10-Q 1 form10q.txt FORM 10-Q 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 March 31, 2004 [ ] 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 001-16855 SCOTTISH RE GROUP LIMITED (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 SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. (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 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No As of May 3, 2004, Registrant had 35,753,694 ordinary shares outstanding. Table of Contents PART I. FINANCIAL INFORMATION................................................2 Item 1. Financial Statements.................................................2 Consolidated Balance Sheets - March 31, 2004 (Unaudited) and December 31, 2003................................................2 Unaudited Consolidated Statements of Income - Three months ended March 31, 2004 and 2003..............................................3 Unaudited Consolidated Statements of Comprehensive Income - Three months ended March 31, 2004 and 2003.................................4 Unaudited Consolidated Statements of Shareholders' Equity - Three months ended March 31, 2004 and 2003.................................5 Unaudited Consolidated Statements of Cash Flows - Three months ended March 31, 2004 and 2003........................................6 Notes to Unaudited Consolidated Financial Statements.................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........................................18 Item 3. Quantitative and Qualitative Disclosures About Market Risk..........42 Item 4. Controls and Procedures.............................................42 PART II. OTHER INFORMATION...................................................43 Item 1. Legal Proceedings...................................................43 Item 2. Changes in Securities and Use of Proceeds...........................43 Item 3. Defaults Upon Senior Securities.....................................43 Item 4. Submission of Matters to a Vote of Securities Holders...............44 Item 5. Other Information...................................................45 Item 6. Exhibits and Reports on Form 8-K....................................45 i PART I. FINANCIAL INFORMATION Item 1. Financial Statements Scottish Re Group Limited Consolidated Balance Sheets - March 31, 2004 (Unaudited) and December 31, 2003 (Dollars in thousands)
March 31, 2004 December 31, (unaudited) 2003 --------------- --------------- ASSETS Fixed maturity investments, available for sale, at fair value (Amortized cost $2,280,078; 2003 - $1,993,247)..................... $ 2,336,664 $ 2,014,719 Preferred stock, available for sale, at fair value (Cost $134,094; 2003 -$125,460).................................................... 137,836 126,449 Cash and cash equivalents.......................................... 215,693 298,149 Other investments.................................................. 17,526 17,678 Funds withheld at interest......................................... 1,473,502 1,469,425 --------------- --------------- Total investments............................................. 4,181,221 3,926,420 Accrued interest receivable........................................ 25,598 22,789 Reinsurance balances and risk fees receivable...................... 209,443 196,192 Deferred acquisition costs......................................... 328,149 308,591 Amount recoverable from reinsurers................................. 769,893 737,429 Present value of in-force business................................. 12,794 13,479 Goodwill........................................................... 35,847 35,847 Fixed assets....................................................... 12,570 11,800 Other assets....................................................... 48,685 45,209 Deferred tax benefit............................................... 6,605 12,624 Segregated assets.................................................. 794,627 743,137 --------------- --------------- Total assets.................................................. $ 6,425,432 $ 6,053,517 =============== =============== LIABILITIES Reserves for future policy benefits................................ $ 1,528,589 $ 1,502,415 Interest sensitive contract liabilities............................ 2,864,570 2,633,346 Accounts payable and accrued expenses.............................. 28,383 31,673 Reinsurance balances payable....................................... 145,873 125,756 Other liabilities.................................................. 39,175 30,546 Current income tax payable......................................... 6,896 13,077 Long term debt..................................................... 162,500 162,500 Segregated liabilities............................................. 794,627 743,137 --------------- --------------- Total liabilities............................................. 5,570,613 5,242,450 --------------- --------------- MINORITY INTEREST 9,546 9,295 MEZZANINE EQUITY 142,008 141,928 SHAREHOLDERS' EQUITY Share capital, par value $0.01 per ordinary share: Issued and fully paid: 35,540,728 ordinary shares (2003 - 35,228,411)...................................................... 355 352 Additional paid-in capital......................................... 552,318 548,750 Accumulated other comprehensive income............................. 60,556 29,034 Retained earnings.................................................. 90,036 81,708 --------------- --------------- Total shareholders' equity..................................... 703,265 659,844 --------------- --------------- Total liabilities and shareholders' equity..................... $ 6,425,432 $ 6,053,517 =============== ===============
See Accompanying Notes to Unaudited Consolidated Financial Statements 2 Scottish Re Group Limited Unaudited Consolidated Statements of Income - Three months ended March 31, 2004 and 2003 (Dollars in thousands, except per share data)
Three months Three months ended ended March 31, 2004 March 31, 2003 -------------- -------------- REVENUES Premiums earned.................................. $ 133,347 $ 64,819 Investment income, net........................... 50,103 32,324 Fee income....................................... 2,953 1,991 Realized gains (losses) ......................... 1,421 (2,321) Change in value of embedded derivatives.......... (8,645) - -------------- -------------- Total revenues.............................. 179,179 96,813 -------------- -------------- BENEFITS AND EXPENSES Claims and other policy benefits................. 95,167 42,914 Interest credited to interest sensitive 24,193 15,893 contract liabilities............................. Acquisition costs and other insurance expenses, net.............................................. 32,869 20,655 Operating expenses............................... 12,854 7,865 Interest expense................................. 2,777 1,813 -------------- -------------- Total benefits and expenses................. 167,860 89,140 -------------- -------------- Income before income taxes and minority interest. 11,319 7,673 Income tax expense............................... (874) (250) -------------- -------------- Income before minority interest.................. 10,445 7,423 Minority interest................................ (349) - -------------- -------------- Income from continuing operations................ 10,096 7,423 Loss from discontinued operations................ - (180) -------------- -------------- Net income $ 10,096 $ 7,243 ============== ============== Earnings per ordinary share from continuing operations -Basic................................ $ 0.29 $ 0.28 ============== ============== Earnings per ordinary share from continuing operations - Diluted............................. $ 0.27 $ 0.26 ============== ============== Earnings per ordinary share - Basic.............. $ 0.29 $ 0.27 ============== ============== Earnings per ordinary share -Diluted............. $ 0.27 $ 0.26 ============== ============== Dividends per ordinary share..................... $ 0.05 $ 0.05 ============== ============== Weighted average number of ordinary shares outstanding...................................... Basic............................................ 35,327,658 26,940,294 ============== ============== Diluted.......................................... 37,230,112 28,096,106 ============== ==============
See Accompanying Notes to Unaudited Consolidated Financial Statements 3 Scottish Re Group Limited Unaudited Consolidated Statements of Comprehensive Income - Three months ended March 31, 2004 and 2003 (Dollars in thousands) Three months Three months ended March 31, ended March 31, 2004 2003 ---------------- --------------- Net income................................. $ 10,096 $ 7,243 ----------- ----------- Other comprehensive income, net of tax..... Unrealized appreciation on investments:....................... 27,455 5,067 Add: reclassification adjustment for investment gains (losses) included in net income............................ 894 (1,406) ----------- ----------- Unrealized appreciation on investments net of income tax expense of $8,218 and $2,298................................. 28,349 3,661 Cumulative translation adjustment.......... 3,173 (727) Minimum pension liability adjustment....... - 23 ----------- ----------- Other comprehensive income................. 31,522 2,957 ----------- ----------- Comprehensive income....................... $ 41,618 $ 10,200 =========== =========== See Accompanying Notes to Unaudited Consolidated Financial Statements 4 Scottish Re Group Limited UnauditedConsolidated Statements of Shareholders' Equity - Three months ended March 31, 2004 and 2003 (Dollars in thousands)
Three months Three months ended ended March 31, 2004 March 31, 2003 --------------- --------------- ORDINARY SHARES: Beginning of period.................................. 35,228,411 26,927,456 Issuance to employees on exercise of options......... 312,317 16,834 ------------- ------------- End of period........................................ 35,540,728 26,944,290 ============= ============= SHARE CAPITAL: Beginning of period.................................. $ 352 $ 269 Issuance to employees on exercise of options......... 3 - ------------- ------------- End of period........................................ 355 269 ------------- ------------- ADDITIONAL PAID-IN CAPITAL: Beginning of period.................................. 548,750 416,712 Issuance to employees on exercise of options......... 3,638 147 Other................................................ (70) - ------------- ------------- End of period........................................ 552,318 416,859 ------------- ------------- ACCUMULATED OTHER COMPREHENSIVE INCOME: Unrealized appreciation on investments.................... Beginning of period.................................. 16,848 8,930 Change in period (net of tax)........................ 28,349 3,661 ------------- ------------- End of period........................................ 45,197 12,591 ------------- ------------- Cumulative translation adjustment......................... Beginning of period.................................. 12,186 5,908 Change in period..................................... 3,173 (727) ------------- ------------- End of period........................................ 15,359 5,181 ------------- ------------- Minimum pension liability adjustment Beginning of period.................................. - (1,371) Change in period..................................... - 23 ------------- ------------- End of period........................................ - (1,348) ------------- ------------- ACCUMULATED OTHER COMPREHENSIVE INCOME ................... 60,556 16,424 ------------- ------------- RETAINED EARNINGS: Beginning of period.................................. 81,708 60,644 Net income........................................... 10,096 7,243 Dividends paid....................................... (1,768) (1,349) ------------- ------------- End of period........................................ 90,036 66,538 ------------- ------------- TOTAL SHAREHOLDERS' EQUITY................................ $ 703,265 $ 500,090 ============= =============
See Accompanying Notes to Unaudited Consolidated Financial Statements 5 Scottish Re Group Limited Unaudited Consolidated Statements of Cash Flows - Three months ended March 31, 2004 and 2003 (Dollars in thousands)
Three months Three months ended ended March 31, 2004 March 31, 2003 --------------- -------------- OPERATING ACTIVITIES Net income................................................ $ 10,096 $ 7,243 Items not affecting cash:................................. Net realized (gains) losses.......................... (1,421) 2,330 Change in value of embedded derivatives.............. 8,645 - Amortization of investments.......................... 2,376 508 Amortization of deferred acquisition costs........... 18,227 9,133 Amortization of present value of in-force business... 1,254 1,022 Changes in assets and liabilities:................... Accrued interest................................. (2,718) (1,256) Reinsurance balances and risk fees receivable.... 7,282 2,610 Deferred acquisition costs....................... (38,572) (26,604) Deferred tax liability........................... (3,075) 860 Other assets..................................... (3,354) 1,964 Current income tax receivable and payable........ (17,956) 372 Reserves for future policy benefits.............. (2,587) 17,939 Interest sensitive contract liabilities, net of funds withheld at interest................ 7,203 3,979 Unit linked contract liabilities................. - (1,579) Accounts payable and accrued expenses............ 2,041 (2,370) Other............................................ 2,665 (3,686) ------------- ------------- Net cash provided by (used in) operating activities....... (9,894) 12,465 ------------- ------------- INVESTING ACTIVITIES Purchase of fixed maturity investments.................... (572,298) (276,740) Proceeds from sales of fixed maturity investments......... 231,782 28,685 Proceeds from maturity of investments..................... 54,630 56,513 Purchase of preferred stock............................... (12,494) (13,758) Proceeds from sales of preferred stock.................... 2,400 - Proceeds from maturity of preferred stock................. 1,447 - ------------- ------------- Net cash used in investing activities..................... (294,533) (205,300) ------------- ------------- FINANCING ACTIVITIES Deposits to interest sensitive contract liabilities....... 233,650 156,311 Withdrawals from interest sensitive contract liabilities.. (13,552) (6,378) Issuance of ordinary shares............................... 3,641 147 Dividends paid............................................ (1,768) (1,349) ------------- ------------- Net cash provided by financing activities................. 221,971 148,731 ------------- ------------- Net change in cash and cash equivalents................... (82,456) (44,104) Cash and cash equivalents, beginning of period............ 298,149 149,666 ------------- ------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 215,693 $ 105,562 ============= =============
See Accompanying Notes to Unaudited Consolidated Financial Statements 6 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements March 31, 2004 1. Basis of presentation Accounting Principles - 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, 2003. All tabular amounts are reported in thousands of United States dollars (except per share amounts). Certain prior period amounts have been reclassified to conform to the current year presentation. 2. New Accounting Pronouncements In July 2003, the Accounting Standards Executive Committee issued Statement of Position 03-01 ("SOP"), "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Insurance Contracts and for Separate Accounts". This SOP provides guidance on accounting and reporting by insurance enterprises for certain nontraditional long-duration contracts and for separate accounts and is effective for financial statements for fiscal years beginning after December 15, 2003. In implementing the SOP we have made various determinations, such as qualification for separate account treatment, classification of securities in separate account arrangements, significance of mortality and morbidity risk, adjustments to contract holder liabilities, and adjustments to estimated gross profits as defined in Statement of Financial Accounting Standards ("SFAS") No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments". Implementation of this SOP has not had a material effect on our financial statements. Effective December 31, 2003, we adopted Emerging Issues Task Force 03-1 ("EITF 03-1") "The Meaning of Other-Than-Temporary Impairments and Its Application to Certain Investments". This EITF provides guidance on disclosures for other than temporary impairments of debt and marketable equity investments that have been accounted for under SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities". Implementation did not have a material effect on our financial statements. 3. Business acquisition On December 22, 2003, we completed the acquisition of 95% of the outstanding capital stock of ERC Life Reinsurance Corporation for $151.0 million in cash, subject to certain post closing adjustments. On February 19, 2004, ERC Life Reinsurance Corporation's name was changed to Scottish Re Life Corporation. The post-closing adjustments are dependent on the completion of the audit of the 2003 financial statements of Scottish Re Life Corporation prepared in accordance with U.S. statutory accounting principles. We have estimated the post closing adjustment as an increase in the purchase price 8 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (continued) March 31, 2004 of approximately $15.1 million on the basis of information currently available. From this evaluation of the initial purchase price allocation, we have determined that no goodwill arises on the acquisition. 4. Discontinued operations During 2003, we decided to discontinue our Wealth Management operations in Luxembourg. We have transferred our Luxembourg Wealth Management business to third parties, closed the office and are in the process of liquidating the company. We have reported the results of the Luxembourg Wealth Management activities as discontinued operations. During the quarter ended March 31, 2003 losses from these operations amounted to $180,000. 5. Business segments We report segments in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". Our main lines of business are Life Reinsurance North America and Life Reinsurance International, which we identify as separate segments. In prior years, we reported our Wealth Management business as a separate segment. As this business is no longer a major contributor to our results, we have combined the reporting of this segment with our Other Segment. The segment reporting for the lines of business is as follows:
Three months ended March 31, 2004 -------------------------------------------------------------- Life Life Reinsurance Reinsurance North America International Other Total ------------- ------------- ---------- ----------- Premiums earned................ $ 105,601 $ 27,746 $ - $ 133,347 Investment income, net......... 47,407 2,149 547 50,103 Fee income..................... 2,103 - 850 2,953 Realized gains (losses)........ 1,693 (151) (121) 1,421 Change in value of embedded derivatives................. (8,645) - - (8,645) ----------- ----------- ----------- ----------- Total revenues................. 148,159 29,744 1,276 179,179 ----------- ----------- ----------- ----------- Claims and other policy benefits.................... 75,592 19,575 - 95,167 Interest credited to interest sensitive contract liabilities................. 24,193 - - 24,193 Acquisition costs and other insurance expenses, net..... 29,536 2,649 684 32,869 Operating expenses............. 4,964 4,408 3,482 12,854 Interest expense............... 686 - 2,091 2,777 ----------- ----------- ----------- ----------- Total benefits and expenses.... 134,971 26,632 6,257 167,860 ----------- ----------- ----------- ----------- Income (loss) before income taxes and minority interest. $ 13,188 $ 3,112 $ (4,981) $ 11,319 =========== =========== =========== ===========
8 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (continued) March 31, 2004
Three months ended March 31, 2003 -------------------------------------------------------------- Life Life Reinsurance Reinsurance North America International Other Total ------------- ------------- ---------- ----------- Premiums earned................ $ 39,461 $ 25,358 $ -- $ 64,819 Investment income, net......... 29,600 1,746 978 32,324 Fee income..................... 1,058 -- 933 1,991 Realized losses................ (1,758) (609) 46 (2,321) ----------- ----------- ----------- ----------- Total revenues................. 68,361 26,495 1,957 96,813 ----------- ----------- ----------- ----------- Claims and other policy benefits.................... 29,405 13,509 -- 42,914 Interest credited to interest sensitive contract liabilities................. 15,893 -- -- 15,893 Acquisition costs and other insurance expenses, net..... 14,452 5,531 672 20,655 Operating expenses............. 2,043 2,548 3,274 7,865 Interest expense............... 237 -- 1,576 1,813 ----------- ----------- ----------- ----------- Total benefits and expenses.... 62,030 21,588 5,522 89,140 ----------- ----------- ----------- ----------- Income (loss) before income taxes and minority interest. $ 6,331 $ 4,907 $ (3,565) $ 7,673 =========== =========== =========== ===========
March 31, December 31, Assets 2004 2003 Life Reinsurance -------------- ------------ North America................... $ 5,194,211 $ 4,882,222 International................... 337,639 308,459 -------------- ------------ Total Life Reinsurance.............. 5,531,850 5,190,681 Other............................... 893,582 862,836 -------------- ------------ Total............................... $ 6,425,432 $ 6,053,517 ============== ============ 9 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (continued) March 31, 2004 6. Earnings per ordinary share The following table sets forth the computation of basic and diluted earnings per ordinary share:
Three months ended Three months ended March 31, 2004 March 31, 2003 -------------- -------------- Numerator: Net income...................................... $10,096 $7,243 Denominator: Denominator for basic earnings per ordinary share - Weighted average number of ordinary shares....................................... 35,327,658 26,940,294 Effect of dilutive securities - Stock options.............................. 900,387 730,552 - Warrants................................... 905,255 425,260 - Hybrid Capital Units....................... 96,812 - ---------- ---------- Denominator for dilutive earnings per ordinary share........................................ 37,230,112 28,096,106 ========== ========== Earnings per ordinary share from continuing operations -Basic............................ $0.29 $0.28 ========== ========== Earnings per ordinary share from continuing operations - Diluted......................... $0.27 $0.26 ========== ========== Basic earnings per ordinary share............... $0.29 $0.27 ========== ========== Diluted earnings per ordinary share.................. $0.27 $0.26 ========== ==========
7. Deferred acquisition costs The change in deferred acquisition costs is as follows:
Three Three months ended months ended March 31, 2004 March 31, 2003 -------------- -------------- Balance beginning of period.................... $ 308,591 $ 213,516 Expenses deferred.............................. 38,572 26,604 Amortization expense........................... (18,227) (9,133) Deferred acquisition costs on realized losses.. (787) 427 --------- --------- Balance end of period...................... $ 328,149 $ 231,414 ========= =========
10 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (continued) March 31, 2004 8. Long-term debt Long-term debt consists of: March 31, December 31, 2004 2003 ------------ ------------ 4.5% senior convertible notes due 2022..... $ 115,000 $ 115,000 Capital securities due 2032................ 17,500 17,500 Preferred trust securities due 2033........ 20,000 20,000 Trust preferred securities due 2033........ 10,000 10,000 ------------ ------------ Total $ 162,500 $ 162,500 ============ ============ 4.5% Senior convertible notes On November 22, 2002 and November 27, 2002, we issued an aggregate of $115.0 million (which included an over allotment option of $15.0 million) of 4.5% senior convertible notes, which are due December 1, 2022, to qualified institutional buyers. The notes are general unsecured obligations, ranking on a parity in right of payment with all our existing and future unsecured senior indebtedness, and senior in right of payment with all our future subordinated indebtedness. Interest on the notes is payable on June 1 and December 1 of each year, beginning on June 1, 2003. The notes are rated Baa2 by Moody's Investors Service ("Moody's") and BBB- by Standard & Poor's Ratings Group ("Standard & Poor's"). The notes are convertible into our ordinary shares at an initial conversion rate of 46.0617 ordinary shares per $1,000 principal amount of notes (equivalent to an initial conversion price of $21.71 per ordinary share), subject to our right to deliver, in lieu of our ordinary shares, cash or a combination of cash and our ordinary shares. The notes are redeemable at our option in whole or in part beginning on December 6, 2006, at a redemption price equal to 100% of the principal amount of the notes plus accrued and unpaid interest. The notes are subject to repurchase by us upon a change of control of Scottish Re or at a holder's option on December 6, 2006, December 1, 2010, December 1, 2012 and December 1, 2017, at a repurchase price equal to 100% of the principal amount of the notes plus accrued and unpaid interest. The notes are due on December 1, 2022 unless earlier converted, redeemed by us at our option or repurchased by us at a holder's option. A holder may surrender notes for conversion prior to the stated maturity only under the following circumstances: o during any conversion period if the sale price of our ordinary shares for at least 20 trading days in the period of 30 consecutive trading days ending on the first day of the conversion period exceeds 120% of the conversion price in effect on that 30th trading day; o during any period in which the notes are rated by either Moody's or Standard & Poor's and the credit rating assigned to the notes by either rating agency is downgraded by two levels or more, suspended or withdrawn; o if we have called those notes for redemption; or o upon the occurrence of certain specified corporate transactions. 11 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (continued) March 31, 2004 Under a registration rights agreement, we agreed to file with the Securities and Exchange Commission a shelf registration statement for resale of the notes and our ordinary shares issuable upon conversion of the notes. This registration statement was filed and later declared effective by the Securities and Exchange Commission on April 4, 2003. Capital securities On December 4, 2002, Scottish Holdings Statutory Trust I, a Connecticut statutory business trust ("Capital Trust") issued and sold in a private offering an aggregate of $17.5 million Floating Rate Capital Securities (the "capital securities"). All of the common shares of the Capital Trust are owned by Scottish Holdings, Inc., our wholly owned subsidiary. The capital securities mature on December 4, 2032. They are redeemable in whole or in part at any time after December 4, 2007. Interest is payable quarterly at a rate equivalent to 3 month LIBOR plus 4%. At March 31, 2004 and December 31, 2003, the interest rates were 5.18% and 5.15%, respectively. Prior to December 4, 2007, interest cannot exceed 12.5%. The Capital Trust may defer payment of the interest for up to 20 consecutive quarterly periods, but no later than December 4, 2032. Any deferred payments would accrue interest quarterly on a compounded basis if Scottish Holdings, Inc. defers interest on the Debentures due December 4, 2032 (as defined below). The sole assets of the Capital Trust consist of $18.0 million principal amount of Floating Rate Debentures (the "Debentures") issued by Scottish Holdings, Inc. The Debentures mature on December 4, 2032 and interest is payable quarterly at a rate equivalent to 3 month LIBOR plus 4%. At March 31, 2004 and December 31, 2003, the interest rates were 5.18% and 5.15%, respectively. Prior to December 4, 2007, interest cannot exceed 12.5%. Scottish Holdings, Inc. may defer payment of the interest for up to 20 consecutive quarterly periods, but no later than December 4, 2032. Any deferred payments would accrue interest quarterly on a compounded basis. Scottish Holdings, Inc. may redeem the Debentures at any time after December 4, 2007 in the event of certain changes in tax or investment company law. Scottish Annuity & Life Insurance Company (Cayman) Ltd. has guaranteed Scottish Holdings, Inc.'s obligations under the Debentures and distributions and other payments due on the capital securities. Preferred trust securities On October 29, 2003, Scottish Holdings, Inc. Statutory Trust II, a Connecticut statutory business trust ("Capital Trust II") issued and sold in a private offering of $20.0 million Preferred Trust Securities ("the preferred trust securities"). All of the common shares of Capital Trust II are owned by Scottish Holdings, Inc. The preferred trust securities mature on October 29, 2033. They are redeemable in whole or in part at any time after October 29, 2003. Interest is payable quarterly at a rate equivalent to 3 month LIBOR plus 3.95%. At March 31, 2004 and December 31, 2003, the interest rates were 5.07% and 5.10%, respectively. Prior to October 29, 2008, interest cannot exceed 12.45%. Capital Trust II may defer payment of the interest for up to 20 consecutive quarterly periods, but no later than October 29, 2033. Any deferred payments would accrue interest quarterly on a compounded basis if Scottish Holdings, Inc. defers interest on the Floating Rate Debentures due October 29, 2033 (as described below). The sole assets of Capital Trust II consist of $20.6 million principal amount of Floating Rate Debentures issued by Scottish Holdings, Inc. The Floating Rate Debentures mature on October 29, 2033 and interest is payable quarterly at 3 month LIBOR plus 3.95%. At March 31, 2004 and December 31, 12 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (continued) March 31, 2004 2003, the interest rates were 5.07% and 5.10%, respectively. Prior to October 29, 2008, interest cannot exceed 12.45%. Scottish Holdings, Inc. may defer payment of the interest for up to 20 consecutive quarterly periods, but no later than October 29, 2033. Any deferred payments would accrue interest quarterly on a compounded basis. Scottish Holdings, Inc. may redeem the Floating Rate Debentures at any time after October 29, 2008 and in the event of certain changes in tax or investment company law. Scottish Annuity & Life Insurance Company (Cayman) Ltd. has guaranteed Scottish Holdings, Inc.'s obligations under the Floating Rate Debentures and distributions and other payments due on the preferred trust securities. Trust Preferred Securities On November 14, 2003, GPIC Holdings Inc. Statutory Trust, a Delaware statutory business trust ("GPIC Trust") issued and sold in a private offering of $10.0 million Trust Preferred Securities ("the trust preferred securities"). All of the common shares of GPIC Trust are owned by Scottish Holdings, Inc. The trust preferred securities mature on September 30, 2033. They are redeemable in whole or in part at any time after September 30, 2008. Interest is payable quarterly at a rate equivalent to 3 month LIBOR plus 3.90%. At March 31, 2004 and December 31, 2003, the interest rates were 5.06% and 5.05%, respectively. GPIC Trust may defer payment of the interest for up to 20 consecutive quarterly periods, but no later than September 30, 2033. Any deferred payments would accrue interest quarterly on a compounded basis if Scottish Holdings, Inc. defers interest on the Junior Subordinated Notes due September 30, 2033 (as described below). The sole assets of GPIC Trust consist of $10.3 million principal amount of Junior Subordinated Notes issued by Scottish Holdings, Inc. The Junior Subordinated Notes mature on September 30, 2033 and interest is payable quarterly at 3 month LIBOR plus 3.90%. At March 31, 2004 and December 31, 2003, the interest rates were 5.06% and 5.05%, respectively. Scottish Holdings, Inc. may defer payment of the interest for up to 20 consecutive quarterly periods, but no later than September 30, 2033. Any deferred payments would accrue interest quarterly on a compounded basis. Scottish Holdings, Inc. may redeem the Junior Subordinated Notes at any time after September 30, 2008 and in the event of certain changes in tax or investment company law. Scottish Annuity & Life Insurance Company (Cayman) Ltd. has guaranteed Scottish Holdings, Inc.'s obligations under the Junior Subordinated Notes and distributions and other payments due on the trust preferred securities. 9. Mezzanine Equity On December 17 and December 22, 2003, we issued in a public offering 5,750,000 Hybrid Capital Units ("HyCUs"). The aggregate net proceeds were $141.9 million. Each HyCU consists of: o A purchase contract under which the holder agrees to purchase an agreed upon number of ordinary shares on February 15, 2007 at a purchase price of $25.00; and o A convertible preferred share with a liquidation preference of $25.00, convertible into ordinary shares, which we will settle in cash and ordinary shares on May 21, 2007. 13 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (continued) March 31, 2004 The agreed upon number of shares that a purchase contract will be settled for is called the "settlement rate". The settlement rate on each purchase contract is as follows: o If the average closing price per ordinary share on each of the 20 consecutive trading days ending on the fourth trading day preceding February 15, 2007 (the "Applicable Market Value"), is less than or equal to $19.32, then each purchase contract will be settled for 1.294 ordinary shares. o If the Applicable Market Value is greater than $19.32, then each purchase contract will be settled for a number of ordinary shares by dividing $25.00 by the Applicable Market Value. The convertible shares will be initially convertible into 1.0607 ordinary shares per $25.00 liquidation preference (referred to as the "conversion rate"), subject to anti-dilution adjustments. This reflects an initial conversion price of $23.57. Upon conversion we will deliver cash equal to the $25.00 liquidation preference and ordinary shares for the value of the excess, if any, of the conversion obligation minus the liquidation preference. The conversion obligation is the conversion rate at the time of conversion multiplied by the average trading price of our ordinary shares for a specified period following the redemption date. Amounts will accumulate under the HyCUs at a rate of 5.875% per year, payable quarterly beginning February 14, 2004. These amounts will consist of: o Quarterly contract adjustment payments at a rate of 4.875% per year; and o Dividends at a rate of 1.00% per year on the convertible preferred shares, payable quarterly when declared by our board of directors. We may defer contract adjustment payments until no later than the purchase contract settlement date. Each convertible preferred share is pledged to us to secure the holder's obligation under the purchase contract. A holder of the HyCU can obtain the release of the pledged convertible share by substituting zero-coupon treasury securities as security for the obligation under the purchase contract. The resulting unit is then known as a Treasury Unit. Holders of Treasury Units can recreate HyCUs by re-substituting the convertible preferred shares and withdrawing the treasury securities. The convertible preferred shares will be mandatorily redeemed on May 21, 2007. We have accounted for the HyCUs in accordance with SFAS No. 150 " Accounting for Certain Instruments with Characteristics of Debt and Equity". 10. Shareholders' equity During the three months ended March 31, 2004 and 2003, respectively, we issued 312,317 and 16,834 ordinary shares to employees upon the exercise of stock options. 14 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (continued) March 31, 2004 11. Stock option plans At March 31, 2004, we had four stock option plans (the "1998 Plan", the "1999 Plan", the "Harbourton Plan" and the "2001 Plan", collectively the "Plans"), which allow us to grant non-statutory options, subject to certain restrictions, to certain eligible employees, non-employee directors, advisors and consultants. The minimum exercise price of the options will be equal to the fair market value, as defined in the Plans, of our ordinary shares at the date of grant. The term of the options is between seven and ten years from the date of grant. Unless otherwise provided in each option agreement, all granted options issued prior to December 31, 2001 become exercisable in three equal annual installments. Commencing January 1, 2002, all granted options became exercisable in five equal installments commencing on the first anniversary of the grant date, except for annual grants of 2,000 to each director, which are fully exercisable on the date of grant. Total options authorized under the Plans are 3,750,000. At our Annual General Meeting held on May 5, 2004, our shareholders approved a new equity incentive compensation plan (the "2004 ECP"). This plan allows us to grant non-statutory options and restricted stock, subject to certain restrictions, to certain eligible employees, non-employee directors, advisors and consultants. For the first year of the 2004 ECP or the first 250,000 options issued, the minimum exercise price of the options will be equal to 110% of fair market value. At the discretion of our Compensation Committee, option grants after the the first year of the 2004 Plan or in excess of 250,000 options may have a minimum exercise price equal to the fair market value of our ordinary shares at the date of grant. The term of the options shall not be more than ten years from the date of grant. Options will become exercisable in five equal installments commencing on the first anniversary of the grant date. Total options authorized under the plan is 750,000. In addition, 1,000,000 restricted shares have been authorized under the plan of which at least 750,000 will vest based on achievement of certain performance goals. The remaining 250,000 restricted shares may be issued without performance goals. Pro forma information regarding net income and earnings per share for all outstanding stock options is required by SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123" and has been determined as if we accounted for all employee stock options under the fair value method of that Statement. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period using the Black-Scholes model. The Black-Scholes and Binomial option-pricing models were developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options. 15 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (continued) March 31, 2004 Our pro forma information is as follows:
Three months ended Three months ended March 31, 2004 March 31, 2003 -------------- -------------- Net income-- as reported.................................. $ 10,096 $ 7,243 Stock-based employee compensation cost, net of related tax effects, included in the determination of net income as reported.................................... 64 - Stock-based employee compensation cost, net of related tax effects, that would have been included in the determination of net income if the fair value based method had been applied to all awards................. (380) (674) ---------- ----------- Net income-- pro forma.................................... $ 9,780 $ 6,569 ========== =========== Three months ended Three months ended March 31, 2004 March 31, 2003 -------------- -------------- Basic earnings per ordinary share-- as reported........... $0.29 $ 0.27 Basic earnings per ordinary share-- pro forma............. $0.28 $ 0.24 Diluted earnings per ordinary share-- as reported......... $0.27 $ 0.26 Diluted earnings per ordinary share-- pro forma........... $0.26 $ 0.23
12. Credit facilities During 2003, we renewed our credit facilities, which currently consist of: a) a credit facility totaling $50.0 million, of which $25.0 million is available on an unsecured basis and $25.0 million is available on a secured basis. The facility provides capacity for borrowings and letters of credit. The interest rates on amounts borrowed under the secured facility is LIBOR plus 50 basis points and under the unsecured facility is LIBOR plus 75 basis points. This facility expires in October 2004 but it is renewable upon the agreement of both parties. b) a secured credit facility totaling $50.0 million. This facility provides a combination of borrowings and letters of credit. Interest rates on amounts borrowed under this facility is LIBOR plus 45 basis points. This facility expires in September 2004 but is renewable upon the agreement of both parties. One of the facilities requires that Scottish Annuity & Life Insurance Company (Cayman) Ltd. maintains shareholder's equity of at least $340.0 million. At March 31, 2004, Scottish Annuity & Life Insurance Company (Cayman) Ltd.'s shareholder's equity was $809.3 million. The other facility requires that we maintain consolidated net worth of $520.0 million, a maximum debt to total capitalization ratio of 30% and uncollateralised assets of 1.2 times any unsecured borrowings. At March 31, 2004, our net worth was $703.3 million and the ratio of debt to total capitalization was 16.1%. Our failure to comply with the requirements of the credit facilities would, subject to grace periods, result in an event of default, and we could be required to repay any outstanding borrowings. At March 31, 2004, there were no 16 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (continued) March 31, 2004 borrowings under the facilities. Outstanding letters of credit under these facilities amounted to $33.5 million as at March 31, 2004 and $31.2 million at December 31, 2003. We also have a reverse repurchase agreement with a major broker/dealer. Under this agreement, we have the ability to sell 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 March 31, 2004 and December 31, 2003, there were no borrowings under this agreement. 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General We are a holding company organized under the laws of the Cayman Islands with our 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. Scottish Re Holdings Limited and its subsidiary Scottish Re Limited specialize 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. In prior years, we referred to this portion of our business as Wealth Management, which was another reportable operating segment. As this business is no longer a major contributor to our results, we have now combined reporting of this segment with our Other Segment. Other revenues and expenses not related to Life Reinsurance are reported in the Other Segment. On December 22, 2003, we completed the acquisition of 95% of the outstanding capital stock of ERC Life Reinsurance Corporation for $151.0 million in cash, subject to certain closing adjustments. On February 19, 2004, ERC Life Reinsurance Corporation's name was changed to Scottish Re Life Corporation. Scottish Re Life Corporation was a subsidiary of General Electric's Employers Reinsurance Corporation, which we call GE ERC, and was one of the companies through which GE ERC conducted life reinsurance business in the United States. Scottish Re Life Corporation's business consists primarily of a closed block of traditional life reinsurance. GE ERC has agreed to administer the business of Scottish Re Life Corporation for a fixed monthly fee for up to nine months from the date of acquisition and to assist with the transition of the business to our systems. No GE ERC employees were transferred. Scottish Re Life Corporation is rated "A- (excellent)" by A.M. Best Company. All amounts are reported in thousands of United States dollars, except per share amounts. Revenues We derive revenue from three principal sources: o premiums from reinsurance assumed on life business; 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. A 18 deposit received on a funding agreement also does not generate premium income but does create income to the extent we earn an investment return in excess of our interest payment obligations thereon. Our investment income includes interest earned on our fixed income investments and income from funds withheld at interest under modified coinsurance agreements. Under generally accepted accounting principles, 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; 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 change in 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. 19 Factors affecting profitability We seek to generate profits from two 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, 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; 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, changes in regulation or tax laws, which may affect the attractiveness of our products or the costs of doing business and changes in foreign currency exchange rates. Critical Accounting Policies Statement of Financial Accounting Standards ("SFAS") No. 60 "Accounting and Reporting by Insurance Enterprises" applies to our 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. SFAS No. 97 "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments" 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, 20 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. Our premiums earned are recorded in accordance with information received from our ceding companies, or are estimated where this information is not current with the reporting period. These premium estimates are based on historical experience as adjusted for current treaty terms and other information. Actual results could differ from these estimates. Management monitors actual experience, and should circumstances warrant, will revise its estimates of premiums earned. 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. In the normal course of business, we acquire in-force blocks of business. The determination of the fair value of the assets acquired and the liabilities assumed require management to make estimates and assumptions regarding mortality, lapse rates and expenses. These estimates are based on historical experience, actuarial studies and information provided by the ceding companies. Actual results could differ materially from these 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 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 the 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 established upon the acquisition of a subsidiary. Goodwill is calculated as the difference between the price paid and the value of individual assets and liabilities on the date of acquisition. We account for goodwill in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets". Goodwill deemed to have an indefinite life is subject to an annual impairment test. Goodwill recognized in the consolidated balance sheet relates to our acquisition of Scottish Re Holdings Limited and has been tested for impairment. We have determined that there is no impairment. Fixed maturity investments are evaluated for other than temporary impairments in accordance with SFAS No. 115: "Accounting for Certain Investments in Debt and Equity Securities", Emerging Issues Task Force 99-20: ("EITF 99-20") "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interest in Securitized Assets" and Emerging Issues Task Force 03-1 ("EITF 03- 21 1") "The Meaning of Other-Than-Temporary Impairments and Its Application to Certain Investments". 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 amortized cost, length of time the value has been below amortized cost, credit worthiness of the issuer, forecasted financial performance of the issuer, position of the security in the issuer's capital structure, the presence and estimated value of collateral or other credit enhancement, length of time to maturity, interest rates and our intent and ability to hold the security until the market value recovers. Our funds withheld at interest arise on modified coinsurance and funds withheld coinsurance transactions. Derivatives Implementation Group Issue No. B36 "Embedded Derivatives: Bifurcation of a Debt Instrument that Incorporates Both Interest Rate and Credit Rate Risk Exposures that are Unrelated or Only Partially Related to the Creditworthiness of the Issuer of that Instrument" ("DIG B36") indicates that these transactions contain embedded derivatives. The embedded derivative feature in our funds withheld treaties is similar to a fixed-rate total return swap on the assets held by the ceding companies. The swap consists of two parts. The first is the market value of the underlying asset portfolio and the second is a hypothetical loan to the ceding company. The hypothetical loan is based on the expected cash flows of the underlying reinsurance liability. We have developed models to systematically estimate the value of the total return swap. The fair value of the embedded derivative is affected by changes in expected cash flows, credit spreads of the assets and changes in "risk-free" interest rates. The change in fair value is included in our calculation of estimated gross profits and, therefore, also affects the amortization of deferred acquisition costs. In addition to our quota share indemnity funds withheld contracts, we have entered into various financial reinsurance treaties that, although considered funds withheld, do not transfer significant insurance risk and are recorded on a deposit method of accounting. As a result of the experience refund provisions of these treaties the value of the embedded derivative is currently considered immaterial. Changes in our expectations of future cash flows could result in material changes to the financial statements. Our accounting policies addressing premiums earned, reserves, deferred acquisition costs, value of business acquired, goodwill, investment impairment and embedded derivatives involve significant assumptions, judgments and estimates. Changes in these assumptions, judgments and estimates could create material changes in our consolidated financial statements. 22 Results of Operations Consolidated results of operations
Three months ended Three months ended March 31, 2004 March 31, 2003 -------------- -------------- Premiums earned.............................................. $ 133,347 $ 64,819 Investment income, net....................................... 50,103 32,324 Fee income................................................... 2,953 1,991 Realized gains (losses)...................................... 1,421 (2,321) Change in value of embedded derivatives...................... (8,645) - ------------ ------------ Total revenues............................................... 179,179 96,813 ------------ ------------ Claims and other policy benefits............................. 95,167 42,914 Interest credited to interest sensitive contract liabilities. 24,193 15,893 Acquisition costs and other insurance expenses, net.......... 32,869 20,655 Operating expenses........................................... 12,854 7,865 Interest expense............................................. 2,777 1,813 ------------ ------------ Total benefits and expenses.................................. 167,860 89,140 ------------ ------------ Income before income taxes and minority interest............. 11,319 7,673 Income tax expense .......................................... (874) (250) Income before minority interest 10,445 7,423 Minority interest (349) - ------------ ------------ Income from continuing operations............................ 10,096 7,423 Loss from discontinued operations............................ - (180) ------------ ------------ Net income................................................... $10,096 $7,243 ============ ============
Total revenues increased by 85% to $179.2 million in the first quarter of 2004 from $96.8 million in the same period of 2003. Total revenues include premiums earned in our Life Reinsurance Segments, investment income on our invested assets, fee income, realized gains and losses on our investment portfolio and the change in the value of embedded derivatives. The increase in premiums earned is primarily due to the acquisition of Scottish Re Life Corporation and growth in the traditional solutions line of business in our Life Reinsurance North America Segment. The increase in investment income is due to growth in our invested assets, which arises from business growth, our equity offering in July 2003 and our HyCU and trust preferred debt offerings in October, November and December 2003. The change in value of the embedded derivatives arises from the implementation of DIG B36. Total benefits and expenses increased by 88% to $167.9 million in the first quarter of 2004 from $89.1 million in the same period in 2003. The increase was due to the acquisition of Scottish Re Life Corporation, continued growth in our Life Reinsurance North America Segment, additional operating costs required to meet the growth in our business and additional interest expense arising from the HyCU and trust preferred issuances in October, November and December 2003. During 2003, we decided to discontinue our Wealth Management operations in Luxembourg. We have transferred our Luxembourg Wealth Management business to third parties, closed the Luxembourg office and are in the process of liquidating our Luxembourg subsidiary. We have reported the results of the Luxembourg Wealth Management activities as discontinued operations. Losses incurred in respect of these operations in the quarter ended March 31, 2003 were $180,000. 23 Earnings per ordinary share
Three months ended Three months ended March 31, 2004 March 31, 2003 -------------- -------------- Income from continuing operations $10,096 $7,423 ========== ========== Net income................................................. $10,096 $7,243 ========== ========== Earnings per ordinary share from continuing operations -Basic $0.29 $0.28 ========== ========== Earnings per ordinary share from continuing operations - Diluted.................................................... $0.27 $0.26 ========== ========== Basic earnings per ordinary share.......................... $0.29 $0.27 ========== ========== Diluted earnings per ordinary share........................ $0.27 $0.26 ========== ========== Weighted average number of ordinary shares outstanding: Basic...................................................... 35,327,658 26,940,294 ========== ========== Diluted.................................................... 37,230,112 28,096,106 ========== ==========
Income from continuing operations for the first quarter increased 36% to $10.1 million from $7.4 million in the same quarter in 2003. The increase is attributable to the acquisition of Scottish Re Life Corporation, 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 were offset in part by increased operating costs and interest expense. Diluted earnings per ordinary share amounted to $0.27 for the first quarter of 2004 and $0.26 in the same period in 2003, an increase of 4%. Diluted earnings per ordinary share increased as a result of the growth in net income discussed above. The weighted average number of ordinary shares outstanding has increased from 28,096,106 at March 31, 2003 to 37,230,112 principally as a result of the offering of 9,200,000 million shares in July 2003. 24 Segment Operating Results Life Reinsurance North America
Three months ended Three months ended March 31, 2003 March 31, 2004 -------------- -------------- Premiums earned $ 105,601 $ 39,461 Investment income, net 47,407 29,600 Fee income 2,103 1,058 Realized gains (losses) 1,693 (1,758) Change in value of embedded derivatives (8,645) - ---------- --------- Total revenues 148,159 68,361 ---------- --------- Claims and other policy benefits 75,592 29,405 Interest credited to interest sensitive contract liabilities 24,193 15,893 Acquisition costs and other insurance expenses, net 29,536 14,452 Operating expenses 4,964 2,043 Interest expense 686 237 ---------- --------- Total benefits and expenses 134,971 62,030 ---------- --------- Income before income taxes and minority interest $ 13,188 $ 6,331 ========== =========
In our Life Reinsurance North America Segment we reinsure 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. The results of Scottish Re Life Corporation, which we acquired on December 22, 2003, are included in the results of this segment for the quarter ended March 31, 2004. Premiums earned in our Life Reinsurance North America Segment during the first quarter increased 168% to $105.6 million in comparison with $39.5 million in the three month period ended March 31, 2003. A significant portion of the increase is due to the acquisition of Scottish Re Life Corporation, which contributed $44.7 million in earned premiums. The increase is also due to increases in the amounts of life insurance in-force on existing traditional solutions treaties and on new business written during the year. As of March 31, 2004, the Company had approximately $286.0 billion of life reinsurance in force covering 6.9 million lives with an average benefit per life of $41,000 in our North American operations. This includes $153.0 billion of in-force in respect of the Scottish Re Corporation Life business that we acquired late in 2003. As of March 31, 2003, the Company had approximately $74.3 million of life reinsurance in force in our Life Reinsurance North America segment covering $1.5 million lives with an average benefit per life of $51,000. Net investment income increased by $17.8 million or 60% to $47.4 million for the three months ended March 31, 2004 from $29.6 million for the prior year period. The increase is due to the growth in our average invested assets offset in part by decreases in realized yields during 2003 and 2004. Our total invested assets have increased significantly because of growth in our Life Reinsurance North America Segment, investment of the proceeds of our equity offering in July 2003 and our HyCU and trust preferred securities offerings in November and December 2003. Total invested assets in this segment have increased from $2.2 billion at March 31, 2003 to $3.9 billion at March 31, 2004. Funds withheld at interest grew from $1.1 billion at March 31, 2003 to $1.5 billion at March 31, 2004. 25 On the portfolio managed by our external investment managers the yields on fixed rate assets were 5.08% and 5.43% at March 31, 2004 and 2003, respectively. The reduction in yield was due primarily to the lower market yields at which new cash flows were invested and proceeds of maturities and sales were reinvested. Yields on floating rate assets are indexed to LIBOR. The yield on our floating rate assets decreased to 3.00% from 3.25%, and the yield on our cash and cash equivalents decreased to 1.20% from 1.68%. The volume of floating rate assets increased during 2003 as a result of our investing the proceeds of floating rate funding agreements to earn a spread over the cost of funds. On October 1 2003, we implemented the requirements of DIG B36 which addresses whether SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" requires bifurcation of a debt instrument into a debt host contract and an embedded derivative if the debt instrument incorporates both interest rate risk and credit risk exposures that are unrelated or only partially related to the creditworthiness of the issuer of that instrument. Under DIG B36 modified coinsurance and coinsurance funds withheld reinsurance agreements where interest is determined by reference to a pool of fixed maturity assets, are arrangements containing embedded derivatives requiring bifurcation. In addition, reinsurance contracts with experience refunds are also considered to be arrangements containing embedded derivatives requiring bifurcation. The change in value of the derivative, net of related deferred amortization costs, during the quarter ended March 31, 2004 amounted to a loss of $8.6 million. This change in value has arisen principally because of declines in risk free interest rates. Claims and other policy benefits increased by 157% to $75.6 million from $29.4 million in the same quarter in 2003. The increase is a result of the acquisition of Scottish Re Life Corporation, the increased number of clients and the increase in our traditional solutions business from these clients in our Life Reinsurance North America Segment as described above. Death claims are reasonably predictable over a period of many years, but are less predictable over shorter periods and are subject to fluctuation from quarter to quarter. Our targeted maximum corporate retention in our Life Reinsurance North America Segment on any one life is $1 million, however, we currently retrocede any liability in excess of $500,000. We have also arranged catastrophe cover, which provides reinsurance for losses of approximately $19.3 million in excess of $750,000. This catastrophe cover provides protection for terrorism, nuclear, biological and chemical risks. For the three months ended March 31, 2004, interest credited to interest sensitive contract liabilities increased by $8.3 million or 52% to $24.2 million from $15.9 million in the same period in 2003. Interest credited includes interest in respect of funding agreements. The amounts due on funding agreements are included in interest sensitive contract liabilities on our balance sheet and amount to $510.3 million at March 31, 2004 in comparison with $100.5 million at March 31, 2003. The remaining increase is due to interest credited on new reinsurance treaties and increases in interest credited on existing treaties due to increasing average liability balances. Interest sensitive contract liabilities amounted to $2.9 billion at March 31, 2004 in comparison with $1.7 billion at March 31, 2003. During the three month period ended March 31, 2004 acquisition costs and other insurance expenses increased by $15.1 million or 104% to $29.5 million from $14.4 million in the same quarter in 2003. The increase was a result of acquisition of Scottish Re Life Corporation and the increased life and annuity business in our Life Reinsurance North America Segment as discussed above. 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. Of these total expenses a portion is deferred and amortized over the life of the 26 reinsurance treaty or, in the case of interest sensitive contracts, in relation to the estimated gross profit in respect of the contracts. Operating expenses have increased by 143% to $4.9 million from $2.0 million in the same quarter in 2003. The increase is principally the result of the acquisition of Scottish Re Life Corporation. The costs of Scottish Re Life Corporation include the cost of the transition services agreement with GE ERC of $900,000. Additional personnel costs have also been incurred as we continue to grow our business. Total employees in this segment and Other have grown from 53 at March 31, 2003 to 87 at March 31, 2004. Interest expense in this segment arises on the trust preferred securities. The increase in interest expense to $686,000 from $237,000 results from the issuance of an additional $30.0 million of these securities in October and November 2003. Life Reinsurance International
Three months ended Three months ended March 31, 2003 March 31, 2004 -------------- -------------- Premiums earned $ 27,746 $ 25,358 Investment income, net 2,149 1,746 Realized losses (151) (609) ----------------- ---------------- Total revenues 29,744 26,495 ----------------- ---------------- Claims and other policy benefits 19,575 13,509 Acquisition costs and other insurance expenses, net 2,649 5,531 Operating expenses 4,408 2,548 ----------------- ---------------- Total benefits and expenses 26,632 21,588 ----------------- ---------------- Income before income taxes and minority interest $ 3,112 $ 4,907 ================= ================
Our Life Reinsurance International Segment specializes in niche markets in developed countries and broader life insurance markets in the developing world and focuses on the reinsurance of short term group life policies and aircrew "loss of license" insurance. Premiums earned in our Life Reinsurance International Segment during the first quarter increased 9% to $27.7 million in comparison with $25.4 million in the three month period ended March 31, 2003. Premiums earned from a portfolio acquired in 2002 were $1.5 million lower in the first quarter of 2004 compared to the same period in the prior year due to the run off nature of the portfolio. Other life reinsurance reported earned premium grew by 9% in the first quarter 2004 to $16.4 million in comparison with $15.0 million in 2003. Earned premium for general reinsurance business, which consists of aircrew loss of license and related personal accident, grew 46% from $5.4 million to $7.9 million due to more contracts being in force in 2004 compared to 2003. The majority of business in our Life Reinsurance International Segment is in respect of short duration contracts. We have experienced considerable reporting delays from some of our cedents on this business. In prior years premiums earned in this segment were subject to variation from quarter to quarter because of the reporting delays. As part of the implementation of this segment's new administrative system, improved data has been compiled which has allowed us to more accurately estimate our premium earned. 27 Investment income in 2004 has increased to $2.1 million compared to $1.7 million for the same period in 2003 due to the increased level of invested assets arising principally from growth in business. Claims and other policy benefits in our Life Reinsurance International Segment increased by 45% to $19.6 million in the quarter ended March 31, 2004 from $13.5 million in the same quarter in 2003. Claims in the current quarter, compared to the same quarter in 2003, have been impacted by the introduction of the estimates process described above and the increased volumes of business in 2003. In addition during the quarter we incurred $900,000 in respect of claims resulting from late reported claims relating to prior periods. During the three month period ended March 31, 2004 acquisition costs and other insurance expenses decreased by $2.9 million or 52% to $2.6 million from $5.5 million in 2003. Acquisition costs for a portfolio acquired late in 2002 are $1.0 million lower due to the run off nature of the portfolio. Acquisition costs have also been impacted by the estimate process described above. Acquisition costs includes the amortization of the present value of in-force business. This is $300,000 lower in first quarter 2004 compared to first quarter 2003 due to the sale of the unit linked business in the second quarter of 2003. Operating expenses have increased by 73% to $4.4 million from $2.5 million in the prior year period. The increase is principally related to personnel costs. The number of employees in this segment has grown from 46 at March 31, 2003 to 53 at March 31, 2004. Additional resources have been added as we continue to grow our business in existing and prospective markets. The increased personnel costs include cost for recruitment expenses. Office costs increased compared to 2003 due to the move to larger offices in the second quarter of 2003. Operating expenses in this segment are incurred in pounds sterling. These expenses have increased as a result of the depreciation of the United States dollar in comparison with pounds sterling. Other
Three months ended Three months ended March 31, 2003 March 31, 2004 -------------- -------------- Investment income, net $ 547 $ 978 Fee income 850 933 Realized gains (losses) (121) 46 ---------------- --------------- Total revenues 1,276 1,957 ---------------- --------------- Acquisition costs and other insurance expenses, net 684 672 Operating expenses 3,482 3,274 Interest expense 2,091 1,576 ---------------- --------------- Total expenses 6,257 5,522 ---------------- --------------- Loss before income taxes and minority interest $ (4,981) $ (3,565) ---------------- ---------------
The Other Segment comprises revenues and expenses not included elsewhere and includes corporate overhead. As previously discussed our Wealth Management operations, which were previously designated as a separate segment, are now included in the Other Segment. Investment income arises in the Other Segment on capital not specifically allocated to the Life Reinsurance North America or Life Reinsurance International Segments. Fee income and acquisition expenses arise from our Wealth Management operations. Operating expenses include the costs of running 28 our principal office in Bermuda, compensation costs for our board of directors and legal and professional fees including those in respect of corporate governance legislation. Interest expense has increased from $1.6 million to $2.1 million as a result of the HyCU issuance in December 2003. Realized gains (losses) During the three months ended March 31, 2004, realized gains amounted to $1.4 million in comparison with realized losses of $2.3 million in the same period in 2003. During the quarter ended March 31, 2004, we recognized losses of $1.9 million in respect of impairments on the portfolio controlled by us. These losses were more than offset by realized gains on the portfolio. The losses in the first quarter of 2003 consist of investment losses on unit linked securities held by Scottish Re Holdings Limited of $966,000, impairments of $1.8 million on the portfolio controlled by us and impairment losses of $1.1 million on contracts written under modified coinsurance agreements. These losses were partially offset by net realized gains on the sales of fixed maturity investments. Management reviews securities with material unrealized losses and tests for "other than temporary impairments" on a quarterly basis. Factors involved in the determination of impairment include fair value as compared to amortized cost, length of time the value has been below amortized cost, credit worthiness of the issuer, forecasted financial performance of the issuer, position of the security in the issuer's capital structure, the presence and estimated value of collateral or other credit enhancement, length of time to maturity, interest rates and our intent and ability to hold the security until the market value recovers. We review all investments with fair values less than amortized cost, and pay particular attention to those that have traded continuously at less than 80% of amortized cost for at least six months or 90% of amortized cost for at least 12 months and other assets with material differences between amortized cost and fair value. Investments meeting those criteria are analyzed in detail for "other than temporary impairment." When a decline is considered to be "other than temporary" a realized loss is incurred and the cost basis of the impaired asset is adjusted to its fair value. Under EITF 99-20, 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 flow to be received, regardless of the resulting yield, unless the decrease is solely a result of changes in market interest rates. The following tables provide details of the sales proceeds, realized loss, the length of time the security had been in an unrealized loss position and reason for sale for securities sold at a loss during the periods ended March 31, 2004 and 2003. Three months ended March 31, 2004 Credit Concern Other Total Days Proceeds Loss Proceeds Loss Proceeds Loss -------- ---- -------- ---- -------- ---- (dollars in thousands) 0-90 ............ $ 3,325 $ (108) $14,296 $ (38) $17,621 $ (146) 91-180 .......... - - 20,317 (226) 20,317 (226) 181-270 ......... - - 1,130 (14) 1,130 (14) Greater than 271 5,060 (548) - - 5,060 (548) ------- ------- ------- ------- ------- ------- Total ........... $ 8,385 $ (656) $35,743 $ (278) $44,128 $ (934) ======= ======= ======= ======= ======= ======= 29 Three months ended March 31, 2003 Credit Concern Other Total Days Proceeds Loss Proceeds Loss Proceeds Loss -------- ---- -------- ---- -------- ---- (dollars in thousands) 0-90 ............... $ - $ - $ - $ - $ - $ - 91-180 ............. 2,691 (202) - - 2,691 (202) 181-270 ............ 1,200 (241) - - 1,200 (241) Greater than 271 ... 1,474 (13) - - 1,474 (13) ------- ------ ------- ------ ------- ------ Total .............. $ 5,365 $ (456) $ - $ - $ 5,365 $ (456) ======= ====== ======= ====== ======= ====== Financial Condition Investments At March 31, 2004, the portfolio controlled by us consisted of $2.6 billion of fixed income securities, preferred stock and cash. The majority of these assets are traded, however, $201.6 million represent investments in private securities. Of the total portfolio controlled by us, $2.5 billion represented the fixed income and preferred stock portfolios managed by external investment managers and $174.5 million represented other cash balances. At December 31, 2003, the portfolio controlled by us consisted of $2.4 billion of fixed income securities, preferred stock and cash. The majority of these assets are traded, however, $175.2 million represented investments in private securities. Of the total portfolio, $2.1 billion represented the fixed income and preferred stock portfolio managed by external investment managers and $262.7 million represented other cash balances. At March 31, 2004, the average Standard & Poor's rating of that portfolio was "AA-", the average effective duration was 3.76 years and the average book yield was 4.43% as compared with an average rating of "AA-", an average effective duration 3.94 years and an average book yield of 4.46% at December 31, 2003. At March 31, 2004, the unrealized appreciation on investments, net of tax, was $45.2 million as compared with $16.8 million at December 31, 2003. The unrealized appreciation on investments is included in our consolidated balance sheet as part of shareholders' equity. In the table below are the total returns earned by our portfolio for the three months ended March 31, 2004, compared to the returns earned by three indices: the Lehman Brothers Global Bond Index, the S&P 500, and a customized index that we developed with General Re New England Asset Management ("NEAM"), an external investment manager, to take into account our investment guidelines. We believe that this customized index is a more relevant benchmark for our portfolio's performance. March 31, 2004 -------------- Portfolio performance............................. 2.81% Customized index.................................. 2.60% Lehman Brothers Global Bond Index................. 2.01% S&P 500........................................... 1.69% 30 The following table presents the investment portfolio (market value) credit exposure by category as assigned by Standard & Poor's.
March 31, 2004 December 31, 2003 Ratings $ in $ in millions % millions % -------- - -------- - AAA................................... $ 885.7 33.4% $ 785.4 32.7% AA.................................... 297.7 11.2 298.4 12.4 A..................................... 851.9 32.2 762.7 31.7 BBB................................... 587.5 22.2 540.8 22.5 BB or below........................... 26.2 1.0 16.6 0.7 -------- ----- -------- ------ Total................................. $2,649.0 100.0% $2,403.9 100.0% ======== ===== ======== ======
The following table illustrates the investment portfolio (market value) sector exposure.
March 31, 2004 December 31, 2003 Sector $ in $ in millions % millions % -------- - -------- - U.S. Treasury securities and U.S. government agency obligations........ $ 56.0 2.1% $ 74.6 3.1% Corporate securities.................... 1,127.8 42.6 1,119.6 46.6 Municipal bonds......................... 9.8 0.4 1.8 0.1 Mortgage and asset backed securities.... 1,143.1 43.1 818.7 34.0 Preferred stock......................... 137.8 5.2 126.5 5.3 -------- ----- -------- ----- 2,474.5 93.4 2,141.2 89.1 Cash.................................... 174.5 6.6 262.7 10.9 -------- ----- -------- ----- Total................................... $2,649.0 100.0% $2,403.9 100.0% ======== ===== ======== =====
The data in the tables above excludes other investments and assets held by ceding insurers under modified coinsurance agreements. At March 31, 2004, our fixed income portfolio had 1,526 positions and $8.9 million of gross unrealized losses. No single position had an unrealized loss greater than $0.9 million. There were $69.2 million of unrealized gains on the remainder of the portfolio. There were 11 private securities in an unrealized loss position totaling $108,000. At December 31, 2003 our fixed income portfolio had 1,375 positions and $14.6 million of gross unrealized losses. No single position had an unrealized loss greater than $1.6 million. There were $37.0 million of unrealized gains on the remainder of the portfolio. There were 34 private securities in an unrealized loss position totaling $805,000. The composition by category of securities that have an unrealized loss at March 31, 2004 and December 31, 2003 are presented in the tables below. 31
March 31, 2004 Estimated Unrealized Fair Value % Loss % ---------- - ---- - Dollars in thousands Other structured securities.................. $ 155,786 40.4% $(6,816) 76.3% Corporate securities......................... 95,947 24.9 (1,159) 13.0 Mortgage backed securities................... 64,939 16.8 (203) 2.3 Collateralized mortgage obligations.......... 49,273 12.8 (494) 5.5 Preferred stock.............................. 13,958 3.6 (187) 2.0 Governments.................................. 3,665 1.0 (42) 0.5 Municipal bonds.............................. 1,964 0.5 (36) 0.4 -------- ----- -------- ----- Total........................................ $385,532 100% $(8,937) 100% ======== ===== ======== ===== December 31, 2003 Estimated Unrealized Fair Value % Loss % ---------- - ---- - Dollars in thousands Corporate securities......................... $223,555 41.4% $ (3,823) 26.2% Other structured securities.................. 154,065 28.5 (8,943) 61.3 Collateralized mortgage obligations.......... 95,455 17.7 (863) 5.9 Governments.................................. 25,838 4.8 (400) 2.7 Preferred stock.............................. 21,303 3.9 (299) 2.1 Mortgage backed securities................... 19,900 3.7 (255) 1.8 -------- ----- -------- ----- Total........................................ $540,116 100.0% $(14,583) 100.0% ======== ===== ======== =====
32 The following tables provide information on the length of time securities have been continuously in an unrealized loss position:
March 31, 2004 Estimated Unrealized Days Book Value % Fair Value % Loss % ---- ---------- - ---------- - ---- - Dollars in thousands 0-90.................. $ 243,723 61.8% $ 240,406 62.4% $ (3,317) 37.1% 91-180................ 34,972 8.9 34,406 8.9 (566) 6.3 181-270............... 39,641 10.0 38,971 10.1 (670) 7.5 271-360............... 25,734 6.5 25,378 6.6 (356) 4.0 Greater than 360...... 50,399 12.8 46,371 12.0 (4,028) 45.1 ---------- ----- ---------- ----- ---------- ----- Total................. $ 394,469 100.0% $ 385,532 100.0% $ (8,937) 100.0% ========== ===== ========== ===== ========== ===== December 31, 2003 Estimated Unrealized Days Book Value % Fair Value % Loss % ---- ---------- - ---------- - ---- - Dollars in thousands 0-90.................. $ 308,267 55.6% $ 304,511 56.4% $ (3,756) 25.8% 91-180................ 115,702 20.9 113,405 21.0 (2,297) 15.8 181-270............... 56,362 10.1 55,243 10.2 (1,119) 7.7 271-360............... 13,486 2.4 13,064 2.4 (422) 2.9 Greater than 360...... 60,882 11.0 53,893 10.0 (6,989) 47.8 ----------- ----- ----------- ----- ----------- ----- Total................. $ 554,699 100.0% $ 540,116 100.0% $ (14,583) 100.0% =========== ===== =========== ===== =========== =====
Unrealized losses on securities that have been in an unrealized loss position for periods greater than 2 years amounted to $2.0 million at both March 31, 2004 and December 31, 2003. Unrealized losses on non-investment grade securities amounted to $3.5 million and $3.0 million at March 31, 2004 and December 31, 2003, respectively. Of these amounts, non-investment grade securities with unrealized losses of $2.9 million at March 31, 2004 and $1.8 million at December 31, 2003 had been in an unrealized loss position for a period greater than one year, of which $1.3 million at March 31, 2004 and $895,000 at December 31, 2003 had been in an unrealized loss position for periods greater than 2 years. 33 The following tables illustrate the industry analysis of the unrealized losses at March 31, 2004 and December 31, 2003.
March 31, 2004 Amortized Estimated Unrealized Cost % Fair Value % Loss % ---- - ---------- - ---- - Industry Dollars in thousands Mortgage and asset backed securities............. $ 277,510 70.4% $ 269,997 70.0% $ (7,513) 84.1% Banking................... 24,234 6.1 23,807 6.2 (427) 4.8 Supernational............. 17,725 4.5 17,490 4.5 (235) 2.6 Electric.................. 12,075 3.1 12,042 3.1 (33) 0.4 Financial other........... 10,077 2.6 9,953 2.6 (124) 1.4 Communications............ 7,427 1.9 7,321 1.9 (106) 1.2 Brokerage................. 5,815 1.5 5,784 1.5 (31) 0.3 Other..................... 39,606 9.9 39,138 10.2 (468) 5.2 ---------- ----- --------- ----- ---------- ----- Total..................... $ 394,469 100.0% $ 385,532 100.0% $ (8,937) 100.0% ========== ===== ========= ===== ========== ===== December 31, 2003 Amortized Estimated Unrealized Cost % Fair Value % Loss % ---- - ---------- - ---- - Industry Dollars in thousands Mortgage and asset backed securities............. $ 279,481 50.4% $ 269,420 49.9% $ (10,061) 69.0% Banking................... 38,738 7.0 38,201 7.1 (537) 3.7 Consumer non-cyclical..... 23,009 4.1 22,632 4.2 (377) 2.6 Communications............ 27,401 4.9 27,055 5.0 (346) 2.4 Financial companies....... 21,900 3.9 21,539 4.0 (361) 2.5 Insurance................. 17,467 3.1 17,289 3.2 (178) 1.2 Transportation............ 7,382 1.3 6,534 1.2 (848) 5.8 Other..................... 139,321 25.3 137,446 25.4 (1,875) 12.8 ---------- ----- --------- ----- ---------- ----- Total..................... $ 554,699 100.0% $ 540,116 100.0% $ (14,583) 100.0% ========== ===== ========== ===== ========== =====
------------- Other industries each represent less than 2% of estimated fair value. 34 The expected maturity dates of securities that have an unrealized loss at March 31, 2004 and December 31, 2003 are presented in the table below.
March 31, 2004 Amortized Estimated Unrealized Maturity Cost % Fair Value % Loss % -------- ---- - ---------- - ---- - Dollars in thousands Due in one year or less............. $ 88,207 22.4% $ 86,688 22.5% (1,519) 17.0% Due in one through five years....... 181,210 45.9 178,746 46.3 (2,464) 27.6 Due in five through ten years....... 111,268 28.2 107,476 27.9 (3,792) 42.4 Due after ten years................. 13,784 3.5 12,622 3.3 (1,162) 13.0 ----------- ----- ---------- ----- ----------- ----- Total............................... $ 394,469 100.0% $ 385,532 100.0% $ (8,937) 100.0% =========== ===== ========== ===== =========== ===== December 31, 2003 Estimated Unrealized Maturity Book Value % Fair Value % Loss % -------- ---------- - ---------- - ---------- - Dollars in thousands Due in one year or less............. $ 36,746 6.9% $ 36,648 7.1% $ (98) 0.7% Due in one through five years....... 220,097 41.3 214,103 41.3 (5,994) 42.0 Due in five through ten years....... 232,231 43.5 225,844 43.5 (6,387) 44.7 Due after ten years................. 44,023 8.3 42,218 8.1 (1,805) 12.6 ----------- ----- ---------- ----- ----------- ----- Total............................... $ 533,097 100.0% $ 518,813 100.0% $ (14,284) 100.0% =========== ===== ========== ===== =========== =====
At March 31, 2004, there were 254 securities with unrealized loss positions with one security having a unrealized loss greater than $1.0 million. This security was a securitized asset and was tested for impairment under EITF 99-20 and EITF 03-1 and satisfied the impairment tests. At December 31, 2003, there were 409 securities with unrealized loss positions with 2 securities having an unrealized loss greater than $1.0 million. These were also securitized assets, were tested for impairment under EITF 99-20 and satisfied the impairment tests at December 31, 2003. At March 31, 2004, there were 8 securities with fair values that traded continuously at less than 80% of amortized cost for at least six months or 90% of amortized cost for at least 12 months. The total unrealized loss on these securities amounted to $2.9 million and the largest unrealized loss position was $0.9 million. At December 31, 2003 there were 12 securities with fair values that traded continuously at less than 80% of amortized cost for at least six months or 90% of amortized cost for at least 12 months. The total unrealized loss on these securities amounted to $7.2 million and the largest unrealized loss position was $1.6 million. Funds withheld at interest Funds withheld at interest arise on contracts written under modified coinsurance agreements. In each case, the business reinsured consists of fixed deferred annuities. In substance, these agreements are identical to coinsurance treaties except that the ceding company retains control of and title to the assets. The deposits paid to the ceding company by the underlying policyholders are held in a segregated portfolio and managed by the ceding company or by investment managers appointed by the ceding company. These treaties transfer a quota share of the risks. The funds withheld at interest represent our share of the ceding companies' statutory reserves. The cash flows exchanged with each monthly 35 settlement are netted and include, among other items, our quota share of investment income on our proportionate share of the portfolio, realized losses, realized gains (amortized to reflect the statutory rules relating to interest maintenance reserve), interest credited and expense allowances. At March 31, 2004 and December 31, 2003, funds withheld at interest were in respect of six fixed annuity reinsurance contracts with three ceding companies. At March 31, 2004 and December 31, 2003, we had three contracts with Lincoln National Insurance Company that account for $1.4 billion (85%) and $1.3 billion (86%) of the funds withheld balances. The other contracts are with Illinois Mutual Insurance Company and American Founders Life Insurance Company. Lincoln National Insurance Company has financial strength ratings of "A+" from A.M. Best, "AA-" from Standard & Poor's, "Aa3" from Moody's and "AA" from Fitch. In the event of insolvency of the ceding companies on these arrangements we would need to exert a claim on the assets supporting the contract liabilities. However, the risk of loss is mitigated by our ability to offset amounts owed to the ceding company, which are included in interest sensitive contract liabilities, with the amounts owed to us by the ceding company. Interest sensitive contract liabilities relating to these fixed annuity reinsurance contracts amounted to $2.9 billion and $1.7 billion at March 31, 2004 and December 31, 2003, respectively. At March 31, 2004, funds withheld at interest totaled $1.5 billion with an average rating of "A-", an average effective duration of 4.92 years and an average book yield of 6.23% as compared with an average rating of "A-", an average effective duration of 5.06 years and an average book yield of 6.32% at December 31, 2003. These are fixed income investments and include marketable securities, commercial mortgages, private placements and cash. The market value of the funds withheld amounted to $1.6 billion at March 31, 2004 and at December 31, 2003, respectively. According to data provided by our ceding companies, the following table reflects the market value of assets backing the funds withheld at interest portfolio using the lowest rating assigned by the three major rating agencies.
March 31, 2004 December 31, 2003 Ratings $ in millions % $ in millions % ------- ------------- - ------------- - AAA................................... $ 233.5 14.8% $216.6 13.9% AA.................................... 76.6 4.8 76.9 4.9 A..................................... 536.3 33.9 528.6 34.0 BBB................................... 537.1 33.9 537.6 34.6 BB or below........................... 65.6 4.2 66.0 4.3 ----------- ----- --------- ----- 1,449.1 91.6 1,425.7 91.7 Commercial mortgage loans............. 133.1 8.4 129.4 8.3 ----------- ----- --------- ----- Total................................. $ 1,582.2 100.0% $ 1,555.1 100.0% =========== ===== ========= =====
36 According to data provided by our ceding companies, the following table reflects the market value of assets backing the funds withheld at interest portfolio by sector.
March 31, 2004 December 31, 2003 Sector $ in millions % $ in millions % ------ ------------- - ------------- - U.S. Treasury securities and U.S. government agency obligations.... $ 31.2 2.0% $ 32.0 2.1% Corporate securities................ 1,041.9 65.8 1,041.2 67.0 Municipal bonds..................... 24.3 1.5 23.1 1.5 Mortgage and asset backed securities 335.0 21.2 329.4 21.1 Commercial mortgage loans........... 133.1 8.4 129.4 8.3 Cash................................ 16.7 1.1 - - ---------- ----- ---------- ----- Total................................ $ 1,582.2 100.0% $ 1,555.1 100.0% ========== ===== ========== =====
Liquidity and Capital Resources Cash flow Cash used in operating activities amounted to $9.9 million in the first three months of 2004 in comparison with a cash source of $12.5 million provided by operating activities in the same period of 2003. Operating cash flow includes cash inflows from premiums, fees and investment income, and cash outflows for benefits and expenses paid. In periods of growth of new business our operating cash flow may decrease due to first year commissions paid on new business generated. For income recognition purposes these commissions are deferred and amortized over the life of the business. The decrease in operating cash flow is principally attributable to settlement of a tax liability of approximately $23.0 million. This liability resulted from actions taken by the former owner of Scottish Re Life Corporation immediately prior its acquisition in December 2003. This outflow is not expected to recur. When adjusted for this payment cash flows from operations in the first three months of 2004 were $13.7 million compared to $13.2 in the same period of 2003. We believe cash flows from operations will be positive over time. However, they may be positive or negative in any one 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 the period. To address the risk that operating cash flows may not be sufficient in any given period we maintain a high quality fixed maturity portfolio with positive liquidity characteristics. These securities are available for sale and can be sold to meet obligations if necessary. 37 Capital and collateral At March 31, 2004, total capitalization was $1.0 billion compared to $964.3 million at December 31, 2003. Total capitalization is analyzed as follows: March 31, 2004 December 31, 2003 -------------- ----------------- (dollars in thousands) Shareholder's equity............ $ 703,265 $ 659,844 Mezzanine equity................ 142,008 141,928 Long-term debt.................. 162,500 162,500 ----------- --------- Total $ 1,007,773 $ 964,272 =========== ========= The increase in capitalization is due to the net income for the three months ended March 31, 2004 of $10.1 million less dividends paid of $1.8 million and other comprehensive income of $31.5 million. Other comprehensive income consists of the unrealized appreciation on investments and the cumulative translation adjustment arising from the translation of Scottish Re Holdings Limited's balance sheet at exchange rates as of March 31, 2004. In February 2004, we filed a registration statement with the Securities and Exchange Commission utilizing a "shelf" registration process relating to a number of different types of debt and equity securities. This shelf enables us to sell from time to time securities described in the registration statement up to a total of $750.0 million. During the three months ended March 31, 2004, we paid quarterly dividends totaling $1.8 million or $0.05 per share. During 2003, we renewed our credit facilities, which currently consist of: a) a credit facility totaling $50 million, of which $25 million is available on an unsecured basis and $25 million is available on a secured basis. The facility provides capacity for borrowings and letters of credit. The interest rates on amounts borrowed under the secured facility is LIBOR plus 50 basis points and under the unsecured facility is LIBOR plus 75 basis points. This facility expires in October 2004 but it is renewable upon the agreement of both parties. b) a secured credit facility totaling $50 million. This facility provides a combination of borrowings and letters of credit. Interest rates on amounts borrowed under this facility is LIBOR plus 45 basis points. This facility expires in September 2004 but is renewable upon the agreement of both parties. One of the facilities requires that Scottish Annuity & Life (Cayman) Ltd. maintain shareholder's equity of at least $340.0 million. At March 31, 2004, Scottish Annuity & Life (Cayman) Ltd.'s shareholder's equity was $809.3 million. The other facility requires that we maintain consolidated net worth of $520.0 million, a maximum debt to total capitalization ratio of 30% and uncollateralised assets of 1.2 times any unsecured borrowings. At March 31, 2004, our net worth was $703.3 million and the ratio of debt to total capitalization was 16.1%. Our failure to comply with the requirements of the credit facilities would, subject to grace periods, result in an event of default, and we could be required to repay any outstanding borrowings. At March 31, 2004, there were no borrowings under the facilities. Outstanding letters of credit under these facilities amounted to $33.5 million as at March 31, 2004 and $31.2 million at December 31, 2003. 38 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 or letters of credit arises in five ways: o when Scottish Annuity & Life (Cayman) Ltd., Scottish Re (Dublin) Limited or Scottish Re Limited enters into a reinsurance treaty with a U.S. customer, we must contribute assets into a reserve credit trust with a U.S. bank or issue a letter of credit in order that the ceding company may obtain reserve credit for the reinsurance transaction; 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 surplus, an infusion of cash or assets from Scottish Re or an affiliate 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 contributing assets in a reserve credit trust or a letter of credit; o Scottish Re (U.S.), Inc. is licensed, accredited, approved or authorized to write reinsurance in 49 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 a licensed, accredited, authorized or approved reinsurer, it likewise must provide a reserve credit trust or letter of credit; and o Scottish Re Life Corporation is licensed, accredited, approved or authorized to write reinsurance in 50 states, the District of Columbia, Guam and the Federated States of Micronesia. When Scottish Re Life Corporation enters into a reinsurance transaction with a customer domiciled in a state in which it is not a 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 a 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. Scottish Annuity & Life (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 250% of Risk Based Capital ("RBC") 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 (Cayman) Ltd. and Scottish Re have agreed with Scottish Re Limited that in the event Scottish Re Limited is unable to meet its obligations under its insurance or reinsurance agreements, Scottish Annuity & Life (Cayman) Ltd. (or if Scottish Annuity & Life (Cayman) Ltd. cannot fulfill such obligations, then Scottish Re) will assume all of Scottish Re Limited's obligations under such agreements. Scottish Annuity & Life Insurance Company (Cayman) Ltd. intends, subject to regulatory approval, to enter into an agreement with Scottish Re Life Corporation stating that it will (1) cause Scottish Re Life Corporation 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 39 capital laws of the state of Missouri and (2) provide Scottish Re Life Corporation with enough liquidity to meet its obligations in a timely manner. Scottish Re and Scottish Annuity & Life (Cayman) Ltd. have executed a similar agreement for Scottish Re (Dublin) Limited and may, from time to time, execute additional agreements guaranteeing the performance and/or obligations of their subsidiaries. Our business is capital intensive. We expect that our cash and investments, together with cash generated from our businesses, will be sufficient to meet our current liquidity and letter of credit needs. However, if our business continues to grow significantly, we will need to raise additional capital. 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 July 2003, the Accounting Standards Executive Committee issued Statement of Position 03-01 ("SOP"), "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Insurance Contracts and for Separate Accounts". This SOP provides guidance on accounting and reporting by insurance enterprises for certain nontraditional long-duration contracts and for separate accounts and is effective for financial statements for fiscal years beginning after December 15, 2003. In implementing the SOP we have made various determinations, such as qualification for separate account treatment, classification of securities in separate account arrangements, significance of mortality and morbidity risk, adjustments to contract holder liabilities, and adjustments to estimated gross profits as defined in SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments". Implementation of this SOP has not had a material effect on our financial statements. Effective December 31, 2003, we adopted EITF 03-1. This EITF provides guidance on disclosures for other than temporary impairments of debt and marketable equity investments that have been accounted for under SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities". Implementation did not have a material effect on our financial statements. 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 results contemplated by the forward-looking statements. These risks and uncertainties include: o uncertainties relating to the ratings accorded to our insurance subsidiaries; 40 o the risk that our risk analysis and underwriting may be inadequate; o exposure to mortality experience which differs from our assumptions; o risks arising from our investment strategy, including risks related to the market value of our investments, fluctuations in interest rates and our need for liquidity; o uncertainties arising from control of our invested assets by third parties; o developments in global financial markets that could affect our investment portfolio and fee income; o changes in the rate of policyholder withdrawals or recapture of reinsurance treaties; o the risk that our retrocessionaires may not honor their obligations to us; 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 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 services of any of our key employees; o losses due to foreign currency exchange rate fluctuations; o uncertainties relating to government and regulatory policies (such as subjecting us to insurance regulation or taxation in additional jurisdictions); o the competitive environment in which we operate and associated pricing pressures; and o changes in accounting principles. 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, other than as may be required under the Federal securities laws, 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. 41 Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes since December 31, 2003. Please refer to "Item 7A: Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K. Item 4. Controls and Procedures Evaluation of disclosure controls and procedures. Based on their evaluation as of March 31, 2004, our principal executive officers and principal financial officer have concluded that Scottish Re's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities and Exchange Act of 1934 (the "Exchange Act")) are effective to ensure that information required to be disclosed by Scottish Re Group Limited in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Changes in internal controls. There have been no changes in internal control over financial reporting that occurred during the quarter ended March 31, 2004 that have materially affected, or are reasonably likely to materially affect, Scottish Re's internal control over financial reporting. 42 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 Not applicable. Item 3. Defaults Upon Senior Securities Not applicable. 43 Item 4. Submission of Matters to a Vote of Securities Holders Not applicable. 44 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: 3.1 Memorandum of Association of Scottish Re Group Limited, as amended as of December 14, 2001 (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K/A).(6) 3.2 Articles of Association of Scottish Re Group Limited, as amended as of May 2, 2002 (incorporated herein by reference to Scottish Re Group Limited 's Current Report on Form 8-K filed with the SEC on April 14, 2003). 4.1 Specimen Ordinary Share Certificate (incorporated herein by reference to Exhibit 4.1 to Scottish Re Group Limited'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 Scottish Re Group Limited'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 Scottish Re Group Limited'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 Scottish Re Group Limited's Registration Statement on Form S-1).(1) 4.5 Form of Warrant Purchase Agreement for the Class B Warrants (incorporated herein by reference to Exhibit 4.5 to Scottish Re Group Limited's Registration Statement on Form S-1).(1) 4.6 Form of Securities Purchase Agreement between Scottish Re Group Limited and the Shareholder Investors (incorporated herein by reference to Exhibit 4.10 to Scottish Re Group Limited's Registration Statement on Form S-1).(1) 4.7 Form of Securities Purchase Agreement between Scottish Re Group Limited and the Non-Shareholder Investors (incorporated herein by reference to Exhibit to Scottish Re Group Limited's Registration Statement on Form S-1).(1) 45 4.8 Purchase Contract Agreement, dated December 17, 2003, by and among the Scottish Re Group Limited and JPMorgan Chase Bank, as purchase contract agent and collateral agent (incorporated herein by reference to the Scottish Re Group Limited's Current Report on form 8-K). (10) 4.9 Pledge Agreement, dated as of December 17, 2003, by and among the Scottish Re Group Limited and JPMorgan Chase Bank, as collateral agent and custodial Agent, purchase contract agent, and securities intermediary (incorporated herein by reference to the Scottish Re Group Limited's Current Report on form 8-K). (10) 4.10 Remarketing Agreement, dated as of December 17, 2003, by and among the Scottish Re Group Limited and Bear, Stearns & Co. Inc., as remarketing agent (incorporated herein by reference to the Scottish Re Group Limited's Current Report on form 8-K). (10) 4.11 Certificate of Designations of Convertible Preferred Shares of the Scottish Re Group Limited (incorporated herein by reference to the Scottish Re Group Limited's Current Report on form 8-K). (10) 10.1 Employment Agreement dated June 18, 1998 between Scottish Re Group Limited and Michael C. French (incorporated herein by reference to Exhibit 10.1 to Scottish Re Group Limited 's Registration Statement on Form S-1).(1)(14) 10.2 Second Amended and Restated 1998 Stock Option Plan effective October 22, 1998 (incorporated herein by reference to Exhibit 10.3 to Scottish Re Group Limited's Registration Statement on Form S-1).(1)(14) 10.3 Form of Stock Option Agreement in connection with 1998 Stock Option Plan (incorporated herein by reference to Exhibit 10.4 to Scottish Re Group Limited's Registration Statement on Form S-1).(1)(14) 10.4 Investment Management Agreement dated October 22, 1998 between Scottish Re Group Limited and General Re-New England Asset Management, Inc. (incorporated herein by reference to Exhibit 10.14 to Scottish Re Group Limited'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 Scottish Re Group Limited's Registration Statement on Form S-1).(1) 10.6 1999 Stock Option Plan (incorporated herein by reference to Exhibit 10.14 to Scottish Re Group Limited's 1999 Annual Report on Form 10-K).(2)(14) 10.7 Form of Stock Options Agreement in connection with 1999 Stock Option Plan (incorporated herein by reference to Exhibit 10.15 to Scottish Re Group Limited s 1999 Annual Report on Form 10-K).(2)(14) 10.8 Employment Agreement dated September 18, 2000 between Scottish Re (U.S.), Inc. and Oscar R. Scofield (incorporated herein by reference to Exhibit 10.16 to Scottish Re Group Limited's 2000 Annual Report on Form 10-K).(3)(14) 46 10.9 Share Purchase Agreement by and between Scottish Re Group Limited and Pacific Life dated August 6, 2001 (incorporated by reference to Scottish Re Group Limited's Current Report on Form 8-K).(7) 10.10 Amendment No. 1, dated November 8, 2001, to Share Purchase Agreement dated August 6, 2001 by and between Scottish Re Group Limited and Pacific Life (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 Scottish Re Group Limited's 2001 Annual Report on Form 10-K). (4)(14) 10.12 Form of Nonqualified Stock Option Agreement in connection with 2001 Stock Option Plan. (incorporated herein by reference to Exhibit 10.17 to Scottish Re Group Limited's 2001 Annual Report on Form 10-K). (4)(14) 10.13 Service Agreement dated December 31, 2001 between Scottish Re Holdings Limited and Paul Andrew Bispham.(4)(14) 10.14 Registration Rights Agreement dated December 31, 2001 between Scottish Re Group Limited and Pacific Life (incorporated by reference to Scottish Re Group Limited's Current Report on Form 8-K).(5) 10.15 Stockholder Agreement dated December 31, 2001 between Scottish Re Group Limited and Pacific Life (incorporated by reference to Scottish Re Group Limited's Current Report on Form 8-K).(5) 10.16 Tax Deed of Covenant dated December 31, 2001 between Scottish Re Group Limited and Pacific Life (incorporated by reference to Scottish Re Group Limited's Current Report on Form 8-K).(5) 10.17 Letter Agreement dated December 28, 2001 between Scottish Re Group Limited and Pacific Life (incorporated by reference to Scottish Re Group Limited's Current Report on Form 8-K).(5) 10.18 Form of Indemnification Agreement between Scottish Re Group Limited and each of its directors and officers (incorporated by reference to Scottish Re Group Limited's Amended Quarterly Report on Form 10-Q/A for the period ended September 30, 2002).(8)(14) 10.19 Employment Agreement dated July 1, 2002 between Scottish Annuity & Life Insurance Company (Cayman) Ltd. and Thomas A. McAvity, Jr. (incorporated by reference to Scottish Re Group Limited's Amended Quarterly Report on Form 10-Q/A for the period ended September 30, 2002).(8)(14) 10.20 Employment Agreement dated June 1, 2002 between Scottish Re Group Limited and Paul Goldean. (2)(14) 10.21 Employment Agreement dated July 1, 2002 between Scottish Re Group Limited and Elizabeth Murphy (incorporated by reference to Scottish Re Group Limited's Amended Quarterly Report on Form 10-Q/A for the period ended September 30, 2002).(8)(14) 47 10.22 Employment Agreement dated June 1, 2002 between Scottish Re Group Limited and Clifford J. Wagner (incorporated by reference to Scottish Re Group Limited's Amended Quarterly Report on Form 10-Q/A for the period ended September 30, 2002).(8)(14) 10.23 Employment Agreement dated July 8, 2002 between Scottish Re Group Limited and Scott E. Willkomm (incorporated by reference to Scottish Re Group Limited's Amended Quarterly Report on Form 10-Q/A for the period ended September 30, 2002).(8)(14) 10.24 Employment Agreement dated February 10, 2003 between Scottish Re Group Limited and Michael C. French (incorporated herein by reference to Scottish Re Group Limited's 2002 Annual Report on Form 10-K). (12)(1) 10.25 Employment Agreement dated February 10, 2003 between Scottish Re (U.S), Inc. and Oscar R. Scofield (incorporated herein by reference to Scottish Re Group Limited's 2002 Annual Report on Form 10-K). (12)(14) 10.26 Amended employment Agreement dated February 10, 2003 between Scottish Re Group Limited and Thomas A. McAvity (incorporated herein by reference to Scottish Re Group Limited's 2002 Annual Report on Form 10-K). (12)(14) 10.27 Indenture, dated November 22, 2002, between Scottish Re Group Limited and The Bank of New York (incorporated herein by reference to Scottish Re Group Limited's Registration Statement on Form S-3). (9) 10.28 Registration Rights Agreement, dated November 22, 2002, between Scottish Re Group Limited and Bear Stearns & Co. and Putnam Lovell Securities Inc. (incorporated herein by reference to Scottish Re Group Limited's Registration Statement on Form S-3). (9) 10.29 Employment Agreement dated May 1, 2003 between Scottish Re Holdings Limited and David Huntley. (incorporated herein by reference to Scottish Re Group Limited's Quarterly Report on Form 10-Q for the period ended June 30, 2003). (13)(14) 10.30 Stock Purchase Agreement, dated as of October 24, 2003, by and among Scottish Re Group Limited, Scottish Holdings, Inc. and Employers Reinsurance Corporation (incorporated herein by reference to the Scottish Re Group Limited's Current Report on form 8-K). (11) 10.31 Tax Matters Agreement, dated as of January 22, 2003, by and among Scottish Re Group Limited, Scottish Holdings, Inc. and Employers Reinsurance Corporation (incorporated herein by reference to the Scottish Re Group Limited's Current Report on form 8-K). (11) 10.32 Transition Services Agreement, dated as of January 22, 2003, by and among Scottish Holdings, Inc. and Employers Reinsurance Corporation (incorporated herein by reference to the Scottish Re Group Limited's Current Report on form 8-K). (11) 10.33 Employment Agreement dated April 21, 2004, by and among Scottish Holdings, Inc. and Seth W. Vance. (14) 48 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.3 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.3 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ---------------- (1) Scottish Re Group Limited's Registration Statement on Form S-1 was filed with the SEC on June 19, 1998, as amended. (2) Scottish Re Group Limited's 1999 Annual Report on Form 10-K was filed with the SEC on April 3, 2000. (3) Scottish Re Group Limited's 2000 Annual Report on Form 10-K was filed with the SEC on March 30, 2001. (4) Scottish Re Group Limited's 2001 Annual Report on Form 10-K was filed with the SEC on March 5, 2002. (5) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on December 31, 2001. (6) Scottish Re Group Limited's Current Report on Form 8-K/A was filed with the SEC on January 11, 2002. (7) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on August 9, 2001. (8) Scottish Re Group Limited's Amended Quarterly Report on Form 10-Q/A was filed with the SEC on August 8, 2002. (9) Scottish Re Group Limited's Registration Statement on Form S-3 was filed with the SEC on January 31, 2003, as amended. (10) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on December 17, 2003. 49 (11) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on January 6, 2004. (12) Scottish Re Group Limited's 2002 Annual Report on Form 10-K was filed with the SEC on March 31, 2003. (13) Scottish Re Group Limited's Quarterly Report on Form 10-Q was filed with the SEC on August 12, 2003. (14) This exhibit is a management contract or compensatory plan or arrangement. B. Reports on Form 8-K The following reports on Form 8-K were filed during the three month period ended March 31, 2004. Scottish Re filed a report on Form 8-K on January 6, 2004 to report under Items 2 (Acquisition or Disposition of Assets) and 7 (Financial Statements, Pro Forma Financial Information and Exhibits) that on December 22, 2003, it had completed the acquisition of 95% of the outstanding capital stock of ERC Life Corporation, which we have renamed Scottish Re Life Corporation, from ERC pursuant to a Stock Purchase Agreement by and among Scottish Re, Scottish Holdings, Inc. and ERC dated as of October 24, 2003. Scottish Re filed a report on Form 8-K on February 24, 2004 to report under Items 7 (Financial Statements, Pro Forma Financial Information and Exhibits) and 12 (Results of Operations and Financial Condition) Scottish Re's financial results for the year ended December 31, 2003. Scottish Re filed a report on Form 8-K/A on March 5, 2004 to report under Item 7 (Financial Statements, Pro Forma Financial Information and Exhibits) certain financial statements and information relating to Scottish Re Life Corporation. 50 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 RE GROUP LIMITED Date: May 10 , 2004 By: /s/ Scott E. Willkomm Scott E. Willkomm President Date: May 10, 2004 By: /s/ Michael C. French Michael C. French Chief Executive Officer Date: May 10, 2004 By: /s/ Elizabeth A. Murphy Elizabeth A. Murphy Chief Financial Officer 51 Exhibit 31.1 CERTIFICATION I, Michael C. French, Chief Executive Officer of Scottish Re Group Limited certify that: 1. I have reviewed this quarterly report on Form 10-Q of Scottish Re Group Limited ("the registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and 52 Exhibit 31.1 b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 10, 2004 /s/ Michael C. French ----------------------- Michael C. French Chief Executive Officer 53 Exhibit 31.2 CERTIFICATION I, Scott E. Willkomm, President of Scottish Re Group Limited certify that: 1. I have reviewed this quarterly report on Form 10-Q of Scottish Re Group Limited (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and 54 Exhibit 31.2 b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 10, 2004 /s/ Scott E. Willkomm Scott E. Willkomm President 55 Exhibit 31.3 CERTIFICATION I, Elizabeth A. Murphy, Chief Financial Officer of Scottish Re Group Limited certify that: 1. I have reviewed this quarterly report on Form 10-Q of Scottish Re Group Limited (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and 56 Exhibit 31.3 b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 10, 2004 /s/ Elizabeth A. Murphy Elizabeth A. Murphy Chief Financial Officer 57 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Scottish Re Group Limited (the "Company") on Form 10-Q for the quarterly period ended March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael C. French, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Michael C. French ---------------------- Michael C. French Chief Executive Officer May 10, 2004 A signed original of this written statement required by Section 906 has been provided to Scottish Re Group Limited and will be retained by Scottish Re Group Limited and furnished to the Securities and Exchange Commission or its staff upon request. 58 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Scottish Re Group Limited (the "Company") on Form 10-Q for the quarterly period ended March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Scott E. Willkomm, President of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Scott E. Willkomm --------------------- Scott E. Willkomm President May 10, 2004 A signed original of this written statement required by Section 906 has been provided to Scottish Re Group Limited and will be retained by Scottish Re Group Limited and furnished to the Securities and Exchange Commission or its staff upon request. 59 Exhibit 32.3 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Scottish Re Group Limited (the "Company") on Form 10-Q for the quarterly period ended March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Elizabeth A. Murphy, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Elizabeth A. Murphy ------------------------ Elizabeth A. Murphy Chief Financial Officer May 10, 2004 A signed original of this written statement required by Section 906 has been provided to Scottish Re Group Limited and will be retained by Scottish Re Group Limited and furnished to the Securities and Exchange Commission or its staff upon request. 60