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UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

o      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the fiscal year ended

 

 

x TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from  January 1, 2008 to December 31, 2008

 

Commission File Number: 333-148189

 

RINEON GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Nevada

 

98-0577859

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

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.

 

Large accelerated filer   

¨

Accelerated filer

¨

Non-accelerated filer

¨

Smaller reporting company

x

(Do not check if a smaller reporting company)

 

 

 

 

 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

 

 

 

 

 

 

Page

PART I

 

 

 

 

Item 1.

 

Business.

 

6

Item 1A.

 

Risk Factors. 

 

20

Item 1B.

 

Unresolved Staff Comments. 

 

20

Item 2.

 

Properties.  

 

20

Item 3.

 

Legal Proceedings.

 

20

Item 4.

 

Submission of Matters to a Vote of Security Holders.

 

20

PART II

 

 

 

 

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.  

 

21

Item 6.

 

Selected Financial Data.

 

24

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

24

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk.

 

32

Item 8.

 

Financial Statements and Supplementary Data.

 

33

Item 9.

 

Changes and Disagreements With Accountants on Accounting and Financial Disclosure. 

 

50

Item 9A(T)

 

Controls and Procedures.

 

50

Item 9B.

 

Other Information.

 

51

PART III

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance.

 

52

Item 11.

 

Executive Compensation.

 

56

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

58

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence.

 

59

Item 14.

 

Principal Accounting Fees and Services.

 

60

Item 15.

 

Exhibits, Financial Statement Schedules.

 

60

 

 

Signatures

 

62

 

 

 

 

 

 

 

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:

 

there is limited historical information available for investors to evaluate Amalphis’ performance or a potential investment in its shares;

 

 

Amalphis currently issues reinsurance to only one insurer;

 

 

Amalphis’ results of operations will fluctuate from period to period and may not be indicative of its long-term prospects;

 

 

Amalphis’ investment strategy may subject it to greater risk of loss;

 

 

established competitors with greater resources may make it difficult for Amalphis to effectively market its products or offer its products at a profit;

 

 

the property and casualty insurance and reinsurance markets may be affected by cyclical trends;

 

 

the current state of the economy and capital markets increases the possibility of adverse effects on Amalphis’ financial position and results of operations;

 

 

 

 

4

 

 

 

 

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;

 

 

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;

 

 

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;

 

 

Amalphis sometimes depends on its insurance company clients’ evaluations of the risks associated with their insurance underwriting, which may subject it to reinsurance losses;

 

 

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;

 

 

any suspension or revocation of Amalphis’ insurance license would materially impact its ability to do business and implement its business strategy;

 

 

Amalphis is subject to the risk of possibly becoming an investment company under U.S. federal securities law;

 

 

insurance regulators in the United States or elsewhere may review Amalphis’ activities and claim that it is subject to that jurisdiction’s licensing requirements;

 

 

current legal and regulatory activities relating to certain insurance products could affect Amalphis’ business, results of operations and financial condition;

 

 

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;

 

 

Amalphis’ investment portfolio may represent a significant portion of its earnings;

 

 

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;

 

 

Amalphis may trade on margin and use other forms of financial leverage, which could potentially adversely affect its revenues;

 

 

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;

 

 

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;

 

 

our ability to pay dividends will be subject to certain restrictions; and

 

 

holders of shares may have difficulty obtaining or enforcing a judgment against us, or face difficulties in protecting their interests;

 

 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:

 

·

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;

·

no additional shares of capital stock of Amalphis may be issued;

·

Amalphis may not incur indebtedness over $0.5 million at any one time or $2.5 million in the aggregate;

·

Amalphis may not change the fundamental nature of its business;

·

Amalphis shall not make any material change in its senior executive officers or management; and

·

Amalphis shall not acquire the securities or assets of any other person, firm or corporation.

 

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.

 

 

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    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.

 

 

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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

 

 

 

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·  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


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