<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-23625
ANNUITY AND LIFE RE (HOLDINGS), LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
BERMUDA NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
CUMBERLAND HOUSE, VICTORIA STREET, HAMILTON, BERMUDA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
441-296-7667
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of the Registrant's Common Shares (par value $1.00 per share)
outstanding as of November 3, 2000 was 25,499,999.
--------------------------------------------------------------------------------
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<PAGE> 2
INDEX TO FORM 10-Q
PART I -- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
ITEM 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheets
September 30, 2000 (unaudited) and December 31, 1999........ 3
Unaudited Consolidated Statements of Operations
Three and Nine Months ended September 30, 2000 and 1999..... 4
Unaudited Consolidated Statements of Comprehensive Income
Three and Nine Months ended September 30, 2000 and 1999..... 5
Unaudited Consolidated Statements of Cash Flows
Nine Months ended September 30, 2000 and 1999............... 6
Unaudited Consolidated Statements of Changes in
Stockholders' Equity
Nine Months ended September 30, 2000 and 1999............... 7
Notes to Unaudited Consolidated Financial Statements........ 8
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 10-14
PART II -- OTHER INFORMATION
ITEM 4. Exhibits and Reports on Form 8-K............................ 15
Signatures........................................................... 16
Exhibits.............................................................
</TABLE>
2
<PAGE> 3
ANNUITY AND LIFE RE (HOLDINGS), LTD.
CONSOLIDATED BALANCE SHEETS
UNAUDITED
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents.................................. $ 37,137,297 $ 31,187,242
Fixed maturity investments, available for sale, at fair
value (amortized cost of $262,785,178 at September 30,
2000; December 31, 1999 $284,142,098).................... 258,623,025 272,872,882
Funds withheld at interest................................. 1,453,375,045 1,532,652,990
Accrued investment income.................................. 3,216,685 4,279,480
Receivable for investments sold............................ 2,007,724 --
Receivable for reinsurance ceded........................... 107,766,637 --
Other reinsurance receivables.............................. 27,648,825 7,834,806
Deferred policy acquisition costs.......................... 193,069,024 203,510,250
Insurance Licenses, net of amortization.................... 2,272,214 --
Other assets............................................... 4,060,413 3,748,338
-------------- --------------
Total Assets..................................... $2,089,176,889 $2,056,085,988
============== ==============
LIABILITIES
Reserves for future policy benefits........................ $ 170,810,545 $ 43,753,923
Interest-sensitive contracts liabilities................... 1,480,003,766 1,603,382,955
Other reinsurance liabilities.............................. 10,463,144 10,746,269
Payable for investments purchased.......................... 999,810 639,352
Accounts payable and accrued expenses...................... 4,321,080 5,508,595
-------------- --------------
Total Liabilities................................ $1,666,598,345 $1,664,031,094
-------------- --------------
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................................. 329,496,091 329,496,091
Notes receivable from stock sales.......................... (1,347,116) (1,286,741)
Accumulated other comprehensive (loss)..................... (4,162,153) (11,269,216)
Retained earnings.......................................... 73,091,723 49,614,761
-------------- --------------
Total Stockholders' Equity....................... $ 422,578,544 $ 392,054,894
-------------- --------------
Total Liabilities and Stockholders' Equity....... $2,089,176,889 $2,056,085,988
============== ==============
</TABLE>
See accompanying notes to unaudited consolidated financial statements
3
<PAGE> 4
ANNUITY AND LIFE RE (HOLDINGS), LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
3 MONTHS ENDED 3 MONTHS ENDED 9 MONTHS ENDED 9 MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
REVENUES
Net premiums................ $44,588,022 $21,101,366 $118,502,400 $ 57,720,663
Investment income, net of
related expenses.......... 23,745,266 19,528,879 76,362,195 58,365,264
Net realized investment
(losses).................. (702,549) (793,008) (3,683,254) (687,305)
Other....................... 1,689,451 1,250,961 5,086,409 1,639,924
----------- ----------- ------------ ------------
Total Revenues.... $69,320,190 $41,088,198 $196,267,750 $117,038,546
----------- ----------- ------------ ------------
BENEFITS AND EXPENSES
Claims and policy
benefits.................. $36,040,180 $17,232,038 $ 98,896,595 $ 48,505,406
Net cost of interest
sensitive contract
liabilities............... 4,734,374 4,762,521 20,637,442 12,588,018
Policy acquisition costs and
other insurance
expenses.................. 15,316,221 9,052,163 43,711,710 25,449,273
Operating expenses.......... 2,328,514 1,326,416 6,485,041 4,552,266
----------- ----------- ------------ ------------
Total Benefits and
Expenses........ $58,419,289 $32,373,138 $169,730,788 $ 91,094,963
----------- ----------- ------------ ------------
Net Income................ $10,900,901 $ 8,715,060 $ 26,536,962 $ 25,943,583
=========== =========== ============ ============
NET INCOME PER COMMON SHARE
(NOTE 3):
Basic....................... $ 0.43 $ 0.34 $ 1.04 $ 1.02
Diluted..................... $ 0.40 $ 0.32 $ 0.97 $ 0.95
</TABLE>
See accompanying notes to unaudited consolidated financial statements
4
<PAGE> 5
ANNUITY AND LIFE RE (HOLDINGS), LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
UNAUDITED
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
3 MONTHS ENDED 3 MONTHS ENDED 9 MONTHS ENDED 9 MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net Income for period... $10,900,901 $ 8,715,060 $26,536,962 $ 25,943,583
Other comprehensive
(loss) income:
Unrealized holding gains
(losses) on securities
arising during
period................ 3,835,801 (2,056,950) 7,107,063 (11,380,465)
----------- ----------- ----------- ------------
Total comprehensive
income................ $14,736,702 $ 6,658,110 $33,644,025 $ 14,563,118
=========== =========== =========== ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements
5
<PAGE> 6
ANNUITY AND LIFE RE (HOLDINGS), LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
9 MONTHS ENDED 9 MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................. $ 26,536,962 $ 25,943,583
Adjustments to reconcile net income to cash (used) by
operating activities
Net realized investment losses............................. 3,683,254 687,305
Changes in:
Accrued investment income.................................. 1,062,795 (83,232)
Deferred policy acquisition costs.......................... 10,441,226 (50,329,823)
Other reinsurance receivables.............................. (19,814,019) --
Other assets............................................... (312,074) (3,359,676)
Reserves for future policy benefits........................ 19,289,985 8,837,322
Interest sensitive contracts, net of funds withheld........ (44,101,244) 7,773,296
Other reinsurance liabilities.............................. (283,125) (18,304,252)
Accounts payable........................................... (1,187,515) 1,463,004
------------- -------------
Net cash (used) by operating activities.................... $ (4,683,755) $ (27,372,473)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of fixed maturity securities........... $ 233,098,294 $ 159,919,267
Purchase of fixed maturity securities...................... (206,162,319) (171,626,737)
Acquisition of business.................................... (13,181,790) --
------------- -------------
Net cash provided (used) by investing activities........... 13,754,185 (11,707,470)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of notes receivable, less interest accrued....... (60,375) 124,177
Dividends paid to stockholders............................. (3,060,000) (3,060,000)
------------- -------------
Net cash (used) by financing activities.................... (3,120,375) (2,935,823)
------------- -------------
Increase (decrease) in cash and cash equivalents........... 5,950,055 (42,015,766)
Cash and cash equivalents, beginning of period............. 31,187,242 66,586,267
------------- -------------
Cash and cash equivalents, end of period................... $ 37,137,297 $ 24,570,501
============= =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
ANNUITY AND LIFE RE (HOLDINGS), LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
UNAUDITED
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
9 MONTHS ENDED 9 MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
PREFERRED SHARES PAR VALUE $1.00
Balance at beginning and end of period..................... $ -- $ --
------------ ------------
COMMON SHARES PAR VALUE $1.00
Balance at beginning and end of period..................... $ 25,499,999 $ 25,499,999
------------ ------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning and end of period..................... $329,496,091 $329,517,104
------------ ------------
NOTES RECEIVABLE FROM STOCK SALES
Balance at beginning of period............................. $ (1,286,741) $ (1,391,068)
Repayments................................................. -- 174,950
Accrued interest during period............................. (60,375) (50,773)
------------ ------------
Balance at end of period................................... $ (1,347,116) $ (1,266,891)
------------ ------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of period............................. $(11,269,216) $ 3,722,594
Net unrealized holding gains (losses) on securities........ 7,107,063 (11,380,465)
------------ ------------
Balance at end of period................................... $ (4,162,153) $ (7,657,871)
------------ ------------
RETAINED EARNINGS
Balance at beginning of period............................. $ 49,614,761 $ 17,991,617
Net income................................................. 26,536,962 25,943,583
Stockholder dividends...................................... (3,060,000) (3,060,000)
------------ ------------
Balance at end of period................................... $ 73,091,723 $ 40,875,200
------------ ------------
TOTAL STOCKHOLDERS' EQUITY................................. $422,578,544 $386,967,541
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
7
<PAGE> 8
ANNUITY AND LIFE RE (HOLDINGS), LTD.
NOTES TO THE UNAUDITED 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; Annuity and Life Re America,
Inc. ("Annuity and Life Re America"), an insurance holding company based in the
United States, and Capitol Bankers Life Insurance Company ("Capitol Bankers"), a
life insurance company domiciled in the United States. Holdings, Annuity and
Life Reassurance, Annuity and Life Re America and Capitol Bankers are
collectively referred to herein as the "Company".
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of the Company
have been prepared in accordance with generally accepted accounting principles
for interim financial information and in accordance with SEC Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
These consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto contained in the
Company's Form 10-K for the fiscal year ended December 31, 1999 and Form 10-Qs
for the fiscal quarters ended March 31, 2000 and June 30, 2000. In the opinion
of management, all adjustments considered necessary for a fair presentation have
been included in these financial statements.
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
3 MONTHS ENDED SEPTEMBER 30, 9 MONTHS ENDED SEPTEMBER 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Income............................ $10,900,901 $ 8,715,060 $26,536,962 $25,943,583
Net average number of common shares
outstanding......................... 25,499,999 25,499,999 25,499,999 25,499,999
Weighted average number of common
shares outstanding including shares
issuable from exercise of options
and warrants........................ 27,419,525 27,218,541 27,383,590 27,177,007
Earnings per share.................... $ 0.43 $ 0.34 $ 1.04 $ 1.02
Earnings per share assuming
dilution............................ $ 0.40 $ 0.32 $ 0.97 $ 0.95
</TABLE>
4. ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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. 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". As a
result Statement No. 133 is effective for all fiscal years beginning after June
15, 2000. The Company 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.
8
<PAGE> 9
ANNUITY AND LIFE RE (HOLDINGS), LTD.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5. SIGNIFICANT TRANSACTION
On June 1, 2000 the Company, through Annuity and Life Re America, completed
the acquisition of Capitol Bankers for $13,200,000. Capitol Bankers is a life
insurance company domiciled in the United States, which is authorized to conduct
its life insurance business in 43 states of the United States, and will focus
its operations on the United States life reinsurance markets. The Company
intends to contribute additional capital to Capitol Bankers during the current
fiscal year of approximately $14,000,000 to bring the total capital and surplus
of Capital Bankers to $25,000,000. The acquisition price was funded from
available cash balances; the subsequent capital contribution will be funded from
available cash balances or proceeds from the sale of fixed maturity securities
held by the Company.
The acquisition has been accounted for as a purchase and the operating
results of Capitol Bankers have been included in the Company's financial
statements since the date of acquisition. Prior to closing, the in force
insurance business of Capitol Bankers was 100% reinsured by Capitol Bankers with
its former owner, a subsidiary of Swiss Re, who will continue to administer the
business reinsured. Accordingly, there will be no earnings from the in-force
insurance business at the acquisition date accruing to the Company currently or
in the future.
The amounts related to the reinsured business referred to above are
included on the Company's Balance Sheet in the assets as Receivable for
Reinsurance Ceded and in the liabilities as Reserves for Future Policy Benefits;
at September 30, 2000 the amounts were $107,766,637.
The purchase price exceeded the fair value of the net assets acquired (the
capital and surplus of Capitol Bankers) by $2,301,000 which has been allocated
to the value of the 43 insurance licenses of Capitol Bankers. This amount is
being amortized over 20 years.
The proforma balance sheet of Capitol Bankers as of the date of acquisition
after giving effect to the reinsurance transaction is as follows:
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Cash & Invested assets...................................... $ 10,880,686
Receivable for reinsurance ceded............................ 108,766,677
Insurance Licenses.......................................... 2,301,104
------------
Total Assets................................................ $121,948,467
============
LIABILITIES & STOCKHOLDERS EQUITY
Reserves for future policy benefits......................... $108,766,677
Stockholders Equity......................................... $ 13,181,790
------------
Total Liabilities & Stockholders Equity..................... $121,948,467
============
</TABLE>
9
<PAGE> 10
ANNUITY AND LIFE RE (HOLDINGS), LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1. GENERAL
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 insurance laws of Bermuda as a long term insurer; Annuity and Life Re
America, Inc. ("Annuity and Life Re America"), an insurance holding company
based in the United States, and Capitol Bankers Life Insurance Company ("Capitol
Bankers"), a life insurance company domiciled in the United States. Holdings,
Annuity and Life Reassurance, Annuity and Life Re America and Capitol Bankers
are collectively referred to herein as the "Company".
2. OPERATING RESULTS
Net Income. For the nine-month period ended September 30, 2000, we had
consolidated net income of $26,537,000 or $1.04 per common share, $0.97 per
common share on a fully diluted basis, compared with $25,944,000 or $1.02 per
common share, $0.95 per common share on a fully diluted basis for the nine
months ended September 30, 1999. For the three month period ending September 30,
2000, we had consolidated net income of $10,901,000 or $0.43 per common share,
$0.40 per common share on a fully diluted basis, compared with $8,715,000 or
$0.34 per common share, $0.32 per common share on a fully diluted basis for the
three months ended September 30, 1999. The increase in the net income for the
three and nine month periods ended September 30, 2000 as compared with the net
income for the three and nine month periods ended September 30, 1999 was
primarily due to the growth and development of our insurance operations offset
by the net realized investment losses. With interest rates rising the investment
portfolio was repositioned to improve performance and to increase future
operating income.
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 three month and nine month periods ended September 30, 2000, our
net operating income increased 22% and 13%, respectively, over the comparable
prior year periods. Net operating income for the nine month period ending
September 30, 2000 was $30,220,000 or $1.19 per common share, $1.10 per common
share on a fully diluted basis, compared with $26,631,000 or $1.04 per common
share, $0.98 per common share on a fully diluted basis for the nine months ended
September 30, 1999. Net operating income for the three month period ending
September 30, 2000 was $11,603,000 or $0.46 per common share, $0.42 per common
share on a fully diluted basis, compared with $9,508,000 or $0.37 per common
share, $0.35 per common share on a fully diluted basis for the three months
ended September 30, 1999. The increase in the net operating income for the three
and nine month periods ended September 30, 2000 as compared with the three and
nine month periods ended September 30, 1999 was primarily due to the growth and
development of our insurance operations.
Net Premiums. Net premium revenue for the three month and nine month
periods ended September 30, 2000 was $44,588,000 and $118,502,000, respectively,
an increase of 111% and 105% over the three month and nine month periods ended
September 30, 1999. Substantially all premium revenue was derived from ordinary
life reinsurance. The growth reflects the level of new business written and the
increase in the face amount of insurance in force. At September 30, 2000 the
total face amount of life insurance in force was $61.4 billion compared with
$36.6 billion at September 30, 1999, an increase of 68%, and $45.4 billion at
December 31, 1999. New business writings and premium levels are significantly
influenced by the seasonal
10
<PAGE> 11
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 three month and
nine month periods ended September 30, 2000 was approximately $23,745,000 and
$76,362,000 million, respectively, an increase of 22% and 31% over the three
month and nine month periods ended September 30, 1999. The growth in investment
income was 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 for the three month and nine month
periods ended September 30, 2000 was $18,735,000 and $61,146,000, respectively,
as compared with $14,688,000 and $42,937,000 for the three and nine month
periods ended September 30, 1999. The average yield rate earned on an annualized
basis on the invested assets, excluding the funds withheld, for this period was
approximately 6.79% as compared with 6.31% for the nine months ended September
30, 1999.
Realized Investment losses. Realized investment losses for the three month
and nine month period ended September 30, 2000 were $702,000 and $3,683,000,
respectively, as compared with $793,000 and $687,000, respectively, for the
three month and nine month periods ended September 30, 1999. These losses result
from active management of our investment portfolio intended to improve
performance and increase operating income.
Realized gains and losses are not considered by the Company 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 nine month period ended September 30, 2000, unrealized gains
were $7,107,000 as compared with unrealized losses of $11,380,000 incurred
during the nine month period ended September 30, 1999 which were included in
Other Comprehensive Income. The unrealized gains and losses are principally
related to changes in the general level of interest rates during those periods.
Claims and Policy Benefits. Life insurance claims and policy benefits for
the three month and nine month periods ended September 30, 2000 were
$31,028,000, 79% of net premium, and $85,903,000, 82% of net premium,
respectively, as compared with $17,232,000, 82% of net premium and $48,505,000,
84% of net premium for the three month and nine month periods ended September
30, 1999. Although we expect mortality to be fairly constant over long periods
of time, it will fluctuate from period to period. Reserves for future policy
benefits are in part determined by claims reported from ceding companies, our
aggregate experience and overall mortality trends.
Interest Credited to Interest Sensitive Contracts Liabilities. Interest
credited to interest sensitive contract liabilities, which are liabilities we
assume under certain reinsurance agreements we enter into, for the three month
and nine month periods ended September 30, 2000 was $4,734,000 and $20,637,000,
respectively, as compared with $4,763,000 and $12,588,000 for the three month
and nine month periods ended September 30, 1999.
The increase reflects the level of our interest sensitive contracts
liabilities and is directly related to income earned on the related funds
withheld at interest. The income earned on the funds withheld at interest for
the three month and nine month periods ended September 30, 2000 was $18,735,000
and $61,146,000, respectively, as compared with $14,688,000 and $42,937,000,
respectively, for the three month and nine month periods ended September 30,
1999.
Policy Acquisition and Other Insurance Expenses. Policy acquisition and
other insurance expenses, consisting primarily of allowances and amortization of
deferred policy acquisition costs, for the three month and nine month periods
ended September 30, 2000 were $15,316,000 and $43,712,000, respectively, as
compared with $9,052,000 and $25,449,000, respectively, for the three month and
nine month periods ended September 30, 1999. 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 reinsurance business.
11
<PAGE> 12
Other Operating Expenses. Operating expenses for the three month and nine
month periods ended September 30, 2000 were $2,329,000, or 3.4% of total revenue
and $6,485,000, or 3.3% of total revenue, respectively, as compared with
$1,326,000, or 3.0% of total revenue and $4,552,000, or 4.0% of total revenue,
for the three month and nine month periods ended September 30, 1999. We consider
the operating expense level to be low by industry standards and is in line with
the Company's plan to be a low cost provider. The reduction in the expense ratio
is primarily due to growth and development of our reinsurance operations.
3. FINANCIAL CONDITION
Investments
Cash & Fixed Maturity Investments
Invested assets including Cash, cash equivalents and Fixed Maturity
Investments amounted to $295,760,000 at September 30, 2000 as compared with
$304,060,000 at December 31, 1999. At September 30, 2000 and December 31,1999
net unrealized losses on Fixed Maturity Investments were $4,162,000 and
$11,269,000 respectively, and generally reflect the changes in interest rates
during the periods.
The Company's investment policy is designed to achieve above average risk
adjusted 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.
Funds Withheld at Interest -- Interest Sensitive Contracts Liabilities
Invested assets included on the Company's Balance Sheet as Funds Withheld
at Interest with a carrying value of approximately $1,453,375,000 at September
30, 2000 and $1,532,653,000 at December 31, 1999, related to annuity reinsurance
agreements with the Company, are held by and managed by the ceding companies in
segmented portfolios. The liability for the annuity reinsurance is included on
the Company's Balance Sheet as Interest Sensitive Contracts Liabilities. During
the nine month period ended September 30, 2000 these liabilities decreased
approximately 8% reflecting a lower level of annuity deposits received by the
Company and benefit payments made by the Company under the reinsurance
agreements.
Liquidity and Capital Resources
The Company's liquidity and capital resources are a measure of the overall
financial strength of the Company and its ability to generate cash flows from
its operations to meet operating and growth needs. The Company's 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 costs and the purchase of investments.
For the nine month period ended September 30, 2000 the Company used
$4,684,000 from its operating activities as compared with the use of $27,372,000
in its operating activities for the nine months ended September 30, 1999. This
change is primarily related to the development of our reinsurance operations,
our underwriting results and the initial costs associated with writing new life
reinsurance and annuity reinsurance business.
The Company's capital structure currently consists entirely of equity. At
September 30, 2000 total capitalization of the Company after deducting loans to
management of $1,347,000 and including retained earnings and accumulated other
comprehensive loss amounted to $422,579,000 as compared with $392,055,000 at
December 31, 1999. We continuously review our capital adequacy and we believe
this level of capital is sufficient to support the Company's insurance writings
and growth for the near future.
At September 30, 2000 the Company had no outstanding debt. The Company may
incur indebtedness in the future for various purposes including without
limitation acquisitions of or investments in companies whose businesses
compliment the Company's business.
At September 30, 2000 and December 31, 1999 letters of credit totaling
$124.0 million and $121.5 million, respectively, issued in the ordinary course
of the Company's business have been issued by the Company's
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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.
On February 9, 2000, April 27, 2000 and July 27, 2000 the Board of
Directors declared quarterly stockholder dividends of $.04 per share payable to
shareholders of record on March 9, 2000, May 18, 2000 and August 24, 2000,
respectively. The Board intends to continue to declare and payout 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 other factors determined to be relevant by the Company's
Board of Directors.
The Company currently has no material commitments.
4. ACQUISITION
On June 1, 2000 the Company, through Annuity and Life Re America, completed
the acquisition of Capitol Bankers for $13,200,000. Capitol Bankers is a life
insurance company domiciled in the United States, which is authorized to conduct
its life insurance business in 43 states of the United States, and will focus
its operations on the United States life reinsurance markets. The Company
intends to contribute additional capital to Capitol Bankers during the current
fiscal year of approximately $14,000,000 to bring the total capital and surplus
of Capital Bankers to $25,000,000. The acquisition price was funded from
available cash balances; the subsequent capital contribution will be funded from
available cash balances or proceeds from the sale of fixed maturity securities
held by the Company.
The acquisition has been accounted for as a purchase and the operating
results of Capitol Bankers have been included in the Company's financial
statements since the date of acquisition. Prior to closing, the in force
insurance business of Capitol Bankers was 100% reinsured by Capitol Bankers with
its former owner, a subsidiary of Swiss Re, who will continue to administer the
business reinsured. Accordingly, there will be no earnings from the in-force
insurance business at the acquisition date accruing to the Company currently or
in the future.
The amounts related to the reinsured business referred to above are
included on the Company's Balance Sheet in the assets as Receivable for
Reinsurance Ceded and in the liabilities as Reserves for Future Policy Benefits;
at September 30, 2000 the amounts were $107,766,637.
The purchase price exceeded the fair value of the net assets acquired (the
capital and surplus of Capitol Bankers) by $2,301,000 which has been allocated
to the value of the 43 insurance licenses of Capitol Bankers. This amount is
being amortized over 20 years.
The proforma balance sheet of Capitol Bankers as of the date of acquisition
after giving effect to the reinsurance transaction is as follows:
<TABLE>
<S> <C>
ASSETS
Cash & Invested assets...................................... $ 10,880,686
Receivable for reinsurance ceded............................ 108,766,677
Insurance Licenses.......................................... 2,301,104
------------
Total Assets................................................ $121,948,467
============
LIABILITIES & STOCKHOLDERS EQUITY
Reserves for future policy benefits......................... $108,766,677
Stockholders Equity......................................... $ 13,181,790
------------
Total Liabilities & Stockholders Equity..................... $121,948,467
============
</TABLE>
5. YEAR 2000
We experienced no disruptions to our business as a result of the conversion
to the Year 2000. We incurred no material Year 2000 expenses during the nine
months ended September 30, 2000 or during the year ended
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December 31, 1999 and all expenses incurred were funded from operations. We do
not expect to incur additional Year 2000 expenses during 2000. If any are
incurred, such expenses will be funded from operations.
6. FORWARD-LOOKING AND CAUTIONARY STATEMENTS
The Company and its representatives may from time to time make written or
oral forward-looking statements, including those contained in the foregoing
Management's Discussion and Analysis. In order to take advantage of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, the
Company is hereby identifying certain important factors which could cause the
Company's actual results, performance or achievement to differ materially from
those that may be contained in or implied by any forward-looking statement made
by or on behalf of the Company. The factors that could cause such forward-
looking statements not to be realized include, without limitation, acceptance in
the market of the Company's reinsurance products; pricing competition; the
amount of underwriting capacity from time to time in the market; general
economic conditions and conditions specific to the reinsurance and investment
markets in which the Company operates; material fluctuations in interest rate
levels; regulatory changes and conditions; rating agency policies and practices;
claims development; and loss of key executives. The Company cautions that the
foregoing list of important factors is not intended to be, and is not,
exhaustive. The Company does not undertake to update any forward-looking
statement that may be made from time to time by or on behalf of the Company.
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PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -- The following exhibits are filed as part of this
report on Form 10-Q:
11 Computation of Earnings per share
27 Financial Data Schedule
(b) Reports on Form 8-K -- There were no reports on Form 8-K filed
during the period ended September 30, 2000.
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ANNUITY AND LIFE RE (HOLDINGS), LTD.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Annuity and Life Re (Holdings), Ltd.
Date: November 10, 2000 /s/ LAWRENCE S. DOYLE
--------------------------------------
Name: Lawrence S. Doyle
Title: President and Chief Executive
Officer
(Principal Executive Officer)
Date: November 10, 2000 /s/ WILLIAM W. ATKIN
--------------------------------------
Name: William W. Atkin
Title: Chief Financial Officer and
Treasurer
(Principal Accounting and Financial
Officer)
16
