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There are four issues that John Burke, CEO and CFO of Annuity & Life Re Holdings Ltd. says need to be “resolved amicably for the company to have a reasonable basis of going forward.”

Over the past year liquidity and capital pressures have forced the company to put a hold on accepting new business.

The first two tasks, according to Burke, are reducing exposure to guaranteed minimum death benefit riders and guaranteed minimum income benefit riders in variable annuity contracts that have been ceded to the life reinsurer, based in Hamilton, Bermuda.

As of March 30, Annuity & Life Res annuity reinsurance business had total assets of $1.04 billion including minimum death benefit, enhanced earnings benefit and minimum income benefit VA guarantees.

The other two issues, says Burke, are resolving an annuity reinsurance contract with Transamerica as well as trueing up an agreement with XL Life Ltd., a subsidiary of XL Capital, to transfer life reinsurance business to XL.

The annuity reinsurance contract with Transamerica was the companys largest at the end of first quarter 2003, representing $695 million or 68% of its fixed portion of statutory reserves carried by the ceding company.

Annuity & Life Re has said it does not expect that block of business to generate significant income in the future. Roughly 65% of premiums paid in connection with those contracts are invested in convertible bonds whose equity component tracks the stock market. “It could be okay, but it could bite us,” says Burke.

And, he continues, work is under way now on post-closing adjustments to the XL transaction of the transfer of four blocks of its business. If an agreement is not reached, it may have to enter into arbitration proceedings.

Currently, Annuity & Life Re is in arbitration with Met Life, New York, and Hartford Life Insurance Company, Hartford, Conn. Burke says those actions are continuing, but there has not been significant change in their status.

The Hartford arbitration focuses on whether Annuity & Life Re should post an additional $59 million in collateral. The Met Life arbitration centers on an allegation by Annuity & Life Re that Met Life failed to disclose material facts related to the agreement.

Burke says talks with Citibank continue regarding fully securing a $40,605,000 letter of credit issued by Citibank. Annuity & Life Re had a June 30 deadline to secure or eliminate the LOC or face termination of the LOC at year-end.

“We continue to work with them and they have been very flexible with us,” says Burke. There will be one secured LOC with either Citibank or Fleet, depending on who offers the best terms, he adds.

On resolving the companys GMDB issue, Burke says, “I dont believe that we will be able to meet the collateral.”

Consequently, he says Annuity & Life Re could seek to have the requirement eliminated or modified. However, he continues, that would affect the statutory surplus of ceding companies and, as a result, might not be possible. The company also says it is pursuing recapture of business by ceding companies to free up capital and reduce the need for LOCs.

Burke says a study is being undertaken to see if the business that is recaptured is low risk business compared with the business that remains with Annuity Life & Re.

Ohio National Life Insurance Company, Cincinnati, recaptured business totaling roughly $376 million of the reinsurers interest-sensitive contracts liability. The recapture included VAs with GMDBs and life reinsurance, says Mike Haverkamp, senior vice president.

Its true that liquidity is created with recaptures, says Keith Buckley, managing director with Fitch Ratings, Chicago. But, he adds, “the quality of the business on the books [of Annuity & Life Re] diminished.”

“It is worthwhile to note at this point that it will be hard to say if Annuity & Life Re will or will not be able to pay their claims,” says Brad Ellis, a director with Fitch Ratings.

When asked if the company could end up out of business, Rodney Clark, director at Standard & Poors Corp.s financial services group in New York, says “I consider that a strong possibility. It is anyones guess at this point.”

In order to remain an ongoing entity, the company needs to manage its collateral down to the point where it can manage it and end up with a “much smaller and profitable block of business,” according to Clark.

“It was absolutely a combination of concentration risk and underpricing. It was what the company did to get into that market,” and now they are taking action to try to reverse the result of that decision, Clark says. Even though pricing did become more disciplined with time, “the damage was done.”

Scott Robinson, a vice president and senior analyst with Moodys Investors Service, New York, says that, in general, what a newer, small company needs to strive for is managed growth and to make sure collateral is in place.

But Burke says he can turn Annuity & Life Re around. “I wouldnt have taken this job if I felt I couldnt get this company turned around.”


Reproduced from National Underwriter Edition, July 7, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.