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, 2001
[ ] 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 HM 2939
Crown House, Third Floor
4 Par-la-Ville Road
Hamilton HM12
Bermuda
Not Applicable
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (441) 295-4451
P.O. Box 10657 APO, Grand Pavilion Commercial Centre, 802 West Bay Road
George Town, Grand Cayman, Cayman Islands, British West Indies
(Former name, former address and former fiscal year, if changed since last
report)
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, 2001, Registrant had 15,612,576 Ordinary Shares outstanding.
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - September 30, 2001 (Unaudited) and December 31,
2000 1
Unaudited Consolidated Statements of Income - Three and nine months ended
September 30, 2001 and 2000 2
Unaudited Consolidated Statements of Comprehensive Income - Three and nine
months ended September 30, 2001 and 2000 4
Unaudited Consolidated Statements of Shareholders' Equity - Nine months ended
September 30, 2001 and 2000 5
Unaudited Consolidated Statements of Cash Flows - Nine months ended September
30, 2001 and 2000 6
Notes to Unaudited Consolidated Financial Statements at September 30, 2001 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 20
PART II OTHER INFORMATION
ITEM 1 through ITEM 6 21
SIGNATURES 22
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Scottish Annuity & Life Holdings, Ltd.
Consolidated Balance Sheets
(Dollars in thousands)
September 30, December 31,
2001 2000
(unaudited)
--------------------------------
ASSETS
Fixed maturity investments, available for sale, at fair $ 483,022 $ 581,020
value (Amortized cost $478,650; 2000 - $584,493)
Cash and cash equivalents 64,434 47,763
Other investments 10,120 -
Funds withheld at interest 274,793 46,256
--------------------------------
Total investments 832,369 675,039
Receivables:
Accrued interest 6,499 6,709
Risk fees 1,054 961
Policy loans 888 441
Reinsurance 13,880 20,618
Deferred acquisition costs 76,419 30,922
Present value of inforce business 10,278 10,433
Other intangible assets 381 7,888
Deferred tax benefit 2,723 2,192
Fixed assets 4,346 2,482
Due from related party - 218
Other assets 6,984 868
Current income tax receivable - 87
Segregated assets 516,450 409,660
--------------------------------
Total assets $1,472,271 $1,168,518
================================
LIABILITIES
Reserves for future policy benefits $ 256,659 $ 182,391
Interest sensitive contract liabilities 348,203 310,755
Borrowings 67,777 -
Accounts payable and accrued expenses 19,506 18,867
Current income tax payable 1,031 -
Other liabilities 4,457 4,461
Segregated liabilities 516,450 409,660
--------------------------------
Total liabilities 1,214,083 926,134
--------------------------------
MINORITY INTEREST - 2,820
--------------------------------
SHAREHOLDERS' EQUITY
Share capital, par value $0.01 per share:
Issued and fully paid: 15,612,576 ordinary shares
(2000 - 15,614,240)
(Excludes 3,062,200 held in Treasury; 2000 - 2,962,200) 156 156
Additional paid in capital 223,587 223,771
Accumulated other comprehensive income (loss) -
Unrealized appreciation (depreciation) on investments, 4,202 (3,822)
net of tax
Retained earnings 30,243 19,459
--------------------------------
Total shareholders' equity 258,188 239,564
--------------------------------
Total liabilities and shareholders' equity $1,472,271 $1,168,518
================================
See Accompanying Notes to Unaudited Consolidated Financial Statements
1
Scottish Annuity & Life Holdings, Ltd.
Unaudited Consolidated Statements of Income
(Dollars in thousands, except per share data)
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30 September 30 September 30
2001 2000 2001 2000
--------------------------------------------------------------
REVENUES
Premiums earned $18,631 $ 6,277 $39,461 $ 9,891
Fee income 1,912 553 4,497 1,548
Investment income, net 12,526 11,965 34,788 33,062
Realized gains (losses) 402 (115) 860 (260)
--------------------------------------------------------------
Total revenues 33,471 18,680 79,606 44,241
--------------------------------------------------------------
BENEFITS & EXPENSES
Claims and other policy benefits 13,028 3,412 30,654 8,165
Interest credited to interest sensitive
contract liabilities 3,391 4,747 10,428 12,626
Acquisition costs and other insurance expenses 7,137 3,468 15,372 6,918
Operating expenses 2,934 2,613 7,977 8,051
Interest expense 623 - 937 -
--------------------------------------------------------------
Total benefits & expenses 27,113 14,240 65,368 35,760
--------------------------------------------------------------
Net income before income taxes and minority
interest 6,358 4,440 14,238 8,481
Income tax expense (benefit) 824 38 767 (332)
--------------------------------------------------------------
Net income before minority interest 5,534 4,402 13,471 8,813
Minority interest - 125 71 125
--------------------------------------------------------------
Income before cumulative effect of change in
accounting principle 5,534 4,527 13,542 8,938
Cumulative effect of change in accounting principle - - (406) -
--------------------------------------------------------------
Net income $ 5,534 $ 4,527 $13,136 $ 8,938
==============================================================
See Accompanying Notes to Unaudited Consolidated Financial Statements
2
Scottish Annuity & Life Holdings, Ltd.
Unaudited Consolidated Statements of Income - continued
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
------------------------------------------------------------------------
Earnings per share - Basic
- --------------------------
Income before cumulative effect of change in
accounting principle $ 0.35 $ 0.29 $ 0.86 $ 0.56
Cumulative effect of change in accounting
principle - - (0.02) -
------------------------------------------------------------------------
Net income $ 0.35 $ 0.29 $ 0.84 $ 0.56
========================================================================
Earnings per share - Diluted
- ----------------------------
Income before cumulative effect of change in
accounting principle $ 0.33 $ 0.28 $ 0.82 $ 0.56
Cumulative effect of change in accounting
principle - - (0.02) -
------------------------------------------------------------------------
Net income $ 0.33 $ 0.28 $ 0.80 $ 0.56
========================================================================
Dividends per share $ 0.05 $ 0.05 $ 0.15 $ 0.15
========================================================================
Weighted average number of shares outstanding:
Basic 15,699,027 15,742,145 15,657,405 15,924,307
========================================================================
Diluted 16,918,832 15,913,452 16,434,262 15,987,319
========================================================================
See Accompanying Notes to Unaudited Consolidated Financial Statements
3
Scottish Annuity & Life Holdings, Ltd.
Unaudited Consolidated Statements of Comprehensive Income
(Dollars in thousands)
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
-------------------------------------------------------------------
Net income $ 5,534 $4,527 $13,136 $ 8,938
-------------------------------------------------------------------
Other comprehensive income (loss), net of tax
Unrealized appreciation (depreciation) on
investments: 5,988 5,030 8,146 4,122
Add: reclassification adjustment for
investment 334 115 (122) 260
losses included in net income, net of tax
-----------------------------------------------------------------------
Unrealized appreciation (depreciation) on
investments 6,322 5,145 8,024 4,382
-----------------------------------------------------------------------
Comprehensive income $11,856 $9,672 $21,160 $13,320
=======================================================================
See Accompanying Notes to Unaudited Consolidated Financial Statements
4
Scottish Annuity & Life Holdings, Ltd.
Unaudited Consolidated Statements of Shareholders' Equity
(Dollars in thousands)
Nine months Nine months
ended ended
September 30, 2001 September 30, 2000
----------------------------------------
SHARE CAPITAL:
Beginning of period $ 156 $ 160
Repurchase of shares (1) (3)
Shares issued 1 -
----------------------------------------
156 157
----------------------------------------
ADDITIONAL PAID IN CAPITAL:
Beginning of period 223,771 227,535
Repurchase of shares (1,483) (3,237)
Issuance of equity on exercise of options 1,299 -
Issuance of equity options - 20
----------------------------------------
223,587 224,318
----------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Beginning of period (3,822) (15,685)
Unrealized appreciation on investments 8,024 4,382
----------------------------------------
4,202 (11,303)
----------------------------------------
RETAINED EARNINGS:
Beginning of period 19,459 6,651
Net income 13,136 8,938
Dividends paid (2,352) (2,382)
----------------------------------------
30,243 13,207
----------------------------------------
TOTAL SHAREHOLDERS' EQUITY $258,188 $226,379
========================================
See Accompanying Notes to Unaudited Consolidated Financial Statements
5
Scottish Annuity & Life Holdings, Ltd.
Unaudited Consolidated Statements of Cash Flows
(Dollars in thousands)
Nine months ended Nine months ended
September 30, 2001 September 30, 2000
----------------------------------------------
OPERATING ACTIVITIES
Income before cumulative effect of change in accounting principle $ 13,542 $ 8,938
Items not affecting cash:
Net realized (gains) losses on investments & fixed assets (860) 260
Amortization of investments (1,123) (276)
Non cash salaries and professional fees - 21
Minority interest (71) (125)
Depreciation 530 296
Amortization of deferred acquisition costs 7,678 3,918
Amortization of present value of inforce business 154 50
Amortization of other intangible assets 222 208
Interest credited to interest sensitive contract liabilities 10,428 12,626
Changes in assets and liabilities:
Accrued interest 210 (43)
Risk fees (93) 141
Reinsurance 6,738 1,052
Deferred acquisition costs (53,175) (21,671)
Deferred tax benefit (351) (602)
Other assets (1,196) 51
Current income tax receivable / payable 1,118 96
Reserve for future policy benefits 74,268 76,901
Due to related party 218 (220)
Accounts payable and accrued expenses 639 3,752
--------------------------------------
Net cash provided by operating activities 58,876 85,373
--------------------------------------
INVESTING ACTIVITIES
Purchase of investments (183,399) (86,974)
Proceeds on sales of investments 225,794 62,112
Proceeds on maturity of investments 65,023 41,392
Other assets & liabilities (4) 11,970
Funds withheld at interest (228,538) (39,131)
Other investments (10,119) -
Policy loans (447) 79
Purchase of present value of inforce business - 120
Purchase of intangible assets 2,366 (7,844)
Minority interest on purchase of subsidiary (2,749) 2,776
Due to related party on purchase of subsidiary - (11,562)
Proceeds from sale of fixed assets 57 -
Purchase of fixed assets (2,451) (1,645)
--------------------------------------
Net cash used in investing activities (134,467) (28,707)
--------------------------------------
FINANCING ACTIVITIES
Deposits to interest sensitive contract liabilities 232,376 50,459
Withdrawals from interest sensitive contract liabilities (205,355) (25,399)
Borrowings 67,777 -
Net cost of repurchase of company shares (1,483) (3,240)
Net proceeds from issue of company shares 1,299 -
Dividends paid (2,352) (2,383)
--------------------------------------
Net cash provided by financing activities 92,262 19,437
--------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 16,671 76,103
Cash and cash equivalents, beginning of period 47,763 29,000
--------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 64,434 $105,103
======================================
See Accompanying Notes to Unaudited Consolidated Financial Statements
6
Scottish Annuity & Life Holdings, Ltd.
Notes to Unaudited Consolidated Financial Statements
September 30, 2001
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, 2000.
We have reclassified some figures from our 2000 financial statements to
conform to our 2001 presentation. These reclassifications had no effect on net
income or shareholders' equity as previously reported.
All amounts are reported in thousands of United States dollars (except per
share amounts).
2. Other investments
Other investments includes the following:
September 30, 2001
------------------
Investment in Fund of Funds $ 5,120
Surplus Note 5,000
------------------
Total $10,120
==================
Investment in Fund of Funds consists of an investment we made in the
second quarter to seed a proprietary hedge fund of funds that we intend to make
available to our Wealth Management clients as an investment option for the
premiums that they deposit into our variable insurance products. We have
engaged an established fund management company to manage the fund, which is
organized as a Cayman Islands company. We earn a sub-advisory fee based upon
the net asset value of the fund, and also record as investment income the net
gain or loss on our investment in the fund. The Fund of Funds earned a 1.69%
return in the third quarter, net of investment management fees.
During the second quarter, we purchased a Surplus Note from a U.S. life
insurance company in connection with a reinsurance transaction that we entered
into in the second quarter. The note pays interest to us at an annual rate of
11% and matures on May 16, 2016.
During the second quarter, we entered into a reinsurance transaction in
which we received certain assets, including cash and mortgage loans on
residential and commercial properties. During the third quarter the mortgage
loans were liquidated.
Additionally, the Company has entered into three total return swap
transactions totaling approximately $104 million on behalf of Wealth Management
clients. The assets and liabilities of these transactions move in tandem and are
segregated from the general accounts of the Company, and the client bears the
investment risk on the account. These transactions are recorded on the Company's
balance sheet by establishing a separate account asset and an equal separate
account liability. The Company receives an asset-based fee for providing this
service that is recorded as fee income.
7
3. Reinsurance transactions
In each of the nine month periods ended September 30, 2001 and 2000, we
entered into reinsurance transactions in which we acquired blocks of inforce
business. These acquisitions have been accounted for as purchases. Our results
of operations include their effects only from their respective dates of
acquisition. Because the blocks of business acquired are discrete transactions
with unique characteristics, comparability among periods is not meaningful.
Nine months ended Nine months ended
September 30, 2001 September 30, 2000
----------------------------------------------------------------
Fair value of assets acquired $58,928 $79,496
Deferred acquisition costs 11,000 10,250
----------------------------------------------------------------
Total assets acquired $69,928 $89,746
================================================================
Fair value of liabilities acquired $69,928 $89,746
================================================================
4. Deferred acquisition costs
The change in deferred acquisition costs is as follows:
Three months ended Three months ended Nine months ended Nine months ended
September 30, 2001 September 30, 2000 September 30, 2001 September 30, 2000
-------------------------------------------------------------------------------
Balance at beginning of period $56,500 $16,267 $30,922 $ 1,920
Deferred acquisition costs on inforce blocks of
business purchased - - 11,000 10,250
Expenses deferred 22,962 5,848 42,175 11,421
Amortization expense (3,043) (2,442) (7,678) (3,918)
-------------------------------------------------------------------------------
Balance at September 30 $76,419 $19,673 $76,419 $19,673
===============================================================================
5. 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 ended ended ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
------------------------------------------------------------------------
Numerator:
Net income $ 5,534 $ 4,527 $ 13,136 $ 8,938
------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share -
Weighted average number of shares 15,699,027 15,742,145 15,657,405 15,924,307
Effect of dilutive securities - Stock options 805,644 171,307 636,477 63,012
-- Warrants 414,161 - 140,380 -
------------------------------------------------------------------------
Denominator for dilutive earnings per share 16,918,832 15,913,452 16,434,262 15,987,319
------------------------------------------------------------------------
Basic earnings per share $ 0.35 $ 0.29 $ 0.84 $ 0.56
========================================================================
Diluted earnings per share $ 0.33 $ 0.28 $ 0.80 $ 0.56
========================================================================
8
6. Comprehensive income
We report comprehensive income in accordance with SFAS 130, which requires
unrealized gains and losses on the Company's available for sale investments to
be included in other comprehensive income in the statement of Shareholders'
equity. The table below shows the gross and net of tax components of other
comprehensive income.
Three months ended
September 30, 2001
--------------------------------------------------
Before Tax Tax Net of Tax
--------------- ---------- ---------------
Unrealized gains (losses) on available for sale investments arising
during period $6,423 $(435) $5,988
Less: Reclassification adjustment for losses (gains) realized in net
income (402) 736 334
--------------------------------------------------
Other comprehensive income $6,021 $ 301 $6,322
==================================================
Three months ended
September 30, 2000
--------------------------------------------------
Before Tax Tax Net of Tax
--------------- ----------- -----------------
Unrealized gains (losses) on available for sale investments arising
during period $5,030 $ - $5,030
Less: Reclassification adjustment for losses (gains) realized in net
income 115 - 115
--------------------------------------------------
Other comprehensive income $5,145 $ - $5,145
==================================================
Nine months ended
September 30, 2001
---------------------------------------------------
Before Tax Tax Net of Tax
--------------- ----------- ---------------
Unrealized gains (losses) on available for sale investments arising
during period $8,702 $(554) $8,148
Less: Reclassification adjustment for losses (gains) realized in net
income (858) 734 (124)
---------------------------------------------------
Other comprehensive income $7,844 $ 180 $8,024
===================================================
Nine months ended
September 30, 2000
--------------------------------------------------
Before Tax Tax Net of Tax
--------------- ----------- ----------------
Unrealized gains (losses) on available for sale investments arising
during period $4,122 $ - $4,122
Less: Reclassification adjustment for losses (gains) realized in net
income 260 - 260
--------------------------------------------------
Other comprehensive income $4,382 $ - $4,382
==================================================
9
7. Segment Reporting
Income from insurance operations is split into two segments: Life
Reinsurance and Wealth Management.
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
2001 2000 2001 2000
-----------------------------------------------------------------
REVENUES
Life Reinsurance $30,525 $15,422 $70,445 $35,225
Wealth Management 660 555 1,934 1,555
Other (1) 2,286 2,703 7,227 7,461
-----------------------------------------------------------------
Total $33,471 $18,680 $79,606 $44,241
=================================================================
NET INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST
Life Reinsurance $ 3,221 $ 2,483 $ 6,635 $ 3,306
Wealth Management (240) 115 316 464
Other (2) 3,377 1,842 7,287 4,711
-----------------------------------------------------------------
Total $ 6,358 $ 4,440 $14,238 $ 8,481
=================================================================
September 30, December 31,
2001 2000
--------------------------------
ASSETS BY SEGMENT
Life Reinsurance $ 812,170 $ 636,382
Wealth Management 544,195 431,670
Other 115,906 110,444
--------------------------------
Total $1,472,271 $1,178,496
================================
(1) Includes investment income on unallocated capital and realized gains and
losses.
(2) Includes corporate expenses.
8. Borrowings
As of September 30, 2001, Borrowings consisted of $40 million borrowed
under our credit facility with a U.S. bank and $27.7 million borrowed in
connection with a reverse repurchase agreement with a major broker/dealer. The
interest rates on these borrowings float with LIBOR. The bank borrowing was used
to fund, in part, the recapture of a block of business by one of our reinsurance
clients on April 30, 2001. By borrowing funds, we were able to retain assets
that would have been otherwise liquidated to fund the recapture, thus
maintaining the earnings power of our investment portfolio. We view both
borrowing facilities as a means of warehousing attractive assets at a positive
spread that can be used to fund future reinsurance liabilities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for further information regarding the recapture.
10
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", "our",
or "the Company") is a Cayman Islands holding company that was incorporated in
May 1998 and completed its initial public offering ("IPO") on November 30, 1998.
Through our wholly owned subsidiaries, we provide life reinsurance to life
insurance companies and issue variable insurance policies to high net worth
individuals.
We have two wholly-owned direct subsidiaries: Scottish Annuity & Life
Insurance Company (Cayman) Ltd. ("SALIC"), a Cayman Islands insurance company
formed by the Company in 1998; and The Scottish Annuity Company (Cayman) Ltd.
("SAC"), a Cayman Islands insurance company that was incorporated in 1994 and
acquired by the Company in 1999.
Scottish Re (U.S.), Inc. ("Scottish Re") is a Delaware insurance company
that was acquired by SALIC in 1999. Scottish Re provides life reinsurance to
life insurance companies. Scottish Re is licensed to do business in the United
States by 15 states and admitted as a reinsurer in an additional 32 states.
Scottish Re (Dublin) Limited ("Dublin") was incorporated in Dublin, Ireland
in 2000 to provide reinsurance for our group companies and, to a lesser extent,
third parties. Dublin, a wholly owned subsidiary of SALIC, commenced writing
business in January 2001.
We now have a 100% holding in Scottish Crown Group (Bermuda) Ltd.
("Scottish Crown"). In July 2001, we acquired the remaining 49.99% of Scottish
Crown that we did not own, and thereby eliminated the minority interest position
in Scottish Crown and certain intangible assets. Prior to July 2001, our
holding in Scottish Crown was 50.01%. As of December 31, 2000, Scottish Crown
owned two Bermuda-licensed insurance companies that are engaged in the issuance
of variable insurance policies to high net worth individuals. In February 2001,
Scottish Holdings (U.S.), Inc. (a wholly owned subsidiary of SALIC) acquired
100% of one of the Bermuda-licensed insurance companies.
On April 30, 2001, one of our clients exercised its right to recapture a
block of business ceded to us in 1999. To fund the $185.7 million due to the
cedent, we generated $138.7 million of cash from asset sales, borrowed $40
million under our existing credit facility and used $7 million in cash. The
asset sales generated realized gains of $529,000 before and after taxes. The
use of cash and borrowings allowed us to retain the portion of the assets
backing that liability that had the most attractive combination of spread and
relative value, warehousing them to use in future reinsurance transactions and
to maintain the earnings power of our investment portfolio. The all-in rate on
the borrowings compares favorably with the effective cost of funds on the
recaptured transaction. Overall, the recapture reduced our investment
portfolio, interest sensitive contract liabilities, net investment income, and
interest credited to interest sensitive contract liabilities, increased realized
gains and interest expense, but did not materially affect net income.
All amounts are reported in thousands of United States dollars, except per
share amounts.
11
Results of Operations
We are engaged in two lines of business: Life Reinsurance, and the direct
issuance of variable insurance policies to high net worth individuals which we
call Wealth Management.
Earnings per share
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
----------------------------------------------------------------------------
Net income $ 5,534 $ 4,527 $ 13,136 $ 8,938
============================================================================
Basic EPS $ 0.35 $ 0.29 $ 0.84 $ 0.56
============================================================================
Diluted EPS $ 0.33 $ 0.28 $ 0.80 $ 0.56
============================================================================
Weighted average number of shares outstanding:
Basic 15,699,027 15,742,145 15,657,405 15,924,307
----------------------------------------------------------------------------
Diluted 16,918,832 15,913,452 16,434,262 15,987,319
----------------------------------------------------------------------------
Our net income for the third quarter of $5.5 million represents a 22%
increase over the same quarter in 2000. Net income for the first nine months of
$13.1 million is a 47% increase over the first nine months of 2000. The
increases are attributable to continued growth in our core segments of Life
Reinsurance and Wealth Management.
Diluted earnings per share increased 18% from $0.28 to $0.33 for the third
quarter and 43% from $0.56 to $0.80 in the first nine months. The increase in
earnings per share was entirely due to increased earnings, which was offset by
an increase in the dilutive effect of stock options in each period. The effect
of our repurchase of shares in the latter part of 2000 and the third quarter of
2001 has been offset by the dilutive effect of stock options in the third
quarter and first nine months of 2001.
Excluding the cumulative effect of change in accounting principle and
realized gains and losses net of tax, 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,
2001 2000 2001 2000
----------------------------------------------------------------------------
Net income excluding cumulative effect of
change in accounting principle and realized
gains and losses, net of tax $ 5,869 $ 4,642 $ 13,419 $ 9,198
============================================================================
Basic EPS $ 0.37 $ 0.29 $ 0.86 $ 0.58
============================================================================
Diluted EPS $ 0.35 $ 0.29 $ 0.82 $ 0.58
============================================================================
Weighted average number of shares outstanding:
Basic 15,699,027 15,742,145 15,657,405 15,924,307
----------------------------------------------------------------------------
Diluted 16,918,832 15,913,452 16,434,262 15,987,319
----------------------------------------------------------------------------
12
Revenues
Revenues increased 79% to $33.5 million in the third quarter of 2001 from
$18.7 million in the same period of 2000 and by 80% to $79.6 million in the
first nine months from $44.2 million in the same period of 2000. Both increases
were due primarily to the growth of Premiums earned in our Life Reinsurance
operations and an increase in fee income.
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,
2001 2000 2001 2000
----------------------------------------------------------------------------
Premiums earned $18,631 $ 6,277 $39,461 $ 9,891
Fee income 1,912 553 4,497 1,548
Investment income, net 12,526 11,965 34,788 33,062
Realized gains (losses) 402 (115) 860 (260)
-----------------------------------------------------------------------------
Total Revenues $33,471 $18,680 $79,606 $44,241
=============================================================================
Premiums earned
Premiums earned during the third quarter and first nine months of 2001 are
in respect of 33 reinsurance clients. Premiums earned in the third quarter and
first nine months of 2000 are in relation to six reinsurance clients. As of
September 30, 2001 we reinsure approximately $27.3 billion of life coverage on
860,000 lives, the average benefit coverage per life is $32,000 and the maximum
corporate retention on any one life is $1 million, however we currently
retrocede any liability in excess of $500,000. As of September 30, 2000 we
reinsured approximately $3 billion of life coverage on 100,000 lives, and the
average benefit per life was $30,000. We anticipate a steady flow of premiums
in future quarters from these treaties.
13
Fee income
Fee income includes fees earned from our Wealth Management products offered
to high net worth individuals by SALIC and SAC in the Cayman Islands and
Scottish Crown in Bermuda. These fees increased from $553,000 to $633,000 in
the third quarter and from $1.5 million to $1.9 million in the first nine months
due primarily to increases in variable account balances on which we earn fees.
We also earn fees on certain financial reinsurance treaties issued to U.S.
clients; these amounted to $1.3 million in the third quarter and $2.6 million
for the nine months of 2001.
Fees earned are as follows:
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
----------------------------------------------------------------------------
Life Reinsurance $1,279 $ - $2,591 $ -
Wealth Management 633 553 1,906 1,548
----------------------------------------------------------------------------
Total $1,912 $553 $4,497 $1,548
============================================================================
Wealth Management fees are earned from both Life and Annuity clients.
The following table summarizes our client base with the associated segregated
assets values and policy face amounts.
September 30, June 30, March 31, December 31, September 30,
2001 2001 2001 2000 2000
-------------------------------------------------------------------------------------
Number of clients - Life 28 25 22 11 9
- Annuity 85 84 83 81 82
-------------------------------------------------------------------------------------
113 109 105 92 91
-------------------------------------------------------------------------------------
Segregated asset value - Life $ 82,100 $ 93,340 $ 82,824 $ 47,155 $ 59,768
- Annuity 434,350 427,230 377,895 362,505 345,817
-------------------------------------------------------------------------------------
$516,450 $520,570 $460,719 $409,660 $405,585
-------------------------------------------------------------------------------------
Face value - Life $586,589 $457,886 $408,398 $241,907 $175,750
-------------------------------------------------------------------------------------
The change in the segregated assets is as follows:
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
----------------------------------------------------------------------------
Balance at beginning of period $520,570 $284,043 $409,660 $256,546
Deposits 27,400 98,084 136,524 116,538
Withdrawals (770) - (8,985) (9,114)
Investment performance (1) (30,750) 23,458 (20,749) 41,615
------------------------------------------------------------------------------
Balance at September 30 $516,450 $405,585 $516,450 $405,585
==============================================================================
(1) Investment performance for the period is determined using actual asset
valuations where available and estimates where actual data is not
available.
14
Investment income
Net investment income increased to $12.5 million for the three months ended
September 30, 2001, from $12.0 million for the prior year period principally due
to an increase in total investments. A significant contributor to this growth
in investments was in Funds Withheld at Interest, which relates to reinsurance
transactions structured on a modified coinsurance ("Modco") basis, in which the
ceding company retains the assets and manages them for our benefit.
Excluding Funds Withheld at Interest and Other Investments, the weighted
average yield on the portfolio was 6.68% at September 30, 2001, as compared with
7.24% at December 31, 2000 and 7.08% at September 30, 2000. Yields earned on
fixed-rate investments increased, but yields on floating-rate investments
decreased with the decline in LIBOR during the period.
In the first nine months of 2001, net investment income increased from
$33.1 million to $34.8 million, primarily as a result of an increase in total
investments.
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,
2001 2000 2001 2000
----------------------------------------------------------------------------
Life Reinsurance $10,169 $ 9,145 $27,990 $25,334
Wealth Management 26 2 28 7
Other 2,331 2,818 6,770 7,721
----------------------------------------------------------------------------
Total $12,526 $11,965 $34,788 $33,062
============================================================================
Capital has been contributed to SALIC and Scottish Re and is utilized to
support the reinsurance agreements in place; more capital will be contributed as
required. 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 gains (losses)
In the third quarter of 2001, realized gains on investments amounted to
$402,000 compared to realized losses of $115,000 in the third quarter of 2000.
For the nine months ended September 30, 2001, realized gains on investments were
$858,000 as compared to realized losses of $260,000 in the prior year period.
The realization of gains in the 2001 periods was occasioned by appreciation of
market values of most bonds in the portfolio. During 2001, interest rates have
been lower than in 2000, causing market values of fixed-income securities to
appreciate. This trend has also caused the unrealized loss of $11.3 million at
September 30, 2000 to improve to an unrealized gain of $4.2 million (net of tax)
at September 30, 2001. Realized gains in the first nine months of 2001 include
gains of $529,000 in respect of sales of assets sold to fund part of the
recapture of a block of business by one client on April 30, 2001.
15
Benefits & expenses
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
----------------------------------------------------------------------------
Claims and other policy benefits $13,028 $ 3,412 $30,654 $ 8,165
Interest credited to interest sensitive 3,391 4,747 10,428 12,626
contract liabilities
Acquisition costs and other insurance expenses 7,137 3,468 15,372 6,918
Operating expenses 2,934 2,613 7,977 8,051
Interest expense 623 - 937 -
----------------------------------------------------------------------------
Total benefits & expenses $27,113 $14,240 $65,368 $35,760
============================================================================
Claims and other policy benefits
Claims and other policy benefits increased from $3.4 million to $13.0
million in the third quarter and from $8.2 million to $30.7 million in the first
nine months of 2001 as a result of new reinsurance clients. We are recording
claims and policy benefit expenses in connection with reinsurance transactions
with 34 clients in the first nine months of 2001. In the third quarter and
first nine months of 2000 we had benefit expenses in relation to seven
reinsurance clients. In the third quarter and nine months ended September 30,
2001 we expensed claims totaling approximately $630,000 in relation to the World
Trade Center and Pentagon attacks on September 11, 2001.
Interest credited to interest sensitive contract liabilities
Interest credited to interest sensitive contract liabilities decreased from
$4.7 million to $3.4 million for the third quarter and from $12.6 million to
$10.4 million in the first nine months of 2001. The decrease was the net effect
of the following: the recapture of a block of business by one client on April
30, 2001 caused a decrease of $3.2 million in the quarter and $5.3 million in
the nine months; these decreases were partly offset by interest credited on new
reinsurance treaties written and increases in interest credited to policies
which commenced in 2000 due to increasing average liability balances.
16
Acquisition costs and other insurance expenses
Acquisition costs and other insurance expenses increased from $3.5 million
to $7.1 million in the third quarter and from $6.9 million to $15.4 million in
the first nine months of 2001 as a result of 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,
2001 2000 2001 2000
-------------------------------------------------------------------
Commissions, excise taxes and other insurance
expenses $ 27,005 $ 6,857 $ 49,715 $ 14,371
Deferred expenses (22,962) (5,848) (42,175) (11,421)
Amortization - PVIF 51 17 154 50
Amortization - DAC 3,043 2,442 7,678 3,918
------------------------------------------------------------------
Total $ 7,137 $ 3,468 $ 15,372 $ 6,918
==================================================================
Commissions & excise taxes vary with premiums earned. Insurance expenses
include direct and indirect expenses of those departments involved in the
marketing, underwriting, issuing and administration 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.
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,
2001 2000 2001 2000
-------------------------------------------------------------------------------
Life Reinsurance $6,941 $3,331 $14,832 $6,538
Wealth Management 196 137 540 380
----------------------------------------------------------------------------
Total $7,137 $3,468 $15,372 $6,918
============================================================================
17
Operating expenses
Operating expenses increased from $2.6 million to $2.9 million for the
third quarter and decreased slightly from $8.1 million to $8.0 million for the
first nine months of 2001 as a result of increased reinsurance activity and
increased personnel costs which is offset by increases in the amount of
marketing and policy acquisition costs being allocated to acquisition expenses.
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,
2001 2000 2001 2000
-------------------------------------------------------------------------------
Life Reinsurance $ 3,943 $1,449 $7,895 $4,591
Wealth Management 704 303 1,078 710
Other (1,713) 861 (996) 2,750
------------------------------------------------------------------------------
Total $ 2,934 $2,613 $7,977 $8,051
==============================================================================
Interest expense
Interest expense in the third quarter and nine months ended September 30,
2001 was $623,000 and $937,000, respectively, compared to none in the 2000
periods. This growth reflects the use of borrowing as described in Note 8.
Income taxes
Income tax expense increased in the third quarter of 2001 to $824,000 from
$38,000 in the third quarter of 2000 due to increased earnings. The income tax
expense in the first nine months of 2001 was $767,000 compared to a benefit of
$332,000 in the same period of 2000. The 2001 income tax calculation includes
the earnings of Scottish Re, Scottish Annuity & Life International Insurance
Company (Bermuda) Ltd. and Dublin. The tax expense in the third quarter and the
benefit in the first nine months of 2000 are related to the earnings of Scottish
Re only and are offset by a release of valuation allowances related to capital
loss carry-forwards.
Minority interest
Minority interest income represents the minority owner's share of the loss
recorded by Scottish Crown in the first six months of 2001. In July 2001, we
acquired the 49.99% of Scottish Crown that we did not own.
18
Financial Condition
Investments
General Re - New England Asset Management, Inc. manages the portion of our
investment portfolio that we control; it excludes the assets classified as Funds
withheld at interest and Other investments. Our investment guidelines are
designed to diversify this portfolio and maximize investment income while
limiting risk in an asset-liability management, enterprise context. At
September 30, 2001, the portfolio had an average quality rating of A+, an
average effective duration of 3.2 years and an average book yield of 6.68%.
This compares with an average quality rating of AA-, an average effective
duration of 2.6 years and an average book yield of 7.24% respectively at
December 31, 2000.
The reduction of average quality to A+ leaves the portfolio quality above
those of most customers and competitors and has permitted us to sustain higher
yields on fixed rate assets and wider spreads on floating-rate assets. The
decline in average book yield was the result of offsetting trends. Yield on
floating-rate investments and cash decreased due to a steep decline in LIBOR.
These floating-rate assets were largely matched by floating-rate liabilities, on
which the cost of funds declined by a similar amount. As a result, spreads
earned between floating-rate assets and floating rate liabilities has held up
well. On the fixed rate portion of the portfolio, the average book yield was
7.21% at September 30, 2001 compared with 6.68% at September 30, 2000 and 7.12%
at December 31, 2000.
Asset duration increased during 2001 because of the change in mix of fixed
and floating rate liabilities: the combination of the $185.7 million recapture
(see General) and the $67.7 million in borrowings (see Note 8) reduced floating-
rate liabilities by a net of $118.0 million; new reinsurance treaties were all
fixed rate. Our policy is to maintain asset durations close to the targets most
suitable for the liabilities on both enterprise and sub-portfolio levels.
We recognized realized gains on investments of $402,000 during the third
quarter and $858,000 in the first nine months of 2001 as compared to realized
losses of $115,000 in the third quarter and $260,000 in the first nine months of
2000. At September 30, 2001 the portfolio had unrealized gains of $4.2 million
net of tax as compared to unrealized losses of $3.8 million net of tax at
December 31, 2000; these amounts are shown on the balance sheet as part of
Shareholders' equity entitled Accumulated other comprehensive income. The
underlying appreciation of our assets was due primarily to the downtrend in
interest rates.
Liquidity and Capital Resources
Cash flow
Cash flow from operations for the first nine months of 2001 was $58.9
million compared to $85.4 million in the first nine months of 2000. The
decrease in operating cash flow reflects our increased level of commissions paid
in respect of new business this year compared to 2000. Our cash flow from
operations may be positive or negative in any specific quarter depending on the
amount of new life reinsurance business written in the quarter and the level of
ceding commissions paid in connection with writing that business offset by the
level of renewal premiums earned in the quarter.
Capital and Collateral
At September 30, 2001, total capitalization was $258.2 million. We
currently have no material commitments for capital expenditures.
During the period September 17 to 21, 2001 we repurchased 100,000 ordinary
shares for a total cost of $1.5 million and an average price of $14.83 including
transaction costs.
During the third quarter of 2001, we paid dividends totaling $0.05 per
share or $786,000 for a total of $0.15 or $2.4 million for the first nine months
of 2001.
We have in place a credit facility with a U.S. bank that provides up to $70
million that we can use for a combination of borrowings and outstanding letters
of credit. Under the agreement, we may borrow at a rate of 40 basis points over
LIBOR. The agreement expires April 30, 2002, but is renewable with the
agreement of both parties. As of September 30, 2001, we have outstanding
borrowings of $40 million and letters of credit of $255,000 in support of our
reinsurance business. The
19
agreement requires that we pledge assets as collateral with a market value not
less than 111% of the sum of outstanding borrowing and letters of credit.
We also have borrowed $27.7 million under a reverse repurchase agreement
with a major dealer. Under this agreement, we have sold agency mortgage backed
securities with the agreement to repurchase them at a fixed price, providing the
dealer with a spread that equates to an effective borrowing cost linked to one-
month LIBOR.
We believe that we can obtain additional credit capacity on comparable
terms and have sufficient pledgable assets available to meet anticipated needs
for growth over the next several months. We can also reduce our borrowings by
selling securities to create additional availability as opportunities arise.
Subsequent Event
On August 6, 2001, we agreed to acquire World-Wide Holdings Limited and its
wholly owned subsidiary, World-Wide Reassurance Company Limited (together,
"World-Wide") from Pacific Life Insurance Company ("Pacific Life") for $78
million in newly issued Ordinary Shares of our stock. World-Wide is a specialty
life reinsurance company headquartered in Windsor, England and conducting
business throughout the world. As a result of the transaction, Pacific Life
will become our largest shareholder with ownership of approximately 22% of our
outstanding Ordinary Shares after the transaction is completed. The transaction
is subject to the approval of our shareholders, as well as various regulatory
authorities. On October 22, 2001 we filed a preliminary proxy statement with
the Securities and Exchange Commission ("SEC") in connection with an
Extraordinary General Meeting of Shareholders, which is scheduled to take place
on December 14, 2001. On October 24, 2001 we received notification from the
Financial Services Authority in the United Kingdom that it has no objection to
us becoming a controller of World-Wide. On November 9, 2001 we filed the
definitive proxy statement, as amended, with the SEC in connection with the
Extraordinary General Meeting. We expect that this transaction will close before
the end of our fiscal year.
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, 2000. Please refer
to "Item 7A: Quantitative and Qualitative Disclosures About Market Risk" in our
Annual Report on Form 10-K.
20
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 Form
10-Q:
10.1 Share Purchase Agreement by and between Scottish Annuity & Life
Holdings, Ltd. and Pacific Life Insurance Company, dated as of
August 6, 2001. (Incorporated by reference from the Company's
report on Form 8-K, filed on August 9, 2001.)
(b) Reports on Form 8-K. The following reports on Form 8-K were
filed during the three-month period ended September 30, 2001.
The Company filed a report on Form 8-K on August 9, 2001 to report
under Item 5 (Other events) that it had signed an agreement to
acquire all of the shares of World-Wide Holdings Limited and its
wholly owned subsidiary World-Wide Reassurance Company Limited from
Pacific Life Insurance Company.
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: November 9, 2001 By: /s/ Michael C. French
Michael C. French
Chief Executive Officer
Date: November 9, 2001 By: /s/ Scott E. Willkomm
Scott E. Willkomm
President & Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
22