Consolidated Financial Statements of DOCUMENTS/ALAC 2014 FS.pdf · Consolidated Financial Statements of ... notes to the consolidated financial statements 2 ... transactions are eliminated

Consolidated Financial Statements of Advantage Life & Annuity Company SPC December 31, 2014

ADVANTAGE LIFE & ANNNUITY COMPANY SPC

Table of Contents

Page(s)

Independent Auditors’ Report to the Directors 1 Consolidated Balance Sheet 2 Consolidated Statement of Total Comprehensive Income 3 Consolidated Statement of Cash Flows 4 Consolidated Statement of Changes in Equity 5 Notes to the Consolidated Financial Statements 6-31

ABCD KPMG PO Box 493 Telephone: +1 345 949-4800 Century Yard Fax: +1 345 949-7164 Grand Cayman KY1-1106 Internet: www.kpmg.ky CAYMAN ISLANDS

KPMG, a Cayman Islands partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

Independent Auditors’ Report to Directors

We have audited the accompanying consolidated financial statements of Advantage Life & Annuity Company SPC (the “Company”) which comprise the consolidated balance sheet as of December 31, 2014 and the related consolidated statement of total comprehensive income, consolidated statement of changes in equity, and consolidated statement of cash flows for the year then ended, and the related notes to the consolidated financial statements.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”); this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly in all material respects, the financial position of Advantage Life & Annuity Company SPC as of December 31, 2014, and the results of its operations and its cash flows for the year then ended in accordance with U.S. generally accepted accounting principles.

May 15, 2015

ADVANTAGE LIFE & ANNUITY COMPANY SPC Consolidated Balance Sheet December 31, 2014 (Stated in thousands of United States dollars, except per share amounts)

See accompanying notes to the consolidated financial statements

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2014

Assets Cash and cash equivalents (Note 4) $ 3,630 Investments – available-for-sale (Note 5) 54,148 Investments – held-to-maturity (Note 5) 19,715 Investment – other (Note 5) 3,438 Accrued investment income 1,772 Reinsurance recoverable (Note 13) 888 Other assets (Note 7) 1,375 Deferred policy acquisition costs (Note 8) 986 Value of business acquired (Note 10) 427 Deferred income taxes (Note 17) 228 Due from related party (Note 11) 2,270 Separate account policy loans (Note 9) 36,383 Separate account assets 294,298

Total assets 419,558

Liabilities and shareholders’ equity Liabilities

Other liabilities (Note 12) 1,545 Note payable (Note 14) 3,000 Earn out payments due (Note 10) 427 Reserves for future policy benefits (Note 13) 560 Unearned revenue 2,537 Due to related parties 225 Separate account liabilities 330,681

Total liabilities 338,975 Shareholders’ equity

Ordinary shares: $1.00 par value – 696,247 issued and outstanding (Note 15) 692 Additional paid in capital (Note 15) 72,771 Accumulated other comprehensive income 864 Retained earnings 6,256

Total shareholders’ equity 80,583

Total liabilities and shareholders’ equity $ 419,558

COMMITMENTS AND CONTINGENCIES (Note 20) SUBSEQUENT EVENTS (Notes 14 and 23) Approved on behalf of the Board on May 15, 2015 Director “Walter Keenan” Director “Stuart Jessop”

ADVANTAGE LIFE & ANNUITY COMPANY SPC Consolidated Statement of Total Comprehensive Income Year ended December 31, 2014 (Stated in thousands of United States dollars, except per share amounts)


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2014 Revenues Policy charges and fee income $ 3,674 Change in reinsurance recoverable 159 Reinsurance ceded (872) Net investment income (Note 5) 2,637

Total revenues 5,598 Expenses

Amortization of deferred policy acquisition costs 365 Other underwriting expenses 477 General and administrative expenses (Note 19) 2,064

Total expenses 2,906 Income before income tax 2,692

Deferred income taxes (Note 17) (35)

Net income 2,657

Other comprehensive income, net of taxes Change in unrealized gain on investments – available-for-sale 483

Other comprehensive income for the year, net of tax 483 Total comprehensive income, net of tax $ 3,140

ADVANTAGE LIFE & ANNUITY COMPANY SPC Consolidated Statement of Cash Flows Year ended December 31, 2014 (Stated in thousands of United States dollars, except per share amounts)


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2014 Cash flows from operating activities Net income $ 2,657 Adjustments to reconcile net income to net cash used in operating activities: Amortization of deferred policy acquisition costs 365 Dividends reinvested (34) Bad debt expense 75 Net realized gain on investments – available-for-sale (43) Changes in operating assets and liabilities:

Accrued investment income (1,529) Reinsurance recoverable (159) Other assets (439) Deferred policy acquisition costs (74) Deferred income taxes (46) Due from related party (2,256) Separate account policy loans (18,079) Separate account assets (94,700) Other liabilities (278) Reserves for future policy benefits (2,598) Unearned revenue (471) Due to related parties 225 Separate account liabilities 112,779

Net cash used in operating activities (4,605) Cash flows from investing activities

Purchase of investments – available-for-sale (51,553) Purchase of investments – held-to-maturity (13,090) Proceeds from sale of investments – available-for-sale 25,868 Principal repayments on investments – available-for-sale 6,344 Principal repayments on investments – held-to-maturity 1,997 Equity income – investment - other (603) Return of capital investment – other 815

Net cash used in investing activities (30,222)

Cash flows from financing activities Issuance of ordinary shares 24,910 Payment to surrender ordinary shares (487) Payment of note payable (4,395) Dividends paid on ordinary shares (437)

Net cash provided from financing activities 19,591 Net decrease in cash and cash equivalents (15,236) Cash and cash equivalents, beginning of year 18,866

Cash and cash equivalents, end of year $ 3,630

Non-cash transactions during year Investments – available-for-sale received from the issuance of ordinary shares $ 2,090 Note payable due in exchange for investments - available-for-sale 7,395

$ 9,485

ADVANTAGE LIFE & ANNUITY COMPANY SPC Consolidated Statement of Changes in Equity Year ended December 31, 2014 (Stated in thousands of United States dollars, except per share amounts)


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Ordinary shares

Additional paid in capital

Total share capital

Retained earnings

Accumulated

other comprehensive

income

Total equity

Balance at December 31, 2013 $ 670 $ 46,280 $ 46,950 $ 4,036 $ 381 $ 51,367 Issuance of shares 27 26,973 27,000 - - 27,000

Surrender of shares (5) (482) (487) - - (487) Dividends - - - (437) - (437)

Net income and total comprehensive income - - - 2,657 483 3,140 Balance at December 31, 2014 $ 692 $ 72,771 $ 73,463 $ 6,256 $ 864 $ 80,583

ADVANTAGE LIFE & ANNUITY COMPANY SPC Notes to the Consolidated Financial Statements December 31, 2014 (Stated in thousands of United States dollars, except per share amounts)

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1. Description of business and nature of operations

Advantage Life & Annuity Company SPC and its subsidiaries (collectively “Advantage” or the “Company”) is a provider of speciality insurance to business owners and high net worth individuals seeking customized insurance solutions for their risk management and financial planning needs. Advantage Life & Annuity Company SPC is incorporated and registered as an exempted segregated portfolio company under the laws of the Cayman Islands. The registered office of the Company is located at Windward 3, 5th Floor, Regatta Office Park, West Bay Road, Grand Cayman, Cayman Islands. On September 9, 2014, the Company contributed $1.1 million to capitalize a new subsidiary, Advantage Life USA SC to issue variable universal life insurance and deferred variable annuities in the state of South Carolina. On October 16, 2014 the Company completed the share purchase of Southpac Life Insurance Limited and SG Holdings, LLC from Southpac Trust (BVI) Limited in the amount of $0.3 million. Under the terms of the Sale and Purchase Agreement the Company is required to pay annual instalments based upon certain performance requirements of the business acquired commencing in March 2015 and ending in December 2017. Refer to Note 10.

On December 1, 2014 the Company purchased Advantage Life Investment Fund SPC, for total consideration of $30,000 cash and Advantage Life Small Cap Fund SPC for total consideration of $1,000 cash. The Company holds a Class B (iii) licenses subject to the provisions of the Insurance Law of the Cayman Islands. In addition, its subsidiary Advantage Life Puerto Rico A.I. holds a Class 5 Authority pursuant to the provision of Chapter 61 of the Insurance Code of Puerto Rico and its recently acquired subsidiary, Advantage Life (Cook Islands) Ltd is licensed as an offshore insurance company pursuant to the Offshore Insurance Act of 2008.

2. Insurance contracts Advantage issues variable universal life insurance policies, deferred variable annuity policies, life reinsurance contracts, immediate variable annuity contracts and other types of life insurance policies. The Company purchases reinsurance coverage for most of the mortality risk associated with its life insurance underwriting activities.

3. Significant accounting policies These consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and the significant accounting policies adopted by the Company are as follows: (a) Basis of consolidation

The consolidated financial statements include the accounts of Advantage Life & Annuity Company SPC, and entities over which the Company exercises control, including majority-owned subsidiaries. All significant intercompany transactions are eliminated on consolidation. At December 31, 2014, the subsidiary companies are:


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3. Significant accounting policies (continued) (a) Basis of consolidation (continued)

Subsidiary Domicile

Advantage Group Holdings (Delaware) LLC (“AGHD”) Delaware, USA Advantage Group Holdings (Puerto Rico) Inc. (“AGHPR”) Commonwealth of Puerto Rico Advantage Life (Cook Islands) Ltd (“ALCI”) Cook Islands (formerly Southpac Life Insurance Limited) Advantage Life Small Cap LLC (“ALSC”) Delaware, USA Advantage Life Puerto Rico A.I. (“ALPR”) Commonwealth of Puerto Rico Advantage Life USA SC (“ALUSA”) South Carolina, USA SG Holdings, LLC (“SGHL”) Delaware, USA The Advantage Life Small Cap Fund SPC (“ALSCF”) Cayman Islands The Advantage Life Investment Fund SPC (“ALIF”) Cayman Islands

(b) Use of estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported and disclosed amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. The most significant estimates reflected in the Company’s consolidated financial statements include, but are not limited to, determining reinsurance recoverable, deferred policy acquisition costs and related amortization; valuation of investments including investments in limited liability companies and the recognition of other-than-temporary impairments; reserves for future policy benefits; provision for income taxes and valuation of deferred tax assets; and reserves for contingent liabilities, including reserves for losses in connection with any unresolved legal matters.

(c) Cash and cash equivalents Cash and cash equivalents represent highly liquid balances held in bank accounts and deposits with original maturities of three months or less.

(d) Investments The Company’s principal investments are collateralized loan obligations (“CLOs”); CLO loan accumulation facilities; investment funds; limited liability companies (“LLCs”); equity securities and fixed maturity securities. The accounting policies related to each are as follows: The Company classifies some of its investments in CLOs and fixed maturity securities as held-to-maturity as management has the intent and the Company has the ability to hold the investment until the final maturity or payment date. These investments are recorded at amortized cost on the consolidated balance sheet. Cash flows received from the CLOs are allocated to net investment income and/or principal repayment based on the effective interest rate established for the specific CLO investment at the time of purchase. The effective interest rate is based on expected cash flows, including interest rate and prepayment assumptions based on data from widely accepted third-party data.


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3. Significant accounting policies (continued)

(d) Investments (continued) In addition, to interest rate and prepayment assumptions, cash flow estimates also vary based on other assumptions regarding the underlying collateral, including default rates and recoveries after defaults. These assumptions can significantly impact income recognition and the amount of other-than-temporary impairments recognized in the consolidated statement of total comprehensive income. The Company tests each individual CLO investment for impairment on a quarterly basis by comparing the expected cash flows from the CLO at the time of purchase to actual payments received. The amortized cost of the CLO investment is adjusted through an impairment loss recognized as an expense if the present value of the total expected cash flow differs materially from its amortized cost. Investments in limited liability companies are accounted for using the equity method. The initial investments are recorded at cost (including transaction costs). After initial measurement, the investments are adjusted subsequently to recognize the Company’s share of the earnings, losses and/or changes in capital of the LLC after the date of acquisition.

The Company classifies its investments in investment funds as available-for-sale. The Company uses the net asset value per share as the practical expedient to measure fair value for all of the investment funds. In general, the investment funds in which the Company is invested offer liquidity at net asset value subject to a notice period. Notice periods vary from daily to quarterly, depending on the investment fund.

The Company classifies its investments in CLO loan accumulation facilities, equity securities and some fixed maturity securities as available-for-sale. These are recorded in the consolidated balance sheet at their fair value, with any unrealized gains or losses, calculated by reference to cost or amortized cost as appropriate, included as a component of accumulated other comprehensive income in the consolidated balance sheet. Where there is a decline in the fair value of an investment below cost or amortized cost, and the Company does not have the intent and ability to hold the investment for a period of time sufficient to allow the anticipated recovery in fair value, the cost or amortized cost is adjusted.

Realized gains and losses on disposal are calculated on the average cost method and are included in the consolidated statement of total comprehensive income.

Other-than-temporary impairments

The Company’s available-for-sale securities with unrealized losses are reviewed quarterly to identify other-than-temporary impairments in value. In evaluating whether a decline in value is other-than-temporary, the Company considers several factors including, but not limited to the following: (1) the extent and the duration of the decline; (2) the reasons for the decline in value (credit event, currency or interest-rate related, including general credit spread widening); and (3) the financial condition of and near-term prospects of the issuer. With regard to available-for-sale equity securities, the Company also considers the ability and intent to hold the investments for a period of time to allow for a recovery of value.


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(d) Investments (continued) Equity securities When it is determined that a decline in value of an equity security is other-than-temporary, the carrying value of the equity security is reduced to its fair value, with a corresponding charge to earnings. Debt securities Where there is a decline in the fair market value of fixed income securities below cost or amortized cost, and it is more-likely-than-not that the Company will sell the fixed income securities prior to recovery or be unable to collect all amounts due according to the contractual terms of the fixed income securities, the cost or amortized cost, as appropriate, is adjusted. Any adjustments to cost or amortized cost as a result of credit losses are recorded in the consolidated statement of total comprehensive income. Remaining adjustments, not associated with credit losses, are recorded in the consolidated statement of total comprehensive income.

(e) Fair value measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In most cases, the exit price and the transaction (or entry) price will be the same at initial recognition. Subsequent to initial recognition, fair values are based on unadjusted quoted prices for identical assets or liabilities in active markets that are readily and regularly obtainable. When such quoted prices are not available, fair values are based on quoted prices in markets that are not active, quoted prices for similar but not identical assets or liabilities, or other observable inputs. If these inputs are not available, or observable inputs are not determinable, unobservable inputs and/or adjustments to observable inputs requiring management judgment are used to determine the estimated fair value of assets and liabilities. The use of fair value to measure certain assets and liabilities with resulting unrealized gains or losses is pervasive within the Company’s financial statements. Fair value is defined under accounting guidance currently applicable to the Company to be the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between open market participants at the measurement date. FASB ASC 820 Topic Fair Value Measurements and Disclosures prescribe a fair value hierarchy that prioritizes the inputs to the respective valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to valuation techniques that use at least one significant input that is unobservable (Level 3). The three levels of the fair value hierarchy are described below:


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(e) Fair value measurements (continued) Level 1: Valuation is based upon quoted prices for identical instruments traded in active markets. Level 2: Valuation is based upon quoted prices for similar instruments in active markets, quoted

prices for identical or similar instruments in markets that are not active, and model based valuation techniques for which all significant assumptions are observable in the market.

Level 3: Valuation is generated from model-based techniques that use significant assumptions not

observable in the market. These unobservable assumptions reflect the Company’s own assumptions about the assumptions market participants would use in pricing the assets or liabilities. Level 3 investments may also be adjusted to reflect illiquidity and/or non-transferability with the amount of such discount estimated by the Company in the absence of market information. Assumptions used by the Company due to the lack of observable input may significantly impact the resulting fair value and therefore the Company’s results of operations.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement of the asset or liability. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and the Company considers factors specific to the asset or liability. In order to determine if a market is active or inactive for a security, the Company considers a number of factors, including, but not limited to, the spread between what a seller is asking for a security and what a buyer is bidding for the same security, the volume of trading activity for the security in question, the price of the security compared to its par value (for fixed maturity investments), and other factors that may be indicative of market activity.

(f) Variable interest entities The Company accounts for variable interest entities (“VIEs”) in accordance with FASB ASC 810 Consolidation, which requires the consolidation of all VIEs by the primary beneficiary, that being the investor that has the power to direct the activities of the VIE and will absorb a majority of the VIE’s expected losses or residual returns. The Company determines whether it is the primary beneficiary of a VIE by performing an analysis that principally considers: (i) the VIE’s purpose and design, including the risks the VIE was designed to create and pass through to its variable interest holders; (ii) the VIE’s capital structure; (iii) the terms between the VIE and its variable interest holders and other parties involved with the VIE; (iv) which variable interest holders have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; (v) which variable interest holders have the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE; and (vi) related party relationships. The Company reassesses its initial determination of whether the Company is the primary beneficiary of a VIE upon changes in facts and circumstances that could potentially alter the Company’s assessment.


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(g) Value of business acquired

As a result of an acquisition and the application of ASC 805, Business Combinations that requires the application of purchase accounting, the Company reports a financial asset representing the value of business acquired (“VOBA”). VOBA includes an explicit adjustment to reflect the cost of capital attributable to the acquired insurance contracts. VOBA represents an adjustment to the stated value of inforce insurance contract liabilities to present them at fair value, deemed as of the acquisition date. VOBA balances are subject to recoverability testing, in the manner in which it was acquired. The Company has established a VOBA asset primarily for its acquired universal life insurance and deferred variable annuity contracts. At December 31, 2014 the VOBA balance relates to the 2014 acquisition of Advantage Life (Cook Islands) Ltd. VOBA is amortized in proportion to gross profits arising principally from investment margins, mortality and expense margins, and surrender charges, based on historical and anticipated future experience, which is updated periodically.

(h) Other assets and other liabilities Other assets consist of accounts receivable and prepayments. Other liabilities consist of accounts payable and accruals and consulting fees payable.

(i) Deferred policy acquisition costs Costs that vary with and that are directly related to the successful acquisition of new and renewal insurance and annuity business are deferred to the extent such costs are deemed recoverable from future premiums or gross profits. Such deferred policy acquisition costs primarily includes introductory fees, costs of policy issuance and underwriting, and certain other expenses that are directly related to successfully negotiated contracts. The Company engages an independent actuary to assist with the calculation of the amortization of the deferred policy acquisition costs. For group annuity contracts (other than single premium group annuities), acquisition costs are generally deferred and amortized over the expected life of the contracts in proportion to gross profits.

(j) Reinsurance recoverable Reinsurance recoverable is recognized in a manner consistent with the liabilities relating to the underlying reinsured contracts, using the same assumptions. The gross cost of reinsurance is the present value of the reinsurance cash flows. The expected cash flows are projected using the same assumptions to calculate the estimated gross profits for deferred policy acquisition costs and unearned revenue. The amortization method used is a prospective method whereby the amount amortized in a given year is based on the expected gross profits for that year. All differences between actual and expected reinsurance cash flows are recognized in the consolidated statement of total comprehensive income.


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(k) Reserves for future policy benefits The Company issues life insurance and annuity policies. The reserve established for future policy benefits is equal to the sum of (i) the balance that accrues to the benefit of policyholders at the date of the financial statements; (ii) amounts that have been assessed to compensate for services to be performed over future periods; (iii) amounts previously assessed against policyholders that are refundable on termination and (iv) any probable loss (premium deficiency). Reserves for future policy benefits represents management’s best estimate of the amount that would be paid to policyholders in the event of death. The value at risk is the difference between the face value of the policy, as stipulated in the policy agreement, and the fair value of the underlying assets accumulated up to the date of death. The reserves for future policy benefits are estimated by applying an appropriate probability of death factor to the value at risk for each policyholder. The estimate is continuously reviewed, and as adjustments to the liability become necessary, they are reflected in the consolidated statement of total comprehensive income in the period in which they are determined. Premium deficiency reserves are established, if necessary, when the liability for future policy benefits plus the present value of expected future gross premiums are determined to be insufficient for expected future policy benefits and expenses. Premium deficiency reserves do not include a provision for the risk of adverse deviation.

The Company records its estimated reserves for future policy benefits gross of any amounts recoverable under the reinsurance agreement described in Note 13, which amounts, are recorded separately in the consolidated balance sheet. In the event that the Company’s reinsurers are unable to meet obligations under the reinsurance agreement, the Company would be liable to pay all related claims but would only receive reimbursement to the extent that the reinsurers can meet their obligations. The Company does not reserve for life insurance and/or reinsurance contracts backed by promissory notes. Life insurance policies backed by promissory notes may be subject to challenge by tax authorities and other regulatory bodies of the domicile(s) of the insured parties and/or policy beneficiaries. Management considers any risk to the Company from tax or regulatory challenges to the policyholder or beneficiary arising from the life insurance policies backed by promissory notes to be remote, and no reserve is carried for the non-collectability of the promissory notes or liability arising from any potential tax or regulatory challenges to the life insurance policies.

(l) Separate account policy loans Separate account policy loans are loans the Company issues to policyholders that use the cash surrender value of their life insurance policy or annuity contract as collateral. Separate account policy loans are stated at their unpaid principal amount outstanding plus accrued interest for certain loans. For certain separate account policy loans, interest is charged on the outstanding loans at a rate per annum the Company may offer. There are no fixed terms of repayment, however, a policy’s death benefit will be reduced for any outstanding loans and accrued interest payable as at the claim date. Policy loans are fully collateralized by the cash surrender value of the associated insurance policies.


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(m) Separate account assets and liabilities Separate account assets are reported at fair value where it is practicable to estimate that value and represent segregated funds that are invested for certain policyholders. Separate account assets comprise cash equivalents, market quoted securities, private equity securities and unlisted funds. The Company has the option to pay these assets out in kind equal to the payment then due. The assets of each account are legally segregated and are not subject to claims that arise out of any other business of the Company. Investment risks associated with market value changes are borne by the policyholders. Separate account liabilities represent the policyholder’s account balance in separate account assets and to a lesser extent borrowings of the separate account, and will be equal and offsetting to total separate account assets. The Company reports separately, as assets and liabilities, investments held in separate accounts and liabilities of the separate accounts if:

Such separate accounts are legally recognized; Assets supporting the contract liabilities are legally insulated from the Company’s general account

liabilities; Investments are directed by the contract holder; and All investment performance, net of contract fees and assessments, is passed through to the

contract holder. The investment income and realized investment gains or losses from separate account assets accrue to the policyholders and are not included in the Company’s results of operations. Mortality risk charges, policy administration fees, surrender charges, asset administration fees and other income are included in policy charges and fee income in the consolidated statement of total comprehensive income.

(n) Insurance revenue and expense recognition The amounts collected from policyholders for universal life insurance contracts are considered deposits and are not included in revenue. Policy charges and fee income consist of cost of insurance charges, administrative fees and surrender charges that have been earned and assessed against the policyholder account balances during the period. The timing of revenue recognition as it relates to fees assessed is determined based on the nature of such fees. Cost of insurance charges and administrative fees are assessed on a quarterly basis and recognized as revenue a quarter in arrears. Surrender charges are recognized upon surrender or partial surrender of a policy in accordance with contractual terms. Amounts charged for origination of the contract are recognized as unearned revenues and amortized over the expected life of the contracts in proportion to gross profits. Policy administration fees on insurance policies are deferred and amortized over the expected life of an individual based on mortality rate assumptions. Fees charged for the origination of immediate variable annuity contracts are recognized over the life of the individual based on the life expectancy of the annuitant at the time of the contract inception. Claim and claim adjustment expenses are recognized when incurred.


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(o) Reinsurance ceded In the normal course of business, the Company seeks to limit its exposure to loss on any single insured life and to recover a portion of benefits paid by ceding reinsurance to other third party insurance entities or reinsurers under facultative reinsurance agreements. Reinsurance ceded are recorded and expensed in the period in which the purchased reinsurance coverage is in effect.

(p) Net investment income

Net investment income is comprised of interest and dividend income, realized gains and losses on sales of investments, earnings from investment in limited liability companies, impairment losses and changes in valuation allowances net of investment management fees. Interest income is recognized as it accrues and is calculated using the effective interest rate method. Fees and commissions that are an integral part of the effective yield of the financial asset or liability are recognized as an adjustment to the effective interest rate of the instrument.

Dividend income is recognized when the right to receive payment is established. This is the ex-dividend date for listed stocks and the notification date for private equity instruments.

(q) Foreign currency translation Transactions involving currencies other than United States dollars are translated at exchange rates prevailing at the time of the transaction. All assets and liabilities denominated in currencies other than the United States dollar are translated at the rates prevailing as of the balance sheet date. Exchange gains and losses are included in the consolidated statement of total comprehensive income.

(r) Taxation The Company has adopted the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established for deferred tax assets where it is more likely than not that future tax benefits will not be realized. Interest or penalties related to income taxes are included in general and administrative expenses. Deferred income taxes are provided on temporary differences between income for financial reporting and tax return purposes and arise principally from the discounting of loss reserves for tax purposes and the recognition of refundable excess insurance.


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(r) Taxation (continued) The Company and its subsidiaries domiciled in the Cayman Islands are not obligated to pay any taxes in the Cayman Islands on either income or capital gains. The Company’s Puerto Rico and Cook Islands life insurance subsidiaries have filed 953(d) elections which allow them as foreign insurance companies to be treated as United States life insurance companies for most tax purposes. Management does not believe there are any tax positions taken by the Company that are subject to uncertainty and as a result, no provisions have been made in these consolidated financial statements.

(s) Comparative information Comparative information has not been disclosed as management has determined that, as a result of the Company’s conversion from International Financial Reporting Standards to U.S. Generally Accepted Accounting Standards and the required adjustments, comparative information is not comparable to current year presentation.

(t) Recently adopted accounting pronouncements

In December 2011, the FASB issued Accounting Standard Update (“ASU”) No. 2011-11, Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). The objective of ASU 2011-11 is to enhance disclosures by requiring improved information about financial instruments and derivative instruments in relation to netting arrangements. ASU 2011-11 became effective for interim and annual periods beginning on or after January 1, 2013, with retrospective presentation of the new disclosure required. The adoption of this guidance did not have a material impact on the Company’s consolidated statement of total comprehensive income and consolidated balance sheet. In January 2013, the FASB issued ASU No. 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (“ASU 2013-01”). The guidance clarified that the disclosures in ASU 2011-11 would apply only to derivatives, repurchase and reverse repurchase agreements, and securities borrowing and securities lending transactions, each to the extent that they met specific conditions provided in the initial accounting standard. ASU 2013-01 became effective for interim and annual periods beginning on or after January 1, 2013, with retrospective presentation of the new disclosure required. As this guidance is disclosure-related only, the adoption of this guidance did not have a material impact on the Company’s consolidated statement of total comprehensive income and consolidated balance sheet. In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”). The objective of ASU 2013-02 is to improve the reporting of classifications out of accumulated other comprehensive income by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional details about those amounts. ASU 2013-02 became effective for interim and annual reporting periods beginning after December 15, 2012.


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(t) Recently adopted accounting pronouncements (continued) The Company prospectively adopted ASU 2013-02 effective January 1, 2013; since this update is disclosure-related only, the adoption of this guidance did not have a material impact on the Company’s consolidated statement of total comprehensive income and consolidated balance sheet. In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). The objective of ASU 2013-11 is to improve the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 seeks to reduce the diversity in practice by providing guidance on the presentation of unrecognized tax benefits to better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. ASU 2013-11 became effective for annual and interim reporting periods beginning after December 15, 2013. The adoption of this guidance did not have a material impact on the Company’s consolidated statement of total comprehensive income and consolidated balance sheet.

(u) Recently issued accounting pronouncements not yet adopted In January 2014, the FASB issued new guidance regarding investments (ASU 2014-01, Investments — Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects), effective retrospectively for fiscal years beginning after December 15, 2014 and interim reporting periods within those years. The new guidance is applicable to investments in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. Under the guidance, an entity that meets certain conditions is permitted to make an accounting policy election to amortize the initial cost of its investment in proportion to the tax credits and other tax benefits received and recognize the net investment performance on the statement of operations as a component of income tax expense (benefit). The Company does not expect the adoption of this new guidance to have a material impact on its consolidated financial statements. In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). The objective of ASU is to improve the reporting of discontinued operations by changing the criteria of what constitutes a discontinued operation. For a disposal of a component of an entity or a group of components of an entity to be reported as a discontinued operation the disposal must represent a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. ASU 2014-08 becomes effective for all entities with annual periods beginning on or after December 15, 2014. Early adoption is permitted, but only for disposals or classifications as held for sale, that have not been reported in financial statements previously issued or available for issuance. In February 2015, the FASB issued new guidance to improve consolidation guidance for legal entities (Accounting Standards Update (“ASU”) 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis), effective for fiscal years beginning after December 15, 2015 and interim periods within those years and early adoption is permitted. The new standard is intended to improve targeted areas of the consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures.


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(u) Recently issued accounting pronouncements not yet adopted (continued) The amendments in the ASU affect the consolidation evaluation for reporting organizations. In addition, the amendments in this ASU simplify and improve current GAAP by reducing the number of consolidation models. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

4. Cash and cash equivalents

2014

Cash $ 2,792 Short-term money market instruments 838

$ 3,630

5. Investments Refer to Note 16 for information about the fair value hierarchy for investments and the related valuation

methodologies. Available-for-sale

At December 31, 2014, the cost/amortized cost, gross unrealized gains and losses and estimated fair values of investments are as follows:

Amortized Unrealized Unrealized Fair 2014 cost or cost gains losses value CLO loan accumulation facilities $ 52,316 $ 901 $ - $ 53,217 Corporate debt 55 8 - 63 Equity securities 40 - (5) 35 Investment funds 875 5 (47) 833 $ 53,286 $ 914 $ (52) $ 54,148 The Company uses the net asset value per share as the practical expedient to measure fair value for all of the investment funds. In general, the investment funds in which the Company is invested have redemption notice periods that vary from weekly to quarterly, depending on the investment fund.


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5. Investments (continued) Available-for-sale (continued) For those available-for-sale securities with unrealized losses the following table summarizes the duration of the unrealized losses:

Less than 12 months 12 months or longer Total Unrealized Fair Unrealized Fair Unrealized Fair 2014 loss value loss value loss value Equity securities (5) 35 - - (5) 35 Investment funds (47) 712 - - (47) 712 $ (52) $ 747 $ - $ - $ (52) $ 747 At December 31, 2014, management considered the ability and intend to hold the investments for a period of time to allow for a recovery of value, as well as the nature and number of investments in an unrealized loss position, in addition to the cause and severity of their unrealized loss and believes that the impairments are temporary in nature. Accordingly, no impairment charges relating to the investment balances have been recognized in the consolidated statement of total comprehensive income. For investments classified as available-for-sale, changes in net unrealized gains for the period are included in accumulated other comprehensive income. The maturity of available-for-sale investments held at December 31, 2014 is as follows:

Fair 2014 value

After ten years $ 63

Held-to-maturity

The amortized cost and fair values of collateralized loan obligations which are classified as held-to-maturity are as follows: Fair Unrecognized Amortized 2014 value losses cost

Collateralized loan obligations $ 19,527 $ (188) $ 19,715

No CLOs were sold during the year. As at December 31, 2014, management has the intent and the Company has the ability to hold all the CLOs to maturity.


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5. Investments (continued) The maturity distribution of CLOs held is as follows: Fair Amortised 2014 value cost

From five to ten years $ 19,527 $ 19,715 Actual maturities may differ from stated maturities because the issuers of certain debt securities may have the right to call or prepay their obligations. Investment - other The Company has an equity interest in a limited liability company holding a CLO investment that management has recorded using the equity method. This investment is recorded at cost of $3.4 million, adjusted for after-tax earnings allocated of $0.6 million and distributions received of $0.8 million. Net investment income Net investment income is comprised of the following:

2014

After-tax income

from LLCInterest income

Interest expense

Dividend income

Investment

management fees

Realized gains

Net investment

income Equity investments $ - $ - $ - $ - $ - $ 15 $ 15Investment funds - 21 - 368 - 28 417CLO loan accumulation facilities - - - - (140) - (140)Collateralized loan obligations - 2,333 - - (324) - 2,009 Investment – other 603 - - - - - 603Note payable - - (267) - - - (267)Total $ 603 $ 2,354 $ (267) $ 368 $ (464) $ 43 $ 2,637

6. Variable interest entities

The Company has determined that it is not the primary beneficiary of certain VIEs for which it holds an equity ownership interest, including LLCs as it does not have both (i) the power to direct the activities of the VIE that most significantly impact the economic performance of the entity and (ii) the obligation to absorb losses of the entity that could be potentially significant to the VIE or the right to receive benefits from the entity that could be potentially significant. The Company’s maximum exposure to loss resulting from its investment in unconsolidated VIEs for which it has an equity ownership in is limited to its investment in one VIE which was $3.4 million at December 31, 2014. This investment is reflected in Investment – other.


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7. Other assets

2014

Accounts receivable 1,296 Prepayments 79

$ 1,375

8. Deferred policy acquisition costs

2014

Balance, beginning of year $ 1,277 Capitalization of policy acquisition costs 74 Amortization (365)

Balance, end of year $ 986

9. Separate account policy loans

Policy loans are funds provided to life insurance policyholders in return for a claim on the account value of the policy, including any future death benefit payable. Policy loan amounts are limited to a certain percentage of the cash surrender value of the policy. Policy loans have low default risk as the loans are fully collateralized by the value of the policy, including future death benefits payable. The majority of policy loans do not have a stated maturity and the balances and accrued interest are repaid with proceeds from the policy account balance. The Company believes the fair value of policy loans approximates carrying value.

10. Value of business acquired

2014

Balance, beginning of year $ - Acquisitions 427 Amortization -

Balance, end of year $ 427

Under the terms of the Sale and Purchase Agreement for Southpac Life Insurance Limited and SG Holdings, LLC, the Company is required to pay annual instalments based upon certain performance requirements of the business acquired commencing in March 2015 and ending in December 2017. These future payments are estimated to be $0.4 million. The assets and liabilities assumed have been included in the Company’s consolidated financial statements as of the acquisition date. After adjustments, total assets assumed were $28.6 million, which includes $0.4 million of value of business acquired, $0.4 million of cash, and total liabilities assumed were $28.3 million. There is no goodwill, including tax deductible goodwill, associated with the acquisition.


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11. Due from related party

During the year the Company provided $2.3 million to a related party for the capital requirement and both the freehold and leasehold capacity to participate in the 2015 Lloyd’s Year of Account. On November 25, 2014, the related party obtained approval to become a corporate member at Lloyd’s with effect from January 1, 2015. As a corporate member of Lloyd's, the related party will participate in syndicates insuring globally and product diversified risks including but not limited to property, casualty, marine, motor, aviation, consumer products and energy risks.

12. Other liabilities

2014

Accounts payable and accruals $ 1,464 Consulting fees payable 81

$ 1,545

13. Reinsurance and reserves for future policy benefits

Reinsurance

In the normal course of business, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid under annuity and life insurance contracts by ceding reinsurance to other insurance enterprises or reinsurers. Non-traditional risk transfer arrangements are utilized such as promissory notes for some life insurance policies carrying high death benefit amounts. Reinsurance contracts and other risk transfer arrangements do not relieve the Company of its obligations to policyholders. To the extent that reinsurers are later unable to meet obligations or the non-traditional risk transfer arrangements fail to perform the Company would be liable for these obligations, and payment of these obligations would result in losses. To limit the possibility of such losses, management evaluates the financial condition of its reinsurers and monitors concentrations of credit risk. Non-traditional risk transfer arrangements are also monitored for any changes in tax, regulation or other circumstance that could impair future performance and collectability of amounts due upon the death of the associated insured person.

No allowance for uncollectible amounts has been established against amounts receivable from other insurance companies, promissory notes or other alternative risk transfer arrangements as none of the receivables are deemed by management to be uncollectible. At December 31, 2014 the gross amount of mortality risk held by the Company was $880.0 million. Of this amount, $311.9 million was reinsured using traditional reinsurance treaties and $451.2million was transferred to third parties by non-traditional arrangements.

Reinsurance recoverable

On the basis of the accounting policy in Note 3(j), the Company has estimated $0.9 million as the amount included in the reserves for future policy benefits at December 31, 2014 that would be recoverable from the Company’s reinsurers should the provision for outstanding losses become payable. Reinsurance ceded arrangements do not relieve the Company from its obligations to policyholders.


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13. Reinsurance and reserves for future policy benefits (continued) Reinsurance recoverable (continued) Should the Company’s reinsurers be unable to reimburse the Company for recoverable losses then the Company would still be liable to pay the losses but would only receive reimbursement to the extent possible from the reinsurers. The Company assesses periodically the recoverability of reinsurance recoverable. At December 31, 2014 no allowance has been provided for the reinsurance recoverable balance.

Reserves for future policy benefits On the basis of the accounting policy described in Note 3(k), the Company has determined there is no additional liability required due to premium deficiencies, as a result the reserves for future policy benefits is set equal to the policy holder separate account balance plus the unearned revenue liability. Based on this, the Company believes that the established reserves for future policy benefits will be adequate to cover the ultimate net cost of death benefits and expenses incurred. However, consistent with most companies with similar insurance operations, the Company’s estimates, although supported by actuarial projections and other data, is ultimately based on management’s reasonable expectations of future events. It is reasonably possible that the expectations associated with these amounts could change in the near term (i.e., within one year) and that the effect of such changes could be material to the consolidated financial statements. The Company utilizes an independent actuary to assess the adequacy of its reserves for future policy benefits. The components of reserves for future policy benefits are shown below:

2014

Reserves for life insurance Balance, beginning of year $ 2,572 Paid (2,572) Total reserves for life insurance - Fixed annuity obligations Balance, beginning of year 586 Interest expense 12 Payments (38) Total fixed annuity obligations 560

Total reserves for future policy benefits $ 560

The fixed annuity obligations are comprised of the present value of the Company's obligations to make future annuity payments to annuitants at the rates called for in the annuity contracts. The obligation is valued at amortized cost.


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14. Note payable

On September 13, 2014 the Company entered into an extendable note payable with BlackRock Kelso Capital Corporation in the amount of $7.4 million for general corporate purposes. The Company further utilized the note payable to support collateralized loan investments. Interest expense on the note payable was accounted for within net investment income. The note payable matures on September 30, 2015 but may be extended by the Company to September 30, 2016 and bears interest at 12% per annum until September 30, 2015. If the Company elects to extend its maturity, the interest rate will increase to 14% per annum beginning on October 1, 2015. Interest payments are due quarterly, in arrears. On December 30, 2014 the Company made a $4.4 million principal payment towards the $7.4 million outstanding balance of the note payable held by BlackRock Kelso Capital Corporation. Subsequent to December 31, 2014 on April 17, 2015 the Company paid the outstanding note payable in full.

15. Share capital Authorized Share Capital

1,000,000 Ordinary shares of $1.00 par value each 9,000,000 Preference shares of $1.00 par value each

Ordinary Par Additional paid Shares value in capital Total Balance at December 31, 2013 669,734 $ 670 $ 46,280 $ 46,950 Issuance of shares 27,000 27 26,973 27,000 Surrender of shares (487) (5) (482) (487) Balance at December 31, 2014 696,247 $ 692 $ 72,771 $ 73,463

16. Fair value measurement

The Company accounts for certain of its assets and liabilities at fair value in accordance with FASB ASC 820 Topic Fair Value Measurements and Disclosures. Refer to Note 3(e) for accounting policies of fair value measurements.

Below is a summary of the assets and liabilities that are measured at fair value on a recurring basis and represents the carrying amount on the Company’s consolidated balance sheet:


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16. Fair value measurement (continued)

2014

Level 1

Level 2

Level 3 Total fair

value Cash and cash equivalents $ 3,630 $ - $ - $ 3,630 Investments – available-for-sale CLO loan accumulation facilities - - 53,217 53,217 Corporate debt - 63 - 63 Equity securities 35 - - 35 Investment funds 367 466 - 833 Subtotal excluding separate account assets 4,032 529 53,217 57,778 Separate account policy loans - - 36,383 36,383 Separate account assets 20,144 39,286 234,868 294,298 $ 24,176 $ 39,815 $ 324,468 $ 388,459

Level 1 and Level 2 assets measured at value fair value Fixed maturity securities traded in active markets Whenever available, the Company obtains prices in active markets for identical assets at the balance sheet date to measure fixed maturity securities at fair value. The fair value and market price data is generally obtained from exchange markets reflecting the closing price quoted for the final trading day of the period. When pricing these securities, the pricing sources utilize daily data from many real time market sources, including applicable securities exchanges. All data sources are regularly reviewed for accuracy to attempt to ensure the most reliable price source was used for each security. The valuation of these securities does not involve management’s judgment. Equity securities – common stock traded in active markets

Whenever available, the Company obtains prices in active markets for identical assets at the balance sheet date to measure equity securities – common stock at fair value. The fair value and market price data is generally obtained from exchange markets reflecting the closing price quoted for the final trading day of the period. When pricing these securities, the pricing sources utilize daily data from many real time market sources, including applicable securities exchanges. All data sources are regularly reviewed for accuracy to attempt to ensure the most reliable price source was used for each security. The valuation of these securities does not involve management’s judgment.

Equity securities – investment funds traded in active markets Whenever available, the Company obtains prices in active markets for identical assets at the balance sheet date to measure equity securities – investment funds at fair value. For those equity securities – investment funds that are Level 1, the fair value and market price data is generally obtained from exchange markets reflecting the closing price quoted for the final trading day of the period. When pricing these securities, the pricing sources utilize daily data from many real time market sources, including applicable securities exchanges. All data sources are regularly reviewed for accuracy to attempt to ensure the most reliable price source was used for each security. The valuation of these securities does not involve management’s judgment.


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16. Fair value measurement (continued) Level 1 and Level 2 assets measured at value fair value (continued) Equity securities – investment funds not traded in active markets Level 2 – The Company initially estimates the fair value of investment funds by reference to the transaction price. Subsequently, the Company’s investments in these funds are valued using estimated monthly net asset valuations received from the investment manager and or prepared internally. The Company obtains and reviews the valuation methodology used by the investment manager and the latest annual audited financial statements to attempt to ensure that the equity securities – investment funds are following fair value principles consistent with GAAP in determining the net asset value. In general the investment funds in which the Company is invested are redeemable at net asset value upon notice periods ranging from one day to three months. Level 3 assets measured at value fair value CLO loan accumulation facilities

Loan accumulation facilities are typically medium term in nature and are entered into in contemplation of a specific CLO investment. Unless the loan accumulation facility documents contemplate transferring the underlying loans at a price other than original cost plus accrued interest or the adviser determines the originally contemplated CLO is unlikely to be consummated, the fair value of the loan accumulation facility is based on the cost of the underlying loans plus accrued interest and realized gains reported by the trustee. In all other situations, the fair value of the CLO loan accumulation facility is based on the market value of the underlying loans plus accrued interest. Separate account policy loans The fair value of policy loans is reflected as being equal to the carrying value of the loans. Policy loans are collateralized by the cash surrender value and future death benefit payable of the associated insurance contracts. Separate account assets The Company has determined the fair value of certain assets, within separate account assets, classified as Level 3. Changes in the fair value of separate account assets are borne by the policyholders and thus are offset by changes in separate account liabilities on the Company’s consolidated balance sheet. As a result, changes in value associated with these investments do no impact the Company’s consolidated balance sheet. In addition, fees earned by the Company related to management of most separate account assets classified as Level 3 change due to changes in the fair value of these investments.


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16. Fair value measurement (continued)

Financial assets disclosed, but not carried at fair value The following disclosures are made due to the requirement to disclose the fair value information about financial instruments, whether or not recognized at fair value on the consolidated balance sheet, for which it is practicable to estimate that value. In some cases, as described below the carrying amount equals or approximates fair value. The derived fair value estimates, in many cases, may not be realized in immediate settlement of the instrument.

2014

Level 1

Level 2

Level 3

Total

fair value

Total carrying

value

Investments – held-to-maturity $ - $ - $ 19,527 $ 19,527 $ 19,715Investment - other - - 3,438 3,438 3,438

$ - $ - $ 22,965 $ 22,965 $ 23,153 Collateralized loan obligations – held to maturity. The Company’s investments in collateralized loan obligations totaling $19.7 million are classified as assets held-to-maturity and are not recorded at their fair value. The table below presents a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2014.

2014

CLO loan

accumulation facilities

Investments

– held-to-maturity

Investment – other

Separate account

policy loans

Separate account

assets

Total Beginning of year $ - $ 8,617 $ 3,650 $ 18,304 $ 158,979 $ 189,550 Realized losses (191) - - - - (191) Unrealized gains 901 - - - - 901

Equity income - - 603 - - 603 Return of capital - - (815) - - (815)Purchases 58,851 13,090 - 14,595 65,350 151,886 Sales - - - - (1,285) (1,285)Issuances - - - 3,481 - 3,481 Principal payment (6,344) (1,997) - (5) - (8,346)Interest - - - 8 - 8 Fair market adjustment - (183) - - 11,824 11,641

End of year $ 53,217 $ 19,527 $ 3,438 $ 36,383 $ 234,868 $ 347,433


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17. Taxation

The Company and its subsidiaries domiciled in the Cayman Islands are not obligated to pay any taxes in the Cayman Islands on either income or capital gains. The Company’s Puerto Rico and Cook Islands life insurance subsidiaries have filed 953(d) elections which allow them as foreign insurance companies to be treated as United States life insurance companies for most tax purposes. Deferred income taxes are based upon temporary differences between the financial statement and tax bases of assets and liabilities. The tax effects of the temporary differences that give rise to the significant portions of the deferred taxes are as follows:

2014

Deferred income tax assets Tax losses $ 228

Net deferred tax asset, net $ 228

Based on earnings to date and future earnings projections, management believes it is more likely than not that the gross deferred tax asset will be fully recognized. Therefore, no valuation allowance has been recognized. Tax rules and regulations

The Company has historically filed, and continues to file, all required income tax returns and to pay the taxes reasonably determined to be due. From time to time the Company is subject to a review of its income tax filings and in connection with such reviews, disputes can arise with the taxing authorities over the interpretation or application of certain rules to the Company’s business conducted within the country involved.


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18. Segmented reporting

The Company is organized into one segment which is specializing in private placement life insurance. The Company operates in the following geographical regions; the Cayman Islands, Commonwealth of Puerto Rico, Cook Islands and the United States. The result of its revenue from external customers for the year ended December 31, 2014 is as follows:

Cayman

Islands Cook

Islands Commonwealth

of Puerto Rico United

States Total

Revenue Policy charges and fee income $ 2,665 $ 129 $ 880 $ - $ 3,674 Change in reinsurance recoverable 59 72 28 - 159 Reinsurance ceded (468) (44) (360) - (872) Net investment income 2,398 18 221 - 2,637 Total revenues $ 4,654 $ 175 $ 769 $ - $ 5,598

Revenue is allocated based on the location from which the insurance contracts are issued or services are rendered.

Management considers its external customers to be the individual life insurance policyholders and managed insurance entities; as such the Company is not reliant on any individual life insurance policyholder.

The assets and liabilities by geographical region for the year ended December 31, 2014 is as follows:

Cayman

Islands Cook

Islands Commonwealth

of Puerto Rico United

States Total

Total assets $ 181,755 $ 24,787 $ 211,922 $ 1,094 $ 419,558 Total liabilities 104,360 24,375 210,172 68 338,975 $ 77,395 $ 412 $ 1,750 $ 1,026 $ 80,583

19. General and administrative expenses

2014

Management fees $ 1,177 Professional fees 567 Government fees 80 Other 80 Bad debt expense 75 Insurance 55 Travel and entertainment 30

$ 2,064


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20. Commitments and contingencies Commitments

(i) On July 1, 2013 the Company entered into an Investment Management Agreement with GSO Capital Partners International LLP for its general account investments. The term of the Investment Management Agreement is for a minimum of three years from inception and includes extension and cancellation provisions, based upon certain liquidity events and amounts of investments managed. The fee payable is calculated as a percentage of the value of investments managed.

Contingencies (i) At December 31, 2014, the Company had $443.7 million of life insurance in force backed by promissory

notes receivable. The promissory notes are matched to the death benefit payable and are required to be paid in-kind by transferring the promissory note to the estate of the policyholder in settlement of the Company’s policy obligations. As the promissory notes are contractually linked the policy death benefits and are expected to be paid in kind with no cash liability to the Company, no asset or liability has been recognized on the consolidated balance sheet. The life insurance policies backed by promissory notes are subject to challenge by tax authorities and other regulatory bodies of the domicile(s) of the insured parties and/or policy beneficiaries. Management considers any risk to the Company from tax or regulatory challenges to the policyholder or beneficiary arising from the life insurance policies backed by promissory notes to be remote, and no reserve is carried for the non-collectability of the promissory notes or liability arising from any potential tax or regulatory challenges to the life insurance policies.

(ii) The Company is, from time to time, involved in various claims, legal proceedings and complaints arising in

the ordinary course of business. The Company cannot reasonably predict the likelihood or outcome of these actions. The Company does not believe that adverse decisions in any other pending or threatened proceedings related to any matter, or any amount which may be required to be paid by reason thereof, will have a material effect on the financial condition or future results of operations.

(iii) The Company issues life insurance policies that are subject to challenge by tax authorities and other

regulatory bodies of the domicile(s) of insured parties and/or policy beneficiaries where the outcome of such a challenge may be uncertain. Management considers such risks to the Company to be remote, and no additional liability is provided for as a result of any potential tax or regulatory challenges to the life insurance policies.


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21. Related party transactions

Related party transactions have been in the normal course of business and taken place at terms that would exist in arm’s length transactions.

The Company has entered into an Insurance Services and Advisory Agreement with Advantage International Management (Cayman) Ltd., (“AIMCL”) a company owned by the ultimate parent, Advantage Insurance Holdings Ltd. The term of the Insurance Services and Advisory Agreement is for a minimum of three years from inception and includes extension and cancellation provisions, based upon certain liquidity events and amounts of investments managed. A minimum annual fee of $0.05 million is payable quarterly in advance and is subject to adjustment. The fee payable is calculated as a percentage of the value of investments managed.

(i) For the year ended December 31, 2014, the Company paid fees to AIMCL of $1.2 million. (ii) During the year, the Company advanced $2.3 million to Advantage Property & Casualty Company

SPC to fund the capital requirement and both the freehold and leasehold capacity to participate in the 2015 Lloyd’s Year of Account.

(iii) During the year, the Company had certain expenses paid on its behalf by several related

companies, of which at December 31, 2014 the Company owed $0.2 million.

(iv) At December 31, 2014, amounts invested by the Company’s life insurance policies and annuity contracts in investments of Advantage Life Investment Fund were $23.1 million.

(v) At December 31, 2014, amounts invested by the Company’s life insurance policies and annuity

contracts in investments of ALSC were $26.2 million.

(vi) At December 31, 2014, amounts invested by the Company’s life insurance policies and annuity contracts in investments of Advantage Life Small Cap Fund were $112.9 million.

(vii) At December 31, 2014, investments held by the Company for their own behalf in investment

funds owned and administered by Crusader Group Holdings was $0.1 million.

22. Capital Management

Managing capital is the continual process of establishing and maintaining the quantity and quality of capital appropriate for the Company to exceed minimum regulatory and internal capital targets. The Company strives to achieve an optimal capital structure by maintaining a balance of highly liquid investments and illiquid long-life investments that offer higher returns. Capital is managed both on a consolidated basis under principles that consider all the risks associated with the business as well as at the operating subsidiary level under the principles appropriate to the jurisdiction in which each operates. The Company manages the capital for all of its international subsidiaries on a local statutory basis in a manner commensurate with their individual risk profiles and in accordance with local regulation. The primary objectives of the Company’s capital management strategy are:

Operating with sufficient capital to be able to honor all policyholder and other obligations with a high degree of

confidence;


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22. Capital Management (continued)

Securing the stability and flexibility to pursue the Company’s business objectives as a result of retaining the ongoing confidence of regulators, policyholders, investors and other creditors; and

Optimizing return on capital to for the benefit of shareholders subject to constraints and considerations of adequate levels of capital established to meet the first two objectives.

Regulatory capital risk

The Company's regulated subsidiaries must comply with the capital adequacy requirements imposed in the jurisdictions in which they operate. In all jurisdictions, the payment of dividends from the Company’s subsidiaries is subject to maintaining capital levels exceeding regulatory targets as well as receiving regulatory approval. The Company maintained capital levels above minimum local requirements as at December 31, 2014. Advantage Life & Annuity Company SPC is required by its regulator, the Cayman Islands Monetary Authority (“CIMA”), to maintain minimum regulatory capital of $240,000. During 2014, in accordance with updated insurance legislation, ALAC has been assigned a Class B (iii) license and is now required to maintain a minimum capital requirement of $400,000. At December 31, 2014 ALAC was compliant with all externally imposed capital requirements. The following subsidiary capital requirements are as follows:

Advantage Life Puerto Rico A.I. is required by its regulator, the Office of the Commissioner of Insurance in the Commonwealth of Puerto Rico, to maintain minimum regulatory capital of $750,000. At December 31, 2014 ALPR was compliant with all externally imposed capital requirements.

Advantage Life (Cook Islands) Ltd is required by its regulator, the Financial Supervisory Commission of the

Cook Islands, to maintain a minimum regulatory capital and solvency requirement of $78,000 ($100,000 New Zealand Dollars). At December 31, 2014 ALCI was compliant with all externally imposed capital requirements.

Advantage Life USA SC is required by its regulator, the South Carolina Department of Insurance, to

maintain a minimum regulatory capital of $1,000,000. At December 31, 2014 ALUSA was compliant with all externally imposed capital requirements.

23. Subsequent events

In preparing these financial statements, the Company’s management has evaluated events and transactions for potential recognition or disclosure through May 15, 2015, the date the financial statements were available to be issued.

Documents

Consolidated Financial Statements of DOCUMENTS/ALAC 2014 FS.pdf · Consolidated Financial Statements of ... notes to the consolidated financial statements 2 ... transactions are eliminated