-----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, JpBLAUDZyNUHYXbMvz+r1bbZuy9R6Fr5I27NEWiUeZVHXMS4n9dQp/3MakBDI/Az kSy4p+aO0qhESWm1jB24Wg== 0000930661-01-501517.txt : 20010813 0000930661-01-501517.hdr.sgml : 20010813 ACCESSION NUMBER: 0000930661-01-501517 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010810 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-29788 FILM NUMBER: 1703463 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-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 __________________ FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2001 [ ] 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 Incorporation or Organization) Identification No.) 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 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 As of August 1, 2001, Registrant had 15,712,576 Ordinary Shares outstanding. Table of Contents PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets - June 30, 2001 (Unaudited) and December 31, 2000 1 Unaudited Consolidated Statements of Income - Three and six months ended June 30, 2001 and 2000 2 Unaudited Consolidated Statements of Comprehensive Income - Three and six months ended June 30, 2001 and 2000 4 Unaudited Consolidated Statements of Shareholders' Equity - Six months ended June 30, 2001 and 2000 5 Unaudited Consolidated Statements of Cash Flows - Six months ended June 30, 2001 and 2000 6 Notes to Unaudited Consolidated Financial Statements at June 30, 2001 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 21 PART II OTHER INFORMATION ITEM 1 through ITEM 6 22 SIGNATURES 23
i PART I. FINANCIAL INFORMATION Item 1. Financial Statements Scottish Annuity & Life Holdings, Ltd. Consolidated Balance Sheets (Dollars in thousands)
June 30, 2001 December 31, (unaudited) 2000 ----------------------------------------- ASSETS Fixed maturity investments, available for sale, at fair value (Amortized cost $465,537; 2000 - $584,493) $ 463,888 $ 581,020 Cash and cash equivalents 61,806 47,763 Other investments 12,119 - Funds withheld at interest 77,378 46,256 ----------------------------------------- Total investments 615,191 675,039 Receivables: Accrued interest 6,374 6,710 Risk fees 959 961 Policy loans 876 441 Reinsurance 23,858 30,595 Deferred acquisition costs 56,500 30,922 Present value of inforce business 10,330 10,433 Other intangible assets 7,697 7,888 Deferred tax benefit 2,503 2,192 Fixed assets 3,304 2,482 Due from related party 218 218 Other assets 1,472 868 Current income tax receivable - 87 Segregated assets 520,570 409,660 ----------------------------------------- Total assets $1,249,852 $1,178,496 ========================================= LIABILITIES Reserves for future policy benefits $ 251,954 $ 182,391 Interest sensitive contract liabilities 175,671 320,732 Borrowings 40,153 - Due to investment brokers 4,132 4,462 Accounts payable and accrued expenses 5,734 18,867 Current income tax payable 288 - Segregated liabilities 520,570 409,660 ----------------------------------------- Total liabilities 998,502 936,112 ----------------------------------------- MINORITY INTEREST 2,749 2,820 ----------------------------------------- SHAREHOLDERS' EQUITY Share capital, par value $0.01 per share: Issued and fully paid: 15,712,576 ordinary shares (2000 - 15,614,240) (Excludes 2,962,200 held in Treasury; 2000 - 2,962,200) 157 156 Additional paid in capital 225,069 223,771 Accumulated other comprehensive income (loss) - Unrealized appreciation (depreciation) on investments, net of tax (2,120) (3,822) Retained earnings 25,495 19,459 ----------------------------------------- Total shareholders' equity 248,601 239,564 ----------------------------------------- Total liabilities and shareholders' equity $1,249,852 $1,178,496 =========================================
See Accompanying Notes to Unaudited Consolidated Financial Statements 1 Scottish Annuity & Life Holdings, Ltd. Unaudited Consolidated Statements of Income (Dollars in thousands, except per share data)
Three months ended Three months ended Six months ended Six months ended June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000 ------------------------------------------------------------------------------- REVENUES Premiums earned $11,311 $ 3,582 $20,830 $ 3,614 Fee income 1,886 545 2,585 994 Investment income, net 10,515 11,332 22,262 21,097 Realized gains (losses) 420 (17) 458 (144) ------------------------------------------------------------------------------- Total revenues 24,132 15,442 46,135 25,561 ------------------------------------------------------------------------------- BENEFITS & EXPENSES Claims and other policy benefits 10,292 3,138 17,626 4,753 Interest credited to interest sensitive contract liabilities 2,818 4,218 7,038 7,879 Acquisition costs and other insurance expenses 4,119 2,836 8,234 3,449 Operating expenses 2,412 3,299 5,043 5,439 Interest expense 314 - 314 - ------------------------------------------------------------------------------- Total benefits & expenses 19,955 13,491 38,255 21,520 ------------------------------------------------------------------------------- Net income before income taxes and minority interest 4,177 1,951 7,880 4,041 Income tax benefit 108 429 57 370 ------------------------------------------------------------------------------- Net income before minority interest 4,285 2,380 7,937 4,411 Minority interest 9 - 71 - ------------------------------------------------------------------------------- Income before cumulative effect of change in accounting principle 4,294 2,380 8,008 4,411 Cumulative effect of change in accounting principle (406) - (406) - ------------------------------------------------------------------------------- Net income $ 3,888 $ 2,380 $ 7,602 $ 4,411 ===============================================================================
See Accompanying Notes to Unaudited Consolidated Financial Statements 2 Scottish Annuity & Life Holdings, Ltd. Unaudited Consolidated Statements of Income - continued (Dollars in thousands, except per share data)
Three months ended Three months ended Six months ended Six months ended June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000 Earnings per share - Basic - -------------------------- Income before cumulative effect of change in accounting principle $ 0.27 $0.15 $0.51 $0.28 Cumulative effect of change in accounting principle (0.02) - (0.02) - -------------------------------------------------------------------------- Net income $0.25 $0.15 $0.49 $0.28 ========================================================================== Earnings per share - Diluted - ---------------------------- Income before cumulative effect of change in accounting principle $0.26 $0.15 $0.49 $0.28 Cumulative effect of change in accounting principle (0.02) - (0.02) - -------------------------------------------------------------------------- Net income $0.24 $0.15 $0.47 $0.28 ========================================================================== Dividends per share $0.05 $0.05 $0.10 $0.10 ========================================================================== Weighted average number of shares outstanding: Basic 15,657,842 15,986,037 15,636,250 16,016,388 ========================================================================== Diluted 16,246,309 16,002,778 16,191,632 16,029,149 ==========================================================================
See Accompanying Notes to Unaudited Consolidated Financial Statements 3 Scottish Annuity & Life Holdings, Ltd. Unaudited Consolidated Statements of Comprehensive Income (Dollars in thousands)
Three months ended Three months ended Six months ended Six months ended June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000 ---------------------------------------------------------------------------------- Net income $ 3,888 $2,380 $7,602 $4,411 ---------------------------------------------------------------------------------- Other comprehensive income (loss), net of tax Unrealized appreciation (depreciation) on investments: (3,134) (605) 2,159 (907) Add: reclassification adjustment for investment (416) 17 (457) 144 losses included in net income, net of tax ---------------------------------------------------------------------------------- Unrealized appreciation (depreciation) on investments (3,550) (588) 1,702 (763) ---------------------------------------------------------------------------------- Comprehensive income $ 338 $1,792 $9,304 $3,648 ==================================================================================
See Accompanying Notes to Unaudited Consolidated Financial Statements 4 Scottish Annuity & Life Holdings, Ltd. Unaudited Consolidated Statements of Shareholders' Equity (Dollars in thousands)
Six months ended Six months ended June 30, 2001 June 30, 2000 ------------------------------------------------- SHARE CAPITAL: Beginning of period $ 156 $ 160 Repurchase of shares - (2) Shares issued 1 - ------------------------------------------------- 157 158 ------------------------------------------------- ADDITIONAL PAID IN CAPITAL: Beginning of period 223,771 227,535 Repurchase of shares (2,017) Issuance of equity on exercise of options 1,298 - Issuance of equity options - 12 ------------------------------------------------- 225,069 225,530 ------------------------------------------------- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS): Beginning of period (3,822) (15,685) Unrealized appreciation (depreciation) on investments 1,702 (763) ------------------------------------------------- (2,120) (16,448) ------------------------------------------------- RETAINED EARNINGS: Beginning of period 19,459 6,651 Net income 7,602 4,411 Dividends paid (1,566) (1,597) ------------------------------------------------- 25,495 9,465 ------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY $248,601 $218,705 =================================================
See Accompanying Notes to Unaudited Consolidated Financial Statements 5 Scottish Annuity & Life Holdings, Ltd. Unaudited Consolidated Statements of Cash Flows (Dollars in thousands)
Six months ended Six months ended June 30, 2001 June 30, 2000 ---------------------------------------------- OPERATING ACTIVITIES Income before cumulative effect of change in accounting principle $ 8,008 $ 4,411 Items not affecting cash: Net realized (gains) losses on securities & fixed assets (458) 145 Amortization of investments (637) (132) Non cash salaries and professional fees - 12 Minority interest (71) - Depreciation 276 162 Amortization of deferred acquisition costs 4,635 1,476 Amortization of present value of inforce business 103 34 Amortization of other intangible assets 192 - Interest credited to interest sensitive contract liabilities 7,038 7,879 Changes in assets and liabilities: Accrued interest 335 148 Risk fees 2 202 Reinsurance 6,737 (61,101) Deferred acquisition costs (30,213) (15,824) Deferred tax benefit (432) (370) Other assets (603) (5) Current income tax receivable/payable 375 96 Reserve for future policy benefits 69,563 82,891 Borrowings 153 - Accounts payable and accrued expenses (13,133) 4,226 ---------------------------------------------- Net cash provided by operating activities 51,870 24,250 ---------------------------------------------- INVESTING ACTIVITIES Purchase of investments (101,215) (57,109) Proceeds on sales of investments 181,933 56,068 Proceeds on maturity of investments 38,924 31,687 Due to investment broker (330) 4 Funds withheld at interest (31,123) - Other investments (12,119) - Policy loans (435) 49 Purchase of present value of inforce business - (216) Purchase of intangible assets - (7,676) Minority interest on purchase of subsidiary - 2,753 Due to related party on purchase of subsidiary - (6,313) Proceeds from sale of fixed assets 58 - Purchase of fixed assets (1,154) (1,117) ---------------------------------------------- Net cash provided by investing activities 74,539 18,130 ---------------------------------------------- FINANCING ACTIVITIES Deposits to interest sensitive contract liabilities 46,890 34,843 Withdrawals from interest sensitive contract liabilities (198,990) (16,629) Borrowings 40,000 - Net cost of repurchase of company shares - (2,019) Net proceeds from issue of company shares 1,300 - Dividends paid (1,566) (1,597) ---------------------------------------------- Net cash (used in) provided by financing activities (112,366) 14,598 ---------------------------------------------- NET CHANGE IN CASH AND CASH EQUIVALENTS 14,043 56,978 Cash and cash equivalents, beginning of period 47,763 29,000 ---------------------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 61,806 $ 85,978 ==============================================
See Accompanying Notes to Unaudited Consolidated Financial Statements 6 Scottish Annuity & Life Holdings, Ltd. Notes to Unaudited Consolidated Financial Statements June 30, 2001 1. Basis of presentation Accounting Principles - The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") for and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results for the period are not necessarily indicative of the results to be expected for the entire year. For further information, refer to the consolidated financial statements and footnotes included in our annual report on Form 10-K for the period ended December 31, 2000. We have reclassified some figures from our 2000 financial statements to conform to our 2001 presentation. These reclassifications had no effect on net income or shareholders' equity as previously reported. All amounts are reported in thousands of United States dollars (except per share amounts). 2. Other investments Other investments includes the following:
June 30, 2001 ----------------- Investment in Fund of Funds $ 5,030 Surplus Note 5,000 Mortgage Loans 2,089 ----------------- Total $12,119 =================
Investment in Fund of Funds consists of an investment we made in the second quarter to seed a proprietary hedge fund of funds that we intend to make available to our Wealth Management clients as an investment option for the premiums that they deposit into our variable insurance products. We have engaged an establish fund management company to manage the fund, which is organized as a Cayman Islands company. We earn a fee based upon the net asset value of the fund, and also record as investment income the net gain or loss on our investment in the fund under the equity method. During the second quarter, we purchased a Surplus Note from a U.S. life insurance company in connection with a reinsurance transaction that we entered into in the second quarter. The note pays interest to us at an annual rate of 11% and matures on May 16, 2016. During the second quarter, we entered into a reinsurance transaction in which we received certain assets, including cash and Mortgage Loans on residential and commercial properties. We are in the process of selling the loans for cash. Additionally, the Company has entered into two total return swap transactions totaling approximately $80 million on behalf of Wealth Management clients. The assets and liabilities of these transactions move in tandem and are segregated from the general account of the Company. As such, these transactions are recorded on the Company's balance sheet by establishing a separate account asset and an equal separate account liability. The Company receives an asset- based fee for providing this service that is recorded as fee income. 7 3. Reinsurance transactions In each of the quarters ended June 30, 2001 and 2000, we entered into reinsurance transactions in which we acquired blocks of inforce business. These acquisitions have been accounted for as purchases. Our results of operations include their effects only from their respective dates of acquisition. Because the blocks of business acquired are discrete transactions with unique characteristics, comparability among periods is not meaningful.
June 30, 2001 June 30, 2000 ----------------------------------------------- Fair value of assets acquired $58,928 $79,496 Deferred acquisition costs 11,000 10,250 ----------------------------------------------- Total assets acquired $69,928 $89,746 =============================================== Fair value of liabilities acquired $69,928 $89,746 ===============================================
4. Deferred acquisition costs The change in deferred acquisition costs ("DAC") is as follows:
Three months ended Three months ended Six months ended Six months ended June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000 ---------------------------------------------------------------------------------- Balance at beginning of period $36,620 $ 2,908 $30,922 $ 1,920 Deferred acquisition costs on inforce blocks of business purchased 11,000 10,250 11,000 10,250 Expenses deferred 10,389 4,514 19,213 5,573 Amortization expense (1,509) (1,405) (4,635) (1,476) ---------------------------------------------------------------------------------- Balance at June 30 $56,500 $16,267 $56,500 $16,267 ==================================================================================
5. Earnings per ordinary share Basic earnings per share ("EPS") exclude the dilutive effect of options and warrants. Diluted EPS includes the dilutive effect of these securities using the treasury stock method. The weighted average number of shares is calculated by weighting how long the shares have been outstanding over the accounting period.
Three months Three months Six months Six months ended ended ended ended June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000 ------------------------------------------------------------------------ Numerator: Net income $3,888 $2,380 $7,602 $4,411 ------------------------------------------------------------------------ Denominator: Denominator for basic earnings per share - Weighted average number of shares 15,657,842 15,986,037 15,636,250 16,016,388 Effect of dilutive securities -- Stock Options 581,488 16,741 551,892 12,761 -- Warrants 6,979 - 3,490 - ------------------------------------------------------------------------ Denominator for dilutive earnings per share 16,246,309 16,002,778 16,191,632 16,029,149 ------------------------------------------------------------------------ Basic earnings per share $0.25 $0.15 $0.49 $0.28 ======================================================================== Diluted earnings per share $0.24 $0.15 $0.47 $0.28 ========================================================================
8 6. Comprehensive income We report comprehensive income in accordance with SFAS 130, which requires unrealized gains and losses on the Company's available for sale investments to be included in other comprehensive income in the statement of Shareholders' equity. The table below shows the gross and net of tax components of other comprehensive income.
Three months ended June 30, 2001 --------------------------------------------------- Before Tax Tax Net of Tax --------------- ---------- ----------------- Unrealized gains (losses) on available for sale investments arising during period $(3,477) $343 $(3,134) Less: Reclassification adjustment for losses (gains) realized in net income (416) - (416) --------------------------------------------------- Other comprehensive income $(3,893) $343 $(3,550) ===================================================
Three months ended June 30, 2000 --------------------------------------------------- Before Tax Tax Net of Tax --------------- ---------- ----------------- Unrealized gains (losses) on available for sale investments arising during period $(605) - $(605) Less: Reclassification adjustment for losses (gains) realized in net income 17 - 17 --------------------------------------------------- Other comprehensive income $(588) - $(588) ===================================================
Six months ended June 30, 2001 --------------------------------------------------- Before Tax Tax Net of Tax --------------- ---------- ----------------- Unrealized gains (losses) on available for sale investments arising during period $2,280 $(121) $2,159 Less: Reclassification adjustment for losses (gains) realized in net income (457) 0 (457) --------------------------------------------------- Other comprehensive income $1,823 $(121) $1,702 ====================================================
Six months ended June 30, 2000 --------------------------------------------------- Before Tax Tax Net of Tax --------------- ---------- ----------------- Unrealized gains (losses) on available for sale investments arising during period $(907) - $(907) Less: Reclassification adjustment for losses (gains) realized in net income 144 - 144 --------------------------------------------------- Other comprehensive income $(763) - $(763) ===================================================
9 7. Segment Reporting Income from insurance operations is split into two segments: Life Reinsurance and Wealth Management. The segment reporting for the lines of business is as follows:
Three months Three months Six months ended Six months ended ended ended June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000 ------------------------------------------------------------------------------ REVENUES Life Reinsurance $20,573 $12,780 $39,920 $19,803 Wealth Management 663 548 1,274 1,000 Other (1) 2,896 2,114 4,941 4,758 ------------------------------------------------------------------------------ Total $24,132 $15,442 $46,135 $25,561 ============================================================================== NET INCOME BEFORE INCOME TAXES AND MINORITY INTEREST Life Reinsurance $ 1,491 $ 907 $ 3,413 $ 823 Wealth Management 348 190 557 350 Other (2) 2,338 854 3,910 2,868 ------------------------------------------------------------------------------ Total $ 4,177 $ 1,951 $ 7,880 $ 4,041 ==============================================================================
June 30, 2001 December 31, 2000 -------------------------------------------- ASSETS BY SEGMENT Life Reinsurance $ 569,844 $ 636,382 Wealth Management 549,009 431,670 Other 130,999 110,444 -------------------------------------------- Total $1,249,852 $1,178,496 ============================================
(1) Includes investment income on unallocated capital and realized gains and losses. (2) Includes corporate expenses. 8. Borrowings In the second quarter 2001 we borrowed $40 million under our credit facility with a U.S. bank at a rate of 40 basis points over one-month LIBOR and recorded interest expense associated with these borrowings. By borrowing these funds, we were able to, in part, fund the recapture of a block of business by one of our reinsurance clients on April 30, 2001 without selling certain investment assets that we wanted to retain to maintain the earnings power of our investment portfolio. We expect that as we write new reinsurance transactions, we will repay the borrowings with the proceeds received in connection with such transactions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further information regarding the recapture. 10 9. New accounting pronouncements EITF Issue No. 99-20 ("EITF 99-20"), "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets," applies to all securities, purchased or retained, which represent beneficial interests in securitized assets, unless they meet certain exception criteria. Such securities include many collateralized mortgage, bond, debt and loan obligations (CMO, CBO, CDO, and CLO), mortgage-backed securities and asset-backed securities. For these assets, EITF 99-20 significantly changes the method of assessing other than temporary impairments and for recognizing interest income. A decline in fair value below the "amortized cost" basis is considered to be an other than temporary impairment whenever there is an adverse change in the amount or timing of cash flows to be received, regardless of the resulting yield, unless the decrease is solely a result of changes in market interest rates. Interest income is based on prospective estimates of future cash flows. EITF 99-20 is effective for fiscal quarters beginning after March 15, 2001 We have reviewed all applicable securities held at June 30, 2001 and have identified securities that qualify for write down in the amount of $406 thousand. This is shown in the income statement as a cumulative effect of change in accounting principle. 11 Scottish Annuity & Life Holdings, Ltd. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General Scottish Annuity & Life Holdings, Ltd. ("Scottish Holdings", "we", "our", or "the Company") is a Cayman Islands holding company that was incorporated in May 1998 and completed its initial public offering ("IPO") on November 30, 1998. Through our wholly owned subsidiaries, we provide life reinsurance to life insurance companies and issue variable insurance policies to high net worth individuals. We have two wholly-owned direct subsidiaries: Scottish Annuity & Life Insurance Company (Cayman) Ltd. ("SALIC"), a Cayman Islands insurance company formed by the Company in 1998; and The Scottish Annuity Company (Cayman) Ltd. ("SAC"), a Cayman Islands insurance company that was incorporated in 1994 and acquired by the Company in 1999. Scottish Re (U.S.), Inc. ("Scottish Re") is a Delaware insurance company that was acquired by SALIC in 1999. Scottish Re provides life reinsurance to life insurance companies. Scottish Re is licensed to do business in the United States by 15 states and admitted as a reinsurer in an additional 31 states. Scottish Re (Dublin) Limited ("Dublin") was incorporated in Dublin, Ireland in 2000 to provide reinsurance for our group companies. Dublin, a wholly owned subsidiary of SALIC, commenced writing business in January 2001. We have a 50.01% holding in Scottish Crown Group (Bermuda) Ltd. ("Scottish Crown"). As of December 31, 2000, Scottish Crown owned two Bermuda-licensed insurance companies that are engaged in the issuance of variable insurance policies to high net worth individuals. In February 2001, Scottish Holdings (U.S.), Inc. (a wholly owned subsidiary of SALIC) acquired 100% of one of the Bermuda-licensed insurance companies. In July 2001, we agreed to acquire the 49.99% of Scottish Crown that we did not own. On April 30, 2001, one of our clients exercised its right to recapture a block of business ceded to us in 1999. To fund the $185.7 million due to the cedent, we generated $138.7 million of cash from asset sales, borrowed $40 million under our existing credit facility and used $7 million in cash. The asset sales generated realized gains of $529 thousand before and after taxes. The use of cash and borrowings allowed us to retain the portion of the assets backing that liability that had the most attractive combination of spread and relative value, warehousing them to use in future reinsurance transactions and to maintain the earnings power of our investment portfolio. The all-in rate on the borrowings compares favorably with the effective cost of funds on the recaptured transaction. Overall, the recapture reduced our investment portfolio, interest sensitive contract liabilities, net investment income, and interest credited to interest sensitive contract liabilities, increased realized gains and interest expense, but did not materially affect net income. All amounts are reported in thousands of United States dollars (except per share amounts). 12 Results of Operations We are engaged in two lines of business: Life Reinsurance, and the direct issuance of variable insurance policies to high net worth individuals which we call Wealth Management. Earnings per share
Three months Three months Six months Six months ended ended ended ended June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000 -------------------------------------------------------------------------------- Net income $3,888 $2,380 $7,602 $4,411 ================================================================================ Basic EPS $0.25 $0.15 $0.49 $0.28 ================================================================================ Diluted EPS $0.24 $0.15 $0.47 $0.28 ================================================================================ Weighted average number of shares outstanding: Basic 15,657,842 15,986,037 15,636,250 16,016,388 -------------------------------------------------------------------------------- Diluted 16,246,309 16,002,778 16,191,632 16,029,149 --------------------------------------------------------------------------------
Our net income for the second quarter of $3.9 million represents a 63% increase over the same quarter in 2000. Net income for the first six months of $7.6 million is a 72% increase over the first six months of 2000. The increase is attributable to continued growth in our core segments of Life Reinsurance and Wealth Management, and an increase in realized gains that are offset by the cumulative effect of change in accounting principle. Earnings per share increased 60% on a diluted basis from $0.15 to $0.24 for the second quarter and 68% from $0.28 to $0.47 in the first six months. The increase in earnings per share was entirely due to increased earnings. The effect of our repurchase of shares in the latter part of 2000 has been offset by the dilutive effect of stock options in the second quarter and first six months of 2001. Excluding the cumulative effect of change in accounting principle and realized gains and losses, our earnings would be as follows:
Three months Three months Six months Six months ended ended ended ended June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000 -------------------------------------------------------------------------------- Net income $3,878 $2,397 $7,551 $4,556 ================================================================================ Basic EPS $0.25 $0.15 $0.48 $0.28 ================================================================================ Diluted EPS $0.24 $0.15 $0.47 $0.28 ================================================================================ Weighted average number of shares outstanding: Basic 15,657,842 15,986,037 15,636,250 16,016,388 -------------------------------------------------------------------------------- Diluted 16,246,309 16,002,778 16,191,632 16,029,149 --------------------------------------------------------------------------------
13 Revenues Revenues have increased 56% to $24.1 million in the second quarter of 2001 compared to $15.4 million in the same period of 2000 and by 80% to $46.1 million in the first six months due primarily to the growth in our Life Reinsurance operations and an increase in fee income. Revenue is made up as follows:
Three months Three months Six months Six months ended ended ended ended June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000 -------------------------------------------------------------------------------- Premiums earned $11,311 $ 3,582 $20,830 $ 3,614 Fee income 1,886 545 2,585 994 Investment income, net 10,515 11,332 22,262 21,097 Realized gains (losses) 420 (17) 458 (144) -------------------------------------------------------------------------------- Total Revenues $24,132 $15,442 $46,135 $25,561 =================================================================================
Premiums earned Premiums earned during the second quarter and first six months of 2001 are in respect of 27 reinsurance clients and premiums from a block of Accident & Health business previously written by Scottish Re before we acquired the company and which is now in run-off. Premiums earned in the second quarter and first six months of 2000 are in relation to 5 reinsurance clients and the Accident & Health business in existence when we acquired Scottish Re. As of June 30, 2001 we reinsure approximately $21.4 billion of life coverage on 749,000 lives, the average benefit coverage per life is $29 thousand and the maximum corporate retention on any one life is $500 thousand. As of June 30, 2000 we reinsured approximately $1.3 billion of life coverage on 69,000 lives, the average benefit coverage per life was $18 thousand. We anticipate a steady flow of premiums in future quarters from these treaties. 14 Fee income Fee income includes fees earned from our Wealth Management products offered to high net worth individuals by SALIC and SAC in the Cayman Islands and Scottish Crown in Bermuda. These fees increased from $545 thousand to $663 thousand in the second quarter and from $994 thousand to $1.3 million in the first six months due primarily to increases in variable account balances on which we earn fees and in the number of clients. We also earn fees on certain financial reinsurance treaties issued to U.S. clients; these amounted to $1.2 million in the second quarter and $1.3 million for the six months of 2001, one new client in the second quarter contributed fee income of $1.1 million. Fees earned are as follows:
Three months Three months Six months Six months ended ended ended ended June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000 -------------------------------------------------------------------------------- Life Reinsurance $1,223 $ - $1,312 $ - Wealth Management 663 545 1,273 994 -------------------------------------------------------------------------------- Total $1,886 $545 $2,585 $994 ================================================================================
Wealth Management fees are earned from both Life and Annuity clients. The following table summarizes our client base with the associated segregated assets values and policy face amounts.
June 30, March 31, December 31, June 30, 2001 2001 2000 2000 ------------------------------------------------------------------------------- Number of clients - Life 25 22 11 5 - Annuity 84 83 81 77 ------------------------------------------------------------------------------- 109 105 92 82 ------------------------------------------------------------------------------- Segregated asset value - Life $93,340 $82,824 $47,155 $16,767 - Annuity 427,230 377,895 362,505 267,276 ---------------------------------------------------------------------------- $520,570 $460,719 $409,660 $284,043 ---------------------------------------------------------------------------- Face value - Life $457,886 $408,398 $241,907 $ 67,589 ----------------------------------------------------------------------------
The change in the segregated assets is as follows:
Three months ended Three months ended Six months ended Six months ended June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000 ------------------------------------------------------------------------------- Balance at beginning of period $460,719 $270,136 $409,660 $256,546 Deposits 46,925 9,499 109,124 18,454 Withdrawals (6,915) (3,518) (8,215) (9,114) Investment performance (1) 19,841 7,926 10,001 18,157 ------------------------------------------------------------------------------- Balance at June 30 $520,570 $284,043 $520,570 $284,043 ===============================================================================
(1) Investment performance for the period is determined using actual asset valuations where available and estimates where actual data is not available. 15 Investment income In the second quarter of 2001, net investment income decreased from $11.3 million to $10.5 million, owing mainly to a decline in total investments and to a decline in LIBOR, with which the yields on some assets float. The decline in total investments was the result primarily of the recapture of a reinsurance treaty, partly offset by net growth in investments related to other reinsurance treaties. In the first six months of 2001, net investment income increased from $21.1 million to $22.3 million as a result of an increase in total investments and an increase in average book yield. The split of investment income by segment is as follows:
Three months Three months Six months Six months ended ended ended ended June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000 -------------------------------------------------------------------------------- Life Reinsurance $ 8,117 $ 9,199 $17,820 $16,189 Wealth Management - 3 2 5 Other 2,398 2,130 4,440 4,903 -------------------------------------------------------------------------------- Total $10,515 $11,332 $22,262 $21,097 ================================================================================
Capital has been contributed to SALIC and Scottish Re and is utilized to support the reinsurance agreements in place; more capital will be contributed as required. Capital that is not yet allocated is invested to provide investment income at competitive rates. Such investment income is shown as other in the above table. Realized gains (losses) Realized gains in the second quarter and first six months of 2001 include gains of $529 thousand in respect of sales of assets sold to fund part of the recapture of a block of business by one client on April 30, 2001. 16 Benefits & expenses
Three months Three months Six months Six months ended ended ended ended June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000 -------------------------------------------------------------------------------- Claims and other policy benefits $10,292 $ 3,138 $17,626 $ 4,753 Interest credited to interest sensitive 2,818 4,218 7,038 7,879 contract liabilities Acquisition costs and other insurance expenses 4,119 2,836 8,234 3,449 Operating expenses 2,412 3,299 5,043 5,439 Interest expense 314 - 314 - -------------------------------------------------------------------------------- Total benefits & expenses $19,955 $13,491 $38,255 $21,520 ================================================================================
Claims and other policy benefits Claims and other policy benefits increased from $3.1 million to $10.3 million in the second quarter and from $4.8 million to $17.6 million in the first six months of 2001 as a result of new reinsurance clients. We are recording claims and policy benefit expenses in respect of 28 reinsurance clients and the run-off of a small amount of Accident & Health business in the first six months of 2001. In the second quarter and first six months of 2000 we had benefit expenses in relation to 6 reinsurance clients and the Accident & Health business. Interest credited to interest sensitive contract liabilities Interest credited to interest sensitive contract liabilities decreased from $4.2 million to $2.8 million for the second quarter and from $7.9 million to $7.0 million in the first six months of 2001 as a result of the recapture of a block of business by one client on April 30, 2001 causing a decrease of $2 million in both the quarter and six months, partly offset by new reinsurance treaties written, and increases in interest credited to policies which commenced in 2000 due to increasing average liability balances. Interest is calculated based on the liabilities recorded on the balance sheet at the rate of interest required by the reinsurance agreement. 17 Acquisition costs and other insurance expenses Acquisition costs and other insurance expenses increased from $2.8 million to $4.1 million in the second quarter and from $3.4 million to $8.2 million in the first six months of 2001 as a result of new reinsurance treaties. The components of these expenses are as follows:
Three months ended Three months ended Six months ended Six months ended June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000 ------------------------------------------------------------------------------- Commissions, excise taxes and other insurance expenses $ 12,948 $ 5,911 $ 22,709 $ 7,512 Deferred expenses (10,389) (4,514) (19,213) (5,573) Amortization - PVIF 51 34 103 34 Amortization - DAC 1,509 1,405 4,635 1,476 ------------------------------------------------------------------------------- Total $ 4,119 $ 2,836 $ 8,234 $ 3,449 ===================================================================================
Commissions & excise taxes vary with premiums earned. Insurance expenses include direct and indirect expenses of those departments involved in the marketing, underwriting, issuing and administration of reinsurance agreements. Of these total expenses a portion is deferred and amortized over the life of the reinsurance treaty or in relation to the estimated gross profit in respect of our interest sensitive contracts. The split of these expenses between segments is as follows:
Three months ended Three months ended Six months ended Six months ended June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000 ------------------------------------------------------------------------------- Life Reinsurance $3,941 $2,688 $7,891 $3,206 Wealth Management 178 148 343 243 ------------------------------------------------------------------------------- Total $4,119 $2,836 $8,234 $3,449 ================================================================================
18 Operating expenses Operating expenses decreased from $3.3 million to $2.4 million for the second quarter and from $5.4 million to $5.0 million for the first six months of 2001 as a result of increased reinsurance activity and increased personnel costs which is offset by increases in the amount of marketing and policy acquisition costs being allocated to acquisition expenses. The split of these expenses between segments is as follows:
Three months ended Three months ended Six months ended Six months ended June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000 ------------------------------------------------------------------------------- Life Reinsurance $2,033 $1,830 $3,952 $3,142 Wealth Management 136 210 374 407 Other 243 1,259 717 1,890 ------------------------------------------------------------------------------- Total $2,412 $3,299 $5,043 $5,439 ============================================================================
Increased business activity in 2001 has resulted in an increase in corporate overhead costs being allocated to lines of business. Interest expense Interest expense in the three and six months ended June 30, 2001 is in respect of $40 million of borrowing which we utilized, in part, to fund the recapture of a block of business by one client on April 30, 2001. Income taxes The income tax benefit decreased in the second quarter of 2001 to $108 thousand from $429 thousand in the second quarter of 2000. The income tax benefit in the first six months of 2001 decreased to $57 thousand from $370 thousand in the same period of 2000. The 2001 calculation includes the earnings of Scottish Re and Dublin. The tax benefit in the second quarter and first six months of 2000 is related to the earnings of Scottish Re offset by a release of valuation allowances related to capital loss carry-forwards. Minority interest Minority interest income represents the minority owner's share of the loss recorded by Scottish Crown in the second quarter and first six months of 2001. 19 Financial Condition Investments General Re - New England Asset Management, Inc. manages our investment portfolio. Our investment guidelines are designed to diversify the portfolio and maximize investment income while limiting risk in an asset-liability management, enterprise context. At June 30, 2001, the portfolio had an average quality rating of A+, an average effective duration of 3.49 years and an average book yield of 6.88%. This compares with an average quality rating of AA-, an average effective duration of 2.62 years and an average book yield of 7.24% respectively at December 31, 2000. Average quality dropped to A+ because of our strategy of enhancing yield while keeping asset quality prudent and at least as high as industry practice and rating agency expectations. The decline in average book yield was the result of offsetting trends. Yield on floating-rate investments and cash dropped owing to a decline in LIBOR. During the second quarter and first half of the year, these floating-rate assets were largely matched by floating-rate liabilities, on which the cost of funds declined by a similar amount. As a result, spreads earned between floating-rate assets and floating rate liabilities held up well. On the fixed rate portion of the portfolio, the average book yield increased from 7.12% to 7.27%. Asset duration increased because of the change in mix of fixed and floating rate liabilities: the combination of the $185.7 million recapture (see General) and the $40 million in borrowings (see Borrowings) reduced floating-rate liabilities by a net of $145.7 million, and new reinsurance treaties were all fixed rate. Our policy is to maintain asset durations close to the targets most suitable for the liabilities on both enterprise and sub-portfolio levels. We recognized realized gains of $416 thousand during the second quarter and $457 thousand in the first six months of 2001 as compared to realized losses of $17 thousand in the second quarter and $144 thousand in the first six months of 2000. At June 30, 2001 the portfolio had unrealized losses of $2.1 million net of tax as compared to unrealized losses of $3.8 million net of tax at December 31, 2000; these amounts are shown on the balance sheet as part of Shareholders' equity entitled Accumulated other comprehensive income. Liquidity and Capital Resources Cash flow Cash flow from operations for the first six months of 2001 was $51.9 million compared to $24.2 million in the first six months of 2000. The increase in operating cash flow reflects our increased level of operations this year compared to 2000. Our cash flow from operations may be positive or negative in any specific quarter depending on the amount of new life reinsurance business written in the quarter and the level of ceding commissions paid in connection with writing that business offset by the level of renewal premiums earned in the quarter. Capital and Collateral At June 30, 2001, total capitalization was $248.6 million. We currently have no material commitments for capital expenditures. During the second quarter of 2001, we paid dividends totaling $0.05 per share or $786 thousand for a total of $0.10 or $1.6 million for the first six months of 2001. We have in place a credit facility with a U.S. bank that provides up to $70 million that we can use for a combination of borrowings and outstanding letters of credit. Under the agreement, we may borrow at a rate of 40 basis points over LIBOR. The agreement expires April 30, 2002, but is renewable with the agreement of both parties. As of June 30, 2001, we have outstanding borrowings of $40 million and letters of credit of $29.4 million in support of our reinsurance business. The agreement requires that we pledge assets as collateral with a market value not less than 111% of the sum of outstanding borrowing and letters of credit. We believe that we can obtain additional credit capacity on comparable terms and have sufficient pledgable assets available to meet anticipated needs for growth over the next several months. We can also reduce our borrowings by selling securities to create additional availability as opportunities arise. 20 Subsequent Event On August 6, 2001, we agreed to acquire World-Wide Holdings Limited and its wholly owned subsidiary, World-Wide Reassurance Company Limited (together, "World-Wide") from Pacific Life Insurance Company ("Pacific Life") for $78 million in newly issued Ordinary Shares of our stock. World-Wide is a specialty life reinsurance company headquartered in Windsor, England and conducting business throughout the world. As a result of the transaction, Pacific Life will become our largest shareholder with ownership of approximately 22% of our outstanding Ordinary Shares after the transaction is completed. The transaction is subject to the approval of our shareholders, as well as various regulatory authorities. We expect that this transaction will close before the end of our fiscal year. 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 under the heading "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 in our Annual Report on Form 10-K filed with the Securities and Exchange Commission. 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. Prior to investing in the Ordinary Shares, potential investors should consider carefully the risk factors set forth in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, in addition to the other information set forth in this Form 10-Q. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes since December 31, 2000. Please refer to "Item 7A: Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K. 21 PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is not currently involved in any litigation or arbitration. Item 2. Changes in Securities and Use of Proceeds Not applicable. Item 3. Default Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Securities Holders The 2001 Annual Meeting of Shareholders of the Company was held on May 31, 2001. The following items of business were presented to the shareholders of the Company (the "Shareholders"): Election of Directors The two directors were elected as proposed in the Proxy Statement dated April 10, 2001 under the caption titled "Proposal for Election of Directors" as follows: Total Vote Total Vote For Withheld From Name Each Director Each Director - ---- ------------- ------------- Michael C. French 11,301,674 39,767 Hazel R. O'Leary 11,274,481 66,960 Ratification of Independent Auditors The Board of Directors has selected, based upon the recommendation of the Audit Committee, Ernst & Young as the independent auditors for the Company for the fiscal year ending December 31, 2001, the Shareholders ratified this selection as follows: For: 11,334,896 Against: 6,500 Abstain: 45 Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K No reports on Form 8-K were filed during the three-month period ended June 30, 2001. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. Date: August 10, 2001 By: /s/ Michael C. French Michael C. French Chief Executive Officer Date: August 10, 2001 By: /s/ Scott E. Willkomm Scott E. Willkomm President & Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 23 -----END PRIVACY-ENHANCED MESSAGE-----