Scottish Annuity & Life Insurance Company (Cayman) Ltd.
Report of Independent Auditors.................................................1
Consolidated Balance Sheets as of December 31, 2003 and 2002...................2
Consolidated Statements of Income for the years ended December 31, 2003, 2002
and 2001.......................................................................3
Consolidated Statements of Comprehensive Income for the years ended December
31, 2003, 2002 and 2001........................................................4
Consolidated Statements of Shareholders' Equity for the years ended December
31, 2003, 2002 and 2001........................................................5
Consolidated Statements of Cash Flows for the years ended December 31, 2003,
2002 and 2001..................................................................6
Notes to Consolidated Financial Statements.....................................7
Unaudited Consolidated Balance Sheets as of September 30, 2004 and 2003.......24
Unaudited Consolidated Statements of Income for the nine months ended
September 30, 2004 and 2003...................................................25
Unaudited Consolidated Statements of Comprehensive Income for the nine months
ended September 30, 2004 and 2003.............................................26
Unaudited Consolidated Statements of Shareholders' Equity for the nine months
ended September 30, 2004 and 2003.............................................27
Unaudited Consolidated Statements of Cash Flows for the nine months ended
September 30, 2004 and 2003...................................................28
Notes to Consolidated Financial Statements....................................29
REPORT OF INDEPENDENT AUDITORS
To the Shareholder and Board of Directors of Scottish Annuity & Life Insurance
Company (Cayman) Ltd.
We have audited the accompanying consolidated balance sheets of Scottish
Annuity & Life Insurance Company (Cayman) Ltd. and subsidiaries as of December
31, 2003 and 2002, and the related consolidated statements of income,
comprehensive income, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 2003. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Scottish Annuity & Life Insurance Company (Cayman) Ltd. and subsidiaries at
December 31, 2003 and 2002, and the consolidated results of their operations
and their cash flows for the each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note 2 to the financial statements, in 2003 the Company changed
its accounting related to its funds withheld at interest.
ERNST & YOUNG LLP
February 10, 2004
1
SCOTTISH ANNUITY & LIFE INSURANCE COMPANY (CAYMAN) LTD.
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2003 2002
-------------- -------------
ASSETS
Fixed maturity investments, available for sale, at fair value
(amortized cost $1,834,382; 2002 -- $874,663)............... $1,854,492 $ 883,886
Preferred stock (cost $125,460).............................. 126,449 --
Cash and cash equivalents ................................... 270,421 116,298
Other investments ........................................... 17,664 5,619
Funds withheld at interest .................................. 1,469,425 1,101,836
---------- ----------
Total investments .......................................... 3,738,451 2,107,639
Accrued interest receivable ................................. 18,845 8,461
Reinsurance balances and risk fees receivable ............... 156,323 61,848
Deferred acquisition costs .................................. 304,849 206,530
Amounts recoverable from reinsurers ......................... 713,248 --
Fixed assets ................................................ 4,627 4,012
Due from related party ...................................... 20,011 --
Other assets ................................................ 35,953 2,251
Deferred tax asset .......................................... 32,051 7,169
Segregated assets ........................................... 403,037 289,899
---------- ----------
Total assets ............................................. $5,427,395 $2,687,809
========== ==========
LIABILITIES
Reserves for future policy benefits ......................... $1,393,220 $ 297,639
Interest sensitive contract liabilities ..................... 2,633,346 1,567,176
Accounts payable and accrued expenses ....................... 26,305 4,417
Reinsurance payable ......................................... 122,188 31,744
Due to related party ........................................ -- 14,167
Other liabilities ........................................... 9,571 74
Current income tax payable .................................. 12,113 1,229
Long term debt .............................................. 47,500 17,500
Segregated liabilities ...................................... 403,037 289,899
---------- ----------
Total liabilities ........................................ 4,647,280 2,223,845
---------- ----------
MINORITY INTEREST ........................................... 9,295 --
SHAREHOLDERS' EQUITY
Share capital, par value $0.01 per share:
Issued and fully paid: 25,000,000 ordinary shares (2002 --
25,000,000) .............................................. 250 250
Additional paid-in capital .................................. 714,892 420,081
Accumulated other comprehensive income ...................... 15,958 6,451
Retained earnings ........................................... 39,720 37,182
---------- ----------
Total shareholders' equity ............................... 770,820 463,964
---------- ----------
Total liabilities and shareholders' equity ............... $5,427,395 $2,687,809
========== ==========
See accompanying notes to Consolidated Financial Statements.
2
SCOTTISH ANNUITY & LIFE INSURANCE COMPANY (CAYMAN) LTD.
CONSOLIDATED STATEMENTS OF INCOME
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2001
-------------- -------------- -------------
REVENUES
Premiums earned ...................................................... $ 266,086 $129,046 $ 68,344
Investment income, net ............................................... 137,615 99,612 50,572
Fee income ........................................................... 6,060 4,520 2,688
Realized losses ...................................................... (7,396) (4,852) (3,883)
Change in value of embedded derivatives .............................. 13,904 -- --
--------- -------- --------
Total revenues .................................................... 416,269 228,326 117,721
--------- -------- --------
BENEFITS AND EXPENSES
Claims and other policy benefits ..................................... 192,857 96,059 51,245
Interest credited to interest sensitive contract liabilities ......... 89,020 48,140 17,578
Acquisition costs and other insurance expenses ....................... 91,771 51,205 24,013
Operating expenses ................................................... 32,681 32,408 15,675
Interest expense ..................................................... 1,244 728 1,405
--------- -------- --------
Total benefits and expenses ....................................... 407,573 228,540 109,916
--------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY
INTEREST ............................................................ 8,696 (214) 7,805
Income tax benefit (expense) ......................................... 13,441 4,164 (58)
--------- -------- --------
INCOME BEFORE MINORITY INTEREST ...................................... 22,137 3,950 7,747
Minority interest .................................................... (62) -- 70
--------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE ................................................ 22,075 3,950 7,817
Cumulative effect of change in accounting principle (net of
taxation of $3,415; 2002 -- nil; 2001 -- nil)........................ (19,537) -- (406)
--------- -------- --------
NET INCOME ........................................................ $ 2,538 $ 3,950 $ 7,411
========= ======== ========
See accompanying notes to Consolidated Financial Statements.
3
SCOTTISH ANNUITY & LIFE INSURANCE COMPANY (CAYMAN) LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2001
-------------- -------------- -------------
Net income ..................................................... $ 2,538 $ 3,950 $ 7,411
-------- -------- --------
Other comprehensive income (loss), net of tax:
Unrealized appreciation (depreciation) on investments ......... 11,631 15,510 (3,000)
Add: reclassification adjustment for investment (gains)
losses included in net income ............................... (2,124) (5,433) 3,196
-------- -------- --------
Other comprehensive income, net of income tax expense
of $2,349 and $3,818 and $1,025................................ 9,507 10,077 196
-------- -------- --------
Comprehensive income ....................................... $ 12,045 $ 14,027 $ 7,607
======== ======== ========
See accompanying notes to Consolidated Financial Statements.
4
SCOTTISH ANNUITY & LIFE INSURANCE COMPANY (CAYMAN) LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT FOR NUMBER OF SHARES)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2001
-------------- -------------- -------------
ORDINARY SHARES:
Beginning of year .............................. 25,000,000 25,000,000 18,568,440
Shares issued .................................. -- -- 6,431,560
---------- ---------- ----------
End of year .................................... 25,000,000 25,000,000 25,000,000
========== ========== ==========
SHARE CAPITAL
Beginning of year .............................. $ 250 $ 250 $ 186
Shares issued .................................. -- -- 64
----------- ----------- -----------
End of year .................................... 250 250 250
----------- ----------- -----------
ADDITIONAL PAID-IN CAPITAL
Beginning of year .............................. 420,081 250,249 250,313
Shares issued .................................. -- -- (64)
Capital contributed by parent .................. 294,811 169,832 --
----------- ----------- -----------
End of year .................................... 714,892 420,081 250,249
----------- ----------- -----------
ACCUMULATED OTHER COMPREHENSIVE GAIN (LOSS)
Beginning of year .............................. 6,451 (3,626) (3,822)
Unrealized appreciation on investments ......... 9,507 10,077 196
----------- ----------- -----------
End of year .................................... 15,958 6,451 (3,626)
----------- ----------- -----------
RETAINED EARNINGS
Beginning of year .............................. 37,182 33,232 25,821
Net income ..................................... 2,538 3,950 7,411
----------- ----------- -----------
End of year .................................... 39,720 37,182 33,232
----------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY ................... $ 770,820 $ 463,964 $ 280,105
=========== =========== ===========
See accompanying notes to Consolidated Financial Statements.
5
SCOTTISH ANNUITY & LIFE INSURANCE COMPANY (CAYMAN) LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2001
-------------- -------------- -------------
OPERATING ACTIVITIES
Income before cumulative effect of change in accounting
principle .................................................... $ 22,075 $ 3,950 $ 7,817
Items not affecting cash:
Net realized losses ........................................ 7,396 4,852 3,883
Changes in value of embedded derivatives ................... 13,903 -- --
Amortization of investments ................................ 4,090 (381) (1,484)
Amortization of deferred acquisition costs ................. 58,002 28,138 11,094
Changes in assets and liabilities:
Accrued interest ........................................ (6,692) (1,732) (19)
Reinsurance balances and risk fees receivables
and payables ........................................... (13,731) 14,684 (38,273)
Deferred acquisition costs .............................. (154,192) (121,194) (93,646)
Deferred tax benefit .................................... (17,389) (2,309) (1,293)
Due to/ from related party .............................. (34,178) 58,002 1,403
Other assets and liabilities ............................ (26,140) 3,628 873
Interest sensitive contract liabilities, net of funds
withheld at interest ................................... 25,546 16,260 9,485
Reserve for future policy benefits ...................... 148,076 (16,378) 131,626
Accounts payable and accrued expenses ................... 21,348 (141) 137
Current income tax payable .............................. (1,732) 1,229 1,351
Other ................................................... 5,617 (1,254) (1,899)
------------ ---------- ----------
Net cash provided by (used in) operating activities ........... 51,999 (12,646) 31,055
------------ ---------- ----------
INVESTING ACTIVITIES
Purchase of fixed maturity investments ........................ (1,167,247) (662,691) (309,373)
Proceeds from sales of fixed maturity investments ............. 275,374 176,930 297,337
Proceeds from maturity of fixed maturity investments .......... 190,222 111,795 86,135
Purchase of preferred stock ................................... (82,717) -- --
Proceeds from sale of preferred stock ......................... 2,263 -- --
Proceeds from maturity of preferred stock ..................... 5,137 -- --
Cost of acquisition of subsidiary net of cash acquired ........ (140,228) -- --
(Purchase) sale of other investments .......................... (640) 5,598 (17,741)
------------ ---------- ----------
Net cash provided by (used in) investing activities ........... (917,836) (368,368) 56,358
------------ ---------- ----------
FINANCING ACTIVITIES
Deposits to interest sensitive contract liabilities ........... 736,884 320,338 83,137
Withdrawals from interest sensitive contract liabilities ...... (40,782) (27,627) (200,751)
Issuance of long term debt .................................... 29,047 17,500 --
Capital contributed from parent ............................... 294,811 169,832 --
Borrowings .................................................... -- (65,145) 65,145
------------ ---------- ----------
Net cash provided by (used in) financing activities ........... 1,019,960 414,898 (52,469)
------------ ---------- ----------
Net change in cash and cash equivalents ....................... 154,123 33,884 34,944
Cash and cash equivalents, beginning of year .................. 116,298 82,414 47,470
------------ ---------- ----------
Cash and cash equivalents, end of year ........................ $ 270,421 $ 116,298 $ 82,414
============ ========== ==========
See accompanying notes to Consolidated Financial Statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN THOUSANDS OF UNITED STATES DOLLARS)
1. ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION
ORGANIZATION
Scottish Annuity & Life Insurance Company (Cayman) Ltd. was incorporated
as an exempted company with limited liability on June 3, 1998 under the laws of
the Cayman Islands. We are a wholly owned subsidiary of Scottish Re Group
Limited (formerly Scottish Annuity & Life Holdings, Ltd.), a holding company
organized under the laws of the Cayman Islands with its principal executive
office in Bermuda. Scottish Re Group Limited is quoted on the New York Stock
Exchange. On July 8, 1998, we received an unrestricted Class "B" insurer's
license under the insurance laws of the Cayman Islands. During 2002, we
obtained an insurance permit to operate in Bermuda.
We are a reinsurer of life insurance, annuities and annuity-type products.
These products are written by life insurance companies and other financial
institutions located principally in the United States, as well as around the
world. Scottish Re (Dublin) Limited, one of our subsidiaries, assumes business
from an affiliate, Scottish Re Limited, a U.K. reinsurance company specializing
in niche markets in developed countries and broader life reinsurance markets in
the developing world. We refer to this portion of our business as Life
Reinsurance. To a lesser extent, we directly issue variable life insurance and
variable annuities and similar products to high net worth individuals and
families for insurance, investment and estate planning purposes. This business
and other revenues and expenses not related to Life Reinsurance are reported in
the Other segment. We have operating companies in Bermuda, the Cayman Islands,
Ireland, and the United States.
BUSINESS
Life Reinsurance
In our Life Reinsurance business, we provide solutions to insurance
companies seeking reinsurance of life insurance, annuities and annuity-type
products. We reinsure lines of business that may be subject to significant
reserve or capital requirements by regulatory and rating agencies.
We assume risks associated with primary life insurance policies and
annuities, both in force and new business. We reinsure: (i) mortality, (ii)
investment, (iii) persistency, and (iv) expense risks. We originate reinsurance
business predominantly by marketing our products and services directly to U.S.
life insurance and reinsurance companies.
Wealth Management
In our Wealth Management business, we directly issue variable life
insurance and variable annuities and similar products to high net worth
individuals and families, for insurance, investment and estate planning
purposes. For us, high net worth generally means individuals and families with
a liquid net worth in excess of $10 million. Variable life insurance and
variable annuities have a cash value component that is placed in a separate
account and invested by us on behalf of the policyholder with a money manager.
Through our Bermuda and Cayman Islands insurance companies, we have the
flexibility to offer policies that permit the use of private independent money
managers to manage the separate accounts. The money managers can utilize
investment strategies not typically available in variable insurance products
issued to the general public.
BASIS OF PRESENTATION
Accounting Principles--Our consolidated financial statements are prepared
in accordance with accounting principles generally accepted in the United
States of America ("GAAP") and all amounts are reported in thousands of United
States dollars (except per share amounts). Certain items in the prior year
financial statements have been reclassified to conform with the current year
presentation.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN THOUSANDS OF UNITED STATES DOLLARS)
Consolidation--We consolidate the results of all our subsidiaries. All
significant intercompany transactions and balances have been eliminated on
consolidation. Prior period results have been reclassified to conform to the
current year presentation.
Estimates, risks and uncertainties--The preparation of consolidated
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported on the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates. Our most significant assumptions are for assumed reinsurance
liabilities and deferred acquisition costs. We review and revise these
estimates as appropriate. Any adjustments made to these estimates are reflected
in the period the estimates are revised.
Certain prior period amounts have been reclassified to conform to the
current year presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following are our significant accounting policies.
A. Fixed maturity investments
Fixed maturities are classified as available for sale, and accordingly, we
carry these investments at fair values on our consolidated balance sheets. The
fair value of fixed maturities is calculated using quoted market prices
provided by independent pricing services. The cost of fixed maturities is
adjusted for prepayments and the amortization of premiums and discounts. The
unrealized appreciation (depreciation) is the difference between fair value and
amortized cost and is recorded directly to equity with no impact to net income.
The change in unrealized appreciation (depreciation) is included in accumulated
other comprehensive income (loss) in shareholders' equity. Investment
transactions are recorded on the trade date with balances pending settlement
reflected in the balance sheet as a component of other assets or other
liabilities. Interest is recorded on the accrual basis.
Short-term investments are carried at cost, which approximates fair value.
Realized gains (losses) on securities are determined on a specific
identification method. We track the cost of each security purchased so that we
are able to identify and record a gain or loss when it is subsequently sold. In
addition, declines in fair value that are determined to be other than temporary
are included in realized gains (losses) in the consolidated statements of
income. Realized gains and losses are stated net of associated amortization of
deferred acquisition costs.
EITF Issue No. 99-20, "Recognition of Interest Income and Impairment on
Purchased and Retained Beneficial Interests in Securitized Financial Assets"
("EITF 99-20"), 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. Under EITF 99-20, 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 reviewed all applicable securities held at June 30, 2001 and
identified a required write down in the amount of $406,000. This is shown in
the consolidated statements of income as a cumulative effect of change in
accounting principle.
Management reviews securities with material unrealized losses and tests
for other than temporary impairments on a quarterly basis. Factors involved in
the determination of potential impairment include fair value as compared to
cost, length of time the value has been below cost,
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN THOUSANDS OF UNITED STATES DOLLARS)
credit worthiness of the issuer, forecasted financial performance of the
issuer, position of the security in the issuer's capital structure, the
presence and estimated value of collateral or other credit enhancement, length
of time to maturity, interest rates and our intent and ability to hold the
security until the market value recovers.
When a decline is considered to be "other than temporary" a realized loss
is incurred and the cost basis of the impaired asset is adjusted to its fair
value.
B. Cash and cash equivalents
Cash and cash equivalents include fixed deposits with an original
maturity, when purchased, of three months or less. Cash and cash equivalents
are recorded at face value, which approximates fair value.
C. Funds withheld at interest
Funds withheld at interest are funds held by ceding companies under
modified coinsurance and coinsurance funds withheld agreements whereby we
receive the interest income earned on the funds. The balance of funds held
represents the statutory reserves of the ceding company. These agreements are
considered to include embedded derivatives as further discussed in Note 2M.
D. Revenue recognition
(i) Reinsurance premiums from traditional life policies and annuity
policies with life contingencies are generally recognized as revenue
when due from policyholders. Traditional life policies include those
contracts with fixed and guaranteed premiums and benefits, and
consist principally of whole life and term insurance policies. Our
premiums earned are recorded in accordance with information received
from our ceding companies, or are estimated where this information
is not current with the reporting period. These premium estimates
are based on historical experience as adjusted for current treaty
terms and other information. Actual results could differ from these
estimates. Management monitors actual experience, and should
circumstances warrant, will revise its estimates of premiums earned.
Benefits and expenses are matched with such income so as to result
in the recognition of profits over the life of the contracts. This
is achieved by means of the provision for liabilities for future
policy benefits and deferral and subsequent amortization of policy
acquisition costs.
From time to time we acquire blocks of in-force business and account
for these transactions as purchases. Results of operations only
include the revenues and expenses from the respective dates of
acquisition of these blocks of in-force business. The initial
transfer of assets and liabilities are recorded on the balance
sheet.
Reinsurance assumed on annuity business does not generate premiums
but generates investment income over time on the assets we receive
from ceding companies.
(ii) Fee income is recorded on an accrual basis.
(iii) Investment income is reported on an accrual basis after deducting
the related investment manager's fees.
(iv) Realized capital gains and losses include gains and losses on the
sale of investments available for sale and fixed assets and amounts
recognized for other than temporary impairments on fixed maturities.
Realized capital gains and losses are stated net of associated
amortization of deferred acquisition costs.
E. Deferred acquisition costs
Costs of acquiring new business, which vary with and are primarily related
to the production of new business, have been deferred to the extent that such
costs are deemed recoverable from future
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN THOUSANDS OF UNITED STATES DOLLARS)
premiums or gross profits. Such costs include commissions and allowances as
well as certain costs of policy issuance and underwriting. We perform periodic
tests to determine that the cost of business acquired remains recoverable, and
the cumulative amortization is re-estimated and adjusted by a cumulative charge
or credit to current operations.
Deferred acquisition costs related to traditional life insurance
contracts, substantially all of which relate to long-duration contracts, are
amortized over the premium-paying period of the related policies in proportion
to the ratio of individual period premium revenues to total anticipated premium
revenues over the life of the policy. Such anticipated premium revenues are
estimated using the same assumptions used for computing liabilities for future
policy benefits.
Deferred acquisition costs related to interest-sensitive life and
investment-type policies are amortized over the lives of the policies, in
relation to the present value of estimated gross profits from mortality,
investment income, and expense margins.
The development of and amortization of deferred acquisition costs for our
products requires management to make estimates and assumptions. Actual results
could differ materially from those estimates. Management monitors actual
experience, and should circumstances warrant, will revise its assumptions and
the related estimates.
F. Fixed assets and leasehold improvements
Fixed assets include leasehold improvements, furniture and fittings and
computer equipment. They are recorded at cost and are depreciated over their
estimated useful lives ranging between 1 and 5 years on a straight-line basis.
Accumulated depreciation at December 31, 2003 and 2002 amounted to $3.2 million
and $1.8 million, respectively.
G. Reserves for future policy benefits
The development of policy reserves for our products requires management to
make estimates and assumptions regarding mortality, lapse, expense and
investment experience. Interest rate assumptions for individual life
reinsurance reserves range from 2.5 to 7.0%. The interest assumptions for
immediate and deferred annuities range from 4.0 to 6.5%.
These estimates are based primarily on historical experience and
information provided by ceding companies. Actual results could differ
materially from those estimates. Management monitors actual experience, and
where circumstances warrant, revises the assumptions and the related reserve
estimates.
For traditional life policies, future benefits are estimated using a net
level premium method on the basis of actuarial assumptions as to mortality,
persistency and interest established at policy issue. Assumptions established
at policy issue as to mortality and persistency are based on anticipated
experience, which, together with interest and expense assumptions, provide a
margin for adverse deviation. If the liabilities for future policy benefits
plus the present value of expected future gross premiums for a product are
insufficient to provide for expected future benefits and expenses for that
product, deferred acquisition costs will be written off and thereafter, if
required, a premium deficiency reserve will be established by a charge to
income.
H. Interest sensitive contract liabilities
The liabilities for interest sensitive contract liabilities equal the
accumulated account values of the policies or contracts as of the valuation
date and include funds received plus interest credited less funds withdrawn and
interest paid. Benefit liabilities for fixed annuities during the accumulation
period equal their account values; after annuitization, they equal the
discounted present value of expected future payments.
I. Income taxes
Income tax liability and deferred tax assets are recorded in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 109. In
accordance with this statement we record
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN THOUSANDS OF UNITED STATES DOLLARS)
deferred income taxes that reflect the net tax effect of the temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. A
valuation allowance is applied to deferred tax assets where the recoverability
is uncertain.
J. Segregated assets
Separate account investments are in respect of wealth management clients
and include the net asset values of the underlying funds plus separate cash and
cash equivalent balances less separate account fees payable to us. The funds in
the separate accounts are not part of our general funds and are not available
to meet our general obligations. The assets and liabilities of these
transactions move in tandem. The client bears the investment risk on the
account and we receive an asset-based fee for providing this service that is
recorded as fee income.
K. Segregated liabilities
Separate account liabilities include amounts set aside to pay the deferred
variable annuities and the cash values associated with life insurance policies.
These balances consist of the initial premiums paid after consideration of the
net investment gains/losses attributable to each separate account, less fees
and withdrawals.
L. Fair value of financial instruments
The fair value of assets and liabilities included on the consolidated
balance sheets which qualify as financial instruments under SFAS No. 107
"Disclosure About Fair Value of Financial Instruments", approximate the
carrying amount presented in the consolidated financial statements.
M. Derivatives
Our funds withheld at interest arise on modified coinsurance and funds
withheld coinsurance transactions. Derivatives Implementation Group Issue No.
B36 "Embedded Derivatives: Bifurcation of a Debt Instrument that Incorporates
Both Interest Rate and Credit Rate Risk Exposures that are Unrelated or Only
Partially Related to the Creditworthiness of the Issuer of that Instrument"
indicates that these transactions contain embedded derivatives. The embedded
derivative feature in our funds withheld treaties is similar to a fixed-rate
total return swap on the assets held by the ceding companies. The swap consists
of two parts. The first is the market value of the underlying asset portfolio
and the second is a hypothetical loan to the ceding company. The hypothetical
loan is based on the expected cash flows of the underlying reinsurance
liability. We have developed models to systematically estimate the value of the
total return swap. The fair value of the embedded derivative is affected by
changes in expected cash flows, credit spreads of the assets and changes in
"risk-free" interest rates. The change in fair value is included in our
calculation of estimated gross profits and, therefore, also affects the
amortization of deferred acquisition costs. In addition to our quota share
indemnity funds withheld contracts, we have entered into various financial
reinsurance treaties that, although considered funds withheld, do not transfer
significant insurance risk and are recorded on a deposit method of accounting.
As a result of the experience refund provisions of these treaties the value of
the embedded derivative is currently considered immaterial.
We adopted DIG B36 on October 1, 2003. The initial adoption has resulted
in a loss, after tax and after related amortization of deferred acquisition
costs of $19.5 million. This has been recorded as a cumulative effect of change
in accounting principle in our consolidated statement of income for the year
ended December 31, 2003. The change in fair value of the derivative between
October 1, 2003 and December 31, 2003 was a gain of $13.9 million, net of
related amortization of deferred acquisition costs. The fair value of the
derivative of $9.3 million at December 31, 2003 is included in other assets.
3. BUSINESS ACQUISITIONS
On December 22, 2003, we completed the purchase of 95% of Scottish Re Life
Corporation (formerly ERC Life) for $151.0 million in cash subject to certain
post closing adjustments. The
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN THOUSANDS OF UNITED STATES DOLLARS)
adjustments are dependant on the completion of the audit of the 2003 financial
statements of Scottish Re Life Corporation prepared in accordance with U.S.
statutory accounting principles. We have estimated the post closing adjustment
at approximately $20.0 million on the basis of information currently available.
There was no goodwill arising on the acquisition. The balance sheet of Scottish
Re Life Corporation at the date of acquisition is as follows:
DECEMBER 22,
2003
-------------
Fixed maturity investments ................... $ 263,301
Funds withheld at interest ................... 204,256
Cash and other investments ................... 106,656
----------
574,213
Reinsurance balances receivable .............. 105,242
Amounts recoverable from reinsurers .......... 713,248
Other assets.................................. 45,370
----------
Total assets ................................. $1,438,073
==========
Reserves for future policy benefits .......... $ 951,899
Interest sensitive contract liabilities ...... 177,485
Reinsurance balances payable ................. 108,894
Other liabilities ............................ 15,141
----------
Total liabilities ............................ $1,253,419
==========
The following pro forma information related to our acquisition of Scottish
Re Life Corporation for the years ended December 31, 2003 and 2002 illustrates
the effects of the acquisition as if it had occurred at the beginning of the
years presented.
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2003 2002
-------------- -------------
Revenue ..................... $768,223 $473,032
Net Income .................. $ 67,663 $ 29,127
The acquisitions described above were accounted for by the purchase method
of accounting. In accordance with APB Opinion No. 16, "Business Combinations,"
the accompanying consolidated statements of income do not include any revenues
or expenses related to this acquisition prior to the closing date.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN THOUSANDS OF UNITED STATES DOLLARS)
4. BUSINESS SEGMENTS
We report segments in accordance with SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". The segment reporting for
the lines of business is as follows:
YEAR ENDED DECEMBER 31, 2003
--------------------------------------
LIFE
REINSURANCE OTHER TOTAL
------------- ------------ -----------
Premiums earned ........................................ $266,086 $ -- $266,086
Investment income, net ................................. 133,542 4,073 137,615
Realized gains (losses) ................................ (8,554) 1,158 (7,396)
Change in value of embedded derivative ................. 13,904 -- 13,904
Fee income ............................................. 4,067 1,993 6,060
-------- -------- --------
Total revenues ...................................... 409,045 7,224 416,269
-------- -------- --------
Claims and other policy benefits ....................... 192,857 -- 192,857
Interest credited to interest sensitive contract
liabilities .......................................... 89,020 -- 89,020
Acquisition costs and other insurance expenses, net..... 90,300 1,471 91,771
Operating expenses ..................................... 21,617 11,064 32,681
Interest expense ....................................... 1,110 134 1,244
-------- -------- --------
Total benefits and expenses ......................... 394,904 12,669 407,573
-------- -------- --------
Income (loss) before income taxes and minority
interest ............................................. $ 14,141 $ (5,445) $ 8,696
======== ======== ========
YEAR ENDED DECEMBER 31, 2002
--------------------------------------
LIFE
REINSURANCE OTHER TOTAL
------------- ------------ -----------
Premiums earned ........................................ $129,046 $ -- $129,046
Investment income, net ................................. 96,108 3,504 99,612
Realized losses ........................................ (4,833) (19) (4,852)
Fee income ............................................. 3,148 1,372 4,520
-------- -------- --------
Total revenues ...................................... 223,469 4,857 228,326
-------- -------- --------
Claims and other policy benefits ....................... 96,059 -- 96,059
Interest credited to interest sensitive contract
liabilities .......................................... 48,140 -- 48,140
Acquisition costs and other insurance expenses, net..... 48,960 2,245 51,205
Operating expenses ..................................... 26,515 5,893 32,408
Interest expense ....................................... 84 644 728
-------- -------- --------
Total benefits and expenses ......................... 219,758 8,782 228,540
-------- -------- --------
Income (loss) before income taxes and minority
interest ............................................. $ 3,711 $ (3,925) $ (214)
======== ======== ========
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN THOUSANDS OF UNITED STATES DOLLARS)
YEAR ENDED DECEMBER 31, 2001
----------------------------------
LIFE
REINSURANCE OTHER TOTAL
------------- --------- ----------
Premiums earned ................................. $ 68,344 $ -- $ 68,344
Investment income, net .......................... 43,036 7,535 50,571
Realized gains (losses) ......................... (4,500) 618 (3,882)
Fee income ...................................... 1,685 1,003 2,688
-------- ------ --------
Total revenues ............................... 108,565 9,156 117,721
-------- ------ --------
Claims and other policy benefits ................ 51,245 -- 51,245
Interest credited to interest sensitive contract
liabilities ................................... 17,578 -- 17,578
Acquisition costs and other insurance expenses, net 23,411 602 24,013
Operating expenses .............................. 11,114 4,561 15,675
Interest expense ................................ -- 1,405 1,405
-------- ------ --------
Total benefits and expenses .................. 103,348 6,568 109,916
-------- ------ --------
Income (loss) before income taxes and minority
interest ...................................... $ 5,217 $2,588 $ 7,805
======== ====== ========
DECEMBER 31, DECEMBER 31,
2003 2002
-------------- -------------
ASSETS
Life Reinsurance .................. $4,937,190 $2,299,494
Other ............................. 490,205 388,315
---------- ----------
Total ............................. $5,427,395 $2,687,809
========== ==========
5. FOREIGN SALES AND OPERATIONS
Our operations include Bermuda, the Cayman Islands, Ireland and the United
States.
Financial information relating to geographic areas:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002 DECEMBER 31, 2001
------------------- ------------------- ------------------
REVENUES
U.S. business ............. $378,285 $208,532 $ 91,020
Non-U.S. business ......... 37,984 19,794 26,701
-------- -------- --------
Total ..................... $416,269 $228,326 $117,721
======== ======== ========
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN THOUSANDS OF UNITED STATES DOLLARS)
6. INVESTMENTS
The amortized cost, gross unrealized appreciation and depreciation, and
estimated fair values of our fixed maturity investments are as follows:
DECEMBER 31, 2003
-----------------------------------------------------------------
AMORTIZED GROSS UNREALIZED GROSS UNREALIZED ESTIMATED
COST APPRECIATION DEPRECIATION FAIR VALUE
------------- ------------------ ------------------ -------------
U.S. Treasury securities and U.S.
government agency obligations .............. $ 57,386 $ 376 $ (338) $ 57,424
Corporate securities ........................ 978,489 22,881 (3,106) 998,264
Mortgage and asset backed securities ........ 798,507 10,165 (9,868) 798,804
---------- ------- --------- ----------
$1,834,382 $33,422 $ (13,312) $1,854,492
========== ======= ========= ==========
DECEMBER 31, 2002
-------------------------------------------------------------------
AMORTIZED GROSS UNREALIZED GROSS UNREALIZED ESTIMATED
COST APPRECIATION DEPRECIATION FAIR VALUE
----------- ------------------ ------------------ -----------
U.S. Treasury securities and U.S.
government agency obligations ............... $ 12,943 $ 864 $ -- $ 13,807
Corporate securities ......................... 424,883 14,285 (5,244) 433,924
Mortgage and asset backed securities ......... 436,837 10,139 (10,821) 436,155
-------- ------- --------- --------
$874,663 $25,288 $ (16,065) $883,886
======== ======= ========= ========
The contractual maturities of the fixed maturities are as follows (actual
maturities may differ as a result of calls and prepayments):
DECEMBER 31, 2003
-----------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
------------- -------------
Due in one year or less ................... $ 37,162 $ 37,550
Due in one year through five years ........ 322,833 331,972
Due in five years through ten years ....... 560,524 569,015
Due after ten years ....................... 115,356 117,151
---------- ----------
1,035,875 1,055,688
Mortgage and asset backed
securities .............................. 798,507 798,804
---------- ----------
$1,834,382 $1,854,492
========== ==========
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN THOUSANDS OF UNITED STATES DOLLARS)
Gross realized gains and losses are as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002 DECEMBER 31, 2001
------------------- ------------------- ------------------
Proceeds from sale of investments ......... $275,816 $176,930 $297,337
======== ======== ========
Gross realized gains ...................... $ 7,082 $ 7,942 $ 5,160
Gross realized losses (1) ................. (12,460) (12,788) (9,065)
-------- -------- --------
Net realized losses ....................... (5,378) (4,846) (3,905)
Other gains and (losses) .................. (2,018) (6) 22
-------- --------- --------
Realized losses ........................... $(7,396) $(4,852) $(3,883)
======== ======== ========
(1) Includes $6.3 million, $10.0 million and $4.0 million in 2003, 2002 and
2001, respectively in respect of fixed maturity investments written down
to estimated realizable values and $2.9 million, $2.5 million and $2.9
million in 2003, 2002 and 2001 respectively in respect of modified
coinsurance receivables written down to estimated realizable values.
At December 31, 2003 and 2002, we did not have a material concentration of
investments in fixed income securities in a single issuer, industry or
geographic location.
The following tables provide information on the length of time securities
have been continuously in an unrealized loss position:
DECEMBER 31, 2003
----------------------------------------------------------------------------
BOOK ESTIMATED UNREALIZED
VALUE % FAIR VALUE % LOSS %
DAYS ----------- ---------- ------------- ---------- ------------- ----------
DOLLARS IN THOUSANDS
0-90 ..................... $281,107 56.7% $277,556 57.6% $ (3,551) 26.1%
91-180 ................... 92,053 18.6 90,229 18.7 (1,824) 13.4
181-270 .................. 52,236 10.5 51,220 10.6 (1,016) 7.5
271-360 .................. 11,100 2.2 10,751 2.2 (349) 2.6
Greater than 360 ......... 58,975 12.0 52,102 10.9 (6,873) 50.4
-------- ----- -------- ----- ----------- -----
Total .................... $495,471 100.0% $481,858 100.0% $ (13,613) 100.0%
======== ===== ======== ===== =========== =====
DECEMBER 31, 2002
-----------------------------------------------------------------------------
BOOK ESTIMATED UNREALIZED
DAYS VALUE % FAIR VALUE % LOSS %
-------- ----- ------------- ----- ----------- -----
DOLLARS IN THOUSANDS
0-90 ..................... $ 77,150 36.9% $ 75,062 38.9% $ (2,088) 13.0%
91-180 ................... 53,663 25.7 50,082 25.9 (3,581) 22.3
181-270 .................. 19,463 9.3 16,080 8.3 (3,383) 21.1
271-360 .................. 7,227 3.5 6,212 3.2 (1,015) 6.3
Greater than 360 ......... 51,578 24.6 45,579 23.7 (5,998) 37.3
--------- ----- -------- ----- ----------- -----
Total .................... $209,081 100.0% $193,015 100.0% $ (16,065) 100.0%
========= ===== ======== ===== =========== =====
7. FUNDS WITHHELD AT INTEREST
At December 31, 2003, funds withheld at interest were in respect of six
fixed annuity reinsurance contracts with three ceding companies. At December
31, 2002 we had four fixed annuity reinsurance contracts with two ceding
companies. We had three contracts with Lincoln National Insurance Company that
accounted for $1.3 billion at December 31, 2003 and $1.1 billion at December
31, 2002, which represented 86% and 98% of the funds withheld balances. The
other contracts were with Illinois Mutual Insurance Company and American
Founders Life Insurance Company. Lincoln National Insurance Company has
financial strength ratings of "A+" from A.M. Best, "AA-" from
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN THOUSANDS OF UNITED STATES DOLLARS)
Standard & Poor's, "Aa3" from Moody's and "AA" from Fitch. In the event of
insolvency of the ceding companies on these arrangements we would need to exert
a claim on the assets supporting the contract liabilities. However, the risk of
loss is mitigated by our ability to offset amounts owed to the ceding company
with the amounts owed to us by the ceding company.
According to data provided by our ceding companies, the amortized cost,
gross unrealized appreciation and depreciation and estimated fair values of
assets, excluding cash, backing our funds withheld at interest at December 31,
2003 and 2002 are as follows:
DECEMBER 31, 2003
-----------------------------------------------------------------
AMORTIZED GROSS UNREALIZED GROSS UNREALIZED ESTIMATED
COST APPRECIATION DEPRECIATION FAIR VALUE
------------- ------------------ ------------------ -------------
U.S. Treasury securities and U.S.
government agency obligations ......... $ 31,577 $ 526 $ (144) $ 31,959
Corporate securities .................... 970,157 77,966 (2,074) 1,046,049
Municipal bonds ......................... 22,481 835 (248) 23,068
Mortgage and asset backed
securities ............................ 318,151 12,254 (1,482) 328,923
---------- -------- -------- ----------
1,342,366 91,581 (3,948) 1,429,999
Commercial mortgage loans ............... 120,178 9,694 (496) 129,376
---------- -------- -------- ----------
Total ................................... $1,462,544 $101,275 $ (4,444) $1,559,375
========== ======== ======== ==========
DECEMBER 31, 2002
-----------------------------------------------------------------
AMORTIZED GROSS UNREALIZED GROSS UNREALIZED ESTIMATED
COST APPRECIATION DEPRECIATION FAIR VALUE
------------- ------------------ ------------------ -------------
U.S. Treasury securities and U.S.
government agency obligations ......... $ 10,230 $ 343 $ -- $ 10,573
Corporate securities .................... 778,251 56,377 (12,468) 822,160
Municipal bonds ......................... 501 8 -- 509
Mortgage and asset backed
securities ............................ 201,887 11,364 (101) 213,150
---------- ------- --------- ----------
990,869 68,092 (12,569) 1,046,392
Commercial mortgage loans ............... 101,360 10,908 -- 112,268
---------- ------- --------- ----------
Total ................................... $1,092,229 $79,000 $ (12,569) $1,158,660
========== ======= ========= ==========
According to data provided by our ceding companies, the contractual
maturities, excluding cash, of the assets backing our funds withheld fixed
maturities are as follows (actual maturities may differ as a result of calls
and prepayments):
DECEMBER 31, 2003
-----------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
------------- -------------
Due in one year or less ................... $ 10,582 $ 10,938
Due in one year through five years ........ 268,943 288,941
Due in five years through ten years ....... 665,959 720,158
Due after ten years ....................... 78,731 81,039
---------- ----------
1,024,215 1,101,076
Mortgage and asset backed
securities .............................. 318,151 328,923
---------- ----------
Total ..................................... $1,342,366 $1,429,999
========== ==========
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN THOUSANDS OF UNITED STATES DOLLARS)
8. REINSURANCE CEDED
Premiums earned are analyzed as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002 DECEMBER 31, 2001
------------------- ------------------- ------------------
Premiums assumed ......... $ 279,612 $ 150,198 $ 90,239
Premiums ceded ........... (13,526) (21,152) (21,895)
--------- --------- ---------
Premiums earned .......... $ 266,086 $ 129,046 $ 68,344
========= ========= =========
Reinsurance contracts do not relieve us from our obligations to
policyholders. Failure of reinsurers to honor their obligations could result in
losses to us. We evaluate the financial condition of our reinsurers to minimize
our exposure to losses from reinsurer insolvencies. Claims and other policy
benefits are net of reinsurance recoveries of $4.4 million, $0.4 million and
$0.1 million during the years ended December 31, 2003, 2002 and 2001.
9. REINSURANCE TRANSACTIONS
The following table summarizes the acquisitions of in-force reinsurance
transactions completed by us during 2002 and 2001. There were no acquisitions
of in-force reinsurance transactions in 2003. These transactions are accounted
for as purchases. Our results of operations include the effects of these
purchases only from the respective acquisition dates.
DECEMBER 31, DECEMBER 31,
2002 2001
-------------- -------------
Fair value of assets acquired ........ $18,222 $107,353
Deferred acquisition costs ........... 4,600 11,000
------- --------
Fair value of assets acquired ........ $22,822 $118,353
======= ========
Fair value of liabilities assumed .... $22,822 $118,353
======= ========
10. DEFERRED ACQUISITION COSTS
The change in deferred acquisition costs is as follows:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2001
-------------- -------------- -------------
Balance at beginning of year .......................... $ 206,530 $ 113,474 $ 30,922
Expenses deferred ..................................... 154,192 124,875 81,153
Amortization expense .................................. (58,002) (28,338) (11,094)
Deferred acquisition costs on in-force reinsurance
transactions purchased ............................... -- 4,600 11,000
Deferred acquisition costs on realized losses ......... 2,129 (8,081) 1,493
--------- --------- ---------
Balance at end of year ................................ $ 304,849 $ 206,530 $ 113,474
========= ========= =========
11. RELATED PARTIES
The amount due from/ to related party represents amounts owed from/ to
Scottish Re Group Limited. The amounts outstanding are unsecured and
interest-free. The amounts due relate to fees paid by us and our subsidiaries
for net worth maintenance, investment management and other corporate services.
These fees amounted to $29.0 million, $25.4 million, and $11.5 million in the
years ended December 31, 2003, 2002 and 2001 respectively.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN THOUSANDS OF UNITED STATES DOLLARS)
Included in net premiums earned is $35.4 million of premiums ceded by
Scottish Re Limited, an affiliated company (2002 -- $6.3 million).
12. LONG TERM DEBT
Capital securities
On December 4, 2002, Scottish Holdings Statutory Trust I, a Connecticut
statutory business trust ("Capital Trust") issued and sold in a public offering
$17.5 million Capital Floating Rate Capital Securities ("the capital
securities"). All of the common shares of the Capital Trust are owned by
Scottish Holdings, Inc., our wholly owned subsidiary.
The capital securities mature on December 4, 2032. They are redeemable in
whole or in part at any time after December 4, 2007. Interest is payable
quarterly at a rate equivalent to 3 month LIBOR plus 4%. At December 31, 2003
the interest rate was 5.15%. Prior to December 4, 2007 interest cannot exceed
12.5%. The Capital Trust may defer payment of the interest for up to 20
consecutive quarterly periods, but no later than December 4, 2032. Any deferred
payments would accrue interest quarterly on a compounded basis if Scottish
Holdings, Inc. defers interest on the Debentures due December 4, 2032 (as
defined below).
The sole assets of the Capital Trust consist of $18.0 million principal
amount of Floating Rate Debentures (the "Debentures") issued by Scottish
Holdings, Inc. The Debentures mature on December 4, 2032 and interest is
payable quarterly at a rate equivalent to 3 month LIBOR plus 4%. At December
31, 2003 the interest rate was 5.15%. Prior to December 4, 2007 interest cannot
exceed 12.5%. Scottish Holdings, Inc. may defer payment of the interest for up
to 20 consecutive quarterly periods, but no later than December 4, 2032. Any
deferred payments would accrue interest quarterly on a compounded basis.
Scottish Holdings, Inc. may redeem the Debentures at any time after December 4,
2007 in the event of certain changes in tax or investment company law.
We have guaranteed Scottish Holdings, Inc.'s obligations under the
Debentures, and distributions and other payments due on the capital securities.
Preferred trust securities
On October 29, 2003, Scottish Holdings, Inc. Statutory Trust II, a
Connecticut statutory business trust ("Capital Trust II") issued and sold in a
private offering of $20.0 million Preferred Trust Securities ("the preferred
trust securities"). All of the common shares of Capital Trust II are owned by
Scottish Holdings, Inc.
The preferred trust securities mature on October 29, 2033. They are
redeemable in whole or in part at any time after October 29, 2003. Interest is
payable quarterly at a rate equivalent to 3 month LIBOR plus 3.95%. At December
31, 2003, the interest rate was 5.10%. Prior to October 29, 2008, interest
cannot exceed 12.45%. Capital Trust II may defer payment of the interest for up
to 20 consecutive quarterly periods, but no later than October 29, 2033. Any
deferred payments would accrue interest quarterly on a compounded basis if
Scottish Holdings, Inc. defers interest on the Floating Rate Debentures due
October 29, 2033 (as described below).
The sole assets of Capital Trust II consist of $20.6 million principal
amount of Floating Rate Debentures (the "Floating Rate Debentures") issued by
Scottish Holdings, Inc. The Floating Rate Debentures mature on October 29, 2033
and interest is payable quarterly at 3 month LIBOR plus 3.95%. At December 31,
2003 the interest rate was 5.10%. Prior to October 29, 2008, interest cannot
exceed 12.45%. Scottish Holdings, Inc. may defer payment of the interest for up
to 20 consecutive quarterly periods, but no later than October 29, 2033. Any
deferred payments would accrue interest quarterly on a compounded basis.
Scottish Holdings, Inc. may redeem the Floating Rate Debentures at any time
after October 29, 2008 and in the event of certain changes in tax or investment
company law.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN THOUSANDS OF UNITED STATES DOLLARS)
We have guaranteed Scottish Holdings, Inc.'s obligations under the
Floating Rate Debentures and distributions and other payments due on the
preferred trust securities.
Trust Preferred Securities
On November 14, 2003, GPIC Holdings Inc. Statutory Trust, a Delaware
statutory business trust ("GPIC Trust") issued and sold in a private offering
of $10.0 million Trust Preferred Securities ("the trust preferred securities").
All of the common shares of GPIC Trust are owned by Scottish Holdings, Inc.
The trust preferred securities mature on September 30, 2033. They are
redeemable in whole or in part at any time after September 30, 2008. Interest
is payable quarterly at a rate equivalent to 3 month LIBOR plus 3.90%. At
December 31, 2003, the interest rate was 5.05%. GPIC Trust may defer payment of
the interest for up to 20 consecutive quarterly periods, but no later than
September 30, 2033. Any deferred payments would accrue interest quarterly on a
compounded basis if Scottish Holdings, Inc. defers interest on the Junior
Subordinated Notes due September 30, 2033 (as described below).
The sole assets of GPIC Trust consist of $10.3 million principal amount of
Junior Subordinated Notes (the "Notes") issued by Scottish Holdings, Inc. The
Notes mature on September 30, 2033 and interest is payable quarterly at 3 month
LIBOR plus 3.90%. At December 31, 2003 the interest rate was 5.05%. Scottish
Holdings, Inc. may defer payment of the interest for up to 20 consecutive
quarterly periods, but no later than September 30, 2033. Any deferred payments
would accrue interest quarterly on a compounded basis. Scottish Holdings, Inc.
may redeem the Notes at any time after September 30, 2008 and in the event of
certain changes in tax or investment company law.
We have guaranteed Scottish Holdings, Inc.'s obligations under the Notes
and distribution and other payments due on the trust preferred securities.
13. SHAREHOLDERS' EQUITY
We are authorized to issue 100,000,000 ordinary shares of par value $0.01
each.
As at December 31, 2003 and 2002, 25,000,000 ordinary shares were
outstanding.
During the years ended December 31, 2003 and 2002 Scottish Re Group
Limited contributed capital of $294.8 million and $169.8 million, respectively.
14. EMPLOYEE BENEFIT PLANS
We provide retirement benefits for all employees under defined
contribution plans. Defined contribution plan expense totaled $343,000,
$380,000 and $232,000 for the years ended December 31, 2003, 2002 and 2001,
respectively.
15. TAXATION
There is presently no taxation imposed on income or capital gains by the
Governments of the Bermuda and the Cayman Islands. Our Bermuda companies have
been granted an exemption from taxation in Bermuda until 2016. If any taxation
were to be enacted in the Cayman Islands, we have been granted an exemption
therefrom until 2018. These companies operate in a manner such that they will
owe no United States tax other than premium excise taxes and withholding taxes
on certain investment income.
Undistributed earnings of our foreign subsidiaries are considered to be
indefinitely reinvested and, accordingly, no provision for U.S. federal
withholding taxes has been provided thereon. Upon distribution of current or
accumulated earnings and profits in the form of dividends or otherwise, we
would be subject to U.S. withholding taxes at a 5% rate.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN THOUSANDS OF UNITED STATES DOLLARS)
At December 31, 2003, we had net operating loss carryforwards of
approximately $168.4 million (2002 -- $83.8 million) for income tax purposes
that expire in years 2012 through 2018. These carryforwards resulted primarily
from our 1999 acquisition of Scottish Re (U.S.), Inc. and from current
operations of Scottish Re (U.S.), Inc.
Significant components of our deferred tax assets and liabilities are as
follows:
DECEMBER 31, 2003 DECEMBER 31, 2002
------------------- ------------------
Deferred tax assets:
Net operating losses .............................. $ 61,077 $ 28,968
Reserves for future policy benefits ............... 13,656 --
Unrealized depreciation on investments ............ 231 --
Negative proxy deferred acquisition costs ......... 1,816 389
Other ............................................. 2,654 1,194
--------- ---------
Total deferred tax assets ........................... 79,434 30,551
--------- ---------
Deferred tax liabilities:
Unrealized appreciation on investments ............ (8,387) (4,432)
Deferred acquisition costs ........................ (21,300) (11,919)
Reserves for future policy benefits ............... (16,835) (6,844)
Other ............................................. (861) (187)
--------- ---------
Total deferred tax liabilities .................... (47,383) (23,382)
--------- ---------
Net deferred tax asset .............................. $ 32,051 $ 7,169
========= =========
For the years ended December 31, 2003 and 2002 we have income tax benefit
(expense) from operations as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002 DECEMBER 31, 2001
------------------- ------------------- ------------------
Current tax expense ................. $ (175) $ (1,727) $ (1,350)
Deferred tax benefit ................ 13,616 5,891 1,292
------- -------- --------
Total tax benefit (expense) ......... $13,441 $ 4,164 $ (58)
======= ======== ========
Income tax benefit (expense) attributable to continuing operations differ
from the amount of income tax benefit (expense) that would result from applying
the federal statutory rates to pretax income from operating due to the
following:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002 DECEMBER 31, 2001
------------------- ------------------- ------------------
Pretax GAAP income at 34% ................ $ (2,956) $ 73 $ (2,654)
Income not subject to tax at 34% ......... 14,352 6,383 3,410
Foreign taxes ............................ (772) (1,727) (1,265)
Negative DAC ............................. 1,427 (695) (61)
Other .................................... 1,390 130 512
-------- -------- --------
Tax benefit .............................. $ 13,441 $ 4,164 $ (58)
======== ======== ========
16. STATUTORY REQUIREMENTS AND DIVIDEND RESTRICTIONS
Our Bermuda insurance companies are required to maintain a minimum capital
of $0.25 million. Under The Insurance Law of the Cayman Islands, Scottish
Annuity & Life Insurance Company (Cayman) Ltd. must maintain a minimum net
capital worth of $0.24 million.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN THOUSANDS OF UNITED STATES DOLLARS)
The maximum amount of dividends that can be paid by Scottish Re (U.S.),
Inc. (a Delaware domiciled insurance company) without prior approval of the
Insurance Commissioner is subject to restrictions relating to statutory surplus
and operating earnings. The maximum dividend payment that may be made without
prior approval is limited to the greater of the net gain from operations for
the preceding year or 10% of statutory capital and surplus as of December 31 of
the preceding year. The statutory surplus of Scottish Re (U.S.), Inc. at
December 31, 2003 was $52.0 million (2002 -- $52.1 million). The maximum
dividend that could be paid in 2003 without prior approval is $5.2 million
(2002 -- $5.2 million). Scottish Re (U.S.), Inc.'s net assets which are
restricted by the above are $172.4 million (2002 -- $119.2 million).
The maximum amount of dividends that can be paid by Scottish Re Life
Corporation (a Missouri domiciled insurance company) without prior approval of
the Director of Insurance in any twelve month period is subject to restrictions
relating to statutory surplus and operating earnings. The maximum dividend
payment that may be made without prior approval is limited to the greater of
the net gain from operations for the preceding year or 10% of policyholders
surplus, as of December 31 of the preceding year, provided however, that
dividends may be paid only from earned surplus, although the Director of
Insurance may permit the payment of dividends from other than earned surplus.
The statutory surplus of Scottish Re Life Corporation at December 31, 2003 was
$143.8 million. As a result of previously paid dividends, however, Scottish Re
Life Corporation had negative unassigned surplus at December 31, 2003. Thus,
the permission of the Director must be sought for the payment of any dividend
in 2004. Scottish Re Life Corporation intends to seek the Director's approval
to restate unassigned surplus to zero pursuant to the certain reorganization
provisions.
The National Association of Insurance Commissioners prescribes risk-based
capital (RBC") requirements for U.S. domiciled life and health insurance
companies. As of December 31, 2003 and 2002, Scottish Re (U.S.), Inc. exceeded
all minimum RBC requirements.
17. COMMITMENTS AND CONTINGENCIES
Credit facilities
During 2003, we renewed our credit facilities, which currently consist of:
(a) a credit facility totaling $50.0 million, of which $25.0 million is
available on an unsecured basis and $25.0 million is available on a
secured basis. The facility provides capacity for borrowings and letters
of credit. The interest rates on amounts borrowed under the secured
facility is LIBOR plus 50 basis points and under the unsecured facility is
LIBOR plus 75 basis points. This facility expires in October 2004 but it
is renewable upon the agreement of both parties.
(b) a secured credit facility totaling $50.0 million. This facility
provides a combination of borrowings and letters of credit. Interest rates
on amounts borrowed under this facility is LIBOR plus 45 basis points.
This facility expires in September 2004 but is renewable upon the
agreement of both parties.
One of the facilities requires that Scottish Annuity & Life Insurance
Company (Cayman) Ltd. maintains shareholders' equity of at least $340.0
million. At December 31, 2003, Scottish Annuity & Life Insurance Company
(Cayman) Ltd's shareholders' equity was $770.8 million. The other facility
requires that Scottish Re Group Limited maintain consolidated net worth of
$520.0 million, a maximum debt to total capitalization ratio of 30% and
uncollateralized assets of 1.2 times any unsecured borrowings. At December 31,
2003, Scottish Re Group Limited's net worth was $659.8 million and the ratio of
debt to total capitalization was 16.9%. Our failure to comply with the
requirements of the credit facilities would, subject to grace periods, result
in an event of default, and we could be required to repay any outstanding
borrowings. At December 31, 2003, there were no borrowings under the
facilities. Outstanding letters of credit under these facilities amounted to
$31.2 million (2002 -- $9.1 million).
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN THOUSANDS OF UNITED STATES DOLLARS)
We also have a reverse repurchase agreement with a major broker/dealer.
Under this agreement, we have the ability to sell agency mortgage backed
securities with the agreement to repurchase them at a fixed price, providing
the dealer with a spread that equates to an effective borrowing cost linked to
one-month LIBOR. This agreement is renewable monthly at the discretion of the
broker/dealer. At December 31, 2003 and December 31, 2002, there were no
borrowings under this agreement.
Lease commitments
Scottish Annuity & Life Insurance Company (Cayman) Ltd. and its
subsidiaries lease office space in the countries in which they conduct business
under operating leases that expire at various dates through 2012. Total rent
expense with respect to these operating leases for the years ended December 31,
2003, 2002 and 2001 were approximately $548,000, $485,000, and $694,000
respectively.
Future minimum lease payments under the leases, are expected to be:
YEAR ENDING DECEMBER 31
-----------------------
2004 .......................................... $ 594
2005 .......................................... 534
2006 .......................................... 483
2007 .......................................... 483
2008 .......................................... 483
Later years ................................... 1,932
------
Total future lease commitments ................ $4,509
======
Legal proceedings
In the normal course of our business, we and our subsidiaries are
occasionally involved in litigation. The ultimate disposition of such
litigation is not expected to have a material adverse effect on our financial
condition, liquidity or results of operations.
23
SCOTTISH ANNUITY & LIFE INSURANCE COMPANY (CAYMAN) LTD.
CONSOLIDATED BALANCE SHEETS--
SEPTEMBER 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, 2004 DECEMBER 31,
(UNAUDITED) 2003
-------------------- -------------
ASSETS
Fixed maturity investments, available for sale, at fair value
(Amortized cost $2,621,940; 2003 -- $1,834,382).................. $2,652,770 $1,854,492
Preferred stock, available for sale, at fair value (Cost $124,663;
2003 -- $125,460)................................................ 125,082 126,449
Cash and cash equivalents ........................................ 155,311 270,421
Other investments ................................................ 16,398 17,664
Funds withheld at interest ....................................... 1,477,870 1,469,425
---------- ----------
Total investments ............................................. 4,427,431 3,738,451
Accrued interest receivable ...................................... 19,499 18,845
Reinsurance balances and risk fees receivable .................... 193,499 156,323
Due from related parties ......................................... 2,152 20,011
Deferred acquisition costs ....................................... 406,437 304,849
Amount recoverable from reinsurers ............................... 676,601 713,248
Present value of in-force business ............................... 27,320 --
Fixed assets ..................................................... 4,258 4,627
Current income tax receivable. ................................... 7,755 --
Other assets ..................................................... 10,161 35,953
Deferred tax benefit ............................................. 30,724 32,051
Segregated assets ................................................ 466,075 403,037
---------- ----------
Total assets .................................................. $6,271,912 $5,427,395
========== ==========
LIABILITIES
Reserves for future policy benefits .............................. $1,451,037 $1,393,220
Interest sensitive contract liabilities .......................... 3,136,931 2,633,346
Structured finance facility liability ............................ 200,000 --
Accounts payable and accrued expenses ............................ 18,446 26,305
Reinsurance balances payable ..................................... 81,502 122,188
Other liabilities ................................................ 22,072 9,571
Current income tax payable ....................................... -- 12,113
Long term debt ................................................... 79,500 47,500
Segregated liabilities ........................................... 466,075 403,037
---------- ----------
Total liabilities ............................................. 5,455,563 4,647,280
---------- ----------
MINORITY INTEREST ................................................ 9,535 9,295
SHAREHOLDERS' EQUITY
Share capital, par value $0.01 per share:
Issued and fully paid: 25,000,000 ordinary shares ............... 250 250
Additional paid-in capital ....................................... 718,525 714,892
Accumulated other comprehensive income ........................... 23,560 15,958
Retained earnings ................................................ 64,479 39,720
---------- ----------
Total shareholders' equity .................................... 806,814 770,820
---------- ----------
Total liabilities and shareholders' equity .................... $6,271,912 $5,427,395
========== ==========
See Accompanying Notes to Unaudited Consolidated Financial Statements
24
SCOTTISH ANNUITY & LIFE INSURANCE COMPANY (CAYMAN) LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME--
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED
--------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2004 2003
--------------- --------------
REVENUES
Premiums earned ...................................................... $368,072 $180,156
Investment income, net ............................................... 151,329 98,605
Fee income ........................................................... 7,496 5,798
Realized losses ...................................................... (3,635) (4,708)
Change in value of embedded derivatives .............................. 456 --
-------- --------
Total revenues .................................................... 523,718 279,851
-------- --------
BENEFITS AND EXPENSES
Claims and other policy benefits ..................................... 278,263 131,037
Interest credited to interest sensitive contract liabilities ......... 77,342 65,925
Acquisition costs and other insurance expenses, net .................. 105,180 61,340
Operating expenses ................................................... 40,317 22,623
Interest expense ..................................................... 2,892 812
-------- --------
Total benefits and expenses ....................................... 503,994 281,737
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST .............. 19,724 (1,886)
Income tax benefit ................................................... 5,390 8,190
-------- --------
INCOME BEFORE MINORITY INTEREST ...................................... 25,114 6,304
Minority interest .................................................... (355) --
-------- --------
NET INCOME ........................................................... $ 24,759 $ 6,304
======== ========
See Accompanying Notes to Unaudited Consolidated Financial Statements
25
SCOTTISH ANNUITY & LIFE INSURANCE COMPANY (CAYMAN) LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME--
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
--------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2004 2003
--------------- --------------
Net income .............................................. $ 24,759 $ 6,304
-------- --------
Other comprehensive income, net of tax:
Unrealized appreciation on investments: .............. 9,511 14,965
Add: reclassification adjustment for investment losses
included in net income .............................. (1,909) (1,463)
-------- --------
Unrealized appreciation on investments net of income tax
expense of $1,028 and $85............................... 7,602 13,502
-------- --------
Comprehensive income .................................... $ 32,361 $ 19,806
======== ========
See Accompanying Notes to Unaudited Consolidated Financial Statements
26
SCOTTISH ANNUITY & LIFE INSURANCE COMPANY (CAYMAN) LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY--
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
--------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2004 2003
--------------- --------------
ORDINARY SHARES:
Beginning and end of period ................ 25,000,000 25,000,000
========== ==========
SHARE CAPITAL:
Beginning and end of period ................ $ 250 $ 250
ADDITIONAL PAID-IN CAPITAL:
Beginning of period ........................ 714,892 420,081
Capital contributed by parent .............. 3,633 145,649
---------- ----------
End of period .............................. 718,525 565,730
---------- ----------
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Unrealized appreciation on investments ......
Beginning of period ........................ 15,958 6,451
Change in period (net of tax) .............. 7,602 13,502
---------- ----------
End of period .............................. 23,560 19,953
---------- ----------
RETAINED EARNINGS:
Beginning of period ........................ 39,720 37,182
Net income ................................. 24,759 6,304
---------- ----------
End of period .............................. 64,479 43,486
---------- ----------
TOTAL SHAREHOLDERS' EQUITY .................. $ 806,814 $ 629,419
========== ==========
See Accompanying Notes to Unaudited Consolidated Financial Statements
27
SCOTTISH ANNUITY & LIFE INSURANCE COMPANY (CAYMAN) LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS--
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
--------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2004 2003
--------------- --------------
OPERATING ACTIVITIES
Net income ......................................................... $ 24,759 $ 6,304
Items not affecting cash:
Realized losses ................................................... 3,635 4,708
Change in value of embedded derivatives ........................... (456) --
Amortization of investments ....................................... 7,001 2,773
Amortization of deferred acquisition costs ........................ 54,216 35,747
Amortization of present value of in-force business ................ 2,536 --
Changes in assets and liabilities:
Accrued interest ................................................ (654) (3,969)
Reinsurance balances and risk fees receivable ................... (110,253) 10,905
Deferred acquisition costs ...................................... (156,420) (107,639)
Deferred tax liability .......................................... (11,106) (8,926)
Other assets .................................................... 16,219 10,621
Current income tax receivable and payable ....................... (22,932) (692)
Reserves for future policy benefits ............................. 129,752 110,106
Interest sensitive contract liabilities, net of funds withheld at
interest ....................................................... 35,741 12,111
Due from related parties ........................................ 17,908 (26,254)
Accounts payable and accrued expenses ........................... (4,793) (329)
Other ........................................................... (2,957) (6,611)
------------ ----------
Net cash (used in) provided by operating activities ................ (17,804) 38,855
------------ ----------
INVESTING ACTIVITIES
Purchase of fixed maturity investments ............................. (1,514,420) (887,676)
Proceeds from sales of fixed maturity investments .................. 479,478 187,155
Proceeds from maturity of investments .............................. 241,381 149,720
Purchase of preferred stock ........................................ (23,662) (50,036)
Proceeds from sales of preferred stock ............................. 18,605 453
Proceeds from maturity of preferred stock .......................... 4,805 1,588
Other .............................................................. 1,635 (1,057)
------------ ----------
Net cash used in investing activities .............................. (792,178) (599,853)
------------ ----------
FINANCING ACTIVITIES
Issuance of long term debt ......................................... 32,000 --
Proceeds from structured finance liability ......................... 200,000 --
Deposits to interest sensitive contract liabilities ................ 518,451 449,185
Withdrawals from interest sensitive contract liabilities ........... (59,211) (27,635)
Capital contributed by parent ...................................... 3,632 145,649
------------ ----------
Net cash provided by financing activities .......................... 694,872 567,199
------------ ----------
Net change in cash and cash equivalents ............................ (115,110) 6,201
Cash and cash equivalents, beginning of period ..................... 270,421 116,298
------------ ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 155,311 $ 122,499
============ ==========
See Accompanying Notes to Unaudited Consolidated Financial Statements
28
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--
SEPTEMBER 30, 2004
(1) BASIS OF PRESENTATION
Accounting Principles--The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles in the United States of America ("GAAP") and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. The results for the period are not necessarily indicative of the
results to be expected for the entire year.
Consolidation--We consolidate the results of all our subsidiaries and all
variable interest entities for which we are the primary beneficiary. All
significant intercompany transactions and balances have been eliminated on
consolidation.
Estimates, risks and uncertainties--The preparation of consolidated
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported on the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates. Our most significant assumptions are for assumed reinsurance
liabilities and deferred acquisition costs. We review and revise these
estimates as appropriate. Any adjustments made to these estimates are reflected
in the period the estimates are revised.
All tabular amounts are reported in thousands of United States dollars
(except per share amounts).
Certain prior period amounts have been reclassified to conform to the
current year presentation.
(2) NEW ACCOUNTING PRONOUNCEMENTS
In July 2003, the Accounting Standards Executive Committee issued
Statement of Position 03-01 ("SOP"), "Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Insurance Contracts and
for Separate Accounts". This SOP provides guidance on accounting and reporting
by insurance enterprises for certain nontraditional long-duration contracts and
for separate accounts and is effective for financial statements for fiscal
years beginning after December 15, 2003. In implementing the SOP we have made
various determinations, such as qualification for separate account treatment,
classification of securities in separate account arrangements, significance of
mortality and morbidity risk, adjustments to contract holder liabilities, and
adjustments to estimated gross profits as defined in Statement of Financial
Accounting Standards ("SFAS") No. 97, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments". Implementation of this SOP has not had a
material effect on our financial statements.
Effective December 31, 2003, we adopted the disclosure requirements of
Emerging Issues Task Force 03-1 ("EITF 03-1") "The Meaning of
Other-Than-Temporary Impairments and Its Application to Certain Investments".
This EITF provides guidance on disclosures for other than temporary impairments
of debt and marketable equity investments that have been accounted for under
SFAS No. 115 "Accounting for Certain Investments in Debt and Equity
Securities". During the quarter ended September 30, 2004 the effective date of
the application of EITF 03-1 for debt securities that are impaired because of
interest rate and/or sector spread increases was delayed pending issuance of
further guidance.
In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51" ("FIN 46"). FIN 46 provides a framework for
identifying variable interest entities and determining when a company should
include its assets, liabilities, non-controlling interests and results of
activities in the consolidated financial statements. A variable interest entity
is a legal structure used to conduct
29
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--
SEPTEMBER 30, 2004
activities or hold assets that either (1) has an insufficient amount of equity
to carry out its principal activities without additional subordinated financial
support, (2) has a group of equity owners that are unable to make significant
decisions about its activities, or (3) has a group of equity owners that do not
have the obligation to absorb losses or the right to receive returns generated
by its operations. FIN 46 requires a variable interest entity to be
consolidated if a party with an ownership, contractual or other financial
interest in the variable interest entity is obligated to absorb a majority of
the risk of loss from the variable interest entity's activities, is entitled to
receive a majority of the variable interest entity's residual returns, or both.
A variable interest holder that consolidates the variable interest entity is
called the primary beneficiary. We have adopted FIN 46 in respect of the
structured finance facility discussed in note 7. We hold no interests in
unconsolidated variable interest entities.
(3) BUSINESS ACQUISITIONS
On October 18, 2004, we announced that we had agreed to acquire the
individual life reinsurance business of ING. On December 31, 2004 we closed
this acquisition. We have reinsured the liabilities of all of ING's individual
life reinsurance business through a coinsurance transaction. ING has
transferred to us assets equal to reserves of approximately $800.0 million and
paid us a ceding commission of $560.0 million. These assets will be held in
trust to secure the reserve obligations of the business. Additionally, ING has
transferred certain operating assets associated with the business. We now have
approximately $1.0 trillion of face amount of life reinsurance in-force, $8.8
billion in assets and $2.1 billion in revenues.
In addition to the assets to be transferred by ING, Scottish Re Group
Limited raised an additional $230.0 million in new capital, which will satisfy
the capital requirements for the acquired business. This new capital includes
$180.0 million provided by The Cypress Group, a private equity firm, and an
additional $50.0 million of trust preferred securities.
On December 22, 2003, we completed the acquisition of 95% of the
outstanding capital stock of ERC Life Reinsurance Corporation for $151.0
million in cash, subject to certain post closing adjustments. During the
quarter ended September 30, 2004, we agreed and settled the post closing
adjustment at $18.9 million, resulting in a final acquisition cost of $169.9
million. There was no goodwill arising on the acquisition. The present value of
in-force of the business acquired was $29.9 million.
ERC has requested a refund of $8.0 million in respect of a settlement of a
tax liability. We have disputed ERC's right to this refund. In the event that
ERC are successful in their request, the present value of in-force business
would increase to $37.8 million. On February 19, 2004, ERC Life Reinsurance
Corporation's name was changed to Scottish Re Life Corporation.
30
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--
SEPTEMBER 30, 2004
(4) BUSINESS SEGMENTS
We report segments in accordance with SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information".
NINE MONTHS ENDED SEPTEMBER 30, 2004
------------------------------------------------
LIFE REINSURANCE OTHER TOTAL
------------------ ------------- -----------
Premiums earned ........................................ $368,072 $ -- $368,072
Investment income, net ................................. 150,540 789 151,329
Fee income ............................................. 5,795 1,701 7,496
Realized (losses) gains ................................ (1,315) (2,320) (3,635)
Change in value of embedded derivatives ................ 456 -- 456
-------- --------- --------
Total revenues ......................................... 523,548 170 523,718
-------- --------- --------
Claims and other policy benefits ....................... 278,263 -- 278,263
Interest credited to interest sensitive contract
liabilities ........................................... 77,342 -- 77,342
Acquisition costs and other insurance expenses, net..... 104,187 993 105,180
Operating expenses ..................................... 28,677 11,640 40,317
Interest expense ....................................... 2,892 -- 2,892
-------- --------- --------
Total benefits and expenses ............................ 491,361 12,633 503,994
-------- --------- --------
Income (loss) before income taxes and minority
interest .............................................. $ 32,187 $ (12,463) $19,724
======== ========= ========
NINE MONTHS ENDED SEPTEMBER 30, 2003
-----------------------------------------------
LIFE REINSURANCE OTHER TOTAL
------------------ ------------ -----------
Premiums earned ........................................ $180,156 $ -- $180,156
Investment income, net ................................. 95,595 3,010 98,605
Fee income ............................................. 4,524 1,274 5,798
Realized (losses) gains ................................ (5,342) 634 (4,708)
-------- -------- --------
Total revenues ......................................... 274,933 4,918 279,851
-------- -------- --------
Claims and other policy benefits ....................... 131,037 -- 131,037
Interest credited to interest sensitive contract
liabilities ........................................... 65,925 -- 65,925
Acquisition costs and other insurance expenses, net..... 60,329 1,011 61,340
Operating expenses ..................................... 13,784 8,839 22,623
Interest expense ....................................... 812 -- 812
-------- -------- --------
Total benefits and expenses ............................ 271,887 9,850 281,737
-------- -------- --------
Loss before income taxes and minority interest ......... $ 3,046 $ (4,932) $(1,886)
======== ======== ========
SEPTEMBER 30, DECEMBER 31,
ASSETS 2004 2003
- ------ --------------- -------------
Life Reinsurance ................................................... $5,784,746 $4,937,190
Other .............................................................. 487,166 490,205
---------- ----------
Total .............................................................. $6,271,912 $5,427,395
========== ==========
31
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--
SEPTEMBER 30, 2004
(5) DERIVATIVES
During the quarter ended September 30, 2004, we entered into an interest
rate swap contract in the amount of $100.0 million in relation to certain of
our investment assets not supporting reinsurance liabilities. This contract is
accounted for in accordance with SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 requires that all derivatives
be recognized as either assets or liabilities on the balance sheet and be
measured at fair value. This derivative has not been designated as a hedge. The
fair value of the swap at September 30, 2004 was a negative $2.2 million. This
loss of $2.2 million has been included in realized gains (losses) in the
statement of income.
(6) DEFERRED ACQUISITION COSTS
The change in deferred acquisition costs is as follows:
NINE MONTHS ENDED
--------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2004 2003
--------------- --------------
Balance beginning of period ................................... $ 304,849 $ 206,530
Expenses deferred ............................................. 156,420 107,639
Amortization expense .......................................... (54,216) (35,747)
Deferred acquisition costs on realized gains (losses) ......... (616) 1,367
--------- ---------
Balance end of period ......................................... $ 406,437 $ 279,789
========= =========
(7) STRUCTURED FINANCE FACILITY LIABILITY
On June 25, 2004, we closed a structured finance facility with HSBC Bank
USA, N.A. This facility provides $200.0 million that can be used to
collateralize reinsurance obligations under intercompany reinsurance
agreements. Simultaneously we entered into a total return swap with HSBC Bank
USA, N.A. under which we are entitled to the total return of the investment
portfolio of the trust established for this facility. In accordance with FIN 46
we are considered to hold a beneficial interest in the trust, which is in turn
considered to be a variable interest entity. As a result, the trust has been
consolidated in these financial statements.
The assets of the variable interest entity have been recorded as fixed
maturity investments. Our consolidated income statements show the investment
return of the variable interest entity as investment income and the cost of the
facility in acquisition costs and other insurance expenses.
The creditors of the variable interest entity have no recourse against our
general assets.
(8) LONG-TERM DEBT
Long-term debt consists of:
SEPTEMBER 30, DECEMBER 31,
2004 2003
--------------- -------------
Capital securities due 2032 ................. $17,500 $17,500
Trust preferred securities due 2033 ......... 20,000 20,000
Trust preferred securities due 2033 ......... 10,000 10,000
Trust preferred securities due 2034 ......... 32,000 --
------- -------
Total ....................................... $79,500 $47,500
======= =======
Capital securities due 2032
On December 4, 2002, Scottish Holdings Statutory Trust I, a Connecticut
statutory business trust (the "Capital Trust") issued and sold in a private
offering an aggregate of $17.5 million Floating Rate Capital Securities (the
"Capital Securities"). All of the common shares of the Capital Trust are owned
by Scottish Holdings, Inc., our wholly owned subsidiary.
32
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--
SEPTEMBER 30, 2004
The Capital Securities mature on December 4, 2032. They are redeemable in
whole or in part at any time after December 4, 2007. Interest is payable
quarterly at a rate equivalent to 3 month LIBOR plus 4%. At September 30, 2004
and December 31, 2003, the interest rates were 6.02% and 5.15%, respectively.
Prior to December 4, 2007, interest cannot exceed 12.5%. The Capital Trust may
defer payment of the interest for up to 20 consecutive quarterly periods, but
no later than December 4, 2032. Any deferred payments would accrue interest
quarterly on a compounded basis if Scottish Holdings, Inc. defers interest on
the Debentures due December 4, 2032 (as defined below).
The sole assets of the Capital Trust consist of $18.0 million principal
amount of Floating Rate Debentures (the "Debentures") issued by Scottish
Holdings, Inc. The Debentures mature on December 4, 2032 and interest is
payable quarterly at a rate equivalent to 3 month LIBOR plus 4%. At September
30, 2004 and December 31, 2003, the interest rates were 6.02% and 5.15%,
respectively. Prior to December 4, 2007, interest cannot exceed 12.5%. Scottish
Holdings, Inc. may defer payment of the interest for up to 20 consecutive
quarterly periods, but no later than December 4, 2032. Any deferred payments
would accrue interest quarterly on a compounded basis. Scottish Holdings, Inc.
may redeem the Debentures at any time after December 4, 2007 in the event of
certain changes in tax or investment company law.
Scottish Annuity & Life Insurance Company (Cayman) Ltd. has guaranteed
Scottish Holdings, Inc.'s obligations under the Debentures and distributions
and other payments due on the Capital Securities.
Trust preferred securities due 2033
On October 29, 2003, Scottish Holdings, Inc. Statutory Trust II, a
Connecticut statutory business trust ("Capital Trust II") issued and sold in a
private offering an aggregate of $20.0 million Preferred Trust Securities (the
"Trust Preferred Securities"). All of the common shares of Capital Trust II are
owned by Scottish Holdings, Inc.
The Trust Preferred Securities mature on October 29, 2033. They are
redeemable in whole or in part at any time after October 29, 2008. Interest is
payable quarterly at a rate equivalent to 3 month LIBOR plus 3.95%. At
September 30, 2004 and December 31, 2003, the interest rates were 5.97% and
5.10%, respectively. Prior to October 29, 2008, interest cannot exceed 12.45%.
Capital Trust II may defer payment of the interest for up to 20 consecutive
quarterly periods, but no later than October 29, 2033. Any deferred payments
would accrue interest quarterly on a compounded basis if Scottish Holdings,
Inc. defers interest on the 2033 Floating Rate Debentures due October 29, 2033
(as described below).
The sole assets of Capital Trust II consist of $20.6 million principal
amount of Floating Rate Debentures (the "2033 Floating Rate Debentures") issued
by Scottish Holdings, Inc. The 2033 Floating Rate Debentures mature on October
29, 2033 and interest is payable quarterly at 3 month LIBOR plus 3.95%. At
September 30, 2004 and December 31, 2003, the interest rates were 5.97% and
5.10%, respectively. Prior to October 29, 2008, interest cannot exceed 12.45%.
Scottish Holdings, Inc. may defer payment of the interest for up to 20
consecutive quarterly periods, but no later than October 29, 2033. Any deferred
payments would accrue interest quarterly on a compounded basis. Scottish
Holdings, Inc. may redeem the 2033 Floating Rate Debentures at any time after
October 29, 2008 and in the event of certain changes in tax or investment
company law.
Scottish Annuity & Life Insurance Company (Cayman) Ltd. has guaranteed
Scottish Holdings, Inc.'s obligations under the Floating Rate Debentures and
distributions and other payments due on the Trust Preferred Securities.
Trust preferred securities due 2033
On November 14, 2003, GPIC Holdings Inc. Statutory Trust, a Delaware
statutory business trust (the "GPIC Trust") issued and sold in a private
offering an aggregate of $10.0 million Trust Preferred Securities (the "2033
Trust Preferred Securities"). All of the common shares of GPIC Trust are owned
by Scottish Holdings, Inc.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--
SEPTEMBER 30, 2004
The 2033 Trust Preferred Securities mature on September 30, 2033. They are
redeemable in whole or in part at any time after September 30, 2008. Interest
is payable quarterly at a rate equivalent to 3 month LIBOR plus 3.90%. At
September 30, 2004 and December 31, 2003, the interest rates were 5.92% and
5.05%, respectively. GPIC Trust may defer payment of the interest for up to 20
consecutive quarterly periods, but no later than September 30, 2033. Any
deferred payments would accrue interest quarterly on a compounded basis if
Scottish Holdings, Inc. defers interest on the Junior Subordinated Notes due
September 30, 2033 (as described below).
The sole assets of the GPIC Trust consist of $10.3 million principal
amount of Junior Subordinated Notes (the "Junior Subordinated Notes") issued by
Scottish Holdings, Inc. The Junior Subordinated Notes mature on September 30,
2033 and interest is payable quarterly at 3 month LIBOR plus 3.90%. At
September 30, 2004 and December 31, 2003, the interest rates were 5.92% and
5.05%, respectively. Scottish Holdings, Inc. may defer payment of the interest
for up to 20 consecutive quarterly periods, but no later than September 30,
2033. Any deferred payments would accrue interest quarterly on a compounded
basis. Scottish Holdings, Inc. may redeem the Junior Subordinated Notes at any
time after September 30, 2008 and in the event of certain changes in tax or
investment company law.
Scottish Annuity & Life Insurance Company (Cayman) Ltd. has guaranteed
Scottish Holdings, Inc.'s obligations under the Junior Subordinated Notes and
distributions and other payments due on the 2033 Trust Preferred Securities.
Trust preferred securities due 2034
On May 12, 2004, Scottish Holdings, Inc. Statutory Trust III, a
Connecticut statutory business trust ("Capital Trust III") issued and sold in a
private offering an aggregate of $32.0 million Trust Preferred Securities (the
"2034 Trust Preferred Securities"). All of the common shares of Capital Trust
III are owned by Scottish Holdings, Inc.
The 2034 Trust Preferred Securities mature on June 17, 2034. They are
redeemable in whole or in part at any time after June 17, 2009. Interest is
payable quarterly at a rate equivalent to 3 month LIBOR plus 3.80%. At
September 30, 2004, the interest rate was 5.82%. Prior to June 17, 2009,
interest cannot exceed 12.50%. Capital Trust III may defer payment of the
interest for up to 20 consecutive quarterly periods, but no later than June 17,
2034. Any deferred payments would accrue interest quarterly on a compounded
basis if Scottish Holdings, Inc. defers interest on the 2034 Floating Rate
Debentures due June 17, 2034 (as described below).
The sole assets of Capital Trust III consist of $33.0 million principal
amount of Floating Rate Debentures (the "2034 Floating Rate Debentures") issued
by Scottish Holdings, Inc. The 2034 Floating Rate Debentures mature on June 17,
2034 and interest is payable quarterly at 3 month LIBOR plus 3.80%. At
September 30, 2004 the interest rate was 5.82%. Prior to June 17, 2009,
interest cannot exceed 12.50%. Scottish Holdings, Inc. may defer payment of the
interest for up to 20 consecutive quarterly periods, but no later than June 17,
2034. Any deferred payments would accrue interest quarterly on a compounded
basis. Scottish Holdings, Inc. may redeem the 2034 Floating Rate Debentures at
any time after June 17, 2009 and in the event of certain changes in tax or
investment company law.
Scottish Annuity & Life Insurance Company (Cayman) Ltd. has guaranteed
Scottish Holdings, Inc.'s obligations under the 2034 Floating Rate Debentures
and distributions and other payments due on the 2034 Trust Preferred
Securities.
On December 18, 2004, SALIC raised approximately $50.0 million in capital
through the issuance by one of its subsidiaries of trust preferred securities
guaranteed by SALIC in a private placement to institutional investors.
(9) SHAREHOLDERS' EQUITY
During the nine months ended September 30, 2004 and 2003, we received
capital contributions of $3.6 million and $145.6 million, respectively.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--
SEPTEMBER 30, 2004
(10) RECENT DEVELOPMENT--CONTINGENT RECOVERABLE
As a result of an ongoing internal accounting examination relating to
certain blocks of business that SALIC acquired prior to 2004, SALIC believes
that premiums accrued and certain other related assets were overstated on the
financial statements originally provided by the seller in connection with the
acquisition. SALIC's internal analysis of these overstatements is not complete,
and the potential impact of these overstatements has not been finally
determined. On the basis of the information currently available to it, SALIC
believes that it has valid claims against the seller relating to these
overstatements. However, if SALIC determines that it is not appropriate to
record an asset in respect of such claims, then the overstatements would result
in adjustments to SALIC's balance sheet at December 31, 2004, which adjustments
would be expected to be in an amount equal to approximately 3% of SALIC's net
worth as at September 30, 2004 and would result in a charge to net income for
the year ended December 31, 2004 in the same amount.
(11) CREDIT AND COLLATERAL FACILITIES
During 2003, we had two credit facilities, which consisted of:
a) a credit facility totaling $50.0 million, of which $25.0 million was
available on an unsecured basis and $25.0 million was available on a
secured basis. The facility provided capacity for borrowings and
letters of credit. The interest rate on amounts borrowed under the
secured facility was LIBOR plus 50 basis points and under the
unsecured facility was LIBOR plus 75 basis points. This facility was
scheduled to expire in October 2004 and was extended to December 31,
2004. This credit facility has been replaced by a facility entered
into on December 29, 2004, which is described below.
b) a secured credit facility totaling $50.0 million. This facility
provided a combination of borrowings and letters of credit. The
interest rate on amounts borrowed under this facility was LIBOR plus
45 basis points. This facility was scheduled to expire in September
2004 and was extended to December 31, 2004. This credit facility has
been replaced by a facility entered into on December 29, 2004, which
is described below
One of the facilities required that we maintain shareholders' equity of at
least $340.0 million. At September 30, 2004, our shareholders' equity was
$806.8 million. The other facility required that Scottish Re Group Limited
maintain consolidated net worth of $520.0 million, a maximum debt to total
capitalization ratio of 30% and uncollateralized assets of 1.2 times any
unsecured borrowings. At September 30, 2004, Scottish Re Group Limited's net
worth was $807 million and the ratio of debt to total capitalization was 10%.
At September 30, 2004, there were no borrowings under the facilities.
Outstanding letters of credit under these facilities amounted to $33.8 million
as at September 30, 2004 and $31.2 million at December 31, 2003.
On December 29, 2004, we, Scottish Re (Dublin) Limited, Scottish Re
(U.S.), Inc., and Scottish Re Limited closed a $175 million, 364-day revolving
credit facility with a syndicate of banks led by Bank of America, N.A. The
facility provides capacity for borrowing and for extending letters of credit.
The proceeds from the facility will be used for working capital, capital
expenditures and general corporate purposes. The facility is a direct financial
obligation of each of the borrowers; however, we have guaranteed the payment of
obligations of Scottish Re (Dublin) Limited, Scottish Re (U.S.), Inc., and
Scottish Re Limited.
The facility may be increased to an aggregate principal amount of $200
million, in which increase the lenders may, but are not obligated to,
participate on a pro rata basis. Standby letters of credit issued under the
facility will be unconditional, irrevocable and will have a maximum term of one
year from the date of issuance.
The facility will terminate and all amounts outstanding thereunder will be
due 364 days from the closing date, unless the term out option is exercised.
The term out option may be exercised if there
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--
SEPTEMBER 30, 2004
are no events of default under the credit facility and if all representations
and warranties are true and correct as of the date of conversion.
The interest rate on each loan made under the facility, as determined by
the nature of the loan, will be at (i) the Federal Funds Rate plus 0.50%, (ii)
the prime rate as announced by Bank of America, N.A., or (iii) the British
Bankers Association LIBOR Rate plus an applicable margin. We may select
interest periods of 1, 2 or 3 months for LIBOR loans, subject to availability.
Interest will be payable at least quarterly, at the end of each interest
period.
Under the terms of the facility, the following constitute events of
default: nonpayment of principal, interest, fees or other amounts due under any
loan or letter of credit obligation thereunder; failure to adhere to the terms
of any covenants contained therein; any material misstatement made in any
representation or warranty contained therein; default on any indebtedness or
guarantee in the amount of $10 million or more by us or any of our
subsidiaries; any attachment or levy against all or part of any of our
property, if not released within 30 days after such attachment or levy; the
institution of bankruptcy or insolvency proceedings, whether voluntary or
involuntary; entry of a final judgment against us or subsidiary for payment
greater than a certain threshold amount, or any non-monetary judgment that
could reasonably be expected to have, individually or in the aggregate, a
material adverse effect; actual or asserted invalidity of any loan
documentation; a change of control; or customary ERISA defaults. If an event of
default occurs and is continuing, the entire principal thereof and interest
accrued thereon may be declared to be due and payable immediately.
The facility requires that Scottish Annuity & Life Insurance Company
(Cayman) Ltd. maintain a minimum amount of shareholders' equity, a debt to
capitalization ratio of less than 20% and uncollateralized assets of 1.2 times
borrowings. In addition, the facility requires that Scottish Re Group Limited
maintain a minimum amount of shareholders' equity, and a debt to capitalization
ratio of less than 30%. The facility also requires that Scottish Re (U.S.),
Inc. maintain minimum capital and surplus equal to the greater of (i) $20
million or (ii) the amount necessary to prevent a company action level event
from occurring under the risk based capital laws of Delaware.
We also have a reverse repurchase agreement with a major broker/dealer.
Under this agreement, we have the ability to sell agency mortgage backed
securities with the agreement to repurchase them at a fixed price, providing
the dealer with a spread that equates to an effective borrowing cost linked to
one-month LIBOR. This agreement is renewable monthly at the discretion of the
broker/dealer. At September 30, 2004 and December 31, 2003, there were no
borrowings under this agreement.
On January 12, 2005, Stingray Pass-Through Trust (the "Pass-Through
Trust") issued $325 million in aggregate principal amount of 5.902% collateral
facility securities (the "Pass-Through Certificates") in a private transaction,
and used the proceeds of this issuance to purchase an aggregate principal
amount of $325 million of 5.902% investor certificates (the "Investor
Certificates") from Stingray Investor Trust ("Investor Trust"). The Investor
Trust used the proceeds of this issuance to purchase a portfolio of high-grade
commercial paper notes. Under a Put Agreement between the Investor Trust and
SALIC, the Investor Trust agrees to purchase at a pre-determined price Funding
Agreements issued by SALIC, up to any amount such that the aggregate face
amount of Funding Agreements outstanding at any time does not exceed
$325,001,000, in exchange for a portfolio of highly rated 30-day commercial
paper. In consideration for the Investor Trust's agreement to purchase Funding
Agreements, SALIC will pay the Investor Trust a Put Premium on a monthly
payment date. Although SALIC participated in the transactions leading to the
establishment of the Pass-Through Trust and the Investor Trust, the trusts are
independent entities and are not owned, controlled or managed by SALIC. The
Pass-Through Certificates are direct financial obligations of the Pass-Through
Trust, the Investor Certificates are direct financial obligations of the
Investor Trust, and the Funding Agreements are a direct financial obligation of
SALIC. See "Description of Scottish Annuity & Life Insurance Company (Cayman)
Ltd.--Recent Developments--Stingray Pass-Through Trust Collateral Facility
Securities Transaction"
36
