-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V71M32N9P6K/n4d7HU6TD2OMshjx+lEGq73k0Lp55ZL3qvtrig2T8wEntk8aGrE8 A3KTfND42Y4sTIp+z17s7w== 0000898080-04-000138.txt : 20040305 0000898080-04-000138.hdr.sgml : 20040305 20040304183844 ACCESSION NUMBER: 0000898080-04-000138 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20031222 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20040305 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCOTTISH RE GROUP LTD CENTRAL INDEX KEY: 0001064122 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 000000000 STATE OF INCORPORATION: E9 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-16855 FILM NUMBER: 04649985 BUSINESS ADDRESS: STREET 1: GRAND PAVILION COMMERCIAL CENTRE STREET 2: 802 WEST BAY RD GEORGE TOWN GRAND CAYMAN CITY: GRAND CAYMAN CAYMAN STATE: E9 ZIP: 00000 BUSINESS PHONE: 3459492800 MAIL ADDRESS: STREET 1: P O BOX HM 2939 CITY: HAMILTON STATE: D0 ZIP: HM MX FORMER COMPANY: FORMER CONFORMED NAME: SCOTTISH LIFE HOLDINGS LTD DATE OF NAME CHANGE: 19980615 8-K/A 1 form8ka.txt FORM 8-K/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A Current Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of Earliest Event Reported): December 22, 2003 Scottish Re Group Limited (Exact Name of Registrant as Specified in its Charter) Cayman Islands (State or Other Jurisdiction of Incorporation) 001-16855 N/A (Commission File Number) (I.R.S. Employer Identification Number) (441) 295-4451 (Registrant's Telephone Number, Including Area Code) P.O. Box HM 2939 Crown House, Third Floor, 4 Par-la-Ville Road N/A Hamilton HM 08, Bermuda (Zip Code) (Address of Principal Executive Offices) N/A (Former Name or Former Address, if Changed Since Last Report) Scottish Re Group Limited hereby amends Item 7 of its Current Report on Form 8-K filed on January 6, 2004, in order to file certain financial statements and information. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. (a) Financial Statements of Business Acquired This item is amended to include the following, attached hereto as Exhibit 99.1: Independent Auditors' Report................................................ 1 Statement of Income of ERC Life Reinsurance Corporation for the nine-month period ended September 30, 2003.......................................... 2 Statement of Cash Flows of ERC Life Reinsurance Corporation for the nine-month period ended September 30, 2003............................... 3 Notes to Financial Statements............................................... 4 (b) Pro Forma Financial Information This item is amended to include the following, attached hereto as Exhibit 99.2: Unaudited Pro Forma Statement of Income for the year ended December 31, 2003 1 (c) Exhibits 23.1 Consent of KPMG LLP 99.1 Financial Statements of ERC Life Reinsurance Corporation for the nine-month period ended September 30, 2003. 99.2 Unaudited Pro Forma Financial Statements of Scottish Re Group Limited for the year ended December 31, 2003. SIGNATURE 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, hereunto duly authorized. SCOTTISH RE GROUP LIMITED By: /s/ Elizabeth Murphy ------------------------------ Elizabeth Murphy Chief Financial Officer Dated: March 4, 2004 INDEX TO EXHIBITS Number Description - ------ ----------- 23.1 Consent of KPMG LLP 99.1 Financial Statements of ERC Life Reinsurance Corporation for the nine-month period ended September 30, 2003. 99.2 Unaudited Pro Forma Financial Statements of Scottish Re Group Limited for the year ended December 31, 2003. EX-23.1 3 ex23-1.txt INDEPENDENT AUDITORS' CONSENT Exhibit 23.1 Independent Auditors' Consent The Board of Directors Scottish Holdings, Inc.: We consent to the incorporation in the Form 8-KA of Scottish Holdings, Inc. of our report dated February 15, 2004 with respect to the income statement and statement of cash flows of ERC Life Reinsurance Corporation for the nine-month period ended September 30, 2003, which appears in the Form 8-K/A of Scottish RE Group Limited dated March 4, 2004. /s KPMG LLP Kansas City, Missouri March 4, 2004 EX-99 4 ex991.txt EXHIBIT 99.1 ERC LIFE REINSURANCE CORPORATION Statements of Income and Cash Flows For the Nine-Month Period Ended September 30, 2003 (With Independent Auditors' Report Thereon) ERC LIFE REINSURANCE CORPORATION Table of Contents Page Independent Auditors' Report..................................................3 Statement of Income, Nine-month period ended September 30, 2003...............4 Statement of Cash Flows, Nine-month period ended September 30, 2003...........5 Notes to Financial Statements.................................................6 Independent Auditors' Report The Board of Directors ERC Life Reinsurance Corporation: We have audited the accompanying statements of income and cash flows of ERC Life Reinsurance Corporation (the Company) for the nine-month period ended September 30, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As discussed in note 1, the accompanying financial statements contain certain adjustments made to reflect the ongoing operations of the Company. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of ERC Life Reinsurance Corporation for the nine-month period ended September 30, 2003, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Kansas City, Missouri February 15, 2004 ERC LIFE REINSURANCE CORPORATION Statement of Income For the nine-month period ended September 30, 2003 (Dollars in thousands)
Revenues: Net premiums earned $ 106,537 Net investment income 28,936 Net realized gains on investments 1,644 Other revenues 3,000 ---------- Total revenues 140,117 ---------- Costs and expenses: Claims, claim expenses and policy benefits 108,936 Commission and expense allowance 11,502 Amortization of insurance acquisition costs and present value of future profits 7,706 Other operating costs and expenses 7,735 ---------- Total costs and expenses 135,879 ---------- Earnings before taxes and discontinued operations 4,238 Income tax expense 1,084 ---------- Earnings before discontinued operations 3,154 Income from discontinued operations 61,152 ---------- Net income $ 64,306 ==========
See accompanying notes to financial statements ERC LIFE REINSURANCE CORPORATION Statement of Cash Flows For the nine-month period ended September 30, 2003 (Dollars in thousands)
Cash flows from operating activities: Net earnings from continuing operations $ 3,154 Net earnings from discontinued operations 61,152 Amortization of insurance acquisition costs and present value of future profits 7,706 Adjustments to reconcile net earnings to cash provided by operating activities: Increase in other liabilities 123,198 Decrease in other reinsurance payables (72,245) Increase in reinsurance recoverables (41,277) Claims and claim expenses 23,768 Funds held by reinsured companies 25,524 Increase in investment in subsidiary (90,397) Insurance acquisition costs deferred (1,349) Realized gains on investments (1,644) Other operating activities 2,674 --------- Net cash provided by operating activities 40,264 --------- Cash flows from investing activities: Fixed maturity securities available for sale Purchases (100,895) Sales 114,162 --------- Cash from investing activities 13,267 --------- Cash flows from financing activities: Net contract accumulation payments (9,791) --------- Net cash used in financing activities (9,791) --------- Increase in cash and cash equivalents 43,740 Cash and cash equivalents, beginning of year (61,244) --------- Cash and cash equivalents, end of year $ (17,504) ========= Supplemental disclosure of cash flow information: Cash paid during the year for taxes $ 22,200
See accompanying notes to financial statements. ERC LIFE REINSURANCE CORPORATION Notes to Financial Statements For the Nine-month Period Ended September 30, 2003 (1) Basis of Presentation ERC Life Reinsurance Corporation (ERC Life), referred to as "we", "us" or "our" in this report, is a wholly owned subsidiary of Employers Reinsurance Corporation (ERC). On October 24, 2003, ERC reached agreement to sell 95% of the common stock of ERC Life to Scottish Holdings, Inc. In order to facilitate the transaction, on October 23, 2003, 100% of the common stock of ERC Life's wholly owned subsidiary, Employers Re Corporation (UK) Limited (UK Life) was dividended to ERC. Additionally, the Company entered into reinsurance agreements with Employers Reassurance Corporation (ERAC) and ERC effective October 1, 2003 to retrocede all of its outstanding health reinsurance business. In addition, other adjustments were recorded to reflect the tax effect of the UK Life dividend, effects of foreign currency hedging activities associated with UK Life, and non-recurring adjustments for administrative activities with the parent. The effect of these transactions is that ERC, the seller, will have a continuing interest in the operation of ERC Life, as sold. However, ERC Life will not have any continuing interest in these activities. Therefore, the effects of these transactions have been excluded from income from continuing operations in the financial statements, and are identified as discontinued operations. The following summarizes the historical ERC Life parent only income and expense as well as the items identified above that are not being transferred to Scottish Holdings, Inc.
ERC Life Parent Only Adjustments ----------- ----------- Revenues: Net premiums earned $ 117,314 $ (10,777) Net investment income 121,860 (92,924) Net realized gains on investments 1,644 - Other revenues 4,904 (1,904) ---------- ---------- Total revenues 245,722 (105,605) ---------- ---------- Costs and expenses: Claims, claim expenses and policy benefits 127,245 (18,309) Commission and expense allowance 15,906 (4,404) Amortization of insurance acquisition costs and present value of future profits 9,085 (1,379) Other operating costs and expenses 7,072 663 ---------- ---------- Total costs and expenses 159,308 (23,429) ---------- ---------- Earnings before taxes 86,414 (82,176) Income tax expense 22,108 (21,024) ---------- ---------- Net income $ 64,306 $ (61,152) ========== ==========
ERC LIFE REINSURANCE CORPORATION Notes to Financial Statements For the Nine-month Period Ended September 30, 2003 The accompanying financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America (GAAP), which, as to the insurance company businesses, vary from statutory accounting practices prescribed or permitted by insurance regulatory authorities. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. (2) Summary of Significant Accounting Policies (a) Revenue Recognition and Related Expenses Revenues from traditional insurance contracts are recognized as revenues when due or over the terms of the policies. For universal life contracts and investment contracts, premiums received are reported as liabilities (accumulated contract values), not as revenues. Revenues from universal life contracts and investment contracts are recognized for assessments made against the policyholder's accumulated contract values for insurance, policy administration, surrenders and other authorized charges throughout the life of the policy. Future policy benefits for traditional life and health contracts represent the present value of such benefits based on mortality and other assumptions which were appropriate at the time the policies were issued or at the date of purchase. Interest rate assumptions used in calculating the present value generally ranged from 5% to 7% at September 30, 2003. Interest rates credited to universal life contracts and investment contracts are generally guaranteed for a specified time period with renewal rates determined by the issuing insurance company. Such crediting interest rates generally ranged from 3% to 6% during the first nine months of 2003. (b) Investment Income and Realized and Unrealized Gains and Losses Substantially all of our fixed maturity securities and marketable equity securities have been designated as available-for-sale. We regularly review investment securities for impairment based on criteria that include: (1) the extent to which the investment's carrying value exceeds its related market value; (2) the duration of the market decline; and (3) the financial health of and specific prospects for the issuer. Unrealized losses that are other than temporary are recognized in earnings. Realized gains and losses on sales of investments are determined on the specific-identification method. Investment income is recognized as earned and includes the accretion of discounts and amortization of premiums related to fixed maturity securities. ERC LIFE REINSURANCE CORPORATION Notes to Financial Statements For the Nine-month Period Ended September 30, 2003 (c) Deferred Acquisition Costs and Present Value of Future Profits The costs of acquiring new and renewal business, which vary with and are primarily related to the production of new and renewal business, are generally deferred to the extent recoverable from future premiums or expected gross profits. Deferrable costs include commissions, underwriting expenses and certain other selling and issue costs. For traditional life, accident and health and group health products, deferred policy acquisition costs are amortized over the premium paying period in proportion to the ratio of annual premium revenues to ultimate anticipated premium revenues. The ultimate premium revenues are estimated based upon the same assumptions used to calculate future policy benefits. For universal life contracts and investment contracts, the amortization is based on the anticipated gross profits from investments, surrender and other charges net of interest credited, mortality and maintenance expenses. As actual gross profits vary from projected gross profits, the impact on amortization is included in net income. Deferred policy acquisition costs are adjusted to reflect the impact of unrealized gains and losses on fixed maturity securities available-for-sale. The actuarially determined present value of anticipated net cash flows to be realized from insurance, annuity and investment contracts in force at the date of acquisition of life insurance enterprises is recorded as the present value of future profits ("PVFP", an intangible asset) and is amortized over the respective policy terms in a manner similar to deferred insurance acquisition costs. Unamortized balances are subject to review for impairment using updated estimates of future cash flows. Impairments, if any, when identified are charged to operations when incurred. (d) Federal Income Taxes We utilize the liability method in accounting for income taxes, whereby deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws. (e) Cash and Cash Equivalents Cash includes cash on hand, demand deposits, certificates of deposit and investments in money-market mutual funds. Investment securities with an original maturity greater than three months but less than one year are classified as short-term investment securities and transactions, as such, are considered investing activities in the statement of cash flows. ERC LIFE REINSURANCE CORPORATION Notes to Financial Statements For the Nine-month Period Ended September 30, 2003 (3) Investment Income Major categories of investment income as of September 30, 2003 are summarized as follows (in thousands): Gross investment income: Fixed maturity securities $ 26,658 Equity securities 232 Short-term investment securities 522 Securities and indebtedness of related parties 1,753 --------- 29,165 Investment expenses 229 --------- Net investment income $ 28,936 ========= The sales proceeds and realized gains and losses on investment securities as of September 30, 2003 are summarized as follows (in thousands): Sales proceeds from fixed maturity securities $ 114,162 ========= Net realized gains on investments before income taxes: Fixed maturities: Gross realized gains $ 2,126 Gross realized losses (482) --------- Total net realized gains before income taxes $ 1,644 ========= There are no unrealized losses that are other than temporary recognized in earnings for the nine-month period ended September 30, 2003. (4) Amortization of Intangible Assets The Present Value of Future Profits (PVFP) was determined using risk adjusted discount rates from 5% to 7% and the interest rates selected for the valuation were determined based on the applicable interest rate and the risk inherent in the realization of the estimated future profits at the date of the respective acquisitions. PVFP is being amortized using the interest method over the duration of the related life business, approximately 20 years, as the premiums on the books of business are recognized. Amortization expense for PVFP in future periods will be affected by acquisitions, realized capital gains/losses or other factors affecting the ultimate amount of gross profits realized from certain lines of business. Similarly, future amortization expense for other intangibles will depend on acquisition activity and other business transactions. The amortization of DAC and PVFP for the nine-month period ended September 30, 2003 was $4,191 and $3,515, respectively. ERC LIFE REINSURANCE CORPORATION Notes to Financial Statements For the Nine-month Period Ended September 30, 2003 (5) Income Taxes The impact of income taxes on our operating results as of September 30, 2003 is summarized below (with income tax benefits reflected as positive amounts and income tax expenses reflected as negative amounts): Current year tax expense $ 8,283 Deferred tax expense (7,199) -------- Income taxes incurred $ 1,084 ======== Our effective income tax rate on pre-tax income differs from the prevailing U.S. corporate federal income tax rate and is summarized as follows for the nine-month period ended September 30, 2003: Corporate federal income tax rate 35 % Dividends received deduction (10)% Meals & entertainment 1 % -------- Effective Tax rate 26 % ======== (6) 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 by ceding reinsurance to other insurance companies. To the extent that a reinsurer is unable to meet its obligation under the reinsurance agreement, the Company remains liable. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk to minimize its exposure to significant losses from reinsurer insolvencies. Allowances are established for amounts deemed to be uncollectible. Reinsurance is accounted for over the lives of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies. The effect on reinsurance premiums for the nine-month period ended September 30, 2003 was as follows (in thousands): Direct $ 103 Assumed 234,778 Ceded (128,344) ---------- Net $ 106,537 ========== ERC LIFE REINSURANCE CORPORATION Notes to Financial Statements For the Nine-month Period Ended September 30, 2003 The effect on reinsurance claims, claim expenses and policy benefits incurred during the nine-month period ended September 30, 2003 was as follows (in thousands): Direct $ - Assumed 263,544 Ceded (154,608) ---------- Net $ 108,936 ========== Reinsurance programs remaining after the sale date are primarily related to traditional life reinsurance business. (7) Commitments and Contingencies There are no pending legal proceedings beyond the ordinary course of business that, in our opinion, based on information available at the date of this report, would have a material adverse effect on our results of operations. (8) Accounting Changes We adopted Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 46, Consolidation of Variable Interest Entities, on July 1, 2003. While FIN 46 represents a significant change in accounting principles governing consolidation, it does not change the economic or legal characteristics of asset sales. The adoption of FIN 46 did not have a material effect on our operating results or cash flows. Subsequent to these financial statements in December 2003, the Financial Accounting Standards Board (FASB) modified FIN 46, Consolidation of Variable Interest Entities (with FIN 46R), amending FIN 46 and deferring its application in certain cases. Our adoption of FIN 46 on July 1, 2003, was unchanged by FIN 46R. In April 2003, the FASB finalized SFAS 133 Implementation Issue No. B36, Modified Coinsurance Arrangements and Debt Instruments that Incorporate Credit Risk Exposures that Are Unrelated or Only Partially Related to the Creditworthiness of the Obligor under those Instruments. In summary, the FASB determined that modified coinsurance arrangements where the ceding insurer withholds funds may include an embedded derivative that must be bifurcated from the host instrument if it is not clearly and closely related to such host instrument. This situation often arises when the interest rate on the funds held balance is linked to the actual performance of a specified pool of assets. This guidance is effective on the first day of the first fiscal quarter beginning after September 15, 2003. This required change in accounting has no impact on cash and does not change the cumulative yield that will be received and/or paid over the life of the underlying funds withheld. While we do not believe the impact of this accounting change will have a material impact on our future operating results, the requirement to mark to market the credit risk component within the referenced pool of assets will result in a greater level of reported income volatility than the accounting approach previously applied. EX-99 5 ex992.txt EXHIBIT 99.2 Unaudited Pro Forma Consolidated Statement of Income The following unaudited pro forma consolidated statement of operations for the year ended December 31, 2003 presents operating results of Scottish Re Group Limited (Scottish Re) as if the acquisition of ERC Life Reinsurance Corporation (ERC Life) had occurred on January 1, 2003. Pro forma adjustments are based on available information and certain assumptions that management of Scottish Re believes are reasonable. The unaudited pro forma consolidated financial information should be read in conjunction with other financial information incorporated by reference in this Form 8K/A. The unaudited pro forma consolidated financial information is not intended to be indicative of the consolidated results of operations that would have been reported if the acquisition had occurred at January 1, 2003 or of the consolidated results of future operations.
Year Ended December 31, 2003 Scottish Re ERC Life Adjustments Pro Forma Combined ------------------------------------------------------------------ Premiums earned $384,520 $182,749 $567,269 Investment income,net 147,697 37,806 (17,151) (1) 168,352 Realized gains (losses) (4,448) 1,644 7,045 (2) 4,241 Change in value of embedded derivatives 13,903 - 13,903 Fee income 7,823 6,632 14,455 ------------------------------------------------------------------ 549,495 228,831 (10,106) (3) 768,220 ------------------------------------------------------------------ Claims and other policy benefits 271,468 153,861 425,329 Interest credited to interest sensitive contract liabilitues 89,180 - 89,180 Acquisition costs and other insurance expenses, net 114,509 37,636 (10,264) (3) 141,881 Operating expenses 30,922 8,470 39,392 Interest expense 7,557 - 7,557 ------------------------------------------------------------------ 513,636 199,967 (10,264) (3) 703,339 ------------------------------------------------------------------ Income before income taxes and minority interest 35,859 28,864 158 64,881 Taxes 11,746 (7,977) 56 (4) 3,825 ------------------------------------------------------------------ Income before minority interest 47,605 20,887 214 68,706 Minority interest (1,055) (5) (1,055) ------------------------------------------------------------------ Income from continuing operations before cumulative effect of change in accounting principle $ 47,605 $ 20,887 $ (841) $ 67,651 ================================================================== Earnings per share from continuing operations before cumulative effect of change in accounting principles Basic $ 1.55 $ 2.21 Diluted $ 1.48 $ 2.10 Weighted average shares outstanding Basic 30,652,719 30,652,719 Diluted 32,228,001 32,228,001
(1) Prior to the acquisition of ERC Life by Scottish Re, ERC Life made certain dividend payments. The estimated investment income adjustment has been calculated to eliminate investment income assumed to have been earned on funds used to pay these dividends and is based on a yield of 5.3%. (2) The adjustment to realized gains(losses) is in respect of gains arising on investments sold to fund the dividends described in Note 1. (3) Acquisition costs and other insurance expenses include the amortization of deferred acquisition costs. Under purchase accounting the total purchase is allocated to the acquired assets and liabilities based on their fair values. Deferred acquisition costs of ERC Life have no fair value and therefore there will be no amortization subsequent to the acquisition. (4) This adjustment is the tax effect of the items discussed in Notes 1, 2 and 3 at an effective tax rate of 35%. (5) Scottish Re acquired 95% of ERC Life. This adjustment is the minority interest of 5%. -----END PRIVACY-ENHANCED MESSAGE-----