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January 18, 2002 at 07:00 PM
NU Online News Service, Jan. 18, 8:16 p.m. – Annuity and Life Re (Holdings) Ltd., Hamilton, Bermuda, says it has started arbitration proceedings against its first, and only, big annuity reinsurance customer and expects the proceedings to take about two years.
Annuity & Life is accusing the insurer that wrote the annuities of running a bad customer retention program and generating low returns on deposits. Because of the high lapse rates and low capital levels, Annuity & Life says it is planning to spend at least $33 million to cover the cost of meeting minimum interest guarantees for customers who gave up on their annuities in the fourth quarter.
The problem annuity reinsurance arrangement has accounted for most of the Annuity & Life annuity reinsurance program since it was set up in October 1998, and it accounted for more than 80% of the $1.9 billion in liabilities on the company balance sheet at the end of the third quarter of 2001.
Rating analysts who follow Annuity & Life for Standard & Poor’s New York, and Fitch Inc., New York, say their companies have known the name of the primary insurer all along, and know that it is a large insurer that is not related to Annuity & Life.
For now, ordinary shareholders and members of the public who want to know the name of the primary insurer are out of luck
Because of a confidentiality clause in a contract, “we’re unable to divulge the identities of the parties involved,” Lawrence Doyle, president of the company, said earlier this week at a public teleconference.
When one company sues another company in court, the details often come out in open court pleadings.
In arbitration proceedings, the details often remain secret.
But Doyle left some hope open that more information might come to light.
“We did send [the primary insurer] a letter telling them to preserve all records,” Doyle said. “I.e., an Enron-type letter. They’re on notice.”
Annuity & Life was incorporated in December 1997 and went public in April 1998. Its shares now trade on the New York Stock Exchange, under the symbol ANR, and XL Capital Ltd., Hamilton, holds about 13% of the stock.
The company announced in September 1998 that it had agreed to reinsure at least $1.25 billion in annuity deposits from a “premier insurer.” The company later described the product reinsured as a “general account fixed deferred annuity.”
During the teleconference, Doyle and John Burke, the chief financial officer, said Annuity & Life decided to end the arrangement in June 1999 because they felt that the program was too big for a small reinsurer and that the lapse rate on the annuities was too high.
A large, “top five” reinsurer took over the reinsurance program and now assumes 16% of the risk, leaving the primary insurer with 20% and Annuity & Life with 64%.
Doyle said the ceding company replaced a respected outside fund manager in late 2000 with its own managers, without complying with a clause that required it to seek approval for such a move from the reinsurers.
Roughly 70% of the assets are now in convertible bonds, and managers at the primary insurer achieved much lower returns than the old manager achieved, Doyle said.
Annuity & Life executives said the company now reinsures $960 million in contract asset value, down from a high of $1.7 billion.
