-----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, HFCbfi81zUSbms9g0UTJ8TFbM6dlDEzg16by7MJYZ5M9YmuNDf0dr+4q1uwU6s4Q lwg83uJMsP4hjnbvI9kZMA== 0000930661-99-001810.txt : 19990811 0000930661-99-001810.hdr.sgml : 19990811 ACCESSION NUMBER: 0000930661-99-001810 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990810 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: SEC FILE NUMBER: 000-29788 FILM NUMBER: 99682069 BUSINESS ADDRESS: STREET 1: UGLAND HOUSE SOUTH CHURCH STREET STREET 2: GEORGE TOWN GRAND CAYMAN CAYMAN ISLANDS CITY: BRITISH WEST INDIES STATE: E9 ZIP: 00000 BUSINESS PHONE: 3459492800 MAIL ADDRESS: STREET 1: UGLAND HOUSE SOUTH CHURCH STREET STREET 2: GEORGE TOWN GRAND CAYMAN CAYMAN ISLANDS CITY: BRITISH WEST INDIES STATE: E9 ZIP: 00000 FORMER COMPANY: FORMER CONFORMED NAME: SCOTTISH LIFE HOLDINGS LTD DATE OF NAME CHANGE: 19980615 10-Q 1 FORM 10-Q ================================================================================ 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, 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 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 9, 1999, Registrant had 18,576,440 Ordinary Shares outstanding. ================================================================================ Table of Contents PART I ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets, June 30, 1999 (Unaudited) and December 31, 1998 2 Condensed Consolidated Statements of Operations--Second Quarter and Six Months Ended June 30, 1999 (Unaudited) and the Periods Ended June 30, 1998 (Unaudited) 3 Condensed Consolidated Statements of Comprehensive Loss-- Second Quarter and Six Months Ended June 30, 1999 (Unaudited) and the Periods Ended June 30, 1998 (Unaudited) 4 Condensed Consolidated Statements of Shareholders' Equity for the Six Months Ended June 30, 1999 (Unaudited) and the Period Ended December 31, 1998 5 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999 (Unaudited) and the Period Ended June 30, 1998 (Unaudited) 6 Condensed Notes to Consolidated Financial Statements (Unaudited) 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANAYLSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 16 PART II OTHER INFORMATION ITEM 1. 16 ITEM 2 through ITEM 6 17 SIGNATURES 18 EXHIBIT INDEX 19 -1- PART I FINANCIAL INFORMATION Item 1: Financial Statements. Scottish Annuity & Life Holdings, Ltd. Condensed Consolidated Balance Sheets (Stated in United States Dollars) Unaudited
June 30, December 31, 1999 1998 ------------------------------------------ ASSETS Fixed Maturity investments $ 239,646,439 $ 229,756,293 Cash and cash equivalents 3,469,533 18,374,725 Receivables: Reinsurance premiums 102,663,907 - Due from investment brokers 36,450 3,060,543 Insurance administration fees 450,823 - Accrued interest 3,134,347 2,883,009 Deferred acquisition costs 1,774,642 - Segregated assets 463,264 - Other assets 167,373 271,669 Net fixed assets and leasehold improvements 552,331 - ------------------------------------------ Total Assets $ 352,359,109 $ 254,346,239 ========================================== LIABILITIES Reserves for future policy benefits $ 104,027,579 $ - Segregated liabilities 463,264 - Accounts payable and accrued expenses 792,640 1,959,160 Due to related party - 326,900 ------------------------------------------ Total Liabilities 105,283,483 2,286,060 ------------------------------------------ SHAREHOLDERS' EQUITY Share capital, par value $0.01 per share: Issued and fully paid: 18,576,440 ordinary shares (18,568,440 ordinary shares 31-Dec-98) 185,764 185,684 Additional paid in capital 252,454,728 252,291,320 Accumulated other comprehensive loss - Unrealized depreciation of investments (8,880,299) (853,146) Retained Earnings 3,315,433 436,321 ------------------------------------------ Total shareholders' equity 247,075,626 252,060,179 ------------------------------------------ Total liabilities and shareholders' equity $ 352,359,109 $ 254,346,239 ==========================================
See notes to the consolidated financial statements -2- Scottish Annuity & Life Holdings, Ltd. Condensed Consolidated Statements of Operations (Stated in United States Dollars) Unaudited
Three Months Period Six Months Period ended June 30, ended June 30, ended June 30, ended June 30, 1999 1998 * 1999 1998 * ---------------------------------------------------------------------------------- REVENUES Interest income, net $ 4,124,756 $ 1,501 $ 7,446,008 $ 1,501 Realized losses on securites, net (518,911) - (1,482,825) - Variable life fees 18,755 - 18,755 - Insurance administration fees 231,741 - 457,526 - ----------------------------------------------------------------------------------- Total revenues 3,856,341 1,501 6,439,464 1,501 EXPENSES Claims and other policy benefits 319,666 - 319,666 - Acquisition costs and other insurance expenses 140,783 - 140,783 - Salaries 666,484 - 1,158,955 - Professional fees 158,913 12,772 369,358 12,772 Administrative expenses 356,891 9,806 615,135 9,806 Depreciation 22,795 - 27,633 - ----------------------------------------------------------------------------------- Total expenses 1,665,532 22,578 2,631,530 22,578 ----------------------------------------------------------------------------------- Net income (loss) $ 2,190,809 $ (21,077) $ 3,807,934 $ (21,077) =================================================================================== ----------------------------------------------------------------------------------- Net operating income (loss) $ 2,709,720 $ (21,077) $ 5,290,759 $ (21,077) =================================================================================== EARNINGS PER SHARE Net income (loss) $ 0.12 $ (0.01) $ 0.21 $ (0.01) =================================================================================== Operating Earnings (loss) $ 0.15 $ (0.01) $ 0.28 $ (0.01) ===================================================================================
* the period from May 12, 1998 (date of incorporation) to June 30, 1998 See notes to the consolidated financial statements -3- Scottish Annuity & Life Holdings, Ltd. Condensed Consolidated Statements of Comprehensive Loss (Stated in United States Dollars) Unaudited
Three Months Period Six Months Period ended June 30, ended June 30, ended June 30, ended June 30, 1999 1998 * 1999 1998 * ---------------------------------------------------------------------------------- Net Income $ 2,190,809 $ (21,077) $ 3,807,934 $ (21,077) ----------------------------------------------------------------------------------- Other comprehensive income (loss) Unrealized depreciation on investments: - - Unrealized holding depreciation arising during the period (5,822,824) - (9,509,978) - Add: reclassification adjustment for losses included in net income 518,911 - 1,482,825 - ----------------------------------------------------------------------------------- Unrealized depreciation on investments (5,303,913) - (8,027,153) - =================================================================================== Comprehensive loss $ (3,113,104) $ (21,077) $ (4,219,219) $ (21,077) ===================================================================================
* the period from May 12, 1998 (date of incorporation) to June 30, 1998 See notes to the consolidated financial statements -4- Scottish Annuity & Life Holdings, Ltd. Condensed Consolidated Statements of Shareholders' Equity (Stated in United States Dollars) Unaudited
June 30, December 31, 1999 1998 -------------------------------------- SHARE CAPITAL: Beginning of period $ 185,684 $ - Issuance of founder shares - 15,000 Repurchase of shares and issuance of warrants - (11,000) Sales to direct investors 80 14,184 Initial public offering - 167,500 -------------------------------------- 185,764 185,684 -------------------------------------- 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 Repurchase of shares and issuance of warrants - 11,000 Sales to direct investors 87,920 19,985,816 Initial public offering - 231,407,504 Issuance of equity options 75,488 - -------------------------------------- 252,454,728 252,291,320 -------------------------------------- ACCUMULATED OTHER COMPREHENSIVE LOSS: Beginning of period (853,146) - Unrealized depreciation on investments (8,027,153) (853,146) -------------------------------------- (8,880,299) (853,146) -------------------------------------- RETAINED EARNINGS: Beginning of period 436,321 - Net income 3,807,934 436,321 Dividends paid (928,822) - -------------------------------------- 3,315,433 436,321 -------------------------------------- TOTAL SHAREHOLDERS' EQUITY $ 247,075,626 $ 252,060,179 ======================================
See notes to the consolidated financial statements -5- Scottish Annuity & Life Holdings, Ltd. Condensed Consolidated Statements of Cash Flows (Stated in United States Dollars) Unaudited
Six Months Period ended June 30, ended June 30, 1999 1998 * -------------------------------------- OPERATING ACTIVITIES Net income (loss) $ 3,807,934 $ (21,077) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Net realized losses on securities 1,482,825 - Non cash salaries and professional fees 163,488 - Depreciation 27,633 - Amortization of deferred acquisition costs 24,014 - Net change in policy benefit reserves (1,313,283) - Changes in assets and liabilities: Reinsurance premiums receivable (102,663,907) - Other receivables 2,321,932 - Deferred acquisition costs (1,798,656) (968,907) Other assets 104,296 (9,309) Fixed assets & leasehold improvements (579,964) - Reserves for future benefit payments 105,340,862 - Accounts payable and accrued expenses (1,166,520) 829,976 Due to related party (326,900) - -------------------------------------- Net cash provided by (used in) operating activities 5,423,754 (169,317) -------------------------------------- INVESTING ACTIVITIES Purchase of securities (470,629,087) - Proceeds on sales of securities 451,228,963 - -------------------------------------- Net cash used in investing activities (19,400,124) - -------------------------------------- FINANCING ACTIVITIES Dividends paid (928,822) - Issuance of share capital - 500,000 Issuance of Class A warrants - 100,000 Issuance of Class B warrants - 302,000 -------------------------------------- Net cash (used in) provided by financing activities (928,822) 902,000 -------------------------------------- NET CHANGE IN CASH AND CASH EQUIVALENTS (14,905,192) 732,683 Cash and cash equivalents, beginning of period 18,374,725 - -------------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,469,533 $ 732,683 ======================================
* the period from May 12, 1998 (date of incorporation) to June 30, 1998 See notes to the consolidated financial statements -6- Scottish Annuity & Life Holdings, Ltd. Condensed Notes to Consolidated Financial Statements (Unaudited) June 30, 1999 1. Basis of presentation Accounting Principles - The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information ("GAAP") and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles 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. The comparative consolidated balance sheet as of December 31, 1998 has been derived from the audited consolidated financial statements for the period ended December 31, 1998. For further information, refer to the consolidated financial statements and footnotes thereto included in the Registrant Company and Subsidiaries' annual report on Form 10-K for the period ended December 31, 1998. We have reclassified some figures from our 1998 financial statements to conform with our 1999 presentation. These reclassifications had no effect on net income or shareholders' equity as previously reported. Consolidation - We consolidate our results and have eliminated all significant intercompany transactions. Estimates, risks and uncertainties - The preparation of GAAP financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Our most significant assumptions are for assumed reinsurance liabilities, which are provided by the ceding companies. It is typical for these ceding companies to periodically review and revise these estimates. We also will review and revise these estimates as appropriate. Any adjustments made to these estimates will be reflected in the period the estimates are revised. -7- Scottish Annuity & Life Holdings, Ltd. Condensed Notes to Consolidated Financial Statements (Unaudited) June 30, 1999 (continued) 2. Earnings per ordinary share We calculate earnings per ordinary share in accordance with Statement of Financial Accounting Standards (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 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. Our warrants and options were not deemed to be dilutive as of June 30, 1999 because the strike price of $15 was greater than our market value.
Three Months Period Six Months Period ended June 30, ended June 30, ended June 30, ended June 30, 1999 1998 * 1999 1998 * ------------------------------------------------------------------------------ Net income $ 2,190,809 $ (21,077) $ 3,807,934 $ (21,077) Weighted average number of shares outstanding 18,576,440 1,500,000 18,574,981 1,500,000 ------------------------------------------------------------------------------ Basic and diluted earnings per ordinary share $ 0.12 $ (0.01) $ 0.21 $ (0.01) ============================================================================== ------------------- Actual shares outstanding at June 30, 1999 18,576,440 ===================
* the period from May 12, 1998 (date of incorporation) to June 30, 1998 -8- Scottish Annuity & Life Holdings, Ltd. Condensed Notes to Consolidated Financial Statements (Unaudited) June 30, 1999 (continued) 3. Fixed maturities The amortized cost, gross unrealized appreciation and depreciation, and estimated fair values of our fixed maturity investments are as follows:
June 30, 1999 ------------------------------------------------------------------------------------- Gross unrealized Gross unrealized Estimated Fair Amortized Cost appreciation depreciation value ------------------------------------------------------------------------------------- U.S. treasury securities and obligations of U.S. government agencies $ 45,363,526 $ - $ (2,652,442) $ 42,711,084 U.S. corporate securities 108,496,101 47,104 (3,649,622) 104,893,583 U.S. mortgage and asset backed securities 94,667,111 94,503 (2,719,842) 92,041,772 ------------------------------------------------------------------------------------- $ 248,526,738 $ 141,607 $ (9,021,906) $ 239,646,439 ===================================================================================== 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 $ 97,674,991 $ 885 $ (633,455) $ 97,042,421 U.S. corporate securities 94,795,887 106,205 (256,060) 94,646,032 U.S. mortgage and asset backed securities 38,138,561 20,102 (90,823) 38,067,840 ------------------------------------------------------------------------------------- $ 230,609,439 $ 127,192 $ (980,338) $ 229,756,293 =====================================================================================
-9- Scottish Annuity & Life Holdings, Ltd. Condensed Notes to Consolidated Financial Statements (Unaudited) June 30, 1999 (continued) 3. Fixed maturities (continued) The contractual maturities of the fixed maturities are as follows. Actual maturities may differ as a result of calls and prepayments.
June 30, 1999 ------------------------------------ Amortized Estimated fair cost value ------------------------------------ Due in one year or less $ 12,766,199 $ 12,757,370 Due in one year through five years 68,287,062 66,187,350 Due in five years through ten years 46,071,723 44,040,142 Due after ten years 26,734,644 24,619,805 ------------------------------------ 153,859,628 147,604,667 Mortgage and asset backed securities 94,667,111 92,041,772 ------------------------------------ $ 248,526,739 $ 239,646,439 ==================================== December 31, 1998 ------------------------------------ Amortized Estimated fair cost value ------------------------------------ Due in one year or less $ 56,736,454 $ 56,737,338 Due in one year through five years 74,431,349 73,728,443 Due in five years through ten years 32,165,658 31,636,454 Due after ten years 29,137,417 29,586,218 ------------------------------------ 192,470,878 191,688,453 Mortgage and asset backed securities 38,138,561 38,067,840 ------------------------------------ $ 230,609,439 $ 229,756,293 ====================================
Proceeds from sales of securities during the six months ended June 30, 1999 were $451,228,963. Gross gains of $232,226 and gross losses of $1,715,051 were realized on those sales. 4. 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, we and Scottish Annuity & Life Insurance Company (Cayman) Ltd. ("Scottish Insurance"), our wholly owned subsidiary, have been granted exemptions therefrom until 2018. We operate in a manner such that we will owe no -10- Scottish Annuity & Life Holdings, Ltd. Condensed Notes to Consolidated Financial Statements (Unaudited) June 30, 1999 (continued) United States tax other than premium excise taxes and withholding taxes on certain investment income. 5. Statutory requirements and dividend restrictions Under The Insurance Law of the Cayman Islands (1998 Revision), Scottish Insurance must maintain a minimum net capital worth of $240,000. Our ability to pay dividends depends on the ability of Scottish Insurance to pay dividends to us. While we are not subject to any significant legal prohibitions on the payment of the dividends, Scottish Insurance will be subject to Cayman Islands regulatory constraints, which affect its ability to pay dividends. Scottish Insurance is prohibited from declaring or paying a dividend if such payment would reduce its net capital worth below $240,000. -11- Scottish Annuity & Life Holdings, Ltd. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations. General Scottish Annuity & Life Holdings is an insurance holding company. Our principal asset is Scottish Annuity & Life Insurance Company (Cayman) Ltd. ("Scottish Insurance"). We were formed on May 12, 1998, and Scottish Insurance was formed on June 8, 1998, under the laws of the Cayman Islands. We commenced our insurance operations on November 30, 1998, immediately following our initial public offering. Results of operations The following table summarizes our operating earnings for the second quarter and year-to-date. Operating earnings, which excludes realized investment gains (losses) is a common measure used in the insurance industry.
Three Months Period Six Months Period ended June 30, ended June 30, ended June 30, ended June 30, 1999 1998 * 1999 1998 * ---------------------------------------------------------------------------------- REVENUES Interest income, net $ 4,124,756 $ 1,501 $ 7,446,008 $ 1,501 Variable life fees 18,755 - 18,755 - Insurance administration fee 231,741 - 457,526 - ---------------------------------------------------------------------------------- Total revenues 4,375,252 1,501 7,922,289 1,501 ---------------------------------------------------------------------------------- EXPENSES Claims and policy benefits 319,666 - 319,666 - Acquisition costs and other insurance expenses 140,783 - 140,783 - Salaries and benefits 666,484 - 1,158,955 - Professional fees 158,913 12,772 369,358 12,772 Administrative expenses 379,686 9,806 642,768 9,806 ---------------------------------------------------------------------------------- Total expenses 1,665,532 22,578 2,631,530 22,578 ================================================================================== Operating earnings (loss) $ 2,709,720 $ (21,077) $ 5,290,759 $ (21,077) ================================================================================== Operating Earnings (loss) per ordinary share $ 0.15 $ (0.01) $ 0.28 $ (0.01) ==================================================================================
* the period from May 12, 1998 (date of incorporation) to June 30, 1998 -12- Scottish Annuity & Life Holdings, Ltd. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Overview Our operating earnings of $2,709,720 or $0.15 per share were driven by revenues from our investment portfolio and insurance administration fees. Comparisons to the prior period are not meaningful because we did not begin operations until November of 1998 in conjunction with our IPO. Investments Our investment portfolio is now managed by two professional investment managers, Gen Re - New England Asset Management, Inc and Prudential Investment Corporation. During the second quarter we realigned our investment portfolio. This change was taken to increase the net yield of our portfolio. Our investment guidelines are designed to diversify the portfolio to maximize investment income while minimizing risk. At June 30, 1999, the portfolio had an average quality rating of AA, an average duration of 4.68 years and an average book yield of 6.06% this compares with AA, 4.73 years and 5.80% respectively at March 31, 1999. The average yield has improved from March because we moved out of governments and cash, and into corporates. A realized loss of $518,911 and net unrealized depreciation of $5,303,913 was recognized on investments during the period. The realized loss occurred as a result of the realignment. The unrealized depreciation was the result of interest rates increasing from March 31,1999. Insurance operations Our business consists of two lines of business, variable life insurance and life and annuity reinsurance. Our second quarter results reflected revenues from both of these lines of business. The insurance administration business, which is part of the variable life insurance line, consists of a variety of insurance administration, accounting and other services provided to The Scottish Annuity Company (Cayman) Ltd. During the second quarter we wrote our first variable life insurance contracts and our first reinsurance treaty. The variable life contracts have face policy values of $15 million. The reinsurance 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 which 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. Outlook Our variable life insurance product offers a unique feature, independent investment management, which we believe will differentiate us in the market. Our reinsurance focus is on the annuity business although we will consider life reinsurance. During the second quarter we continued to review a number of variable life and reinsurance transactions. We expect to write some of these during the third and fourth quarters. On the reinsurance side we continued to review several opportunities. On July 12, 1999, we -13- Scottish Annuity & Life Holdings, Ltd. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) announced the execution of a definitive agreement to reinsure up to $400 million of group funding agreement business. This transaction will consist of four tranches each at $100 million. Each tranche is subject to final approval by both parties. We closed on the first tranche in the third quarter, with the transfer of $100 million in reserves during July. We expect to receive the second $100 million reserve installment on August 12, 1999. In addition, we announced our intention to acquire the U.S. based reinsurer, Harbourton Reassurance, Inc. This transaction will provide us with a United States platform to write insurance business. Harbourton is licensed in 14 states and the District of Columbia, and is an authorized reinsurer in 38 states. At March 31, 1999, Harbourton's principal assets were four blocks of deferred annuities with aggregate reserves of approximately $90 million. Harbourton had total statutory assets of approximately $136 million and statutory capital of approximately $38 million at March 31, 1999. The transaction, which is expected to close prior to year-end, is subject to regulatory approvals and other customary conditions. Capital Resources and Liquidity At June 30, 1999, total capitalization was $247,075,626. 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 reinsurance business. During the quarter we paid dividends of $928,822, or $0.05 per share. At our July 28, 1999 Board of Directors meeting, a stockholder dividend of $0.05 per ordinary share was declared on the shares outstanding as of the record date of September 6, 1999 to be paid on September 22, 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. Year 2000 Risk Many existing computer programs use only two digits to identify a year in the date field. These programs, if not corrected, could fail or create erroneous results by or at the year 2000. This "Year 2000" Issue is 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 believe that our exposure with respect to our own computer systems to Year 2000-related problems is not significant. In addition, we recently upgraded our principal accounting software from a DOS-based version which was not Year 2000 compliant to a Windows NT version which is certified Year 2000 compliant by the software vendor. -14- Scottish Annuity & Life Holdings, Ltd. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) We rely significantly on a number of third party service providers, such as General Re and Prudential Investment, each of whom confirmed to us, or is in the process of confirming, that they are Year 2000 compliant. We also intend to require that any new service providers be or become Year 2000 compliant in a timely manner. There can be no assurance, however, that our operations will not experience disruptions due to the failure of third parties, including reinsurance counter parties, to become fully Year 2000 compliant in a timely manner or that a failure will not otherwise have an adverse effect on our business, results of operations or financial condition. In the event our plans with respect to Year 2000 readiness fail to protect our operations from disruptions or its business, results of operations or financial condition from adverse effect, we have no contingency plan other than the replacement of existing third party service providers which are not Year 2000 compliant with comparable third party service providers who are Year 2000 compliant. We may also have an exposure to Year 2000 issues from reinsurance business. 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 or 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. 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 -15- Scottish Annuity & Life Holdings, Ltd. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 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; the declaration and payment of dividends and Year 2000 issues. 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 "Risks 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. Qualitative Disclosure of Market Risk Our qualitative disclosure about market risk is incorporated herein by reference to "Item 7A: Quantitative and Qualitative Disclosures About Market Risk" of our Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1998. Quantitative Disclosure of Interest Rate Risk Our quantitative disclosure about interest rate risk is incorporated herein by reference to "Item 7A: Quantitative and Qualitative Disclosures About Market Risk" of our Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1998. PART II OTHER INFORMATION Item 1: Legal Proceedings. The Company is not currently involved in any litigation or arbitration. -16- 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. Scottish Holdings did not submit any matter to a vote of securities holders during the second quarter of 1999. Item 5: Other Information. Not applicable. Item 6: Exhibits and Reports on Form 8-K. (a) Exhibits. Except as otherwise indicated, the following Exhibits are filed herewith and made a part hereof: EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 27.1 Financial Data Schedule (b) Reports on Form 8-K. On June 16, 1999, the Company filed a Current Report on Form 8-K reporting matters under Items 5 and 7 thereof. -17- 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 9, 1999 By: /s/ Michael C. French ------------------------------------------ Michael C. French Chief Executive Officer and President Date: August 9, 1999 By: /s/ Peter W. Presperin ------------------------------------------ Peter W. Presperin Senior Vice President-Chief Financial Officer and Secretary (Principal Financial Officer and Principal Accounting Officer) -18- EXHIBIT INDEX EXHIBIT SEQUENTIAL NUMBER PAGE NO. DESCRIPTION OF DOCUMENT -------- ----------------------- 27.1 Financial Data Schedule -19- EX-27 2 FINANCIAL DATA SCHEDULE
7 3-MOS DEC-31-1998 APR-01-1999 JUN-30-1999 239,646,439 0 0 0 0 0 239,646,439 3,469,533 0 0 352,359,109 104,027,579 0 0 0 0 0 0 185,764 246,889,862 352,359,109 0 4,124,756 (518,911) 250,496 319,666 24,014 116,769 2,190,809 0 2,190,809 0 0 0 2,190,809 0.12 0.12 0 0 0 0 0 0 0
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