-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IAaBSZ45Prcf331zTVje6YUcCQPMuoV1HonZ26RUymC37vry/n+SvQUtip/EEm4g pxMfgn15n8SaZKyAYJXgkA== 0000898080-04-000577.txt : 20041108 0000898080-04-000577.hdr.sgml : 20041108 20041108163822 ACCESSION NUMBER: 0000898080-04-000577 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041108 DATE AS OF CHANGE: 20041108 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCOTTISH RE GROUP LTD CENTRAL INDEX KEY: 0001064122 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 000000000 STATE OF INCORPORATION: E9 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-16855 FILM NUMBER: 041126157 BUSINESS ADDRESS: STREET 1: GRAND PAVILION COMMERCIAL CENTRE STREET 2: 802 WEST BAY RD GEORGE TOWN GRAND CAYMAN CITY: GRAND CAYMAN CAYMAN STATE: E9 ZIP: 00000 BUSINESS PHONE: 3459492800 MAIL ADDRESS: STREET 1: P O BOX HM 2939 CITY: HAMILTON STATE: D0 ZIP: HM MX FORMER COMPANY: FORMER CONFORMED NAME: SCOTTISH LIFE HOLDINGS LTD DATE OF NAME CHANGE: 19980615 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 September 30, 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) (441) 295-4451 (Registrant's telephone number, including area code) (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 November 1, 2004, Registrant had 35,905,962 ordinary shares outstanding. Table of Contents PART I. FINANCIAL INFORMATION..............................................2 Item 1. Financial Statements...............................................2 Consolidated Balance Sheets - September 30, 2004 (Unaudited) and December 31, 2003......................................................2 Unaudited Consolidated Statements of Income - Three and Nine months ended September 30, 2004 and 2003...............................3 Unaudited Consolidated Statements of Comprehensive Income - Three and Nine months ended September 30, 2004 and 2003......................4 Unaudited Consolidated Statements of Shareholders' Equity - Nine months ended September 30, 2004 and 2003...............................5 Unaudited Consolidated Statements of Cash Flows - Nine months ended September 30, 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.........................................24 Item 3. Quantitative and Qualitative Disclosures About Market Risk........54 Item 4. Controls and Procedures...........................................54 PART II. OTHER INFORMATION.................................................55 Item 1. Legal Proceedings.................................................55 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......55 Item 3. Defaults Upon Senior Securities...................................55 Item 4. Submission of Matters to a Vote of Securities Holders.............56 Item 5. Other Information.................................................57 Item 6. Exhibits and Reports on Form 8-K..................................64 i PART I. FINANCIAL INFORMATION Item 1. Financial Statements Scottish Re Group Limited Consolidated Balance Sheets - September 30, 2004 (Unaudited) and December 31, 2003 (Dollars in thousands) September 30, 2004 December 31, (unaudited) 2003 ------------ ------------ ASSETS Fixed maturity investments, available for sale, at fair value (Amortized cost $2,766,389; 2003 - - $1,993,247)................................. $ 2,797,450 $ 2,014,719 Preferred stock, available for sale, at fair value (Cost $124,663; 2003 -$125,460)......... 125,082 126,449 Cash and cash equivalents..................... 191,016 298,149 Other investments............................. 16,412 17,678 Funds withheld at interest.................... 1,477,870 1,469,425 ----------- ----------- Total investments......................... 4,607,830 3,926,420 Accrued interest receivable................... 24,159 22,789 Reinsurance balances and risk fees receivable. 290,763 196,192 Deferred acquisition costs.................... 411,540 308,591 Amount recoverable from reinsurers............ 703,288 737,429 Present value of in-force business............ 38,349 13,479 Goodwill...................................... 34,125 35,847 Fixed assets.................................. 12,242 11,800 Other assets.................................. 11,999 45,209 Current income tax receivable................. 10,716 - Deferred tax benefit.......................... 8,913 12,624 Segregated assets............................. 740,220 743,137 ----------- ----------- Total assets.............................. $ 6,894,144 $ 6,053,517 =========== =========== LIABILITIES Reserves for future policy benefits........... $ 1,603,840 $ 1,502,415 Interest sensitive contract liabilities....... 3,136,930 2,633,346 Structured finance facility liability......... 200,000 - Accounts payable and accrued expenses......... 23,223 31,673 Reinsurance balances payable.................. 93,678 125,756 Other liabilities............................. 28,932 30,546 Current income tax payable.................... - 13,077 Long term debt................................ 194,500 162,500 Segregated liabilities........................ 740,220 743,137 ----------- ----------- Total liabilities......................... 6,021,323 5,242,450 ----------- ----------- MINORITY INTEREST 9,535 9,295 MEZZANINE EQUITY 142,296 141,928 SHAREHOLDERS' EQUITY Share capital, par value $0.01 per ordinary share: Issued and fully paid: 35,905,962 ordinary shares (2003 - 35,228,411)................. 359 352 Additional paid-in capital.................... 556,173 548,750 Accumulated other comprehensive income........ 37,644 29,034 Retained earnings............................. 126,814 81,708 ----------- ----------- Total shareholders' equity................ 720,990 659,844 ----------- ----------- Total liabilities and shareholders' equity $ 6,894,144 $ 6,053,517 =========== =========== See Accompanying Notes to Unaudited Consolidated Financial Statements 2 Scottish Re Group Limited Unaudited Consolidated Statements of Income - Three and Nine months ended September 30, 2004 and 2003 (Dollars in thousands, except per share data)
Three months ended Nine Months ended ---------------------------- ---------------------------- September 30, September 30, September 30, September 30, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- REVENUES Premiums earned...................... $ 148,987 $ 92,741 $ 440,217 $ 252,296 Investment income, net............... 55,519 38,133 160,439 106,272 Fee income........................... 2,545 2,932 8,686 7,303 Realized gains (losses).............. (3,398) 744 (3,664) (4,969) Change in value of embedded derivatives......................... (5,509) - 456 - ------------- ------------- ------------- ------------- Total revenues................... 198,144 134,550 606,134 360,902 ------------- ------------- ------------- ------------- BENEFITS AND EXPENSES Claims and other policy benefits..... 104,970 69,424 324,112 177,886 Interest credited to interest sensitive contract liabilities....... 27,685 33,294 77,342 66,061 Acquisition costs and other insurance expenses, net.............. 40,312 27,593 113,282 76,132 Operating expenses................... 13,214 8,753 36,969 24,767 Interest expense..................... 3,352 1,869 9,126 5,533 ------------- ------------- ------------- ------------- Total benefits and expenses...... 189,533 140,933 560,831 350,379 ------------- ------------- ------------- ------------- Income (loss) before income taxes and minority interest................ 8,611 (6,383) 45,303 10,523 Income tax benefit................... 4,212 8,165 5,507 7,999 ------------- ------------- ------------- ------------- Income before minority interest...... 12,823 1,782 50,810 18,522 Minority interest.................... (17) - (355) - ------------- ------------- ------------- ------------- Income from continuing operations.... 12,806 1,782 50,455 18,522 Loss from discontinued operations.... - (157) - (1,782) ------------- ------------- ------------- ------------- Net income $ 12,806 $ 1,625 $ 50,455 $ 16,740 ============= ============= ============= ============= Earnings per ordinary share from continuing operations -Basic......... $ 0.36 $ 0.05 $ 1.42 $ 0.64 ============= ============= ============ ============= Earnings per ordinary share from continuing operations - Diluted...... $ 0.34 $ 0.05 $ 1.35 $ 0.60 ============= ============= ============ ============= Earnings per ordinary share - Basic.. $ 0.36 $ 0.05 $ 1.42 $ 0.57 ============= ============= ============ ============= Earnings per ordinary share -Diluted. $ 0.34 $ 0.05 $ 1.35 $ 0.55 ============= ============= ============ ============= Dividends per ordinary share......... $ 0.05 $ 0.05 $ 0.15 $ 0.15 ============= ============= ============ ============= Weighted average number of ordinary shares outstanding................... Basic................................ 35,869,413 33,248,670 35,648,913 29,119,913 ========== ========== ========== ========== Diluted.............................. 37,244,288 35,240,768 37,268,420 30,647,580 ========== ========== ========== ==========
See Accompanying Notes to Unaudited Consolidated Financial Statements 3 Scottish Re Group Limited Unaudited Consolidated Statements of Comprehensive Income - Three and Nine months ended September 30, 2004 and 2003 (Dollars in thousands)
Three months ended Nine Months ended ---------------------------- ---------------------------- September 30, September 30, September 30, September 30, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Net income............................. $ 12,806 $ 1,625 $ 50,455 $ 16,740 -------------- ------------- -------------- -------------- Other comprehensive income, net of tax: Unrealized appreciation (depreciation) on investments:.... 40,756 (6,423) 8,582 18,142 Add: reclassification adjustment for investment (losses) gains included in net income................. (1,862) 475 (1,797) (4,649) -------------- ------------- -------------- -------------- Unrealized appreciation (depreciation) on investments net of income taxes of $12,519, $(3,364), $2,515 and $3,466......................... 38,894 (5,948) 6,785 13,493 Cumulative translation adjustment..................... 1,888 21 1,825 2,042 Minimum pension liability adjustment..................... - (6) - (45) -------------- ------------- -------------- -------------- Other comprehensive income (loss)........................ 40,782 (5,933) 8,610 15,490 -------------- ------------- -------------- -------------- Comprehensive income (loss).... $ 53,588 $ (4,308) $ 59,065 $ 32,230 ============== ============= ============== ==============
See Accompanying Notes to Unaudited Consolidated Financial Statements 4 Scottish Re Group Limited Unaudited Consolidated Statements of Shareholders' Equity - Nine months ended September 30, 2004 and 2003 (Dollars in thousands) Nine months ended ----------------------------- September 30, September 30, 2004 2003 ------------- ------------- ORDINARY SHARES: Beginning of period.......................... 35,228,411 26,927,456 Ordinary shares issued....................... - 9,200,000 Ordinary shares repurchased.................. - (1,525,000) Issuance to employees on exercise of 677,551 381,955 options...................................... Issuance on exercise of warrants............. - 200,000 ------------- ------------- End of period................................ 35,905,962 35,184,411 ============= ============= SHARE CAPITAL: Beginning of period.......................... $ 352 $ 269 Ordinary shares issued....................... - 92 Ordinary shares repurchased.................. - (15) Issuance to employees on exercise of options. 7 4 Issuance on exercise of warrants............. - 2 ------------- ------------- End of period................................ 359 352 ------------- ------------- ADDITIONAL PAID-IN CAPITAL: Beginning of period.......................... 548,750 416,712 Ordinary shares issued....................... - 180,105 Ordinary shares repurchased.................. - (29,966) Issuance to employees on exercise of options. 7,246 4,187 Issuance on exercise of warrants............. - 2,998 Warrants repurchased......................... - (1,600) Other........................................ 177 - ------------- ------------- End of period................................ 556,173 572,436 ------------- ------------- ACCUMULATED OTHER COMPREHENSIVE INCOME: Unrealized appreciation on investments Beginning of period.......................... 16,848 8,930 Change in period (net of tax)................ 6,785 13,493 ------------- ------------- End of period................................ 23,633 22,423 ------------- ------------- Cumulative translation adjustment Beginning of period.......................... 12,186 5,908 Change in period............................. 1,825 2,042 ------------- ------------- End of period................................ 14,011 7,950 ------------- ------------- Minimum pension liability adjustment Beginning of period.......................... - (1,371) Change in period............................. - (45) ------------- ------------- End of period................................ - (1,416) ------------- ------------- ACCUMULATED OTHER COMPREHENSIVE INCOME .... 37,644 28,957 ------------- ------------- RETAINED EARNINGS: Beginning of period.......................... 81,708 60,644 Net income................................... 50,455 16,740 Dividends paid............................... (5,349) (4,457) ------------- ------------- End of period................................ 126,814 72,927 ------------- ------------- TOTAL SHAREHOLDERS' EQUITY................ . $ 720,990 $ 674,672 ============= ============= See Accompanying Notes to Unaudited Consolidated Financial Statements 5 Scottish Re Group Limited Unaudited Consolidated Statements of Cash Flows - Nine months ended September 30, 2004 and 2003 (Dollars in thousands) Nine months ended ----------------------------- September 30, September 30, 2004 2003 ------------- ------------- OPERATING ACTIVITIES Net income........................................... $ 50,455 $ 16,740 Items not affecting cash:............................ Realized losses................................... 3,664 4,969 Change in value of embedded derivatives........... (456) - Amortization of investments....................... 8,321 3,940 Amortization of deferred acquisition costs........ 64,355 35,803 Amortization of present value of in-force business 5,034 2,353 Changes in assets and liabilities:................ Accrued interest............................... (1,302) (5,485) Reinsurance balances and risk fees receivable.. (151,793) (5,210) Deferred acquisition costs..................... (167,919) (105,856) Deferred tax liability......................... (9,499) (8,766) Other assets................................... (59) 2,903 Current income tax receivable and payable...... (26,864) (1,484) Reserves for future policy benefits............ 171,106 118,301 Interest sensitive contract liabilities, net of funds withheld at interest..................... 35,741 12,111 Accounts payable and accrued expenses.......... (5,779) (1,226) Other.......................................... 6,636 (6,645) ----------- ----------- Net cash (used in) provided by operating activities.. (18,359) 62,448 ----------- ----------- INVESTING ACTIVITIES Purchase of fixed maturity investments............... (1,538,634) (968,551) Proceeds from sales of fixed maturity investments.... 498,397 212,929 Proceeds from maturity of investments................ 257,625 165,466 Purchase of preferred stock.......................... (23,662) (71,168) Proceeds from sales of preferred stock............... 18,605 17,803 Proceeds from maturity of preferred stock............ 4,805 1,762 Other................................................ 946 - ----------- ----------- Net cash used in investing activities................ (781,918) (641,759) ----------- ----------- FINANCING ACTIVITIES Issuance of long term debt........................... 32,000 - Proceeds from collateral facility liability.......... 200,000 - Deposits to interest sensitive contract liabilities.. 518,451 449,185 Withdrawals from interest sensitive contract liabilities.......................................... (59,211) (27,635) Issuance of ordinary shares.......................... 7,253 187,230 Repurchase of ordinary shares........................ - (29,981) Repurchase of warrants............................... - (1,600) Dividends paid....................................... (5,349) (4,457) ----------- ----------- Net cash provided by financing activities............ 693,144 572,742 ----------- ----------- Net change in cash and cash equivalents.............. (107,133) (6,569) Cash and cash equivalents, beginning of period....... 298,149 149,666 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 191,016 $ 143,097 =========== =========== See Accompanying Notes to Unaudited Consolidated Financial Statements 6 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements September 30, 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. Consolidation - We consolidate the results of all our subsidiaries and all variable interest entities for which we are the primary beneficiary. All significant intercompany transactions and balances have been eliminated on consolidation. Estimates, risks and uncertainties - The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported on the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Our most significant assumptions are for assumed reinsurance liabilities and deferred acquisition costs. We review and revise these estimates as appropriate. Any adjustments made to these estimates are reflected in the period the estimates are revised. 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 period 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 the disclosure requirements of 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". During the quarter ended 7 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements September 30, 2004 September 30, 2004 the effective date of the application of EITF 03-1 for debt securities that are impaired because of interest rate and/or sector spread increases was delayed pending issuance of further guidance. In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"). FIN 46 provides a framework for identifying variable interest entities and determining when a company should include its assets, liabilities, non-controlling interests and results of activities in the consolidated financial statements. A variable interest entity is a legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations. FIN 46 requires a variable interest entity to be consolidated if a party with an ownership, contractual or other financial interest in the variable interest entity is obligated to absorb a majority of the risk of loss from the variable interest entity's activities, is entitled to receive a majority of the variable interest entity's residual returns, or both. A variable interest holder that consolidates the variable interest entity is called the primary beneficiary. We are the primary beneficiary of the structured finance facility discussed in note 12 and thus have consolidated the variable interest entity in accordance with FIN 46. We hold no interests in unconsolidated variable interest entities. During the quarter ended September 30, 2004, EITF 04-8 "The Effect of Contingently Convertible Debt on Diluted Earnings Per Share" was issued. EITF 04-8 requires that certain instruments with embedded conversion features that are contingent upon market price triggers be included in diluted earnings per share calculations regardless of whether the contingency has been met. Our 4.5% senior convertible notes are convertible on the basis of a market price trigger. On October 26, 2004 we amended the terms of these notes so that we are required to settle the principal amount of $115.0 million in cash on conversion or repurchase. As a result we shall continue to apply the treasury stock method in calculating diluted earnings per share for amounts in excess of the principal of $115.0 million. 3. Business acquisitions On October 18, 2004, we announced that we had agreed to acquire the individual life reinsurance business of ING Re. We will reinsure the liabilities of all of ING Re's individual life reinsurance business through a coinsurance transaction. ING Re will transfer to us assets equal to reserves of approximately $800.0 million and will pay a ceding commission of $560.0 million. These assets will be held in trust to secure the reserve obligations of the business. Additionally, ING Re will transfer certain operating assets associated with the business. Following the acquisition, we will have approximately $1.0 trillion of face amount of life reinsurance in-force, $8.8 billion in assets, $2.1 billion in revenues. In addition to the assets to be transferred by ING Re, we will raise an additional $230.0 million in new capital, which will satisfy the capital requirements for the acquired business. This new capital includes $180.0 million to be provided by The Cypress Group, a private equity firm, and an additional $50.0 million of trust preferred securities. 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. During the quarter ended September 30, 2004, we agreed and settled the post closing adjustment at $18.9 million, resulting in a final acquisition cost of $169.9 million. There was no goodwill arising on the acquisition. The present value of in-force of the business acquired was $29.9 million. 8 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements September 30, 2004 ERC has requested a refund of $8.0 million in respect of a settlement of a tax liability. We have disputed ERC's right to this refund. In the event that ERC are successful in their request, the present value of in-force business would increase to $37.8 million. On February 19, 2004, ERC Life Reinsurance Corporation's name was changed to Scottish Re Life Corporation. 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 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. During the quarter ended September 30, 2003 losses from these operations amounted to $157,000 and for the nine month period ended September 30, 2003, losses incurred were $1.8 million. There has been no impact in 2004. 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. 9 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (continued) September 30, 2004 5. Business segments (continued) 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 for all periods presented. The segment reporting for the lines of business is as follows: Three months ended September 30, 2004 ------------------------------------- Life Reinsurance ---------------- North America International Other Total ------------- ------------- ----- ----- Premiums earned ............. $ 119,468 $ 29,519 $ - $ 148,987 Investment income, net ...... 53,250 2,105 164 55,519 Fee income .................. 1,445 - 1,100 2,545 Realized gains (losses) ..... (1,289) 67 (2,176) (3,398) Change in value of embedded derivatives ...... (5,509) - - (5,509) ---------- --------- ---------- ---------- Total revenues .............. 167,365 31,691 (912) 198,144 ---------- --------- ---------- ---------- Claims and other policy benefits .................. 88,070 16,900 - 104,970 Interest credited to interest sensitive contract liabilities ...... 27,685 - - 27,685 Acquisition costs and other insurance expenses, net ............. 35,374 4,488 450 40,312 Operating expenses .......... 4,437 4,941 3,836 13,214 Interest expense ............ 1,266 - 2,086 3,352 ---------- --------- ---------- ---------- Total benefits and expenses .................. 156,832 26,329 6,372 189,533 ---------- --------- ---------- ---------- Income (loss) before income taxes and minority interest ......... $ 10,533 $ 5,362 $ (7,284) $ 8,611 ========== ========= ========== ========== 10 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (continued) September 30, 2004 5. Business segments (continued) Three months ended September 30, 2003 ------------------------------------- Life Reinsurance ---------------- North America International Other Total ------------- ------------- ----- ----- Premiums earned ............ $ 62,446 $ 30,295 $ - $ 92,741 Investment income, net ..... 34,889 1,860 1,384 38,133 Fee income ................. 2,128 - 804 2,932 Realized gains (losses) .... 395 (89) 438 744 ---------- ---------- ---------- ---------- Total revenues ............. 99,858 32,066 2,626 134,550 ---------- ---------- ---------- ---------- Claims and other policy benefits ................. 46,559 22,865 - 69,424 Interest credited to interest sensitive contract liabilities ..... 33,294 - - 33,294 Acquisition costs and other insurance expenses, net ............ 21,634 5,355 604 27,593 Operating expenses ......... 2,404 3,584 2,765 8,753 Interest expense ........... 235 - 1,634 1,869 ---------- ---------- ---------- ---------- Total benefits and expenses ................. 104,126 31,804 5,003 140,933 ---------- ---------- ---------- ---------- Income (loss) before income taxes and minority interest ........ $ (4,268) $ 262 $ (2,377) $ (6,383) ========== ========== ========== ========== 11 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (continued) September 30, 2004 5. Business segments (continued) Nine months ended September 30, 2004 ------------------------------------ Life Reinsurance ---------------- North America International Other Total ------------- ------------- ----- ----- Premiums earned ............ $ 352,340 $ 87,877 $ - $ 440,217 Investment income, net ..... 151,636 7,828 975 160,439 Fee income ................. 5,795 - 2,891 8,686 Realized losses ............ (1,149) (273) (2,242) (3,664) Change in value of embedded derivatives ..... 456 - - 456 ---------- ---------- ---------- ---------- Total revenues ............. 509,078 95,432 1,624 606,134 ---------- ---------- ---------- ---------- Claims and other policy benefits ................. 266,147 57,965 - 324,112 Interest credited to interest sensitive contract liabilities ..... 77,342 - - 77,342 Acquisition costs and other insurance expenses, net ............ 100,611 10,982 1,689 113,282 Operating expenses ......... 13,543 13,107 10,319 36,969 Interest expense ........... 2,892 - 6,234 9,126 ---------- ---------- ---------- ---------- Total benefits and expenses ................. 460,535 82,054 18,242 560,831 ---------- ---------- ---------- ---------- Income (loss) before income taxes and minority interest ........ $ 48,543 $ 13,378 $ (16,618) $ 45,303 ========== ========== ========== ========== 12 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (continued) September 30, 2004 5. Business segments (continued) Nine months ended September 30, 2003 ------------------------------------ Life Reinsurance ---------------- North America International Other Total ------------- ------------- ----- ----- Premiums earned ............ $ 158,471 $ 93,825 $ - $ 252,296 Investment income, net ..... 97,169 5,604 3,499 106,272 Fee income ................. 4,523 - 2,780 7,303 Realized gains (losses) .... (4,656) (962) 649 (4,969) ---------- ---------- ---------- ---------- Total revenues ............. 255,507 98,467 6,928 360,902 ---------- ---------- ---------- ---------- Claims and other policy benefits ................. 118,785 59,101 - 177,886 Interest credited to interest sensitive contract liabilities ..... 66,061 - - 66,061 Acquisition costs and other insurance expenses, net ............ 55,900 18,576 1,656 76,132 Operating expenses ......... 6,819 9,425 8,523 24,767 Interest expense ........... 712 - 4,821 5,533 ---------- ---------- ---------- ---------- Total benefits and expenses ................. 248,277 87,102 15,000 350,379 ---------- ---------- ---------- ---------- Income (loss) before income taxes and minority interest ........ $ 7,230 $ 11,365 $ (8,072) $ 10,523 ========== ========== ========== ========== Assets September 30, 2004 December 31, 2003 ------------------ ----------------- Life Reinsurance North America............... $ 5,709,085 $ 4,882,222 International............... 376,050 308,459 ------------------ ----------------- Total Life Reinsurance......... 6,085,135 5,190,681 Other.......................... 809,009 862,836 ------------------ ----------------- Total.......................... $ 6,894,144 $ 6,053,517 ================== ================= 13 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (continued) September 30, 2004 6. Earnings per ordinary share The following table sets forth the computation of basic and diluted earnings per ordinary share:
Three months ended Nine months ended ------------------ ----------------- September 30, September 30, September 30, September 30, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Numerator: Net income........................ $ 12,806 $ 1,625 $ 50,455 $ 16,740 ============ ============== ============= ============ Denominator: Denominator for basic earnings per ordinary share - Weighted average number of ordinary shares.......................... 35,869,413 33,248,670 35,648,913 29,119,913 Effect of dilutive securities - Stock options................. 603,525 1,055,776 735,013 872,532 - Warrants...................... 771,350 936,322 852,223 655,135 - Hybrid Capital Units.......... - - 32,271 - ------------ -------------- ------------- ------------ Denominator for dilutive earnings per ordinary share.............. 37,244,288 35,240,768 37,268,420 30,647,580 ============ ============== ============= ============ Earnings per ordinary share from continuing operations -Basic.... $ 0.36 $ 0.05 $ 1.42 $ 0.64 ============ ============== ============= ============ Earnings per ordinary share from continuing operations - Diluted. $ 0.34 $ 0.05 $ 1.35 $ 0.60 ============ ============== ============= ============ Basic earnings per ordinary share. $ 0.36 $ 0.05 $ 1.42 $ 0.57 ============ ============== ============= ============ Diluted earnings per ordinary share... $ 0.34 $ 0.05 $ 1.35 $ 0.55 ============ ============== ============= ============
14 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (continued) September 30, 2004 7. Derivatives During the quarter ended September 30, 2004, we entered into an interest rate swap contract in the amount of $100.0 million in relation to certain of our investment assets not supporting reinsurance liabilities. This contract is accounted for in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 requires that all derivatives be recognized as either assets or liabilities on the balance sheet and be measured at fair value. This derivative has not been designated as a hedge. The fair value of the swap at September 30, 2004 was a negative $2.2 million. This loss of $2.2 million has been included in realized gains (losses) in the statement of income. 8. Deferred acquisition costs The change in deferred acquisition costs is as follows:
Three months ended Nine months ended ---------------------------- ---------------------------- September 30, September 30, September 30, September 30, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Balance beginning of period ........................ $ 391,049 $ 262,015 $ 308,591 $ 213,516 Expenses deferred .............. 43,144 37,927 167,919 105,856 Amortization expense ........... (22,365) (14,216) (64,355) (35,803) Deferred acquisition costs on realized gains (losses)....................... (288) (790) (615) 1,367 ---------- ---------- ---------- --------- Balance end of period ....... $ 411,540 $ 284,936 $ 411,540 $ 284,936 ========== ========== ========== =========
9. Goodwill During the quarter, we received a payment of $1.7 million in respect of a settlement of the purchase price of Scottish Re Holdings Limited (formerly World-Wide Holdings Limited). This settlement arose on the finalization of income taxes due for periods prior to the acquisition and has resulted in a decrease in the goodwill arising on the acquisition. 10. Other assets Included in other assets as of September 30, 2004 is an amount of $4.9 million in respect of professional fees and other costs incurred for due diligence activities of potential acquisition targets. At September 30, 2004 the timing and certainty of completion of the proposed acquisitions cannot be determined. In the event that we determine that some of these transactions will not be completed we shall recognize a charge to income. 11. Structured finance facility liability On June 25, 2004, we closed a structured finance facility with HSBC Bank USA, N.A. This facility provides $200.0 million that can be used to collateralize reinsurance obligations under intercompany reinsurance agreements. Simultaneously we entered into a total return swap with HSBC Bank USA, N.A. under which we are entitled to the total return of the investment portfolio of the trust established for this facility. In accordance with FIN 46 we are considered to hold a beneficial interest in 15 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (continued) June 30, 2004 11. Structured finance facility liability (continued) the trust, which is in turn considered to be a variable interest entity. As a result, the trust has been consolidated in these financial statements. The assets of the variable interest entity have been recorded as fixed maturity investments. Our consolidated income statements show the investment return of the variable interest entity as investment income and the cost of the facility in acquisition costs and other insurance expenses. The creditors of the variable interest entity have no recourse against our general assets. 12. Long-term debt Long-term debt consists of: September 30, December 31, 2004 2003 ------------- ------------ 4.5% senior convertible notes due 2022..... $ 115,000 $ 115,000 Capital securities due 2032................ 17,500 17,500 Trust preferred securities due 2033........ 20,000 20,000 Trust preferred securities due 2033........ 10,000 10,000 Trust preferred securities due 2034........ 32,000 - -------------- -------------- Total $ 194,500 $ 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. 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). On conversion, we shall settle the principal amount of $115.0 million in cash. We have the right to deliver, in lieu of our ordinary shares, cash or a combination of cash and our ordinary shares for amounts in excess of the principal of $115.0 million. 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: 16 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (continued) September 30, 2004 12. Long-term debt (continued) 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. 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 due 2032 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 September 30, 2004 and December 31, 2003, the interest rates were 6.02% 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 September 30, 2004 and December 31, 2003, the interest rates were 6.02% 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. 17 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (continued) September 30, 2004 12. Long-term debt (continued) Trust preferred securities due 2033 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 an aggregate of $20.0 million Preferred Trust Securities (the "Trust Preferred Securities"). All of the common shares of Capital Trust II are owned by Scottish Holdings, Inc. The Trust Preferred Securities mature on October 29, 2033. They are redeemable in whole or in part at any time after October 29, 2008. Interest is payable quarterly at a rate equivalent to 3 month LIBOR plus 3.95%. At September 30, 2004 and December 31, 2003, the interest rates were 5.97% 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 (the "2033 Floating Rate Debentures") issued by Scottish Holdings, Inc. The 2033 Floating Rate Debentures mature on October 29, 2033 and interest is payable quarterly at 3 month LIBOR plus 3.95%. At September 30, 2004 and December 31, 2003, the interest rates were 5.97% 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 2033 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 2033 Floating Rate Debentures and distributions and other payments due on the Trust Preferred Securities. Trust preferred securities due 2033 On November 14, 2003, GPIC Holdings Inc. Statutory Trust, a Delaware statutory business trust ("GPIC Trust") issued and sold in a private offering an aggregate of $10.0 million Trust Preferred Securities (the "2033 Trust Preferred Securities"). All of the common shares of GPIC Trust are owned by Scottish Holdings, Inc. The 2033 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 September 30, 2004 and December 31, 2003, the interest rates were 5.92% 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 (the "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 September 30, 2004 and December 31, 2003, the interest rates were 5.92% and 5.05%, respectively. 18 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (continued) September 30, 2004 12. Long-term debt (continued) 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 2033 Trust Preferred Securities. Trust preferred securities due 2034 On May 12, 2004, Scottish Holdings, Inc. Statutory Trust III, a Connecticut statutory business trust ("Capital Trust III") issued and sold in a private offering an aggregate of $32.0 million Trust Perferred Securities (the "2034 Trust Preferred Securities"). All of the common shares of Capital Trust III are owned by Scottish Holdings, Inc. The 2034 Trust Preferred Securities mature on June 17, 2034. They are redeemable in whole or in part at any time after June 17, 2009. Interest is payable quarterly at a rate equivalent to 3 month LIBOR plus 3.80%. At September 30, 2004, the interest rate was 5.82%. Prior to June 17, 2009, interest cannot exceed 12.50%. Capital Trust III may defer payment of the interest for up to 20 consecutive quarterly periods, but no later than June 17, 2034. Any deferred payments would accrue interest quarterly on a compounded basis if Scottish Holdings, Inc. defers interest on the 2034 Floating Rate Debentures due June 17, 2034 (as described below). The sole assets of Capital Trust III consist of $33.0 million principal amount of Floating Rate Debentures (the "2034 Floating Rate Debentures") issued by Scottish Holdings, Inc. The 2034 Floating Rate Debentures mature on June 17, 2034 and interest is payable quarterly at 3 month LIBOR plus 3.80%. At September 30, 2004 the interest rate was 5.82%. Prior to June 17, 2009, interest cannot exceed 12.50%. Scottish Holdings, Inc. may defer payment of the interest for up to 20 consecutive quarterly periods, but no later than June 17, 2034. Any deferred payments would accrue interest quarterly on a compounded basis. Scottish Holdings, Inc. may redeem the 2034 Floating Rate Debentures at any time after June 17, 2009 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 2034 Floating Rate Debentures and distributions and other payments due on the 2034 Trust Preferred Securities. 13. 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. 19 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (continued) September 30, 2004 13. Mezzanine equity (continued) 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". 14. Shareholders' equity During the quarter ended September 30, 2004 and 2003, respectively, we issued 77,500 and 146,369 ordinary shares to employees upon the exercise of stock options. During the nine months ended September 30, 2004 and 2003, respectively, we issued 677,551 and 381,955 ordinary shares to employees upon the exercise of stock options. 20 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (continued) September 30, 2004 15. Stock option plans At September 30, 2004, we had four stock option plans (the "1998 Plan", the "1999 Plan", the "Harbourton Plan" and the "2001 Plan", collectively the "Plans") and an equity incentive compensation plan ("the 2004 ECP"). The Plans 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 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 first year of the 2004 ECP 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 three equal installments commencing on the first anniversary of the grant date. Total options authorized under the 2004 ECP are 750,000. In addition, 1,000,000 restricted shares have been authorized under the 2004 ECP 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 model was 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. 21 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (continued) September 30, 2004 15. Stock option plans (continued) Our pro forma information is as follows:
Three months ended Nine months ended ---------------------------- ---------------------------- September 30, September 30, September 30, September 30, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Net income-- as reported......... $ 12,806 $ 1,625 $ 50,455 $ 16,740 Stock-based employee compensation cost, net of related tax effects, included in the determination of net income as reported............ 127 77 340 158 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.................... (305) (562) (1,028) (1,881) ---------- ---------- --------- --------- Net income-- pro forma........ $ 12,628 $ 1,140 $ 49,767 $ 15,017 ========== ========== ========= ========= Basic earnings per ordinary share-- as reported........ $ 0.36 $ 0.05 $ 1.42 $ 0.57 ========== ========== ========= ========= Basic earnings per ordinary share-- pro forma.......... $ 0.35 $ 0.03 $ 1.40 $ 0.52 ========== ========== ========= ========= Diluted earnings per ordinary share-- as reported........ $ 0.34 $ 0.05 $ 1.35 $ 0.55 ========== ========== ========= ========= Diluted earnings per ordinary share-- pro forma.......... $ 0.34 $ 0.03 $ 1.34 $ 0.49 ========== ========== ========= =========
22 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (continued) September 30, 2004 16. 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 was scheduled to expire in October 2004 and was extended to December 31, 2004. 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 was scheduled to expire in September 2004 and was extended to December 1, 2004. It 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 September 30, 2004, Scottish Annuity & Life Insurance Company (Cayman) Ltd.'s shareholder's equity was $821.8 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 uncollateralized assets of 1.2 times any unsecured borrowings. At September 30, 2004, our net worth was $721.0 million and the ratio of debt to total capitalization was 18.4%. 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 September 30, 2004, there were no borrowings under the facilities. Outstanding letters of credit under these facilities amounted to $33.8 million as at September 30, 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 September 30, 2004 and December 31, 2003, there were no borrowings under this agreement. 23 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 combined reporting of this segment with our Other Segment for all periods presented. Other revenues and expenses not related to Life Reinsurance are reported in the Other Segment. On October 18, 2004, we announced that we had agreed to acquire the individual life reinsurance business of ING Re. We will reinsure the liabilities of all of ING Re's individual life reinsurance business through a coinsurance transaction. ING Re will transfer to us assets equal to reserves of approximately $800.0 million and will pay a ceding commission of $560.0 million. These assets will be held in trust to secure the reserve obligations of the business. Additionally, ING Re will transfer certain operating assets associated with the business. Following the acquisition, we will have approximately $1.0 trillion of face amount of life reinsurance in-force, $8.8 billion in assets, $2.1 billion in revenues and a capital base of approximately $1.3 billion. In addition to the assets to be transferred by ING Re, we will raise an additional $230.0 million in new capital, which will satisfy the capital requirements for the acquired business. This new capital includes $180.0 million to be provided by The Cypress Group, a private equity firm, and an additional $50.0 million of trust preferred securities. 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. We have agreed and settled the post closing adjustment at $18.9 million. 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 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. This transition period has now been completed. 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. 24 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 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 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 maturity investments and income from funds withheld at interest under modified coinsurance agreements. Under generally accepted accounting principles, because our fixed maturity 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. 25 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) In connection with reinsurance of annuity and annuity-type products, we record a liability for interest sensitive contract liabilities, which represents the amount ultimately due to the policyholder. We credit interest to these contracts each period at the rates determined in the underlying contract, and the amount is reported as interest credited to interest sensitive contract liabilities on our consolidated statements of income. A portion of the costs of acquiring new business, such as commissions, certain internal expenses related to our policy issuance and underwriting departments and some variable selling expenses are capitalized. The resulting deferred acquisition costs asset is amortized over future periods based on our expectations as to the emergence of future gross profits from the underlying contracts. These costs are dependent on the structure, size and type of business written. For certain products, we may retrospectively adjust our amortization when we revise our estimate of current or future gross profits to be realized. The effects of this adjustment are reflected in earnings in the period in which we revise our estimate. Operating expenses consist of salary and salary related expenses, legal and professional fees, rent and office expenses, travel and entertainment, directors' expenses, insurance and other similar expenses, except to the extent capitalized in deferred acquisition costs. Interest expense consists of interest charges on our borrowings. Factors affecting profitability We seek to generate profits from 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, the rate at which we amortize deferred acquisition costs and the change in value of our embedded derivatives. 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. 26 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 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, 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. 27 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 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 03-1") "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 28 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) assumptions, judgments and estimates. Changes in these assumptions, judgments and estimates could create material changes in our consolidated financial statements. Results of Operations Consolidated results of operations
Three months ended Nine months ended ---------------------------- ---------------------------- September 30, September 30, September 30, September 30, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Premiums earned ................. $ 148,987 $ 92,741 $ 440,217 $ 252,296 Investment income, net .......... 55,519 38,133 160,439 106,272 Fee income ...................... 2,545 2,932 8,686 7,303 Realized gains (losses) ......... (3,398) 744 (3,664) (4,969) Change in value of embedded derivatives ..................... (5,509) - 456 - ---------- ---------- ---------- ---------- Total revenues .................. 198,144 134,550 606,134 360,902 ---------- ---------- ---------- ---------- Claims and other policy benefits 104,970 69,424 324,112 177,886 Interest credited to interest sensitive contract liabilities .. 27,685 33,294 77,342 66,061 Acquisition costs and other insurance expenses, net ......... 40,312 27,593 113,282 76,132 Operating expenses .............. 13,214 8,753 36,969 24,767 Interest expense ................ 3,352 1,869 9,126 5,533 ---------- ---------- ---------- ---------- Total benefits and expenses ..... 189,533 140,933 560,831 350,379 ---------- ---------- ---------- ---------- Income before income taxes and minority interest ............... 8,611 (6,383) 45,303 10,523 Income tax benefit .............. 4,212 8,165 5,507 7,999 ---------- ---------- ---------- ---------- Income before minority interest . 12,823 1,782 50,810 18,522 Minority interest ............... (17) - (355) - ---------- ---------- ---------- ---------- Income from continuing operations 12,806 1,782 50,455 18,522 Loss from discontinued operations - (157) - (1,782) ---------- ---------- ---------- ---------- Net income ...................... $ 12,806 $ 1,625 $ 50,455 $ 16,740 ========== ========== ========== ==========
Total revenues increased by 47% to $198.1 million in the quarter ended September 30, 2004 from $134.6 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 derivative instruments 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, and our HyCU offering and trust preferred debt offerings in the fourth quarter of 2003 and the second quarter of 2004. Growth in these areas has been offset by realized losses on investments and derivatives and the change in value of embedded derivatives. The change in value of the embedded derivatives arises from the implementation of DIG B36. Total benefits and expenses increased by 34% to $189.5 million in the quarter ended September 30, 2004 from $140.9 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, additional operating costs necessary to meet the requirements of the Sarbanes-Oxley Act of 2002 and additional interest expense 29 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) arising from the HyCU offering and trust preferred debt offerings in the fourth quarter of 2003 and the second quarter of 2004. Total revenues increased by 68% to $606.1 million in the nine months ended September 30, 2004 from $360.9 million in the same period of 2003. 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, our HyCU offering and trust preferred debt offerings in the fourth quarter of 2003 and the second quarter of 2004. Growth in this area has been offset by realized losses on investments and derivatives. Total benefits and expenses increased by 60% to $560.8 million in the nine months ended September 30, 2004 from $350.4 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, additional operating costs necessary to meet the requirements of the Sarbanes-Oxley Act of 2002 and additional interest expense arising from the HyCU offering and trust preferred debt offerings in the fourth quarter of 2003 and second quarter of 2004. 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. During the quarter ended September 30, 2003 losses from these operations amounted to $157,000 and for the nine month period ended September 30, 2003, losses were $1.8 million. No losses were reported in 2004. Earnings per ordinary share
Three months ended Nine months ended ---------------------------- ---------------------------- September 30, September 30, September 30, September 30, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Income from continuing operations $ 12,806 $ 1,782 $ 50,455 $ 18,522 =========== =========== =========== =========== Net income....................... $ 12,806 $ 1,625 $ 50,455 $ 16,740 =========== =========== =========== =========== Earnings per ordinary share from continuing operations -Basic..... $ 0.36 $ 0.05 $ 1.42 $ 0.64 =========== =========== =========== =========== Earnings per ordinary share from continuing operations - Diluted.. $ 0.34 $ 0.05 $ 1.35 $ 0.60 =========== =========== =========== =========== Basic earnings per ordinary share $ 0.36 $ 0.05 $ 1.42 $ 0.57 =========== =========== =========== =========== Diluted earnings per ordinary share............................ $ 0.34 $ 0.05 $ 1.35 $ 0.55 =========== =========== =========== =========== Weighted average number of ordinary shares outstanding: Basic............................ 35,869,413 33,248,670 35,648,913 29,119,913 =========== =========== =========== =========== Diluted.......................... 37,244,288 35,240,768 37,268,420 30,647,580 =========== =========== =========== ===========
30 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Income from continuing operations for the quarter ended September 30, 2004 increased 619% to $12.8 million from $1.8 million in the same period in 2003. In the three month period ended September 30, 2003 we incurred a charge of $12.5 million to account for revised reporting by a ceding company client in connection with two fixed annuity reinsurance contracts. Income from continuing operations has increased due 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, and realized losses on our investments and derivatives and the change in value of the embedded derivative Diluted earnings per ordinary share amounted to $0.34 for the quarter ended September 30, 2004 and $0.05 in the same period in 2003, an increase of 580%. 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, on a fully diluted basis, has increased from 35,240,768 for the three months ended September 30, 2003 to 37,244,288 for the three months ended September 30, 2004 principally as a result of the offering of 9,200,000 million shares in July 2003. Income from continuing operations for the nine months ended September 30, 2004 increased 172% to $50.5 million from $18.5 million in the same period in 2003. In the nine months ended September 30, 2004 we incurred a change of $12.5 million to account for revised reporting by a ceding company client in connection with two fixed annuity reinsurance contracts. Income from continuing operations has increased due 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 and realized losses on our investments and derivatives. Diluted earnings per ordinary share amounted to $1.35 for the nine months ended September 30, 2004 and $0.55 in the same period in 2003, an increase of 145%. 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, on a fully diluted basis, has increased from 30,647,580 for the nine months ended September 30, 2003 to 37,268,420 for the nine months ended September 30, 2004 principally as a result of the offering of 9,200,000 million shares in July 2003. 31 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Segment Operating Results Life Reinsurance North America
Three months ended Nine months ended ---------------------------- ---------------------------- September 30, September 30, September 30, September 30, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Premiums earned ................ $ 119,468 $ 62,446 $ 352,340 $ 158,471 Investment income, net ......... 53,250 34,889 151,636 97,169 Fee income ..................... 1,445 2,128 5,795 4,523 Realized gains (losses) ........ (1,289) 395 (1,149) (4,656) Change in value of embedded .... derivatives (5,509) - 456 - ---------- ---------- ---------- ---------- Total revenues ................. 167,365 99,858 509,078 255,507 ---------- ---------- ---------- ---------- Claims and other policy benefits 88,070 46,559 266,147 118,785 Interest credited to interest sensitive contract liabilities . 27,685 33,294 77,342 66,061 Acquisition costs and other insurance expenses, net ........ 35,374 21,634 100,611 55,900 Operating expenses ............. 4,437 2,404 13,543 6,819 Interest expense ............... 1,266 235 2,892 712 ---------- ---------- ---------- ---------- Total benefits and expenses .... 156,832 104,126 460,535 248,277 ---------- ---------- ---------- ---------- Income (loss) before income taxes and minority interest .......... $ 10,533 $ (4,268) $ 48,543 $ 7,230 ========== ========== ========== ==========
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 and nine months ended September 30, 2004. Premiums earned in our Life Reinsurance North America Segment during the quarter ended September 30, 2004 increased 91% to $119.5 million in comparison with $62.4 million in the same period in 2003. A significant portion of the increase is due to the acquisition of Scottish Re Life Corporation, which contributed $29.8 million in earned premiums for the quarter. The increase is also due to increases in the amounts of life insurance in-force on existing business and on new business written during the year. As of September 30, 2004, we had approximately $307.4 billion of life reinsurance in force covering 7.5 million lives with an average benefit per life of $41,000 in our North American operations. As of September 30, 2003, we had approximately $105.2 billion of life reinsurance in force in our Life Reinsurance North America Segment covering 2.0 million lives with an average benefit per life of $53,000. Net investment income increased 53% to $53.3 million for the quarter ended September 30, 2004 from $34.9 million for the same period in the prior year. 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 and our HyCU and trust preferred securities offerings in the fourth quarter of 2003 and the second quarter of 2004. Total invested assets in this segment have increased from $3.1 billion at September 30, 2003 to $4.4 billion at September 30, 2004. 32 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) On the portfolio managed by our external investment managers the yields on fixed rate assets were 5.1% and 5.3% at September 30, 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 3.0% as at September 30, 2004 from 3.1% as at September 30, 2003, and the yield on our cash and cash equivalents decreased to 1.3% as at September 30, 2004 from 1.6% as at September 30, 2003. 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 in which 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 September 30, 2004 amounted to a loss of $5.5 million. This change in value has arisen principally because of decreases in risk free interest rates. Claims and other policy benefits increased by 89% to $88.1 million for the quarter ended September 30, 2004 from $46.6 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 $1.0 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 $29.3 million in excess of $750,000. This catastrophe cover provides protection for terrorism, nuclear, biological and chemical risks. For the quarter ended September 30, 2004, interest credited to interest sensitive contract liabilities decreased 17% to $27.7 million from $33.3 million in the same period in 2003. During the quarter ended September 30, 2003 we incurred a $12.5 million charge due to revised reporting by a ceding company client in connection with two fixed annuity reinsurance contracts. Excluding this charge, interest credited in the 2004 third quarter increased by 39% in comparison with the three months ended September 30, 2003. Interest credited includes interest in respect of funding agreements. The amounts due on secured funding agreements are included in interest sensitive contract liabilities on our balance sheet and amount to $500.5 million at September 30, 2004 in comparison with $170.1 million at September 30, 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 $3.1 billion at September 30, 2004 in comparison with $2.1 billion at September 30, 2003. During the quarter ended September 30, 2004, acquisition costs and other insurance expenses increased by 64% to $35.4 million from $21.6 million in the same quarter in 2003. The increase was a result of the acquisition of Scottish Re Life Corporation and the increased life and annuity business in our Life Reinsurance North America Segment as discussed above. The costs of the structured finance facility described below are included in acquisition costs and other insurance expenses. 33 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The components of these expenses are as follows: Three Months Ended September 30, ------------------ 2004 2003 ---- ---- (dollars in thousands) Commissions, excise taxes and other insurance expenses....................................... $57,556 45,891 Deferral of expenses........................... (39,860) (38,280) -------- -------- 17,696 7,611 Amortization-- Present value of in-force business 343 - Amortization-- Deferred acquisition costs...... 17,335 14,023 -------- -------- Total.......................................... $35,374 $21,634 ======== ======== 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 reinsurance treaty or, in the case of interest sensitive contracts, in relation to the estimated gross profits in respect of the contracts. Operating expenses have increased by 85% to $4.4 million in the quarter ended September 30, 2004 from $2.4 million in the same quarter in 2003. The increase is primarily the result of the acquisition of Scottish Re Life Corporation and additional personnel costs incurred as we continue to grow our business. The costs of Scottish Re Life Corporation include the cost of the transition services agreement with GE ERC of $750,000. Total employees in this segment have grown from 62 at September 30, 2003 to 80 at September 30, 2004. Interest expense in this segment arises on the trust preferred securities. The increase in interest expense to $1.3 million in the quarter ended September 30, 2004 from $0.2 million for the same quarter in 2003, results from the issuance of an additional $62.0 million of these securities in October 2003, November 2003, and May 2004. Premiums earned in our Life Reinsurance North America Segment during the nine months ended September 30, 2004 increased 122% to $352.3 million in comparison with $158.5 million in the same period in 2003. A significant portion of the increase is due to the acquisition of Scottish Re Life Corporation, which contributed $107.6 million in earned premiums. The remaining increase is due to the increase in the number of client ceding companies and the increase in business from these clients in our Life Reinsurance North America Segment. As of September 30, 2004, we had approximately $307.4 billion life reinsurance in force covering 7.5 million lives with an average benefit per life of $41,000 in our Life Reinsurance North America Segment. As of September 30, 2003, we had approximately $105.2 billion of life reinsurance in force in our Life Reinsurance North America Segment covering 2.0 million lives with an average benefit per life of $53,000. Net investment income increased by 56% to $151.6 million for the nine months ended September 30, 2004 from $97.2 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. The change in value of derivatives, net of related deferred amortization costs, during the nine months ended September 30, 2004 amounted to a gain of $0.4 million. This change in value arose principally because of an increase in risk free interest rates. 34 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Claims and other policy benefits increased by 124% to $266.1 million during the nine months ended September 30, 2004 from $118.8 million in the same period in 2003. The increase is a result of the acquisition of Scottish Re Life Corporation, the increased number of clients and the increase in 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 period to period. For the nine months ended September 30, 2004, interest credited to interest sensitive contract liabilities increased by 17% to $77.3 million from $66.1 million in the same period in 2003. During the nine months ended September 30, 2003 we incurred $12.5 million due to revised reporting by a ceding company client in connection with two fixed annuity reinsurance contracts. Excluding this charge interest credited increased by 46% in comparison with the nine months ended September 30, 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 $500.5 million at September 30, 2004 in comparison with $170.1 million at September 30, 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 $3.1 billion at September 30, 2004 in comparison with $2.1 billion at September 30, 2003. During the nine months ended September 30, 2004 acquisition costs and other insurance expenses increased by 80% to $100.6 million from $55.9 million in the same period in 2003. The increase was a result of the acquisition of Scottish Re Life Corporation and the increased life and annuity business in our Life Reinsurance North America Segment as discussed above. The costs of the structured finance facility described below are included in acquisition costs and other insurance expenses. The components of these expenses are as follows: Nine Months Ended September 30, ----------------- 2004 2003 ----------------- (dollars in thousands) Commissions, excise taxes and other insurance expenses....................................... $202,205 $130,890 Deferral of expenses........................... (157,807) (110,248) --------- --------- 44,398 20,642 Amortization-- Present value of in-force business 2,536 - Amortization-- Deferred acquisition costs...... 53,677 35,258 --------- --------- Total.......................................... $100,611 $ 55,900 ========= ========= Operating expenses increased by 99% to $13.5 million during the nine months ended September 30, 2004 from $6.8 million in the same period in 2003. The increase is primarily the result of the acquisition of Scottish Re Life Corporation and additional personnel costs incurred as we continue to grow our business. The costs of Scottish Re Life Corporation include the cost of the transition services agreement with GE ERC of $2.4 million. Total employees in this segment have grown from 62 at September 30, 2003 to 80 at September 30, 2004. Interest expense in this segment arises on the trust preferred securities. The increase in interest expense to $2.9 for the nine months ended September 30, 2004 from $0.7 million in the same period in 35 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 2003, results from the issuance of an additional $62.0 million of these securities in October 2003, November 2003, and May 2004. Life Reinsurance International
Three months ended Nine months ended ---------------------------- ---------------------------- September 30, September 30, September 30, September 30, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Premiums earned ..................$ 29,519 $ 30,295 $ 87,877 $ 93,825 Investment income, net ........... 2,105 1,860 7,828 5,604 Realized gains (losses) .......... 67 (89) (273) (962) -------- -------- -------- -------- Total revenues ................... 31,691 32,066 95,432 98,467 -------- -------- -------- -------- Claims and other policy benefits.. 16,900 22,865 57,965 59,101 Acquisition costs and other insurance expenses, net .......... 4,488 5,355 10,982 18,576 Operating expenses ............... 4,941 3,584 13,107 9,425 -------- -------- -------- -------- Total benefits and expenses ...... 26,329 31,804 82,054 87,102 -------- -------- -------- -------- Income before income taxes and minority interest ................$ 5,362 $ 262 $ 13,378 $ 11,365 ======== ======== ======== ========
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 quarter ended September 30, 2004 decreased 3% to $29.5 million in comparison with $30.3 million in the same period in 2003. Premiums earned from a portfolio acquired in 2002 were $2.1 million lower in the quarter ended September 30, 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 increased by 3% in the quarter ended September 30, 2004 to $17.1 million in comparison with $16.7 million in the same period in 2003. Earned premium for general reinsurance business, which consists of aircrew loss of license and related personal accident, increased 11% from $7.6 million to $8.5 million. 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. During the year to date we have decided not to renew certain contracts, which do not meet our required return thresholds. Investment income for the quarter ended September 30, 2004 has increased to $2.1 million compared to $1.9 million for the same period in 2003. The increase is 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 decreased to $16.9 million in the quarter ended September 30, 2004 from $22.9 million in the same quarter in 2003. Claims from a portfolio acquired in 2002 were $1.6 million lower in the quarter ended September 30, 2004 compared to the same quarter in the prior year due to the run off nature of the portfolio. Claims in 36 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) the current quarter, compared to the same quarter in 2003, have been impacted by the introduction of the estimates process described above. During the quarter ended September 30, 2004, acquisition costs and other insurance expenses decreased by $0.9 million or 16% to $4.5 million from $5.4 million in the same period in 2003. Acquisition costs have also been impacted by the estimate process described above. Operating expenses have increased by 36% for the quarter ended September 30, 2004 to $4.9 million from $3.6 million in the prior year period. The increase is principally related to personnel costs. Additional resources have been added as we continue to grow our business. Additional costs have been incurred due to the amortization of a new administration system. 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. Premiums earned in our Life Reinsurance International Segment during the nine months ended September 30, 2004 decreased 6% to $87.9 million in comparison with $93.8 million in the same period in 2003. Premiums earned from a portfolio acquired late in 2002 were $5.0 million lower in the first nine months 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 decreased by 6% in the nine months ended September 30, 2004 to $47.8 million in comparison with $50.9 million in 2003. Earned premium for general reinsurance business, which consists of aircrew loss of license and related personal accident, grew 9% from $23.3 million to $25.5 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. Investment income during the nine months ended September 30, 2004 has increased to $7.8 million compared to $5.6 million for the same period in 2003. The agreements for the acquisition of a portfolio of business completed late in 2002 included conditions for recapture of certain business by the ceding company. This recapture has now been completed and has resulted in additional investment income of $1.1 million in the nine month period ended September 30, 2004. The remainder of the increase is 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 decreased by 2% to $58.0 million in the nine months ended September 30, 2004 from $59.1 million in the same period in 2003. Claims in the current nine month period, compared to the same period in 2003, have been impacted by the introduction of the estimates process described above. During the current nine month period we have recognized claims and other policy benefits of $1.8 million in respect of the recapture of business on the portfolio acquisition described above. In addition during the period we incurred $1.0 million in respect of a claim from our stop loss business. Claims and other policy benefits in the prior year were favorably impacted by a $3.4 million release of reserves on the sale of our unit linked business in 2003. During the nine months ended September 30, 2004 acquisition costs and other insurance expenses decreased by $5.6 million or 49% to $11.0 million from $18.6 million in the same period in 2003. Acquisition costs for a portfolio acquired in late 2002 are $2.0 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 $1.9 million lower in the nine month period of 2004 compared to the same period of 2003 primarily due to the sale of 37 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) the unit linked business in the second quarter of 2003. In the current year we recognized a commission due of $1.8 million arising from a run off book of business. Operating expenses have increased by 39% to $13.1 million for the nine months ended September 30, 2004 from $9.4 million in the prior year period. The increase is principally related to personnel costs. Additional resources have been added as we continue to grow our business. The increased personnel costs include costs for recruitment expenses. Other expense increases compared to 2003 include office costs due to the move to larger offices in the second quarter of 2003 and amortization of the costs of a new administration system. 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 Nine months ended ---------------------------- ---------------------------- September 30, September 30, September 30, September 30, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Investment income, net .......... $ 164 $ 1,384 $ 975 $ 3,499 Fee income ...................... 1,100 804 2,891 2,780 Realized gains (losses) ........ (2,176) 438 (2,242) 649 --------- --------- --------- --------- Total revenues .................. (912) 2,626 1,624 6,928 --------- --------- --------- --------- Acquisition costs and other insurance expenses, net ......... 450 604 1,689 1,656 Operating expenses .............. 3,836 2,765 10,319 8,523 Interest expense ................ 2,086 1,634 6,234 4,821 --------- --------- --------- --------- Total benefits and expenses ..... 6,372 5,003 18,242 15,000 --------- --------- --------- --------- Loss before income taxes and minority interest ............... $ (7,284) $ (2,377) $(16,618) $ (8,072) ========= ========= ========= =========
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. Investment income in the three months and nine months ended September 30, 2004 has decreased due to the additional deployment of capital to our operating subsidiaries. Fee income and acquisition expenses arise from our Wealth Management operations. Operating expenses include the costs of running 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. Operating expenses have increased by 40% to $3.8 million for the quarter ended September 30, 2004 and 21% to $10.3 million for the nine months ended September 30, 2004. These increases relate primarily to increased personnel costs and the costs of corporate governance initiatives, including the Sarbanes Oxley Act of 2002. For the quarter ended September 30, 2004, interest expense has increased by 28% to $2.1 million from $1.6 million for the same period in 2003 as a result of the HyCU issuance in December 2003. For the nine months ended September 30, 2004, interest expense has increased by 29% to $6.2 million from $4.8 million for the same period in 2003. 38 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Realized gains (losses) During the quarter ended September 30, 2004, realized losses amounted to $3.4 million in comparison with a gain of $0.7 million in the same period in 2003. Included in realized losses for the current quarter is $2.2 million resulting from the mark to market of an interest rate swap contract. We entered into this contract in relation to certain of our investment assets not supporting reinsurance liabilities. This derivative has not been designated as a hedge and accordingly changes in the fair value are recorded in the determination of net income. During the quarter ended September 30, 2004, we recognized losses of $1.2 million in respect of impairments on the portfolio controlled by us. During the nine months ended September 30, 2004, realized losses amounted to $3.7 million in comparison with realized losses of $5.0 million in the same period in 2003. Included in realized losses is $2.2 million resulting from the mark to market of an interest rate swap as described above. During the nine months ended September 30, 2004, we recognized losses of $3.2 million in respect of impairments on the portfolio controlled by us. These losses were offset by net realized gains on the portfolio. The losses in the nine months ended September 30, 2003 consist of investment losses on unit linked securities of $1.0 million, impairments of $5.7 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, as well as 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. 39 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 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 September 30, 2004 and 2003. Three months ended September 30, 2004 ------------------------------------- Credit Concern Other Total -------------- ----- ----- Days Proceeds Loss Proceeds Loss Proceeds Loss -------- ---- -------- ---- -------- ---- (dollars in thousands) 0-90............ $ 250 $ (84) $9,556 $ (377) $9,806 $(461) 91-180.......... 105 (45) 3,796 (57) 3,901 (102) 181-270......... - - - - - - 271-360......... - - 187 (15) 187 (15) Greater than 360 - - 388 (33) 388 (33) ---- ------ ------- ------- ------- ------ Total........... $355 $(129) $13,927 $ (482) $14,282 $(611) ==== ====== ======= ======= ======= ====== Three months ended September 30, 2003 ------------------------------------- Credit Concern Other Total -------------- ----- ----- Days Proceeds Loss Proceeds Loss Proceeds Loss -------- ---- -------- ---- -------- ---- (dollars in thousands) 0-90............ $ - $ - $17,657 $ (180) $17,657 $ (180) 91-180.......... 100 (83) 2,108 (10) 2,208 (93) 181-270......... - - 279 (2) 279 (2) 271-360......... - - 479 (55) 479 (55) Greater than 360 1,577 (765) 1,380 (116) 2,957 (881) ------ ------ ------- ------- ------- -------- Total........... $1,677 $(848) $21,903 $ (363) $23,580 $(1,211) ====== ====== ======= ======= ======= ======== Nine months ended September 30, 2004 ------------------------------------- Credit Concern Other Total -------------- ----- ----- Days Proceeds Loss Proceeds Loss Proceeds Loss -------- ---- -------- ---- -------- ---- (dollars in thousands) 0-90............ $ 250 $ (84) $112,405 $(2,596) $112,655 $(2,680) 91-180.......... 1,909 (136) 29,426 (311) 31,335 (447) 181-270......... 3,216 (106) 494 (15) 3,710 (121) 271-360......... - - 2,374 (41) 2,374 (41) Greater than 360 5,060 (548) 388 (33) 5,448 (581) ------- ------ -------- -------- -------- -------- Total........... $10,435 $(874) $145,087 $(2,996) $155,522 $(3,870) ======= ====== ======== ======== ======== ======== 40 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Nine months ended September 30, 2003 ------------------------------------- Credit Concern Other Total -------------- ----- ----- Days Proceeds Loss Proceeds Loss Proceeds Loss -------- ---- -------- ---- -------- ---- (dollars in thousands) 0-90............ $ - $ - $ 20,133 $ (183) $ 20,133 $ (183) 91-180.......... 3,529 (295) 2,108 (10) 5,637 (305) 181-270......... 1,200 (241) 279 (2) 1,479 (243) 271-360......... - - 479 (55) 479 (55) Greater than 360 3,051 (778) 1,380 (116) 4,431 (894) -------- -------- -------- ------- -------- -------- Total........... $ 7,780 $(1,314) $ 24,379 $ (366) $ 32,159 $(1,680) ======== ======== ======== ======= ======== ======== Financial Condition Investments At September 30, 2004, the portfolio controlled by us consisted of $3.1 billion of fixed income securities, preferred stock and cash. The majority of these assets are traded; however, $285.5 million represent investments in private securities. Of the total portfolio controlled by us, $2.9 billion represented the fixed income and preferred stock portfolios managed by external investment managers and $153.5 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 September 30, 2004, the average Standard & Poor's rating of that portfolio was "AA-", the average effective duration was 3.3 years and the average book yield was 4.3% as compared with an average rating of "AA-", an average effective duration 3.9 years and an average book yield of 4.5% at December 31, 2003. At September 30, 2004, the unrealized appreciation on investments, net of tax, was $23.6 million as compared with unrealized appreciation on investments, net of tax, of $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 September 30, 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. September 30, 2004 ------------------ Portfolio performance....................... 2.1% Customized index............................ 2.6% Lehman Brothers Global Bond Index........... 3.4% S&P 500..................................... (1.9)% 41 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The following table presents the investment portfolio (market value) credit exposure by category as assigned by Standard & Poor's. September 30, 2004 December 31, 2003 ------------------ ----------------- Ratings $ in $ in millions % millions % -------- - -------- - AAA............................... $1,109.2 36.0% $ 785.4 32.7% AA................................ 395.5 12.9 298.4 12.4 A................................. 962.3 31.3 762.7 31.7 BBB............................... 580.3 18.9 540.8 22.5 BB or below....................... 28.8 0.9 16.6 0.7 -------- ------ -------- ------ Total............................. $3,076.1 100.0% $2,403.9 100.0% ======== ====== ======== ====== The following table illustrates the investment portfolio (market value) sector exposure. September 30, 2004 December 31, 2003 ------------------ ----------------- Sector $ in $ in millions % millions % -------- - -------- - U.S. Treasury securities and U.S. government agency obligations.................. $ 45.4 1.4% $ 74.6 3.1% Corporate securities............ 1,106.5 36.0 1,119.6 46.6 Municipal bonds................. 14.9 0.5 1.8 0.1 Mortgage and asset backed 1,630.7 53.0 securities................... 818.7 34.0 Preferred stock................. 125.1 4.1 126.5 5.3 -------- ------ -------- ------ 2,922.6 95.0 2,141.2 89.1 Cash............................ 153.5 5.0 262.7 10.9 -------- ------ -------- ------ Total........................... $3,076.1 100.0% $2,403.9 100.0% ======== ====== ======== ====== The data in the tables above exclude other investments and assets held by ceding insurers under modified coinsurance agreements. At September 30, 2004, our fixed income portfolio had 1,678 positions and $14.0 million of gross unrealized losses. No single position had an unrealized loss greater than $2.2 million. There were $45.5 million of unrealized gains on the remainder of the portfolio. There were 38 private securities in an unrealized loss position totaling $0.5 million. 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 $0.8 million. 42 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The composition by category of securities that have an unrealized loss at September 30, 2004 and December 31, 2003 are presented in the tables below. September 30, 2004 ------------------ Estimated Unrealized Fair Value % Loss % ---------- - ---- - Dollars in thousands Corporate securities................. $ 258,826 27.1% $(2,815) 20.1% Other structured securities.......... 395,848 41.4 (7,871) 56.3 Collateralized mortgage obligations.. 163,650 17.1 (1,458) 10.4 Preferred stock...................... 42,979 4.5 (902) 6.5 Mortgage backed securities........... 67,434 7.1 (755) 5.4 Governments.......................... 20,037 2.1 (76) 0.6 Municipal bonds...................... 6,858 0.7 (96) 0.7 ---------- ------ --------- ------ Total................................ $ 955,632 100.0% $(13,973) 100.0% ========== ====== ========= ====== 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% ======== ====== ========= ====== 43 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The following tables provide information on the length of time securities have been continuously in an unrealized loss position: September 30, 2004 ------------------ Estimated Unrealized Days Book Value % Fair Value % Loss % ---- ---------- - ---------- - ---- - Dollars in thousands 0-90............ $358,312 37.0% $356,296 37.3% $(2,016) 14.4% 91-180.......... 375,674 38.7 372,314 39.0 (3,360) 24.0 181-270......... 129,258 13.3 124,664 13.0 (4,594) 32.9 271-360......... 19,880 2.1 19,625 2.1 (255) 1.8 Greater than 360 86,481 8.9 82,733 8.6 (3,748) 26.9 -------- ------ -------- ------ --------- ------ Total........... $969,605 100.0% $955,632 100.0% $(13,973) 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 $2.4 million at September 30, 2004 and $2.0 million at December 31, 2003. Unrealized losses on non-investment grade securities amounted to $1.8 million and $3.0 million at September 30, 2004 and December 31, 2003, respectively. Of these amounts, non-investment grade securities with unrealized losses of $1.2 million at September 30, 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 $1.2 million at September 30, 2004 and $0.9 million at December 31, 2003 had been in an unrealized loss position for periods greater than 2 years. 44 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The following tables illustrate the industry analysis of the unrealized losses at September 30, 2004 and December 31, 2003. September 30, 2004 ------------------ Amortized Estimated Unrealized Cost % Fair Value % Loss % ---- - ---------- - ---- - Industry Dollars in thousands Mortgage and asset backed securities. $ 637,016 65.7% $ 626,932 65.6% $(10,084) 72.2% Banking............. 70,539 7.3 69,671 7.3 (868) 6.2 Communications...... 29,004 3.0 28,547 3.0 (457) 3.3 Financial other .... 26,395 2.7 26,003 2.7 (392) 2.8 Electric............ 22,315 2.3 22,191 2.3 (124) 0.9 Brokerage........... 21,964 2.3 21,789 2.3 (175) 1.3 Supranationals...... 18,495 1.9 18,251 1.9 (244) 1.7 Other............... 143,877 14.8 142,248 14.9 (1,629) 11.6 ---------- ------ --------- ------ --------- ------ Total............... $ 969,605 100.0% $ 955,632 100.0% $(13,973) 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 23,009 4.1 22,632 4.2 (377) 2.6 non-cyclical...... 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% ========== ====== ========= ====== ========== ====== The expected maturity dates of securities that have an unrealized loss at September 30, 2004 and December 31, 2003 are presented in the table below. September 30, 2004 ------------------ Amortized Estimated Unrealized Maturity Cost % Fair Value % Loss % - -------- ---- - ---------- - ---- - Dollars in thousands Due in one year or less. $ 113,510 11.7% $ 111,714 11.7% $ (1,796) 12.9% Due in one through five 510,782 52.7 506,167 53.0 (4,615) 33.0 years................... Due in five through ten 253,898 26.2 247,928 25.9 (5,970) 42.7 years................... Due after ten years..... 91,415 9.4 89,823 9.4 (1,592) 11.4 --------- ------ --------- ------ --------- ------ Total................... $ 969,605 100.0% $ 955,632 100.0% $(13,973) 100.0% ========= ====== ========= ====== ========= ====== 45 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) December 31, 2003 ----------------- Estimated Unrealized Maturity Book Value % Fair Value % Loss % -------- ---------- - ---------- - ---- - Dollars in thousands Due in one year or less. $ 57,518 10.4% $ 57,129 10.6% $ (389) 2.7% Due in one through five 220,835 39.8 214,836 39.8 (5,999) 41.1 years................... Due in five through ten 232,231 41.9 225,844 41.8 (6,387) 43.8 years................... Due after ten years..... 44,115 7.9 42,307 7.8 (1,808) 12.4 --------- ------ --------- ------ --------- ------ Total................... $ 554,699 100.0% $ 540,116 100.0% $(14,583) 100.0% ========= ====== ========= ====== ========= ====== At September 30, 2004, there were 599 securities with unrealized loss positions with no security having an unrealized loss greater than $2.2 million. 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 securitized assets, were tested for impairment and satisfied the impairment tests at December 31, 2003. The increase in the number of securities with unrealized losses is primarily attributable to increases in interest rates. At September 30, 2004, there were five 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 $4.1 million and the largest unrealized loss position was $2.2 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 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 September 30, 2004 and December 31, 2003, funds withheld at interest were in respect of six fixed annuity reinsurance contracts with three ceding companies. At both September 30, 2004 and December 31, 2003, we had three contracts with Lincoln National Insurance Company that accounted for $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 $1.8 billion and $1.7 billion at September 30, 2004 and December 31, 2003, respectively. 46 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) At September 30, 2004, funds withheld at interest totaled $1.5 billion with an average rating of "A-", an average effective duration of 4.8 years and an average book yield of 6.2% as compared with an average rating of "A-", an average effective duration of 5.1 years and an average book yield of 6.3% 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 $1.5 billion and $1.6 billion at September 30, 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. September 30, 2004 December 31, 2003 Ratings $ in millions % $ in millions % ------- ------------- - ------------- - AAA......................... $ 223.2 14.5% $ 216.6 13.9% AA.......................... 72.6 4.7 76.9 4.9 A........................... 517.9 33.7 528.6 34.0 BBB......................... 527.9 34.4 537.6 34.6 BB or below................. 64.0 4.2 66.0 4.3 ----------- ------ --------- ------ 1,405.6 91.5 1,425.7 91.7 Commercial mortgage loans... 130.3 8.5 129.4 8.3 ----------- ------ --------- ------ Total....................... $ 1,535.9 100.0% $ 1,555.1 100.0% =========== ====== ========= ====== 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. September 30, 2004 December 31, 2003 Sector $ in millions % $ in millions % ------ ------------- - ------------- - U.S. Treasury securities and U.S. government agency obligations..... $ 35.2 2.3% $ 32.0 2.1% Corporate securities..... 1,021.1 66.5 1,041.2 67.0 Municipal bonds.......... 24.5 1.6 23.1 1.5 Mortgage and asset backed securities...... 320.2 20.8 329.4 21.1 Commercial mortgage loans 130.3 8.5 129.4 8.3 Cash 4.6 0.3 - - ----------- ------ --------- ------ Total....................... $ 1,535.9 100.0% $ 1,555.1 100.0% =========== ====== ========= ====== Liquidity and Capital Resources Cash flow Cash used in operating activities amounted to $18.4 million in the first nine months of 2004 in comparison with a cash source of $62.4 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 47 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) operating cash flow is partly 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 to its acquisition in December 2003. This outflow is not expected to recur. When adjusted for this payment, cash inflows from operations in the first nine months of 2004 were $4.6 million compared to inflows $62.4 in the same period of 2003. This decrease is due to the timing of receipt of reinsurance receivables and settlement of reinsurance payables. During the nine month period ending September 30, 2004 we settled reinsurance payables outstanding at December 30, 2003. Reinsurance receivables have increased due to the recently completed negotiation of a contract. 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, the level of renewal premiums earned in the period and the timing of receipt of reinsurance receivables and settlement of reinsurance payables. 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. Capital and collateral At September 30, 2004, total capitalization was $1.1 billion compared to $964.3 million at December 31, 2003. Total capitalization is analyzed as follows: September 30, December 31, 2004 2003 ------------- ------------ (dollars in thousands) Shareholders' equity............. $ 720,990 $ 659,844 Mezzanine equity................. 142,296 141,928 Long-term debt................... 194,500 162,500 --------------- ------------- Total $ 1,057,786 $ 964,272 =============== ============= The increase in capitalization is due to the net income for the nine months ended September 30, 2004 of $50.5 million, the issuance of trust preferred debt of $32.0 million, the issuance of share capital to employees on the exercise of options of $7.3 million and an increase in other comprehensive income of $8.6 million offset by dividends paid of $5.3 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 September 30, 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. As discussed previously, we expect to raise an additional $230.0 million in new capital to satisfy the capital requirements of our proposed acquisition of the individual life business of ING Re. This capital includes $180.0 million to be provided by The Cypress Group, a private equity firm, and an additional $50.0 million of trust preferred securities. During the nine months ended September 30, 2004, we paid dividends totaling $5.3 million or $0.15 per share. On November 5, 2004, we declared a dividend of $0.05 per share to be paid on December 2, 2004. 48 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) On June 25, 2004, we closed a structured finance facility with HSBC Bank USA, N.A. This facility provides $200.0 million that can be used to collateralize reinsurance obligations under intercompany reinsurance agreements. Simultaneously, we entered into a total return swap with HSBC Bank USA, N.A. under which we are entitled to the total return of the investment portfolio of the trust established in respect of this facility. As a result, the balances and activities of the trust have been consolidated in these financial statements. 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 was scheduled to expire in October 2004 and was extended to December 31, 2004. 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 was scheduled to expire in September 2004 and was extended to December 1, 2004. It 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 September 30, 2004, Scottish Annuity & Life Insurance Company (Cayman) Ltd.'s shareholder's equity was $821.8 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 uncollateralized assets of 1.2 times any unsecured borrowings. At September 30, 2004, our net worth was $721.0 million and the ratio of debt to total capitalization was 18.4%. 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 September 30, 2004, there were no borrowings under the facilities. Outstanding letters of credit under these facilities amounted to $33.8 million as at September 30, 2004 and $31.2 million at December 31, 2003. We are currently in process of arranging a $150.0 million 364 day unsecured credit facility, which is expected to be completed by December 31, 2004. 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 Insurance Company (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 49 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 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 50 states including 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 Insurance Company (Cayman) Ltd. has agreed with Scottish Re (U.S.), Inc. that it will (1) cause Scottish Re (U.S.), Inc. to maintain capital and surplus equal to the greater of $20.0 million or 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 Insurance Company (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 Insurance Company (Cayman) Ltd. (or if Scottish Annuity & Life Insurance Company (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 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 Group Limited and Scottish Annuity & Life Insurance Company (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. 50 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 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 the disclosure requirements 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". During the quarter ended September 30, 2004, the effective date of the application of EITF 03-01 for debt securities that are impaired because of interest rate and/or sector spread increases was delayed pending issuance of further guidance. In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"). FIN 46 provides a framework for identifying variable interest entities and determining when a company should include its assets, liabilities, non-controlling interests and results of activities in the consolidated financial statements. A variable interest entity is a legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations. FIN 46 requires a variable interest entity to be consolidated if a party with an ownership, contractual or other financial interest in the variable interest entity is obligated to absorb a majority of the risk of loss from the variable interest entity's activities, is entitled to receive a majority of the variable interest entity's residual returns, or both. A variable interest holder that consolidates the variable interest entity is called the primary beneficiary. We are the primary beneficiary of the structured finance facility discussed in note 12 and thus have consolidated the variable interest entity in accordance with FIN 46. During the quarter ended September 30, 2004, EITF 04-8 "The Effect of Contingently Convertible Debt on Diluted Earnings Per Share" was issued. EITF 04-8 requires that certain instruments with embedded conversion features that are contingent upon market price triggers be included in diluted earnings per share calculations regardless of whether the contingency has been met. Our 4.5% senior convertible notes are convertible on the basis of a market price trigger. On October 26, 2004 we amended the terms of these notes so that we are required to settle the principal amount of $115.0 million in cash on conversion or repurchase. 51 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) As a result we shall continue to apply the treasury stock method in calculating diluted earnings per share for amounts in excess of the principal of $115.0 million. 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; 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 52 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 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. 53 Item 3. Quantitative and Qualitative Disclosures About Market Risk Please refer to "Item 7A: Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K. That information is hereby supplemented as follows: Interest Rate Risk Interest rate risk consists of two components: (1) in a falling rate scenario, we have reinvestment risk, which is the risk that interest rates will decline and funds reinvested will earn less than is necessary to match anticipated liabilities; and (2) in a rising rate scenario, we have the risk that cash outflows will have to be funded by selling assets, which will then be trading at depreciated values. With some annuity liabilities, these risks are compounded by variability in liability cash flows arising from adverse experience in withdrawals, surrenders, mortality, and election of early retirement. We mitigate both components of risk through asset-liability management, including the technique of simulating future results under a variety of interest rate scenarios and modifying the investment and hedging strategy to mitigate downside risk to earnings. Our investment portfolio is composed of fixed-maturity bond investments, of which the majority are at fixed interest rates. For fixed-rate investments backing reinsurance liabilities, the maturity structure has been designed to have approximately the same exposure to changes in interest rates as the related liabilities. Floating-rate liabilities, including borrowings, are backed primarily by floating-rate assets. In the capital account, however, we own investments that are also sensitive to interest rate changes and this sensitivity is not offset by liabilities. In order to mitigate the impact of changes in interest rates we have entered into an interest rate swap in respect of the investments in our capital accounts. Our overall objective is to limit interest rate exposure. Item 4. Controls and Procedures Evaluation of disclosure controls and procedures. Based on their evaluation as of September 30, 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 September 30, 2004 that have materially affected, or are reasonably likely to materially affect, Scottish Re Group Limited's internal control over financial reporting. 54 PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is not currently involved in any material litigation or arbitration. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Not applicable. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Securities Holders None. Item 5. Other Information Not applicable. 55 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) 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) 56 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)(16) 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)(16) 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)(16) 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)(16) 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)(16) 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)(16) 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) 57 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)(16) 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)(16) 10.13 Service Agreement dated December 31, 2001 between Scottish Re Holdings Limited and Paul Andrew Bispham (incorporated herein by reference to Scottish Re Group Limited's 2001 Annual Report on Form 10-K).(4)(16) 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)(16) 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)(16) 10.20 Employment Agreement dated June 1, 2002 between Scottish Re Group Limited and Paul Goldean (incorporated herein by reference to Scottish Re Group Limited's Quarterly Report on Form 10-Q for the period ended March 31, 2004). (14)(16) 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)(16) 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)(16) 58 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)(16) 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)(16) 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)(16) 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 September 30, 2003).(13)(16) 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 (incorprated herein by reference to Scottish Re Group Limited's Quarterly Report on Form 10-Q for the period ended March 31, 2004).(14)(16) 10.34 Amendment to Employment Agreement dated March 29, 2004, by and between Scottish Re (U.S.), Inc. and Oscar R. Scofield (incorporated herein by reference to Scottish Re Group Limited's Quarterly Report on Form 10-Q for the period ended June 30, 2004, filed with the SEC on August 9, 2004).(16) 59 10.35 Asset Purchase Agreement, dated as of October 17, 2004, by and among Security Life of Denver Insurance Company, Security Life of Denver International Limited, ING America Insurance Holdings, Inc. (for purposes of Section 11.11), Scottish Re Group Limited, Scottish Re (U.S.), Inc., Scottish Annuity & Life Insurance Company (Cayman) Ltd. (for purposes of Section 5.26) and Scottish Re Life Corporation (for purposes of Section 5.24) (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K).(15) 10.36 Securities Purchase Agreement, dated as of October 17, 2004, by and among Scottish Re Group Limited and Cypress Merchant B Partners II (Cayman) L.P., Cypress Merchant Banking II-A C.V., 55th Street Partners II (Cayman) L.P. and Cypress Side-by-Side (Cayman) L.P. (including form of Subordinated Note, Class C Warrant, Shareholders' Agreement and Amendments to Articles of Association) (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K).(15) 10.37 Form of Voting Agreement, by and among Cypress Merchant B Partners II (Cayman) L.P., Cypress Merchant Banking II-A C.V., 55th Street Partners II (Cayman) L.P. and Cypress Side-by-Side (Cayman) L.P., Scottish Re Group Limited and, respectively, each director and each officer of Scottish Re Group Limited (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K).(15) 10.38 Voting Agreement, dated as of October 15, 2004, by and among Scottish Re Group Limited, Cypress Merchant B Partners II (Cayman) L.P., Cypress Merchant Banking II-A C.V., 55th Street Partners II (Cayman) L.P. and Cypress Side-by-Side (Cayman) L.P. and Pacific Life Insurance Company (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K).(15) 10.39 Letter Agreement, dated as of October 17, 2004, by and among Scottish Re Group Limited and Cypress Merchant B Partners II (Cayman) L.P., Cypress Merchant Banking II-A C.V., 55th Street Partners II (Cayman) L.P. and Cypress Side-by-Side (Cayman) L.P. (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K).(15) 10.40 First Supplemental Indenture, dated as of October 26, 2004, between Scottish Re Group Limited and The Bank of New York (incorporated herein by reference to Scottish Re Group Limited's Current Report on form 8-K, filed with the SEC on October 29, 2004). 10.41 Amendment to Employment Agreement, dated as of March 29, 2004, by and among the Company and Michael C. French. 10.42 Employment Agreement, dated as of March 29, 2004, by and among the Company and Deborah G. Percy. 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. 60 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. (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) Scottish Re Group Limited's Quarterly Report on Form 10-Q was filed with the SEC on May 10, 2004. (15) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on October 21, 2004. (16) This exhibit is a management contract or compensatory plan or arrangement. 61 B. Reports on Form 8-K The following reports on Form 8-K were filed during the three month period ending September 30, 2004: Scottish Re Group Limited filed a report on Form 8-K on August 9, 2004 to report under Items 7 (Financial Statements, Pro Forma Financial Information and Exhibits) and 12 (Results of Operations and Financial Condition) Scottish Re Group Limited's financial results for the six month period ended June 30, 2004. 62 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: November 5, 2004 By: /s/ Scott E. Willkomm --------------------- Scott E. Willkomm President Date: November 5, 2004 By: /s/ Michael C. French --------------------- Michael C. French Chief Executive Officer Date: November 5, 2004 By: /s/ Elizabeth A. Murphy ----------------------- Elizabeth A. Murphy Chief Financial Officer 63 EX-10.41 2 ex10-41.txt AMENDMENT TO EMPLOYMENT AGREEMENT AMENDMENT TO Employment Agreement This AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment"), dated as of March 29, 2004, is made and entered into by and between Scottish Re Group Limited, a Cayman Islands, British West Indies company (the "Company") and Michael C. French (the "Executive"). W I T N E S S E T H: WHEREAS, on February 10, 2003, the Company and Executive executed an employment agreement (the "Employment Agreement"); and WHEREAS, the Company and Executive desire to amend the Employment Agreement; and NOW, THEREFORE, in consideration of the agreements and covenants herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto covenant and agree to modify and amend the Employment Agreement as follows: Section 8 (d) Compensation upon Death . In the event of the Executive's death, the Company shall pay to the Executive (or beneficiaries, or estate, as the case may be) an amount equal to the sum of (i) the Compensation Payments, (ii) the Termination Bonus, if any, and (iii) an amount equal to the sum of the Total Cash Compensation Executive would have received during the remaining Term of the Agreement, such amount to be calculated from the date of the Executive's death (the "Death Calculation Period"). Notwithstanding the foregoing provisions of this Section 8(d), where the Death Calculation Period is for thirty-six (36) calendar months or less, the Company shall pay the Executive under 8(d)(iii) an amount equal to the sum of three (3) full year's Total Cash Compensation. Executive shall be entitled to any other rights, compensation and/or benefits as may be due to Executive in accordance with the terms and provision of any agreements, plans or programs of the Company. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first written above. /s/ Michael C. French ------------------------------ Michael C. French SCOTTISH RE GROUP LIMITED By: /s/ Scott Willkomm ------------------------ Name: Scott Willkomm Title: Director 2 EX-10.42 3 ex10-42.txt Execution Copy -------------- Employment Agreement This EMPLOYMENT AGREEMENT (the "Agreement"), dated as of March 29, 2004, is made and entered into by and between Scottish Re Holdings Limited (the "Company") and Deborah G. Percy (the "Executive"). W I T N E S S E T H: WHEREAS, the Company desires to ensure that it retains the Executive's management and executive services by directly engaging Executive as its Executive Vice President Human Resources; WHEREAS, in order to induce the Executive to continue to serve in such position, the Company desires to provide the Executive with compensation and other benefits on the terms and conditions set forth in this Agreement; and WHEREAS, the Executive is willing to accept such employment and perform services for the Company, on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the agreements and covenants herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto covenant and agree as follows: 1. Certain Defined Terms. --------------------- In addition to terms defined elsewhere herein, the following terms have the following meanings when used in this Agreement with initial capital letters: (a) "Act" means the Securities Exchange Act of 1934, as amended. (b) "Change in Control" means the occurrence during the Term of any of the following events: (i) the acquisition by any individual, entity or group, within the meaning of Section 13(d)(3) or 14(d)(2) of the Act (a "Person"), including as a result of a Business Combination (as defined in Section 1(b)(iii)), of beneficial ownership, within the meaning of Rule 13d-3 promulgated under the Act, of 25% or more of the combined voting power of the then outstanding Voting Stock of Holdings; provided, however, that for purposes of this Section 1(b)(i), the following acquisitions shall not constitute a Change in Control: (A) any acquisition by Holdings of Voting Stock of Holdings, or (B) any acquisition of Voting Stock of Page 1 of 25 Holdings by any employee benefit plan (or related trust) sponsored or maintained by Holdings or any Subsidiary; or (ii) individuals who, as of the date hereof, constitute the Holdings Board (the "Incumbent Board," (as modified by this Section 1(b)(ii))) cease for any reason to constitute at least a majority of the Holdings Board; provided, however, that any individual becoming a Director subsequent to the date hereof whose election, or nomination for election by the shareholders of Holdings, was approved by a vote of at least two-thirds of the Directors then comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of Holdings in which such person is named as a nominee for director, without objection to such nomination) shall be deemed to have been a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest (within the meaning of Rule 14a-11 of the Act) with respect to the election or removal of Directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Holdings Board; or (iii) consummation of a reorganization, merger or consolidation, a sale or other disposition of all or substantially all of the assets of Holdings, or other transaction (each, a "Business Combination"), unless, in each case, immediately following such Business Combination, either (A)(I) the individuals and entities who were the beneficial owners of Voting Stock of Holdings immediately prior to such Business Combination beneficially own in the aggregate, directly or indirectly, more than 50% of the combined voting power of the then outstanding shares of Voting Stock of the entity resulting from such Business Combination (including, without limitation, an entity which as a result of such transaction owns Holdings or all or substantially all of the assets of Holdings either directly or through one or more subsidiaries), (II) no Person (other than Holdings, such entity resulting from such Business Combination, or any employee benefit plan (or related trust) sponsored or maintained by Holdings, any Subsidiary or such entity resulting from such Business Combination) beneficially owns, directly or indirectly, 25% or more of the combined voting power of the then outstanding shares of Voting Stock of the entity resulting from such Business Combination, and (III) at least a majority of the members of the board of directors of the entity Page 2 of 25 resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Holdings Board providing for such Business Combination, or (B) the same as Section 1(b)(iii)(A), except in clause (I), substituting "one-third" for "50%," and in clause (III), substituting "two-thirds" for "a majority"; (iv) approval by the shareholders of Holdings of a complete liquidation or dissolution of Holdings, except pursuant to a Business Combination that complies with clause (A) or (B) of Section 1(b)(iii); or (v) a sale or other disposition of (A) shares of Voting Stock of the Company representing at least 50% of the combined voting power of the then outstanding shares of Voting Stock of the Company, or (B) all or substantially all of the assets of the Company, unless, in either case, the individuals and entities who were the beneficial owners of Voting Stock of Holdings immediately prior to such sale or disposition beneficially own in the aggregate, directly or indirectly, more than 50% of the combined voting power of the then outstanding shares of Voting Stock of the entity acquiring such Voting Stock or assets of the Company. (c) "Company Board" means the Board of directors of the Company. (d) "Competitive Activity" means the Executive's participation, without the written consent of the Company Board, in the management of any business enterprise if such enterprise engages in substantial and direct competition with the Company and such enterprise engages in substantial and direct competition with the Company if such enterprise's sales of any product or service competitive with any product or service of the Company amounted to 10% of such enterprise's net sales for its most recently completed fiscal year and if the Company's net sales of said product or service amounted to 10% of the Company's net sales for its most recently completed fiscal year. "Competitive Activity" shall not include (i) the mere ownership of securities in any such enterprise (which is a company whose shares are quoted or dealt in on any recognized investment exchange (as defined by Section 207(1) of the Financial Services Act 1986) and the exercise of rights appurtenant thereto or (ii) participation in the management of any such enterprise other than in connection with the competitive operations of such enterprise. (e) "Director" means a member of the Holdings Board. Page 3 of 25 (f) "Holdings" means Scottish Re Group Limited, a Cayman Islands, British West Indies company. (g) "Holdings Board" means the Board of Directors of Holdings ("Holdings"). (h) "Incapacity" means sickness or injury rendering the Executive incapable of performing services in accordance with the provisions of this Agreement. (i) "Ordinary Shares" means the ordinary shares, par value $0.01 per share, of Holdings. (j) "Subsidiary" means an entity in which Holdings directly or indirectly beneficially owns 50% or more of the outstanding Voting Stock. (k) "Total Cash Compensation" means the sum of the (i) highest annual Base Salary in effect during the Term; and (ii) highest annual Incentive Bonus (as set forth in Section 6(b)) earned during the prior three (3) fiscal years. (l) "Voting Stock" means securities entitled to vote generally in the election of directors. 2. Employment. ---------- The Company hereby agrees to employ Executive, and Executive hereby agrees to be employed with the Company for the Term, upon the terms and conditions herein set forth. 3. Term. ---- The term of employment under this Agreement (the "Initial Term") shall commence on March 29, 2004 ("Commencement Date") and subject to earlier termination pursuant to Section 7, expire on the third anniversary of the Commencement Date; provided, however, that commencing on the third anniversary of the Commencement Date, this Agreement will automatically be renewed for successive one-year periods (the "Additional Term"), subject to earlier termination pursuant to Section 7, unless either party provides written notice of non-renewal to the other pursuant to Section 14 at least ninety (90) days prior to the end of the Initial Term or any Additional Term. The Initial Term and any Additional Term shall be referred to under this Agreement as the "Term"; provided, however, that if a Change in Control occurs during the Term (as determined without regard to this clause), then the Term shall include the period ending on the second anniversary of the first occurrence of a Change in Control. Page 4 of 25 4. Positions and Duties; Hours of Work; Suspension. ----------------------------------------------- (a) During the Term, Executive will serve in the position of Executive Vice President Human Resources of the Company, or such other positions as may be agreed upon by the Company and the Executive, and will have such duties, functions, responsibilities and authority as are (i) reasonably assigned to her by the Holdings' Chief Executive Officer, consistent with Executive's position as Executive Vice President Human Resources or (ii) assigned to her office in the Company's Articles of Association. Executive will report directly to the Chief Executive Officer of Holdings. (b) During the Term, Executive will be the Company's full-time employee and, except as may otherwise be approved in advance in writing by the Company Board, and except during vacation periods and reasonable periods of absence due to sickness, personal injury or other disability, Executive will devote substantially all of her business time and attention to the performance of her duties to the Company. Notwithstanding the foregoing, Executive may (i) subject to the approval of the Company Board, serve as a director of a company, provided such service does not constitute a Competitive Activity, (ii) serve as an officer, director or otherwise participate in purely educational, welfare, social, religious and civic organizations, (iii) serve as an officer, director or trustee of, or otherwise participate in, any organizations and activities with respect to which Executive's participation was disclosed to the Company in writing prior to the date hereof and (iv) manage personal and family investments. (c) The Executive shall carry out her duties between 09.00 and 17.00 Monday to Friday (inclusive) with a one hour break for lunch. The Executive's normal working week shall be 35 hours. However, the Executive will also be required to work (without any additional remuneration) any additional hours as are reasonably necessary or appropriate from time to time to carry out her duties properly and effectively. The Executive agrees that any cap on the average working time imposed by the Working Time Regulations 1998 will not apply to her. (d) Notwithstanding the foregoing or any other provision of this Agreement the Company will not be under any obligation to provide the Executive with any work and the Company may immediately upon commencing any disciplinary investigation into the activities or conduct of the Executive without notice suspend the Executive and/or exclude her from all or any premises of the Company for any period not exceeding three months provided that throughout such period the Executive's Base Salary and other contractual benefits shall continue to be paid or provided by the Company and provided further that at any time during such period the Page 5 of 25 Executive will at the request of the Board immediately resign without claim for compensation from office as a director of the Company and any Associated Company and from any other office held by her in the Company or any Associated Company and in the event of her failure to do so the Company hereby irrevocably authorised to appoint some person in her name and on her behalf to sign and deliver such resignations to the Board. 5. Place of Performance. -------------------- In connection with her employment during the Term, unless otherwise agreed by Executive, Executive will be based at the Company's principal executive offices in Windsor, England; provided, however, that Executive agrees and acknowledges that in view of the nature of Company's business operations, Executive may be required in the performance of her duties to undertake substantial travel on behalf of the Company and, if necessary, requested to relocate to another executive office of the Company within the United Kingdom. 6. Compensation and Related Matters. -------------------------------- As compensation and consideration for the performance by Executive of her obligations pursuant to this Agreement, Executive shall be entitled to the following: (a) Base Salary. During the Term, the Company shall pay Executive an annual base salary ("Base Salary") of (pound) 125,000, payable at the times and in the manner consistent with the Company's policies regarding compensation of executive employees but not less frequently than monthly. The Company agrees to review such compensation not less frequently than annually during the Term. Once increased, the Base Salary may not be decreased. The Base Salary as increased from time to time shall be referred to herein as "Base Salary". (b) Incentive Bonus. The Company may pay a cash bonus to Executive based upon pre-established performance goals established by the Company (the "Incentive Bonus"). Any Incentive Bonus shall be payable at the times and in the manner consistent with the Company's policies regarding compensation of executive employees. (c) Executive Benefits. During the Term, the Company will make available to Executive and her eligible dependents, participation in all Company-sponsored employee benefit plans including all employee retirement income and welfare benefit policies, plans, programs or arrangements in which senior executives of the Company participate, including any stock Page 6 of 25 option, stock purchase, stock appreciation, savings, pension, supplemental executive retirement or other retirement income or welfare benefit, disability, salary continuation, and any other deferred compensation, incentive compensation, group and/or executive life, health, medical/hospital or other insurance, expense reimbursement or other employee benefit policies, plans, programs or arrangements, including without limitation financial counseling services or any equivalent successor policies, plans, programs or arrangements that may now exist or be adopted hereafter by the Company. Details of such plans will be provided to the Executive when available, and save as provided therein, the terms of such plans may be amended at the Company's discretion. (d) Expenses. The Company will promptly reimburse Executive for all reasonable business expenses Executive incurs in order to perform her duties to the Company under this Agreement in a manner commensurate with Executive's position and level of responsibility with the Company, and in accordance with the Company's policy regarding substantiation of expenses. (e) Vacation and Holidays. --------------------- (i) The Executive will (in addition to the usual public and bank holidays) be entitled during the continuance of her employment to 28 working day's paid holiday in each period of 12 months commencing on 1 January (the "Holiday Year"). (ii) Holiday shall be taken at such times as may be approved by the Chairman of the Company. (iii) The Executive may not, without the prior written consent of the Chairman of the Company carry forward more than six days unused holiday entitlement from one Holiday Year to another. (iv) On the termination of her employment the Executive's entitlement to accrued holiday pay will be calculated on a pro rata basis in respect of each completed month of service in the Holiday Year in which her employment terminates and the appropriate amount will be paid to the Executive provided that if the Executive shall have taken more days' holiday than her accrued entitlement the Company is hereby authorised to make an appropriate deduction from any amounts due from the Company to the Executive. Page 7 of 25 (f) Indemnification. The Executive shall be offered an opportunity to enter into Holdings' Indemnification Agreement substantially in the form attached hereto as Exhibit A effective as of the Commencement Date. (g) Initial Equity Compensation Grant. The Company shall grant Executive an option (the "Option") to purchase 50,000 Ordinary Shares of Holdings. Additionally, the Company shall grant Executive 20,000 restricted shares (the "Restricted Shares") of Holdings (collectively the "Grants"). Any such issuance of Options and/or Restricted Shares shall be subject to shareholder approval of the 2004 Equity Incentive Compensation Plan (the "2004 Plan"). Additionally, any grant to Executive under the 2004 Equity Incentive Compensation Plan shall be subject to the terms and conditions of the 2004 Plan as well as the performance requirements expressly adopted by the Holdings' Board and/or Compensation Committee. A copy of the 2004 Equity Incentive Compensation Plan is attached hereto as Exhibit B. (h) Incapacity. (i) The Executive shall, subject to complying with the Company's rules governing notification and evidence of absence by reason of Incapacity for the time being in force, be entitled to payment of her salary (which shall include any entitlement to statutory sick pay or social security benefits to which he may be entitled) in respect of absence by reason of Incapacity in respect of the first 180 days' absence in any 12-month period PROVIDED THAT whilst the Executive is entitled to be paid during Incapacity there shall be deducted therefrom the aggregate of any amounts receivable by the Executive by virtue of any sickness, accident benefit or permanent health scheme operated by or on behalf of the Company (except insofar as such amounts represent reimbursement of medical or nursing fees or expenses incurred by the Executive) and the amount of any social security sickness or other benefit to which the Executive may be entitled. (ii) If the Executive shall have been absent from work due to sickness injury or other incapacity for 180 days or more in any 12-month period then he shall receive such benefits (if any) as the Company may in its absolute discretion decide. (iii) If any Incapacity is caused by any alleged action or wrong of a third party and the Executive decides to claim damages in respect thereof, then the Executive will use all reasonable endeavours to recover damages for loss of earnings over the period for which Page 8 of 25 salary has been or will be paid to her by the Company under Clause 6(i)(i), and will account to the Company for any such damages recovered (net of the reasonable costs of recovery and in an amount not exceeding the actual salary paid or payable to her by the Company under Clause 6(i)(i) in respect of the said period.) The Executive will keep the Company informed of the commencement, progress and outcome of any such claim. (i) Disciplinary and Grievance Procedure. (i) For statutory purposes there are no formal disciplinary or grievance procedures in relation to the Executive's employment. The Executive will be expected to maintain the highest standards of integrity and behaviour. (ii) If the Executive is not satisfied with any disciplinary decision taken in relation to her she may appeal in writing within 14 days of that decision to the Chairman of the Company whose decision shall be final. (iii) If the Executive has a grievance regarding her employment it should in the first instance be taken up with the Chairman of the Company. (j) There are no collective agreements which apply to the Executive's employment. 7. Termination. ----------- (a) Termination by the Company with Cause. The Company shall have the right to terminate Executive's employment at any time with Cause by providing a Notice of Termination to Executive in accordance with Section 7(g) not more than sixty (60) days after the Company's actual knowledge of the Cause event, and such termination shall not be deemed to be a breach of this Agreement. For purposes of this Agreement, "Cause" shall mean: (i) habitual drug or alcohol use which impairs Executive's ability to perform her or her duties hereunder; (ii) Executive's conviction during the Term by a court of competent jurisdiction, or a pleading of "no contest" or guilty to an arrestable criminal offense resulting in the imposition of a custodial sentence; (iii) Executive's engaging in fraud, embezzlement or any other illegal conduct with respect to the Company or Holdings, which acts are materially harmful to, either financially, or to the business reputation of the Company or Holdings; (iv) Executive's willful breach of Section 9 hereof; (v) Executive's willful Page 9 of 25 and continued failure or refusal to perform her duties hereunder (other than such failure caused by Executive's Disability), after a written demand for performance is delivered to Executive by the Company that specifically identifies the manner in which the Company believes that Executive has failed or refused to perform her duties; or (vi) Executive otherwise breaches any material provision of this Agreement which is not cured, if curable, within thirty (30) days after written notice thereof. No act or failure to act on the part of Executive shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, but shall be deemed "intentional" only if done or omitted to be done by Executive not in good faith and without reasonable belief that her action or omission was in the best interest of the Company and Holdings. (b) Death. In the event Executive dies during the Term, her employment shall automatically terminate effective on the date of her death, such termination shall not be deemed to be a breach of this Agreement, and the Company shall pay or provide to the Executive's beneficiaries or estate, as appropriate, as soon as practicable after the Executive's death, the amounts and benefits provided for in Section 8(d). (c) Disability. In the event Executive shall suffer from a mental or physical disability which shall have prevented her from performing her material duties hereunder for a period of at least one-hundred eighty (180) non-consecutive days within any 365 day period, the Company shall have the right to terminate Executive's employment for "Disability," such termination to be effective upon the giving of notice thereof to the Executive in accordance with Section 7(g) hereof, such termination shall not be deemed to be a breach of this Agreement, and the Company shall provide to the Executive the amounts and benefits provided for in Section 8(d). Executive's employment hereunder shall terminate effective on the 30th day after receipt of such notice by Executive (the "Disability Effective Date"); provided that Executive shall not have returned to full-time performance of her duties hereunder within thirty (30) days following receipt of such notice. Providing always that the Company warrants that Executive's employment will not be terminated by the Company if Executive is receiving benefits under the Company PHI scheme or is awaiting a decision from the PHI scheme insurers in respect of benefits under the PHI scheme, where continuing employment is a prerequisite to the Executive's receipt of benefits under such scheme. (d) Good Reason. ----------- Page 10 of 25 (i) Executive may terminate her employment with the Company for "Good Reason" and such termination shall not be deemed to be a breach of this Agreement. Executive shall have Good Reason if Executive has knowledge that one of the events described in Section 7(d)(ii) has occurred without Executive's written consent and (A) if the event is not curable, Executive gives a Notice of Termination to the Company pursuant to Section 7(g) within sixty (60) days after having knowledge of the event, or (B) if the event is curable, (I) Executive gives written notice to the Company thereof in accordance with Section 14 within sixty (60) days after having knowledge of the event, (II) such event has not been cured within thirty (30) days after the Executive gives notice of the event to the Company, and (III) Executive gives a Notice of Termination to the Company in accordance with Section 7(g) within thirty (30) days after the expiration of the Company's 30-day cure period. (ii) For purposes of this Agreement, "Good Reason" shall mean (A) prior to a Change in Control, (I) a failure by the Company to comply with any material provision of this Agreement; (II) the liquidation, dissolution, merger, consolidation or reorganization of the Company or all of its business and/or assets, unless the successor(s) assume all duties and obligations of the Company pursuant to Section 13(a); or (III) upon the provision of notice by the Company under Section 3 of non-renewal of the Agreement, and (B) on or after a Change in Control, (I) any of the events set forth in Section 7(d)(ii)(A); (II) any material and adverse change to Executive's duties or authority which are inconsistent with her title and position set forth herein; (III) a diminution of Executive's title or position; (IV) the relocation of Executive's office; (V) a reduction in Executive's Base Salary; or (VI) a material reduction of Executive's benefits provided pursuant to Section 6 other than a reduction permitted under terms and conditions of the applicable Company policy or benefit plan. (e) Without Good Reason. Executive may voluntarily terminate her employment with the Company without Good Reason by giving written notice to the Company as provided in Section 7(g). Such notice must be provided to the Company at least thirty (30) days prior to such termination. Such termination shall not be deemed to be a breach of this Agreement. (f) Without Cause. This Company shall have the right to terminate Executive's employment hereunder without Cause by providing written notice to Executive as provided in Section 7(g), and such termination shall Page 11 of 25 not be deemed to be a breach of this Agreement. "Without Cause" shall mean for any reason other than Cause, death or Disability, as provided in Sections 7(a), 7(b) and 7(c). (g) Notice of Termination; Garden Leave. ----------------------------------- (i) Any termination of Executive's employment by the Company pursuant to Section 7(a), 7(c) or 7(f), or by Executive pursuant to Section 7(d) or 7(e), shall be communicated by a Notice of Termination to the other party hereto in accordance with this Section 7(g) and Section 14. For purposes of this Agreement, a "Notice of Termination" means a written notice that (A) indicates the specific termination provision in this Agreement relied upon, (B) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (C) if the Date of Termination (as defined in Section 7(h)) is other than the date of receipt of such notice, specifies the Date of Termination. The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance that contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or Company's rights hereunder. (ii) Any Notice of Termination by the Company for Cause shall be ratified by a resolution duly adopted by the affirmative vote of not less than two-thirds of the Company Board then in office (excluding, for this purpose, the Executive, if the Executive is then a member of the Company Board) at a meeting of the Company Board called and held for such purpose, after reasonable notice to the Executive and an opportunity for the Executive, together with her counsel (if the Executive chooses to have counsel present at such meeting), to be heard before the Company Board, finding that, in the good faith opinion of the Company Board, the Executive had committed an act constituting "Cause" as defined in Section 7(a) and specifying the particulars thereof in detail. (iii) After notice of termination has been given by the Executive, or if the Executive seeks to resign without notice or by giving shorter notice than that required under this Agreement then provided the Company continues to pay the Executive's contractual benefits in accordance with the terms of this Agreement, the Company has at Page 12 of 25 its discretion the right for the notice period or balance of the notice period then outstanding until the date of termination to: (A) exclude the Executive from the Company's premises and require the Executive not to attend at the Company's premises; and/or (B) require the Executive to carry out no duties; and/or (C) require the Executive not to communicate or deal with employees, agents, consultants, clients or other representatives of the Company. (h) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein (but not more than thirty (30) days thereafter), as the case may be (although such Date of Termination shall retroactively cease to apply if the circumstances providing the basis of termination for Cause or Good Reason are cured in accordance with Section 7(a) or 7(d) of this Agreement, as the case may be), (ii) if Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date set forth in the Notice of Termination (iii) if Executive's employment is terminated by Executive without Good Reason, the Date of Termination shall be the date set forth in the Notice of Termination, but no sooner than thirty (30) days after such Notice of Termination is received by the Company and (iv) if Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of the Executive's death or the Disability Effective Date, as the case may be. 8. Compensation upon Termination. ----------------------------- If the Company or Executive terminates the Executive's employment during the Term, the Company shall pay to the Executive the amount(s) set forth below. The Compensation Payments described in Section 8(a) shall be paid, subject to all required deductions, in a lump sum to the Executive's bank account five (5) business days after the Date of Termination or date of expiration of this Agreement, as the case may be. Severance Pay and the Termination Bonus under Section 8(b) shall be paid, subject to all applicable deductions, into the Executive's bank account in six (6) equal monthly installments, the first installment to be paid five (5) business days after the effective date of the release described in Section 8(b): Page 13 of 25 (a) Compensation upon Termination for Cause or Without Good Reason. In the event of termination of Executive's employment by the Company for Cause or by the Executive without Good Reason, or by reason of expiration of the Term (if applicable), the Company shall pay the Executive her accrued, but unpaid Base Salary, accrued vacation pay and unpaid business expenses through the Date of Termination (the "Compensation Payments"), and the Executive shall be entitled to no other compensation, except as otherwise due to the Executive under applicable law. The Executive shall not be entitled to the payment of any bonus or other incentive compensation for any portion of the fiscal year in which such termination occurs. (b) Compensation upon Termination by the Company Without Cause or upon Termination by the Executive for Good Reason. Subject to Section 8(c), in the event of the termination of the Executive's employment by the Company without Cause or upon termination of the Executive's employment by the Executive for Good Reason, the Company shall pay the Executive the Compensation Payments. In addition, conditioned upon receipt of the Executive's release of claims substantially in the form attached hereto as Exhibit C, subject to such changes as may be required to preserve the intent thereof for changes in applicable law, the Company shall pay or provide to the Executive, in lieu of notice and any statutory entitlement in respect of the termination of her employment, (i) as "Severance Pay", an amount equal to the sum of the Total Cash Compensation that Executive would have received during the Initial Term, such amount to be calculated from the date the Executive's employment was terminated to the date that is the third anniversary of the Commencement Date (the "Severance Calculation Period"), (ii) earned, but unpaid Incentive Bonus for the year of termination, as determined in the good faith opinion of the Company based upon the relative achievement of performance targets through the Date of Termination (the "Termination Bonus"), and (iii) the welfare benefits set forth in Section 8(f). Notwithstanding the foregoing provisions of this Section 8(b), (x) where the Severance Calculation Period is for twelve (12) calendar months or less or where termination takes place during the Additional Term, the sum payable under Section 8(b)(i) shall be an amount equal to the sum of one (1) full year's Total Cash Compensation and (y) any right of the Executive to receive termination payments and benefits under Section 8(b) shall be forfeited to the extent of any amounts payable or benefits to be provided after a material breach of any covenant set forth in Section 9. Page 14 of 25 (c) Compensation upon Termination in Connection with a Change in Control of the Company. If, within the period of time commencing on the date of the first occurrence of a Change in Control and continuing until the second anniversary of such occurrence of a Change in Control or, if earlier, until the Executive's death, the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason, then the provisions of Section 8(b) shall be applicable, except that an amount equal to 300% of the Executive's Total Cash Compensation shall be substituted in lieu of the amount set forth in Section 8(b)(i), and the Severance Calculation Period shall be inapplicable. For purposes of the preceding sentence, if a Change in Control occurs and not more than one-hundred twenty (120) days prior to the date on which the Change in Control occurs, the Executive's employment is terminated by the Company without Cause, such termination of employment shall be deemed a termination of employment after a Change in Control if the Executive has reasonably demonstrated that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control, or (ii) otherwise arose in connection with or in anticipation of a Change in Control. (d) Compensation upon Death or Disability. In the event of the Executive's death or the termination of employment due to Disability, the Company shall pay to the Executive (or beneficiaries, or estate, as the case may be) an amount equal to the sum of (i) the Compensation Payments and (ii) the Termination Bonus. Executive shall be entitled to any other rights, compensation and/or benefits as may be due to Executive in accordance with the terms and provision of any agreements, plans or programs of the Company. (e) Set-Off, Counterclaim or Late Payment. There shall be no right of set-off or counterclaim in respect of any claim, debt or obligation against any payment to or benefit for the Executive provided for in this Agreement. Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment required to be made hereunder on a timely basis, the Company shall pay interest on the amount or value thereof at an annualized rate of interest equal to the "prime rate" as set forth from time to time during the relevant period in The Wall Street Journal "Money Rates" column, plus four (4)%. Such interest shall be payable as it accrues on demand. Any change in such prime rate shall be effective on and as of the date of such change. (f) Welfare Benefits. If the Executive becomes entitled to the benefits provided by Section 8(b) or 8(c), then in addition to such benefits, for a period following the Date of Termination equal to the greater of the Page 15 of 25 remaining Term or twelve (12) months (the "Continuation Period"), the Company shall arrange to provide the Executive with health insurance, life insurance, and other medical benefits substantially similar to those that the Executive was receiving or entitled to receive immediately prior to the Date of Termination (or, if greater, immediately prior to the reduction, termination, or denial described in Section 7(d)(ii)(B)(VI), if applicable). If and to the extent that any benefit described in this Section 8(f) is not or cannot be paid or provided under any policy, plan, program or arrangement of the Company, then the Company will itself pay or provide for the payment to the Executive, her dependents and beneficiaries, of such benefits along with, in the case of any benefit described in this Section 8(f) that is subject to tax because it is not or cannot be paid or provided under any such policy, plan, program or arrangement of the Company, an additional amount such that after payment by the Executive, or her dependents or beneficiaries, as the case may be, of all taxes so imposed, the recipient retains an amount equal to such taxes. (g) Scope and Nonduplication. The provision or payment of termination benefits under this Section 8 shall not affect any rights the Executive may have pursuant to any agreement, plan, policy, program or arrangement of the Company providing employee benefits, which rights shall be governed by the terms thereof or by the release described in Section 8; provided, however, that to the extent, and only to the extent, a payment or benefit that is paid or provided under this Section 8 would also be paid or provided under the terms of any applicable plan, program, or arrangement, including, without limitation, any severance program, such applicable plan, program, agreement or arrangement shall be deemed to have been satisfied by the payment made or benefit provided under this Agreement. (h) Mitigation. In the event of the termination of the Executive by the Company without Cause, or by the Executive with Good Reason, the Executive shall not be required to mitigate damages by seeking other employment or otherwise as a condition to receiving termination payments or benefits under this Agreement. No amounts earned by the Executive after the Executive's termination by the Company without Cause or by the Executive with Good Reason, whether from self-employment, as a common law employee, or otherwise, shall reduce the amount of any payment or benefit under any provision of this Agreement. Notwithstanding the foregoing, the Executive's coverage under the Company's group medical insurance as provided in Section 8(f) shall be reduced to the extent comparable welfare benefits are actually received by Page 16 of 25 the Executive as soon as the Executive becomes covered under any group medical plan made available by another employer. The Executive shall report to the Company any such coverage actually received by the Executive. (i) Resignations. Except to the extent requested by the Company, upon any termination of the Executive's employment with the Company, the Executive shall immediately resign all positions and directorships with the Company, Holdings and each of their subsidiaries and affiliates. 9. Competitive Activity; Confidentiality; Non-solicitation. ------------------------------------------------------- (a) Executive acknowledges that during the course of her employment with the Company the Executive will learn business information valuable to the Company and Holdings and will form substantial business relationships with the Company's and Holdings' clients. To protect the Company's and Holdings' legitimate business interests in preserving its valuable confidential business information and client relationships, the Executive shall not without the prior written consent of the Company or Holdings, which consent shall not be unreasonably withheld, engage in any Competitive Activity during the Term or for a period of six (6) months following the termination of the Executive's employment. (b) During the Term, and in consideration for the Executive's agreement to enter into this Agreement, the Company agrees that it will disclose or cause to be disclosed to Executive its Confidential or Proprietary Information (as defined in this Section 9(b)) to the extent necessary for Executive to carry out her obligations to the Company. The Executive hereby acknowledges the Company has a legitimate business interest in protecting its Confidential or Proprietary Information and hereby covenants and agrees that he will not without the prior written consent of the Company, during the Term or thereafter (i) disclose to any person not employed by the Company, or use in connection with engaging in competition with the Company, any Confidential or Proprietary Information of the Company or (ii) remove, copy or retain in her possession any Company files or records. For purposes of this Agreement, the term "Confidential or Proprietary Information" will include all information of any nature and in any form that is owned by the Company or by Holdings and that is not publicly available (other than by Executive's breach of this Section 9(b)) or generally known to persons engaged in businesses similar or related to those of the Company or Holdings. Confidential or Proprietary Information will include, without limitation, the Company's and Holdings' financial matters, customers, employees, industry contacts, strategic business plans, product Page 17 of 25 development (or other proprietary product data), marketing plans, and all other secrets and all other information of a confidential or proprietary nature. Confidential or Proprietary Information shall not be deemed to have become public for purposes of this Agreement where it has been disclosed or made public by or through anyone acting in violation of a contractual, ethical, or legal responsibility to maintain its confidentiality. The foregoing obligations imposed by this Section 9(b) shall not apply (x) during the Term, in the course of the business of and for the benefit of the Company or Holdings, (y) if such Confidential or Proprietary Information will have become, through no fault of the Executive, generally known to the public or (z) if the Executive is required by law to make disclosure (after giving the Company notice and an opportunity to contest such requirement). (c) The Executive hereby covenants and agrees that during the Term and for six (6) months after the Date of Termination Executive will not, without the prior written consent of the Company, which consent shall not unreasonably be withheld, on behalf of Executive or on behalf of any person, firm or company, directly or indirectly, attempt to influence, persuade or induce, or assist any other person in so persuading or inducing, any senior employee of the Company or Holdings with whom the Executive has had direct contact during the course of her employment to give up employment or a business relationship with the Company or Holdings, and the Executive shall not directly or indirectly solicit or hire such employees of the Company or Holdings for employment with any other employer. (d) The Executive agrees that on or before the Date of Termination the Executive shall return all Company property, including without limitation all credit, identification and similar cards, keys and documents, books, records and office equipment. The Executive agrees that he shall abide by, through the Date of Termination, the Company's and Holdings' policies and procedures for worldwide business conduct. (e) Executive and the Company agree that the covenants contained in this Section 9 are reasonable under the circumstances, and further agree that if in the opinion of any court of competent jurisdiction any such covenant is not reasonable in any respect, such court will have the right, power and authority to excise or modify any provision or provisions of such covenants as to the court will appear not reasonable and to enforce the remainder of the covenants as so amended. Executive acknowledges and agrees that the remedy at law available to the Company for breach of any of her obligations under this Section 9 would be inadequate and that damages flowing from such a breach may not readily be susceptible to Page 18 of 25 being measured in monetary terms. Accordingly, Executive acknowledges, consents and agrees that, in addition to any other rights or remedies that the Company may have at law, in equity or under this Agreement, upon adequate proof of her violation of any such provision of this Agreement, the Company will be entitled to immediate injunctive relief and may obtain a temporary order restraining any threatened or further breach, without the necessity of proof of actual damage. (f) Representations of the Executive. The Executive represents and warrants to the Company that: (i) (A) There are no restrictions, agreements or understandings whatsoever to which the Executive is a party that would prevent or make unlawful the Executive's execution of this Agreement or the Executive's employment under this Agreement, or that is or would be inconsistent, or in conflict with this Agreement or the Executive's employment under this Agreement, or would prevent, limit or impair in any way the performance by the Executive of the obligations under this Agreement; and (B) the Executive has disclosed to the Company all restraints, confidentiality commitments or other employment restrictions that the Executive has with any other employer, person or entity. (ii) Upon and after the Executive's termination or cessation of employment with the Company, and until such time as no obligations of the Executive to the Company hereunder exist, the Executive: (A) shall provide a complete copy of this Agreement to any prospective employer or other person, entity or association in a competing business with whom or which the Executive proposes to be employed, affiliated, engaged, associated or to establish any business or remunerative relationship prior to the commencement thereof, provided that Executive shall first cause the compensation amounts hereunder to be deleted or not disclosed; and (B) shall notify the Company of the name and address of any such person, entity or association prior to the Executive's employment, affiliation, engagement, association or the establishment of any business or remunerative relationship. 10. Intellectual Property. --------------------- (a) Subject to the relevant provisions of the Patents Act 1977, the Registered Designs Act 1949 and the Copyright Designs and Patents Act 1988 if at any time in the course of her employment the Executive makes or discovers or participates in the making or discovery of any Intellectual Page 19 of 25 Property relating to or capable of being used in the business of the Company or Holdings he will immediately disclose full details of such to the Company Board and at the request and expense of the Company he will do all things which may be necessary or desirable for obtaining appropriate forms of protection for the Intellectual Property in such parts of the world as may be specified by the Company and for vesting all rights in the same in the Company or its nominee. (b) The Executive hereby irrevocably appoints the Company to be her attorney in her name and on her behalf to sign, execute or do any instrument or thing and generally to use her name for the purpose of giving to the Company or its nominee the full benefit of the provisions of Clause 10(a) and in favour of any third party a certificate in writing signed by any director or the secretary of the Company that any instrument or act falls within the authority conferred by Clause 10(a) shall be conclusive evidence that such is the case. (c) The Executive hereby waives all of her moral rights (as defined in the Copyright Designs and Patents Act 1988) in respect of any acts of the Company or any acts of third parties done with the Company's authority in relation to any Intellectual Property which is the property of the Company by virtue of Clause 10(a). (d) All rights and obligations under this Clause in respect of Intellectual Property made or discovered by the Executive during her employment will continue in full force and effect after the termination of her employment and will be binding upon the Executive's personal representatives. 11. Legal Fees and Expenses. ----------------------- If it should appear to Executive that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, Executive the benefits provided or intended to be provided to Executive hereunder, the Company irrevocably authorizes Executive from time to time to retain counsel of Executive's choice at the expense of the Company as hereafter provided, to advise and represent Executive in connection with any such interpretation, enforcement or defense, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company or any director, officer, stockholder or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Page 20 of 25 Company and such counsel, the Company irrevocably consents to Executive's entering into an attorney-client relationship with such counsel, and in that connection the Company and Executive agree that a confidential relationship shall exist between Executive and such counsel. Without respect to whether Executive prevails, in whole or in part, in connection with any of the foregoing, the Company will pay and be solely financially responsible for any and all attorneys, and related fees and expenses incurred by Executive in connection with any of the foregoing; provided that, in regard to such matters, the Executive has not acted in bad faith or with no colorable claim of success. Such payments shall be made within five (5) business days after delivery of Executive's written requests for payment, accompanied by such evidence of fees and expenses incurred as the Company may reasonably require. Notwithstanding the foregoing provisions of this Section 11, the obligations of the Company under this Section 11 shall not exceed, in the aggregate, (pound)15,000.00. 12. Withholding of Taxes. -------------------- The Company may withhold from any amounts payable under this Agreement all applicable taxes that the Company is required to withhold pursuant to any applicable law, regulation or ruling. 13. Successors and Binding Agreement. -------------------------------- (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance reasonably satisfactory to Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company. (b) This Agreement will inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. (c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Page 21 of 25 Agreement or any rights or obligations hereunder except as expressly provided in Sections 13(a) and 13(b). Without limiting the generality or effect of the foregoing, Executive's right to receive payments hereunder will not be assignable, transferable or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by Executive's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 13(c), the Company shall have no liability to pay any amount so attempted to be assigned, transferred or delegated. 14. Notices. ------- For all purposes of this Agreement, all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or five (5) business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or three (3) business days after having been sent by an internationally recognized overnight courier service, addressed to the Company (to the attention of the Chief Executive Officer of the Company) at its principal executive office and to Executive at her principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address shall be effective only upon receipt. 15. Governing Law. ------------- The validity, interpretation, construction and performance of this Agreement will be governed by and construed in accordance with the substantive laws of England, without giving effect to the principles of conflict of laws, except as expressly provided herein. In the event the Company exercises its discretion under Section 9(e) to bring an action to enforce the covenants contained in Section 9 in a court of competent jurisdiction where the Executive has breached or threatened to breach such covenants, and in no other event, the parties agree that the court may apply the law of the jurisdiction in which such action is pending in order to enforce the covenants to the fullest extent permissible. Notwithstanding the foregoing, to the extent that Bermuda law restricts the ability of the Company to fully comply with the express terms of this Agreement, the Company may modify this Agreement to the extent necessary to comply with such law and such modification shall not be deemed to be a breach of this Agreement by the Company. Page 22 of 25 16. Validity. -------- Any provision of this Agreement that is deemed invalid, illegal or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective, to the extent of such invalidity, illegality or unenforceability, without affecting in any way the remaining provisions hereof in such jurisdiction or rendering that or any other provisions of this Agreement invalid, illegal or unenforceable in any other jurisdiction. If any covenant in Section 9 should be deemed invalid, illegal or unenforceable because its time, geographical area, or restricted activity, is considered excessive, such covenant shall be modified to the minimum extent necessary to render the modified covenant valid, legal and enforceable. 17. Miscellaneous. ------------- No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party that are not set forth expressly in this Agreement. The headings used in this Agreement are intended for convenience or reference only and shall not in any manner amplify, limit, modify or otherwise be used in the construction or interpretation of any provision of this Agreement. References to Sections are references to Sections of this Agreement. Any reference in this Agreement to a provision of a statute, rule or regulation shall also include any successor thereto. 18. Survival. -------- Notwithstanding any provision of this Agreement to the contrary, the parties' respective rights and obligations under Sections 8, 9, 10, 11, 12 and 13(b) will survive any termination or expiration of this Agreement or the termination of the Executive's employment for any reason whatsoever. 19. Beneficiaries. ------------- The Executive shall be entitled to select (and change, to the extent permitted under any applicable law) a beneficiary or beneficiaries to receive any compensation or benefit payable hereunder following the Executive's death, and may change such election, in either case by giving the Company written notice thereof in accordance with Section 14. In the event of the Executive's death or a Page 23 of 25 judicial determination of the Executive's incompetence, reference in this Agreement to the "Executive" shall be deemed, where appropriate, to the Executive's beneficiary, estate or other legal representative. 20. Counterparts. ------------ This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same agreement. 21. Entire Agreement. ---------------- The terms of this Agreement are intended by the parties to be the final expression of their agreement with respect to the Executive's employment by the Company and may not be contradicted by evidence of any prior or contemporaneous agreement. The parties further intend that this Agreement shall constitute the complete and exclusive statement of its terms and that no extrinsic evidence whatsoever may be introduced in any judicial, administrative, or other legal proceedings to vary the terms of this Agreement. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] Page 24 of 25 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first written above. /s/ Deborah G. Percy -------------------------------- Deborah G. Percy SCOTTISH RE GROUP LIMITED By: /s/ Scott Willkomm -------------------------- Name: Scott Willkomm Title: Director Page 25 of 25 EX-31 4 ex31-1.txt 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 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 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: November 5, 2004 /s/ Michael C. French - --------------------- Michael C. French Chief Executive Officer EX-31 5 ex31-2.txt 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 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 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: November 5, 2004 /s/ Scott E. Willkomm - --------------------- Scott E. Willkomm President EX-31 6 ex31-3.txt 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 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 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: November 5, 2004 /s/ Elizabeth A. Murphy - ----------------------- Elizabeth A. Murphy Chief Financial Officer EX-32 7 ex32-1.txt 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 September 30, 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 November 5, 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. EX-32 8 ex32-2.txt 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 September 30, 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 November 5, 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. EX-32 9 ex32-3.txt 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 September 30, 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 November 5, 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. -----END PRIVACY-ENHANCED MESSAGE-----