-----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, FaEyZEZSkYqwAEIQ0qONykLoG1kL+XzVEAQfcEFBYp11vlx44YYpd/uaj98tSOJE VauafcCwpNCTsn5P49oZwQ== 0000930661-00-000869.txt : 20000404 0000930661-00-000869.hdr.sgml : 20000404 ACCESSION NUMBER: 0000930661-00-000869 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000403 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCOTTISH ANNUITY & LIFE HOLDINGS 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-K SEC ACT: SEC FILE NUMBER: 000-29788 FILM NUMBER: 592464 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: GRAND PAVILION COMMERCIAL CENTRE STREET 2: 802 WEST BAY RD GEORGE TOWN CITY: GRAND CAYMAN CAYMAN STATE: E9 ZIP: 00000 FORMER COMPANY: FORMER CONFORMED NAME: SCOTTISH LIFE HOLDINGS LTD DATE OF NAME CHANGE: 19980615 10-K 1 FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 __________________ FORM 10-K For Annual and Transition Reports Pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934 [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1999 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition period from ____ to ______ Commission File Number 0-29788 SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. (Exact Name of Registrant as Specified in Its Charter) Cayman Islands Not Applicable (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) P.O. Box 10657 APO Grand Pavilion Commercial Centre 802 West Bay Road George Town, Grand Cayman Cayman Islands, British West Indies Not Applicable (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (345) 949-2800 Securities Registered Pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered ------------------- ------------------- None Securities Registered Pursuant to Section 12(g) of the Act: Ordinary Shares, par value $.01 per share 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 24, 2000 was $122,356,393.00 As of March 24, 2000, Registrant had 16,046,740 Ordinary Shares outstanding. DOCUMENTS INCORPORATED BY REFERENCE. List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) any annual report to security holders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980). Certain information required by Items 10, 11, 12 and 13 of Form 10-K is incorporated by reference into Part III hereof from the registrant's proxy statement for its 2000 Annual Meeting of Shareholders, which is expected to be filed with the Securities and Exchange Commission (the "Commission") within 120 days of the close of the registrant's fiscal year ended December 31, 1999. _____________________ _____________________ Table of Contents
PART I........................................................................................... 1 Item 1: BUSINESS.............................................................................. 1 Item 2: PROPERTY.............................................................................. 5 Item 3: LEGAL PROCEEDINGS..................................................................... 5 Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS................................. 5 PART II.......................................................................................... 6 Item 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS................. 6 Item 6: SELECTED FINANCIAL DATA............................................................... 6 Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 6 Item 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................ 14 Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................... 14 Item 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.. 14 PART III......................................................................................... 15 Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................................... 15 Item 11: EXECUTIVE COMPENSATION................................................................ 15 Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................ 15 Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................ 15 PART IV.......................................................................................... 16 Item 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...................... 16 Consolidated Financial Statements..................................................... 17 Report Of Management.................................................................. 18 Report of Independent Auditors........................................................ 19 Consolidated Balance Sheets........................................................... 20 Consolidated Statements of Income..................................................... 21 Consolidated Statements of Comprehensive Loss......................................... 22 Consolidated Statements of Shareholders' Equity....................................... 23 Consolidated Statements of Cash Flows................................................. 24 Notes to Consolidated Financial Statements............................................ 25 Exhibit Index.................................................................................... 40
PART I Item 1: BUSINESS General - -------- Scottish Annuity & Life Holdings, Ltd. ("Scottish Holdings", "we", "us", "our", or "the Company") completed its initial public offering ("IPO") on November 30, 1998. Scottish Holdings, and its wholly owned subsidiary, Scottish Annuity & Life Insurance Company (Cayman) Ltd. ("Scottish Insurance") were formed in 1998 as offshore companies principally to provide reinsurance of life and annuity products and to issue customized variable life insurance products to high net worth individuals and families. The Scottish Annuity Company (Cayman) Ltd. ("Scottish Annuity") , a Cayman Islands insurance company providing customized variable annuity products to high net worth individuals and families, was acquired by Scottish Holdings during 1999. Harbourton Reassurance, Inc. ("Harbourton"), a Delaware insurance company which is licensed in 15 states and admitted as a reinsurer in an additional 8 states, was also acquired during 1999 to provide us with a U.S. based platform to provide reinsurance products. We are in the process of changing Harbourton's name to Scottish Re (U.S.), Inc. In our reinsurance activities we seek to reinsure lines of business that are subject to significant reserve or capital requirements under regulatory and rating agency guidelines. We believe that, in response to heightened regulatory and rating agency scrutiny, insurers are increasingly seeking reinsurance as a means to improve earnings, risk-based capital or other financial ratios. We focus our reinsurance activities principally on accepting risk from U.S. insurers, although we also expect to target opportunities in the United Kingdom, Western Europe, Canada and Australia. In fiscal year 1999, our revenues from reinsurance activities were derived from the U.S. We provide both onshore and offshore solutions to primary insurers seeking non- traditional and traditional life reinsurance of annuity and life insurance business. Non-traditional reinsurance involves the transfer of investment risks associated with blocks of new and existing annuity type contracts, such as deferred annuities, payout annuities, funding agreements and similar contracts. Our traditional life reinsurance will focus on assuming risks associated with primary life insurance policies, both in force and new business. We expect to reinsure the following risks: (i) mortality and ancillary morbidity, (ii) investment, (iii) persistency, and (iv) expense. We will write reinsurance predominantly on a direct basis with primary life insurance companies, covering individual term life insurance policies, whole life insurance policies, universal life insurance policies, and joint and survivor insurance policies. We will limit our net liability on any one ordinary life risk up to $1.0 million. Through our variable products business, we are responding to what we believe are increasing demands of high net worth individuals and families for customized products for use as part of sophisticated estate planning strategies. For us, high net worth generally means individuals and families with a liquid net worth in excess of $10 million. We offer both variable universal life insurance policies and variable annuities. Variable life insurance offers a death benefit and a cash value component which is placed in a separate account and invested on behalf of the policyholder by a money manager. As a Cayman Islands insurance company, we have the flexibility to offer policies that permit the use of private independent money managers to manage the separate accounts and who utilize investment strategies not typically available in variable products issued to the general public. We will also seek to leverage our expertise with respect to variable life insurance products by offering structured life insurance products, such as corporate-owned life insurance, which target the deferred compensation market. Products Offered Reinsurance Reinsurance is an arrangement under which an insurance company, called the reinsurer, agrees to indemnify another insurance company, called the ceding company or cedent, for all or a portion of the insurance risks underwritten by the ceding company. It is standard industry practice for primary insurers to reinsure portions of their insurance risks with other insurance companies. This practice permits primary insurers to write insurance policies in amounts larger than they would be willing or able to retain. Reinsurers may also purchase reinsurance, or "retrocession" coverage, to limit their own risk exposure. We expect to assume risks from both primary insurers as well as reinsurers. We are focusing our reinsurance activities principally on the reinsurance of life insurance and annuity type products. For these products, we write reinsurance generally as coinsurance or modified coinsurance, whereby we assume all or a proportionate share of the liability for the reinsured business. Under coinsurance, ownership of the assets supporting the reserves is transferred to the reinsurer, whereas in modified coinsurance arrangements, the ceding company retains ownership of the assets supporting the reserves. Under a coinsurance or modified coinsurance arrangement, the reinsurer will generally share proportionately in all material risks inherent in the underlying policies. When we reinsure life insurance products, the reinsurance may also be structured on a yearly renewable term basis. Under the yearly renewable term structure, premium rates are generally adjusted annually based on the age and underwriting classification of each insured and the age of the policies and the reinsurer assumes only the mortality risk associated with the underlying policies. The reinsurer, under such treaties, agrees to indemnify the primary insurer for all or a portion of the risks associated with the underlying insurance policy in exchange for a reinsurance premium payable to the reinsurer. We may also enter into retrocessional reinsurance arrangements with other reinsurers, which operate in a manner similar to the underlying reinsurance treaty described above. Under retrocessional reinsurance arrangements, the reinsurer transfers a portion of the risk associated with the underlying insurance policy to the retrocessionaires. Each retrocessionaire in our current ordinary life pool reinsures a percentage of each risk that is retroceded to the pool. Each of the domestic participants in the pool is rated "A" or better by A.M. Best Company, Inc. ("A.M. Best"). Our reinsurance agreements will be written on an automatic treaty basis. The reinsurance may be solicited directly by us or through reinsurance intermediaries. An automatic treaty provides for a ceding company to cede contractually agreed-upon risks on specific blocks of business to a reinsurer. In addition, the reinsurance may be written on either: 1) a proportional basis under which a specified percentage of each risk in the reinsured class of risk is assumed by the reinsurer from the ceding company with the reinsurer receiving its proportion of the underlying premiums in proportion to such assumed risk; 2) or an excess of loss basis under which the reinsurer indemnifies the ceding company up to a contractually-specified amount for a portion of claims exceeding a specified retention amount in consideration of non- proportional premiums being paid. 1 Variable Life Insurance and Annuities Variable life insurance and annuity products are "separate account" products under which the net premiums paid, after deducting expenses, including the costs of insurance, are placed in a separate account for the policyholder's benefit. Under Cayman Islands Law, assets held in a separate account are not subject to claims of the insurance company's general creditors. The cash values of this separate account are invested for the policyholder by a private independent money manager. Variable life insurance offers flexible premiums and a minimum death benefit in addition to providing a return linked to an underlying portfolio held in a separate account. Variable annuities provide tax-deferred growth of the contractholder's investment until earnings are withdrawn or periodic annuity payments begin. We do not provide any investment management or advisory services to any variable life policyholder. Our revenues earned from these policies consist of amounts assessed during the period against policyholders' separate account balances for mortality and expense fees and policy administration and surrender charges. Our variable life insurance and annuity contracts have no guaranteed rate of return on the cash values. The cash value varies based on the investment results on the policy's assets managed by the policy's private independent money manager. Marketing Under our marketing plan with respect to variable life insurance and annuity policies, we rely primarily on referrals by financial advisors, investment managers, private bankers, attorneys and other intermediaries in the U.S. to generate clients. None of these intermediaries represent us as agents or in any other capacity, nor do they receive any commissions or other remuneration from us for activities undertaken in the U.S. Our marketing plan with respect to our reinsurance business seeks to capitalize on the relationships developed by our executive officers and marketing staff with members of the actuarial profession and senior insurance company executives, at both primary insurers and other reinsurers. We target potential ceding insurers that we believe would benefit from our reinsurance products based on our analysis of publicly available information and other industry data. In addition, reinsurance transactions are often placed by reinsurance intermediaries, brokers and consultants. A significant component of our marketing program involves working with such third party marketers in an effort to maintain a high degree of visibility in the reinsurance marketplace. Underwriting Reinsurance The principal risk associated with our fixed annuity reinsurance activities is investment risk. Specifically, we are subject to the following: . asset value risk, which is the risk that invested assets supporting the reinsured business will decrease in value; . credit risk, relating to the uncertainty associated with the continued ability of a given obligor to make timely payments of principal and interest; . reinvestment risk, which is the risk that interest rates will decline and funds reinvested will earn less than is necessary to match anticipated liabilities; and . disintermediation risk, which is the risk that we may have to sell assets at a loss to provide for policyholder withdrawals or to satisfy liabilities not otherwise properly matched. We may also be subject to mortality risk with respect to the fixed annuities we reinsure, although our exposure to such risk is expected to be generally immaterial as compared to the investment risk associated with these products. We may assume all of the liabilities under the fixed annuity contracts we reinsure, although, in certain circumstances, we may require the ceding company to retain a portion of such liabilities, typically not to exceed 10%. We also reinsure various forms of life insurance products, including universal, variable, term and whole life insurance. The primary risk under life insurance policies is mortality risk. Our Underwriting Guidelines with respect to reinsurance limit such risk to $1,000,000 per insured and we intend to reinsure, or retrocede, any liability for amounts in excess of $1,000,000 per insured in order to comply with such guidelines. Universal life insurance and similar interest-rate sensitive policies provide life insurance with adjustable rates of return based on applicable interest rates in effect from time to time. As a consequence, the risks reinsured by us may also include investment risks similar to those for fixed annuities. As with annuities, all life insurance policies are subject to surrender risk. 2 Variable Life Insurance The principal risk associated with our variable life insurance policies is mortality risk. The death benefit provided by our variable life insurance policies varies based on the investment return of the underlying separate account of policy assets invested by the policy's private independent money manager. The difference between the value of the assets in the underlying separate account and the policy's stated death benefit, known as the "net amount at risk", represents a general liability. Fees are charged, based on the "net amount at risk", and increase with the age of the insured. In accordance with generally accepted accounting principles ("GAAP") no reserves are required other than the deposit liability as the Company fees are based on its expected mortality for the period charged. Mortality risk tends to be more stable when spread across large numbers of insureds. We expect that our variable life insurance policies, which provide substantial death benefits given expected initial premiums of at least $1.0 million for single premium policies and $500,000 for multiple premium policies, will be held by a relatively small number of high net worth policyholders. Consequently, our associated mortality risk exposure will be greater in the aggregate, and our probability of loss less predictable, than an insurer with a broader risk pool. Therefore, pursuant to our Underwriting Guidelines, we reinsure all of the mortality risk associated with our variable life insurance business. Our Underwriting Guidelines provide that any reinsurer to whom we cede business must have a financial strength rating of at least "A-" or higher from A.M. Best or an equivalent rating by another major rating agency. Investment Portfolio General We seek to generate attractive levels of investment income through a professionally managed investment portfolio. If we are unable to effectively manage our investment portfolio and the risks associated with such investments, our ability to support our variable life insurance and reinsurance businesses, and our results of operations and financial condition, will be adversely affected. Investment Guidelines Our investment activities are governed by the Investment Guidelines as approved by the Board of Directors. Our investment portfolio, excluding assets transferred and invested as part of any reinsurance transaction, principally consists of fixed income securities with a weighted average investment rating of "A". Although a fixed income security rated "A" by Standard & Poor's is somewhat susceptible to the adverse effects of changes in circumstances and economic conditions, however, the issuer's capacity to meet its financial commitment on the security is still strong. We do not invest in any fixed income securities in emerging markets or which are not rated by a major rating agency. The Investment Guidelines provide that we may purchase, among other things, securities issued by the United States government and its agencies and instrumentalities, securities issued by foreign governments if rated "A" or better by at least one major rating agency, certain asset backed securities, preferred stocks, mortgage backed securities and corporate debt securities (which may include convertible debt securities, but may not include payment-in- kind corporate securities), including fixed income securities that are rated below investment grade. The Investment Guidelines also provide that the fixed income investment portfolio may not be leveraged and that purchases of securities on margin and short sales may not be made without approval of the Board of Directors. We are exposed to two primary sources of investment risk on fixed income investments: credit risk, relating to the uncertainty associated with the continued ability of a given obligor to make timely payments of principal and interest, and interest rate risk, relating to the market price and/or cash flow variability associated with changes in market interest rates. We seek to manage credit risk through industry and issuer diversification and asset allocation and interest rate risk through interest rate swaps and other hedging techniques. Our investments in fixed income securities that are rated below investment grade, are subject to greater risks than our investments in investment grade securities. The risk of loss of principal or interest through default is greater with lower-rated securities because they are usually unsecured and are often subordinated to an issuer's other obligations. Additionally, issuers of these securities frequently have higher debt levels which makes them more susceptible to adverse economic developments, individual corporate developments and rising interest rates could impair their ability to meet their financial commitments. Consequently, the market price of these securities may be quite volatile, and the risk of loss is greater. As a result, the Investment Guidelines provide that no more than 15% of our investment portfolio may be invested in fixed income securities that are rated below investment grade. We will manage the investment risks on the assets received from reinsurance transactions by matching anticipated payout patterns of the reinsurance liabilities. We invest such assets principally in fixed income and, to a lesser extent, equity securities. We may invest in foreign denominated securities to manage currency risk if the reinsurance transaction has a foreign currency component. We may also enter into interest rate swap and other hedging transactions in an effort to manage interest rate risks associated with such transactions. Although the total investment in derivatives may be substantial, any use of derivatives is expected to be incidental to our efforts to manage interest rate risk rather than a speculative investment. Any investment in equity securities (expected to be typically not more than 10% of the assets transferred to us in a reinsurance transaction) will be made in an effort to enhance our overall return on such assets. 3 Investment Managers Our portfolio is managed by General Re-New England Asset Management, Inc. ("Gen Re") and Prudential Investment Corporation. Gen Re manages approximately 89% of our investment portfolio and Prudential Investment Corporation manages the balance. We expect that one or both of the Investment Managers will manage the investment of any assets transferred to us in any reinsurance transaction. Investment Oversight Our Board of Directors, from time to time, reviews our investment portfolio and the performance of our investment managers. The Board of Directors can approve exceptions to our Investment Guidelines and periodically reviews our Investment Guidelines in light of prevailing market conditions. The investment managers and our Investment Guidelines may be changed from time to time as a result of such reviews. Competition and Ratings The insurance and reinsurance industries are highly competitive. Most of the companies in such industries are significantly larger, and have operating histories and access to significantly greater financial and other resources than we do. Our variable products primarily compete with those issued by U.S. insurance companies. To the extent that our variable products provide for management of the underlying separate accounts by private independent money managers, our variable products compete with mutual funds and other investment or savings vehicles. We believe that the most important competitive factor affecting the marketability of our variable products is the degree to which these products meet customer expectations, in terms of low expenses, returns (after fees and expenses) and customer service. Competition in the reinsurance business is based on price, ratings, perceived financial strength and service. Because we currently rely on a small number of clients in both our variable products and reinsurance businesses and expect to continue to do so for the near future, such businesses are more susceptible to the adverse effects of competition. Insurance ratings are used by prospective purchasers of insurance policies as well as insurers and reinsurance intermediaries as an important means of assessing the financial strength and quality of insurers and reinsurers. In addition, a ceding company's own rating may be adversely affected by an unfavorable rating or the lack of a rating of its reinsurer. Duff & Phelps has assigned a rating of "A" and A.M. Best has assigned a Best Rating of "A-" (Excellent). These ratings have been assigned to Scottish Insurance and Harbourton. Duff & Phelps assigns an "A" rating to companies that it characterizes as having, in its opinion, high claims paying ability, average protection factors and an expectation of variability in risk over time due to economic or underwriting conditions. A.M. Best assigns an "A- " (Excellent) rating to companies that have, in its opinion, on balance, excellent financial strength, operating performance and market profile, as well as strong abilities to meet their ongoing obligations to policyholders. These ratings represent each rating agency's opinion of Scottish Insurance's and Harbourton's ability to meet its obligations to its policyholders. Scottish Annuity is unrated. Employees We currently employ forty-five full time employees. Regulation Cayman Islands Scottish Holdings is a holding company owning all of the outstanding Ordinary Shares of Scottish Insurance, Scottish Annuity, and Harbourton (through a Delaware holding company). Scottish Insurance and Scottish Annuity are subject to regulation as licensed insurance companies under Cayman Islands law. Scottish Insurance holds an unrestricted Class B insurance license under Cayman Islands Insurance Law and may therefore carry on an insurance business from the Cayman Islands, but may not engage in any Cayman Islands domestic insurance business. Scottish Annuity holds an unrestricted Class B license under Cayman Islands Insurance Law and may therefore carry on an insurance business from the Cayman Islands, but may not engage in any Cayman Islands domestic insurance business. 4 Unless specifically exempted, a Cayman Islands insurance company must engage a licensed insurance manager operating in the Cayman Islands to provide insurance expertise and oversight. Scottish Insurance has been exempt from this requirement and Scottish Annuity has engaged International Risk Management (Cayman) Ltd. as its licensed insurance manager in the Cayman Islands. It is anticipated that Scottish Annuity will also be exempted from this requirement during 2000. In addition, under the Insurance Law, Cayman Islands insurance companies carrying on long term business (which includes the writing of life insurance policies) must hold all receipts in respect of its long-term business and earnings thereon in a separate long-term business fund. Payments from such long- term business fund may not be made directly or indirectly for any purpose other than those of the insurer's long-term business. Every Cayman Islands insurance company carrying on long-term business may establish any number of separate accounts in respect of premiums paid to it to provide (i) annuities on human life and (ii) contracts of insurance on human life, and such respective premiums shall be kept segregated one from the other and independent of all other funds of the Cayman Islands insurer, and, notwithstanding the provisions of any other written law to the contrary, are not chargeable with any liability arising from any other business of the insurer. The scope and the validity of the Cayman Islands law regarding separate accounts has not been tested in the courts of the Cayman Islands. United States and Other Jurisdictions Scottish Holdings, Scottish Insurance, and Scottish Annuity are not licensed to do business in any jurisdiction other than the Cayman Islands. The insurance laws of each state of the United States and of many foreign countries regulate the sale of insurance and reinsurance within their jurisdictions by alien insurers, such as Scottish Insurance and Scottish Annuity, that are not admitted to do business within such jurisdictions. With some exceptions, the sale of insurance within a jurisdiction where the insurer is not admitted to do business is prohibited. Scottish Insurance and Scottish Annuity conduct their insurance and reinsurance business through their executive offices in the Cayman Islands, and their personnel will not solicit, advertise, underwrite, settle claims or conduct other insurance or reinsurance activities in the United States or in any other jurisdiction where such activities are prohibited. All of Scottish Insurance's and Scottish Annuity's insurance, reinsurance, and annuity contracts are negotiated, executed, and issued, and all premiums will be received, at their offices in George Town, Grand Cayman or in such other offices outside the United States as Scottish Insurance or Scottish Annuity may establish or designate. Harbourton is a Delaware domestic life insurer. In total, Harbourton is licensed in 15 states and is also an authorized reinsurer in 8 additional states. As such, Harbourton is subject to individual state regulation and the requirements set forth by the National Association of Insurance Commissioners. Harbourton's principal office, which had been located in Aurora, Colorado prior to the acquisition by Scottish Holdings, has been relocated to Charlotte, North Carolina. Item 2: PROPERTY We currently lease approximately 7,500 square feet of office space in George Town, Grand Cayman where our executive and principal offices are located. The base term of the lease is seven years. We also lease approximately 8,000 square feet of office space in Charlotte, North Carolina where Harbourton's principal offices are located. We also currently lease approximately 400 feet of office space in Denver, Colorado where Harbourton currently has temporary offices. Theses offices will be closed prior to July 2000. We believe that these properties are adequate to meet our needs for the foreseeable future. Item 3: LEGAL PROCEEDINGS The Company is not currently involved in any litigation or arbitration. Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS Scottish Holdings did not submit any matter to a vote of securities holders during the fourth quarter of the year covered by this Form 10-K. 5 PART II Item 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS A. Market for the Ordinary Shares The Ordinary Shares, par value $0.01 per share, of Scottish Holdings are quoted on the Nasdaq Stock Market National Market under the symbol "SCOT". The Ordinary Shares commenced trading on November 24, 1998. The high and low bid prices for the Ordinary Shares are shown below:
High Low -------------------------- November 24 - December 31, 1998 14.500 11.375 January 1 - March 31, 1999 14.063 8.750 April 1 - June 30, 1999 10.875 9.250 July 1 - September 30, 1999 12.375 9.625 October 1 - December 31, 1999 10.125 7.813 January 1 - March 24, 2000 9.000 7.688
As of March 24, 2000, Scottish Holdings had approximately twenty-six record holders of its Ordinary Shares. Approximately 14,180,250 Ordinary Shares are held in street name. Scottish Holdings did not pay any dividends in 1998. Cash dividends of $0.05 were paid each quarter by Scottish Holdings in 1999. Item 6: SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with the Consolidated Financial Statements, including the related notes, and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
(Stated in United States Dollars) December 31, 1999 December 31, 1998 ------------------------------------------------- Statement of Income Data: Total revenues $ 22,465,011 $ 1,338,151 Total expenses including tax benefit $ 13,590,292 $ 901,830 Net income $ 8,874,719 $ 436,321 Per Share Data: Basic and diluted earnings per share $ 0.50 $ 0.12 Book value per share $ 13.63 $ 13.57 Market value per share $ 8.188 $ 13.750 Cash dividends per share $ 0.20 $ -- Actual number of ordinary shares outstanding 16,046,740 18,568,440 Balance Sheet Data: Total investments $546,806,744 $178,520,719 Total assets $856,634,487 $254,346,239 Total liabilities $637,973,406 $ 2,286,060 Total shareholders' equity $218,661,081 $252,060,179
Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. General Scottish Holdings is an insurance holding company, and our principal assets include the ownership of Scottish Insurance, Harbourton and Scottish Annuity. Scottish Holdings was formed on May 12, 1998, and Scottish Insurance was formed on June 3, 1998, under the laws of the Cayman Islands. We commenced our insurance operations on November 30, 1998, immediately following our IPO. Harbourton was acquired effective as of September 30, 1999 and Scottish Annuity was acquired on December 31, 1999. 6 Results of operations The following table summarizes our net income:
Period from Year ended May 12, 1998* to December 31, 1999 December 31, 1998 Revenues Net premium & reinsurance fees $ 21,311 $ - Interest income, net 24,068,240 1,142,501 Variable life fees 21,438 - Insurance administration fees 992,528 209,886 Realized losses on securities, net (2,638,506) (14,236) -------------------------------------------------------- Total revenues 22,465,011 1,338,151 -------------------------------------------------------- Benefits and expenses Interest credited and other policy benefits 7,200,135 - Acquisition expenses and other insurance expenses 2,225,613 - Operating Expenses 4,205,930 901,830 -------------------------------------------------------- Total benefits and expenses 13,631,678 901,030 -------------------------------------------------------- -------------------------------------------------------- Net income before benefit for federal income taxes 8,833,333 436,321 -------------------------------------------------------- Benefit for federal income taxes Current -- -- Deferred (41,386) -- -------------------------------------------------------- (41,386) -- -------------------------------------------------------- Net income $ 8,874,719 $ 436,321 ======================================================== Basic and diluted net income per oridnary share $0.50 $0.12 ========================================================
*Date of incorporation Overview Our net income of $8,874,719 or $0.50 per share was driven by revenues from our investment portfolio and insurance administration fees. Our investment income in 1999 included $14,344,530 earned on our surplus and $9,723,710 earned in relation to our reinsurance activities. Comparisons to the prior period are not meaningful because of our limited period of operations after our November 1998 IPO. Investments Our investment portfolio is managed by two professional investment managers, Prudential Investment Corporation and Gen Re. Our investment guidelines are designed to diversify the portfolio to maximize investment income while minimizing risk. At December 31, 1999, the portfolio had an average quality rating of AA, an average duration of 2.98 years and an average book yield of 6.79%. At December 31, 1998, the portfolio had an average quality rating of AA+, an average duration of 3.67 years and an average book yield of 5.50%. Our fixed maturity portfolio increased from $178,520,719 to $546,806,744 principally as a result of the reinsurance transactions and acquisition of Harbourton. The duration of our portfolio was reduced from 3.67 years to 2.98 years as investments of short duration were acquired to match the duration of liabilities acquired through our reinsurance operations. The realized loss of $2,638,506 recorded for the year was due to portfolio restructuring. As at December 31, 1999 we had unrealized depreciation of $15.7 million, a result of the effect of the current interest rate environment on our fixed income portfolio. Insurance operations Our business consists of two lines of business, variable life insurance and annuities, and life and annuity reinsurance. Prior to the acquisition of Scottish Annuity, we provided a variety of insurance administration, accounting and other services to Scottish Annuity. During 1999, we wrote our first variable life insurance contracts and entered into several reinsurance treaties. The first treaty was a coinsurance transaction involving group long term disability claims for which we have established a reserve for policyholder benefits of approximately $104 million. This transaction involves a closed block of existing claims that were in effect as of June 1, 1999. The block consists of approximately 1,500 claimants who are receiving disability income payments. No additional claimants may be added. Further, our liability is limited to income benefit payments only and does not include any health, medical or other types of payments. Under our second reinsurance agreement, we contracted to reinsure up to $400 million of group funding agreement business. This transaction was structured so that reserves would be transferred in four separate $100 million tranches. Additionally, closing each tranch is subject to final approval by both parties. We closed on the two first tranches in July and August. Subsequently, in mutual agreement with the ceding company, we elected to delay taking down the third and fourth tranches. This decision does not reflect the quality of the reinsured business, but rather came as a result of adverse conditions in the overall market that were outside our control and that of the ceding company. As of 7 December 31, 1999, we have not taken down the third and fourth tranches. As of year end, the business reinsured has perfomed as we had expected and, if market conditions permit, we will consider taking down the final two tranches. On October 15, 1999 we closed our acquisition of Harbourton. Harbourton provides us with a United States platform to write reinsurance business. Harbourton is licensed in 15 states and the District of Columbia and is an authorized reinsurer in an additional 8 states. Harbourton has approximately $83 million of annuity reinsurance in force as of year end 1999. Subsequent to year end, we have hired 26 reinsurance professionals to expand the reinsurance operations of Harbourton. While we expect to write short duration annuity reinsurance business in Harbourton, the principal focus of new business in Harbourton will be traditional life reinsurance. In addition, we are in the process of changing the name of Harbourton to "Scottish Re (U.S.), Inc.". We expect to have all required regulatory approvals for the name change by the end of the second quarter of 2000. In the fourth quarter we executed a letter of intent with Lincoln National Life Insurance Company, under which, beginning in February 2000, Scottish Insurance will reinsure a 50% share of the new fixed annuity business written by Lincoln and sold through financial institutions. The business, which is managed by First Penn-Pacific Life Insurance Company, is expected to generate $150 million of reinsurance reserves during 2000. The treaty has subsequently been executed, reinsuring business sold on or after February 15, 2000. However no assurance can be given that these expectations can be achieved. Effective December 31, 1999 we acquired ownership of Scottish Annuity, which has approximately $250 million of variable annuity business. We had previously provided insurance administration and accounting services to Scottish Annuity under an administration agreement. Outlook Our business consists of two lines of business, variable life insurance and annuity products, and annuity and life reinsuance. Both lines of business are designed to capitalize on our offshore location, which allows us to offer unique product features and competive pricing. During the past year, we entered into several reinsurance agreements and we are pricing and underwriting several more. In addition, the variable products business is beginning to grow more rapidly as we develop relationships with independent insurance brokers. Capital Resources and Liquidity At December 31, 1999, total capitalization was $218,661,081. In the third quarter we completed a stock repurchase program. At its conclusion, we had repurchased 2,529,700 shares for $24,999,234. On October 15, 1999 we completed our acquisition of Harbourton for $25,183,372. On December 31, 1999 we acquired Scottish Annuity for $11,601,464. We currently have no material commitments for capital expenditures and do not anticipate incurring material indebtedness other than letters of credit, which may be required in the ordinary course of our planned reinsurance business. During the year, we paid quarterly dividends of $928,822 or $0.05 per share, to the shareholders of record as at June 7, 1999 and September 6, 1999. We also paid $802,337 or $0.05 per share to shareholders of record as at December 6, 1999. We expect that our cash and investments, together with cash generated from our businesses, will provide sufficient sources of liquidity and capital to meet our needs for the next several years. In addition, we have access to a combined $70 million through available lines and letters of credit, none of which have been utilized to date. Year 2000 Risk Many computer programs used only two digits to identify a year in the date field prior to December 31, 1999. These programs, if not corrected, could have failed or created erroneous results by or at the year 2000. This "Year 2000" Issue was believed to affect virtually all companies and organizations, including us. Because most of our computer hardware and software is less than three years old, we believed that our exposure with respect to our own computer systems to Year 2000-related problems was not significant, and we encountered no Year 2000 related problems. We are continuing to monitor our systems and those of our primary suppliers of data. Changes in Accounting Standards The Financial Accounting Standards Board's Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities", was issued in June 1998 and requires adoption no later than fiscal quarters of fiscal years beginning after June 15, 2000. The new standard establishes accounting and reporting standards for derivative instruments. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted 8 transaction. We have not yet completed our evaluation of the effect this standard will have on us. We do not currently own any securities that would be subject to this statement. 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. When used, the words "may," "will," "expect," "anticipate," "continue," "estimate," "project," "plan," "intend" and similar expressions identify forward-looking statements. These forward-looking statements involve risks and uncertainties including, but not limited to, the following: our ability to execute the business plan; changes in the general economic conditions including the performance of the financial markets and interest rates; changes in insurance regulations or taxes; changes in rating agency policy; the loss of key executives; trends in the insurance and reinsurance industries; government regulations; trends that may affect our financial condition or results of operations; and the declaration and payment of dividends. Potential investors are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. Actual results may differ materially from those included within the forward-looking statements as a result of various factors. Factors that could cause or contribute to such differences include, but are not limited to, those described in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and under the heading "Risk Factors of Investing in our Ordinary Shares" set forth below. We assume no obligation to update any forward-looking statement to reflect actual results or changes in or additions to the factors affecting such forward-looking statements. RISK FACTORS OF INVESTING IN OUR ORDINARY SHARES Investing in our Ordinary Shares involves a high degree of risk. Potential investors should consider carefully the following risk factors, in addition to the other information set forth in this Form 10-K, prior to investing in the Ordinary Shares. When used, the words "may," "will," "expect," "anticipate," "continue," "estimate," "project," "plan," "intend" and similar expressions identify forward-looking statements regarding among other things: (i) our business and growth plans; (ii) our relationship with third-party service providers and clients; (iii) trends in the insurance and reinsurance industries; (iv) government regulations; (v) trends that may affect our financial condition or results of operations; and (vi) the declaration and payment of dividends. Potential investors are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. Actual results may differ materially from those included within the forward- looking statements as a result of various factors. Factors that could cause or contribute to such differences include, but are not limited to, those described below and under the heading "Management's Discussion and Analysis of Financial Condition and Plan of Operations" and elsewhere in this Form 10-K. Our Variable Life & Annuity Insurance Business Is Dependent Upon Referral Sources. We will not be successful in our variable life and annuity insurance business if we cannot get clients from referrals by financial advisors, investment managers, private bankers, attorneys and other intermediaries in the United States and elsewhere. Since Scottish Insurance and Scottish Annuity are not licensed or registered to do business in the U.S., these referral sources may not act as our agent, nor can they be compensated by us for any activities in the U.S. As a result, we cannot assure you that we will be able to effectively implement our insurance plans. We can, however, pay non-U.S. referral sources for activities undertaken outside the U.S. We expect to compensate referral sources based on a percentage of the revenue received from referrals. Subject to any regulatory limitations, we may provide referrals to persons or entities that provide referrals to us. We cannot assure you that we will receive a significant amount of referrals or, if so, that any referrals will result in actual sales of variable life and annuity insurance policies. Our Ability to Develop Our Reinsurance Business is Dependent Upon Building Relationships. We will not be successful in our non-traditional annuity and life reinsurance businesses if we cannot develop business primarily through relationships with reinsurance intermediaries, insurance consultants, members of the actuarial profession and senior insurance company executives. Our Reinsurance Business Targets a Competitive Market. The Scottish Insurance business plan for reinsurance activities provides that one of our principal targets is reinsuring blocks of in-force fixed annuities issued by insurers that are no longer actively writing these contracts or that want to lessen the reserve and capital requirements associated with these contracts. Another principal target is reinsuring new issues of fixed annuities. Reinsurance of new business can be used to increase capacity, lessen reserve and capital requirements, improve the competativeness of the product, improve the return to the insurance company, or some combination of the above. 9 The Harbourton business plan primarily targets reinsurance of mortality risk associated with life insurance products issued by U.S. direct writers. While sales of life reinsurance have increased dramatically in recent years, the market is also well-established and competitive. As the business targets of both Scottish Insurance and Harbourton are addressed by several domestic and international reinsurers, we cannot be certain that it will meet our expectation. Our Ability to Develop Our Business Plan is Dependent Upon Maintaining Our Claims-Paying Ability Rating. Potential purchasers of insurance policies, insurers, reinsurers and insurance and reinsurance intermediaries use insurance ratings to assess the financial strength and quality of insurers and reinsurers. In addition, an unfavorable rating or the lack of a rating will adversely affect a company purchasing reinsurance. Although Duff & Phelps has assigned Scottish Insurance and Harbourton a claims-paying ability rating of "A" and A.M. Best has assigned both companies a rating of "A-" (Excellent), we cannot assure you that we will be able to maintain these ratings. If we are unable to maintain these ratings, we cannot assure you that we will be able to obtain similar claims-paying ability ratings from other major rating agencies. Changes in U.S. Tax Laws With Respect to Variable Annuities and Life Insurance Could Adversely Affect Our Product Sales The tax treatment afforded annuity and life insurance products (both variable and non-variable) by United States tax law is in many respects more favorable than the tax treatment of certain other investment alternatives, and is therefore a primary competitive feature of such products. Any material change in the current tax treatment of annuity or life insurance products, including the imposition of a "flat tax" or national sales tax in lieu of the current United States federal income tax structure, could adversely affect the market for variable annuities or life insurance products. In addition, elimination of the federal estate tax has been proposed from time to time. Were the federal estate tax to be eliminated, the sale of life insurance products could be adversely affected. The Clinton Administration's Fiscal Year 2000 Budget Proposal contains provisions that, if enacted into law, could adversely affect the sale of variable products. First, the Proposal would require the reporting of payments of more than $10,000 made to entities in "identified tax havens." It is not known if the Cayman Islands will be treated as an identified tax haven, but if so purchasers of variable policies issued by Scottish Insurance or Scottish Annuity will be required to provide certain information to the IRS. Second, the Proposal would require insurance companies to report to the IRS items of income and gain with respect to a "private separate account." Although the reporting requirements that would be imposed under this proposal would generally not apply to insurers that do not do business in the United States, the proposal indicates that the IRS might take the position that a United States taxpayer that is the owner of a variable contract that is based on a "private separate account" (i.e., the separate account supports only a small number of insurance or annuity contracts) will be treated as the owner of the assets held in the separate account for federal income tax purposes. Third, the Proposal would reduce or eliminate the tax advantages of "corporate-owned life insurance." Finally, the Proposal would eliminate the "Crummey" rule, pursuant to which certain gifts to trusts for the payment of life insurance premiums are treated as present interests that are eligible for the annual exclusion from the gift tax. The elimination of this rule would eliminate the primary and most efficient method of making premium payments by insurance trusts. Because we expect that insurance trusts will purchase our variable life insurance policies, or such policies will be contributed to trusts, to provide liquidity for estate taxes and to effect the transfer of assets from one generation to another, adoption of this proposal could adversely affect the sales of these policies, which could adversely affect our results of operation and our financial condition. In its most recent business plan, the IRS announced that it intends to issue guidance as to whether an annuity that is issued by an insurer that is not an "insurance company subject to tax under Subchapter L" (the provisions of the United States Internal Revenue Code that apply to insurance companies that do business in the United States) will be subject to the favorable tax treatment generally afforded annuity contracts, or instead will be treated as "debt instruments" that are not eligible for tax deferral. Were the IRS to adopt a rule or regulation treating annuities issued by Scottish Insurance or Scottish Annuity, which do not do business in the United States, as debt instruments, the market for such annuities could be adversely affected. Governmental Regulation Could Adversely Affect Our Business. Scottish Insurance and Scottish Annuity. Scottish Insurance and Scottish Annuity are licensed as unrestricted Class B insurers and are subject to regulation and supervision by the Cayman Islands Monetary Authority. They are not registered or licensed to do business in any jurisdiction in the United States or any other country. Generally, the sale of insurance within a jurisdiction where the insurer is not admitted to do business is prohibited. Under the operating guidelines, Scottish Insurance and Scottish Annuity do not operate in the United States or, to the extent prohibited, in any other country. We can give no assurance that inquiries or challenges to our insurance activities will not be raised in the future. Scottish Insurance's variable life insurance products have customized features that are not typically available from a company subject to those laws. If Scottish Insurance were to become subject to those laws, our business, results of operations and financial condition would likely be materially adversely affected. In the past, federal and state governments have proposed to regulate foreign insurers. While none of these proposals has been adopted, we cannot assure you that federal or state legislation will not be enacted subjecting our business to supervision and regulation in the United States. Our Reinsurance Business Could Be Adversely Affected By Uncertainties of Letters of Credit or Other Collateral Amounts. Because many jurisdictions do not allow insurance companies to take credit for reinsurance obtained from unlicensed or non-admitted insurers on their statutory financial statements unless appropriate security measures are in place, we anticipate that our reinsurance clients will typically require us to post a letter of credit or provide other collateral through a funds withheld or trust arrangement. If we are unable to obtain a letter of credit facility on commercially acceptable terms or are unable to arrange for such other collateral, our ability to operate our reinsurance business will be severely limited. 10 Our Products Carry With Them Inherent Insurance Industry Risks And Risks Specific to Our Business Plan. Life Reinsurance--Mortality Risk. The principal risk associated with our planned life reinsurance business is mortality risk. Harbourton will reinsure various forms of life insurance products including term life, universal life and traditional life insurance. Mortality risk typically is more stable when spread across large numbers of insureds. As our life reinsurance business grows, we will initially have a relatively small number of lives covered and as a result, our mortality risk exposure is likely to be larger, and our probability of loss less predictable, than an insurer with a larger risk pool. As a result, we cannot assure you that our actual mortality experience will be consistent with our pricing expectation. Mortality risk is also a factor in our variable life insurance product, however, currently we reinsure 100% of the mortality risk on all variable life policies. Fixed Annuity and Life Reinsurance--Investment Risk. The principal risk associated with our fixed annuity reinsurance activities is investment risk. Specifically, we are subject to the following risks: . the risk that invested assets supporting the reinsured business will decrease in value; . the credit risk that the continued ability of a given obligor to make timely payments of principal and interest; . the risk that interest rates will decline and funds reinvested will earn less than expected; and . the risk that we may have to sell assets at a loss to provide for policyholder withdrawals. Universal life insurance and similar policies sensitive to interest rates provide life insurance with adjustable rates of return based on applicable interest rates in effect from time to time. As a result, the risks with respect to reinsuring those kinds of policies may also include investment risks similar to those for fixed annuities. In addition, like annuities, life insurance policies and variable annuities are subject to surrender risk. Reinsurance Business--Ceding Insurer Risk. An additional risk associated with our reinsurance business is the risk that the ceding insurer will be unable to pay to us amounts due because of its own financial difficulties. We can give no assurance that the ceding insurers will be able to pay amounts due to us, which could have a material adverse effect on our business, results of operations or financial condition. In addition, we can give no assurance that the ceding companies will maintain appropriate interest crediting rates with respect to fixed annuities or interest rate-sensitive life insurance policies. Our Business is Dependent on Our Ability To Manage Risks In Our Investment Activities. Our fixed income investments are subject to the following two primary sources of investment risk: . credit risk, relating to the continued ability of a given obligor to make timely payments of principal and interest; and . interest rate risk, relating to the market price and/or cash flow variability associated with changes in market interest rates. We cannot assure you we will be able to effectively manage these risks. If we are unable to effectively manage these risks, our ability to support our planned variable insurance and reinsurance businesses, and our results of operations and financial condition, will be adversely affected. In addition, under our investment guidelines, we can invest up to 15% of our investment portfolio in below investment grade fixed income securities. While any investment carries some risk, the risks of investing in lower-rated securities are greater than the risks of investing in investment grade securities. In addition, we seek to invest the assets transferred to us to match our anticipated reinsurance liabilities. We expect to invest these assets in fixed income and, to a lesser extent, equity securities. We may invest in foreign denominated securities to manage currency risk if the coinsurance transaction involves foreign currency. We may also enter into interest rate swaps and other hedging transactions in an effort to manage interest rate risks. We can not assure you that we will successfully structure our investments so as to match our anticipated reinsurance liabilities. If our calculations are incorrect, or if we improperly structure our investments to match these liabilities, we could be forced to sell investments before they mature at a significant loss with the result that our assets may not be adequate to meet our needed reserves, which could adversely affect our business, results of operations and financial condition. 11 Our Success May Be Affected by Foreign Currency Fluctuations. Our functional currency is the United States dollar. However, because a portion of our planned business, including premiums, may be in currencies other than United States dollars and because we may maintain a small portion of our investment portfolio in investments denominated in currencies other than United States dollars, we may have losses if we do not properly manage or otherwise hedge, our currency risks. We Have Limited Experience Competing With Established Companies in the Life Insurance and Reinsurance Industry. The life insurance and reinsurance industries are highly competitive and most of the companies in these industries are significantly larger, have operating histories and have access to significantly greater financial and other resources than we do. We have limited experience competing with these companies. Our Business Would Be Adversely Affected by the Imposition of or Increases in United States Taxes. As Cayman Islands companies, Scottish Insurance and Scottish Annuity, we operate in a manner so that we are not subject to United States tax, other than withholding tax on certain investment income from United States sources. However, the Internal Revenue Service could contend that we are conducting business in the United States. If the Internal Revenue Service were to prevail in that contention, we would be subject to United States tax at regular corporate rates on taxable income that is effectively connected with United States business plus an additional 30% "branch profits" tax on the income remaining after the regular tax, which could adversely affect our results of operation. Harbourton is a U.S. licensed insurance company and is therefore subject to United States tax at regular corporate tax rates on taxable income. Any increase in United States taxes on income in Harbourton could adversely affect our results of operation. 12 Insurance and reinsurance premiums that will be paid to Scottish Insurance and Scottish Annuity will be subject to a U.S. excise tax to the extent the underlying risks are located in the United States. In addition, our investment income from United States sources could be subject to withholding tax. These taxes could be increased and other taxes could be imposed on our business, which could also adversely affect our results of operation. Owners of Our Ordinary Shares May in Certain Circumstances Be Exposed to Adverse Personal United States Tax Risks. Controlled Foreign Corporation Rules. Each "United States shareholder" of a "controlled foreign corporation" who owns shares in the controlled foreign corporation on the last day of its taxable year generally must include in his gross income for United States federal income tax purposes his pro-rata share of the controlled foreign corporation's "subpart F income," even if the subpart F income has not been distributed. For these purposes, any United States person who owns directly or indirectly 10% or more of our ordinary shares will be considered to be a "United States shareholder." In general, a foreign insurance company such as our subsidiary, Scottish Insurance, is treated as a controlled foreign corporation only if such "United States shareholders" collectively own more than 25% of the total combined voting power or total value of our stock for an uninterrupted period of 30 days or more during any year. We believe that, because of the anticipated dispersion of our share ownership among holders and because of the restrictions in our Articles of Association on transfer, issuance or repurchase of our ordinary shares, our shareholders will not be subject to treatment as "United States shareholders" of a controlled foreign corporation. In addition, because under the Articles of Association no single shareholder will be permitted to exercise 10% or more of our total combined voting power, our shareholders should not be viewed as "United States shareholders'" of a controlled foreign corporation for purposes of these rules. There can be no assurance, however, that these rules will not apply to our shareholders. Related Person Insurance Income Risks. If our related person insurance income, determined on a gross basis, were to equal or exceed 20% of our gross insurance income in any taxable year, and direct or indirect insureds and persons related to such insureds were directly or indirectly to own more than 20% of the voting power or value of our capital stock, a United States person who directly or indirectly owns our Ordinary Shares on the last day of the taxable year may be required to include in his income for United States federal income tax purposes the shareholder's pro-rata share of our related person insurance income for the taxable year, determined as if this income were distributed proportionately to the United States person at that date. Related person insurance income is generally underwriting premium and related investment income attributable to insurance or reinsurance policies where the direct or indirect insureds are United States shareholders or are related to United States shareholders of the insurance company issuing the policies. If we have related person insurance income, and all United States persons own 25% or more of the voting power or value of our shares, any shareholder who is a United States person who owns 10% or more of our shares and disposes of the shares would have any gain from the disposition generally treated as ordinary income to the extent of the shareholder's portion of our undistributed earnings and profits that were accumulated during the period that the shareholder owned the shares. The shareholder also will be required to follow certain reporting requirements, regardless of the amount of shares owned by the shareholder. These rules should not apply to sales of our shares because we are not directly engaged in the insurance business and because proposed United States Treasury regulations applicable to this situation appear to apply only in the case of shares of corporations that are directly engaged in the insurance business. We can give no assurances however, that the IRS will interpret the proposed regulations in this manner or that the proposed regulations will not be promulgated in final form in a manner that would cause these rules to apply to dispositions of Ordinary Shares. Passive Foreign Investment Company Risks. You will have adverse United States federal income tax consequences if we are deemed a "passive foreign investment company." In general, a foreign corporation is a passive foreign investment company if 75% or more of its income constitutes "passive income" or 50% or more of its assets produces passive income. "Passive income" generally includes interest, dividends and other investment income. However, "passive income" does not include income "derived in the active conduct of an insurance business by a corporation which is predominantly engaged in an insurance business." This exception is intended to ensure that income derived by a bona fide insurance company is not treated as passive income, except to the extent this income is attributable to financial reserves in excess of the reasonable needs of the insurance business. Because we intend to continue to be in the insurance business and do not intend to have financial reserves in excess of the reasonable needs of our insurance business, we do not expect to be a "passive foreign investment company." We can give no assurance, however, that the IRS or a court will agree in this view. Our Ability to Pay Dividends Is Dependent on the Success of Our Subsidiaries and Regulatory Constraints. We are a holding company engaged in the variable insurance and reinsurance business through our wholly owned subsidiaries, Scottish Insurance, Scottish Annuity, and Harbourton. Our principal source of income is dividends paid to us by our subsidiaries. The payment of dividends is at the discretion of our Board of Directors and depends largely on the ability of our subsidiaries to pay dividends to us. Scottish Insurance and Scottish Annuity are subject to Cayman Islands regulatory constraints which also affect their ability to pay dividends to us. Specifically, Scottish Insurance and Scottish Annuity must keep enough capital to support its variable insurance and reinsurance businesses and comply with restrictions under Cayman Islands insurance corporate law. Accordingly, there is no assurance that dividends will be declared or paid in the future. Our Articles of Association Contain Substantial Limitations on Ownership, Transfers and Voting Rights. Except as described below with respect to the purchase and sale of our shares on the Nasdaq National Market, our Articles of Association require our directors to decline to register any transfer of our shares if they believe that the transfer would result in a person (or any group of which such person is a member) beneficially owning, directly or indirectly, 10% or more of our outstanding shares. Similar restrictions apply to our issuance and repurchase of shares. The directors also may, in their absolute discretion, decline to register the transfer of any shares if they believe that the transfer may expose us, any subsidiary or shareholder or any person insured or reinsured or proposing to be insured or reinsured by us to adverse tax or regulatory treatment or if they believe that registration of the transfer under any federal or state securities law or under the laws of any other jurisdiction is required and the registration has not been done. A transferor of Ordinary Shares will be deemed to own the shares for dividend, voting and reporting purposes until a transfer of the shares has been registered on our Register of Members. We are authorized to request information from any holder or potential acquirer of our shares as necessary and may decline to register any transaction if we do not receive complete and accurate information. Our directors will not decline to register any transfer of our shares executed on the Nasdaq National Market. However, if any transfer results in the transferee (or any group) beneficially owning, directly or indirectly, 10% or more of any class of shares or causes our directors to have reason to believe that a transfer may expose us, any subsidiary or shareholder thereof or any person insured or reinsured or proposing to be insured or reinsured to adverse tax or regulatory treatment in any jurisdiction, under our Articles of Association, the directors have the power to deliver a notice to the transferee demanding that the transferee surrender to an agent, designated by the directors, certificates representing the shares and any dividends or distributions that the transferee has received as a result of owning the shares. A transferee who has resold the shares before receiving this notice will be required to transfer to the agent the proceeds of the sale, to the extent such proceeds exceed the amount that the transferee paid for such shares, together with any dividends or distributions that the transferee received from us. As soon as practicable after receiving the shares and any dividends or distributions that the transferee received, the agent will use its best efforts to sell the shares and any non-cash dividends or distributions to the extent tradeable as market securities in an arm's-length transaction on the Nasdaq National Market. After applying the proceeds from such sale toward reimbursing the transferee for the price paid for such shares, the agent will pay any remaining proceeds and any cash dividends and distributions to organizations described in Section 501(c)(3) of the Code that the directors designate. The proceeds of any such sale by the agent or the surrender of dividends or distributions will not inure to our benefit or the agent's benefit, but the amounts may be used to reimburse expenses incurred by the agent in performing its duties. In addition, the Articles of Association generally provide that any person (or any group) holding 10% or more of the total voting rights of all of our outstanding capital shares, will have the voting rights of its voting shares reduced so that the person (or group) may not exercise more than approximately 9.9% of the total voting rights. Because of the attribution provisions of the U.S. tax code and the rules of the Securities and Exchange Commission regarding determination of beneficial ownership, this requirement may have the effect of reducing the voting rights of a shareholder whether or not the shareholder directly holds of record 10% or more of the voting shares. The directors also have the authority to request from any shareholder certain information for the purpose of determining whether such shareholder's voting rights are to be reduced. If the shareholder fails to respond to the notice, or submits incomplete or inaccurate information, the directors (or their designee) have the discretion to disregard all votes attached to the shareholder's Ordinary Shares. 13 Our Articles of Association and Cayman Islands Confidentiality Laws Have Anti- takeover Effects. Our Articles of Association contain provisions that make it more difficult to acquire control of us by means of a tender offer, open market purchase, a proxy fight or otherwise, including by reason of the limitation on transfers of Ordinary Shares and voting rights described above. While these provisions are designed to encourage persons seeking to acquire control to negotiate with our Board of Directors, they could have the effect of discouraging a potential purchaser from making a tender offer or otherwise attempting to obtain control. Cayman Islands law restricts disclosure of, among other things, shareholder lists. Accordingly, such laws may make the acquisition of control by means of a tender offer or proxy fight more difficult. Item 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our qualitative discussion about market risk is contained in the following sections: . Business--Underwriting; . Business--Investment Portfolio; . Management's Discussion and Analysis of Financial Condition and Results of Operations; . Risk Factors of Investing in Our Ordinary Shares--Our Products Carry With Them Inherent Industry Risks and Risks Specific to Our Business Plan; . Risk Factors of Investing in Our Ordinary Shares--Our Business is Dependent on Our Ability to Manage Risks in Our Investment Activities; and . Risk Factors of Investing in Our Ordinary Shares--Our Success May be Affected by Foreign Currency Fluctuations. Quantitative Market risk relates to those financial instruments that are sensitive to changes in interest rates, foreign exchange rates and equity price. Scottish Holdings' portfolio is principally composed of fixed maturity bond investments. These investments, by their nature, are subject to market value changes in relation to interest rate changes. Interest Rate Risk Scottish Holdings could incur losses on securities if it were required to liquidate during periods of volatile movements in interest rates. The Company attempts to mitigate its exposure to adverse interest rate movement through asset/liability duration matching exercises, and by staggering the maturities of its fixed income investments to assure sufficient liquidity to meet its obligations and to address reinvestment risk considerations. Sensitivity Anaylsis Scottish Holdings regularly conducts various analyses to gauge the financial impact of changes in interest rates on its financial condition. Quantitative Disclosure of Interest Rate Risk The following table represents a summary of the par values of the Company's financial investments at their expected maturity dates, the weighted average coupons by those maturity dates and the estimated fair value of those instruments for the period ended December 31, 1999. The expected maturity categories take into consideration par amortization (for mortgage backed securities), call features and sinking fund features. The estimated market value of available-for-sale securities is based on bid quotations from security dealers or on bid prices published in news quote services. December 31, 1999 market interest rates were used as discounting rates in the estimation of fair value. (Dollars in millions, except average interest rate)
Expected Maturity Date TOTAL -------------------------------------------------- FAIR Fixed Maturities (US $) 2000 2001 2002 2003 2004 Thereafter TOTAL VALUE ---- ---- ---- ---- ---- ---------- ----- ----- Principal Amount 19.14 38.85 37.04 43.87 46.12 377.09 562.11 546.81 Book Value 19.11 38.87 37.21 43.84 46.25 377.61 562.89 Average Interest Rate (%) 6.55 7.06 6.66 6.65 6.68 7.12 6.99 7.62
Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information called for by this item is set forth in "Item 14: Exhibits, Financial Statements and Reports on Form 8-K". Item 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There are no changes in or disagreements with accountants on accounting and financial disclosure for the fiscal year ended December 31, 1999. 14 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The information required by this item 10 will be set forth in the Company's Proxy Statement for its 2000 Annual Meeting of Shareholders (the "2000 Proxy Statement") under the captions "Proposal for Election of Directors," "Principal Shareholders and Management Ownership" and "Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated herein by reference. Item 11. EXECUTIVE COMPENSATION The information required by this Item 11 will be set forth in the 2000 Proxy Statement under the captions "Management Compensation" and "Report on Executive Compensation" and is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item 12 will be set forth in the 2000 Proxy Statement under the caption "Principal Shareholders and Management Ownership" and is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item 13 will be set forth in the 2000 Proxy Statement under the caption "Certain Transactions" and is incorporated herein by reference. 15 PART IV Item 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this report: (1) Consolidated Financial Statements of Scottish Annuity & Life Holdings, Ltd.: Report of Management Report of Independent Auditors Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Comprehensive Loss Consolidated Statements of Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements (2) Consolidated Financial Statement Schedules All financial statement schedules are omitted because they are either not applicable or the required information is included in the balance sheet or notes thereto appearing elsewhere in this Registration Statement. (3) Exhibits Except as otherwise indicated, the following Exhibits are filed herewith and made a part hereof: Exhibit Number Description of Document - ------- ----------------------------------------------------------------- 3.1 Memorandum of Association of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 3.2 Articles of Association of the Company (incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.1 Specimen Ordinary Share Certificate (incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.2 Form of Amended and Restated Class A Warrant (incorporated herein by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.3 Form of Amended and Restated Class B Warrant (incorporated herein by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.4 Form of Securities Purchase Agreement for the Class A Warrants (incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.5 Form of Warrant Purchase Agreement for the Class B Warrants (incorporated herein by reference to Exhibit 4.5 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.6 Form of Registration Rights Agreement for the Class A Warrants (incorporated herein by reference to Exhibit 4.6 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.7 Form of Registration Rights Agreement for the Class B Warrants (incorporated herein by reference to Exhibit 4.7 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.8 Form of Securities Purchase Agreement between the Company and the Shareholder Investors (incorporated herein by reference to Exhibit 4.10 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.9 Form of Registration Rights Agreement between the Company and the Shareholder Investors (incorporated herein by reference to Exhibit 4.11 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.10 Form of Securities Purchase Agreement between the Company and the Non-Shareholder Investors (incorporated herein by reference to Exhibit 4.12 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.11 Form of Registration Rights Agreement between the Company and the Non-Shareholder Investors (incorporated herein by reference to Exhibit 4.13 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.1 Employment Agreement dated June 18, 1998 between the Company and Michael C. French (incorporated herein by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.2 Second Amended and Restated 1998 Stock Option Plan effective October 22, 1998 (incorporated herein by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.3 Form of Stock Option Agreement in connection with 1998 Stock Option Plan (incorporated herein by reference to Exhibit 4.6 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.4 Agreement dated June 30, 1998 between the Company and International Risk Management (Cayman) Ltd. (incorporated herein by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.5 Amended and Restated Insurance Administration, Services and Referral Agreement dated as of October 1, 1998 between the Company and The Scottish Annuity Company (Cayman) Ltd. (incorporated herein by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.6 Employment Agreement dated July 20, 1998 between the Company and Henryk Sulikowski (incorporated herein by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.7 Form of Indemnification Agreement between the Company and each of its directors and officers (incorporated herein by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.8 Investment Management Agreement dated October 22, 1998 between the Company and Pacific Investment Management Company (incorporated herein by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.9 Investment Management Agreement dated October 22, 1998 between the Company and General Re-New England Asset Management, Inc. (incorporated herein by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.10 Agreement dated October 23, 1998 between the Company and Westport Partners (Bermuda), Ltd. (incorporated herein by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.11 Investment Management Agreement dated October 22, 1998 between the Company and The Prudential Investment Corporation (incorporated herein by reference to Exhibit 10.16 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.12 Form of Omnibus Registration Rights Agreement (incorporated herein by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.13 Investment Advisory Service between the Company and Prudential Securities Corporation (incorporated herein by reference to Exhibit 10.15 to the Company's Registration Statement on Form 10-K filed with the Securities Exchange Commission on March 30, 1999). 10.14 1999 Stock Option Plan. 10.15 Form of Stock Options Agreement in connection with 1999 Stock Option Plan. 10.16 Employment Agreement dated March 08, 2000 between the Company amd Scott E. Willkomm. 21.1 Subsidiaries of Registrant. 24.1 Powers of Attorney. 27.1 Financial Data Schedule. (b) Reports on Form 8-K (1) The Company filed a Report on Form 8-K on November 1, 1999 to report that the Company acquired, through a wholly owned subsidiary, all of the issued and outstanding shares of common stock of Harbourton Reassurance, Inc. (2) The Company filed a Report on Form 8-K/A on December 22, 1999 to file the financial statements of Harbourton Reassurance, Inc. and the Pro Forma Combined Condensed Financial Statements. 16 Scottish Annuity & Life Holdings, Ltd. Consolidated Financial Statements For the Year Ended December 31, 1999 and the Period from May 12, 1998 (date of incorporation) to December 31, 1998 with Report of Independent Auditors 17 Scottish Annuity & Life Holdings, Ltd. Report of Management Management of the Company has primary responsibility for preparing the accompanying consolidated financial statements and for their integrity and objectivity. The consolidated financial statements included in this report were prepared in accordance with accounting principles generally accepted in the United States applied on a consistent basis. The consolidated financial statements include amounts that are based on management's best estimates and judgements. Management also prepared the other information presented in the annual report and is responsible for its accuracy and consistency with the consolidated financial statements. Management of the Company has established and maintains a system of internal controls designed to provide reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition and the prevention and detection of fraudulent financial reporting. The Company's consolidated financial statements have been audited by independent auditors. The independent auditors had unrestricted access to each member of management in conducting their audit. Management has made available to the independent auditors all of the Company's financial records and related data, as well as the minutes of shareholders' and directors' meetings. Management believes that all representations made to the independent auditors during their audits were valid and appropriate. The Audit Committee of the Board of Directors is comprised of certain directors who are neither employees nor officers of the Company. The Audit Committee meets periodically with management and independent auditors regarding independent audit scope, timing, results and to discuss other auditing and financial reporting matters. The independent auditors have direct access to and meet privately with the Audit Committee. Scott Willkomm President Bruce J. Crozier Senior Vice President and Chief Financial Officer 18 Report of Independent Auditors To the Shareholders and Board of Directors Scottish Annuity & Life Holdings, Ltd. We have audited the accompanying consolidated balance sheets of Scottish Annuity & Life Holdings, Ltd. and subsidiaries (the "Company") as of December 31, 1999 and 1998, and the related consolidated statements of income, comprehensive loss, shareholders' equity, and cash flows for the year ended December 31, 1999 and for the period from May 12, 1998 (date of incorporation) through December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Scottish Annuity & Life Holdings, Ltd. and subsidiaries at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for the year ended December 31, 1999 and for the period from May 12, 1998 (date of incorporation) to December 31, 1998 in conformity with accounting principles generally accepted in the United States of America. /s/ Ernst & Young George Town, Grand Cayman British West Indies March 22, 2000 19 Scottish Annuity & Life Holdings, Ltd. Consolidated Balance Sheets (Stated in United States Dollars)
December 31 1999 1998 -------------- -------------- Assets Fixed maturity investments $546,806,744 $178,520,719 Cash and cash equivalents 29,000,653 69,610,299 Receivables: Reinsurance premiums 298,295 - Risk fees 861,552 - Due from investment brokers 109,891 3,060,543 Accrued interest 5,554,355 2,883,009 Policy loans 536,420 - Deferred acquisition costs 1,919,528 - Present value of inforce business 10,619,599 - Other assets 740,116 271,669 Goodwill 200,000 - Deferred tax benefit 2,218,077 - Current income tax receivable 196,905 - Fixed assets and leasehold improvements, net 1,026,820 - Segregated assets 256,545,532 - ------------ ------------ Total assets $856,634,487 $254,346,239 ============ ============ Liabilities Reserves for future policy benefits $365,478,762 $ - Accounts payable and accrued expenses 4,347,648 1,959,160 Due to related party 11,601,464 326,900 Segregated liabilities 256,545,532 - ------------ ------------ Total Liabilities 637,973,406 2,286,060 Shareholders' Equity Share capital: Issued and fully paid: 16,046,740 ordinary shares (18,568,440 ordinary shares December 31,1998) par value $0.01 per share 160,467 185,684 Additional paid in capital 227,534,287 252,291,320 Accumulated other comprehensive loss Unrealized depreciation of investments (15,684,732) (853,146) Retained Earnings 6,651,059 436,321 ------------ ------------ Total shareholders' equity 218,661,081 252,060,179 ------------ ------------ Total liabilities and shareholders' equity $856,634,487 $254,346,239 ============ ============
See accompanying notes to consolidated financial statements 20 Scottish Annuity & Life Holdings, Ltd. Consolidated Statements of Income (Stated in United States Dollars)
Year Ended The Period December 31, Ended December 1999 31, 1998 * ----------- ----------- Revenues Investment income, net $24,068,240 $ 1,142,501 Insurance administration fees 992,528 209,886 Variable life fees 21,438 - Premiums and reinsurance fees, net 21,311 - Realized losses on securites, net (2,638,506) (14,236) ----------- ----------- Total revenues 22,465,011 1,338,151 ----------- ----------- Benefits and expenses Interest credited and other policy benefits 7,200,135 - Acquisition costs & other insurance expenses 2,225,613 - Operating expenses 4,205,930 901,830 ----------- ----------- Total benefits and expenses 13,631,678 901,830 ----------- ----------- Net income before benefit ----------- ----------- for federal income taxes 8,833,333 436,321 ----------- ----------- Benefit for federal income taxes Current - - Deferred (41,386) - ----------- ----------- (41,386) - ----------- ----------- Net income $ 8,874,719 $ 436,321 =========== =========== Earnings per share Basic and diluted net income $ 0.50 $ 0.12 =========== ===========
* the period from May 12, 1998 (date of incorporation) to December 31, 1998 See accompanying notes to consolidated financial statements 21 Scottish Annuity & Life Holdings, Ltd. Consolidated Statements of Comprehensive Loss (Stated in United States Dollars)
Year Ended The Period December 31, Ended December 1999 31, 1998 * ------------ --------------- Net income $ 8,874,719 $ 436,321 Other comprehensive loss Unrealized depreciation on investments (17,470,092) (867,382) Add: reclassification adjustment for losses included in net income 2,638,506 14,236 ------------ --------- Unrealized depreciation on investments (14,831,586) (853,146) ------------ --------- Comprehensive loss $ (5,956,867) $(416,825) ============ =========
* the period from May 12, 1998 (date of incorporation) to December 31, 1998 See accompanying notes to consolidated financial statements 22 Scottish Annuity & Life Holdings, Ltd. Consolidated Statements of Shareholders' Equity (Stated in United States Dollars)
Year Ended The Period December 31, Ended December 1999 31, 1998 * ------------ ------------ Share: Beginning of period 18,568,440 - Issuance of founder shares - 1,500,000 Repurchase of shares (2,529,700) (1,100,000) Issuance to executive officers 8,000 - Sales to direct investors - 1,418,440 Initital public offering - 16,750,000 ------------ ------------ End of period 16,046,740 18,568,440 ============ ============ Share capital: Beginning of period $ 185,684 $ - Issuance of founder shares - 15,000 Repurchase of shares (25,297) (11,000) Issuance to executive officers 80 - Sales to direct investors - 14,184 Initial public offering - 167,500 ------------ ------------ End of period 160,467 185,684 ------------ ------------ Additional paid in capital: Beginning of period 252,291,320 - Issuance of founder shares - 485,000 Issuance of Class A warrants - 100,000 Issuance of Class B warrants - 302,000 Issuance of warrants - 11,000 Repurchase of shares (24,973,937) - Issuance to executive officers 87,920 - Sales to direct investors - 19,985,816 Initial public offering - 231,407,504 Issuance of equity options 128,984 - ------------ ------------ End of period 227,534,287 252,291,320 ------------ ------------ Accumulated other comprehensive loss: Beginning of period (853,146) - Unrealized depreciation on investments (14,831,586) (853,146) ------------ ------------ End of period (15,684,732) (853,146) ------------ ------------ Retained earnings: Beginning of period 436,321 - Net income 8,874,719 436,321 Dividends paid (2,659,981) - ------------ ------------ End of period 6,651,059 436,321 ------------ ------------ Total shareholders' equity $218,661,081 $252,060,179 ============ ============
* the period from May 12, 1998 (date of incorporation) to December 31, 1998 See accompanying notes to consolidated financial statements 23 Scottish Annuity & Life Holdings, Ltd. Consolidated Statements of Cash Flows (Stated in United States Dollars)
Year Ended The Period December 31, Ended December 1999 31, 1998 * ------------- --------------- Operating activities Net income $ 8,874,719 $ 436,321 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Net realized losses on securities 2,638,506 14,236 Non cash salaries and professional fees 128,984 - Depreciation 94,856 1,598 Amortization of deferred acquisition costs 165,389 - Net change in policy benefit reserves 1,097,944 - Changes in assets and liabilities, net of effects of acquisitions: Reinsurance premiums receivable 230,766 - Policy loans 26,199 - Other receivables 279,306 (5,943,552) Deferred acquisition costs (2,084,917) - Other assets (464,788) (271,669) Goodwill (200,000) - Deferred tax benefit (41,386) - Accounts payable and accrued expenses (2,588,719) 1,959,160 Due to related party 11,274,564 326,900 ------------- ------------- Net cash provided by (used in) operating activities 19,431,423 (3,477,006) ------------- ------------- Investing Activities Cash acquired, net of payments for acquisitions 60,939,073 - Purchase of securities (846,767,542) (179,388,101) Proceeds on sales of securities 475,246,053 - Purchase of fixed assets & leasehold improvements (1,121,676) (1,598) ------------- ------------- Net cash used in investing activities (311,704,092) (179,389,699) ------------- ------------- Financing activities Deposits to insurance accounts 305,653,734 - Withdrawals from insurance accounts (26,419,496) - Issuance of company stock 88,000 - Net cost of repurchase of company stock (24,999,234) - Dividends paid (2,659,981) - Issuance of share capital - 252,075,004 Issuance of Class A warrants - 100,000 Issuance of Class B warrants - 302,000 ------------- ------------- Net cash provided by financing activities 251,663,023 252,477,004 ------------- ------------- Net change in cash and cash equivalents (40,609,646) 69,610,299 Cash and cash equivalents, beginning of period 69,610,299 - ------------- ------------- Cash and cash equivalents, end of period $ 29,000,653 $ 69,610,299 ============= =============
* the period from May 12, 1998 (date of incorporation) to December 31, 1998 See accompanying notes to consolidated financial statements 24 Scottish Annuity & Life Holdings, Ltd. Notes to Consolidated Financial Statements December 31, 1999 1. Organization, business, and basis of presentation Organization Scottish Annuity & Life Holdings, Ltd. ("Scottish Holdings") was incorporated as an exempted company with limited liability on May 12, 1998 under the laws of the Cayman Islands. Scottish Holdings has been organized to provide annuity contracts and insurance policies, as discussed below, through its wholly-owned subsidiaries, Scottish Annuity & Life Insurance Company (Cayman) Ltd. ("Scottish Insurance"), The Scottish Annuity Company (Cayman) Ltd. ("Scottish Annuity"), Scottish Holdings, Inc. ("SHI"), and Harbourton Reassurance, Inc. ("Harbourton") (collectively referred to as the "Company", and additionally referred to as "we", "our", and "us"). Prior to June 24, 1998, Scottish Holdings, Ltd. ("SHL"), a Cayman Islands company, owned all Ordinary Shares of Scottish Holdings. On July 8, 1998, Scottish Insurance received an unrestricted Class 'B' insurer's license under the insurance laws of the Cayman Islands. Scottish Holdings' initial public offering of its Ordinary Shares (the "IPO") was completed on November 30, 1998. Scottish Annuity was acquired by Scottish Holdings on December 31, 1999. The Company operates as an insurance company and engages in writing deferred variable annuities with a fixed annuity option with persons who are not resident in the Cayman Islands. Scottish Annuity also operates under the provision of an unrestricted Class `B' insurer's license under the insurance laws of the Cayman Islands. Scottish Holdings also acquired Harbourton (a U.S. based reinsurer) effective on September 30, 1999. Harbourton provides us with a United States platform to write insurance business. Harbourton is licensed in 15 states and the District of Columbia and is an authorized reinsurer in an additional 8 states. Business Our business activities currently consists of fee income from the administration of variable annuities for Scottish Annuity (prior to its acquistion) and includes life and annuity reinsurance and sales of variable life insurance policies. Variable life insurance is a separate account product where the net premium is placed in a separate account for the policyholder that is not subject to the claims of the Company's general creditors. Our product is targeted towards high net worth individuals or families generally worth more than $10 million. A private money manager manages the cash values. We do not provide any investment management or advisory services to any individual variable life policyholder. We also offer variable life insurance products to corporate customers in the form of corporate owned life insurance, bank owned life insurance, and trust-owned life insurance. These types of policies are primarily used in connection with certain deferred compensation and bonus plans for executives. We also offer variable life insurance policies under a group policy that is owned by an employer to fund employee benefits. Traditional reinsurance of life and annuity business is an arrangement under which an insurance company (the reinsurer) agrees to insure (assume risks of) another insurance company (the ceding company or cedent) for all or a portion of the insurance underwritten by the ceding company. Our reinsurance activities primarily focus on group and individual life and annuity type contracts. Basis of presentation Accounting Principles - Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and all amounts are reported in United States dollars. We follow the accounting standards established by the Financial Accounting Standards Board and the American Institute of Certified Public Accountants. Consolidation - We consolidate our results and have eliminated all significant intercompany transactions. 25 Scottish Annuity & Life Holdings, Ltd. Notes to Consolidated Financial Statements (Continued) 1. Organization, business, and basis of presentation (continued) Estimates, risks and uncertainties - The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported on the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Our most significant assumptions are for assumed reinsurance liabilities. We review and revise these estimates as appropriate. Any adjustments made to these estimates are reflected in the period the estimates are revised. 2. Summary of significant accounting policies As previously stated the consolidated financial statements are prepared in accordance with GAAP. The following are the significant accounting policies adopted by the Company: Investments - Fixed maturities are classified as available for sale, and accordingly, we carry these investments at fair values on our consolidated balance sheets. The cost of fixed maturities is adjusted for prepayments and the amortization of premiums and discounts. The unrealized appreciation (depreciation) is the difference between fair value and amortized cost and is recorded directly to equity with no impact to net income. The change in unrealized appreciation (depreciation) is included in accumulated other comprehensive loss, unrealized depreciation on investments. Short-term investments are carried at cost, which approximates fair value. Realized gains (losses) on securities are determined on a specific identification method which means that we track the cost of each security purchased so that we are able to identify and record a gain or loss when it is subsequently sold. In addition, declines in fair value that are determined to be other than temporary are included in realized gains (losses). Investment transactions are accounted for on a trade date basis. Interest is recorded on the accrual basis. Insurance administration fees - We collected insurance administration fees for the administration of a variable annuity book of business, which was written by Scottish Annuity. These fees are recognized ratably over the year based on the fair value of the underlying investments. (See note 11 for further discussion.) Due from brokers - Due from brokers includes amounts receivable from our brokers for investment transactions that have not settled at year end. Organizational and offering expenses - All formation and organization costs incurred have been expensed in the period ending December 31, 1998. All offering costs incurred in connection with the IPO, including certain amounts payable for investment banking and financial advisory services, have been deducted from the gross proceeds of the IPO. Cash and cash equivalents - Cash and cash equivalents include fixed deposits with an original maturity, when purchased, of three months or less. Cash and cash equivalents are recorded at face value, which approximates fair value. Policy revenues and related expenses - Our policy revenues are generated from reinsurance and variable life activities. The reinsurance revenues are derived from interest sensitive life products and traditional life reinsurance. The premium on interest sensitive products is reported as a deposit on the consolidated balance sheet with a corresponding liability. Revenues are reported periodically for the mortality, policy administration and surrender charges. The related policy benefits and claims expenses include benefit claims incurred in excess of deposits and interest credited to the policyholder for the period. The premiums from traditional reinsurance transactions are included in revenues over the premium paying period of the underlying policies. The related policy benefits and expenses are provided against the revenues to recognize profits over the estimated lives of the policies. Variable life insurance policies are also interest sensitive products and are reported like the reinsurance interest rate sensitive products except that the assets are reported in a separate account for the benefit of the policyholder. 26 Scottish Annuity & Life Holdings, Ltd. Notes to Consolidated Financial Statements (Continued) 2. Summary of significant accounting policies (continued) Deferred policy acquisition costs - The costs of acquiring new business such as commissions, certain internal expenses related to policy issuance and underwriting departments, and certain variable selling expenses are capitalized and amortized in future periods. For variable life insurance and reinsurance of investment type fixed annuity contracts and reinsured variable annuity contracts, deferred policy acquisition costs will be amortized over the expected average life of the contracts as a constant percentage of the present value of estimated gross profits arising principally from investment results, mortality and expense margins, and surrender charges based on historical and anticipated future experience, which will be updated at the end of each accounting period. In computing amortization, interest will accrue to the unamortized balance of capitalized acquisition costs at the rate used to discount expected gross profits. The effect on the amortization of deferred policy acquisition costs of revisions to estimated gross profits will be reflected in earnings in the period such estimated gross profits are revised. For reinsured fixed immediate annuity policies and traditional life insurance contracts, deferred policy acquisition costs are charged to expense using assumptions consistent with those used in computing policy reserves. Assumptions as to anticipated premiums are estimated at the date of the policy issuance and are consistently applied during the life of the policies. Deviations from estimated experience are reflected in earnings in the period such deviations occur. For these policies, the amortization periods generally are for the estimated lives of the policies. When the liabilities for future policy benefits plus the present value of expected future gross premiums for a policy are insufficient to provide for expected future benefits and expenses for that policy, a premium deficiency reserve will be established by a charge to income. Present value of inforce business - The present value of the inforce business will be amortized over the expected life of the business at the time of acquisition. The amortization each year will be a function of the gross profits each year in relation to the total gross profits expected over the life of the business, discounted at the assumed net credit rate. Fixed assets and leasehold improvements - Fixed assets and leasehold improvements are recorded at cost and are depreciated over their estimated useful lives using the straight-line method. Policyholders' benefit liabilities - The liabilities for interest sensitive products equal the accumulated account values of the policies or contracts as of the valuation date. Liabilities for future benefits under traditional life insurance contracts reinsured are estimated using actuarial assumptions for mortality, morbidity, terminations, investment yields, and expenses applicable at the time the insurance contracts were entered into. Benefit liabilities for fixed annuities during the accumulation period equal their account values and, after annuitization equal the accumulated present value of expected future payments. Separate account assets and liabilities - Separate account investments are recorded at the net asset values of the underlying funds invested in plus separate cash and cash equivalent balances, less separate account fees payable to the Company. The funds in the separated accounts are not part of the Company's general funds and are not available to meet the general obligations of the Company. Separate account liabilities are the amounts set aside to pay the deferred variable annuities. They consist of the initial premiums paid after consideration of the net investment gains/losses attributable to each separate account, less fees and withdrawals. Separate account fees - Scottish Annuity charges separate account fees quarterly in advance. Such fees are recognized into income ratably. Separate account fees consist of Mortality, Expense and Distributions Risk Charges, Set-Up, and Maintenance and Supervisory Fees based on total assets in each contract holder's separate account. During 1996, Scottish Annuity ceased charging Maintenance and Supervisory Fees to substanially all contract holders and added an annual flat fee for contract administration. In addition, a contract holder may be charged a fee upon a partial or total surrender of the policy. Fair value of financial instruments - The fair value of the consolidated balance sheets which qualify as financial instruments under Statement of Financial Accounting Standards ("SFAS") No. 107 "Disclosure About Fair Value of Financial Instruments", approximates the carrying amount presented in the consolidated financial statements. 27 Scottish Annuity & Life Holdings, Ltd. Notes to Consolidated Financial Statements (Continued) 2. Summary of significant accounting policies (continued) Accounting Standards - The Financial Accounting Standards Board has issued the following accounting standard that will affect us. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", was issued in June 1998 and requires adoption no later than fiscal quarters of fiscal years beginning after June 15, 2000. The new standard establishes accounting and reporting standards for derivative instruments. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency- denominated forecasted transaction. We have not yet completed our evaluation of the effect this standard will have on us. 3. Business Acquisitions SHI, a wholly owned subsidiary was formed on August 18, 1999, for the sole purpose of the purchase of Harbourton for a purchase price of $25,183,372. This transaction provides us with a United States platform to write insurance business. Harbourton is licensed in 15 states and the District of Columbia and is an authorized reinsurer in an additional 8 states. On December 31, 1999, Scottish Holdings entered into an agreement with SHL to purchase all the outstanding shares of Scottish Annuity. Scottish Holdings paid SHL $11,601,464, subject to adjustment for the value of its net assets per its year end audited financial statements. Scottish Annuity operates as a life insurance company and engages in writing deferred variable annuities with a fixed annuity option with persons who are not resident in the Cayman Islands. It does not provide any investment management or advisory services. The acquisitions described above were accounted for by the purchase method of accounting. In accordance with Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations", the accompanying consolidated statements of income do not include any revenues or expenses related to these acquisitions prior to the respective closing dates. The following unaudited consolidated pro forma information utilizes our audited information for 1999 and 1998 and unaudited information for Scottish Annuity and Harbourton for the same periods. The proforma data assumes that both acquisitions had occurred on January 1, 1999 and May 12, 1998 respectively.
Year ended December Period from May 12, 1998* to 31, 1999 December 31, 1998 -------------------------------------------------------- Revenues $ 25,661,173 $ 5,899,127 Net income (loss) $ 5,859,259 $ (2,124,277) Net income (loss) per share $ 0.33 $ (0.59)
* Date of incorporation These unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which would have actually resulted had the acquisitions been in effect on January 1, 1999 or May 12, 1998 or of future results of operations. 4. Information Concerning Business Segments We record segmental reporting in accordance with SFAS No.131 "Disclosures about Segments of an Enterprise and Related Information". The reportable lines of business offer different products and services. The Company's main lines of business are Reinsurance and Variable Products. Reinsurance and Variable Products activities have been defined in Note 1. 28 Scottish Annuity & Life Holdings, Ltd. Notes to Consolidated Financial Statements (Continued) 4. Information Concerning Business Segments (continued) The segmental reporting for the lines of business is as follows:
December 31, 1999 ------------------------------------------------------------------------------- Variable Reinsurance Products Other Total ------------------------------------------------------------------------------- REVENUES Premiums and reinsurance fees, net $ 21,311 $ - $ - $ 21,311 Investment income, net 9,723,710 - 14,344,530 24,068,240 Realized gains (losses) on securities 191,213 - (2,829,719) (2,638,506) Variable products fees - 21,438 - 21,438 Insurance administration fees - 992,528 - 992,528 ------------------------------------------------------------------------------- Total revenues 9,936,234 1,013,966 11,514,811 22,465,011 BENEFITS AND EXPENSES Interest credited and other policy benefits 7,200,135 - - 7,200,135 Acquisition costs and other insurance expenses 1,905,048 320,565 - 2,225,613 Operating expenses 70,854 10,519 4,124,557 4,205,930 ------------------------------------------------------------------------------- Total benefits and expenses 9,176,037 331,084 4,124,557 13,631,678 Benefit for federal income taxes Current - - - - Deferred (41,386) - - (41,386) ------------------------------------------------------------------------------- Net income $ 801,583 $ 682,882 $ 7,390,254 $ 8,874,719 ===============================================================================
Our activities for the period ended December 31, 1998 were limited to investment income on capital and operating expenses not specifically allocated to a line of business and therefore, no comparative information has been provided. For 1999, the "Other" category includes investment income and realized losses on capital and operating expenses not specifically allocated to a line of business. Assets as of December 31, 1999 for the Reinsurance and Variable Products lines of business were $407,057,362 and $268,174,719, respectively. Assets of $181,402,406 were not specifically allocated to a line of business. Deferred acquisition costs for the Reinsurance line was $1,851,893 and for the Variable line was $67,635. Present value of inforce business for the Reinsurance line was $119,599 and for the Variable line was $10,500,000. Reserves for future policy benefits relate to the Reinsurance line of business. Segregated assets and liabilities relate to the Variable Products line of business. As of December 31, 1998, all assets and liabilities were not specifically allocated to a line of business. 5. Earnings per Ordinary Share We calculate earnings per ordinary share in accordance with SFAS No. 128 "Earnings per Share" (EPS). Basic EPS excludes the dilutive effect of options and warrants. Diluted EPS includes the dilutive effect of these securities under the treasury stock method. The weighted-average number of shares is determined by the number of days the shares have been outstanding over the accounting period. The dilutive impact of our warrants and options is not material and therefore, has no effect on EPS. 29 Scottish Annuity & Life Holdings, Ltd. Notes to Consolidated Financial Statements (Continued) 5. Earnings per Ordinary Shares (continued)
Year Ended Period December ended December 31, 1999 31, 1998* ---------------------------------------- Net income $ 8,874,719 $ 436,321 Weighted average number of shares outstanding 17,919,683 3,586,788 Basic and diluted net income per ordinary share $ 0.50 $ 0.12 Actual shares outstanding 16,046,740 18,568,440
* the period from May 12, 1998 (date of incorporation) to December 31, 1998 At December 31, 1998, the Company had a relatively small number of shares outstanding from the date of incorporation through the initial public offering on November 30, 1998. As a result, the weighted average number of shares outstanding for the period ended December 31, 1998 and the related EPS are not meaningful, in the opinion of management. 6. Fixed Maturities The amortized cost, gross unrealized appreciation and depreciation, and estimated fair values of our fixed maturity investments are as follows:
December 31, 1999 Gross Unrealized Gross Unrealized Estimated Fair Amortized Cost Appreciation Depreciation Value ---------------------------------------------------------------------- U.S. treasury securities and obligations of U.S. government agencies $ 21,375,543 $ 646 $ (2,072,729) $ 19,303,460 U.S. corporate securities 190,641,123 112,606 (7,226,609) 183,527,120 Mortgage and asset backed securities 350,474,810 113,767 (6,612,413) 343,976,164 ----------------------------------------------------------------------- $ 562,491,476 $ 227,019 $(15,911,751) $ 546,806,744 ======================================================================= December 31, 1998 Gross Unrealized Gross Unrealized Estimated Fair Amortized Cost Appreciation Depreciation Value ---------------------------------------------------------------------- U.S. treasury securities and obligations of U.S. government agencies $ 77,060,078 $ 885 $ (632,945) $ 76,428,018 U.S. corporate securities 64,174,716 106,203 (256,058) 64,024,861 Mortgage and asset backed securities 38,139,071 23,992 (95,223) 38,067,840 ----------------------------------------------------------------------- $ 179,373,865 $ 131,080 $ (984,226) $ 178,520,719 =======================================================================
30 Scottish Annuity & Life Holdings, Ltd. Notes to Consolidated Financial Statements (Continued) 6. Fixed Maturities (continued) The contractual maturities of the fixed maturities are as follows. Actual maturities may differ as a result of calls and prepayments.
December 31, 1999 ----------------------------------- Amortized Estimated Cost Fair Value ----------------------------------- Due in one year or less $ 4,196,759 $ 4,200,585 Due in one year through five years 102,304,343 100,215,581 Due in five years through ten years 79,773,425 75,975,816 Due after ten years 25,742,139 22,438,598 ----------------------------------- 212,016,666 202,830,580 Mortgage and asset backed securities 350,474,810 343,976,164 ----------------------------------- $ 562,491,476 $ 546,806,744 =================================== December 31, 1998 ----------------------------------- Amortized Estimated Cost Fair Value ----------------------------------- Due in one year or less $ 2,500,000 $ 2,500,000 Due in one year through five years 77,113,324 76,730,208 Due in five years through ten years 30,084,831 30,049,753 Due after ten years 31,536,639 31,172,918 ----------------------------------- 141,234,794 140,452,879 Mortgage and asset backed securities 38,139,071 38,067,840 ----------------------------------- $ 179,373,865 $ 178,520,719 ===================================
Gross gains and gross losses for the periods are as follows:
Year Ended December 31, Period from May 12, 1998* 1999 to December 31, 1998 -------------- ------------------------- Gross realized gains $ 765,011 $ 88,368 Gross realized losses $ 3,403,517 $ 102,604
* Date of incorporation At December 31, 1999 and 1998, investments owned by the Company for which no readily available market quotation exists were valued at $8,647,037 and $nil, respectively. Our investment manager obtains prices for these investments from a third party source. The realizable value of the securities may differ from the amount recorded in the consolidated balance sheets. 7. Present Value of Inforce Business Total amortization of the present value of inforce business was $ nil for the year ended December 31, 1999 and $ nil for the period ended December 31, 1998. Based on the amortization method and expected gross profits, the following chart provides the percentage of the present value of inforce business that we expect to amortize each year for the next 5 years:
Percent Amortized Year In the Year ---- ----------------- 2000 0.64% 2001 1.96% 2002 3.41% 2003 5.13% 2004 7.18%
8. Reserves Activity in the liability for unpaid claims and claim adjustment expense is summarized below.
Year Ended December 31, 1999 ------------ Balance at the beginning of the year $ - Liabilities assumed 105,653,734 ------------ 105,653,734 ------------ Adjustments to reserves (1,861,689) Amortization of discount 3,497,514 ------------ Total incurred liabilities 1,635,825 ------------ 107,289,559 Benefits paid in the current year 12,133,782 ------------ Balance at the end of the year $ 95,155,777 ============
During the year, the Company reinsured a closed block of long-term disability claims. Our adjustment to reserves reflects changes in the estimates underlying the initial reserves and improvements in our case management. As of December 31, 1999, the unpaid claims and claim adjustment liability for these contracts is included in reserves for future policy benefits. We had no reserves for future policy benefits for the period ended December 31, 1998. The Company has entered into a reinsurance funding agreement that features put options for the ultimate insureds. If executed, these options would require the Company to repay liabilities within seven or thirty days. Total liabilities subject to the put options total $185,714,286. The Company holds marketable securities to meet these obligations. 9. Shareholders' Equity Effective June 24, 1998, SHL transferred to its shareholders all of its ordinary shares in Scottish Holdings by way of a distribution. On October 22, 1998, we paid nominal consideration and issued 900,000 Class A warrants to reacquire and cancel 1,100,000 of our issued and outstanding ordinary shares. On November 30, 1998, we closed our IPO of 16,750,000 ordinary shares for proceeds received net of underwriting discounts and commissions totaling $235,375,000. Simultaneous with the initial closing of the IPO, direct sales of 1,418,440 ordinary shares and 400,000 Class A warrants were made to Direct Investors for net proceeds of $20,000,000. 31 Scottish Annuity & Life Holdings, Ltd. Notes to Consolidated Financial Statements (Continued) 9. Shareholders' Equity (continued) Common shares We are authorized to issue 100,000,000 ordinary shares of par value $0.01 each. At December 31, 1998, 18,568,440 ordinary shares were outstanding. In January 1999, 8,000 shares were issued as non-monetary compensation to an executive officer. On September 1, 1999, it was agreed by the directors of the Company to enter into a share repurchase program. This was completed November 2, 1999, resulting in 2,529,700 shares being repurchased for a total amount of $24,999,234. As at December 31, 1999, 16,046,740 ordinary shares were outstanding. Preferred shares We are authorized to issue 50,000,000 preferred shares of par value $0.01 each. At the balance sheet dates there were no preferred shares issued or outstanding. Warrants In connection with our initial capitalization, we issued Class A warrants to purchase an aggregate of 1,550,000 ordinary shares to related parties. The aggregate consideration of $100,000 paid for these warrants is reflected as additional paid-in-capital. The Class A warrants were issued on June 9, 1998 at the initial stage of the development of our business plan when the feasibility of proceeding with the offering was uncertain. The consideration paid for the Class A warrants was determined to be fair value in the judgement of management in light of such uncertainty. Effective September 3, 1998, the Class A warrant agreements were superseded by Amended and Restated Class A warrant agreements with no material impact on the operation of the agreements. The exercise price of the Class A warrants is $15 per share of the Company's ordinary shares. The Class A warrants become exercisable in equal amounts over a three-year period commencing on the first anniversary of the consummation of the Offering. The Class A warrants will expire on the tenth anniversary of the consummation of the Offering. We entered into Warrant Purchase Agreements whereby The Roman Arch Fund L.P. and The Roman Arch Fund II L.P. purchased an aggregate of 200,000 Class B warrants for an aggregate purchase price of $302,000 which is reflected as additional paid-in-capital. Class B Warrants are exercisable at $15 per ordinary share, in equal amounts over a three-year period commencing one year after the Offering and expire ten years after the consummation of the Offering. Management is of the view that the agreed sale price of the Class B Warrants represented fair value at the time of purchase. The Roman Arch Fund L.P. and the Roman Arch Fund II L.P. are each limited partnerships and affiliates of Prudential Securities Incorporated, one of the underwriters of the IPO, and make investments for the benefit of limited partners who are employees of Prudential Securities Incorporated. The Class B warrants were issued after our business plan underwent further development and we were in a position to proceed with the Offering. As a result, the Class B warrants were issued for greater consideration. Effective September 3, 1998, the Class B warrant agreements were superseded by Amended and Restated Class B warrant agreements with no material impact on the operation of the agreements. As of December 31, 1999, no Class A or Class B warrants have been executed. We have entered into an agreement with Westport Partners (Bermuda), Ltd. ("Westport"), a developer and administrator of insurance products for international insurance brokers, insurance companies and corporations, pursuant to which Westport will provide non-exclusive distribution services with respect to the Company's variable life insurance products. In addition, Westport may be retained to provide administration services for certain variable life insurance products that the Company issues. For its distribution activities, we are authorized to issue up to 750,000 Class C warrants to Westport at an exercise price equal to $15 per ordinary share. The warrants are issuable over a four-year period beginning on January 1, 2000 and on each anniversary thereafter in an amount to be determined by a formula, as defined, in the agreement. The Class C warrants, if issued, will be for a term expiring ten years from the date of the Offering. We apply the fair value method of SFAS Statement No. 123, "Accounting for Stock-Based Compensation," in accounting for these warrants. No Class C warrants had been issued as of December 31, 1999. 32 Scottish Annuity & Life Holdings, Ltd. Notes to Consolidated Financial Statements (Continued) 10. Stock Option Plan The Company has two stock option plans (the "1998 Plan" and the "1999 Plan") which allows us to grant non-statutory options, subject to certain restrictions, to certain eligible employees, non-employee Directors, advisors and consultants. The minimum exercise price of the options will be equal to the fair market value, as defined in the Plan, of our ordinary shares at the date of grant. The term of the options shall not be more than ten years from the date of grant. Unless otherwise provided in the option agreement, the options shall become exercisable in three equal annual installments, commencing on the first anniversary of the grant date. Option activity under the 1998 Plan is as follows:
Weighted Average Shares Available Number of Exercise Price of for Grant Shares Options Outstanding -------------------------------------------------------------------- Balance, May 12, 1998* - - $ - Authorized 1,600,000 - - Granted (1,070,000) 1,070,000 15.0000 Exercised - - - Canceled - - - Unvested shares repurchased - - - -------------------------------------------------------------------- Balance, December 31, 1998 530,000 1,070,000 15.0000 Authorized - - - Granted (545,600) 545,600 15.0000 Exercised - - - Canceled 233,333 (233,333) 15.0000 Unvested shares repurchased - - - -------------------------------------------------------------------- Balance, December 31, 1999 217,733 1,382,267 15.0000 ====================================================================
* Date of incorporation Option activity under the 1999 Plan is as follows:
Weighted Average Shares Available Number of Exercise Price of for Grant Shares Options Outstanding ------------------------------------------------------------------- Balance, December 31, 1998 - - $ - Authorized 750,000 - - Granted (325,000) 325,000 8.0625 Exercised - - - Canceled - - - Unvested shares repurchased - - - ------------------------------------------------------------------- Balance, December 31, 1999 425,000 325,000 8.0625 ===================================================================
In addition to the Company's stock option plans, 750,000 options were authorized to be issued to new employees of our U.S. operations by the Board of Directors at an exercise price to be determined on the date of the grant. The term of the options shall be seven years from the date of grant. The options shall become exercisable in three equal annual installments, commencing on the first anniversary of the grant date. Of the 750,000 options authorized, 586,000 have been granted to new employees of our U.S. operations, pursuant to a resolution of the Board of Directors, at an exercise price equal to the fair market value of our ordinary shares at the date of the grant. The options that have been granted are reflected in the pro forma and outstanding options calculations below. Subsequent to year end, 300,000 options under the 1998 Plan were canceled and 400,000 options were granted to our President under the 1998 Plan. We have adopted the disclosure provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for employee stock options. Since the exercise price of the stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if we accounted for the employee stock options under the fair value method of that Statement. 33 Scottish Annuity & Life Holdings, Ltd. Notes to Consolidated Financial Statements (continued) 10. Stock Option Plan (continued) The Binomial option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Our pro forma information follows:
Period from Year ended May 12, 1998* December 31, to December 1999 31, 1998 -------------------------------------- Net income - as reported $8,874,719 $436,321 Net income - pro forma $7,037,799 $331,699 Basic and diluted net income per share - as reported $ 0.50 $ 0.12 Basic and diluted net income per share - pro forma $ 0.39 $ 0.09
* Date of incorporation The fair value for the options was estimated at the date of grant using the Binomial option-pricing model with the following assumptions:
1999 1998 --------------------------------------- Expected dividend yield 2.44 % 1.33 % Risk free interest rate 6.44 % 5.52 % Expected volatility 0.667 0.22
The following table summarizes information concerning outstanding and exercisable options at December 31, 1999:
Options Outstanding Options Exercisable - ---------------------------------------------------------------------------------- --------------------------------- Weighted Average Weighted Weighted Range of Number Remaining Contractual Average Number Average Exercise Prices Outstanding Life (in Years) Exercise Price Exercisable Exercise Price - ---------------------------------------------------------------------------------- --------------------------------- $ 8.00 - 8.20 911,000 8.06 $ 8.0861 - $ - $ 12.00 - 15.00 1,382,267 8.99 $15.0000 267,333 $15.0000 ----------------------------------------------------------------- --------------------------------- 2,293,267 8.62 $11.5503 267,333 $15.0000 ----------------------------------------------------------------- ---------------------------------
The following table summarizes information concerning outstanding and exercisable options at December 31, 1998:
Options Outstanding Options Exercisable - ---------------------------------------------------------------------------------- --------------------------------- Weighted Average Weighted Weighted Range of Number Remaining Contractual Average Number Average Exercise Prices Outstanding Life (in Years) Exercise Price Exercisable Exercise Price - ---------------------------------------------------------------------------------- --------------------------------- $ 12.00 - 15.00 1,070,000 9.92 $15.0000 - $ - ----------------------------------------------------------------- ---------------------------------
As of December 31, 1999, options for 203,267 ordinary shares, exercisable at a price of $15 per share, have been granted to certain non-employee participants in the Plan (160,000 at December 31, 1998). The Company applies the fair value method of SFAS No. 123, in accounting for stock options granted to non-employees who provide services to the Company. Note 11: Pension Contributions The Company has a defined contribution retirement plan covering substantially all employees. Company contributions to the plan are two times the employee contribution. Employee contributions are defined by legislation in the Cayman Islands, and vary between 2% and 5% of salary. Amounts charged to operations under this plan were $114,759 for the year ended December 31, 1999 and $ nil for the period ended December 31, 1998. 12. Taxation There is presently no taxation imposed on income or capital gains by the Government of the Cayman Islands. If any taxation were to be enacted, Scottish Holdings and Scottish Insurance have been granted exemptions therefrom until 2018 and Scottish Annuity has been granted exemptions therefrom until 2014. These companies operate in a manner such that they will owe no United States tax other than premium excise taxes and withholding taxes on certain investment income. Both Harbourton and SHI are U.S. corporations and therefore are liable for Federal Income Tax. The valuation allowances for December 31, 1999 are related primarily to the tax benefit of the unrealized depreciation on securities and realized capital loss carryforwards of Harbourton. 34 Scottish Annuity & Life Holdings, Ltd. Notes to Consolidated Financial Statements (continued) 12. Taxation (continued) Undistributed earnings of the Company's foreign subsidiaries are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal withholding taxes has been provided thereon. Upon distribution of current or accumulated earnings and profits in the form of dividends or otherwise, the Company would be subject to U.S. withholding taxes at a 30% rate. At December 31, 1999, the Company has net operating loss carryforwards of approximately $3.3 million for income tax purposes that expire in years 2012 through 2014. The Company also has capital loss carryforwards of approximately $3.7 million for income tax purposes that expire in years 2002 through 2004. Those carryforwards resulted primarily from the Company's 1999 acquisition of Harbourton. For financial reporting purposes, a valuation allowance of approximately $1.2 million has been recognized to offset the deferred tax assets related to the capital loss carryforwards acquired. When realized, the tax benefit for those items will be applied to reduce intangible value related to the acquisition of Harbourton. Significant components of our deferred tax assets and liabilites are as follows: Deferred tax assets Net operating losses $ 1,126,031 Capital losses 1,258,717 Alternative minimum tax credits 20,083 Unrealized depreciation on investments 366,211 Accrued market discount 82,985 Negative proxy deferred acquisition costs 993,732 ------------ Total deferred tax assets 3,847,759 Valuation allowance (1,624,928) ------------ Deferred tax assets net of valuation allowance 2,222,831 Deferred tax liabilities: Reserves for future policy benefits 4,754 ------------ Total deferred tax liabilities 4,754 ------------ Net deferred tax asset $ 2,218,077 ============ For the year ended December 31, 1999 we have income tax benefits from operations as follows: Current tax benefit $ - Deferred tax benefit (41,386) ------------ Total tax benefit $ (41,386) ------------ Income tax expenses attributable to continuing operations differs from the amount of income tax expense that would result from applying the federal statutory rates to pretax income from operating due to the following: Pretax GAAP income at 34% $ 3,003,333 Income not subject to tax at 34% (3,095,668) Other 50,949 ------------ Tax benefit $ (41,386) ============ 35 Scottish Annuity & Life Holdings, Ltd. Notes to Consolidated Financial Statements (continued) 13. Statutory Requirements and Dividend Restrictions Under The Insurance Law of the Cayman Islands, Scottish Insurance and Scottish Annuity must each maintain a minimum net capital worth of $240,000. Our ability to pay dividends depends on the ability of Scottish Insurance and Scottish Annuity pay dividends to Scottish Holdings. While we are not subject to any significant legal prohibitions on the payment of dividends, Scottish Insurance and Scottish Annuity will be subject to Cayman Islands regulatory constraints, which affect its ability to pay dividends. Scottish Insurance and Scottish Annuity are prohibited from declaring or paying a dividend if such payment would reduce their net capital worth below $240,000. 14. Related Parties Scottish Annuity agreement - Prior to our acquisition of Scottish Annuity, Scottish Insurance entered into an Insurance Administration, Services and Referral Agreement (the "Agreement") with Scottish Annuity effective October 1, 1998. Scottish Insurance provided Scottish Annuity with a variety of insurance administration, accounting and other services. Scottish Insurance received compensation equal to 0.50% per annum of the quarterly separate account value of each annuity contract issued by Scottish Annuity subject to a minimum of US$25,000 per year In addition, pursuant to this agreement (i) Scottish Annuity refrained from the direct or indirect offer or sale of any life insurance products and refered only to Scottish Insurance any opportunity or inquiry that it received to issue and sell any life insurance products, and (ii) Scottish Insurance refrained from the direct or indirect offer or sale of any variable annuity products and refered only to Scottish Annuity any opportunity or inquiry that it received to issue and sell any variable annuity products. The agreement remained in effect until December 31, 1999. Purchase of Scottish Annuity - On December 31, 1999 Scottish Holdings purchased all of the outstanding shares of Scottish Annuity from SHI. Our Chief Executive Officer and certain members of our board of directors own 95% of SHI. The purchase price paid was assessed for fairness by an independent party and therefore, management believes it represents a value that would have been reached at arms-length. DC Planning agreement - We entered into a consulting services agreement with DC Planning, an insurance consulting firm that develops life insurance products and acts as a consultant on insurance matters for high net worth families, trust companies and other fiduciaries. Under the terms of the agreement, DC Planning provided certain consulting services to the Company, including with respect to the development and implementation of its business plan. This agreement ceased with the death of Howard Shapiro who was the managing partner of DC Planning. 15. Credit Arrangements At December 31, 1999 the Company had in place a $50 million revolving line of credit with a U.S. bank. Under the agreement, the Company has the option to borrow at a predetermined interest rate of 40 basis points over LIBOR. The terms of the agreement expire on December 22, 2000 but are renewable with the agreement of both parties. Additionally, the Company has entered into a stand-by letter of credit agreement the terms of which allow the Company to issue letters of credit up to $25 million dollars. The terms of the stand-by letter of credit agreement expire July 13, 2000. In January, 2000, the amount available to the Company was reduced to $20 million to reflect the availability of credit under the revolving letter of credit. As of December 31, 1999 and 1998, the Company had not utilized either of the above credit facilities. 36 Scottish Annuity & Life Holdings, Ltd. Notes to Consolidated Financial Statements (continued) 16. Quarterly Financial Data (Unaudited) Quarterly financial data for the year ended December 31, 1999 is as follows:
1999 ------------------------------------------------------ March 31 June 30 September 30 December 31 ------------------------------------------------------ REVENUES Premiums and reinsurance fees, net $ - $ - $ - $ 21,311 Investment income, net 3,321,252 4,124,756 7,145,693 9,476,539 Realized losses on securities, net (963,914) (518,911) (1,014,444) (141,237) Insurance administration and variable life fees 225,785 250,495 267,998 269,688 ------------------------------------------------------ Total revenues 2,583,123 3,856,340 6,399,247 9,626,301 BENEFITS AND EXPENSES Interest credited and other policy benefits - 319,666 2,660,664 4,219,805 Acquisition costs and other insurance expenses 255,100 423,517 570,537 976,459 Operating expenses 710,898 922,350 902,944 1,669,738 ------------------------------------------------------ Total benefits and expenses 965,998 1,665,533 4,134,145 6,866,002 Net income before benefit for income taxes 1,617,125 2,190,807 2,265,102 2,760,299 Deferred benefit for federal income taxes - - - (41,386) ------------------------------------------------------ Net Income $1,617,125 $2,190,807 $ 2,265,102 $2,801,685 ====================================================== EARNINGS PER SHARE ------------------------------------------------------ Basic and diluted net income $ 0.09 $ 0.12 $ 0.12 $ 0.18 ======================================================
Quarterly financial data for the period ended December 31, 1998 is as follows:
1998 --------------------------------------------------------------- June 30 September 30 December 31 --------------------------------------------------------------- REVENUES Premiums and reinsurance fees, net $ - $ - $ - Investment income, net 1,501 - 1,126,764 Insurance administration and variable life fees - - 209,886 --------------------------------------------------------------- Total revenues 1,501 - 1,336,650 BENEFITS AND EXPENSES Interest credited and other policy benefits - - - Acquisition costs and other insurance expenses - - - Operating expenses 22,578 98,153 781,099 --------------------------------------------------------------- Total benefits and expenses 22,578 98,153 781,099 --------------------------------------------------------------- Net (loss) income $(21,077) $(98,153) $ 555,551 =============================================================== EARNINGS PER SHARE --------------------------------------------------------------- Basic and diluted net (loss) income $(0.01) $ (0.07) $0.08 ===============================================================
37 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. By: /s/ Michael C. French -------------------------------- Michael C. French Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - ------------------------ ---------------------------------- --------------- /s/ Michael C. French Chief Executive Officer and April 3, 2000 - ------------------------ Director (Principal Executive Michael C. French Officer) /s/ Bruce J. Crozier Senior Vice President-Chief April 3, 2000 - ------------------------ Financial Officer and Secretary Bruce J. Crozier (Principal Financial Officer and Principal Accounting Officer) * Director April 3, 2000 - ------------------------ Sam Wyly * Director April 3, 2000 - ------------------------ Michael Austin * Director April 3, 2000 - ------------------------ R. Duke Buchan III * Director April 3, 2000 - ------------------------ Robert M .Chmely * Director April 3, 2000 - ------------------------ David Matthews * Director April 3, 2000 - ------------------------ Bill Caulfeild-Browne * Director April 3, 2000 - ------------------------ Charles J. Wyly, Jr.
38 * The undersigned, by signing his name hereto, does hereby sign this Annual Report on Form 10-K pursuant to the Powers of Attorney executed on behalf of the above-named officers and directors of the Registrant and contemporaneously filed herewith with the Securities and Exchange Commission. /s/ Michael C. French --------------------- Michael C. French Attorney-in-Fact 39 EXHIBIT INDEX ------------- EXHIBIT SEQUENTIAL NUMBER PAGE NO. DESCRIPTION OF DOCUMENT - ---------- ----------------------- - -------------------------------------------------------------------------------- 3.1 Memorandum of Association of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 3.2 Articles of Association of the Company (incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.1 Specimen Ordinary Share Certificate (incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.2 Form of Amended and Restated Class A Warrant (incorporated herein by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.3 Form of Amended and Restated Class B Warrant (incorporated herein by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.4 Form of Securities Purchase Agreement for the Class A Warrants (incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.5 Form of Warrant Purchase Agreement for the Class B Warrants (incorporated herein by reference to Exhibit 4.5 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.6 Form of Registration Rights Agreement for the Class A Warrants (incorporated herein by reference to Exhibit 4.6 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.7 Form of Registration Rights Agreement for the Class B Warrants (incorporated herein by reference to Exhibit 4.7 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.8 Form of Securities Purchase Agreement between the Company and the Shareholder Investors (incorporated herein by reference to Exhibit 4.10 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.9 Form of Registration Rights Agreement between the Company and the Shareholder Investors (incorporated herein by reference to Exhibit 4.11 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.10 Form of Securities Purchase Agreement between the Company and the Non-Shareholder Investors (incorporated herein by reference to Exhibit 4.12 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.11 Form of Registration Rights Agreement between the Company and the Non-Shareholder Investors (incorporated herein by reference to Exhibit 4.13 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.1 Employment Agreement dated June 18, 1998 between the Company and Michael C. French (incorporated herein by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.2 Second Amended and Restated 1998 Stock Option Plan effective October 22, 1998 (incorporated herein by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.3 Form of Stock Option Agreement in connection with 1998 Stock Option Plan (incorporated herein by reference to Exhibit 4.6 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.4 Agreement dated June 30, 1998 between the Company and International Risk Management (Cayman) Ltd. (incorporated herein by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.5 Amended and Restated Insurance Administration, Services and Referral Agreement dated as of October 1, 1998 between the Company and The Scottish Annuity Company (Cayman) Ltd. (incorporated herein by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.6 Employment Agreement dated July 20, 1998 between the Company and Henryk Sulikowski (incorporated herein by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.7 Form of Indemnification Agreement between the Company and each of its directors and officers (incorporated herein by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.8 Investment Management Agreement dated October 22, 1998 between the Company and Pacific Investment Management Company (incorporated herein by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.9 Investment Management Agreement dated October 22, 1998 between the Company and General Re-New England Asset Management, Inc. (incorporated herein by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.10 Agreement dated October 23, 1998 between the Company and Westport Partners (Bermuda), Ltd. (incorporated herein by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.11 Investment Management Agreement dated October 22, 1998 between the Company and The Prudential Investment Corporation (incorporated herein by reference to Exhibit 10.16 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.12 Form of Omnibus Registration Rights Agreement (incorporated herein by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.13 Investment Advisory Service between the Company and Prudential Securities Corporation (incorporated herein by reference to Exhibit 10.15 to the Company's Registration Statement on Form 10-K filed with the Securities Exchange Commission on March 30, 1999). 10.14 1999 Stock Option Plan. 10.15 Form of Stock Options Agreement in connection with 1999 Stock Option Plan. 10.16 Employment Agreement dated March 08, 2000 between the Company amd Scott E. Willkomm. 21.1 Subsidiaries of Registrant. 24.1 Powers of Attorney. 27.1 Financial Data Schedule. 40 EX-10.14 2 1999 STOCK OPTION PLAN Exhibit 10.14 ------------- SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. 1999 STOCK OPTION PLAN ---------------------- 1. Purpose. The purpose of this Plan is to attract and retain the best available talent and encourage the highest level of performance by executive officers, employees, directors, advisors and consultants, and to provide them with incentives to put forth maximum efforts for the success of Scottish Annuity & Life Holdings, Ltd.'s business, in order to serve the best interests of Scottish Annuity & Life Holdings, Ltd. and its stockholders. All options granted under the Plan are intended to be nonstatutory stock options. 2. Definitions. The following terms, when used in the Plan with initial capital letters, shall have the following meanings: (a) "Act" means the Securities Exchange Act of 1934, as in effect from time to time. (b) "Board" means the Board of Directors of the Company and, to the extent of any delegation by the Board to a committee (or subcommittee thereof) pursuant to Paragraph 9 of this Plan, such committee (or subcommittee). (c) "Change in Control" shall have the meaning provided in Paragraph 11 of this Plan. (d) "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. (e) "Company" means Scottish Annuity & Life Holdings, Ltd., a Cayman Islands limited liability company. (f) "Date of Grant" means the date specified by the Board on which a grant of Stock Options shall become effective (which date shall not be earlier than the date on which the Board takes action with respect thereto). (g) "Director" means a member of the Board of Directors of the Company. (h) "Eligible Person" means a person who may be awarded Stock Options under this Plan and includes executive officers, any other employee, directors, advisors and consultants of the Company and of any Subsidiary. (i) "Eligible Non-Employee Director" means any person, not an employee of the Company or any Subsidiary, who is a Director. (j) "Immediate Family" has the meaning ascribed thereto in Rule 16a-1(e) under the Act (or any successor rule to the same effect) as in effect from time to time. (k) "Market Value Per Share" means, as of any given day, the closing price of an Ordinary Share on a national securities exchange on which the Ordinary Shares are listed or admitted to trading on the day preceding the day such determination is being made or, if there was no closing price reported on such day, on the most recently preceding day on which such a closing price was reported; or if the Ordinary Shares are not listed or admitted to trading on a national securities exchange on the day as of which the determination is being made, the amount determined by the Board to be the fair market value of an Ordinary Share on such day. (l) "Option Price" means the purchase price per Ordinary Share payable on exercise of a Stock Option. (m) "Optionee" means the optionee named in an agreement evidencing an outstanding Stock Option or a permitted transferee of a Stock Option. (n) "Ordinary Shares" means the ordinary shares, par value $0.01 per share, of the Company or any security into which such Ordinary Shares may be changed by reason of any transaction or event of the type described in Paragraph 7 of this Plan. (o) "Participant" means an Eligible Person who is selected by the Board to receive Stock Options under Paragraph 5 of this Plan. (p) "Plan" means this 1999 Stock Option Plan of the Company, as amended from time to time. (q) "Rule 16b-3" means Rule 16b-3 under Section 16 of the Act (or any successor rule to the same effect) as in effect from time to time. (r) "Stock Option" means the right to purchase Ordinary Shares upon exercise of an option granted pursuant to Paragraph 5 of this Plan. (s) "Subsidiary" means any corporation, partnership, joint venture or other entity in which the Company owns or controls, directly or indirectly, not less than 50% of the total combined voting power or equity interests represented by all classes of stock issued by such corporation, partnership, joint venture or other entity. 3. Shares Available Under Plan. The Ordinary Shares which may be issued under the Plan shall not exceed in the aggregate 750,000 shares, subject to adjustment as provided in this Paragraph 3. Such shares may be shares of original issuance or treasury shares or a combination of the foregoing. (a) Any Ordinary Shares which are subject to Stock Options that are terminated unexercised, forfeited or surrendered or that expire for any reason shall again be available for issuance under the Plan. (b) The shares available for issuance under the Plan also shall be subject to adjustment as provided in Paragraph 7 of this Plan. 2 4. Individual Limitation on Stock Options. Notwithstanding anything in this Plan to the contrary, and subject to adjustment as provided in Paragraph 7 of this Plan, no individual Participant shall be granted Stock Options under this Plan, during the term of this Plan, for more than 300,000 Ordinary Shares. 5. Grants of Stock Options to Participants. The Board may from time to time authorize grants to any Participant of Stock Options upon such terms and conditions as the Board may determine in accordance with the provisions set forth below. (a) Each grant shall specify the number of Ordinary Shares to which it pertains, subject to the limitations set forth in Paragraphs 3 and 4 of this Plan. (b) Each grant shall specify the Option Price, which shall not be less than 100% of the Market Value Per Share on the Date of Grant. (c) Each grant shall specify whether the Option Price shall be payable (i) in cash or by check acceptable to the Company or (ii) deferred payment of the Option Price from the proceeds of sale through a bank or broker of some or all of the shares to which such exercise relates or (iii) by a combination of methods (i) or (ii). (d) Successive grants may be made to the same Participant whether or not any Stock Options previously granted to such Participant remain unexercised. (e) Each grant shall specify the required period or periods (if any) of continuous service by the Participant with the Company or any Subsidiary and/or any other conditions to be satisfied before the Stock Options or installments thereof shall become exercisable, and any grant may provide for the earlier exercise of the Stock Options in the event of a Change in Control of the Company or in the event of any other similar transaction or event. Unless otherwise provided in the option agreement evidencing a grant, a grant shall become exercisable in three equal annual installments, commencing on the first anniversary of the grant. (f) Each grant shall specify whether or not a Stock Option is transferable, and the conditions, if any, of such transferability. (g) No Stock Option shall be exercisable more than 10 years from the Date of Grant. (h) An Optionee may exercise a Stock Option in whole or in part at any time and from time to time during the period within which the Stock Option may be exercised. To exercise a Stock Option, an Optionee shall give written notice to the Company specifying the number of Ordinary Shares to be purchased and provide payment of the Option Price and any other documentation that may be required by the Company. (i) An Optionee shall be treated for all purposes as the owner of record of the number of Ordinary Shares purchased pursuant to exercise of the Stock Option (in whole or in part) as of the date the conditions set forth in Paragraph 5(h) of this Plan are satisfied. 3 (j) The Board may permit Optionees to elect to defer the issuance of Ordinary Shares under this Plan pursuant to such rules, procedures or programs as it may establish for purposes of this Plan. The Board may also provide that deferred issuances and settlements include the payment or crediting of dividend equivalents or interest on the deferred amounts. (k) Each grant shall be evidenced by a stock option agreement executed on behalf of the Company by the Chief Executive Officer (or another officer designated by the Board) and delivered to the Participant and containing such further terms and provisions, consistent with the Plan, as the Board may approve. 6. Grants of Stock Options to Eligible Non-Employee Directors. Each Eligible Non-Employee Director will be granted a Stock Option to purchase 2,000 Ordinary Shares at each successive annual general meeting, provided that (i) such individual continues to be an Eligible Non-Employee Director at the close of business of each such annual general meeting and (ii) if such Eligible Non- Employee Director receives a grant at such time of options under Paragraph 6 of the Company's Second Amended and Restated 1998 Stock Option Plan the grant of options at such time under such 1998 Stock Option Plan and this Plan shall not exceed in the aggregate options to purchase 2,000 Ordinary Shares. The Stock Options granted under this Paragraph 6 will have an exercise price equal to the fair market value of the Ordinary Shares on the date of grant and shall be immediately exercisable. For purposes of this Paragraph 6, the date of an annual general meeting is the date on which the meeting is convened or, if later, the date of the last adjournment thereof. 7. Adjustments. The Board may make or provide for such adjustments in the maximum number of shares specified in Paragraphs 3 or 4 of this Plan, in the number of Ordinary Shares covered by outstanding Stock Options granted hereunder, in the Option Price applicable to any such Stock Options, and/or in the kind of shares covered thereby (including shares of another issuer), as the Board in its sole discretion, exercised in good faith, may determine is equitably required to prevent dilution or enlargement of the rights of Participants that otherwise would result from any stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Company, merger, consolidation, spin-off, reorganization, partial or complete liquidation, issuance of rights or warrants to purchase securities or any other corporate transaction or event having an effect similar to any of the foregoing. Any fractional shares resulting from the foregoing adjustments shall be eliminated. 8. Withholding of Taxes. To the extent that the Company is required to withhold federal, state, local or foreign taxes in connection with any benefit realized by an Optionee under the Plan, or is requested by an Optionee to withhold additional amounts with respect to such taxes, and the amounts available to the Company for such withholding are insufficient, it shall be a condition to the realization of such benefit that the Optionee make arrangements satisfactory to the Company for payment of the balance of such taxes required or requested to be withheld. In addition, if permitted by the Board, an Optionee may elect to have any withholding obligation of the Company satisfied with Ordinary Shares that would otherwise be transferred to the Optionee on exercise of the Stock Option. 4 9. Administration of the Plan. (a) The Plan shall be administered by the Board, which from time to time may delegate all or any part of its authority under this Plan to a committee (the "Stock Option Committee") of not less than two Directors appointed by the Board. The members of the Stock Option Committee shall be "Non-Employee Directors" within the meaning of Rule 16b-3. To the extent of any such delegation, references in this Plan to the Board shall also refer to the Stock Option Committee. A majority of the members of the Stock Option Committee shall constitute a quorum, and any action taken by a majority of the members of the Stock Option Committee who are present at any meeting of the Stock Option Committee at which a quorum is present, or any actions of the Stock Option Committee that are unanimously approved by the members of the Stock Option Committee in writing, shall be the acts of the Stock Option Committee. The Board shall have the authority to delegate responsibility and authority for the operation and administration of this Plan, appoint employees and officers of the Company and Subsidiaries to act on its behalf, and employ persons to assist in fulfilling its responsibilities under this Plan. (b) The Board has the full authority and discretion to interpret and construe any provision of this Plan or of any agreement, notification or document evidencing the grant of a Stock Option. The interpretation and construction by the Board of any such provision and any determination by the Board pursuant to any provision of the Plan or of any such agreement, notification or document shall be final and conclusive. No member of the Board shall be liable for any such action or determination made in good faith. 10. Amendments, Etc. (a) The Board may, without the consent of the Optionee, amend any agreement evidencing a Stock Option granted under the Plan, or otherwise take action, to accelerate the time or times at which the Stock Option may be exercised, to extend the expiration date of the Stock Option, to waive any other condition or restriction applicable to such Stock Option or to the exercise of such Stock Option and to reduce the exercise price of such Stock Option and may amend any such agreement in any other respect with the consent of the Optionee. (b) The Plan may be amended from time to time by the Board or any duly authorized committee thereof. In the event any law, or any rule or regulation issued or promulgated by the Internal Revenue Service, the Securities and Exchange Commission, the National Association of Securities Dealers, Inc., any stock exchange upon which the Ordinary Shares are listed for trading, or any other governmental or quasi-governmental agency having jurisdiction over the Company, the Common Stock or the Plan, requires the Plan to be amended, or in the event Rule 16b-3 is amended or supplemented (e.g., by addition of --- alternative rules) or any of the rules under Section 16 of the Act are amended or supplemented, in either event to permit the Company to remove or lessen any restrictions on or with respect to Stock Options, the Board reserves the right to amend the Plan to the extent of any such requirement, amendment or supplement, and all Stock Options then outstanding shall be subject to such amendment. (c) The Plan may be terminated at any time by action of the Board. The termination of the Plan shall not adversely affect the terms of any outstanding Stock Option. (d) The Plan shall not confer upon any Participant any right with respect to continuance of employment or other service with the Company or any Subsidiary, nor shall it 5 interfere in any way with any right the Company or any Subsidiary would otherwise have to terminate a Participant's employment or other service at any time. (e) This Plan shall be effective as of December 20, 1999. (f) No Stock Option shall be granted pursuant to this Plan on or after the tenth anniversary of the date of effectiveness of this Plan, but awards granted prior to such tenth anniversary may extend beyond that date. 11. Change in Control. For purposes of this Plan, a "Change in Control" shall mean the occurrence of any of the following events shall have occurred: (a) The Company is merged or consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such transaction are held in the aggregate by the holders of Ordinary Shares immediately prior to such transaction; (b) The Company sells or otherwise transfers all or substantially all of its assets to any other corporation or other legal person, and less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such sale or transfer is held in the aggregate by the holders of Ordinary Shares immediately prior to such sale or transfer; (c) The Company files a report or proxy statement with the Securities and Exchange Commission pursuant to the Act disclosing in response to Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) that a change in control of the Company has or may have occurred or will or may occur in the future pursuant to any then-existing contract or transaction; or (d) If during any period of two consecutive years after December 31, 1999, individuals who at the beginning of any such period constitute the Directors cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Company's shareholders, of each Director first elected during such period was approved by a vote of at least two-thirds of the Directors then still in office who were Directors at the beginning of any such period. Notwithstanding the foregoing provisions of Paragraph 11(c) above, a "Change in Control" shall not be deemed to have occurred for purposes of this Plan (i) solely because (A) the Company, (B) a Subsidiary, or (C) any Company- sponsored employee stock ownership plan or other employee benefit plan of the Company either files or becomes obligated to file a report or proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Act, disclosing beneficial ownership by it of shares, or because the Company reports that a change of control of the Company has or may have occurred or will or may occur in the future by reason of such beneficial ownership; or (ii) solely because of a change in control of any Subsidiary other than Scottish Annuity & Life Insurance Company (Cayman), Ltd. 6 EX-10.15 3 NONQUALIFIED STOCK OPTION AGREEMENT Exhibit 10.15 ------------- NONQUALIFIED STOCK OPTION AGREEMENT ----------------------------------- This AGREEMENT (the "Agreement") is made as of ___________, 1999 by and between SCOTTISH ANNUITY & LIFE HOLDINGS, LTD., a Cayman Islands company (the "Company"), and __________ (the "Optionee"). 1. Grant of Share Option. Subject to and upon the terms, conditions, and restrictions set forth in this Agreement and in the Company's 1999 Employee Stock Option Plan (the "1999 Plan"), the Company hereby grants to the Optionee a stock option (the "Option") to purchase _______ of the Company's Ordinary Shares (the "Optioned Shares"). The Option may be exercised from time to time in accordance with the terms of this Agreement. The price at which the Optioned Shares may be purchased pursuant to this Option shall be $______ per share, subject to adjustment as hereinafter provided (the "Option Price"). The Option is intended to be a nonqualified stock option and shall not be treated as an "incentive stock option" within the meaning of that term under Section 422 of the Code, or any successor provision thereto. 2. Term of Option. The term of the Option shall commence on the date set forth above (the "Date of Grant") and, unless earlier terminated in accordance with Section 6 hereof, shall expire ten (10) years from the Date of Grant. 3. Right to Exercise. Subject to expiration or earlier termination, on each anniversary of the Date of Grant the number of Optioned Shares equal to thirty-three and one-third percent (33 1/3%) multiplied by the initial number of Optioned Shares specified in this Agreement shall become exercisable on a cumulative basis until the Option is fully exercisable. To the extent the Option is exercisable, it may be exercised in whole or in part. In no event shall the Optionee be entitled to acquire a fraction of one Optioned Share pursuant to this Option. The Optionee shall be entitled to the privileges of ownership with respect to Optioned Shares purchased and delivered to him upon the exercise of all or part of this Option. 4. Transferability. The Option granted hereby shall be transferable, in whole or part, by the Optionee upon five business days prior notice to the Company. 5. Notice of Exercise; Payment. (a) To the extent then exercisable, the Option may be exercised by written notice to the Company stating the number of Optioned Shares for which the Option is being exercised and the intended manner of payment. The date of such notice shall be the exercise date. Payment equal to the aggregate Option Price of the Optioned Shares being exercised shall be tendered in full with the notice of exercise to the Company in cash in the form of currency or check or other cash equivalent acceptable to the Company. The requirement of payment in cash shall be deemed satisfied if, with the consent of the Board, the Optionee makes arrangements that are satisfactory to the Company with a broker that is a member of the National Association of Securities Dealers, Inc. to sell a sufficient number of Optioned Shares which are being purchased pursuant to the exercise, so that the net proceeds of the sale transaction will at least equal the amount of the aggregate Option Price, and pursuant to which the broker undertakes to deliver to the Company the amount of the aggregate Option Price not later than the date on which the sale transaction will settle in the ordinary course of business. The Optionee may also, with the consent of the Board, tender the Option Price by a combination of the foregoing methods of payment. (b) Within ten (10) days after notice, the Company shall direct the due issuance of the Optioned Shares so purchased. (c) As a further condition precedent to the exercise of this Option, the Optionee shall comply with all regulations and the requirements of any regulatory authority having control of, or supervision over, the issuance of Ordinary Shares and in connection therewith shall execute any documents which the Board shall in its sole discretion deem necessary or advisable. 6. Termination of Agreement. The Agreement and the Option granted hereby shall terminate automatically and without further notice on the earliest of the following dates: (a) Sixty (60) days after the Optionee's death if the Optionee dies while in the employ of the Company; (b) Two (2) years after the date of the Optionee's permanent and total disability if the Optionee becomes permanently and totally disabled while an employee of the Company; (c) Except as provided on a case-by-case basis, 60 days after the date the Optionee ceases to be an employee of the Company, or a Subsidiary, for any reason other than as described in this Section 6; or (d) Ten (10) years from the Date of Grant. In the event that the Optionee's employment is terminated for cause, the Agreement shall terminate at the time of such termination notwithstanding any other provision of this Agreement. For purposes of this provision, "cause" shall mean the Optionee shall have committed prior to termination of employment any of the following acts: (i) an intentional act of fraud, embezzlement, theft, or any other material violation of law in connection with the Optionee's duties or in the course of the Optionee's employment; (ii) intentional wrongful damage to material assets of the Company; (iii) intentional wrongful disclosure of material confidential information of the Company; (iv) intentional wrongful engagement in any competitive activity that would constitute a material breach of the duty of loyalty; or (v) intentional breach of any stated material employment policy of the Company. 2 Any determination of whether an Optionee's employment was terminated for cause shall be made by the Board, whose determination shall be binding and conclusive. This Agreement shall not be exercisable for any number of Optioned Shares in excess of the number of Optioned Shares for which this Agreement is then exercisable, pursuant to Sections 3 and 7 hereof, on the date of termination of employment. For the purposes of this Agreement, the continuous employment of the Optionee with the Company shall not be deemed to have been interrupted, and the Optionee shall not be deemed to have ceased to be an employee of the Company, by reason of the transfer of his employment among the Company and its Subsidiaries or a leave of absence approved by the Board. 7. Acceleration of Option. Notwithstanding Section 3, but subject to earlier termination, the Option granted hereby shall become immediately exercisable in full in the event of a Change of Control, as defined in the 1999 Plan. 8. No Employment Contract. Nothing contained in this Agreement shall confer upon the Optionee any right with respect to continuance of employment by the Company, nor limit or affect in any manner the right of the Company to terminate the employment or adjust the compensation of the Optionee. 9. Taxes and Withholding. If the Company shall be required to withhold any federal, state, local or foreign tax in connection with the exercise of the Option, and the amounts available to the Company for such withholding are insufficient, the Optionee shall pay the tax or make provisions that are satisfactory to the Company for the payment thereof. The Company will pay any and all issue and other taxes in the nature thereof which may be payable by the Company in respect of any issue or delivery upon a purchase pursuant to this Option. 10. Compliance with Law. The Company shall make reasonable efforts to comply with all applicable federal and state securities laws; provided, however, notwithstanding any other provision of this Agreement, the Option shall not be exercisable if the exercise thereof would result in a violation of any such law. 11. Adjustments. The Board may make or provide for such adjustments in the number of Optioned Shares covered by this Option, in the Option Price applicable to such Option, and in the kind of shares covered thereby, as the Board in its sole discretion, exercised in good faith, may determine is equitably required to prevent dilution or enlargement of the Optionee's rights that otherwise would result from (a) any stock dividend, stock split, combination of shares, recapitalization, or other change in the capital structure of the Company, (b) any merger, consolidation, spin-off, reorganization, partial or complete liquidation, or issuance of rights or warrants to purchase securities, or (c) any other corporate transaction or event having an effect similar to any of the foregoing. In the event of any such transaction or event, the Board may provide in substitution for this Option such alternative consideration as it may determine to be equitable in the circumstances and may require in connection therewith the surrender of this Option. Any fractional shares resulting from the foregoing adjustments shall be eliminated. 12. Relation to Other Benefits. Any economic or other benefit to the Optionee under this Agreement shall not be taken into account in determining any benefits to which the 3 Optionee may be entitled under any profit-sharing, retirement, or other benefit or compensation plan maintained by the Company and shall not affect the amount of any life insurance coverage available to any beneficiary under any life insurance plan covering employees of the Company. 13. Amendments. Any amendment to the 1999 Plan shall be deemed to be an amendment to this Agreement to the extent that the amendment is applicable hereto; provided, however, that no amendment shall adversely affect the rights of the Optionee under this Agreement without the Optionee's consent. 14. Severability. In the event that one or more of the provisions of this Agreement shall be invalidated for any reason by a court of competent jurisdiction, any provision so invalidated shall be deemed to be separable from the other provisions hereof, and the remaining provisions hereof shall continue to be valid and fully enforceable. 15. Relation to 1999 Plan. This Agreement is subject to the terms and conditions of the 1999 Plan. In the event of any inconsistent provisions between this Agreement and the 1999 Plan, the 1999 Plan shall govern. Capitalized terms used herein without definition shall have the meanings assigned to them in the 1999 Plan. The Board acting pursuant to the 1999 Plan, as constituted from time to time, shall, except as expressly provided otherwise herein, have the right to determine any questions which arise in connection with this option or its exercise. 16. Successors and Assigns. The provisions of this Agreement shall inure to the benefit of, and be binding upon, the successors, administrators, heirs, legal representatives, and assigns of the Optionee, and the successors and assigns of the Company. 17. Governing Law. The interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the Cayman Islands, without giving effect to the principles of conflict of laws thereof. 18. Notices. Any notice to the Company provided for herein shall be in writing to the Company, marked Attention: Chief Executive Officer, and any notice to the Optionee shall be addressed to said Optionee at his or her address currently on file with the Company. Except as otherwise provided herein, any written notice shall be deemed to be duly given if and when delivered personally or deposited in the mail, postage and fees prepaid, and addressed as aforesaid. Any party may change the address to which notices are to be given hereunder by written notice to the other party as herein specified (provided that for this purpose any mailed notice shall be deemed given on the third business day following deposit of the same in the United States mail). [Remainder of page intentionally left blank] 4 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its behalf by its duly authorized officer and Optionee has also executed this Agreement as of the day and year first above written. If this Agreement is executed in duplicate counterparts, each counterpart shall be deemed an original, but the duplicate counterparts together constitute one and the same instrument. SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. By: ------------------------------------------ Name: Michael C. French Title: President and Chief Executive Officer --------------------------------------------- 5 EX-10.16 4 EMPLOYMENT AGREEMENT BETWEEN SCOTTISH & LIFE HOLDINGS Exhibit 10.16 ------------- EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement"), dated as of March 8, 2000, is made and entered into by and between Scottish Annuity & Life Holdings, Ltd., a Cayman Islands company (the "Company"), and Scott E. Willkomm (the "Executive"). WITNESSETH: WHEREAS, the Executive has agreed to serve as President of the Company and is expected to make major contributions to the short- and long-term profitability, growth and financial strength of the Company; and WHEREAS, the Company wishes to employ the Executive, and the Executive is willing to be employed by the Company, both on the terms and subject to the conditions set forth in this Agreement. NOW, THEREFORE, the Company and the Executive agree as follows: 1. Certain Defined Terms. In addition to terms defined elsewhere herein, the following terms have the following meanings when used in this Agreement with initial capital letters: (a) "Act" means the Securities Exchange Act of 1934, as amended. (b) "Base Pay" means the Executive's annual base salary rate as in effect from time to time, as set forth in Section 5(a). (c) "Board" means the Board of Directors of the Company. (d) "Cause" means that the Executive shall have committed any of the following: (i) an intentional act of fraud, embezzlement or theft in connection with his duties or in the course of his employment with the Company or any Subsidiary; (ii) intentional wrongful damage to any material property of the Company or any Subsidiary; (iii) intentional wrongful disclosure of secret processes or confidential information of the Company or any Subsidiary; or (iv) conviction of a felony or other crime involving moral turpitude; and any such act shall have been materially harmful to the Company. For purposes of this Agreement, no act or failure to act on the part of the Executive shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, but shall be deemed "intentional" only if done or omitted to be done by the Executive not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for "Cause" hereunder unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds of the Board then in office at a meeting of the Board called and held for such purpose, after reasonable notice to the Executive and an opportunity for the Executive, together with his counsel (if the Executive chooses to have counsel present at such meeting), to be heard before the Board, finding that, in the good faith opinion of the Board, the Executive had committed an act constituting "Cause" as herein defined and specifying the particulars thereof in detail. Nothing herein will limit the right of the Executive or his beneficiaries to contest the validity or propriety of any such determination. (e) "Change in Control" means the occurrence of any of the following events: (i) the Company is merged or consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such transaction are held in the aggregate by the holders of Ordinary Shares immediately prior to such transaction; (ii) the Company sells or otherwise transfers all or substantially all of its assets to any other corporation or other legal person, and less than a majority of the combined voting power of the then- outstanding securities of such corporation or person immediately after such sale or transfer is held in the aggregate by the holders of Ordinary Shares immediately prior to such sale or transfer; (iii) the Company files a report or proxy statement with the Securities and Exchange Commission pursuant to the Act disclosing in response to Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) that a change in control of the Company has or may have occurred or will or may occur in the future pursuant to any then- existing contract or transaction; or (iv) if during any period of two consecutive years, individuals who at the beginning of any such period constitute the Directors cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Company's shareholders, of each Director first elected during such period was approved by a vote of at least two-thirds of the Directors then still in office who were Directors at the beginning of any such period. Notwithstanding the foregoing provisions of Paragraph (iii) above, a "Change in Control" shall not be deemed to have occurred for purposes of this Agreement: (i) solely because (A) the Company, (B) a Subsidiary or (C) any Company-sponsored employee stock ownership plan or other employee benefit plan of the Company either files or becomes obligated to file a report or proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Act, disclosing beneficial ownership by it of shares, or because 2 the Company reports that a change of control of the Company has or may have occurred or will or may occur in the future by reason of such beneficial ownership; or (ii) solely because of a change in control of any Subsidiary other than Scottish Annuity & Life Insurance Company (Cayman) Ltd. (f) "Competitive Activity" means the Executive's participation, without the written consent of an officer of the Company, in the management of any business enterprise if such enterprise engages in substantial and direct competition with the Company. "Competitive Activity" will not include the mere ownership of securities in any such enterprise and the exercise of rights appurtenant thereto. (g) "Director" means a member of the Board. (h) "Employee Benefits" means the perquisites, benefits and service credit for benefits as provided under any and all employee retirement income and welfare benefit policies, plans, programs or arrangements in which senior officers of the Company are entitled to participate, including without limitation any stock option, performance share, performance unit, stock purchase, stock appreciation, savings, pension, supplemental executive retirement, or other retirement income or welfare benefit, deferred compensation, incentive compensation, group or other life, health, medical/hospital or other insurance (whether funded by actual insurance or self- insured by the Company or a Subsidiary), disability, salary continuation, expense reimbursement and other employee benefit policies, plans, programs or arrangements that may now exist or may be adopted hereafter by the Company or a Subsidiary. (i) "Incentive Pay" means an annual bonus, incentive or other payment of compensation, in addition to Base Pay, made or to be made in regard to services rendered in any year or other period pursuant to any bonus, incentive, profit-sharing, performance, discretionary pay or similar agreement, policy, plan, program or arrangement (whether or not funded) of the Company or a Subsidiary, or any successor thereto. (j) "Ordinary Shares" means the ordinary shares, par value $.01 per share, of the Company. (k) "Retirement Plans" means the retirement income, supplemental executive retirement, excess benefits and retiree medical, life and similar benefit plans providing retirement perquisites, benefits and service credit for benefits for senior officers of the Company now existing or hereafter adopted. (l) "Subsidiary" means an entity in which the Company directly or indirectly beneficially owns 50% or more of the outstanding Voting Stock. (m) "Term" means the period commencing as of the date of this Agreement and expiring on the second anniversary of this Agreement; provided, however, that commencing on the second anniversary of the date of this Agreement and each anniversary thereafter, the term of this Agreement will automatically be extended for an additional one year unless, not later than 90 days before any such anniversary date, the Company or the Executive shall have given written notice that it or the Executive, as the case may be, does not wish to have the Term extended. 3 (n) "Termination Date" means the date on which the Executive's employment is terminated (the effective date of which shall be the date of termination, or such other date that may be specified by the Executive if the termination is pursuant to Section 6(b)). (o) "Voting Stock" means securities entitled to vote generally in the election of directors. 2. Employment. The Company hereby agrees to employ the Executive, and the Executive hereby agrees to be employed with the Company for the Term, upon the terms and conditions herein set forth. 3. Positions and Duties. (a) During the Term, the Executive will serve in the position of President of the Company, or such other position as may be agreed upon by the Company and the Executive, and will have such duties, functions, responsibilities and authority as are (i) reasonably assigned to him by the Board, consistent with the Executive's position as the Company's President or (ii) assigned to his office in the Company's articles of association. The Executive will report directly to the Chief Executive Officer of the Company. (b) During the Term, the Executive will be the Company's full-time employee and, except as may otherwise be approved in advance in writing by the Board, and except during vacation periods and reasonable periods of absence due to sickness, personal injury or other disability, the Executive will devote substantially all of his business time and attention to the performance of his duties to the Company. Notwithstanding the foregoing, the Executive may (i) subject to the approval of the Board, serve as a director of a company, provided such service does not constitute a Competitive Activity, (ii) serve as an officer, director or otherwise participate in purely educational, welfare, social, religious and civic organizations, (iii) serve as an officer, director or trustee of, or otherwise participate in, any organizations and activities with respect to which the Executive's participation was disclosed to the Company in writing prior to the date hereof and (iv) manage personal and family investments. 4. Place of Performance. In connection with his employment during the Term, unless otherwise agreed by the Executive, the Executive will be based at the Company's principal executive offices in the Cayman Islands. The Executive will undertake normal business travel on behalf of the Company. 5. Compensation and Related Matters. (a) Annual Base Salary. During the Term, the Company will pay to the Executive an annual base salary of not less than US $408,000, which annual base salary may be increased (but not decreased) from time to time by the Board (or a duly authorized committee thereof) in its sole discretion, payable at the times and in the manner consistent with the Company's general policies regarding compensation of executive employees. The Board may from time to time authorize such additional compensation to the Executive, in cash or in property, as the Board may determine in its sole discretion to be appropriate. 4 (b) Annual Incentive Compensation. If the Board (or a duly authorized committee thereof) authorizes any cash incentive compensation or approves any other management incentive program or arrangement, the Executive will be eligible to participate in such plan, program or arrangement under the general terms and conditions applicable to executive and management employees. The annual cash incentive compensation paid to the Executive will be paid in accordance with the Company's annual incentive compensation plan. Nothing in this Section 5(b) will guarantee to the Executive any specific amount of incentive compensation, or prevent the Board (or a duly authorized committee thereof) from establishing performance goals and compensation targets applicable only to the Executive. (c) Retirement Account. During the Term, the Company shall fund a retirement account for the Executive in an amount not less than 10% of Executive's Base Pay for each year during the Term. The Company shall provide for the Executive and his dependents medical and health care benefits standard for executive officers of the Company. (d) Executive Benefits. In addition to the compensation described in Sections 5(a) and 5(b), the Company will make available to the Executive and his eligible dependents, subject to the terms and conditions of the applicable plans, including without limitation the eligibility rules, participation in all Company-sponsored employee benefit plans including all employee retirement income and welfare benefit policies, plans, programs or arrangements in which senior executives of the Company participate, including any stock option, stock purchase, stock appreciation, savings, pension, supplemental executive retirement or other retirement income or welfare benefit, disability, salary continuation, and any other deferred compensation, incentive compensation, group and/or executive life, health, medical/hospital or other insurance (whether funded by actual insurance or self-insured by the Company), expense reimbursement or other employee benefit policies, plans, programs or arrangements, including without limitation financial counseling services or any equivalent successor policies, plans, programs or arrangements that may now exist or be adopted hereafter by the Company. (e) Expenses. The Company will promptly reimburse the Executive for all business expenses the Executive incurs in order to perform his duties to the Company under this Agreement in a manner commensurate with the Executive's position and level of responsibility with the Company, and in accordance with the Company's policy regarding substantiation of expenses. (f) Options. The Company shall grant Executive, upon the execution of this Agreement, an option ("Option") to purchase up to 400,000 Ordinary Shares of the Company, such Option to be exercisable at a per share price equal to the Market Value Per Share (as defined in the Company's Second Amended and Restated 1998 Stock Option Plan) on the date of grant and to be governed by the option agreement, a form of which is attached hereto as Exhibit A. 6. Termination Following the Date of this Agreement. (a) The Executive's employment may be terminated by the Company during the Term and the Executive shall be entitled to the severance compensation provided by 5 Section 7 unless such termination is the result of the occurrence of one or more of the following events: (i) The Executive's death; (ii) If the Executive becomes permanently disabled within the meaning of, and begins actually to receive disability benefits pursuant to, the long-term disability plan in effect for, or applicable to, the Executive; or (iii) Cause. If, during the Term, the Executive's employment is terminated by the Company or any Subsidiary other than pursuant to Section 6(a)(i), 6(a)(ii) or 6(a)(iii), the Executive will be entitled to the benefits provided by Section 7 hereof. (b) The Executive may terminate employment with the Company during the Term with the right to severance compensation as provided in Section 7 upon the occurrence of one or more of the following events (regardless of whether any other reason, other than Cause as hereinabove provided, for such termination exists or has occurred, including without limitation other employment): (i) Failure to elect or reelect or otherwise to maintain the Executive in the office or the position, or a substantially equivalent office or position, of or with the Company (or any successor thereto by operation of law of or otherwise), which the Executive held pursuant to, and upon the date of, this Agreement; (ii) (A) A significant adverse change in the nature or scope of the authorities, powers, functions, responsibilities or duties attached to the position with the Company which the Executive held pursuant to, and upon the date of, this Agreement, (B) a reduction in the aggregate of the Executive's Base Pay received from the Company and any Subsidiary or (C) the termination or denial of the Executive's rights to Employee Benefits or a reduction in the scope or value thereof, unless such reduction is applicable to all employees of the Company on a pro rata basis, any of which is not remedied by the Company within 30 calendar days after receipt by the Company of written notice from the Executive of such change, reduction or termination, as the case may be; (iii) A determination by the Executive (which determination will be conclusive and binding upon the parties hereto provided it has been made in good faith and in all events will be presumed to have been made in good faith unless otherwise shown by the Company by clear and convincing evidence) that a change in circumstances has occurred following this Agreement, including, without limitation, a change in the scope of the business or other activities for which the Executive was responsible immediately prior to the date of this Agreement, which has rendered the Executive substantially unable to carry out, has substantially hindered the Executive's performance of, or has caused the Executive to suffer a substantial reduction in, any of the authorities, powers, functions, responsibilities or duties attached to the position held by the Executive pursuant to, and upon the date of, this Agreement, which situation is not remedied within 6 30 calendar days after written notice to the Company from the Executive of such determination; (iv) The liquidation, dissolution, merger, consolidation or reorganization of the Company or transfer of all or substantially all of its business and/or assets, unless the successor or successors (by liquidation, merger, consolidation, reorganization, transfer or otherwise) to which all or substantially all of its business and/or assets have been transferred (by operation of law or otherwise) assumed all duties and obligations of the Company under this Agreement pursuant to Section 13(a); (v) A Change in Control has occurred and Executive, within one year thereafter, gives the notice of termination of his employment with the Company contemplated in this Section 6(b); or (vi) Without limiting the generality or effect of the foregoing, any material breach of this Agreement by the Company or any successor thereto which is not remedied by the Company within 30 calendar days after receipt by the Company of written notice from the Executive of such breach. (c) A termination by the Company pursuant to Section 6(a) or by the Executive pursuant to Section 6(b) will not affect any rights that the Executive may have pursuant to any agreement, policy, plan, program or arrangement of the Company or any Subsidiary providing Employee Benefits, which rights shall be governed by the terms thereof. 7. Severance Compensation. (a) If the Company shall terminate the Executive's employment during the Term other than pursuant to Section 6(a)(i), 6(a)(ii) or 6(a)(iii), if the Executive shall terminate his employment pursuant to Section 6(b), or if the Company shall give Executive written notice not later than 90 days prior to the second anniversary or any subsequent anniversary of this Agreement of non- renewal of this Agreement, the Company shall pay to the Executive the amount specified herein upon the later of (i) five business days after the Termination Date or date of expiration of this Agreement, as the case may be, (ii) the effective date of a release executed by the Executive and the Company in the form attached hereto as Exhibit B or (iii) , at the Executive's option, a date later than the dates specified in clauses (i) and (ii). In lieu of any further payments to the Executive for periods subsequent to the Termination Date or such expiration date, except in the event of a termination by the Executive of his employment pursuant to Section 6(b)(v), the Company shall make a lump sum payment (the "Severance Payment"), in an amount equal to 200% of the sum of (i) an amount equal to the aggregate annual Base Pay (at the highest rate in effect for any year prior to the Termination Date) and (ii) the aggregate Incentive Pay (based upon the greatest amount of Incentive Pay paid or payable to the Executive for any year prior to the Termination Date). If the Executive shall terminate his employment pursuant to Section 6(b)(v), his Severance Payment shall be an amount equal to 300% of the sum of the amounts described in clauses (i) and (ii) of the immediately preceding sentence of this Section 7(a). 7 (b) There shall be no right of set-off or counterclaim in respect of any claim, debt or obligation against any payment to or benefit for the Executive provided for in this Agreement. (c) Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment required to be made hereunder on a timely basis, the Company shall pay interest on the amount thereof at an annualized rate of interest equal to the then-applicable interest rate prescribed by the Pension Benefit Guarantee Corporation for benefit valuations in connection with non-multiemployer pension plan terminations assuming the immediate commencement of benefit payments. 8. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding, in the event that this Agreement shall become operative and it shall be determined (as hereafter provided) that any payment (other than the Gross-Up payments provided for in this Section 8) or distribution by the Company or any of its affiliates to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any stock option, performance share, performance unit, stock appreciation right or similar right, or the lapse or termination of any restriction on or the vesting or exercisability of any of the foregoing (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or any successor provision thereto) by reason of being considered "contingent on a change in ownership or control" of the Company, within the meaning of Section 280G of the Code (or any successor provision thereto)or to any similar tax imposed by state or local law, or any interest or penalties with respect to such tax (such tax or taxes, together with any such interest and penalties, being hereafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment or payments (collectively, a "Gross-Up Payment"); provided; however, that no Gross-up Payment shall be made with respect to the Excise Tax, if any, attributable to (i) any incentive stock option, as defined by Section 422 of the Code ("ISO") granted prior to the execution of this Agreement, or (ii) any stock appreciation or similar right, whether or not limited, granted in tandem with any ISO described in clause (i). The Gross-Up Payment shall be in an amount such that, after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. (b) Subject to the provisions of Section 8(f), all determinations required to be made under this Section 8, including whether an Excise Tax is payable by the Executive and the amount of such Excise Tax and whether a Gross- Up Payment is required to be paid by the Company to the Executive and the amount of such Gross-Up Payment, if any, shall be made by a nationally recognized accounting firm (the "Accounting Firm") selected by the Executive in his sole discretion. The Executive shall direct the Accounting Firm to submit its determination and detailed supporting calculations to both the Company and the Executive within 30 calendar days after the Termination Date, if applicable, and any such other time or times as may be requested by the Company or the Executive. If the Accounting Firm determines that any Excise Tax is 8 payable by the Executive, the Company shall pay the required Gross-Up Payment to the Executive within five business days after receipt of such determination and calculations with respect to any Payment to the Executive. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall, at the same time as it makes such determination, furnish the Company and the Executive an opinion that the Executive has substantial authority not to report any Excise Tax on his federal, state or local income or other tax return. As a result of the uncertainty in the application of Section 4999 of the Code (or any successor provision thereto) and the possibility of similar uncertainty regarding applicable state or local tax law at the time of any determination by the Accounting Firm hereunder, it is possible that Gross- Up Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts or fails to pursue its remedies pursuant to Section 8(f) and the Executive thereafter is required to make a payment of any Excise Tax, the Executive shall direct the Accounting Firm to determine the amount of the Underpayment that has occurred and to submit its determination and detailed supporting calculations to both the Company and the Executive as promptly as possible. Any such Underpayment shall be promptly paid by the Company to, or for the benefit of, the Executive within five business days after receipt of such determination and calculations. (c) The Company and the Executive shall each provide the Accounting Firm access to and copies of any books, record and documents in the possession of the Company or the Executive, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determinations and calculations contemplated by Section 8(b). Any determination by the Accounting Firm as to the amount of the Gross-Up Payment shall be binding upon the Company and the Executive. (d) The federal, state and local income or other tax returns filed by the Executive shall be prepared and filed on a consistent basis with the determination of the Accounting Firm with respect to the Excise Tax payable by the Executive. The Executive shall make proper payment of the amount of any Excise Payment, and at the request of the Company, provide to the Company true and correct copies (with any amendments) of his federal income tax return as filed with the Internal Revenue Service and corresponding state and local tax returns, if relevant, as filed with the applicable taxing authority, and such other documents reasonably requested by the Company, evidencing such payment. If prior to the filing of the Executive's federal income tax return, or corresponding state or local tax return, if relevant, the Accounting Firm determines that the amount of the Gross-Up Payment should be reduced, the Executive shall within five business days pay to the Company the amount of such reduction. (e) The fees and expenses of Accounting Firm for its services in connection with the determinations and calculations contemplated by Section 8(b) shall be borne by the Company. If such fees and expenses are initially paid by the Executive, the Company shall reimburse the Executive the full amount of such fees and expenses within five business days after receipt from the Executive of a statement therefor and reasonable evidence of his payment thereof. (f) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service or any other taxing authority that, if successful, would require the 9 payment by the Company of a Gross-Up Payment. Such notification shall be given as promptly as practicable but no later than 30 business days after the Executive actually receives notice of such claim and the Executive shall further apprise the Company of the nature of such claim and the date on which such claim is requested to be paid (in each case, to the extent known by the Executive). The Executive shall not pay such claim prior to the earlier of (i) the expiration of the 30-calendar-day period following the date on which he gives such notice to the Company and (ii) the date that any payment of amount with respect to such claim is due. If the Company notified the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) provide the Company with any written records or documents in his possession relating to such claim reasonably requested by the Company; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including without limitation accepting legal representation with respect to such claim by an attorney competent in respect of the subject matter and reasonably selected by the Company; (iii) cooperate with the Company in good faith in order effectively to contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including interest and penalties) incurred in connection with such contest and shall indemnify and hold harmless the Executive, on an after-tax basis, for and against any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this Section 8(f), the Company shall control all proceedings taken in connection with the contest of any claim contemplated by this Section 8(f) and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim (provided, however, that the Executive may participate therein at his own cost and expense) and may, at its option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay the tax claimed and sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income or other tax, including interest or penalties with respect thereto, imposed with respect to such advance; and provided further, however, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which the contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of any such contested claim shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be 10 entitled to settle or contest as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (g) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 8(f), the Executive receives any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 8(f)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after any taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 8(f), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial or refund prior to the expiration of 30 calendar days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of any such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid by the Company to the Executive pursuant to this Section 8. 9. No Mitigation Obligation. The Company hereby acknowledges that it will be difficult and may be impossible for the Executive to find reasonably comparable employment following the Termination Date and that the non- competition covenant in Section 10 will further limit the employment opportunities for the Executive. In addition, the Company acknowledges that its severance pay plans applicable in general to its salaried employees do not provide for mitigation, offset or reduction of any severance payment received thereunder. Accordingly, the payment of the severance compensation by the Company to the Executive in accordance with the terms of this Agreement is hereby acknowledged by the Company to be reasonable, and the Executive will not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of the Executive hereunder or otherwise. 10. Competitive Activity; Confidentiality; Nonsolicitation. (a) The Executive acknowledges that during the course of his employment with the Company the Executive will learn business information valuable to the Company and will form substantial business relationships with the Company's clients. To protect the Company's legitimate business interests in preserving its valuable confidential business information and client relationships, the Executive shall not without the prior written consent of the Company, which consent shall not be unreasonably withheld, (i) engage in any Competitive Activity during the Term and (ii) if the Executive shall have received or shall be receiving benefits under Section 7, engage in any Competitive Activity for a period ending on the first anniversary of the Termination Date or date of expiration of this Agreement, as the case may be. (b) During the Term, the Company agrees that it will disclose to Executive its confidential or proprietary information (as defined in this Section 10(b)) to the extent necessary for Executive to carry out his obligations to the Company. The Executive hereby acknowledges the Company has a legitimate business interest in protecting its confidential and proprietary information and hereby covenants and agrees that he will not, without the prior written consent of the Company, during the Term or thereafter (i) disclose to any person not employed by the 11 Company, or use in connection with engaging in competition with the Company, any confidential or proprietary information of the Company or (ii) remove, copy or retain in his possession any Company files or records. For purposes of this Agreement, the term "confidential or proprietary information" will include all information of any nature and in any form that is owned by the Company and that is not publicly available (other than by Executive's breach of this Section 10(b)) or generally known to persons engaged in businesses similar or related to those of the Company. Confidential or proprietary information will include, without limitation, the Company's financial matters, customers, employees, industry contracts, strategic business plans, product development (or other proprietary product data), marketing plans, and all other secrets and all other information of a confidential or proprietary nature. For purposes of the preceding two sentences, the term "Company" will also include any Subsidiary (collectively, the "Restricted Group"). The foregoing obligations imposed by this Section 10(b) will not apply (i) during the Term, in the course of the business of and for the benefit of the Company, (ii) if such confidential or proprietary information will have become, through no fault of the Executive, generally known to the public or (iii) if the Executive is required by law to make disclosure (after giving the Company notice and an opportunity to contest such requirement). (c) The Executive hereby covenants and agrees that during the Term and for one year thereafter Executive will not, without the prior written consent of the Company, which consent shall not unreasonably be withheld, on behalf of Executive or on behalf of any person, firm or company, directly or indirectly, attempt to influence, persuade or induce, or assist any other person in so persuading or inducing, any employee of the Restricted Group to give up employment or a business relationship with the Restricted Group. (d) The Executive agrees that on or before the Termination Date the Executive shall return all Company property, including without limitation all credit, identification and similar cards, keys and documents, books, records and office equipment. The Executive agrees that he shall abide by, through the Termination Date, the Company's policies and procedures for worldwide business conduct. 11. Legal Fees and Expenses. It is the intent of the Company that the Executive not be required to incur legal fees and the related expenses associated with the interpretation, enforcement or defense of Executive's rights under this Agreement by litigation or otherwise because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Executive hereunder. Accordingly, if it should appear to the Executive that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, the Executive the benefits provided or intended to be provided to the Executive hereunder, the Company irrevocably authorizes the Executive from time to time to retain counsel of Executive's choice at the expense of the Company as hereafter provided, to advise and represent the Executive in connection with any such interpretation, enforcement or defense, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company or any Director, officer, stockholder or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company irrevocably consents to the Executive's entering into an attorney-client relationship with such 12 counsel, and in that connection the Company and the Executive agree that a confidential relationship shall exist between the Executive and such counsel. Without respect to whether the Executive prevails, in whole or in part, in connection with any of the foregoing, the Company will pay and be solely financially responsible for any and all attorneys' and related fees and expenses incurred by the Executive in connection with any of the foregoing. 12. Withholding of Taxes. The Company may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as the Company is required to withhold pursuant to any applicable law, regulation or ruling. 13. Successors and Binding Agreement. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance reasonably satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company. (b) This Agreement will inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. (c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 13(a) and 13(b). Without limiting the generality or effect of the foregoing, the Executive's right to receive payments hereunder will not be assignable, transferable or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by Executive's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 13(c), the Company shall have no liability to pay any amount so attempted to be assigned, transferred or delegated. 14. Notices. For all purposes of this Agreement, all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or five business days after having been mailed by, or three business days after having been sent by an internationally recognized overnight courier service such as FedEx or UPS, addressed to the Company (to the attention of the Chief Executive Officer of the Company) at its principal executive office and to the Executive at his principal residence, or to such other address as any 13 party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address shall be effective only upon receipt. 15. Governing Law. The validity, interpretation, construction and performance of this Agreement will be governed by and construed in accordance with the substantive laws of the Cayman Islands, British West Indies, without giving effect to the principles of conflict of laws. 16. Validity. If any provision of this Agreement or the application of any provision hereof to any person or circumstances is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstances will not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal will be reformed to the extent (and only to the extent) necessary to make it enforceable, valid or legal. 17. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. References to Sections are references to Sections of this Agreement. 18. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same agreement. 19. Entire Agreement. This Agreement sets forth the entire understanding between the Company and the Executive, and all oral or written agreements or representations, express or implied, with respect to the subject matter of this Agreement are set forth in this Agreement. All prior employment agreements, understandings and obligations (whether written, oral, express or implied) between the Company and the Executive are, without further action, terminated as of the date of this Agreement and are superseded by this Agreement. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 14 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. /s/ Scott E. Willkomm --------------------------------------------- Scott E. Willkomm SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. By: /s/ Michael C. French ------------------------------------------ Name: Michael C. French Title: Chairman of the Board and Chief Executive Officer 15 Exhibit A --------- Form of NONQUALIFIED STOCK OPTION AGREEMENT ----------------------------------- This AGREEMENT (the "Agreement") is made as of _________________, 2000 by and between SCOTTISH ANNUITY & LIFE HOLDINGS, LTD., a Cayman Islands company (the "Company") and Scott E. Willkomm (the "Optionee"). 1. Grant of Share Option. Subject to and upon the terms, conditions, and restrictions set forth in this Agreement and in the Company's Second Amended and Restated 1998 Stock Option Plan (the "Plan"), the Company hereby grants to the Optionee a stock option (the "Option") to purchase 400,000 of the Company's Ordinary Shares (the "Optioned Shares"). The Option may be exercised from time to time in accordance with the terms of this Agreement. The price at which the Optioned Shares may be purchased pursuant to this Option shall be $____ per share, subject to adjustment as hereinafter provided (the "Option Price"). The Option is intended to be a nonqualified stock option and shall not be treated as an "incentive stock option" within the meaning of that term under Section 422 of the Code, or any successor provision thereto. 2. Term of Option. The term of the Option shall commence on the date set forth above of the grant (the "Date of Grant") and, unless earlier terminated in accordance with Section 6 hereof, shall expire ten (10) years from the Date of Grant. 3. Right to Exercise. Subject to expiration or earlier termination, on each anniversary of the Date of Grant the number of Optioned Shares equal to thirty-three and one-third percent (33 %) multiplied by the initial number of Optioned Shares specified in this Agreement shall become exercisable on a cumulative basis until the Option is fully exercisable. To the extent the Option is exercisable, it may be exercised in whole or in part. In no event shall the Optionee be entitled to acquire a fraction of one Optioned Share pursuant to this Option. The Optionee shall be entitled to the privileges of ownership with respect to Optioned Shares purchased and delivered to him upon the exercise of all or part of this Option. 4. Transferability. The Option granted hereby shall be transferable in whole or part, by the Optionee upon five business days prior notice to the Company. 5. Notice of Exercise; Payment. (a) To the extent then exercisable, the Option may be exercised by written notice to the Company stating the number of Optioned Shares for which the Option is being exercised and the intended manner of payment. The date of such notice shall be the exercise date. Payment equal to the aggregate Option Price of the Optioned Shares being exercised shall be tendered in full with the notice of exercise to the Company in cash in the form of currency or check or other cash equivalent acceptable to the Company. The requirement of payment in cash shall be deemed satisfied if, with the consent of the Board, the Optionee makes arrangements A-1 that are satisfactory to the Company with a broker that is a member of the National Association of Securities Dealers, Inc. to sell a sufficient number of Optioned Shares which are being purchased pursuant to the exercise, so that the net proceeds of the sale transaction will at least equal the amount of the aggregate Option Price, and pursuant to which the broker undertakes to deliver to the Company the amount of the aggregate Option Price not later than the date on which the sale transaction will settle in the ordinary course of business. The Optionee may also, with the consent of the Board, tender the Option Price by a combination of the foregoing methods of payment. (b) Within ten (10) days after notice, the Company shall direct the due issuance of the Optioned Shares so purchased. (c) As a further condition precedent to the exercise of this Option, the Optionee shall comply with all regulations and the requirements of any regulatory authority having control of, or supervision over, the issuance of Ordinary Shares and in connection therewith shall execute any documents which the Board shall in its sole discretion deem necessary or advisable. 6. Termination of Agreement. The Agreement and the Option granted hereby shall terminate automatically and without further notice on the earliest of the following dates: (a) Two (2) years after the Optionee's death if the Optionee dies while in the employ of the Company; (b) Two (2) years after the date of the Optionee's permanent and total disability if the Optionee becomes permanently and totally disabled while an employee of the Company; (c) Except as provided on a case-by-case basis, 60 days after the date the Optionee ceases to be an employee of the Company, or a Subsidiary, for any reason other than as described in this Section 6; or (d) Ten (10) years from the Date of Grant. In the event that the Optionee's employment is terminated for cause, the Agreement shall terminate at the time of such termination notwithstanding any other provision of this Agreement. For purposes of this provision, "cause" shall mean the Optionee shall have committed prior to termination of employment any of the following acts: (i) an intentional act of fraud, embezzlement, theft, or any other material violation of law in connection with the Optionee's duties or in the course of the Optionee's employment; (ii) intentional wrongful damage to material assets of the Company; (iii) intentional wrongful disclosure of material confidential information of the Company; A-2 (iv) intentional wrongful engagement in any competitive activity that would constitute a material breach of the duty of loyalty; or (v) intentional breach of any stated material employment policy of the Company. Any determination of whether an Optionee's employment was terminated for cause shall be made by the Board, whose determination shall be binding and conclusive. This Agreement shall not be exercisable for any number of Optioned Shares in excess of the number of Optioned Shares for which this Agreement is then exercisable, pursuant to Sections 3 and 7 hereof, on the date of termination of employment. For the purposes of this Agreement, the continuous employment of the Optionee with the Company shall not be deemed to have been interrupted, and the Optionee shall not be deemed to have ceased to be an employee of the Company, by reason of the transfer of his employment among the Company and its Subsidiaries or a leave of absence approved by the Board. 7. Acceleration of Option. Notwithstanding Section 3, but subject to earlier termination, the Option granted hereby shall become immediately exercisable in full in the event of a Change of Control, as defined in the Plan. 8. No Employment Contract. Nothing contained in this Agreement shall confer upon the Optionee any right with respect to continuance of employment by the Company, nor limit or affect in any manner the right of the Company to terminate the employment or adjust the compensation of the Optionee. 9. Taxes and Withholding. If the Company shall be required to withhold any federal, state, local or foreign tax in connection with the exercise of the Option, and the amounts available to the Company for such withholding are insufficient, the Optionee shall pay the tax or make provisions that are satisfactory to the Company for the payment thereof. The Company will pay any and all issue and other taxes in the nature thereof which may be payable by the Company in respect of any issue or delivery upon a purchase pursuant to this Option. 10. Compliance with Law. The Company shall make reasonable efforts to comply with all applicable federal and state securities laws; provided, however, notwithstanding any other provision of this Agreement, the Option shall not be exercisable if the exercise thereof would result in a violation of any such law. 11. Adjustments. The Board may make or provide for such adjustments in the number of Optioned Shares covered by this Option, in the Option Price applicable to such Option, and in the kind of shares covered thereby, as the Board in its sole discretion, exercised in good faith, may determine is equitably required to prevent dilution or enlargement of the Optionee's rights that otherwise would result from (a) any stock dividend, stock split, combination of shares, recapitalization, or other change in the capital structure of the Company, (b) any merger, consolidation, spin-off, reorganization, partial or complete liquidation, or issuance of rights or warrants to purchase securities, or (c) any other corporate transaction or event having an effect similar to any of the foregoing. In the event of any such transaction or A-3 event, the Board may provide in substitution for this Option such alternative consideration as it may determine to be equitable in the circumstances and may require in connection therewith the surrender of this Option. Any fractional shares resulting from the foregoing adjustments shall be eliminated. 12. Relation to Other Benefits. Any economic or other benefit to the Optionee under this Agreement shall not be taken into account in determining any benefits to which the Optionee may be entitled under any profit-sharing, retirement or other benefit or compensation plan maintained by the Company and shall not affect the amount of any life insurance coverage available to any beneficiary under any life insurance plan covering employees of the Company. 13. Amendments. Any amendment to the Plan shall be deemed to be an amendment to this Agreement to the extent that the amendment is applicable hereto; provided, however, that no amendment shall adversely affect the rights of the Optionee under this Agreement without the Optionee's consent. 14. Severability. In the event that one or more of the provisions of this Agreement shall be invalidated for any reason by a court of competent jurisdiction, any provision so invalidated shall be deemed to be separable from the other provisions hereof, and the remaining provisions hereof shall continue to be valid and fully enforceable. 15. Relation to Plan. This Agreement is subject to the terms and conditions of the Plan. In the event of any inconsistent provisions between this Agreement and the Plan, the Plan shall govern. Capitalized terms used herein without definition shall have the meanings assigned to them in the Plan. The Board acting pursuant to the Plan, as constituted from time to time, shall, except as expressly provided otherwise herein, have the right to determine any questions which arise in connection with this option or its exercise. 16. Successors and Assigns. The provisions of this Agreement shall inure to the benefit of, and be binding upon, the successors, administrators, heirs, legal representatives and assigns of the Optionee, and the successors and assigns of the Company. 17. Governing Law. The interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the Cayman Islands, without giving effect to the principles of conflict of laws thereof. 18. Notices. Any notice to the Company provided for herein shall be in writing to the Company, marked Attention: Chief Executive Officer, and any notice to the Optionee shall be addressed to said Optionee at his or her address currently on file with the Company. Except as otherwise provided herein, any written notice shall be deemed to be duly given if and when delivered personally or deposited in the mail, postage and fees prepaid, and addressed as aforesaid. Any party may change the address to which notices are to be given hereunder by written notice to the other party as herein specified (provided that for this purpose any mailed notice shall be deemed given on the third business day following deposit of the same in the United States mail). A-4 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its behalf by its duly authorized officer and Optionee has also executed this Agreement as of the day and year first above written. If this Agreement is executed in duplicate counterparts, each counterpart shall be deemed an original, but the duplicate counterparts together constitute one and the same instrument. SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. By: ------------------------------------------ Name: ---------------------------------------- Title: --------------------------------------- --------------------------------------------- Scott E. Willkomm A-5 Exhibit B --------- Form of Release --------------- WHEREAS, Scott E. Willkomm's (the "Executive") employment has been terminated either by (a) the Company other than pursuant to Section 6(a)(i), 6(a)(ii) or 6(a)(iii) in accordance with the Employment Agreement, dated as of _____________, 2000, by and between the Executive and Scottish Annuity & Life Holdings, Ltd. (the "Agreement"), (b) the Executive pursuant to Section 6(b) of the Agreement or (c) the Company giving the Executive written notice of nonrenewal of the Agreement no later than 90 days prior to the second anniversary or any subsequent anniversary of the Agreement. WHEREAS, the Executive is required to sign this Release in order to receive the Severance Payment as described in Section 7 of the Agreement and the other benefits described in the Agreement. NOW, THEREFORE, in consideration of the promises and agreements contained herein and other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, and intending to be legally bound, the Executive agrees as follows: 1. This Release is effective on the date hereof and will continue in effect as provided herein. 2. In consideration of the payments to be made and the benefits to be received by the Executive pursuant to the Agreement, which the Executive acknowledges are in addition to payments and benefits which the Executive would be entitled to receive absent the Agreement, the Executive, for himself and his dependents, successors, assigns, heirs, executors and administrators (and his and their legal representatives of every kind), hereby releases, dismisses, remises and forever discharges Scottish Annuity & Life Holdings, Ltd., its predecessors, parents, subsidiaries, divisions, related or affiliated companies, officers, directors, stockholders, members, employees, heirs, successors, assigns, representatives, agents and counsel (the "Company") from any and all arbitrations, claims, including without limitation claims for attorney's fees, demands, damages, suits, proceedings, actions and/or causes of action of any kind and every description, whether known or unknown, which Executive now has or may have had for, upon, or by reason of any cause whatsoever ("claims"), against the Company, including but not limited to: (a) any and all claims arising out of or relating to the Executive's employment by or service with the Company and his termination from the Company; (b) any and all claims of discrimination, including without limitation claims of discrimination on the basis of sex, race, age, national origin, marital status, religion or handicap, including, specifically, but without limiting the generality of the foregoing, any claims under the Age Discrimination in Employment Act, as amended, Title VII of the Civil Rights Act of 1964, as amended, and the Americans with Disabilities Act; and (c) any and all claims of wrongful or unjust discharge or breach of any contract or promise, express or implied. B-1 3. The Executive understands and acknowledges that the Company does not admit any violation of law, liability or invasion of any of his rights and that any such violation, liability or invasion is expressly denied. The consideration provided for this Release is made for the purpose of settling and extinguishing all claims and rights (and every other similar or dissimilar matter) that the Executive ever had or now may have against the Company to the extent provided in this Release. The Executive further agrees and acknowledges that no representations, promises or inducements have been made by the Company other than as appear in the Agreement. 4. The Executive further agrees and acknowledges that: (a) The release provided for herein releases claims to and including the date of this Release; (b) He has been advised by the Company to consult with legal counsel prior to executing this Release, has had an opportunity to consult with and to be advised by legal counsel of his choice, fully understands the terms of this Release, and enters into this Release freely, voluntarily and intending to be bound; (c) He has been given a period of 21 days to review and consider the terms of this Release, prior to its execution and that he may use as much of the 21 day period as he desires; and (d) He may, within seven days after execution, revoke this Release. Revocation shall be made by delivering a written notice of revocation to the Company. For such revocation to be effective, written notice must be actually received by the Company no later than the close of business on the seventh day after the Executive executes this Release. If the Executive does exercise his right to revoke this Release, all of the terms and conditions of the Release shall be of no force and effect and the Company shall not have any obligation to make payments or provide benefits to the Executive as set forth in Section 7 of the Agreement. 5. The Executive agrees that he will never file a lawsuit or other complaint asserting any claim that is released in this Release. 6. The Executive waives and releases any claim that he has or may have to reemployment after __________________. IN WITNESS WHEREOF, the Executive has executed and delivered this Release on the date set forth below. Dated:_____________________ ___________________________________ Scott E. Willkomm B-2 EX-21.1 5 SUBSIDIARIES Exhibit 21.1 Subsidiaries of Registrant Scottish Annuity & Life Insurance Company (Cayman) Ltd. Scottish Annuity Company (Cayman) Ltd. Scottish Holdings, Inc. Harbourton Reassurance, Inc. EX-24.1 6 POWER OF ATTORNEY Exhibit 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, on behalf of Scottish Annuity & Life Holdings, Ltd., a Cayman Islands company (the "Company"), hereby constitutes and appoints Michael C. French and Bruce Crozier, and each of them, the true and lawful attorney or attorneys-in-fact, with full power of substitution and resubstitution, for the Company, to sign on behalf of the Company and on behalf of the undersigned in his or her capacity as an officer and/or a director of the Company, the Company's Annual Report on Form 10-K for the year ended December 31, 1999, and to sign any or all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, to or with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended, and the regulations promulgated thereunder, granting unto said attorney or attorneys-in-fact, and each of them with or without the others, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as the undersigned might or could in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact, or any of them or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have executed this Power of Attorney as of March ___, 2000. - ------------------------ ------------------------ ------------------------ Sam Wyly Michael Austin R. Duke Buchan III - ------------------------ ------------------------ ------------------------ William Caulfeild-Browne Robert M. Chmely Michael C. French - ------------------------ ------------------------ ------------------------ David S. Matthews Charles J. Wyly, Jr. Bruce Crozier EX-27.1 7 FINANCIAL DATA SCHEDULE
7 12-MOS DEC-31-1998 JAN-01-1999 DEC-31-1999 546,806,744 0 0 0 0 0 546,806,744 29,000,653 0 1,919,528 856,634,487 365,478,762 0 0 0 0 0 0 160,467 218,500,614 856,634,487 21,311 24,068,240 (2,638,506) 1,013,966 7,200,135 165,389 2,060,224 8,833,333 (41,386) 8,874,719 0 0 0 8,874,719 0.50 0.50 0 0 0 0 0 0 0
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