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TWST: How do you segment the life insurance area for your analysis?

Mr. Capra: We look at the life insurance group in a somewhat unique way as we break it down into more subsectors. The life insurance subsector includes companies that derive more than half of their earnings from the more traditional life insurance business. On the other hand, the asset accumulation subsector includes companies that derive more than half of their earnings from variable annuity, variable life, and money-management businesses.

TWST: What are the trends and issues that were most significant in 2000 in setting the stage for 2001 within those four areas?

Mr. Capra: Clearly, 2000 was a strong year for life and annuity companies. The group as a whole was up about 30.2% in 2000. The difference between 1999 and 2000 was the recognition last year that there was too wide a disparity between the fundamental outlook for the industry and the current valuations that were being ascribed to these companies. Our investment thesis in 2001 revolves around those companies with earnings and near- to intermediate-term sales prospects that are relatively less dependent on the retail asset accumulation market; have well diversified earnings and, in turn, above-average earnings visibility; can manage their capital effectively; and have management teams that have a long-term track record of creating shareholder value. In our view, insurance companies with these attributes should be well positioned to navigate through what we view as one of the more challenging operating environments in recent memory. That said, we think that some of the bigger companies in the life subsector encompass many of these attributes. We currently have a Buy rating on Annuity & Life Re (Nasdaq:ALRE), a Bermuda-based life-and-annuity reinsurer. The company recently established an operating platform here in the US. Annuity & Life Re’s main focus is pricing and underwriting mortality risk. In turn, this reinsurer helps primary life insurance companies take mortality risks off their balance sheets. Annuity & Life Re does this for in-force blocks of business, which tend to be very capital-intensive, so that from a capital-management perspective it makes more sense to have the risks managed by a life reinsurer. Primary insurers also reinsure new business, in which Annuity & Life Re, with the support of its balance sheet and the support of its underwriting and risk-assessment capabilities, can help companies in building new products by providing the capital needed to support new-product growth. Annuity Life, in turn, often shares in the profitability of new business with the primary life insurance companies. We also believe that the barriers to entry in the life reinsurance business are perhaps higher than some believe. There is a scarcity of talent needed to build a company such as Annuity & Life Re, and in turn, given that it would be difficult to duplicate, we believe that there should be a scarcity value placed on this property. We currently don’t think that’s factored into the valuation. If you look at the growth in premiums over the last 10 years in the life insurance business, the primary insurance business has been growing at a mid-to-upper-single-digit growth rate, while the life reinsurance business has been growing closer to 20% over that time frame. That trend of life reinsurance premium growth outperforming primary insurance premium growth could continue as the primary companies continue to focus on profitability and freeing up capital to support new business initiatives. That certainly bodes well for Annuity & Life Re and some of its peers.