-----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, Im6OUNoR/ZmQJ0h0UT6/+RA5Daadk4u2+CMQGZh77jNT/w+YzPiMlaLFUYaQrL6e 9U6YFw8epXWnwFTYf1Jt9A== 0000898080-05-000369.txt : 20050809 0000898080-05-000369.hdr.sgml : 20050809 20050809161028 ACCESSION NUMBER: 0000898080-05-000369 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050809 DATE AS OF CHANGE: 20050809 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: 051010017 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 June 30, 2005 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition period from ____ to ______ Commission File Number 001-16855 SCOTTISH RE GROUP LIMITED (Exact Name of Registrant as Specified in Its Charter) Cayman Islands 98-0362785 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) P.O. Box HM 2939 Crown House, Third Floor 4 Par-la-Ville Road Hamilton HM08 Bermuda Not Applicable (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (441) 295-4451 (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 August 1, 2005, Registrant had 45,479,172 ordinary shares outstanding. Table of Contents PART I. FINANCIAL INFORMATION..............................................2 Item 1. Financial Statements...............................................2 Consolidated Balance Sheets - June 30, 2005 (unaudited) and December 31, 2004......................................................2 Unaudited Consolidated Statements of Income - Three and Six months ended June 30, 2005 and 2004....................................3 Unaudited Consolidated Statements of Comprehensive Income - Three and Six months ended June 30, 2005 and 2004............................4 Unaudited Consolidated Statements of Shareholders' Equity - Six months ended June 30, 2005 and 2004....................................5 Unaudited Consolidated Statements of Cash Flows - Six months ended June 30, 2005 and 2004...........................................6 Notes to Consolidated Financial Statements (unaudited) - Six months ended June 30, 2005 and 2004...........................................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.........................................18 Item 3. Quantitative and Qualitative Disclosures About Market Risk........45 Item 4. Controls and Procedures...........................................45 PART II. OTHER INFORMATION.................................................46 Item 1. Legal Proceedings.................................................46 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......46 Item 3. Defaults Upon Senior Securities...................................46 Item 4. Submission of Matters to a Vote of Security Holders...............46 Item 5. Other Information.................................................46 Item 6. Exhibits..........................................................47 i PART I. FINANCIAL INFORMATION Item 1. Financial Statements SCOTTISH RE GROUP LIMITED CONSOLIDATED BALANCE SHEETS June 30, 2005 (Unaudited) and December 31, 2004 (Expressed in Thousands of United States dollars) (Dollars in thousands)
June 30, 2005 December 31, (unaudited) 2004 --------------- --------------- ASSETS Fixed maturity investments, available for sale, at fair value (Amortized cost $5,052,721; 2004 - $3,362,929)... $ 5,119,254 $ 3,392,463 Preferred stock, available for sale, at fair value (Cost $130,793; 2004 -$124,629)........................ 130,231 125,204 Cash and cash equivalents.............................. 320,531 794,639 Other investments...................................... 24,594 16,250 Funds withheld at interest............................. 1,895,353 2,056,280 --------------- --------------- Total investments.................................. 7,489,963 6,384,836 Accrued interest receivable............................ 39,645 32,092 Net proceeds receivable on perpetual preferred shares.. 120,786 - Reinsurance balances and risk fees receivable.......... 443,589 470,817 Deferred acquisition costs............................. 477,449 417,306 Amount recoverable from reinsurers..................... 792,296 774,503 Present value of in-force business..................... 58,752 62,164 Goodwill............................................... 34,125 34,125 Other assets........................................... 88,847 61,668 Segregated assets...................................... 799,329 783,573 --------------- --------------- Total assets....................................... $ 10,344,781 $ 9,021,084 =============== =============== LIABILITIES Reserves for future policy benefits.................... $ 3,524,757 $ 3,370,562 Interest sensitive contract liabilities................ 3,278,793 3,181,447 Collateral finance facilities.......................... 1,050,000 200,000 Accounts payable and other liabilities................. 115,782 68,311 Reinsurance balances payable........................... 100,060 116,589 7.00% Convertible Junior Subordinated Notes............ - 41,282 Long term debt......................................... 244,500 244,500 Segregated liabilities................................. 799,329 783,573 --------------- --------------- Total liabilities.................................. 9,113,221 8,006,264 --------------- --------------- MINORITY INTEREST 9,920 9,697 MEZZANINE EQUITY 142,753 142,449 SHAREHOLDERS' EQUITY Ordinary shares, par value $0.01: Issued and fully paid: 45,453,472 shares (2004-39,931,145).................................. 454 399 Preferred shares, par value $0.01: Issued and fully paid: 10,750,000 shares (2004 - 5,750,000)................................ 125,000 - Additional paid-in capital............................. 726,850 684,719 Accumulated other comprehensive income................. 50,051 31,604 Retained earnings...................................... 176,532 145,952 --------------- --------------- Total shareholders' equity......................... 1,078,887 862,674 --------------- --------------- Total liabilities and shareholders' equity......... $ 10,344,781 9,021,084 =============== ===============
See Accompanying Notes to Unaudited Consolidated Financial Statements 2 SCOTTISH RE GROUP LIMITED UNAUDITED CONSOLIDATED STATEMENTS OF INCOME Three and Six months ended June 30, 2005 and 2004 (Expressed in Thousands of United States dollars, except per share data)
Three months ended Six Months ended ------------------------- ---------------------------- June 30, June 30, June 30, June 30, 2005 2004 2005 2004 ----------- ------------- -------------- ------------- Revenues Premiums earned......................... $ 438,625 $ 155,980 $ 903,875 $ 289,327 Investment income, net.................. 83,554 54,817 164,033 104,919 Fee income.............................. 2,785 3,189 6,409 6,141 Realized gains (losses)................. 934 (1,687) 4,229 (266) Change in value of embedded derivatives, net........................ (22,120) 14,610 (16,635) 5,964 ----------- ------------- -------------- ------------- Total revenues...................... 503,778 226,909 1,061,911 406,085 ----------- ------------- -------------- ------------- Benefits and expenses Claims and other policy benefits........ 311,493 122,988 674,766 218,155 Interest credited to interest sensitive contract liabilities...... 31,723 25,465 62,365 49,658 Acquisition costs and other insurance expenses, net........................... 124,226 37,589 217,438 70,458 Operating expenses...................... 26,500 10,901 51,069 23,755 Collateral finance facilities expense... 11,821 - 19,241 - Interest expense........................ 4,813 2,996 10,407 5,773 ----------- ------------- -------------- ------------- Total benefits and expenses......... 510,576 199,939 1,035,286 367,799 ----------- ------------- -------------- ------------- Income (loss) before income taxes and minority interest....................... (6,798) 26,970 26,625 38,286 Income tax benefit...................... 8,187 1,690 8,555 816 ----------- ------------- -------------- ------------- Income before minority interest......... 1,389 28,660 35,180 39,102 Minority interest....................... 202 11 (169) (338) ----------- ------------- -------------- ------------- Net income $ 1,591 $ 28,671 $ 35,011 $ 38,764 =========== ============= ============== ============= Earnings per ordinary share - Basic..... $ 0.04 0.80 $ 0.84 $ 1.09 =========== ============= ============== ============= Earnings per ordinary share -Diluted.... $ 0.03 0.77 $ 0.76 $ 1.04 =========== ============= ============== ============= Dividends per ordinary share............ $ 0.05 0.05 $ 0.10 $ 0.10 =========== ============= ============== ============= Weighted average number of ordinary shares outstanding...................... Basic................................... 43,462,385 35,747,254 41,726,320 35,537,458 =========== ============= ============== ============= Diluted................................. 47,136,889 37,328,448 46,179,275 37,279,282 =========== ============= ============== =============
See Accompanying Notes to Unaudited Consolidated Financial Statements 3 SCOTTISH RE GROUP LIMITED UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Three and Six months ended June 30, 2005 and 2004 (Expressed in Thousands of United States dollars)
Three months ended Six Months ended -------------------------------- ------------------------------- June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004 ---------------- --------------- --------------- --------------- Net income........................... $ 1,591 $ 28,671 $ 35,011 $ 38,764 ---------------- --------------- --------------- --------------- Other comprehensive income, net of tax: Unrealized appreciation (depreciation)on investments..... 48,879 (64,086) 26,187 (32,044) Add: reclassification adjustment for investment losses (gains) included in net income....................... (319) 3,627 (1,339) (65) ---------------- --------------- --------------- --------------- Net unrealized appreciation (depreciation) on investments net of income tax benefit (expense) and deferred acquisition costs of $(36,364), $(18,223), $(10,883) and $(10,004)............................ 48,560 (60,459) 24,848 (32,109) Cumulative translation adjustment.... (4,212) (3,236) (6,401) (64) ---------------- --------------- --------------- --------------- Other comprehensive income (loss).... 44,348 (63,695) 18,447 (32,173) ---------------- --------------- --------------- --------------- Comprehensive income (loss).......... $ 45,939 $ (35,024) $ 53,458 $ 6,591 ================ =============== =============== ===============
See Accompanying Notes to Unaudited Consolidated Financial Statements 4 SCOTTISH RE GROUP LIMITED UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Three and Six months ended June 30, 2005 and 2004 (Expressed in Thousands of United States dollars, except for number of shares)
Six months ended ------------------------------------- June 30, 2005 June 30, 2004 ------------------ ----------------- Ordinary shares: Beginning of period........................................... 39,931,145 35,228,411 Issuance to employees on exercise of options.................. 145,000 600,051 Issuance on exercise of warrants.............................. 5,377,327 - ------------------ ----------------- End of period................................................. 45,453,472 35,828,462 ================== ================= Preferred shares: Beginning of period........................................... 5,750,000 5,750,000 Perpetual preferred shares issued............................. 5,000,000 - ------------------ ----------------- End of period................................................. 10,750,000 5,750,000 ================== ================= Share capital: Ordinary shares: Beginning of period............................................ $ 399 $ 352 Issuance to employees on exercise of options................... 1 6 Issuance on conversion of warrants............................. 54 - ------------------ ----------------- End of period.................................................. 454 358 ------------------ ----------------- Preferred shares:.................................................. Beginning of period............................................ - - Non-cumulative perpetual preferred shares issued............... 125,000 - ------------------ ----------------- End of period.................................................. 125,000 - ------------------ ----------------- Additional paid in capital: Beginning of period............................................ 684,719 548,750 Conversion of 7.00% Convertible Junior Subordinated Notes ..... 42,061 - Issuance to employees on exercise of options................... 1,810 6,641 Costs of issue of perpetual preferred shares................... (4,214) - Option and restricted stock unit expense....................... 2,474 54 ------------------ ----------------- End of period.................................................. 726,850 555,445 ------------------ ----------------- Accumulated other comprehensive income: Unrealized appreciation (depreciation) on investments.............. Beginning of period............................................ 13,661 16,848 Change in period (net of tax and deferred acquisition costs)... 24,848 (32,109) ------------------ ----------------- End of period.................................................. 38,509 (15,261) ------------------ ----------------- Cumulative translation adjustment.................................. Beginning of period............................................ 17,943 12,186 Change in period (net of tax).................................. (6,401) (64) ------------------ ----------------- End of period.................................................. 11,542 12,122 ------------------ ----------------- Total accumulated other comprehensive income (loss)................ 50,051 (3,139) ------------------ ----------------- Retained Earnings: Beginning of period............................................ 145,952 81,708 Net income..................................................... 35,011 38,764 Dividends paid................................................. (4,431) (3,556) ------------------ ----------------- End of period.................................................. 176,532 116,916 ------------------ ----------------- Total shareholders' equity......................................... $ 1,078,887 $ 669,580 ================== =================
See Accompanying Notes to Unaudited Consolidated Financial Statements 5 SCOTTISH RE GROUP LIMITED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS Six months ended June 30, 2005 and 2004 (Expressed in Thousands of United States dollars)
Six months ended -------------------------------- June 30, 2005 June 30, 2004 --------------- --------------- Operating activities Net income...................................................... $ 35,011 $ 38,764 Items not affecting cash:....................................... Net realized (gains) losses................................. (4,229) 266 Change in value of embedded derivatives, net................ 16,635 (5,964) Amortization of investments................................. 9,347 5,376 Amortization of deferred acquisition costs.................. 33,685 41,990 Amortization of present value of in-force business.......... 3,380 3,863 Changes in assets and liabilities:.......................... Accrued interest........................................ (7,754) (3,205) Reinsurance balances and risk fees receivable........... (3,538) (147,696) Deferred acquisition costs.............................. (93,264) (124,366) Other assets ........................................... (73,694) (36,120) Reserves for future policy benefits..................... 175,598 175,769 Interest sensitive contract liabilities, net of funds withheld at interest.................................... 38,476 24,338 Accounts payable and other liabilities.................. 47,471 (5,200) Other................................................... 5,890 4,594 --------------- --------------- Net cash provided by (used in) operating activities............. 183,014 (27,591) --------------- --------------- Investing activities Purchase of fixed maturity investments.......................... (2,326,016) (1,111,305) Proceeds from sales of fixed maturity investments............... 506,872 370,865 Proceeds from maturity of fixed maturity investments............ 259,688 162,219 Purchase of preferred stock..................................... (8,348) (22,388) Proceeds from sales of preferred stock.......................... 2,076 5,358 Proceeds from maturity of preferred stock....................... - 2,720 Other........................................................... (12,386) 91 --------------- --------------- Net cash used in investing activities........................... (1,578,114) (592,440) --------------- --------------- Financing activities Proceeds from collateral finance facility....................... 850,000 - Issuance of long term debt...................................... - 32,000 Deposits to interest sensitive contract liabilities............. 131,059 596,299 Withdrawals from interest sensitive contract liabilities........ (57,985) (39,005) Proceeds from issuance of ordinary shares....................... 1,811 6,647 Proceeds from exercise of Class C warrants...................... 538 - Dividends paid.................................................. (4,431) (3,556) --------------- --------------- Net cash provided by financing activities....................... 920,992 592,385 --------------- --------------- Net change in cash and cash equivalents......................... (474,108) (27,646) Cash and cash equivalents, beginning of period.................. 794,639 298,149 --------------- --------------- Cash and cash equivalents, end of period $ 320,531 $ 270,503 =============== ===============
See Accompanying Notes to Unaudited Consolidated Financial Statements 6 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements June 30, 2005 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 interim periods 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 premium, 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, and for our significant accounting policies, refer to the consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the period ended December 31, 2004. All tabular amounts are reported in thousands of United States dollars, except as otherwise noted. Certain prior period amounts have been reclassified to conform to the current period presentation. 2. Significant Accounting Policies Refer to Note 2 to the audited consolidated financial statements in our annual report on Form 10-K for the year ended December 31, 2004. 3. New Accounting Pronouncements In December 2004, the Financial Accounting Standards Board ("FASB") issued a revision to Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123(R)"). This statement requires us to recognize, in the determination of income, the grant date fair value of all stock options and other-equity based compensation issued to employees. In April 2005, the Securities and Exchange Commission announced that it would provide for a phased-in implementation process for SFAS No. 123(R). This requires us to adopt SFAS No. 123(R)'s fair value method of accounting for share-based payments to employees no later than January 1, 2006. We have currently adopted SFAS 148 in relation to our stock options and are therefore expensing our equity based compensation issued after January 1, 2003. We have not completed our evaluation of the impact of the implementation of SFAS No. 123(R). 7 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (continued) June 30, 2005 4. Business acquisition On December 31, 2004, we completed the acquisition, through two of our subsidiaries, of the in-force individual life reinsurance business of ING America Insurance Holdings, Inc., ("ING") (the "ING acquisition"). The ING acquisition was accounted for in accordance with SFAS No. 141 "Business Combinations". We received approximately $1.9 billion in assets from ING and recorded a corresponding amount of reserves for future policy benefits and other liabilities. This acquisition is subject to certain post closing adjustments. We are in the process of evaluating and agreeing upon these post closing adjustments and, based on current information, expect to pay an amount of approximately $43.3 million to ING. This amount is recorded in accounts payable and other liabilities. 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. The segment reporting for the lines of business is as follows:
Three months ended June 30, 2005 ------------------------------------------------------ Life Reinsurance ---------------------------- Corporate & North America International Other Total ------------- ------------- ----------- ----------- Premiums earned ...................... $ 410,687 $ 27,938 $ - $ 438,625 Investment income, net ............... 80,956 2,352 246 83,554 Fee income ........................... 2,007 - 778 2,785 Realized gains (losses) .............. 2,208 88 (1,362) 934 Change in value of embedded derivatives, net ................... (22,120) - - (22,120) ---------- --------- ----------- ---------- Total revenues ....................... 473,738 30,378 (338) 503,778 ---------- --------- ----------- ---------- Claims and other policy benefits ..... 293,599 17,894 - 311,493 Interest credited to interest sensitive contract liabilities ..... 31,723 - - 31,723 Acquisition costs and other insurance expenses, net ............ 119,737 3,975 514 124,226 Operating expenses ................... 10,221 7,285 8,994 26,500 Collateral finance facilities expense. 10,448 - 1,373 11,821 Interest expense ..................... 2,657 - 2,156 4,813 ---------- --------- ----------- ---------- Total benefits and expenses .......... 468,385 29,154 13,037 510,576 ---------- --------- ----------- ---------- Income (loss) before income taxes and minority interest .............. $ 5,353 $ 1,224 $ (13,375) $ (6,798) ========== ========= =========== ==========
8 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (continued) June 30, 2005 5. Business segments (continued)
Three months ended June 30, 2004 ------------------------------------------------------ Life Reinsurance ---------------------------- Corporate & North America International Other Total ------------- ------------- ----------- ----------- Premiums earned ................... $ 127,272 $ 28,708 $ - $ 155,980 Investment income, net ............ 50,979 3,574 264 54,817 Fee income ........................ 2,248 - 941 3,189 Realized gains (losses) ........... (1,552) (189) 54 (1,687) Change in value of embedded derivatives, net ................ 14,610 - - 14,610 ---------- ---------- ---------- ---------- Total revenues .................... 193,557 32,093 1,259 226,909 ---------- ---------- ---------- ---------- Claims and other policy benefits 102,485 20,503 - 122,988 Interest credited to interest sensitive contract liabilities... 25,465 - - 25,465 Acquisition costs and other insurance expenses, net ......... 35,701 1,334 554 37,589 Operating expenses ................ 4,142 3,757 3,002 10,901 Interest expense .................. 939 - 2,057 2,996 ---------- ---------- ---------- ---------- Total benefits and expenses ....... 168,732 25,594 5,613 199,939 ---------- ---------- ---------- ---------- Income (loss) before income taxes and minority interest ........... $ 24,825 $ 6,499 $ (4,354) $ 26,970 ========== ========== ========== ==========
9 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (continued) June 30, 2005 5. Business segments (continued)
Six months ended June 30, 2005 ------------------------------------------------------ Life Reinsurance ---------------------------- Corporate & North America International Other Total ------------- ------------- ----------- ----------- Premiums earned ...................... $ 848,560 $ 55,315 $ - $ 903,875 Investment income, net ............... 158,487 4,942 604 164,033 Fee income ........................... 4,907 - 1,502 6,409 Realized gains (losses) .............. 3,650 585 (6) 4,229 Change in value of embedded derivatives, net ................... (16,635) - - (16,635) ------------ ---------- ---------- ------------ Total revenues ....................... 998,969 60,842 2,100 1,061,911 ------------ ---------- ---------- ------------ Claims and other policy benefits ..... 637,787 36,979 - 674,766 Interest credited to interest sensitive contract liabilities ..... 62,365 - - 62,365 Acquisition costs and other insurance expenses, net ............ 208,793 7,612 1,033 217,438 Operating expenses ................... 21,894 13,134 16,041 51,069 Collateral finance facilities expense............................. 16,633 - 2,608 19,241 Interest expense ..................... 5,365 - 5,042 10,407 ------------ ---------- ---------- ------------ Total benefits and expenses .......... 952,837 57,725 24,724 1,035,286 ------------ ---------- ---------- ------------ Income (loss) before income taxes and minority interest .............. $ 46,132 $ 3,117 $ (22,624) $ 26,625 ============ ========== ========== ============
10 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (continued) June 30, 2005 5. Business segments (continued)
Six months ended June 30, 2004 ------------------------------------------------------ Life Reinsurance ---------------------------- Corporate & North America International Other Total ------------- ------------- ----------- ----------- Premiums earned .................. $ 232,874 $ 56,453 $ - $ 289,327 Investment income, net ........... 98,386 5,722 811 104,919 Fee income ....................... 4,350 - 1,791 6,141 Realized gains (losses) .......... 140 (340) (66) (266) Change in value of embedded derivatives, net ............... 5,964 - - 5,964 --------- ---------- ---------- ---------- Total revenues ................... 341,714 61,835 2,536 406,085 --------- ---------- ---------- ---------- Claims and other policy benefits.. 178,078 40,077 - 218,155 Interest credited to interest sensitive contract liabilities.. 49,658 - - 49,658 Acquisition costs and other insurance expenses, net ........ 65,236 3,983 1,239 70,458 Operating expenses ............... 9,105 8,166 6,484 23,755 Interest expense ................. 1,625 - 4,148 5,773 --------- ---------- ---------- ---------- Total benefits and expenses ...... 303,702 52,226 11,871 367,799 --------- ---------- ---------- ---------- Income (loss) before income taxes and minority interest .......... $ 38,012 $ 9,609 $ (9,335) $ 38,286 ========= ========== ========== ========== Assets June 30, 2005 December 31, 2004 ------------- ----------------- Life Reinsurance North America...................... $ 8,757,230 $ 7,629,784 International...................... 446,148 396,219 -------------- -------------- Total Life Reinsurance................ 9,203,378 8,026,003 Corporate & Other..................... 1,141,403 995,081 -------------- -------------- Total................................. $ 10,344,781 $ 9,021,084 ============== ==============
11 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements June 30, 2005 6. Earnings per ordinary share The following table sets forth the computation of basic and diluted earnings per ordinary share:
Three months ended Six months ended ----------------------- --------------------- June 30, June 30, June 30, June 30, 2005 2004 2005 2004 --------- --------- ---------- -------- Numerator: Net income .......................... $ 1,591 $ 28,671 $ 35,011 $ 38,764 ========== ========== ========== ========== Denominator: Denominator for basic earnings per ordinary share - Weighted average number of ordinary shares . 43,462,385 35,747,254 41,726,320 35,537,458 Effect of dilutive securities - Stock options and restricted stock units ....................... 625,438 701,125 633,360 800,756 - Warrants ........................ 2,776,786 880,069 3,470,053 892,662 - 4.50% senior convertible notes and Hybrid Capital Units .......... 272,280 - 349,542 48,406 ---------- ---------- ---------- ---------- Denominator for dilutive earnings per ordinary share ................ 47,136,889 37,328,448 46,179,275 37,279,282 ========== ========== ========== ========== Basic earnings per ordinary share ... $0.04 $0.80 $0.84 $1.09 ========== ========== ========== ========== Diluted earnings per ordinary share . $0.03 $0.77 $0.76 $1.04 ========== ========== ========== ==========
7. Derivatives During 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 133"), which 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 change in fair value of the swap during the quarter and six months ended June 30, 2005 amounted to a loss of $2.0 million and a gain of $0.1 million, respectively. These losses are included in realized gains (losses) in the consolidated statements of income. During 2004, we entered into interest rate swaps with varying notional amounts and maturities, which have been designated as hedges of the variable rate cash flows of four of our trust preferred debt issuances. These interest rate swaps require us to pay fixed rate interest in exchange for variable rate interest, based on a fixed notional, until the maturity of the contract, and have been used to eliminate interest rate risk from the hedged portions of our long term debt. The notional amounts, reset periods, variable interest rates and maturities of the interest rate swaps match the terms of the cash flows of the debt they have been designated to hedge and therefore the interest rate swaps are considered to be fully effective as required by SFAS 133. Interest expense on the interest rate swaps for the quarter ended March 31, 2005 of $0.2 million has been included in interest expense for the period. There was no additional interest expense in the quarter ended June 30, 2005. 12 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (continued) June 30, 2005 7. Derivatives (continued) During the quarter ended June 30, 2005, we entered into a forward contract in the amount of $5.0 million in relation to certain of our non-dollar operating expenses. This contract is accounted for in accordance with SFAS 133, which requires all derivatives be recognized as either assets or liabilities on the balance sheet and be measured at fair value with changes reflected in the income for all non hedge derivatives. This derivative has not been designated as a hedge. The fair value of the forward contract at June 30, 2005 was a loss of $0.1 million. This loss has been included in realized gains (losses) in the consolidated statement of income. 8. Collateral finance facilities In 2004, we closed a collateral 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 FASB Interpretation 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46") we are considered to hold a beneficial interest in 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 is reflected in collateral finance facilities expense. The creditors of the variable interest entity have no recourse against our general assets. On February 11, 2005, Orkney Holdings, LLC, a newly formed Delaware limited liability company, issued and sold in a private offering an aggregate of $850.0 million Series A Floating Rate Insured Notes due February 11, 2035 (the "Orkney Notes"). Orkney Holdings, LLC is organized for the limited purpose of holding the stock of Orkney Re, Inc., a South Carolina special purpose captive insurance company, and issuing the Orkney Notes. All of the common shares of Orkney Holdings, LLC are owned by Scottish Re (U.S.), Inc. Proceeds from this offering will fund the Regulation XXX reserve requirements for a defined block of level premium term life insurance policies issued between January 1, 2000 and December 31, 2003 reinsured by Scottish Re (U.S.), Inc. to Orkney Re, Inc. Proceeds from the Orkney Notes have been deposited into a series of trusts that collateralize the notes. The holders of the Orkney Notes cannot require repayment from us or any of our subsidiaries, other than Orkney Holdings, LLC. Both principal and interest payments on the Orkney Notes are guaranteed by MBIA Insurance Corporation, and are rated "AAA" by Standard and Poor's and "Aaa" by Moody's. Interest on the principal amount of the Orkney Notes is payable quarterly at a rate equivalent to three month LIBOR plus 0.53%. At June 30, 2005, the interest rate was 4.05%. Any payment of principal, including by redemption, or interest on the Orkney Notes is sourced from dividends from Orkney Re, Inc. and the balances available in a series of trust accounts. Dividends may only be made with the prior approval of the Director of Insurance of the State of South Carolina in accordance with the terms of its licensing orders and in accordance with applicable law. The Orkney Notes also contain a customary limitation on lien provisions and customary events of default provisions, which, if breached, could result in the accelerated maturity of the Orkney Notes. 13 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (continued) June 30, 2004 8. Collateral finance facilities (continued) Orkney Holdings, LLC has the option to redeem all or a portion of the Orkney Notes prior to and on or after February 11, 2010, subject to certain call premiums. In accordance with FIN 46 we are considered to hold a beneficial interest in Orkney Holdings, LLC, which is in turn considered to be a variable interest entity. As a result, Orkney Holdings, LLC has been consolidated in these financial statements. The assets of the variable interest entity have been recorded as fixed maturity investments and cash and cash equivalents. Our consolidated income statements show the investment return of the variable interest entity as investment income and the cost of the facility is reflected in collateral finance facilities expense. 9. 7.00% Convertible Junior Subordinated Debentures On December 31, 2004, we issued to 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. (collectively, the "Cypress Entities") $41.3 million aggregate principal amount of 7.00% Convertible Junior Subordinated Notes (the "Cypress Notes") with a maturity date of December 31, 2034. On April 7, 2005 our shareholders approved the conversion of the Cypress Notes and accrued interest thereon resulting in the issuance of 2,170,896 Class C Warrants. These warrants were subsequently exercised, as discussed in Note 10. 10. Shareholders' equity During the quarter ended June 30, 2005 and 2004, respectively, we issued 53,200 and 217,434 ordinary shares to employees upon the exercise of stock options. During the six months ended June 30, 2005 and 2004, respectively, we issued 145,000 and 600,051 ordinary shares to employees upon the exercise of stock options. We issued to the Cypress Entities on December 31, 2004: (i) 3,953,183 ordinary shares, par value $0.01 per share; (ii) Class C Warrants to purchase 3,206,431 ordinary shares; and (ii) the Cypress Notes discussed in Note 9. The Class C Warrants were exercisable on receipt of shareholder and regulatory approvals. On April 7, 2005 our shareholders approved the conversion of the Cypress Notes into 2,170,896 Class C Warrants. All regulatory approvals were obtained on May 4, 2005 and all of the Class C Warrants were converted into 5,377,327 ordinary shares. At June 30, 2005, there were 45,453,472 outstanding ordinary shares. 11. Preferred Shares We are permitted to issue up to 50,000,000 authorized preferred shares under our Memorandum of Association. As part of our Hybrid Capital Units offering in December 2003 we issued 5,750,000 preferred shares (see Note 19 included in our Annual Report on Form 10-K for the period ended December 31, 14 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (Continued) June 30, 2005 11. Preferred Shares (continued) 2004). On June 28, 2005, we priced our offering of 5,000,000 non-cumulative perpetual preferred shares and entered into a purchase agreement relating to the shares pursuant to which the underwriters of the offering agreed to purchase the shares. Gross proceeds were $125.0 million and related expenses were $4.2 million. Settlement of the net proceeds occurred on July 6, 2005. Dividends on the perpetual preferred shares are non-cumulative. During any dividend period unless the full dividends for the current dividend period on all outstanding perpetual preferred shares have been declared or paid, no dividend shall be paid or declared on our ordinary shares and no ordinary shares or other junior shares shall be purchased, redeemed or otherwise acquired for consideration. Declaration of dividends on the perpetual preferred shares is prohibited if we fail to meet specified capital adequacy, net income or shareholders' equity levels. The perpetual preferred shares do not have a maturity date and we are not required to redeem the shares. The perpetual preferred shares are not redeemable prior to July 2010. Subsequent to July 2010 the perpetual preferred shares will be redeemable at our option, in whole or in part, at a redemption price equal to $25.00 per share, plus any declared and unpaid dividends at the redemption date, without accumulation of any undeclared dividends. The perpetual preferred shares are unsecured obligations, subordinated to all indebtedness that does not by its terms rank pari passu or junior to the perpetual preferred shares. The holders of the perpetual preferred shares have no voting rights except with respect to certain fundamental changes in the terms of the perpetual preferred shares and in the case of certain dividend non-payments. The perpetual preferred shares are rated "BB-" by Standard & Poor's, "Ba1" by Moody's, "BB+" by Fitch Ratings and "BB" by A.M. Best Company. 12. Stock option plans We have 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. 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" ("SFAS 148") and has been determined as if we accounted for all employee stock options under the fair value method of SFAS 148. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period using the Black-Scholes model. The Black-Scholes and Binomial option-pricing models were developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options. 15 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (Continued) June 30, 2005 12. Stock option plans (continued) Our pro forma information is as follows:
Three months ended Six months ended ----------------------- --------------------- June 30, June 30, June 30, June 30, 2005 2004 2005 2004 --------- --------- ---------- -------- Net income -- as reported............ $ 1,591 $ 28,671 $ 35,011 $ 38,764 Stock-based employee compensation cost, net of related tax effects, included in the determination of net income as reported.......................... 1,426 149 2,474 54 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.... (1,889) (343) (2,922) (723) ---------- ----------- ----------- ---------- Net income -- pro forma.............. $ 1,128 $ 28,477 $ 34,563 $ 38,095 ========== =========== =========== ========== ----------------------- --------------------- Three months ended Six months ended ----------------------- --------------------- June 30, June 30, June 30, June 30, 2005 2004 2005 2004 --------- --------- ---------- -------- Basic earnings per ordinary share -- as reported ..................... $ 0.04 $ 0.80 $ 0.84 $ 1.09 Basic earnings per ordinary share -- pro forma ....................... $ 0.03 $ 0.80 $ 0.83 $ 1.08 Diluted earnings per ordinary share -- as reported .................. $ 0.03 $ 0.77 $ 0.76 $ 1.04 Diluted earnings per ordinary share -- pro forma .................... $ 0.02 $ 0.76 $ 0.75 $ 1.03
13. Stingray Pass-Through Trust On January 12, 2005, we entered into a put agreement with Stingray Investor Trust ("Investor Trust") for an aggregate value of $325.0 million. Under the terms of the put agreement, we have acquired an irrevocable put option to issue funding agreements to Investor Trust in return for a portfolio of 30-day commercial paper. This put option may be exercised at any time. In addition, we may be required to issue funding agreements to the Investor Trust under certain circumstances, including, but not limited to, the non-payment of the put option premium and a ratings downgrade. The facility matures on January 12, 2015. This transaction provides relief under state insurance regulations in the U.S. for reinsurance obligations under intercompany quota share reinsurance agreements. The put premium incurred during the quarter and six months ended June 30, 2005 amounted to $1.2 million and $2.3 million, respectively, and is included in collateral finance facilities expense in the consolidated statements of income. In accordance with FIN 46, we are not considered to have a variable interest in Investor Trust and as a result we are not required to consolidate the trust. 16 Scottish Re Group Limited Notes to Unaudited Consolidated Financial Statements (Continued) June 30, 2005 14. Credit Facilities On July 18, 2005, Scottish Annuity & Life Insurance Company (Cayman) Ltd., Scottish Re (Dublin) Limited, Scottish Re (U.S.), Inc. and Scottish Re Limited closed an unsecured $200.0 million 3-year credit facility with a syndicate of banks led by Bank of America, N.A. This facility replaced our 364-day facility which was due to mature in October 2005. The facility may be increased, at our option, to an aggregate principal amount of $300.0 million. The facility provides capacity for borrowing and extending letters of credit. The facility is a direct financial obligation of each of the borrowers, however, Scottish Annuity & Life Insurance Company (Cayman) Ltd. has guaranteed the payment of obligations of Scottish Re (Dublin) Limited, Scottish Re (U.S.), Inc., and Scottish Re Limited. The facility requires that Scottish Annuity & Life Insurance Company (Cayman) Ltd. maintain a minimum amount of shareholder's equity and uncollateralized assets of 1.2 times borrowings. In addition, the facility requires that we maintain a minimum amount of shareholders' equity and debt to capitalization ratio of less than 30%. Our failure to comply with the requirements of the credit facility would, subject to grace periods, result in an event of default and we would be required to repay any outstanding borrowings. Outstanding letters of credit under the former facility and its successor amounted to $35.8 million at June 30, 2005. There were no outstanding borrowings. 15. Mediation On June 16, 2005, we requested mediation from Employers Reinsurance Corporation ("ERC") pursuant to the stock purchase agreement transferring a 95% interest in Scottish Re Life Corporation (formerly ERC Life Corporation) to Scottish Holdings, Inc. We assert that ERC breached certain representations and warranties under the agreement. The impact of these breaches was fully reflected in our financial position at December 31, 2004, the time of finalization of the purchase accounting for the acquisition. A successful outcome from the mediation would have no negative impact and would result in an increase in income and shareholders' equity. 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General This discussion and analysis should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", and the audited Consolidated Financial Statements and notes thereto, presented under Item 7 and Item 8, respectively, of our Form 10-K for the year ended December 31, 2004. All amounts are reported in thousands of United States dollars, except per share amounts. Overview See "Overview" in Item 7 of our Form 10-K for the year ended December 31, 2004. On December 31, 2004, we completed the acquisition of the individual life reinsurance business of ING America Insurance Holdings, Inc. ("ING") (the "ING acquisition"). We have reinsured the liabilities of all of ING America Insurance Holdings, Inc.'s ("ING") individual life reinsurance business through a coinsurance transaction. ING transferred to us assets of approximately $1.9 billion. The ING acquisition is subject to certain post closing adjustments. Certain of these assets will be held in trust to secure the reserve obligations of the business. Additionally, ING transferred certain operating assets associated with the business. We are in the process of evaluating and agreeing upon these post closing adjustments and, based on current information, expect to pay an amount of approximately $43.3 million to ING. This amount is recorded in accounts payable and other liabilities. Critical Accounting Policies See the discussion of our Critical Accounting Policies and Estimates in Item 7 of our Form 10-K for the year ended December 31, 2004. That discussion is updated for disclosures set forth below. Consolidation and Variable Interest Entities We consolidate the results of all our subsidiaries. All significant inter-company transactions and balances have been eliminated on consolidation. In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46") which 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 collateral finance facilities discussed in Note 8 to the Consolidated Financial Statements, and have consolidated the variable interest entities in accordance with FIN 46. The Stingray Investor Trust, discussed in Note 13 to the Consolidated Financial Statements, is a 18 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) variable interest entity but we are not considered to have a variable interest in Investor Trust. Accordingly, it is not consolidated in accordance with FIN 46. Results of Operations Consolidated results of operations Our results of operations for the three and six months ended June 30, 2004 do not include the results of the ING acquisition which was completed on December 31, 2004.
Three months ended Six months ended ----------------------- ----------------------- June 30, June 30, June 30, June 30, 2005 2004 2005 2004 --------- --------- ---------- --------- Premiums earned ....................... $ 438,625 $ 155,980 $ 903,875 $ 289,327 Investment income, net ................ 83,554 54,817 164,033 104,919 Fee income ............................ 2,785 3,189 6,409 6,141 Realized gains (losses) ............... 934 (1,687) 4,229 (266) Change in value of embedded derivatives, net ...................... (22,120) 14,610 (16,635) 5,964 ------------ ------------ ------------ ------------ Total revenues ........................ 503,778 226,909 1,061,911 406,085 ------------ ------------ ------------ ------------ Claims and other policy benefits ...... 311,493 122,988 674,766 218,155 Interest credited to interest sensitive contract liabilities ........ 31,723 25,465 62,365 49,658 Acquisition costs and other insurance expenses, net ......................... 124,226 37,589 217,438 70,458 Operating expenses .................... 26,500 10,901 51,069 23,755 Collateral finance facilities expense . 11,821 - 19,241 - Interest expense ...................... 4,813 2,996 10,407 5,773 ------------ ------------ ------------ ------------ Total benefits and expenses ........... 510,576 199,939 1,035,286 367,799 ------------ ------------ ------------ ------------ Income (loss) before income taxes and minority interest ..................... (6,798) 26,970 26,625 38,286 Income tax benefit .................... 8,187 1,690 8,555 816 ------------ ------------ ------------ ------------ Income before minority interest ....... 1,389 28,660 35,180 39,102 Minority interest ..................... 202 11 (169) (338) ------------ ------------ ------------ ------------ Net income ............................ $ 1,591 $ 28,671 $ 35,011 $ 38,764 ============ ============ ============ ============
Total revenues increased by 122% to $503.8 million in the quarter ended June 30, 2005 from $226.9 million in the same period of 2004. Total revenues include premiums earned in our Life Reinsurance Segments, investment income on our invested assets, fee income, realized gains and losses on our investment portfolio and the change in the value of embedded derivatives. The increase in premiums earned is primarily due to the ING acquisition 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, invested assets acquired as a result of the ING acquisition, the additional $230.0 million in capital raised to support the ING acquisition and assets raised through our collateral finance facilities in June 2004 and February 2005. The change in the value of embedded derivatives was a loss of $22.1 million in the quarter ended June 30, 2005 in comparison with a gain of $14.6 million in the prior year period. Total benefits and expenses increased by 155% to $510.6 million in the quarter ended June 30, 2005 from $199.9 million in the same period in 2004. The increase was due to the ING acquisition, continued growth in our Life Reinsurance North America segment, higher than expected mortality 19 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) experience in our Life Reinsurance North America segment, additional operating costs required to meet the growth in our business, expenses of our collateral finance facilities and increased interest expense on the trust preferred securities issued in May and December 2004. Total revenues increased by 161% to $1.1 billion in the six months ended June 30, 2005 from $406.1 million in the same period of 2004. Total benefits and expenses increased by 181% to $1.0 billion in the six months ended June 30, 2005 from $367.8 million in the same period in 2004. The increases were primarily due to the ING acquisition and growth in our Life Reinsurance North America segment. Earnings per ordinary share
Three months ended Six months ended ----------------------- ------------------------ June 30, June 30, June 30, June 30, 2005 2004 2005 2004 --------- --------- ---------- -------- Net income............................. $ 1,591 $ 28,671 $ 35,011 $ 38,764 ========== ========== ========== ========== Basic earnings per ordinary share...... $ 0.04 $ 0.80 $ 0.84 $ 1.09 ========== ========== ========== ========== Diluted earnings per ordinary share.... $ 0.03 $ 0.77 $ 0.76 $ 1.04 ========== ========== ========== ========== Weighted average number of ordinary shares outstanding: Basic.................................. 43,462,385 35,747,254 41,726,320 35,537,458 ========== ========== ========== ========== Diluted................................ 47,136,889 37,328,448 46,179,275 37,279,282 ========== ========== ========== ==========
Net income for the quarter ended June 30, 2005 decreased 94% to $1.6 million from $28.7 million in the same quarter in 2004. The decrease is primarily attributable to the change in value of embedded derivatives which was a gain of $14.6 million in the quarter ended June 30, 2004 in comparison with a loss of $22.1 million in the quarter ended June 30, 2005. The change in value of the embedded derivatives is dependent on changes in both interest rates and credit spreads. The gain in the quarter ended June 30, 2004 was attributable principally to increases in interest rates. The loss in the quarter ended June 30, 2005 is attributable to decreases in interest rates and widening of credit spreads. In addition, in 2005 we have an additional embedded derivative as a result of the ING acquisition. This decrease in net income is offset by increases due to the ING acquisition and continued growth in our Life Reinsurance North America Segment. Higher than expected mortality in North America of approximately $11.2 million (after taxes) for the quarter ended June 30, 2005 also resulted in decreased earnings. Increases in operating expenses, costs of the collateral finance facilities and interest expense also contributed to the decrease in net income in the quarter. Diluted earnings per ordinary share amounted to $0.03 for the quarter ended June 30, 2005 and $0.77 in the same period in 2004, a decrease of 96%. Diluted earnings per ordinary share decreased as a result of the decline in net income discussed above and an increase in the number of ordinary shares outstanding. The diluted weighted average number of ordinary shares outstanding has increased from 37,328,448 at June 30, 2004 to 47,136,889 at June 30, 2005 principally as a result of the issuance of shares to the Cypress Entities, as discussed in Notes 9 and 10 to the Consolidated Financial Statements. Net income for the six months ended June 30, 2005 decreased by 9.7% to $35.0 million from $38.8 million in the prior year period. The decrease is attributable to the change in value of embedded derivatives which was a gain of $6.0 million in the six months ended June 30, 2004 in comparison with a 20 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) loss of $16.6 million in the six months ended June 30, 2005. This decrease is offset by increases due to the ING acquisition and continued growth in our Life Reinsurance North America segment. Segment Operating Results Life Reinsurance North America
Three months ended Six months ended ----------------------- --------------------- June 30, June 30, June 30, June 30, 2005 2004 2005 2004 --------- --------- ---------- -------- Premiums earned ....................... $ 410,687 $ 127,272 $ 848,560 $ 232,874 Investment income, net ................ 80,956 50,979 158,487 98,386 Fee income ............................ 2,007 2,248 4,907 4,350 Realized gains (losses) ............... 2,208 (1,552) 3,650 140 Change in value of embedded derivatives, net ...................... (22,120) 14,610 (16,635) 5,964 ---------- ---------- ---------- --------- Total revenues ........................ 473,738 193,557 998,969 341,714 ---------- ---------- ---------- --------- Claims and other policy benefits ...... 293,599 102,485 637,787 178,078 Interest credited to interest sensitive contract liabilities ........ 31,723 25,465 62,365 49,658 Acquisition costs and other insurance expenses, net ............... 119,737 35,701 208,793 65,236 Operating expenses .................... 10,221 4,142 21,894 9,105 Collateral finance facilities expense.. 10,448 - 16,633 - Interest expense ...................... 2,657 939 5,365 1,625 ---------- ---------- ---------- --------- Total benefits and expenses ........... 468,385 168,732 952,837 303,702 ---------- ---------- ---------- --------- Income before income taxes and minority interest...................... $ 5,353 $ 24,825 $ 46,132 $ 38,012 ========== ========== ========== =========
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. The results of the ING acquisition which we acquired on December 31, 2004, are included in the results of this segment for the three and six months ended June 30, 2005. The financial statement impact of the ING acquisition for the three and six month periods is detailed below. Premiums earned, claims and other policy benefits and acquisition costs and other insurance expenses include amounts related to 2005 new business on treaties that remained open to new business after the date of the acquisition. Since this block of business has been combined with our existing North America traditional solutions business, shared operating expenses are not allocated directly to this block. 21 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Three months Six months ended ended June 30, 2005 June 30, 2005 ------------- ------------- Premiums earned $ 278,776 $ 567,007 Investment income, net 18,584 36,093 Realized gains 394 2,294 Change in value of embedded derivatives, net (17,616) (13,231) --------- --------- Total revenues 280,138 592,163 --------- --------- Claims and other policy benefits 183,056 412,544 Acquisition costs and other insurance expenses, net 77,895 136,379 Operating expenses 4,538 9,690 --------- --------- Total benefits and expenses 265,489 558,613 --------- --------- Income before income taxes and minority interest $ 14,649 $ 33,550 ========= =========
Premiums earned in our Life Reinsurance North America Segment during the quarter ended June 30, 2005 increased 223% to $410.7 million in comparison with $127.3 million in the same period in 2004. A significant portion of the increase is due to the ING acquisition, which contributed $278.8 million in earned premiums. 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 June 30, 2005, we had approximately $1.0 trillion of life reinsurance in force covering 13.9 million lives with an average benefit per life of $74,000 in our North American operations. As of June 30, 2004, we had approximately $298.1 billion of life reinsurance in force in our Life Reinsurance North America Segment covering 7.4 million lives with an average benefit per life of $40,000. Net investment income increased by $30.0 million or 59% to $81.0 million for the quarter ended June 30, 2005 from $51.0 million for the same period in the prior year. The increase is due to the growth in our average invested assets. Our total invested assets have increased significantly because of the ING acquisition, growth in our Life Reinsurance North America Segment, investment of the proceeds of our collateral finance facilities and additional trust preferred securities issued in May and December 2004. On the portfolio managed by our external investment managers the yields on fixed rate assets were 5.1% at both June 30, 2005 and 2004. Yields on floating rate assets are indexed to LIBOR. The yield on our floating rate assets increased to 4.0% as at June 30, 2005 from 2.5% as at June 30, 2004, and the yield on our cash and cash equivalents increased to 2.2% as at June 30, 2005 from 1.0% as at June 30, 2004. The change in value of embedded derivatives, net of related deferred amortization costs, arises from the application of 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"). Contracts written on a modified coinsurance or funds withheld coinsurance basis are considered to include embedded derivates. During the three months ended June 30, 2005 the change in value of the embedded derivatives amounted to a loss of $22.1 million. This change in value arose principally because of contracts written on a modified coinsurance basis assumed in the ING acquisition, a decrease in risk free interest rates and widening of credit spreads. The change in value of the embedded 22 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) derivatives during the period ended June 30, 2004 amounted to a gain of $14.6 million. The gain arose from an increase in risk free interest rates. Claims and other policy benefits increased by 186% to $293.6 million for the quarter ended June 30, 2005 from $102.5 million in the same quarter in 2004. The increase is a result of the ING acquisition, 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. During the quarter we experienced higher than expected mortality which resulted in higher claims of approximately $14.0 million. A greater than expected number of large claims were incurred. Effective January 1, 2005, our targeted maximum corporate retention in our Life Reinsurance North America Segment on any one life has been increased to $1.0 million. For periods up to December 31, 2004 we ceded amounts in excess of $500,000. However, effective January 1, 2005, we have increased our retention to $1.0 million per life. Our retention on business acquired in the ING individual life reinsurance acquisition, effective December 31, 2004, is $2.0 million per life. In addition, we maintain catastrophe cover on our entire retained life reinsurance business, which effective January 1, 2005, provides reinsurance for losses of $50.0 million in excess of $10.0 million, and provides protection for terrorism, nuclear, biological and chemical risks. Claims and other policy benefits on the ING block of business amounted to $183.1 million in the three month period ended June 30, 2005. The ING block is comprised of life reinsurance treaties that cover individual policies that were issued prior to December 31, 2004 ("2004 issues"), the closing date of the ING acquisition, as well as, policies that were issued after December 31, 2004 ("2005 issues"). 2004 issues are accounted for as the purchase of a business pursuant to SFAS 141 "Business Combinations" ("SFAS 141"). 2005 issues are accounted for as new business under SFAS 60 "Accounting and Reporting by Insurance Enterprises". In accordance with SFAS 141, deferred acquisition costs are not recorded on 2004 issues. Since the purchase, we have estimated the portion of the business related to 2004 issues and 2005 issues based on information received from ceding companies. These estimates will continue to be revised as we receive detailed policy-level detail from our ceding companies that allows a more precise allocation of business between 2004 and 2005 issues. As a result, for the second quarter of 2005, we revised our estimate of this allocation with a greater percentage of business allocated to 2004 issues than originally estimated. Accordingly, we increased the amount of business accounted for under purchase accounting principles. During the second quarter, we allocated additional premiums earned of approximately $17.7 million to 2004 issues. As a result, the change in benefit reserves for the three months ended June 30, 2005 decreased and the change in deferred acquisition costs increased by an equivalent amount. In addition, during the quarter we reviewed and revised estimates in respect of certain reserves resulting in a decrease in claims and other policy benefits of $6.7 million. For the quarter ended June 30, 2005, interest credited to interest sensitive contract liabilities increased by $6.3 million or 24.6% to $31.7 million from $25.5 million in the same period in 2004. The 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 $3.3 billion at June 30, 2005 in comparison with $3.0 billion at June 30, 2004. During the quarter ended June 30, 2005 acquisition costs and other insurance expenses increased by $84.0 million or 235% to $119.7 million from $35.7 million in the same quarter in 2004. The increase was a result of the ING acquisition and the increased life and annuity business in our Life Reinsurance North America Segment as discussed above. For the quarter ended June 30, 2005, acquisition costs include letters of credit costs of $7.6 million in respect of business assumed in the ING acquisition. Acquisition costs for the current quarter were impacted by the revision of our estimates of 2005 and 2004 issues on the ING block of business as described above. During this quarter, acquisition costs also include expenses of $2.2 million in respect of revised reporting from a ceding company on a fixed annuity contract. 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 23 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 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 147% to $10.2 million in the quarter ended June 30, 2005 from $4.1 million in the same quarter in 2004. The increase is primarily the result of the ING acquisition and additional personnel and consulting costs incurred as we continue to grow our business. We have increased our head count principally because of hiring additional employees in respect of the acquisition of the ING business. Total employees in this segment have grown from 82 at June 30, 2004 to 197 at June 30, 2005. Included in operating costs for the quarter ended June 30, 2005 are costs of the transition services agreement with ING amounting to $0.7 million. Operating costs in the three months ended June 30, 2004 including $0.8 million in respect of transition services paid to ERC as part of the acquisition of Scottish Re Life Corporation. The costs of the collateral finance facilities completed in June 2004 and February 2005 amounted to $10.5 million in the three months ended June 30, 2005. These facilities are described in Note 8 to the Consolidated Financial Statements. Interest expense in this segment arises on the trust preferred securities. The increase in interest expense to $2.7 million in the quarter ended June 30, 2005 from $0.9 million for the same quarter in 2004, results from the issuance of an additional $82.0 million of these securities in May and December 2004. Premiums earned in our Life Reinsurance North America Segment during the six months ended June 30, 2005 increased 264% to $848.6 million in comparison with $232.9 million in the same period in 2004. A significant portion of the increase is due to the ING acquisition, which contributed $567.0 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. Net investment income increased by $60.1 million or 61.1% to $158.5 million for the six months ended June 30, 2005 from $98.4 million for the prior year period. The increase is due to the growth in our average invested assets. Our total invested assets have increased significantly because of the ING acquisition, growth in our Life Reinsurance North America Segment, investment of the proceeds of our collateral finance facilities and additional trust preferred securities issued in May and December 2004. The yields on fixed rate assets in the portfolio managed by our external investment managers were 5.1% both at June 30, 2005 and 2004. Yields on the majority of the floating rate assets are indexed to LIBOR. The yield on our floating rate assets increased to 4.0% from 2.5%, and the yield on our cash and cash equivalents increased to 2.2% from 1.0%. During the six months ended June 30, 2005 the change in value of embedded derivatives amounted to a loss of $16.6 million. This change in value arose principally because of contracts written on a modified coinsurance basis assumed in the ING acquisition, a decrease in risk free interest rates and widening of credit spreads. The change in value of the embedded derivatives during the six months ended June 30, 2004 amounted to a gain of $6.0 million. The gain arose from an increase in risk free interest rates. Claims and other policy benefits increased by 258% to $637.8 million during the six months ended June 30, 2005 from $178.1 million in the same period in 2004. The increase is a result of the ING acquisition, 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 24 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) reasonably predictable over a period of many years, but are less predictable over shorter periods and are subject to fluctuation from quarter to quarter. During the six months ended June 30, 2005 we experienced higher than expected mortality which resulted in higher claims of approximately $14.0 million. A greater than expected number of large claims were incurred. In addition during the period we reviewed and revised estimates in respect of certain reserves resulting in a decrease in claims and other policy benefits of $4.9 million. For the six months ended June 30, 2005, interest credited to interest sensitive contract liabilities increased by $12.7 million or 26% to $62.4 million from $49.7 million in the same period in 2004. The 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 $3.3 billion at June 30, 2005 in comparison with $3.0 billion at June 30, 2004. During the six months ended June 30, 2005 acquisition costs and other insurance expenses increased by $143.6 million or 220% to $208.8 million from $65.2 million in the same period in 2004. The increase was a result of the ING acquisition and the increased life and annuity business in our Life Reinsurance North America Segment as discussed above. For the six months ended June 30, 2005, acquisition costs include letters of credit costs of $14.5 million in respect of business assumed in the ING acquisition. During this period, acquisition costs also include expenses of $2.2 million in respect of revised reporting from a ceding company on a fixed annuity contract. 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 profit in respect of the contracts. Operating expenses increased by 140% to $21.9 million during the six months ended June 30, 2005 from $9.1 million in the same period in 2004. The increase is principally the result of the ING acquisition. These costs include the cost of the transition services agreement with ING that amounted to $2.7 million in the six month period ended June 30, 2005. Additional personnel costs have also been incurred as we continue to grow our business. We have increased our headcount principally because of hiring additional employees in respect of the acquisition of the ING business. Total employees in this segment have grown from 82 at June 30, 2004 to 197 at June 30, 2005. Operating costs in the six months ended June 30, 2004 inlcuded $1.7 million in respect of transition services paid to ERC as part of the acquisition of Scottish Re Life Corporation. The costs of the collateral finance facilities completed in June 2004 and February 2005, amounted to $16.6 million in the six months ended June 30, 2005. These facilities are described in Note 8 to the Consolidated Financial Statements. Interest expense in this segment arises on the trust preferred securities. The increase in interest expense to $5.4 million for the six months ended June 30, 2005 from $1.6 million in the same period in 2004, results from the issuance of an additional $82.0 million of these securities in May and December 2004. 25 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Life Reinsurance International
Three months ended Six months ended ---------------------- ----------------------- June 30, June 30, June 30, June 30, 2005 2004 2005 2004 ---------- ---------- ---------- ----------- Premiums earned ..................... $ 27,938 $ 28,708 $ 55,315 $ 56,453 Investment income, net .............. 2,352 3,574 4,942 5,722 Realized gains (losses) ............. 88 (189) 585 (340) -------- -------- -------- -------- Total revenues ...................... 30,378 32,093 60,842 61,835 -------- -------- -------- -------- Claims and other policy benefits .... 17,894 20,503 36,979 40,077 Acquisition costs and other insurance expenses, net ....................... 3,975 1,334 7,612 3,983 Operating expenses .................. 7,285 3,757 13,134 8,166 -------- -------- -------- -------- Total benefits and expenses ......... 29,154 25,594 57,725 52,226 -------- -------- -------- -------- Income before income taxes .......... $ 1,224 $ 6,499 $ 3,117 $ 9,609 ======== ======== ======== ========
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 June 30, 2005 decreased 3% to $27.9 million in comparison with $28.7 million in the same period in 2004. During 2004, we reviewed the pricing and profitability of all contracts written in this segment. As a result we decided not to renew treaties which did not meet our return hurdles. Premiums earned in the quarter ended June 30, 2004 included $1.3 million due to the recapture of a portfolio by a ceding company. Investment income in the quarter ended June 30, 2005 decreased to $2.4 million compared to $3.6 million for the same period in 2004. Investment income in the three months ended June 30, 2004 included $1.1 million in respect of the recapture of a portfolio of business by a ceding company. Claims and other policy benefits in our Life Reinsurance International Segment decreased by 13% to $17.9 million in the quarter ended June 30, 2005 from $20.5 million in the same quarter in 2004. During the quarter ended June 30, 2004 we incurred claims and other policy benefits of $1.8 million in respect of the recapture described above. During the quarter ended June 30, 2005 we received additional information from ceding companies which resulted in a review of policy benefits on certain lines of business and a resultant decrease of $6.0 million in claims and other policy benefits. During this quarter we also incurred $2.2 million in respect of large claims. Our targeted maximum corporate retention per life in our Life Reinsurance International Segment is $250,000. However, in certain circumstances, we retain amounts in excess of $250,000. In addition, we maintain catastrophe cover on our entire retained life reinsurance business, which effective January 1, 2005, provides reinsurance for losses of $57.5 million in excess of $2.5 million, and provides protection for terrorism, nuclear, biological and chemical risks. During the quarter ended June 30, 2005, acquisition costs and other insurance expenses increased by $2.6 million or 198% to $4.0 million from $1.3 million in the same period in 2004. Acquisition costs include the amortization of the present value of in-force business. In the quarter ended June 30, 2004 we recognized commission income of $1.8 million arising from a run-off book of business. 26 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Operating expenses have increased by 94% for the quarter ended June 30, 2005 to $7.3 million from $3.8 million in the same period in 2004. During the quarter ended June 30, 2005 we incurred $1.6 million in consulting fees for the review, design and implementation of processes and controls for our financial statement close process. The remaining increase is principally related to personnel costs, including recruitment costs, professional expenses and depreciation of new computer systems. The number of employees in this segment has grown from 56 at June 30, 2004 to 67 at June 30, 2005. Additional resources have been added as we continue to strive to grow our business in existing and prospective markets. Premiums earned in our Life Reinsurance International Segment during the six months ended June 30, 2005 decreased 2% to $55.3 million in comparison with $56.5 million in the same period in 2004. During 2004, we reviewed the pricing and profitability of all contracts written in this segment. As a result we decided not to renew treaties which did not meet our return hurdles. Premiums earned in the six months ended June 30, 2004 included $1.3 million due to the recapture of a portfolio by a ceding company. Investment income during the six months ended June 30, 2005 decreased to $4.9 million compared to $5.7 million for the same period in 2004. Investment income in the six months ended June 30, 2004 included $1.1 million in respect of the recapture of a portfolio of business by a ceding company. Claims and other policy benefits in our Life Reinsurance International Segment decreased by 8% to $37.0 million in the six months ended June 30, 2005 from $40.1 million in the same period in 2004. During the six month period ended June 30, 2004 we recognized claims and other policy benefits of $1.8 million in respect of the recapture of business described above. During the six month period ended June 30, 2005 we received additional information from ceding companies that resulted in a review of policy benefits on certain lines of business and a resultant decrease of $6.0 million in claims and other policy benefits. During the six months ended June 30, 2005 we also incurred $2.2 million in respect of large claims. During the six month period ended June 30, 2005 acquisition costs and other insurance expenses increased by $3.6 million or 91% to $7.6 million from $4.0 million in 2004 due to the payment of profit commissions. During the six month period ended June 30, 2004 we recognized a commission due of $1.8 million arising from a run-off book of business. The remainder of the increase is due to profit commission payments. During the six months ended June 30, 2005 operating expenses increased by 61% to $13.1 million from $8.2 million in the same period in 2004. During the six months ended June 30, 2005 we incurred $1.6 million in consulting fees for the review, design and implementation of processes and controls for our financial statement close process. The remaining increase is principally related to personnel costs, including recruitment costs, professional expenses and depreciation of new computer systems. The number of employees in this segment has grown from 56 at June 30, 2004 to 67 at June 30, 2005. Additional resources have been added as we continue to strive to grow our business in existing and prospective markets. 27 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Corporate & Other
Three months ended Six months ended ---------------------- ---------------------- June 30, June 30, June 30, June 30, 2005 2004 2005 2004 ---------- ---------- ---------- ---------- Investment income, net .............. $ 246 $ 264 $ 604 $ 811 Fee income .......................... 778 941 1,502 1,791 Realized gains (losses) ............. (1,362) 54 (6) (66) --------- --------- --------- --------- Total revenues ...................... (338) 1,259 2,100 2,536 --------- --------- --------- --------- Acquisition costs and other insurance expenses, net ............. 514 554 1,033 1,239 Operating expenses .................. 8,994 3,002 16,041 6,484 Collateral finance facilities expense ............................. 1,373 - 2,608 - Interest expense .................... 2,156 2,057 5,042 4,148 --------- --------- --------- --------- Total benefits and expenses ......... 13,037 5,613 24,724 11,871 --------- --------- --------- --------- Loss before income taxes ............ $(13,375) $ (4,354) $(22,624) $ (9,335) ========= ========= ========= =========
The Corporate & Other Segment is comprised of revenues and expenses not included elsewhere and includes corporate overhead. 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 will increase or decrease as we raise capital and deploy it in our operating segments. 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 200% to $9.0 million for the quarter ended June 30, 2005 and by 147% to $16.0 million during the six months ended June 30, 2005. The increases are principally due to increased personnel costs, including recruitment and relocation costs, as we continue to grow our business, the costs of option and restricted stock awards granted under our 2004 ECP and consulting fees incurred in respect of the implementation of the requirements of the Sarbanes-Oxley Act of 2002 on the business acquired from ING. The collateral finance facilities expense consists of the put premium and amortization of facility costs on the Stingray Pass-Through Trust described in Note 13 to the Consolidated Financial Statements. This facility has not been utilized and accordingly these costs have not been allocated to our operating segments. Interest expense includes interest on the 4.5% senior convertible notes and the 1.0% dividend payable on the convertible preferred shares of our Hybrid Capital Units. In addition interest expense in the six months ended June 30, 2005 included $0.8 million in interest expense on the Cypress Notes. These were converted into Class C Warrants on April 7, 2005. 28 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Realized gains (losses) During the quarter ended June 30, 2005 realized gains amounted to $0.9 million in comparison with realized losses of $1.7 million in the same period in 2004. During the quarter ended June 30, 2005, we recognized losses of $1.2 million in respect of impairments. Included in realized losses is a $2.0 million realized loss resulting from the mark to market of an interest rate swap. This derivative has not been designated as a hedge and, accordingly, changes in fair value are recorded in the determination of net income. These losses were offset by net realized gains on the sales of fixed maturity and preferred stock investments. During the quarter ended June 30, 2004 we recognized impairment losses of $1.2 million. During the six months ended June 30, 2005 realized gains amounted to $4.2 million in comparison with realized losses of $0.3 million in the same period in 2004. During the six months ended June 30, 2005 we recognized losses of $2.3 million in respect of impairments. These losses were offset by net realized gains on the sales of fixed maturity and preferred stock investments. During the six months ended June 30, 2004 we recognized impairment losses of $2.0 million. These losses were 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 Emerging Issues Task Force 99-20: "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interest in Securitized Assets", a decline in fair value below "amortized cost" basis is considered to be an "other than temporary impairment" whenever there is an adverse change in the amount or timing of cash flow to be received, regardless of the resulting yield, unless the decrease is solely a result of changes in market interest rates. The following tables provide details of the sales proceeds, realized loss, the length of time the security had been in an unrealized loss position and reason for sale for securities sold at a loss during the periods ended June 30, 2005 and 2004.
Three months ended June 30, 2005 ------------------------------------------------------------------------------------- Credit Concern Relative Value Tactical Total ----------------- ---------------- ---------------- -------------------- Days Proceeds Loss Proceeds Loss Proceeds Loss Proceeds Loss -------- ---- -------- ---- -------- ---- -------- ---- (dollars in thousands) 0-90 ........ $ 17,469 $ (698) $ 7,185 $ (71) $ 31,192 $ (355) $ 55,846 $ (1,124) 91-180 ...... 65 (57) 5,432 (16) - - 5,497 (73) 181-270 ..... - - 197 (3) - - 197 (3) Greater than 270 ....... - - 365 (1) - - 365 (1) -------- -------- -------- ------- -------- -------- -------- --------- Total ....... $ 17,534 $ (755) $ 13,179 $ (91) $ 31,192 $ (355) $ 61,905 $ (1,201) ======== ======== ======== ======= ======== ======== ======== =========
29 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Three months ended June 30, 2004 -------------------------------------------------------------------------------- Credit Concern Relative Value Tactical Total ----------------- ---------------- ---------------- ----------------- Days Proceeds Loss Proceeds Loss Proceeds Loss Proceeds Loss -------- ---- -------- ---- -------- ---- -------- ----- (dollars in thousands) 0-90 ....... $ - $ - $36,237 $(1,118) $56,567 $(1,065) $92,804 $(2,183) 91-180 ..... 1,695 (89) 736 (30) 50 (1) 2,481 (120) 181-270 .... - - 127 (6) - - 127 (6) Greater than 270 ....... - - - - 1,699 (16) 1,699 (16) ------- -------- ------- -------- ------- -------- ------- -------- Total ...... $ 1,695 $ (89) $37,100 $(1,154) $58,316 $(1,082) $97,111 $(2,325) ======= ======== ======= ======== ======= ======== ======= ======== Six months ended June 30, 2005 -------------------------------------------------------------------------------- Credit Concern Relative Value Tactical Total ----------------- ---------------- ---------------- ------------------ Days Proceeds Loss Proceeds Loss Proceeds Loss Proceeds Loss -------- ---- -------- ---- -------- ---- -------- ----- (dollars in thousands) 0-90 ....... $ 19,621 $ (1,000) $ 18,809 $ (160) $125,729 $ (963) $164,159 $ (2,123) 91-180 ..... 355 (83) 9,415 (27) - - 9,770 (110) 181-270 .... 981 (51) 197 (3) 81 (1) 1,259 (55) Greater than 270 ....... 54 (11) 365 (1) - - 419 (12) -------- --------- -------- -------- -------- -------- -------- -------- Total ...... $ 21,011 $ (1,145) $ 28,786 $ (191) $125,810 $ (964) $175,607 $ (2,300) ======== ========= ======== ======== ======== ======== ======== ========= Six months ended June 30, 2004 ------------------------------------------------------------------------------------- Credit Concern Relative Value Tactical Total ----------------- ---------------- ---------------- ----------------- Days Proceeds Loss Proceeds Loss Proceeds Loss Proceeds Loss -------- ---- -------- ---- -------- ---- -------- ----- (dollars in thousands) 0-90 ....... $ - $ - $ 36,736 $ (1,129) $ 66,113 $ (1,089) $102,849 $ (2,218) 91-180 ..... 1,804 (90) 21,328 (251) 4,302 (4) 27,434 (345) 181-270 .... 3,216 (106) 367 (14) 127 (1) 3,710 (121) Greater than 270 ....... 5,060 (549) 488 (10) 1,698 (17) 7,246 (576) -------- -------- -------- --------- -------- --------- -------- --------- Total ...... $ 10,080 $ (745) $ 58,919 $ (1,404) $ 72,240 $ (1,111) $141,239 $ (3,260) ======== ======== ======== ========= ======== ========= ======== =========
Income Taxes We determine our income tax provision in accordance with SFAS 109 "Accounting for Income Taxes". The consolidated income tax expense or benefit is determined by applying the income tax rate for each subsidiary to its pre-tax income or loss. These tax rates for our subsidiaries vary from jurisdiction to jurisdiction and range from zero to approximately 39%. Income tax expense arises in periods where taxes on subsidiaries with pre-tax income exceeds the tax benefit on subsidiaries with pre-tax losses. An income tax benefit arises in periods where the tax benefit on subsidiaries with pre-tax losses exceeds the taxes on subsidiaries with pre-tax income. Our effective tax rate in each reporting period is determined by dividing the net tax benefit (expense) by our pre-tax income or loss. The change in our effective tax rate is due primarily to the amount in any reporting period of pre-tax earnings attributable to different subsidiaries (which changes from time to time), each of which may have different tax rates. The change in our 30 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) effective tax rate is due primarily to the relationship of pre-tax income or losses in different jurisdictions. The tax benefit for the three months ended June 30, 2005 was $8.2 million. Of this amount, $3.1 million related to tax benefits arising on realized gains and losses and the change in value of embedded derivatives. Excluding this amount and also excluding the tax benefit of the higher than expected claims in the Reinsurance North America Segment of approximately $2.8 million, the tax benefit for the three month period ended June 30, 2005 amounted to approximately $2.3 million. The tax benefit for the six month period ended June 30, 2005 was $8.6 million. Of this amount, $0.8 million related to tax benefits arising on realized gains and losses and the change in value of embedded derivatives. Excluding this amount and also excluding the tax benefit of the higher than expected claims in the Reinsurance North America Segment of approximately $2.8 million, the tax benefit for the six month period ended June 30, 2005 amounted to approximately $5.0 million. Financial Condition Investments At June 30, 2005, the portfolio controlled by us consisted of $5.5 billion of fixed income securities, preferred stock and cash. The majority of these assets are traded; however, $437.2 million represent investments in private securities. Of the total portfolio controlled by us, $5.2 billion represented the fixed income and preferred stock portfolios managed by external investment managers and $296.0 million represented other cash balances. At December 31, 2004, the portfolio controlled by us consisted of $4.3 billion of fixed income securities, preferred stock and cash. The majority of these assets are traded; however, $330.3 million represented investments in private securities. Of the total portfolio, $3.5 billion represented the fixed income and preferred stock portfolio managed by external investment managers and $752.5 million represented other cash balances. At June 30, 2005, the average Standard & Poor's rating of that portfolio was "AA-", the average effective duration was 3.6 years and the average book yield was 4.6% as compared with an average rating of "AA-", an average effective duration 3.8 years and an average book yield of 4.2% at December 31, 2004. At June 30, 2005, the unrealized appreciation on investments, net of tax, was $38.5 million as compared with unrealized appreciation on investments, net of tax, of $13.7 million at December 31, 2004. The unrealized appreciation (depreciation) 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 June 30, 2005, 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, to take into account our investment guidelines. We believe that this customized index is a more relevant benchmark for our portfolio's performance. 31 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) June 30, 2005 ------------- Portfolio performance............................. 2.59% Customized index.................................. 2.69% Lehman Brothers Global Bond Index................. -0.5 % S&P 500........................................... 1.37% The following table presents the investment portfolio (market value) credit exposure by category as assigned by Standard & Poor's.
June 30, 2005 December 31, 2004 ------------------- ------------------- Ratings $ in $ in millions % millions % ---------- ------ --------- ------ AAA.................................... $ 2,141.4 38.8% 1,754.2 41.1% AA..................................... 751.7 13.6 451.1 10.5 A...................................... 1,642.6 29.8 1,284.0 30.1 BBB.................................... 954.8 17.3 750.5 17.6 BB or below............................ 28.0 0.5 30.3 0.7 --------- ------ --------- ------ Total.................................. $ 5,518.5 100.0% $ 4,270.1 100.0% ========= ====== ========= ======
The following table illustrates the investment portfolio (market value) sector exposure.
June 30, 2005 December 31, 2004 ------------------- ------------------ Sector $ in $ in millions % millions % ---------- ------ ---------- ------ U.S. Treasury securities and U.S. government agency obligations..... $ 81.5 1.5% $ 89.5 2.1% Corporate securities................. 1,926.3 34.9 1,618.3 37.9 Municipal bonds...................... 38.2 0.7 20.8 0.5 Mortgage and asset backed securities. 3,049.0 55.3 1,663.8 39.0 Preferred stock...................... 154.5 2.8 125.2 2.9 --------- ------ --------- ------ 5,249.5 95.2 3,517.6 82.4 Cash................................. 269.0 4.8 752.5 17.6 --------- ------ --------- ------ Total................................ $ 5,518.5 100.0% $ 4,270.1 100.0% ========= ====== ========= ======
The data in the tables above exclude other investments and assets held by ceding insurers under modified coinsurance agreements. At June 30, 2005, our fixed income portfolio had 2,363 positions and $13.2 million of gross unrealized losses. No single position had an unrealized loss greater than $0.4 million. There were $79.2 million of unrealized gains on the remainder of the portfolio. There were 50 private securities in an unrealized loss position totaling $1.0 million. At December 31, 2004, our fixed income portfolio had 1,773 positions and $12.0 million of gross unrealized losses. No single position had an unrealized loss greater than $0.9 million. There were $42.1 million of unrealized gains on the remainder of the portfolio. There were 44 private securities in an unrealized loss position totaling $0.7 million. 32 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 June 30, 2005 and December 31, 2004 are presented in the tables below.
June 30, 2005 ---------------------------------------------- Estimated Unrealized Fair Value % Loss % ------------ ------ ----------- ------- Dollars in thousands Corporate securities........................ $ 390,236 22.4% $ (3,737) 28.3% Other structured securities................. 857,252 49.3 (4,698) 35.6 Collateralized mortgage obligations......... 291,120 16.7 (1,631) 12.4 Governments................................. 43,035 2.5 (394) 3.0 Municipal bonds............................. 7,171 0.4 (104) 0.8 Preferred stock ............................ 56,027 3.2 (1,428) 10.8 Mortgage backed securities.................. 95,583 5.5 (1,199) 9.1 ------------ ------ ---------- ------- Total....................................... $ 1,740,424 100.0% $ (13,191) 100.0% ============ ====== ========== ======= December 31, 2004 ---------------------------------------------- Estimated Unrealized Fair Value % Loss % ------------ ------ ----------- ------- Dollars in thousands Other structured securities................... $ 339,441 33.3% $ (5,526) 45.9% Corporate securities.......................... 292,441 28.7 (2,834) 23.5 Collateralized mortgage obligations........... 229,168 22.5 (1,925) 16.0 Governments................................... 51,123 5.0 (139) 1.2 Municipal..................................... 12,130 1.2 (158) 1.3 Preferred stock............................... 35,462 3.5 (641) 5.3 Mortgage backed securities.................... 58,670 5.8 (825) 6.8 ---------- ------ ---------- ------ Total......................................... $1,018,435 100.0% $ (12,048) 100.0% ========== ====== ========== ======
The following tables provide information on the length of time securities have been continuously in an unrealized loss position:
June 30, 2005 -------------------------------------------------------------------- Estimated Unrealized Days Book Value % Fair Value % Loss % ---- ---------- ----- ---------- ----- ---------- ----- Dollars in thousands 0-90.............. $ 758,014 43.2% $ 755,464 43.4% $ (2,550) 19.3% 91-180............ 490,197 28.0 486,175 27.9 (4,022) 30.5 181-270........... 197,032 11.2 195,295 11.2 (1,737) 13.2 271-360........... 73,085 4.2 72,707 4.2 (378) 2.9 Greater than 360.. 235,287 13.4 230,783 13.3 (4,504) 34.1 ----------- ------ ---------- ------ ---------- ------ Total............. $ 1,753,615 100.0% $1,740,424 100.0% $ (13,191) 100.0% =========== ====== ========== ====== ========== ======
33 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
December 31, 2004 -------------------------------------------------------------------- Estimated Unrealized Days Book Value % Fair Value % Loss % ---- ---------- ----- ---------- ----- ---------- ----- Dollars in thousands 0-90 ............. $ 471,909 45.8% $ 468,924 46.0% $ (2,985) 24.8% 91-180............ 154,062 14.9 153,237 15.0 (825) 6.8 181-270........... 231,798 22.5 229,026 22.5 (2,772) 23.0 271-360........... 86,468 8.4 84,142 8.3 (2,326) 19.3 Greater than 360.. 86,246 8.4 83,106 8.2 (3,140) 26.1 ----------- ------ ----------- ------ ---------- ------ Total ............ $ 1,030,483 100.0% $ 1,018,435 100.0% $ (12,048) 100.0% =========== ====== =========== ====== ========== ======
Unrealized losses on securities that have been in an unrealized loss position for periods greater than 2 years amounted to $0.6 million at June 30, 2005 and $2.1 million at December 31, 2004. Unrealized losses on non-investment grade securities amounted to $1.1 million and $2.1 million at June 30, 2005 and December 31, 2004, respectively. Of these amounts, non-investment grade securities with unrealized losses of $0.5 million at June 30, 2005 and $1.0 million at December 31, 2004 had been in an unrealized loss position for a period greater than one year, of which $0.2 million at June 30, 2005 and $1.0 million at December 31, 2004 had been in an unrealized loss position for periods greater than 2 years. The following tables illustrate the industry analysis of the unrealized losses at June 30, 2005 and December 31, 2004.
June 30, 2005 --------------------------------------------------------------------- Amortized Estimated Unrealized Cost % Fair Value % Loss % ---------------- ----- ------------ ------ ----------- ----- Industry Dollars in thousands Mortgage and asset backed securities...... $ 1,251,483 71.4% $ 1,243,955 71.5% $ (7,528) 57.1% Banking.................. 84,544 4.8 83,593 4.8 (951) 7.2 Communications........... 60,077 3.4 59,053 3.4 (1,024) 7.8 Financial Other.......... 40,422 2.3 39,916 2.3 (506) 3.8 Finance Companies ....... 35,286 2.0 34,982 2.0 (304) 2.3 Consumer Noncyclical .... 34,321 2.0 33,998 2.0 (323) 2.5 Insurance................ 27,038 1.5 26,745 1.5 (293) 2.2 Other.................... 220,444 12.6 218,182 12.5 (2,262) 17.1 ----------- ------ ----------- ------ ---------- ------ Total.................... $ 1,753,615 100.0% $ 1,740,424 100.0% $ (13,191) 100.0% =========== ====== =========== ====== ========== ======
34 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
December 31, 2004 -------------------------------------------------------------------- Amortized Estimated Unrealized Cost % Fair Value % Loss % ---------------- ----- ------------ ------ ----------- ----- Industry Dollars in thousands Mortgage and asset backed securities.... $ 635,556 61.7% $ 627,279 61.6% $ (8,277) 68.7% Banking .............. 89,131 8.7 88,371 8.7 (760) 6.3 Insurance ............ 30,229 2.9 29,831 2.9 (398) 3.3 Financial Other ...... 30,081 2.9 29,645 2.9 (436) 3.6 Brokerage ............ 25,071 2.4 24,893 2.4 (178) 1.5 Financial Companies... 24,293 2.4 24,080 2.4 (213) 1.8 Communications ....... 16,734 1.6 16,503 1.6 (231) 1.9 Other ................ 179,388 17.4 177,833 17.5 (1,555) 12.9 ---------- ------ ---------- ------ ----------- ------ Total ................ $1,030,483 100.0% $1,018,435 100.0% $ (12,048) 100.0% ========== ====== ========== ====== =========== ======
The expected maturity dates of securities that have an unrealized loss at June 30, 2005 and December 31, 2004 are presented in the table below.
June 30, 2005 --------------------------------------------------------------------- Amortized Estimated Unrealized Maturity Cost % Fair Value % Loss % - -------- ---------------- ----- ------------ ------ ----------- ----- Dollars in thousands Due in one year or less....... $ 191,154 10.8% $ 189,746 10.8% $ (1,408) 10.7% Due in one through five years. 1,137,765 64.9 1,130,480 65.0 (7,285) 55.2 Due in five through ten years. 320,237 18.3 318,156 18.3 (2,081) 15.8 Due after ten years........... 104,459 6.0 102,042 5.9 (2,417) 18.3 ----------- ------ ----------- ------ ---------- ------ Total......................... $ 1,753,615 100.0% $ 1,740,424 100.0% $ (13,191) 100.0% =========== ====== =========== ====== ========== ====== ---------------------------------------------------------------------- December 31, 2004 ---------------------------------------------------------------------- Estimated Unrealized Maturity Book Value % Fair Value % Loss % -------- ---------------- ----- ------------ ------ ----------- ----- Dollars in thousands Due in one year or less...... $ 162,787 15.8% $ 160,087 15.7% $ (2,700) 22.4% Due in one through five years 532,436 51.7 527,660 51.8 (4,776) 39.6 Due in five through ten years 256,319 24.9 252,939 24.9 (3,380) 28.1 Due after ten years.......... 78,941 7.6 77,749 7.6 (1,192) 9.9 ----------- ------ ---------- ------ ---------- ------ Total........................ $ 1,030,483 100.0% $1,018,435 100.0% $ (12,048) 100.0% =========== ====== ========== ====== ========== ======
At June 30, 2005, there were 921 securities with unrealized loss positions all of which were less than $1.0 million. At December 31, 2004, there were 647 securities with unrealized loss positions, all of which were less than $1.0 million. At June 30 2005, there was one security with fair value 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 this security amounted to $0.2 million. At December 31, 2004, there were 2 securities 35 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 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 $1.1 million and the largest unrealized loss position was $0.9 million. Funds withheld at interest Funds withheld at interest arise on contracts written under modified coinsurance agreements and funds withheld coinsurance agreements. 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 us or 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 June 30, 2005 and December 31, 2004, funds withheld at interest were in respect of 6 contracts with 4 ceding companies. At June 30, 2005, we had three contracts with Lincoln National Insurance Company that accounted for $1.3 billion or 68% of the funds withheld balance. At December 31, 2004, these contracts amounted to $1.3 billion or 63% of the funds withheld balance. Additionally we have one contract with Security Life of Denver International that accounted for $0.6 billion or 29% of the funds withheld balances at June 30, 2005 and $0.5 billion or 27% of funds withheld balances at December 31, 2004. The remaining 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 with the amounts owed to us by the ceding company. Reserves for future policy benefits and interest sensitive contract liabilities relating to these contracts amounted to $2.0 billion at both June 30, 2005 and December 31, 2004, respectively. At June 30, 2005, funds withheld at interest totaled $1.9 billion with an average rating of "A", an average effective duration of 5.2 years and an average book yield of 5.8% as compared with an average rating of "A+", an average effective duration of 3.9 years and an average book yield of 5.2% at December 31, 2004. The change in rating, duration and yield reflected the deployment of cash in 2005 into fixed income investments. The funds withheld are fixed income investments and include marketable securities, commercial mortgages, private placements and cash. The market value of the funds withheld amounted to $1.9 billion and $2.1 billion at June 30, 2005 and at December 31, 2004, respectively. The investment objectives for these arrangements are included in the agreements. The primary objective is to maximize current income, consistent with the long-term preservation of capital. The overall investment strategy is executed within the context of prudent asset/liability management. The investment guidelines permit investments in fixed maturity securities, and include marketable securities, commercial mortgages, private placements and cash. The maximum percentage of below investment grade securities is 10% and other guidelines limit risk, ensure issuer and industry diversification as well as maintain liquidity and overall portfolio credit quality. 36 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 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.
June 30, 2005 December 31, 2004 ------------------------- ------------------------ Ratings $ in millions % $ in millions % ------- ----------------- ------ --------------- ------- AAA.............................. $ 444.1 22.9% $ 692.6 33.3% AA............................... 91.1 4.7 85.0 4.1 A................................ 558.4 28.8 527.7 25.4 BBB.............................. 637.4 32.9 579.7 27.9 BB or below...................... 82.8 4.3 63.3 3.1 --------- ------ --------- ------ 1,813.8 93.6 1,948.3 93.8 Commercial mortgage loans........ 125.9 6.4 129.9 6.2 --------- ------ --------- ------ Total............................ $ 1,939.7 100.0% $ 2,078.2 100.0% ========= ====== ========= ======
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.
June 30, 2005 December 31, 2004 ------------------------- ------------------------ Sector $ in millions % $ in millions % ------- ----------------- ------ --------------- ------- U.S. Treasury securities and U.S. government agency obligations.................. $ 31.9 1.6% $ 39.7 1.9% Corporate securities........... 1,237.5 63.8 1,096.3 52.8 Municipal bonds................ 30.3 1.6 25.2 1.2 Mortgage and asset backed securities................... 509.4 26.3 314.7 15.1 Commercial mortgage loans...... 125.9 6.5 129.9 6.3 Cash........................... 4.7 0.2 472.4 22.7 ---------- ------ --------- ------ Total............................. $ 1,939.7 100.0% $ 2,078.2 100.0% ========== ====== ========= ======
Liquidity and Capital Resources Cash flow Cash provided by operating activities amounted to $183.0 million in the first six months of 2005 in comparison with cash of $27.6 million used by operating activities in the same period of 2004. 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. In 2004, operating cash flow was impacted by settlement of a tax liability of approximately $23.0 million. This outflow is not expected to recur. This liability resulted from actions taken by the former owner of Scottish Re Life Corporation immediately prior to its acquisition by us in December 2003. When adjusted for this payment, cash flows used in operations in the first six months of 2004 were $4.6 million compared to cash provided by operations of $183.0 million in the same period of 2005. The increase in cash flow from operating activities is principally due to the ING acquisition. 37 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) We believe cash flows from operations will be positive over time. However, they may be positive or negative in any one period depending on the amount of new life reinsurance business written, the level of ceding commissions paid in connection with writing that business and the level of renewal premiums earned in the period 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 At June 30, 2005, total capitalization was $1.5 billion compared to $1.3 billion at December 31, 2004. Total capitalization is analyzed as follows:
June 30, 2005 December 31, 2004 ------------- ----------------- (dollars in thousands) Shareholders' equity...................... $ 1,078,887 $ 862,674 Mezzanine equity.......................... 142,753 142,449 Long-term debt............................ 244,500 244,500 7% Convertible Junior Subordinated Notes.. - 41,282 ---------------- --------------- Total..................................... $ 1,466,140 $ 1,290,905 ================ ===============
The increase in shareholders' equity is principally due to the net proceeds of $120.8 million from the offering of perpetual preferred shares, net income for the six months ended June 30, 2005 of $35.0 million, conversion of the 7.0% Convertible Junior Subordinated Notes to ordinary shares of $42.0 million, less dividends paid of $4.4 million and other comprehensive income of $18.4 million. The other comprehensive income consists of the unrealized appreciation on investments and the cumulative translation adjustment arising from the translation of our balance sheet at exchange rates as of June 30, 2005. On April 7, 2005, our shareholders approved amendments to our Articles of Association permitting certain affiliates of The Cypress Group to own up to 24.9% of our ordinary shares and the issuance of ordinary shares to the Cypress Entities upon the conversion of the 7.0% Convertible Junior Subordinated Notes. With this shareholder approval, the notes and accrued interest thereon were exchanged for Class C Warrants to purchase 2,170,896 ordinary shares. On May 4, 2005, the Cypress Entities obtained insurance regulatory approval in Delaware and the United Kingdom to hold more than 10% of our outstanding shares. On May 7, 2005 the Class C Warrants were exercised and converted into 5,377,327 ordinary shares. The Cypress Entities now collectively hold 9,330,510 ordinary shares, approximately 20.6% of our issued and outstanding ordinary shares. On June 28, 2005, we priced our offering of 5,000,000 non-cumulative perpetual preferred shares and entered into a purchase agreement relating to the shares pursuant to which the underwriters of the offering agreed to purchase the shares. Gross proceeds were $125.0 million and related expenses were $4.2 million. Settlement of the net proceeds occurred on July 6, 2005. Dividends on the perpetual preferred shares are non-cumulative. During any dividend period, unless the full dividends for the current dividend period on all outstanding perpetual preferred shares have been declared or paid no dividend shall be paid or declared on our ordinary shares and no ordinary shares or other junior shares shall be purchased, redeemed or otherwise acquired for consideration. Declaration 38 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) of dividends on the perpetual preferred shares is prohibited if we fail to meet specified capital adequacy, net income or shareholders' equity levels. The perpetual preferred shares do not have any maturity date and we are not required to redeem the shares. The perpetual preferred shares are not redeemable prior to July 2010. Subsequent to July 2010, the perpetual preferred shares will be redeemable at our option, in whole or in part, at a redemption price equal to $25.00 per share, plus any declared and unpaid dividends at the redemption date, without accumulation of any undeclared dividends. The perpetual preferred shares are unsecured obligations, subordinated to all indebtedness that does not by its terms rank pari passu or junior to the perpetual preferred shares. The holders of the perpetual preferred shares have no voting rights except with respect to certain fundamental changes in the terms of the perpetual preferred shares and in the case of certain dividend non-payments. The perpetual preferred shares are rated "BB-" by Standard & Poor's Ratings Services, "Ba1" by Moody's Investors Service, "BB+" by Fitch Ratings and "BB" by A.M. Best Company. Long-term debt consists of:
June 30, 2005 December 31, 2004 ---------------------- ---------------------- (dollars in thousands) (dollars in thousands) 4.5% senior convertible notes due 2022........ $ 115,000 $ 115,000 Capital securities due 2032................... 17,500 17,500 Preferred trust securities due 2033........... 20,000 20,000 Trust preferred securities due 2033........... 10,000 10,000 Trust preferred securities due 2034........... 32,000 32,000 Trust preferred securities due 2034........... 50,000 50,000 --------------- --------------- $ 244,500 $ 244,500 =============== ===============
During the six months ended June 30, 2005, we paid quarterly dividends totaling $4.4 million or $0.10 per share on our ordinary shares and Class C Warrants. Collateral 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 us or an affiliate or by ceding a portion of the transaction to another company within the group or an unrelated reinsurance company, in which case 39 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 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 and the District of Columbia. When Scottish Re (U.S.), Inc. enters into a reinsurance transaction with a customer domiciled in a state in which it is not a licensed, accredited, authorized or approved reinsurer, it likewise must provide a reserve credit trust or letter of credit; 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 otherwise be unavailable or would be available only on significantly less attractive terms. We have a number of facilities in place to provide the collateral required for our reinsurance business. Credit Facilities In 2004, we closed a collateral 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. The initial scheduled maturity date is March 31, 2009, which is subject to extension by agreement of the parties. In accordance with FIN 46 we are considered to hold a beneficial interest in 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 is reflected in collateral finance facilities expense. The creditors of the variable interest entity have no recourse against our general assets. On July 18, 2005, Scottish Annuity & Life Insurance Company (Cayman) Ltd., Scottish Re (Dublin) Limited, Scottish Re (U.S.), Inc., and Scottish Re Limited closed an unsecured $200.0 million 3-year credit facility with a syndicate of banks led by Bank of America, N.A. The facility may be increased, at our option, to an aggregate principal amount of $300.0 million. The facility provides capacity for borrowing and extending letters of credit. The facility is a direct financial obligation of each of the borrowers, however, Scottish Annuity & Life Insurance Company (Cayman) Ltd. has guaranteed the payment of obligations of Scottish Re (Dublin) Limited, Scottish Re (U.S.), Inc, and Scottish Re Limited. The facility requires that Scottish Annuity & Life Insurance Company (Cayman) Ltd. maintain a minimum amount of shareholder's equity and uncollateralized assets of 1.2 times borrowings. In addition, the facility requires that we maintain a minimum amount of shareholder's equity and debt to capitalization ratio of less than 30%. Our failure to comply with the requirements of the credit facility 40 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) would, subject to grace periods, result in an event of default and we would be required to repay any outstanding borrowings. Outstanding letters of credit under the former facility and its successor amounted to $35.8 million at June 30, 2005. 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 June 30, 2005, there were no borrowings under this agreement. ING Collateral Arrangement ING is obligated to maintain collateral for the Regulation XXX and AXXX reserve requirements of the business we acquired from them for the duration of such requirements (which relate to state insurance law reserve requirements applying to reserves for level premium term life insurance policies and universal life policies). We pay ING a fee based on the face amount of the collateral provided until satisfactory alternative collateral arrangements are made. In the normal course of business and our capital planning we are always looking for opportunities to relieve capital strain relating to XXX reserve requirements for our existing business as well as the business acquired from ING. We anticipate implementing capital markets related solutions relating to these requirements as cost efficient opportunities arise. Stingray Pass-Through Trust On January 12, 2005, we entered into a put agreement with Investor Trust for an aggregate value of $325.0 million. Under the terms of the put agreement, we have acquired an irrevocable put option to issue funding agreements to Investor Trust in return for a portfolio of 30-day commercial paper. This put option may be exercised at any time. In addition, we may be required to issue funding agreements to the Investor Trust under certain circumstances, including, but not limited to, the non-payment of the put option premium and a ratings downgrade. The facility matures on January 12, 2015. This transaction provides relief under state insurance regulations in the U.S. for reinsurance obligations under intercompany quota share reinsurance agreements. The put premium incurred during the quarter and six months ended June 30, 2005 amounted to $1.2 million and $2.3 million, respectively, and is included in collateral finance facilities expense in the consolidated statements of income. In accordance with FIN 46, we are not considered to have a variable interest in Investor Trust and as a result we are not required to consolidate the trust. Orkney Holdings, LLC On February 11, 2005, Orkney Holdings, LLC, a newly formed Delaware limited liability company, issued and sold in a private offering an aggregate of $850.0 million of Series A Floating Rate Insured Notes due February 11, 2035. Orkney Holdings, LLC is organized for the limited purpose of holding the stock of Orkney Re, Inc., a South Carolina special purpose captive insurance company, and issuing the Orkney Notes. All of the common shares of Orkney Holdings, LLC are owned by Scottish Re (U.S.), Inc. Proceeds from this offering will fund the Regulation XXX reserve requirements for a defined block of level premium term life insurance policies issued between January 1, 41 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 2000 and December 31, 2003 reinsured by Scottish Re (U.S.), Inc. to Orkney Re, Inc. Proceeds from the Orkney Notes have been deposited into a series of trusts that collateralize the notes. The holders of the Orkney Notes cannot require repayment from us or any of our subsidiaries, other than Orkney Holdings, LLC. Both principal and interest payments on the Orkney Notes are guaranteed by MBIA Insurance Corporation, and are rated "AAA" by Standard and Poor's and "Aaa" by Moody's. Interest on the principal amount of the Orkney Notes is payable quarterly at a rate equivalent to three-month LIBOR plus 0.53%. At June 30, 2005, the interest rate was 4.05%. Any payment of principal of, including by redemption, or interest on the Orkney Notes is sourced from dividends from Orkney Re, Inc., and the balances available in a series of trust accounts. Dividends may only be made with the prior approval of the Director of Insurance of the State of South Carolina in accordance with the terms of its licensing orders and in accordance with applicable law. The Orkney Notes also contain customary limitation on lien provisions and customary events of default provisions, which, if breached, could result in the accelerated maturity of the Orkney Notes. Orkney Holdings, LLC has the option to redeem all or a portion of the Orkney Notes prior to and on or after February 11, 2010, subject to certain call premiums. In accordance with FIN 46 we are considered to hold a beneficial interest in Orkney Holdings, LLC, which is in turn considered to be a variable interest entity. As a result, Orkney Holdings, LLC has been consolidated in these financial statements. The assets of the variable interest entity have been recorded as fixed maturity investments and cash and cash equivalents. Our consolidated income statements show the investment return of the variable interest entity as investment income and the cost of the facility is reflected in collateral finance facilities expenses. Regulatory Capital Requirements Scottish Annuity & Life Insurance Company (Cayman) Ltd. has agreed with Scottish Re (U.S.), Inc. that it will (1) cause Scottish Re, (U.S.), Inc. to maintain capital and surplus equal to the greater of $20.0 million or such amount necessary to prevent the occurrence of a Company Action Level Event under the risk-based capital laws of the State of Delaware and (2) provide Scottish Re (U.S.), Inc. with enough liquidity to meet its obligations in a timely manner. Scottish Annuity & Life Insurance Company (Cayman) Ltd. has agreed with Scottish Re Life Corporation that it will (1) cause Scottish Re Life Corporation to maintain capital and surplus equal to at least 175% of Company Action Level RBC, as defined under the laws of the State of Delaware and (2) provide Scottish Re Life Corporation with enough liquidity to meet its obligations in a timely manner. Scottish Annuity & Life Insurance Company (Cayman) Ltd. and Scottish Re Group Limited 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 Group Limited will assume all of Scottish Re Limited's obligations under such agreements. Scottish Re Group Limited and Scottish Annuity & Life Insurance Company (Cayman) Ltd. have executed similar agreements for Scottish Re (Dublin) Limited and Scottish Re Life (Bermuda) Limited and may, from time to time, execute additional agreements guaranteeing the performance and/or obligations of their subsidiaries. 42 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Our business is capital and collateral intensive. We expect that our cash and investments, together with cash generated from our businesses, will be sufficient to meet our current liquidity and letter of credit needs. However, if our business continues to grow significantly, we will need to raise additional capital. Off balance sheet arrangements We have no obligations, assets or liabilities other than those disclosed in the financial statements; no trading activities involving non-exchange traded contracts accounted for at fair value; and no relationships and transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties. 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; 43 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) o loss of the services of any of our key employees; o losses due to foreign currency exchange rate fluctuations; o uncertainties relating to government and regulatory policies (such as subjecting us to insurance regulation or taxation in additional jurisdictions); o the competitive environment in which we operate and associated pricing pressures; and o changes in accounting principles. The effects of these factors are difficult to predict. New factors emerge from time to time and we cannot assess the financial impact of any such factor on the business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward looking statement. Any forward looking statement speaks only as of the date of this report and we do not undertake any obligation, other than as may be required under the Federal securities laws, to update any forward looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of unanticipated events. 44 Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes since December 31, 2004. Please refer to "Item 7A: Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the year ended December 31, 2004. Item 4. Controls and Procedures Evaluation of disclosure controls and procedures Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13 a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on such evaluation, such officers have concluded that our disclosure controls and procedures were effective as of June 30, 2005 to ensure that information required to be disclosed by us in the reports filed and submitted by us under the Exchange Act were recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Changes in internal controls (i) Effective January 1, 2005, the MoSes actuarial projection system became the basis for estimating benefit reserves, deferred acquisition costs and premium accruals for our traditional solutions business. Implementation of the MoSes system enhances the estimation process because actual changes in the characteristics of the underlying business are based on the most recent information received. (ii) As previously disclosed in our Annual Report on Form 10-K (Item 9A) for the year ended December 31, 2004, management concluded that a material weakness exists regarding internal control over financial reporting in our U.K. subsidiary. The material weakness identified relates to the monthly financial statement closing process. In response, we implemented a number of additional controls to improve the internal control over financial reporting in our U.K. subsidiary. In addition, we continue to take a number of other steps to improve the internal control over financial reporting in our U.K. subsidiary, including: a) Implementing control improvements that have been recommended by our Internal Audit Department, as well as remediating control deficiencies identified by our Internal Audit Department and our external auditors; b) Hiring a new Chief Financial Officer and Chief Actuary for the U.K. subsidiary as of February 1, 2005; c) Hiring a new Head of Administration for the U.K. subsidiary as of January 1, 2005; d) Completing the reconciliation of all premium receivable balances in 2005; and e) With the assistance of a major international accounting and auditing firm, continuing to review the U.K. subsidiary's finance function and implementing recommended process and control improvements by September 30, 2005. Other than the changes discussed above, there have not been any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated by the SEC under the Securities Exchange Act of 1934) during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 45 PART II. OTHER INFORMATION Item 1. Legal Proceedings We are 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 Security Holders The 2005 Annual Meeting of Shareholders of the Company was held on May 4, 2005. The following items of business were presented to our shareholders (the "Shareholders"): Election of Directors The results of the vote of the Shareholders with respect to the three Class I Directors and one Class III Director were elected as proposed in the Proxy Statement dated April 1, 2005 under the caption titled "Proposal for Election of Directors" were as follows:
- ------------------------------------------------ ----------------------- ------------------------ Total Vote For Each Total Vote Withheld Name Director From Each Director - ------------------------------------------------ ----------------------- ------------------------ G. William Caulfeild-Browne 37,912,384 25,640 - ------------------------------------------------ ----------------------- ------------------------ Robert M. Chmely 37,910,342 27,692 - ------------------------------------------------ ----------------------- ------------------------ William L. Spiegel 37,894,627 43,407 - ------------------------------------------------ ----------------------- ------------------------ Jean Claude Damerval 37,911,777 26,257 - ------------------------------------------------ ----------------------- ------------------------
Ratification of Independent Auditors The Board of Directors has selected, based upon the recommendation of the Audit Committee, Ernst & Young, as the independent auditors for the Company for the fiscal year ending December 31, 2005. The results of the vote of the Shareholders with respect to this selection were as follows: For: 37,840,960 Against: 94,584 Abstain: 2,490 Item 5. Other Information Not applicable. 46 Item 6. Exhibits Exhibits Except as otherwise indicated, the following Exhibits are filed herewith and made a part hereof: 47 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 April 7, 2005 (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (6) 3.2 Articles of Association of Scottish Re Group Limited, as amended as of April 7, 2005 (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (6) 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 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) 4.4 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) 4.5 Form of Securities Purchase Agreement between Scottish Re Group Limited and the Non-Shareholder Investors (incorporated herein by reference to Exhibit 4.12 to Scottish Re Group Limited's Registration Statement on Form S-1). (1) 4.6 Certificate of Designations of Convertible Preferred Shares of Scottish Re Group Limited (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (10) 4.7 Certificate of Designations of Scottish Re Group Limited's Non-Cumulative Perpetual Preferred Shares, dated June 28, 2005 (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (16) 4.8 Specimen Stock Certificate for the Company's Non-Cumulative Perpetual Preferred Shares (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (16) 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)(21) 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)(21) 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)(21) 48 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)(21) 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)(21) 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)(21) 10.9 Share Purchase Agreement by and between Scottish Re Group Limited and Pacific Life dated August 6, 2001 (incorporated by reference to Scottish Re Group Limited's Current Report on Form 8-K). (7) 10.10 Amendment No. 1, dated November 8, 2001, to Share Purchase Agreement dated August 6, 2001 by and between Scottish Re Group Limited and Pacific Life (incorporated by reference to Scottish Re Group Limited'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)(21) 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)(21) 10.13 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) 10.14 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) 10.15 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)(21) 10.16 Employment Agreement dated July 1, 2002 between Scottish Annuity & Life Insurance Company (Cayman) Ltd. and Thomas A. McAvity, Jr. (incorporated by reference to 49 Scottish Re Group Limited's Amended Quarterly Report on Form 10-Q/A for the period ended September 30, 2002). (8)(21) 10.17 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)(21) 10.18 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)(21) 10.19 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)(21) 10.20 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)(21) 10.21 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)(21) 10.22 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)(21) 10.23 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)(21) 10.24 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) 10.25 Registration Rights Agreement, dated November 22, 2002, by and among 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) 10.26 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)(21) 10.27 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 Scottish Re Group Limited's Current Report on Form 8-K). (11) 50 10.28 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 Scottish Re Group Limited's Current Report on Form 8-K). (11) 10.29 Transition Services Agreement, dated as of January 22, 2003, by and among Scottish Holdings, Inc. and Employers Reinsurance Corporation (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (11) 10.30 Employment Agreement dated April 21, 2004, by and among Scottish Holdings, Inc. and Seth W. Vance (incorporated herein by reference to Scottish Re Group Limited's Quarterly Report on Form 10-Q for the period ended March 31, 2004). (14)(21) 10.31 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). (21) 10.32 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) 10.33 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) 10.34 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) 10.35 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) 10.36 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) 51 10.37 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). 10.38 Amendment to Employment Agreement dated as of March 29, 2004, by and among the Company and Michael C. French (incorporated herein by reference to Scottish Re Group Limited's Quarterly Report on Form 10-Q for the nine month period ended September 30, 2004, filed with the SEC on November 8, 2004). (21) 10.39 Employment Agreement, dated as of March 29, 2004, by and among the Company and Deborah G. Percy (incorporated herein by reference to Scottish Re Group Limited's Quarterly Report on Form 10-Q for the nine month period ended September 30, 2004, filed with the SEC on November 8, 2004). (21) 10.40 Employment Agreement, dated as of January 1, 2005, between Scottish Holdings, Inc. and Gary Dombowsky. (20)(21) 10.41 Amendment to Employment Agreement, dated as of February 7, 2005, between Scottish Re Group Limited and Michael C. French. (20)(21) 10.42 Employment Agreement, dated as of February 1, 2005, between Scottish Re Group Limited and Hugh T. McCormick. (20)(21) 10.43 Employment Agreement, dated as of December 1, 2004, between Scottish Holdings, Inc. and Kenneth R. Stott. (20)(21) 10.44 Credit Agreement, dated as of December 29, 2004, among Scottish Annuity & Life Insurance Company (Cayman) Ltd., Scottish Re (Dublin) Limited, Scottish Re (U.S.), Inc., and Scottish Re Limited as borrowers, Bear Stearns Corporate Lending, Inc. and Wachovia Bank, National Association as Co-Syndication Agents, Bank of America, N.A., as Administrative Agent and L/C Issuer, and The Other Lenders Party Hereto, Banc of America Securities LLC as Sole Lead Arranger and Sole Book Manager. (20) 10.45 Administrative Services Agreement, dated as of December 31, 2004, between Security Life of Denver Insurance Company and Security Life of Denver International Limited and Scottish Re (U.S.), Inc. (20) 10.46 Coinsurance Agreement dated December 31, 2004 between Security Life of Denver Insurance Company and Scottish Re (U.S.), Inc. (20) 10.47 Coinsurance/ Modified Coinsurance Agreement, dated December 31, 2004, between Security Life of Denver Insurance Company and Scottish Re (U.S.), Inc. (20) 10.48 Retrocession Agreement, dated December 31, 2004, between Scottish Re (U.S.), Inc. and Security Life of Denver Insurance Company. (20) 10.49 Retrocession Agreement, dated December 31, 2004, between Scottish Re Life (Bermuda) Limited Bermuda and Security Life of Denver Insurance Company. (20) 10.50 Reserve Trust Agreement, dated as of December 31, 2004, between Scottish Re (U.S.) 52 Inc., as Grantor, and Security Life of Denver Insurance Company, as Beneficiary, and The Bank of New York, as Trustee, and The Bank of New York, as Securities Intermediary. (20) 10.51 Security Trust Agreement, dated as of December 31, 2004, by and among Scottish Re (U.S.), Inc., as Grantor, Security Life of Denver Insurance Company, as Beneficiary, The Bank of New York, as Trustee, and The Bank of New York, as Securities Intermediary. (20) 10.52 Coinsurance Agreement, dated December 31, 2004, between Security Life of Denver International Limited and Scottish Re Life (Bermuda) Limited. (20) 10.53 Coinsurance/Modified Coinsurance Agreement, dated December 31, 2004, between Security Life of Denver International Limited and Scottish Re Life (Bermuda) Limited. (20) 10.54 Coinsurance Funds Withheld Agreement, dated December 31, 2004, between Security Life of Denver International Limited and Scottish Re Life (Bermuda) Limited. (20) 10.55 Reserve Trust Agreement, dated December 31, 2004, between Scottish Re Life (Bermuda) Limited, as Grantor, and Security Life of Denver International Limited, as Beneficiary, and The Bank of New York, as Trustee, and The Bank of New York, as Securities Intermediary. (20) 10.56 Security Trust Agreement, dated as of December 31, 2004, by and among Scottish Re Life (Bermuda) Limited, as Grantor, Security Life of Denver International Limited, as Beneficiary, The Bank of New York, as Trustee, and the Bank of New York, as Securities Intermediary. (20) 10.57 Technology Transfer and License Agreement, dated as of December 31, 2004, between Security Life of Denver Insurance Company, ING North America Insurance Corporation and Scottish Re (U.S.), Inc. (20) 10.58 Transition and Integration Services Agreement, dated December 31, 2004, between Security Life of Denver Insurance Company and Scottish Re (U.S.), Inc. (20) 10.59 Form of Remarketing Agreement, between the Company and Lehman Brothers, Inc., as Remarketing Agent (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (16) 10.60 Amended and Restated Credit Agreement, dated as of July 14, 2005, among Scottish Annuity & Life Insurance Company (Cayman) Ltd., Scottish Re (Dublin) Limited, Scottish Re (U.S.), Inc., and Scottish Re Limited as Borrowers, Bear Stearns Corporate Lending, Inc., HSBC Bank USA, National Association, and Wachovia Bank, National Association as Syndication Agents, Bank of America, N.A., as Administrative Agent and L/C Issuer, and the Other Lenders Party Hereto, Banc of America Securities LLC as Sole Lead Arranger and Sole Book Manager (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (17) 10.61 Scottish Re Group Limited 2004 Equity Incentive Compensation Plan (incorporated herein by reference to Scottish Re Group Limited's Proxy Statement filed with the SEC 53 on April 1, 2004). 10.62 Amendment No. 1 to Scottish Re Group Limited 2004 Equity Incentive Compensation Plan (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (18) (21) 10.63 Amendment No. 2 to Scottish Re Group Limited 2004 Equity Incentive Compensation Plan (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (18) (21) 10.64 Form of Management Stock Option Agreement under the Scottish Re Group Limited 2004 Equity Incentive Compensation Plan (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (18) (21) 10.65 Form of Management Performance Share Unit Agreement under the Scottish Re Group Limited 2004 Equity Incentive Compensation Plan (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (18) (21) 10.66 Form of Management Restricted Share Unit Agreement under the Scottish Re Group Limited 2004 Equity Incentive Compensation Plan (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (18) (21) 10.67 Employment Agreement, dated as of July 18, 2005, between Scottish Re Group Limited and Dean Miller. (19) (21) 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. 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. -------------------- (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 was filed with the SEC on June 2, 2005. (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. 54 (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) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on July 1, 2005. (17) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on July 18, 2005. (18) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on August 8, 2005. (19) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on August 4, 2005. (20) Scottish Re Group Limited's 2004 Annual Report on Form 10-K was filed with the SEC on March 18, 2005. (21) This exhibit is a management contract or compensatory plan or arrangement. 55 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: August 9, 2005 By: /s/ Scott E. Willkomm ------------------------- Scott E. Willkomm President and Chief Executive Officer Date: August 9, 2005 By: /s/ Elizabeth A. Murphy --------------------------- Elizabeth A. Murphy Chief Financial Officer 56 EX-31.1 2 ex31-1.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATION I, Scott E. Willkomm, President and 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 15d-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 quarterly report is being prepared; b. designed such internal control over financial reporting, or caused such control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. 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 d. 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. 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: August 9, 2005 /s/ Scott E. Willkomm - --------------------- Scott E. Willkomm President and Chief Executive Officer EX-31.2 3 ex31-2.txt EXHIBIT 31.2 Exhibit 31.2 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 15d-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 quarterly report is being prepared; b. designed such internal control over financial reporting, or caused such control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. 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 d. 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. 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: August 9, 2005 /s/ Elizabeth A. Murphy - ----------------------- Elizabeth A. Murphy Chief Financial Officer EX-32.1 4 ex32-1.txt EXHIBIT 32.1 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 June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Scott E. Willkomm, President and 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/ Scott E. Willkomm - --------------------- Scott E. Willkomm President and Chief Executive Officer August 9, 2005 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-32.2 5 ex32-2.txt EXHIBIT 32.2 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 June 30, 2005 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 August 9, 2005 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-----