10-Q 1 form10q.txt FORM 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------ FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2002 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition period from ____ to ______ Commission File Number 0-29788 SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. (Exact Name of Registrant as Specified in Its Charter) Cayman Islands 98-0362785 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) P.O. Box HM 2939 Crown House, Third Floor 4 Par-la-Ville Road Hamilton HM08 Bermuda Not Applicable (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (441) 295-4451 (Former name, former address and former fiscal year, if changed since last report) 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 As of August 1, 2002, Registrant had 26,909,956 ordinary shares outstanding. Table of Contents PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets - June 30, 2002 (Unaudited) and December 31, 2001 1 Unaudited Consolidated Statements of Income - Three and six months ended June 30, 2002 and 2001 2 Unaudited Consolidated Statements of Comprehensive Income - Six months ended June 30, 2002 and 2001 4 Unaudited Consolidated Statements of Shareholders' Equity - Six months ended June 30, 2002 and 2001 5 Unaudited Consolidated Statements of Cash Flows - Six months ended June 30, 2002 and 2001 6 Notes to Unaudited Consolidated Financial Statements at June 30, 2002 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 13 CONDITION AND RESULTS OF OPERATIONS ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 27 PART II OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS 28 ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS 28 ITEM 3 DEFAULTS UPON SENIOR SECURITIES 28 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 28 ITEM 5 OTHER INFORMATION 29 ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 29 SIGNATURES 32 i PART I. FINANCIAL INFORMATION Item 1. Financial Statements Scottish Annuity & Life Holdings, Ltd. Consolidated Balance Sheets (Dollars in thousands)
June 30, December 31, 2002 2001 (unaudited) -------------------- -------------------- ASSETS Fixed maturity investments, available for sale, at fair value (Amortized cost $697,183; 2001 - $588,542) $ 698,519 $ 583,890 Investment in unit-linked securities 19,299 20,705 Cash and cash equivalents 57,627 94,581 Policy loans 760 801 Other investments 9,949 10,120 Funds withheld at interest 879,555 562,446 -------------------- -------------------- Total investments 1,665,709 1,272,543 Amount receivable under Funding Agreement 100,000 - Receivables: Accrued interest 10,020 9,335 Risk fees 1,845 1,436 Reinsurance 54,860 59,221 Deferred acquisition costs 150,464 113,898 Amount recoverable from reinsurers 19,886 19,212 Present value of in-force business 19,303 20,383 Goodwill 32,246 30,970 Fixed assets 5,566 5,459 Due from related party 1,933 1,892 Other assets 7,923 8,764 Segregated assets 573,155 602,800 -------------------- -------------------- Total assets $2,642,910 $2,145,913 ==================== ==================== LIABILITIES Reserves for future policy benefits $ 382,297 $ 379,618 Interest sensitive contract liabilities 1,055,892 718,815 Unit-linked contract liabilities 20,139 25,503 Borrowings 22,331 65,145 Accounts payable and accrued expenses 10,750 12,532 Reinsurance payables 4,459 4,258 Other liabilities 2,802 - Current income tax payable 869 359 Deferred tax liability 6,053 5,601 Amount payable under Funding Agreement 100,000 - Segregated liabilities 573,155 602,800 -------------------- -------------------- Total liabilities 2,178,747 1,814,631 -------------------- -------------------- SHAREHOLDERS' EQUITY Share capital, par value $0.01 per ordinary share: Issued and fully paid: 26,909,956 ordinary shares (2001 - 20,144,956) 269 201 Additional paid-in capital 415,970 301,542 Accumulated other comprehensive income 4,264 (3,626) Retained earnings 43,660 33,165 -------------------- -------------------- Total shareholders' equity 464,163 331,282 -------------------- -------------------- Total liabilities and shareholders' equity $2,642,910 $2,145,913 ==================== ====================
See Accompanying Notes to Unaudited Consolidated Financial Statements 1 Scottish Annuity & Life Holdings, Ltd. Unaudited Consolidated Statements of Income (Dollars in thousands)
Three months Three months Six months Six months ended ended ended ended June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001 ------------------- ------------------ ------------------ ------------------- REVENUES Premiums earned $ 37,628 $ 11,311 $ 68,983 $ 20,830 Fee income 2,201 919 4,275 1,618 Investment income, net 26,147 10,515 47,877 22,262 Realized gains (losses) (1,815) 420 (3,279) 458 ------------------- ------------------ ------------------ ------------------- Total revenues 64,161 23,165 117,856 45,168 ------------------- ------------------ ------------------ ------------------- BENEFITS AND EXPENSES Claims and other policy benefits 26,656 10,292 50,543 17,626 Interest credited to interest sensitive contract liabilities 11,228 2,818 20,406 7,038 Acquisition costs and other insurance expenses, net 11,575 3,152 22,212 7,267 Operating expenses 6,632 2,412 10,976 5,043 Interest expense 138 314 482 314 ------------------- ------------------ ------------------ ------------------- Total benefits and expenses 56,229 18,988 104,619 37,288 ------------------- ------------------ ------------------ ------------------- Net income before income taxes and minority interest 7,932 4,177 13,237 7,880 Income tax benefit (expense) (83) 108 (390) 57 ------------------- ------------------ ------------------ ------------------- Net income before minority interest 7,849 4,285 12,847 7,937 Minority interest - 9 - 71 ------------------- ------------------ ------------------ ------------------- Income before cumulative effect of change in 7,849 4,294 12,847 8,008 accounting principle Cumulative effect of change in accounting principle - (406) - (406) ------------------- ------------------ ------------------ ------------------- Net income $ 7,849 $ 3,888 $ 12,847 $ 7,602 =================== ================== ================== ===================
See Accompanying Notes to Unaudited Consolidated Financial Statements 2 Scottish Annuity & Life Holdings, Ltd. Unaudited Consolidated Statements of Income (continued) (Dollars in thousands, except per share data)
Three months Three months Six months Six months ended ended ended ended June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001 ------------------- ------------------ ------------------ ------------------- Earnings per ordinary share - Basic Net income before cumulative effect of change in accounting principle $0.29 $0.27 $0.55 $0.51 Cumulative effect of change in accounting principle - (0.02) - (0.02) ------------------- ------------------ ------------------ ------------------- Net Income $0.29 $0.25 $0.55 $0.49 =================== ================== ================== =================== Earnings per ordinary share -Diluted Net income before cumulative effect of change in accounting principle $0.28 $0.26 $0.51 $0.49 Cumulative effect of change in accounting principle - (0.02) - (0.02) ------------------- ------------------ ------------------ ------------------- Net Income $0.28 $0.24 $0.51 $0.47 =================== ================== ================== =================== Dividends per ordinary share $0.05 $0.05 $0.10 $0.10 =================== ================== ================== =================== Weighted average number of ordinary shares outstanding Basic 26,683,204 15,657,842 23,432,731 15,636,250 =================== ================== ================== =================== Diluted 28,504,230 16,246,309 24,946,671 16,191,632 =================== ================== ================== ===================
See Accompanying Notes to Unaudited Consolidated Financial Statements 3 Scottish Annuity & Life Holdings, Ltd. Unaudited Consolidated Statements of Comprehensive Income (Dollars in thousands)
Six months ended Six months ended June 30, 2002 June 30, 2001 ----------------------- ---------------------- Net income $12,847 $ 7,602 ----------------------- ---------------------- Other comprehensive income, net of tax Unrealized appreciation on investments: 4,878 2,159 Add: reclassification adjustment for investment losses included in net income 24 (457) ----------------------- ---------------------- Unrealized appreciation on investments net of income tax expense of $1,085 and $121 4,902 1,702 ----------------------- ---------------------- Cumulative translation adjustments 2,988 - ----------------------- ---------------------- Comprehensive income $20,737 $ 9,304 ======================= ======================
See Accompanying Notes to Unaudited Consolidated Financial Statements 4 Scottish Annuity & Life Holdings, Ltd. Unaudited Consolidated Statements of Shareholders' Equity (Dollars in thousands)
Six months Six months ended ended June 30, 2002 June 30, 2001 ------------------- ------------------ ORDINARY SHARES Beginning of period 20,144,956 15,614,240 Ordinary shares issued 6,750,000 - Issuance to employees on exercise of options 15,000 - ------------------- ------------------ End of period 26,909,956 15,614,240 ------------------- ------------------ SHARE CAPITAL: Beginning of period $ 201 $ 156 Ordinary shares issued 67 - Issuance to employees on exercise of options 1 1 ------------------- ------------------ End of period 269 157 ------------------- ------------------ ADDITIONAL PAID-IN CAPITAL: Beginning of period 301,542 223,771 Ordinary shares issued 114,284 - Issuance to employees on exercise of options 144 1,298 ------------------- ------------------ End of period 415,970 225,069 ------------------- ------------------ ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS): Unrealized depreciation on investments Beginning of period (3,626) (3,822) Change in period (net of tax) 4,902 1,702 ------------------- ------------------ End of period 1,276 (2,120) ------------------- ------------------ Cumulative translation adjustment 2,988 - ------------------- ------------------ ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) 4,264 (2,120) ------------------- ------------------ RETAINED EARNINGS: Beginning of period 33,165 19,459 Net income 12,847 7,602 Dividends paid (2,352) (1,566) ------------------- ------------------ End of period 43,660 25,495 ------------------- ------------------ TOTAL SHAREHOLDERS' EQUITY $464,163 $248,601 =================== ==================
See Accompanying Notes to Unaudited Consolidated Financial Statements 5 Scottish Annuity & Life Holdings, Ltd. Unaudited Consolidated Statements of Cash Flows (Dollars in thousands)
Six months ended Six months ended June 30, 2002 June 30, 2001 --------------------- -------------------- OPERATING ACTIVITIES Net income $ 12,847 $ 8,008 Items not affecting cash: Net realized (gains) losses 3,279 (458) Amortization of investments 173 (637) Amortization of deferred acquisition costs 13,622 4,635 Amortization of present value of inforce business 1,401 103 Interest credited to interest sensitive contract liabilities 20,406 7,038 Changes in assets and liabilities: Accrued interest (685) 335 Risk fees (409) 2 Reinsurance receivables and payables 3,336 6,737 Deferred acquisition costs (50,188) (30,213) Deferred tax benefit 514 (432) Other assets (1,743) (603) Current income tax receivable and payable 510 375 Reserve for future policy benefits (430) 69,563 Unit linked contract liabilities (6,704) - Due from related party (41) - Accounts payable and accrued expenses (1,782) (13,133) Other 1,431 (546) --------------------- -------------------- Net cash provided by (used in) operating activities (4,463) 50,774 --------------------- -------------------- INVESTING ACTIVITIES Purchase of securities (218,605) (101,215) Proceeds from sales of investments 71,223 181,933 Proceeds from maturity of investments 41,677 38,924 Other assets and liabilities 5,386 (330) Funds withheld at interest (317,109) (31,123) Costs on acquisition of World-Wide (1,276) - Other investments 171 (12,119) Policy loans 41 (435) --------------------- -------------------- Net cash provided by (used in) investing activities (418,492) 75,635 --------------------- -------------------- FINANCING ACTIVITIES Deposits to interest sensitive contract liabilities 346,748 46,890 Withdrawals from interest sensitive contract liabilities (30,077) (198,990) Borrowings (42,814) 40,000 Issuance of ordinary shares 114,496 1,300 Dividends paid (2,352) (1,566) --------------------- -------------------- Net cash provided by (used in) financing activities 386,001 (112,366) --------------------- -------------------- NET CHANGE IN CASH AND CASH EQUIVALENTS (36,954) 14,043 Cash and cash equivalents, beginning of period 94,581 47,763 --------------------- -------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 57,627 $ 61,806 ===================== ====================
See Accompanying Notes to Unaudited Consolidated Financial Statements 6 Scottish Annuity & Life Holdings, Ltd. Notes to Unaudited Consolidated Financial Statements June 30, 2002 1. General Scottish Annuity & Life Holdings, Ltd. is a holding company organized under the laws of the Cayman Islands with its principal executive office in Bermuda. We are a reinsurer of life insurance, annuities and annuity-type products. We have operating companies in Bermuda, the Cayman Islands, Ireland, Luxembourg, the United Kingdom and the United States. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results for the period are not necessarily indicative of the results to be expected for the entire year. For further information, refer to the consolidated financial statements and footnotes included in our annual report on Form 10-K for the period ended December 31, 2001. All amounts are reported in thousands of United States dollars (except per share amounts). Prior period amounts have been reclassified to conform to the current year presentation. 2. New accounting pronouncements In June 2001, the Financial Accounting Standards Board issued SFAS 141, "Business Combinations", and SFAS 142, "Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. We have applied the new rules on accounting for goodwill and other intangible assets in this quarter. Goodwill recognized in the consolidated balance sheet has been assigned to reporting units. Goodwill was tested for impairment at June 30, 2002. There was no impairment in goodwill recognized on initial adoption. Our reported earnings and financial position for 2001 do not reflect significant amounts of amortization of goodwill. 3. Change in Accounting Principle EITF Issue No. 99-20("EITF 99-20"), "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets", applies to all securities, purchased or retained, which represent beneficial interests in securitized assets, unless they meet certain exception criteria. Such securities include many collateralized mortgage, bond, debt and loan obligations (CMO, CBO, CDO and CLO), mortgage-backed securities and asset-backed securities. EITF 99-20 significantly changed the method of assessing "other than temporary impairments" and for recognizing interest income. A decline in fair value below the "amortized cost" basis is considered to be an other than temporary impairment whenever there is an adverse change in the amounts or timing of cash flows to be received, regardless of the resulting yield, unless the decrease is solely a result of changes in market interest rates. Interest income is based on prospective estimates of future cash flows. EITF 99-20 is effective for fiscal quarters beginning after March 15, 2001. We reviewed all applicable securities held at June 30, 2001, and identified a required write down in the amount of $406,000. This was shown in the consolidated statements of income as a cumulative effect of change in accounting principle. 4. Business acquisitions On December 31, 2001, we completed the purchase of World-Wide Holdings and its wholly owned subsidiary World-Wide Reassurance. The excess of the purchase price over net assets acquired was $32.2 million and is recorded as goodwill. Goodwill arising on the purchase of World-Wide has increased from $30.6 million at December 31, 2001 because of additional 7 Scottish Annuity & Life Holdings, Ltd. Notes to Unaudited Consolidated Financial Statements June 30, 2002 costs of $1.6 million, relating to the acquisition, which were identified during the six months ended June 30, 2002. These costs were principally legal and other professional fees. Pro forma information related to our acquisition of World-Wide Holdings is prepared for the three and six-month periods ended June 30, 2001, and illustrates the effects of the acquisition as if it had occurred at the beginning of the period.
Scottish World-Wide Combined Scottish World-Wide Combined Annuity & Life Holdings(1) Annuity & Life Holdings(1) Holdings, Ltd. Holdings, Ltd. Three months ended June 30, 2001 Six months ended June 30, 2001 Revenues $23,165 $9,398 $32,563 $45,168 $ 17,895 $64,063 ================= ================ =============== ================= =============== ================ Income before cumulative effect of change in accounting principle $ 4,294 $ 517 $ 4,811 $8,008 $ 1,033 $ 9,041 Cumulative effect of change in accounting principle (406) - (406) (406) - (406) ----------------- ---------------- --------------- ----------------- --------------- ---------------- Net income $ 3,888 $ 517 $ 4,405 $7,602 $ 1,033 $ 8,635 ================= ================ =============== ================= =============== ================ Earnings per ordinary share - basic (2) Income before cumulative effect of change in accounting principle $0.27 $0.24 $0.51 $0.45 Cumulative effect of change in accounting principle (0.02) (0.02) (0.02) (0.02) ----------------- ---------------- --------------- ----------------- --------------- ---------------- Net income $0.25 $0.22 $0.49 $0.43 ================= ================ =============== ================= =============== ================ Earnings per ordinary share - diluted Income before cumulative effect of change in accounting principle $0.26 $0.23 $0.49 $0.44 Cumulative effect of change in accounting principle (0.02) (0.02) (0.02) (0.02) ----------------- ---------------- --------------- ----------------- --------------- ---------------- Net income $0.24 $0.21 $0.47 $0.42 ================= ================ =============== ================= =============== ================
(1) World-Wide Holdings includes pro forma adjustments. (2) Combined amounts are calculated using historical weighted average number of ordinary shares plus 4,532,380 ordinary shares issued to acquire World-Wide Holdings. 8 Scottish Annuity & Life Holdings, Ltd. Notes to Unaudited Consolidated Financial Statements June 30, 2002 5. Business segments We report segments in accordance with SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." Our main lines of business are Life Reinsurance and Wealth Management. The segment reporting for the lines of business is as follows:
Three months Three months Six months Six months ended ended ended ended June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001 ------------------- ------------------- ------------------- ------------------- REVENUES Life Reinsurance North America $48,050 $19,699 $87,116 $39,322 International 13,832 - 27,074 - ------------------- ------------------- ------------------- ------------------- Total Life Reinsurance 61,882 19,699 114,190 39,322 Wealth Management 850 663 1,547 1,274 Other 1,429 2,803 2,119 4,572 ------------------- ------------------- ------------------- ------------------- Total $64,161 $23,165 $117,856 $45,168 =================== =================== =================== =================== NET INCOME BEFORE INCOME TAXES AND MINORITY INTEREST Life Reinsurance North America $6,853 $2,587 $11,256 $5,628 International 2,725 - 4,458 - ------------------- ------------------- ------------------- ------------------- Total Life Reinsurance 9,578 2,587 15,714 5,628 Wealth Management (607) 375 (678) 608 Other (1,039) 1,215 (1,799) 1,644 ------------------- ------------------- ------------------- ------------------- Total $7,932 $4,177 $13,237 $7,880 =================== =================== =================== =================== June 30, 2002 December 31, 2001 --------------------- --------------------- ASSETS BY SEGMENT Life Reinsurance North America $1,735,125 $1,253,605 International 203,242 185,551 --------------------- --------------------- Total Life Reinsurance 1,938,367 1,439,156 Wealth Management 616,701 632,835 Other 87,842 78,363 --------------------- --------------------- Total $2,642,910 $2,150,354 ===================== =====================
9 Scottish Annuity & Life Holdings, Ltd. Notes to Unaudited Consolidated Financial Statements June 30, 2002 6. Earnings per ordinary share The following table sets forth the computation of basic and diluted earnings per ordinary share:
Three months Three months Six months Six months ended ended ended ended June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001 ------------------ ------------------ ------------------ ------------------ Numerator: Net income $7,849 $3,888 $12,847 $7,602 ================== ================== ================== ================== Denominator: Denominator for basic earnings per ordinary share - Weighted average number of ordinary shares 26,683,204 15,657,842 23,432,731 15,636,250 Effect of dilutive securities - Stock options 1,055,956 581,488 926,607 551,892 - Warrants 765,070 6,979 587,333 3,490 ------------------ ------------------ ------------------ ------------------ Denominator for dilutive earnings per ordinary share 28,504,230 6,246,309 24,946,671 16,191,632 ================== ================== ================== ================== Basic earnings per ordinary share $0.29 $0.25 $0.55 $0.49 ================== ================== ================== ================== Diluted earnings per ordinary share $0.28 $0.24 $0.51 $0.47 ================== ================== ================== ==================
7. Other investments Other investments are made up of a fund of funds that is carried at fair value of $4.9 million and a surplus note purchased from a U.S. life insurance company in connection with a reinsurance transaction that we entered into in the second quarter of 2001. The surplus note pays interest to us at an annual rate of 11%, matures on May 16, 2016 and is carried at cost of $5.0 million. 8. Funding Agreement Total assets and liabilities include $100 million in respect of a Funding Agreement (the "Agreement") that we entered into on June 28, 2002. The funds were received on July 5, 2002. The principal is to be repaid in five equal installments on December 28, 2006, March 28, 2007, June 28, 2007, September 28, 2007 and December 28, 2007. Interest is payable quarterly at LIBOR plus 0.525% commencing on September 28, 2002. The Agreement is collateralized by assets held in a trust that are managed in accordance with agreed investment guidelines. The market value of the assets in the trust is determined weekly and is compared to a required amount equal to the sum of the funded amount under the Agreement, including accrued interest, and over-collateralization based on the ratings of individual trust assets and our lowest financial strength rating from Moody's, Standard & Poor's and Fitch. We are required to deposit cash, eligible investments or provide a letter of credit if there is a deficit between the assets in the trust, including accrued interest, and the required amount. We may withdraw funds from the trust to the extent that the valuation of the trust assets is in excess of the required amount. 10 Scottish Annuity & Life Holdings, Ltd. Notes to Unaudited Consolidated Financial Statements June 30, 2002 9. Reinsurance transactions The following table summarises the acquisitions of in-force reinsurance transactions completed by us during the quarter ended June 30, 2001. There were no acquisitions of in-force reinsurance transactions in 2002. These transactions are accounted for as purchases. Our results of operations include the effects of these purchases only from the respective acquisition dates. June 30, 2001 Fair value of assets acquired $58,928 Deferred acquisition costs 11,000 ---------------- Total assets acquired $69,928 ================ Fair value of liabilities acquired $69,928 ================ 10. Deferred acquisition costs The change in deferred acquisition costs is as follows:
Three months Three months Six months Six months ended ended ended ended June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001 ------------------- ------------------ ------------------ ------------------- Balance beginning of period $131,073 $36,620 $113,898 $30,922 Deferred acquisition costs on inforce blocks of business purchased - 11,000 - 11,000 Expenses deferred 25,694 10,389 48,354 19,213 Amortization expense (6,303) (1,509) (11,788) (4,635) ------------------- ------------------- ------------------- ------------------- Balance end of period $150,464 $56,500 $150,464 $56,500 =================== =================== =================== ===================
11. Borrowings We have in place a credit facility with a U.S. bank that provides a combination of borrowings and letters of credit totaling $50 million. This facility expires on July 31, 2003 but is renewable with the agreement of both parties. Borrowings are at a rate of LIBOR plus 40 basis points. At June 30, 2002 there were no borrowings or outstanding letters of credit under this facility. We are also in discussion with a U.S. bank for an additional credit facility providing a combination of borrowings and letters of credit totaling $50 million. We also have borrowings of $22.3 million in connection with a reverse repurchase agreement with a major broker/dealer. Under this agreement, we have sold agency mortgage backed securities with the agreement to repurchase them at a fixed price, providing the dealer with a spread that equates to an effective borrowing cost linked to one-month LIBOR. This agreement is renewable monthly at the discretion of the broker/dealer. At June 30, 2002 the one-month LIBOR rate applicable to borrowings was 1.83%. 11 Scottish Annuity & Life Holdings, Ltd. Notes to Unaudited Consolidated Financial Statements June 30, 2002 12. Shareholders' equity On April 4, 2002, we completed a public offering of 6,750,000 ordinary shares (which included the over-allotment option of 750,000 ordinary shares) in which we raised aggregate net proceeds of $114.3 million. We have used the proceeds of the equity offering to repay short-term borrowings of $40 million and the remainder for general corporate purposes. 12 Scottish Annuity & Life Holdings, Ltd. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General Scottish Annuity & Life Holdings, Ltd., which we call Scottish Holdings, is a holding company organized under the laws of the Cayman Islands with its principal executive office in Bermuda. We are a reinsurer of life insurance, annuities and annuity-type products. These products are written by life insurance companies and other financial institutions located principally in the United States as well as around the world. We refer to this portion of our business as Life Reinsurance North America. On December 31, 2001 we completed the purchase of World-Wide Holdings Limited and its subsidiary World-Wide Reassurance Company Limited. World-Wide specializes in niche markets in developed countries and broader life insurance markets in the developing world. We refer to this portion of our business as Life Reinsurance International. To a lesser extent, we directly issue variable life insurance and variable annuities and similar products to high net worth individuals and families for insurance, investment and estate planning purposes. We refer to this portion of our business as Wealth Management. All amounts are reported in thousands of United States dollars, except per share amounts. Revenues We derive revenue from four principal sources: o premiums from reinsurance assumed on life business; o fee income from our variable life insurance and variable annuity products and from financial reinsurance transactions; o investment income from our investment portfolio; and o realized gains and losses from our investment portfolio. Premiums from reinsurance assumed on life business are included in revenues over the premium paying period of the underlying policies. When we acquire blocks of in-force business, we account for these transactions as purchases, and our results of operations include the net income from these blocks as of their respective dates of acquisition. Reinsurance assumed on annuity business does not generate premium income but generates investment income over time on the assets we receive from the ceding company. We also earn fees in our financial reinsurance transactions with U.S. insurance company clients. Because some of these transactions do not satisfy the risk transfer rules for reinsurance accounting, the premiums and benefits are not reported in the consolidated statements of income. In our Wealth Management business, when we sell a variable life insurance policy or a variable annuity contract, we charge mortality, expense and distribution risk fees that are based on total assets in each policyholder's separate account. In the case of variable life insurance policies, we also charge a cost of insurance fee based on the amount necessary to cover the death benefit under the policy. Our investment income includes interest earned on our fixed income investments and income from funds withheld at interest under modified coinsurance agreements. Under GAAP, because our fixed income investments are held as available for sale, these securities are carried at fair value, and unrealized appreciation and depreciation on these securities is not included in investment income on our statements of income, but is included in comprehensive income as a separate component of shareholders' equity. Realized gains and losses include gains and losses on investment securities that we sell during a period and write downs of securities deemed to be other than temporarily impaired. Expenses We have five principal types of expenses: o claims and policy benefits under our reinsurance contracts; o interest credited to interest sensitive contract liabilities; 13 Scottish Annuity & Life Holdings, Ltd. Management's Discussion and Analysis of Financial Condition and Results of Operations o acquisition costs and other insurance expenses; o operating expenses; and o interest expense. When we issue a Life Reinsurance contract, we establish reserves for benefits. These reserves are our estimates of what we expect to pay in claims and policy benefits and related expenses under the contract or policy. From time to time, we may also add to reserves if our experience leads us to believe that benefit claims and expenses will ultimately be greater than the existing reserve. We report the provision for these reserves as an expense during the period when the reserve or additional reserve is established. In connection with reinsurance of annuity and annuity-type products, we record a liability for interest sensitive contract liabilities, which represents the amount ultimately due to the policyholder. We credit interest to these contracts each period at the rates determined in the underlying contract, and the amount is reported as interest credited to interest sensitive contract liabilities on our consolidated statements of income. A portion of the costs of acquiring new business, such as commissions, certain internal expenses related to our policy issuance and underwriting departments and some variable selling expenses are capitalized. The resulting deferred acquisition costs asset is amortized over future periods based on our expectations as to the emergence of future gross profits from the underlying contracts. These costs are dependent on the structure, size and type of business written. For certain products, we may retrospectively adjust our amortization when we revise our estimate of current or future gross profits to be realized. The effects of this adjustment are reflected in earnings in the period in which we revise our estimate. Operating expenses consist of salary and salary related expenses, legal and professional fees, rent and office expenses, travel and entertainment, directors' expenses, insurance and other similar expenses, except to the extent capitalized in deferred acquisition costs. Interest expense consists of interest charges on our borrowings. Factors affecting profitability We seek to generate profits from three principal sources. First, in our Life Reinsurance business, we seek to receive reinsurance premiums and financial reinsurance fees that, together with income from the assets in which those premiums are invested, exceed the amounts we ultimately pay as claims and policy benefits, acquisition costs and ceding commissions. Second, in our Wealth Management business, we seek to generate fee income that will exceed the expenses of maintaining and administering our variable life insurance and variable annuity products. Third, within our investment guidelines, we seek to maximize the return on our unallocated capital. The following factors affect our profitability: o the volume of business we write; o our ability to assess and price adequately for the risks we assume; o the mix of different types of business that we reinsure, because profits on some kinds of business emerge later than on other types; o our ability to manage our assets and liabilities to manage investment and liquidity risk; o the level of fees that we charge on our Wealth Management contracts; and o our ability to control expenses. In addition, our profits can be affected by a number of factors that are not within our control. For example, movements in interest rates can affect the volume of business that we write, the income earned from our investments, the interest we credit on interest sensitive contracts, the level of surrender activity on contracts that we reinsure and the rate at which we amortize deferred acquisition costs. Other external factors that can affect profitability include mortality experience that varies from our assumed mortality and changes in regulation or tax laws which may affect the attractiveness of our products or the costs of doing business. 14 Scottish Annuity & Life Holdings, Ltd. Management's Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. We consider the following accounting policies critical in the preparation of our financial statements. Financial Accounting Standard 60 applies to traditional life policies with continuing premiums. For these policies, future benefits are estimated using a net level premium method on the basis of actuarial assumptions as to mortality, persistency and interest established at policy issue. Assumptions established at policy issue as to mortality and persistency are based on anticipated experience, which, together with interest and expense assumptions, provide a margin for adverse deviation. Acquisition costs are deferred and recognized as expense in a constant percentage of the gross premiums using these assumptions established at issue. Should the liabilities for future policy benefits plus the present value of expected future gross premiums for a product be insufficient to provide for expected future benefits and expenses for that product, deferred acquisition costs will be written off and thereafter, if required, a premium deficiency reserve will be established by a charge to income. Changes in the assumptions for mortality, persistency and interest could result in material changes to the financial statements. Financial Accounting Standard 97 applies to investment contracts, limited premium contracts, and universal life-type contracts. For investment and universal life-type contracts, future benefit liabilities are held using the retrospective deposit method, increased for amounts representing unearned revenue or refundable policy charges. Acquisition costs are deferred and recognized as expense as a constant percentage of gross margins using assumptions as to mortality, persistency, and expense established at policy issue without provision for adverse deviation and are revised periodically to reflect emerging actual experience and any material changes in expected future experience. Liabilities and the deferral of acquisition costs are established for limited premium policies under the same practices as used for traditional life policies with the exception that any gross premium in excess of the net premium is deferred and recognized into income as a constant percentage of insurance in-force. Should the liabilities for future policy benefits plus the present value of expected future gross premiums for a product be insufficient to provide for expected future benefits and expenses for that product, deferred acquisition costs will be written off and thereafter, if required, a premium deficiency reserve will be established by a charge to income. Changes in the assumptions for mortality, persistency, maintenance expense and interest could result in material changes to the financial statements. The development of policy reserves and amortization of deferred acquisition costs for our products requires management to make estimates and assumptions regarding mortality, lapse, expense and investment experience. Such estimates are primarily based on historical experience and information provided by ceding companies. Actual results could differ materially from those estimates. Management monitors actual experience, and should circumstances warrant, will revise its assumptions and the related reserve estimates. Present value of in-force business is established upon the acquisition of a subsidiary and is amortized over the expected life of the business at the time of acquisition. The amortization each year will be a function of the gross profits or revenues each year in relation to the total gross profits or revenues expected over the life of the business, discounted at the assumed net credit rate. The determination of the initial value and the subsequent amortization require management to make estimates and assumptions regarding future business results that could differ materially from actual results. Estimates and assumptions involved in the present value of in-force business and subsequent amortization are similar to those necessary in the establishment of reserves and amortization of deferred acquisition costs. Goodwill is calculated as the difference between the price paid and the value of individual assets and liabilities on the date of acquisition of a subsidiary. In June 2001, the Financial Accounting Standards Board issued SFAS 141, "Business Combinations", and SFAS 142, "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests in accordance with the Statements. We have applied the new rules in this quarter. We have performed the first of the required impairment tests and have determined that there is no goodwill impairment. Fixed maturity investments are evaluated for other than temporary impairments in accordance with SFAS 115 and EITF 99-20. Under these pronouncements, realized losses are recognized on securities if the securities are determined to be other than temporarily impaired. Factors involved in the determination of potential impairment include fair value as compared to cost, length of time to maturity, length of time the value has been below cost, credit worthiness of the issuer, 15 Scottish Annuity & Life Holdings, Ltd. Management's Discussion and Analysis of Financial Condition and Results of Operations forecasted financial performance of the issuer, and interest rates. Changes in these factors could result in additional write-downs being necessary. Our accounting policies addressing reserves, deferred acquisition costs, value of business acquired, goodwill and investment impairment involve significant assumptions, judgments and estimates. Changes in these assumptions, judgments and estimates could create material changes in our consolidated financial statements. Results of Operations Our results of operations for the three and six month periods ended June 30, 2001 do not include the results of operations of World-Wide Holdings, which we acquired at the close of business on December 31, 2001. Earnings per ordinary share
Three months Three months Six months Six months ended ended ended ended June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001 ------------------- ------------------ ------------------ ------------------- Net income $7,849 $3,888 $12,847 $7,602 =================== =================== =================== =================== Basic earnings per ordinary share $0.29 $0.25 $0.55 $0.49 =================== =================== =================== =================== Diluted earnings per ordinary share $0.28 $0.24 $0.51 $0.47 =================== =================== =================== =================== Weighted average number of ordinary shares outstanding: Basic 26,683,204 15,657,842 23,432,731 15,636,250 ------------------- ------------------- ------------------- ------------------- Diluted 28,504,230 16,246,309 24,946,671 16,191,632 ------------------- ------------------- ------------------- -------------------
Net income for the second quarter increased 100% to $7.8 million from $3.9 million in the same quarter in 2001. Net income for the six-month period ended June 30, 2002 increased 68% to $12.8 million from $7.6 million in the same period in 2001. The increases are attributable to the inclusion of World-Wide for the first time since its acquisition, continued growth in our Life Reinsurance North America segment, and an increase in investment income primarily due to the increase in average invested assets. These increases have been offset in part by an increase in realized losses on fixed maturity investments and unit-linked securities. The contribution to net income by World-Wide amounted to $2.1 million and $3.6 million for the three and six month periods, respectively. Earnings per ordinary share on a diluted basis amounted to $0.28 for the second quarter of 2002 in comparison with $0.24 in the same quarter in 2001. For the six-month period ended June 30, 2002 diluted earnings per share amounted to $0.51 in comparison with $0.47 per ordinary share in the same period in 2001. The increase in earnings per ordinary share was the result of increased net income which was offset by the increase in the number of ordinary shares outstanding as a result of the acquisition of World-Wide and the equity offering, discussed in Note 12 to the unaudited consolidated financial statements, and an increase in the dilutive effect of stock options and warrants. 16 Scottish Annuity & Life Holdings, Ltd. Management's Discussion and Analysis of Financial Condition and Results of Operations
Three months ended Three months ended Six months ended Six months ended June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001 ------------------- ------------------ ------------------ ------------------- GAAP net income $7,849 $3,888 $12,847 $7,602 Realized losses (gains) net of deferred acquisition costs - non taxable companies (641) (416) 537 (457) Realized losses net of deferred acquisition costs - taxable companies 2,247 - 2,769 - Provision for taxes - taxable companies (703) - (901) - Cumulative effect of change in accounting principle - 406 - 406 ------------------- ------------------ ------------------ ------------------- Net operating earnings $8,728 $3,878 $15,251 $7,551 =================== ================== ================== =================== Weighted average number of ordinary shares outstanding Basic 26,683,204 15,657,842 23,432,731 15,636,250 ------------------- ------------------ ------------------ ------------------- Diluted 28,504,230 16,246,309 24,946,671 16,191,632 ------------------- ------------------ ------------------ -------------------
We determine net operating earnings by adjusting GAAP net income for net realized capital gains and losses, as adjusted for the related effects upon the amortization of deferred acquisition costs and taxes, and non-recurring items that we believe are not indicative of overall operating trends. While these items may be significant components in understanding and assessing our consolidated financial performance, we believe the presentation of net operating earnings enhances the understanding of our results of operations by highlighting earnings attributable to the normal, recurring operations of our business. However, net operating earnings is not a substitute for net income determined in accordance with GAAP. Net operating earnings increased 123% to $8.7 million in the second quarter from $3.9 million in the same quarter in 2001. Net operating earnings for the six-month period ended June 30, 2002 increased 101% to $15.3 million from $7.6 million in the same period in 2001. The increase in net operating earnings is attributable to the inclusion of World-Wide for the first time since its acquisition, continued growth in our Life Reinsurance North America segment and an increase in investment income primarily due to the increase in average invested assets. Revenues Revenues increased by $40.9 million or 177% to $64.1 million in the second quarter of 2002 in comparison with the second quarter of 2001. During the six months ended June 30, 2002 revenues increased by $72.7 million or 161% to $117.9 million in comparison with 2001. The increases are primarily due to the acquisition of World-Wide, the growth in our Life Reinsurance North America operations and an increase in investment income primarily due to the growth in our invested assets resulting from new business and the equity offering discussed in Note 12 to the unaudited consolidated financial statements. 17 Scottish Annuity & Life Holdings, Ltd. Management's Discussion and Analysis of Financial Condition and Results of Operations Revenues consist of the following:
Three months Three months Six months Six months ended ended ended ended June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001 ------------------- ------------------ ------------------ ------------------- Premiums earned $37,628 $11,311 $68,983 $20,830 Fee income 2,201 919 4,275 1,618 Investment income, net 26,147 10,515 47,877 22,262 Realized gains (losses) (1,815) 420 (3,279) 458 ------------------ ------------------- ------------------- ------------------- Total revenues $64,161 $23,165 $117,856 $45,168 ================== =================== =================== ===================
Premiums earned Premiums earned during the second quarter increased 233% to $37.6 million compared with the same quarter in 2001. Premiums earned during the six-month period ended June 30, 2002 increased 231% to $69.0 million compared with the prior year period. World-Wide's premiums earned amounted to $14.2 million and $26.4 million, respectively, during those periods. Premiums earned on Life Reinsurance North America operations increased by 107% to $23.4 million and were from 53 clients. Premiums earned on Life Reinsurance North America operations during the six-month period ended June 30, 2002 increased 105% to $42.6 million. Premiums earned in the second quarter and first six months of 2001 were from 27 reinsurance clients and premiums from a run-off block of Accident & Health Business written by Scottish Re before we acquired the company. As of June 30, 2002 we reinsured approximately $49.0 billion of life coverage on 1,252,000 lives in our North American operations. Our average benefit coverage per life is $39,000 and our targeted maximum corporate retention on any one life is $500,000. As of June 30, 2001 we reinsured approximately $21.4 billion of life coverage on 749,000 lives. Our average benefit coverage per life was $29,000. Fee income Both Life Reinsurance and Wealth Management business generate fee income. In Life Reinsurance we earn fees on our financial reinsurance treaties that do not qualify under risk transfer rules for reinsurance accounting. Life Reinsurance fees increased by 414% to $1.3 million and by 656% to $2.6 million during second quarter and first six months of 2002 compared to the same periods in 2001. The increase is due to the growth in the number of clients. Wealth Management fees increased in the second quarter of 2002 by 33% to $0.9 and by 31% to $1.7 million during the first six months compared to the same periods in 2001. The increase is primarily due to increases in variable account balances on which we earn fees and an increase in the number of clients. 18 Scottish Annuity & Life Holdings, Ltd. Management's Discussion and Analysis of Financial Condition and Results of Operations Fees earned are as follows:
Three months Three months Six months Six months ended ended ended ended June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001 ------------------- ------------------- ------------------ ------------------- Life Reinsurance North America $1,316 $256 $2,609 $ 345 Wealth Management 885 662 1,666 1,273 ------------------- ------------------- ------------------- ------------------- Total $2,201 $918 $4,275 $1,618 =================== =================== =================== ===================
Wealth Management fees are earned from both life and annuity clients. The following table summarizes our client base with the associated segregated asset values and policy face amounts.
June 30, 2002 March 31, 2002 December 31, 2001 June 30, 2001 ---------------- ----------------- ---------------- ---------------- Number of clients - Life 47 43 42 25 - Annuity 93 91 90 84 ---------------- ----------------- ---------------- ---------------- 140 134 132 109 ================ ================= ================ ================ Segregated asset value - Life $122,000 $130,600 $134,800 $ 93,340 - Annuity 451,150 473,000 468,000 427,230 ---------------- ----------------- ---------------- ---------------- $573,150 $603,600 602,800 $520,570 ================ ================= ================ ================ Face value - Life $914,540 $843,112 $812,380 $457,886 ================ ================= ================ ================
The change in the segregated assets is as follows:
Three months Three months Six months Six months ended ended ended ended June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001 ------------------- ------------------ ------------------ ------------------- Balance at beginning of period $603,600 $460,719 $602,800 $409,660 Deposits 7,607 46,925 11,807 109,124 Withdrawals - (6,915) (650) (8,215) Investment performance (1) (38,052) 19,841 (40,802) 10,001 ------------------- ------------------- ------------------- ------------------- Balance end of period $573,155 $520,570 $573,155 $520,570 =================== =================== =================== ===================
(1) Investment performance for the period is determined using actual asset valuations where available and estimates where actual data is not available. Investment income Net investment income increased by $15.6 million or 149% to $26.1 million in the second quarter of 2002 compared to $10.5 million in the second quarter of 2001 and by $25.6 million or 115% to $47.9 million during the first six months of 2002 compared to $22.3 million in the same period in 2001. The increase in net investment income for each period of 2002 over the comparable period in 2002 is attributable to an increase in our average invested assets and funds withheld at interest in our North American operations, the inclusion of World-Wide's net investment income for the first time since we acquired World-Wide on December 31, 2001, and the net proceeds of the equity offering of $114.3 million. Fixed maturity investments have increased from $463.9 million at June 30, 2001 to $698.5 million at June 30, 2002. Funds withheld by ceding insurers at interest amounted to $879.6 million at June 30, 2002 in comparison with $77.4 million at June 30, 2001. The World-Wide fixed income portfolio totaled $93.0 million as of June 30, 2002. 19 Scottish Annuity & Life Holdings, Ltd. Management's Discussion and Analysis of Financial Condition and Results of Operations The growth in average invested assets has been offset by a decline due to the recapture by a ceding company of $185.7 million of assets on April 30, 2001. During the second quarter of 2002 and the first six months of 2002, average book yields were lower, particularly on floating rate assets and cash than in the same periods in 2001. Yields on floating rate assets move with LIBOR, which has decreased significantly. On the $643.7 million portfolio managed by General Re - New England Asset Management Inc. ("NEAM"), the yields on fixed rate assets were 6.3% and 6.9% at June 30, 2002 and 2001, respectively. Between those dates, however, LIBOR decreased to 1.8% from 3.8%, causing the yield on our floating rate assets to decrease to 3.7% from 6.6% and the yield on our cash and cash equivalents to decrease to 1.8% from 3.4%. Since floating rate liabilities funded the floating rate assets, the decrease in yield on assets had no material effect on earned margins. The split of investment income by segment is as follows:
Three months Three months Six months Six months ended ended ended ended June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001 ------------------- ------------------ ------------------ ------------------- Life Reinsurance - North America $23,157 $8,210 $42,683 $18,190 - International 1,705 - 3,108 - Wealth Management (35) - (119) 2 Other (1) 1,320 2,305 2,205 4,070 ------------------- ------------------- ------------------- ------------------- Total $26,147 $10,515 $47,877 $22,262 =================== =================== =================== ===================
(1) Other includes investment income on unallocated capital. Realized gains (losses) In the second quarter of 2002, realized losses on investments amounted to $1.8 million compared to a realized gain of $420,000 in the second quarter of 2001. During the first six months realized losses amounted to $3.3 million in comparison with gains of $458,000 in the first six months of 2001. These losses comprise realized investment losses on unit-linked securities held by World-Wide and impairment losses recognized under EITF Issue No. 99-20, offset by net gains on fixed maturity investments. Under EITF 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets", a decline in fair value below "amortized cost" basis is considered to be an other than temporary impairment whenever there is an adverse change in the amount or timing of cash flows to be received, regardless of the resulting yield, unless the decrease is solely a result of changes in market interest rates. Unit-linked securities are comprised of investments in a unit trust denominated in British pounds. These investments were acquired as part of the purchase of World-Wide and are recorded at quoted market value. Changes in market value are recorded as net realized gains. The investment results of the unit-linked securities are generally passed on to the policyholder. 20 Scottish Annuity & Life Holdings, Ltd. Management's Discussion and Analysis of Financial Condition and Results of Operations Benefits and expenses
Three months Three months Six months Six months ended ended ended ended June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001 ------------------- ------------------ ------------------ ------------------- Claims and other policy benefits $26,656 $10,292 $50,543 $17,626 Interest credited to interest sensitive contract liabilities 11,228 2,818 20,406 7,038 Acquisition costs and other insurance expenses 11,575 3,152 22,212 7,267 Operating expenses 6,632 2,412 10,976 5,043 Interest expense 138 314 482 314 ------------------- ------------------- ------------------- ------------------- Total benefits and expenses $56,229 $18,988 $104,619 $37,288 =================== =================== =================== ===================
Claims and other policy benefits Claims and other policy benefits increased by 159% to $26.7 million in the second quarter of 2002 from $10.3 million in 2001 and by 187% to $50.6 million in the first six months from $17.6 million in 2001. The increase is a result of the acquisition of World-Wide, the increased number of clients and the increase in business from these clients in our Life Reinsurance North America operations. Claims and policyholder benefits in respect of World-Wide were $9.2 million and $17.4 million, respectively, for the second quarter and first six months of 2002. Interest credited to interest sensitive contract liabilities Interest credited to interest sensitive contract liabilities increased by $8.4 million or 298% to $11.2 million for the second quarter of 2002 from $2.8 million in 2001. For the first six months interest credited to interest sensitive contract liabilities increased by $13.4 million or 190% to $20.4 million from $7.0 million in 2001. The increase was due to interest credited on new 2002 reinsurance treaties and increases in interest credited to policies which commenced in 2002 and 2001 due to increasing average liability balances. Acquisition costs and other insurance expenses Acquisition costs and other insurance expenses increased by $8.4 million or 267% to $11.6 million in the second quarter of 2002 from $3.1 million in 2001. During the first six months of 2002 acquisition costs and other insurance expenses increased by $14.9 million or 206% to $22.2 million from $7.3 million in 2001. The increases were a result of the acquisition of World-Wide, the increased number of reinsurance clients in our Life Reinsurance business and the increase in premiums earned over the last two years. 21 Scottish Annuity & Life Holdings, Ltd. Management's Discussion and Analysis of Financial Condition and Results of Operations The components of these expenses are as follows:
Three months Three months Six months Six months ended ended ended ended June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001 ------------------- ------------------ ------------------ ------------------- Commissions, excise taxes and other insurance expenses $29,786 $11,980 $56,877 $21,742 Deferral of expenses (27,027) (10,388) (49,688) (19,213) ------------------- ------------------- ------------------- ------------------- 2,759 1,592 7,189 2,529 Amortization - Present value of in-force business 679 51 1,401 103 Amortization - Deferred acquisition costs 8,137 1,509 13,622 4,635 ------------------- ------------------- ------------------- ------------------- Total $11,575 $ 3,152 $22,212 $ 7,267 =================== =================== =================== ===================
Commissions and excise taxes vary with premiums earned. Other insurance expenses include direct and indirect expenses of those departments involved in the marketing, underwriting and issuing of reinsurance treaties. In 2002 we have allocated less of these expenses to acquisition costs than in 2001. They are now included in operating expenses. Of these total expenses a portion is deferred and amortized over the life of the reinsurance treaty or in relation to the estimated gross profit in respect of our interest sensitive contracts. The split of these expenses between segments is as follows:
Three months Three months Six months Six months ended ended ended ended June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001 ------------------- ------------------ ------------------ ------------------- Life Reinsurance - North America $10,487 $2,974 $19,025 $6,952 - International 139 - 1,674 - Wealth Management 949 178 1,513 315 ------------------- ------------------- ------------------- ------------------- Total $11,575 $3,152 $22,212 $7,267 =================== =================== =================== ===================
22 Scottish Annuity & Life Holdings, Ltd. Management's Discussion and Analysis of Financial Condition and Results of Operations Operating expenses Operating expenses increased to $6.6 million for the second quarter of 2002 compared to $2.4 million in the second quarter of 2001 and to $11.0 million in the first six months of 2002 compared to $5.0 million in the same period in 2001. The increase is a result of the acquisition of World-Wide, less costs being allocated in 2002 to acquisition expenses as they relate to marketing, underwriting and policy and treaty issuance and increased personnel costs and legal and professional fees due to the growth in our business. The split of these expenses between segments is as follows:
Three months Three months Six months Six months ended ended ended ended June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001 ------------------- ------------------ ------------------ ------------------- Life Reinsurance - North America $2,021 $1,029 $3,374 $2,078 - International 1,767 - 3,454 - Wealth Management 508 110 711 352 Other 2,336 1,273 3,437 2,613 ------------------- ------------------- ------------------- ------------------- Total $6,632 $2,412 $10,976 $5,043 =================== =================== =================== ===================
Other operating expenses include salaries, head office expenses, legal and professional fees and other expenses not related to either our Life Reinsurance or Wealth Management lines of business. Interest expense We incurred interest expense of $138,000 during the second quarter as compared with $314,000 in 2001 reflecting the use of borrowings as described in Note 11 to the unaudited consolidated financial statements. Interest expense for the six months ended June 30, 2002 amounted to $482,000 in comparison with $314,000 in 2001. Income taxes The 2002 income tax expense includes taxes on the earnings of Scottish Re (U.S.), Inc., Scottish Annuity & Life International Insurance Company (Bermuda) Ltd., World-Wide Reassurance Company Limited and Scottish Re (Dublin) Limited. In 2001, the income tax expense was offset by a release of capital loss carry-forwards. Minority interest We now own 100% of Scottish Annuity & Life Holdings (Bermuda) Limited (formerly Scottish Crown Group (Bermuda) Ltd.). In July 2001 we acquired the remaining 49.99% of Scottish Annuity & Life Holdings (Bermuda) Limited that we did not own, and thereby eliminated the minority interest position. Financial Condition Investments At June 30, 2002 the portfolio controlled by us consisted of $756.1 million of fixed income securities and cash. Of this total $643.6 million represented the fixed income portfolio controlled by NEAM, $93.1 million represented investments of World-Wide, which have historically been managed internally, and $19.5 million represented other cash balances. At June 30, 2002, the portion of the portfolio managed by NEAM had an average Standard & Poor's rating of "AA-", an average effective duration of 3.9 years and an average book yield of 5.98% as compared with an average rating of "A+", an 23 Scottish Annuity & Life Holdings, Ltd. Management's Discussion and Analysis of Financial Condition and Results of Operations average effective duration of 3.5 years and an average book yield of 6.14% at December 31, 2001. At June 30, 2002 the portion of the investment portfolio managed by World-Wide had an average rating of "AA-", an average duration of 2.8 years and an average book yield of 5.66% as compared with an average rating of "AA-", an average duration of 1.9 years and an average book yield of 5.22% at December 31, 2001. At June 30, 2002 the unrealized appreciation on investments, net of tax was $1.3 million as compared with depreciation of $3.6 million at December 31, 2001. These amounts are included on our consolidated balance sheets as part of shareholders' equity. At June 30, 2002 funds withheld at interest totaled $879.6 million with an average rating of "A", an average duration of 5.8 years and an average book yield of 6.68% as compared with an average rating of "A-", an average duration of 6.0 years and an average book yield of 6.80% at December 31, 2001. These are fixed income investments associated with modified coinsurance transactions and include marketable securities, commercial mortgages and private placements. The market value of the funds withheld amounted to $892.2 million at June 30, 2002. Liquidity and Capital Resources Cash flow Cash flow from operations for the six-month period ended June 30, 2002 was a negative of $4.4 million compared to $50.8 million in the prior year period. The positive cash flow of $50.8 million in the first six months of 2001 arose principally as a result of the acquisition of the assets of $58.9 million on the in-force reinsurance transaction discussed in Note 9 to the unaudited consolidated financial statements. There have been no acquisitions of in-force business in 2002. Although premiums written and renewal premiums received in the first half of the year are typically lower than the later period, causing reduced cash flows, the payment of claims and operating expenses continue on a more level basis throughout the year. Our cash flow from operations may be positive or negative in any period depending on the amount of new Life Reinsurance business written, the level of ceding commissions paid in connection with writing that business and the level of renewal premiums earned in that period. Capital and collateral At June 30, 2002, total capitalization was $464.2 million compared to $331.3 million at December 31, 2001. The increase in capitalization at June 30, 2002 is due to the proceeds of the equity offering of $114.3 million discussed in Note 12 to the unaudited consolidated financial statements, the increase in unrealized appreciation of investments, the cumulative translation adjustment, and net earnings for the period less dividends. On April 4, 2002, we completed a public offering of 6,750,000 ordinary shares (which included the over-allotment option of 750,000 ordinary shares) in which we raised aggregate net proceeds of approximately $114.3 million. We have used the proceeds of the offering to repay short-term borrowings of $40 million and for general corporate purposes. During the second quarter, we paid dividends totaling $0.05 per share or $1.4 million for a total of $0.10 per share or $2.4 million for the first six months of 2001. We have in place a credit facility with a U.S. bank that provides a combination of borrowings and letters of credit totaling $50 million. This facility expires on July 31, 2003 but is renewable with the agreement of both parties. Borrowings are at a rate of LIBOR plus 40 basis points. At June 30, 2002 there were no borrowings or outstanding letters of credit under this facility. We are also in discussion with a U.S. bank for an additional credit facility providing a combination of borrowings and letters of credit totaling $50 million. We have also borrowed $22.3 million ($25.1 million at December 31, 2001) under a reverse repurchase agreement with a major broker/dealer. Under this agreement, we have sold agency mortgage backed securities with the agreement to repurchase them at a fixed price, providing the dealer with a spread that equates to an effective borrowing cost linked to one-month LIBOR. This agreement is renewable monthly at the discretion of the broker/dealer. 24 Scottish Annuity & Life Holdings, Ltd. Management's Discussion and Analysis of Financial Condition and Results of Operations Total assets and liabilities include $100 million in respect of a Funding Agreement (the "Agreement") that we entered into on June 28, 2002. The funds were received on July 5, 2002. The principal is to be repaid in five equal installments on December 28, 2006, March 28, 2007, June 28, 2007, September 28, 2007 and December 28, 2007. Interest is payable quarterly at LIBOR plus 0.525% commencing on September 28, 2002. The Agreement is collateralized by assets held in a trust that are managed in accordance with agreed investment guidelines. The market value of the assets in the trust is determined weekly and is compared to a required amount equal to the sum of the funded amount under the Agreement, including accrued interest and over-collateralization based on the ratings of individual trust assets and our lowest financial strength rating from Moody's, Standard & Poor's and Fitch. We are required to deposit cash, eligible investments or provide a letter of credit if there is a deficit between the assets in the trust, including accrued interest, and the required amount. We may withdraw funds from the trust to the extent that the valuation of the trust assets is in excess of the required amount. We must have sufficient assets available for use as collateral to support borrowings, letters of credit and certain reinsurance transactions. With these reinsurance transactions, the need for collateral letters of credit arises in four ways: o When Scottish Annuity & Life Insurance Company (Cayman) Ltd. enters into a reinsurance treaty with a U.S. customer, it must pledge assets into a reserve credit trust with a U.S. bank in order that the ceding company may obtain reserve credit for the reinsurance transaction; in some cases, a letter of credit may be substituted for all or a portion of a reserve credit trust; o When Scottish Re (U.S.), Inc. enters into a reinsurance transaction, it typically incurs a need for additional statutory capital; this need can be met by its own capital and surplus, an infusion of cash or assets from Scottish Annuity & Life Insurance Company (Cayman) Ltd. or by ceding a portion of the transaction to another company within the group or an unrelated reinsurance company, in which case that reinsurer must provide reserve credit by pledging assets in a reserve credit trust or pledging assets to a bank to support a letter of credit; o Scottish Re (U.S.), Inc. is licensed, accredited, approved or authorized to write reinsurance in 47 states and the District of Columbia. When Scottish Re (U.S.), Inc. enters into a reinsurance transaction with a customer domiciled in a state in which it is not licensed, accredited, authorized or approved reinsurer, it likewise must provide a reserve credit trust or letter of credit; and o Even when Scottish Re (U.S.), Inc. is licensed, accredited, approved or authorized to write reinsurance in the state, it may agree with a customer to provide a reserve credit trust or letter of credit voluntarily to mitigate the counter-party risk from the customer's perspective, thereby doing transactions that would be otherwise unavailable or would be available only on significantly less attractive terms; such a requirement most often arises in connection with interest-sensitive liabilities. Scottish Annuity & Life Insurance Company (Cayman) Ltd. has agreed with Scottish Re (U.S.), Inc. that it will (1) cause Scottish Re (U.S.), Inc. to maintain capital and surplus equal to the greater of $20.0 million or such amount necessary to prevent the occurrence of a Company Action Level Event under the risk-based capital laws of the State of Delaware and (2) provide Scottish Re (U.S.), Inc. with enough liquidity to meet its obligations in a timely manner. In addition, Scottish Annuity & Life Insurance Company (Cayman) Ltd. and Scottish Holdings have agreed with World-Wide Reassurance that in the event World-Wide Reassurance is unable to meet its obligations under its insurance and reinsurance agreements, Scottish Annuity & Life Insurance Company (Cayman) Ltd. (or if Scottish Annuity & Life Insurance Company (Cayman) Ltd. cannot fulfill such obligations, then Scottish Holdings) will indemnify World-Wide Reassurance for all of its obligations under such agreements. Scottish Holdings and Scottish Annuity & Life Insurance Company (Cayman) Ltd. may, from time to time, execute additional agreements guaranteeing the performance and/or obligations of their subsidiaries. While we believe that we have sufficient assets available in the short term to support our liquidity and letter of credit needs, we may need to raise additional capital and/or find alternative assets or unsecured letters of credit to continue to grow. We expect that our cash and investments, together with cash generated from our businesses, will provide sufficient sources of liquidity to meet our current needs. However, if our business continues to grow significantly, we will need to raise additional capital. 25 Scottish Annuity & Life Holdings, Ltd. Management's Discussion and Analysis of Financial Condition and Results of Operations Off balance sheet arrangements We have no obligations, assets or liabilities other than those disclosed in the financial statements; no trading activities involving non-exchange traded contracts accounted for at fair value; and no relationships and transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties. Changes in Accounting Standards In June 2001, the Financial Accounting Standards Board issued SFAS 141, "Business Combinations", and SFAS 142, "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. We have applied the new rules on accounting for goodwill and other intangible assets in this quarter. Goodwill of $32.3 million arose on the acquisition of World-Wide at December 31, 2001. We have performed the first of the required impairment tests of goodwill and have determined that there is no goodwill impairment. Our reported earnings and financial position for 2001 do not reflect significant amounts of amortization of goodwill. Forward-Looking Statements Some of the statements contained in this report are not historical facts and are forward-looking within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results to differ materially from the forward-looking statements. Words such as "anticipates", "expects", "intends", "plans", "believes", "seeks", "estimates", "may", "will", "continue", "project", and similar expressions, as well as statements in the future tense, identify forward-looking statements. These forward-looking statements are not guarantees of our future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. These risks and uncertainties include: o Uncertainties relating to the ratings accorded to our insurance subsidiaries; o Uncertainties relating to government and regulatory policies (such as subjecting us to insurance regulation or taxation in additional jurisdictions); o Exposure to mortality experience which differs from our assumptions; o Uncertainties arising from control of our assets by third parties; o The risk that our risk analysis and underwriting may be inadequate; o Risks arising from our investment strategy, including risks related to market value of our investments, fluctuations in interest rates and our need for liquidity; o The risk that our retrocessionaires may not honor their obligations to us; o Changes in capital needs; o The impact of acquisitions, including the ability to successfully integrate acquired businesses, the competing demands for our capital and the risk of undisclosed liabilities; o Loss of the service of any of our key employees; o Changes in accounting principles; o Terrorist attacks on the United States and the impact of such attacks on the economy in general and on our business in particular; o Political and economic risks in developing countries; o Losses due to foreign currency rate fluctuations; o Changes in the rate of policyholder withdrawals or recapture of reinsurance treaties; o The competitive environment in which we operate and associated pricing pressures; and o Developments in global financial markets that could affect our investment portfolio and fee income. 26 Scottish Annuity & Life Holdings, Ltd. Management's Discussion and Analysis of Financial Condition and Results of Operations The effects of these factors are difficult to predict. New factors emerge from time to time and we cannot assess the financial impact of any such factor on the business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward looking statement. Any forward looking statement speaks only as of the date of this report and we do not undertake any obligation to update any forward looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of unanticipated events. Risk Factors of Investing in Our Ordinary Shares Investing in our ordinary shares involves a high degree of risk. Prior to investing in the ordinary shares, potential investors should consider carefully the risk factors set forth in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, in addition to the other information set forth in this Form 10-Q. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes since December 31, 2001. Please refer to "Item 7A: Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K. 27 PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is not currently involved in any material litigation or arbitration. Item 2. Changes in Securities and Use of Proceeds On April 4, 2002, the Company completed a public offering of 6,750,000 ordinary shares (Commission File Numbers 333-83696 and 333-85548), which included the over-allotment option of 750,000 ordinary shares, for an aggregate offering price of $123 million. After deducting estimated expenses of $9 million, the Company raised aggregate net proceeds of approximately $114 million. The managing underwriters were Bear, Stearns & Co. Inc., Putnam Lovell Securities Inc., Fox-Pitt, Kelton and Keefe Bruyette & Woods, Inc. The Company has used the proceeds of the offering to repay short term borrowings of $40 million and will use the remainder for general corporate purposes. Item 3. Default Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Securities Holders The 2002 Annual Meeting of Shareholders of the Company was held on May 2, 2002. The following items of business were presented to the shareholders of the Company (the "Shareholders"): Election of Directors The results of the vote of the Shareholders with respect to the three Class I Directors, one Class II Director and one Class III Director were elected as proposed in the Proxy Statement dated April 1, 2002 under the caption titled "Proposal for Election of Directors" were as follows: Total Vote Total Vote For Withheld From Name Each Director Each Director Class I Directors G. William Caulfield-Browne 16,995,096 225,700 Robert M. Chmely 16,992,496 288,300 Glenn S. Schafer 16,992,196 288,600 Class II Directors Lord Norman Lamont 16,774,446 446,350 Class III Director Khanh T. Tran 16,768,346 452,450 28 Amendments to the Articles of Association The Articles of Association were amended as proposed in the Proxy Statement dated April 1, 2002 under the caption titled "Amendments to the Articles of Association" to make technical amendments to Article 9 of the Articles of Association to conform to the Company's recent listing on the New York Stock Exchange. The results of the vote of the Shareholders with respect to the amendments to the Articles of Association were as follows: For: 16,713,482 Against: 481,814 Abstain: 25,500 Ratification of Independent Auditors The Board of Directors has selected, based upon the recommendation of the Audit Committee, Ernst & Young, as the independent auditors for the Company for the fiscal year ending December 31, 2002. The results of the vote of the Shareholders with respect to this selection were as follows: For: 17,149,546 Against: 69,550 Abstain: 1,700 Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K A. Exhibits Except as otherwise indicated, the following Exhibits are filed herewith and made a part hereof: Exhibit Description of Document Number 3.1 Memorandum of Association of the Company, as amended as of December 14, 2001 (incorporated herein by reference to the Company's Current Report on Form 8-K/A).(6) 3.2 Articles of Association of the Company, as amended as of December 14, 2001 (incorporated herein by reference to the Company's Current Report on Form 8-K/A).(6) 4.1 Specimen Ordinary Share Certificate (incorporated herein by reference to Exhibit 4.1 to the Company's registration Statement on Form S-1).(1) 4.2 Form of Amended and Restated Class A Warrant (incorporated herein by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-1).(1) 4.3 Form of Amended and Restated Class B Warrant (incorporated herein by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-1).(1) 4.4 Form of Securities Purchase Agreement for the Class A Warrants (incorporated herein by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-1).(1) 29 4.5 Form of Warrant Purchase Agreement for the Class B Warrants (incorporated herein by reference to Exhibit 4.5 to the Company's Registration Statement on Form S-1).(1) 4.6 Form of Securities Purchase Agreement between the Company and the Shareholder Investors (incorporated herein by reference to Exhibit 4.10 to the Company's Registration Statement on Form S-1).(1) 4.7 Form of Securities Purchase Agreement between the Company and the Non-Shareholder Investors (incorporated herein by reference to Exhibit 4.12 to the Company's Registration Statement on Form S-1).(1) 10.1 Employment Agreement dated June 18, 1998 between the Company and Michael C. French (incorporated herein by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1).(1) 10.2 Second Amended and Restated 1998 Stock Option Plan effective October 22, 1998 (incorporated herein by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1).(1) 10.3 Form of Stock Option Agreement in connection with 1998 Stock Option Plan (incorporated herein by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1).(1) 10.4 Investment Management Agreement dated October 22, 1998 between the Company and General Re-New England Asset Management, Inc. (incorporated herein by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1).(1) 10.5 Form of Omnibus Registration Rights Agreement (incorporated herein by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1).(1) 10.6 1999 Stock Option Plan (incorporated herein by reference to Exhibit 10.14 to the Company's 1999 Annual Report on Form 10-K).(2) 10.7 Form of Stock Options Agreement in connection with 1999 Stock Option Plan (incorporated herein by reference to Exhibit 10.15 to the Company's 1999 Annual Report on Form 10-K).(2) 10.8 Employment Agreement dated September 18, 2000 between the Company and Oscar R. Scofield (incorporated herein by reference to Exhibit 10.16 to the Company's 2000 Annual Report on Form 10-K).(3) 10.9 Share Purchase Agreement by and between the Company and Pacific Life Insurance Company dated August 6, 2001 (incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on August 9, 2001). 10.10 Amendment No. 1, dated November 8, 2001, to Share Purchase Agreement dated August 2001 by and between the Company and Pacific Life Insurance Company (incorporated by reference to the Company's Current Report on Form 8-K).(5) 10.11 2001 Stock Option Plan (incorporated herein by reference to Exhibit 10.17 to the Company's 2001 Annual Report on Form 10-K).(4) 30 10.12 Form of Nonqualified Stock Option Agreement in connection with 2001 Stock Option Plan (incorporated herein by reference to Exhibit 10.18 to the Company's 2001 Annual Report on Form 10-K).(4) 10.13 Service Agreement dated December 31, 2001 between World-Wide Holdings, Paul Andrew Bispham and the Company (incorporated herein by reference to Exhibit 10.19 to the Company's 2001 Annual Report on Form 10-K).(4) 10.14 Registration Rights Agreement dated December 31, 2001 between the Company and Pacific Life Insurance Company (incorporated by reference to the Company's Current Report on Form 8-K).(5) 10.15 Stockholder Agreement dated December 31, 2001 between the Company and Pacific Life Insurance Company (incorporated by reference to the Company's Current Report on Form 8-K).(5) 10.16 Tax Deed of Covenant dated December 31, 2001 between the Company and Pacific Life Insurance Company (incorporated by reference to the Company's Current Report on Form 8-K).(5) 10.17 Letter Agreement dated December 28, 2001 between the Company and Pacific Life Insurance Company (incorporated by reference to the Company's Current Report on Form 8-K).(5) 10.18 Form of Indemnification Agreement between the Company and each of its directors and officers. 10.19 Employment Agreement dated July 1,2002 between Scottish Annuity & Life International Insurance Company (Bermuda) Ltd. and Steven A. Helland. 10.20 Employment Agreement dated July 1,2002 between Scottish Annuity & Life Insurance Company (Cayman) Ltd. and Thomas A. McAvity, Jr. 10.21 Employment Agreement dated June 3, 2002 between Scottish Re (U.S.), Inc. and James Clayton Moye, III. 10.22 Employment Agreement dated June 1, 2002 between the Company and Elizabeth Murphy. 10.23 Employment Agreement dated June 1, 2002 between the Company and Clifford J. Wagner. 10.24 Employment Agreement dated July 8, 2002 between the Company and Scott E. Willkomm. 10.25 Employment Agreement dated May 29, 2002 between Scottish Re (U.S.), Inc. and Larry N. Stern. 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.3 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 31 (1) The Company's Registration Statement on Form S-1 was filed with the Securities and Exchange Commission on June 19, 1998, as amended. (2) The Company's 1999 Annual Report on Form 10-K was filed with the Securities and Exchange Commission on April 3, 2000. (3) The Company's 2000 Annual Report on Form 10-K was filed with the Securities and Exchange Commission on March 30, 2001. (4) The Company's 2001 Annual Report on Form 10-K was filed with the Securities and Exchange Commission on March 5, 2002. (5) The Company's Current Report on Form 8-K was filed with the Securities and Exchange Commission on December 31, 2001. (6) The Company's Current Report on Form 8-K/A was filed with the Securities and Exchange Commission on January 11, 2002. B. Reports on Form 8-K The Company did not file any Current Reports on Form 8-K during the three month period ended June 30, 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. Date: August 7, 2002 By: /s/ Scott E. Willkomm Scott E. Willkomm President Date: August 7, 2002 By: /s/ Elizabeth A. Murphy Elizabeth A. Murphy Chief Financial Officer