-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Rn0PgXZHolAlKq06vyN3pVwoqHzM7YHCrwfURLlafapaxGBTdI7YZ1b1iIDQ2+yk 1S+5Et+as8LJ8S8OWqk+RA== 0000893220-00-000368.txt : 20000411 0000893220-00-000368.hdr.sgml : 20000411 ACCESSION NUMBER: 0000893220-00-000368 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANNUITY & LIFE RE HOLDINGS LTD CENTRAL INDEX KEY: 0001051628 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-23625 FILM NUMBER: 583204 BUSINESS ADDRESS: STREET 1: VICTORIA HALL STREET 2: VICTORIA STREET, PO BOX HM 1262 CITY: HAMILTON, HM BERMUDA BUSINESS PHONE: 4412951422 MAIL ADDRESS: STREET 1: VICTORIA HALL, VICTORIA STREET STREET 2: PO BOX HM 1262, HAMILTON, HM FX CITY: BERMUDA 10-K405 1 FORM 10-K405 ANNUITY & LIFE RE (HOLDINGS), LTD. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------ FORM 10-K ------------------------ 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) 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)
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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
PAGE ---- 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
1 3 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. 2 4 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
YEAR ENDED DECEMBER 31 -------------------------------- 1999 1998 -------------- -------------- Life Reinsurance Policy Revenues First Year(1).......................................... $ 72,268,437 $ 27,943,890 Renewal................................................ 28,566,570 -- -------------- -------------- Total................................................ $ 100,835,007 $ 27,943,890 ============== ============== Insurance In-force at end of year (in thousands)............ $ 45,407,000 $ 22,538,000 ============== ============== Annuity Reinsurance Annuity Deposits.......................................... $1,603,382,955 $1,283,675,809 ============== ==============
- --------------- (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 3 5 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. 4 6 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. 5 7 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 6 8 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 7 9 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. 8 10 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:
1999 1998 ---------------- ---------------- PERIOD HIGH LOW HIGH LOW - ------ ------ ------ ------ ------ 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
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 11
1999 1998 -------------- -------------- 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
- --------------- (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 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 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 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 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
PERIOD ENDED YEAR ENDED DECEMBER 31, 1998 DECEMBER 31, 1999 (8 1/2 MONTHS) ----------------- ----------------- 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
- --------------- (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 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:
PERIOD ENDED YEAR ENDED DECEMBER 31, 1998 DECEMBER 31, 1999 (8 1/2 MONTHS) ----------------- ----------------- Interest Earned.................................... $64,606,000 $8,927,000 Interest Credited.................................. $22,313,000 $1,989,000 Interest Spread.................................... $42,293,000 $6,938,000
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 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. 16 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.
CASH AND CASH WEIGHTED AVERAGE FIXED MATURITY WEIGHTED AVERAGE EQUIVALENTS INTEREST RATE INVESTMENTS INTEREST RATE ------------- ---------------- -------------- ---------------- 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
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE ANNUITY AND LIFE RE (HOLDINGS), LTD. AND SUBSIDIARIES 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
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 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 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 21 ANNUITY AND LIFE RE (HOLDINGS), LTD. CONSOLIDATED BALANCE SHEETS (EXPRESSED IN UNITED STATES DOLLARS)
DECEMBER 31, 1999 DECEMBER 31, 1998 ----------------- ----------------- 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 ============== ==============
See accompanying notes to consolidated financial statements 20 22 ANNUITY AND LIFE RE (HOLDINGS), LTD. CONSOLIDATED STATEMENTS OF OPERATIONS (EXPRESSED IN UNITED STATES DOLLARS)
YEAR ENDED DECEMBER 31 --------------------------- 1999 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 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 ------------ -----------
See accompanying notes to consolidated financial statements 21 23 ANNUITY AND LIFE RE (HOLDINGS), LTD. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (EXPRESSED IN UNITED STATES DOLLARS)
YEAR ENDED DECEMBER 31 --------------------------- 1999 1998 ------------ ----------- 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 ============ ===========
See accompanying notes to consolidated financial statements 22 24 ANNUITY AND LIFE RE (HOLDINGS), LTD. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (EXPRESSED IN UNITED STATES DOLLARS)
YEAR ENDED DECEMBER 31 ---------------------------- 1999 1998 ------------ ------------ 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 ============ ============
See accompanying notes to consolidated financial statements 23 25 ANNUITY AND LIFE RE (HOLDINGS), LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS (EXPRESSED IN UNITED STATES DOLLARS)
YEAR ENDED DECEMBER 31 ------------------------------ 1999 1998 ------------- ------------- 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 ============= =============
See accompanying notes to consolidated financial statements 24 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 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 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 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:
AMORTIZED UNREALIZED UNREALIZED FAIR 1999 COST GAIN LOSS VALUE - ---- ------------ ---------- ----------- ------------ 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 ============ ========== =========== ============
AMORTIZED UNREALIZED UNREALIZED FAIR 1998 COST GAIN LOSS VALUE - ---- ------------ ---------- ----------- ------------ 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 ============ ========== =========== ============
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.
1999 1998 ---------------------- ---------------------- RATINGS(1) AMORTIZED COST % AMORTIZED COST % - ---------- -------------- ----- -------------- ----- 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% ============ ===== ============ =====
- --------------- (1) Rating as assigned by Standard & Poor's Corporation. 28 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:
1999 ---------------------------- AMORTIZED FAIR COST VALUE ------------ ------------ 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 ============ ============
(e) Investment income earned during the year is comprised as follows:
1999 1998 ------------ ------------ 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 ============ ============
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 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.
1999 1998 ----------- ----------- 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 =========== ===========
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 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 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.
1999 1998 ----------------------------- ----------------------------- NUMBER WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE --------- ---------------- --------- ---------------- 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 ========= ====== ========= ======
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 34 ANNUITY AND LIFE RE (HOLDINGS), LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1999 1998 ----------- ----------- 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
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 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 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:
FIRST SECOND THIRD FOURTH 1999 QUARTER QUARTER QUARTER QUARTER - ---- ----------- ----------- ----------- ----------- 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
FIRST SECOND THIRD FOURTH 1998 QUARTER QUARTER QUARTER QUARTER - ---- ----------- ----------- ----------- ----------- 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
35 37 ANNUITY AND LIFE RE (HOLDINGS), LTD. CONDENSED FINANCIAL INFORMATION OF REGISTRANT SCHEDULE II BALANCE SHEETS (PARENT COMPANY)
DECEMBER 31, 1999 DECEMBER 31, 1998 ----------------- ----------------- 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 ============ ============
36 38 ANNUITY AND LIFE RE (HOLDINGS), LTD. CONDENSED FINANCIAL INFORMATION OF REGISTRANT SCHEDULE II STATEMENTS OF OPERATIONS (PARENT COMPANY)
YEAR ENDED DECEMBER 31 -------------------------- 1999 1998 ----------- ----------- 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 =========== ===========
37 39 ANNUITY AND LIFE RE (HOLDINGS), LTD. CONDENSED FINANCIAL INFORMATION OF REGISTRANT SCHEDULE II STATEMENTS OF CASH FLOWS (PARENT COMPANY)
YEAR ENDED DECEMBER 31 ----------------------------- 1999 1998 ------------ ------------- 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 ============ =============
38 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: *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).
39 41 *+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.
- --------------- * 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 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.
SIGNATURE DATE --------- ---- /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
41 43
SIGNATURE DATE --------- ---- /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
42 EX-10.17 2 EMPLOYMENT AGREEMENT, DATED AS OF JANUARY 1, 1999 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 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 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 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 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 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 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 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 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 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 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 EX-10.18 3 EMPLOYMENT AGREEMENT, DATED AS OF JULY 1, 1999 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. 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 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 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 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 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 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 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 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 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 EX-21.1 4 SUBSIDIARIES OF THE COMPANY 1 Exhibit 21.1 Subsidiaries of the Registrant - - Annuity and Life Reassurance, Ltd. - - Annuity and Life Re America, Inc. EX-23.1 5 CONSENT OF KPMG (INDEPENDENT ACCOUNTANTS) 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 EX-27.1 6 FINANCIAL DATA SCHEDULE
7 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. YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 272,872,882 0 0 0 0 0 272,872,882 31,187,242 7,834,306 203,510,250 2,056,085,988 43,753,923 0 0 1,603,382,955 0 0 0 25,499,999 366,554,895 2,056,085,988 100,835,007 85,089,811 (1,284,769) 3,215,429 102,265,844 26,289,721 15,910,967 35,703,144 0 0 0 0 0 35,703,144 1.40 1.31 0 0 0 0 0 0 0
-----END PRIVACY-ENHANCED MESSAGE-----