Three US investment firms have given a vote of confidence in the long term prospects of startup Bermuda insurer Annuity and Life Re.

Schroders & Co. Inc. has initiated coverage with an "outperform'' rating.

Merrill Lynch & Co. has put the company as a long term buy, and Prudential Securities recommends a buy with the proviso the stock is a high risk.

Annuity & Life and its wholly owned operating subsidiary, Annuity & Reassurance Ltd., were formed in December to sell reinsurance to the annuity and life market.

In a report issued on May 3, Schroders expects a 12-month target of $29 per share, a 21 percent appreciation. Even in a worst case scenario Schroders expects a stock price of $25, or four percent appreciation.

"As a start-up, ALREF (Annuity's stock market symbol) is likely to trade at a discount, but reach a comparable multiple during the next five years as it builds a solid track record,'' firm analysts Andrew Kligerman and Sue Yu state in the report.

They say the company is in a position to capitalise on annuity and life reinsurance markets that are large and growing, a low cost infrastructure due in part to the absence of corporate taxes, and an experienced management team.

"As life and annuity industry consolidation intensifies, acquirers are using reinsurance to lock in targeted returns and stabilise earnings,'' the analysts state. "In addition, large mutual companies that plan to demutualise, such as MONY and Prudential, are likely to use financial reinsurance to enhance returns, which will be a critical focus of public shareholders.'' While the top ten reinsurers in the market received about 77 percent of new business in 1996 Schroders believes there is room for a new market entrant.

Annuity's start up capital of $354.9 million places it among the top ten largest US reinsurers based on equity capital.

"Several sizable business opportunities already appear viable,'' Schroders states. "ALREF has indicated that it is in discussions with several large insurers to place reinsurance. For example it is working with a top ten mutual insurer to reinsure a $2 million annuity block and one of the top five life insurers to assume $100 million in fixed annuity risks.'' The company cites the leadership of President and Chief Executive Officer Larry Doyle, 54, as a major factor in the company's future. Mr. Doyle held the same position at Bermuda-based GCR Holdings, which he founded in 1993, made public in 1995 and ran it until it was sold to Bermuda-based Exel Ltd. in 1997.

"We think the stock's negative risk is small relative to its positive potential,'' the analysts conclude.

Meanwhile, Merrill Lynch analyst Robert Ryan believes the favourable industry fundamentals and the company's pricing advantages will push the stock to outperform the market. He projects a 12-month price target of $28 a share.

Mr. Ryan also noted the rapidly growing market, Bermuda's favourable regulatory and tax environment, and management experience.

High hopes over prospects for insurer "Even before its IPO (initial public offering), the company received numerous unsolicited indications of interest from potential major customers and requests for transaction partnering arrangements with US-based competitors,'' Mr. Ryan wrote.

He also stated Bermuda-based Ace Ltd. and Exel Ltd. were unlikely to become competitors with Annuity, the only company of its kind on the Island, as both were involved with the startup through board memberships.

Exel was also a strategic investor during the company's launch.

"In our view, as an end-game scenario, the eventual purchase of Annuity and Life Re by a Bermuda-based insurer is a possibility,'' he states. Prudential analysts Jonathan Adams and Jennifer Frankot take the same line, projecting but hedge their bets with the high risk proviso. They project a $31 price target over the next year, generating a total return of about 31 percent.

"As a foreign-based start-up company, we believe management's high calibre and broad experience in the industry are essential to Annuity and Life's success,'' they state.

They project Annuity will book $4.9 million of gross premiums in 1998 from yearly renewable term policies, ramping up to $34.7 million in 1999, and $88 million by 2000.

"We are also assuming annuity sales equal to $375 million in 1998, $650 million in 1999, and $925 million in 2000,'' they continue.

"...Added together we are projecting net income of $17.2 million in 1998, $34.7 million in 1999, and $55.2 million in 2000.'' The risks come from building a franchise and capturing market share.

"If Annuity and Life is unable to obtain the business volume projected in our model, earnings would be affected accordingly,'' they warn.