the Offering, is comprised of
Messrs. Doyle and Hammer. Following their initial terms, all classes of
directors shall be elected to three-year terms.
Committees of the Board
The Board has established Executive, Finance and Investment, Audit and
Compensation committees. Each committee reports to the Board.
Executive Committee. The Board has appointed an Executive Committee to
exercise all of the authority of the Board between meetings of the full Board.
The Executive Committee does not, however, have authority to take any action on
matters committed or reserved by Bermuda law, the Bye-Laws or resolution of the
Board of Directors to the full Board or another committee of the Board. In
addition, the Executive Committee may review any aspects of the Company's
business and report or make recommendations to the Board thereon. The Executive
Committee presently consists of three directors of the Company (presently
Messrs. Hammer (Chairman), Collis, and Doyle).
Finance and Investment Committee. The Board has appointed a Finance and
Investment Committee to establish and monitor the Company's investment policies.
The Finance and Investment Committee presently consists of two members
(presently Messrs. Lichten (Chairman) and Esposito).
Audit Committee. The Board has appointed an Audit Committee to review the
Company's internal administrative and accounting controls and to recommend to
the Board the appointment of independent auditors. The Audit Committee presently
consists of two directors of the Company (presently Messrs. Collis (Chairman)
and Esposito), neither of whom is an officer or employee of the Company or
Annuity Reassurance.
Compensation Committee. The Board has appointed a Compensation Committee
to review the performance of corporate officers and the Company's compensation
policies and procedures and to make recommendations to the Board with respect to
such policies and procedures. The Compensation Committee also administers any
stock option plans and incentive compensation plans of the Company. The
Compensation Committee presently consists of two directors of the Company
(presently Messrs. Esposito (Chairman) and Lichten), neither of whom is an
officer or employee of the Company or Annuity Reassurance.
Compensation of Directors
Directors who are employees of the Company will not be paid any fees or
additional compensation for services as members of the Company's Board of
Directors or any committee thereof. Non-employee directors will receive cash in
the amount of $20,000 per annum and $1,000 per board or committee meeting
attended. The Chairman of the Board and Committee Chairmen will receive an
additional $1,000 per annum. Non-employee directors who are not directors,
officers or employees of Inter-Atlantic will also receive options to acquire
15,000 Common Shares upon the later of (i) their election to the Company's Board
of Directors and (ii) the consummation of the Offering. Such options become
exercisable in three equal annual installments
37
<PAGE> 39
commencing on the first anniversary of the date of grant and will have an
exercise price equal to the fair market value of the Common Shares on the date
of grant. All non-employee directors will receive options to acquire 2,000
Common Shares on the date of each annual meeting of the Company's shareholders.
Such options will be immediately exercisable if granted after the first
anniversary of the consummation of the Offering and will have an exercise price
equal to the fair market value of the Common Shares on the date of grant. If
such options are granted before the first anniversary of the consummation of the
Offering, they will not become exercisable until such first anniversary. All
directors will be reimbursed for travel and other expenses incurred in attending
meetings of the Board or committees thereof.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is currently composed of Messrs. Esposito
(Chairman) and Lichten. No member of the Compensation Committee is or was an
officer or employee of the Company or Annuity Reassurance, nor has any executive
officer of the Company served as a director or a member of the compensation
committee of any other company, one of whose executive officers served as a
member of the Company's Board or Compensation Committee.
EXECUTIVE COMPENSATION
The Company did not pay any compensation to its executive officer during
the fiscal period ended December 31, 1997. Commencing on January 1, 1998,
Lawrence S. Doyle will begin to receive compensation from the Company.
EMPLOYMENT AGREEMENTS
The Company, Annuity Reassurance, and Mr. Doyle have entered into an
Employment Agreement which is effective as of January 1, 1998. The Employment
Agreement provides that Mr. Doyle will serve as Chief Executive Officer and
President of the Company and Annuity Reassurance, for a period ending on the
third anniversary of the consummation of the Offering. Pursuant to the terms of
his employment agreement, commencing on January 1, 1998, Mr. Doyle will receive
an annual salary of $240,000. Upon consummation of the Offering, Mr. Doyle's
salary will increase to $350,000 per year, he will be eligible to participate in
all employee benefit programs maintained by the Company, and he will receive a
monthly housing and travel allowance of $8,333. Mr. Doyle's employment agreement
also provides that he will receive, subject to the consummation of the Offering,
options to purchase Common Shares equal to three percent of the Common Shares
issued in the Offering. The exercise price of such options is equal to the
initial public offering price per share. The options become exercisable in three
equal annual installments beginning on the first anniversary of the consummation
of the Offering. In addition, Mr. Doyle's Employment Agreement provides that he
will not, for a period of time following the termination of his employment with
the Company, acquire any financial or beneficial interest (unless such interest
is less than one percent) in, provide consulting or other services to, be
employed by, or own, manage, operate or control any entity engaged in any
business similar to that of the Company at the time of the termination of his
employment. Mr. Doyle's Employment Agreement also provides that he will keep
secret and retain in the strictest confidence all confidential matters that
relate to the Company or any affiliate of the Company. Mr. Doyle's Employment
Agreement provides that upon a change in control of the Company, if Mr. Doyle's
employment with the Company is terminated without serious cause or if he
terminates his employment with the Company for good reason, Mr. Doyle's options
to purchase Common Shares will become exercisable immediately, and Mr. Doyle
will be entitled to receive a lump sum payment equal to two times his annual
base salary as of the date of termination.
STOCK OPTION PLAN
The Company's Board of Directors adopted the Annuity and Life Re
(Holdings), Ltd. Initial Stock Option Plan on December 3, 1997 (the "Stock
Option Plan"). The Stock Option Plan is intended to attract and retain selected
employees, directors and consultants (collectively, the "Eligible Individuals")
and to motivate them to exercise their best efforts on behalf of the Company and
any subsidiary or parent of the Company (a "Related Corporation"). Options
granted under the Stock Option Plan may be "incentive stock
38
<PAGE> 40
options" ("ISOs") within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"), or may be options not intended to be ISOs
("Non-Qualified Stock Options"). The aggregate maximum number of Common Shares
for which options may be granted under the Stock Option Plan will be equal to
the lesser of (i) five percent of the Common Shares issued in the Offering plus
150,000 Common Shares or (ii) 1,700,000 Common Shares. Of the shares reserved
under the Stock Option Plan, 150,000 Common Shares are reserved for grants to
non-employee directors. The balance of the Common Shares is reserved for grants
to employees and consultants. No option may be granted under the Stock Option
Plan after December 3, 2007, although options outstanding on December 3, 2007
may extend beyond that date.
Administration. The Stock Option Plan is administered by the Compensation
Committee, whose members are designated by the Company's Board of Directors.
Under the terms of the Stock Option Plan, the Compensation Committee must
consist of at least two directors. It is intended (although not required) that
each member of the Compensation Committee administering the Plan be a
"non-employee" director within the meaning of Rule 16b-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and an "outside director"
within the meaning of Treasury Regulation sec.1.162-27(e)(3) or any successor
provision. If the Compensation Committee does not consist solely of two or more
non-employee directors (within the meaning of Rule 16b-3), each option must be
approved by the full Board. The Compensation Committee has the authority to (i)
select the Eligible Individuals to be granted ISOs and Non-Qualified Stock
Options under the Stock Option Plan, (ii) grant options on behalf of the Company
and (iii) set the date of grant and other terms of the options, including the
times and the price at which options will be granted. The Compensation Committee
may, in its discretion, accelerate the date on which an option may be exercised.
Eligibility. Only employees of the Company and/or a Related Corporation
are eligible to receive ISOs under the Stock Option Plan. Non-Qualified Stock
Options may be granted to all Eligible Individuals. (An Eligible Individual who
receives an option grant shall hereinafter be referred to as an "Optionee.") As
of December 15, 1997, there were two employees of the Company eligible to
receive ISOs and six Eligible Individuals (including employees) eligible to
receive non-qualified stock options.
Terms and Conditions of Option. All options terminate on the earliest of:
(i) the expiration of the term specified in the option document, which may not
exceed ten years (five years, in the case of an ISO if the Optionee on the date
of grants owns, directly or by attribution, shares possessing more than 10% of
the total combined voting power of all classes of stock of the Company); or (ii)
an accelerated expiration date if the Optionee's employment or service as a
director terminates before the expiration of the term specified in the option
document, unless otherwise provided in the stock option agreement related to the
option. However, if the Optionee's employment or service as a director
terminates for "cause" (as defined in the Stock Option Plan) prior to the
expiration date of the option, such option will terminate immediately.
The option price for an ISO may not be less than 100% of the fair market
value of the shares subject to the option on the date that the option is
granted. If an ISO is granted to an employee who then owns, directly or by
attribution under the Code, Common Shares possessing more than 10% of the total
combined voting power of all classes of shares of the Company, the option price
must be at least 110% of the fair market value of the shares on the date that
the option is granted.
An Optionee may, in the discretion of the Committee, pay for Common Shares
covered by his or her option (i) in cash or its equivalent, (ii) in Common
Shares previously acquired by the Optionee (subject, in the discretion of the
Compensation Committee, to certain holding period requirements), (iii) through a
combination or (i) and (ii) above or (iv) by delivering a properly executed
notice of exercise of the option to the Company and a broker, with irrevocable
instructions to the broker promptly to deliver to the Company the amount of sale
or loan proceeds necessary to pay the exercise price of the option.
Option Document; Restriction on Transferability. All options will be
evidenced by a written option document containing provisions consistent with the
Stock Option Plan and such other provisions as the Compensation Committee deems
appropriate. No option granted under the Stock Option Plan may be transferred,
except by will or the laws of descent and distribution. If the Optionee is
married at the time of exercise and if the Optionee requests at the time of
exercise, the certificate will be registered in the name of the Optionee and his
or her spouse, jointly, with right of survivorship.
39
<PAGE> 41
Amendments to Options and the Stock Option Plan; Discontinuance of the
Stock Option Plan. Subject to the provisions of the Stock Option Plan, the
Compensation Committee may not amend an option document without an Optionee's
consent if the amendment is unfavorable to the Optionee. The Board of Directors
may suspend or discontinue the Stock Option Plan or amend it in any respect
whatsoever, except that, without the approval of the holders of a majority of
the shares of the Company present, in person or by proxy, and entitled to vote
at a duly called meeting, no such action may be taken, with respect to ISOs, to
change the class of employees eligible to participate in the Stock Option Plan,
increase the maximum number of Common Shares with respect to which ISOs may be
granted under the Stock Option Plan (except as permitted under the Stock Option
Plan with respect to capital adjustments) or extend the duration of the Stock
Option Plan. Shareholder approval is also required for any amendment that
requires shareholder approval to comply with Treasury Regulation (S)1.162-27(e)
or any successor thereto, if such compliance is intended.
Registration Statement on Form S-8. The Company intends to file with the
Commission a Registration Statement on Form S-8 relating to the Stock Option
Plan promptly following the first anniversary of the consummation of the
Offering.
Stock Option Grants. The following table sets forth information concerning
the stock options to be granted upon consummation of the Offering by the Company
to its executive officers under the Stock Option Plan.
INITIAL OPTION GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED ANNUAL
---------------------------------------------------------------- RATE OF COMMON SHARE
NUMBER OF PRICE APPRECIATION FOR
COMMON SHARES PERCENT OF TOTAL EXERCISE OPTION TERM
UNDERLYING OPTIONS GRANTED TO PRICE EXPIRATION -------------------------
NAME OPTIONS GRANTED EMPLOYEES PER SHARE DATE 5% 10%
- ----------------- --------------- ------------------ --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Lawrence S.
Doyle.......... 502,500(1) 100% (2) (3) $4,740,293 $12,012,834
</TABLE>
- ---------------
(1) If the Underwriters' over-allotment option is exercised in full, the number
of Common Shares underlying Mr. Doyle's options will increase to 577,875
Common Shares.
(2) The exercise price per share is equal to the initial public offering price
per share.
(3) The options expire on the tenth anniversary of the consummation of the
public offering.
MANAGEMENT INCENTIVE PLAN
The Company's Management Incentive Plan provides that incentive bonuses may
be awarded to the Company's senior executives based on the operating performance
of the Company measured against targets established by the Compensation
Committee. Such bonuses are capped at $3.0 million per year in the aggregate.
Mr. Doyle's employment agreement provides that he is entitled to 60% of the
amount available for bonuses up to a maximum of $2.0 million per year. The
remainder of any amount available for bonuses will be allocated amongst the
Company's senior executives in the discretion of the Compensation Committee of
the Board of Directors.
40
<PAGE> 42
PRINCIPAL STOCKHOLDERS
The table below sets forth the expected beneficial ownership of Common
Shares, after giving effect to the Offering, by all persons who will
beneficially own 5% or more of the Common Shares and by each director and
executive officer of the Company and by the directors and executive officers of
the Company as a group (assuming no exercise of the Underwriters' over-allotment
option).
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNERS* NUMBER OF SHARES PERCENT OF CLASS
- -------------------------------------------------------------- ---------------- ----------------
<S> <C> <C>
Lawrence S. Doyle(1).......................................... 0 --
Andrew S. Lerner(2)........................................... 0 --
Frederick S. Hammer(3)........................................ 0 --
Robert M. Lichten(3).......................................... 0 --
Michael P. Esposito, Jr.(3)................................... 0 --
Charles G. Collis, Jr......................................... 0 --
All directors and executive officers as a group (six
persons).................................................... 0 --
</TABLE>
- ---------------
* The address for each beneficial owner is c/o Annuity and Life Re (Holdings),
Ltd., Victoria Hall, Victoria Street, P.O. Box HM1262, Hamilton, HM FX,
Bermuda.
(1) Does not include 502,500 Common Shares (577,875 Common Shares if the
Underwriters' over-allotment option is exercised in full) issuable upon
exercise of outstanding options which are not currently exercisable.
(2) Does not include 201,000 Common Shares (231,150 Common Shares if the
Underwriters' over-allotment option is exercised in full) purchasable upon
exercise of Class A Warrants which are not currently exercisable.
(3) Does not include 431,313 Common Shares (496,009 Common Shares if the
Underwriters' over-allotment option is exercised in full) purchasable upon
exercise of Class A Warrants which are not currently exercisable.
The Purpose Trust currently owns 12,000 Common Shares, which constitute all
of the currently outstanding Common Shares. Upon consummation of the Offering,
the Purpose Trust has agreed to sell such Common Shares to the Company for an
aggregate price of $12,000 and such Common Shares will be cancelled.
41
<PAGE> 43
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The following descriptions summarize certain relationships and the terms of
certain agreements of the Company. Such summaries of agreements do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, all of the provisions of the relevant agreements. A copy of each
such agreement is filed as an exhibit to the Registration Statement of which
this Prospectus is a part.
Certain officers and directors of the Company (Messrs. Esposito, Hammer,
Lerner and Lichten) are owners, directors and/or officers of Inter-Atlantic.
Inter-Atlantic is a United States domiciled corporation with a broker-dealer
subsidiary which provides investment banking services for insurance companies
and other financial services firms. Inter-Atlantic has loaned $12,000 to the
Purpose Trust which will be repaid upon consummation of the Offering.
Inter-Atlantic Securities Corp., a subsidiary of Inter-Atlantic, has entered
into an agreement with the Company pursuant to which Inter-Atlantic Securities
Corp. provides services to the Company. The Company has agreed to reimburse
Inter-Atlantic Securities Corp. for expenses incurred in connection with the
formation of the Company and the Offering, including payments made to third
parties, which are estimated to be approximately $1.0 million. Inter-Atlantic
Securities Corp. will also receive a fee upon consummation of the Offering equal
to $2.0 million as compensation for financial advisory services provided to the
Company in connection with its formation and the Offering. See "Use of
Proceeds." Under this agreement, Inter-Atlantic Securities Corp. has agreed to
perform or supervise the performance by certain third parties of a variety of
services in connection with the formation of the Company and the Offering,
including assisting in recruiting senior management, obtaining necessary
governmental permits, retaining underwriters in connection with the Offering and
such other services as the Company deems appropriate. In addition,
Inter-Atlantic Securities Corp. will provide financial advisory and other
services to the Company for a term of five years from the date of consummation
of the Offering in exchange for quarterly payments at the annual rate of
$600,000 beginning on the first anniversary of the consummation of the Offering.
In exchange for such fees, Inter-Atlantic Securities Corp. will assist the
Company in the development of products, financial planning, management of assets
and liabilities, international marketing efforts and such other services as the
Company may request.
In connection with the formation of the Company, six individuals employed
by Inter-Atlantic (Messrs. Esposito, Hammer, Lerner, Lichten, William S. Ogden,
Jr. and Arnold Welles) purchased for $238,000 in the aggregate Class A Warrants
to purchase up to an aggregate of 2,010,000 Common Shares. The exercise price of
the Class A Warrants will be equal to the initial public offering price per
share, subject to customary anti-dilution adjustments for certain events,
including stock splits and the issuance of Common Shares at a price below the
initial public offering price per share. The Class A Warrants become exercisable
in three equal annual installments commencing on the first anniversary of the
consummation of the Offering. In the event of a change of control of the
Company, the Class A Warrants then outstanding will become immediately
exercisable. If the Underwriters' over-allotment option is exercised in full,
the Class A Warrants will entitle the holders thereof to purchase up to an
aggregate of 2,311,500 Common Shares. The Class A Warrants will expire on
January 15, 2008. The holders of the Class A Warrants have also been granted
rights to require the Company to register the Common Shares underlying the Class
A Warrants, which rights become exercisable on the first anniversary of the
consummation of the Offering.
It is contemplated that Lawrence S. Doyle, the Company's President and
Chief Executive Officer, and certain officers, directors or employees of
Inter-Atlantic will purchase Common Shares in the Offering.
42
<PAGE> 44
DESCRIPTION OF CAPITAL STOCK
The following description of the Company's capital stock summarizes certain
provisions of the Company's Memorandum of Association and Bye-Laws. Such
summaries do not purport to be complete and are subject to, and are qualified in
their entirely by reference to, all of the provisions of the Memorandum of
Association and Bye-Laws. A copy of the Memorandum of Association and Bye-Laws
are filed as exhibits to the Registration Statement of which this Prospectus is
a part.
GENERAL
The Company's authorized share capital upon consummation of the Offering
will consist of: (i) 100,000,000 Common Shares, of which 16,750,000 Common
Shares will be outstanding and (ii) 50,000,000 preferred shares, par value $1.00
per share (the "Preferred Shares"), none of which will be outstanding. In
addition an aggregate of 2,010,000 Common Shares will be issuable upon exercise
of outstanding Class A Warrants and an aggregate of 502,500 Common Shares will
be issuable upon exercise of outstanding options, in each case, subject to
adjustment as provided therein. If the Underwriters' over-allotment option is
exercised in full, the number of Common Shares issuable upon exercise of
outstanding Class A Warrants will increase to an aggregate of 2,311,500 Common
Shares and the number of Common Shares issuable upon exercise of outstanding
options will increase to an aggregate of 577,875 Common Shares. None of the
outstanding Class A Warrants or options are currently exercisable. The Purpose
Trust currently owns 12,000 Common Shares, which constitute all of the currently
outstanding Common Shares. Upon consummation of the Offering, the Purpose Trust
has agreed to sell such Common Shares to the Company for an aggregate price of
$12,000, and such Common Shares will be cancelled.
COMMON SHARES
Holders of the Common Shares have no pre-emptive, redemption, conversion or
sinking fund rights. The quorum required for a general meeting of shareholders
is two or more persons present in person and representing in person or by proxy
more than 50% of the Common Shares (without giving effect to the limitation on
voting rights described below). Subject to the limitation on voting rights
described below, holders of Common Shares are entitled to one vote per share on
all matters submitted to a vote of holders of Common Shares. Most matters to be
approved by holders of Common Shares require approval by a simple majority of
the votes cast at a meeting at which a quorum is present. Furthermore, a
resolution to remove the Company's auditor before the expiration of the
auditor's term of office must be approved by the holders of at least two-thirds
of the Common Shares present in person or by proxy and voting thereon (after
giving effect to the limitation on voting rights) at a meeting at which a quorum
is present.
In the event of a liquidation, dissolution or winding-up of the Company,
the holders of Common Shares are entitled to share equally and ratably in the
assets of the Company, if any remain after the payment of all debts and
liabilities of the Company and the liquidation preference of any outstanding
Preferred Shares.
Limitation on Voting Rights. Each Common Share has one vote on a poll of
the shareholders, except that, if and for as long as the number of issued
Controlled Shares (as defined below) of any person would constitute 10% or more
of the combined voting power of the issued Common Shares of the Company (after
giving effect to any prior reduction in voting power as described below), each
such issued Controlled Share, regardless of the identity of the registered
holder thereof, will confer only a fraction of a vote as determined by the
following formula (the "Formula"):
(T - C) / (9.1 X C)
Where: "T" is the aggregate number of votes conferred by all the issued Common
Shares immediately prior to that application of the Formula with respect
to any particular shareholder, adjusted to take into account any prior
reduction taken with respect to any other shareholder pursuant to the
"sequencing provision" described below; and
"C" is the number of issued Controlled Shares attributable to such
person. "Controlled Shares" of any person refers to all Common Shares
owned by such person, whether (i) directly, (ii) with respect
43
<PAGE> 45
to persons who are United States persons, by application of the
attribution and constructive ownership rules of Sections 958(a) and
958(b) of the Code or (iii) beneficially, directly or indirectly, within
the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and the rules and regulations
thereunder.
The Formula will be applied successively as many times as may be necessary
to ensure that no person will be a 10% Shareholder (as defined below) at any
time (the "sequencing provision"). For the purposes of determining the votes
exercisable by shareholders as of any date, the Formula will be applied to the
shares of each shareholder in declining order based on the respective numbers of
total Controlled Shares attributable to each shareholder. Thus, the Formula will
be applied first to the votes of shares held by the shareholder to whom the
largest number of total Controlled Shares is attributable and thereafter
sequentially with respect to the shareholder with the next largest number of
total Controlled Shares. In each case, calculations are made on the basis of the
aggregate number of votes conferred by the issued Common Shares as of such date,
as reduced by the application of the Formula to any issued Common Shares of any
shareholder with a larger number of total Controlled Shares as of such date.
"10% Shareholder" means a person who owns, in aggregate, (i) directly, (ii) with
respect to persons who are United States persons, by application of the
attribution and constructive ownership rules of Sections 958(a) and 958(b) of
the Code or (iii) beneficially, directly or indirectly, within the meaning of
Section 13(d)(3) of the Exchange Act, issued Common Shares of the Company
carrying 10% or more of the total combined voting rights attaching to all issued
shares.
The directors are empowered to require any shareholder to provide
information as to that shareholder's beneficial share ownership, the names of
persons having beneficial ownership of the shareholder's shares, relationships
with other shareholders or any other facts the directors may deem relevant to a
determination of the number of Controlled Shares attributable to any person. The
directors may disregard the votes attached to shares of any holder failing to
respond to such a request or submitting incomplete or untrue information.
The directors retain certain discretion to make such final adjustments to
the aggregate number of votes attaching to the Common Shares of any shareholder
that they consider fair and reasonable in all the circumstances to ensure that
no person will be a 10% Shareholder at any time.
Restrictions on Transfer. The Bye-Laws contain several provisions
restricting the transferability of Common Shares. The directors are required to
decline to register a transfer of shares if they have reason to believe that the
result of such transfer would be to increase the number of total Controlled
Shares of any person to 10% or more of the issued Common Shares without giving
effect to the limitation on voting rights described above. Similarly, the
Company is restricted from issuing or repurchasing Common Shares if such
issuance or repurchase would increase the number of total Controlled Shares of
any person to 10% or more of the issued Common Shares without giving effect to
the limitations on voting rights described above.
The directors also may, in their absolute discretion, decline to register
the transfer of any Common Shares if they have reason to believe (i) that such
transfer may expose the Company, any subsidiary thereof, any shareholder or any
person ceding insurance to the Company or any such subsidiary to adverse tax or
regulatory treatment in any jurisdiction or (ii) that registration of such
transfer under the Securities Act or under any United States state securities
laws or under the laws of any other jurisdiction is required and such
registration has not been duly effected.
The Company is authorized to request information from any holder or
prospective acquiror of Common Shares as necessary to give effect to the
transfer, issuance and repurchase restrictions described above, and may decline
to effect any such transaction if complete and accurate information is not
received as requested.
Conyers Dill & Pearman, Bermuda counsel to the Company, have advised the
Company that while the precise form of the restrictions on transfer contained in
the Bye-Laws is untested, as a matter of general principle, restrictions on
transfers are enforceable under Bermuda law and are not uncommon. A proposed
transferee will be permitted to dispose of any Common Shares purchased that
violate the restrictions and as to the transfer of which registration is
refused. The transferor of such Common Shares will be deemed to own such Common
Shares for dividend, voting and reporting purposes until a transfer of such
Common Shares has been registered on the Register of Members of the Company.
44
<PAGE> 46
If the directors refuse to register a transfer for any reason, they must
notify the proposed transferor and transferee within thirty days of such
refusal. The Bye-Laws also provide that the Board may suspend the registration
of transfers for any reason and for such periods as the Board may determine,
provided that they may not suspend the registration of transfers for more than
45 days in any period of 365 consecutive days.
The directors have designated the Company's Chief Executive Officer to
exercise their authority to decline to register transfers or to limit voting,
rights as described above, or to take any other action, for as long as such
officer is also a director.
PREFERRED SHARES
Pursuant to the Bye-Laws and Bermuda law, the Board by resolution may
establish one or more series of Preferred Shares having such number of shares,
designations, relative voting rights, dividend rates, liquidation and other
rights, preferences and limitations as may be fixed by the Board without any
further shareholder approval, which, if any such Preferred Shares are issued,
will include restrictions on voting and transfer intended to avoid having the
Company constitute a "controlled foreign corporation" for United States federal
income tax purposes. Such rights, preferences, powers and limitations as may be
established could have the effect of discouraging an attempt to obtain control
of the Company. The issuance of Preferred Shares could also adversely affect the
voting power of the holders of Common Shares, deny shareholders the receipt of a
premium on their Common Shares in the event of a tender or other offer for the
Common Shares and have a depressive effect on the market price of the Common
Shares. The Company has no present plan to issue any Preferred Shares.
WARRANTS
Class A Warrants to purchase an aggregate of 2,010,000 Common Shares have
been purchased by six individuals, subject to adjustment as provided in the
warrants. If the Underwriters' over-allotment option is exercised in full, the
number of Common Shares issuable upon exercise of the Class A Warrants will
increase to 2,311,500 Common Shares. The exercise price of the Class A Warrants
is equal to the initial public offering price per share, subject to customary
anti-dilution adjustments for certain events, including stock splits and the
issuance of Common Shares at a price below the initial public offering price per
share. The Class A Warrants become exercisable in three equal annual
installments commencing on the first anniversary of the consummation of the
Offering. In the event of a change of control of the Company, the Class A
Warrants then outstanding will become immediately exercisable. The Class A
Warrants expire on January 15, 2008.
The Class A Warrant holders have been granted certain registration rights
with respect to the sale of the Common Shares underlying the warrants, and have
entered into agreements with the Underwriters under which they have agreed not
to dispose of such shares or the Warrants for a one-year period from the date of
this Prospectus. See "Shares Eligible for Future Sale" and "Underwriting."
OPTIONS
Upon consummation of the Offering, the Company will grant options to
purchase an aggregate of 502,500 Common Shares pursuant to its Stock Option
Plan. An additional 485,000 Common Shares are reserved for future issuance under
the Stock Option Plan. If the Underwriters' over-allotment option is exercised
in full, the number of Common Shares issuable upon exercise of the future
options to be issued upon consummation of the Offering will increase to 577,875
Common Shares, and the number of Common Shares reserved for issuance under the
Stock Option Plan will increase to 535,250 Common Shares. See
"Management -- Stock Option Plan."
BYE-LAWS
The Bye-Laws provide for the corporate governance of the Company, including
the establishment of share rights, modification of such rights, issuance of
share certificates, imposition of a lien over shares in respect of unpaid
amounts on those shares, calls on shares which are not fully paid, the transfer
of shares, alterations to capital, the calling and conduct of general meetings,
proxies, the appointment and removal of
45
<PAGE> 47
directors, conduct and powers of directors, the payment of dividends, the
appointment of an auditor and the winding-up of the Company.
The Bye-Laws provide that the Board shall be elected annually and shall
consist of three approximately equal classes, each class to be elected to serve
for a three year term. Shareholders may only remove a director prior to the
expiration of such director's term at a special meeting of shareholders at which
a majority of the votes cast thereon is cast in favor of such action.
The Bye-Laws also provide that if the Board in its absolute discretion
determines that share ownership by any shareholder may result in adverse tax,
regulatory or legal consequences to the Company, any of its subsidiaries or any
other shareholder, then the Company will have the option, but not the
obligation, to repurchase all or part of the Common Shares held by such
shareholder to the extent the Board determines it is necessary or advisable to
avoid or cure such adverse or potential adverse consequences. The price to be
paid for such Common Shares will be the fair market value of such shares.
TRANSFER AGENT
The Company's registrar and transfer agent for the Common Shares is
ChaseMellon Shareholder Services, L.L.C.
DIFFERENCES IN CORPORATE LAW
The Companies Act 1981 of Bermuda (the "Act"), which applies to the
Company, differs in certain material respects from laws generally applicable to
United States corporations and their shareholders. Set forth below is a summary
of certain significant provisions of the Act (including modifications adopted
pursuant to the Bye-Laws) applicable to the Company which differ in certain
respects from provisions of Delaware corporate law. The following statements are
summaries and do not purport to deal with all aspects of Bermuda law that may be
relevant to the Company and its shareholders.
Interested Directors. Bermuda law and the Bye-Laws provide that any
transaction entered into by the Company in which a director has an interest is
not voidable by the Company nor can such director be liable to the Company for
any profit realized pursuant to such transaction provided the nature of the
interest is disclosed at the first opportunity at a meeting of directors, or in
writing to the directors. Under Delaware law such transaction would not be
voidable if (i) the material facts as to such interested director's relationship
or interests are disclosed or are known to the board of directors and the board
in good faith authorizes the transaction by the affirmative vote of a majority
of the disinterested directors, (ii) such material facts are disclosed or are
known to the stockholders entitled to vote on such transaction and the
transaction is specifically approved in good faith by vote of the stockholders
or (iii) the transaction is fair as to the corporation as of the time it is
authorized, approved or ratified. Under Delaware law, such interested director
could be held liable for a transaction in which such director derived an
improper personal benefit.
Mergers and Similar Arrangements. The Company may acquire the business of
another Bermuda exempted company or a company incorporated outside Bermuda when
such business is within its business purpose as set forth in its Memorandum of
Association. The Company may, with the approval of holders of 75% of its
outstanding Common Shares, amalgamate with another Bermuda company or with a
body incorporated outside Bermuda. In the case of an amalgamation, a shareholder
may apply to a Bermuda court for a proper valuation of such shareholder's shares
if such shareholder is not satisfied that fair value has been paid for such
shares. The court ordinarily would not disapprove the transaction on that ground
absent evidence of fraud or bad faith. Under Delaware law, with certain
exceptions, a merger, consolidation or sale of all or substantially all the
assets of a corporation must be approved by the board of directors and a
majority of the outstanding shares entitled to vote thereon. Under Delaware law,
a stockholder of a corporation participating in certain major corporate
transactions may, under certain circumstances, be entitled to appraisal rights
pursuant to which such stockholder may receive cash in the amount of the fair
value of the shares held by such stockholder (as determined by a court) in lieu
of the consideration such stockholder would otherwise receive in the
transaction. Delaware law does not provide stockholders of a corporation with
voting or appraisal rights when the corporation acquires another business
through the issuance of its stock or other consideration (i) in
46
<PAGE> 48
exchange for the assets of the business to be acquired, (ii) in exchange for the
outstanding stock of the corporation to be acquired or (iii) in a merger of the
corporation to be acquired with a subsidiary of the acquiring corporation.
Takeovers. Bermuda law provides that where an offer is made for shares of
a company and, within four months of the offer, the holders of not less than 90%
of the shares which are the subject of the offer accept, the offeror may by
notice require the nontendering shareholders to transfer their shares on the
terms of the offer. Dissenting shareholders may apply to the court within one
month of the notice objecting to the transfer. The burden is on the dissenting
shareholders to show that the court should exercise its direction to enjoin the
required transfer, which the court will be unlikely to do unless there is
evidence of fraud or bad faith or collusion between the offeror and the holders
of the shares who have accepted the offer as a means of unfairly forcing out
minority shareholders. Delaware law provides that a parent corporation, by
resolution of its board of directors and without any shareholder vote, may merge
with any subsidiary of which it owns at least 90% of each class of capital
stock. Upon any such merger, dissenting stockholders of the subsidiary would
have appraisal rights.
Shareholder's Suit. The rights of shareholders under Bermuda law are not
as extensive as the rights of shareholders under legislation or judicial
precedent in many United States jurisdictions. Class actions and derivative
actions are generally not available to shareholders under the laws of Bermuda.
However, the Bermuda courts ordinarily would be expected to follow English case
law precedent, which would permit a shareholder to commence an action in the
name of the Company to remedy a wrong done to the Company where the act
complained of is alleged to be beyond the corporate power of the Company or is
illegal or would result in the violation of the Memorandum of Association or
Bye-Laws. Furthermore, consideration would be given by the court to acts that
are alleged to constitute a fraud against the minority shareholders or where an
act requires the approval of a greater percentage of the Company's shareholders
than actually approved it. The winning party in such an action generally would
be able to recover a portion of attorneys' fees incurred in connection with such
action. Class actions and derivative actions generally are available to
stockholders under Delaware law for, among other things, breach of fiduciary
duty, corporate waste and actions not taken in accordance with applicable law.
In such actions, the court has discretion to permit the winning party to recover
attorneys' fees incurred in connection with such action.
Indemnification of Directors. The Company may indemnify its directors or
officers in their capacity as such in respect of any loss arising or liability
attaching to them by virtue of any rule of law in respect of any negligence,
default, breach of duty or breach of trust of which a director or officer may be
guilty in relation to the Company other than in respect of his own fraud or
dishonesty. Under Delaware law, a corporation may indemnify a director or
officer of the corporation against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
in defense of an action, suit or proceeding by reason of such position if (i)
such director or officer acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation and
(ii) without reasonable cause to believe his conduct was unlawful.
Inspection of Corporate Records. Members of the general public have the
right to inspect the public documents of the Company available at the office of
the Registrar of Companies in Bermuda, which will include the Memorandum of
Association (including its objects and powers) and any alteration to the
Memorandum of Association and documents relating to any increase or reduction of
authorized capital. The shareholders have the additional right to inspect the
Bye-Laws, minutes of general meetings and audited financial statements of the
Company, which must be presented to the annual general meeting of shareholders.
The register of shareholders of the Company is also open to inspection by
shareholders without charge, and to members of the public for a fee. The Company
is required to maintain its share register in Bermuda but may establish a branch
register outside Bermuda. The Company is required to keep at its registered
office a register of its directors and officers which is open for inspection by
members of the public without charge. Bermuda law does not, however, provide a
general right for shareholders to inspect or obtain copies of any other
corporate records. Delaware law permits any shareholder to inspect or obtain
copies of a corporation's shareholder list and its other books and records for
any purpose reasonably related to such person's interest as a shareholder.
47
<PAGE> 49
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
16,750,000 Common Shares, all of which will have been sold in the Offering
(assuming the Underwriters' over-allotment option is not exercised). In
addition, up to an aggregate of 2,010,000 Common Shares will be issuable upon
exercise of outstanding Class A Warrants, an aggregate of 502,500 Common Shares
will be issuable pursuant to outstanding options, and 485,000 Common Shares will
be reserved for future issuance under the Stock Option Plan. If the
Underwriters' over-allotment option is exercised in full, an additional
2,512,500 Common Shares will be outstanding, the number of Common Shares
issuable upon exercise of outstanding Class A Warrants will increase to an
aggregate of 2,311,500 Common Shares, the number of Common Shares issuable upon
exercise of outstanding options will increase to an aggregate of 577,875, and
the number of Common Shares reserved for future issuance under the Stock Option
Plan will increase to 535,250 Common Shares. None of the outstanding Class A
Warrants or options are currently exercisable. Except as disclosed in
"Description of Capital Stock -- Restrictions on Transfer," the Common Shares
sold in the Offering will be freely transferable without restriction or further
registration under the Securities Act, except for any of those Common Shares
owned at any time by an "affiliate" of the Company within the meaning of Rule
144 under the Securities Act (which sales will be subject to the volume
limitations and certain other restrictions). The Common Shares underlying the
outstanding options and Class A Warrants are "restricted securities" as defined
in Rule 144 under the Securities Act and may not be resold in the absence of
registration under the Securities Act or pursuant to an exemption from
registration, including the exemption provided by Rule 144.
The Company, its directors and officers and the holders of the outstanding
options and Class A Warrants have executed agreements under which they have
agreed that they will not, for one year after the date of this Prospectus,
directly or indirectly offer, sell, offer to sell, contract to sell, pledge,
grant any option to purchase, or otherwise sell or dispose (or announce any
offer, sale, offer of sale, contract of sale, pledge, grant of any option to
purchase or other sale or disposition) of any Common Shares or other capital
stock of the Company or any other securities convertible into, or exercisable or
exchangeable for, any Common Shares or other capital stock of the Company
without the prior written consent of Prudential Securities Incorporated on
behalf of the Underwriters, except that such agreements do not prevent the
Company from granting options under the Stock Option Plan so long as such
options are not exercisable until one year from the date of this Prospectus.
Prudential Securities Incorporated may, in its sole discretion at any time and
without notice, release all or any portion of the securities subject to such
lock-up agreements.
Pursuant to the terms of a registration rights agreement, the Company is
obligated to register under the Securities Act the resale of the Common Shares
issuable upon exercise of the Class A Warrants. In connection with such
registration, the Company is required to bear all registration and selling
expenses. The registration rights may be transferred to any assignee or
transferee of the Class A Warrants or the underlying Common Shares. The Company
also intends to file a registration statement on Form S-8 covering the resale of
the Common Shares issuable upon exercise of options issued under the Stock
Option Plan promptly following the first anniversary of the consummation of the
Offering.
No prediction can be made as to the effect, if any, that future sales of
Common Shares, or the availability of Common Shares for future sale, will have
on the market price of the Common Shares prevailing from time to time. Sales of
substantial amounts of Common Shares in the public market following the
Offering, or the perception that such sales could occur, could adversely affect
the market price of the Common Shares and may make it more difficult for the
Company to sell its equity securities in the future at a time and at a price
which it deems appropriate. If the persons holding the outstanding options and
Class A Warrants cause a large number of the Common Shares underlying such
securities to be sold in the market, such sales could have an adverse effect on
the market price for the Common Shares.
48
<PAGE> 50
CERTAIN TAX CONSIDERATIONS
The following summary of the taxation of the Company and Annuity
Reassurance and the taxation of the Company's shareholders is based upon current
law. Legislative, judicial or administrative changes may be forthcoming that
could affect this summary. Except for statements as to the Company's beliefs and
conclusions, the statements as to United States federal income tax law set forth
below represent the opinion of Drinker Biddle & Reath LLP, United States counsel
to the Company, subject to the qualifications and assumptions set forth in such
statements. The statements as to Bermuda tax law set forth below represent the
opinion of Conyers Dill & Pearman, Bermuda counsel to the Company, subject to
the qualifications and assumptions set forth in such statements. The statements
as to the Company's beliefs and conclusions as to the application of such tax
laws to the Company (for example, "While there can be no assurance, the Company
does not believe that Annuity Reassurance will have a permanent establishment in
the United States") represent the views of the Company's management as to the
application of such laws and do not represent legal opinions of the Company or
its counsel.
TAXATION OF THE COMPANY AND ANNUITY REASSURANCE
Bermuda
Under current Bermuda law, there is no income tax or capital gains tax
payable by the Company or Annuity Reassurance. The Company and Annuity
Reassurance have applied to the Bermuda Minister of Finance for an undertaking
under The Exempted Undertakings Tax Protection Act 1966 of Bermuda to the effect
that in the event of there being enacted in Bermuda any legislation imposing tax
computed on profits or income, or computed on any capital asset, gain or
appreciation, or any tax in the nature of estate duty or inheritance tax, then
the imposition of any such tax shall not be applicable to the Company, Annuity
Reassurance or to any of their operations or the shares, debentures or other
obligations of the Company or Annuity Reassurance until March 2016. These
undertakings are subject to the proviso that they are not construed so as to
prevent the application of any tax or duty to such persons as are ordinarily
resident in Bermuda (the Company and Annuity Reassurance are not so currently
designated) or to prevent the application of any tax payable in accordance with
the provisions of The Land Tax Act 1967 of Bermuda or otherwise payable in
relation to the property leased to the Company or Annuity Reassurance. The
Company and Annuity Reassurance, under current rates, will pay annual Bermuda
government fees of $25,000 and $3,360, respectively, and Annuity Reassurance
will pay annual insurance fees of $2,500.
United States
The Company believes that under its current plans of operation, the Company
and Annuity Reassurance will not conduct business within the United States.
Accordingly, the Company and Annuity Reassurance do not currently plan to file
United States income tax returns. However, because definitive identification of
activities that constitute being engaged in a trade or business in the United
States is not provided by the Code or regulations or court decisions, there can
be no assurance that the IRS will not contend that the Company and/or Annuity
Reassurance is engaged in a trade or business in the United States. A foreign
corporation deemed to be so engaged would be subject to United States income
tax, as well as branch profits tax, on its income that is treated as effectively
connected with the conduct of that trade or business unless the corporation is
entitled to relief under the permanent establishment provision of a tax treaty,
as discussed below. Section 842 of the Code requires that foreign insurance
companies carrying on an insurance business within the United States have a
certain minimum amount of effectively connected net investment income even if
they have no United States source investment income. Otherwise, the income tax,
if imposed, would be based on effectively connected income computed in a manner
generally analogous to that applied to the income of a domestic corporation,
except that a foreign corporation can anticipate an allowance of deductions and
credits only if it files a United States income tax return. Under regulations,
the foreign corporation would be entitled to deductions and credits for the
taxable year only if the return for that year is timely filed under rules set
forth therein. Penalties may be assessed for failure to file tax returns. The
federal income tax rates currently are a maximum of 35% for a corporation's
effectively connected income and 30% for branch profits
49
<PAGE> 51
tax. The branch profits tax is imposed on net income after subtracting the
regular corporate tax and making certain other adjustments.
Under the income tax treaty between Bermuda and the United States (the
"Treaty"), provided that the predominant business activity of Annuity
Reassurance is acting as the reinsurer of risks underwritten by other insurance
companies (together with the investing or reinvesting of assets held in respect
of insurance reserves, capital and surplus incident to the carrying on of its
insurance business), Annuity Reassurance will be subject to United States income
tax on any income found to be effectively connected with a United States trade
or business only if that trade or business is conducted through a permanent
establishment in the United States. No regulations interpreting the Treaty have
been issued. While there can be no assurance, the Company does not believe that
Annuity Reassurance will have a permanent establishment in the United States.
Annuity Reassurance would not be entitled to the benefits of the Treaty if (i)
less than 50% of Annuity Reassurance's stock were beneficially owned, directly
or indirectly, by Bermuda residents or United States citizens or residents, or
(ii) Annuity Reassurance's income were used in substantial part to make
disproportionate distributions to, or to meet certain liabilities to, persons
who are not Bermuda residents or United States citizens or residents. While
there can be no assurance, the Company believes that no exception to Treaty
benefits will apply after the sale of Common Shares offered hereby.
Foreign corporations not engaged in a trade or business in the United
States are nonetheless subject to United States income tax at a rate of 30% of
the gross amount of certain "fixed or determinable annual or periodical gains,
profits, and income" derived from sources within the United States as enumerated
in Section 881(a) of the Code (such as dividends and interest on certain
investments). The Company does expect Annuity Reassurance to be subject to such
taxes on dividends from United States companies in which Annuity Reassurance
will make portfolio investments.
The United States also imposes an excise tax on insurance and reinsurance
premiums paid to foreign insurers or reinsurers with respect to risks located in
the United States. The rate of tax applicable to reinsurance premiums paid to
Annuity Reassurance is currently 1%.
Other Countries
Annuity Reassurance may be subject to taxes imposed by other countries on
dividends or interest received from payors located in those countries.
TAXATION OF SHAREHOLDERS
Bermuda Taxation
Currently, there is no Bermuda withholding tax on dividends paid by the
Company or Annuity Reassurance.
United States Taxation
UNITED STATES SHAREHOLDERS
General. The following discussion summarizes certain United States federal
income tax consequences relating to the acquisition, ownership and disposition
of Common Shares by a beneficial owner who is (i) a citizen or resident of the
United States, (ii) a United States domestic corporation or (iii) otherwise
subject to United States federal income taxation on a net income basis in
respect of the Common Shares. This summary deals only with Common Shares
acquired by purchasers in the Offering and held as capital assets and does not
deal with the tax consequences applicable to all categories of investors, some
of which (such as broker-dealers who hold Common Shares as part of hedging or
conversion transactions and investors whose functional currency is not the
United States dollar) may be subject to special rules. Prospective purchasers of
the Common Shares are advised to consult their own tax advisers with respect to
their particular circumstances and with respect to the effects of United States
federal, state, local or other laws to which they may be subject.
50
<PAGE> 52
Dividends. Distributions with respect to the Common Shares will be treated
as ordinary dividend income to the extent of the Company's current or
accumulated earnings and profits as determined for United States federal income
tax purposes, subject to the discussion below relating to the potential
application of the "controlled foreign corporation" or "passive foreign
investment company" rules. Such dividends will not be eligible for the
dividends-received deduction allowed to United States corporations under Section
243 of the Code. The amount of any distribution in excess of the Company's
current and accumulated earnings and profits will first be applied to reduce the
holder's tax basis in the Common Shares, and any amount in excess of tax basis
will be treated as gain from the sale or exchange of the Common Shares.
Classification of the Company and Annuity Reassurance as Controlled Foreign
Corporations. Under Section 951(a) of the Code, each "United States
shareholder" of a foreign corporation that is a "controlled foreign corporation"
(a "CFC") who for an uninterrupted period of 30 days or more during a taxable
year who owns shares in the CFC directly or indirectly through foreign entities
on the last day during such taxable year on which the corporation is a CFC must
include in its gross income for United States federal income tax purposes his
pro-rata share of the CFC's "subpart F income," even if the subpart F income is
not distributed. The Company anticipates that substantially all of the income of
the Company and Annuity Reassurance will be subpart F income. Under Section
951(b) of the Code, any United States corporation, citizen, resident or other
United States person who owns, directly or indirectly through foreign entities,
or is considered to own (by application of the rules of constructive ownership
set forth in Section 958(b) of the Code, generally applying to family members,
partnerships, estates, trusts, controlled corporations or holders of certain
options), 10% or more of the total combined voting power of all classes of stock
of the foreign corporation will be considered to be a "United States
shareholder." In general, a foreign insurance company such as Annuity
Reassurance is treated as a CFC only if such "United States shareholders"
collectively own more than 25% of the total combined voting power or total value
of the corporation's stock. The Company believes that, because of the expected
dispersion of the Company's share ownership following the Offering and the
restrictions on transfer, issuance or repurchase of Common Shares, shareholders
who acquire Common Shares in the Offering will not be subject to treatment as
United States shareholders of a CFC. In addition, because the Company's Bye-Laws
provide that no single shareholder is permitted to hold 10% or more of the total
combined voting power of the Company, shareholders of the Company should not be
viewed as United States shareholders of a CFC for purposes of these rules.
RPII Companies. Different definitions of "United States shareholder" and
"controlled foreign corporation" are applicable in the case of a foreign
corporation which earns "related person insurance income" ("RPII"). RPII is
defined in Section 953(c)(2) of the Code as any "insurance income" of a foreign
corporation attributable to policies of insurance or reinsurance with respect to
which the person (directly or indirectly) insured is a "United States
shareholder" of such corporation or a "related person" to such a shareholder. In
general, "insurance income" is income (including underwriting premium and
investment income) attributable to the issuing of any insurance or reinsurance
contract in connection with risks located in a country other than the country
under the laws of which the CFC is created or organized and which would be taxed
under the provisions of the Code relating to insurance companies if the income
were the income of a domestic insurance company.
Generally, the term "related person" for this purpose means someone who
controls or is controlled by the United States shareholder or someone who is
controlled by the same person or persons who control the United States
shareholder. "Control" is measured by either more than 50% in value or more than
50% in voting power of stock, applying constructive ownership principles similar
to the rules of Section 958 of the Code. For purposes of inclusion of Annuity
Reassurance's RPII in the income of United States shareholders, unless an
exception applies, the term "United States shareholder" includes all United
States persons who own, directly or indirectly, any amount (rather than 10% or
more) of Annuity Reassurance's stock. Annuity Reassurance will be subject to the
CFC provisions for RPII purposes if such persons collectively own directly,
indirectly or constructively 25% or more of the stock of Annuity Reassurance by
vote or value for an uninterrupted period of at least 30 days during any taxable
year.
RPII Exceptions. The special RPII rules do not apply if (i) direct or
indirect insureds and persons related to such insureds, whether or not United
States persons, are treated at all times during the taxable year
51
<PAGE> 53
as owning less than 20% of the voting power and less than 20% of the value of
the stock of Annuity Reassurance, (ii) RPII, determined on a gross basis, is
less than 20% of Annuity Reassurance's gross insurance income for the taxable
year, (iii) Annuity Reassurance elects to be taxed on its RPII as if the RPII
were effectively connected with the conduct of a United States trade or business
and to waive all treaty benefits with respect to RPII or (iv) Annuity
Reassurance elects to be treated as a United States corporation. Annuity
Reassurance does not intend to make either of the described elections. Thus,
only exceptions (i) and (ii) may be available.
The Company does not expect that Annuity Reassurance will knowingly enter
into reinsurance arrangements in which the direct or indirect insureds are, or
are related to, owners of 20% or more of the Common Shares. Accordingly, the
Company anticipates that exceptions (i) will, and that exception (ii) may, apply
to Annuity Reassurance. If, however, neither of these exceptions were to apply,
each United States person owning, directly or indirectly, stock in the Company
(and therefore, indirectly in Annuity Reassurance) at the end of any taxable
year would generally be required to include in its gross income for United
States federal income tax purposes its share of the RPII for the entire taxable
year, determined as if such RPII were distributed proportionately only to such
United States shareholders at that date, but limited to Annuity Reassurance's
current-year earnings and profits reduced by the shareholder's pro-rata share,
if any, of certain prior-year deficits in earnings and profits.
Computation of RPII. In order to determine how much RPII Annuity
Reassurance has earned in each taxable year the Company intends to obtain and
rely upon information from its insureds to determine whether any of the insureds
or persons related to such insureds own shares of the Company and are United
States persons. Annuity Reassurance intends to include in its insurance
application and renewal forms, or related documents, a provision requesting
information as to whether the policyholders (or a related person) are or have
been, and a notice if they should become, a shareholder of the Company. In
addition, Annuity Reassurance will send a letter after each taxable year to each
person who was a policyholder to represent whether it was a shareholder of the
Company or related to a shareholder during the year. For any taxable year in
which Annuity Reassurance's gross RPII is 20% or more of its gross insurance
income for the year, the Company may also seek information from its shareholders
as to whether direct or indirect owners of its shares at the end of the year are
United States persons so that the RPII may be determined and apportioned among
such persons. To the extent the Company is unable to determine whether a direct
or indirect owner of shares is a United States person, the Company may assume
that such owner is not a United States person, thereby increasing the per share
RPII amount for all United States shareholders. Although, Annuity Reassurance
intends to operate in a manner that would minimize RPII, there can be no
assurance that an investor will not be required to include amounts in its income
in respect of RPII in any taxable year.
Apportionment of RPII to United States Shareholders. If direct or indirect
insureds and persons related to such insureds were to own more than 20% of the
voting power or value of Annuity Reassurance's common shares and Annuity
Reassurance's RPII determined on a gross basis for any future taxable year were
to be 20% or more of its gross insurance income, every United States person who
owns directly or indirectly Common Shares on the last day of that year would be
required to include in its gross income its share of Annuity Reassurance's RPII
for such year, whether or not distributed. A United States person who owns
Common Shares during the Company's taxable year but not on the last day of the
taxable year on which Annuity Reassurance is a controlled foreign corporation
within the meaning of the RPII provision of the Code, which would normally be
December 31, would not be required to include in its gross income any part of
Annuity Reassurance's RPII. Correspondingly, a United States person who owns
directly or indirectly, Common Shares on the last day of the taxable year on
which Annuity Reassurance is a controlled foreign corporation for purposes of
those provisions would be required to include in its income its share of the
RPII for the entire year even though such holder does not own the Common Shares
for the entire year.
Information Reporting. Each United States person who is a direct or
indirect shareholder of the Company on the last day of the Company's taxable
year would be required to attach to the income tax or information return such
holder would normally file for the period which includes that date a Form 5471
if Annuity Reassurance were a CFC for RPII purposes for any continuous
thirty-day period during its taxable year whether or not any net RPII income is
required to be reported. Annuity Reassurance will not be
52
<PAGE> 54
considered to be a CFC for this purpose and, therefore, Form 5471 will not be
required, for any taxable year in which (i) Annuity Reassurances's gross RPII
constitutes less than 20% of its gross insurance income or (ii) less than 20% of
the voting power or value of Annuity Reassurance's common shares is owned by
direct or indirect insureds and persons related to such insureds. For any year
in which Annuity Reassurance's gross RPII constitutes 20% or more of its gross
insurance income and its direct or indirect insureds and persons related to such
insureds own more than 20% of the voting power or value of Annuity Reassurance's
common shares, the Company intends to provide Form 5471 to its direct or
indirect United States shareholders for attachment to the returns of
shareholders. The amounts of the RPII inclusions may be subject to adjustment
based upon subsequent IRS examination. A tax-exempt organization would be
required to attach Form 5471 to its information return in the circumstances
described above. Failure to file Form 5471 may result in penalties. In addition,
United States persons who at any time own 10% or more of the shares of the
Company may have an independent obligation to file certain information returns.
Tax-Exempt Shareholders. United States tax-exempt organizations would
generally be required to treat subpart F insurance income, including RPII, that
is includable in income by the tax-exempt entity, as unrelated business taxable
income within the meaning of Section 512 of the Code.
Dividend; Basis; Exclusion of Dividends from Gross Income. A United States
shareholder's tax basis in his Common Shares would be increased by the amount of
any RPII that the shareholder includes in his income. The shareholder could
exclude from income the amount of any distribution by the Company to the extent
of the RPII included in such shareholder's income for the year in which the
distribution was paid or for any prior year. A shareholder's tax basis in his
Common Shares would be reduced by the amount of such distributions that are
excluded from his income. Although, in certain circumstances, a United States
shareholder might be able to exclude from his income distributions with respect
to RPII that a prior shareholder included in his income, that exclusion would
not generally be available to holders who purchase Common Shares in the public
trading markets and are therefore unable to identify the previous shareholder
and demonstrate that such shareholder had previously included the RPII in his
income.
Dispositions of Common Shares. Subject to the discussion below relating to
the potential application of Section 1248 of the Code or the passive foreign
investment company rules, a United States shareholder will, upon the sale or
exchange of any Common Shares, recognize a gain or loss for United States income
tax purposes equal to the difference between the amount realized upon such sale
or exchange and the shareholder's basis in the Common Shares. If the
shareholder's holding period for such Common Shares is more than eighteen
months, any gain will be subject to tax at a current maximum marginal tax rate
of 20% for individuals and 35% for corporations.
Section 1248 of the Code provides that if a United States person disposes
of stock in a foreign corporation and such person owned directly, indirectly or
constructively 10% or more of the voting shares of the corporation at any time
during the five-year period ending on the date of disposition when the
corporation was a CFC, any gain from the sale or exchange of the shares may be
treated as ordinary income to the extent of the CFC's previously untaxed
earnings and profits during the period that the shareholder held the shares
(with certain adjustments). A 10% United States shareholder may in certain
circumstances be required to report a disposition of shares of a CFC by
attaching IRS Form 5471 to the United States income tax or information return
that the shareholder would normally file for the taxable year in which the
disposition occurs. Section 953(c)(7) of the Code generally provides that
Section 1248 will also apply to any sale or exchange of shares in a foreign
corporation that earns RPII if the foreign corporation would be taxed as an
insurance company if it were a domestic corporation, regardless of whether the
selling shareholder is or was a 10% shareholder or whether RPII constitutes 20%
or more of the corporation's gross insurance income. Existing Treasury
regulations do not address whether Section 1248 of the Code and the requirement
to file Form 5471 would apply if the foreign corporation is not a CFC but the
foreign corporation has a subsidiary that is a CFC or that would be taxed as an
insurance company if it were a domestic corporation (although, as discussed
above, shareholders of 10% or more of the shares of the Company may have an
independent obligation to file Form 5471). Section 1248 of the Code and the
requirement to file Form 5471 should not apply to dispositions of Common Shares
because the Company is not directly engaged in the insurance business and, under
proposed regulations, these provisions appear to be applicable only in the case
of shares of corporations that
53
<PAGE> 55
are directly engaged in the insurance business. There can be no assurance,
however, that the IRS will interpret the proposed regulations in this manner or
that the proposed regulations will not be amended or promulgated in final form
so as to provide that Section 1248 of the Code and the requirement to file Form
5471 will apply to dispositions of Common Shares. In that event, the Company
would notify shareholders that Section 1248 of the Code and the requirement to
file Form 5471 will apply to dispositions of Common Shares. Thereafter, the
Company would send a notice after the end of each calendar year to all persons
who were shareholders during the year notifying them that Section 1248 of the
Code and the requirement to file Form 5471 apply to dispositions of Common
Shares. The Company would attach to this notice a copy of Form 5471 completed
with all Company information and instructions for completing the shareholder
information.
Foreign Tax Credit. Because it is anticipated that United States persons
will own a majority of the Company's shares, only a portion of the current
income inclusions under the CFC, RPII and passive foreign investment company
rules, if any, and of dividends paid by the Company (including any gain from the
sale of Common Shares that is treated as a dividend under Section 1248 of the
Code) will be treated as foreign source income for purposes of computing a
shareholder's United States foreign tax credit limitations. The Company will
consider providing shareholders with information regarding the portion of such
amounts constituting foreign source income to the extent such information is
reasonably available. It is also likely that substantially all of the RPII and
dividends that are foreign source income will constitute either "passive" or
"financial services" income for foreign tax credit limitation purposes. Thus, it
may not be possible for most United States shareholders to utilize excess
foreign tax credits to reduce United States tax on such income.
Uncertainty as to Application of RPII. Regulations interpreting the RPII
provisions of the Code exist only in proposed form. It is not certain whether
these regulations will be adopted in their proposed form or what changes might
ultimately be made thereto or whether any such changes, as well as any
interpretation or application of the RPII rules by the IRS, the courts or
otherwise, might have retroactive effect. The description of RPII herein is
therefore qualified. Accordingly, the meaning of the RPII provisions and the
application thereof to the Company and Annuity Reassurance is uncertain. These
provisions include the grant of authority to the United States Treasury
Department to prescribe "such regulations as may be necessary to carry out the
purpose of this subsection including . . . regulations preventing the avoidance
of this subsection through cross insurance arrangements or otherwise." In
addition, there can be no assurance that the IRS will not challenge any
determinations by the Company or Annuity Reassurance as to the amount, if any,
of RPII that should be includable in the income of a holder of Common Shares or
that the amounts of the RPII inclusions will not be subject to adjustment based
upon subsequent IRS examination. Each United States person who is considering an
investment in Common Shares should consult his tax advisor as to the effects of
these uncertainties.
Passive Foreign Investment Companies. Sections 1291 through 1297 of the
Code contain special rules applicable to foreign corporations that are "passive
foreign investment companies" ("PFICs"). In general, a foreign corporation will
be a PFIC if 75% or more of its income constitutes "passive income" or 50% or
more of its assets produce passive income. If the Company were to be
characterized as a PFIC, its United States shareholders would be subject to a
penalty tax at the time of their sale of, or receipt of an "excess distribution"
with respect to, their Common Shares, unless such shareholders elected from the
outset to be taxed on their pro-rata share of the Company's earnings whether or
not such earnings were distributed. In general, a shareholder receives an
"excess distribution" if the amount of the distribution is more than 125% of the
average distribution with respect to the stock during the three preceding
taxable years (or shorter period during which the taxpayer held the stock). In
general, the penalty tax is computed by assuming that the excess distribution or
gain (in the case of a sale) with respect to the shares was taxed in equal
annual portions at the highest applicable ordinary income tax rate throughout
the holder's period of ownership, and that interest accrued on each tax amount
for each prior year from the due date of such prior year's return. The interest
charge is equal to the applicable rate imposed on underpayments of United States
federal income tax for such period.
For the above purposes, passive income is defined to include income of the
kind which would be foreign personal holding company income under Section 954(c)
of the Code, and generally includes interest, dividends, annuities and other
investment income. However, the PFIC statutory provisions contain an express
54
<PAGE> 56
exception for income "derived in the active conduct of an insurance business by
a corporation which is predominantly engaged in an insurance business." This
exception is intended to ensure that income derived by a bona fide insurance
company is not treated as passive income, except to the extent such income is
attributable to financial reserves in excess of the reasonable needs of the
insurance business. In the Company's view, Annuity Reassurance will be
predominantly engaged in an insurance business and will not have financial
reserves in excess of the reasonable needs of its insurance business. The PFIC
statutory provisions (unlike the RPII provisions of the Code) contain a
look-through rule that states that, for purposes of determining whether a
foreign corporation is a PFIC, such foreign corporation shall be treated as if
it received "directly its proportionate share of the income," and as if it "held
its proportionate share of the assets," of any other corporation in which it
owns at least 25% by value of the stock. While no explicit guidance is provided
by the statutory language, under the look-through rule the Company should be
deemed to own the assets and to have received the income of Annuity Reassurance
directly for purposes of determining whether the Company qualifies for the
aforementioned insurance exception. This interpretation of the look-through rule
is consistent with the legislative intention generally to exclude bona fide
insurance companies from the application of PFIC provisions. There can be no
assurance, however, as to what positions the IRS or a court might take in the
future on whether the Company or Annuity Reassurance is predominantly engaged in
an insurance business and does not have financial reserves in excess of the
reasonable needs of such business. United States persons who are considering an
investment in Common Shares should consult their tax advisors as to the effects
of the PFIC rules.
Other. Information reporting to the IRS by paying agents and custodians
located in the United States will be required with respect to payments of
dividends on the Common Shares to United States persons. Thus, a holder of
Common Shares may be subject to backup withholding at the rate of 31% with
respect to dividends paid to such persons, unless such holder (a) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates this fact, or (b) provides a taxpayer identification number,
certifies as to no loss of exemption from backup withholding and otherwise
complies with applicable requirements of the backup withholding rules. Backup
withholding is not an additional tax and may be credited against a holder's
regular federal income tax liability.
NON-UNITED STATES SHAREHOLDERS
Subject to certain exceptions, non-United States persons will be subject to
United States federal income tax on dividend distributions with respect to, and
gain realized from the sale or exchange of, Common Shares only if such dividends
or gains are effectively connected with the conduct of a trade or business
within the United States. Nonresident alien individuals will not be subject to
United States estate tax with respect to Common Shares of the Company.
* * *
The foregoing discussion is based upon current law. The tax treatment of an
owner of Common Shares, or a person treated as an owner of Common Shares for
United States federal income, state, local or non-United States tax purposes,
may vary depending on the owner's particular tax situation. Legislative,
judicial or administrative changes or interpretations may be forthcoming that
could be retroactive and could affect the tax consequences to owners of Common
Shares. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING
THE FEDERAL, STATE, LOCAL AND NON-UNITED STATES TAX CONSEQUENCES OF OWNERSHIP
AND DISPOSITION OF THE COMMON SHARES.
55
<PAGE> 57
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated and
are acting as representatives (the "Representatives"), have
severally agreed, subject to the terms and conditions contained in the
Underwriting Agreement, to purchase from the Company the number of Common Shares
set forth below opposite their respective names:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
----------------------------------------------------------------- ----------
<S> <C>
Prudential Securities Incorporated...............................
Merrill Lynch, Pierce, Fenner & Smith Incorporated...............
----------
Total............................................................ 16,750,000
==========
</TABLE>
The Company is obligated to sell, and the Underwriters are obligated to
purchase, all of the Common Shares offered hereby if any are purchased.
The Underwriters, through the Representatives, have advised the Company
that they propose to offer the Common Shares initially at the public offering
price set forth on the cover page of this Prospectus; that the Underwriters may
allow to selected dealers a concession of $ per share; and that such
dealers may reallow a concession of $ per share to certain other
dealers. After the Offering, the offering price and the concessions may be
changed by the Representatives.
The Company has granted to the Underwriters an over-allotment option,
exercisable for 30 days from the date of this Prospectus, to purchase up to
2,512,500 additional Common Shares at the initial public offering price per
share, less underwriting discounts and commissions, as set forth on the cover
page of this Prospectus. The Underwriters may exercise such option solely for
the purpose of covering any over-allotments incurred in the sale of the Common
Shares offered hereby. To the extent such option is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional Common Shares as the number set forth
next to such Underwriter's name in the preceding table bears to 16,750,000.
The Company, its directors and officers and the holders of the outstanding
options and Class A Warrants have executed agreements pursuant to which they
have agreed, except for certain limited exceptions, that they will not for a
period of one year from the date of this Prospectus offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase, or otherwise sell or
dispose (or announce any offer, sale, offer to sell, contract of sale, pledge,
grant of any option to purchase or other sale or disposition) of any Common
Shares or other capital stock of the Company or any other securities convertible
into, or exercisable or exchangeable for, any Common Shares or other capital
stock of the Company, without the prior written consent of Prudential Securities
Incorporated on behalf of the Underwriters, except such agreements do not
prevent the Company from granting options under the Stock Option Plan so long as
such options are not exercisable until one year from the date of this
Prospectus. The Company also has agreed not to file any registration statement
on Form S-8 with respect to, or otherwise register for resale with the
Commission, Common Shares underlying stock options or warrants for a period of
one year from the date of this Prospectus. Prudential Securities
56
<PAGE> 58
Incorporated may, in its sole discretion, at any time and without notice,
release all or any portion of the securities subject to such lock-up agreements.
The Company has agreed to indemnify the several Underwriters or contribute
to losses arising out of certain liabilities, including liabilities under the
Securities Act.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
Prior to the Offering, there has been no public market for the Common
Shares. Consequently, the initial public offering price will be determined
through negotiations between the Company and the Representatives. Among the
factors to be considered in making such determination will be the prevailing
market conditions, the Company's prospects and the prospects for its industry in
general, the management of the Company and the market prices of securities for
companies in businesses similar to that of the Company.
Upon consummation of the Offering, the Company will pay Prudential
Securities Incorporated an advisory fee equal to $525,000 for investment banking
and financial advisory services related to, among other things, the formation of
the Company and the structure of the Offering.
In connection with the Offering, certain Underwriters and selling group
members (if any) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Shares.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Shares for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Shares in connection with the Offering than
they are committed to purchase from the Company, and in such case may purchase
Common Shares in the open market following completion of the Offering to cover
all or a portion of such short position. The Underwriters may also cover all or
a portion of such short position, up to 2,512,500 Common Shares, by exercising
the Underwriters' over-allotment option referred to above. In addition,
Prudential Securities Incorporated, on behalf of the Underwriters, may impose
"penalty bids" under contractual arrangements with the Underwriters whereby it
may reclaim from an Underwriter (or any selling group member participating in
the Offering) for the account of the other Underwriters, the selling concession
with respect to Common Shares that are distributed in the Offering but
subsequently purchased for the account of the Underwriters in the open market.
Any of the transactions described in this paragraph may result in the
maintenance of the price of the Common Shares at a level above that which might
otherwise prevail in the open market. None of the transactions described in this
paragraph is required and, if they are undertaken, they may be discontinued at
any time.
LEGAL MATTERS
The validity of the Common Shares under Bermuda law will be passed upon for
the Company by Conyers Dill & Pearman, Hamilton, Bermuda. Certain matters as to
United States law in connection with the Offering will be passed upon for the
Company by Drinker Biddle & Reath LLP, Philadelphia, Pennsylvania. Certain
matters as to United States law in connection with the Offering will be passed
upon for the Underwriters by Cleary, Gottlieb, Steen & Hamilton, New York, New
York. Drinker Biddle & Reath LLP, who serve as United States counsel to the
Company, also served as United States counsel to Inter-Atlantic in connection
with the establishment of the Company and Annuity Reassurance in 1997 and
continues to represent Inter-Atlantic on an ongoing basis.
EXPERTS
The consolidated balance sheet of the Company as of December 22, 1997
included in this Prospectus and in the Registration Statement has been audited
by KPMG Peat Marwick, independent auditors, as indicated in their report with
respect thereto, and is included herein in reliance on the authority of said
firm as experts in accounting and auditing.
57
<PAGE> 59
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement on Form
S-1 (together with all amendments, exhibits and schedules thereto, the
"Registration Statement") under the Securities Act with respect to the Common
Shares offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all the information set forth in the
Registration Statement, certain items of which are omitted as permitted by the
rules and regulations of the Commission. For further information with respect to
the Company and the Common Shares offered hereby, reference is made to the
Registration Statement. Statements contained in this Prospectus as to the
contents of any contract, agreement or other document are not necessarily
complete. With respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference.
Upon completion of the Offering, the Company will be subject to the
informational reporting requirements of the Exchange Act and, in accordance
therewith, will file reports, proxy and information statements and other
information with the Commission. The Registration Statement, the exhibits and
schedules forming a part thereof, as well as such reports, proxy and information
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549-1004 and at the following regional offices of the
Commission: Seven World Trade Center, Suite 1300, New York, New York 10048, and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material can be obtained from the public reference
section of the Commission at its Washington address at prescribed rates. The
Commission also maintains an Internet web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding issuers, such as the Company, that file electronically with the
Commission.
After giving effect to the Offering, the Company will be treated as a
domestic corporation for purposes of certain requirements of the Exchange Act,
including the proxy rules. Pursuant to Rule 3b-4 under the Exchange Act, a
"foreign private issuer" is a non-United States issuer other than an issuer that
meets the following conditions: (1) more than 50% of the outstanding voting
securities of the issuer are held of record by residents of the United States
and (2) any of the following: (i) the majority of the executive officers or
directors of the issuer are United States citizens or residents, (ii) more than
50% of the assets of the issuer are located in the United States or (iii) the
business of the issuer is administered principally in the United States. By
virtue of (1) and (2)(i), the Company does not expect that it will be a "foreign
private issuer," although there is no assurance of such. If the Company were to
be treated as a "foreign private issuer," it would be exempted from the proxy
and short-swing profit rules under Sections 14 and 16 of the Exchange Act and,
for reporting purposes under the Exchange Act, would be subject to rules
applicable to "foreign private issuers."
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by an independent accounting firm and
quarterly reports containing unaudited financial statements for the first three
quarters of each fiscal year.
58
<PAGE> 60
GLOSSARY OF SELECTED ANNUITY AND LIFE INSURANCE TERMS
A.M. Best rating........... A.M. Best Company, Inc. financial condition ratings
are its opinions of an insurance company's
financial strength, operating performance and
ability to meet its obligations to policyholders.
A.M. Best's ratings range from "A++ (superior)"
to "F (in liquidation)."
Account value.............. The amount held in either the general account or a
separate account of an insurance company to
maintain policy owner assets and support
liabilities.
Acquisition costs.......... Commission and brokerage fees paid for the
production of premiums written and certain other
acquisition and underwriting expenses.
Alien reinsurer............ A reinsurance company that is organized under the
laws of a non-United States jurisdiction.
Annuitant.................. The person on whose life or life expectancy the
annuity payouts are based.
Annuity.................... A periodic payment contract purchased from an
insurance company that typically offers
tax-deferred growth of the investment until
earnings are withdrawn.
Annuity payouts............ An amount paid at regular intervals under one of
several plans available to the annuity owner
and/or any other payee. This amount may be paid
on a variable or fixed basis or a combination of
both.
Approved actuary........... An entity approved by the Minister of Finance of
Bermuda that certifies whether or not, in its
opinion, the aggregate amount of the liabilities
of an insurer in relation to long-term business
at the end of the relevant year exceeded the
aggregate amount of those liabilities as shown in
the insurer's statutory balance sheet.
Automatic reinsurance;
treaty..................... Reinsurance of a specified type or category of risk
defined in a reinsurance agreement (a "treaty")
between a ceding company and a reinsurer.
Typically, in automatic reinsurance the ceding
company is obligated to offer and the reinsurer
is obligated to accept a specified portion of all
such type or category of risks originally insured
or reinsured by the ceding company. Also known as
treaty reinsurance.
Beneficiary................ The person designated to receive annuity benefits
in case of the owner's or annuitant's death.
Broker..................... One who negotiates contracts of insurance or
reinsurance, receiving a commission for placement
and other services rendered, between (1) a policy
holder and a primary insurer, on behalf of the
insured party, (2) a primary insurer and
reinsurer, on behalf of the primary insurer, or
(3) a reinsurer and a retrocessionaire, on behalf
of the reinsurer.
Ceding..................... The reinsurance by a primary insurer or reinsurer
of all or a portion of its risk with a reinsurer
or retrocessionaires. In doing so, the party
"cedes" business and is referred to as the
"cedent" or "ceding" company.
Contract................... A reinsurance agreement between the ceding company
and a reinsurer, such as Annuity Reassurance.
59
<PAGE> 61
Corporate owned life
insurance ("COLI")......... A fixed premium individual or group life insurance
policy owned by a company or a trust sponsored by
a company. The proceeds from such a policy may be
used to help fund general corporate liabilities,
such as the cost of employee benefit programs.
Credited rates............. Interest rates applied to annuity and life
insurance policies, whether contractually
guaranteed or currently declared for a specified
period, as outlined in the policy or contract.
Duration................... A measure, expressed in years, of the price
sensitivity of a financial instrument to changes
in interest rates.
Facultative reinsurance.... A type of reinsurance whereby the ceding company is
not obligated to offer, and the reinsurer is not
obligated to accept, all or a portion of each
risk originally insured by the ceding company.
Fixed annuities............ General account annuities which guarantee an
annuitant that a specific sum of money will be
paid in the future, either as a lump sum or as
periodic income.
United States generally
accepted accounting
principles ("GAAP")...... United States accounting principles as set forth in
opinions of the Accounting Principles Board of
the American Institute of Certified Public
Accountants and/or statements of the Financial
Accounting Standards Board and/or their
respective successors and which are applicable in
the circumstances as of the date in question.
General account............ The main account of an insurer through which
premiums are collected and the insurer's
liabilities are incurred where the insurer bears
the relevant risks.
Indemnity reinsurance...... An arrangement in which an insurance company, the
reinsurer, in consideration of a premium, agrees
to indemnify another insurance or reinsurance
company, known as the ceding company, against all
or a portion of the insurance or reinsurance
risks underwritten by the ceding company under
one or more policies. Reinsurance does not
legally discharge the primary insurer from its
liability with respect to its obligations to the
insured.
Mortality.................. The relative incidence of death.
Persistency................ The rate which insurance policies or annuity
contracts remain in force, expressed as a
percentage of the number of policies remaining in
force over the previous year.
Policy..................... The printed document issued by an insurance or
reinsurance company that states the terms of the
insurance, reinsurance or annuity contract.
Premiums written........... Premiums written for a given period.
Primary insurer............ An insurance company that contracts with the
consumer to provide insurance coverage. Such
primary insurer may then cede a portion of its
business to reinsurers.
Quota share reinsurance.... A term describing all forms of reinsurance in which
the reinsurer shares a pro-rata part of the
original premiums and losses of the reinsured
60
<PAGE> 62
under a quota share. (Also known as proportional
reinsurance, "pro-rata contract" reinsurance or
participating reinsurance.)
Reserves................... Liabilities established by insurers that generally
represent the estimated discounted present value
of the net cost of claims, repayments or contract
liabilities and the related expenses that the
insurer will ultimately be required to pay in
respect of insurance or annuities it has written.
Retention.................. The amount or portion of insurance risk that an
insurer retains for its own account. Any
insurance issued in excess of the retention is
reinsured. In proportional treaties, the
retention may be a percentage of the original
policy's limit. In excess of loss business, the
retention typically is a dollar amount of loss, a
loss ratio or a percentage.
Retrocessional reinsurance;
Retrocessionaire......... A transaction whereby a reinsurer cedes to another
reinsurer, the retrocessionaire, all or part of
the reinsurance that the first reinsurer has
assumed. Retrocessional reinsurance does not
legally discharge the ceding reinsurer from its
liability with respect to its obligations to the
reinsured. Reinsurance companies cede risks to
retrocessionaires for reasons similar to those
that cause primary insurers to purchase
reinsurance: to reduce net liability on
individual risks, to protect against multiple
losses, to stabilize financial ratios and to
obtain additional underwriting capacity.
Standard & Poor's insurance
claims-paying ability
ratings.................. Standard & Poor's insurance claims-paying ability
rating is the opinion of Standard & Poor's of an
operating insurance company's financial capacity
to meet the obligations of its insurance policies
in accordance with their terms. Standard & Poor's
ratings range from "AAA (superior)" to "CCC
(extremely vulnerable)."
Separate account........... A segregated account established by an insurance
company to hold customer assets and liabilities
on behalf of a customer. The funds in a separate
account are maintained separately from those in
other separate accounts and the general account.
Structured settlement
contracts.................. Contracts providing for periodic payments to an
injured person for a determinable number of years
or for life, typically in settlement of an injury
claim or a lottery award.
Surplus relief
reinsurance................ A type of reinsurance which is primarily designed
to increase temporarily a ceding company's
statutory capital.
Surrender charge........... A deferred sales charge to be applied if an annuity
or life insurance policy is surrendered for its
cash value prior to the retirement date. Such a
charge is intended to recover all or a portion of
the policy acquisition costs and act as a
deterrent to early surrender.
Term life insurance........ A form of life insurance which provides mortality
protection during a stated period of time, but
expires without policy cash value in the event
the policy owner survives the stated period.
Underwriting............... The insurer's or reinsurer's process of reviewing
contracts submitted for insurance or reinsurance
coverage, deciding whether to accept all or part
of the coverage requested and determining the
applicable premiums.
61
<PAGE> 63
Underwriting capacity...... The maximum amount that an insurance or reinsurance
company can underwrite. Reinsurance serves to
increase an insurer's underwriting capacity by
reducing its exposure from particular risks.
Underwriting expenses...... The aggregate of policy acquisition costs,
including commissions, and the portion of
administrative, general and other expenses
attributable to underwriting operations.
Unearned premiums.......... Premiums written but not yet earned, as they are
attributable to the unexpired portion of the
related contract term.
Universal life insurance... A form of life insurance where an insurance account
is maintained for each policy. Premiums, net of
specified expenses, are credited to the account
as is interest on the underlying assets. Specific
charges are made against the account for the cost
of insurance protection and for the insurer's
expenses. This form of life insurance allows
considerable flexibility as to the amount and
timing of premium payments and for the level of
death benefits provided.
Variable annuity........... An annuity which includes a provision for benefit
payments to vary according to the investment
experience of the separate account in which the
amounts paid to provide for this annuity are
allocated. Variable annuity contracts often
include a general account guaranteed interest
option.
Variable life insurance.... An investment-oriented form of life insurance that
offers fixed premiums and a minimum death benefit
as well as providing a return linked to an
underlying portfolio of securities that may be in
either a separate or general account of the
insurer.
Whole life insurance....... A form of life insurance which provides guaranteed
death benefits and guaranteed cash values to
policy holders.
62
<PAGE> 64
INDEX TO CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................................ F-2
Balance Sheet as of December 22, 1997................................................. F-3
Notes to Consolidated Balance Sheet................................................... F-4
</TABLE>
F-1
<PAGE> 65
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Annuity and Life Re (Holdings), Ltd.
We have audited the accompanying consolidated balance sheet of Annuity and
Life Re (Holdings), Ltd. as at December 22, 1997 (date of inception). This
financial statement is the responsibility of the company's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of the company as at December
22, 1997 in conformity with United States generally accepted accounting
principles.
KPMG PEAT MARWICK
Chartered Accountants
Hamilton, Bermuda
December 22, 1997
F-2
<PAGE> 66
ANNUITY AND LIFE RE (HOLDINGS), LTD.
CONSOLIDATED BALANCE SHEET
DECEMBER 22, 1997 (DATE OF INCEPTION)
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<S> <C>
ASSETS
Cash.............................................................................. $250,000
========
STOCKHOLDERS' EQUITY (NOTE 4)
Preferred Stock -- (par value $1.00; 50,000,000 shares authorized; no shares
outstanding).................................................................... $ --
--------
Common stock -- (par value $1.00; 100,000,000 shares authorized; 12,000 shares
issued and outstanding)......................................................... 12,000
Additional paid-in capital........................................................ 238,000
--------
Total stockholders' equity........................................................ $250,000
========
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-3
<PAGE> 67
ANNUITY AND LIFE RE (HOLDINGS), LTD.
NOTES TO CONSOLIDATED BALANCE SHEET
1. ORGANIZATION
Annuity and Life Re (Holdings), Ltd. ("Holdings") was incorporated on
December 2, 1997 under the laws of Bermuda to provide annuity and life
reinsurance to insurers and reinsurers. Holdings will operate through a
wholly-owned subsidiary, Annuity and Life Reassurance, Ltd. ("Annuity
Reassurance," and together with Holdings, the "Company"). Annuity Reassurance is
licensed under the insurance laws of Bermuda. The Company's initial
capitalization of $250,000, as reflected on the Balance Sheet, was provided by
Frederick S. Hammer, Robert M. Lichten, Michael P. Esposito, Jr., Andrew S.
Lerner, William S. Ogden, Jr. and Arnold Welles (referred to as the "Class A
Warrant Holders") (see notes 3 and 4) and the Annuity Re Purpose Trust, which
was lent $12,000 by Inter-Atlantic Capital Partners, Inc. See note 3. The
Company's fiscal year end will be December 31.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statement is prepared in accordance with United
States generally accepted accounting principles which require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statement. Actual results could differ from those estimates. The
following are the significant accounting policies adopted by the Company:
(a) Premium income and related expenses
Reinsurance premiums from traditional life and annuity policies with life
contingencies will be recognized generally as income over the premium paying
period. Traditional life policies include those contracts with fixed and
guaranteed premiums and benefits, and consist principally of whole life and term
insurance policies. Benefits and expenses are matched with such income so as to
result in the recognition of profits over the life of the contracts. This is
achieved by means of the provision for liabilities for future policy benefits
and deferral and subsequent amortization of policy acquisition costs.
For contracts with a single premium or a limited number of premium payments
due over a significantly shorter period than the total period over which
benefits are provided ("limited payment contracts"), reinsurance premiums will
be recorded as income when due with any excess profit deferred and recognized in
income in a constant relationship to the insurance in force or, for annuities,
in relation to the amount of expected future benefit payments.
Premiums from universal life and investment-type contracts will be reported
as deposits to policy holders' account balances. Revenues from these contracts
will consist of amounts assessed during the period against policyholders'
account balances for mortality charges, policy administration charges and
surrender charges. Policy benefits and claims that are charged to expense will
include benefit claims incurred in the period in excess of related
policyholders' account balances.
(b) Deferred policy acquisition costs
The costs of acquiring new business, principally commissions, underwriting,
agency and policy issue expenses, all of which vary with and are primarily
related to the production of new business, will be deferred. Deferred policy
acquisition costs will be subject to recoverability testing at the time of the
policy issuance and loss recognition testing at the end of each accounting
period.
For traditional life and annuity policies with life contingencies, deferred
policy acquisition costs will be amortized in proportion to anticipated
premiums. Assumptions as to anticipated premiums will be estimated at the date
of the policy issuance and will be consistently applied during the life of the
contracts. Deviations from estimated experience will be reflected in earnings in
the period such deviations occur. For these contracts, the amortization periods
generally will be for the estimated life of the policy.
F-4
<PAGE> 68
ANNUITY AND LIFE RE (HOLDINGS), LTD.
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
For universal life and investment-type products, deferred acquisition costs
will be amortized over the expected average life of the contracts as a constant
percentage of estimated gross profits arising principally from investment
results, mortality and expense margins and surrender charges based on historical
and anticipated future experience, which is updated at the end of each
accounting period. The effect on the amortization of deferred policy acquisition
costs of revisions to estimated gross profits will be reflected in earnings in
the period such estimated gross profits are revised.
(c) Policyholders' account balances and future policy benefits
The development of policy reserves for the Company's products will require
management to make estimates and assumptions regarding mortality, lapse, expense
and investment experience. Such estimates will be primarily based on historical
experience and information provided by ceding companies. Actual results could
differ materially from those estimates. Management will monitor actual
experience, and where circumstances warrant, will revise its assumptions and the
related reserve estimates.
For traditional life policies, future benefit and dividend liabilities will
be estimated using a net level premium method on the basis of actuarial
assumptions as to mortality, persistency and interest established at policy
issue. Assumptions established at policy issue as to mortality and persistency
are based on anticipated experience which, together with interest and expense
assumptions, provide a margin for adverse deviation. When the liabilities for
future policy benefits plus the present value of expected future gross premiums
for a product are insufficient to provide for expected future benefits and
expenses for that product, deferred acquisition costs will be written off and
thereafter, if required, a premium deficiency reserve will be established by a
charge to income. Benefit liabilities for traditional annuities during the
accumulation period are equal to the accumulated present value of expected
future payments.
Premiums for universal life and investment-type contracts will be reported
as deposits to clients' account balances. Revenues from these contracts will
consist of amounts assessed during the period against clients' account balances
for mortality charges, policy administration and surrender charges. Policy
benefits and claims that are charged to expense will include benefit claims
incurred in the period in excess of related clients' account balances and
interest credited to clients' account balances.
(d) Investments
The Company will classify its investments in fixed income and equity
securities as available for sale and, accordingly, such securities will be
carried at fair value. The cost of fixed income securities will be adjusted for
amortization of premiums and discounts. The cost of fixed income and equity
securities will be adjusted for declines in value that are considered other than
temporary.
Realized gains and losses on investments will be recognized in net income,
net of related amortization of deferred acquisition costs, using the specific
identification method. Changes in fair values of securities carried at fair
value are reflected directly in shareholders' equity, after deductions for
related adjustments for deferred acquisition expenses and amounts required to
satisfy policyholder commitments that would have been recorded had these
securities been sold at their fair value.
(e) Translation of foreign currencies
The Company's functional currency is the United States dollar. Premiums
written and receivable in foreign currencies will be recorded at exchange rates
prevailing on the date the contract attaches and liabilities for future benefits
payable in foreign currencies at the time such liabilities are first recorded.
Exchange gains or losses resulting from the periodic revaluation and settlement
of such assets and liabilities will be recorded in the Company's statement of
operations.
F-5
<PAGE> 69
ANNUITY AND LIFE RE (HOLDINGS), LTD.
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
(f) Organizational expenses
Organizational expenses (including such amounts paid to Inter-Atlantic
Securities Corp. ("Inter-Atlantic")) will be capitalized and amortized evenly
over five years.
(g) Earnings per Common Share
The Company will calculate earnings per common share based upon the
guidance provided in Financial Accounting Standards Board Statement No. 128
"Earnings per Share." This statement requires the presentation of two amounts of
earnings per share when the company has a complex capital structure. These
amounts are earnings per common share and earnings per common share-assuming
dilution.
Earnings per common share will be calculated by dividing net income
attributable to common shareholders by the weighted average number of common
shares outstanding during the period.
Earnings per common share-assuming dilution will calculated by dividing the
net income attributable to common shareholders by the weighted average number of
common shares outstanding during the period, plus dilutive potential common
shares. Options and warrants issued by the Company will be considered dilutive
potential common shares and will be included in the calculation using the
treasury stock method.
3. AGREEMENTS WITH RELATED PARTIES
Formation and Initial Public Offering
The Company has entered into an agreement with Inter-Atlantic, whereby
Inter-Atlantic has agreed to provide financial advisory services to the Company
in connection with its organization and planned initial public offering. Certain
officers and directors of the Company are also beneficial owners, directors or
officers of Inter-Atlantic.
The Company will reimburse Inter-Atlantic for expenses incurred in
connection with the organization of the Company and the planned initial public
offering provided that such offering is consummated prior to June 30, 1998. If
such offering is not consummated prior to June 30, 1998, Inter-Atlantic will
only be entitled to reimbursement of expenses incurred on or after December 23,
1997. Subsequent to the closing of the planned initial public offering,
Inter-Atlantic will also receive a fee equal to $2.0 million as compensation for
financial advisory services provided to the Company in connection with its
organization and planned initial public offering. In addition, Inter-Atlantic
will provide financial advisory and other services to the Company for a term of
five years in exchange for four annual payments of $600,000 beginning on the
first anniversary of the consummation of the planned initial public offering.
In connection with the formation of the Company, the Class A Warrant
Holders purchased Class A Warrants to purchase up to an aggregate number of
common shares equal to 12% of the common shares issued in the Company's planned
initial public offering. The exercise price of such warrants is equal to the
initial public offering price per share of the Company's common shares. These
Warrants are discussed in Note 4.
4. STOCKHOLDERS' EQUITY
Preferred Stock
The Company is authorized to issue 50,000,000 preferred shares of par value
$1.00 each. At the balance sheet date there were no preferred shares issued or
outstanding.
Common Stock
The Company is authorized to issue 100,000,000 common shares of par value
$1.00 each. At the balance sheet date 12,000 common shares were outstanding.
F-6
<PAGE> 70
ANNUITY AND LIFE RE (HOLDINGS), LTD.
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
Warrants
In connection with its initial capitalization, the Company has issued Class
A Warrants to the Class A Warrant Holders to purchase up to an aggregate number
of common shares equal to 12% of the common shares issued in the Company's
planned initial public offering. The consideration paid for these warrants of
$238,000 has been recorded as additional paid in capital. The exercise price of
the warrants will be equal to the initial public offering price per share of the
Company's common shares. The Class A Warrants become exercisable over three
years commencing on the first anniversary of the consummation of the Company's
initial public offering. The Class A Warrants will expire on January 15, 2008.
5. STOCK PLANS
Stock Option Plan
The Board of Directors has adopted a Stock Option Plan (the "plan") under
which it may grant, subject to certain restrictions, Incentive Stock Options
(ISO's) and Non-Qualified Stock Options (NQSO's). The aggregate number of common
shares for which options may be granted under the plan is limited to the lessor
of (i) five percent of the common shares issued in the Company's initial public
offering, plus 150,000 shares or (ii) 1,700,000 common shares. Only eligible
employees of the Company are entitled to ISO's, while NQSO's may be granted to
eligible employees, non-employee Directors and consultants.
The plan will be administered by the Compensation Committee of the Board of
Directors. The Compensation Committee has the authority to select the parties to
be granted ISO's and NQSO's, to set the date of grant and other terms of the
options granted under the plan.
The minimum exercise price of the ISO's will be equal to the fair market
value, as defined in the plan, of the Company's optioned common shares at the
date of grant. The term of the ISO's is not more than ten years from the date of
grant. Unless otherwise provided in the option agreement, the ISO's shall be
exercisable in three equal annual installments, commencing on the first
anniversary of the grant date.
Subject to the consummation of the offering, options will be granted to the
President and Chief Executive Officer of the Company to purchase common shares
equal to 3% of the common shares issued in the initial public offering. The
exercise price of such options will be equal to the public offering price per
share.
Each person who becomes an eligible non-employee Director, as defined in
the plan, shall be granted an option to purchase 15,000 common shares on the
later of (i) the date he or she becomes an eligible non-employee Director or
(ii) the date the planned initial public offering is consummated. The options
shall have an exercise price equal to the fair market value of the optioned
common shares on the date the options are granted and shall be exercisable in
three equal installments commencing with the first anniversary of the grant
date. In addition, subject to certain conditions, each non-employee Director
shall be granted an option to purchase 2,000 common shares at each successive
annual general meeting after December 31, 1998. These options shall have an
exercise price equal to the fair market value of the optioned common shares on
the date the options are granted and shall be immediately exercisable if granted
after the first anniversary of the consummation of the planned initial public
offering. If such options are granted prior to the first anniversary of the
consummation of the planned initial public offering, such options shall become
exercisable on such anniversary.
In addition, Directors shall receive cash of $20,000 per annum plus $1,000
per board or committee meeting attended. Committee Chairmen shall receive an
additional $1,000 per annum.
6. TAXATION
Under current Bermuda law the Company is not required to pay any taxes in
Bermuda on either income or capital gains. The Company has applied for an
undertaking from the Minister of Finance in Bermuda that
F-7
<PAGE> 71
ANNUITY AND LIFE RE (HOLDINGS), LTD.
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
in the event of any such taxes being imposed the Company will be exempted from
taxation until the year 2016. The Company intends to operate in a manner such
that it will owe no United States tax other than premium excise taxes and
withholding taxes on certain investments.
7. STATUTORY REQUIREMENTS AND DIVIDEND RESTRICTIONS
Under The Bermuda Insurance Act, 1978, and related regulations, Annuity
Reassurance is required to maintain certain levels of solvency and liquidity.
The minimum statutory capital and surplus requirement of $250,000 was met at the
balance sheet date.
The Company's ability to pay dividends depends on the ability of Annuity
Reassurance to pay dividends to the Company. While the Company itself is not
subject to any significant legal prohibitions on the payment of dividends,
Annuity Reassurance will be subject to Bermuda regulatory constraints which
affect its ability to pay dividends to the Company. Annuity Reassurance is
prohibited from declaring or paying a dividend if such payment would reduce its
statutory surplus below $250,000.
F-8
<PAGE> 72
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY
SECURITY OTHER THAN THE COMMON SHARES OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE COMMON
SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS
NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
UNTIL , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Enforceability of Civil Liabilities
under United States Federal
Securities Laws..................... 3
Prospectus Summary.................... 4
Risk Factors.......................... 8
Use of Proceeds....................... 16
Capitalization........................ 17
Dividend Policy....................... 17
Dilution.............................. 18
Management's Discussion and Analysis
of Financial Condition and Plan of
Operations.......................... 19
Business.............................. 21
Management............................ 36
Principal Stockholders................ 41
Certain Relationships and Related
Party Transactions.................. 42
Description of Capital Stock.......... 43
Shares Eligible for Future Sale....... 48
Certain Tax Considerations............ 49
Underwriting.......................... 56
Legal Matters......................... 57
Experts............................... 57
Additional Information................ 58
Glossary of Selected Insurance
Terms............................... 59
Index to Consolidated Balance Sheet... F-1
</TABLE>
======================================================
======================================================
16,750,000 Shares
ANNUITY AND
LIFE RE (HOLDINGS), LTD.
Common Shares
--------------------
PROSPECTUS
--------------------
PRUDENTIAL SECURITIES INCORPORATED
MERRILL LYNCH & CO.
, 1998
======================================================
<PAGE> 73
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses payable by the Registrant in
connection with this Registration Statement. All of such expenses are estimates,
other than the filing and quotation fees payable to the Securities and Exchange
Commission, the National Association of Securities Dealers, Inc. and The Nasdaq
National Market.
<TABLE>
<S> <C>
Filing Fee -- Securities and Exchange Commission................... $90,919
Filing Fee -- National Association of Securities Dealers, Inc...... 30,500
Quotation Fees -- The Nasdaq National Market....................... 50,000
Advisory Fees...................................................... *
Reimbursement to Inter-Atlantic Securities Corp.................... *
Fees and Expenses of Counsel....................................... *
Fees and Expenses of Accountants................................... *
Printing Expenses.................................................. *
Blue Sky Fees and Expenses......................................... *
Fees and Expenses of Transfer Agent................................ *
Miscellaneous Expenses............................................. *
-------
Total.................................................... $ *
=======
</TABLE>
- ---------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 31 of the Registrant's Bye-Laws provides that: (a) the directors
and officers of the Registrant shall be indemnified from and against all
actions, costs, charges, losses, damages and expenses which they shall incur by
reason of any act done in connection with their duty as a director or officer of
the Registrant (b) each director and officer of the Registrant shall be
indemnified out of the funds of the Registrant against all liabilities incurred
by him as such a director or officer of the Registrant in defending any
proceedings in which judgment is given in his favor or he is acquitted or
relieved from liability and (c) funds shall be advanced to each director or
officer of the Registrant on his incurring liability prior to judgment provided
that should he be found guilty of a criminal or other offense for which he
cannot by law be indemnified he shall reimburse the Registrant for the funds
advanced.
Section 32 of the Registrant's Bye-Laws provides that each shareholder
agrees to waive any claim or right of action such shareholder might have against
any director or officer on account of any action taken by such director or
officer, or the failure of such director or officer to take any action in the
performance of his or her duties with or for the Registrant, provided that such
waiver does not extend to any matter in respect of any fraud or dishonesty that
may attach to such director.
Reference is made to the form of Underwriting Agreement to be filed as
Exhibit 1.1 hereto for provisions providing that the Underwriters are obligated,
under certain circumstances, to indemnify the directors, certain officers and
the controlling persons of the Registrant against certain liabilities under the
Securities Act of 1933, as amended (the "Securities Act").
Reference is made to the Agreement to be filed as Exhibit 10.5 hereto for
provisions providing that the Registrant and Inter-Atlantic Securities Corp. are
each obligated to indemnify the other for certain actions.
II-1
<PAGE> 74
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since its formation, the Registrant has issued the following securities
that were not registered under the Securities Act:
(a) On December 3, 1997, the Registrant sold 12,000 Common Shares to
the Annuity Re Purpose Trust, a Bermuda trust, for an aggregate price of
$12,000. The Registrant will repurchase these shares upon consummation of
the Offering and such shares will be cancelled.
(b) On December 9, 1997, the Registrant sold Class A Warrants for an
aggregate price of $238,000 to Frederick S. Hammer, Robert M. Lichten,
Michael P. Esposito, Jr., William S. Ogden, Jr., Andrew S. Lerner and
Arnold Welles to purchase up to an aggregate of 2,010,000 Common Shares
issuable upon exercise of the Class A Warrants (2,311,500 Common Shares if
the Underwriters' over-allotment option is exercised in full) at an
exercise price equal to the initial public offering price per share.
No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by an
issuer not involving a public offering. All of the foregoing securities are
deemed restricted securities for purposes of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ ----------------------------------------------------------------------------------
<S> <C>
1.1* Form of Underwriting Agreement.
3.1** Memorandum of Association.
3.2* Amended and Restated Memorandum of Association.
3.3* Bye-Laws.
4.1* Specimen Common Share Certificate.
4.2* Form of Class A Warrant.
5.1** Form of opinion of Conyers Dill & Pearman.
8.1** Form of opinion of Conyers Dill & Pearman (included in Exhibit 5.1).
8.2* Form of opinion of Drinker Biddle & Reath LLP.
10.1* Employment Agreement, dated as of December 3, 1997, between Lawrence S. Doyle and
the Registrant.
10.2* Investment Advisory Agreement, dated as of December , 1997, between Pacific
Investment Management Company and the Registrant.
10.3* Initial Stock Option Plan.
10.4* Insurance Management Agreement, dated as of December 22, 1997, between J&H Marsh &
McLennan Management (Bermuda) Limited and the Registrant.
10.5* Agreement, dated as of December 23, 1997, between Inter-Atlantic Securities Corp.
and the Registrant.
21.1** Subsidiaries of the Registrant.
23.1** Consent of Conyers Dill & Pearman (included in Exhibit 5.1).
23.2* Consent of Drinker Biddle & Reath LLP (included in Exhibit 8.2).
23.3** Consent of KPMG Peat Marwick.
</TABLE>
- ---------------
* To be filed by amendment.
** Filed herewith.
II-2
<PAGE> 75
(b) Financial Statement Schedules
All schedules of the Registrant for which provision is made in the
applicable accounting regulations of the Commission are not required, are
inapplicable, or have been disclosed in the notes to the consolidated financial
statements and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit, or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes that:
1. For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this Registration Statement as of the time it was declared effective.
2. For the purposes of determining any liability under the Securities
Act of 1933, each posteffective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
II-3
<PAGE> 76
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Hamilton, Bermuda, on the
24th day of December, 1997.
ANNUITY AND LIFE RE (HOLDINGS), LTD.
By: /s/ LAWRENCE S. DOYLE
------------------------------------
Lawrence S. Doyle
President and Chief Executive
Officer
POWER OF ATTORNEY AND SIGNATURES
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Lawrence S. Doyle as his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to this Registration Statement, or any Registration Statement
for the same offering that is to be effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933, as amended, and to file the same with
all exhibits thereto and other documents in connection therewith, or in
connection with the registration of the Common Shares under the Securities
Exchange Act of 1934, as amended, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary in connection with
such matters, as fully and to all intents and purposes as he might or could do
in person, and hereby ratifying and confirming all that said attorney-in-fact
and agent or his substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------ ------------------
<C> <S> <C>
/s/ LAWRENCE S. DOYLE President, Chief Executive December 24, 1997
- ------------------------------------------ Officer and Director
Lawrence S. Doyle (Principal Executive
Officer)
/s/ ANDREW S. LERNER Interim Chief Financial December 24, 1997
- ------------------------------------------ Officer (Principal Financial
Andrew S. Lerner and Accounting Officer)
/s/ FREDERICK S. HAMMER Chairman and Director December 24, 1997
- ------------------------------------------
Frederick S. Hammer
/s/ MICHAEL P. ESPOSITO, JR. Director December 24, 1997
- ------------------------------------------
Michael P. Esposito, Jr.
/s/ ROBERT M. LICHTEN Deputy Chairman and Director December 24, 1997
- ------------------------------------------
Robert M. Lichten
Director December 24, 1997
- ------------------------------------------
Charles G. Collis, Jr.
</TABLE>
II-4
<PAGE> 77
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ------ ----------------------------------------------------------------------------- -----
<S> <C> <C>
1.1* Form of Underwriting Agreement.
3.1** Memorandum of Association.
3.2* Amended and Restated Memorandum of Association.
3.3* Bye-Laws.
4.1* Specimen Common Share Certificate.
4.2* Form of Class A Warrant.
5.1** Form of opinion of Conyers Dill & Pearman.
8.1** Form of opinion of Conyers Dill & Pearman (included in Exhibit 5.1).
8.2* Form of opinion of Drinker Biddle & Reath LLP.
10.1* Employment Agreement, dated as of December 3, 1997, between Lawrence S. Doyle
and the Registrant.
10.2* Investment Advisory Agreement, dated as of December , 1997, between Pacific
Investment Management Company and the Registrant.
10.3* Initial Stock Option Plan.
10.4* Insurance Management Agreement, dated as of December 22, 1997, between J&H
Marsh & McLennan Management (Bermuda) Limited and the Registrant.
10.5* Agreement, dated as of December 23, 1997, between Inter-Atlantic Securities
Corp. and the Registrant.
21.1** Subsidiaries of the Registrant.
23.1** Consent of Conyers Dill & Pearman (included in Exhibit 5.1).
23.2* Consent of Drinker Biddle & Reath LLP (included in Exhibit 8.2).
23.3** Consent of KPMG Peat Marwick.
</TABLE>
- ---------------
* To be filed by amendment.
** Filed herewith.
<PAGE> 1
EXHIBIT 3.1
FORM NO. 2
[NATION OF BERMUDA SEAL]
BERMUDA
THE COMPANIES ACT 1981
MEMORANDUM OF ASSOCIATION OF
COMPANY LIMITED BY SHARES
(Section 7(1) and (2))
MEMORANDUM OF ASSOCIATION
OF
Annuity Re (Holdings), Ltd.
(hereinafter referred to as "the Company")
1. The liability of the members of the Company is limited to the amount (if
any) for the time being unpaid on the shares respectively held by them.
2. We, the undersigned, namely,
NAME ADDRESS BERMUDIAN NATIONALITY NUMBER OF
STATUS SHARES
(Yes/No) SUBSCRIBED
Anthony D. Whaley Clarendon House Yes British One
2 Church Street
Hamilton HM11
Bermuda
Edwin S. Mortimer " Yes British One
Donald H. Malcolm " Yes British One
do hereby respectively agree to take such number of shares of the Company as
may be allotted to us respectively by the provisional directors of the Company,
not exceeding the number of shares for which we have respectively subscribed,
and to satisfy such calls as may be made by the directors, provisional
directors or promoters of the Company in respect of the shares allotted to us
respectively.
<PAGE> 2
3. THE COMPANY IS TO BE AN EXEMPTED COMPANY AS DEFINED BY THE COMPANIES ACT
1981.
4. THE COMPANY HAS POWER TO HOLD LAND SITUATED IN BERMUDA NOT EXCEEDING IN ALL,
INCLUDING THE FOLLOWING PARCELS -
N/A
5. THE AUTHORISED SHARE CAPITAL OF THE COMPANY IS US$250,000 DIVIDED INTO SHARES
OF US$1.00 EACH. THE MINIMUM SUBSCRIBED SHARE CAPITAL OF THE COMPANY IS
US$12,000.
6. THE OBJECTS FOR WHICH THE COMPANY IS FORMED AND INCORPORATED ARE -
1. to act and to perform all the functions of a holding company in all its
branches and to co-ordinate the policy and administration of any
subsidiary company or companies wherever incorporated or carrying on
business or of any group of companies of which the Company or any
subsidiary company is a member or which are in any manner controlled
directly or indirectly by the Company.
2. to act as an investment company and for that purpose to acquire and hold
upon any terms and, either in the name of the Company or that of any
nominee, shares, stock, debentures, debenture stock, annuities, notes,
mortgages, bonds, obligations and securities, foreign exchange, foreign
currency deposits and commodities, issued or guaranteed by any company
wherever incorporated or carrying on business, or by any government,
sovereign, ruler, commissioners, public body or authority, supreme,
municipal, local or otherwise, by original subscription, tender,
purchase, exchange, underwriting, participation in syndicates or in any
other manner and whether or not fully paid up, and to make payments
thereon as called up or in advance of calls or otherwise and to
subscribe for the same, whether conditionally or absolutely, and to hold
the same with a view to investment, but with the power to vary any
investments, and to exercise and enforce all rights and powers conferred
by or incident to the ownership thereof, and to invest and deal with the
moneys of the Company not immediately required upon such securities and
in such manner as may be from time to time determined;
3. as set out in paragraphs (b) to (n) and (p) to (u) inclusive of the
Second Schedule to The Companies Act 1981.
7. POWERS OF THE COMPANY
1. The Company shall, pursuant to Section 42 of the Companies Act 1981,
have the power to issue preference shares which are, at the option of
the holder, liable to be redeemed.
<PAGE> 3
Signed by each subscriber in the presence of at least one witness attesting the
signature thereof.
- --------------------------------- -------------------------------
/s/ Anthony D. Whaley [Signature Illegible]
- --------------------------------- -------------------------------
/s/ Edwin S. Mortimer [Signature Illegible]
- --------------------------------- -------------------------------
/s/ Donald H. Malcolm [Signature Illegible]
- --------------------------------- -------------------------------
(Subscribers) (Witnesses)
SUBSCRIBED this 10th day of November, 1997
<PAGE> 4
STAMP DUTY (To be affixed)
<PAGE> 1
EXHIBIT 5.1
December __, 1997
Annuity and Life Re (Holdings), Ltd.
Victoria Hall
Victoria Street
P.O. Box HM1262
Hamilton, HM FX
Bermuda
Dear Sirs:
RE: REGISTRATION STATEMENT ON FORM S-1
We have acted as special legal counsel to Annuity and Life Re (Holdings), Ltd.,
a Bermuda corporation (the "Company"), in connection with the preparation and
filing with the Securities and Exchange Commission of a Registration Statement
on Form S-1 under the Securities Act of 1933, as amended (the "Registration
Statement"), related to the offering of 16,750,000 common shares (the "Common
Shares") of Annuity and Life Re (Holdings), Ltd. (the "Offering").
As such counsel, we have examined originals, or copies certified or otherwise
identified to our satisfaction, of the Registration Statement (but not any of
the schedules or exhibits attached thereto), the Memorandum of Association and
Bye-Laws of the Company as well as resolutions of the Company's Board of
Directors. We have also examined originals, or copies certified to our
satisfaction, of such corporate records of the Company and other instruments,
certificates of appropriate public officials and certificates of officers and
representatives of the Company and other documents as we have deemed necessary
as a basis for the opinions hereinafter expressed. In such examination, we have
assumed the authenticity of all documents submitted to us as originals, the
conformity with the originals of all documents submitted to us as copies, the
genuineness of all signatures and the legal capacity of natural persons.
Cont.../
<PAGE> 2
Annuity and Life Re (Holdings), Ltd.
Page 2
December __, 1997
On the basis of the foregoing, we are of the opinion that:
1. The discussions set forth in the prospectus contained in the Registration
Statement under the headings "ENFORCEABILITY OF CIVIL LIABILITIES UNDER
UNITED STATES FEDERAL SECURITIES LAWS," "BUSINESS -- Regulation --
Bermuda", "CERTAIN TAX CONSIDERATIONS - Taxation of the Company and Annuity
Reassurance - Bermuda" and "CERTAIN TAX CONSIDERATIONS - Taxation of
Shareholders - Bermuda" accurately reflect our opinion as to such matters.
2. The authorised capital of the Company established under its Memorandum of
Association is US$150,000,000. The issue of the Common Shares pursuant to
the Offering has been duly authorised and when the Common Shares have been
issued and paid for as contemplated in the Registration Statement the
Common Shares will be validly issued, fully paid and non-assessable
(meaning that no further sums are payable with respect to the holding of
such Common Shares now or in the future).
We are members of the bar of Bermuda, and we have made no investigation of and
express no opinion in relation to the laws of any jurisdiction other than
Bermuda. This opinion is to be governed by and construed in accordance with the
laws of Bermuda and is limited to and is given on the basis of the current law
and practice in Bermuda.
We consent to the filing of this opinion as an exhibit to the Registration
Statement. We also consent to the reference made to us under the captions
"Enforceability of Civil Liabilities" and "Certain Tax Considerations" in the
prospectus contained in the Registration Statement.
Yours faithfully
<PAGE> 1
Exhibit 21.1
Subsidiaries of the Registrant
Annuity and Life Reassurance, Ltd.
<PAGE> 1
EXHIBIT 23.3
The Board of Directors
Annuity and Life Re (Holdings), Ltd.
We consent to the use of our report included herein and to the reference to our
firm in the prospectus, under the heading "Experts".
/s/ KPMG Peat Marwick
Hamilton, Bermuda
December 24, 1997
