<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-11340
LIFE RE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 01-0437851
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</TABLE>
969 HIGH RIDGE ROAD
STAMFORD, CONNECTICUT 06905
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(203) 321-3000
(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.
[X] Yes [ ] No
Common stock outstanding ($.001 par value) as of November 11, 1998:
17,286,529 shares
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<C> <S> <C>
1 Financial Statements
Independent Accountants' Review Report...................... 2
Condensed Consolidated Balance Sheets (Unaudited) September
30, 1998 and December 31, 1997.............................. 3
Condensed Consolidated Statements of Income (Unaudited)
Three and nine months ended September 30, 1998 and 1997..... 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 1998 and 1997............... 5
Notes to Condensed Consolidated Financial Statements
September 30, 1998 (Unaudited).............................. 6
Management's Discussion and Analysis of Financial Condition
2 and Results of Operations................................... 9
PART II -- OTHER INFORMATION
5 Other Information........................................... 13
6 Exhibits and Reports on Form 8-K............................ 13
</TABLE>
1
<PAGE> 3
PART I
ITEM 1 FINANCIAL INFORMATION
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors
Life Re Corporation
We have reviewed the accompanying condensed consolidated balance sheet of
Life Re Corporation and its subsidiaries as of September 30, 1998, and the
related condensed consolidated statements of income for the three-month and
nine-month periods ended September 30, 1998 and 1997, and the condensed
consolidated statements of cash flows for the nine-month periods ended September
30, 1998 and 1997. These condensed consolidated financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Life Re Corporation and
subsidiaries as of December 31, 1997 and the related consolidated statements of
income, shareholders' equity and cash flows for the year then ended (not
presented herein) and in our report dated February 12, 1998 (except for Notes 9
and 10, as to which the date is March 17, 1998), we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1997, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
ERNST & YOUNG LLP
Stamford, Connecticut
October 29, 1998
2
<PAGE> 4
LIFE RE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Fixed maturities -- at fair value (amortized cost:
$3,151,644 and $2,243,423, respectively).................. $3,286,364 $2,335,795
Equity securities -- at fair value (cost: $31,001 and
$25,171, respectively).................................... 32,242 26,775
Assets held by ceding company under reinsurance treaty -- at
fair value (amortized cost: $96,279 and $101,767,
respectively)............................................. 104,614 109,266
Mortgage loans and real estate.............................. 34,110 12,007
Short-term investments...................................... 161,537 166,801
Policy loans................................................ 179,390 133,986
---------- ----------
Total investments................................. 3,798,257 2,784,630
Cash........................................................ 3,535 16,797
Accrued investment income................................... 64,491 43,378
Policy revenues receivable.................................. 218,247 158,560
Amounts receivable on reinsurance ceded..................... 289,874 347,828
Deferred acquisition costs.................................. 518,246 325,570
Other assets................................................ 20,628 23,479
---------- ----------
Total assets...................................... $4,913,278 $3,700,242
========== ==========
LIABILITIES
Policy benefits............................................. $3,601,211 $2,871,243
Acquisition costs payable................................... 69,193 54,247
Amounts due on reinsurance ceded............................ 45,741 55,085
Other liabilities........................................... 171,957 120,877
Loans payable............................................... 125,000 125,000
---------- ----------
Total liabilities................................. 4,013,102 3,226,452
---------- ----------
Corporation-obligated, mandatorily redeemable capital
securities of subsidiary trusts holding solely parent
debentures................................................ 236,620 100,000
---------- ----------
COMMON SHAREHOLDERS' EQUITY
Common stock (par value $.001 per share; authorized
40,000,000 shares; issued 19,502,435 and 15,835,785
shares, respectively)..................................... 20 16
Paid in capital............................................. 334,091 111,337
Net unrealized appreciation of securities................... 86,404 61,416
Retained earnings........................................... 292,009 249,297
Treasury stock -- at cost (2,215,906 and 2,205,223 shares,
respectively)............................................. (48,968) (48,276)
---------- ----------
Total common shareholders' equity................. 663,556 373,790
---------- ----------
Total liabilities and shareholders' equity........ $4,913,278 $3,700,242
========== ==========
</TABLE>
The accompanying notes are an integral component of the condensed consolidated
financial statements.
3
<PAGE> 5
LIFE RE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES
Policy revenues................................. $206,256 $123,573 $508,668 $360,894
Investment income............................... 62,345 38,784 167,694 110,021
Realized investment gains....................... 902 1,069 1,617 2,858
-------- -------- -------- --------
Total revenues........................ 269,503 163,426 677,979 473,773
-------- -------- -------- --------
BENEFITS AND EXPENSES
Policy benefits................................. 148,014 83,914 354,025 252,526
Acquisition costs............................... 52,807 36,911 138,431 105,139
Interest credited to policyholder accounts...... 21,919 10,485 55,115 28,628
Interest expense................................ 1,970 2,007 5,912 5,988
Distributions on corporation-obligated,
mandatorily redeemable capital securities of
subsidiary trusts holding solely parent
debentures.................................... 4,283 2,180 11,011 2,786
Other operating expenses........................ 12,775 8,169 36,653 24,953
-------- -------- -------- --------
Total benefits and expenses........... 241,768 143,666 601,147 420,020
-------- -------- -------- --------
Income before federal income taxes.............. 27,735 19,760 76,832 53,753
Provision for federal income taxes.............. 9,707 6,917 26,891 18,815
-------- -------- -------- --------
NET INCOME...................................... $ 18,028 $ 12,843 $ 49,941 $ 34,938
======== ======== ======== ========
Earnings per common share....................... $ 1.04 $ 0.94 $ 3.07 $ 2.57
======== ======== ======== ========
Earnings per common share assuming dilution..... $ 0.97 $ 0.90 $ 2.87 $ 2.47
======== ======== ======== ========
Dividends per common share...................... $ 0.15 $ 0.13 $ 0.45 $ 0.39
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral component of the condensed consolidated
financial statements.
4
<PAGE> 6
LIFE RE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1998 1997
----------- ---------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Income before federal income taxes.......................... $ 76,832 $ 53,753
Adjustments to reconcile income before federal income taxes
to net cash provided by operating activities:
Change in accrued investment income....................... (13,284) (2,299)
Change in policy revenues receivable, net................. (35,638) (9,734)
Change in policy benefits................................. 50,731 (21,449)
Change in reinsurance ceded balances...................... (5,506) 16,984
Interest credited to policyholder accounts................ 55,115 28,629
Fees and charges deducted from policyholder accounts...... (51,243) (25,878)
Deferral of acquisition costs............................. (52,053) (44,842)
Amortization of acquisition costs, net of interest
accretion............................................... 17,320 17,676
Net realized gains on investments......................... (1,617) (2,858)
Depreciation and amortization............................. 4,846 954
Other..................................................... 848 28,247
----------- ---------
46,351 39,183
Federal income taxes recovered (paid)..................... (23,892) 1,466
----------- ---------
Net cash provided by operating activities.......... 22,459 40,649
----------- ---------
INVESTING ACTIVITIES
Purchases of fixed maturities............................... (1,191,084) (448,793)
Sales of fixed maturities................................... 695,159 222,942
Maturities of fixed maturities.............................. 99,708 54,256
Purchases of equity securities.............................. (5,943) (4,200)
Sales or redemptions of equity securities................... 2,983
Change in short-term investments, policy loans and other
investments............................................... 241,816 6,312
Short-term borrowings....................................... 28,445
Cash (paid) or received in connection with acquisitions and
reinsurance transactions, net............................. (178,968) 82,040
Other, net.................................................. (1,680) (1,750)
----------- ---------
Net cash used by investing activities.............. (309,564) (89,193)
----------- ---------
FINANCING ACTIVITIES
Purchases of common stock for treasury...................... (692) (956)
Proceeds from exercises of common stock options............. 3,737 2,748
Issuance of common stock, net of issuance costs............. 219,120
Issuance of corporation-obligated, manditorily redeemable
capital securities of subsidiary trusts holding solely
parent debentures......................................... 133,177 99,034
Dividends on common stock................................... (7,229) (5,300)
Deposits to policyholder accounts........................... 59,230 37,881
Withdrawals from policyholder accounts...................... (133,500) (85,548)
----------- ---------
Net cash provided by financing activities.......... 273,843 47,859
----------- ---------
Decrease in cash............................................ (13,262) (685)
Cash, beginning of period................................... 16,797 6,337
----------- ---------
Cash, end of period......................................... $ 3,535 $ 5,652
=========== =========
</TABLE>
The accompanying notes are an integral component of the condensed consolidated
financial statements.
5
<PAGE> 7
LIFE RE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Life Re Corporation and Subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments, consisting solely of
normal recurring accruals considered necessary for a fair presentation of
financial results, have been included. Operating results for the nine month
period ended September 30, 1998 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1998. For further
information, refer to the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997.
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation.
All amounts are reported in thousands except per share data or unless
otherwise specified.
Earnings per common share are computed using the weighted average number of
common shares outstanding during the periods presented. Earnings per share
assuming dilution reflect the dilution that could occur if options to purchase
common stock granted under the Company's stock option plans and common stock
purchase contracts issued as part of the public offering described in Note 2
were exercised. The following table presents the effect of dilutive common stock
options and purchase contracts.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding.............. 17,286 13,618 16,280 13,579
Net effect of stock options assumed to be exercised..... 1,051 696 925 588
Effect of common stock purchase contracts assumed to be
exercised............................................. 167 167
------ ------ ------ ------
Total common shares assuming dilution......... 18,504 14,314 17,372 14,167
====== ====== ====== ======
</TABLE>
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"),
which establishes new rules for the reporting and display of comprehensive
income and its components, consisting of net income and other comprehensive
income. The accumulated balance of other comprehensive income is required to be
reported separately in common shareholders' equity. The Company's only component
of other comprehensive income is net unrealized gains or losses on available for
sale securities, as defined, which is reported separately in common
shareholders' equity. Therefore, the adoption of SFAS 130 has no impact on
common shareholders' equity. Comprehensive income, which will be reported in the
Statement of Changes in Common Shareholders' Equity on an annual basis, is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income.......................................... $18,028 $12,843 $49,941 $34,938
Net unrealized gains (losses) on securities......... 16,281 24,749 24,988 22,424
------- ------- ------- -------
Total comprehensive income................ $34,309 $37,592 $74,929 $57,362
======= ======= ======= =======
</TABLE>
6
<PAGE> 8
LIFE RE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. CORPORATION-OBLIGATED, MANDATORILY REDEEMABLE CAPITAL SECURITIES OF
SUBSIDIARY TRUSTS HOLDING SOLELY PARENT DEBENTURES AND SHAREHOLDERS' EQUITY
On March 17, 1998, the Company completed two separate public offerings
(together, the "Offerings") in which it sold 3,500,000 shares of common stock
and 2,070,000 6.0% Adjustable Conversion-rate Equity Security Units (the
"Units") issued through Life Re Capital Trust II, a subsidiary of the Company.
The Units consist of common stock purchase contracts and Quarterly Income
Preferred Securities. Net proceeds from the Offerings were $352,297 of which
$207,000 was contributed to the insurance subsidiaries.
3. ACQUISITIONS AND REINSURANCE TRANSACTION
Effective February 28, 1998, the Company acquired, for a purchase price of
$61,596, 100% of the common stock of Mission Life Insurance Company ("Mission").
The fair values of assets acquired and liabilities assumed were approximately
$261,000 and $200,000, respectively.
Effective April 1, 1998, the Company acquired, for a purchase price of
$46,600, 100% of the common stock of Lincoln Liberty Life Insurance Company and
First Delaware Life Insurance Company from First Lincoln Holdings, Inc. The
combined fair values of the assets acquired and the liabilities assumed were
approximately $243,000 and $196,000, respectively.
Effective June 30, 1998, the Company acquired, for a purchase price of
$29,338, 100% of the common stock of North American Financial Services, Inc.,
the parent of Atlas Life Insurance Company. The fair values of the assets
acquired and liabilities assumed were approximately $205,000 and $176,000,
respectively.
Also effective June 30, 1998, the Company acquired, for a purchase price of
$70,834, 100% of the common stock of Capitol Bankers Life Insurance Company, an
indirect subsidiary of The Manufacturers Life Insurance Company. The fair values
of the assets acquired and liabilities assumed were approximately $189,000 and
$118,000, respectively.
Effective September 30, 1998, the Company recaptured an additional 20%
portion of a total block of business coinsured from Allianz Life Insurance
Company effective December 31, 1997 ,which had been retroceded to ERC Life
Insurance Company. A 20% portion was previously recaptured effective April 1,
1998. With the recapture transactions, the Company's net coinsurance share of
the Allianz block is 60%.
On July 24, 1998, the Company entered into an agreement to acquire 100% of
the common stock of Eagan Holding Company, the parent of First Capital Life
Insurance Company of Louisiana ("First Capital Life"), for a purchase price of
approximately $24,000. The acquisition, which is subject to regulatory
approvals, is expected to close in the fourth quarter. First Capital Life had
statutory assets of approximately $90,000 at June 30, 1998.
4. MERGER
On July 27, 1998, the Company and Swiss Reinsurance Company ("Swiss Re")
entered into a definitive agreement (the "Merger Agreement") pursuant to which
Swiss Re will acquire the Company in a merger transaction (the "Merger") for
$95.00 per share, provided that if the closing is delayed by Swiss Re after all
conditions are otherwise satisfied, shareholders shall also be entitled to
receive an additional payment per share equal to $.0208 per day from, but not
including, the date on which the closing would have occurred absent the exercise
by Swiss Re of its right to delay the closing, to, and including, the closing
date. The aggregate cash purchase price of the Merger transaction is
approximately $1,800,000.
The Merger is subject to certain customary closing conditions, including,
without limitation, the approval of the Merger Agreement by the requisite vote
of the shareholders of the Company in accordance with applicable law, the
representations and warranties of each of Swiss Re, Swiss Re's subsidiary formed
to consummate the acquisition ("Sub") and the Company being true and correct in
all material respects on and
7
<PAGE> 9
LIFE RE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
as of the effective time of the Merger (the "Effective Time"), each of Swiss Re,
Sub and the Company having performed in all material respects its obligations to
be performed prior to the Effective Time under the Merger Agreement, and the
receipt of all material consents, authorizations, orders, approvals and filings
of any governmental entity required in connection with the Merger (including all
insurance regulatory approvals) shall have been obtained or made.
The Merger Agreement will be subject to termination at any time prior to
the Effective Time by (i) the mutual consent of Swiss Re and the Company, (ii)
either Swiss Re, Sub or the Company if the Company's shareholders fail to
approve and adopt the Merger Agreement at the Company's special meeting of
shareholders scheduled for November 23, 1998, if any court or governmental
entity has taken action to permanently restrain, enjoin or otherwise prohibit
the Merger and such action has become final and non-appealable, or if the
Effective Time shall not have occurred before January 31, 1999, or (iii) if the
Company receives a superior proposal from a bona fide third party under certain
circumstances. If the Merger Agreement is terminated by the Company because it
has received a superior proposal, then the Company shall promptly pay Swiss Re a
fee of $60,000. Additionally, if following termination of the Merger Agreement,
the Company enters into an acquisition agreement within 12 months of such
termination with a person that previously made a takeover proposal to the
Company, or announced an intention to make a takeover proposal, then the Company
shall promptly pay Swiss Re a fee of $60,000.
8
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
With the exception of historical information, the matters contained in the
following analysis are "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. 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 "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. Such factors include, but are not limited to,
(i) uncertainties relating to general economic and business conditions which may
impact the reinsurance marketplace; (ii) changes in laws and government
regulations applicable to the Company; (iii) the ability of the Company to
implement its operating strategies successfully; (iv) the ability of the Company
to execute Administrative Reinsurance(SM) transactions and the amount, timing
and returns thereof and therefrom: (v) material fluctuations in interest rate
levels; (vi) material changes in mortality and morbidity experience; (vii)
material changes in persistency; (viii) material changes in the level of
operating expenses; (ix) success or failure of certain of the Company's clients
in premium writing; (x) significant changes in competitive factors affecting the
Company; (xi) occurrences affecting the Company's ability to obtain funds from
operations, debt or equity to finance growth in its businesses; and (xii) other
risks and uncertainties. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual outcomes
may vary materially from those indicated.
RESULTS OF OPERATIONS
During 1997 and the first nine months of 1998, the Company completed
several transactions through which it acquired blocks of insurance in force
(collectively, the "Transactions"). Transactions completed in 1997 (the "1997
Transactions") increased total assets by approximately $930 million. The
transactions completed in 1998 (the "1998 Transactions") increased total assets
by approximately $730 million.
On June 6, 1997, the Company completed a private placement under Rule 144A
of the Securities Act of 1933 of $100,000 of 8.72% capital securities of Life Re
Capital Trust I, a subsidiary of the Company (the "1997 Offering"). On March 17,
1998, the Company completed two separate public offerings in which it sold
3,500,000 shares of common stock (the "Common Stock Issuance") and 2,070,000
6.0% Adjustable Conversion-rate Equity Security Units (the "Units") issued
through Life Re Capital Trust II, a subsidiary of the Company (the "1998
Offering"). The Units consist of a stock purchase contract and Quarterly Income
Preferred Securities.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September
30, 1997
Net income was $49.9 million for the nine months ended September 30, 1998
compared to $34.9 million for the same period last year. The increase is due to
the contribution to administrative reinsurance from the Transactions and higher
premium volumes and lower relative mortality in traditional reinsurance.
Policy revenues by major source for the nine months ended September 30,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
(IN MILLIONS)
<S> <C> <C>
Traditional reinsurance.................................... $342.4 $236.6
Administrative reinsurance................................. 117.5 35.1
Group accident and health and special risk reinsurance..... 48.8 89.2
------ ------
$508.7 $360.9
====== ======
</TABLE>
Policy revenues increased by $147.8 million, or 41%, to $508.7 million from
$360.9 million in the same period last year. Traditional life reinsurance policy
revenues increased by $105.8 million, or 45%, to $342.4
9
<PAGE> 11
million due to an increase in first year premiums of $12.6 million, higher
renewal premiums resulting from higher in force amounts and a reinsurance
agreement entered into in the current quarter. The $82.4 million increase in
administrative reinsurance policy revenues is attributable to the Transactions.
Group accident and health and special risk policy revenues decreased by $40.4
million, or 45%, to $48.8 million. This decrease is due to the Company's
withdrawal from the group accident and health and special risk marketplace
during 1997 and an agreement, effective January 1, 1997, to retrocede 50% of
1997 group accident and health and special risk reinsurance risks.
Investment income increased by 52% to $167.7 million as a result of assets
received in conjunction with the Transactions and the proceeds received from the
Common Stock Issuance and 1998 Offering, partially offset by a decline in the
weighted average portfolio earned rate period over period.
Policy benefits increased by $101.5 million period to period due to higher
volumes of business in force; as a percentage of policy revenues, policy
benefits were basically level at 70%. A decrease in the policy benefit ratio
attributable to a shift in the relative mix of business from group accident and
health and special risk to interest sensitive products included in
administrative reinsurance, where a significant portion of policy benefits
consists of interest credited, was offset during the current period by the
aforementioned reinsurance agreement.
Policy acquisition costs as a percentage of policy revenues were 27% for
the 1998 period compared to 29% for the comparable prior year period. The
decrease is attributable primarily to the decline in group accident and health
and special risk business, which generally has a higher acquisition cost ratio,
and the growth in the administrative reinsurance business, which generally has
lower acquisition cost ratios. Also contributing to this decline was the new
reinsurance treaty referred to above.
Interest credited to policyholder accounts increased to $55.1 million in
1998 from $28.6 million in 1997 corresponding to the growth in interest
sensitive business resulting from the Transactions.
Interest expense on loans payable was level at $6.0 million for 1998 and
1997, as rates were basically level and amounts outstanding were unchanged.
Distributions on corporation-obligated, mandatorily redeemable capital
securities of subsidiary trusts holding solely parent debentures of $11.0
million were incurred from the 1997 and 1998 Offerings.
Other operating expenses increased by $11.7 million to $36.7 million due
primarily to administrative fees for third party administrators incurred as a
result of the Transactions and higher compensation costs.
Federal income taxes were provided at the federal statutory rate of 35% for
1998 and 1997.
Third Quarter of 1998 Compared to Third Quarter of 1997
Net income was $18.0 million for the three months ended September 30, 1998
compared to $12.8 million for the same period last year. The increase is due to
the contribution to administrative reinsurance from the Transactions.
Policy revenues by major source for the three month periods ended September
30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
(IN MILLIONS)
<S> <C> <C>
Traditional reinsurance.................................... $147.7 $ 83.2
Administrative reinsurance................................. 47.3 12.0
Group accident and health and special risk reinsurance..... 11.3 28.4
------ ------
$206.3 $123.6
====== ======
</TABLE>
Policy revenues increased by $82.7 million, or 67%, to $206.3 million in
1998 from $123.6 million in last year's third quarter. Traditional life
reinsurance policy revenues increased by $64.5 million, or 78%, to $147.7
million due to an increase in first year premiums of $5.6 million, higher
renewal premiums resulting from
10
<PAGE> 12
higher in force amounts and a reinsurance agreement entered into in the current
quarter. The $35.3 million increase in administrative reinsurance policy
revenues is attributable to the Transactions. Group accident and health and
special risk policy revenues decreased by $17.1 million, or 60%, to $11.3
million. This decrease is due to the Company's withdrawal from the group
accident and health and special risk marketplace during 1997 and an agreement,
effective January 1, 1997, to retrocede 50% of 1997 group accident and health
and special risk reinsurance risks.
Investment income increased by 61% to $62.3 million as a result of assets
received in conjunction with the Transactions and the proceeds received from the
Common Stock Issuance and 1998 Offering, partially offset by a decline in the
weighted average portfolio earned rate period over period.
Policy benefits increased by $64.1 million period to period due to higher
volumes of business in force and the reinsurance treaty entered into in the
current quarter. As a percentage of policy revenues, policy benefits were 72% in
1998 and 68% in 1997. The increase was due largely to the aforementioned
reinsurance treaty entered into in the current quarter partially offset by a
shift in the relative mix of business from group accident and health and special
risk to administrative reinsurance, which effect has caused a decrease in the
ratio.
Policy acquisition costs as a percentage of policy revenues were 26% for
the 1998 period compared to 30% for comparable prior year quarter. The decrease
is attributable largely to the decline in group accident and health and special
risk business, which generally has a higher acquisition cost ratio and the
growth in the administrative reinsurance business, which generally has lower
acquisition cost ratios. Also contributing to this decline was the new
reinsurance treaty referred to above.
Interest credited to policyholder accounts increased to $21.9 million in
1998 from $10.5 million in 1997 corresponding to the growth in interest
sensitive business resulting from the Transactions.
Interest expense on loans payable was level at $2.0 million for 1998 and
1997, as rates were basically level and amounts outstanding were unchanged.
Distributions on corporation-obligated, mandatorily redeemable capital
securities of subsidiary trusts holding solely parent debentures of $4.2 million
were incurred from the 1997 and 1998 Offerings.
Other operating expenses increased by $4.6 million to $12.8 million due to
administrative fees for third party administrators incurred as a result of the
Transactions and costs associated with the planned acquisition of the Company by
Swiss Reinsurance Company. (See Note 4 of "Notes to Condensed Consolidated
Financial Statements".)
Federal income taxes were provided at the federal statutory rate of 35% for
1998 and 1997.
FINANCIAL CONDITION AND LIQUIDITY
Investments
Invested assets totaled $3,798.3 million at September 30, 1998 compared to
$2,784.6 million at December 31, 1997. This increase is largely due to assets
acquired from the 1998 Transactions and proceeds from the Common Stock Issuance
and 1998 Offering.
The Company's fixed maturity portfolio (including the fixed maturity
securities which are included in assets held by ceding company under reinsurance
treaty) constituted 89% of invested assets at September 30, 1998, of which
$105.3 million, or 3% of invested assets, consisted of below investment grade
securities. At September 30, 1998, the weighted average quality rating of the
fixed maturities portfolio was A2/A and no fixed maturities were in default.
Liquidity
Sources of liquidity are available to the Company in the form of cash and
short-term investments and, if necessary, the sale of invested assets. The
Company may enter into reverse repurchase agreements to fund short-term cash
needs and can also borrow an additional $35.0 million under its revolving credit
agreement. In addition to debt servicing and dividend and capital securities
distribution obligations, the Company's financial
11
<PAGE> 13
obligations consist of policy benefit and acquisition costs, taxes and general
operating expenses. Management believes that these obligations will be
adequately provided for by policy revenues and investment income for the next
twelve months.
In order to provide additional liquidity and capital needed to support its
core businesses, the Company raised capital in the quarter ended March 31, 1998
(see Note 2 of "Notes to Condensed Consolidated Financial Statements") through
the Common Stock Issuance and 1998 Offering.
The ability of the Company to make principal and interest payments under
its credit agreement as well as to continue to pay common stock dividends
ultimately is dependent on the statutory earnings and surplus of the insurance
subsidiaries. The transfer of funds from the subsidiaries to the Company is
subject to applicable insurance laws and regulations.
IMPACT OF YEAR 2000
The Company is in the final stages of a comprehensive review of its
computer systems which could be affected by year 2000 processing issues. All of
the Company's core, or mission-critical, systems are or are planned to be year
2000 compliant by December 1998. Currently, approximately 80% of the Company's
core systems are Year 2000 compliant. Other non-core systems are planned to be
compliant by June 1999. The costs associated with these efforts is not expected
to exceed $1.0 million.
The computer systems of the Company's third party administrators are or are
in the process of becoming year 2000 compliant. The Company is in the process of
reviewing the third party administrators' systems to ensure such compliance.
Generally, the costs associated with these efforts are being borne by the third
party administrators and the costs associated with this review are anticipated
to be immaterial.
The Company has sent questionnaires to its ceding company clients to
determine the extent to which data received and utilized by the Company is
vulnerable to those third parties' failure to remediate their own year 2000
issues. The Company has received responses from a significant number of these
clients and is in the process of evaluating the information. There is no
guarantee that the systems of other companies on which the Company may rely for
data will be timely converted and would not have an adverse effect on analyses
and reports that utilize that data. However, the Company believes its own
systems and processes mitigate the risk that ceding companies' year 2000
noncompliance would have a material adverse effect on its operations.
The Company currently has no contingency plans in place in the event it
does not complete all phases of Year 2000 compliance due to its expectation of
completing all phases. However, should the Company not complete all associated
compliance work, the Company would use estimating techniques based on available
historical data to bill reinsurance premiums and record policy benefits and
acquisition costs on business affected by this noncompliance. However, there can
be no assurance that noncompliance would not have a material adverse impact on
the Company's operations.
12
<PAGE> 14
PART II
ITEM 5 OTHER INFORMATION
On July 27, 1998, Life Re Corporation and Swiss Reinsurance Company ("Swiss
Re") entered into an agreement whereby Swiss Re will acquire Life Re Corporation
for $95.00 per common share. The agreement is subject to shareholder and
regulatory approvals and certain other conditions and is more fully described in
Note 4 "Notes to Consolidated Financial Statements."
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <S>
3.01 Restated Certificate of Incorporation of Life Re Corporation
(the "Company"), dated November 13, 1997, incorporated by
reference to Exhibit 3.01 of the Company's Form 10-Q for
the quarterly period ended September 30, 1997, as filed
with the Securities and Exchange Commission ("SEC") on
November 13, 1997.
3.02 Amendment to the Restated Certificate of Incorporation of
the Company, dated June 19, 1998, incorporated by
reference to Exhibit 3.02 of the Company's Form 10-Q for
the quarterly period ended June 30, 1998, as filed with
the SEC on August 12, 1998.
3.03 Bylaws of the Company, dated August 5, 1992, incorporated by
reference to Exhibit 3.02 of the Company's Form 10-Q for
the quarterly period ended September 30, 1997, as filed
with the SEC on November 13, 1997.
4.01 Specimen Common Stock Certificate of the Company,
incorporated by reference to Exhibit 4.1 of the Company's
Registration Statement on Form S-1 (File No. 33-50556).
4.02 Certificate of Trust of Life Re Capital Trust II ("Trust
II"), incorporated by reference to Exhibit 4.3 of the
Company's Registration Statement on Form S-3 (File No.
333-46213).
4.03 Declaration of Trust of Trust II, incorporated by reference
to Exhibit 4.4 of the Company's Registration Statement on
Form S-3 (File No. 333-46213).
4.04 Form of Amended and Restated Declaration of Trust of Trust
II, incorporated by reference to Exhibit 4.5 of the
Company's Registration Statement on Form S-3 (File No.
333-46213).
4.05 Form of Quarterly Income Preferred Security ("QUIPS") of
Trust II, incorporated by reference to Exhibit 4.6 of the
Company's Registration Statement on Form S-3 (File No.
333-46213).
4.06 Form of Junior Subordinated Debenture, incorporated by
reference to Exhibit 4.8 of the Company's Registration
Statement on Form S-3 (File No. 333-46213).
4.07 Form of Indenture between the Company and The Bank of New
York, as Trustee, pursuant to which the Junior
Subordinated Debentures are to be issued, incorporated by
reference to Exhibit 4.7 of the Company's Registration
Statement on Form S-3 (File No. 333-46213).
4.08 Form of Guarantee Agreement with respect to the QUIPS,
incorporated by reference to Exhibit 4.9 of the Company's
Registration Statement on Form S-3 (File No. 333-46213).
4.09 Form of Master Unit Agreement, incorporated by reference to
Exhibit 4.11 of the Company's Registration Statement on
Form S-3 (File No. 333-46213).
4.10 Form of Adjustable Conversion-rate Equity Security Units,
incorporated by reference to Exhibit 4.12 of the Company's
Registration Statement on Form S-3 (File No. 333-46213).
4.11 Form of Pledge Agreement, incorporated by reference to
Exhibit 4.13 of the Company's Registration Statement on
Form S-3 (File No. 333-46213).
4.12 Form of Call Option Agreement, incorporated by reference to
Exhibit 4.14 of the Company's Registration Statement on
Form S-3 (File No. 333-46213).
</TABLE>
13
<PAGE> 15
<TABLE>
<C> <S>
4.13 Company's Agreement to File Indenture, incorporated by
reference to Exhibit 4.02 of the Company's Form 10-Q for
the quarterly period ended June 30, 1997, as filed with
the SEC on August 13, 1997.
15.01 Acknowledgment Letter of Ernst & Young LLP.
27.01 Financial Data Schedule.
</TABLE>
(b) A Current Report on Form 8-K was filed on July 27, 1998 with respect to
the proposed transaction between Life Re Corporation and Swiss Reinsurance
Company. No other Current Reports on Form 8-K were filed during the three months
ended September 30, 1998.
14
<PAGE> 16
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.
Life Re Corporation
By: /s/ CHRIS C. STROUP
------------------------------------
Chris C. Stroup,
Executive Vice President and
Chief Financial Officer
Dated: November 13, 1998
15
<PAGE> 17
EXHIBIT INDEX
15.01 Acknowledgment Letter of Ernst & Young LLP.
27.01 Financial Data Schedule.
<PAGE> 1
ACKNOWLEDGMENT LETTER
The Board of Directors
Life Re Corporation
We are aware of the incorporation by reference in the Registration
Statement (Form S-8 Number 33-54138) pertaining to The Life Re Corporation Stock
Investment Plan, the Registration Statement (Form S-8 No. 33-80251) pertaining
to the Life Re Corporation Stock Option Plan, the Registration Statement (Form
S-8 No. 33-80737) pertaining to the Life Re Corporation 1993 Non-Employee
Directors Stock Option Plan and in the Registration Statement (Form S-3 No.
333-35031) pertaining to the registration of shares of common stock in
connection with certain employees' restricted stock grant of our report dated
October 29, 1998 relating to the unaudited condensed consolidated interim
financial statements of Life Re Corporation that are included in its Form 10-Q
for the quarter ended September 30, 1998.
ERNST & YOUNG LLP
Stamford, Connecticut
November 10, 1998
16
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 3,286,364
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 32,242
<MORTGAGE> 33,015
<REAL-ESTATE> 1,095
<TOTAL-INVEST> 3,798,257
<CASH> 3,535
<RECOVER-REINSURE> 289,874
<DEFERRED-ACQUISITION> 518,246
<TOTAL-ASSETS> 4,913,278
<POLICY-LOSSES> 3,601,211
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 125,000
0
0
<COMMON> 20
<OTHER-SE> 663,536
<TOTAL-LIABILITY-AND-EQUITY> 4,913,278
508,668
<INVESTMENT-INCOME> 167,694
<INVESTMENT-GAINS> 1,617
<OTHER-INCOME> 0
<BENEFITS> 354,025
<UNDERWRITING-AMORTIZATION> 138,431
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 76,832
<INCOME-TAX> 26,891
<INCOME-CONTINUING> 49,941
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49,941
<EPS-PRIMARY> 3.07
<EPS-DILUTED> 2.87
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
