UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-21874
London Pacific Group Limited
(Exact name of registrant as specified in its charter)
----------------------
Jersey, Channel Islands Not applicable
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
Minden House, 6 Minden Place
St. Helier, Jersey JE2 4WQ
Channel Islands
(Address of principal executive offices)
(Zip Code)
011 44 (1534) 607700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No ____
As of November 5, 2001, the registrant had outstanding 64,439,073 Ordinary
Shares, par value $0.05 per share.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements: Page
Condensed Consolidated Balance Sheets as of September 30, 2001 and
December 31, 2000 ........................................................................... 3
Condensed Consolidated Statements of Income for the three and nine months
ended September 30, 2001 and 2000............................................................ 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2001 and 2000............................................................ 5
Consolidated Statements of Changes in Shareholders' Equity for the nine
months ended September 30, 2001 and 2000..................................................... 6
Consolidated Statements of Comprehensive Income for the three and nine months
ended September 30, 2001 and 2000............................................................ 7
Notes to Interim Consolidated Financial Statements............................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ....................................................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk ...................................... 25
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................................................................ 26
Signature ................................................................................................. 27
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share amounts)
September 30, December 31,
2001 2000
------------- -------------
ASSETS
Cash and cash equivalents......................................................... $ 104,350 $ 114,285
Investments, principally of life insurance subsidiaries:
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $1,623,249 and $1,352,313
as of September 30, 2001 and December 31, 2000, respectively).............. 1,593,231 1,292,015
Held-to-maturity, at amortized cost (fair value: $115,408 and $129,400
as of September 30, 2001 and December 31, 2000, respectively).............. 111,589 127,514
Equity securities:
Trading, at fair value (cost: $84,264 and $99,747 as of September 30, 2001
and December 31, 2000, respectively) ...................................... 46,150 353,896
Available-for-sale, at fair value (cost: $226,459 and $238,942 as of
September 30, 2001 and December 31, 2000, respectively) ................... 218,418 229,403
Policy loans .................................................................. 10,530 10,301
------------- -------------
Total investments ................................................................ 1,979,918 2,013,129
Accrued investment income ........................................................ 34,877 28,629
Deferred policy acquisition costs ................................................ 161,359 168,102
Assets held in separate accounts ................................................. 228,229 206,325
Receivables....................................................................... 18,289 17,222
Other assets...................................................................... 18,316 15,296
------------- -------------
Total assets ..................................................................... $ 2,545,338 $ 2,562,988
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Life insurance policy liabilities ................................................ $ 1,984,737 $ 1,691,601
Liabilities related to separate accounts ......................................... 218,879 203,806
Notes payable..................................................................... 36,874 35,556
Deferred income tax liabilities .................................................. 2,593 41,587
Accounts payable, accruals and other liabilities ................................. 35,777 22,696
------------- -------------
Total liabilities ................................................................ 2,278,860 1,995,246
------------- -------------
Commitments and contingencies
Shareholders' equity:
Ordinary shares, $0.05 par value per share: authorized 86,400,000 shares;
issued and outstanding 64,439,073 and 64,433,313 shares as of
September 30, 2001 and December 31, 2000, respectively......................... 3,222 3,222
Additional paid-in capital ....................................................... 68,274 67,591
Retained earnings ................................................................ 273,086 580,176
Employee benefit trusts, at cost (shares: 13,698,181 and 12,811,381 as of
September 30, 2001 and December 31, 2000, respectively) ....................... (63,599) (58,003)
Accumulated other comprehensive income (loss) .................................... (14,505) (25,244)
------------- -------------
Total shareholders' equity ....................................................... 266,478 567,742
------------- -------------
Total liabilities and shareholders' equity ....................................... $ 2,545,338 $ 2,562,988
------------- -------------
------------- -------------
<FN>
See accompanying Notes to Interim Consolidated Financial Statements.
</FN>
3
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share and ADS amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
2001 2000 2001 2000
--------- --------- --------- ----------
Revenues:
Investment income.............................................. $ 36,411 $ 29,799 $ 107,002 $ 83,131
Insurance policy charges....................................... 1,418 1,822 4,254 5,660
Financial advisory services, asset management and other
fee income.................................................. 5,926 7,329 19,118 24,325
Net realized investment gains (losses)......................... (42,490) 87,982 (21,624) 88,170
Change in net unrealized investment gains and losses
on trading securities ...................................... (116,167) (62,359) (292,264) 291,834
--------- --------- --------- ---------
(114,902) 64,573 (183,514) 493,120
Expenses:
Interest credited on insurance policyholder accounts........... 30,887 24,610 87,938 67,385
Amortization of deferred policy acquisition costs.............. 6,205 4,769 17,756 16,011
Operating expenses............................................. 12,983 13,894 39,828 43,154
Goodwill amortization.......................................... 57 58 172 173
Interest expense............................................... 467 128 1,803 142
--------- --------- --------- ---------
50,599 43,459 147,497 126,865
--------- --------- --------- ---------
Income (loss) before income tax expense........................ (165,501) 21,114 (331,011) 366,255
Income tax expense (benefit)................................... (21,056) (7,947) (35,723) 52,901
--------- --------- --------- ---------
Net income (loss).............................................. $(144,445) $ 29,061 $(295,288) $ 313,354
--------- --------- --------- ---------
--------- --------- --------- ---------
Interim dividend declared
(2001 and 2000: 11.0 cents per share gross; 8.8 cents per ADS) $ 4,504 $ 4,608
--------- ---------
--------- ---------
Basic earnings (loss) per share and ADS........................ $(2.85) $ 0.56 $ (5.78) $ 6.21
Diluted earnings (loss) per share and ADS...................... $(2.85) $ 0.47 $ (5.78) $ 5.16
<FN>
See accompanying Notes to Interim Consolidated Financial Statements.
</FN>
4
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months
Ended September 30,
----------------------------
2001 2000
---------- ----------
Net cash provided by operating activities ........................................ $ 61,363 $ 24,736
Cash flows from investing activities:
Purchases of held-to-maturity fixed maturity securities .......................... (14,865) (2,328)
Purchases of available-for-sale fixed maturity securities ........................ (657,937) (239,332)
Purchases of available-for-sale equity securities ................................ (51,100) (90,142)
Proceeds from redemption of held-to-maturity fixed maturity securities ........... 19,998 37,098
Proceeds from sale of available-for-sale fixed maturity securities ............... 389,241 52,416
Proceeds from sale of available-for-sale equity securities ....................... 16,723 2,243
Capital expenditures ............................................................. (1,222) (1,411)
Other cash flows from investing activities ....................................... (229) 3,039
---------- ----------
Net cash provided by (used in) investing activities .............................. (299,391) (238,417)
---------- ----------
Cash flows from financing activities:
Insurance policyholder contract deposits ......................................... 378,663 377,016
Insurance policyholder benefits paid ............................................. (134,502) (167,928)
Issue of Ordinary Shares ......................................................... 3 -
Purchases of Ordinary Shares by the employee benefit trusts....................... (6,005) (12,712)
Proceeds from disposal of shares by the employee benefit trusts................... 440 8,299
Dividends paid.................................................................... (11,802) (11,625)
Notes payable..................................................................... 1,318 20,066
Bank overdrafts................................................................... - (593)
---------- ----------
Net cash provided by financing activities ........................................ 228,115 212,523
---------- ----------
Net increase (decrease) in cash and cash equivalents ............................. (9,913) (1,158)
Cash and cash equivalents at beginning of period ................................. 114,285 49,703
Foreign currency translation adjustment .......................................... (22) -
---------- ----------
Cash and cash equivalents at end of period ....................................... $ 104,350 $ 48,545
---------- ----------
---------- ----------
<FN>
See accompanying Notes to Interim Consolidated Financial Statements.
</FN>
5
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)
Accumulated
Other
Ordinary Additional Employee Compre- Total
Shares at Paid-in Retained Benefit hensive Shareholders'
Par Value Capital Earnings Trusts Income (Loss) Equity
----------- ----------- ----------- ----------- ----------- -----------
Balance as of January 1, 2000 ..... $ 3,222 $ 62,307 $ 559,344 $ (54,033) $ (18,365) $ 552,475
Net income ........................ - - 313,354 - - 313,354
Change in net unrealized gains
and losses on available-for-sale
securities...................... - - - - (8,630) (8,630)
Foreign currency translation
adjustment...................... - - - - 16 16
Exercise of employee share
options, including income
tax effect...................... - 2,508 - 8,640 - 11,148
Extension of employee
share options................... - 1,150 - - - 1,150
Net realized gains (losses) on
disposal of shares held by the
employee benefit trusts......... - (341) - - - (341)
Cash dividends declared ........... - - (11,625) - - (11,625)
Purchase of shares by the
employee benefit trusts......... - - - (12,712) - (12,712)
----------- ----------- ----------- ----------- ----------- -----------
Balance as of September 30, 2000... $ 3,222 $ 65,624 $ 861,073 $ (58,105) $ (26,979) $ 844,835
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Accumulated
Other
Ordinary Additional Employee Compre- Total
Shares at Paid-in Retained Benefit hensive Shareholders'
Par Value Capital Earnings Trusts Income (Loss) Equity
----------- ----------- ----------- ----------- ----------- -----------
Balance as of January 1, 2001 ..... $ 3,222 $ 67,591 $ 580,176 $ (58,003) $ (25,244) $ 567,742
Net income (loss).................. - - (295,288) - - (295,288)
Change in net unrealized gains
and losses on available-for-sale
securities...................... - - - - 10,737 10,737
Foreign currency translation
adjustment...................... - - - - 2 2
Exercise of employee share
options, including income
tax effect...................... - 122 - 409 - 531
Grant of employee share options
below fair market value......... - 530 - - - 530
Net realized gains on disposal
of shares held by the
employee benefit trusts......... - 31 - - - 31
Cash dividends declared ........... - - (11,802) - - (11,802)
Purchase of shares by the
employee benefit trusts......... - - - (6,005) - (6,005)
----------- ----------- ----------- ----------- ----------- -----------
Balance as of September 30, 2001... $ 3,222 $ 68,274 $ 273,086 $ (63,599) $ (14,505) $ 266,478
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
<FN>
See accompanying Notes to Interim Consolidated Financial Statements.
</FN>
6
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net income (loss)................................................. $ (144,445) $ 29,061 $ (295,288) $ 313,354
Other comprehensive income (loss), net of deferred
income taxes:
Foreign currency translation adjustments, net of income
taxes of $0.................................................... 17 16 2 16
Change in net unrealized gains and losses on available-for-sale
securities arising during the period, net of income taxes and
deferred policy acquisition cost amortization adjustments
totaling $(7,155), $(11,355), $(25,661) and $15,502,
respectively................................................... 843 3,666 10,737 (8,630)
---------- ---------- ---------- -----------
Other comprehensive income (loss) ................................ 860 3,682 10,739 (8,614)
---------- ---------- ---------- ----------
Comprehensive income (loss) ...................................... $ (143,585) $ 32,743 $ (284,549) $ 304,740
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
<FN>
See accompanying Notes to Interim Consolidated Financial Statements.
</FN>
7
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Item 1. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Basis of Presentation and Principles of Consolidation
The accompanying interim consolidated financial statements are unaudited
and have been prepared by London Pacific Group Limited (the "Company") in
conformity with United States generally accepted accounting principles ("U.S.
GAAP"). These consolidated financial statements include the accounts of the
Company, its subsidiaries, the Employee Share Option Trust and the Agent Loyalty
Opportunity Trust (collectively, the "Group"). All intercompany transactions
have been eliminated in consolidation. Certain information and note disclosures
normally included in the Group's annual consolidated financial statements have
been condensed or omitted. The interim consolidated financial statements, in the
opinion of management, reflect all adjustments (consisting only of normal
recurring accruals) which are necessary for a fair statement of the results for
the interim periods presented.
While the Group believes that the disclosures presented are adequate to
make the information not misleading, these interim consolidated financial
statements should be read in conjunction with the audited financial statements
and related notes for the year ended December 31, 2000, which are contained in
the Company's Annual Report on Form 10-K, filed with the U.S. Securities and
Exchange Commission on March 30, 2001. The year-end condensed balance sheet data
was derived from audited financial statements but does not include all
disclosures required by U.S. GAAP.
The results for the three and nine month periods ended September 30, 2001,
are not necessarily indicative of the results to be expected for the full fiscal
year.
Certain reclassifications were made to prior period amounts to conform with
the current year's presentation. These reclassifications have no effect on the
net income or shareholders' equity for the prior period.
Note 2. Comprehensive Income
Comprehensive income consists of net income; changes in unrealized gains or
losses on available-for-sale securities, net of income taxes and deferred policy
acquisition cost amortization adjustments; and foreign currency translation
gains or losses arising on the translation of the Group's Jersey, Channel
Islands insurance subsidiary.
Note 3. Earnings per Share and ADS
The Group calculates earnings per share in accordance with Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share." This
statement requires the presentation of basic and diluted earnings per share.
Basic earnings per share is calculated by dividing net income or loss by the
weighted average number of Ordinary Shares outstanding during the applicable
period, excluding shares held by the Employee Share Option Trust and the Agent
Loyalty Opportunity Trust which are regarded as treasury stock for the purposes
of this calculation. The Group has issued employee share options, which are
considered potential common stock under SFAS 128. Diluted earnings per share is
calculated by dividing net income by the weighted average number of Ordinary
Shares outstanding during the applicable period as adjusted for these
potentially dilutive options which are determined based on the "Treasury Stock
Method." As the Group recorded a net loss for the three and nine months ended
September 30, 2001, the calculation of diluted earnings per share for these
periods does not include these potentially dilutive options as they are
anti-dilutive and would result in a reduction of net loss per share. If the
Group had reported net income for the three and nine months ended September 30,
2001, there would have been an additional 2,057,944 and 3,914,920 shares,
respectively, included in the calculations of diluted earnings per share.
8
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Item 1. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
A reconciliation of the numerators and denominators for the basic and
diluted earnings per share calculations is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
(In thousands, except share and
per share and ADS amounts)
Net income (loss)................................................. $ (144,445) $ 29,061 $ (295,288) $ 313,354
Basic earnings per share and ADS:
Weighted average number of Ordinary Shares outstanding,
excluding shares held by the employee benefit trusts............ 50,740,892 51,625,224 51,065,230 50,457,786
----------- ----------- ----------- -----------
Basic earnings (loss) per share and ADS .......................... $ (2.85) $ 0.56 $ (5.78) $ 6.21
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted earnings per share and ADS:
Weighted average number of Ordinary Shares outstanding,
excluding shares held by the employee benefit trusts............ 50,740,892 51,625,224 51,065,230 50,457,786
Effect of dilutive securities (employee share options)............ - 9,737,286 - 10,322,344
----------- ----------- ----------- -----------
Weighted average Ordinary Shares used in diluted earnings
per share calculations.......................................... 50,740,892 61,362,510 51,065,230 60,780,130
----------- ----------- ----------- -----------
Diluted earnings (loss) per share and ADS ........................ $ (2.85) $ 0.47 $ (5.78) $ 5.16
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Note 4. Investments
Equity Securities
Equity securities are comprised of available-for-sale and trading
securities. An analysis of equity securities is as follows:
September 30, 2001 December 31, 2000
----------------------------------------------- ------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Unrealized Unrealized Fair Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
----------- ---------- ---------- ---------- ----------- ---------- ---------- -----------
(In thousands)
Private corporate equity
securities............... $ 215,533 $ - $ - $ 215,533 $ 226,799 $ - $ - $ 226,799
Listed equity securities .. 10,926 - (8,041) 2,885 12,143 124 (9,663) 2,604
----------- ---------- ---------- ---------- ----------- ---------- ---------- -----------
Total available-for-sale
equity securities........ 226,459 - (8,041) 218,418 238,942 124 (9,663) 229,403
Trading securities......... 84,264 3,006 (41,120) 46,150 99,747 264,433 (10,284) 353,896
----------- ---------- ---------- ---------- ----------- ---------- ---------- -----------
Total equity securities.... $ 310,723 $ 3,006 $ (49,161) $ 264,568 $ 338,689 $ 264,557 $ (19,947) $ 583,299
----------- ---------- ---------- ---------- ----------- ---------- ---------- -----------
----------- ---------- ---------- ---------- ----------- ---------- ---------- -----------
Trading securities are carried at fair value with changes in net unrealized
gains and losses of $(116,167,000) and $(62,359,000) included in earnings for
the three month periods ended September 30, 2001
9
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Item 1. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
and 2000, respectively, and of $(292,264,000) and $291,834,000 included in
earnings for the nine month periods ended September 30, 2001 and 2000,
respectively.
Realized Gains and Losses
Information about gross realized gains and losses on securities
transactions is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- --------------------
2001 2000 2001 2000
---------- ---------- --------- ---------
(In thousands)
Gross realized gains (losses) on securities transactions:
Fixed maturities, available-for-sale:
Gross gains................................................... $ 4,225 $ 111 $ 15,452 $ 237
Gross losses.................................................. (19,604) (41) (22,603) (136)
Fixed maturities, held-to-maturity:
Gross losses.................................................. (42) (615) (54) (27,083)
Trading securities:
Gross gains................................................... - 88,478 43,665 120,674
Gross losses.................................................. - - (1,646) -
Equity securities, available-for-sale:
Gross gains................................................... 730 49 1,140 179
Gross losses.................................................. (27,799) - (57,578) (5,701)
---------- ---------- --------- ---------
Net realized investment gains (losses) on securities
transactions.................................................. $ (42,490) $ 87,982 $ (21,624) $ 88,170
---------- ---------- --------- ---------
---------- ---------- --------- ---------
Note 5. Recently Issued Accounting Pronouncements
On January 1, 2001, the Group adopted Statement of Financial Accounting
Standard No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities." This standard, as amended, establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that all derivative instruments be recorded on the balance sheet at
fair value unless the derivative qualifies as a hedge. The adoption of SFAS 133
did not have a material impact on the Group's consolidated financial statements
for the three and nine month periods ended September 30, 2001.
On July 1, 2001, the Group adopted Statement of Financial Accounting
Standard No. 141 ("SFAS 141"), "Business Combinations," which supersedes
Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations."
This standard eliminates the pooling-of-interests method of accounting for
business combinations and modifies the application of the purchase accounting
method. SFAS 141 also specifies criteria intangible assets acquired in a
business combination must meet to be recognized and reported separately from
goodwill. The elimination of the pooling-of-interests method was effective for
transactions initiated after June 30, 2001. The remaining provisions of SFAS 141
were effective for transactions accounted for using the purchase method for
which the date of acquisition is July 1, 2001 or later. The adoption of SFAS 141
did not impact the Group's consolidated financial statements for the three and
nine month periods ended September 30, 2001.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 142 ("SFAS 142"), "Goodwill and
Other Intangible Assets," which supersedes APB Opinion No. 17, "Intangible
Assets." SFAS 142 eliminates the current requirement to amortize goodwill and
10
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Item 1. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
indefinite-lived intangible assets, addresses the amortization of intangible
assets with a defined life and addresses the impairment testing and recognition
for goodwill and intangible assets. The provisions of SFAS 142 are effective for
fiscal years beginning after December 15, 2001. Impairment losses, if any, due
to the initial application of SFAS 142 are to be reported as resulting from a
change in accounting principle. The Group will apply the new rules on accounting
for goodwill and other intangible assets beginning in the first quarter of 2002.
The first of the required impairment tests will be performed as of January 1,
2002 and the Group has not yet determined what effect these tests will have on
its results of operations. However, the Group does not expect adoption of this
statement to have a material effect on its results of operations or financial
position.
In June 2001, the FASB also issued Statement of Financial Accounting
Standard No. 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations."
SFAS 143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset and should be
allocated to expense using a systematic and rational method. The provisions of
SFAS 143 are effective for fiscal years beginning after June 15, 2002, however
earlier application is encouraged. The Group does not expect adoption of this
statement to have a material effect on its results of operations or financial
position.
In August 2001, the FASB issued Statement of Financial Accounting Standard
No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets." SFAS 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supercedes, with exceptions,
Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets to Be Disposed Of." The provisions of SFAS 144
are effective for fiscal years beginning after December 15, 2001, and interim
periods within those fiscal years, with early application encouraged. The Group
does not expect adoption of this statement to have a material effect on its
results of operations or financial position.
Note 6. Business Segment and Geographical Information
The Group's reportable operating segments are classified according to its
principal businesses, which are the following: life insurance and annuities,
financial advisory services, asset management and venture capital management.
During the three month periods ended September 30, 2001 and 2000, there
were included in the asset management and venture capital management segments,
portfolio management fees from the life insurance and annuities segment of
$2,943,000 and $2,801,000, respectively. During the nine month periods ended
September 30, 2001 and 2000, there were included in the asset management and
venture capital management segments, portfolio management fees from the life
insurance and annuities segment of $8,709,000 and $7,744,000, respectively.
These management fees have been approved by the insurance regulatory body in the
life insurance company's U.S. state of domicile. Realized investment gains in
the amount of $37,763,000 were recorded during the first nine months of 2001 by
the life insurance and annuities segment, related to intersegmental investment
sales to the venture capital management segment. These realized investment gains
were offset by a corresponding decrease in unrealized investment gains for the
same amount.
Summary revenue and investment gain (loss) information by geographic
segment, based on the domicile of the Group company generating those revenues,
is as follows:
11
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Item 1. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(In thousands)
Jersey............................................................ $ (26,389) $ 53,173 $ (143,371) $ 204,656
Guernsey.......................................................... (76,929) (3,282) (73,509) 24,521
United States..................................................... (11,584) 14,682 33,366 263,943
---------- ---------- ---------- ----------
Consolidated revenues and net investment gains (losses)........... $ (114,902) $ 64,573 $ (183,514) $ 493,120
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Total assets by geographic segment were as follows:
September 30, December 31,
2001 2000
------------ ------------
(In thousands)
Jersey............................................................................... $ 54,536 $ 251,255
Guernsey............................................................................. 143,003 176,173
United States........................................................................ 2,347,799 2,135,560
------------ ------------
Consolidated total assets............................................................ $ 2,545,338 $ 2,562,988
------------ ------------
------------ ------------
Revenues and income before tax expense for the Group's reportable operating
segments, based on management's internal reporting structure, were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
2001 2000 2001 2000
---------- --------- ---------- ----------
(In thousands)
Revenues:
Life insurance and annuities (1) (2).............................. $ (45,182) $ 52,911 $ (133,995) $ 429,959
Financial advisory services....................................... 4,361 5,692 14,487 17,456
Asset management (1) ............................................. 1,716 2,153 5,130 5,912
Venture capital management (2) ................................... (76,342) 3,605 (70,824) 38,650
---------- ---------- ---------- ----------
(115,447) 64,361 (185,202) 491,977
Reconciliation of segment amounts to consolidated amounts:
Interest income .................................................. 545 212 1,688 1,143
---------- ---------- ---------- ----------
Consolidated revenues and net investment gains (losses)........... $ (114,902) $ 64,573 $ (183,514) $ 493,120
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
<FN>
(1) Included in the revenues of the asset management segment are management fees
from the life insurance and annuities segment of $481,000 and $953,000 in the
third quarters of 2001 and 2000, respectively, and $1,470,000 and $2,150,000 in
the first nine months of 2001 and 2000, respectively.
</FN>
<FN>
(2) Included in the revenues of the venture capital management segment are
management fees from the life insurance and annuities segment of $2,462,000 and
$1,848,000 in the third quarters of 2001 and 2000, respectively, and $7,239,000
and $5,594,000 in the first nine months of 2001 and 2000, respectively.
</FN>
12
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Item 1. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
2001 2000 2001 2000
---------- --------- ---------- ----------
(In thousands)
Income (loss) before income tax expense:
Life insurance and annuities (1) (2).............................. $ (84,499) $ 21,480 $ (246,291) $ 339,850
Financial advisory services ...................................... (1,071) (1,323) (2,878) (3,129)
Asset management (1).............................................. 588 803 1,102 1,569
Venture capital management (2) ................................... (79,225) 2,244 (78,211) 31,816
---------- ---------- ---------- ----------
(164,207) 23,204 (326,278) 370,106
Reconciliation of segment amounts to consolidated amounts:
Interest income .................................................. 545 212 1,688 1,143
Corporate expenses ............................................... (1,315) (2,116) (4,446) (4,679)
Goodwill amortization ............................................ (57) (58) (172) (173)
Interest expense ................................................. (467) (128) (1,803) (142)
---------- ---------- ---------- ----------
Consolidated income (loss) before income tax expense ............. $ (165,501) $ 21,114 $ (331,011) $ 366,255
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
<FN>
(1) Included in the revenues of the asset management segment are management fees
from the life insurance and annuities segment of $481,000 and $953,000 in the
third quarters of 2001 and 2000, respectively, and $1,470,000 and $2,150,000 in
the first nine months of 2001 and 2000, respectively.
</FN>
<FN>
(2) Included in the revenues of the venture capital management segment are
management fees from the life insurance and annuities segment of $2,462,000 and
$1,848,000 in the third quarters of 2001 and 2000, respectively, and $7,239,000
and $5,594,000 in the first nine months of 2001 and 2000, respectively.
</FN>
The only material change in segmental assets during the third quarter of
2001 was in the venture capital management segment, where assets decreased by
$79,026,000 from $93,193,000 to $14,167,000, primarily caused by the change in
net unrealized gains and losses on listed equity securities in the trading
account. The only material change in segmental assets during the first nine
months of 2001 was in the venture capital management segment, where assets
decreased by $95,437,000 from $109,604,000 to $14,167,000, primarily caused by
the change in net unrealized gains and losses on listed equity securities in the
trading account.
13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the unaudited interim
consolidated financial statements, and the notes thereto, presented elsewhere in
this report. The interim consolidated financial statements are prepared in
accordance with generally accepted accounting principles in the United States.
This item should also be read in conjunction with the "Forward-Looking
Statements and Factors That May Affect Future Results" which are set forth below
and in the Company's other filings with the U.S. Securities and Exchange
Commission ("SEC").
Forward-Looking Statements and Factors That May Affect Future Results
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this report contain forward-looking
statements within the meaning of Section 21E of the Exchange Act. Such
forward-looking statements are based on current expectations, estimates,
forecasts and projections about the industries in which the Group operates,
management's current beliefs and assumptions made by management. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates,"
"goals," variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions that
are difficult to predict. Future outcomes and results may differ materially from
what is expressed or forecast in such forward-looking statements. The Group
undertakes no obligation to update any forward-looking statements, whether as a
result of new information, future developments or otherwise.
Factors that could cause or contribute to deviations from the
forward-looking statements include those discussed in this section, elsewhere in
this report and in the Company's other filings with the SEC. The factors
include, but are not limited to, (i) the risks described in Item 3 "Quantitative
and Qualitative Disclosures About Market Risk," (ii) variations in demand for
the Group's products and services, (iii) the success of new products and
services provided by the Group, (iv) the credit ratings of the Group's insurance
subsidiaries, (v) significant changes in net cash flows in or out of the Group's
businesses, (vi) fluctuations in the performance of debt and equity markets
worldwide, (vii) the enactment of adverse state, federal or foreign regulation
or changes in government policy or regulation (including accounting standards)
affecting the Group's operations, (viii) the effect of economic conditions and
interest rates in the U.S., the U.K. or internationally, (ix) the ability of the
Group's subsidiaries to compete in their respective businesses, and (x) the
ability of the Group to attract and retain key personnel.
14
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
Life Insurance and Annuities
Certain information regarding the life insurance and annuities segment's
results of operations is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(In thousands)
Revenues:
Investment income................................................. $ 32,923 $ 26,785 $ 96,605 $ 73,971
Insurance policy charges ......................................... 1,418 1,822 4,254 5,660
Net realized investment gains (losses), including related
amortization (1) (2)............................................ (47,553) 76,451 4,720 69,585
Change in net unrealized investment gains and losses on
trading securities, including related amortization (1) (2)...... (36,919) (55,698) (251,509) 269,373
Other fee income ................................................. 330 437 971 1,183
---------- ---------- ---------- ----------
Total revenues and investment gains (losses), including
related amortization (1)........................................ (49,801) 49,797 (144,959) 419,772
Expenses:
Interest credited on insurance policyholder accounts ............. 30,887 24,610 87,938 67,385
Amortization of deferred policy acquisition costs related to
operations (1).................................................. 1,586 1,655 6,792 5,824
Mortality expenses (gains)........................................ 21 66 (285) (335)
General and administrative expenses .............................. 2,204 1,986 6,887 7,048
---------- ---------- ---------- ----------
Total expenses related to operations (1).......................... 34,698 28,317 101,332 79,922
---------- ---------- ---------- ----------
Income (loss) before income tax expense .......................... $ (84,499) $ 21,480 $ (246,291) $ 339,850
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
<FN>
(1) As a result of net realized investment gains on available-for-sale
securities and the change in net unrealized investment gains on trading
securities which back the life insurance and annuities segment's investment-type
products, amortization of deferred policy acquisition costs was increased by
$4,619,000 and $3,114,000 in the third quarters of 2001 and 2000, respectively,
and by $10,964,000 and $10,187,000 in the first nine months of 2001 and 2000,
respectively. For purposes of the above business segment presentation, this
additional amortization is not shown in operating expenses in accordance with
the Group's accounting policy used to prepare the consolidated income statement,
but is netted against net realized investment gains (losses) ($4,619,000 and
($160,000) in the third quarters of 2001 and 2000, respectively, and $10,964,000
and ($1,746,000) for the first nine months of 2001 and 2000, respectively) and
the change in net unrealized investment gains and losses ($0 and $3,274,000 in
the third quarters of 2001 and 2000, respectively, and $0 and $11,933,000 for
the first nine months of 2001 and 2000, respectively).
(2) Realized investment gains in the amount of $37,763,000 were recorded during
the first nine months of 2001 by the life insurance and annuities segment,
related to intersegmental investment sales to the venture capital management
segment. These realized investment gains were offset by a corresponding decrease
in unrealized investment gains for the same amount. These gains are eliminated
in the Group's consolidated financial statements.
</FN>
Third quarter of 2001 compared to third quarter of 2000
For the third quarter of 2001, the life insurance and annuities segment,
which consists of London Pacific Life & Annuity Company ("LPLA") and London
Pacific Assurance Limited ("LPAL"), contributed a loss before income taxes of
$84.5 million to the Group's overall loss before taxes, compared to income of
$21.5 million in the third quarter of 2000. Net realized investment losses,
including related amortization of deferred policy acquisition costs ("DPAC"),
were $47.6 million, compared to net realized investment gains of $76.5 million
in
15
the third quarter of 2000. The loss from the change in net unrealized investment
gains and losses, including related DPAC amortization, decreased from $55.7
million in the third quarter of 2000 to $36.9 million in the third quarter of
2001. General and administrative expenses increased by $0.2 million;
amortization of DPAC, excluding amortization related to investment gains and
losses, decreased by $0.1 million; and the spread between investment income and
interest credited to policyholder accounts decreased by $0.1 million, each as
compared to the third quarter of 2000. Policy charges for the third quarter of
2001 decreased by $0.4 million and other fee income decreased by $0.1 million,
each as compared to the third quarter of 2000.
In accordance with U.S. GAAP, premiums collected on annuity and universal
life contracts are not reported as revenues, but rather as deposits to insurance
liabilities. Revenues for these products are recognized over time in the form of
investment income and surrender or other charges. LPLA offers both fixed
annuities which typically have an interest rate guaranteed for one to seven
years, after which the company has the discretionary ability to change the
crediting rate to any rate not below a guaranteed rate, and variable annuities
which allow the contract holders the ability to direct premiums into specific
investment portfolios with rates of return being based on the performance of the
portfolio. LPAL began selling guaranteed bond contracts, which are similar to
LPLA's fixed annuity products, in the Jersey, Channel Islands market during the
first quarter of 2000 and in the U.K. market during the second quarter of 2000.
Premiums received for all life, annuity and guaranteed bond products were
$117.2 million for the third quarter of 2001, a decrease of 22.0% over the
premiums received for the same period in 2000. LPAL generated $16.1 million of
the total premiums received during the third quarter of 2001, the same amount
generated for the third quarter of 2000. The flat premium volume in the quarter
for LPAL reflected the decrease in crediting rates as a result of falling U.K.
interest rates. LPLA generated premiums of $101.1 million in the third quarter
of 2001, a 24.7% decrease over the premiums received in the same period in 2000.
The $33.1 million decrease in LPLA's premiums reflected the impact of a
declining U.S. interest rate environment. As a result of lower reinvestment
rates, LPLA again reduced annuity crediting rates during the third quarter of
2001, which reduced the competitiveness of its annuity product line. LPLA's mix
of business continued to shift toward traditional annuities, which typically
guarantee crediting rates for one year, but have surrender charge periods
ranging from seven to ten years. Sales of traditional annuities in the third
quarter of 2001 increased to $71.3 million, compared to $42.9 million in the
third quarter of 2000 as a result of production from new distributors that have
been attracted to LPLA because of its strong track record. The declining U.S.
interest rate environment had the most significant impact on LPLA's multi-year
guaranteed rate annuities, sales of which in the third quarter of 2001 decreased
to $23.9 million, compared to $79.9 million in the third quarter of 2000.
Interest and dividend income on investments was $32.9 million in the third
quarter of 2001 as compared with $26.8 million in the same period in 2000. This
$6.1 million increase was primarily due to asset growth from new business,
offset by lower reinvestment rates and by acquisitions of capital appreciation
(zero yield) securities. The carrying value of the private equity portfolio as
of September 30, 2001 was $225.7 million, compared with $234.2 million as of
December 31, 2000 and $157.6 million as of September 30, 2000.
Net investment losses, including related DPAC amortization, were $84.5
million in the third quarter of 2001, compared to net investment gains of $20.8
million in the third quarter of 2000. Net investment losses in the third quarter
of 2001 were comprised of net realized investment losses of $42.9 million, a
$36.9 million loss from the change in net unrealized gains and losses on the
listed equity securities held in the trading portfolio, and related DPAC
amortization of $4.6 million. The market value of the trading portfolio
decreased from $60.1 million as of June 30, 2001 to $23.2 million as of
September 30, 2001. There were no additions to the trading portfolio during the
third quarter of 2001. The life insurance and annuities segment recorded $4.5
million in net realized losses from the sale of certain corporate bonds and
other investments during the third quarter of 2001. In addition, permanent
impairment writedowns were made during the quarter of $38.4 million on four
private placement securities. As of September 30, 2001, LPLA's and LPAL's
investment portfolios included eight former private preferred stocks that have
been converted to listed common equities and one convertible bond holding in a
publicly traded company.
Total invested assets (defined as total assets excluding DPAC, other assets
and income tax related accounts) increased to $2.3 billion as of September 30,
2001, compared with $2.2 billion as of December 31, 2000. On total average
invested assets for the third quarter of 2001, the average annualized net
return,
16
including both realized and unrealized investment gains and losses, was -8.42%,
compared with 8.88% for the same period in 2000. This decrease in annualized net
return resulted primarily from the decrease in net investment gains discussed
above.
Policy surrender and mortality charge income decreased by $0.4 million in
the third quarter of 2001 to $1.4 million, compared with $1.8 million for the
same period in 2000. Full policy surrenders totaled $27.5 million in the third
quarter of 2001, a $10.4 million decrease over the same period in 2000. Internal
policy conversions accounted for $7.9 million of the full surrenders in the
third quarter of 2001, compared to $12.5 million for the same period in 2000.
The decrease in policy surrenders reflects one of the effects of the declining
U.S. interest rate environment, which has reduced yields on competing products.
Although the current U.S. interest rate environment favors higher policy
persistency, annuity surrenders may increase in future periods as the portion of
the business that can be withdrawn by policyholders without incurring a
surrender charge penalty grows.
Interest credited on policyholder accounts increased by $6.3 million in the
third quarter of 2001 to $30.9 million, compared with $24.6 million for the same
period in 2000. This increase was primarily due to new business growth, offset
by favorable renewal rates on certain blocks of business. The average rate
credited to policyholders was 5.91% in the third quarter of 2001, compared with
5.89% for the same period in 2000.
Amortization of DPAC, excluding amortization related to investment gains
and losses, was $1.6 million in the third quarter of 2001, a decrease of $0.1
million from the same period in 2000. This decrease was primarily due to the
lower level of policy surrenders, partially offset by new business growth.
Realized and unrealized investment gains and losses were included in the gross
profits used to calculate the amortization of DPAC. This inclusion of investment
gains and losses resulted in additional amortization of $4.6 million for the
third quarter of 2001, compared to $3.1 million in the third quarter of 2000.
General and administrative expenses were $2.2 million in the third quarter
of 2001, compared with $2.0 million for the same period in 2000. This $0.2
million increase was primarily due to increases in employee compensation costs
and professional services. The annualized expense ratio for the third quarter of
2001, which is defined as general and administrative expenses divided by the
average book value of total cash and investments, was 0.37%, compared with 0.31%
for the same period in 2000.
First nine months of 2001 compared to first nine months of 2000
For the first nine months of 2001, the life insurance and annuities segment
contributed a loss before income taxes of $246.3 million to the Group's overall
loss before taxes, compared to income of $339.9 million for the same period in
2000. Net realized investment gains, including related amortization of DPAC,
decreased by $64.9 million, while the loss from the change in net unrealized
investment gains and losses, including related DPAC amortization, was $251.5
million, compared to a net gain of $269.4 million in the first nine months of
2000. The spread between investment income and interest credited to policyholder
accounts increased by $2.1 million; general and administrative expenses
decreased by $0.2 million; and amortization of DPAC, excluding amortization
related to investment gains and losses, increased by $1.0 million, each as
compared to the first nine months of 2000. Policy charges for the first nine
months of 2001 decreased by $1.4 million and other fee income decreased by $0.2
million, each as compared to the same period in 2000.
Premiums received for all life, annuity and guaranteed bond products were
$404.6 million for the first nine months of 2001, a decrease of 1.8% over the
premiums received for the same period in 2000. LPAL generated $66.5 million of
the total premiums received during the first nine months of 2001, compared to
$28.8 million for the same period in 2000. The increase in premiums reflected
LPAL's continuing success in increasing the number of financial intermediaries
who sell LPAL's expanded product range, which is ideally suited for risk averse
investors seeking income and capital preservation in volatile market conditions.
The twofold increase in 2001 reflects a full nine months of operations during
the period, compared to the initial period of operations in 2000. LPAL continued
to make substantial inroads in its sector of the guaranteed bond market in
Jersey and the U.K. The number of financial intermediaries signed up to sell
LPAL's products has increased dramatically since it began operations. LPAL has
been able to focus its efforts successfully on marketing and distribution
without the normal problems associated with startups, as LPAL utilizes the
17
administrative capability of its sister company, LPLA, in the U.S. LPLA
generated $338.1 million for the first nine months of 2001, a 11.8% decrease
over the premiums received in the same period in 2000. The $45.3 million
decrease in LPLA's premiums reflected the impact of a declining U.S. interest
rate environment, which led to reduced crediting rates and lower production in
the second and third quarters of 2001. In response to the changing interest rate
environment, LPLA began to shift its business mix toward traditional annuities,
which typically guarantee crediting rates for one year. Sales of traditional
annuities for the first nine months of 2001 increased to $206.2 million,
compared to $131.8 million for the same period in 2000. This increased
production resulted from the addition of new distributors that have been
attracted to LPLA because of its strong track record. Multi-year guaranteed rate
annuities were adversely affected by the declining U.S. interest rate
environment; sales of these products for the first nine months of 2001 decreased
to $111.9 million, compared to $223.6 million for the same period in 2000.
Actual premiums for all life, annuity and guaranteed bond products will be lower
for the full year of 2001 compared to 2000, reflecting a reduced interest rate
environment not experienced in nearly forty years.
Interest and dividend income on investments was $96.6 million for the first
nine months of 2001 as compared with $74.0 million in the same period in 2000.
This $22.6 million increase was primarily due to asset growth from new business,
offset by lower reinvestment rates.
Net investment losses, including related DPAC amortization, were $246.8
million for the first nine months of 2001, compared to net investment gains of
$339.0 million for the same period in 2000. Net investment losses for the first
nine months of 2001 were comprised of net realized investment gains of $15.7
million, a $251.5 million loss from the change in net unrealized gains and
losses on the listed equity securities held in the trading portfolio, and
related DPAC amortization of $11.0 million. The market value of the trading
portfolio decreased from $248.7 million as of December 31, 2000, to $23.2
million as of September 30, 2001. Additions to the trading portfolio during the
first nine months of 2001 of $60.8 million resulted from the $55.8 million
purchase of certain listed equity securities from the venture capital management
segment and $5.0 million due to the conversion of a private preferred stock to
common stock of a publicly traded company. LPLA and LPAL sold certain trading
positions during the first nine months of 2001, which resulted in net realized
gains of $42.0 million based on their aggregate original cost of $20.6 million.
Disposals of certain listed equity securities to the venture capital management
segment resulted in realized gains of $37.8 million based on their aggregate
cost of $14.2 million. These gains were partially offset by permanent impairment
writedowns of $70.3 million on six private placement securities and one
corporate bond. The life insurance and annuities segment also recorded $6.2
million in net realized gains from the sale of certain corporate bonds and other
investments during the first nine months of the year. All intersegmental
investment gains have been eliminated on the Group's consolidated income
statement.
Total invested assets increased to $2.3 billion as of September 30, 2001,
compared with $2.2 billion as of December 31, 2000. On total average invested
assets for the first nine months of 2001, the average annualized net return,
including both realized and unrealized investment gains and losses, was -8.41%,
compared with 29.31% for the same period in 2000. This decrease in annualized
net return resulted primarily from the decrease in net investment gains
discussed above.
Policy surrender and mortality charge income decreased by $1.4 million for
the first nine months of 2001 to $4.3 million, compared with $5.7 million for
the same period in 2000. Full policy surrenders totaled $80.2 million for the
first nine months of 2001, a $29.9 million decrease compared with the same
period in 2000. The majority of the surrenders occurred in older blocks of
business that were in the later stages of their surrender penalty period.
Annuity surrenders may increase as the portion of the business that can be
withdrawn by policyholders without incurring a surrender charge penalty grows.
Internal policy conversions accounted for $26.0 million of the full surrenders
for the first nine months of 2001, compared to $34.8 million for the same period
in 2000.
Interest credited on policyholder accounts increased by $20.5 million in
the first nine months of 2001 to $87.9 million, compared with $67.4 million for
the same period in 2000. This increase was primarily due to new business growth,
offset by lower renewal rates on certain blocks of business. The average rate
credited to policyholders was 6.02% in the first nine months of 2001, compared
with 5.78% for the same period in 2000.
18
Amortization of DPAC, excluding amortization related to investment gains
and losses, was $6.8 million for the first nine months of 2001, an increase of
$1.0 million from the same period in 2000. This increase was primarily due to
new business growth, particularly in the traditional annuity business discussed
above, partially offset by a decrease in surrenders. Realized and unrealized
investment gains and losses were included in the gross profits used to calculate
the amortization of DPAC. This inclusion of investment gains and losses resulted
in additional amortization of $11.0 million for the first nine months of 2001,
compared to $10.2 million for the same period in 2000.
General and administrative expenses were $6.9 million for the first nine
months of 2001, compared with $7.0 million for the same period in 2000. This
decrease was primarily due to expense reductions at LPLA for underwriting,
miscellaneous taxes and fees, and legal expenses, offset by increased expenses
at LPLA for technology consultants and state guaranty fund assessment costs, and
at LPAL for additional staffing. The annualized expense ratio for the first nine
months of 2001, which is defined as general and administrative expenses divided
by the average book value of total cash and investments, was 0.39%, compared
with 0.45% for the same period in 2000.
LPAL, which began its operations in the first quarter of 2000, sells a
single premium term life insurance bond designed to offer a yield higher than
bank deposits. LPAL offers a unique range of capital guaranteed at maturity
bonds, denominated in British pounds sterling, U.S. dollars and Euros. These
capital secure products appeal to a wide variety of investors in the Channel
Islands, U.K. and other permitted jurisdictions. The single premium investment,
the Guaranteed Return Bond, offers a guaranteed yield and a guaranteed return of
capital at maturity for either three or five years. The yield can be taken as
either a regular payment or as capital appreciation. Premiums totaling $119.3
million have been generated since inception through September 30, 2001. Sales
have been made directly to the public and through financial intermediaries in
the Channel Islands, the U.K. and the Isle of Man, with over 55% of the premiums
received from investors, or through financial intermediaries, in the Channel
Islands.
Financial Advisory Services
Certain information regarding the financial advisory services segment's
results of operations is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(In thousands)
Gross financial advisory services fees............................ $ 4,361 $ 5,692 $ 14,487 $ 17,456
Payouts due to independent advisors............................... (2,822) (4,174) (9,511) (12,579)
---------- ---------- ---------- ----------
Net financial advisory services fees.............................. 1,539 1,518 4,976 4,877
Operating expenses................................................ 2,610 2,841 7,854 8,006
---------- ---------- ---------- ----------
Income (loss) before income tax expense .......................... $ (1,071) $ (1,323) $ (2,878) $ (3,129)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Third quarter of 2001 compared to third quarter of 2000
The pre-tax loss from the financial advisory services segment decreased
from $1.3 million in the third quarter of 2000 to $1.1 million in the third
quarter of 2001, primarily due to an increase in net revenues resulting from new
client contracts, as well as a decrease in operating expenses.
Net asset management and consulting fee income increased from the prior
year period as a result of a shift toward higher margin managed and consulting
accounts, while income from brokerage and commission product sales decreased due
to a change in focus toward fee based (rather than commission based) services
19
and the difficult market conditions prevailing during the quarter. Assets under
management, consulting or administration increased from $1.9 billion as of
September 30, 2000 to $2.3 billion as of June 30, 2001 and then decreased to
$2.1 billion as of September 30, 2001, a result of the negative market
conditions.
Operating expenses decreased to $2.6 million in the third quarter of 2001,
compared with $2.8 million in the third quarter of 2000. This decline resulted
from a reduction in web development consulting costs, which were partially
offset by increased staff costs as staffing additions were made over the course
of the last year to support the institutional and Internet based initiatives
discussed below.
In late 1999, the Group decided to make the London Pacific Advisors
business the foundation for an Internet based initiative that could then be
migrated to other vertical markets in which the Group has expertise. This
initiative aims to deliver a full complement of consulting and back office
services to institutions and financial advisors through the Internet. An
overview of the project is available at www.lpadvisors.com.
The total investment in the project through September 30, 2001 was $3.1
million, including $0.2 million in the third quarter of 2001. Of this total,
$2.5 million has been capitalized as software development costs and is being
amortized (as a component of operating expenses) over five years.
The Internet based initiative has opened the door for marketing of
financial advisory services to institutions and large groups of advisors. To
date, service contracts have been signed with seven major institutions, and
additional contracts are currently under negotiation. The impact of these
contracts increased during the third quarter of 2001 as newly contracted
business came on line.
First nine months of 2001 compared to first nine months of 2000
The pre-tax loss from the financial advisory services segment decreased
from $3.1 million for the first nine months of 2000 to $2.9 million for the
first nine months of 2001, primarily due to an increase in net revenues
resulting from new client contracts, as well as a decrease in operating
expenses.
Net asset management and consulting fee income increased from the prior
year period as a result of a shift toward higher margin managed and consulting
accounts, while income from brokerage and commission product sales decreased due
to a change in focus toward fee based (rather than commission based) services
and the difficult market conditions prevailing during the first nine months of
2001. Assets under management, consulting or administration increased from $1.5
billion as of December 31, 2000 to $2.1 billion as of September 30, 2001. The
addition of assets from new institutional clients more than offset the decline
in managed assets resulting from the negative market conditions.
Operating expenses were $7.9 million for the first nine months of 2001,
which was a decrease from $8.0 million in operating expenses for the same period
in 2000. The mix of expenses changed as staffing additions were made over the
course of the last year to support the institutional and Internet based
initiatives discussed above.
The total investment in the Internet based project through September 30,
2001 was $3.1 million, including $0.4 million in the first nine months of 2001.
Of this total, $2.5 million has been capitalized as software development costs
and is being amortized (as a component of operating expenses) over five years;
amortization of these costs began in May 2001 and the amount amortized during
the first nine months of 2001 was $0.2 million.
20
Asset Management
Certain information regarding the asset management segment's results of
operations is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(In thousands)
Revenues ......................................................... $ 1,716 $ 2,153 $ 5,130 $ 5,912
Operating expenses ............................................... 1,128 1,350 4,028 4,343
---------- ---------- ---------- ----------
Income before income tax expense ................................. $ 588 $ 803 $ 1,102 $ 1,569
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Third quarter of 2001 compared to third quarter of 2000
Berkeley Capital Management ("BCM"), the Group's U.S. asset manager,
generates most of this segment's revenues and expenses. BCM's revenues increased
by $0.1 million to $1.5 million, which included $0.2 million of management fees
from the life insurance and annuities segment. Expenses decreased by $0.2
million to $1.1 million primarily due to an intensive expense control program
which was initiated during the second quarter of 2001, with its full benefits
realized during the third quarter.
Wrap accounts continued to be the source of the majority of BCM's revenues,
and the number of wrap accounts increased by 28% from September 30, 2000 to
September 30, 2001. However, the additional assets under management from this
increase in the number of BCM wrap accounts were more than offset by lower asset
values due to the general stock market decline during the period. Total wrap
assets were $934 million as of September 30, 2001, compared to $1,014 million as
of June 30, 2001, and $940 million as of September 30, 2000.
BCM's revenues during the third quarter of 2001 were primarily based upon
asset values as of the beginning of the quarter due to the billing pattern of
wrap program sponsors. Therefore, the increase in market values during the
second quarter of 2001 helped to raise BCM's revenues during the third quarter
of 2001.
Included in the revenues of the asset management segment for the third
quarter of 2001 were portfolio management fees from the life insurance and
annuities segment of $0.5 million, compared with $1.0 million for the third
quarter of 2000. These reduced fees resulted from the decline in the market
value of the listed equity securities portfolio held by the life insurance
operation which is managed by Berkeley International Limited ("BIL"), the
Group's asset management subsidiary in Jersey.
First nine months of 2001 compared to first nine months of 2000
The asset management segment's results for the first nine months of 2001
included improved results at BCM. Revenues at BCM increased by $0.3 million to
$4.3 million, which included $0.6 million of management fees from the life
insurance and annuities segment, an increase of $0.2 million over the prior
period. Expenses decreased by $0.3 million to $4.0 million for the first nine
months of 2001. The increased revenues and lower expenses combined to increase
BCM's contribution to segment income by $0.6 million for the first nine months
of 2001 compared to the same period in 2000.
Total wrap assets were $934 million as of September 30, 2001, compared to
$955 million as of December 31, 2000. The additional assets under management
from the 15% net increase in the number of wrap accounts over the first nine
months of 2001 were more than offset by lower asset values due to the general
stock market decline. Wrap assets under management in BCM's Value Equity style
were 10% higher at September 30, 2001 than at the beginning of the year as the
inflow of new account assets more than offset market value declines. This
increase was offset by the decline in the value of assets managed in BCM's
21
Growth Equity style, as the market became more risk averse. BCM's revenues from
its wrap accounts increased by $0.3 million during the first nine months of 2001
as compared to the same period in 2000, despite the decline in assets under
management, primarily due to the billing pattern discussed above.
BCM implemented an aggressive cost cutting program during the second
quarter of 2001, and the benefits will continue into the fourth quarter of 2001.
Other revenue in the asset management segment decreased by $0.2 million in
the first nine months of 2001, following the conclusion at the end of the third
quarter of 2000 of a development capital fund management contract handled by BIL
in Jersey.
Included in the revenues of the asset management segment for the first nine
months of 2001 were portfolio management fees from the life insurance and
annuities segment of $1.4 million, compared with $2.2 million for the first nine
months of 2000. These reduced fees primarily account for the overall decrease in
income in the asset management segment. The reduced fees resulted from the
decline in the market value of the listed equity securities portfolio held by
the life insurance operation which is managed by BIL.
Venture Capital Management
Certain information regarding the venture capital management segment's
results of operations is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(In thousands)
Revenues:
Management fees................................................... $ 2,462 $ 1,848 $ 7,239 $ 7,518
Investment income................................................. - 1 - 273
Net realized investment gains (1)................................. 444 11,691 37,724 20,331
Change in net unrealized investment gains and losses (1).......... (79,248) (9,935) (115,787) 10,528
---------- ---------- ---------- ----------
Total revenues and net investment gains........................... (76,342) 3,605 (70,824) 38,650
Operating expenses................................................ 2,883 1,361 7,387 6,834
---------- ---------- ---------- ----------
Income (loss) before income tax expense........................... $ (79,225) $ 2,244 $ (78,211) $ 31,816
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
<FN>
(1) Realized investment gains in the amount of $37,269,000 were recorded during
the first nine months of 2001 by the venture capital management segment, related
to intersegmental investment sales to the life insurance and annuities segment.
These realized investment gains were offset by a corresponding decrease in
unrealized investment gains for the same amount.
</FN>
Third quarter of 2001 compared to third quarter of 2000
Income before income taxes from the venture capital management segment
decreased from $2.2 million in the third quarter of 2000 to a loss of $79.2
million in the third quarter of 2001. This loss was primarily attributable to
the change in net unrealized gains and losses for the third quarter of 2001 on
the listed equity securities held in the trading portfolio. These positions in
listed equity securities were the result of private equity transactions in
technology companies.
The change in net unrealized gains and losses in the listed equity trading
portfolio during the third quarter of 2001 was a loss of $79.2 million. The
market value of the trading portfolio decreased from $102.1 million as of June
30, 2001, to $22.9 million as of September 30, 2001. The decline in value
reflected the general downward trend in the market for technology stocks during
the third quarter of 2001. Significant fluctuations in net unrealized gains and
losses in the listed equity trading portfolio are likely in future quarters,
reflecting equity market volatility, especially in the technology sector.
22
Net realized investment gains were $0.4 million in the third quarter of
2001, compared to $11.7 million in the third quarter of 2000. The realized gains
in the third quarter of 2000 were the result of partial sales of four listed
equity holdings; no such sales occurred in the third quarter of 2001.
Included in the revenues of the venture capital management segment for the
third quarter of 2001 are portfolio management fees from the life insurance and
annuities segment of $2.5 million, compared to $1.8 million in the third quarter
of 2000. Berkeley International Capital Corporation ("BICC") sources and
monitors private investments for LPLA, for which LPLA pays BICC management fees.
Operating expenses increased from $1.4 million in the third quarter of 2000
to $2.9 million in the third quarter of 2001. This $1.5 million increase was
primarily attributable to higher employee compensation.
First nine months of 2001 compared to first nine months of 2000
Income before income taxes from the venture capital management segment
decreased from $31.8 million in the first nine months of 2000 to a loss of $78.2
million in the first nine months of 2001. This loss was primarily attributable
to the change in net unrealized gains and losses for the first nine months of
2001 on the listed equity securities held in the trading portfolio. These
positions in listed equity securities were the result of private equity
transactions in technology companies.
The change in net unrealized gains and losses in the listed equity trading
portfolio during the first nine months of 2001 was a loss of $115.8 million. The
market value of the trading portfolio decreased from $105.2 million as of
December 31, 2000, to $22.9 million as of September 30, 2001. The decline in
value reflected the general downward trend in the market for technology stocks
during the first nine months of 2001. Additions to the trading portfolio during
the first nine months of 2001 of $52.0 million resulted from the purchase of
certain listed equity securities from the life insurance and annuities segment.
Disposals of certain listed equity securities to the life insurance and
annuities segment resulted in realized gains of $37.3 million based on their
aggregate cost of $18.5 million. All intersegmental investment gains have been
eliminated in the Group's consolidated income statement.
Included in the revenues of the venture capital management segment for the
first nine months of 2001 are portfolio management fees from the life insurance
and annuities segment of $7.2 million, compared to $5.6 million in the first
nine months of 2000. BICC sources and monitors private investments for LPLA, for
which LPLA pays BICC management fees. Total financings completed by BICC for the
insurance subsidiaries and for Berkeley International Capital Limited during the
first nine months of 2001 were $51.1 million, compared to $90.0 million during
the first nine months of 2000. This decreased level of activity in venture
capital placements reflects the general trend in the industry as a whole, as
venture capitalists adopt a wait and see policy in view of the current
difficulties being experienced by the market and the technology sector in
particular. Other non-recurring fees of $1.9 million were received in the first
nine months of 2000.
Operating expenses in the first nine months of 2001 were $7.4 million,
compared to $6.8 million in the first nine months of 2000. This $0.6 million
increase was primarily attributable to higher employee compensation.
Corporate and Other
Third quarter of 2001 compared to third quarter of 2000
Corporate expenses decreased by $0.8 million to $1.3 million in the third
quarter of 2001 as compared with the third quarter of 2000. This decrease was
primarily due to the compensation expense, relating to the extension of employee
share option grants, recorded in the third quarter of 2000, which was not
repeated in 2001.
Interest income earned by the Group (excluding the life insurance and
annuities segment) increased by $0.3 million to $0.5 million in the third
quarter of 2001 as compared with the third quarter of 2000,
23
primarily due to the increase in cash and cash equivalents held by the Group.
Interest expense incurred by the Group (excluding the life insurance and
annuities segment) increased by $0.3 million to $0.5 million in the third
quarter of 2001 as compared with the third quarter of 2000, primarily due to
higher bank borrowings during the third quarter of 2001.
First nine months of 2001 compared to first nine months of 2000
Overall, corporate expenses decreased by $0.2 million to $4.4 million in
the first nine months of 2001 as compared with the first nine months of 2000.
There was an increase in corporate expenses of $0.9 million, primarily due to
additional staffing at the corporate level and to the grant of employee share
options at an exercise price below fair market value on the date of the grant.
However, this was more than offset by an expense decrease of $1.1 million, which
was due to the compensation expense, relating to the extension of employee share
option grants, recorded in the first nine months of 2000, which was not repeated
in 2001.
Interest income earned by the Group (excluding the life insurance and
annuities segment) increased by $0.5 million to $1.7 million in the first nine
months of 2001 as compared with the first nine months of 2000, primarily due to
the increase in cash and cash equivalents held by the Group. Interest expense
incurred by the Group (excluding the life insurance and annuities segment)
increased by $1.7 million to $1.8 million in the first nine months of 2001 as
compared with the first nine months of 2000, primarily due to higher bank
borrowings during the first nine months of 2001.
Consolidated Income (Loss) Before Income Taxes
Third quarter of 2001 compared to third quarter of 2000
Consolidated income before income taxes decreased by $186.6 million, from
$21.1 million in the third quarter of 2000 to a loss of $165.5 million in the
third quarter of 2001. This loss was primarily attributable to the change in net
unrealized investment gains and losses, as well as net realized investment
losses.
Consolidated income before income tax expense for the full year 2001 and
future years may be volatile due to the Group's holdings of listed equity
securities primarily in the technology sector, which are marked to market with
changes in their market value recognized in the income statement for each
period. For more information on the possible effects of volatility in the prices
of equity securities, see Item 3 "Quantitative and Qualitative Disclosures About
Market Risk" below.
First nine months of 2001 compared to first nine months of 2000
The consolidated loss before income taxes for the first nine months of 2001
was $331.0 million, compared to income of $366.3 million for the first nine
months of 2000. The loss for the 2001 period was primarily attributable to the
change in net unrealized investment gains and losses, as well as net realized
investment losses.
Income Taxes
The Group is subject to taxation on its income in all countries in which it
operates based upon the taxable income arising in each country. However,
realized gains on certain investments are exempt from Jersey and Guernsey
taxation. The Group is subject to income tax in Jersey at a rate of 20%. In the
United States, the Group is subject to both federal and California taxes at
34-35% and 8.84%, respectively.
Third quarter of 2001 compared to third quarter of 2000
The effective tax credit rate, as a percentage of the loss before income
taxes for the third quarter of 2001, was 13%. This low effective tax credit rate
was primarily attributable to losses of $108.5 million contributed by the Jersey
and Guernsey operations during the first nine months of 2001, which primarily
consisted of unrealized investment losses for which no tax benefits will be
realized. Though income before tax
24
expense was $21.1 million in the third quarter of 2000, an income tax benefit of
$7.9 million resulted for the quarter. This was primarily attributable to the
$25.6 million loss from the U.S. life and annuity company which generated a $9.0
million tax benefit. Income of $46.7 million was contributed by the Jersey and
Guernsey operations during the third quarter of 2000, which primarily consisted
of untaxed investment gains.
First nine months of 2001 compared to first nine months of 2000
The effective tax credit rate, as a percentage of the loss before income
taxes for the first nine months of 2001, was 11%. This low effective tax credit
rate was primarily attributable to losses of $231.1 million contributed by the
Jersey and Guernsey operations during the first nine months of 2001, which
primarily consisted of unrealized investment losses for which no tax benefits
will be realized. The effective tax rate, as a percentage of income before
income taxes for the first nine months of 2000, was 14%. This effective rate
reflected the fact that only 40% of income for the first nine months of 2000 was
contributed by the U.S. life and annuity company, and that 61% of income for
that period represented net capital gains from the Jersey and Guernsey
operations (where capital gains are not taxed).
LIQUIDITY AND CAPITAL RESOURCES
On a consolidated basis as of September 30, 2001, cash and cash equivalents
of the Group, excluding the life insurance segment, amounted to $60.1 million.
As of September 30, 2001, the Group, excluding the life insurance and annuities
segment, also held $22.2 million of listed equity securities which could be sold
within a short period of time. Management believes that the balances of cash,
liquid resources and borrowings, should be sufficient to satisfy the Group's
anticipated financing requirements during the next twelve months.
Shareholders' equity decreased in the first nine months of 2001 by $301.3
million to $266.5 million, primarily due to the net loss for the period of
$295.3 million. The value of the Company's Ordinary Shares held by the employee
benefit trusts, valued at cost of $63.6 million, has been netted against
shareholders' equity. Upon exercise of employee share options, shareholders'
equity will be increased by the cost of the shares transferred to the employees
and the proceeds received will increase Group cash.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The nature of the Group's businesses exposes the Group to market risk.
Market risk is the risk of loss that may occur when changes in interest rates
and public equity prices adversely affect the value of invested assets.
Interest Rate Risk
The Group's life insurance and annuities segment is subject to risk from
interest rate fluctuations when there is a difference between the amount of
interest earning assets and the amount of interest bearing liabilities that are
prepaid, mature or are repriced in specific periods. LPLA and LPAL attempt to
minimize their exposure to interest rate fluctuations by managing the
characteristics of their assets and liabilities so that the effects of changes
are reasonably likely to be offset. LPLA's and LPAL's principal asset/liability
management goals are to achieve sufficient cash flows from invested assets to
fund contractual obligations, while maximizing investment returns. LPLA and LPAL
have not used derivative financial instruments to achieve their asset/liability
management goals. Exposure to interest rate risk is estimated by performing
sensitivity tests based on duration analysis of LPLA's investment and product
portfolios.
Duration is an option adjusted measure of the percentage change in the
market value of the assets or liabilities in response to a given change in
interest rates. For LPLA's universal life products and for all of LPAL's
products, given that policyholder liabilities are only $48.2 million and $122.4
million, respectively, interest rate risk is considered to be minimal. To
demonstrate the sensitivity of LPLA's assets and liabilities, tests performed on
LPLA's assets and liabilities indicated that, as of September 30, 2001, if
market
25
interest rates had suddenly increased by 100 basis points, the fair value of the
investment portfolio that is subject to interest rate risk, which was
approximately $1.9 billion, would have decreased by $82.0 million, compared with
a decrease of $84.4 million for the calculated market value of liabilities,
which was approximately $1.8 billion. Conversely, a sudden decrease of 100 basis
points would have increased the investment portfolio's fair value by $84.8
million, compared with an increase in the calculated market value of liabilities
of $125.9 million. These results depend upon certain key assumptions regarding
the behavior of interest sensitive cash flows. Although LPLA has attempted to
ensure that the assumptions used are based on the best available data, cash
flows cannot be forecasted with certainty, and can deviate materially from the
assumed results.
Equity Price Risk
The Group, including LPLA and LPAL, is exposed to equity price risk on the
listed equity securities held almost entirely in its trading portfolio. Changes
in the level or volatility of equity prices affect the value of the listed
equity securities. These changes in turn directly affect the Group's net income,
because the Group's holdings of listed equity securities are marked to market,
with changes in their market value recognized in the income statement for the
period in which the changes occur. These listed equity securities are primarily
in companies in the high technology industry sector, many of which are small
capitalization stocks.
If the market price of the Group's listed equity portfolio as of September
30, 2001 and 2000, which totaled $49.0 million and $754.1 million, respectively,
had abruptly increased or decreased by 50%, the market value of the listed
equity portfolio would have increased or decreased by $24.5 million and $377.1
million, respectively.
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the third quarter
of 2001.
26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LONDON PACIFIC GROUP LIMITED
(Registrant)
Date: November 5, 2001 By: /s/ Ian K. Whitehead
Ian K. Whitehead
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized
Officer of the Registrant)
27