UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the
fiscal year ended
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the
transition period from January 1, 2008 to December 31,
2008
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Commission
File Number: 333-148189
RINEON
GROUP, INC.
(Exact
name of registrant as specified in its charter)
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Nevada
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98-0577859
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(State or
other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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408 Royal
Street, Imperial, Saskatchewan, Canada, S0G 2J0
(Address
of principal executive offices, including zip code)
Registrant’s
telephone number, including area code:
(954)
727-1925
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
None
________________
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
¨
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange
Act. ¨
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 x No
¨
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (§229.405 of this
chapter) is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this
Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer or a smaller
reporting company. See the definitions of “large accelerated
filer,” “accelerated filer”
and “smaller reporting company” in Rule 12b-2 of
the Exchange Act.
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Large
accelerated filer
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Accelerated
filer
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Non-accelerated
filer
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Smaller
reporting company
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x
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(Do not
check if a smaller reporting company)
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Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange
Act). Yes o No
x
The
aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant was approximately $20,000
as of August 27, 2008.
As
of November 20, 2009, 2,010,000 shares of the registrant’s
common stock, par value $.001 per share, were issued and
outstanding.
Documents
Incorporated by Reference: None .
EXPLANATORY
NOTE – Change of Control
As
previously reported by Rineon Group, Inc. (f/k/a Jupiter Resources,
Inc.) in its Current Report on Form 8-K filed with the Securities
and Exchange Commission on May 14, 2009 (the “Form
8-K”), the Company entered into a preferred stock purchase
agreement dated as of April 30, 2009 (the “Preferred Stock
Purchase Agreement”) under which the Company sold an
aggregate of 36,000 shares of its Series A convertible preferred
stock (the “Series A Preferred Stock”) to Intigy
Absolute Return Ltd., a British Virgin Islands corporation
(“Intigy”), for a purchase price of $36,000,000, or
$1,000 per share of Series A Preferred Stock. In addition, on May
14, 2009, pursuant to the terms of a stock purchase agreement,
dated as of May 14, 2009, Rineon acquired 81.5% of the outstanding
shares of Amalphis, on a fully diluted basis, from NatProv Holdings
Inc (“NatProv”) for a total consideration of
$36,000,000. Rineon purchased Amalphis’ Class A
Preferred Shares which has a liquidation preference of $1,000 per
share, is non-voting, may not be converted into Amalphis common
stock, and participates with the common stock in the payment of any
dividends by Amalphis. NatProv owns the remaining 18.5% of
the outstanding shares of Amalphis that is not owned by
Rineon.
In
connection with the closing of the share exchange, Darcy George
Roney resigned as the Company’s President, Chief Executive
Officer, Chief Financial Officer, and Chairman. Further, effective
May 14, 2009, Tore Nag, Michael Hlavsa, Keith Laslop, Leo de Waal
and Thomas R. Lindsay, Jr. were appointed as members of the
Company’s board of directors. Finally, effective May 14,
2009, the Company’s directors appointed the following
officers: Tore Nag as Chief Operating Officer; and
Michel Hlavsa as Chief Financial Officer and Corporate
Secretary.
The
transactions consummated as set forth above resulted in a Change of
Control of the Company. In connection with such change
in control, on May 14, 2009 the board of directors of the Company
authorized a change in the fiscal year end of the Company from May
31 to December 31.
Accordingly,
the Company is filing this Annual Report on Form 10-K for the
fiscal year ended December 31, 2008 based upon the new December 31
st fiscal year end which includes financial information prior to
the consummation of the share exchange and change in
control.
RINEON
GROUP, INC.
2008
FORM 10-K ANNUAL REPORT
TABLE OF
CONTENTS
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Page
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PART
I
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Item 1.
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Business.
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6
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Item 1A.
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Risk
Factors.
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20
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Item 1B.
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Unresolved
Staff Comments.
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20
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Item 2.
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Properties.
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20
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Item 3.
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Legal
Proceedings.
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20
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Item 4.
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Submission
of Matters to a Vote of Security Holders.
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20
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PART
II
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Item 5.
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Market for
Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
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21
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Item 6.
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Selected
Financial Data.
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24
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Item 7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
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24
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk.
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32
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Item 8.
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Financial
Statements and Supplementary Data.
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33
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Item 9.
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Changes
and Disagreements With Accountants on Accounting and Financial
Disclosure.
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50
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Item 9A(T)
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Controls
and Procedures.
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50
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Item 9B.
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Other
Information.
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51
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PART
III
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Item 10.
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Directors,
Executive Officers and Corporate Governance.
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52
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Item 11.
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Executive
Compensation.
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56
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
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58
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence.
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59
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Item
14.
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Principal
Accounting Fees and Services.
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60
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Item
15.
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Exhibits,
Financial Statement Schedules.
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60
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Signatures
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62
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PART I
Cautionary
Statement Concerning Forward-Looking Statements
The
enclosed report on form 10-K is for the 12-month period ended
December 31, 2008. Subsequent to this reporting period,
on May 14, 2009, we completed a Change of Control (as more fully
described herein). For the avoidance of doubt, our
disclosures cover two distinct periods: (i) prior to the Change of
Control; and (ii) subsequent to the Change of Control.
Our
representatives and we may from time to time make written or oral
statements that are "forward-looking," including statements
contained in this Annual Report on Form 10-K and other filings with
the Securities and Exchange Commission, reports to our stockholders
and news releases. All statements that express expectations,
estimates, forecasts or projections are forward-looking statements
within the meaning of the Act. In addition, other written or oral
statements which constitute forward-looking statements may be made
by us or on our behalf. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates," "projects,"
"forecasts," "may," "should," variations of such words and similar
expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future
performance and involve risks, uncertainties and assumptions which
are difficult to predict. These risks may relate to, without
limitation:
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there is
limited historical information available for investors to evaluate
Amalphis’ performance or a potential investment in its
shares;
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Amalphis
currently issues reinsurance to only one insurer;
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Amalphis’
results of operations will fluctuate from period to period and may
not be indicative of its long-term prospects;
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Amalphis’
investment strategy may subject it to greater risk of
loss;
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established
competitors with greater resources may make it difficult for
Amalphis to effectively market its products or offer its products
at a profit;
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the
property and casualty insurance and reinsurance markets may be
affected by cyclical trends;
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the
current state of the economy and capital markets increases the
possibility of adverse effects on Amalphis’ financial
position and results of operations;
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if
Amalphis loses or is unable to retain its senior management or
other key personnel and are unable to attract qualified personnel,
its ability to implement its business strategy could be delayed or
hindered, which, in turn, could significantly and negatively affect
its business;
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Amalphis
may need additional capital in the future in order to operate its
business, and such capital, if available, could dilute your
ownership interest in Amalphis and may cause the market price of
the shares to decline;
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Amalphis’
property and property catastrophe reinsurance operations may make
it vulnerable to losses from catastrophes and may cause its results
of operations to vary significantly from period to
period;
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Amalphis
sometimes depends on its insurance company clients’
evaluations of the risks associated with their insurance
underwriting, which may subject it to reinsurance
losses;
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Amalphis’
inability to purchase or collect upon certain indemnity coverage it
seeks to obtain in order to limit its reinsurance risks could
adversely affect its business, financial condition and results of
operations;
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any
suspension or revocation of Amalphis’ insurance license would
materially impact its ability to do business and implement its
business strategy;
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Amalphis
is subject to the risk of possibly becoming an investment company
under U.S. federal securities law;
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insurance
regulators in the United States or elsewhere may review
Amalphis’ activities and claim that it is subject to that
jurisdiction’s licensing requirements;
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current
legal and regulatory activities relating to certain insurance
products could affect Amalphis’ business, results of
operations and financial condition;
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the
outcome of recent industry investigations and regulatory proposals
could adversely affect Amalphis’ financial condition and
results of operations and cause the price of its shares to be
volatile;
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Amalphis’
investment portfolio may represent a significant portion of its
earnings;
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the
performance of Amalphis’ investment portfolio may suffer as a
result of adverse capital market developments or other factors and
impact its liquidity, which could in turn adversely affect its
financial condition and results of operations;
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Amalphis
may trade on margin and use other forms of financial leverage,
which could potentially adversely affect its revenues;
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we may
reincorporate in the British Virgin Islands with the same capital
structure as we currently have as a Nevada
corporation. If we consummate such reincorporation, we
will become subject to the laws of the British Virgin Islands which
may have an adverse impact on the rights of our
shareholders;
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provisions
of our proposed Articles, the Companies Law of the British Virgin
Islands and our corporate structure may each impede a takeover or a
merger, which could adversely affect the value of our
shares;
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our
ability to pay dividends will be subject to certain restrictions;
and
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holders of
shares may have difficulty obtaining or enforcing a judgment
against us, or face difficulties in protecting their
interests;
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Therefore,
actual outcomes and results may differ materially from what is
expressed or forecasted in or suggested by such forward-looking
statements. We undertake no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that
arise after the date hereof. Readers should carefully review the
factors described herein and in other documents we file from time
to time with the Securities and Exchange Commission, including our
Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K, and
any Current Reports on Form 8-K filed by us.
In this
Annual Report on Form 10-K, unless the context otherwise
requires:
(a) all
references to “Rineon” refers to (i) Jupiter Resources
Inc., a Nevada corporation, for all periods prior to the
consummation of the change of its corporate name by amendment to
its certificate of incorporation effected on April 30, 2009, (ii)
Rineon Group Inc., a Nevada corporation, following the name change
effected on April 30, 2009, and (iii) Rineon Group Inc. a Nevada
corporation.
(b) all
references to the “Amalphis Group” refers collectively
to Amalphis Group Inc., a British Virgin Islands corporation
(“Amalphis”) and its wholly-owned subsidiary Allied
Provident Insurance, Inc., a Barbados corporation (“Allied
Provident”).
(c) all
references to ‘we,’’
‘‘us,’’ ‘‘our’’ and
“the Company” refers collectively to Rineon and its
direct and indirect subsidiaries including Amalphis and Allied
Provident.
5
Item 1.
Business.
Our
Business Prior to Consummation of the Change in Control
Transaction
We were
incorporated in the State of Nevada on June 15, 2006. On
March 27, 2007, we entered into an agreement with Ms. Helen Louise
Robinson of Vernon, British Columbia, whereby she agreed to sell to
us one mineral claim located approximately 30 kilometers northwest
of Vernon, British Columbia in an area having the potential to
contain silver or copper mineralization or deposits. In
order to acquire a 100% interest in this claim, we paid $7,500 to
Ms. Robinson. However, we were unable to keep the mineral claim in
good standing due to lack of funding and our interest in it has
lapsed.
However,
we were unable to keep the mineral claim in good standing due to
lack of funding and our interest in it has lapsed and had to cease
any operations and search for an acquisition
target. Accordingly, the Company entered into a
preferred stock purchase agreement dated as of April 30, 2009 (the
“Preferred Stock Purchase Agreement”) under which the
Company sold an aggregate of 36,000 shares of its Series A
convertible preferred stock (the “Series A Preferred
Stock”) to Intigy Absolute Return Ltd., a British Virgin
Islands corporation (“Intigy”), for a purchase price of
$36,000,000, or $1,000 per share of Series A Preferred Stock (the
“Change of Control”). In addition, on May 14, 2009,
pursuant to the terms of a stock purchase agreement, dated as of
May 14, 2009, Rineon acquired 81.5% of the outstanding shares of
Amalphis, on a fully diluted basis, from NatProv Holdings Inc
(“NatProv”) for a total consideration of
$36,000,000. Rineon purchased Amalphis’ Class A
Preferred Shares which has a liquidation preference of $1,000 per
share, is non-voting, may not be converted into Amalphis common
stock, and participates with the common stock in the payment of any
dividends by Amalphis. NatProv owns the remaining 18.5% of
the outstanding shares of Amalphis that is not owned by
Rineon.
Employees
As of
December 31, 2008 and prior to the Change of Control, we had no
employees other than our sole officer who received no
compensation.
Research
and Development Expenditures
We have
not incurred any other research or development expenditures since
our incorporation.
Subsidiaries
Prior to
the Change of Control, we did not have any
subsidiaries. After the Change of Control, Amalphis
became our majority owned subsidiary whereby we own 81.5% of
Amalphis.
Patents
and Trademarks
We do not
own, either legally or beneficially, any patents or
trademarks.
Our
Business Subsequent to Change in Control Transaction
Unless
otherwise indicated, references to “Amalphis” shall
include is operating subsidiary, Allied Provident Insurance,
Inc.
Overview
Amalphis
is a specialty insurance company that offers reinsurance products
in markets where traditional reinsurance alternatives are limited.
Amalphis also directly sells a variety of property and casualty
insurance products to businesses. Its insurance business is
currently conducted solely through its wholly-owned subsidiary,
Allied Provident Insurance, Inc., a Barbados based exempt insurance
company that holds an insurance license granted by the Ministry of
Finance in Barbados.
6
Amalphis’
Insurance Business
The
primary operating business of Amalphis is Allied Provident
Insurance, an insurance company established by NatProv Holdings
(“NatProv”) in November 2007. To organize Allied
Provident, NatProv capitalized Allied Provident through the equity
contribution of cash and marketable securities aggregating of
$23,900,000. NatProv believes that this initial equity capital
contribution provides Allied Provident sufficient capital to
implement its business plan as a de novo insurance company. Allied
Provident Insurance, Inc. holds an insurance license in Barbados
and is authorized to conduct a general insurance business,
including the sale of property, general liability, business
interruption and political risk insurance, as well as compensation
bonds, directors and officers insurance, errors and omissions
insurance, structured transactions insurance wraps, and
reinsurance.
In its
first full year of operation for the year ended December 31,
2008, Amalphis generated total revenue of
$17,468,388 including earned premiums of $11,617,910,
net investment gain of $5,809,338, interest income of $41,140.
After giving effect to incurred losses of $9,111,327 (policy
claims), of which $6,165,627 were paid claims, the Company produced
net income of $5,833,870. As a result of the Company’s
financial performance during the period, as of December 31, 2008,
the total shareholders’ equity of Allied Provident had
increased to approximately $29,850,000.
In
September 2008, NatProv reorganized its holding in
Allied Provident by contributing 100% of the share capital of
Allied Provident to Amalphis in exchange for an aggregate of
2,340,000 shares of Amalphis, valued at $10.21 per share, or
$23,900,000. As a result Amalphis owned Allied Provident and
NatProv owned Amalphis.
On May 14,
2009 the Company entered into a preferred stock purchase agreement
dated as of April 30, 2009 (the “Preferred Stock Purchase
Agreement”) under which the Company sold an aggregate of
36,000 shares of its Series A convertible preferred stock (the
“Series A Preferred Stock”) to Intigy Absolute Return
Ltd., a British Virgin Islands corporation (“Intigy”),
for a purchase price of $36,000,000, or $1,000 per share of Series
A Preferred Stock. In addition, pursuant to the terms of a
stock purchase agreement dated as of May 14, 2009, Rineon agreed to
acquire from NatProv Holdings Inc (“NatProv”) 1,985,834
shares of Amalphis common stock, representing approximately 81.5%
of the 2,437,500 outstanding shares of Amalphis common stock, for
total cash consideration of $36,000,000. The remaining
451,666 of the outstanding Amalphis shares are currently owned by
NatProv.
On July
14, 2009, with Rineon’s approval, NatProv converted all of
the 1,985,834 shares of Amalphis common stock it agreed to sell to
Rineon into 36,000 shares of Amalphis Series A preferred stock (the
“Amalphis Preferred Stock”), and on July 15, 2009
issued the Amalphis Preferred Stock to Rineon in lieu of the
1,985,834 shares of Amalphis common stock contemplated by the May
14, 2009 stock purchase agreement. The Amalphis
Preferred Stock has a liquidation preference of $1,000 per share,
is non-voting, may not be converted into Amalphis common stock, and
participates with the common stock in the payment of any dividends
by Amalphis. As a result of such transaction, NatProv
which owns 451,666 shares of Amalphis common stock, owns 100% of
the Amalphis voting shares. The conversion of the
1,985,834 shares of Amalphis common stock into 36,000 shares of
Amalphis Preferred Stock was consummated primarily to enable
Rineon’s subsidiary Allied Provident Insurance Inc. to
continue to comply with Barbados insurance regulations.
Simultaneous
with its receipt of the Amalphis Preferred Stock, Rineon, NatProv
and Amalphis entered into a stockholders agreement under which the
parties agreed that, unless additional shares of Amalphis have
previously been issued with Rineon's prior written consent, in the
event of any sale of the outstanding common stock or assets and
business of Amalphis, whether by stock sale, asset sale, merger,
consolidation or like combination to any person, firm or
corporation not affiliated with the parties (a "Sale of Control"),
Rineon shall receive the greater of (a) $36,000,000, or (b) 81.5%
of the total consideration. NatProv or its transferees
shall receive any remaining balance of the total
consideration. In addition, the parties agreed that,
without the prior written consent of Rineon:
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the
existing members of the board of directors of Amalphis cannot be
changed nor may any vacancies on or additions to such board of
directors be filled;
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no
additional shares of capital stock of Amalphis may be
issued;
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Amalphis
may not incur indebtedness over $0.5 million at any one time or
$2.5 million in the aggregate;
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Amalphis
may not change the fundamental nature of its business;
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Amalphis
shall not make any material change in its senior executive officers
or management; and
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Amalphis
shall not acquire the securities or assets of any other person,
firm or corporation.
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Amalphis
is a relatively new business, as its Allied Provident operating
subsidiary was incorporated November 9, 2007 and commenced its
insurance business in Barbados in November 2007. Because Amalphis
is a new business, it has only issued a limited number of policies,
a financial guaranty policy, which has been commuted, a quota share
policy and two directors and officers liability
policies. Since its inception, Amalphis has entered into
two direct policies and one reinsurance policy, however the
underlying insured risk consist of numerous smaller auto insurance
policies.
7
Amalphis
currently issues reinsurance to one insurer, Drivers Insurance
Company, a United States licensed insurance carrier that offers
non-standard personal automotive insurance coverage to high risk or
“rated” drivers who are unable to obtain insurance from
standard carriers. Non-standard insurance is insurance sold to
those drivers whose underwriting experience makes it difficult or
impossible to obtain insurance at standard or preferred rates. Such
drivers generally have a poor driving history, which may include,
but is not limited to, multiple points violations, multiple
accidents reported, single or multiple severe accidents reported,
and/or repeated nonpayment of premiums. Amalphis plans to
significantly expand its reinsurance product offerings with other
insurers that provide a variety of property and casualty insurance
products.
Amalphis’
direct insurance business currently includes a suite of business
property and casualty insurance products, such as directors and
officers liability insurance, financial guarantee insurance, excess
and umbrella liability insurance, business income insurance, and
inland marine and product liability insurance.
Reinsurance
is an arrangement whereby the reinsurer agrees to indemnify its
client insurance company against all or a portion of the insurance
risks underwritten by the client under one or more insurance
policies. As a reinsurer, Amalphis assumes a portion of the
insurer’s risk in exchange for a portion of the premium
payable by the insured to the primary insurer. Reinsurance provides
an insurer with several benefits, including a reduction in net
liability on individual risks and catastrophe protection from large
or multiple losses. Reinsurance also provides the insurance company
with additional underwriting capacity by permitting it to accept
larger risks and write more business than would be possible without
a related increase in capital and surplus. Although reinsurance
provides security and indemnities to the insurance company, it does
not legally discharge the insurer from its liability with respect
to its obligations to the insured.
Amalphis’
current quota share treaty reinsurance agreement with Drivers
Insurance Company commenced on January 1, 2008 for a one year term,
and was renewed on January 1, 2009 for an additional one year term.
However the agreement may be terminated by either party on 90 days
prior written notice. Under the terms of the agreement, Drivers
“ceded” (which is a term used in the insurance industry
similar to the term transferred or assigned) to Amalphis’
subsidiary Allied Provident 50% of its premium as well as the net
liability risk under all non-standard automobile liability
insurance policies written by Drivers during the term of the
agreement.
8
However,
Amalphis agreed to allow Drivers to receive or retain 29% of all
gross earned premiums ceded to Amalphis by Drivers. Upon
termination of the agreement, Amalphis remains liable for all
losses that occur under insurance risks ceded to it at the time of
termination for a period of one year following termination of such
agreement, and for all claims made under such policies for a period
of 18 months from termination of the reinsurance agreement. Drivers
must obtain Amalphis’ approval for the settlement of any
claims for which Amalphis may be liable that are in excess of
$5,000. Drivers is obligated to notify Amalphis within 60 days
after the close of each calendar quarter of any claims or losses
incurred and premiums received from insureds and the amounts owed
by either party to the other. If Drivers paid any claim in excess
of $50,000, subject to Amalphis’ receipt of satisfactory
proof of loss and payment, Amalphis will reimburse Drivers within
15 business days.
Amalphis’
reinsurance strategy is to build a portfolio of
“frequency” and “severity” reinsurance
agreements with select insurance companies that are designed to
meet the needs of the insurer that are not being met in the
traditional reinsurance marketplace. Amalphis currently
has one senior generalist underwriter and it has contracted with
third-party actuaries to operate its reinsurance business.
“Frequency” reinsurance contracts typically contain a
potentially large number of small losses from multiple events,
whereas “severity” contracts have the potential for
significant losses from one event. As an example of a frequency
reinsurance contract, Amalphis’ reinsurance business
currently consists of reinsuring non-standard personal automobile
insurance policies for a United States insurance carrier. The
automobile insurance policies are designed to provide coverage to
drivers who ordinarily cannot obtain insurance from standard
carriers due to a variety of factors. The automobile insurance
policies are designed to provide coverage to drivers who ordinarily
cannot obtain insurance from standard carriers due to a variety of
factors. For example, motorist may be considered as a high-risk
driver because he or she has a serious violation, such as a DUI, on
their driving record. It also may be difficult for a driver to find
standard auto insurance if they have been recently involved in a
serious accident or who may have had a number of claims, accidents
or motor vehicle violations in their recent past. Because of such
factors, the motorist may not meet the underwriting standards
established by a standard policy issuer. Non-standard policies
generally are issued for the minimum limits of coverage required
under applicable state laws and have relatively small individual
premiums. However, they have a relatively high
“frequency” of losses.
Amalphis
intends to expand its reinsurance business to provide reinsurance
contracts to other business, property and casualty insurance
companies providing frequency and severity policy coverage,
including homeowners’ policies in Florida, where the total
risk exposure is less than $25 million. Amalphis intends to
underwrite reinsurance contracts only where it believes it can
model, analyze and monitor its risks effectively. Amalphis’
underwriters are responsible for both its reinsurance and its
direct property and casualty insurance contracts from origination
to final disposition, including underwriting, pricing, servicing,
monitoring and claims proceeds. Amalphis believes that this
integrated approach will translate to superior contract management,
better client service and superior economic returns over the long
term.
Amalphis’
investment strategy, like its reinsurance strategy, is designed to
maximize returns over the long term while minimizing the risk of
capital loss. Unlike the investment strategy of many of its
competitors, which invest primarily in fixed-income securities
either directly or through fixed-fee arrangements with one or more
investment managers, Amalphis’ investment strategy is to
invest in long and short positions primarily in publicly-traded
equity and corporate debt securities. As of December 31, 2008, 48%
of its investments were invested in publicly-traded equity
securities primarily traded on exchanges in North America and
Bermuda. The returns on its investment portfolio for the period
ended December 31, 2007 and the twelve months ended December 31,
2008 were 0.15% and 25.04%, respectively. Amalphis notes that past
performance is not necessarily indicative of future
results.
Amalphis
measures its success by long-term growth in book value per share,
which Amalphis believes is the most comprehensive gauge of the
performance of its business. Accordingly, its incentive
compensation plans are designed to align employee and shareholder
interests. Compensation under its cash bonus plan is based on the
ultimate underwriting returns of its business measured over a
multi-year period, rather than premium targets or estimated
underwriting profitability for the year in which Amalphis initially
underwrote the business.
Amalphis’
combined ratio, which is the sum of its composite ratio and its
internal expense ratio, for the period from inception and ended
December 31, 2007 and the year ended December 31, 2008 was 81.71%
and 100.10%, respectively. The composite ratio is the ratio of
underwriting losses incurred, loss adjustment expenses and
acquisition costs, excluding general and administrative expenses,
to premiums earned. The internal expense ratio is the ratio of all
general and administrative expenses to premiums earned. For
example, a combined ratio of 110% signifies a loss of $0.10 per
dollar of premiums earned. The reported combined ratio is expected
to be high due to general and administrative expenses incurred in
connection with start-up of its reinsurance operations. Because
Amalphis believes that it can expand its underwriting business
without increasing certain of its expenses, such as advertising and
payroll, Amalphis expects its internal expense ratio to decrease
significantly as it continues to expand its underwriting
activities.
Amalphis
expects over time that its general and administrative expenses will
be two to three percent of capital.
Given
Amalphis’ limited operating history, these results set forth
in the preceding two paragraphs should not be relied upon as a
basis for evaluating the potential success of its business
strategy.
9
Amalphis’
Business Strategy
Amalphis
is a Caribbean based financial services business providing a
variety of insurance and reinsurance products and services to
clients and customers on an international basis.
Its goal
is to differentiate itself from its competitors in underwriting
insurance, and to become a leading provider of insurance and
reinsurance products as well as providing significant returns on
its equity. The key elements of Amalphis’ business
strategy are to:
·
Distinguish
its operations from those of its competitors. As
opposed to engaging in traditional insurance and reinsurance
underwriting, Amalphis focuses on offering specialty insurance and
reinsurance products and solutions, such as reinsuring frequency
contracts on automobile insurance issued to high risk
drivers;
·
Achieve
attractive economic returns. On each insurance and
reinsurance contract Amalphis underwrites, Amalphis focuses on its
expected return on equity over the life of the contract, which may
span many years, rather than on yearly combined ratios or
short-term considerations such as premium volume in any given
period. Accordingly, unlike many of its competitors, Amalphis does
not measure its economic success with respect to a contract in any
given accounting period but rather after the final loss payments on
the contract are made. Over time, Amalphis anticipates that the
average loss duration on its contracts will be between 2.5 and 3.5
years. Amalphis’ decision to underwrite a contract depends
whether it is able to satisfy itself that that the expected
economic returns from such contract may exceed its budgeted return
on equity. Amalphis’ budgeted return on equity varies with
the degree of risk assumed and generally is at least equal to the
risk-free rate (the interest rate on a riskless, or safe, asset,
usually short-term U.S. government security rate) plus 5.0%. In
pricing its contracts during 2007 and the twelve months ending
December 31, 2008, and setting its budgeted return on equity,
Amalphis assumed a risk-free rate of 2.3%, rather than using its
historical investment returns as a benchmark.
·
Operate
as a lead underwriter on the majority of the premium that Amalphis
underwrites. Due to the nature of its
business strategy, Amalphis anticipates that the majority of its
insurance and reinsurance contracts will be sizeable and require
significant interaction among clients, brokers and
itself. Amalphis has a strong preference to be the lead
underwriter of a majority of the premium that it underwrites, which
Amalphis believes allows it to influence the pricing, terms and
conditions of the business it writes and, accordingly, better
enables Amalphis to meet or exceed its targeted return on equity.
Amalphis was the lead underwriter for all of its contracts bound
from inception to December 31, 2008. Although Amalphis seeks to be
the lead underwriter for the majority of the aggregate premium that
it underwrites, Amalphis may participate in non-lead positions when
it believes the opportunity offers compelling returns on
equity.
·
Manage
capital prudently. Amalphis seeks to
manage its capital prudently with respect to its underwriting and
capital financing activities. Amalphis models, analyzes and
monitors its underwriting activities, which are subject to written
underwriting guidelines and regularly reviewed by the Underwriting
Committee of its Board of Directors. Each reinsurance contract
Amalphis underwrites must satisfy minimum expected returns on
equity. Amalphis utilizes a capital allocation model that requires
it to allocate substantially more capital for contracts with larger
potential for loss in an effort to not overexpose its capital.
Amalphis’ underwriting decision-making is centralized and the
Chief Executive Officer of its operating subsidiary, Allied
Provident, must approve each contract that Amalphis executes.
Additionally, Amalphis occasionally may purchase reinsurance of the
liabilities we reinsure, or retrocessional coverage, in an effort
to protect its invested capital in a transaction. Retrocessional
coverage is typically acquired to mitigate the effect of a
potential concentration of losses. Amalphis’ investment
strategy attempts to maximize returns while limiting the risk of
capital loss; the investment portfolio is comprised of both long
and short securities in an attempt to partially hedge overall
market exposure. Further, Amalphis’ investment guidelines
provide for minimal use of leverage. Finally, Amalphis currently
employs no debt in its capital structure.
·
Use
only generalist underwriters . Amalphis employs
experienced underwriters possessing industry knowledge, experience
and relationships with many brokers in the United States, Europe,
Asia and Barbados. Its generalist underwriters handle
both the underwriting and administering of each insurance and
reinsurance contract, as opposed to underwriters who focus only on
specific lines of business;
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·
Maintain
a highly experienced management team . The Chief
Executive Officer of Amalphis’ operating subsidiary, Andre
Heyliger, has more than 20 years of industry experience. Its
management team has knowledge, experience and relationships with
brokers in the United States, Bermuda and Barbados;
·
Provide
management incentives to align management and employee’s
interests with those of Amalphis’ shareholders
. Amalphis structures its management incentive
compensation plans to align management and employee interests with
those of its shareholders over the long term. As such, the majority
of payments under its cash bonus plan are based on the ultimate
underwriting returns, not on underwriting profitability in any
single year or the returns generated by its investment portfolio.
As a result, Amalphis expects most of the cash bonus plan payments
each year will be deferred for a multi-year period to reflect
actual underwriting results as they develop; and
·
deploy
a more aggressive value-oriented investment strategy by investing
in long and short positions of equity and corporate debt
securities, rather than investing predominantly in fixed-income
securities.
Because
Amalphis’ underwriting and investment strategies differ from
other participants in the property and casualty reinsurance market,
you may not be able to directly compare its business or prospects
with those of other property and casualty reinsurers.
Amalphis’ results from financial accounting period to period
may vary significantly and may not be as predictable as many of its
competitors. However, Amalphis believes that its operational
differences, particularly its focus on writing select contracts,
which it believes will allow Amalphis to better manage its
underwriting risks, and its value-oriented investment strategy,
which has the potential to generate higher rates of return than
traditional fixed-income strategies, will enable Amalphis to
generate, over the long term, returns on equity superior to those
of traditional reinsurers.
Market
Trends and Opportunities
Extended
periods of competitive pricing, increases in reserves, rating
downgrades, higher than expected losses and rating agency changes
in capital requirements for certain lines of business historically
have caused capacity shortages in certain product lines in the
property and casualty industry. These capacity shortages have
created considerable cyclical increases in pricing and changes in
terms and conditions that are significantly more favorable for
reinsurers as clients may not be able to identify or locate
reinsurers that are willing or able to reinsure their underwriting
risks.
Amalphis
anticipates that over the next five years, it will see attractive
opportunities to write directly and to write as a reinsurer in
directors’ and officers’, homeowners’, medical
malpractice, workers’ compensation, property catastrophe and
marine lines. Amalphis believes that these lines of business will
present it with opportunities for the following reasons:
·
the
current financial crisis has driven up the frequency and severity
of securities fraud claims, moving some directors’ and
officers’ insurance rates sharply higher;
·
in
certain states, including Florida, a number of insurers are
reducing their homeowners’ writings, creating opportunity for
the remaining insurers that, in turn, will require more reinsurance
to mitigate their overall exposure;
·
legislation
in certain states, including tort reform and workers’
compensation regulation, has resulted in attractive opportunities
for medical malpractice and workers’ compensation
reinsurance; and
·
there
continues to be significant demand for property catastrophe and
marine reinsurance.
Amalphis
intends to continue to monitor market conditions so as to be
positioned to participate in future underserved or
capacity-constrained markets as they arise and to offer products
that it believes will generate favorable returns on equity over the
long term. Accordingly, its underwriting results and product line
concentrations in any given period may not be indicative of its
future results of operations.
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Reinsurance
Risks to Be Written
Amalphis
intends to underwrite reinsurance contracts with favorable
long-term returns on equity as opportunities arise. It will attempt
to select the most economically attractive opportunities across a
variety of all property and casualty lines of business.
Reinsurance
is an arrangement under which an insurance company or reinsurer
agrees to indemnify or assume the obligations of another insurance
company, or client, for all or a portion of the insurance risks
underwritten by the client. It is standard industry practice for
primary insurers to reinsure portions of their insurance risks with
other insurance companies under reinsurance agreements or
contracts. This permits primary insurers to underwrite policies in
amounts larger than the risks they are willing to retain.
Reinsurance is generally designed to:
·
reduce
the client’s net liability on individual risks, thereby
assisting it in increasing its capacity to underwrite business as
well as increasing the limit to which it can underwrite on a single
risk;
·
assist
the client in meeting applicable regulatory and rating agency
capital requirements;
·
assist
the client in reducing the short-term financial impact of sales and
other acquisition costs; and
·
enhance
the client’s financial strength and statutory
capital.
Amalphis
characterizes the reinsurance risks it assumes as frequency or
severity and aim to balance the risks and opportunities of its
underwriting activities by creating a diversified portfolio of both
types of businesses.
Frequency
business is characterized by contracts containing a potentially
large number of smaller losses emanating from multiple events.
Clients generally buy this protection to increase their own
underwriting capacity and typically select a reinsurer based upon
the reinsurer’s financial strength and expertise. Amalphis
expects the results of frequency business to be less volatile than
those of severity business from period to period due to its greater
predictability. Amalphis also expects that over time the profit
margins and return on equity for its frequency business will be
lower than those of its severity business.
Severity
business is typically characterized by contracts with the potential
for significant losses emanating from one event. Clients generally
buy this protection to remove volatility from their balance sheets
and, accordingly, Amalphis expects the results of severity business
to be volatile from period to period. However, over the long term,
Amalphis also expects that its severity business will generate
higher profit margins and return on equity than its frequency
business.
Amalphis
anticipates that the average loss duration of its contracts will be
between 2.5 and 3.5 years.
Amalphis
expects to act as lead underwriter for the majority of total
premium it underwrites. Depending on the mix of our frequency and
severity business, Amalphis expects that, over time, its annual
premiums written will be equal to 0.5 to 1.0 times its
capital.
In
addition, some of the risks Amalphis intends to underwrite will
reflect traditional opportunities in reinsurance where it will
participate in a larger underwriting syndicate, where it believes
the return on equity over the long term will exceed its internal
targeted return on equity.
Amalphis’
targeted return on equity varies with the degree of risk assumed on
the contract underwritten, but is equal to at least the sum of an
assumed risk-free rate plus 5.0%. In pricing its contracts in 2007
and the twelve month period ended December 31, 2008, and setting
its targeted return on equity, Amalphis assumed investment returns
would equal a risk-free rate of 2.3%, rather than using its
historical investment returns as a benchmark.
Products
Amalphis’
experienced, generalist underwriting team allows it to offer a
range of property and casualty insurance and reinsurance products,
including, but not limited to, casualty and liability risks,
damage, health, homeowners’, medical malpractice,
professional liability, property catastrophe, automotive surety and
fidelity and workers’ compensation, and marine
insurance. At present, Amalphis only reinsures
automotive frequency-type insurance issued to high risk or
“rated” drivers, but intends to expand its reinsurance
business to cover all of the other business, property and casualty
insurance it currently writes as a direct insurer and propose to
write in the future.
12
While
Amalphis expects to establish a diversified portfolio, its
allocation of risk will vary based on its perception of the
opportunities available in each line of business. Moreover, its
focus on certain lines will fluctuate based upon market conditions
and Amalphis may only offer or underwrite a limited number of lines
in any given period. Amalphis intends to:
·
target
markets where capacity and alternatives are underserved or capacity
constrained;
·
employ
strict underwriting discipline;
·
select
reinsurance opportunities with favorable returns on equity over the
life of the contract; and
·
potentially
offer lines such as political risk, completion bonds, business
interruption, structured transactions, insurance wraps and
annuities.
Marketing
and Distribution
Currently,
Amalphis’ products are marketed through its web site and by
leveraging the personal and business contacts of its employee and
directors. Amalphis does not have any employees who are
dedicated solely to marketing its
products. Amalphis expects that some of its
business will be sourced through insurance brokers. Brokerage
distribution channels provide Amalphis with access to an efficient,
variable cost, and global distribution system without the
significant time and expense that would be incurred in creating a
wholly-owned distribution network. Amalphis believes that its
financial strength, unencumbered balance sheet and superior client
service are essential for creating long-term relationships with
clients and brokers.
Amalphis
intends to build long-term relationships with global reinsurance
brokers and captive insurance companies located in the Barbados.
Its management team has significant relationships with most of the
primary and specialty broker intermediaries in the reinsurance
marketplace. Amalphis believes that by maintaining close
relationships with brokers it will be able to continue to obtain
access to a broad range of reinsurance clients and
opportunities.
Amalphis
intends to focus on the quality and financial strength of any
brokerage firm with which it does business. Brokers do not have the
authority to bind Amalphis to any reinsurance contract. Amalphis
reviews and approves all contract submissions in its corporate
offices located in Barbados. From time to time, Amalphis may also
enter into relationships with managing general agents who could
bind Amalphis to reinsurance contracts based on narrowly defined
underwriting guidelines.
Insurance
brokers receive a brokerage commission that is usually a percentage
of gross premiums written. Amalphis seeks to become a preferred
choice of brokers and their clients by providing:
·
solutions
that address the specific business needs of its clients;
·
rapid
and substantive responses to proposal and pricing quote
requests;
·
timely
payment of claims;
·
financial
security; and
·
clear
indication of risks it will and will not underwrite.
One of
Amalphis’ key objectives is to build long-term relationships
with key reinsurance brokers, such as Access Reinsurance, Inc., Aon
Re Worldwide, Inc., Benfield Group Limited, Guy Carpenter &
Company, Inc., and Willis Group Holdings, Ltd., and with their
clients.
13
Amalphis
believes that by maintaining close relationships with brokers, it
is able to obtain access to a broad range of potential clients.
Amalphis meets frequently in Barbados and elsewhere with brokers
and senior representatives of clients and prospective clients. All
contract submissions are approved in Allied Provident’s
offices in Barbados.
In
addition, Amalphis expects the large number of captive insurance
companies located in Barbados to be a source of business for
Amalphis in the future. Amalphis expects to develop relationships
with potential clients when it believes they have a need for
reinsurance, based on its industry knowledge and market trends.
Amalphis believes that diversity in its sources of business will
help reduce any potential adverse effects arising out of the
termination of any one of its business relationships.
Underwriting
and Risk Management
Amalphis
believes that its approach to underwriting will allow it to deploy
its capital in a variety of lines of business and to capitalize on
opportunities that Amalphis believes offer favorable returns on
equity over the long term. Amalphis’ underwriters have
expertise in a number of lines of business and Amalphis will also
look to outside consultants on a fee-for-service basis, to help
Amalphis with niche areas of expertise when Amalphis deems it
appropriate.
Economics
of Results
Amalphis’
primary goal is to build a reinsurance portfolio that has
attractive economic results. Amalphis may underwrite a reinsurance
contract that may not demonstrate immediate short-term benefits if
it believes it will provide favorable return on equity over the
life of the contract. In pricing its products, Amalphis assumes
investment returns equal to the risk-free rate, which it intends to
review and adjust, if necessary, on an annual basis. As of March 1,
2009, Amalphis assumes a risk-free rate of 2.3%.
Actuarially
Based Pricing
Amalphis
has internally developed actuarial models and also use several
commercially available tools to price its business. Amalphis’
models not only consider conventional underwriting metrics, but
also incorporate a component for risk aversion that places greater
weight on scenarios that result in greater losses. The actuary
working on the transaction must agree that the transaction meets or
exceeds its return on equity requirements before Amalphis commits
capital. Amalphis prices each transaction based on the merits and
structure of the transaction.
Act as Lead Underwriter
Typically,
one reinsurer acts as the lead in negotiating principal policy
terms and pricing of reinsurance contracts. Amalphis plans to act
as the lead underwriter for the majority of the aggregate premium
that it underwrites. Amalphis believes that lead underwriting is an
important factor in achieving long-term success, as lead
underwriters have greater influence in negotiating pricing, terms
and conditions. In addition, Amalphis believes that reinsurers that
lead policies are generally solicited for a broader range of
business and have greater access to attractive risks.
Alignment
of Company and Client’s Interests
Amalphis
seeks to ensure every contract it underwrites aligns its interests
with its client’s interest. Specifically, Amalphis may seek
to:
·
pay
its clients a commission based upon a predetermined percentage of
the profit Amalphis realizes on the business, which Amalphis refers
to as a profit commission;
·
allow
the client to perform all claims adjusting and audits, as well as
the funding and paying of claims, which Amalphis refers to as self
insured retentions;
·
provide
that the client pays a predetermined proportion of all losses above
a pre-determined amount, which Amalphis refers to as
co-participation; and/or
14
·
charge
the client a premium for reinstatement of the amount of reinsurance
coverage to the full amount reduced as a result of a reinsurance
loss payment, which Amalphis refers to as a reinstatement
premium.
Amalphis
believes that through profit commissions, self-insured retentions,
co-participation, reinstatement premiums or other terms within the
contract, its clients are provided with an incentive to manage its
interests. Amalphis believes that aligning its interests with its
client’s interests promotes accurate reporting of
information, timely settling and management of claims and limits
the potential for disputes.
Integrated
Underwriting Operations
Amalphis
has implemented a ‘‘cradle to grave’’
service philosophy where the same individual underwrites and
administers the reinsurance contracts. Amalphis believes this
method enables it to best understand the risks and likelihood of
loss for any particular contract and to provide superior client
service.
Detailed
Contract Diligence
Amalphis
seeks to be highly selective in the contracts it chooses to
underwrite and spend a significant amount of time with its clients
and brokers to understand the risks and appropriately structure the
contracts. Amalphis usually obtains significant amounts of data
from its clients to conduct a thorough actuarial modeling analysis.
As part of its pricing and underwriting process, Amalphis assesses
among other factors:
·
the
client’s and industry historical loss data;
·
the
expected duration for claims to fully develop;
·
the
client’s pricing and underwriting strategies;
·
the
geographic areas in which the client is doing business and its
market share;
·
the
reputation and financial strength of the client;
·
the
reputation and expertise of the broker;
·
the
likelihood of establishing a long-term relationship with the client
and the broker; and
·
reports
provided by independent industry specialists.
Underwriting
Authorities
Amalphis
uses actuarial models that it produces and applies its underwriting
guidelines to analyze each reinsurance opportunity before it
commits capital. The Underwriting Committee of its Board of
Directors has set parameters for zonal and aggregate property
catastrophic caps and limits for maximum loss potential under any
individual contract. The Underwriting Committee may approve
exceptions to the established limits. Amalphis’ approach to
risk control imposes an absolute loss limit on its natural
catastrophic exposures rather than an estimate of probable maximum
losses and Amalphis has established zonal and aggregate limits.
Amalphis manages all non-catastrophic exposures and other risks by
analyzing its maximum loss potential on a contract-by-contract
basis. Maximum authorities will likely change ove