There was more bad news on Friday for Bermuda-based insurer Annuity and Life Re with a further rating downgrade from rating agency Fitch which prompted investor reaction pushing the battered stock down more than ten percent.

The company had already seen the value of its shares fall sharply through the year and on Friday the stock made another plunge to close on the New York Stock Exchange at $4.90. The stock also reached a new 52 week low on Friday with trading during falling as low as $4.60 in strong contrast to its 52 week high of $36.41.

Fitch lowered the insurer's financial strength rating from A- to BBB+ and lowered the indicative rating on Annuity's (ANR) shelf registration from to BB+ from `BBB-'. Both ratings have been placed on rating watch negative, which indicated that Fitch may lower Annuity's ratings further and is a warning to investors considering purchasing the stock.

ANR reinsures life insurers in the US and Canada and was the first life reinsurer to set up on the Island in 1998.

The bad news from Fitch followed the company posting losses of more than $20.29 million for the second quarter. The company is also under review by the US Securities and Exchange Commission (SEC) for its accounting practices, and has said it would restate its results for the fourth quarter of last year and the first quarter of this year. The latest figures overshadowed Annuity & Life's $10.43 million in net earnings for the first quarter and put the company's results $9.86 million in the red for the first half of the year.

Fitch said its rating action specifically stemmed from the view that ANR's business model had become overly dependent on the company's ability to obtain credit in various forms to allow it to provide collateral to its US-based ceding companies.

Being Bermuda-based, ANR is an unauthorised reinsurer in the US and like all unauthorised reinsurers, it must post collateral to the benefit of its US ceding companies per US regulatory requirements.

As of the end of June ANR had arranged secured and unsecured letters of credit totalling $189 million as collateral for various reinsurance transactions, of which $89 million was in the form of unsecured letters of credit from Citibank. Citibank has requested that unsecured letters of credit totalling $89 million be secured by October 31, 2002. Management is currently in discussions with Citibank and Bank of America to extend the $89 million capacity.

Fitch estimates that of $457 million of cash and invested assets reported on ANR's balance sheet at June 30, 2002; $62 million in such invested assets were unencumbered. Encumbrances include approximately $294 million of invested assets placed in trust deposits with ceding companies to collateralize other reinsured balances, and approximately $100 million of assets pledged to secure other letters of credit. In addition, a portion of the $62 million in unencumbered assets is necessary for working capital needs, and is thus not fully available to secure the letters of credit.

ANR disclosed in it first quarter 2002 financial statements that the reinsurer has the right to terminate the agreement with a notice of 180 days, which would require ANR to return the reinsurer's deposits. These deposits, which totalled $147 million at June 30, 2002, are secured with a deposit ANR has placed with the reinsurer of $41 million.

Management indicated that it has obtained agreement with principal parties to replace this 180-day termination notice with various financial covenants that if not met would require deposits to be repaid over a 5-year period. Management expects that final terms of the revised agreement will be executed over the next several weeks.

Management said it is currently in the process of raising additional external capital to provide room for future growth. And Fitch has said it would review Annuity's rating status after issues related to the Citibank letters of credit and capital raising are resolved.