UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 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 November 1, 2000, Registrant had 15,628,240 Ordinary Shares outstanding.
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - September 30, 2000 (Unaudited) and December 31, 1999 1
Unaudited Consolidated Statements of Income - Three and Nine Months ended September 30, 2000
and 1999 2
Unaudited Consolidated Statements of Comprehensive Income (Loss) - Three and Nine Months
ended September 30, 2000 and 1999 3
Unaudited Consolidated Statements of Shareholders' Equity - Nine Months ended September 30, 2000
and 1999 4
Unaudited Consolidated Statements of Cash Flows - Nine Months ended September 30, 2000
and 1999 5
Notes to Unaudited Consolidated Financial Statements at September 30, 2000 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19
PART II OTHER INFORMATION
ITEM 1 through ITEM 6 20
SIGNATURES 21
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Scottish Annuity & Life Holdings, Ltd.
Consolidated Balance Sheets
(Expressed in United States Dollars)
September 30, December 31,
2000 1999
(unaudited)
------------------------------------
ASSETS
Fixed maturity investments, available for sale, at fair
value (Amortized cost $545,976,486; 1999 - $562,491,476) $ 534,673,726 $546,806,744
Cash and cash equivalents 105,103,195 29,000,653
Funds withheld at interest 39,130,671 -
------------------------------------
Total investments 678,907,592 575,807,397
Receivables:
Accrued interest 5,597,593 5,554,355
Risk fees 720,379 861,552
Policy loans 457,344 536,420
Reinsurance - 298,295
Due from investment brokers - 109,891
Deferred acquisition costs 19,672,742 1,919,528
Present value of inforce business 10,449,600 10,619,599
Other intangible assets 7,836,812 200,000
Deferred tax benefit 2,820,024 2,218,077
Fixed assets 2,375,629 1,026,820
Other assets 689,240 740,116
Due from related party 180,505 -
Current income tax receivable 100,934 196,905
Segregated assets 405,584,564 256,545,532
------------------------------------
Total assets $1,135,392,958 $856,634,487
====================================
LIABILITIES
Reserves for future policy benefits $ 480,064,958 $365,478,762
Due to investment brokers 11,859,588 -
Accounts payable and accrued expenses 8,099,854 4,347,648
Reinsurance payables 753,871 -
Due to related party - 11,601,464
Segregated liabilities 405,584,564 256,545,532
------------------------------------
Total liabilities 906,362,835 637,973,406
------------------------------------
MINORITY INTEREST 2,651,231 -
------------------------------------
SHAREHOLDERS' EQUITY
Share capital, par value $0.01 per share:
Issued and fully paid: 15,671,940 ordinary shares
(1999 - 16,046,740 )
(Excludes 2,904,500 held in Treasury; 1999 - 2,529,700 ) 156,719 160,467
Additional paid in capital 224,318,364 227,534,287
Accumulated other comprehensive loss -
Unrealized depreciation on investments (11,302,760) (15,684,732)
Retained earnings 13,206,569 6,651,059
------------------------------------
Total shareholders' equity 226,378,892 218,661,081
------------------------------------
Total liabilities and shareholders' equity $1,135,392,958 $856,634,487
====================================
See Accompanying Notes to Unaudited Consolidated Financial Statements
1
Scottish Annuity & Life Holdings, Ltd.
Unaudited Consolidated Statements of Income
(Expressed in United States Dollars)
Three Months Three Months Nine Months Nine Months
ended ended ended ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
----------------------------------------------------------------------------------
REVENUES
Premiums earned $ 6,277,219 $ - $ 9,891,259 $ -
Fee income 553,147 267,999 1,547,465 744,279
Investment income, net 11,965,074 7,145,693 33,061,922 14,591,701
Realized losses (115,080) (1,014,444) (259,705) (2,497,268)
----------------------------------------------------------------------------------
Total revenues 18,680,360 6,399,248 44,240,941 12,838,712
----------------------------------------------------------------------------------
BENEFITS & EXPENSES
Claims and other policy benefits 3,412,361 869,181 8,165,062 1,188,846
Interest credited to interest sensitive
contract liabilities 4,746,915 1,791,484 12,625,690 1,791,484
Acquisition costs and other insurance
expenses 3,269,345 668,498 7,490,291 1,890,499
Operating expenses 2,811,417 804,984 7,478,592 1,894,848
----------------------------------------------------------------------------------
Total benefits & expenses 14,240,038 4,134,147 35,759,635 6,765,677
----------------------------------------------------------------------------------
Net income before income taxes
and minority interest 4,440,322 2,265,101 8,481,306 6,073,035
Income taxes 38,000 - (332,000) -
----------------------------------------------------------------------------------
Net income before minority
interest 4,402,322 2,265,101 8,813,306 6,073,035
Minority interest (124,745) - (124,745) -
----------------------------------------------------------------------------------
Net income $ 4,527,067 $ 2,265,101 $ 8,938,051 $ 6,073,035
==================================================================================
Earnings per share
Basic $ 0.29 $ 0.12 $ 0.56 $ 0.33
==================================================================================
Diluted $ 0.28 $ 0.12 $ 0.56 $ 0.33
==================================================================================
Dividends per share $ 0.05 $ 0.05 $ 0.15 $ 0.10
==================================================================================
Weighted average number of shares
outstanding:
Basic 15,742,145 18,315,351 15,924,307 18,487,487
==================================================================================
Diluted 15,913,452 18,315,351 15,987,319 18,487,487
==================================================================================
See Accompanying Notes to Unaudited Consolidated Financial Statements
2
Scottish Annuity & Life Holdings, Ltd.
Unaudited Consolidated Statements of Comprehensive Income (Loss)
(Expressed in United States Dollars)
Three Months Three Months Nine Months Nine Months
ended ended ended ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 4,527,067 $ 2,265,101 $ 8,938,051 $ 6,073,035
Other comprehensive income (loss),
net of taxes
Unrealized appreciation (depreciation) on
investments:
Unrealized holding appreciation (depreciation)
arising during the period 5,029,731 (2,344,704) 4,122,267 (11,854,680)
Add: reclassification adjustment 115,080 1,014,444 259,705 2,497,268
for losses included in net income
-----------------------------------------------------------------------------
Unrealized appreciation (depreciation) on 5,144,811 (1,330,260) 4,381,972 (9,357,412)
investments
-----------------------------------------------------------------------------
Comprehensive income (loss) $ 9,671,878 $ 934,841 $13,320,023 $ (3,284,377)
=============================================================================
See Accompanying Notes to Unaudited Consolidated Financial Statements
3
Scottish Annuity & Life Holdings, Ltd.
Unaudited Consolidated Statements of Shareholders' Equity
(Expressed in United States Dollars)
Nine Months ended Nine Months ended
September 30, 2000 September 30, 1999
- ---------------------------------------------------------------------------------------------------
SHARE CAPITAL:
Beginning of period $ 160,467 $ 185,684
Repurchase of shares (3,748) (14,878)
Sales to direct investors - 80
-------------------------------------
156,719 170,886
-------------------------------------
ADDITIONAL PAID IN CAPITAL:
Beginning of period 227,534,287 252,291,320
Repurchase of shares (3,236,727) (14,863,492)
Sales to direct investors - 87,920
Issuance of equity options 20,804 102,236
-------------------------------------
224,318,364 237,617,984
-------------------------------------
ACCUMULATED OTHER COMPREHENSIVE LOSS:
Beginning of period (15,684,732) (853,146)
Unrealized appreciation (depreciation) on investments 4,381,972 (9,357,412)
-------------------------------------
(11,302,760) (10,210,558)
-------------------------------------
RETAINED EARNINGS:
Beginning of period 6,651,059 436,321
Net income 8,938,051 6,073,035
Dividends paid (2,382,541) (1,857,644)
-------------------------------------
13,206,569 4,651,712
-------------------------------------
TOTAL SHAREHOLDERS' EQUITY $226,378,892 $232,230,024
=====================================
See Accompanying Notes to Unaudited Consolidated Financial Statements
4
Scottish Annuity & Life Holdings, Ltd.
Unaudited Consolidated Statements of Cash Flows
(Expressed in United States Dollars)
Nine Months Nine Months
ended ended
September 30, September 30,
2000 1999
----------------------------------
OPERATING ACTIVITIES
Net income $ 8,938,051 $ 6,073,035
Adjustments to reconcile net income to net cash provided by operating
activities:
Net realized losses on securities 259,705 2,497,268
Non cash salaries and professional fees 20,804 102,236
Minority interest (124,745) -
Depreciation 295,925 54,679
Amortization of deferred acquisition costs 3,917,792 74,197
Amortization of PVIF 50,400 -
Amortization of other intangible assets 207,452 -
Net change in policy benefit reserves 16,012,138 3,179,907
Changes in assets and liabilities:
Reinsurance receivables and payables 1,052,166 (13,690,867)
Risk fees 141,173 -
Policy loans 79,076 -
Accrued interest (43,238) 2,040,236
Deferred acquisition costs (8,883,859) (2,161,620)
Present value of inforce business 119,599 -
Other assets 50,876 189,397
Deferred tax benefit (601,947) -
Current income tax receivable 95,971 -
Accounts payable and accrued expenses 3,722,199 5,004,802
Due to related party (195,000) (326,900)
-----------------------------------
Net cash provided by operating activities 25,114,538 3,036,370
-----------------------------------
INVESTING ACTIVITIES
Purchase of securities (157,658,202) (588,858,254)
Proceeds on sales of securities 173,913,487 313,877,931
Due to / from investment broker 11,969,479 -
Acquisition of majority interest in subsidiary net of cash acquired 258,078 -
Due to related party re purchase of subsidiary (11,562,162) -
Purchase of intangible assets (5,321,166) -
Purchase of fixed assets (1,644,734) (875,990)
-----------------------------------
Net cash provided by (used in) investing activities 9,954,780 (275,856,313)
-----------------------------------
FINANCING ACTIVITIES
Deposits to insurance accounts 144,098,017 302,579,171
Withdrawals from insurance accounts (45,523,959) (22,543,881)
Purchase of deferred acquisition costs (12,787,147) (75,036)
Funds withheld at interest (39,130,671) -
Net proceeds from sale of company stock - 88,000
Net cost of repurchase of company stock (3,240,475) (14,878,370)
Dividends paid (2,382,541) (1,857,644)
-----------------------------------
Net cash provided by financing activities 41,033,224 263,312,240
-----------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 76,102,542 (9,507,703)
Cash and cash equivalents, beginning of period 29,000,653 69,610,299
-----------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 105,103,195 $ 60,102,596
===================================
See Accompanying Notes to Unaudited Consolidated Financial Statements
5
Scottish Annuity & Life Holdings, Ltd.
Notes to Unaudited Consolidated Financial Statements
September 30, 2000
1. Basis of presentation
Accounting Principles - The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles in the United States of America ("GAAP") 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.
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
to our 2000 presentation. These reclassifications had no effect on net income or
shareholders' equity as previously reported.
2. Minority interest
In June 2000, 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 requirements in relation to this minority
interest.
3. Deferred acquisition costs
The change in deferred acquisition costs ("DAC") is as follows:
Nine Months Nine Months
ended September ended September
30, 2000 30, 1999
-----------------------------------------
Balance January 1 $ 1,919,528 $ -
Purchased DAC (1) 12,787,147 75,036
Expenses deferred 8,883,859 2,161,620
Amortization expense (3,917,792) (74,197)
--------------------------------------
Balance September 30 $19,672,742 $ 2,162,459
======================================
(1) Includes ceding commissions, broker commissions and excise taxes.
6
Scottish Annuity & Life Holdings, Ltd.
Notes to Unaudited Consolidated Financial Statements
September 30, 2000
4. Earnings per ordinary share
Basic earnings per share ("EPS") exclude 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.
Three Months Three Months Nine Months Nine Months
ended September ended September ended September ended September
30, 2000 30, 1999 30, 2000 30, 1999
----------------------------------------------------------------------------
Numerator:
Net income $ 4,527,067 $ 2,265,101 $ 8,938,051 $ 6,073,035
----------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share -
Weighted average number of shares 15,742,145 18,315,351 15,924,307 18,487,487
Effect of dilutive securities -
Stock Options 171,307 - 63,012 -
----------------------------------------------------------------------------
Denominator for dilutive earnings
per share 15,913,452 18,315,351 15,987,319 18,487,487
----------------------------------------------------------------------------
Basic earnings per share $ 0.29 $ 0.12 $ 0.56 $ 0.33
============================================================================
Diluted earnings per share $ 0.28 $ 0.12 $ 0.56 $ 0.33
============================================================================
7
Scottish Annuity & Life Holdings, Ltd.
Notes to Unaudited Consolidated Financial Statements
September 30, 2000
5. Segment Reporting
Income from insurance operations is split into three segments: U.S. reinsurance,
Non U.S. reinsurance and Wealth management (previously named traditional
reinsurance, non-traditional reinsurance and variable products).
The segment reporting for the lines of business is as follows:
Three Months Three Months Nine Months Nine Months
ended ended ended ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
---------------------------------------------------------------------------------
REVENUES
U.S. reinsurance $ 5,098,960 $ - $10,256,841 $ -
Non U.S. reinsurance 10,323,064 3,659,163 24,968,241 4,305,695
Wealth management 555,397 267,999 1,555,005 744,279
Other (1) 2,702,939 2,472,086 7,460,854 7,788,738
-----------------------------------------------------------------------------------
Total $18,680,360 $6,399,248 $44,240,941 $12,838,712
===================================================================================
NET INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST
U.S. reinsurance $ 212,994 $ - $ 120,078 $ -
Non U.S. reinsurance 2,265,364 8,006 2,721,384 (1,323,073)
Wealth management 17,609 179,451 405,294 535,846
Other (2) 1,944,355 2,077,644 5,234,550 6,860,262
-----------------------------------------------------------------------------------
Total $ 4,440,322 $2,265,101 $ 8,481,306 $ 6,073,035
===================================================================================
September 30, December 31,
2000 1999
------------------------------------
ASSETS BY SEGMENT
U.S. reinsurance $ 126,627,102 $111,387,649
Non U.S. reinsurance 463,959,826 316,724,151
Wealth management 425,890,585 257,664,994
Other 118,915,445 170,857,693
-----------------------------------
Total $1,135,392,958 $856,634,487
====================================
(1) Includes investment income on unallocated capital and realized gains and
losses.
(2) Includes corporate expenses.
8
Scottish Annuity & Life Holdings, Ltd.
Notes to Unaudited Consolidated Financial Statements
September 30, 2000
6. 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
Options average exercise
available for Number of price of options
grant options outstanding
----------------------------------------------------------
Balance May 12, 1998 (1) - - -
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 (2) (556,000) 556,000 8.0555
Exercised - - -
Cancelled (3) 538,333 (538,333) 15.0000
--------------------------------------------------------
Balance September 30, 2000 200,066 1,399,934 $12.2419
========================================================
(1) Date of incorporation.
(2) Includes options granted to new employees and Directors annual grant.
(3) Options cancelled upon the resignation of employees.
9
Scottish Annuity & Life Holdings, Ltd.
Notes to Unaudited Consolidated Financial Statements
September 30, 2000
Option activity under the 1999 Plan is as follows:
Weighted
Options average exercise
available for Number of price 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 (1) (114,500) 114,500 8.3881
Exercised - - -
Cancelled (2) 162,500 (162,500) 8.0421
-----------------------------------------------------------
Balance September 30, 2000 473,000 277,000 $8.2090
===========================================================
(1) Options granted to new employees.
(2) Options cancelled upon the resignation of employees.
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.
Weighted
Options average exercise
available for Number of price of options
grant options outstanding
---------------------------------------------------------------
Balance December 31, 1998 - - -
Authorized 750,000 - -
Granted (573,000) 573,000 $8.0898
Exercised - - -
Cancelled - - -
---------------------------------------------------------------
Balance December 31, 1999 177,000 573,000 8.0898
Authorized - - -
Granted (1) (235,000) 235,000 8.4066
Exercised - - -
Cancelled (2) 75,000 (75,000) 8.0625
---------------------------------------------------------------
Balance September 30, 2000 17,000 733,000 $8.1941
===============================================================
(1) Options granted to new employees.
(2) Options cancelled upon the resignation of employees.
10
Scottish Annuity & Life Holdings, Ltd.
Notes to Unaudited Consolidated Financial Statements
September 30, 2000
Summarizing the information above, the Company has authorized a total of
3,100,000 options. Of those authorized, 2,409,934 have been granted, leaving
690,066 available for grant. The average exercise price of all options granted
is $10.5472.
Weighted
Options average exercise
available for Number of price of options
grant options outstanding
---------------------------------------------------------
Balance May 12, 1998 (1) - - -
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 1,500,000 - -
Granted (1,443,600) 1,443,600 10.6953
Exercised - - -
Cancelled 233,333 (233,333) 15.0000
--------------------------------------------------------
Balance December 31, 1999 819,733 2,280,267 12.2748
Authorized - - -
Granted (2) (905,500) 905,500 8.1887
Exercised - - -
Cancelled (3) 775,833 (775,833) 12.8720
--------------------------------------------------------
Balance September 30, 2000 690,066 2,409,934 $10.5472
========================================================
(1) Date of incorporation.
(2) Includes options granted to new employees and Directors annual grant.
(3) Options cancelled upon the resignation of employees.
11
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 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 14 states and admitted as a reinsurer in an
additional 19 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.
Earnings per share
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
Net income $4,527,067 $2,265,101 $8,938,051 $6,073,035
========== ========== ========== ==========
Basic EPS $ 0.29 $ 0.12 $ 0.56 $ 0.33
========== ========== ========== ==========
Diluted EPS $ 0.28 $ 0.12 $ 0.56 $ 0.33
========== ========== ========== ==========
Our Net income for the third quarter of $4.5 million or $0.29 per share was a
142% increase over the same quarter in 1999 on a per share basis. Net income for
the nine months of $8.9 million or $0.56 per share was a 70% increase over the
same period in 1999 on a per share basis. These increases are primarily due to
increased income from our reinsurance and wealth management operations, our
investment portfolio, reductions in realized losses on securities and our
repurchase of ordinary shares during the year.
Excluding the effect of realized losses on securities our earnings would be as
follows:
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
Net income $4,642,147 $3,279,545 $9,197,756 $8,570,303
========== ========== ========== ==========
Basic & Diluted EPS $ 0.29 $ 0.18 $ 0.58 $ 0.46
========== ========== ========== ==========
12
Revenues
Revenues have increased significantly in the year to date due to growth in our
Non U.S. reinsurance operations, our acquisition of Scottish Re which is writing
reinsurance treaties for domestic insurance companies, new reinsurance treaties
written by our Cayman operation and a large increase in investment income due to
the increase in our investment portfolio as a result of these new reinsurance
agreements.
Revenue is made up as follows:
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
Premiums earned $ 6,277,219 $ - $ 9,891,259 $ -
Fee income 553,147 267,999 1,547,465 744,279
Investment income, net 11,965,074 7,145,693 33,061,922 14,591,701
Realized losses (115,080) (1,014,444) (259,705) (2,497,268)
----------------------------------------------------------------------------
Total Revenues $18,680,360 $ 6,399,248 $44,240,941 $12,838,712
============================================================================
Premiums earned
Premiums earned are a result of new reinsurance treaties written by Scottish Re,
premiums from a block of Accident & Health business previously written by
Scottish Re before we acquired the company and reinsurance treaties written by
our international company Scottish Insurance. As of September 30, 2000 we
reinsure approximately $3 billion of life coverage on 100,000 lives. The
average benefit coverage per life is $30,000 and the maximum retention on any
one life is $1 million.
The split of premium income from these segments is as follows:
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
U.S. reinsurance $3,272,584 $ - $4,747,076 $ -
Non U.S. reinsurance 3,004,635 - 5,144,183 -
--------------------------------------------------------------------
Total $6,277,219 $ - $9,891,259 $ -
====================================================================
We anticipate a steady flow of premiums in future quarters from these new
treaties. During the third quarter we continued to review a number of
reinsurance transactions. We expect to write some of these during the fourth
quarter.
13
Fee income
Fee income includes fees earned from our Wealth Management products offered to
high net worth individuals by Scottish Annuity and Scottish Insurance in the
Cayman Islands. These fees increased from $.3 million to $.6 million in the
quarter and from $.7 million to $ 1.5 million in the nine months due primarily
to increases in variable account balances and the purchase of Scottish Annuity,
resulting in 100% of the fee income reverting to us this year.
Investment income
Net investment income increased from $7.1 million to $12.0 million in the three
months and from $14.6 million to $33.1 million in the nine months compared to
the same periods last year as a result of an increase in total investments plus
an increase in our average book yield.
The split of investment income by segment is as follows:
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
U.S. reinsurance $ 1,826,376 $ - $ 5,509,765 $ -
Non U.S. reinsurance 7,318,429 3,659,163 19,824,058 4,305,695
Wealth management 2,250 - 7,540 -
Other 2,818,019 3,486,530 7,720,559 10,286,006
-------------------------------------------------------------------------
Total $11,965,074 $7,145,693 $33,061,922 $14,591,701
=========================================================================
Capital has been contributed to our U.S. operations as required and is utilized
to support the reinsurance agreements in place, more capital will be contributed
as required. The funds remaining in our Cayman companies are being utilized to
support our Non U.S. reinsurance agreements and capital that is not yet
allocated is invested to provide investment income at competitive rates. Such
investment income is shown as other in the above table.
Realized losses
Net realized losses on securities in 1999 were primarily due to portfolio
restructuring. The losses this year are as a result of sales of securities to
meet cash flow demands.
14
Benefits & Expenses
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
Claims and other policy benefits $ 3,412,361 $ 869,181 $ 8,165,062 $1,188,846
Interest credited to interest
sensitive contract liabilities 4,746,915 1,791,484 12,625,690 1,791,484
Acquisition costs and other
insurance expenses 3,269,345 668,498 7,490,291 1,890,499
Operating expenses 2,811,417 804,984 7,478,592 1,894,848
------------------------------------------------------------------
Total benefits & expenses $ 14,240,038 $4,134,147 $35,759,635 $6,765,677
==================================================================
Claims and other policy benefits
Claims and other policy benefits increased from $.9 million in the third quarter
to $3.4 million and from $1.2 million to $8.2 million in the first nine months
of 2000 as a result of the new reinsurance treaties together with active
management of existing treaties.
The split of these expenses between segments is as follows:
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
U.S. reinsurance $ 1,743,500 $ - $ 2,623,817 $ -
Non U.S. reinsurance 1,668,861 869,181 5,541,245 1,188,846
------------------------------------------------------------------
Total $ 3,412,361 $ 869,181 $ 8,165,062 $ 1,188,846
==================================================================
15
Interest credited to interest sensitive contract liabilities
Interest credited to interest sensitive contract liabilities increased from $1.8
million to $4.7 million for the three months and from $1.8 million to $12.6
million for the nine months as a result of new reinsurance treaties. Interest is
calculated based on the liabilities recorded on the balance sheet at the rate of
interest specified in the reinsurance agreement.
The split of these expenses between segments is as follows:
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
U.S. reinsurance $ 785,631 $ - $ 2,467,011 $ -
Non U.S. reinsurance 3,961,284 1,791,484 10,158,679 1,791,484
------------------------------------------------------------------
Total $ 4,746,915 $ 1,791,484 $ 12,625,690 $ 1,791,484
==================================================================
Acquisition costs and other insurance expenses
Acquisition costs and other insurance expenses increased from $.7 million to
$3.3 million in the third quarter and from $1.9 million to $7.5 million in the
first nine months as a result of the new reinsurance treaties.
The components of these expenses are as follows:
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
Commissions & excise taxes $ 3,993,805 $ (48,252) $ 6,128,137 $ 1,363,316
Insurance expenses 2,421,373 1,104,567 6,277,821 2,614,606
Deferred expenses (5,604,227) (438,000) (8,883,859) (2,161,620)
Amortization - PVIF 16,800 - 50,400 -
Amortization - DAC 2,441,594 50,183 3,917,792 74,197
----------------------------------------------------------------------------
Total $ 3,269,345 $ 668,498 $ 7,490,291 $ 1,890,499
============================================================================
Commissions & excise taxes vary with premiums earned. Insurance expenses include
direct and indirect expenses of those departments involved in the marketing,
underwriting and issuing of reinsurance agreements. Of these total expenses a
portion is deferred and amortized over the life of the reinsurance treaty or in
relation to the estimated gross profit in respect of our interest sensitive
contracts.
16
The split of these expenses between segments is as follows:
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
U.S. reinsurance $ 1,320,893 $ - $ 2,380,422 $ -
Non U.S. reinsurance 1,808,303 668,498 4,729,542 1,890,499
Wealth Management 140,149 - 380,327 -
------------------------------------------------------------------------
Total $ 3,269,345 $ 668,498 $ 7,490,291 $ 1,890,499
========================================================================
Operating expenses
Operating expenses increased from $.8 million to $2.8 million for the quarter
and from $1.9 million to $7.5 million for the nine months as a result of
increased reinsurance activity and the implementation of our U.S. reinsurance
operations through Scottish Re. Included in the nine month figure is $.9
million of non-recurring employee expenses, which relate to four employees
including severance, recruiting and relocation expenses, all of which occurred
in the first two quarters of the year.
The split of these expenses between segments is as follows:
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
U.S. reinsurance $ 1,035,942 $ - $ 2,665,513 $ -
Non U.S. reinsurance 619,252 321,994 1,817,391 757,939
Wealth management 397,639 88,548 769,384 208,433
Other 758,584 394,442 2,226,304 928,476
------------------------------------------------------------
Total $ 2,811,417 $ 804,984 $ 7,478,592 $ 1,894,848
============================================================
17
Income taxes
The income tax benefit arises from a deferred tax credit offset by current tax
on our U.S. operations, which became profitable for the first time this quarter.
Minority interest
In June 2000, 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. The Minority
interests share of the results of this operation is shown separately on the
Income Statement and Balance Sheet.
Investments
Two professional investment managers, General Re - New England Asset Management,
Inc. and Prudential Investment Corporation, manage our investment portfolio. Our
investment guidelines are designed to diversify the portfolio to maximize
investment income while minimizing risk. At September 30, 2000, the portfolio
had an average quality rating of AA, an average duration of 2.59 years and an
average book yield of 7.07%. 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 $.1 million and net
unrealized appreciation of $5.1 million were recognized on investments during
the third quarter. A realized loss of $.3 million and net unrealized
appreciation of $4.4 million were recognized on investments during the first
nine months.
Capital Resources and Liquidity
At September 30, 2000, total capitalization was $226 million. 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 nine months of 2000, we paid dividends totaling $0.15 per share
or $2.4 million.
In the nine months ended September 30, 2000 we repurchased 374,800 shares for
$3.2 million (average price of $8.66 per share), and through November 1, 2000 we
have repurchased an additional 43,700 shares, resulting in an aggregate
repurchase in the year to date of 418,500 shares for $3.7 million (average price
of $8.74 per share) under a program authorized by the Board on April 6, 2000 to
repurchase up to $20 million of outstanding shares.
We successfully renewed our letter of credit and line of credit facility for one
year expiring in July 2001. We have access to a combined $70 million through
available lines and letters of credit, of which approximately $19.3 million is
currently being utilized under a letter of credit in support of our Non U.S.
reinsurance business.
Cash flow
Cash flow from operations for the nine months was $25.2 million. 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.
18
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.
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
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following Exhibits are filed as part of this 10-Q:
27.1 Financial Data Schedule
(b) Reports on Form 8-K . No reports on Form 8-K were filed during
the three month period ended September 30, 2000.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SCOTTISH ANNUITY & LIFE HOLDINGS, LTD.
Date: November 8, 2000 By: /s/ Michael C. French
Michael C. French
Chief Executive Officer
Date: November 8, 2000 By: /s/ Scott E. Willkomm
Scott E. Willkomm
President
(Principal Financial Officer and
Principal Accounting Officer)
21
EXHIBIT INDEX
EXHIBIT
SEQUENTIAL
NUMBER
PAGE NO. DESCRIPTION OF DOCUMENT
- -------- -----------------------
27.1 Financial Data Schedule
22