-----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, Pg31rJTvueQhKraKGQt3/Apx7cWH8w24I1CaobMWMEJLfUar5NXkpSBGiXZn7sHl 4jEllgPxMK6oNXB4IWX8sw== 0000930661-99-002636.txt : 19991117 0000930661-99-002636.hdr.sgml : 19991117 ACCESSION NUMBER: 0000930661-99-002636 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99751608 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 September 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 November 12, 1999, Registrant had 16,046,740 Ordinary Shares outstanding. ================================================================================ Table of Contents PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets, September 30, 1999 (Unaudited) and December 31, 1998 (note 1) 2 Condensed Consolidated Statements of Operations - Three and Nine Months Ended September 30, 1999 (Unaudited), Three Months Ended and the Period Ended September 30, 1998 (Unaudited) 3 Condensed Consolidated Statements of Comprehensive Income (Loss) Three and Nine Months Ended September 30, 1999 (Unaudited), Three Months Ended and the Period Ended September 30, 1998 (Unaudited) 4 Condensed Consolidated Statements of Shareholders' Equity for the Nine Months Ended September 30, 1999 (Unaudited) and the Period Ended September 30, 1998 (Unaudited) 5 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 (Unaudited) and the Period Ended September 30, 1998 (Unaudited) 6 Notes to Condensed Consolidated Financial Statements (Unaudited) 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 17 PART II OTHER INFORMATION ITEM 1. 17 ITEM 2 through ITEM 5 18 ITEM 6 19 SIGNATURES 20 EXHIBIT INDEX 21 PART I FINANCIAL INFORMATION Item 1. Financial Statements Scottish Annuity & Life Holdings, Ltd. Condensed Consolidated Balance Sheets (Stated in United States Dollars)
September 30, 1999 December 31, 1998 (unaudited) (note 1) ------------------------------------------ ASSETS Fixed maturity investments $441,646,362 $178,520,719 Cash and cash equivalents 60,102,596 69,610,299 Receivables: Reinsurance premiums 13,690,867 - Due from investment brokers - 3,060,543 Insurance administration fees 240,940 - Accrued interest 3,662,376 2,883,009 Deferred acquisition costs 2,162,459 - Segregated assets 458,634 - Other assets 82,272 271,669 Net fixed assets and leasehold improvements 821,311 - ------------------------------------------ Total assets $522,867,817 $254,346,239 ========================================== LIABILITIES Reserves for future policy benefits $283,215,197 $ - Segregated liabilities 458,634 - Accounts payable and accrued expenses 6,963,962 1,959,160 Due to related party - 326,900 ------------------------------------------ Total liabilities 290,637,793 2,286,060 ------------------------------------------ SHAREHOLDERS' EQUITY Share capital, par value $0.01 per share: Issued and fully paid: 17,088,640 ordinary shares (18,568,440 ordinary shares 31-Dec-98) 170,886 185,684 Additional paid in capital 237,617,984 252,291,320 Accumulated other comprehensive loss - Unrealized depreciation on investments (10,210,558) (853,146) Retained earnings 4,651,712 436,321 ------------------------------------------ Total shareholders' equity 232,230,024 252,060,179 ------------------------------------------ Total liabilities and shareholders' equity $522,867,817 $254,346,239 ==========================================
See notes to the condensed consolidated financial statements -2- Scottish Annuity & Life Holdings, Ltd. Condensed Consolidated Statements of Operations (Stated in United States Dollars) Unaudited
Three Months Three Months Nine Months Period ended September ended September ended September ended September 30, 1999 30, 1998 30, 1999 30, 1998 * -------------------------------------------------------------------------------- REVENUES Investment income, net $ 7,145,693 $ 4,349 $14,591,701 $ 5,850 Realized losses on securities, net (1,014,444) - (2,497,268) - Insurance administration and variable life fees 267,999 - 744,279 - -------------------------------------------------------------------------------- Total revenues 6,399,248 4,349 12,838,712 5,850 EXPENSES Claims and other policy benefits 2,660,664 - 2,980,330 - Acquisition costs and other insurance expenses 713,958 - 2,002,899 - Operating expenses 759,525 98,153 1,782,448 120,731 -------------------------------------------------------------------------------- Total expenses 4,134,147 98,153 6,765,677 120,731 -------------------------------------------------------------------------------- Net income (loss) $ 2,265,101 $ (93,804) $ 6,073,035 $ (114,881) ================================================================================ Net operating earnings (loss) $ 3,279,545 $ (93,804) $ 8,570,303 $ (114,881) ================================================================================ EARNINGS PER SHARE Net income (loss) $ 0.12 $ (0.06) $ 0.33 $ (0.08) ================================================================================ Net operating earnings (loss) $ 0.18 $ (0.06) $ 0.46 $ (0.08) ================================================================================
*period from May 12, 1998 (date of incorporation) to September 30, 1998 See notes to the condensed consolidated financial statements -3- Scottish Annuity & Life Holdings, Ltd. Condensed Consolidated Statements of Comprehensive Income (Loss) (Stated in United States Dollars) Unaudited
Three Months Three Months Nine Months Period ended September ended September ended September ended September 30, 1999 30, 1998 30, 1999 30, 1998 * -------------------------------------------------------------------------------- Net income (loss) $ 2,265,101 $ (93,804) $ 6,073,035 $ (114,881) -------------------------------------------------------------------------------- Other comprehensive loss Unrealized depreciation on investments: Unrealized holding depreciation arising during the period (2,344,704) - (11,854,680) - Add: reclassification adjustment for losses included in net income 1,014,444 - 2,497,268 - -------------------------------------------------------------------------------- Unrealized depreciation on investments (1,330,260) - (9,357,412) - -------------------------------------------------------------------------------- Comprehensive income (loss) $ 934,841 $ (93,804) $ (3,284,377) $ (114,881) ================================================================================
* the period from May 12, 1998 (date of incorporation) to September 30, 1998 See notes to the condensed consolidated financial statements -4- Scottish Annuity & Life Holdings, Ltd. Condensed Consolidated Statements of Shareholders' Equity (Stated in United States Dollars) Unaudited
Nine Months Period ended September ended September 30, 1999 30, 1998 * ------------------------------------------- SHARE CAPITAL: Beginning of period $ 185,684 $ - Issuance of founder shares - 15,000 Repurchase of shares (14,878) - Sales to direct investors 80 - ------------------------------------------- 170,886 15,000 ------------------------------------------- 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 (14,863,492) - Sales to direct investors 87,920 - Issuance of equity options 102,236 - ------------------------------------------- 237,617,984 887,000 ------------------------------------------- ACCUMULATED OTHER COMPREHENSIVE LOSS: Beginning of period (853,146) - Unrealized depreciation on investments (9,357,412) - ------------------------------------------- (10,210,558) - ------------------------------------------- RETAINED EARNINGS: Beginning of period 436,321 - Net income 6,073,035 (114,881) Dividends paid (1,857,644) - ------------------------------------------- 4,651,712 (114,881) ------------------------------------------- TOTAL SHAREHOLDERS' EQUITY $232,230,024 $ 787,119 ===========================================
* the period from May 12, 1998 (date of incorporation) to September 30, 1998 See notes to the condensed consolidated financial statements -5- Scottish Annuity & Life Holdings, Ltd. Condensed Consolidated Statements of Cash Flow (Stated in United States Dollars) Unaudited
Nine Months Period ended September 30, ended September 30, 1999 1998 * -------------------------------------------------- OPERATING ACTIVITIES Net income (loss) $ 6,073,035 $ (114,881) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Net realized losses on securities 2,497,268 - Non cash salaries and professional fees 102,236 - Depreciation 54,679 - Amortization of deferred acquisition costs 74,197 - Net change in policy benefit reserves (5,725,594) - Changes in assets and liabilities: - Reinsurance premiums receivable (13,690,867) - Other receivables 2,040,236 - Deferred acquisition costs (2,236,656) - Other assets 189,397 (158,593) Reserves for future benefit payments 288,940,791 - Accounts payable and accrued expenses 5,004,802 975,417 Due to related party (326,900) 168,783 -------------------------------------------------- Net cash provided by operating activities 282,996,624 870,726 -------------------------------------------------- INVESTING ACTIVITIES Purchase of securities (588,858,254) - Proceeds on sales of securities 313,877,931 - Purchase of fixed assets & leasehold improvements (875,990) (1,461,553) -------------------------------------------------- Net cash used in investing activities (275,856,313) (1,461,553) -------------------------------------------------- FINANCING ACTIVITIES Net proceeds from sale of company stock 88,000 - Net cost of repurchase of company stock (14,878,370) - Dividends paid (1,857,644) - 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 (16,648,014) 902,000 -------------------------------------------------- NET CHANGE IN CASH AND CASH EQUIVALENTS (9,507,703) 311,173 Cash and cash equivalents, beginning of period 69,610,299 - -------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 60,102,596 $ 311,173 ==================================================
* the period from May 12, 1998 (date of incorporation) to September 30, 1998 See notes to the condensed consolidated financial statements -6- Scottish Annuity & Life Holdings, Ltd. Notes to the Condensed Consolidated Financial Statements (Unaudited) September 30, 1999 1. Basis of presentation Accounting Principles The accompanying unaudited condensed 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 included in our 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. Notes to the Condensed Consolidated Financial Statements (Unaudited) September 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 September 30, 1999 because the strike price of $15 was greater than our market value.
Three Months Three Months Nine Months Period ended September ended September ended September ended September 30, 1999 30, 1998 30, 1999 30, 1998* -------------------------------------------------------------------------------------------------- Net income (loss) $ 2,265,101 $ (93,804) $ 6,073,035 $ (114,881) Operating earnings (loss) $ 3,279,545 $ (93,804) $ 8,570,303 $ (114,881) Weighted average number 18,315,351 1,500,000 18,487,487 1,500,000 of shares outstanding Basic and diluted net income $ 0.12 $ (0.06) $ 0.33 $ (0.08) (loss) per ordinary share Basic and diluted net operating $ 0.18 $ (0.06) $ 0.46 $ (0.08) earnings (loss) per ordinary share Actual shares outstanding at September 30, 1999 17,088,640 ===============
* the period from May 12, 1998 (date of incorporation) to September 30, 1998 -8- Scottish Annuity & Life Holdings, Ltd. Notes to the Condensed Consolidated Financial Statements (Unaudited) September 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:
September 30, 1999 --------------------------------------------------------------------------------------------- Gross Unrealized Gross Unrealized Estimated Fair Amortized Cost Appreciation Depreciation Value --------------------------------------------------------------------------------------------- U.S. treasury securities and obligations of U.S. government agencies $ 15,192,517 $ - $ (1,520,516) $ 13,672,001 U.S. corporate securities 131,898,637 75,775 (5,171,401) 126,803,011 Mortgage and asset backed securities 304,765,766 328,178 (3,922,594) 301,171,350 --------------------------------------------------------------------------------------------- $451,856,920 $403,953 $(10,614,511) $441,646,362 ============================================================================================= 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 =============================================================================================
-9- Scottish Annuity & Life Holdings, Ltd. Notes to the Condensed Consolidated Financial Statements (Unaudited) September 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.
September 30, 1999 -------------------------------------- Amortized Estimated Fair Cost Value -------------------------------------- Due in one year or less $ 5,454,557 $ 5,446,960 Due in one year through five years 48,846,701 47,672,869 Due in five years through ten years 67,177,542 64,359,096 Due after ten years 25,612,354 22,996,087 -------------------------------------- 147,091,154 140,475,012 Mortgage and asset backed securities 304,765,766 301,171,350 -------------------------------------- $451,856,920 $441,646,362 ====================================== December 31, 1998 -------------------------------------- Amortized Estimated Fair Cost 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 ======================================
Proceeds from sales of securities during the nine months ended September 30, 1999 were $313,877,931. Gross gains of $601,995 and gross losses of $3,099,263 were realized on those sales. -10- Scottish Annuity & Life Holdings, Ltd. Notes to the Condensed Consolidated Financial Statements (Unaudited) September 30, 1999 (continued) 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 United States tax other than premium excise taxes, withholding taxes on certain investment income, and corporate income tax in relation to the operations of Harbourton Reassurance, Inc. ("Harbourton") a U.S. based company we acquired subsequent to September 30, 1999. 5. Statutory requirements and dividend restrictions Under The Insurance Law of the Cayman Islands (1999 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. 6. Subsequent events On October 15, 1999 we acquired Harbourton, a U.S. based reinsurer, for a purchase price of $25,183,372 in cash. This transaction will provide 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 24 states. At September 30, 1999, Harbourton had unaudited revenues of $4.8 million for the nine months then ended and total assets of $115.8 million. This acquisition will be accounted for using the purchase method of accounting. We are currently in the process of preparing the purchase price allocation and determining the useful lives of the assets acquired. The following are our unaudited pro forma results for the nine months ended September 30, 1999 and the period from incorporation (May 12, 1998) to September 30, 1998 assuming the acquisition occurred on May 12, 1998. -11- Scottish Annuity & Life Holdings, Ltd. Notes to the Condensed Consolidated Financial Statements (Unaudited) September 30, 1999 (continued) 6. Subsequent events (continued)
Nine Months Period ended September 30, ended September 30, 1999 1998 ------------------------------------------------ Total revenue 16,581,260 3,715,024 Net income (loss) 3,970,508 (362,075) Net operating earnings (loss) 7,394,666 (489,177) Earnings per share Net income (loss) 0.21 (0.24) Net operating earnings (loss) 0.40 (0.33)
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 acquisition been effective on May 12, 1998, or of future results of operations. -12- 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. 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 current year's third quarter and year-to-date and prior year's comparative periods. Operating earnings, which excludes realized investment gains (losses) is a common measure used in the insurance industry.
Three Months Three Months Nine Months Period ended September ended September ended September ended September 30, 1999 30, 1998 30, 1999 30, 1998 * ------------------------------------------------------------------------------------------- REVENUES Investment income, net $7,145,693 $ 4,349 $14,591,701 $ 5,850 Insurance administration and variable life fees 267,999 - 744,279 - ------------------------------------------------------------------------------------------- Total revenues 7,413,692 4,349 15,335,980 5,850 EXPENSES Claims and other policy benefits 2,660,664 - 2,980,330 - Acquisition costs and other insurance expenses 713,958 - 2,002,899 - Operating expenses 759,525 98,153 1,782,448 120,731 ------------------------------------------------------------------------------------------- Total expenses 4,134,147 98,153 6,765,677 120,731 ------------------------------------------------------------------------------------------- Net operating earnings (loss) $3,279,545 $ (93,804) $ 8,570,303 $ (114,881) =========================================================================================== EARNINGS PER SHARE ------------------------------------------------------------------------------------------- Net operating earnings (loss) $0.18 $(0.06) $0.46 $(0.08) ===========================================================================================
* the period from May 12, 1998 (date of incorporation) to September 30, 1998 -13- Scottish Annuity & Life Holdings, Ltd. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Overview Our operating earnings for the quarter of $3,279,545 or $0.18 per share were driven by revenues from our investment portfolio, reinsurance operations, 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 managed by two professional investment managers, Gen Re - New England Asset Management, Inc and Prudential Investment Corporation. Our investment guidelines are designed to diversify the portfolio to maximize investment income while minimizing risk. At September 30, 1999, the portfolio had an average quality rating of AA+, an average duration of 2.75 years and an average book yield of 6.33%. This compares with AA, 4.68 years and 6.06% respectively at June 30, 1999. Our fixed maturity portfolio more than doubled to $441 million as a result of the reinsurance business. The duration was reduced because of our liquidity needs, which were, the acquisition of Harbourton Reassurance, Inc. ("Harbourton") and the stock buy back. A realized loss of $1,014,444 and net unrealized depreciation of $1,330,260 were recognized on investments during the quarter. The realized loss occurred as a result of the realignment of the investment portfolio. The unrealized depreciation was the result of interest rates increasing from June 30, 1999. Insurance Operations Our business consists of two lines of business, variable life insurance and life and annuity reinsurance. Our 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 Scottish Annuity Company (Cayman) Ltd. During the third quarter there was no additional activity in our variable life insurance line of business. During the third quarter we entered into a reinsurance agreement 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. If market conditions continue to stabilize, we may consider taking down the final two tranches. -14- Scottish Annuity & Life Holdings, Ltd. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Outlook We have continued to develop the variable life distribution system by building relationships with independent insurance brokers. We have had significant interest from the brokerage community and are excited about the prospects. We are currently evaluating several reinsurance transactions, which we expect to close in the fourth quarter. In addition, on October 15, 1999 we closed our acquisition of Harbourton. Harbourton will provide us with a United States platform to write reinsurance business. It should be noted that, in our opinion, the Harbourton losses reflected in the pro forma information in footnote 6 are non-recurring in nature. Harbourton is licensed in 15 states and the District of Columbia and is an authorized reinsurer in 24 states. Capital Resources and Liquidity At September 30, 1999, total capitalization was $232,230,024. We have recently completed a $25 million stock repurchase program. Through September 30, 1999 we had repurchased 1,487,800 shares for $14,878,370; to date we have repurchased 2,529,700 shares for $24,999,232. On October 15, 1999 we completed our acquisition of Harbourton for $25,183,372. We have no material commitments for capital expenditures and do not anticipate incurring material indebtedness other than letters of credit or lines of credit, which may be required in the ordinary course of our reinsurance business. During the quarter we paid the second quarter dividend of $928,822. At our October 27, 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 December 6, 1999 to be paid on December 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. -15- 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 that 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 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. 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 -16- 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. -17- 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 1999 Annual Meeting of Shareholders of the Company was held on July 28, 1999. The following items of business were presented to the shareholders of the Company (the "Shareholders"): Election of Directors The three directors were elected as proposed in the Proxy Statement dated June 21, 1999 under the caption titled "Proposal for Election of Directors" as follows:
Total Vote Total Vote For Withheld From Name Each Director Each Director - ---- ------------- ------------- Bill Caulfeild-Browne............................................ 15,469,140 11,790 Robert M. Chmely................................................. 15,466,640 14,290 David Matthews................................................... 15,466,140 14,790
Ratification of Independent Auditors The selection by the Board of Directors, upon the recommendation of the Audit Committee, of Ernst & Young as the independent auditors for the Company for the fiscal year ending December 31, 1999 was ratified by the Shareholders by a vote of 15,472,830 for ratification, 4,500 against, and 3,600 abstaining. Item 5. Other Information. Not applicable. -18- 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. Not applicable -19- 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: November 12, 1999 By: /s/ Michael C. French ----------------------------------- Michael C. French Chief Executive Officer and President Date: November 12, 1999 By: /s/ Peter W. Presperin ----------------------------------- Peter W. Presperin Senior Vice President-Chief Financial Officer and Secretary (Principal Financial Officer and Principal Accounting Officer) -20- EXHIBIT INDEX EXHIBIT SEQUENTIAL NUMBER PAGE NO. DESCRIPTION OF DOCUMENT -------- ----------------------- 27.1 Financial Data Schedule -21- EX-27.1 2 FINANCIAL DATA SCHEDULE
7 9-MOS DEC-31-1998 JAN-01-1999 SEP-30-1999 441,646,362 0 0 0 0 0 441,646,362 60,102,596 0 2,162,495 522,867,817 283,215,197 0 0 0 0 0 0 170,886 227,407,426 522,867,817 0 14,591,701 (2,497,268) 744,279 2,980,330 74,197 1,928,702 6,073,035 0 6,073,035 0 0 0 6,073,035 0.33 0.33 0 0 0 0 0 0 0
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