ANNUITY & LIFE RE HOLDINGS LTD - 10-Q Quarterly Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q


(Mark One)
þ		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended March 31, 2003

or

o		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 1-16561

ANNUITY AND LIFE RE (HOLDINGS), LTD.

(Exact Name of Registrant as Specified in Its Charter)


Bermuda		Not applicable
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

Cumberland House, 1 Victoria Street, Hamilton, Bermuda		HM11
(Address of Principal Executive Offices)		(Zip Code)

441-296-7667

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

The number of the registrant’s Common Shares (par value $1.00 per share) outstanding as of May 5, 2003 was 26,106,328.

TABLE OF CONTENTS


PART I FINANCIAL INFORMATION
	Item 1. Unaudited Consolidated Financial Statements
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATIONS
	CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
	CONSOLIDATED STATEMENTS OF CASH FLOWS
	NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II
OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATION
EXHIBIT INDEX
EMPLOYMENT AGREEMENT, DATED AS OF APRIL 3, 2003
SECTION 1350 CERTIFICATION OF C.E.O. & C.F.O.

INDEX TO FORM 10-Q


		Page

	PART I FINANCIAL INFORMATION

Item 1.	Unaudited Consolidated Financial Statements		1
	Consolidated Balance Sheets March 31, 2003 and December 31, 2002		1
	Consolidated Statements of Operations Three Months ended March 31, 2003 and March 31, 2002		2
	Consolidated Statements of Comprehensive (Loss) Income Three Months ended March 31, 2003 and March 31, 2002		3
	Consolidated Statements of Cash Flows Three Months ended March 31, 2003 and March 31, 2002		4
	Consolidated Statements of Changes in Stockholders’ Equity Three Months ended March 31, 2003 and March 31, 2002		5
	Notes to Unaudited Consolidated Financial Statements		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		30

Item 4.	Controls and Procedures		30
	PART II OTHER INFORMATION
Item 1.	Legal Proceedings		30
Item 2.	Changes in Securities and Use of Proceeds		31
Item 5.	Other Information		31
Item 6.	Exhibits and Reports on Form 8-K		31
Signatures			33
Certification			34

PART I

FINANCIAL INFORMATION


Item 1.	*Unaudited Consolidated Financial Statements*

ANNUITY AND LIFE RE (HOLDINGS), LTD.

CONSOLIDATED BALANCE SHEETS


		March 31,			December 31,
		2003			2002

		(Unaudited)

		(U.S. dollars)
Assets
Cash and cash equivalents		$	146,503,623		$	152,930,908
Fixed maturity investments at fair value (amortized cost of $147,315,720 and $146,487,903 at March 31, 2003 and December 31, 2002)			153,360,710			153,415,429
Funds withheld at interest			1,018,528,844			1,427,093,380
Accrued investment income			1,711,831			2,141,338
Receivable for reinsurance ceded			92,249,886			93,669,173
Deposits and other reinsurance receivables			12,828,459			25,025,453
Deferred policy acquisition costs			143,691,268			187,913,648
Other assets			3,752,274			2,508,858

	Total Assets	$	1,572,626,895		$	2,044,698,187

Liabilities
Reserves for future policy benefits		$	256,908,708		$	269,619,809
Interest sensitive contracts liability			998,608,700			1,443,143,080
Other reinsurance liabilities			89,304,437			51,139,164
Payable for investments purchased			118,152			—
Accounts payable and accrued expenses			11,469,694			12,459,423

	Total Liabilities	$	1,356,409,691		$	1,776,361,476

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; 26,283,128 and 26,106,328 shares outstanding at March 31, 2003 and December 31, 2002)			26,283,128			26,106,328
Additional paid-in capital			335,186,168			335,334,932
Notes receivable from stock sales			(699,458	)		(1,626,493	)
Restricted stock (577,800 shares at March 31, 2003)			(2,358,457	)		(2,514,693	)
Accumulated other comprehensive income			5,406,527			6,162,525
(Deficit)			(147,600,704	)		(95,125,888	)

	Total Stockholders’ Equity	$	216,217,204		$	268,336,711

	Total Liabilities and Stockholders’ Equity	$	1,572,626,895		$	2,044,698,187

See accompanying Notes to Unaudited Consolidated Financial Statements

ANNUITY AND LIFE RE (HOLDINGS), LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS



		For the Three Months Ended
		March 31,

		2003			2002


		(Unaudited and in U.S. dollars)
Revenues
Net premiums		$	61,365,914		$	78,006,891
Investment income, net of related expenses			8,158,689			24,589,790
Net realized investment gains (losses)			1,663,868			(321,708	)
Net change in fair value of embedded derivatives			13,754,859			1,590,098
Surrender fees and other revenues			1,390,247			3,896,125

Total Revenues		$	86,333,577		$	107,761,196

Benefits and Expenses
Claim and policy benefits		$	75,089,440		$	58,815,606
Interest credited to interest sensitive products			4,871,759			17,922,346
Policy acquisition costs and other insurance expenses			52,501,064			15,636,118
Collateral costs			—			1,295,704
Operating expenses			6,346,130			3,657,792

Total Benefits and Expenses		$	138,808,393		$	97,327,566

Net (Loss) Income		$	(52,474,816	)	$	10,433,630

Net (Loss) Income Per Common Share
	Basic	$	(2.03	)	$	0.41
	Diluted	$	(2.03	)	$	0.39

See accompanying Notes to Unaudited Consolidated Financial Statements

ANNUITY AND LIFE RE (HOLDINGS), LTD.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME



	For the Three Months Ended
	March 31,

	2003			2002


	(Unaudited and in U.S. dollars)
Net (loss) income for the period	$	(52,474,816	)	$	10,433,630
Other comprehensive (loss) income:
Unrealized holding gains (losses) on securities arising during the period		907,870			(5,835,707	)
Less reclassification adjustment for realized gains and (losses) in net (loss) income		1,663,868			(321,708	)

Other comprehensive (loss)	$	(755,998	)	$	(5,513,999	)

Total Comprehensive (Loss) Income	$	(53,230,814	)	$	4,919,631

See accompanying Notes to Unaudited Consolidated Financial Statements

ANNUITY AND LIFE RE (HOLDINGS), LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS



		For the Three Months Ended
		March 31,

		2003			2002


		(Unaudited and in U.S. dollars)
Cash flows from operating activities
Net (loss) income		$	(52,474,816	)	$	10,433,630
Adjustments to reconcile net (loss) income to cash (used) provided by operating activities:
Net realized investment (gains) losses			(1,663,868	)		321,708
Net change in fair value of embedded derivatives			(13,754,859	)		(1,590,098	)
Amortization of restricted stock			184,272			163,687
Changes in:
Accrued investment income			429,507			(233,792	)
Deferred policy acquisition costs			44,222,380			(10,338,350	)
Deposits and other reinsurance receivables			13,616,282			7,723,217
Other assets			(1,243,416	)		(496,093	)
Reserves for future policy benefits			(12,711,101	)		12,267,466
Interest sensitive contracts, net of funds withheld			(22,214,985	)		(3,111,538	)
Other reinsurance liabilities			38,165,273			186,955
Accounts payable			(989,729	)		(999,163	)

	Net cash (used) provided by operating activities	$	(8,435,060	)	$	14,327,629

Cash flows from investing activities
Proceeds from sales of fixed maturity investments		$	176,481,085		$	175,541,454
Purchase of fixed maturity investments			(175,400,345	)		(238,878,784	)

	Net cash provided (used) by investing activities	$	1,080,740		$	(63,337,330	)

Cash flows from financing activities
Interest accrued on notes receivable		$	(32,099	)	$	(23,522	)
Interest collected on notes receivable			209,134			38,620
Reduction (increase) of notes receivable			750,000			(250,000	)
Dividends paid to stockholders			—			(1,285,266	)

	Net cash provided (used) by financing activities	$	927,035		$	(1,520,168	)

Decrease in cash and cash equivalents		$	(6,427,285	)	$	(50,529,869	)
Cash and cash equivalents, beginning of period			152,930,908			104,793,019

Cash and cash equivalents, end of period		$	146,503,623		$	54,263,150

See accompanying Notes to Unaudited Consolidated Financial Statements

ANNUITY AND LIFE RE (HOLDINGS), LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY



	For the Three Months Ended
	March 31,

	2003			2002


	(Unaudited and in U.S. dollars)
Preferred shares par value $1.00
Balance at beginning and end of period	$	—		$	—

Common shares par value $1.00
Balance at beginning of period	$	26,106,328		$	25,705,328
Issuance of shares		200,000			133,500
(Cancellation) of shares		(23,200	)		—

Balance at end of period	$	26,283,128		$	25,838,828

Additional paid-in capital
Balance at beginning of period	$	335,334,932		$	332,447,062
(Cancellation) issuance of shares		(148,764	)		2,031,870

Balance at end of period	$	335,186,168		$	334,478,932

Notes receivable from stock sales
Balance at beginning of period	$	(1,626,493	)	$	(1,317,259	)
Repayments (issuances)		750,000			(250,000	)
Interest collected on notes receivable		209,134			38,620
Accrued interest during period		(32,099	)		(23,522	)

Balance at end of period	$	(699,458	)	$	(1,552,161	)

Restricted stock
Balance at beginning of period	$	(2,514,693	)	$	—
(Issuance) of shares		(200,000	)		(2,165,370	)
Cancellation of shares		171,964			—
Amortization of restricted stock		184,272			163,687

Balance at end of period	$	(2,358,457	)	$	(2,001,683	)

Accumulated other comprehensive income
Balance at beginning of period	$	6,162,525		$	6,418,469
Net unrealized (losses) on securities		(755,998	)		(5,513,999	)

Balance at end of period	$	5,406,527		$	904,470

(Deficit) Retained earnings
Balance at beginning of period	$	(95,125,888	)	$	38,935,242
Net (loss) income		(52,474,816	)		10,433,630
Stockholder dividends		—			(1,285,266	)

Balance at end of period	$	(147,600,704	)	$	48,083,605

Total Stockholders’ Equity	$	216,217,204		$	405,751,991

See accompanying Notes to Unaudited Consolidated Financial Statements

ANNUITY AND LIFE RE (HOLDINGS), LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization

Annuity and Life Re (Holdings), Ltd. (“Holdings”) was incorporated on December 2, 1997 under the laws of Bermuda. Holdings provides annuity and life reinsurance to insurers and reinsurers through its wholly-owned subsidiaries: Annuity and Life Reassurance, Ltd., which is licensed under the laws of Bermuda as a long term insurer; and Annuity and Life Re America, Inc., an insurance holding company based in the United States, and Annuity and Life Reassurance America, Inc., a life insurance company domiciled in the United States. Holdings, Annuity and Life Reassurance, Annuity and Life Re America and Annuity and Life Reassurance America are collectively referred to herein as the “Company.” The Company completed an initial public offering of its equity securities and commercial operations on April 17, 1998.

2. Going Concern Basis of Presentation

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and in accordance with Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Form 10-K for the fiscal year ended December 31, 2002. In the opinion of management, all adjustments considered necessary for a fair presentation have been included in these financial statements.

The accompanying unaudited consolidated financial statements of the Company have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company incurred a significant operating loss in 2002 and the first quarter of 2003. Further, the financial strength ratings of the Company’s operating subsidiaries were downgraded several times in 2002 and most recently in March 2003 by A.M. Best, Standard & Poor’s, and Fitch Ratings to B-, BB-, and C, respectively.

In addition, the Company is required to post collateral for the statutory reserves ceded to it by U.S. based insurers and reinsurers. The Company did not have sufficient available cash and investments at March 31, 2003 to satisfy the collateral requirements asserted by its cedents under certain of its reinsurance treaties. The Company’s cedents have asserted that the Company must satisfy additional collateral requirements of approximately $172 million in excess of amounts the Company currently has posted. The Company is currently analyzing these asserted collateral requirements and has not concluded that such amounts are in fact required to be posted as collateral under the relevant reinsurance contracts. As a result of the Company’s inability to satisfy its obligations, certain parties have claimed that the Company is in breach of its agreements. As a consequence, such parties have sought and others may seek remedies for such claimed breaches by the Company, and the Company may be required to enter into arbitration or litigation proceedings with those parties. If the Company does not prevail in any such arbitration or litigation proceeding, it would have a material adverse effect on the Company’s financial condition and the Company may be required to liquidate its operations.

The Company also currently has approximately $40,605,000 of outstanding unsecured letters of credit issued on its behalf by Citibank. In October 2002, Citibank agreed to extend the Company’s unsecured letter of credit facility into 2003 in exchange for the Company’s agreement to secure or eliminate the letter of credit facility by June 30, 2003. If the Company is unable to secure or eliminate the letter of credit facility by that date, Citibank will not renew the outstanding letters of credit at December 31, 2003. In addition, as the result of a draw on certain letters of credit issued by Citibank for the benefit of one of the Company’s cedents, approximately $4,395,000 related to the Company’s letter of credit facility is due and payable by the Company upon Citibank’s demand.

ANNUITY AND LIFE RE (HOLDINGS), LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Under Bermuda law, a single creditor could make a statutory demand upon the Company for satisfaction of obligations owed to that creditor. If the statutory demand is held to be valid, and the Company is unable to satisfy its obligations to that creditor, the creditor may institute proceedings seeking the liquidation of the Company. As of the date of this report, the Company has been served with two statutory demands under Bermuda law and has satisfied or otherwise eliminated its obligations to the parties making those demands. If a creditor of the Company successfully pursues this statutory process and the Company is unable to discharge its obligations, liquidation proceedings could be commenced against the Company.

On November 20, 2002, the State of Connecticut Insurance Department and the Company’s United States domiciled operating subsidiary, entered into a letter agreement acknowledging that the Connecticut Insurance Department is monitoring the financial condition of the Company’s United States domiciled operating subsidiary and such letter agreement requires that certain financial transactions entered into by the subsidiary, including the disposal of assets, payment of dividends and settlement of inter-company balances with the Company’s Bermuda operating subsidiary, be pre-approved by the insurance department. In addition, the Connecticut Insurance Department has requested weekly updates from senior management of the U.S. operating subsidiary on the status of the Company and any changes in the status of the U.S. operating subsidiary. The letter agreement continues to be effective until March 1, 2004.

The Company engaged a financial advisor in September 2002 to assist it in seeking to raise capital, but the Company has not been able to successfully raise new capital to date. The Company has ceased to write new reinsurance agreements and has notified its existing clients that it will not be accepting any new business under existing treaties on their current

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