=============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 __________________ FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2000 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition period from ____ to ______ Commission File Number 0-29788 SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. (Exact Name of Registrant as Specified in Its Charter) Cayman Islands Not Applicable (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) P.O. Box 10657 APO Grand Pavilion Commercial Centre 802 West Bay Road George Town, Grand Cayman Cayman Islands, British West Indies Not Applicable (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (345) 949-2800 Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of August 10, 2000, Registrant had 15,751,740 Ordinary Shares outstanding. ================================================================================ Table of Contents PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets - June 30, 2000 (Unaudited) and December 31, 1999 (note 1) 2 Condensed Consolidated Statements of Income - Three and Six Months Ended June 30, 2000 (Unaudited) and the Three and Six Months Ended June 30, 1999 (Unaudited) 3 Condensed Consolidated Statements of Comprehensive Income (Loss) - Three and Six Months Ended June 30, 2000 (Unaudited) and the Three and Six Months Ended June 30, 1999 (Unaudited) 4 Condensed Consolidated Statements of Shareholders' Equity - Six Months Ended June 30, 2000 (Unaudited) and the Six Months Ended June 30, 1999 (Unaudited) 5 Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2000 (Unaudited) and the Six Months Ended June 30, 1999 (Unaudited) 6 Notes to the Condensed Consolidated Financial Statements (Unaudited) 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANAYLSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19 PART II OTHER INFORMATION ITEM 1 through ITEM 4 20 ITEM 5 and ITEM 6 21 SIGNATURES 22 PART I FINANCIAL INFORMATION Item 1. Financial Statements Scottish Annuity & Life Holdings, Ltd. Condensed Consolidated Balance Sheets (Stated in United States Dollars) June 30, 2000 December 31, 1999 (unaudited) (note 1) ------------------------------------ ASSETS Fixed maturity investments $ 515,385,268 $ 546,806,744 Cash and cash equivalents 85,977,876 29,000,653 Receivables: Reinsurance 61,399,402 298,295 Risk fees 659,235 861,552 Due from investment brokers 106,337 109,891 Accrued interest 5,406,103 5,554,355 Policy loans 487,484 536,420 Deferred acquisition costs 16,267,320 1,919,528 Present value of inforce business 10,801,659 10,619,599 Other assets 744,678 740,116 Other intangible assets 7,876,057 200,000 Deferred tax benefit 2,588,077 2,218,077 Current income tax receivable 100,934 196,905 Net fixed assets and leasehold improvements 1,981,733 1,026,820 Segregated assets 284,043,173 256,545,532 ------------------------------------ Total assets $ 993,825,336 $ 856,634,487 ==================================== LIABILITIES Reserves for future policy benefits $ 474,462,796 $ 365,478,762 Accounts payable and accrued expenses 8,573,317 4,347,648 Due to related party 5,288,302 11,601,464 Segregated liabilities 284,043,173 256,545,532 ------------------------------------ Total liabilities 772,367,588 637,973,406 ------------------------------------ ------------------------------------ MINORITY INTEREST $ 2,752,916 - ------------------------------------ SHAREHOLDERS' EQUITY Share capital, par value $0.01 per share: Issued and fully paid: 15,803,340 ordinary shares as of June 30, 2000 and 16,046,740 as of December 31, 1999 158,033 160,467 Additional paid in capital 225,529,303 227,534,287 Accumulated other comprehensive loss - Unrealized depreciation on investments (16,447,571) (15,684,732) Retained earnings 9,465,067 6,651,059 ------------------------------------ Total shareholders' equity 218,704,832 218,661,081 ------------------------------------ Total liabilities and shareholders' equity $ 993,825,336 $ 856,634,487 ==================================== See notes to the condensed consolidated financial statements -2- Scottish Annuity & Life Holdings, Ltd. Condensed Consolidated Statements of Income (Stated in United States Dollars) Unaudited Three Months Three Months Six Months Six Months ended June ended June ended June ended June 30, 2000 30, 1999 30, 2000 30, 1999 ---------------------------------------------------------------- REVENUES Net premiums & reinsurance fees $ 3,586,930 $ - $ 3,619,303 $ - Investment income, net 11,331,710 4,124,756 21,096,848 7,446,008 Realized losses on securities, net (16,968) (518,911) (144,625) (1,482,824) Insurance administration and variable fees 539,483 250,496 989,055 476,280 ---------------------------------------------------------------- Total revenues 15,441,155 3,856,341 25,560,581 6,439,464 BENEFITS & EXPENSES Claims and other policy benefits 7,355,873 319,666 12,631,476 319,666 Acquisition costs and other insurance expenses 3,106,770 733,537 4,220,947 1,222,001 Operating expenses 3,027,808 612,330 4,667,176 1,089,863 ---------------------------------------------------------------- Total benefits & expenses 13,490,451 1,665,533 21,519,599 2,631,530 ---------------------------------------------------------------- Net income before provision for federal income taxes $ 1,950,704 $ 2,190,808 $ 4,040,982 $ 3,807,934 ---------------------------------------------------------------- PROVISION FOR FEDERAL INCOME TAXES Current - - - - Deferred (429,627) - (370,000) - ---------------------------------------------------------------- (429,627) - (370,000) - ---------------------------------------------------------------- Net income $ 2,380,331 $ 2,190,808 $ 4,410,982 $ 3,807,934 ================================================================ Earnings per share, basic and diluted $ 0.15 $ 0.12 $ 0.28 $ 0.21 ================================================================ Dividends declared per share $ 0.05 $ 0.05 $ 0.10 $ 0.05 ================================================================ See notes to the condensed consolidated financial statements -3- Scottish Annuity & Life Holdings, Ltd. Condensed Consolidated Statements of Comprehensive Income (Loss) (Stated in United States Dollars) Unaudited Three Months Three Months Six Months Six Months ended June ended June ended June ended June 30, 2000 30, 1999 30, 2000 30, 1999 ---------------------------------------------------------------- Net income $ 2,380,331 $ 2,190,808 $ 4,410,982 $ 3,807,934 Other comprehensive income (loss), net of taxes Unrealized depreciation on investments: Unrealized holding depreciation arising during the period (605,234) (5,822,824) (907,464) (9,509,978) Add: reclassification adjustment for losses included in net income 16,968 518,911 144,625 1,482,824 ---------------------------------------------------------------- Unrealized depreciation on investments (588,266) (5,303,913) (762,839) (8,027,154) ---------------------------------------------------------------- Comprehensive income (loss) $ 1,792,065 $ (3,113,105) $ 3,648,143 $ (4,219,220) ================================================================ See notes to the condensed consolidated financial statements -4- Scottish Annuity & Life Holdings, Ltd. Condensed Consolidated Statements of Shareholders' Equity (Stated in United States Dollars) Unaudited Six Months Six Months ended June ended June 30, 2000 30, 1999 ------------------------------ SHARE CAPITAL: Beginning of period $ 160,467 $ 185,684 Repurchase of shares (2,434) - Sales to direct investors - 80 ------------------------------ 158,033 185,764 ------------------------------ ADDITIONAL PAID-IN CAPITAL: Beginning of period 227,534,287 252,291,320 Repurchase of shares (2,016,872) - Sales to direct investors - 87,920 Issuance of equity options 11,888 75,488 ------------------------------ 225,529,303 252,454,728 ------------------------------ ACCUMULATED OTHER COMPREHENSIVE LOSS: Beginning of period (15,684,732) (853,146) Unrealized depreciation on investments (762,839) (8,027,153) ------------------------------ (16,447,571) (8,880,299) ------------------------------ RETAINED EARNINGS: Beginning of period 6,651,059 436,321 Net income 4,410,982 3,807,934 Dividends paid (1,596,974) (928,822) ------------------------------ 9,465,067 3,315,433 ------------------------------ TOTAL SHAREHOLDERS' EQUITY $ 218,704,832 $ 247,075,626 ============================== See notes to the condensed consolidated financial statements -5- Scottish Annuity & Life Holdings, Ltd. Condensed Consolidated Statements of Cash Flows (Stated in United States Dollars) Unaudited Six Months Six Months ended June ended June 30, 2000 30, 1999 ---------------------------------- OPERATING ACTIVITIES Net income $ 4,410,982 $ 3,807,934 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Net realized losses on securities 144,625 1,482,825 Non cash salaries and professional fees 11,888 163,488 Depreciation 162,239 27,633 Amortization of deferred acquisition costs 1,476,198 24,014 Amortization of PVIF 33,600 - Net change in policy benefit reserves 11,067,616 - Changes in assets and liabilities: Reinsurance receivables (61,101,107) (102,663,907) Risk fees 202,317 - Policy loans 48,936 - Other receivables 174,390 2,321,932 Deferred acquisition costs (15,823,990) (1,798,656) Present value of inforce business (215,660) - Other assets (4,562) 104,296 Deferred tax benefit (370,000) - Current income tax receivable 95,971 - Accounts payable and accrued expenses 4,223,169 (1,166,520) Due to related party (6,563,162) (326,900) --------------------------------- Net cash provided by (used in) operating activities (62,026,550) (98,023,861) --------------------------------- INVESTING ACTIVITIES Purchase of securities (82,010,108) (470,629,087) Proceeds on sales of securities 112,753,337 399,993,389 Acquisition of majority interest in subsidiary net of cash acquired 256,531 - Purchase of intangible assets (5,178,973) - Purchase of fixed assets & leasehold improvements (1,117,152) (579,964) --------------------------------- Net cash provided by (used in) investing activities 24,703,635 (71,215,662) --------------------------------- FINANCING ACTIVITIES Deposits to insurance accounts 114,563,046 104,027,579 Withdrawals from insurance accounts (16,646,628) - Net cost of repurchase of company stock (2,019,306) - Dividends paid (1,596,974) (928,822) --------------------------------- Net cash provided by financing activities 94,300,138 103,098,757 --------------------------------- NET CHANGE IN CASH AND CASH EQUIVALENTS 56,977,223 (66,140,766) Cash and cash equivalents, beginning of period 29,000,653 69,610,299 --------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 85,977,876 $ 3,469,533 ================================= See notes to the condensed consolidated financial statements -6- Scottish Annuity & Life Holdings, Ltd. Notes to the Condensed Consolidated Financial Statements (Unaudited) June 30, 2000 1. Basis of presentation Accounting Principles - The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") for and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results for the period are not necessarily indicative of the results to be expected for the entire year. The comparative consolidated balance sheet as of December 31, 1999 has been derived from the audited consolidated financial statements for the period ended December 31, 1999. For further information, refer to the consolidated financial statements and footnotes included in our annual report on Form 10-K for the period ended December 31, 1999. We have reclassified some figures from our 1999 financial statements to conform with our 2000 presentation. These reclassifications had no effect on net income or shareholders'equity as previously reported. 2. Minority Interest During the quarter, we acquired a majority holding in Scottish Crown Group (Bermuda) Ltd. No amount of the resulting minority interest is held in preferred shares and therefore, we have no dividend requirement in relation to this minority interest. -7- Scottish Annuity & Life Holdings, Ltd. Notes to the Condensed Consolidated Financial Statements (Unaudited) June 30, 2000 (continued) 3. Earnings per ordinary share Basic earnings per share ("EPS") excludes the dilutive effect of options and warrants. Diluted EPS includes the dilutive effect of these securities using the treasury stock method. The weighted-average number of shares is calculated by weighting how long the shares have been outstanding over the accounting period. The dilutive impact of our warrants and options is not material and therefore, has no effect on EPS. Three Months Three Months Six Months Six Months Ended Ended Ended Ended June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999 ---------------------------------------------------------------- Numerator: Net income $ 2,380,331 $ 2,190,808 $ 4,410,982 $ 3,807,934 Denominator: Denominator for basic earnings per share - Weighted average number of shares 15,986,037 18,576,440 16,016,388 18,574,981 Effect of dilutive securities- Stock options 16,741 - 12,761 - Denominator for dilutive earnings per share 16,002,778 18,576,440 16,029,149 18,574,981 Basic earnings per ordinary share $ 0.15 $ 0.12 $ 0.28 $ 0.21 Diluted earnings per share $ 0.15 $ 0.12 $ 0.28 $ 0.21 Actual shares outstanding 15,803,340 18,576,440 15,803,340 18,576,440 -8- Scottish Annuity & Life Holdings, Ltd. Notes to the Condensed Consolidated Financial Statements (Unaudited) June 30, 2000 (continued) 4. Segment Reporting Income from insurance operations is split into three lines of business: traditional reinsurance, non-traditional reinsurance (previously called reinsurance) and variable products. The segment reporting for the lines of business is as follows: Three Months Three Months Six Months Six Months ended June 30, ended June 30, ended June 30, ended June 30, 2000 1999 2000 1999 ---------------------------------------------------------------- REVENUES FROM EXTERNAL CUSTOMERS Variable products $ 539,483 $ 250,495 $ 989,055 $ 476,280 Traditional reinsurance 1,490,642 - 1,490,642 - Non-traditional reinsurance 11,380,399 612,372 18,623,945 934,872 Other 2,030,631 2,993,474 4,456,939 5,028,312 ---------------------------------------------------------------- Total $ 15,441,155 $ 3,856,341 $ 25,560,581 $ 6,439,464 ================================================================ NET INCOME BY SEGMENT Variable products $ 427,582 $ 199,115 $ 779,898 $ 353,778 Traditional reinsurance 484,621 - 139,957 - Non-traditional reinsurance 2,465,305 (389,451) 3,599,770 (250,066) Other (997,177) 2,381,144 (108,643) 3,704,222 ---------------------------------------------------------------- Total $ 2,380,331 $ 2,190,808 $ 4,410,982 $ 3,807,934 ================================================================ ASSETS BY SEGMENT June 30, December 31, 2000 1999 ------------------------------ Variable products $ 295,568,525 $ 268,174,719 Traditional reinsurance 5,616,327 - Non-traditional reinsurance 510,289,650 407,057,362 Other 182,350,834 181,402,406 ------------------------------ Total $ 993,825,336 $ 856,634,487 ============================== -9- Scottish Annuity & Life Holdings, Ltd. Notes to the Condensed Consolidated Financial Statements (Unaudited) June 30, 2000 (continued) 5. Stock Option Plans The Company has two stock option plans (the "1998 Plan" and the "1999 Plan") which allow us to grant non-statutory options, subject to certain restrictions, to certain eligible employees, non-employee Directors, advisors and consultants. The minimum exercise price of the options will be equal to the fair market value, as defined in the plans, of our ordinary shares at the date of grant. The term of the options shall not be more than ten years from the date of grant. Unless otherwise provided in the option agreement, the options shall become exercisable in three equal annual installments, commencing on the first anniversary of the grant date. Option activity under the 1998 Plan is as follows: Weighted average exercise Options available Number of price of options for grant options outstanding ------------------------------------------------------------ Balance May 12, 1998* - - - Authorized 1,600,000 - - Granted (1,070,000) 1,070,000 $ 15.0000 Exercised - - - Cancelled - - - ----------------- ---------------- --------------- Balance December 31, 1998 530,000 1,070,000 $ 15.0000 Authorized - - - Granted (545,600) 545,600 $ 15.0000 Exercised - - - Cancelled 233,333 (233,333) $ 15.0000 ----------------- ---------------- --------------- Balance December 31, 1999 217,733 1,382,267 $ 15.0000 Authorized - - - Granted (400,000) 400,000 (1) $ 7.7500 Exercised - - - Cancelled 500,000 (500,000)(2) $ 15.0000 ----------------- ---------------- --------------- Balance June 30, 2000 317,733 1,282,267 $ 12.7384 ================= ================ =============== * Date of incorporation (1) 400,000 options granted to Scott Willkomm upon execution of employment agreement. (2) 300,000 cancelled upon the resignation of Peter Presperin and 200,000 cancelled upon the resignation of Henryk Sulikowski. 75,000 options were granted to Larry Stern as of August 1, 2000 upon execution of employment agreement at an exercise price of $8.75. -10- Scottish Annuity & Life Holdings, Ltd. Notes to the Condensed Consolidated Financial Statements (Unaudited) June 30, 2000 (continued) 5. Stock Option Plans (continued) Option activity under the 1999 Plan is as follows: Weighted average exercise Options price available for Number of of options grant options outstanding ------------------------------------------------------------ Balance December 31, 1998 - - - Authorized 750,000 - - Granted (325,000) 325,000 $ 8.0625 Exercised - - - Cancelled - - - ------------- --------- --------------- Balance December 31, 1999 425,000 325,000 $ 8.0625 Authorized - - - Granted (62,500) 64,500 (1) $ 7.7240 Exercised - - - Cancelled 120,000 (120,000) (2) $ 8.0625 ------------- --------- --------------- Balance June 30, 2000 482,500 269,500 $ 7.9835 ============= ========= =============== (1) 62,500 options granted to new employees of Scottish Re (U.S.), Inc., having a term of 7 years and 2,000 shares granted to new employees of Scottish Annuity & Life Insurance Company (Cayman) Ltd. having a term of 10 years. (2) 120,000 options cancelled upon the resignation of Henryk Sulikowski. -11- Scottish Annuity & Life Holdings, Ltd. Notes to the Condensed Consolidated Financial Statements (Unaudited) June 30, 2000 (continued) 5. Stock Option Plans (continued) In addition to the Company's stock option plans, 750,000 options were authorized to be issued to new employees of Scottish Re (U.S.), Inc., our U.S. operations, by the Board of Directors at an exercise price to be determined on the date of the grant. The term of the options are seven years from the date of grant. The options are exercisable in three equal annual installments, commencing on the first anniversary of the grant date. Options have been granted to new employees of our U.S. operations, pursuant to a resolution of the Board of Directors, at an exercise price equal to the fair market value of our ordinary shares at the date of the grant. The options that have been granted are reflected in the chart below. Exercise price Options available Number of of options for grant options outstanding ------------------------------------------------------------------ Balance December 31, 1998 - - - Authorized 750,000 - - Granted (586,000) 586,000 $8.1117 Exercised - - - Cancelled - - - --------------- --------- ------------ Balance December 31, 1999 164,000 586,000 $8.1117 Authorized - - - Granted (157,000) 157,000 $8.2325 Exercised - - - Cancelled - - - --------------- --------- ------------ Balance June 30, 2000 7,000 743,000 $8.1367 =============== ========= ============ Summarizing the information above, the company has authorized a total of 3,100,000 options. Of those authorized, 2,369,767 have been granted, leaving 730,233 available for grant. The average exercise price of all options granted is $10.6286. -12- Scottish Annuity & Life Holdings, Ltd. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General Scottish Annuity & Life Holdings, Ltd. ("Scottish Holdings", "we", "us", "our", or "the Company") completed its initial public offering ("IPO") on November 30, 1998. Our principal assets include the direct or indirect ownership of Scottish Annuity & Life Insurance Company (Cayman) Ltd. ("Scottish Insurance"), Scottish Holdings, Inc., Scottish Holdings (Barbados) Limited, Scottish Re (U.S.), Inc. ("Scottish Re") (formerly Harbourton Reassurance, Inc.), The Scottish Annuity Company (Cayman) Ltd. ("Scottish Annuity"), and a 50.01% share of Scottish Crown Group (Bermuda) Limited ("Scottish Crown"). Scottish Insurance was formed in 1998 as an offshore company principally to provide reinsurance of life and annuity products and to issue customized variable life insurance products to high net worth individuals and families. Scottish Annuity provides customized variable annuity products to high net worth individuals and families. Scottish Re, a Delaware insurance company, which is licensed in 15 states and admitted as a reinsurer in an additional 13 states, provides us with a U.S. based platform to provide reinsurance products. Scottish Crown was formed to provide customized variable life and annuity insurance products to high net worth individuals and families. -13- Scottish Annuity & Life Holdings, Ltd. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Overview Three months ended June 30, 2000 compared to the three months ended June 30, - ---------------------------------------------------------------------------- 1999 - ---- Our net income for the second quarter of $2,380,331 or $0.15 per share was driven by revenues from our investment portfolio, reinsurance operations, and insurance administration fees. Net income, when compared to the second quarter of the prior year, changed primarily due to the following factors: (1) Net premiums and reinsurance fees increased from $0 to approximately $3.6 million as a result of new reinsurance transactions, (2) Net investment income increased from approximately $4.1 million to $11.3 million as a result of invested assets from reinsurance growing from $0 to over $450 million, (3) Net realized losses on securities in the second quarter of 1999 of approximately $519,000 were primarily due to portfolio restructuring, whereas no restructuring was done in the second quarter of 2000, (4) Insurance administration and variable life fees increased from approximately $250,000 to $540,000 due primarily to increases in variable account balances and the purchase of Scottish Annuity, resulting in 100% of the fee income reverting to us, (5) Claims and other policy benefits were approximately $320,000 in the first quarter 1999 and approximately $7.4 million in the second quarter 2000 as a result of new reinsurance treaties, (6) Acquisition costs and other insurance expenses increased from approximately $734,000 to $3.1 million and operating expenses increased from approximately $612,000 to $3.0 million as a result of increased reinsurance activity and the implementation of our U.S. reinsurance operations through Scottish Re. Of these expenses, $900,000 consisted of non-recurring employee expenses related to four employees, including severance, recruiting and relocation expenses and (7) As a result of losses on a tax basis in Scottish Re, the deferred tax asset increased by approximately $430,000. -14- Scottish Annuity & Life Holdings, Ltd. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Six months ended June 30, 2000 compared to the six months ended June 30, 1999 - ----------------------------------------------------------------------------- Our net income for the first six months of 2000 of $4,410,982 or $0.28 per share was driven by revenues from our investment portfolio, reinsurance operations, and insurance administration fees. Net income, when compared to first six months of the prior year, changed primarily due to the following factors: (1) Net premiums and reinsurance fees increased from $0 to approximately $3.6 million as a result of new reinsurance transactions, (2) Net investment income increased from approximately $7.4 to $21.1 million as a result of invested assets from reinsurance growing from $0 to over $450 million, (3) Net realized losses on securities in the first six months of 1999 of approximately $1.4 million were primarily due to portfolio restructuring, whereas no restructuring was done in the first six months of 2000, (4) Insurance administration and variable life fees increased from approximately $475,000 to $990,000 due primarily to increases in variable account balances and the purchase of Scottish Annuity, resulting in 100% of the fee income reverting to us, (5) Claims and other policy benefits were approximately $320,000 in the first six months of 1999 and approximately $12.6 million in the first six months of 2000 as a result of new reinsurance treaties and (6) Acquisition costs and other insurance expenses increased from approximately $1.2 to $4.2 million and operating expenses increased from approximately $1.1 to $4.6 million as a result of increased reinsurance activity and the implementation of our U.S. reinsurance operations through Scottish Re. Of these expenses, $900,000 consisted of non-recurring employee expenses related to four employees, including severance, recruiting and relocation expenses. Three months ended June 30, 2000 compared to the three months ended March 31, - ----------------------------------------------------------------------------- 2000 - ---- Our net income for the second quarter of 2000 of $2,380,331 or $0.15 per share increased from $2,030,651 or $0.13 per share in the first quarter of 2000. The increase in income was primarily due to the following factors: (1) Net premiums and reinsurance fees increased from approximately $32,000 to approximately $3.6 million as a result of new reinsurance transactions, (2) Net investment income increased from approximately $9.8 to $11.3 million as a result of invested assets from reinsurance growing from $350 to over $450 million, (3) Insurance administration and variable life fees increased from approximately $450,000 to $540,000 due to increases in variable account balances, (4) Claims and other policy benefits were approximately $5.2 million in the first quarter of 2000 and approximately $7.3 million in the second quarter of 2000 as a result of new reinsurance treaties and (6) Acquisition costs and other insurance expenses increased from approximately $1.1 to $3.1 million and operating expenses increased from approximately $1.6 to $3.0 million as a result of increased reinsurance transactions. Of the expenses in the second quarter, $900,000 consisted of non-recurring employee expenses related to four employees, including severance, recruiting and relocation expenses. -15- Scottish Annuity & Life Holdings, Ltd. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Investments Our investment portfolio is managed by two professional investment managers, General Re - New England Asset Management, Inc. and Prudential Investment Corporation. Our investment guidelines are designed to diversify the portfolio to maximize investment income while minimizing risk. At June 30, 2000, the portfolio had an average quality rating of AA, an average duration of 2.42 years and an average book yield of 6.96%. This compares with an average quality rating of AA, an average duration of 2.98 years and an average book yield of 6.79% respectively at December 31, 1999. A realized loss of $144,625 and net unrealized depreciation of $762,839 were recognized on investments during the first six months. A realized loss of $16,968 and net unrealized depreciation of $588,266 were recognized on investments during the second quarter. Insurance Operations Our business consists of three lines of business: traditional, non-traditional and variable products. Our results reflected revenues from these lines of business. Since January 1, 2000, in the non-traditional line, we closed on three reinsurance transactions, that have generated approximately $100 million of assumed reserves and are expected to generate an additional $50 million of assumed reserves by year end 2000. As these transactions represent the assumption of existing reserves for past sales of the ceding company, we account for the initial assumption on the balance sheet only. Future operations will include the renewal premiums, benefits and underwriting expense including the amortization of the acquisition costs related to the initial assumptions. One treaty was effective February 15th, the others were effective April 1, 2000. In the traditional life line in the second quarter, we collected approximately $1.5 million of premium on traditional life reinsurance. As of June 30, 2000 we reinsure approximately $1 billion of life coverage on 25,000 lives. The average benefit coverage per life is $40,000 and the maximum retention on any one life is $1 million. Since the beginning of the second quarter, we have signed 5 binders for traditional life reinsurance. These binders and the closed transactions are expected to create approximately $10 billion of life reinsurance volume and $14 million of collected premium during 2000. However, no assurance can be given that these expectations can be achieved. In the variable products line, we received $9 million of deposits from variable life sales in the quarter, and subsequently have received an additional $16 million of deposits. In addition, Scottish Insurance entered into a joint venture with Crown Capital Investors, LLC, a Delaware limited liability company ("Crown") to form Scottish Crown. Scottish Insurance paid $5.25 million for its share of Scottish Crown. Scottish Crown will provide customized variable life and annuity insurance products to high net worth individuals and families. Scottish Crown owns two Bermuda licensed insurance companies, and has a 10 year exclusive distribution agreement with Crown World Services Ltd., a Bermuda company. -16- Scottish Annuity & Life Holdings, Ltd. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Capital Resources and Liquidity At June 30, 2000, total capitalization was $218,947,132. We have no material commitments for capital expenditures and do not anticipate incurring material indebtedness other than letters of credit or lines of credit, which may be required in the ordinary course of our reinsurance business. During the first six months of 2000, we paid a dividend of $0.05 per share, or $802,337 to shareholders of record as of March 6, 2000, and a dividend of $0.05 per share, or $794,637 to shareholders of record as of June 6, 2000. Through June 30, 2000 we repurchased 243,400 shares for $2,026,204 (average price of $8.33 per share), and through August 10, 2000 we have repurchased an additional 51,600 shares, resulting in an aggregate repurchase to date of 295,000 shares for $2,487,462 (average price of $8.43 per share) under a program authorized by the Board on April 6, 2000 to repurchase up to $20 million of outstanding shares. We expect that our cash and investments, together with cash generated from our businesses, will provide sufficient sources of liquidity and capital to meet our needs for the next several years. In addition, we have access to a combined $70 million through available lines and letters of credit, of which approximately $15.5 million is currently being utilized under a letter of credit in support of our non-traditional reinsurance business. -17- Scottish Annuity & Life Holdings, Ltd. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Forward Looking Statements Some of the statements contained in this report are not historical facts and are forward-looking within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results to differ materially from the forward-looking statements. When used, the words "may", "will", "expect", "anticipate", "continue", "estimate", "project", "plan", "intend" and similar expressions identify forward-looking statements. These forward-looking statements involve risks and uncertainties including, but not limited to, the following: our ability to execute the business plan; changes in the general economic conditions including the performance of the financial markets and interest rates; changes in insurance regulations or taxes; changes in rating agency policy; the loss of key executives; trends in the insurance and reinsurance industries; government regulations; trends that may affect our financial condition or results of operations; and the declaration and payment of dividends. Potential investors are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. Actual results may differ materially from those included within the forward-looking statements as a result of various factors. Factors that could cause or contribute to such differences include, but are not limited to, those described under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" and under the heading "Risk Factors of Investing in our Ordinary Shares" set forth in our Annual Report on Form 10-K filed with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statement to reflect actual results or changes in or additions to the factors affecting such forward-looking statements. -18- Scottish Annuity & Life Holdings, Ltd. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Risk Factors of Investing in Our Ordinary Shares Investing in our Ordinary Shares involves a high degree of risk. Prior to investing in the Ordinary Shares, potential investors should consider carefully the risk factors set forth in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, in addition to the other information set forth in this Form 10-Q. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes since December 31, 1999. Please refer to "Item 7A: Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K. -19- PART II OTHER INFORMATION Item 1. Legal Proceedings The Company is not currently involved in any litigation or arbitration. Item 2. Changes in Securities and Use of Proceeds Not applicable. Item 3. Default Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Securities Holders The 2000 Annual Meeting of Shareholders of the Company was held on June 7, 2000. The following items of business were presented to the shareholders of the Company (the "Shareholders"): Election of Directors The two directors were elected as proposed in the Proxy Statement dated May 1, 2000 under the caption titled "Proposal for Election of Directors" as follows: Total Vote Total Vote For Withheld From Name Each Director Each Director - ---- ------------- ------------- Michael Austin 11,683,497 288,700 Scott E. Willkomm 11,685,197 287,000 Ratification of Independent Auditors The selection by the Board of Directors, upon the recommendation of the Audit Committee, of Ernst & Young as the independent auditors for the Company for the fiscal year ending December 31, 2000 was ratified by the Shareholders by a vote of 11,711,442 for ratification, 257,755 against, and 3,000 abstaining. -20- Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. Except as otherwise indicated, the following Exhibits are filed herewith and made a part hereof: Exhibit Number Description of Document - ------ ----------------------- 27.1 Financial Data Schedule (b) Reports on Form 8-K (1) The Company filed a Report on Form 8-K on January 18, 2000 to report that the Company acquired all of the issued and outstanding shares of common stock of The Scottish Annuity Company (Cayman) Ltd. (2) The Company filed a Report on Form 8-K/A on March 20, 2000 to file the financial statements of The Scottish Annuity Company (Cayman) Ltd. and the Pro Forma Combined Condensed Financial Statements. -21- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. Date: August 10, 2000 By: /s/ Michael C. French ---------------------------------------------- Michael C. French Chief Executive Officer Date: August 10, 2000 By: /s/ Bruce J. Crozier ---------------------------------------------- Bruce J. Crozier Senior Vice President-Chief Financial Officer and Secretary (Principal Financial Officer and Principal Accounting Officer) -22- EXHIBIT INDEX EXHIBIT SEQUENTIAL NUMBER PAGE NO. DESCRIPTION OF DOCUMENT - -------- ----------------------- 27.1 Financial Data Schedule -23-