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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-23625
ANNUITY AND LIFE RE (HOLDINGS), LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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BERMUDA NOT APPLICABLE
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
CUMBERLAND HOUSE, 1 VICTORIA STREET, HM 11
HAMILTON, BERMUDA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (441) 296-7667
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON SHARES, $1.00 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 15, 2000, the aggregate market value of Common Shares, $1.00
par value, held by non-affiliates was $631,124,975, based on the closing price
as reported by the Nasdaq National Market.
As of March 15, 2000, 25,499,999 Common Shares, $1.00 par value, were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
Certain information required by Items 10, 11, 12 and 13 of Form 10-K is
incorporated by reference into Part III hereof from the registrant's proxy
statement for its 2000 Annual Meeting of Shareholders, which is expected to be
filed with the Securities and Exchange Commission (the "Commission") within 120
days of the close of the registrant's fiscal year ended December 31, 1999.
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TABLE OF CONTENTS
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PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 8
Item 3. Legal Proceedings........................................... 9
Item 4. Submission of Matters to a Vote of Security Holders......... 9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 9
Item 6. Selected Financial Data..................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 10
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 16
Item 8. Financial Statements and Supplementary Data................. 17
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 39
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 39
Item 11. Executive Compensation...................................... 39
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 39
Item 13. Certain Relationships and Related Transactions.............. 39
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 39
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PART I
ITEM 1. BUSINESS.
OVERVIEW
Annuity and Life Re (Holdings), Ltd. ("the Company") was incorporated on
December 2, 1997 under the laws of Bermuda. We provide annuity and life
reinsurance to select insurers and reinsurers through our wholly-owned
subsidiaries: Annuity and Life Reassurance, Ltd., which is licensed under the
insurance laws of Bermuda as a long term insurer; and Annuity and Life Re
America, Inc., an insurance holding company based in the United States.
On September 7, 1999, we signed an agreement to acquire Capitol Bankers
Life Insurance Company. Capitol Bankers is domiciled in the United States and is
authorized to conduct its life insurance business in 43 states of the United
States. Our completion of the acquisition, however, is subject to regulatory
approval.
BUSINESS WRITTEN
General
Our reinsurance business generally consists of entering into contractual
arrangements (known as treaties) with primary insurers (known as ceding
companies) whereby we agree to indemnify the ceding company for all or a portion
of the risks associated with the underlying insurance policy in exchange for a
reinsurance premium. We also may enter into retrocessional reinsurance
arrangements with other reinsurers, which operate in a manner similar to the
underlying reinsurance arrangement described above. Under retrocessional
reinsurance arrangements, we shift a portion of the risk associated with the
underlying insurance policy to the retrocessionaires.
We write reinsurance agreements on an automatic basis or facultative basis,
and market our reinsurance directly, as well as through reinsurance
intermediaries or brokers. An automatic treaty provides for a ceding company to
cede contractually agreed-upon risks on identified types of business that meet
established criteria to a reinsurer and binds the reinsurer without obtaining
its further approval. Facultative reinsurance is the reinsurance of individual
risks, which allows a reinsurer the opportunity to analyze and separately
underwrite a risk before agreeing to accept the risk. Both automatic treaty and
facultative reinsurance may be written on either a quota share basis, where a
percentage of each risk in the reinsured class of risk is assumed by the
reinsurer from the ceding company with premiums proportional to the assumed risk
being paid to reinsurers, or an excess of loss basis, where reinsurers indemnify
the ceding company up to a contractually-specified amount for a portion of
claims exceeding a specified retention amount in consideration of
non-proportional premiums being paid to the reinsurer.
Our principal target market is North America, particularly the United
States, and we operate in one business segment. Within that segment our major
product lines are traditional life reinsurance and annuity reinsurance that
cover the following categories of risks: (i) mortality, (ii) investment, (iii)
lapsation, (iv) interest rate and (v) expense. We write reinsurance
predominantly on a direct basis with primary life insurance companies. The
reinsurance agreements typically remain in force for the life of the underlying
policies reinsured, which on average range from ten to thirty years. Each year,
a portion of the business under an existing treaty terminates due to, among
other things, surrenders and/or lapses of underlying policies, deaths of
underlying insureds and the exercise of recapture options.
Our life reinsurance business principally involves the reinsurance of
ordinary life insurance, primarily for mortality risks. Ordinary life
reinsurance generally is the reinsurance of individual term life insurance
policies, whole life insurance policies, universal life insurance policies and
joint and survivor insurance policies. Our ordinary life line of business
reinsures all of these products. The profitability of our life reinsurance
product depends in large part on the volume and amount of death claims incurred.
Although death claims are reasonably predictable over many years, claims become
less predictable over shorter periods and are subject to fluctuation from
quarter to quarter and year to year. Significant fluctuations from period to
period could adversely affect our results of operations.
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Our annuity reinsurance business principally involves "fixed" general
account annuities. In the future, we may also reinsure "variable" annuities,
pay-out annuities and certain structured settlement contracts.
The following table presents selected information for the indicated periods
concerning our insurance operations:
Distribution of Policy Revenues and Insurance in Force
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YEAR ENDED DECEMBER 31
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1999 1998
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Life Reinsurance
Policy Revenues
First Year(1).......................................... $ 72,268,437 $ 27,943,890
Renewal................................................ 28,566,570 --
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Total................................................ $ 100,835,007 $ 27,943,890
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Insurance In-force at end of year (in thousands)............ $ 45,407,000 $ 22,538,000
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Annuity Reinsurance
Annuity Deposits.......................................... $1,603,382,955 $1,283,675,809
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(1) Represents revenues received from the reinsurance of life insurance in the
first year of the reinsurance contract.
Underwriting
We have developed underwriting guidelines with the objective of controlling
the risks of the reinsurance policies written as well as to determine
appropriate pricing levels. Any deviation from the approved guidelines requires
the approval of our Board of Directors. Subject to the approval of our Board,
these guidelines may be amended from time to time in response to changing
industry conditions, market developments, changes in technology and other
factors.
In implementing our underwriting guidelines, we utilize an experienced
underwriting team to select opportunities with acceptable risk/return profiles.
In deciding whether to assume any particular reinsurance business, we consider
many factors, including the type of risks to be covered, actuarial evaluations,
historical performance data for the cedent and the industry as a whole, the
cedent's retention, the product 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 our reinsurance products is based on our
sophisticated actuarial and investment models which incorporate a number of
factors including assumptions for mortality, expenses, demographics, persistency
and investment returns as well as macroeconomic factors, such as inflation, and
regulatory factors, such as taxation and surplus requirements.
All of our policy revenues derived from ordinary life and annuity
reinsurance are written on an automatic treaty quota share basis with a focus on
large blocks of business where the underlying policies meet our underwriting
criteria. To a lesser extent, we may enter into facultative reinsurance
arrangements with primary insurers with which we have automatic treaty
reinsurance business. We generally require ceding companies to retain at least
10% of every life insurance risk reinsured, and we limit our own net liability
on any single-life risk to $2.0 million.
The reinsurance agreements typically remain in force for the life of the
underlying policies reinsured. However, these agreements in some instances
provide for recapture rights on the part of the ceding company. Recapture rights
permit the ceding company to reassume all or a portion of the risk formerly
ceded to us after an agreed upon period of time (generally 10 years), subject to
certain other conditions. Recapture is a factor
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taken into consideration when pricing a reinsurance agreement and in some cases
can be mitigated by various contractual provisions.
POLICY BENEFIT LIABILITIES
Policy benefit liabilities comprise the majority of our financial
obligations. Policy benefit liabilities for other than annuities and interest
sensitive life insurance products reflected in our consolidated financial
statements included elsewhere in this report are based on our estimates of
mortality, persistency and investment income, with estimated provisions for
adverse deviation. The liabilities for policy benefits we have established for
individual risks or classes of business may be greater or less than those
established by ceding companies due to the use of different mortality and other
assumptions. Policy benefit liabilities for annuities and interest sensitive
life insurance products are reported at the accumulated fund balance of these
contracts. Policy benefit liabilities include both mortality and morbidity
claims in the process of settlement and claims that have been incurred but not
yet reported. Actual experience in a particular period may be worse than assumed
experience and, consequently, may adversely affect our operating results for the
period. See Note 2(d) of "Notes to Consolidated Financial Statements" for
additional information regarding reserve assumptions under generally accepted
accounting principles ("GAAP").
INVESTMENTS
Invested Assets
Our investment decisions are governed by the investment guidelines
established and approved by our Board of Directors.
Our investment policy is designed to achieve above average risk-adjusted
total returns, maintain a high quality portfolio, maximize current income,
maintain adequate levels of liquidity and match the cash flows of the portfolio
to the anticipated cash flows of our related insurance liabilities. The
investment guidelines require our overall fixed income investment portfolio to
maintain a minimum weighted average rating of "A." Standard & Poor's "A" rating
on fixed income security signifies its judgment that the security 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. We do not invest in any fixed income securities in
emerging markets or which are not rated by a major rating agency. The investment
guidelines allow us to invest in fixed income securities that are rated below
investment grade. These investments are limited to 25% of the amount by which
the invested assets exceed the related insurance liabilities.
At December 31, 1999, our invested assets, including cash and cash
equivalents, had an aggregate fair value of $304,060,000, and all of the
securities held were fixed maturities with a weighted average investment quality
rating of "AA-". At December 31, 1999, the weighted average duration of invested
assets was 3.7 years. If the duration of our invested assets was to differ
materially from the duration of our liabilities and if significant rapid
increases in market interest rates were to occur, we could be required to sell
invested assets at a loss. Conversely, if significant rapid decreases in market
interest rates were to occur, we would have gains on invested assets but we
could earn less income than we credit to policyholders. These consequences could
have a material adverse effect on our capital resources and financial condition.
Our investment securities currently are managed by three professional
investment advisors, Pacific Investment Management Company ("PIMCO"), Alliance
Capital Management Corporation ("ACM") and Prudential Investment Corporation
("PRU"), each of which manages a segment of the portfolio. We directly manage
certain short-term investments aggregating approximately $3 million at fair
value. The agreements with PIMCO and PRU may be terminated by either party upon
thirty days notice; the agreement with ACM may be terminated by either party
upon forty-five days notice. The performance of PIMCO, ACM and PRU and the fees
associated with the arrangements are periodically reviewed by our Boards of
Directors.
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Funds Withheld at Interest
Generally, the ceding companies hold assets related to annuity reinsurance
agreements and appoint investment managers to manage these assets in segmented
portfolios. Under the terms of the reinsurance agreements, the investment income
that accrues to us is dependent on the performance of the underlying portfolios.
These assets are included on our Balance Sheet as Funds Withheld at Interest. At
December 31, 1999, the carrying value was approximately $1,532,653,000.
COMPETITION
The reinsurance industry is highly competitive, and we compete with the
major reinsurers. Our principal target market is North America. According to
management's estimates, there are approximately 25 reinsurers of annuity or life
insurance products located in the United States. There are also numerous foreign
reinsurers that compete for reinsurance business in the United States as well as
elsewhere. These competitors primarily reinsure life insurance and health
insurance risks and, to a lesser degree, annuity risks. We expect most, if not
all, of these competitors to compete for annuity and life reinsurance business
in the future. Most of these competitors are well established, have significant
operating histories, strong claims paying ability and long-standing client
relationships through existing treaties with cedents.
Reinsurers compete on the basis of many factors, including premium charges,
their reputation and perceived financial strength of the reinsurers, other terms
and conditions of the 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. We believe that our primary
competitors include Lincoln National Corporation, Transamerica Occidental Life
Insurance Company, Reinsurance Group of America, Inc., ING Reinsurance,
Employers Reassurance Corporation and Swiss Reinsurance. However, within the
reinsurance industry, our competitors can change from year to year.
RATINGS
A.M. Best, an independent insurance company rating organization, has rated
Annuity and Life Reassurance "A-" (Excellent). A.M. Best assigns an "A-"
(Excellent) rating to companies that have on balance, in its opinion, excellent
financial strength, operating performance and market profile as well as strong
abilities to meet their ongoing obligations to policyholders.
Additionally, Annuity and Life Reassurance has received an "A" (high)
rating from Duff & Phelps and an "A-" (good financial security) rating from
Standard & Poor's.
EMPLOYEES
As of December 31, 1999, we had eleven employees located in Bermuda and two
employees located in the United States.
REGULATION
Bermuda
Annuity and Life Reassurance is licensed as a long-term insurer under the
Bermuda Insurance Act of 1978, as amended, and Related Regulations
(collectively, the "Insurance Act"). The Insurance Act, which regulates the
insurance business of Annuity and Life Reassurance, provides that no person may
carry on an insurance business in Bermuda unless registered as an insurer under
the Insurance Act by the Bermuda Minister of Finance. 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.
The Insurance Act imposes on Bermuda insurance companies minimum 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. Some of the significant aspects of the Bermuda insurance
regulatory framework are set forth below.
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Classification of Insurers. The Insurance Act distinguishes between
insurers carrying on long term business and insurers carrying on general
business. Because Annuity and Life 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 will be regulated as such under the
Insurance Act.
Cancellation of Insurer's Registration. An insurer's registration may be
cancelled by the Minister on the 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.
Annual Statutory Financial Return. Annuity and Life 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. If an insurer's 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.
Statutory Financial Statements. An insurer must prepare annual Statutory
Financial Statements. The Insurance Act prescribes rules for the preparation and
substance of these 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. An insurer is
required to submit the annual Statutory Financial Statements as part of the
annual Statutory Financial Return.
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 that audits the insurer's financial statements and
reports for presentation to its shareholders. Annuity & Life Reassurance's
independent auditor is KPMG.
Approved Actuary. Annuity and Life 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 must 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 and Life
Reassurance's approved actuary is Robert P. Mills.
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.
Annuity and Life Reassurance met the minimum statutory capital and surplus
requirement as of December 31, 1999.
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
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effect would be to increase the insurer's liabilities, (iii) not to make certain
investments, (iv) to realize certain investments, (v) to maintain, or transfer
to the custody of a specified 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.
Under the Insurance Act, 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 &
Life Reassurance is at our offices in Hamilton, Bermuda, and Lawrence S. Doyle,
our President and Chief Executive Officer, is the principal representative of
Annuity & Life 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 that the insurer for which the principal representative acts will
become 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. We have been designated as
non-resident for exchange control purposes by the Bermuda Monetary Authority.
This designation allows us to engage in transactions, and to pay dividends to
non-residents of Bermuda who are holders of our common shares, in currencies
other than the Bermuda Dollar.
The transfer of our common shares between persons regarded as non-resident
in Bermuda for exchange control purposes and our issuance of common shares 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. Annuity
and Life Reassurance's common shares cannot be transferred without the consent
of the Bermuda Monetary Authority.
As "exempted companies," we are exempt from Bermuda laws restricting the
percentage of share capital that may be held by non-Bermudians, but we may not
participate in certain business transactions, including (i) acquiring or holding
land in Bermuda (except that required for our 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) taking mortgages on land in
Bermuda to secure an amount in excess of $50,000 without the consent of the
Minister, (iii) acquiring any bonds or debentures secured by any land in
Bermuda, other than certain types of Bermuda government securities, or (iv)
carrying on business of any kind in Bermuda, including insuring domestic risks,
except in furtherance of business risks we have undertaken or under a license
granted by the Minister.
United States
General. Our Bermuda operating subsidiary, Annuity and Life Reassurance,
is not licensed or admitted as an insurer in any state of the United States and
is not directly subject to regulation in any state of the United States. The
insurance laws of each state in the United States regulate the sale of insurance
and reinsurance within its jurisdiction by reinsurers, such as Annuity and Life
Reassurance, which are not admitted to do business within its jurisdiction.
Annuity and Life Reassurance conducts its business through its Bermuda office
either directly or through intermediaries, such as brokers and consultants.
Annuity and Life Reassurance does not maintain an office, and its personnel do
not 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 these activities.
Capitol Bankers Life Insurance Company, which, subject to regulatory
approval, we expect to acquire, is licensed and authorized to conduct life
insurance business in 43 states of the United States. The insurance laws and
regulations, as well as the supervisory authority that may be exercised by the
various insurance
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departments, vary by jurisdiction, but generally grant broad powers to
supervisory agencies or regulators to examine and supervise insurance companies
and insurance holding companies with respect to every significant aspect of the
conduct of the insurance business. These laws and regulations generally require
insurance companies to meet certain solvency standards and asset tests, to
maintain minimum standards of business conduct and to file certain reports with
regulatory authorities, including information concerning their capital
structure, ownership and financial condition, and subject insurers to potential
assessments for amounts paid by guarantee funds. The insurance laws of Michigan
have the most significant impact on Capitol Bankers because that is the
jurisdiction in which it was formed.
Annuity and Life Re America, Inc. is domiciled in Delaware and regulated as
a Delaware corporation. The Delaware insurance holding company system laws and
regulations generally do not apply to Annuity and Life Re America, Inc. because
it is not an insurer and they will not apply solely because of our pending
acquisition of Capitol Bankers because Capitol Bankers is not required to
register with the Delaware Insurance Commissioner under applicable provisions of
these laws and regulations. Nevertheless, after our acquisition of Capitol
Bankers, Annuity and Life Re America, Inc.'s books and records may be subject to
inspection by the Michigan insurance regulators because Annuity and Life Re
America, Inc. will be an affiliate of Capital Bankers, which is subject to
Michigan's holding company laws.
Current Michigan law (applicable to Capitol Bankers) permits the payment of
ordinary shareholder dividends or distributions, the fair market value of which,
together with that of other dividends or distributions made during the preceding
twelve months, does not exceed the greater of (i) 10% of Capitol Bankers'
statutory surplus as regards policyholders as of the immediately preceding
December 31, or (ii) statutory net gain from operations, excluding realized
capital gains, for the immediately preceding calendar year, excluding pro rata
distributions of any class of Capitol Bankers' own securities. Any proposed
dividend in excess of this amount is considered an "extraordinary dividend" and
may not be paid until it has been approved, or a 30-day waiting period has
passed during which it has not been disapproved, by the Michigan Insurance
Commissioner. In addition, ordinary shareholder dividends may be paid only from
earned surplus (as opposed to contributed surplus) without the prior approval of
the Michigan Insurance Commissioner.
In addition to the foregoing, Michigan insurance laws require that the
statutory surplus of Capitol Bankers following any ordinary shareholder dividend
be reasonable in relation to its outstanding liabilities and adequate to meet
its needs so that Capitol Bankers is and continues to be safe, reliable and
entitled to public confidence. If the Michigan Insurance Commissioner determines
that Capitol Bankers' policyholder surplus is not reasonable in relation to its
outstanding liabilities, and is not adequate to meet its financial needs, then
the Commissioner may limit or disallow the payment of shareholder dividends and
may apply for an order enjoining Capitol Bankers from continuing this violation
of the insurance laws.
Credit for Reinsurance. 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 ceding companies are located governing "credit for reinsurance" which are
imposed on its ceding companies. In general, a ceding company that 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 policy reserves, claims and other
amounts ceded to the reinsurers. Many jurisdictions 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.
ITEM 2. PROPERTIES.
We conduct our operations from leased office space located at Cumberland
House, 1 Victoria Street, Hamilton, HM 11, Bermuda. Annuity and Life Re America
conducts its operations from leased space located at 406 Farmington Avenue,
Farmington, Connecticut, USA. We believe our space is adequate to meet our
current and expected needs.
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ITEM 3. LEGAL PROCEEDINGS.
We are not currently involved in any litigation or arbitration. We
anticipate that in the ordinary course of business we may be subject to
litigation and arbitration.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of 1999, no matters were submitted to our
security holders for a vote.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
Our common shares have been listed for trading on the Nasdaq National
Market since April 17, 1998, the date of our initial public offering, under the
symbol "ALRE". Based on information reported in the NASDAQ ONLINE reporting
system, the high and low sales prices per common share for each quarterly period
from April 17, 1998 to December 31, 1999 were as follows:
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
PERIOD HIGH LOW HIGH LOW
- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
January 1 - March 31............................ 27.000 19.750 -- --
April 1 - June 30............................... 26.375 19.094 24.875 21.688
July 1 - September 30........................... 24.875 20.875 22.875 17.000
October 1 - December 31......................... 28.500 20.375 27.000 18.250
</TABLE>
As of March 15, 2000, there were approximately 3,300 holders of record of
our outstanding common shares.
DIVIDENDS
We declared quarterly dividends of $0.04 per common share, for a total of
$0.16 per common share, in 1999. On February 10, 2000, our Board of Directors
declared a quarterly dividend of $0.04 per share to be paid in March 2000.
The declaration and payment of future dividends to holders of our common
shares will be at the discretion of our Board of Directors and will depend upon
our earnings and financial condition, capital requirements of our subsidiaries,
regulatory considerations and other factors our Board of Directors deems
relevant. (See "Liquidity" in Management's Discussion and Analysis of Financial
Condition and Results of Operations and Note 14 of "Notes to Consolidated
Financial Statements" included elsewhere in this report.) Our general policy is
to retain most of our earnings to finance the growth and development of our
business.
ITEM 6. SELECTED FINANCIAL DATA.
The following table presents selected financial data and other operating
information. The selected financial data have been derived from our consolidated
financial statements and should be read in conjunction with our consolidated
financial statements and accompanying notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this report.
9
<PAGE> 11
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
INCOME STATEMENT DATA FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998:
Revenues:
Net premiums.............................................. $ 100,835,007 $ 27,943,890
Investment income, net of related expenses................ 85,089,811 24,130,550
Net realized investment gains (losses).................... (1,284,769) 2,673,281
Other..................................................... 3,215,429 311,243
-------------- --------------
Total revenues............................................ $ 187,855,478 $ 55,058,964
-------------- --------------
Benefits and expenses:
Claims and other policy benefits.......................... $ 79,953,160 $ 23,297,115
Interest credited to interest sensitive contract
Liabilities............................................ 22,312,684 1,989,000
Policy acquisition costs and other insurance expenses..... 42,200,688 6,541,872
Operating expenses........................................ 7,685,802 4,150,321
Organizational expenses................................... -- 69,039
-------------- --------------
Total benefits and expenses............................... $ 152,152,334 $ 36,047,347
-------------- --------------
Net Income.................................................. $ 35,703,144 $ 19,011,617
============== ==============
Basic Earnings per common share............................. $ 1.40 $ 0.81
Diluted Earnings per common share........................... $ 1.31 $ 0.76
Dividends per common share.................................. $ 0.16 $ 0.04
Weighted average shares outstanding......................... 25,499,999 24,020,999
BALANCE SHEET DATA:
Invested Assets............................................. $ 304,060,124 $ 342,614,194
Funds Withheld.............................................. $1,532,652,990 $1,200,101,268
Total Assets................................................ $2,056,085,988 $1,706,510,180
Stockholders' equity........................................ $ 392,054,894 $ 375,340,246
OTHER FINANCIAL DATA:
Book value per common share(1).............................. $ 15.82 $ 14.57
First year reinsurance premiums assumed..................... $ 72,268,437 $ 27,943,890
Life insurance in force (in thousands)...................... $ 45,407,000 $ 22,538,000
</TABLE>
- ---------------
(1) Book value per share is calculated by dividing end of period stockholders'
equity (excluding unrealized investment gains or losses) by the end of
period common shares outstanding.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following analysis of our consolidated financial condition and results
of operations should be read in conjunction with "Selected Financial Data" and
the consolidated financial statements and accompanying notes included elsewhere
in this report. The preparation of our financial statements in conformity with
generally accepted accounting principles requires the use of estimates and
assumptions developed by our management. Any adjustments to reported bases of
assets or liabilities resulting from changes in estimates are reflected in
earnings in the period the estimates are revised. Certain management estimates
are based, in part, on information provided by ceding companies. As is usual in
the reinsurance business, our ceding companies periodically update, refine and
revise the reinsurance information they provide to us. The financial effects
resulting from the incorporation of revised data are reflected in earnings as
changes in estimates.
With the exception of historical information, the matters contained in this
report are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act. Such statements may include, but are not
limited to, projections of earnings, revenues, income or loss, capital
expenditures, plans for future operations and financing needs or plans, as well
as assumptions relating to the foregoing. The words
10
<PAGE> 12
"expect", "project", "estimate", predict", "anticipate", "believes", and similar
expressions are also intended to identify forward-looking statements.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results, performance and achievements could differ materially from those set
forth in, contemplated by or underlying the forward-looking statements. We
assume no obligation to update any forward looking statement to reflect actual
results or changes in or additions to the factors affecting such forward looking
statements.
The factors that could affect forward-looking statements include, but are
not limited to: uncertainties relating to general economic and business
conditions that may impact the reinsurance marketplace, including, among other
things, changes in interest rate levels and the liquidity of certain securities;
changes in laws and government regulations applicable to us; our ability to
successfully implement our operating strategies; material changes in the level
of our operating expenses; material changes in mortality and morbidity
experience; and material changes in persistency. In addition, as part of our
business strategy we evaluate from time to time opportunities to acquire, make
investments in, or enter into joint ventures or other strategic alliances with
companies whose businesses compliment our business, some of which could be
material. If an acquisition is consummated, we may need to incur indebtedness in
connection with the acquisition. In addition, we could have difficulty
assimilating the personnel and operations of the acquired company, which would
prevent us from realizing expected synergies and could disrupt our ongoing
business and distract management and resources. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual outcomes may vary materially from those indicated.
GENERAL
Our two major product lines are traditional ordinary life reinsurance and
annuity reinsurance. The reinsurance agreements typically remain in force for
the life of the underlying policies reinsured, which on average range from ten
to thirty years. Each year, a portion of the business under an existing treaty
terminates due to among other things, surrenders and/or lapses of underlying
policies, deaths of underlying insureds and the exercise of recapture options.
The profitability of the life reinsurance product line depends in large
part on the volume and amount of death claims incurred. While death claims are
reasonably predictable over many years, claims become less predictable over
shorter periods and are subject to fluctuation from quarter to quarter and year
to year. Significant fluctuations from period to period could adversely affect
the results of operations.
At December 31, 1999, our life insurance in force amounted to $45.4
billion. We assign to third parties, or "retrocede," portions of certain risks
in excess of a predetermined retention amount for which we have accepted
liability. At December 31, 1999, we had ceded $34.9 million, or 0.08%, of our in
force life insurance coverage.
Our primary annuity product is reinsurance of a general account fixed
deferred annuity. The profitability of the deferred annuity reinsurance product
line depends on earning a targeted spread between the interest rate earned on
the supporting asset base and the interest rate credited to the underlying
annuity liability. This spread is interest rate sensitive, as fluctuations in
the general level of interest rates from period to period may cause fluctuations
in the results of operations. At December 31, 1999, our liability for deferred
annuity contracts amounted to $1.6 billion. Additional information concerning
the spread between the interest rate earned on the supporting asset base and the
interest rate credited to the underlying annuity liability is presented
elsewhere in this report under the headings "Funds Withheld at
Interest -- Interest Sensitive Contract Liabilities" and "Quantitative and
Qualitative Disclosures about Market Risk."
OPERATING RESULTS
We began our insurance operations on April 17, 1998 following the
completion of our initial public offering and direct sales of our common shares.
A loss of $449,000 was incurred during the three month period ended March 31,
1998 relating to expenses and costs incurred in our formation and organization.
For purposes of this discussion, we compare our results for the year ended
December 31, 1999 to our results for the eight and one half month period ended
December 31, 1998. Part of the difference in our operating results for these
11
<PAGE> 13
two periods is attributable to the difference in length of the two operating
periods. Information regarding the full year ended December 31, 1998 is included
in the financial statements filed as a part of this report.
Net Income. For the year ended December 31, 1999, we had consolidated net
income of $35,703,000, or $1.40 per common share ($1.31 per common share on a
fully diluted basis), compared with $0.81 per common share ($0.76 per common
share on a fully diluted basis) for the initial operating period of
approximately eight and one-half months ended December 31, 1998. Earnings per
share for the year ended December 31, 1998 has been calculated using earnings
and the number of shares outstanding since the beginning of the second fiscal
quarter.
Net Operating Income. In addition to net income, we report net operating
income. This is not a substitute for net income computed in accordance with
generally accepted accounting principles (GAAP), but is an important measure
used by management, investors and others to measure our results. We define net
operating income as net income excluding realized gains and losses from the sale
of investments. Our definition of net operating income may differ from that used
by other public life and annuity companies.
For the year ended December 31, 1999 our net operating income increased
120% over the prior year. Net operating income for the year ending December 31,
1999 was $36,988,000 or $1.45 per common share, $1.36 per common share on a
fully diluted basis, compared with $0.70 per common share, $0.66 per common
share on a fully diluted basis for the initial operating period of approximately
eight and one-half months ended December 31, 1998. The increase in net operating
income is due to the growth and development of our insurance operations and
favorable underwriting and investment results.
Net Premiums. Net premium revenue for the year ended December 31, 1999 was
$100,835,000, an increase of 261% over the initial operating period of
approximately eight and one-half months ended December 31, 1998. All premium
revenue was derived from traditional ordinary life reinsurance we developed
directly and through the use of intermediaries. The growth reflects the level of
new business written and the increase in the face amount of insurance in force.
At December 31, 1999 the total face amount of life insurance in force was $45.4
billion compared with $22.5 billion at December 31, 1998. New business writings
and premium revenue levels are significantly influenced by the seasonal nature
of the life reinsurance marketplace and by large transactions and therefore can
fluctuate from period to period.
Net Investment Income. Total net investment income for the year ended
December 31, 1999 was $85,090,000, an increase of 253% over the initial
operating period of eight and one half months ended December 31,1998. The growth
in the investment income is primarily due to the income earned on Funds Withheld
under modified coinsurance agreements related to our Interest Sensitive
Contracts Liabilities. The income earned on the Funds withheld was $64,606,000
for the year ended December 31, 1999 compared with $8,927,000 for the initial
operating period of eight and one-half months ended December 31, 1998. The
average yield rate earned on an annualized basis on the invested assets,
excluding Funds Withheld, was 6.29% for the year ended December 31, 1999
compared with 6.32% for the period ending December 31, 1998.
Realized Investment Gains (Losses). Realized investment losses were
$1,285,000 for the year ended December 31, 1999 compared with realized gains of
$2,673,000 for the initial operating period of eight and one-half months ended
December 31, 1998. These gains and losses result from normal activity in the
management of our investment portfolio.
We do not consider realized gains and losses to be recurring components of
earnings. We make decisions concerning the sales of invested assets based on a
variety of market, business and other factors.
During the year ended December 31, 1999, we incurred unrealized losses of
$14,992,000, as compared with unrealized gains of $3,723,000 incurred during the
period ended December 31,1998 which were included in Other Comprehensive Income
(Loss). The change in unrealized gains and losses is principally related to the
increase in the general level of interest rates during 1999.
Claims and Policy Benefits. Claims and Policy Benefits for the year ended
December 31, 1999 were $79,953,000 or 79% of net premium as compared with
$23,297,000 or 83% of net premium for the initial operating period of eight and
one-half months ended December 31, 1998. Mortality experience has been
12
<PAGE> 14
favorable, falling within pricing parameters. We expect mortality to be fairly
constant over long periods of time, but it will fluctuate from period to period.
Reserve levels are in part determined by claims reported from ceding companies,
our aggregate experience and overall mortality trends.
Interest Credited to Interest Sensitive Contract Liabilities. Interest
credited to interest sensitive contract liabilities, which are the liabilities
we assume under reinsurance agreements we enter into, was $22,313,000 for the
year ended December 31, 1999, as compared with $1,989,000 for the initial
operating period of eight and one-half months ended December 31, 1998. This
increase reflects the growth in our interest sensitive contracts liabilities and
is directly related to income earned on the related Funds Withheld at Interest.
The income earned on Funds Withheld was $64,606,000 for the year ended December
31, 1999, as compared with $8,927,000 for the initial operating period of eight
and one-half months ended December 31, 1998.
Policy Acquisition Costs and Other Insurance Expenses. Policy Acquisition
Costs and Other Insurance Expenses, consisting primarily of allowances and
amortization of deferred policy acquisition costs, were $42,201,000 for the year
ended December 31, 1999, as compared with $6,542,000 for the initial operating
period of eight and one-half months ended December 31, 1998. Generally, policy
acquisition costs and other insurance expenses fluctuate with business volume
and changes in product mix. The increase in these costs reflects the growth and
development of our life insurance and annuity business.
Other Operating Expenses. Operating expenses were $7,686,000 or 4.1% of
total revenue for the year ended December 31, 1999, as compared with $3,770,000
or 6.8% of total revenue for the initial operating period of eight and one-half
months ended December 31, 1998. The decrease in the ratio of operating expenses
to total revenue is due to the growth and development of our insurance
operations and our revenue base. We consider the operating expense level to be
low by industry standards and in line with our plan to be a low cost provider.
FINANCIAL CONDITION
Investments. Invested assets, including cash and cash equivalents,
amounted to $304,060,000 at December 31, 1999 as compared with $342,614,000 at
December 31, 1998. The change in invested assets during 1999 is due primarily to
the unrealized losses incurred in the year, the funds used in our operating
activities and payment of shareholder dividends. At December 31, 1999 unrealized
losses total $11,269,000 as compared with total unrealized gains of $3,723,000
at December 31, 1998. The change in unrealized gains and losses is principally
related to the increase in the general level of interest rates during 1999.
Our investment policy is designed to achieve above average risk adjusted
total returns, maintain a high quality portfolio, maximize current income,
maintain an adequate level of liquidity and match the cash flows of the
portfolio to the required cash flows for the related liabilities.
We do not engage in trading activities to recognize realized investment
gains and, thus, do not have a trading portfolio. However, we evaluate the
desirability of continuing to hold a security when market conditions,
creditworthiness or other measurement factors change. These changes may relate
to a change in the credit risk of an issuer and a decision to sell may be made
to avoid further declines in realizable value. Securities also may be sold prior
to maturity to provide liquidity. As a result our securities are classified as
"available for sale".
At December 31, 1999, fixed maturity securities, which constituted all of
our invested assets, were 88% investment grade, liquid securities with varying
maturity dates, as compared with 83% at December 31, 1998. The fair value of
these investments may vary depending on economic and market conditions, the
level of interest rates and the perceived creditworthiness of the issuer. At
December 31, 1999 and 1998, the weighted average duration of invested assets was
3.7 and 2.9 years, respectively, and the weighted average investment quality
rating was "AA-" in both years.
At December 31, 1999, $34,500,000 at fair value or 12% of invested assets,
consisted of below investment grade securities, as compared with $45,000,000 or
17% of invested assets at December 31, 1998. We limit our investments in fixed
maturities that are rated below investment grade to not more than 25% of our
total capital because these investments are subject to a higher degree of credit
risk than investment grade securities. We
13
<PAGE> 15
monitor our below investment grade securities as well as the creditworthiness of
the portfolio as a whole. When fair market values decline for reasons other than
changes in interest rates or other perceived temporary conditions, the security
is written down to its net realizable value. We had no fixed maturities in
default at December 31, 1999 or 1998, and no securities were written down during
1999 or 1998.
Our results of operations and our financial condition are significantly
affected by the performance of our investments and by changes in interest rates.
During a period of declining interest rates, if our investments are sold,
called, prepaid or redeemed, we may be unable to reinvest the proceeds in
securities of equivalent risk with comparable rates of return. During a period
of rising interest rates, the fair value of our invested assets could decline.
In addition, rising interest rates could also cause disintermediation, which in
turn could cause us to sell investments at prices and times when the fair values
of these investments are less than their amortized cost. We believe that our
traditional life insurance liabilities are not highly interest rate sensitive
and, therefore, the effects of fluctuating interest rates on these liability
cash flows are not significant. For interest sensitive liabilities, the cedent
utilizes asset/liability matching to minimize the impact of changes in interest
rates. We have not engaged in hedging activities to mitigate the effects of
interest rate changes on our invested assets and related liabilities, although
we may do so in the future.
The following table summarizes our investment results, excluding interest
earned on funds withheld under modified coinsurance agreements, for the periods
ended December 31, 1999 and 1998.
INVESTMENT RESULTS
<TABLE>
<CAPTION>
PERIOD ENDED
YEAR ENDED DECEMBER 31, 1998
DECEMBER 31, 1999 (8 1/2 MONTHS)
----------------- -----------------
<S> <C> <C>
Total invested assets, cash and cash equivalents(1)........ $304,060,124 $342,614,194
Investment income, net of related expense.................. $ 20,483,345 $ 15,203,210
Effective yield rate(2).................................... 6.29% 6.32%
Realized investment gains (losses)......................... $ (1,284,769) $ 2,673,281
</TABLE>
- ---------------
(1) Fair value at end of the indicated year.
(2) The effective yield rate equals (i) net investment income divided by (ii)
the average of total adjusted invested assets (fixed maturities at amortized
cost) at the end of each calendar quarter included in the indicated period.
Our invested assets consist primarily of fixed maturity securities. These
fixed maturity securities are invested primarily in U.S. government obligations,
foreign government obligations excluding emerging markets, public utilities
obligations, corporate fixed maturities and mortgage backed securities.
At December 31, 1999, mortgage backed securities represented 37% of
invested assets, as compared with 33% at December 31, 1998. Investors in these
securities are compensated primarily for reinvestment risk rather than credit
quality risk. Investments in mortgage backed securities include collateralized
mortgage obligations and mortgage backed pass-through securities. Mortgage
backed securities generally are collateralized by mortgages issued by the
Government National Mortgage Association ("GNMA"), the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation, all of which are
agencies of the U.S. government. Of these, only GNMA mortgages are backed by the
full faith and credit of the U.S. government. Credit risk generally is not a
consideration when investing in agency mortgage backed securities. Our mortgage
backed securities portfolio had a weighted average investment quality rating of
"AAA" at December 31, 1999 and 1998.
At December 31, 1999, 19% of our mortgage backed investment portfolio
consisted of planned amortization class, target amortization class and
sequential instruments, as compared with 14% at December 31, 1998. These
investments are designed to amortize in a more predictable manner by shifting
the primary risk of prepayment of the underlying collateral to investors in
other tranches ("support classes") of the collateralized mortgage obligation.
14
<PAGE> 16
Funds Withheld at Interest -- Interest Sensitive Contract Liabilities. At
December 31, 1999 and 1998 the liability related to our annuity reinsurance
agreements in the amount of $1,603,383,000 and $1,283,676,000 was included on
the balance sheet as Interest Sensitive Contract Liabilities. The products
reinsured under these agreements are general account deferred annuity policies
containing minimum interest guarantees and market value adjustment features. At
December 31, 1999 and 1998, assets related to these annuity reinsurance
agreements with a carrying value of $1,532,653,000 and $1,200,101,000,
respectively, were included on our balance sheet as Funds Withheld at Interest.
Funds Withheld at Interest is equivalent to the statutory reserve held by the
ceding company. This reserve is calculated in accordance with the actuarial
valuation method known as the Commissioners Annuity Reserve Valuation Method.
Under the reinsurance agreements the ceding company is obligated to credit
interest on the outstanding amounts of these funds based on the return of the
underlying assets held by the ceding companies in segmented portfolios. The
underlying assets, which include fixed income and convertible fixed income
securities, are managed by investment managers appointed by the original cedant
in accordance with investment guidelines and policies that are included in the
reinsurance agreements. Accordingly, the carrying value of the Funds Withheld at
Interest is not directly exposed to market risk with respect to the assets held
by the ceding company.
These reinsurance agreements are accounted for as investment type contracts
because they do not bear significant insurance risk. Accordingly, premiums are
reported as a deposit liability on the balance sheet and benefits such as policy
surrenders are reported as withdrawals from the liability account.
The profitability of these agreements is dependent on earning a targeted
spread between the interest earned on the Funds Withheld at Interest, and the
interest credited to the policyholder liabilities.
For the year ended December 31, 1999 and the eight and a half month period
ended December 31, 1998 the interest spread we earned was:
<TABLE>
<CAPTION>
PERIOD ENDED
YEAR ENDED DECEMBER 31, 1998
DECEMBER 31, 1999 (8 1/2 MONTHS)
----------------- -----------------
<S> <C> <C>
Interest Earned.................................... $64,606,000 $8,927,000
Interest Credited.................................. $22,313,000 $1,989,000
Interest Spread.................................... $42,293,000 $6,938,000
</TABLE>
The product line is interest rate sensitive, as fluctuations in the general
level of interest rates from period to period may cause fluctuations in the
interest spread earned. The product type reinsured and the structure of the
reinsurance agreement tend to mitigate the interest rate sensitivity of this
business. Further, due to the structure of the reinsurance agreement, we are not
directly exposed to market risk with respect to the assets underlying the
reinsurance agreements.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resources are a measure of our overall financial
strength and our ability to generate cash flows from our operations to meet our
operating and growth needs. Our principal sources of funds are premiums
received, net investment income, proceeds from investments called, redeemed or
sold, cash and short term investments. The principal obligations and uses of the
funds are the payment of policy benefits, acquisition and operating expenses and
the purchase of investments.
Net cash used by operating activities was $18,920,000 for the year ended
December 31, 1999, as compared with $16,388,000 for the initial operating period
of eight and one-half months ended December 31, 1998. In addition to the
difference in length of the operating periods compared, the increase in the cash
used by operating activities is primarily related to the growth and development
of our insurance operations and the initial costs associated with writing new
life reinsurance and annuity reinsurance business. The net cash used by
operating activities was funded from available cash balances and proceeds from
our sales of fixed maturity securities. During the next twelve months, we
believe our obligations will be adequately provided for by our principal sources
of funds.
15
<PAGE> 17
Our capital structure currently consists entirely of equity. At December
31, 1999, our total capitalization after deducting certain loans to management
and including retained earnings and accumulated other comprehensive income
(loss) amounted to $392,055,000, as compared with $375,340,000 at December 31,
1998. We believe this level of capital is sufficient to support our insurance
writings and growth for the near future.
At December 31, 1999 and 1998, we had no outstanding debt. At December 31,
1999 and 1998, letters of credit totaling $121,475,000 and $46,425,000,
respectively, issued in the ordinary course of our business had been issued by
our bankers in favor of certain ceding insurance companies to provide security
and to meet regulatory requirements. These letters of credit are fully
collateralized by our investments. We may incur indebtedness in the future in
connection with possible acquisitions of, investments in, joint ventures with or
other strategic alliances with companies whose businesses complement our
business.
On April 17, 1998 we completed an initial public offering of 19,640,579
common shares. Total proceeds received net of underwriting discounts and
commissions were $276,932,164. Simultaneous with the initial closing of the
public offering, we sold 5,859,420 common shares and 397,500 Class B warrants to
certain investors, members of our Board of Directors and management. Total net
proceeds were $82,617,806. Substantially all of the net proceeds from these
offerings were used to provide working capital and to capitalize our operating
subsidiary, Annuity & Life Reassurance, Ltd.
At the February 11, 1999, April 29,1999, July 28, 1999 and October 27, 1999
Board of Directors meetings, shareholder dividends of $.04 per share were
declared. The Board intends to continue to declare and pay out of earnings a
quarterly dividend. The continued payment of dividends is dependent on the
ability of our operating subsidiaries to achieve satisfactory underwriting and
investment results, and we cannot assure you that dividends will be declared or
paid in the future.
We have no material commitments other than as outlined in "Acquisition"
below.
ACQUISITION
On September 7, 1999, we signed an agreement to acquire Capitol Bankers
Life Insurance Company for $2,000,000 plus the capital and surplus of Capitol
Bankers. Upon completion of the acquisition, we intend to contribute additional
capital to Capitol Bankers of approximately $18 million. Completion of the
acquisition, however, is subject to regulatory approval. We expect to fund the
acquisition price and subsequent capital contribution from available cash
balances and proceeds from the sale of fixed maturity securities. Prior to
closing, the in force insurance business of Capitol Bankers will be 100%
reinsured by Capitol Bankers to a third party reinsurer. This transaction will
be accounted for as a purchase.
Capitol Bankers is domiciled in the United States and is authorized to
conduct its life insurance business in 43 states of the United States. After we
complete our pending acquisitions, we expect Capitol Bankers to focus its
operations on the United States life and annuity reinsurance markets.
YEAR 2000
We experienced no significant disruptions to our business as a result of
the conversion to the Year 2000. We incurred no material Year 2000 expenses
during 1999, and all expenses incurred were funded from operations. We do not
expect to incur significant Year 2000 expenses during 2000 and we expect to fund
any such expenses from operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our major market risk exposure is changing interest rates, primarily in the
United States, because we have a portfolio of fixed maturity investments. A
change in interest rates will affect the fair value of our investments and may
affect our operating results and financial condition. Interest rate risk is
managed with effective maturity structures and with the application of duration
management practices. We do not currently use derivative financial instruments
such as futures and options to manage this risk, although we may do so in the
future. In addition, we manage other risks, including credit and liquidity, in
the normal course of business.
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<PAGE> 18
In managing credit risk we establish overall quality and rating guidelines and
place limits on credit exposure by industry and issuer to achieve appropriate
diversification. We do not have a trading portfolio and are not exposed to
market risk from trading activities. We are not directly exposed to market risk
with respect to the assets underlying the annuity reinsurance agreements we
enter into.
The table below (expressed in millions of U.S. dollars) presents as of
December 31, 1999 the amortized cost amounts and related weighted average
interest rates by years of maturity for our investment portfolio. Mortgage
backed securities are included in the table by relevant year of maturity.
<TABLE>
<CAPTION>
CASH AND CASH WEIGHTED AVERAGE FIXED MATURITY WEIGHTED AVERAGE
EQUIVALENTS INTEREST RATE INVESTMENTS INTEREST RATE
------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
2000............................ $31.2 4.73% $ 11.6 7.27%
2001............................ 12.5 6.98%
2002............................ 13.4 7.94%
2003............................ 22.0 7.06%
2004............................ 28.2 7.30%
Thereafter...................... 196.4 7.21%
Total........................... $31.2 4.73% $284.1 7.23%
Fair Value...................... $31.2 $272.9
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
ANNUITY AND LIFE RE (HOLDINGS), LTD. AND SUBSIDIARIES
<TABLE>
<S> <C>
FINANCIAL STATEMENTS
Report of Management........................................ 18
Report of Independent Auditors.............................. 19
Consolidated Balance Sheets at December 31, 1999 and 1998... 20
Consolidated Statements of Operations for the years ended
December 31, 1999 and 1998................................ 21
Consolidated Statements of Comprehensive Income for the
years ended December 31, 1999 and 1998.................... 22
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1999 and 1998............ 23
Consolidated Statements of Cash Flows for the years ended
December 31, 1999 and 1998................................ 24
Notes to Consolidated Financial Statements.................. 25
FINANCIAL STATEMENT SCHEDULE
Schedule II Condensed Financial Information of Registrant... 36
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted, or the information is presented in the consolidated financial
statements or accompanying notes.
17
<PAGE> 19
REPORT OF MANAGEMENT
Management of the Company has primary responsibility for preparing the
accompanying financial statements and for their integrity and objectivity. The
financial statements included in this report were prepared in accordance with
generally accepted accounting principles in the United States applied on a
consistent basis. The financial statements include amounts that are based on
management's best estimates and judgements. Management also prepared the other
information presented in the annual report and is responsible for its accuracy
and consistency with the financial statements.
Management of the Company has established and maintains a system of
internal controls designed to provide reasonable assurance as to the integrity
and reliability of the financial statements, the protection of assets from
unauthorized use or disposition and the prevention and detection of fraudulent
financial reporting.
The Company's financial statements have been audited by our independent
auditors, KPMG. Our independent auditors had unrestricted access to each member
of management in conducting their audit. Management has made available to our
auditors all of the Company's financial records and related data, as well as the
minutes of shareholders' and directors' meetings. Management believes that all
representations made to our auditors during their audits were valid and
appropriate.
The Audit Committee of the Board of Directors is comprised of certain
directors who are neither employees nor officers of the Company. The Audit
Committee meets periodically with management and KPMG regarding audit scope,
timing, results and to discus other auditing and financial reporting matters.
Our auditors have direct access to and meet privately with the Audit Committee.
LAWRENCE S. DOYLE
President and
Chief Executive Officer
WILLIAM W. ATKIN
Senior Vice President and
Chief Financial Officer
18
<PAGE> 20
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Annuity and Life Re (Holdings), Ltd.
We have audited the consolidated financial statements of Annuity and Life
Re (Holdings), Ltd. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule listed in the accompanying index.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. 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 that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
and its subsidiaries as at December 31, 1999 and 1998 and the results of their
operations and cash flows for the years ended December 31, 1999 and 1998 in
conformity with United States generally accepted accounting principles. Also in
our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
KPMG
Chartered Accountants
Hamilton, Bermuda
February 8, 2000
19
<PAGE> 21
ANNUITY AND LIFE RE (HOLDINGS), LTD.
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents.................................. $ 31,187,242 $ 66,586,267
Fixed interest investments, available for sale, at fair
value (amortized cost of $284,142,098 at December 31,
1999 and $272,305,333 at December 31, 1998).............. 272,872,882 276,027,927
Funds withheld at interest................................. 1,532,652,990 1,200,101,268
Accrued investment income.................................. 4,279,480 3,812,062
Other reinsurance receivables.............................. 7,834,806 --
Deferred policy acquisition costs.......................... 203,510,250 159,582,286
Other assets............................................... 3,748,338 400,370
-------------- --------------
Total Assets............................................. $2,056,085,988 $1,706,510,180
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Reserves for future policy benefits........................ $ 43,753,923 $ 22,026,409
Interest-sensitive contracts liabilities................... 1,603,382,955 1,283,675,809
Other reinsurance liabilities.............................. 10,746,269 22,455,437
Payable for investments purchased but not yet settled...... 639,352 --
Accounts payable and accrued expenses...................... 5,508,595 3,012,279
-------------- --------------
Total Liabilities........................................ $1,664,031,094 $1,331,169,934
-------------- --------------
STOCKHOLDERS' EQUITY
Preferred Shares (par value $1.00; 50,000,000 shares
authorized; no shares outstanding)....................... $ -- $ --
Common Shares (par value $1.00; 100,000,000 shares
authorized; 25,499,999 shares outstanding)............... 25,499,999 25,499,999
Additional paid-in capital................................. 329,496,091 329,517,104
Notes receivable from stock sales.......................... (1,286,741) (1,391,068)
Accumulated other comprehensive income (loss).............. (11,269,216) 3,722,594
Retained earnings.......................................... 49,614,761 17,991,617
-------------- --------------
Total Stockholders' Equity............................... $ 392,054,894 $ 375,340,246
-------------- --------------
Total Liabilities and Stockholders' Equity............... $2,056,085,988 $1,706,510,180
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements
20
<PAGE> 22
ANNUITY AND LIFE RE (HOLDINGS), LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1999 1998
------------ -----------
<S> <C> <C>
REVENUES
Net premiums................................................ $100,835,007 $27,943,890
Investment income, net of related expenses.................. 85,089,811 24,130,550
Net realized investment gains (losses)...................... (1,284,769) 2,673,281
Other revenue............................................... 3,215,429 311,243
------------ -----------
Total Revenues.............................................. $187,855,478 $55,058,964
------------ -----------
BENEFITS AND EXPENSES
Claims and other policy benefits............................ $ 79,953,160 $23,297,115
Interest credited to interest sensitive contract
liabilities............................................... 22,312,684 1,989,000
Policy acquisition costs and other insurance expenses....... 42,200,688 6,541,872
Operating expenses.......................................... 7,685,802 4,150,321
Organizational expenses..................................... -- 69,039
------------ -----------
Total Benefits and Expenses................................. $152,152,334 $36,047,347
------------ -----------
Net Income................................................ $ 35,703,144 $19,011,617
============ ===========
NET INCOME PER COMMON SHARE
Basic..................................................... $ 1.40 $ 0.81
------------ -----------
Diluted................................................... $ 1.31 $ 0.76
------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements
21
<PAGE> 23
ANNUITY AND LIFE RE (HOLDINGS), LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1999 1998
------------ -----------
<S> <C> <C>
Net Income.................................................. $ 35,703,144 $19,011,617
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized holding gains (losses) on securities arising
during period............................................. (14,991,810) 3,722,594
------------ -----------
Total Comprehensive Income.................................. $ 20,711,334 $22,734,211
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements
22
<PAGE> 24
ANNUITY AND LIFE RE (HOLDINGS), LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
PREFERRED SHARES PAR VALUE $1.00
Balance at beginning and end of period...................... $ -- $ --
------------ ------------
COMMON SHARES PAR VALUE $1.00
Balance of beginning of period.............................. $ 25,499,999 $ 12,000
Issuance of shares.......................................... -- 25,499,999
Retirement of shares........................................ -- (12,000)
------------ ------------
Balance at end of period.................................... $ 25,499,999 $ 25,499,999
------------ ------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period.............................. $329,517,104 $ 238,000
Issuance of shares.......................................... -- 334,049,964
Direct equity offering expenses............................. ( 21,013) (4,770,860)
------------ ------------
Balance at end of period.................................... $329,496,091 $329,517,104
------------ ------------
NOTES RECEIVABLE FROM STOCK SALES
Balance at beginning of period.............................. $ (1,391,068) $ --
Notes issued................................................ -- (1,325,000)
Repayments.................................................. 175,000 --
Accrued interest during period.............................. (70,673) (66,068)
------------ ------------
Balance at end of period.................................... $ (1,286,741) $ (1,391,068)
------------ ------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of period.............................. $ 3,722,594 $ --
Net unrealized holding gains (losses) on securities......... (14,991,810) 3,722,594
------------ ------------
Balance at end of period.................................... $(11,269,216) $ 3,722,594
------------ ------------
RETAINED EARNINGS
Balance at beginning of period.............................. $ 17,991,617 $ --
Net income.................................................. 35,703,144 19,011,617
Stockholder dividends....................................... (4,080,000) (1,020,000)
------------ ------------
Balance at end of period.................................... $ 49,614,761 $ 17,991,617
------------ ------------
TOTAL STOCKHOLDERS' EQUITY.................................. $392,054,894 $375,340,246
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
23
<PAGE> 25
ANNUITY AND LIFE RE (HOLDINGS), LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 35,703,144 $ 19,011,617
Adjustments to reconcile net income to net cash used by
operating activities:
Net realized investment gains (losses)...................... 1,284,769 (2,673,281)
Changes in:
Accrued investment income................................... (467,418) (3,812,062)
Deferred policy acquisition costs........................... (43,927,964) (159,582,286)
Other reinsurance receivables............................... (7,834,806) --
Other assets................................................ (3,347,968) (167,370)
Reserves for future policy benefits and interest sensitive
contracts, net of funds withheld.......................... 8,882,938 105,600,950
Other reinsurance liabilities............................... (11,709,168) 22,455,437
Accounts payable and accrued expenses....................... 2,475,303 2,779,279
------------- -------------
Net cash used by operating activities....................... (18,941,170) (16,387,716)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of fixed interest securities............ 226,566,212 309,328,762
Purchase of fixed interest securities....................... (239,048,394) (578,960,814)
------------- -------------
Net cash used by investing activities....................... (12,482,182) (269,632,052)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of company stock..................... -- 353,376,035
Repayment of notes receivable, less accrued interest........ 104,327 --
Dividends paid to stockholders.............................. (4,080,000) (1,020,000)
------------- -------------
Net cash provided (used) by financing activities............ (3,975,673) 352,356,035
------------- -------------
Increase (Decrease) in cash and cash equivalents............ (35,399,025) 66,336,267
Cash and cash equivalents, beginning of period.............. 66,586,267 250,000
------------- -------------
Cash and cash equivalents, end of period.................... $ 31,187,242 $ 66,586,267
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
24
<PAGE> 26
ANNUITY AND LIFE RE (HOLDINGS), LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Annuity and Life Re (Holdings), Ltd. ("Holdings") was incorporated on
December 2, 1997 under the laws of Bermuda. Holdings provides annuity and life
reinsurance to insurers and reinsurers through its wholly-owned subsidiaries:
Annuity and Life Reassurance, Ltd. ("Annuity and Life Reassurance"), licensed
under the laws of Bermuda as a long term insurer; and Annuity and Life Re
America, Inc. ("Annuity and Life Re America"), an insurance holding company
based in the United States which was incorporated on May 28, 1999. Holdings,
Annuity and Life Reassurance and Annuity and Life Re America are collectively
referred to herein as the "Company". The Company completed an initial public
offering of its equity securities and commenced operations on April 17, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements are 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 statements. Actual results could differ from those estimates. The
following are the significant accounting policies adopted by the Company:
(a) Basis of consolidation
The consolidated financial statements include the accounts of Holdings and
its subsidiaries, Annuity and Life Reassurance and Annuity & Life Re America.
All significant inter-company accounts and transactions have been eliminated
upon consolidation.
(b) Premium income and related expenses
Reinsurance premiums from traditional life and annuity policies with life
contingencies are generally recognized as revenue when due from policyholders.
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 are
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 are reported as
deposits to policyholders' account balances. Revenues from these contracts
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 include benefit
claims incurred in the period in excess of related policyholders' account
balances.
(c) Deferred policy acquisition costs
The costs of acquiring new business, principally allowances, which vary
with and are primarily related to the production of new business, are deferred.
Deferred policy acquisition costs are subject to recoverability testing at the
time of the policy issuance and loss recognition testing at the end of each
accounting period.
25
<PAGE> 27
ANNUITY AND LIFE RE (HOLDINGS), LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For traditional life and annuity policies with life contingencies, deferred
policy acquisition costs are charged to expense using assumptions consistent
with those used in computing policy reserves. Assumptions as to anticipated
premiums are estimated at the date of the policy issuance and are consistently
applied during the life of the contracts. Deviations from estimated experience
are reflected in earnings in the period such deviations occur. For these
contracts, the amortization periods generally are for the estimated life of the
policies.
For universal life and investment-type products, deferred policy
acquisition costs are amortized over the expected average life of the contracts
as a constant percentage of the present value 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. In computing amortization, interest
accrues to the unamortized balance of capitalized policy acquisition costs at
the rate used to discount expected gross profit. The effect on the amortization
of deferred policy acquisition costs of revisions to estimated gross profits are
reflected in earnings in the period such estimated gross profits are revised.
(d) Policyholders' account balances and future policy benefits
The development of policy reserves for the Company's products requires
management to make estimates and assumptions regarding mortality, lapse, expense
and investment experience. Such estimates are primarily based on historical
experience and information provided by ceding companies. Actual results could
differ materially from those estimates. Management monitors actual experience,
and where circumstances warrant, will revise its assumptions and the related
reserve estimates.
For traditional life policies, future policy benefits and dividend
liabilities are 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 policy acquisition costs are
written off and thereafter, if required, a premium deficiency reserve is
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 benefit payments.
Premiums for universal life and investment-type contracts are 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 include benefit claims incurred
in the period in excess of related clients' account balances and interest
credited to clients' account balances.
(e) Investments
The Company classifies its investments in fixed income securities as
available for sale and, accordingly, such securities are carried at fair value.
The cost of fixed income securities are adjusted for amortization of premiums
and discounts. The cost of fixed income securities are adjusted for declines in
value that are considered other than temporary.
Realized gains and losses on investments are recognized in net income,
using the specific identification method. Changes in fair values of securities
carried at fair value are reflected in other comprehensive income.
26
<PAGE> 28
ANNUITY AND LIFE RE (HOLDINGS), LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(f) Translation of foreign currencies
The Company's functional currency is the United States dollar. Premiums
written and receivable in foreign currencies are 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 are recorded in the Company's statement of
operations.
(g) Organizational expenses
Organization expenses consist of legal, accounting and incorporation
expenses incurred in connection with the formation and organization of the
Company. Such costs were expensed as incurred.
Certain equity offering costs incurred in connection with the Company's
initial public offering, including certain amounts payable for investment
banking and financial advisory services, have been deducted from the gross
proceeds of the offering.
(h) Earnings per common share
The Company calculates basic earnings per common share and earnings per
common share-assuming dilution.
Basic earnings per common share is calculated by dividing net income
attributable to common shareholders by the weighted average number of common
shares outstanding during the period.
Diluted earnings per common share is 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 are considered dilutive potential
common shares and are included in the calculation using the treasury stock
method.
(i) Comprehensive income
The most significant items of comprehensive income are net income and the
change in unrealized gains and losses on securities.
(j) Cash and cash equivalents
For the purposes of the statements of cash flows, the Company considers all
time deposits and short term investments with an original maturity of 90 days or
less as equivalent to cash.
(k) Stock plans
The Company accounts for stock option grants in accordance with APB opinion
No. 25, "Accounting for Stock Issued to Employees." Compensation expense for
stock option grants is recognized to the extent that the fair value of the stock
exceeds the exercise price of the option at the measurement date. Any resulting
compensation expense is recorded over the shorter of the vesting or service
period.
(l) Accounting pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133 "Accounting for Derivative Instruments and Hedging
Activities." This Statement establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts, and for hedging activities. It requires that entities recognize all
derivatives as either assets or liabilities on the balance sheet and measure
those instruments at their fair value. The accounting for changes in the fair
value of such instruments depends upon the intended use of the derivative and
the resulting designation. This standard also establishes new rules for
derivative instruments designated and used as part of a hedging activity.
27
<PAGE> 29
ANNUITY AND LIFE RE (HOLDINGS), LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1999 the FASB issued Statement No. 137 "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the effective date of FASB
Statement No. 133", which defers the effective date of Statement No. 133 until
fiscal quarters beginning after June 15, 2000.
The Company currently does not hold any derivatives and does not engage in
any derivative hedging activities, although it may do so in the future.
Management has reviewed this new Statement and has concluded that it is not
likely to significantly affect its current financial reporting.
3. INVESTMENTS
(a) The amortized cost and fair values of investments in fixed interest
securities classified as available for sale at December 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
1999 COST GAIN LOSS VALUE
- ---- ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
US Government Securities........... $ 42,942,928 $ -- $ 1,631,493 $ 41,311,435
Non U.S. Government Securities..... 2,592,517 -- 82,567 2,509,950
US Corporate Securities............ 122,134,896 -- 4,807,736 117,327,160
Non U.S. Corporate Securities...... 11,981,240 -- 363,774 11,617,466
Mortgage Securities................ 104,490,517 -- 4,383,646 100,106,871
------------ ---------- ----------- ------------
$284,142,098 $ -- $11,269,216 $272,872,882
============ ========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
1998 COST GAIN LOSS VALUE
- ---- ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
US Government Securities........... $ 41,802,719 $1,279,641 $ -- $ 43,082,360
Non U.S. Government Securities..... 3,137,980 120,800 -- 3,258,780
US Corporate Securities............ 121,382,257 1,689,659 -- 123,071,916
Non U.S. Corporate Securities...... 14,800,901 248,926 314,929 14,734,898
Mortgage Securities................ 91,181,476 702,649 4,152 91,879,973
------------ ---------- ----------- ------------
$272,305,333 $4,041,675 $ 319,081 $276,027,927
============ ========== =========== ============
</TABLE>
During the year ended December 31, 1999 there were sales of fixed interest
securities amounting to $226,566,212, as compared with $309,328,762 during the
year ended December 31, 1998.
(b) The following table sets forth certain information regarding the
investment ratings of the Company's fixed interest securities portfolio at
December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
RATINGS(1) AMORTIZED COST % AMORTIZED COST %
- ---------- -------------- ----- -------------- -----
<S> <C> <C> <C> <C>
AAA....................................... $128,530,965 45.2% $140,231,184 51.5%
AA........................................ 16,384,799 5.8 12,832,276 4.7
A......................................... 59,199,639 20.8 38,310,749 14.1
BBB....................................... 45,318,510 15.9 35,759,493 13.1
BB........................................ 30,197,599 10.6 42,792,743 15.7
B......................................... 4,510,586 1.7 2,378,888 0.9
------------ ----- ------------ -----
$284,142,098 100.0% $272,305,333 100.0%
============ ===== ============ =====
</TABLE>
- ---------------
(1) Rating as assigned by Standard & Poor's Corporation.
28
<PAGE> 30
ANNUITY AND LIFE RE (HOLDINGS), LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) At December 31, 1999 and 1998 letters of credit totaling $121,475,000
and $46,425,000, respectively, issued in the ordinary course of the Company's
business had been issued by the Company's bankers in favor of certain ceding
insurance companies. At December 31, 1999 and 1998 investments of a similar
amount were pledged as collateral for these letters of credit.
(d) For fixed interest securities held on December 31, 1999 and 1998 the
maturity distribution is as follows:
<TABLE>
<CAPTION>
1999
----------------------------
AMORTIZED FAIR
COST VALUE
------------ ------------
<S> <C> <C>
Within one year......................................... $ 11,640,513 $ 11,590,592
From one to five years.................................. 76,025,504 73,582,344
From five to ten years.................................. 58,714,280 56,036,156
After more than ten years............................... 33,271,284 31,556,919
Mortgage Securities..................................... 104,490,517 100,106,871
------------ ------------
$284,142,098 $272,872,882
============ ============
</TABLE>
(e) Investment income earned during the year is comprised as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Interest income......................................... $ 22,004,986 $ 16,539,911
Interest earned on funds withheld under modified
coinsurance agreements................................ 64,606,466 8,927,340
Amortization of premium/discount........................ (659,506) (749,899)
Investment Expenses..................................... (862,135) (586,802)
------------ ------------
$ 85,089,811 $ 24,130,550
============ ============
</TABLE>
Net realized investment gains (losses) comprise $1,104,026 gross realized
gains and $2,388,795 gross realized losses for the year ended December 31, 1999
(1998: $3,492,358 and $819,077 respectively).
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.
In April 1998, the Company completed an equity offering of its shares to
the public and direct sales of its shares to certain "strategic investors",
directors and members of management. The Company issued 25,499,999 common
shares, raising total equity of approximately $354,000,000.
The common shareholders have no pre-emptive, redemption, conversion or
sinking fund rights. Subject to certain voting restrictions, which limit the
voting power of any one person to less than 10% of the combined voting power of
the issued voting shares of the Company, each holder is entitled to one vote per
share.
In the event of a liquidation, dissolution or winding up of the Company,
the holders of the common shares are able to share equally in the assets of the
Company, if any remain after payment of all liabilities and the liquidation
preference of any outstanding preference shares. Certain restrictions exist with
respect to the
29
<PAGE> 31
ANNUITY AND LIFE RE (HOLDINGS), LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
transfer of shares, should such a transfer cause the number of shares held by
one person to be 10% or more of the Company's outstanding common shares.
Class A Warrants
In connection with the initial capitalization of the Company, the Company
issued Class A Warrants to certain individuals employed by Inter-Atlantic
Securities Corporation ("Inter-Atlantic"). These Warrants entitle the holders to
purchase up to 3,059,990 common shares in the Company.
The exercise price of the Warrants is $15.00, which was equal to the
initial public offering price per share of the Company's common shares. The
Class A Warrants become exercisable over three years commencing on the first
anniversary of the consummation of the Company's initial public offering. The
Class A Warrants will expire on January 15, 2008.
Class B Warrants
In connection with the Direct Sales of equity securities to the "Strategic
Investors," the Company issued Class B Warrants that enable the holders to
purchase an aggregate of 397,500 common shares of the Company. The exercise
price of the Warrants is $15.00 per share, which was equal to the price of the
common shares in the initial public offering. The Class B Warrants become
exercisable in three equal annual installments commencing on the first
anniversary of the date of the Direct Sales. The Class B Warrants expire on the
tenth anniversary of the consummation of the Direct Sales.
5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share. The Company was nominally capitalized with 12,000 common
shares of par value of $1.00 each during the period from its incorporation to
the date of the initial public offering and did not commence operations until
April 17, 1998. For this reason the calculation of earnings per share for the
year ended December 31, 1998 is based upon the earnings and number of shares
outstanding since the beginning of the second fiscal quarter; in the opinion of
Management this is the most meaningful presentation.
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
BASIC:
Net income available to common shareholders............... $35,703,144 $19,460,603
=========== ===========
Weighted average number of common shares outstanding...... 25,499,999 24,020,999
----------- -----------
Earnings per common share................................. $ 1.40 0.81
=========== ===========
DILUTED:
Net income available to common shareholders............... $35,703,144 $19,460,603
=========== ===========
Weighted average number of common shares outstanding...... 25,499,999 24,020,999
Plus: incremental shares from assumed exercise of
options and warrants................................. 1,722,636 1,499,846
----------- -----------
Adjusted weighted average number of common shares
outstanding............................................. 27,222,635 25,520,845
=========== ===========
Earnings per common share assuming dilution............... $ 1.31 $ 0.76
=========== ===========
</TABLE>
As of December 31, 1999 and 1998 the Company had 1,497,865 and 1,415,865
options outstanding, respectively, and 3,457,490 warrants outstanding.
30
<PAGE> 32
ANNUITY AND LIFE RE (HOLDINGS), LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. AGREEMENTS WITH RELATED PARTIES
Inter-Atlantic Capital Partners, Inc.
Certain directors of the Company are also owners, directors, or officers of
Inter-Atlantic Capital Partners, Inc. ("Inter-Atlantic"). In 1998 the Company
entered into an agreement with Inter-Atlantic, whereby Inter-Atlantic agreed to
provide financial advisory services to the Company in connection with its
organization and initial public offering. The Company reimbursed Inter-Atlantic
for expenses incurred in connection with the organization of the Company and the
initial public offering of $683,000 and paid a fee of $2.0 million as
compensation for financial advisory services.
In addition, in 1998 Inter-Atlantic agreed to provide financial advisory
and other services to the Company for a term of five years in exchange for four
annual payments of $600,000. Such services include, among other things,
assistance 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 1999 the Company prepaid this fee at a discount
of 10%.
Strategic Investors
One of the strategic investors is affiliated with Prudential Securities
Incorporated, one of the underwriters of the Company's initial public offering,
and with The Prudential Investment Corporation, which serves as one of the
Company's investment managers. The Company paid a fee of $1.0 million to
Prudential Securities Incorporated for investment banking and financial advisory
services in connection with the Company's initial public offering. The Company
has agreed to pay a fee for investment management services to The Prudential
Investment Corporation based upon the amount of funds managed. The fee is based
upon a sliding scale and has been determined on an arms-length basis. The
Company has entered into a life reinsurance agreement with the Prudential
Insurance Company of America to reinsure certain mortality risks. The contract
has been negotiated under normal commercial terms.
Transactions with management
During the 1998 certain of the Company's officers purchased 163,121 shares
in the Company as part of the Direct Sales. The Company made loans to the
officers totaling $1,325,000 to partially finance such purchases. The loans bear
interest at 7% per annum and must be repaid within five years of the
consummation of the Direct Sales, except that $175,000 of the loans must be
repaid within 14 months of the consummation of the Direct Sales.
At December 31, 1999 and 1998 there were loans outstanding from management
for stock purchases of $1,150,000 and $1,325,000, respectively, with accrued
interest thereon of $136,691 and $66,068, respectively. Interest income of
$70,623 and $66,068 has been recognized for the years December 31, 1999 and
1998, respectively, on these loans.
7. STOCK OPTION PLANS
In 1998 the Board of Directors adopted a Stock Option Plan (the "Plan")
under which it may grant, subject to certain restrictions, Incentive Stock
Options ("ISOs") and Non-Qualified Stock Options ("NQSOs"). The aggregate number
of common shares for which options may be granted under the initial plan is
limited to 1,552,500 Common Shares. In 1999 the plan was amended such that
options may be granted in any fiscal year equal to not more than 2% of the
adjusted average of the outstanding common shares of the Company, as that number
is determined by the Company to calculate fully diluted earnings per share. In
1999 no options were granted under this amendment. Only eligible employees of
the Company are entitled to ISOs, while NQSOs may be granted to eligible
employees, non-employee Directors and consultants.
31
<PAGE> 33
ANNUITY AND LIFE RE (HOLDINGS), LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Plan is administered by the Compensation Committee of the Board of
Directors.
The minimum exercise price of the options will be equal to the fair market
value, as defined in the Plan, of the Company's optioned Common Shares at the
date of grant. The term of the options is not more than ten years from the date
of grant. Unless otherwise provided in the option agreement, they shall be
exercisable in three equal annual installments, commencing on the first
anniversary of the grant date.
Each person who becomes an eligible non-employee Director, as defined in
the plan, shall be granted an option to purchase 15,000 common shares on the
date he or she becomes an eligible non-employee Director. The options shall have
an exercise price equal to the fair market value of the optioned Common Shares
on the date the options are granted and shall be exercisable in three equal
installments commencing with the first anniversary of the grant date. In
addition, subject to certain conditions, each non-employee Director shall be
granted an option to purchase 2,000 Common Shares at each successive annual
general meeting. These options shall have an exercise price equal to the fair
market value of the optioned Common Shares on the date the options are granted
and shall be immediately exercisable if granted after April 8, 1999.
<TABLE>
<CAPTION>
1999 1998
----------------------------- -----------------------------
NUMBER WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE
--------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year... 1,415,865 $15.28 -- $ --
Granted............................ 82,000 $22.08 1,415,865 $15.28
--------- ------ --------- ------
Outstanding at end of year......... 1,497,865 $15.65 1,415,865 $15.28
========= ====== ========= ======
</TABLE>
At December 31, 1999 497,955 options outstanding are presently exercisable.
The weighted average fair value of options granted during 1998 is $6.47.
The fair value of the options is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions; dividend
yield of 1.07% per annum; expected volatility of 26%; expected life of 10 years;
and a risk free interest rate of 5.6%.
The weighted average fair value of options granted during 1999 is $9.85 per
share. The fair values of the options granted in 1999 are estimated on the date
of the grant using the Black-Scholes option pricing model with the following
assumptions; dividend yield of 0.8% per annum; expected volatility of 25%;
expected life of 10 years and a risk free interest rate of 5.6%.
The Company applies APB Opinion No. 25 and Related Interpretations in
accounting for the Stock Option Plan. Accordingly, no compensation cost has been
recognized as the intrinsic value of the options was $nil at the measurement
date. The net income and earnings per Common Share would have been reduced to
the pro forma amounts indicated below, had compensation cost been determined
based on the fair value of the options at the grant date, consistent with the
method of SFAS No. 123, "Accounting for Stock-Based Compensation."
32
<PAGE> 34
ANNUITY AND LIFE RE (HOLDINGS), LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Net income:
- as reported........................................... $35,703,144 $19,011,617
- pro forma............................................. $32,437,835 $16,903,501
Earnings per share as stated:
- Basic................................................. $1.40 $0.81
- Diluted............................................... $1.31 $0.76
Pro forma Earnings per share:
- Basic................................................. $1.27 $0.70
- Diluted............................................... $1.19 $0.66
</TABLE>
8. RETROCESSION AGREEMENT
The Company has entered into a retrocession agreement which enables it to
limit the amount of life reinsurance it retains to $2,000,000 per single life.
The contract is on an automatic basis and is effective for risks assumed and in
force from January 1, 1997. The limit of cover is $50 million and covers all
single and joint life reinsurance assumed by the Company on an automatic basis.
At December 31,1999 the Company ceded approximately $34.9 million of in force
insurance coverage for a premium of $396,000. No claims are recoverable.
It should be noted that such retrocession agreements do not relieve the
Company from its obligations to its reinsureds and failure of reinsurers to
honor their obligations could result in losses to the Company. The Company
evaluates the financial condition of its reinsurers and monitors any
concentrations of credit risk that may develop to minimize its exposure. The
other party to this retrocession agreement has a current credit rating of AA+,
as assigned by A.M. Best.
9. VULNERABILITY FROM CONCENTRATIONS
At December 31, 1999 and 1998, the Company did not have a material
concentration of investments in fixed income securities in a single investee,
industry or geographic location.
The Company has entered into several significant life reinsurance contracts
and one significant deferred annuity contract. Due to the size of certain of
these contracts, there is a material concentration of net premiums, funds
withheld at interest, deferred policy acquisition costs and balances related to
interest-sensitive contract liabilities with the underlying parties to these
significant contracts. The underlying parties to these contracts are large
insurance companies based in the United States and Canada.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair value of the Company's financial instruments.
Considerable judgment is required to develop these fair values. Accordingly, the
estimates shown are not necessarily indicative of the amounts that would be
realized in a one-time, current market exchange of all of the Company's
financial instruments.
Fixed Interest Securities
Fair values for fixed interest securities are based on quoted market
prices, where available. For fixed interest securities not actively traded, fair
values are estimated using values obtained from independent pricing services.
33
<PAGE> 35
ANNUITY AND LIFE RE (HOLDINGS), LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and Cash Equivalents
The carrying value of assets classified as cash and cash equivalents is
approximately their fair value.
Funds Withheld at Interest and Interest Sensitive Contract Liabilities
The balance sheet captions "Funds Withheld at Interest" and "Interest
Sensitive Contracts Liabilities" relate to deferred annuity contracts reinsured
on a modified coinsurance basis. The Funds Withheld at Interest is equivalent to
the statutory reserve held by the ceding company. Taking into consideration the
structure of the reinsurance agreement, the carrying value of the liabilities
approximate their fair value.
Other items
Fair value disclosures are not required for deferred policy acquisition
costs and liabilities arising from insurance contracts and, therefore, they have
not been determined by the Company.
Fair values of other assets and liabilities approximate their carrying
values due to their short-term nature.
11. SEGMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 131, "Disclosure about Segments of an Enterprise and Related Information."
This Standard requires public companies to report financial and descriptive
information about their reportable operating segments. Operating segments, as
defined, are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision-maker in deciding how to allocate resources and in assessing
performance.
To date the Company has written of a number of ordinary life reinsurance
and annuity reinsurance contracts. The Company views life and annuity
reinsurance as one business segment and accumulates financial data for this
segment when assessing performance and allocating resources. As the Company only
has one business segment at the current time, management feels that the
information presented in the balance sheet and statement of operations is
sufficient to understand the business segment of the Company.
12. SIGNIFICANT TRANSACTION
On September 7, 1999 the Company, through Annuity and Life Re America,
signed an agreement to acquire Capitol Bankers Life Insurance Company ("Capitol
Bankers") for approximately $2,000,000 plus the capital and surplus of Capitol
Bankers. Upon completion of the acquisition, the Company intends to contribute
additional capital of approximately $18 million. Completion of the acquisition,
however, is subject to regulatory approval. The acquisition price and subsequent
capital contribution will be funded from available cash balances and proceeds
from the sale of fixed maturity securities held by the Company. Prior to
closing, the in force insurance business of Capitol Bankers will be 100%
reinsured by Capitol Bankers to a third party. This transaction will be
accounted for as a purchase.
Capitol Bankers is domiciled in the United States and is authorized to
conduct its life insurance business in 43 states of the United States. After the
Company completes its acquisition of Capitol Bankers, the Company expects
Capitol Bankers to focus its operations on the United States life and
reinsurance markets.
13. TAXATION
Under current Bermuda law neither Holdings nor Annuity and Life Reassurance
is required to pay any taxes in Bermuda on either income or capital gains.
Holdings and Annuity and Life Reassurance have each received an assurance from
the Minister of Finance in Bermuda that in the event of any such taxes being
imposed the Company will be exempted from taxation until the year 2016. Annuity
and Life Reassurance
34
<PAGE> 36
ANNUITY AND LIFE RE (HOLDINGS), LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
intends to operate in a manner such that it will not be liable to United States
tax other than premium excise taxes and withholding taxes on certain
investments.
Annuity and Life Re America is subject to all applicable Federal and State
taxes of the United States.
14. STATUTORY REQUIREMENTS AND DIVIDEND RESTRICTIONS
Under The Bermuda Insurance Act, 1978, and related regulations, Annuity and
Life Reassurance is required to maintain certain levels of solvency. This
requirement was met at the balance sheet date.
The Company's ability to pay dividends depends on the ability of its
operating subsidiaries to pay dividends to the Company. While the Company itself
is not subject to any significant legal prohibitions on the payment of
dividends, Annuity and Life Reassurance is subject to Bermuda regulatory
constraints which affect its ability to pay dividends to the Company. Annuity
and Life Reassurance is prohibited from declaring or paying a dividend if such a
payment would reduce its statutory surplus below the required minimum of
$250,000. No such restriction currently exists.
15. UNAUDITED QUARTERLY FINANCIAL DATA
The Company was incorporated on December 2, 1997 but did not commence
operations until the successful completion of its initial public offering on
April 17, 1998.
The unaudited quarterly financial data for the years ended December 31,
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1999 QUARTER QUARTER QUARTER QUARTER
- ---- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Premiums.................. $18,247,012 $18,372,285 $21,101,366 $43,114,344
Net Investment income......... $18,159,060 $20,677,325 $19,528,879 $26,724,547
Net realized investment gains
(losses).................... $ 263,458 $ (157,755) $ (793,008) $ (597,464)
Claims and policy benefits.... $15,765,869 $15,507,499 $17,232,038 $31,447,754
Interest credited............. $ 3,876,829 $ 3,948,668 $ 4,762,521 $ 9,724,666
Net income.................... $ 8,482,279 $ 8,746,243 $ 8,715,060 $ 9,759,562
Net income per common share
(diluted)................... $ 0.31 $ 0.32 $ 0.32 $ 0.36
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1998 QUARTER QUARTER QUARTER QUARTER
- ---- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net premiums.................. $ -- $ -- $10,065,750 $17,878,140
Net investment income......... $ -- $ 4,299,615 $ 5,366,566 $14,464,369
Net realized investment
gains....................... $ -- $ 148,674 $ 1,018,990 $ 1,505,617
Claims and policy benefits.... $ -- $ -- $ 8,399,500 $14,897,615
Interest credited............. $ -- $ -- $ -- $ 1,989,000
Net income (loss)............. $ (448,986) $ 3,575,011 $ 6,660,166 $ 9,225,426
Net income per common share
(diluted)................... $ -- $ 0.16 $ 0.25 $ 0.35
</TABLE>
35
<PAGE> 37
ANNUITY AND LIFE RE (HOLDINGS), LTD.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SCHEDULE II
BALANCE SHEETS
(PARENT COMPANY)
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
ASSETS
Investment in common stock of subsidiaries................. $388,423,856 $367,983,728
Cash and cash equivalents.................................. 3,652,821 7,353,039
Other assets............................................... 15,813 15,000
------------ ------------
Total Assets............................................... $392,092,490 $375,351,767
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable........................................... $ 37,596 $ 11,521
------------ ------------
Total Liabilities.......................................... $ 37,596 $ 11,521
------------ ------------
STOCKHOLDERS' EQUITY
Preferred shares (par value $1.00; 50,000,000 shares
authorized; no shares outstanding)....................... $ -- $ --
Common shares (par value $1.00; 100,000,000 shares
authorized; 25,499,999 shares outstanding);.............. 25,499,999 25,499,999
Additional paid-in capital................................. 329,496,091 329,517,104
Notes receivable from stock sales.......................... (1,286,741) (1,391,068)
Accumulated other comprehensive income (loss).............. (11,269,216) 3,722,594
Retained earnings.......................................... 49,614,761 17,991,617
------------ ------------
$392,054,894 $375,340,246
------------ ------------
Total Liabilities and Stockholders' Equity................. $392,092,490 $375,351,767
============ ============
</TABLE>
36
<PAGE> 38
ANNUITY AND LIFE RE (HOLDINGS), LTD.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SCHEDULE II
STATEMENTS OF OPERATIONS
(PARENT COMPANY)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
REVENUES
Interest income............................................. $ 305,605 $ 573,683
----------- -----------
Total revenues.............................................. 305,605 573,683
----------- -----------
EXPENSES
Operating expenses.......................................... 860,899 573,200
----------- -----------
Net Income (loss) before equity in earnings of
subsidiaries.............................................. (555,294) 483
Equity in earnings of subsidiaries.......................... 36,258,438 19,011,134
----------- -----------
Net Income................................................ $35,703,144 $19,011,617
=========== ===========
</TABLE>
37
<PAGE> 39
ANNUITY AND LIFE RE (HOLDINGS), LTD.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SCHEDULE II
STATEMENTS OF CASH FLOWS
(PARENT COMPANY)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------
1999 1998
------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income.................................................. $ 35,703,144 $ 19,011,617
Adjustments to reconcile net income to net cash used by
operations:
Equity in earnings of subsidiaries.......................... (36,258,438) (19,011,134)
Other assets................................................ (813) 218,000
Accounts payable............................................ 26,075 (221,479)
------------ -------------
Net cash used by operating activities....................... (531,032) (2,996)
------------ -------------
INVESTING ACTIVITIES
Dividend received from subsidiary........................... 1,020,000 --
Investment in subsidiary.................................... (193,500) (345,000,000)
------------ -------------
Net cash provided (used) by investing activities............ 826,500 (345,000,000)
------------ -------------
FINANCING ACTIVITIES
Net proceeds from sale of company stock..................... -- 353,376,035
Equity offering expenses paid............................... (21,013) --
Repayment of notes receivable, less accrued interest........ 104,327 --
Dividends paid to stockholders.............................. (4,080,000) (1,020,000)
------------ -------------
Net cash provided (used) by financing activities............ (3,996,686) 352,356,035
------------ -------------
Increase (Decrease) in cash and cash equivalents............ (3,700,218) 7,353,039
Cash and cash equivalents, beginning of period.............. 7,353,039 --
------------ -------------
Cash and cash equivalents, end of period.................... $ 3,652,821 $ 7,353,039
============ =============
</TABLE>
38
<PAGE> 40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 is hereby incorporated by reference to
our definitive proxy statement to be filed with the Commission pursuant to
Regulation 14A within 120 days after December 31, 1999.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is hereby incorporated by reference to
our definitive proxy statement to be filed with the Commission pursuant to
Regulation 14A within 120 days after December 31, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is hereby incorporated by reference to
our definitive proxy statement to be filed with the Commission pursuant to
Regulation 14A within 120 days after December 31, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is hereby incorporated by reference to
our definitive proxy statement to be filed with the Commission pursuant to
Regulation 14A within 120 days after December 31, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed or incorporated by reference as part
of this Form 10-K.
1. Financial Statements
The audited consolidated financial statements of Annuity and Life Re
(Holdings), Ltd. and the related auditor's report listed in the Index to
Financial Statements and Financial Statement Schedule appearing on page 18.
2. Financial Statement Schedule
The schedule listed in the Index to Financial Statements and Financial
Statement Schedule appearing on page 18.
3. Exhibits
The following exhibits are filed or incorporated by reference as part of
this Form 10-K:
<TABLE>
<C> <S>
*3.1 Memorandum of Association, as amended, of the Company
(Exhibit 3.1 to the Company's Registration Statement on Form
S-1, Registration No. 333-43301, declared effective on April
8, 1998 (the "Registration Statement")).
*3.2 Bye-laws, as amended, of the Company (Exhibit 3.2 of the
Registration Statement).
*4.1 Form of Amended and Restated Class A Warrant (Exhibit 4.2 to
the Registration Statement).
*4.2 Form of Class B Warrant (Exhibit 4.3 to the Registration
Statement).
*+10.1 Employment Agreement, dated as of December 5, 1997, between
Lawrence S. Doyle and the Company (Exhibit 10.1 to the
Registration Statement).
</TABLE>
39
<PAGE> 41
<TABLE>
<C> <S>
*+10.2 Amendment No. 1, dated as of February 27, 1998, to
Employment Agreement, dated as of December 5, 1997, between
Lawrence S. Doyle and the Company (Exhibit 10.8 to the
Registration Statement).
*+10.3 Employment Agreement, dated as of January 5, 1998, between
Robert P. Mills, Jr. and the Company (Exhibit 10.7 to the
Registration Statement).
*+10.4 Amendment No. 1, dated as of February 27, 1998, between
Robert P. Mills, Jr. and the Company (Exhibit 10.10 to the
Registration Statement).
*+10.5 Employment Agreement, dated as of January 8, 1998, between
Robert J. Reale and the Company (Exhibit 10.6 to the
Registration Statement).
*+10.6 Amendment No. 1, dated as of February 1, 1998, to Employment
Agreement, dated as of January 8, 1998, between Robert J.
Reale and the Company (Exhibit 10.9 to the Registration
Statement).
*+10.7 Employment Agreement dated as of March 2, 1998, between
William W. Atkin and the Company (Exhibit 10.15 to the
Registration Statement).
*+10.8 Employment Agreement, dated as of March 5, 1998, between
Richard Tucker and the Company (Exhibit 10.16 to the
Registration Statement).
*10.9 Agreement, dated as of December 23, 1997, between
Inter-Atlantic Securities Corp. and the Company (Exhibit
10.4 to the Registration Statement).
*+10.10 Initial Stock Option Plan, as amended and restated effective
April 29, 1999 (Exhibit 4 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1999).
*10.11 Registration Rights Agreement, dated as of January 9, 1998,
between the Company and the holders of the Class A Warrants
(Exhibit 10.5 to the Registration Statement).
*10.12 Form of Securities Purchase Agreement entered into by The
Prudential Insurance Company of America and the Company,
EXEL Limited and the Company, Risk Capital Reinsurance
Company and the Company, Insurance Partners, L.P. and the
Company and Insurance Partners Offshore (Bermuda), L.P. and
the Company (Exhibit 10.12 to the Registration Statement).
*10.13 Form of Registration Rights Agreement entered into between
The Prudential Insurance Company of America and the Company,
EXEL Limited and the Company, Risk Capital Reinsurance
Company and the Company, Insurance Partners, L.P. and the
Company and Insurance Partners Offshore (Bermuda), L.P. and
the Company (Exhibit 10.13 to the Registration Statement).
*10.14 Letter Agreement, dated as of March 4, 1998, between Risk
Capital Reinsurance Company and the Company (Exhibit 10.14
to the Registration Statement).
*10.15 Letter Agreement, dated as of December 23, 1997, between
Prudential Securities Incorporated and the Company and
related indemnification agreement (Exhibit 10.17 to the
Registration Statement).
*10.16 Letter Agreement, dated as of March 19, 1998, among
Insurance Partners, L.P., Insurance Partners Offshore
(Bermuda), L.P. and the Company, which has been assigned to
Overseas Partners, Ltd. (Exhibit 10.18 to the Registration
Statement).
+10.17 Employment Agreement, dated as of January 1, 1999, among
Gary Scofield, Annuity and Life Reassurance, Ltd. and the
Company.
+10.18 Employment Agreement, dated as of July 1, 1999, among Bryan
Featherstone, Annuity and Life Re America, Inc. and the
Company.
21.1 Subsidiaries of the Company (Exhibit 21.1 to the
Registration Statement).
23.1 Consent of KPMG (Independent Accountants).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed with the Commission and incorporated herein by reference.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this form.
(b) No reports on Form 8-K were filed with the Securities and Exchange
Commission during the three months ended December 31, 1999.
40
<PAGE> 42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ANNUITY AND LIFE RE (HOLDINGS), LTD.
/s/ LAWRENCE S. DOYLE
--------------------------------------
Lawrence S. Doyle
President, Chief Executive Officer and
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE DATE
--------- ----
<S> <C>
/s/ LAWRENCE S. DOYLE March 2, 2000
- --------------------------------------------------------
Lawrence S. Doyle, President,
Chief Executive Officer and Director
/s/ WILLIAM W. ATKIN March 2, 2000
- --------------------------------------------------------
William W. Atkin, Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Accounting Officer)
/s/ FREDERICK S. HAMMER March 2, 2000
- --------------------------------------------------------
Frederick S. Hammer, Chairman and Director
/s/ ROBERT M. LICHTEN March 2, 2000
- --------------------------------------------------------
Robert M. Lichten, Deputy Chairman and Director
March , 2000
- --------------------------------------------------------
Robert Clements, Director
/s/ ALBERT R. DOWDEN March 2, 2000
- --------------------------------------------------------
Albert R. Dowden, Director
/s/ MICHAEL P. ESPOSITO March 2, 2000
- --------------------------------------------------------
Michael P. Esposito, Jr., Director
/s/ LEE M. GAMMILL, JR. March 2, 2000
- --------------------------------------------------------
Lee M. Gammill, Jr., Director
/s/ MARK GRIER March 2, 2000
- --------------------------------------------------------
Mark Grier, Director
/s/ DONALD J. MATTHEWS March 2, 2000
- --------------------------------------------------------
Donald J. Matthews, Director
</TABLE>
41
<PAGE> 43
<TABLE>
<CAPTION>
SIGNATURE DATE
--------- ----
<S> <C>
/s/ BRIAN M. O'HARA March 2, 2000
- --------------------------------------------------------
Brian M. O'Hara, Director
/s/ JERRY S. ROSENBLOOM March 2, 2000
- --------------------------------------------------------
Jerry S. Rosenbloom, Director
/s/ WALTER A. SCOTT March 2, 2000
- --------------------------------------------------------
Walter A. Scott, Director
/s/ JON W. YOSKIN March 2, 2000
- --------------------------------------------------------
Jon W. Yoskin, II, Director
</TABLE>
42
<PAGE> 1
Exhibit 10.17
ANNUITY AND LIFE RE (HOLDINGS), LTD.
EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated as of January 1, 1999 by and between Annuity & Life
Re (Holdings), Ltd., a Bermudian corporation (the "Company"), Annuity & Life
Reassurance, Ltd., a subsidiary of the Company organized under the laws of
Bermuda to engage in worldwide life and annuity reinsurance (the "Operating
Company"), and Gary Scofield (hereinafter called the "Employee").
W I T N E S S E T H:
WHEREAS, the Company and the Operating Company desire that the Employee
serve as Vice President of the Company and Senior Vice President of the
Operating Company and the Employee is willing to serve in such capacities; and
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
and other good and valuable consideration, the parties hereto agree as follows:
Section: 1. Employment
Effective as of January 1, 1999, the Company and the Operating Company
will employ the Employee and the Employee will perform services for the Company
and the Operating Company on the terms and conditions set forth in this
Agreement and for the period ("Term of Employment") specified in Section 3
hereof. This Agreement may be terminated at any time during its initial term or
during any renewal term solely in accordance with the terms and conditions of
Section 11 hereof.
Section: 2. Duties
The Employee, during the Term of Employment, shall serve the Company as a
Vice President. The Employee shall also serve as a Senior Vice President of the
Operating Company. The employee shall be based at the Operating Company's
headquarters in Bermuda, other than for periodic travel in the ordinary course
of business. The Employee shall have such duties and responsibilities as are
assigned to him by the Boards of Directors of the Company and the Operating
Company commensurate with his positions as Vice President and Life Underwriter
of the Company and the Operating Company.
The Employee shall perform his duties hereunder faithfully and to the best
of his abilities and in furtherance of the business of the Company, and shall
devote his full business time, energy, attention and skill to the business of
the
<PAGE> 2
Company and to the promotion of its interests except as otherwise agreed by the
Company.
The Employee warrants and represents that he is free to enter into this
Agreement and is not restricted by any prior or existing agreement and the
Company and the Operating Company may rely on such representation in entering
into this Agreement.
Section: 3. Term of Employment
The initial Term of Employment of this Agreement shall be three years
commencing on January 1, 1999. At the end of the initial Term of Employment, and
on each anniversary thereof, the Term of Employment shall automatically be
extended for one additional year, unless the Company or the Employee shall have
given written notice to the other that it does not wish to extend this Agreement
at least three months in advance. If the Employee does not wish to continue
employment with the Company and the Operating Company or family reasons after
the end of the initial Term of Employment, the Company will pay reasonable
relocation expenses to the United States for the Employee if the Employee wishes
to be employed in the United States, subject to Section 13.
Section: 4. Salary
The Employee shall receive, as compensation for his duties and obligations
to the Company and the Operating Company, a salary at the annual rate of
$160,000, payable in substantially equal installments in accordance with the
Operating Company's payroll practice. It is agreed between the parties that the
Company shall review the base annual salary annually and in light of such review
may, in the discretion of the Board of Directors of the Company (but shall not
be obligated to), increase such base annual salary taking into account any
change in the Employee's then responsibilities, increases in the cost of living,
performance by the Employee, and other pertinent factors.
Section: 5. Bonus
During the Term of Employment, the Employee shall participate in the
Company's Incentive Compensation Plan, and will be eligible for an annual cash
bonus of up to two times his annual salary based on performance targets as
determined in accordance with the terms of the Plan.
Section: 6. Options
(a) Initial Options. The Company shall grant to the Employee the right and
option to purchase all or any part of an aggregate of 30,000 common shares at a
price determined by the Company's Compensation
2
<PAGE> 3
Committee. Thirty-three and one-thirds percent (33 1/3%) of the Initial Options
shall be exercisable after the first anniversary of the Grant, 33 1/3% of the
Options shall become exercisable after the second anniversary of the Grant,
and an additional 33 1/3% of the Options shall become exercisable after the
third anniversary thereof. In addition, no Option may be exercised after the
earlier of (A) the date that is (i) ninety (90) days following the termination
of the Employee's employment for any reason other than death, disability or
Serious Cause (as defined in Section 11), or (ii) six (6) months after the
termination of the Employee's employment by reason of death or disability or
(iii) the date upon which the Employee's employment is terminated for Serious
Cause; or (B) the tenth anniversary of the Grant date.
The consideration for the Ordinary Shares purchased upon exercise of the
Initial Options may be paid in cash or by any other method permitted by the
term of the Company's Initial Option Plan. The issuance of any Ordinary Shares
pursuant to the Initial Options shall in all events be subject to all
applicable securities laws and the Employee shall enter into any agreement
reasonably requested by the Company in order to ensure that all such issuances
are in full compliance therewith. The Employee shall not have any of the rights
and privileges of the shareholder of the Company with respect to the Ordinary
Shares issuable upon any exercise of Initial Options unless and until his
name is entered into the register of members of the Company in respect of such
Ordinary Shares. If there is any change in the number or nature of outstanding
shares of the Company's capital stock by reason of a share dividend,
recapitalization, merger, consolidation, scheme or arrangement, share split,
combination or exchange, share repurchase or otherwise, which in any case has a
dilutive or anti-dilutive effect on the Ordinary Shares, the number of Ordinary
Shares subject to each outstanding Initial Option, the exercise price thereof
and/or other terms thereof shall be appropriately adjusted by the Board of
Directors of the Company (or any committee thereof), whose determination shall
be conclusive, so as to restore the option holder of his rights thereunder.
(b) OTHER OPTIONS. During the Term of Employment, the Employee shall be
eligible to be granted options (in addition to the Initial Options) to purchase
Ordinary Shares at such price and subject to such terms as provided by the
Company's Initial Stock Option Plan, in the sole discretion of the Board of
Directors of the Company.
Section 7. EMPLOYEE BENEFITS
During the Term of Employment the Employee shall be entitled to participate
in all employee benefit programs of the Company, as such programs may be in
effect from time to time, including without limitation, pension and other
retirement plans, profit sharing plans, group life insurance, accidental death
and dismemberment insurance, hospitalization, surgical and major medical
coverage, sick leave (including salary continuation arrangements), long term
disability,
3
<PAGE> 4
holidays and vacations. The Company shall contribute monthly ten percent of the
base monthly salary of the employee to a retirement plan for the benefit of the
Employee.
Section: 8. Business Expenses
All reasonable travel and other expenses incidental to the rendering of
services by the Employee hereunder shall be paid by the Company and if expenses
are paid in the first instance by the Employee, the Company will reimburse him
therefor upon presentation of proper invoices; subject in each case to
compliance with the Company's reasonable reimbursement policies and procedures.
Section: 9. Housing and Travel Expenses
Effective January 1, 1999, the Company shall provide to the Employee the
sum of $8,333.00 monthly as an allowance to cover the expenses of housing and
the cost of living in Bermuda and for personal travel for the Employee and his
family.
Section 10. Vacations
The Employee shall be entitled to reasonable vacation and reasonable sick
leave each year (beginning with 1999), in accordance with policies of the
Company, as determined by the Board of Directors, provided, however, that the
Employee shall be entitled to a minimum of four (4) weeks vacation per year.
Section 11. Termination
(a) In the event of Serious Cause, as defined below, the Company may
terminate the Employee's employment and the Term of Employment upon written
notice of such termination stating the Serious Cause upon which the Company
relies for its termination. The Employee's employment and the Term of
Employment shall be terminated effective as of the date specified in such
notice, which shall in no event be earlier than the effective date of such
notice as provided in Section 20.
"Serious Cause" shall mean (i) the willful and continued failure by the
Employee to perform substantially his duties hereunder, other than by reasons
of health, after written demand for substantial performance is delivered by the
Company that identifies the manner in which the Company believes the Employee
has not substantially performed his duties, (ii) the Employee shall have been
indicted by any federal, state or local authority in any jurisdiction for, or
shall have pleaded guilty or nolo contendre to, an act constituting a felony,
(iii) the Employee shall have habitually abused any substance (such as narcotics
or alcohol), or (iv) the Employee shall have (A) engaged in acts of fraud,
material
4
<PAGE> 5
dishonesty or gross misconduct in connection with the business of the Company
of (B) committed a material breach of this Agreement.
(b) The Employee may terminate his employment and the Term of his
Employment in the event of Good Reason, as defined below, upon 30 days' prior
written notice of such termination stating the Good Reason upon which the
Employee relies for his termination. The Employee's employment and the Term of
Employment shall be terminated effective as of the date specified in such
notice, which in no event shall be earlier than the effective date of such
notice as provided in Section 20.
"Good Reason" shall mean (i) a substantial reduction in the Employee's
travel and living allowance, salary, or benefits, (ii) the demotion of the
Employee, (iii) a material reduction of the Employee's duties or
responsibilities hereunder, (iv) a material breach of this Agreement by the
Company, or (v) the occurrence of any action taken by the Company that would
constitute a constructive termination of the Employee's employment.
(c) In the event of termination of the Employee's employment and the Term
of Employment by the Company for Serious Cause or by the Employee without Good
Reason, the Employee shall forfeit all bonus amounts for the then current
fiscal year, and the Company shall be liable to the Employee only for (i) any
accrued but unpaid salary, (ii) any accrued but unpaid bonus from a prior
fiscal year, and (iii) reimbursement of business expenses incurred prior to the
date of termination.
(d) In the event of the death, retirement or disability of the Employee,
the Employee's employment and Term of Employment shall be terminated as of the
date of such death, retirement or disability and the Company shall pay the
Employee, or the Employee's estate or legal representative, as appropriate, (i)
any accrued but unpaid salary, (ii) any earned but unpaid bonus from a prior
fiscal year, (iii) reimbursement of business expenses incurred prior to the
date of termination, (iv) travel and housing allowances under Section 9 for six
months after the date of termination, and (v) reasonable relocation expenses
from Bermuda to the United States. The date of the Employee's disability shall
be deemed to be the last day of the sixth month during which the Employee has
been unable to carry out his position as provided below.
"Disability" shall mean the Employees inability, for reasons of health, to
carry out the functions of his position for a total of six (6) months during
any 12-month period of this Agreement. "Retirement" shall mean retirement from
employment upon attaining age 65 or such earlier age agreed to by the Company.
In addition, in such event, if the Company's Ordinary Shares are not then
publicly traded, the Company shall have the right to call any or all of the
Ordinary
5
<PAGE> 6
Shares of the Company owned by the Employee within six (6) months of death,
retirement or disability, and the Employee, the Employee's estate or legal
representative, whichever is appropriate, shall have the right to put any or
all of the Employee's Ordinary Shares to the Company within twelve (12) months
after death or within six (6) months after retirement or disability. The price
at which such put or call is exercisable shall be equal to the appraised value,
in each case measured as of the date of termination.
(e) If the Company should (i) terminate the Term of Employment and the
Employee's employment herein without Serious Cause, or (ii) if the Employee
should terminate the Term of Employment and his employment hereunder for Good
Reason, the Company shall continue to pay the Employee his base salary for a
period of one year from such termination. In addition, the Employee shall be
entitled to (A) any accrued but unpaid salary, (B) any earned but unpaid bonus
from a prior fiscal year, (C) reimbursement of business expenses incurred
prior to the date of termination, and (D) travel and housing allowances under
Section 9 for six months after the date of termination, and (E) reasonable
relocation expenses from Bermuda to the United States.
(f) In the event of the liquidation of the Company or in the event that
the Board of Directors elects to discontinue permanently operating the Company,
the Term of Employment and the Employee's employment herein shall be terminated
as of the date of such liquidation or discontinuance and the Company shall pay
the Employee (i) any accrued but unpaid salary, (ii) any earned but unpaid
bonus from a prior fiscal year, (iii) unreimbursed business expenses incurred
prior to the date of termination, (iv) travel and housing allowances under
Section 9 for two months after the date of termination, and (v) reasonable
relocation expenses from Bermuda to the United States. In addition, the
Employee shall be entitled to receive one year's base salary from the date on
which the Employee's employment is terminated.
Section: 12. Change of Control
(a) Notwithstanding any other provision contained herein, the Employee's
Initial Options and other options issued under the Company's share option plans
that are not then exercisable shall become exercisable (and be deemed to be
vested) on the date on which a Change of Control of the Company occurs. In
addition, restricted Ordinary Shares granted under any of the Company's share
option plans shall immediately vest upon a Change of Control of the Company.
(b) If (i) the employment of the Employee is terminated by the Company
(or successor thereto) without Serious Cause or (ii) the Employee terminates
employment with the Company (or successor thereto) for Good Reason or because
of the failure of a successor to the Company to expressly assume and agree to
perform this Agreement, within the period commencing on
6
<PAGE> 7
the date that a Change of Control is formally proposed to the Company's Board of
Directors and ending on the first anniversary of the date on which such Change
of Control occurs, then the Employee shall be entitled to receive (in lieu of
the benefits described in Section 11): (1) any accrued but unpaid salary, (2) a
lump sum payment equal to two times such Employee's annual base salary as of the
date of termination, (3) any accrued but unpaid bonus from a prior fiscal year,
(4) reimbursement of business expenses incurred prior to the date of
termination, (5) travel and housing allowances under Section 9 for one year
following the date of termination, (6) reasonable relocation expenses from
Bermuda to the United States, together with (7) a gross-up of any income taxes
payable by the Employee by reason of such payments occurring in connection with
a change of control.
The Employee shall not be entitled to any benefits or other entitlements
under this section unless a Change of Control actually occurs.
(c) A "Change of Control" of the Company shall be deemed to have occurred
if (i) any "person" (as such term is defined in Section 3(a)(9) and as used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange
Act"), excluding the Company or any of its subsidiaries, a trustee or any
fiduciary holding securities under an employee benefit plan of the Company or
any of its subsidiaries, an underwriter temporarily holding securities pursuant
to an offering of such securities or a corporation owned, directly or
indirectly, by shareholders of the Company in substantially the same proportion
as their ownership of the Company, is or becomes the "beneficial owner" (as
defined in rule 13d-3 under the Exchange Act), directly or indirectly, of
securities ("Voting Securities"); (ii) during any period of not more than two
years, individuals who constitute the Board of Directors of the Company (the
"Board") as of the beginning of the period and any new director (other than a
director designated by a person who has entered into an agreement with the
Company to effect a transaction described in clause (i) or (iii) of this
sentence) whose election by the Board or nomination for election by the
Company's shareholders was approved by a vote of at least two-thirds (2/3) of
the directors then still in office who either were directors at such time or
whose election or nomination for election was previously so approved, cease for
any reason to constitute a majority thereof; (iii) the shareholders of the
Company approve a merger, consolidation or reorganization or a court of
competent jurisdiction approves a scheme of arrangement of the Company, other
than a merger, consolidation, reorganization or scheme of arrangement which
would result in the Voting Securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into Voting Securities of the surviving entity) at least 50% of
the combined voting power of the Voting Securities of the Company or such
surviving entity outstanding immediately after such merger, consolidation,
reorganization or scheme of arrangement; or (iv) the shareholders of the Company
approve a plan of complete liquidation of the
7
<PAGE> 8
Company or any agreement for the sale of substantially all of the Company's
assets.
Section: 13. Agreement Not to Compete
(a) The Employee hereby covenants and agrees that at no time during the
Term of Employment nor for a period of (i) one year immediately following the
termination of the Employee's employment by the Company without Serious Cause or
by the Employee for Good Reason or (ii) two years following the termination of
the Employee's employment for any other reason, will he for himself or on behalf
of any other person, partnership, company or corporation, directly or
indirectly, acquire any financial or beneficial interest in (except as provided
in the next sentence) any entity engaged in any business directly competitive to
the business engaged in by the Company or the Operating Company at the time of
such termination of employment. Notwithstanding the preceding sentence, the
Employee shall not be prohibited from owning less than one (1%) percent of any
publicly traded corporation, whether or not such corporation is in competition
with the Company or the Operating Company. Additionally, the Employee will not
become employed by any non-United States entity engaged in a directly
competitive business. Furthermore, the employee will not enter into competition
with the Company or Operating Company for a period of two years following
termination. For purposes of this Employment Agreement, "competition" will mean
soliciting business from any clients of the Company and/or Operating Company.
Clients of the Company and/or Operating Company are those companies for whom the
Company and/or Operating Company has reinsured business during the Employee's
period of employment under this agreement.
(b) The Employee hereby covenants and agrees that, at all times during the
Term of Employment and for a period of two years immediately following the
termination thereof, the Employee shall not directly or indirectly employ or
seek to employ any person or entity employed at that time by the Company or any
of its subsidiaries, or otherwise encourage or entice such person or entity to
leave such employment.
Section: 14. Confidential Information
(a) The Employee agrees to keep secret and retain in the strictest
confidence all confidential matters which relate to the Company or any
affiliate of the Company, including, without limitation, customer lists, client
lists, trade secrets, pricing policies and other business affairs of the
Company and any affiliate of the Company learned by him from the Company or any
such affiliate or otherwise before or after the date of this Agreement, and not
to disclose any such confidential matters to anyone outside the Company or any
of its affiliates, whether during or after his period of service with the
Company, except as may be required in the course of a legal or governmental
proceeding. Upon request by
8
<PAGE> 9
the Company the Employee agrees to deliver promptly to the Company upon
termination of his services for the Company, or at any time thereafter as the
Company may request, all Company or affiliate memoranda, notes, records,
reports, manuals, drawings, designs, computer files in any media and other
documents (and all copies thereof) relating to the Company's or any affiliate's
business and all property of the Company or any affiliate associated therewith,
which he may then possess or have under his control.
Section: 15 Remedy
(a) Should the Employee engage in or perform, either directly or
indirectly, and of the acts prohibited by Sections 13 or 14 hereof, it is agreed
that the Company shall be entitled to full injunctive relief, to be issued by
any competent court of equity, enjoining and restraining the Employee and each
and every other person, firm, organization, association, or corporation
concerned therein, from the continuance of such violative acts. The foregoing
remedy available to the Company shall not be deemed to limit or prevent the
exercise by the Company shall not be deemed to limit or prevent the exercise by
the Company of any or all further rights and remedies which may be available to
the Company hereunder or at law or in equity.
(b) The Employee acknowledges and agrees that the covenants contained in
this Agreement are fair and reasonable in light of the consideration paid
hereunder, and the invalidity or unenforceability of any particular provision,
or part of any provision, of this Agreement shall not affect the other
provisions or parts hereof. If any provision hereof is determined to be invalid
or unenforceable by a court of competent jurisdiction, the Employee shall
negotiate in good faith to provide the Company with protection as nearly
equivalent to that found to be invalid or unenforceable and if any such
provision shall be so determined to be invalid or unenforceable by reason of the
duration or geographical scope of the covenants contained therein, such duration
or geographical scope, or both, shall be considered to be reduced to a duration
or geographical scope to the extent necessary to cure such invalidity.
Section 16. Successors and Assigns
This Agreement shall be binding upon and inure to the benefit of the
Employee, his heirs, executors, administrators and beneficiaries, and the
Company, the Operating Company and their successors and assigns.
Section 17. Governing Law
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of New York, without reference to rules
relating to conflicts of law.
9
<PAGE> 10
Section: 18. Entire Agreement
This Agreement constitutes the full and complete understanding and
agreement of the parties and supersedes all prior understandings and agreements
as to employment of the Employee. This Agreement cannot be amended, changed,
modified or terminated without the written consent of the parties hereto.
Section: 19. Waiver of Breach
The waiver by either party of a breach of any term of this Agreement shall
not operate nor be construed as a waiver of any subsequent breach thereof.
Section: 20. Notices
Any notice, report, request or other communication given under this
Agreement shall be written and shall be effective upon delivery when delivered
personally, by Federal Express or by fax.
Unless otherwise notified by any of the parties, notices shall be sent to
the parties as follows:
To Employee: Gary Scofield
Sea Cliffs #3
34 South Road
Warwick, WK 02, Bermuda
To the Company: Annuity & Life Reassurance, Ltd.
Cumberland House
PO Box HM 98
Hamilton, HM AX, Bermuda
Section: 21. Severability
If any one or more of the provisions contained in this Agreement shall be
invalid, illegal or unenforceable in any respect under any applicable law, the
validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby.
Section: 22. Counterparts
This Agreement may be executed in one or more counterparts, each of which
shall be deemed to be an original but all of which together will constitute one
and the same instrument.
10
<PAGE> 11
IN WITNESS WHEREOF the parties hereto have executed this Agreement as on
the day and year first above written.
/s/ Gary Scofield
----------------------------------
Gary Scofield
Annuity & Life Re (Holdings), Ltd.
By: /s/ Lawrence S. Doyle
----------------------------------
Annuity & Life Reassurance, Ltd.
By: /s/ Lawrence S. Doyle
----------------------------------
11
<PAGE> 1
Exhibit 10.18
ANNUITY AND LIFE RE (HOLDINGS), LTD.
EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated as of July 1, 1999 by and between Annuity & Life Re
(Holdings), Ltd., a Bermudian corporation (the "Company", Annuity & Life Re
America, Inc., a subsidiary of the Company organized under the laws of the
United States to engage in life and annuity reinsurance (the "Operating
Company"), and Bryan Featherstone (hereinafter called the "Employee").
W I T N E S S E T H:
WHEREAS, the Company and the Operating Company desire that the Employee
serve as President of the Operating Company and the Employee is willing to serve
in such capacities; and
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
and other good and valuable consideration, the parties hereto agree as follows:
Section: 1. Employment
Effective as of August 1, 1999, the Operating Company will employ the
Employee and the Employee will perform services for the Operating Company on the
terms and conditions set forth in this Agreement and for the period ("Term of
Employment") specified in Section 3 hereof. This Agreement may be terminated at
any time during its initial term or during any renewal term solely in accordance
with the terms and conditions of Section 11 hereof.
Section: 2. Duties
The Employee, during the Term of Employment, shall serve the Operating
Company as President. The employee shall be based at the Operating Company's
headquarters in Connecticut, other than for periodic travel in the ordinary
course of business. The Employee shall have such duties and responsibilities as
are assigned to him by the Boards of Directors of the Operating Company
commensurate with his position as President of the Operating Company.
The Employee shall perform his duties hereunder faithfully and to the best
of his abilities and in furtherance of the business of the Operating Company,
and shall devote his full business time, energy, attention and skill to the
business of the Operating Company and to the promotion of its interests except
as otherwise agreed by the Operating Company.
<PAGE> 2
The Employee warrants and represents that he is free to enter into this
Agreement and is not restricted by any prior or existing agreement and the
Company and the Operating Company may rely on such representation in entering
into this Agreement.
Section: 3. Term of Employment
The initial Term of Employment of this Agreement shall be three years
commencing on August 1, 1999. At the end of the initial Term of Employment, and
on each anniversary thereof, the Term of Employment shall automatically be
extended for one additional year, unless the Operating Company or the Employee
shall have given written notice to the other that it does not wish to extend
this Agreement at least three months in advance.
Section: 4. Salary
The Employee shall receive as compensation for his duties and obligations
to the Operating Company, a salary at the annual rate of $250,000, payable in
substantially equal installments in accordance with the Operating Company's
payroll practice. It is agreed between the parties that the Operating Company
shall review the base annual salary annually and in light of such review may in
the discretion of the Board of Directors of the Operating Company (but shall not
be obligated to), increase such base annual salary taking into account any
change in the Employee's then responsibilities, increases in the cost of living,
performance by the Employee, and other pertinent factors.
Section: 5. Bonus
During the Term of Employment, the Employee shall participate in the
Company's Incentive Compensation Plan, and will be eligible for an annual cash
bonus of up to two times his annual salary based on performance targets as
determined in accordance with the terms of the Plan.
Section: 6. Options
(a) Initial Options. The Company shall grant to the Employee the
right and option to purchase all or any part of an aggregate of 30,000 common
shares at a price determined by the Company's Compensation Committee.
Thirty-three and one-thirds percent (33 1/3%) of the Initial Options shall
become exercisable after the first anniversary of the Grant. 33 1/3% of the
Options shall become exercisable after the second anniversary of the Grant, and
an additional 33 1/3% of the Options shall become exercisable after the third
anniversary thereof. In addition, no Option may be exercised after the earlier
of (A) the date that is (i) ninety (90) days following the termination of the
Employee's employment for any reason other than death, disability or Serious
Cause (as defined in Section 11), or (ii) six (6) months after the termination
of the
2
<PAGE> 3
Employee's employment by reason of death or disability or (iii) the date upon
which the Employee's employment is terminated for Serious Cause or (By the
tenth anniversary of the Grant date.
The consideration for the Ordinary Shares purchased upon exercise of the
Initial Options may be paid in cash or by any other method permitted by the
terms of the Company's Initial Option Plan. The issuance of any Ordinary Shares
pursuant to the Initial Options shall in all events be subject to all applicable
securities laws and the Employee shall enter into any agreement reasonably
requested by the Company in order to ensure that all such issuances are in full
compliance therewith. The Employee shall not have any of the rights and
privileges of a shareholder of the Company with respect to the Ordinary Shares
issuable upon any exercise of Initial Options unless and until his name is
entered into the register of members of the Company in respect of such Ordinary
Shares. If there is any change in the number or nature of outstanding shares of
the Company's capital stock by reason of a share dividend, recapitalization,
merger, consolidation, scheme or arrangement, share split, combination or
exchange, share repurchase or otherwise, which in any such case has a dilutive
or anti-dilutive effect on the Ordinary Shares, the number of Ordinary Shares
subject to each outstanding Initial Option, the exercise price thereof and/or
other terms thereof shall be appropriately adjusted by the Board of Directors of
the Company (or any committee thereof), whose determination shall be conclusive,
so as to restore the option holder to his rights thereunder.
(b) Other Options. During the Term of Employment, the Employee shall be
eligible to be granted options (in addition to the Initial Options) to purchase
Ordinary Shares at such price and subject to such terms as provided by the
Company's Initial Stock Option Plan, in the sole discretion of the Board of
Directors of the Company.
Section: 7. Employee Benefits
During the Term of Employment the Employee shall be entitled to participate
in all employee benefit programs of the Operating Company, as such programs may
be in effect from time to time, including without limitation, pension and other
retirement plans, profit sharing plans, group life insurance, accidental death
and dismemberment insurance, hospitalization, surgical and major medical
coverage, sick leave (including salary continuation arrangements), long term
disability, holidays and vacations. The Operating Company shall contribute
monthly ten percent of the base monthly salary of the employee to a retirement
plan for the benefit of the Employee.
Section: 8. Business Expenses
All reasonable travel and other expenses incidental to the rendering of
services by the Employee hereunder shall be paid by the Operating Company
3
<PAGE> 4
and if expenses are paid in the first instance by the Employee, the Operating
Company will reimburse him therefor upon presentation of proper invoices;
subject in each case to compliance with the Operating Company's reasonable
reimbursement policies and procedures.
Section 9. Vacations
The Employee shall be entitled to reasonable vacation and reasonable sick
leave each year (beginning with 1999), in accordance with policies of the
Operating Company, as determined by the Board of Directors, provided, however,
that the Employee shall be entitled to a minimum of four (4) weeks vacation per
year.
Section 10. Termination
(a) In the event of Serious Cause as defined below, the Operating
Company may terminate the Employee's employment and the Term of Employment upon
written notice of such termination stating the Serious Cause upon which the
Operating Company relies for its termination. The Employee's employment and the
Term of Employment shall be terminated effective as of the date specified in
such notice, which shall in no event be earlier than the effective date of such
notice as provided in Section 19.
"Serious Cause" shall mean (i) the willful and continued failure by the
Employee to perform substantially his duties hereunder, other than by reasons
of health after written demand for substantial performance is delivered by the
Company that identifies the manner in which the Operating Company believes the
Employee has not substantially performed his duties, (ii) the Employee shall
have been indicted by any federal, state or local authority in any jurisdiction
for, or shall have pleaded guilty or nolo contendre to, an act constituting a
felony, (iii) the Employee shall have habitually abused any substance (such as
narcotics or alcohol), or (iv) the Employee shall have (A) engaged in acts of
fraud, material dishonesty or gross misconduct in connection with the business
of the Operating Company of (B) committed a material breach of this Agreement.
(b) The Employee may terminate his employment and the Term of his
Employment in the event of Good Reason, as defined below, upon 30 days' prior
written notice of such termination stating the Good Reason upon which the
Employee relies for his termination. The Employee's employment and the Term of
Employment shall be terminated effective as of the date specified in such
notice, which in no event shall be earlier than the effective date of such
notice as provided in Section 19.
"Good Reason" shall mean (i) a substantial reduction in the Employee's
salary or benefits, (ii) the demotion of the Employee, (iii) a material
reduction of the Employee's duties or responsibilities hereunder, (iv) a
material breach of this
4
<PAGE> 5
Agreement by the Operating Company, or (v) the occurrence of any action taken
by the Operating Company that would constitute a constructive termination of
the Employee's employment.
(c) In the event of termination of the Employee's employment and the
Term of Employment by the Operating Company for Serious Cause or by the Employee
without Good Reason, the Employee shall forfeit all bonus amounts for the then
current fiscal year, and the Operating Company shall be liable to the Employee
only for (i) any accrued but unpaid salary, (ii) any accrued but unpaid bonus
from a prior fiscal year, and (iii) reimbursement of business expenses incurred
prior to the date of termination.
(d) In the event of the death, retirement or disability of the Employee,
the Employee's employment and Term of Employment shall be terminated as of the
date of such death, retirement or disability and the Operating Company shall
pay the Employee, or the Employee's estate or legal representative, as
appropriate, (i) any accrued but unpaid salary, (ii) any earned but unpaid
bonus from a prior fiscal year, and (iii) reimbursement of business expenses
incurred prior to the date of termination. The date of the Employee's
disability shall be deemed to be the last day of the sixth month during which
the Employee has been unable to carry out his position as provided below.
"Disability" shall mean the Employees inability, for reasons of health, to
carry out the functions of his position for a total of six (6) months during
any 12-month period of this Agreement. "Retirement" shall mean retirement from
employment upon attaining age 65 or such earlier age agreed to by the Operating
Company.
In addition, in such event, if the Company's Ordinary Shares are not then
publicly traded, the Company shall have the right to call any or all of the
Ordinary Shares of the Company owned by the Employee within six (6) months after
death, retirement or disability, and the Employee, the Employee's estate or
legal representative, whichever is appropriate, shall have the right to put any
or all of the Employee's Ordinary Shares to the Company within twelve (12)
months after death or within six (6) months after retirement or disability. The
price at which such put or call is exercisable shall be equal to the appraised
value, in each case measured as of the date of termination.
(e) If the Operating Company should (i) terminate the Term of Employment
and the Employee's employment herein without Serious Cause, or (ii) if the
Employee should terminate the Term of Employment and his employment hereunder
for Good Reason, the Operating Company shall continue to pay the Employee his
base salary for a period of one year from such termination. In addition, the
Employee shall be entitled to (A) any accrued but unpaid salary, (B) any earned
but unpaid bonus from a prior fiscal year, and (C) reimbursement of business
expenses incurred prior to the date of termination.
5
<PAGE> 6
(f) In the event of the liquidation of the Operating Company or in the
event that the Board of Directors elects to discontinue permanently operating
the Operating Company, the Term of Employment and the Employee's employment
herein shall be terminated as of the date of such liquidation or discontinuance
and the Operating Company shall pay the Employee (i) any accrued but unpaid
salary, (ii) any earned but unpaid bonus from a prior fiscal year and (iii)
unreimbursed business expenses incurred prior to the date of termination. In
addition, the Employee shall be entitled to receive one year's base salary from
the date on which the Employee's employment is terminated.
Section: 11. Change of Control
(a) Notwithstanding any other provision contained herein, the Employee's
Initial Options and other options issued under the Company's share option plans
that are not then exercisable shall become exercisable (and be deemed to be
vested) on the date on which a Change of Control of the Company occurs. In
addition, restricted Ordinary Shares granted under any of the Company's share
option plans shall immediately vest upon a Change of Control of the Company.
(b) If (i) the employment of the Employee is terminated by the Operating
Company (or successor thereto) without Serious Cause or (ii) the Employee
terminates employment with the Operating Company (or successor thereto) for Good
Reason or because of the failure of a successor to the Operating Company to
expressly assume and agree to perform this Agreement, within the period
commencing on the date that a Change of Control is formally proposed to the
Company's Board of Directors and ending on the first anniversary of the date on
which such Change of Control occurs, then the Employee shall be entitled to
receive (in lieu of the benefits described in Section 10): (1) any accrued but
unpaid salary, (2) a lump sum payment equal to two times such Employee's annual
base salary as of the date of termination, (3) any accrued but unpaid bonus from
a prior fiscal year, and (4) reimbursement of business expenses incurred prior
to the date of termination.
The Employee shall not be entitled to any benefits or other entitlements
under this section unless a Change of Control actually occurs.
(c) A "Change of Control" of the Company shall be deemed to have occurred
if (i) any "person" (as such term is defined in Section 3(a)(9) and as used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange
Act"), excluding the Company or any of its subsidiaries, a trustee or any
fiduciary holding securities under an employee benefit plan of the Company or
any of its subsidiaries, an underwriter temporarily holding securities pursuant
to an offering of such securities or a corporation owned, directly or
indirectly, by shareholders of the Company in substantially the same proportion
as their ownership of the Company, is or becomes the "beneficial owner" (as
defined in
6
<PAGE> 7
rule 13d-3 under the Exchange Act), directly or indirectly, of securities
("Voting Securities"); (ii) during any period of not more than two years,
individuals who constitute the Board of Directors of the Company (the "Board")
as of the beginning of the period and any new director (other than a director
designated by a person who has entered into an agreement with the Company to
effect a transaction described in clause (i) or (iii) of this sentence) whose
election by the Board or nomination for election by the Company's shareholders
was approved by a vote of at least two-thirds (2/3) of the directors then still
in office who either were directors at such time or whose election or
nomination for election was previously so approved, cease for any reason to
constitute a majority thereof; (iii) the shareholders of the Company approve a
merger, consolidation or reorganization or a court of competent jurisdiction
approves a scheme of arrangement of the Company, other than a merger,
consolidation, reorganization or scheme of arrangement which would result in
the Voting Securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into Voting Securities of the surviving entity) at least 50% of the combined
voting power of the Voting Securities of the Company or such surviving entity
outstanding immediately after such merger, consolidation, reorganization or
scheme of arrangement; or (iv) the shareholders of the Company approve a plan
of complete liquidation of the Company or any agreement for the sale of
substantially all of the Company's assets.
Section: 12. Agreement Not to Compete
(a) The Employee hereby covenants and agrees that at no time during the
Term of Employment nor for a period of (i) one year immediately following the
termination of the Employee's employment by the Operating Company without
Serious Cause or by the Employee for Good Reason or in the event of the
liquidation of the Operating Company or in the event the Board of Directors
elect to discontinue permanently operating the Operating Company or (ii) two
years following the termination of the Employee's employment for any other
reason, will he for himself or on behalf of any other person, partnership,
company or corporation, directly or indirectly, acquire any financial or
beneficial interest in (except as provided in the next sentence) any entity
engaged in any business directly competitive to the business engaged in by the
Company or the Operating Company at the time of such termination of employment.
Notwithstanding the preceding sentence, the Employee shall not be prohibited
from owning less than one (1%) percent of any publicly traded corporation,
whether or not such corporation is in competition with the Company or the
Operating Company. Additionally, the Employee will not become employed by any
non-United States entity engaged in a directly competitive business.
Furthermore, the employee will not enter into competition with the Company or
Operating Company for a period of two years following termination. For purposes
of this Employment Agreement, "competition" will mean soliciting reinsurance
business from any clients of the Company and/or Operating Company. Clients of
the Company
7
<PAGE> 8
and/or Operating Company are those companies for whom the Company and/or
Operating Company has reinsured business during the Employee's period of
employment under this agreement.
(b) The Employee hereby covenants and agrees that, at all times during the
Term of Employment and for a period of two years immediately following the
termination thereof, the Employee shall not directly or indirectly employ or
seek to employ any person or entity employed at that time by the Company or any
of its subsidiaries, or otherwise encourage or entice such person or entity to
leave such employment.
Section 13. Confidential Information
(a) The Employee agrees to keep secret and retain in the strictest
confidence all confidential matters which relate to the Company or any
affiliate of the Company, including, without limitation, customer lists, client
lists, trade secrets, pricing policies and other business affairs of the
Company and any affiliate of the Company learned by him from the Company or
any such affiliate or otherwise before or after the date of this Agreement, and
not to disclose any such confidential matter to anyone outside the Company or
any of its affiliates, whether during or after his period of service with the
Company, except as may be required in the course of a legal or governmental
proceeding. Upon request by the Company the Employee agrees to deliver promptly
to the Company upon termination of his services for the Company, or at any time
thereafter as the Company may request, all Company or affiliate memoranda,
notes, records, reports, manuals, drawings, designs, computer files in any
media and other documents (and all copies thereof) relating to the Company's or
any affiliate's business and all property of the Company or any affiliate
associated therewith, which he may then possess or have under his control.
Section: 14. Remedy
(a) Should the Employee engage in or perform, either directly or
indirectly, and of the acts prohibited by Sections 13 or 14 hereof, it is
agreed that the Operating Company shall be entitled to full injunctive relief,
to be issued by any competent court of equity, enjoining and restraining the
Employee and each and every other person, firm, organization, association, or
corporation concerned therein, from the continuance of such violative acts. The
foregoing remedy available to the Operating Company shall not be deemed to
limit or prevent the exercise by the Company of any or all further rights and
remedies which may be available to the Company hereunder or at law or in equity.
(b) The Employee acknowledges and agrees that the covenants contained in
this Agreement are fair and reasonable in light of the consideration paid
hereunder, and the invalidity or unenforceability of any particular provision,
or part of any provision, of this Agreement shall not affect the other
provisions or
8
<PAGE> 9
parts hereof. If any provision hereof is determined to be invalid or
unenforceable by a court of competent jurisdiction, the Employee shall
negotiate in good faith to provide the Operating Company with protection as
nearly equivalent to that found to be invalid or unenforceable and if any such
provision shall be so determined to be invalid or unenforceable by reason of
the duration or geographic scope of the covenants contained therein, such
duration or geographical scope, or both, shall be considered to be reduced to a
duration or geographical scope to the extent necessary to cure such invalidity.
Section: 15. Successors and Assigns
This Agreement shall be binding upon and inure to the benefit of the
Employee, his heirs, executors, administrators and beneficiaries, and the
Company, the Operating Company and their successors and assigns.
Section: 16. Governing Law
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Connecticut without reference to rules
relating to conflicts of law.
Section: 17. Entire Agreement
This Agreement constitutes the full and complete understanding and
agreement of the parties and supersedes all prior understandings and agreements
as to employment of the Employee. This Agreement cannot be amended, changed,
modified or terminated without the written consent of the parties hereto.
Section: 18. Waiver of Breach
The waiver by either party of a breach of any term of this Agreement shall
not operate nor be construed as a waiver of any subsequent breach thereof.
Section: 19. Notices
Any notice, report, request or other communication given under this
Agreement shall be written and shall be effective upon delivery when delivered
personally, by Federal Express or by fax.
Unless otherwise notified by any of the parties, notices shall be sent to
the parties as follows:
To Employee: Bryan Featherstone
68 Portage Crossing
Farmington, CT 06032
9
<PAGE> 10
To the Company Annuity & Life Reassurance, Ltd.
Cumberland House
PO Box HM 98
Hamilton, HM AX, Bermuda
Section: 20. Severability
If any one or more of the provisions contained in this Agreement shall be
invalid, illegal or unenforceable in any respect under any applicable law, the
validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby.
Section: 21. Counterparts
This Agreement may be executed in one or more counterparts, each of which
shall be deemed to be an original but all of which together will constitute one
and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as on
the day and year first above written.
/s/ Bryan Featherstone
------------------------------------
Bryan Featherstone
Annuity & Life Re (Holdings), Ltd.
By: /s/ Lawrence S. Doyle, CEO
--------------------------------
Lawrence S. Doyle
Annuity & Life Reassurance, Ltd.
By: /s/ Lawrence S. Doyle, CEO
--------------------------------
Lawrence S. Doyle
10
<PAGE> 1
Exhibit 21.1
Subsidiaries of the Registrant
- - Annuity and Life Reassurance, Ltd.
- - Annuity and Life Re America, Inc.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Annuity and Life Re (Holdings), Ltd.
We consent to the incorporation by reference in the registration statement on
Form S-8 (File No. 333-76229) of Annuity and Life Re (Holdings), Ltd. of our
report dated February 8, 2000, relating to the consolidated balance sheets of
Annuity and Life Re (Holdings), Ltd. and subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of operations, comprehensive
income, changes in stockholders' equity and cash flows for the two year period
ended December 31, 1999 and the related schedule, which report appears in the
December 31, 1999 Form 10-K of Annuity and Life Re (Holdings), Ltd.
/s/ KPMG
- -------------------------
KPMG
Hamilton, Bermuda
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLDIATED BALANCE SHEET AS OF DECEMBER 31, 1999 AND THE CONSOLDIATED
STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 272,872,882
<DEBT-CARRYING-VALUE> 0
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<EQUITIES> 0
<MORTGAGE> 0
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<TOTAL-INVEST> 272,872,882
<CASH> 31,187,242
<RECOVER-REINSURE> 7,834,306
<DEFERRED-ACQUISITION> 203,510,250
<TOTAL-ASSETS> 2,056,085,988
<POLICY-LOSSES> 43,753,923
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<POLICY-HOLDER-FUNDS> 1,603,382,955
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0
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<COMMON> 25,499,999
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100,835,007
<INVESTMENT-INCOME> 85,089,811
<INVESTMENT-GAINS> (1,284,769)
<OTHER-INCOME> 3,215,429
<BENEFITS> 102,265,844
<UNDERWRITING-AMORTIZATION> 26,289,721
<UNDERWRITING-OTHER> 15,910,967
<INCOME-PRETAX> 35,703,144
<INCOME-TAX> 0
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